UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 2, 2004
Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware | 52-2055918 | |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, $0.01 par value ( | New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Philadelphia Stock Exchange |
The aggregate market value of shares of common stock held by non-affiliates at January 31,June 20, 2003, was $5,646,330,643.$6,973,761,505.
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, and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
Indicate by check mark if disclosure by 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.¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yesx No¨
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the 20032004 Annual Meeting of Shareholders are incorporated by
reference into Part III of this report.
Index to Exhibits is located on pages 76 through 77.
PART I1
MARRIOTT INTERNATIONAL, INC.
FORM 10-K TABLE OF CONTENTS
FISCAL YEAR ENDED JANUARY 2, 2004
Page No. | ||||
3 | ||||
3 | ||||
Part I. | ||||
Items 1 and 2. | 5 | |||
Item 3. | 15 | |||
Item 4. | 16 | |||
Part II. | ||||
Item 5. | Market Price and Dividends on the Registrant’s Common Equity and Related Stockholder Matters | 17 | ||
Item 6. | 18 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
Item 7A. | 39 | |||
Item 8. | 41 | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 77 | ||
Item 9A. | 77 | |||
Part III. | ||||
Item 10. | 78 | |||
Item 11. | 78 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 78 | ||
Item 13. | 78 | |||
Item 14. | 78 | |||
Part IV. | ||||
Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 82 | ||
84 |
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Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.”
We have mademake forward-looking statements in this document that arereport based on the beliefs and assumptions of our management, and on information currently available to our management.us. Forward-looking statements include the information concerningabout our possible or assumed future results of operations in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Business Overview,” “Liquidity and Capital Resources” and other statements throughout this report preceded by, followed by or that include the words “believes”, “expects”, “anticipates”, “intends”, “plans”, “estimates”,“believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actualassumptions, and our actual results may differ materially from those expressed in theseour forward-looking statements. We therefore caution you not to put undue reliancerely unduly on any forward-looking statements.statement.
You should understand that the following important factors, in addition toas well as those discussed in Exhibit 99 and elsewhere in this annual report, could cause results to differ materially from those expressed in such forward-looking statements. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following.
• | Competition in each of our business segments. Each of our hotel brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from other market opportunities. |
• | Supply of and demand for hotel rooms, timeshare units and corporate apartments. The availability of and demand for hotel rooms, timeshare units and corporate apartments is directly affected by overall economic conditions, regional and national development of competing hotels and timeshare resorts, local supply and demand for extended stay and corporate apartments, and the recovery in business travel. While we monitor the projected and actual estimates of room supply and availability, the demand for and occupancy rate of hotel rooms and timeshare units, and the occupancy rates of apartments and extended stay lodging properties in all markets in which we conduct business, we cannot assure you that current factors relating to supply and demand will work to contain revenue growth and business volume. |
• | Consistency in Owner Relations. Our responsibility under our management agreements to manage each hotel and enforce the standards required for our brands may, in some instances, be subject to interpretation. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners. |
• | Increase in the costs of conducting our business; Insurance. We take appropriate steps to monitor cost increases in energy, healthcare, insurance, transportation and fuel costs and other expenses central to the conduct of our business. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain such coverage at reasonable rates, particularly in light of continued terrorist activities and threats. We therefore cannot assure you that we will be successful in obtaining such insurance without increases in cost or decreases in coverage levels. |
• | International, national and regional economic conditions. Because we conduct our business activities on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years our business has been hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the uncertain magnitude and duration of the apparent economic recovery in the United States, the prospects of improving economic performance in other regions, and the unknown pace of any business travel recovery that results. |
• | Threat and spread of communicable diseases. The impact of any significant recurrence of Severe Acute Respiratory Syndrome (“SARS”), or the uncontained spread of any contagious or volatile disease will affect our business. |
• | Recovery of loan and guarantee investments and recycling of capital; availability of new capital resources. The availability of capital to allow us and potential and current hotel owners to fund new hotel investments, as well as refurbishment and improvement of existing hotels, depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and |
3
guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also effect our ability to recycle and raise new capital. |
• | Effect of Internet reservation services. Internet room distribution and reservation channels may adversely affect the rates we may charge for hotel rooms and the manner in which our brands can compete in the marketplace with other brands. We believe that we are taking adequate steps to resolve this competitive threat, but cannot assure you that these steps will prove or remain successful. |
• | Change in laws and regulations. Our business may be affected by changes in accounting standards, timeshare sales regulations and state and federal tax laws. |
• | Recent privacy initiatives and State and Federal limitations on marketing and solicitation. The National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, may affect the amount and timing of our sales of timeshare units and other products. |
• | Interruption of the synthetic fuel operations. Problems related to supply, production, and demand at any of the synthetic fuel facilities, the power plants that buy synthetic fuel from the joint venture or the coal mines where the joint venture buys coal, could be caused by accidents, personnel issues, severe weather or similar unpredictable events. |
• | Litigation. We cannot predict with certainty the cost of defense, the cost of prosecution, or the ultimate outcome of litigation filed by or against us, including remedies or damage awards. |
• | Disaster. We cannot assure you that our ability to provide fully integrated business continuity solutions in the event of a disaster will occur without interruption to, or effect on, the conduct of our business. |
• | Barriers to growth and market entry. Factors influencing real estate development generally, including site availability, financing, planning, zoning and other local approvals, and other limitations which may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure, all affect and potentially limit our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands. |
• | Other risks described from time to time in our filings with the Securities and Exchange Commission(the SEC). We continually evaluate the risks and possible mitigating factors to such risks and provide additional and updated information in our SEC filings. |
4
PART I
ITEMS 1 and 2. BUSINESS AND PROPERTIES
We are a worldwide operator and franchisor of hotels and related lodging facilities. Our operations are grouped into the following five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel, which represented 65, 12, 7, 14 and 2 percent, respectively, of total sales in the fiscal year ended January 3, 2003. segments:
Segment | Percentage of total sales in the fiscal year ended January 2, 2004 | ||
Full-Service Lodging | 65 | % | |
Select-Service Lodging | 11 | % | |
Extended-Stay Lodging | 6 | % | |
Timeshare | 14 | % | |
Synthetic Fuel | 4 | % |
Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which arewe now classifiedclassify as discontinued operations. We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”
In our Lodging business, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, we develop, operate develop and franchise hotels and corporate housing properties under 14 separate brand names and we develop, operate, develop and market Marriott timeshare properties under 4four separate brand names. Our lodging business includes the Full-Service, Select-Service, Extended-Stay and Timeshare segments.
2Our Synthetic Fuel operation consists of our minority interest in four coal-based synthetic fuel production facilities whose operations qualify for tax credits based on Section 29 of the Internal Revenue Code.
Financial information by industry segment and geographic area as of January 3, 20032, 2004 and for the three fiscal years then ended, appears in the Business Segments note to our Consolidated Financial Statements included in this annual report.
Lodging
We operate or franchise 2,5572,718 lodging properties worldwide, with 463,429490,564 rooms as of January 3, 2003.2, 2004. In addition, we provide 4,3162,978 furnished corporate housing rental units. We believe that our portfolio of lodging brands is the broadest of any company in the world, and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. Our lodging brands include:
Full-Service Lodging | Extended-Stay Lodging | ||
• Marriott Hotels & Resorts | • Residence Inn | ||
• Marriott Conference Centers | • TownePlace Suites | ||
• JW Marriott Hotels & Resorts | • Marriott ExecuStay | ||
• The Ritz-Carlton | • Marriott Executive Apartments and Other | ||
• Renaissance Hotels & Resorts | |||
• Ramada International | Timeshare | ||
• (primarily Europe, Middle East and Asia/Pacific) | • Marriott Vacation Club International | ||
• | • Horizons by Marriott Vacation Club International | ||
• The Ritz-Carlton Club | |||
Select-Service Lodging | • Marriott Grand Residence Club | ||
| |||
• Courtyard | |||
• Fairfield Inn | |||
• SpringHill Suites |
35
Company-Operated Lodging Properties
At January 3, 2003,2, 2004, we operated 937947 properties (242,520(249,503 rooms) under long-term management or lease agreements with property owners (together, the Operating Agreements) and 8six properties (1,525(1,413 rooms) as owned.
Terms of our management agreements vary, but typically we earn a management fee which comprises a base fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs (both direct and indirect) of operations. Such agreements are generally for initial periods of 20 to 30 years, with options to renew for up to 50 additional years. Our lease agreements also vary, but typically include fixed annual rentals plus additional rentals based on a percentage of annual revenues in excess of a fixed amount. Many of the Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Additionally, a numbermost of the Operating Agreements permit the owners to terminate the agreement if financial returns fail to meet defined levels for a period of time and we have not cured such deficiencies.
For lodging facilities that we manage, we are responsible for hiring, training and supervising the managers and employees required to operate the facilities and for purchasing supplies, for which we generally are reimbursed by the owners. We provide centralized reservation services and national advertising, marketing and promotional services, as well as various accounting and data processing services. For lodging facilities that we manage, we prepare and implement annual operating budgets that are subject to owner review and approval.
Franchised Lodging Properties
We have franchising programs that permit the use of certain of our brand names and our lodging systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from four4 percent to six6 percent of room revenues for all brands, plus two2 percent to three3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs, and pay fees for use of our centralized reservation systems. At January 3, 2003,2, 2004, we had 1,6121,765 franchised properties (219,384(239,648 rooms).
Summary of Properties by Brand
As of January 3, 20032, 2004 we operated or franchised the following properties by brand (excluding 4,3162,978 corporate housing rental units):
Company-operated | Franchised | Company-Operated | Franchised | |||||||||||||
Brand | Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | ||||||||
Full-Service Lodging | ||||||||||||||||
Marriott Hotels, Resorts and Suites | 262 | 112,731 | 188 | 52,469 | ||||||||||||
The Ritz-Carlton Hotels | 51 | 16,566 | — | — | ||||||||||||
Renaissance Hotels, Resorts and Suites | 84 | 32,381 | 42 | 13,418 | ||||||||||||
Marriott Hotels & Resorts | 226 | 100,328 | 201 | 56,494 | ||||||||||||
Marriott Conference Centers | 14 | 3,457 | — | — | ||||||||||||
JW Marriott Hotels & Resorts | 28 | 12,686 | 3 | 1,009 | ||||||||||||
The Ritz-Carlton | 56 | 18,347 | — | — | ||||||||||||
Renaissance Hotels & Resorts | 84 | 32,807 | 42 | 12,807 | ||||||||||||
Ramada International | 4 | 727 | 142 | 20,503 | 4 | 727 | 188 | 25,423 | ||||||||
Select-Service Lodging | ||||||||||||||||
Courtyard | 289 | 45,881 | 298 | 38,475 | 294 | 46,705 | 322 | 41,509 | ||||||||
Fairfield Inn | 2 | 890 | 501 | 47,324 | 2 | 855 | 522 | 49,351 | ||||||||
SpringHill Suites | 20 | 3,187 | 78 | 8,022 | 22 | 3,452 | 88 | 9,230 | ||||||||
Extended-Stay Lodging | ||||||||||||||||
Residence Inn | 136 | 18,538 | 292 | 32,035 | 130 | 17,497 | 319 | 35,817 | ||||||||
TownePlace Suites | 34 | 3,665 | 70 | 7,039 | 32 | 3,472 | 79 | 7,909 | ||||||||
Marriott Executive Apartments and other | 10 | 1,908 | 1 | 99 | ||||||||||||
Marriott Executive Apartments and Other | 12 | 2,223 | 1 | 99 | ||||||||||||
Timeshare | ||||||||||||||||
Marriott Vacation Club International | 45 | 6,973 | — | — | 41 | 7,622 | — | — | ||||||||
Horizons by Marriott Vacation Club International | 2 | 146 | — | — | ||||||||||||
The Ritz-Carlton Club | 4 | 204 | — | — | 4 | 234 | — | — | ||||||||
Marriott Grand Residence Club | 2 | 248 | — | — | 2 | 248 | — | — | ||||||||
Horizons by Marriott Vacation Club International | 2 | 256 | — | — | ||||||||||||
Total | 945 | 244,045 | 1,612 | 219,384 | 953 | 250,916 | 1,765 | 239,648 | ||||||||
46
We plan to open over 150175 hotels (25,000 –to 30,000 rooms) during 2003.2004. We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel developers to build or acquire new Marriott properties, which are important parts of our growth plans,plan, is partially dependent on their access to and the availability and cost of capital. See “Liquidity and Capital Resources” caption in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Summary of Properties by Country
As of January 2, 2004 we operated or franchised properties in the following 68 countries and territories:
Country | Hotels | Rooms | ||
Americas | ||||
Argentina | 2 | 401 | ||
Aruba | 4 | 1,500 | ||
Brazil | 5 | 1,506 | ||
Canada | 35 | 8,733 | ||
Cayman Islands | 1 | 309 | ||
Chile | 2 | 485 | ||
Costa Rica | 3 | 574 | ||
Curacao | 1 | 247 | ||
Dominican Republic | 3 | 692 | ||
Ecuador | 1 | 257 | ||
Guatemala | 2 | 544 | ||
Jamaica | 2 | 1,135 | ||
Mexico | 10 | 3,184 | ||
Panama | 1 | 296 | ||
Peru | 1 | 300 | ||
Puerto Rico | 3 | 1,195 | ||
Saint Kitts & Nevis | 1 | 500 | ||
United States | 2,188 | 373,686 | ||
U.S. Virgin Islands | 3 | 785 | ||
Venezuela | 1 | 269 | ||
Total Americas | 2,269 | 396,598 | ||
Middle East and Africa | ||||
Armenia | 1 | 115 | ||
Bahrain | 2 | 387 | ||
Egypt | 7 | 3,029 | ||
Israel | 2 | 960 | ||
Jordan | 3 | 609 | ||
Kuwait | 2 | 601 | ||
Lebanon | 1 | 174 | ||
Oman | 1 | 93 | ||
Pakistan | 2 | 509 | ||
Qatar | 3 | 1,044 | ||
Saudi Arabia | 4 | 773 | ||
Tunisia | 1 | 221 | ||
Turkey | 5 | 1,507 | ||
United Arab Emirates | 5 | 1,106 | ||
Total Middle East and Africa | 39 | 11,128 |
7
Country | Hotels | Rooms | ||
Asia | ||||
China | 39 | 13,877 | ||
Guam | 1 | 357 | ||
India | 8 | 1,590 | ||
Indonesia | 5 | 1,641 | ||
Japan | 10 | 3,059 | ||
Malaysia | 6 | 2,659 | ||
Philippines | 2 | 898 | ||
Republic of Korea | 1 | 380 | ||
Singapore | 2 | 983 | ||
South Korea | 4 | 1,763 | ||
Thailand | 8 | 2,082 | ||
Vietnam | 2 | 888 | ||
Total Asia | 88 | 30,177 | ||
Australia | 11 | 2,679 | ||
Europe | ||||
Austria | 6 | 1,569 | ||
Belgium | 3 | 530 | ||
Czech Republic | 5 | 812 | ||
Denmark | 1 | 395 | ||
Finland | 5 | 1,392 | ||
France | 6 | 1,343 | ||
Georgia | 1 | 127 | ||
Germany | 84 | 14,064 | ||
Greece | 1 | 258 | ||
Hungary | 2 | 470 | ||
Italy | 7 | 1,194 | ||
Netherlands | 3 | 945 | ||
Poland | 2 | 748 | ||
Portugal | 3 | 933 | ||
Romania | 1 | 402 | ||
Russia | 5 | 1,457 | ||
Spain | 6 | 1,368 | ||
Sweden | 29 | 1,953 | ||
Switzerland | 10 | 1,587 | ||
Total Europe | 180 | 31,547 | ||
United Kingdom | ||||
Ireland | 1 | 148 | ||
United Kingdom (England, Scotland and Wales) | 130 | 18,287 | ||
Total United Kingdom | 131 | 18,435 | ||
Total – All Countries and Territories | 2,718 | 490,564 | ||
Full-Service Lodging
Marriott Hotels & Resorts and Suites (including JW Marriott Hotels & Resorts and Marriott Conference Centers) is our global flagship brand, primarily serveserving business and leisure travelers and meeting groups at locations in downtown, urban, and suburban areas, near airports and at resort locations. Most Marriott full-service hotels containis a quality tier brand, with most hotels typically containing from 300400 to 500700 rooms, and typically have internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges, room service, concierge lounges, and parking facilities. Many Marriott resort hotels have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. The 13 Marriott Suites (approximately 3,400 rooms) are full-service suite hotels that typically contain approximately 200 to 300 suites, each consisting of a living room, bedroom and bathroom. Marriott Suites have limited meeting space. Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report to Marriott Hotels, Resorts and Suites include JW Marriott Hotels & Resorts and Marriott Conference Centers.
8
JW Marriott Hotels & Resorts is a world-classthe Marriott brand’s luxury collection of distinctive hotels that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 2331 hotels and resorts are primarily located in gateway cities and upscale resort locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities in theat JW Marriott Hotels & Resorts normally include larger guestrooms, more luxuriousguest rooms, higher end décor and furnishings, upgraded in-room amenities, “on-call” housekeeping, upgraded executive business centers and fitness centers/spas, and 24-hour room service.
We operate 13 conference centers (3,25914Marriott Conference Centers (3,457 rooms), throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. TheIn addition to the features found in a typical Marriott full-service hotel, the centers typically include expanded meeting room space, banquet and dining facilities, guestroomsguest rooms and recreational facilities.
Room operationsRooms revenue contributed the majority of hotel salesMarriott Hotels & Resorts’ revenues for fiscal year 2002,2003, with the remainder coming from food and beverage operations, recreational facilities and other services. Although business at many resort properties is seasonal depending on location, overallOverall hotel system profits are usually relatively stable and include only moderate seasonal fluctuations. Business at resort properties may be seasonal depending on location.
Marriott Hotels & Resorts Geographic Distribution at January | Hotels | ||||
United States (42 states and the District of Columbia) |
| ( |
| ||
Non-U.S. | |||||
Americas (Non-U.S.) |
| 33 | |||
Continental Europe |
| 31 | |||
United Kingdom |
| 51 | |||
Asia |
| 27 | |||
|
| 18 | |||
Australia |
| 5 | |||
Total Non-U.S. |
| ( |
| ||
The Ritz-Carlton hotels and resorts are renowned for their distinctive architecture and for the quality of their facilities, dining and exceptional personalized guest service. Most Ritz-Carlton hotels have 250 to 400 guest rooms and typically include meeting and banquet facilities, a variety of restaurants and lounges, gift shops, swimming pools and parking facilities. Guests at most of the Ritz-Carlton resorts have access to additional recreational amenities, such as tennis courts, golf courses and golf courses.health spas.
The Ritz-Carlton Geographic Distribution at January | Hotels | ||||
United States |
| ( |
| ||
Non-U.S. |
| ( |
| ||
5
Renaissance Hotels & Resortsis a distinctive and global quality-tier brand, whichthat targets individual business and leisure travelers, and group meetings seeking stylish and leisure travelers.personalized environments. Renaissance hotels are generally located inat downtown locations ofin major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotels contain from 300 to 500 rooms; however, a few of the convention oriented hotels are larger, and some hotels in non-gateway markets, particularly in Europe, are smaller. Renaissance hotelsproducts and services typically include an all-day dining restaurant, a specialty restaurant, club floorsstylish décor, internet access, restaurants and a lounge, boardrooms,lounges, room service, swimming pools, gift shops, concierge lounges, and conventionmeeting and banquet facilities. Renaissance resort hotelsproperties have additional recreational and entertainment facilities and services including golf courses, tennis courts, water sports, additional restaurants and spa facilities.
Renaissance Hotels & Resorts Geographic Distribution at January | Hotels | ||||
United States |
| ( |
| ||
Non-U.S. | |||||
Americas (Non-U.S.) |
| 8 | |||
Continental Europe |
| 19 | |||
United Kingdom | 7 | ||||
Asia | 20 | ||||
| 8 | ||||
Australia |
| — | |||
Total Non-U.S. |
| ( |
| ||
9
Ramada International is a moderately-priced brand targeted at business and leisure travelers.travelers outside the United States. Each full-service Ramada International property includes a restaurant, a cocktail lounge and full-service meeting and banquet facilities. Ramada International hotels are located primarily in Europe and Asia in major cities, near major international airports and suburban office park locations. In 2002, Marriott and Cendant Corporation (Cendant) completed the formation of a joint venture to further develop and expand the Ramada and Days Inn brands in the United States. In addition to management and franchise fees associated with Ramada International, we receive a royalty fee for the use of the Ramada name in Canada. We also record, in accordance with the equity method of accounting,Canada and we recognize our proportionate share of the net income reported by the Marriott and Cendant joint venture that was formed in the first quarter of 2002 to further develop and expand the Ramada and Days Inn brands in the United States.venture’s earnings. In 2002,2003, we opened 1649 hotels with the Ramada brand name outside the United States and Canada.
Ramada International Geographic Distribution at January | Hotels | ||||
Americas (Non-U.S. and Canada) | 3 | ||||
Continental Europe |
| 99 | |||
United Kingdom |
| 61 | |||
| 6 | ||||
Asia |
| 19 | |||
Australia |
| 4 | |||
Total |
| ( |
| ||
BvlgariBulgari Hotels and Resorts& Resorts.. As part of our ongoing strategy to expand our reach through partnerships with preeminent, world classpre-eminent world-class companies, in early 2001 we announced our plans to launchentered into a joint venture with Bulgari SpA to create and introduce distinctive new luxury hotel properties in prime locations – BvlgariBulgari Hotels and& Resorts. The first property, the Bulgari Hotel Milano, is expectedscheduled to open in JanuaryMilan, Italy in May 2004. The second property announced is the Bulgari Resort Bali, currently in development and scheduled to open in late 2005. Other projects are currently in development in Europe, Asia, and North America.
Select-Service Lodging
Courtyard is our upper moderate-price select-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically havecontain 90 to 150 rooms. Well landscaped grounds typically include a courtyard with a pool and social areas. Most hotels feature functionally designed quality guest rooms and meeting rooms, limited restaurant and lounge facilities, a swimming pool and an exercise room. In 2003, most Courtyard hotels introduced free in-room high-speed internet and in 2004, this will be a standard feature along withThe Market (a self-serve food store open 24 hours a day). The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year end, there were 587616 Courtyards operating in 1015 countries.
Courtyard Geographic Distribution at January | Hotels | ||||
United States (45 states and the District of Columbia) |
| ( |
| ||
Non-U.S. |
| ( |
| ||
6
Fairfield Inn is our hotel brand that competes in the lower moderate price-tier.moderate-price tier. Aimed at value-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 60 to 140 rooms and offers a swimming pool, complimentary continental breakfast and free local phone calls. At year endyear-end there were 503445 Fairfield Inns and 79 Fairfield Inn & Suites (524 hotels total), operating in the United States.States and Mexico.
SpringHill Suitesis our all-suite brand in the upper moderate-price tier targeting business travelers, leisure travelers and families. SpringHill Suites typically have 90 to 165 rooms. They featurestudio suites that are 25 percent larger than a typical hotel guest room and offerroom. The brand offers a broad range of amenities including complimentary continental breakfast and exercise facilities. In 2004, the brand will also introduce free in-room high-speed internet andThe Market(a self-serve food store open 24 hours a day). There were 98110 properties located in the United States and Canada at January 3, 2003.2, 2004.
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Extended-Stay Lodging
Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 416449 Residence Inn hotels across North America.
Residence Inn Geographic Distribution at January | Hotels | |||
United States (47 states and the District of Columbia) |
| ( | ||
Canada |
| ( | ||
Mexico | 1 | (76 rooms) | ||
TownePlace Suitesis a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. The typical TownePlace Suites hotel contains 100 studio, one-bedroom and two-bedroom suites. Each suite has a fully equipped kitchen and separate living area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-hour staffing and laundry facilities. At January 3, 2003, 1042, 2004, 111 TownePlace Suites (10,704(11,381 rooms) were located in 3034 states.
Marriott ExecuStayprovides furnished corporate apartments for stays of one month or longer nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers.managers and franchise agreements. In late2003, consistent with our plan to shift the business toward franchising, the total number of units leased by ExecuStay decreased and 10 franchise markets were added. At January 2, 2004, Marriott ExecuStay’s franchise program, launched in July 2002, ExecuStay also became a corporate housing franchisor.included eight franchisees covering 11 U.S. markets.
Marriott Executive ApartmentApartments and Other.other.We provide temporary housing (serviced apartments) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some serviced apartments operate under theMarriott Executive Apartmentsbrand, which is designed specifically for the long-term international traveler. At January 3, 2003, 112, 2004, 13 serviced apartment properties (2,007(2,322 units), including sixnine Marriott Executive Apartments, were located in seveneight countries and territories. All Marriott Executive Apartments are located outside the United States.
Timeshare
Marriott Vacation Club Internationaldevelops, sells and operates vacation timesharing resorts.resorts under four brands. Revenues are generated from three primary sources: (1) selling fee simple and other forms of timeshare intervals, (2) operating the resorts and (3) financing consumer purchases of timesharing intervals.intervals, and (3) operating the resorts.
Many timesharing resorts are located adjacent to Marriott hotels, and timeshare owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through an externala third party exchange company. Owners can also can trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 2,3002,400 Marriott hotels worldwide.
Marriott Vacation Club International (MVCI) brand offers full service villas featuring living and dining areas, one, two and three bedroom options, full kitchen and washer/dryer. In 2002 we continued41 locations worldwide this brand draws U.S. and international customers who vacation regularly with a focus on family, relaxation, and recreational activities. In the U.S., MVCI is located in beach and golf communities in California, Hawaii, the Carolinas and Florida and in ski resorts in Colorado, California and Utah. MVCI has a growing international presence with resorts in Thailand, France and Spain.
The Ritz-Carlton Club brand is a luxury tier real estate fractional brand that combines the benefits of second home ownership with personalized services and amenities. This brand is designed as a private club whose members have access to growall Ritz-Carlton Clubs. This brand is offered in ski, golf and beach destinations in Colorado, St. Thomas, U.S.V.I., and Florida.
Marriott Grand Residence Club(launched is an upper quality tier fractional ownership brand for corporate and leisure customers. This new brand is currently offering ownership in 2001), our “fractional share” business line,projects located in Lake Tahoe, California and initiated sales in Mayfair, London. In this business line, fractional share owners purchase the right to stay at their property up to thirteen weeks each year. In addition, we continued to expandThe Ritz-Carlton Club timeshare business line (launched in 2000) by initiating sales of both golf and spa memberships and personal residences in Jupiter, Florida. Lastly, we initiated sales at four new Marriott Vacation Club International locations: Canyon Villas
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at Desert Ridge, Arizona; Paris, France; Aruba Surf Club, Aruba; and Playa Andaluza, Spain. We continue to offer timeshare intervals throughHorizons by Marriott Vacation Club International (Horizons),is Marriott Vacation Club’s moderately priced timeshare brand whose product offerings and customer base are currently focused on facilitating family vacations in entertainment communities. Today, Horizons resorts are located in Orlando and Branson, Missouri.
We expect that our moderate tier vacation ownershipfuture timeshare growth will increasingly reflect opportunities presented by partnerships, joint ventures, and other business line.structures. In 2003 MVCI entered into a joint venture with a third-party builder to build a new project in Las Vegas. We also entered into a sales and marketing agreement in connection with an existing non-Marriott project. Marriott Vacation Club International opened six resorts in 2003: four under the MVCI brand (Ko’Olina and Waiohai in Hawaii, Playa Andaluza in Spain, and Village d’Ile de France outside of Paris) together with The Ritz-Carlton Club in Jupiter, Florida and the Grand Residence Club in London. Our project in Myrtle Beach, South Carolina opened for sales in 2003, and we expect that the resort will open in June 2004. MVCI continues to offer timeshare intervals in its moderate-tier brand, Horizons by Marriott Vacation Club International.
Marriott Vacation Club International’s owner base continues to expand, with 223,000256,000 owners at year end 2002,2003, compared to 195,000223,000 in 2001.2002.
Timeshare (all brands) Geographic Distribution at January 3, 2003 | Resorts | Units | ||||||
Timeshare (all brands) Geographic Distribution at January 2, 2004 | Resorts | Units | ||||||
Continental United States | 39 | 5,692 | 36 | 6,255 | ||||
Hawaii | 4 | 705 | 4 | 747 | ||||
Caribbean | 4 | 477 | 3 | 608 | ||||
Europe | 5 | 643 | 5 | 696 | ||||
Asia | 1 | 54 | 1 | 54 | ||||
Total | 53 | 7,571 | 49 | 8,360 | ||||
Other Activities
Marriott Golf manages 2623 golf course facilities as part of our management of hotels and for other golf course owners.
We operate 1819 systemwide hotel reservation centers, 1113 of them in the U.S.United States and Canada and seven internationally,six in other countries and territories, that handle reservation requests for Marriott lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others.
Our Architecture and Construction (A&C) division provides design, development, construction, refurbishment and procurement services to owners and franchisees of lodging properties and senior living communities on a voluntary basis outside the scope of and separate from their management or franchise contracts. Consistent with third partythird-party contractors, A&C provides these services for owners and franchisees of Marriott branded properties on a fee basis.
Competition
We encounter strong competition both as a lodging operator and as a franchisor. There are approximately 600 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.
Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2002, over2003, approximately two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the three largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.
Outside the United States branding is much less prevalent, and most markets are served primarily by independent operators. We believe that chain affiliation will increase in overseas markets as local economies grow, trade barriers are reduced, international travel accelerates and hotel owners seek the economies of centralized reservation systems and marketing programs.
Based on lodging industry data, we have an eight8 percent share of the U.S. hotel market (based on number of rooms), and less than a one1 percent share of the lodging market outside the United States. We believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically
12
generate higher occupancies and Revenue per Available Room (REVPAR) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. Approximately 3634 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.
8
Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Our management, lease, and franchise agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that thethese ongoing refurbishment program isprograms are adequate to preserve the competitive position and earning power of the hotels.hotels and timeshare properties. We also strive to update and improve the products and services we offer. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains whichthat rely exclusively on franchising.
The vacation ownership industry is one of the fastest growing segments in hospitality and is comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry in 1984, we have become a recognized leader in vacation ownership worldwide. Competition in the timeshare business is based primarily on the quality and location of timeshare resorts, the pricing of timeshare intervals and the availability of program benefits, such as exchange programs. We believe that our focus on offering distinct vacation experiences, combined with our financial strength, diverse market presence, strong brands and well-maintained properties, will enable us to remain competitive.
Marriott Rewards is a frequent guest program with over 18nearly 20 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 2224 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In addition, the ability of Marriott Vacation Club International timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brand.
Synthetic Fuel
Our synthetic fuel operation consists of our minority ownership interest in four coal-based synthetic fuel production facilities, two of which are located at a coal mine in Saline County, Illinois and the remaining two are located at a coal mine in Jefferson County, Alabama. The operation creates a fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. This tax credit program expires on December 31, 2007. We held all of the ownership in the synthetic fuel business prior to June 21, 2003, when we completed a previously announced sale of an approximately 50 percent ownership interest in the operation.
At both of the locations, the synthetic fuel operation has entered into long-term site leases at sites that are adjacent to large underground mines as well as barge load-out facilities on navigable rivers. In addition, the synthetic fuel operation has entered into long-term fixed-price coal purchase agreements with the owners of the adjacent coal mines and long-term fixed-price synthetic fuel sales contracts with the Tennessee Valley Authority and with Alabama Power Company, two major utilities. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel, covering approximately 80 percent of the productive capacity of the facilities. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into short-term spot contracts to buy coal from other coal mines and sell synthetic fuel to these or different end users. The operation is slightly seasonal as the synthetic fuel is mainly burned to produce electricity and electricity use peaks in the Summer in the markets served by the synthetic fuel operation.
In addition, the synthetic fuel operation has entered into a long-term operations and maintenance agreement with an experienced manager of synthetic fuel facilities. This manager is responsible for staffing the facilities, operating and maintaining the machinery and conducting routine maintenance on behalf of the synthetic fuel operation.
Finally, the synthetic fuel operation has entered into a long-term license and binder supply agreement with Headwaters Incorporated, which permits the operation to utilize a carboxylated polystyrene copolymer emulsion patented by Headwaters and manufactured by Dow Chemical to facilitate converting the coal into a qualified synthetic fuel.
On November 7, 2003, the U.S. Internal Revenue Service issued private letter rulings to the synthetic fuel joint venture confirming that the synthetic fuel produced by the facilities is a “qualified fuel” under Section 29 of the Internal Revenue Code and that the resulting tax credit may be allocated among the members of the Synthetic Fuel joint venture.
Discontinued Operations
Marriott Senior Living Services
In our Senior Living Services business,On December 17, 2002, we operate both “independent full-service” and “assisted living”sold 12 senior living communities and provide related senior care services. Most are rental communities with monthly rates that depend on the amenities and services provided. We are one of the largest U.S. operators of senior living communities in the quality tier. Marriott International entered into a definitive Agreement on December 30, 2002 to sell our Senior Living Services business to Sunrise Assisted Living, Inc. and our remaining communities to CNL Retirement Partners,Properties, Inc. (CNL).(“CNL”) for approximately $89 million in cash. We expect to completeaccounted for the sale earlyunder the full accrual method in 2003. accordance with Statement of Financial Accounting Standards (“FAS”) No. 66, and we recorded an after-tax loss of approximately $13 million. On December 30, 2002, we entered into definitive agreements to sell our senior living management
13
business to Sunrise Senior Living, Inc. (Sunrise) and to sell nine senior living communities to CNL. We completed these sales to Sunrise and CNL in addition to the related sale of a parcel of land to Sunrise on March 28, 2003, for $266 million and recognized a gain, net of taxes, of $23 million.
Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to restructuresell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the debt and sellsubordinated credit-enhanced mortgage securities relating to the 14 communities in 2003.a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We now report our Senior Living Services business as discontinued operations. Seeprovided a $92 million acquisition loan to CNL in connection with the Notessale. Sunrise currently operates and will continue to Consolidated Financial Statements.operate the 14 communities under long-term management agreements. We accounted for the sale in accordance with FAS No. 66 and recorded a gain, net of taxes, of $1 million.
AtFor the year ended January 3, 2003, we operated 129recorded an after-tax charge of $131 million associated with our agreement to sell our senior living communities in 29 states.
Communities | Units (1) | |||
Independent full-service | ||||
- owned | 2 | 1,029 | ||
- operated under long-term agreements | 40 | 11,764 | ||
42 | 12,793 | |||
Assisted living | ||||
- owned | 21 | 2,810 | ||
- operated under long-term agreements | 66 | 8,127 | ||
87 | 10,937 | |||
Total senior living communities | 129 | 23,730 | ||
At January 3, 2003, we operated 42 independent full-service senior living communities, which offer both independent living apartments and personal assistance units for seniors. Most of these communities also offer licensed nursing care.management business.
At January 3, 2003, we also operated 87 assisted living senior living communities principally under the names “Brighton Gardens by Marriott” and “Marriott MapleRidge”. Assisted living communities are for seniors who benefit from assistance with daily activities such as bathing, dressing or medication. Brighton Gardens isAs a quality-tier assisted living concept which generally has 90 assisted living suites and in certain locations, 30 to 45 nursing beds in a community. In some communities, separate on-site centers also provide specialized care for residents with Alzheimer’s or other memory-related disorders. Marriott MapleRidge assisted living communities consist of a cluster of six or seven 14-room cottages which offer residents a smaller scale, more intimate setting and family-like living at a moderate price.
The assisted living concepts typically include three meals per day, linen and housekeeping services, security, transportation, and social and recreational activities. Additionally, skilled nursing and therapy services are generally available to Brighton Gardens residents.
9
Termsresult of the Senior Living Services management agreements vary but typically include base management fees, ranging from four to six percent of revenues, central administrative services reimbursements and incentive management fees. Such agreements are generally for initial periods of five to 30 years, with options to renew for up to 25 additional years. Under the leases covering certain of the communities,above transactions we pay the owner fixed annual rent plus additional rent equal to a percentage of the amount by which annual revenues exceed a fixed amount.now report this business in discontinued operations.
Marriott Distribution Services
Prior to its discontinuance, MDSMarriott Distribution Services (MDS) was a United States limited-line distributor of food and related supplies to Marriott businesses and unrelated third parties. In the third quarter of 2002, we completed a strategic review of the distribution servicesDistribution Services business and decided to exit the business. As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations ofat four facilities, we have exitedcompleted our exit of the distribution servicesDistribution Services business. Accordingly, we now report this business in discontinued operations.
Employee Relations
At January 3, 2003,2, 2004, we had approximately 144,000128,000 employees. Approximately 7,5007,100 employees were represented by labor unions. We believe relations with our employees are positive.
Other Properties
In addition to the operating properties discussed above, we lease twofive office buildings with combined space of approximately 930,0001,140,000 square feet in Bethesda, Maryland, Chevy Chase, Maryland and Orlando, Florida where weour corporate, Ritz-Carlton and Marriott Vacation Club International headquarters are headquartered.located, respectively.
We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance.maintenance and periodic capital improvements.
Internet Address and Company SEC Filings
Our internet address iswww.marriott.com. On our website, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing.
Executive Officers of the Registrant
See Item 10 on page 79 of this report for information about our executive officers.
14
ITEM 3. | LEGAL PROCEEDINGS |
ITEM 3. LEGAL PROCEEDINGSCurrent Proceedings
Legal proceedingsThe CTF/HPI arbitration and litigationand theStrategic Hotel litigation are incorporated by referencedescribed under the caption heading “Litigation and Arbitration” in Footnote 19 of the Notes to the “Contingencies” footnote in the financial statementsConsolidated Financial Statements set forth in Part II, Item 8 “Financial Statementsof this annual report and Supplementary Data.”are hereby incorporated by reference. We believe that the claims made against us in each of those proceedings are without merit, and we intend to vigorously defend against them. However, we cannot assure you as to the outcome of these lawsuits, nor can we currently estimate the range of potential losses to the Company.
From time to time we are also subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.
Recently Terminated Proceedings
Senior Housing and Five Star litigation. The Company and Marriott Senior Living Services, Inc. (“SLS”) (which on March 28, 2003, became a subsidiary of Sunrise Senior Living) were parties to actions in the Circuit Court for Montgomery County, Maryland and the Superior Court for Middlesex County, Massachusetts both initiated on November 27, 2002 (the Massachusetts court subsequently dismissed the Massachusetts action on March 4, 2003). These actions related to 31 senior living communities that SLS operates for Senior Housing Properties Trust (“SNH”) and Five Star Quality Care, Inc. (“FVE”), and SNH/FVE’s attempt to terminate the operating agreements for these communities. In the fourth quarter of 2003, the parties entered into settlement discussions and on January 7, 2004, the parties settled the suit on terms not material to us. The parties expect to receive formal notice of dismissal from the Maryland court in the near future.
Whitehouse Hotel litigation. On April 7, 2003, Whitehouse Hotel Limited Partnership and WH Holdings, L.L.C., the owners of the New Orleans Ritz-Carlton Hotel, filed suit against us and The Ritz-Carlton Hotel Company, L.L.C. (“Ritz-Carlton”) in the Civil District Court for the Parish of New Orleans, Louisiana. On October 24, 2003 the parties settled the suit on terms not material to us and on November 3, 2003 the suit was dismissed with prejudice upon joint motion of the parties.
Shareholders Derivative Actions (also recently resolved)
On January 16, 2003, Daniel and Raizel Taubenfeld filed a shareholder’s derivative action in Delaware Chancery Court against each member of our Board of Directors and against Avendra LLC. The company was named as a nominal defendant. The individual defendants were accused of exposing the company to accusations and lawsuits which allege wrongdoing on the part of the company. The complaint alleged that, as a result, the company’s reputation had been damaged leading to business losses and the compelled renegotiation of some management contracts. The substantive allegations of the complaint were derived exclusively from prior press reports. The plaintiffs made no damage claim against us, nor did they assert any specific damage amount against the individual defendants. Both the directors and the Company moved to dismiss this action. The court granted that motion on October 28, 2003, dismissing the complaint with prejudice as to the named plaintiffs only.
On July 2, 2003, the Taubenfelds also initiated an action in Delaware Chancery Court pursuant to Section 220 of the Delaware General Corporation Law, to obtain access to certain of the Company’s books and records, which remains outstanding. Amalgamated Bank brought a similar shareholder action for access to books and records under Section 220 in Delaware Chancery Court on July 8, 2003. During the fourth quarter of 2003, we entered into separate settlement agreements with the Taubenfelds and with Amalgamated Bank pursuant to which we will produce a limited number of documents. Once confidentiality agreements are entered into, these two proceedings will also be dismissed.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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Part II
ITEM 5. |
Market Information and Dividends
The range of prices of our common stock and dividends declared per share for each quarterly period within the last two years are as follows:
Stock Price | Dividends Declared Per Share | ||||||||||
High | Low | ||||||||||
2001 | First Quarter | $ | 47.81 | $ | 37.25 | $ | 0.060 | ||||
Second Quarter |
| 50.50 |
| 38.13 |
| 0.065 | |||||
Third Quarter |
| 49.72 |
| 40.50 |
| 0.065 | |||||
Fourth Quarter |
| 41.50 |
| 27.30 |
| 0.065 |
Stock Price | Dividends Declared Per Share | ||||||||||
High | Low | ||||||||||
2002 | First Quarter | $ | 45.49 | $ | 34.60 | $ | 0.065 | ||||
Second Quarter |
| 46.45 |
| 37.25 |
| 0.070 | |||||
Third Quarter |
| 40.25 |
| 30.44 |
| 0.070 | |||||
Fourth Quarter |
| 36.62 |
| 26.25 |
| 0.070 |
Stock Price | Dividends Declared Per | ||||||||||
High | Low | ||||||||||
2002 | First Quarter | $ | 45.49 | $ | 34.60 | $ | 0.065 | ||||
Second Quarter | 46.45 | 37.25 | 0.070 | ||||||||
Third Quarter | 40.25 | 30.44 | 0.070 | ||||||||
Fourth Quarter | 36.62 | 26.25 | 0.070 | ||||||||
Stock Price | Dividends Declared Per | ||||||||||
High | Low | ||||||||||
2003 | First Quarter | $ | 34.89 | $ | 28.55 | $ | 0.070 | ||||
Second Quarter | 40.44 | 31.23 | 0.075 | ||||||||
Third Quarter | 41.59 | 37.66 | 0.075 | ||||||||
Fourth Quarter | 47.20 | 40.04 | 0.075 |
At January 31, 2003,30, 2004, there were 233,802,816230,054,286 shares of Class A Common Stock outstanding held by 55,12247,202 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and Philadelphia Stock Exchange. The year-end closing price for our stock was $34.28 on January 3, 2003 and $46.15 on January 2, 2004.
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ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
ITEM 6. | SELECTED HISTORICAL FINANCIAL DATA |
The following table presents summary selected historical financial data for the Company derived from our financial statements as of and for the five fiscal years ended January 3, 2003.2, 2004.
Since the information in this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements.
Fiscal Year2 | ||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||
($ in millions, except per share data) | ||||||||||||||||||
Income Statement Data: | ||||||||||||||||||
Sales1 | $ | 8,441 |
| $ | 7,786 |
| $ | 7,911 |
| $ | 7,041 | $ | 6,311 | |||||
Segment Financial Results1,4 |
| 573 |
|
| 641 |
|
| 936 |
|
| 827 |
| 704 | |||||
Income from Continuing Operations, after tax |
| 439 |
|
| 269 |
|
| 490 |
|
| 399 |
| 372 | |||||
Discontinued Operations, after tax |
| (162 | ) |
| (33 | ) |
| (11 | ) |
| 1 |
| 18 | |||||
Net Income |
| 277 |
|
| 236 |
|
| 479 |
|
| 400 |
| 390 | |||||
Per Share Data: | ||||||||||||||||||
Diluted Earnings from Continuing Operations Per Share |
| 1.74 |
|
| 1.05 |
|
| 1.93 |
|
| 1.51 |
| 1.39 | |||||
Diluted (Loss)/Earnings from Discontinued Operations Per Share |
| (.64 | ) |
| (.13 | ) |
| (.04 | ) |
| — |
| 0.07 | |||||
Diluted Earnings Per Share |
| 1.10 |
|
| .92 |
|
| 1.89 |
|
| 1.51 |
| 1.46 | |||||
Cash Dividends Declared Per Share |
| .275 |
|
| .255 |
|
| .235 |
|
| .215 |
| .195 | |||||
Balance Sheet Data (at end of year): | ||||||||||||||||||
Total Assets |
| 8,296 |
|
| 9,107 |
|
| 8,237 |
|
| 7,324 |
| 6,233 | |||||
Long-Term and Convertible Debt1 |
| 1,553 |
|
| 2,708 |
|
| 1,908 |
|
| 1,570 |
| 1,163 | |||||
Shareholders’ Equity |
| 3,573 |
|
| 3,478 |
|
| 3,267 |
|
| 2,908 |
| 2,570 | |||||
Other Data: | ||||||||||||||||||
Systemwide Sales1,3 | $ | 18,599 |
| $ | 17,477 |
| $ | 17,489 |
| $ | 15,892 | $ | 14,279 |
($ in millions, except per share data) | Fiscal Year2 | |||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||
Income Statement Data: | ||||||||||||||||||
Revenues1 | $ | 9,014 | $ | 8,415 | $ | 7,768 | $ | 7,911 | $ | 7,026 | ||||||||
Operating income1 | 377 | 321 | 420 | 762 | 621 | |||||||||||||
Income from continuing operations | 476 | 439 | 269 | 490 | 399 | |||||||||||||
Discontinued operations | 26 | (162 | ) | (33 | ) | (11 | ) | 1 | ||||||||||
Net income | $ | 502 | $ | 277 | $ | 236 | $ | 479 | $ | 400 | ||||||||
Per Share Data: | ||||||||||||||||||
Diluted earnings per share from continuing operations | $ | 1.94 | $ | 1.74 | $ | 1.05 | $ | 1.93 | $ | 1.51 | ||||||||
Diluted earnings (loss) per share from discontinued operations | .11 | (.64 | ) | (.13 | ) | (.04 | ) | — | ||||||||||
Diluted earnings per share | $ | 2.05 | $ | 1.10 | $ | .92 | $ | 1.89 | $ | 1.51 | ||||||||
Cash dividends declared per share | .295 | .275 | .255 | .235 | .215 | |||||||||||||
Balance Sheet Data (at end of year): | ||||||||||||||||||
Total assets | $ | 8,177 | $ | 8,296 | $ | 9,107 | $ | 8,237 | $ | 7,324 | ||||||||
Long-term debt1 | 1,391 | 1,553 | 2,708 | 1,908 | 1,570 | |||||||||||||
Shareholders’ equity | 3,838 | 3,573 | 3,478 | 3,267 | 2,908 | |||||||||||||
Other Data: | ||||||||||||||||||
Base management fees1 | 388 | 379 | 372 | 383 | 352 | |||||||||||||
Incentive management fees1 | 109 | 162 | 202 | 316 | 268 | |||||||||||||
Franchise fees1 | 245 | 232 | 220 | 208 | 180 |
1 |
2 |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSBUSINESS AND OVERVIEW
We are a worldwide operator and franchisor of 2,718 hotels and related facilities. Our operations are grouped into five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel. In our Lodging business, we operate, develop and franchise under 14 separate brand names in 68 countries. We also operate and develop Marriott timeshare properties under four separate brand names.
We earn base, incentive and franchise fees based upon the terms of our management and franchise agreements. Revenues are also generated from the following sources associated with our timeshare business: (1) selling timeshare intervals, (2) operating the resorts, and (3) financing customer purchases of timesharing intervals. In addition, we earn revenues and generate tax credits from our Synthetic Fuel joint venture.
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, and interest income. With the exception of our Synthetic Fuel segment, we do not allocate income taxes to our segments. As timeshare note sales are an integral part of the timeshare business, we include timeshare note sale gains in our timeshare segment results and we allocate other gains as well as equity income (losses) from our joint ventures to each of our segments.
This historically challenging time in the lodging industry has demonstrated Marriott International’s resilience, the strength of our business model, superior brands, strong management team and dedicated associates. We are optimistic about a stronger business climate in 2004. And with the final disposition of our senior living and distribution services businesses in 2003, we look forward to operating as a focused lodging and timeshare company for the first time in our 76-year history. In 2003, we grew productivity at the hotel level leveraging our buying power and systems. Greater integration of sophisticated scheduling systems reduced hours worked per occupied room by over 10 percent in 2003 over 2000 levels for participating hotels. In addition, food and supply costs were reduced due to greater participation in our centralized procurement and accounts payable systems. By pooling risk among our managed hotel portfolio, we continued to purchase insurance at a lower cost than any property could purchase alone.
By the end of 2003, we had high-speed internet access available in approximately 1,400 hotels, far outpacing our competition. We also introduced wireless internet access in lobbies, meeting rooms and public spaces in over 900 hotels in the U.S. during the year.
GeneralCONSOLIDATED RESULTS
The following discussion presents an analysis of results of our operations for fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000. Systemwide sales include sales from our franchised properties, in addition to our owned, leased and managed properties.
CONSOLIDATED RESULTS2001.
Continuing Operations
Revenues
($ in millions)
2003 | 2002 | 2001 | |||||||
Full-Service | $ | 5,876 | $ | 5,508 | $ | 5,260 | |||
Select-Service | 1,000 | 967 | 864 | ||||||
Extended-Stay | 557 | 600 | 635 | ||||||
Timeshare | 1,279 | 1,147 | 1,009 | ||||||
Total lodging | 8,712 | 8,222 | 7,768 | ||||||
Synthetic fuel | 302 | 193 | — | ||||||
$ | 9,014 | $ | 8,415 | $ | 7,768 | ||||
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Income from Continuing Operations
($ in millions) | 2003 | 2002 | 2001 | |||||||||
Full-Service | $ | 407 | $ | 397 | $ | 294 | ||||||
Select-Service | 99 | 130 | 145 | |||||||||
Extended-Stay | 47 | (3 | ) | 55 | ||||||||
Timeshare | 149 | 183 | 147 | |||||||||
Total lodging financial results (pretax) | 702 | 707 | 641 | |||||||||
Synthetic fuel (after tax) | 96 | 74 | — | |||||||||
Unallocated corporate expenses | (132 | ) | (126 | ) | (157 | ) | ||||||
Interest income, provision for loan losses and interest expense | 12 | 24 | (63 | ) | ||||||||
Income taxes (excluding Synthetic fuel) | (202 | ) | (240 | ) | (152 | ) | ||||||
$ | 476 | $ | 439 | $ | 269 | |||||||
2003 Compared to 2002
Revenues from continuing operations increased 7 percent to $9 billion in 2003 reflecting revenue from new lodging properties, partially offset by lower demand for hotel rooms and consequently lower fees to us.
Income from continuing operations, net of taxes, increased 8 percent to $476 million, and diluted earnings per share from continuing operations advanced 11 percent to $1.94. Synthetic Fuel operations contributed $96 million in 2003 compared to $74 million in 2002. Our lodging financial results declined $5 million, to $702 million in 2003. The comparisons from 2002 benefit from the $50 million pretax charge to write-down acquisition goodwill for ExecuStay in 2002, offset by the $44 million pretax gain on the sale of our investment in Interval International in 2002, and further benefit from our 2003 receipt of a $36 million insurance settlement for lost management fees associated with the New York Marriott World Trade Center hotel, which was destroyed in the 2001 terrorist attacks.
2002 Compared to 2001
Revenues from continuing operations increased 8 percent to $8.4 billion in 2002 reflecting the sales of our new Synthetic Fuel operation and revenue from new lodging properties, partially offset by a slowdown in the economy and the resulting decline in lodging demand.
Income from continuing operations, net of taxes, increased 63 percent to $439 million, and diluted earnings per share from continuing operations advanced 66 percent to $1.74. Income from continuing operations reflected $208$74 million of tax benefits associated with our Synthetic Fuel business andsynthetic fuel operation, the results also reflected a $44 million pretax 2002 gain on the sale of our investment in Interval International, offset by the $50 million pretax 2002 charge to write-down the acquisition goodwill for ExecuStay and the decreased 2002 demand for hotelshotel rooms and executive apartments. The comparisons to 2001 reflectedinclude the impact of the $204 million pretax restructuring and other charges that we recorded against continuing operations that we recorded in the fourth quarter of 2001.
Sales, which exclude salesOperating Income
2003 Compared to 2002
Operating income increased 17 percent to $377 million in 2003. The favorable comparisons to 2002 include the impact of the $50 million write-down of goodwill recorded in 2002 associated with our ExecuStay business, the 2003 receipt of $36 million of insurance proceeds associated with lost management fees resulting from the destruction of the Marriott World Trade Center hotel and lower 2003 operating losses from our discontinued Distribution Services and Senior Living Services businesses, increased 8 percent to $8.4 billion in 2002 reflecting the sales forSynthetic Fuel operation. In 2003, our new Synthetic Fuel business and revenue from new lodging properties, partially offset by the decline in lodging demand. Systemwide sales, excluding sales from discontinued businesses, increased by 6 percent to $18.6 billion in 2002.
2001 Compared to 2000
Income and diluted earnings per share from continuing operations decreased 45 percent to $269generated operating losses of $104 million, and 46 percent to $1.05, respectively. Pretax restructuring and other charges totaling $204 million and lower lodging segment financial results, due to the decline in hotel performance, reduced income from continuing operations.
Sales of $7.8 billion in 2001 from our continuing operations were down slightly compared to $134 million in 2002. Operating income in 2003 was hurt by $53 million of lower incentive fees, which resulted from the prior year, reflecting a declineweak operating environment in hotel performance, partially offset by revenue from new lodging properties. Systemwide sales, excluding sales from our discontinued businesses were $17.5 billion, flat with the prior year.domestic lodging.
Marriott Lodging
Annual Change | |||||||||||||||||
($ in millions) | 2002 | 2001 | 2000 | 2002/2001 | 2001/2000 | ||||||||||||
Sales | $ | 8,248 |
| $ | 7,786 |
| $ | 7,911 | 6 | % | -2 | % | |||||
Segment financial results before restructuring costs, other charges, goodwill impairment and Interval International gain | $ | 713 |
| $ | 756 |
| $ | 936 | -6 | % | -19 | % | |||||
Restructuring costs |
| — |
|
| (44 | ) |
| — | nm |
| nm |
| |||||
Other charges |
| — |
|
| (71 | ) |
| — | nm |
| nm |
| |||||
Interval International gain |
| 44 |
|
| — |
|
| — | nm |
| nm |
| |||||
Goodwill impairment |
| (50 | ) |
| — |
|
| — | nm |
| nm |
| |||||
Segment financial results, as reported | $ | 707 |
| $ | 641 |
| $ | 936 | 10 | % | -32 | % | |||||
13
2002 Compared to 2001
Operating income decreased 24 percent to $321 million largely as a result of the $50 million write-down of goodwill associated with our ExecuStay business. In addition, we recorded $134 million of operating losses associated with our Synthetic Fuel operation, which commenced operations in 2002. The comparisons to 2001 are impacted by the $155 million restructuring and other charges recorded against operating income in 2001 and a $40 million reduction in incentive fees resulting from the decline in hotel demand.
20
Marriott Lodging
We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.
2003 Compared to 2002
Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported financial results of $702 million in 2003, compared to $707 million in 2002 and revenues of $8,712 million in 2003, a 106 percent increase, compared to revenues of $8,222 million in segment2002. The lodging revenue and financial results include the receipt of a $36 million insurance settlement for lost revenues associated with the New York World Trade Center hotel. Our revenues from base management fees totaled $388 million, an increase of 2 percent, reflecting 3 percent growth in the number of managed rooms and a 1.9 percent decline in REVPAR for our North American managed hotels. Incentive management fees were $109 million, a decline of 33 percent, reflecting the decline in REVPAR as well as lower property level house profit. House profit margins declined 2.7 percentage points, largely due to lower average room rates, higher wages, insurance and utility costs, and lower telephone profits, offset by continued productivity improvements. Franchise fees totaled $245 million, an increase of 6 percent higher salespercent. The comparison to 2002 includes the impact of the $50 million pretax write-down of ExecuStay goodwill recorded in 2002. Results reflect2002, partially offset by a $44 million pretax gain related to the sale of our investment in Interval International.
2002 Compared to 2001
Lodging financial results increased 10 percent to $707 million, and revenues increased 6 percent to $8,222 million. Results reflected a $44 million pretax gain related to the sale of our investment in Interval International, a timeshare exchange company, and increased revenue associated with new properties partially offset by lower fees due to the decline in demand for hotel rooms. Our revenues from base management fees totaled $379 million, an increase of 2 percent. Franchise fees totaled $232 million, an increase of 5 percent and incentive management fees were $162 million, a decline of 20 percent. The $50 million write-down of acquisition goodwill associated with our executive housing business, ExecuStay, reduced Lodging results in 2002. The 2002 comparisons are also impacted by the $115 million restructuring costs and other charges recorded against lodging results in 2001.
14
Marriott Lodging opened 185 properties totaling over 31,000 rooms across its brands in 2003, while 24 hotels (approximately 4,000 rooms) exited the system. Highlights of the year included:
At year-end 2003, we had over 300 hotel properties and approximately 50,000 rooms under construction, awaiting conversion, or approved for development. We expect to open over 175 hotels and timeshare resorts (approximately 25,000 to 30,000 rooms) in 2004. These growth plans are subject to numerous risks and uncertainties, many of which are outside our control. See “Forward-Looking Statements” above and “Liquidity and Capital Resources” below.
REVPAR
We consider Revenue per Available Room (REVPAR) to be a meaningful indicator of our performance because it measures the period over period change in room revenues for comparable properties. We calculate REVPAR by dividing room sales for comparable properties by room nights available to guests for the period. REVPAR may not be comparable to similarly titled measures such as revenues. Comparable REVPAR, room
The following table shows occupancy, average daily rate and occupancyREVPAR for each of our comparable principal established brands. We have not presented statistics used throughout this report are based onfor company-operated North American properties we operate. Statistics for Fairfield Inn and SpringHill Suites company-operated North American properties are nothere (or in the comparable information for the prior years presented - sincelater in this report) because we operate only a small number of properties as both these brands only have a few properties that we operate, theare predominantly franchised and such information would not be meaningful for those brands (identified as nm“nm” in the tables below). Systemwide
21
statistics include data from our franchised properties, in addition to our owned, leased and managed properties. Systemwide International statistics by region are based on comparable worldwide units, reflecting constant foreign exchange rates. Occupancy,excluding North America.
Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||
2003 | Change vs. 2002 | 2003 | Change vs. 2002 | |||||||||||
Marriott Hotels & Resorts(1) | ||||||||||||||
Occupancy | 69.3 | % | -0.5 | % pts. | 67.6 | % | -0.4 | % pts. | ||||||
Average daily rate | $ | 135.42 | -2.1 | % | $ | 128.53 | -1.8 | % | ||||||
REVPAR | $ | 93.81 | -2.8 | % | $ | 86.87 | -2.4 | % | ||||||
The Ritz-Carlton(2) | ||||||||||||||
Occupancy | 65.7 | % | 1.1 | % pts. | 65.7 | % | 1.1 | % pts. | ||||||
Average daily rate | $ | 231.12 | -0.8 | % | $ | 231.12 | -0.8 | % | ||||||
REVPAR | $ | 151.85 | 1.0 | % | $ | 151.85 | 1.0 | % | ||||||
Renaissance Hotels & Resorts | ||||||||||||||
Occupancy | 65.8 | % | 0.9 | % pts. | 65.3 | % | 1.5 | % pts. | ||||||
Average daily rate | $ | 132.12 | -1.8 | % | $ | 123.97 | -2.2 | % | ||||||
REVPAR | $ | 86.99 | -0.4 | % | $ | 80.92 | 0.1 | % | ||||||
Composite – Full-Service(3) | ||||||||||||||
Occupancy | 68.4 | % | -0.1 | % pts. | 67.1 | % | 0.0 | % pts. | ||||||
Average daily rate | $ | 144.17 | -1.6 | % | $ | 134.92 | -1.6 | % | ||||||
REVPAR | $ | 98.65 | -1.8 | % | $ | 90.57 | -1.6 | % | ||||||
Courtyard | ||||||||||||||
Occupancy | 67.6 | % | -1.0 | % pts. | 68.5 | % | -0.6 | % pts. | ||||||
Average daily rate | $ | 93.16 | -1.2 | % | $ | 92.90 | -0.6 | % | ||||||
REVPAR | $ | 63.01 | -2.7 | % | $ | 63.65 | -1.4 | % | ||||||
Fairfield Inn | ||||||||||||||
Occupancy | nm | nm | 64.1 | % | -0.3 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 64.28 | 0.2 | % | ||||||||
REVPAR | nm | nm | $ | 41.22 | -0.4 | % | ||||||||
SpringHill Suites | ||||||||||||||
Occupancy | nm | nm | 68.4 | % | 1.3 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 80.38 | 1.3 | % | ||||||||
REVPAR | nm | nm | $ | 54.94 | 3.2 | % | ||||||||
Residence Inn | ||||||||||||||
Occupancy | 77.0 | % | -0.3 | % pts. | 76.2 | % | 0.2 | % pts. | ||||||
Average daily rate | $ | 94.94 | -1.9 | % | $ | 93.85 | -1.4 | % | ||||||
REVPAR | $ | 73.09 | -2.3 | % | $ | 71.47 | -1.1 | % | ||||||
TownePlace Suites | ||||||||||||||
Occupancy | 70.3 | % | -2.0 | % pts. | 70.9 | % | 0.0 | % pts. | ||||||
Average daily rate | $ | 63.24 | 1.8 | % | $ | 63.34 | -0.2 | % | ||||||
REVPAR | $ | 44.48 | -1.0 | % | $ | 44.89 | -0.1 | % | ||||||
Composite – Select-Service & Extended-Stay(4) | ||||||||||||||
Occupancy | 70.0 | % | -0.8 | % pts. | 69.2 | % | -0.2 | % pts. | ||||||
Average daily rate | $ | 90.98 | -1.1 | % | $ | 83.70 | -0.6 | % | ||||||
REVPAR | $ | 63.64 | -2.2 | % | $ | 57.95 | -0.8 | % | ||||||
Composite – All(5) | ||||||||||||||
Occupancy | 69.0 | % | -0.4 | % pts. | 68.3 | % | -0.1 | % pts. | ||||||
Average daily rate | $ | 124.45 | -1.4 | % | $ | 105.86 | -1.1 | % | ||||||
REVPAR | $ | 85.85 | -1.9 | % | $ | 72.31 | -1.3 | % |
1 | Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand. |
2 | Statistics for The Ritz-Carlton are for January through December. |
3 | Full-Service composite statistics include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands. |
4 | Select-Service and Extended-Stay composite statistics include the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
5 | Composite statistics – All include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
22
For North American properties (except for The Ritz-Carlton as noted on the previous page), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended January 2, 2004, include the period from January 4, 2003 through January 2, 2004, while the statistics for the fiscal year ended January 3, 2003, include the period from December 29, 2001 through January 3, 2003.
The following table shows occupancy, average daily rate and REVPAR for international properties by region.
Comparable Company-Operated International Properties(1) | Comparable Systemwide International Properties (1) | |||||||||||||
Year Ended December 31, 2003 | Change vs. 2002 | Year Ended December 31, 2003 | Change vs. 2002 | |||||||||||
Caribbean & Latin America | ||||||||||||||
Occupancy | 67.5 | % | 4.2 | % pts. | 65.3 | % | 3.8 | % pts. | ||||||
Average daily rate | $ | 126.45 | 2.7 | % | $ | 121.64 | 2.2 | % | ||||||
REVPAR | $ | 85.32 | 9.5 | % | $ | 79.49 | 8.5 | % | ||||||
Continental Europe | ||||||||||||||
Occupancy | 67.9 | % | 0.3 | % pts. | 64.9 | % | 0.3 | % pts. | ||||||
Average daily rate | $ | 117.79 | -5.4 | % | $ | 119.40 | -4.0 | % | ||||||
REVPAR | $ | 79.92 | -4.9 | % | $ | 77.50 | -3.5 | % | ||||||
United Kingdom | ||||||||||||||
Occupancy | 76.6 | % | -0.7 | % pts. | 72.3 | % | -0.8 | % pts. | ||||||
Average daily rate | $ | 148.14 | -1.5 | % | $ | 125.44 | -3.2 | % | ||||||
REVPAR | $ | 113.48 | -2.4 | % | $ | 90.71 | -4.2 | % | ||||||
Middle East & Africa | ||||||||||||||
Occupancy | 66.5 | % | 0.4 | % pts. | 64.3 | % | 0.6 | % pts. | ||||||
Average daily rate | $ | 71.39 | 14.9 | % | $ | 71.58 | 14.6 | % | ||||||
REVPAR | $ | 47.49 | 15.7 | % | $ | 46.00 | 15.8 | % | ||||||
Asia Pacific(2) | ||||||||||||||
Occupancy | 65.5 | % | -6.7 | % pts. | 67.8 | % | -5.3 | % pts. | ||||||
Average daily rate | $ | 85.25 | -1.4 | % | $ | 93.13 | 0.5 | % | ||||||
REVPAR | $ | 55.86 | -10.5 | % | $ | 63.10 | -6.8 | % | ||||||
Composite International(3) | ||||||||||||||
Occupancy | 67.6 | % | -1.3 | % pts. | 67.5 | % | -1.0 | % pts. | ||||||
Average daily rate | $ | 109.62 | 0.1 | % | $ | 112.14 | 0.0 | % | ||||||
REVPAR | $ | 74.14 | -1.8 | % | $ | 75.69 | -1.5 | % |
1 | The comparison to 2002 is on a currency neutral basis and includes results for January through December. |
2 | Excludes Hawaii. |
3 | Includes Hawaii. |
23
The following table shows occupancy, average daily rate and REVPAR for each of our principal established brands for 2002 compared to 2001.
Comparable Company-Operated North American Properties | Comparable Systemwide North American Properties | |||||||||||||
2002 | Change vs. 2001 | 2002 | Change vs. 2001 | |||||||||||
Marriott Hotels & Resorts(1) | ||||||||||||||
Occupancy | 70.1 | % | 0.0 | % pts. | 68.4 | % | 0.3 | % pts. | ||||||
Average daily rate | $ | 137.28 | -4.8 | % | $ | 130.65 | -4.8 | % | ||||||
REVPAR | $ | 96.25 | -4.8 | % | $ | 89.30 | -4.4 | % | ||||||
The Ritz-Carlton(2) | ||||||||||||||
Occupancy | 66.1 | % | 0.6 | % pts. | 66.1 | % | 0.6 | % pts. | ||||||
Average daily rate | $ | 233.40 | -5.2 | % | $ | 233.40 | -5.2 | % | ||||||
REVPAR | $ | 154.21 | -4.3 | % | $ | 154.21 | -4.3 | % | ||||||
Renaissance Hotels & Resorts | ||||||||||||||
Occupancy | 65.1 | % | -0.9 | % pts. | 63.6 | % | -0.5 | % pts. | ||||||
Average daily rate | $ | 131.77 | -3.2 | % | $ | 123.43 | -3.0 | % | ||||||
REVPAR | $ | 85.80 | -4.5 | % | $ | 78.56 | -3.8 | % | ||||||
Composite – Full-Service(3) | ||||||||||||||
Occupancy | 69.1 | % | -0.1 | % pts. | 67.6 | % | 0.2 | % pts. | ||||||
Average daily rate | $ | 144.07 | -4.7 | % | $ | 135.57 | -4.6 | % | ||||||
REVPAR | $ | 99.51 | -4.8 | % | $ | 91.59 | -4.4 | % | ||||||
Courtyard | ||||||||||||||
Occupancy | 69.1 | % | -2.1 | % pts. | 69.7 | % | -1.2 | % pts. | ||||||
Average daily rate | $ | 94.47 | -5.1 | % | $ | 93.41 | -4.3 | % | ||||||
REVPAR | $ | 65.26 | -7.9 | % | $ | 65.13 | -5.9 | % | ||||||
Fairfield Inn | ||||||||||||||
Occupancy | nm | nm | 66.0 | % | -0.3 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 64.48 | -0.8 | % | ||||||||
REVPAR | nm | nm | $ | 42.59 | -1.3 | % | ||||||||
SpringHill Suites | ||||||||||||||
Occupancy | nm | nm | 68.2 | % | 1.6 | % pts. | ||||||||
Average daily rate | nm | nm | $ | 77.96 | -2.5 | % | ||||||||
REVPAR | nm | nm | $ | 53.14 | -0.2 | % | ||||||||
Residence Inn | ||||||||||||||
Occupancy | 76.9 | % | -0.6 | % pts. | 76.8 | % | -0.5 | % pts. | ||||||
Average daily rate | $ | 97.36 | -7.2 | % | $ | 95.68 | -5.6 | % | ||||||
REVPAR | $ | 74.87 | -7.9 | % | $ | 73.47 | -6.2 | % | ||||||
TownePlace Suites | ||||||||||||||
Occupancy | 73.4 | % | 0.2 | % pts. | 72.4 | % | 2.0 | % pts. | ||||||
Average daily rate | $ | 62.78 | -6.8 | % | $ | 63.28 | -4.9 | % | ||||||
REVPAR | $ | 46.08 | -6.5 | % | $ | 45.80 | -2.3 | % | ||||||
Composite – Select-Service & Extended-Stay (4) | ||||||||||||||
Occupancy | 71.5 | % | -1.5 | % pts. | 70.8 | % | -0.5 | % pts. | ||||||
Average daily rate | $ | 93.16 | -5.9 | % | $ | 85.92 | -4.3 | % | ||||||
REVPAR | $ | 66.65 | -7.8 | % | $ | 60.86 | -5.0 | % | ||||||
Composite – All(5) | ||||||||||||||
Occupancy | 70.1 | % | -0.6 | % pts. | 69.4 | % | -0.2 | % pts. | ||||||
Average daily rate | $ | 123.43 | -4.9 | % | $ | 107.58 | -4.4 | % | ||||||
REVPAR | $ | 86.47 | -5.7 | % | $ | 74.62 | -4.7 | % |
1 | Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand. |
2 | Statistics for The Ritz-Carlton are for January through December. |
3 | Full-Service composite statistics include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands. |
4 | Select-Service and Extended-Stay composite statistics include the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
5 | Composite statistics – All include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands. |
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For North American properties (except for The Ritz-Carlton as noted on the previous page), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended January 3, 2003 include the period from December 29, 2001 through January 3, 2003, while the statistics for the fiscal year ended December 28, 2001 include the period from December 30, 2000 through December 28, 2001.
Occupancy, average daily rate, and REVPAR by region for international properties are shown in the following table.
Comparable Company-Operated North American Properties | Comparable Worldwide Systemwide | |||||||||||||||||||||||||||
2002 | Change vs. 2001 | 2002 | Change vs. 2001 | Comparable Company-Operated International Properties(1) | Comparable Systemwide International Properties (1) | |||||||||||||||||||||||
Marriott Hotels, Resorts and Suites | ||||||||||||||||||||||||||||
Year Ended December 31, 2002 | Change vs. 2001 | Year Ended December 31, 2002 | Change vs. 2001 | |||||||||||||||||||||||||
Caribbean & Latin America | ||||||||||||||||||||||||||||
Occupancy |
| 70.1 | % | — | %pts. |
| 68.7 | % | 0.8 | % pts. | 66.3 | % | -0.6 | % pts. | 63.5 | % | -1.0 | % pts. | ||||||||||
Average daily rate | $ | 137.28 |
| -4.8 | % | $ | 126.87 |
| -4.1 | % | $ | 129.33 | -1.2 | % | $ | 124.25 | -2.6 | % | ||||||||||
REVPAR | $ | 96.25 |
| -4.8 | % | $ | 87.20 |
| -3.0 | % | $ | 85.73 | -2.2 | % | $ | 78.87 | -4.1 | % | ||||||||||
The Ritz-Carlton Hotels | ||||||||||||||||||||||||||||
Continental Europe | ||||||||||||||||||||||||||||
Occupancy |
| 66.1 | % | 0.6 | %pts. |
| 67.3 | % | 1.5 | % pts. | 67.1 | % | 0.4 | % pts. | 64.2 | % | -0.3 | % pts. | ||||||||||
Average daily rate | $ | 233.40 |
| -5.2 | % | $ | 213.15 |
| -4.1 | % | $ | 106.82 | -2.3 | % | $ | 108.58 | -1.0 | % | ||||||||||
REVPAR | $ | 154.21 |
| -4.3 | % | $ | 143.47 |
| -2.0 | % | $ | 71.71 | -1.7 | % | $ | 69.67 | -1.4 | % | ||||||||||
Renaissance Hotels, Resorts and Suites | ||||||||||||||||||||||||||||
United Kingdom | ||||||||||||||||||||||||||||
Occupancy |
| 65.1 | % | -0.9 | % pts. |
| 66.6 | % | 1.4 | % pts. | 77.3 | % | 2.9 | % pts. | 74.0 | % | 1.6 | % pts. | ||||||||||
Average daily rate | $ | 131.77 |
| -3.2 | % | $ | 107.46 |
| -3.5 | % | $ | 139.98 | -0.3 | % | $ | 123.59 | -3.0 | % | ||||||||||
REVPAR | $ | 85.80 |
| -4.5 | % | $ | 71.58 |
| -1.4 | % | $ | 107.50 | 3.6 | % | $ | 91.43 | -0.8 | % | ||||||||||
Courtyard | ||||||||||||||||||||||||||||
Middle East & Africa | ||||||||||||||||||||||||||||
Occupancy |
| 69.1 | % | -2.1 | % pts. |
| 69.3 | % | -1.2 | % pts. | 66.2 | % | 5.4 | % pts. | 66.2 | % | 5.4 | % pts. | ||||||||||
Average daily rate | $ | 94.47 |
| -5.1 | % | $ | 91.24 |
| -4.0 | % | $ | 72.84 | -6.3 | % | $ | 72.84 | -6.3 | % | ||||||||||
REVPAR | $ | 65.26 |
| -7.9 | % | $ | 63.23 |
| -5.6 | % | $ | 48.19 | 2.0 | % | $ | 48.19 | 2.0 | % | ||||||||||
Fairfield Inn | ||||||||||||||||||||||||||||
Asia Pacific(2) | ||||||||||||||||||||||||||||
Occupancy |
| nm |
| nm |
|
| 66.0 | % | -0.3 | % pts. | 72.8 | % | 4.8 | % pts. | 73.5 | % | 4.2 | % pts. | ||||||||||
Average daily rate |
| nm |
| nm |
| $ | 64.48 |
| -0.8 | % | $ | 81.13 | -0.8 | % | $ | 87.35 | -0.7 | % | ||||||||||
REVPAR |
| nm |
| nm |
| $ | 42.59 |
| -1.3 | % | $ | 59.08 | 6.2 | % | $ | 64.17 | 5.2 | % | ||||||||||
SpringHill Suites | ||||||||||||||||||||||||||||
Composite International(3) | ||||||||||||||||||||||||||||
Occupancy |
| nm |
| nm |
|
| 68.2 | % | 1.6 | % pts. | 69.7 | % | 2.9 | % pts. | 69.1 | % | 2.3 | % pts. | ||||||||||
Average daily rate |
| nm |
| nm |
| $ | 77.96 |
| -2.5 | % | $ | 101.81 | -2.0 | % | $ | 105.22 | -2.2 | % | ||||||||||
REVPAR |
| nm |
| nm |
| $ | 53.14 |
| -0.2 | % | $ | 70.95 | 2.2 | % | $ | 72.71 | 1.1 | % | ||||||||||
Residence Inn | ||||||||||||||||||||||||||||
Occupancy |
| 76.9 | % | -0.6 | %pts. |
| 76.8 | % | -0.5 | % pts. | ||||||||||||||||||
Average daily rate | $ | 97.36 |
| -7.2 | % | $ | 95.68 |
| -5.6 | % | ||||||||||||||||||
REVPAR | $ | 74.87 |
| -7.9 | % | $ | 73.47 |
| -6.2 | % | ||||||||||||||||||
TownePlace Suites | ||||||||||||||||||||||||||||
Occupancy |
| 73.4 | % | 0.2 | %pts. |
| 72.4 | % | 2.0 | % pts. | ||||||||||||||||||
Average daily rate | $ | 62.78 |
| -6.8 | % | $ | 63.28 |
| -4.9 | % | ||||||||||||||||||
REVPAR | $ | 46.08 |
| -6.5 | % | $ | 45.80 |
| -2.3 | % |
1 | The comparison to 2001 is on a currency neutral basis and includes results for January through December. |
2 | Excludes Hawaii. |
3 | Includes Hawaii. |
1525
Full-Service Lodging | Annual Change | ||||||||||||||
($ in millions) | 2003 | 2002 | 2001 | 2003/2002 | 2002/2001 | ||||||||||
Revenues | $ | 5,876 | $ | 5,508 | $ | 5,260 | 7 | % | 5 | % | |||||
Segment results | $ | 407 | $ | 397 | $ | 294 | 3 | % | 35 | % | |||||
2003 Compared to 2002
Full-Service Lodging, which includes theMarriott Hotels & Resorts,The Ritz-Carlton,Renaissance Hotels & Resorts,Ramada International andBulgari Hotels & Resorts brands, had revenues of $5,876 million, a 7 percent increase over prior year, and segment results of $407 million compared to $397 million in 2002. The 3 percent increase in results includes the $36 million insurance payment received for lost management fees in connection with the loss of the New York Marriott World Trade Center hotel in the September 11, 2001 terrorist attacks. The 2003 results also reflect an $18 million increase in base management and franchise fees, largely due to the growth in the number of rooms. Across our Full-Service Lodging brands, segment, we added 88 hotels (18,000 rooms) and deflagged 15 hotels (3,000 rooms). We typically earn incentive fees only after a managed hotel achieves a minimum level of owner profitability. As a result, lower revenue and lower property-level margins have reduced the number of hotels from which we earn incentive management fees. As a result, full-service incentive fees declined $41 million in 2003.
REVPAR for comparable company-operatedFull-Service Lodging North American propertiessystemwide hotels declined by an average of 5.71.6 percent in 2002. Average room ratesto $90.57. Occupancy for these hotels was flat at 67.1 percent, while average room rates declined 1.6 percent to $134.92. REVPAR for our International systemwide hotels declined 1.5 percent. Occupancy declined 1 percentage point, while average room rates remained flat at $112.14.
Our international operations increased 9 percent to $102 million, reflecting $21 million of gains associated with the sale of our interests in three joint ventures and favorable foreign exchange rates, partially offset by an $8 million charge for guarantee fundings related to a hotel in Istanbul, a $7 million charge to write-down our investment in a joint venture that sold a hotel at a loss in January 2004, and the impact of the war and Severe Acute Respiratory Syndrome (SARS) on international travel earlier in the year.
2002 Compared to 2001
Full-Service Lodging had revenues of $5,508 million, a 5 percent increase over prior year, and segment results of $397 million, an increase of 35 percent. The comparison reflects $84 million of restructuring and other charges recorded in the fourth quarter of 2001. The 2002 results also reflect a $9 million increase in base management fees, largely due to the growth in the number of managed rooms. Franchise fees decreased 4.9 percent$6 million primarily as a result of the transfer of the Ramada license agreements to the joint venture formed with Cendant Corporation. In 2001, we had franchise revenue associated with the Ramada license agreements, while in 2002 we had equity in earnings of the joint venture, the impact of the change in the Ramada structure was partially offset by higher franchise fees resulting from the growth in the number of franchised rooms. Across our Full-Service Lodging segment, we added 60 hotels (15,000 rooms) and occupancydeflagged 12 hotels (3,300 rooms). Full-Service incentive fees were down $27 million due to the decline in the number of properties from which we earn incentive fees.
REVPAR for Full-Service Lodging North American systemwide hotels declined 4.4 percent. Occupancy for these hotels was up slightly to 70.167.6 percent, while the average room rates declined 4.6 percent.
International Lodginglodging reported an increase in the results of operations, reflecting the impact of the increase in travel in Asia and the United Kingdom. The favorable comparison is also impacted byreflects the restructuring and other charges recorded in the fourth quarter of 2001.
Select-Service Lodging | Annual Change | ||||||||||||
($ in millions) | 2003 | 2002 | 2001 | 2003/2002 | 2002/2001 | ||||||||
Revenues | $ | 1,000 | $ | 967 | $ | 864 | 3% | 12% | |||||
Segment results | $ | 99 | $ | 130 | $ | 145 | -24% | -10% | |||||
26
2003 Compared to 2002
Select-Service Lodging, which includes theCourtyard, Fairfield Inn andSpringHill Suites brands, had revenues of $1 billion, a 3 percent increase over the prior year, and segment results of $99 million compared to $130 million in 2002. The $31 million decrease reflects the impact of a $12 million reduction in base and incentive management fees, partially offset by a $3 million increase in franchise fees. The results also include $12 million of higher equity losses primarily from our Courtyard joint venture, formed in 2000, which owns 120 Courtyard hotels.
In 2003, across our Select-Service Lodging segment, we added 66 hotels (8,000 rooms) and deflagged four hotels (700 rooms). Over 90 percent of the gross room additions were franchised.
2002 Compared to 2001
Select-Service Lodginghad revenues of $967 million, a 12 percent increase compared to the prior year, and segment results of $130 million compared to $145 million in 2002. The comparison to 2001 reflects $13 million of restructuring and other charges recorded in the fourth quarter of 2001. The $15 million decrease in segment results reflects the impact of an $11 million reduction in base and incentive management fees, offset by a $13 million increase in franchise fees. The results also include $8 million of equity losses in 2002 compared to earnings of $5 million in 2001, primarily related to our Courtyard joint ventures.
In 2002, across our Select-Service Lodging segment, we added 80 hotels (10,600 rooms) and deflagged 9 hotels (1,100 rooms). Eighty-two percent of the gross room additions were franchised.
Extended-Stay Lodging | Annual Change | |||||||||||||
($ in millions) | 2003 | 2002 | 2001 | 2003/2002 | 2002/2001 | |||||||||
Revenues | $ | 557 | $ | 600 | $ | 635 | -7% | -6% | ||||||
Segment results | $ | 47 | $ | (3 | ) | $ | 55 | nm | nm | |||||
2003 Compared to 2002
Extended-Stay Lodging, which includes theResidence Inn,TownePlace Suites,Marriott Executive Apartments andMarriott ExecuStay brands, had revenues of $557 million, a decrease of 7 percent, and segment results of $47 million compared to an operating loss of $3 million in 2002. In 2002, we recorded a $50 million charge to write-down the acquisition goodwill for ExecuStay. Our base and incentive management fees decreased $7 million and our franchise fees increased $6 million.
In 2003 we added 31 hotels (3,800 rooms) across our Extended-Stay Lodging segment. Over 80 percent of the gross room additions were franchised. We deflagged one property (100 rooms), and we decreased our ExecuStay brand by 1,300 units.
2002 Compared to 2001
Extended-Stay Lodginghad revenues of $600 million, a decrease of 6 percent, and an operating loss of $3 million compared to income of $55 million in 2001. In 2002, we recorded a $50 million charge to write-down the acquisition goodwill for ExecuStay. Our base and incentive management fees decreased $7 million, and our franchise fees increased $5 million. The comparisons to 2001 were also impacted by $16 million of restructuring and other charges recorded in the fourth quarter of 2001.
In 2002, across our Extended-Stay Lodging segment, we added 44 hotels (5,400 rooms). Over 80 percent of the gross room additions were franchised. We deflagged three properties (300 rooms), and we decreased our ExecuStay brand by 1,800 units.
27
Timeshare | Annual Change | ||||||||||||
($ in millions) | 2003 | 2002 | 2001 | 2003/2002 | 2002/2001 | ||||||||
Revenues | $ | 1,279 | $ | 1,147 | $ | 1,009 | 12% | 14% | |||||
Segment results | $ | 149 | $ | 183 | $ | 147 | -19% | 24% | |||||
2003 Compared to 2002
The results of ourTimeshare segment (Marriott Vacation Club International, Horizons by Marriott Vacation Club International, The Ritz-Carlton Club and Marriott Grand Residence Club) decreased 19 percent to $149 million, while revenues increased 12 percent. Note sale gains in 2003 were $64 million compared to $60 million in 2002. Contract sales increased 16 percent and were strong at timeshare resorts in the Caribbean, Hawaii, and South Carolina and soft in Lake Tahoe, Orlando and Williamsburg. The comparison to 2002 reflects the $44 million gain in 2002 on the sale of our investment in Interval International. Timeshare revenues of $1,279 million and $1,147 million, in 2003 and 2002, respectively, includes interval sales, base management fees and cost reimbursements.
Marriott Vacation Club International.2002 Compared to 2001 Financial
The financial results of ourTimesharesegment increased 24 percent to $183 million, reflecting a 514 percent increase in contract sales andrevenues, note sale gains in 2002 of $60 million compared to $40 million in 2001, and a gain of $44 million related to the sale of our investment in Interval International, partially offset by lower development profits and higher depreciation from recently addedon systems for customer support. Contract sales increased 5 percent.
Lodging DevelopmentSynthetic Fuel
Marriott Lodging opened 188 properties totaling over 31,000 rooms across its brandsIn October 2001, we acquired four coal-based synthetic fuel production facilities (the “Facilities”) for $46 million in 2002, while 25 hotels (approximately 4,700 rooms) exitedcash. The synthetic fuel produced at the system. HighlightsFacilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code (credits are not available for fuel produced after 2007). We began operating these Facilities in the first quarter of 2002. Operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be, significantly accretive to our net income. Our synthetic fuel operation generated net income of $96 million and $74 million in fiscal years 2003 and 2002, respectively. Although the Facilities produce significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In fiscal year included:2003, our synthetic fuel operation reflected sales of $302 million, equity income of $10 million and an operating loss of $104 million, resulting in a tax benefit of $245 million, including tax credits of $211 million, offset by minority interest expense of $55 million.
On June 21, 2003, we completed the previously announced sale of an approximately 50 percent ownership interest in the synthetic fuel operation. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that we expect will continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. We earned $56 million of such additional profits in 2003. Certain post closing conditions, including our receipt of satisfactory private letter rulings from the Internal Revenue Service, were satisfied during the fourth quarter. Those rulings confirm, among other things, both that the process used by our synthetic fuel operations produces a “qualified fuel” as required by Section 29 of the Internal Revenue Code and the validity of the joint venture ownership structure with the 50 percent purchaser. After reviewing the private letter rulings, the purchaser informed us in writing that it would not be exercising a one-time “put option,” which would potentially have allowed it to return its ownership interest to us if satisfactory rulings had not been obtained prior to December 15, 2003.
As a result of the put option, we continued to consolidate the synthetic fuel operation through November 6, 2003. Effective November 7, 2003, because the put option was voided, we account for the Synthetic Fuel joint venture using the equity method of accounting. The $24 million of additional profits we received from the joint venture partner beginning November 7, 2003, along with our share of the equity in losses of the synthetic fuel joint venture, are reflected in the income statement under Equity in
earnings/(losses) from synthetic fuel. The additional profits earned prior to November 7, 2003, along with the revenue generated from the previously consolidated synthetic fuel joint venture, are included in synthetic fuel revenue in the income statement.
We will continue to record the benefit of our total room additions forshare of the year, were conversionstax credits in our financial statements as a reduction of our tax provision. Going forward, we expect net income will continue to benefit from other brands.
At year-end 2002, we had 300 hotel properties28
General, Administrative and more than 50,000 rooms under construction, awaiting conversion, or approved for development. We expect to open over 150 hotels and timesharing resorts (25,000 - 30,000 rooms) in 2003. These growth plans are subject to numerous risks and uncertainties, many of which are outside our control. See “Forward-Looking Statements” above and “Liquidity and Capital Resources” below.Other Expenses
20012003 Compared to 20002002
Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 32 percent decrease in segment financial results and 2 percent lower sales in 2001. Results reflected restructuring costs of $44 millionGeneral, administrative and other charges of $71 million, including a $36 million reserve for third-party guarantees we expect to fund and not recover out of future cash flow, $12 million of reserves for accounts receivable deemed uncollectible, a write-off of two investments in management contracts and other assets of $8 million,expenses increased $13 million of losses on the anticipated sale of three lodging properties,in 2003 to $523 million, reflecting higher litigation expenses related to two continuing and a $2 million write-off associated with capitalized software costs arising from a decision to change a technology platform. Results also reflect lower fees due to the decline in demand for hotel rooms,previously disclosed lawsuits, partially offset by increased revenue associated with new properties. Incentive management fees declined 36 percent, base management fees declined 3 percent, and franchise fees increased 6 percent.
16
Occupancy, average daily rate and REVPAR for each of our principal established brands are shown in the following table.
Comparable Company-Operated North American Properties | Comparable Worldwide Systemwide | |||||||||||||
2001 | Change vs. 2000 | 2001 | Change vs. 2000 | |||||||||||
Marriott Hotels, Resorts and Suites | ||||||||||||||
Occupancy |
| 70.4 | % | -7.1 | % pts. |
| 68.9 | % | -5.7 | % pts. | ||||
Average daily rate | $ | 142.96 |
| -2.9 | % | $ | 131.60 |
| -1.6 | % | ||||
REVPAR | $ | 100.62 |
| -11.8 | % | $ | 90.64 |
| -9.1 | % | ||||
The Ritz-Carlton Hotels | ||||||||||||||
Occupancy |
| 66.9 | % | -10.4 | % pts. |
| 67.6 | % | -8.0 | % pts. | ||||
Average daily rate | $ | 249.94 |
| 2.3 | % | $ | 226.58 |
| 4.1 | % | ||||
REVPAR | $ | 167.21 |
| -11.5 | % | $ | 153.25 |
| -7.0 | % | ||||
Renaissance Hotels, Resorts and Suites | ||||||||||||||
Occupancy |
| 65.6 | % | -7.7 | % pts. |
| 65.4 | % | -4.7 | % pts. | ||||
Average daily rate | $ | 137.79 |
| -2.9 | % | $ | 112.33 |
| -1.8 | % | ||||
REVPAR | $ | 90.39 |
| -13.1 | % | $ | 73.48 |
| -8.3 | % | ||||
Courtyard | ||||||||||||||
Occupancy |
| 71.6 | % | -6.3 | % pts. |
| 70.9 | % | -4.9 | % pts. | ||||
Average daily rate | $ | 99.45 |
| 1.2 | % | $ | 94.61 |
| 1.2 | % | ||||
REVPAR | $ | 71.24 |
| -7.0 | % | $ | 67.12 |
| -5.3 | % | ||||
Fairfield Inn | ||||||||||||||
Occupancy |
| nm |
| nm |
|
| 66.3 | % | -3.2 | % pts. | ||||
Average daily rate |
| nm |
| nm |
| $ | 64.70 |
| 2.1 | % | ||||
REVPAR |
| nm |
| nm |
| $ | 42.91 |
| -2.6 | % | ||||
SpringHill Suites | ||||||||||||||
Occupancy |
| nm |
| nm |
|
| 70.0 | % | -0.1 | % pts. | ||||
Average daily rate |
| nm |
| nm |
| $ | 81.74 |
| 2.7 | % | ||||
REVPAR |
| nm |
| nm |
| $ | 57.20 |
| 2.6 | % | ||||
Residence Inn | ||||||||||||||
Occupancy |
| 77.8 | % | -5.1 | % pts. |
| 77.9 | % | -3.9 | % pts. | ||||
Average daily rate | $ | 105.46 |
| -1.4 | % | $ | 102.69 |
| -0.2 | % | ||||
REVPAR | $ | 82.05 |
| -7.5 | % | $ | 79.96 |
| -5.0 | % | ||||
TownePlace Suites | ||||||||||||||
Occupancy |
| 74.6 | % | 1.2 | % |
| 73.0 | % | -0.6 | % pts. | ||||
Average daily rate | $ | 67.36 |
| -2.5 | % | $ | 65.22 |
| 0.2 | % | ||||
REVPAR | $ | 50.28 |
| -0.9 | % | $ | 47.64 |
| -0.7 | % |
Across our Lodging brands, REVPAR for comparable company-operated North American properties declined by an average of 10.4 percent in 2001. Average room rates for these hotels declined 2 percent, while occupancy declined 6.7 percentage points.
International Lodgingreported a decrease in the results of operations, reflecting the impact of the declineadditional week in international travel and restructuring and other charges, partially offset by sales associated with new rooms. Over 35 percent2002 (our 2002 fiscal year included 53 weeks compared to 52 weeks in 2003). The expenses also reflect foreign exchange gains of rooms added in 2001 were outside the United States.
Marriott Vacation Club International contributed over 20 percent of lodging segment financial results in 2001, after the impact of restructuring and other charges. Segment financial results increased 7 percent reflecting a
17
22 percent increase in contract sales, the 2001 acquisition of the Grand Residence Club in Lake Tahoe, California, and note sale gains in 2001 of $40$7 million, compared to $22losses of $6 million in 2000, partially offset by higher marketing and selling expenses and severance expenses of nearly $2 million associated with the Company’s restructuring plan.2002.
Corporate Expenses, Interest and Taxes
Corporate Expenses
Annual Change | |||||||||||||||
($ in millions) | 2002 | 2001 | 2000 | 2002/2001 | 2001/2000 | ||||||||||
Corporate expenses before restructuring costs and other charges | $ | 126 | $ | 117 | $ | 120 | 8 | % | -3 | % | |||||
Restructuring costs |
| — |
| 18 |
| — | nm |
| nm |
| |||||
Other charges |
| — |
| 22 |
| — | nm |
| nm |
| |||||
Corporate expenses, as reported | $ | 126 | $ | 157 | $ | 120 | -20 | % | 31 | % | |||||
2002 Compared to 2001
CorporateGeneral, administrative and other expenses decreased $31$145 million in 2002 to $126$510 million, primarily reflecting the following: (i) 2002 items, including higher insurance costs,a $9 million reserve recorded in connection with a lawsuit involving the sale of a hotel previously managed by us, $3 million of higher litigation expenses, and $9 million of lower expenses associated with our deferred compensation plan, lower foreign exchange losses and the continued favorable impact of our cost containment initiatives;plan; (ii) 2001 items, including restructuring charges$155 million of $18 million related to severancerestructuring costs and facilities exit costs, a $35 million write-off of three investments in technology partners (including a $22 million chargeother charges recorded in the fourth quarter),quarter of 2001 associated with the downturn in the economy and the impact of the September 11, 2001 attacks, $13 million related to the write-down of two investments in technology partners; $29 million of goodwill amortization expense (in accordance with FAS No. 142, we ceased amortizing goodwill in 2002) $11 million in gains from the sale of affordable housing investments and the reversal of a $10 million insurance reserve related to a lawsuit at one of our hotels.hotels.
2001 Compared to 2000Gains and Other Income
Corporate expenses increased $37 million reflecting the impact of restructuring charges of $18 million related to severance costs and facilities exit costs,The following table shows our gains and other charges related toincome for the fourth quarter write-off of a $22 million investment in one of our technology partners. In addition to these items, we also recorded $8 million of foreign exchange lossesfiscal years ended January 2, 2004, January 3, 2003 and in prior quarters we recorded a $13 million write-off of two investments in technology partners. These charges were partially offset by $11 million in gains from the sale of affordable housing tax credit investments, the favorable impact of cost containment action plans, and the reversal of a long-standing $10 million insurance reserve related to a lawsuit at one of our managed hotels. The reversal of the insurance reserve was the result of our conclusion that a settlement could be reached in an amount that would be covered by insurance. We determined that it was no longer probable that the loss contingency would result in a material outlay by us and accordingly, we reversed the reserve during the first quarter ofDecember 28, 2001.
($ in millions) | 2003 | 2002 | 2001 | ||||||
Timeshare note sale gains | $ | 64 | $ | 60 | $ | 40 | |||
Gains on sale of real estate | 21 | 28 | 38 | ||||||
Gains on sales of three international joint ventures | 21 | — | — | ||||||
Gain on sale of investment in Interval International | — | 44 | — | ||||||
$ | 106 | $ | 132 | $ | 78 | ||||
Interest Expense
2003 Compared to 2002
Interest expense increased $24 million to $110 million reflecting interest on the mortgage debt assumed in the fourth quarter of 2002 associated with the acquisition of 14 senior living communities, and lower capitalized interest resulting from fewer projects under construction, primarily related to our timeshare segment. In the fourth quarter of 2003, $234 million of senior debt was repaid. The weighted average interest rate on the repaid debt was 7 percent.
2002 Compared to 2001
Interest expense decreased $23 million to $86 million, reflecting the decrease in borrowing and interest rates.
2001 Compared to 2000
Interest expense increased $9 million to $109 million reflecting the impact of the issuance of Series E Notes in January 2001 and borrowings under our revolving credit facilities,rates, partially offset by lower interest resulting from the payoff of commercial paper.capitalized interest.
Interest Income and Income Tax
2003 Compared to 2002
Interest income increased $7 million (6 percent) to $129 million. The provision for loan losses for 2003 was $7 million and includes $15 million of reserves for loans deemed uncollectible at six hotels, offset by the reversal of $8 million of reserves no longer deemed necessary.
Income from continuing operations before income taxes and minority interest generated a tax benefit of $43 million in 2003, compared to a tax provision of $32 million in 2002. The difference is primarily attributable to the impact of our Synthetic Fuel operation, which generated a tax benefit and tax credits of $245 million in 2003, compared to $208 million in 2002. Excluding the impact of our Synthetic Fuel operation, our pretax income was lower in 2003, which also contributed to the favorable tax impact.
Our effective tax rate for discontinued operations increased from 15.7 percent to 39 percent due to the impact of the taxes in 2002 associated with the sale of stock in connection with the disposal of our Senior Living Services business.
29
2002 Compared to 2001
Interest income increased $28 million to $122 million, before reflecting reserves of $12 million for loans deemed uncollectible at four hotels. The increase in interest income was favorably impacted by amounts recognized whichthat were previously
18
deemed uncollectible. The comparison to 2001 also reflects a $6 million charge for expected guarantee fundings recorded against interest income in the fourth quarter of 2001.
Our effective income tax rate for continuing operations decreased to approximately 6.8 percent in 2002 from 36.1 percent in 2001, primarily due to the impact of our Synthetic Fuel business. Excluding the impactoperation which generated a tax benefit and tax credits of Synthetic Fuel, our effective income tax rate for continuing operations for 2002 was 39.6 percent.$208 million. Our effective tax rate for discontinued operations decreased from 35.4 percent to 15.7 percent due to the impact of the taxes associated with the sale of stock in connection with the disposal of our Senior Living Services business.
2001 Compared to 2000
Interest income increased $34 million, before reflecting reserves of $48 million for loans deemed uncollectible as a result of certain hotels experiencing significant declines in profitability and the owners not being able to meet debt service obligations. The change in interest income was impacted by income associated with higher loan balances, including the loans made to the Courtyard joint venture in the fourth quarter of 2000, offset by $6 million of expected guarantee fundings and the impact of $14 million of income recorded in 2000 associated with an international loan that was previously deemed uncollectible.
Our effective income tax rate for continuing operations decreased to 36.1 percent in 2001 from 36.6 percent in 2000 as a result of modifications related to our deferred compensation plan and the impact of increased income in countries with lower effective tax rates.
Synthetic Fuel
In October 2001, we acquired four coal-based synthetic fuel production facilities (the Facilities) for $46 million in cash. The Synthetic Fuel produced at the Facilities qualifies for tax credits based on Section 29 of the Internal Revenue Code. Under Section 29, tax credits are not available for Synthetic Fuel produced after 2007. We began operating these Facilities in the first quarter of 2002. The operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be significantly accretive to our net income. Although the Facilities produce significant losses, these are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In the fiscal year 2002, our Synthetic Fuel business reflected sales of $193 million and a loss of $134 million, resulting in a tax benefit of $49 million and tax credits of $159 million.
In January 2003, we entered into a contract with an unrelated third party to sell approximately a 50 percent interest in the Synthetic Fuel business. The transaction is subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service regarding the new ownership structure. Contracts related to the potential sale are being held in escrow until closing conditions are met. If the conditions are not met by August 31, 2003, neither party will have an obligation to perform under the agreements. If the transaction is consummated, we expect to receive $25 million in promissory notes and cash as well as an earnout based on the amount of synthetic fuel produced. If the transaction is consummated, we expect to account for the remaining interest in the Synthetic Fuel business under the equity method of accounting.
DISCONTINUED OPERATIONS
Senior Living Services
2002 Compared to 2001
On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc. and to sell nine senior living communities to CNL Retirement Partners, Inc. (CNL) for approximately $259 million in cash. We expect to complete the sale early in 2003. On December 17, 2002, we sold twelve senior living communities to CNL for approximately $89 million in cash. We accounted for the sale under the full accrual method in accordance with Financial Accounting Standards (FAS) 66, and we recorded an after-tax loss of approximately $13 million. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. We plan to restructure the debt and sell the communities in 2003. Management has approved and committed to a plan to sell these communities within 12 months. Accordingly, at January 3, 2003, the operating results of our Senior Living Services
19
segment are reported in discontinued operations, and the remaining assets are classified as assets held for sale on the balance sheet.
As a result of the transactions outlined above, we anticipate a total after-tax charge of $109 million. Since generally accepted accounting principles do not allow gains to be recognized until the underlying transaction closes, we cannot record the estimated after-tax gain of $22 million on the sale of the nine communities to CNL until the sale is completed, which we expect to occur in early 2003. As a result, we have recorded an after-tax charge of $131 million which is included in discontinued operations for the year ended January 3, 2003.
In December 2001, management approved and committed to a plan to exit the companion living concept of senior living services and sell the related properties within the next 12 months. We recorded an impairment charge of $60 million to adjust the carrying value of the properties to their estimated fair value atfor the year ended December 28, 2001. On October 1, 2002, we completed the sale of these properties for $62 million, which exceeded our previous estimate of fair value by $11 million. We included the $11 million gain in discontinued operations for the year ended January 3, 2003.
Income from discontinued operations,In the second quarter of 2002, we sold five senior living communities for $59 million. We ceased operating these communities under our previously existing long-term management agreements. We accounted for these sales under the full accrual method in accordance with FAS No. 66. We continue to provide an operating profit guarantee to the buyer, and fundings under that guarantee are applied against the initial deferred gain of $6 million. As of January 2, 2004, the remaining deferred gain was $3 million.
On December 17, 2002, we sold 12 senior living communities to CNL for approximately $89 million. We accounted for the sale under the full accrual method in accordance with FAS No. 66, and we recorded an after-tax loss of approximately $13 million. On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc. and to sell nine senior living communities to CNL. We completed the sales to Sunrise and CNL and a related sale of a parcel of land to Sunrise, in March 2003 for $266 million and recognized a gain, net of taxes, of $23 million.
On December 30, 2002, we purchased 14 senior living communities from an unrelated owner for approximately $15 million in cash, plus the assumption of $227 million in debt. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and excludingcommitted to a plan to sell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the loss on disposalsubordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates and will continue to operate the 14 communities under long-term management agreements. We recorded a gain, net of taxes, of $1 million.
For the year ended January 3, 2003, we had recorded an after-tax charge of $131 million was $23 million, an increase of $52 million over 2001 results. The increase reflects the impact of the 2001 plan to exit the companion living concept and its subsequent execution, higher per diems, recognition of a $2 million one-time pretax payment associated with the sale of the Crestline Senior Living communities to an unaffiliated third-party, lower amortization associated with our adoptionagreement to sell our senior living management business. Accordingly, we report the operating results of FAS No. 142, “Goodwill and other Intangible Assets,”our senior living segment in the first quarter of 2002 and lower depreciation, partially offset by higher insurance costs.
2001 Compared to 2000
Marriott Senior Living Services posted a 9 percent increase in sales in 2001, as we added a net total of three new communities (369 units)discontinued operations during the year. Occupancy for comparable communities increased by nearlyyears ended January 2, percent to 85.3 percent in 2001.
The division reported an after tax loss of $45 million, reflecting pretax restructuring2004 and other charges of $62 million, primarily related toJanuary 3, 2003 and the $60 million write-down of 25 senior living communitiesremaining assets and liabilities were classified as assets held for sale to their estimated fair value and liabilities of businesses held for sale, respectively, on the write-off of a $2 million (pretax) receivable no longer deemed collectible. These charges were partially offset by the favorable impact of the increase in comparable occupancy and the new units.balance sheet at January 3, 2003.
Distribution Services
2002 Compared to 2001
In the third quarter of 2002, we completed a previously announced strategic review of the distribution servicesour Distribution Services business and decided to exit that business. We completed that exit during the business. Asfourth quarter of January 3, 2003,2002 through a combination of sale and transfer of ninetransferring certain facilities, closing other facilities and other suitable arrangements. In the termination of all operations at four facilities, we have exited the distribution services business. Accordingly, we present the operating results of our distribution services business as discontinued operations and classify the remaining assets as held for sale atyear ended January 3, 2003, onwe recognized a pretax charge of $65 million in connection with the balance sheet. The after tax costdecision to exit the business was $40this business. The charge includes: (1) $15 million and includedfor payments to third parties to subsidize their assumption of, or in connection with contractual agreements,some cases to terminate, existing distribution or warehouse lease contracts; (2) $9 million for severance costs andcosts; (3) $10 million related to the adjusting of fixed assets to net realizable value. We present the exit costs together with the lossvalues; (4) $2 million related to inventory losses; (5) $15 million for losses on operationsequipment leases; (6) $10 million for losses on warehouse leases; and
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(7) $4 million of $14 million, net of taxes in discontinued operations forother associated charges. For the year ended January 3, 2003. The $14 million after2, 2004, we incurred exit costs, net of tax, loss in 2002 represents a decline of $10 million from 2001 results. The decrease reflects the impact of lower sales and a pretax $2 million, write-off in the first quarter of 2002 of an investment in a customer contract, offset by the 2001 restructuring and other charges of $5 million (pretax) for severance costs and the write-off of an accounts receivable balance from a customer that filed for bankruptcy.
2001 Compared to 2000
Financial results for Marriott Distribution Services (MDS) reflect the impact of an increase in salesprimarily related to ongoing compensation costs associated with the commencementwind down. We also reversed $2 million, net of new contracts in 2001 and increased sales from contracts established in 2000. The impact of higher sales on the financial results was more than offset by the decline in business from one significant customer, transportation inefficiencies and restructuring and other charges of $5 million (pretax), including severancetax, for previously estimated exit costs, and the write-off of an accounts receivable balance from a customer that filed for bankruptcy in the fourth quarter of 2001.which we deemed no longer necessary.
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2001 Restructuring Costs and Other Charges
The Company experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001, attacks onin New York and Washington and the subsequent dramatic downturn in the economy. This decline resulted in reduced management and franchise fees, cancellation of development projects, and anticipated losses under guarantees and loans. In 2001, we responded by implementing certain companywide cost-saving measures, although we did not significantly change the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001, we recorded pretax restructuring costs of $62 million, including (1) $15 million in severance costs; (2) $19 million primarily associated with a loss on a sublease of excess space arising from the reduction in personnel; and (3) $28 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. We also incurred $142 million of other charges including (1) $85 million related to reserves for guarantees and loan losses; (2) $12 million related to accounts receivable reserves; (3) $13 million related to the write-down of properties held for sale; and (4) $32 million related to the impairment of technology relatedtechnology-related investments and other write-offs. We have provided below detailed information related to the restructuring costs and other charges, which were recorded in the fourth quarter of 2001 as a result of the economic downturn and the unfavorable lodging environment.
2001 Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700 employees across our operations (the majority of which were terminated by December 28, 2001). In 2001, we recorded a workforce reduction charge of $15 million related primarily to severance and fringe benefits. The charge did not reflect amounts billed out separately to owners for property-level severance costs. In addition, we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $14 million for excess corporate facilities, primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. In addition, we recorded a $5 million charge for lease terminations resulting from cancellations of leased units by our corporate apartment business, primarily in downtown New York City.
Development Cancellations and Elimination of Product LineLIQUIDITY AND CAPITAL RESOURCES
We incur certain costs associated with the developmentare party to two multicurrency revolving credit agreements that provide for aggregate borrowings of properties, including legal costs, the cost of landup to $2 billion, expiring in 2006 ($1.5 billion expiring in July and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is developed. As a result of the dramatic downturn$500 million expiring in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, in 2001, we expensed $28 million of previously capitalized costs.
2001 Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels experienced significant declines in profitability and the owners were not able to meet debt service obligations to the Company or in some cases, to other third-party lending institutions. As a result, in 2001, based upon cash flow projections, we expected to fund under certain guarantees, which were not deemed recoverable, and we expected that several of the loans made by us would not be repaid according to their original terms. Due to these expected non-recoverable guarantee fundings and expected loan losses, we recorded charges of $85 million in the fourth quarter of 2001.
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Accounts Receivable-Bad Debts
In the fourth quarter of 2001, we reserved $12 million of accounts receivable which we deemed uncollectible following an analysis of these accounts, generally as a result of the unfavorable hotel operating environment.
Asset Impairments
We recorded a charge related to the impairment of an investment in a technology-related joint venture ($22 million)August), losses on the anticipated sale of three lodging properties ($13 million), write-offs of investments in management contracts and other assets ($8 million), and the write-off of capitalized software costs arising from a decision to change a technology platform ($2 million).
The following table summarizes our remaining restructuring liability ($ in millions):
Restructuring costs and other charges liability at December 28, 2001 | Cash payments made in fiscal 2002 | Charges reversed in fiscal 2002 | Restructuring costs and other charges liability at January 3, 2003 | |||||||||
Severance | $ | 6 | $ | 4 | $ | — | $ | 2 | ||||
Facilities exit costs |
| 17 |
| 4 |
| 2 |
| 11 | ||||
Total restructuring costs |
| 23 |
| 8 |
| 2 |
| 13 | ||||
Reserves for guarantees and loan losses |
| 33 |
| 10 |
| 2 |
| 21 | ||||
Impairment of technology-related investments and other |
| 1 |
| 1 |
| — |
| — | ||||
Total | $ | 57 | $ | 19 | $ | 4 | $ | 34 | ||||
The remaining liability related to the workforce reduction and fundings under guarantees will be substantially paid by January 2004. The amounts related to the space reduction and resulting lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2012.
The following table provides further detail on the 2001 charges:
2001 Segment Financial Results Impact ($ in millions)
Full- Service | Select- Service | Extended- Stay | Timeshare | Total | |||||||||||
Severance | $ | 7 | $ | 1 | $ | 1 | $ | 2 | $ | 11 | |||||
Facilities exit costs |
| — |
| — |
| 5 |
| — |
| 5 | |||||
Development cancellations and Elimination of product line |
| 19 |
| 4 |
| 5 |
| — |
| 28 | |||||
Total restructuring costs |
| 26 |
| 5 |
| 11 |
| 2 |
| 44 | |||||
Reserves for guarantees and loan losses |
| 30 |
| 3 |
| 3 |
| — |
| 36 | |||||
Accounts receivable – bad debts |
| 11 |
| 1 |
| — |
| — |
| 12 | |||||
Write-down of properties held for sale |
| 9 |
| 4 |
| — |
| — |
| 13 | |||||
Impairment of technology-related investments and other |
| 8 |
| — |
| 2 |
| — |
| 10 | |||||
Total | $ | 84 | $ | 13 | $ | 16 | $ | 2 | $ | 115 | |||||
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2001 Corporate Expenses and Interest Impact ($ in millions)
Corporate expenses | Provision for loan losses | Interest income | Total corporate expenses and interest | |||||||||
Severance | $ | 4 | $ | — | $ | — | $ | 4 | ||||
Facilities exit costs |
| 14 |
| — |
| — |
| 14 | ||||
Total restructuring costs |
| 18 |
| — |
| — |
| 18 | ||||
Reserves for guarantees and loan losses |
| — |
| 43 |
| 6 |
| 49 | ||||
Impairment of technology-related investments and other |
| 22 |
| — |
| — |
| 22 | ||||
Total | $ | 40 | $ | 43 | $ | 6 | $ | 89 | ||||
In addition to the above, in 2001, we recorded restructuring charges of $62 million and other charges of $5 million now reflected in our losses from discontinued operations. The restructuring liability related to discontinued operations was $3 million as of December 28, 2001 and $1 million as of January 3, 2003.
Liquidity and Capital Resources
We have credit facilities which support our commercial paper program and letters of credit. We entered into the $500 million facility during the third quarter of 2003, replacing a similar facility that would have expired in February 2004. At January 3, 2003,2, 2004, we had no loans outstanding under these facilities. Fluctuations in the availability of the commercial paper market do not affect our liquidity because of the flexibility provided by our credit facilities. Borrowings under these facilities bear interest at LIBOR plus a spread, based on our public debt rating. At January 2, 2004, our cash balances combined with our available borrowing capacity under the credit facilities amounted to nearly $2approximately $2.1 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements, including the repayment of $200 million of senior notes due in November 2003.requirements. We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We expect that part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, or if disruptions in the commercial paper market take place as they did in the immediate aftermath of September 11, 2001, we may be unable to place some or all of our commercial paper on a temporary or extended basis, and may have to rely more on bank borrowings under the credit facilities, which may carry a higher cost than commercial paper.
We have presented a claim with an insurance company for lost management fees from the September 11, 2001 terrorist attacks. At this stage of the claims process, we have recognized $1 million in income from insurance proceeds. Although we expect to realize further proceeds we cannot currently estimate the amounts that may be paid to us.
Cash from Operations
Cash from operations, was $516 million in 2002, $403 million in 2001, and $856 million in 2000. Income from continuing operations is stated after depreciation expense of $114 million in 2002, $110 million in 2001, and $94 million in 2000, and after amortization expense of $36 millionfor the last three fiscal years are presented in 2002, $68 million in 2001, and $67 million in 2000. the following table:
($ in millions) | 2003 | 2002 | 2001 | ||||||
Cash from operations | $ | 421 | $ | 516 | $ | 403 | |||
Depreciation expense | 132 | 145 | 142 | ||||||
Amortization expense | 28 | 42 | 80 |
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While our timesharingtimeshare business generates strong operating cash flow, the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing affectaffects annual amounts. We include timeshare interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. In 2002,The net operating activity from our timeshare business (which excludes the $63 million net cash outflow from timeshare activity included $102 million in timeshare development (the amount spent to build timeshare resorts less the costs of sales), $280 million of new timeshare mortgages net of collections, $60 million of note sale gains, a $16 million net reduction in Marriott Rewards accruals, $13 million of financially reportable sales in excess of closed sales, and $10 million of other cash outflows, offset by $387 million of note sale proceeds and $31 millionportion of net fees received for servicing notes. In 2001,income from our timeshare business, as that number is a component of income from continuing operations) is shown in the $358 million net cash outflow from timeshare activity included $253 million in timeshare development, $320 million of new timeshare mortgages net of collections, $40 million of note sale gains and $27 million in capitalized marketing costs, offset by $199 million of note sale proceeds, $26 million of net fees received for servicing notes, $53 million of closed sales in excess of financially reportable sales and $4 million of other cash inflows. In 2000, the $195 million cash outflow from timeshare activity included $112 million in timeshare development, $210 million of new timeshare mortgages net of collections, $23 million of note sale gains, $25 million in capitalized marketing costs, $18 million of financially reportable sales in excess of closed sales and $3 million of other cash outflows, offset by $154 million of note sale proceeds, $17 million of net fees received for servicing notes and $25 million net increase in Marriott Rewards accruals.following table:
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($ in millions) | 2003 | 2002 | 2001 | |||||||||
Timeshare development, less the cost of sales | $ | (94 | ) | $ | (102 | ) | $ | (253 | ) | |||
New timeshare mortgages, net of collections | (284 | ) | (280 | ) | (320 | ) | ||||||
Note sale gains | (64 | ) | (60 | ) | (40 | ) | ||||||
Financially reportable sales, (in excess of) less than closed sales | (4 | ) | (13 | ) | 53 | |||||||
Note sale proceeds | 281 | 387 | 199 | |||||||||
Net fees received for servicing notes | 17 | 31 | 26 | |||||||||
Other cash inflows (outflows) | 37 | (26 | ) | (23 | ) | |||||||
Net cash outflows from timeshare activity | $ | (111 | ) | $ | (63 | ) | $ | (358 | ) | |||
In 2002, other cash flows from operating activities of $223 million included an adjustment for $186 million, related to the exit of our Senior Living Services and Distribution Services businesses, and an adjustment for $50 million, related to the impairment of goodwill of our ExecuStay brand.
In 2001, other cash flows from operating activities of $278 million included an adjustment for $248 million, related to non-cash restructuring and other charges, necessary to reconcile net income to cash provided by operations.charges.
Earnings before interest expense, income taxes, depreciation and amortization (EBITDA) (from continuing operations) was $707$745 million in 2003, $551 million in 2002 $708and $701 million in 2001, and $1,032 million in 2000. Excluding the impact of our Synthetic Fuel business, EBITDA would have increased by $125 million, or 18 percent to $833 million.
The reconciliation of income from continuing operations, before income taxes to EBITDA is as follows:
($ in millions) | 2002 | 2001 | 2000 | |||||||
Income from continuing operations, before taxes | $ | 471 |
| $ | 421 | $ | 771 | |||
Interest expense |
| 86 |
|
| 109 |
| 100 | |||
Depreciation |
| 114 |
|
| 110 |
| 94 | |||
Amortization |
| 36 |
|
| 68 |
| 67 | |||
EBITDA from continuing operations | $ | 707 |
| $ | 708 | $ | 1,032 | |||
Synthetic Fuel loss, before taxes |
| 134 |
|
| — |
| — | |||
Depreciation-Synthetic Fuel |
| (8 | ) |
| — |
| — | |||
EBITDA from continuing operations, excluding Synthetic Fuel | $ | 833 |
| $ | 708 | $ | 1,032 | |||
2001. We consider EBITDA to be an indicator of our operating performance because it can be used to measure our ability to service debt, fund capital expenditures and expand our business. Nevertheless, you shouldHowever, EBITDA is a non-GAAP financial measure, and is not consider EBITDA an alternative to net income, financial results, or cash flows from operations, asany other operating measure prescribed by accounting principles generally accepted in the United States.
The reconciliation of net income to EBITDA is as follows:
($ in millions) | 2003 | 2002 | 2001 | |||||||||
Net income | $ | 502 | $ | 277 | $ | 236 | ||||||
Interest expense | 110 | 86 | 109 | |||||||||
Tax (benefit) provision—continuing operations | (43 | ) | 32 | 152 | ||||||||
Tax provision (benefit)—discontinued operations | 16 | (31 | ) | (18 | ) | |||||||
Depreciation | 132 | 145 | 142 | |||||||||
Amortization | 28 | 42 | 80 | |||||||||
$ | 745 | $ | 551 | $ | 701 | |||||||
Reducing net income are losses associated with our synthetic fuel operations of $104 million and $134 million, respectively, for the years ended January 2, 2004 and January 3, 2003. Also effecting our 2003 net income is equity in earnings from Synthetic Fuel of $10 million and minority interest expense of $55 million. The Synthetic Fuel operating losses include depreciation expense of
$8 million for both the years ended January 2, 2004 and January 3, 2003. There was no loss or depreciation expense associated with our synthetic fuel operations for the year ended December 28, 2001, since operations did not commence until to 2002.
Also included in net income above is income from our discontinued senior living services business of $26 million in 2003 and losses of $108 million and $29 million, for 2002 and 2001, respectively, as well as losses from our discontinued distribution services business of $54 million and $4 million, respectively for 2002 and 2001. There were no losses associated with our distribution services business in 2003. Included above is depreciation and amortization expense related to our discontinued operations of $37 million and $44 million in 2002 and 2001, respectively. There was no depreciation or amortization expense for our discontinued operations in 2003.
A substantial portion of both our net income and therefore EBITDA is based on fixed dollar amounts or percentages of sales. These include lodging base management fees, franchise fees and land rent. With almost 2,600over 2,700 hotels in the Marriott system, no single property or region is critical to our financial results.
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Our ratio of current assets to current liabilities was 0.7 to 1 at January 2, 2004, compared to 0.8 to 1 at January 3, 2003, compared to 1.4 to 1 at December 28, 2001.2003. Each of our businesses minimizes working capital through cash management, strict credit-granting policies, aggressive collection efforts and high inventory turnover. Additionally, weWe also have significant borrowing capacity under our revolving credit agreements.facilities should we need additional working capital.
In 20022003 we securitized $387sold $281 million of notes by selling notes receivable originated by our timeshare business. We recognized gains on these sales of $60$64 million in the year ended January 3, 2003.2, 2004. Our ability to continue to sell these timeshare notes to such off-balance sheet entities depends on the continued ability of the capital markets to provide financing to the special purpose entities buyingthat buy the notes. Also, our ability to continuewe might have increased difficulty or be unable to consummate such securitizations would be impactedsales if the underlying quality of the notes receivable originated by uswe originate were to deteriorate, although we do not expect such a deterioration. In connection with these securitization transactions,timeshare note sales, at January 3, 2003,2, 2004, we had repurchase obligations of $12$19 million related to previously sold notes receivable although we have sold. We do not expect to incur no material losses in respect of those obligations. We retain interests in the securitizationsnotes, which are accounted for as interest only strips,residual interests, and in the year ended January 3, 2003,2, 2004, we received cash flows of $28$47 million arising from those retained interests. At January 3, 2003,2, 2004, the qualifying special purpose entities that had purchased notes receivable from us had aggregate assets of $682$733 million.
Investing Activities Cash Flows
Acquisitions.We continually seek opportunities to enter new markets, increase market share or broaden service offerings through acquisitions.
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Dispositions.Property sales generated cash proceeds of $494 million in 2003, $729 million in 2002 and $554 million in 2001 and $742 million in 2000.2001. Proceeds in 20022003 are net of $36a $92 million of financingnote receivable and joint venture investments made by us in connection with the sales transactions.closing costs and other items totaling $25 million. In 20022003, we closed on the sales of 10three hotels and 4123 senior living communities, over half of which wecommunities. We continue to operate all of the hotels under long-term operating agreements.
Capital Expenditures and Other Investments.Investments. Capital expenditures of $210 million in 2003, $292 million in 2002 and $560 million in 2001 and $1,095 million in 2000 included development and construction of new hotels and senior living communities and acquisitions of hotel properties. Over time, we have sold certain lodging and senior living properties under development, or to be developed, while continuing to operate them under long-term agreements. The ability of third-party purchasers to raise the necessary debt and equity capital depends in part on the perceived risks inherent in the lodging industry and other constraints inherent in the capital markets as a whole. Although we expect to continue to consummate such real estate sales, if we were unable to do so, our liquidity could decrease and we could have increased exposure to the operating risks of owning real estate. We monitor the status of the capital markets, and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans.
We also expect to continue to make other investments in connection with adding units to our lodging business. These investments include loans and minority equity investments and developmentinvestments.
A summary of new timeshare resorts. In 2002, other investing activities outflows of $7 million included equity investments of $26 million, an investment in corporate owned life insurance of $11 million and other net cash outflows of $33 million, offset by cash proceeds of $63 million from the sale of our investment in Interval International. In 2001, other investing outflows of $179 million included equity investments of $33 million, an investmentis shown in corporate owned life insurance of $97 million and other net cash outflows of $131 million, partially offset by the sale of the affordable housing tax credit investments of $82 million. In 2000, other investing outflows of $377 million included equity investments of $170 million, an investment in corporate owned life insurance of $14 million and other net cash outflows of $193 million.table below.
On February 23, 2000, we entered into an agreement to resolve litigation involving certain limited partnerships formed in the mid- to late 1980s. Under the agreement, we paid $31 million to partners in four limited partnerships and acquired, through an unconsolidated joint venture (the Courtyard Joint Venture) with affiliates of Host Marriott Corporation (Host Marriott), substantially all of the limited partners’ interests in two other limited partnerships, Courtyard by Marriott Limited Partnership (CBM I) and Courtyard by Marriott II Limited Partnership (CBM II). These partnerships own 120 Courtyard by Marriott hotels. The Courtyard Joint Venture was financed with equity contributed in equal shares by us and affiliates of Host Marriott and approximately $200 million in mezzanine debt provided by us. Our total investment in the joint venture, including mezzanine debt, is approximately $300 million.
In early 2000, the Company estimated the amount of the planned investment in the Courtyard Joint Venture based upon (1) estimated post acquisition cash flows, including anticipated changes in the related hotel management agreements to be made contemporaneously with the investment; (2) the investee’s new capital structure; and (3) estimates of prevailing discount rates and capitalization rates reflected in the market at that time. The investment in the Courtyard Joint Venture was consummated late in the fourth quarter of 2000. For purposes of purchase accounting, the Courtyard Joint Venture valued its investment in the partnership units based on (1) pre-acquisition cash flows; (2) the pre-acquisition capital structure; and (3) prevailing discount rates and capitalization rates in December 2000.
Due to a number of factors, the equity values used in the purchase accounting for the Courtyard Joint Venture’s investment were different than limited partner unit estimates included in the CBM I and CBM II Purchase Offer and Consent Solicitations (the Solicitations). At a 20 percent discount rate, the combined CBM I and CBM II estimates reflected in the Solicitations totaled $254 million. In the purchase accounting, the corresponding equity value in the Courtyard Joint Venture totaled $372 million. The principal differences between these two amounts are attributed to the following: (1) the investment was consummated almost one year subsequent to the time the original estimates were prepared ($30 million); and (2) a lower discount rate (17 percent) and capitalization rate reflecting changes in market conditions versus the date at which the estimates in the solicitations were prepared ($79 million). The Company assessed its potential investment and any potential loss on settlement based on post-acquisition cash flows. The purchase accounting was based on pre-acquisition cash flows and capital structure. As a result, the factors giving rise to the differences outlined above did not materially impact the Company’s previous assessment of any expense related to litigation. The post-settlement equity of the Joint Venture is considerably lower then the pre-acquisition equity due to additional indebtedness post-acquisition and the impact of changes to the management agreements made contemporaneously with the transaction.
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($ in millions) | 2003 | 2002 | 2001 | |||||||||
Equity investments | $ | (22 | ) | $ | (26 | ) | $ | (33 | ) | |||
Investment in corporate owned life insurance | (12 | ) | (11 | ) | (97 | ) | ||||||
Other net cash outflows | (5 | ) | (33 | ) | (131 | ) | ||||||
Cash proceeds on sale of investment in Interval International | — | 63 | — | |||||||||
Sale of affordable housing tax credit investments | — | — | 82 | |||||||||
Other investing outflows | $ | (39 | ) | $ | (7 | ) | $ | (179 | ) | |||
Fluctuations in the values of hotel real estate generally have little impact on the overall results of our Lodging businessessegments because (1) we own less than 1 percent of the total number of hotels that we operate or franchise; (2) management and franchise fees are generally based upon hotel revenues and profits versus hotel salesproperty values; and (3) our management agreements generally do not terminate upon hotel sale.
We have made loans to owners of hotels and senior living communities that we operate or franchise. We have also made loans to the synthetic fuel joint venture partner and to the purchaser of our senior living business. Loans outstanding, under this program, excluding timeshare notes, totaled $996 million at January 2, 2004, $944 million at January 3, 2003, and $860 million at December 28, 2001 and $592 million at December 29, 2000.2001. Unfunded commitments aggregating $217$80 million were outstanding at January 3, 2003,2, 2004, of which we expect to fund $140$44 million in 20032004 and $156$60 million in total. We participate in a program with an unaffiliated lender in which we may partially guarantee loans made to facilitate third-party ownership of hotels that we operate or franchise.
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Cash from Financing Activities
Debt including convertibledecreased $319 million in 2003, due to the $200 million repayment, at maturity, of Series A debt in November 2003 and the net pay down of $161 million of commercial paper and other debt. Debt decreased by $945 million in 2002, due to the redemption of 85 percent of the LYONs in May 2002 and the pay down of our revolving credit facility, offset by the debt assumed as part ofin connection with the acquisition of the 14 senior living communities in December 2002. Debt increased by $799 million in 2001 primarily due to borrowings to finance our capital expenditure and share repurchase programs, and to maintain excess cash reserves totaling $645 million in the aftermath of the September 11, 2001 terrorist attacks on New York and Washington.
Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt and reducing our working capital. At year-end 2002,2003, our long-term debt excluding convertible debt and debt associated with businesses held for sale, had an average interest rate of 6.87.0 percent and an average maturity of approximately 6.65.8 years. The ratio of fixed ratefixed-rate long-term debt to total long-term debt was .910.99 as of January 3, 2003.2, 2004. At January 2, 2004, we had long-term public debt ratings of BBB+ from Standard and Poor’s and Baa2 from Moody’s.
In April 1999, January 2000 and January 2001, we filed “universal shelf” registration statements with the Securities and Exchange Commission in the amounts of $500 million, $300 million and $300 million, respectively. As of January 31, 2003, we had offered and sold to the public under these registration statements $300 million of debt securities at 77/8 percent, due 2009 and $300 million at 81/8 percent, due 2005, leaving a balance ofWe have $500 million available for future offerings.offerings under “universal shelf” registration statements we have filed with the SEC.
In January 2001, we issued, through a private placement, $300 million of 7 percent senior unsecured notes due 2008 and received net proceeds of $297 million. We completed a registered exchange offer for these notes on January 15, 2002.
We are a party to revolving credit agreements that provide for borrowings of $1.5 billion expiring in July 2006, and $500 million expiring in February 2004, which support our commercial paper program and letters of credit. At January 3, 2003, loans of approximately $21 million were outstanding under these facilities. Fluctuations in the availability of the commercial paper market do not affect our liquidity because of the flexibility provided by our credit facilities. Borrowings under these facilities bear interest at LIBOR plus a spread, based on our public debt rating.
On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, also known as LYONs, and received cash proceeds of $405 million. On May 9, 2002, we redeemed for cash the approximately 85 percent of that issue which the LYONs that wereholders tendered for mandatory repurchase by the holders.repurchase. The remaining LYONs are convertible into approximately 0.9 million shares of our Class A Common Stock and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prioron or after May 8, 2004. The holders may also at their option require us to May 2004. We may atpurchase the option of the holders be required to purchase LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay the purchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock.
We determine our debt capacity based on the amountContractual Obligations and variability of our cash flows. EBITDA (from continuing operations) coverage of gross interest cost was 5.5 times in 2002, and we met the cash flow requirements under our loan agreements. Excluding the impact of our Synthetic Fuel business, EBITDA coverage of gross interest would have been 6.5 times. At January 3, 2003, we had long-term public debt ratings of BBB+ from Standard and Poor’s and Baa2 from Moody’s, respectively.Off Balance Sheet Arrangements
26
The following table summarizes our contractual obligations:obligations as of January 2, 2004:
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||
($ in millions) | |||||||||||||||
Debt | $ | 1,734 | $ | 242 | $ | 550 | $ | 121 | $ | 821 | |||||
Operating Leases | |||||||||||||||
Recourse |
| 971 |
| 107 |
| 174 |
| 121 |
| 569 | |||||
Non-recourse |
| 548 |
| 17 |
| 69 |
| 96 |
| 366 | |||||
Total Contractual Cash Obligations | $ | 3,253 | $ | 366 | $ | 793 | $ | 338 | $ | 1,756 | |||||
The totals above exclude recourse minimum lease payments of $341 million associated with the discontinued Senior Living and Distribution Services businesses, due as follows: less than 1 year $40 million; 1-3 years $68 million; 4-5 years $63 million; and after 5 years $170 million. Also excluded are non-recourse minimum lease payments of $82 million associated with the discontinued Senior Living Services business, due as follows: less than 1 year $2 million; 1-3 years $12 million; 4-5 years $13 million; and after 5 years $55 million. Excluded from the debt obligation is $155 million associated with the discontinued Senior Living Services business.
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | ||||||||||
($ in millions) | |||||||||||||||
Debt | $ | 1,455 | $ | 64 | $ | 508 | $ | 313 | $ | 570 | |||||
Capital lease obligations | 11 | 1 | 2 | 1 | 7 | ||||||||||
Operating leases | |||||||||||||||
Recourse | 1,163 | 105 | 189 | 196 | 673 | ||||||||||
Non-recourse | 623 | 42 | 94 | 94 | 393 | ||||||||||
Other long-term liabilities | 70 | 9 | 8 | 8 | 45 | ||||||||||
Total contractual cash obligations | $ | 3,322 | $ | 221 | $ | 801 | $ | 612 | $ | 1,688 | |||||
The following table summarizes our commitments:commitments as of January 2, 2004:
Total Amounts Committed | Amount of Commitment Expiration Per Period | Amount of Commitment Expiration Per Period | ||||||||||||||||||||||||||||
Other Commercial Commitments | Less than 1 year | 1-3 years | 4-5 years | After 5 years | Total Amounts Committed | Less Than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||||||||
Guarantees | $ | 827 | $ | 77 | $ | 100 | $ | 264 | $ | 386 | $ | 1,182 | $ | 133 | $ | 354 | $ | 249 | $ | 446 | ||||||||||
Timeshare note repurchase obligations |
| 12 |
| — |
| 2 |
| — |
| 10 | 19 | — | — | — | 19 | |||||||||||||||
Total | $ | 839 | $ | 77 | $ | 102 | $ | 264 | $ | 396 | $ | 1,201 | $ | 133 | $ | 354 | $ | 249 | $ | 465 | ||||||||||
34
Our guarantees listed above include $270$238 million for commitments whichguarantees that will not be in effect until the underlying hotels are open and we begin to manage the properties. Our guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. When we repurchase non- performing timeshare loans, we either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.
Our guarantees include $387 million related to Senior Living Services lease obligations and lifecare bonds. Sunrise is the primary obligor of the leases and a portion of the lifecare bonds, and CNL is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. Our guarantees also include $47 million of other guarantees associated with the Sunrise sale transaction. As a result of the settlement with Five Star, discussed in Item 3, $41 million of these guarantees included above expired subsequent to January 2, 2004.
Our total unfunded loan commitments amounted to $217$80 million at January 3, 2003.2, 2004. We expect to fund $140$44 million of those commitments within one year and $16 million in one to three years. We do not expect to fund the remaining $61$20 million of commitments, which expire as follows: $51 million within one year; $5$8 million in one to three years; $2 million in four to five years; and $3$12 million after five years.
As part of the normal course of business we enter into purchase commitments to manage the daily operating needs of our hotels. Since we are reimbursed by the hotel owners, these obligations have minimal impact on our net income and cash flow.
35
Related Party Transactions
We have equity method investments in entities that own hotels for which we provide management and/or franchise services and we receive a fee. In addition, in some cases we provide loans, preferred equity, or guarantees to these entities. The following tables present financial data resulting from transactions with these related parties:
Income Statement Data
($ in millions) | 2003 | 2002 | 2001 | |||||||||
Base management fees | $ | 56 | $ | 48 | $ | 48 | ||||||
Incentive management fees | 4 | 4 | 4 | |||||||||
Cost reimbursements | 699 | 557 | 559 | |||||||||
Other income | 28 | 26 | 28 | |||||||||
Total Revenue | $ | 787 | $ | 635 | $ | 639 | ||||||
General, administrative and other | $ | (11 | ) | $ | (11 | ) | $ | (15 | ) | |||
Reimbursed costs | (699 | ) | (557 | ) | (559 | ) | ||||||
Interest income | 77 | 66 | 51 | |||||||||
Provision for loan losses | (2 | ) | (5 | ) | — | |||||||
Balance Sheet Data | ||||||||||||
($ in millions) | 2003 | 2002 | ||||||||||
Due to equity method investees | $ | (2 | ) | $ | (1 | ) | ||||||
Due from equity method investees | 623 | 532 |
Share Repurchases. We purchased 10.5 million of our shares in 2003 at an average price of $36.07 per share, 7.8 million of our shares in 2002 at an average price of $32.52 per share, and 6.1 million of our shares in 2001 at an average price of $38.20 per share. As of February 6, 2003, we had been authorized byJanuary 2, 2004, 13 million shares remained available for repurchase under authorizations from our Board of Directors to repurchase 20 million shares.Directors.
Dividends. In May 2002,2003, our Board of Directors increased the quarterly cash dividend by 87 percent to $.07$0.075 per share.
Other Matters
Inflation
Inflation.Inflation has been moderate in recent years and has not had a significant impact on our businesses.
Critical Accounting Policies
Policies.Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Our accounting policies are in compliancecomply with principles generally accepted in the United States, although a change in the facts and circumstances of the underlying transactions could significantly change the application of an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and require the use of complex judgment in their application.
27
Incentive Fees
We recognize incentive fees as revenue when earned in accordance with the terms of the management contract. In interim periods, we recognize as income the incentive fees that would be due to us as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us. If we recognized incentive fees only after the underlying full-year performance thresholds were certain, the revenue recognized for each year would be unchanged, but no incentive fees for any year would be recognized until the fourth quarter. We recognized incentive fee revenue of $109 million, $162 million and $202 million in 2003, 2002 and $316 million in 2002, 2001, and 2000, respectively.
Cost Reimbursements
ForWe incur certain reimbursable costs on behalf of managed hotel properties and franchisees. In accordance with Emerging Issues Task Force (EITF) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” we report cost reimbursements from managed properties and franchisees as revenue, and we report the costs incurred on behalf of managed properties and franchisees as expenses. Cost
36
reimbursements are based upon the costs incurred with no added margin or mark-up. These reimbursed costs relate primarily to payroll costs at domestic properties that we manage, we are responsible to employees for salaries and wages and to subcontractors and other creditors forbut also include costs associated with certain materials and services. We also have the discretionary responsibility to procure and manage the resources in performing our services under these contracts. We therefore include these costs and the reimbursement of the costs as part of our expenses and revenues. We recorded
Our financial statements reflect cost reimbursements (excluding senior living services) of $6.2 billion in 2003, $5.7 billion in 2002, and $5.2 billion in 2001 and $5.3 billion in 2000.2001.
Real Estate Sales
We account for the sales of real estate in accordance with FAS No. 66, “Accounting for Sales of Real Estate.” We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $4 million in 2003, $51 million in 2002 and $16 million in 2001 and $18 million in 2000.2001. Our ongoing ability to achieve sale accounting under FAS No. 66 depends on our ability to negotiate the structure of the sales transactions to comply with these rules.
Timeshare Sales
We also recognize revenue from the sale of timeshare interests in accordance with FAS No. 66. We recognize sales when (1) we have received a minimum of 10 percent of the purchase price for the timeshare interval, (2) the purchaser’s period of cancellation withto cancel for a refund has expired, (3) we deem the receivables are deemedto be collectible, and (4) we have attained certain minimum sales and construction levels have been attained. For sales that do not meet these criteria, welevels. We defer all revenue using the deposit method.method for sales that do not meet all four of these criteria.
Costs Incurred to Sell Real Estate Projects
We capitalize direct costs incurred to sell real estate projects that are attributable to and recoverable from the sales of timeshare interests until we have recognized the sales are recognized.sale. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”. SellingProjects.” Under this approach, we capitalized selling and marketing costs capitalized under this approach wereof approximately $107$69 million and $126$107 million at January 2, 2004, and January 3, 2003, and December 28, 2001, respectively, and arehave included those costs in property and equipment in the accompanying consolidated balance sheets. If a contract is canceled,cancelled, we charge unrecoverable direct selling and marketing costs are charged to expense and depositsrecord forfeited are recordeddeposits as income.
Interest Only StripsResidual Interests
We periodically sell the notes receivable originated by our timeshare businesssegment in connection with the sale of timeshare intervals. We retain servicing assets and other interests in the assets transferred to special purpose entities that are accounted for as interest only strips.residual interests. The interest only stripsresidual interests are treated as “Trading”“trading” or “Available“available for Sale”sale” securities under the provisions of FAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.Securities.”At the end of each reporting period, we estimate the fair value of the residual interests, including servicing assets, using a discounted cash flow model. We report changes in the fair values of the interest only stripsthese residual interests through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available-for-sale securities. We had interest only stripsresidual interests of $203 million at January 2, 2004 and $135 million at January 3, 2003, and $87 million at December 28, 2001, which are recorded as long-term receivables on the consolidated balance sheet.
Loan Loss Reserves
We measure 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, we establish a specific
28
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. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loansWhere we determine that we have determined to bea loan is impaired, we recognize interest income on a cash basis. At January 3, 2003,2, 2004, our recorded investment in impaired loans was $129$142 million. We have a $59$61 million allowance for credit losses, leaving $70$81 million of our investment in impaired loans for which there is no related allowance for credit losses.
Marriott Rewards
Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies.
We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas whichthat project timing of future point redemption based on historical levels,
37
including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points. Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, and communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.
AvendraValuation of Goodwill and Other Long-Lived Assets
In January 2001, MarriottWe evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and Hyatt Corporation formed a joint venture, Avendra LLC (Avendra),make that determination based upon future cash flow projections. We evaluate the potential impairment of other intangible assets whenever an event or other circumstance indicates that we may be able to berecover the carrying amount of the asset. Our evaluation is based upon future cash flow projections. We record an independent professional procurement services company servingimpairment loss for goodwill and other intangible assets when the North American hospitality market and related industries. Six Continents Hotels, Inc., ClubCorp USA Inc., and Fairmont Hotels & Resorts, Inc., joined Avendra in March 2001. We andcarrying value of the other four members contributed our respective procurement businesses to Avendra. Currently, our interest in Avendraintangible asset is slightly less than 50 percent.its estimated fair value.
Avendra generally does not purchase and resell goods and services; instead, its customers purchase goods and services directly from Avendra’s vendors on terms negotiated by Avendra. Avendra earns revenue through agreements with its vendors which provide that the vendors pay Avendra an unrestricted allowance for purchases by its customers. Our hotel management agreements treat vendor-generated unrestricted allowances in three separate ways, and the requirements of those agreements are reflected in our Procurement Services Agreement with Avendra (PSA).
For purchases of goods and services by the majority of Marriott’s managed hotels, Avendra is permitted to retain unrestricted allowances, in an amount sufficient only to recover Avendra’s properly allocated costs of providing procurement services. Other management contracts allow Avendra to retain vendor allowances and earn a return which is competitive in the industry. This amount is capped by the PSA. Lastly, for purchases of goods and services by hotels owned by one of Marriott’s hotel owners, Avendra is not permitted to retain any of such unrestricted allowances; instead, Avendra charges a negotiated fee to Marriott, and Marriott in turn charges a negotiated fee to that owner. In 2002, we distributed to the hotels that we manage approximately $12 million in unrestricted rebates received from Avendra, and its predecessor, Marketplace by Marriott. If Marriott franchised hotels (not managed by Marriott) elect to purchase through Avendra, they negotiate separately with Avendra and are not bound by the terms of the PSA for our managed hotels. We account for our interest in Avendra under the equity method and recognized income of $2 million in 2002 and a loss of $1 million in 2001. After we have recovered our investment in Avendra and associated expenses through distributions from Avendra or a sale of all or any portion of our equity interest in Avendra, we will apply any further benefits to offset costs otherwise allocable to Marriott branded hotels.
2938
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in interest rates and changes in foreign exchange rates. We manage our exposure to this riskthese risks by monitoring available financing alternatives, and through development and application of credit granting policies. Our strategy to manage exposure to changes in interest rates is unchanged from December 28, 2001. Furthermore, wepolicies and by entering into derivative arrangements. We do not foresee any significant changes in either our exposure to fluctuations in interest rates or foreign exchange rates or in how such exposure is managed in the near future.
The following sensitivity analysis displays how changes in interest rates affect our earnings and the fair values of certain instruments we hold.
We holdare exposed to interest rate risk on our floating rate timeshare and notes receivable, that earn interest at variable rates. Hypothetically, an immediate one percentage point changeour residual interests retained in interest rates would change annual interest income by $5 millionconnection with the sale of timeshare intervals, and $5 million, based on the respective balancesfair value of theseour fixed rate notes receivable at January 3, 2003 and December 28, 2001.receivable.
Changes in interest rates also impact our floating rate long-term debt and the fair value of our long-term fixed rate debt and long-term fixed rate notes receivable. Based on the balances outstanding at January 3, 2003 and December 28, 2001, a hypothetical immediate one percentage point changedebt.
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates would changeand foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.
At January 2, 2004, we were party to the following derivative instruments:
39
The following table sets forth the scheduled maturities and the total fair value of our long-term fixed rate debt by $42 millionderivatives and $53 million, respectively, and would change the fair valueother financial instruments as of long-term fixed rate notes receivable by $20 million and $22 million, respectively, in each year.January 2, 2004:
Although commercial paper is classified as long-term debt (based on our ability and intent to refinance it on a long-term basis) all commercial paper matures within two months of year-end. Based on the balance of commercial paper outstanding at January 3, 2003, a hypothetical one percentage point change in interest rates would change interest expense by $1 million on an annualized basis.
Maturities by Period | ||||||||||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | There - after | Total Carrying Amount | Total Fair Value | |||||||||||||||||||||||||
Assets - Maturities represent principal receipts, fair values represent assets. |
| |||||||||||||||||||||||||||||||
Timeshare notes receivable | $ | 15 | $ | 21 | $ | 17 | $ | 13 | $ | 13 | $ | 88 | $ | 167 | $ | 167 | ||||||||||||||||
Average interest rate | 12.4% | |||||||||||||||||||||||||||||||
Fixed rate notes receivable | $ | 26 | $ | 1 | $ | 190 | $ | 29 | $ | 89 | $ | 362 | $ | 697 | $ | 725 | ||||||||||||||||
Average interest rate | 11.02% | |||||||||||||||||||||||||||||||
Floating rate notes receivable | $ | 23 | $ | 28 | $ | 43 | $ | 140 | $ | 41 | $ | 24 | $ | 299 | $ | 299 | ||||||||||||||||
Average interest rate | 6.24% | |||||||||||||||||||||||||||||||
Residual interests | $ | 83 | $ | 39 | $ | 28 | $ | 19 | $ | 14 | $ | 20 | $ | 203 | $ | 203 | ||||||||||||||||
Average interest rate | 5.62% | |||||||||||||||||||||||||||||||
Liabilities - Maturities represent principal payments, fair values represent liabilities. |
| |||||||||||||||||||||||||||||||
Fixed rate debt | $ | (63 | ) | $ | (495 | ) | $ | (13 | ) | $ | (9 | ) | $ | (303 | ) | $ | (505 | ) | $ | (1,388 | ) | $ | (1,401 | ) | ||||||||
Average interest rate | 7.27% | |||||||||||||||||||||||||||||||
Floating rate debt | $ | (1 | ) | $ | — | $ | — | $ | (1 | ) | $ | — | $ | (3 | ) | $ | (5 | ) | $ | (5 | ) | |||||||||||
Average interest rate | .01% | |||||||||||||||||||||||||||||||
Convertible debt | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (62 | ) | $ | (62 | ) | $ | (43 | ) | |||||||||||||
Average interest rate | 0.75% | |||||||||||||||||||||||||||||||
Derivatives - Maturities represent notional amounts, fair values represent assets (liabilities). |
| |||||||||||||||||||||||||||||||
Interest Rate Swaps: | ||||||||||||||||||||||||||||||||
Fixed to variable | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 590 | $ | (10 | ) | $ | (10 | ) | ||||||||||||||
Average pay rate | 4.53% | |||||||||||||||||||||||||||||||
Average receive rate | 1.34% | |||||||||||||||||||||||||||||||
Variable to fixed | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 228 | $ | 8 | $ | 8 | ||||||||||||||||
Average pay rate | 1.65% | |||||||||||||||||||||||||||||||
Average receive rate | 5.33% | 101 | ||||||||||||||||||||||||||||||
Forward Foreign Exchange Contracts: | ||||||||||||||||||||||||||||||||
Fixed (Euro) to Fixed ($U.S.) | $ | 22 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | 1 | ||||||||||||||||
Fixed (GPB) to Fixed ($U.S.) | $ | 49 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
3040
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following financial information is included on the pages indicated:
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3141
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Marriott International, Inc.:
We have audited the accompanying consolidated balance sheet of Marriott International, Inc. as of January 2, 2004 and
January 3, 2003, and December 28, 2001, and the related consolidated statements of income, cash flows, comprehensive income and shareholders’ equity for each of the three fiscal years in the period ended January 3, 2003.2, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform an 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 Marriott International, Inc. as of January 2, 2004 and January 3, 2003, and December 28, 2001, and the consolidated results of theirits operations and theirits cash flows for each of the three fiscal years in the period ended January 3, 20032, 2004 in conformity with accounting principles generally accepted in the United States.
As discussed in the notes to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and otherOther Intangible Assets.”
/s/ Ernst & Young LLP
McLean, Virginia
February 5, 20033, 2004
3242
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000
($ in millions, except per share amounts)
2002 | 2001 | 2000 | ||||||||||
SALES | ||||||||||||
Lodging | ||||||||||||
Base management fees | $ | 379 |
| $ | 372 |
| $ | 383 |
| |||
Franchise fees |
| 232 |
|
| 220 |
|
| 208 |
| |||
Incentive management fees |
| 162 |
|
| 202 |
|
| 316 |
| |||
Owned and leased properties |
| 383 |
|
| 478 |
|
| 650 |
| |||
Other revenue |
| 1,353 |
|
| 1,277 |
|
| 1,052 |
| |||
Cost reimbursements |
| 5,739 |
|
| 5,237 |
|
| 5,302 |
| |||
Synthetic Fuel |
| 193 |
|
| — |
|
| — |
| |||
| 8,441 |
|
| 7,786 |
|
| 7,911 |
| ||||
OPERATING COSTS AND EXPENSES | ||||||||||||
Lodging | ||||||||||||
Owned and leased – direct |
| 384 |
|
| 456 |
|
| 573 |
| |||
Other lodging – direct |
| 1,185 |
|
| 1,077 |
|
| 866 |
| |||
Reimbursed costs |
| 5,739 |
|
| 5,237 |
|
| 5,302 |
| |||
Restructuring costs |
| — |
|
| 44 |
|
| — |
| |||
Administrative and other |
| 233 |
|
| 331 |
|
| 234 |
| |||
Synthetic Fuel |
| 327 |
|
| — |
|
| — |
| |||
| 7,868 |
|
| 7,145 |
|
| 6,975 |
| ||||
| 573 |
|
| 641 |
|
| 936 |
| ||||
Corporate expenses |
| (126 | ) |
| (139 | ) |
| (120 | ) | |||
Interest expense |
| (86 | ) |
| (109 | ) |
| (100 | ) | |||
Interest income |
| 122 |
|
| 94 |
|
| 60 |
| |||
Provision for loan losses |
| (12 | ) |
| (48 | ) |
| (5 | ) | |||
Restructuring costs |
| — |
|
| (18 | ) |
| — |
| |||
INCOME FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES |
| 471 |
|
| 421 |
|
| 771 |
| |||
Provision for income taxes |
| (32 | ) |
| (152 | ) |
| (281 | ) | |||
INCOME FROM CONTINUING OPERATIONS |
| 439 |
|
| 269 |
|
| 490 |
| |||
Discontinued Operations | ||||||||||||
Income (Loss) from Senior Living Services, net of tax |
| 23 |
|
| (29 | ) |
| (13 | ) | |||
Loss on disposal of Senior Living Services, net of tax |
| (131 | ) |
| — |
|
| — |
| |||
(Loss) Income from Distribution Services, net of tax |
| (14 | ) |
| (4 | ) |
| 2 |
| |||
Exit costs - Distribution Services, net of tax |
| (40 | ) |
| — |
|
| — |
| |||
NET INCOME | $ | 277 |
| $ | 236 |
| $ | 479 |
| |||
EARNINGS PER SHARE – Basic | ||||||||||||
Earnings from continuing operations | $ | 1.83 |
| $ | 1.10 |
| $ | 2.03 |
| |||
Loss from discontinued operations |
| (.68 | ) |
| (.13 | ) |
| (.04 | ) | |||
Earnings per share | $ | 1.15 |
| $ | .97 |
| $ | 1.99 |
| |||
EARNINGS PER SHARE – Diluted | ||||||||||||
Earnings from continuing operations | $ | 1.74 |
| $ | 1.05 |
| $ | 1.93 |
| |||
Loss from discontinued operations |
| (.64 | ) |
| (.13 | ) |
| (.04 | ) | |||
Earnings per share | $ | 1.10 |
| $ | .92 |
| $ | 1.89 |
| |||
DIVIDENDS DECLARED PER SHARE | $ | 0.275 |
| $ | 0.255 |
| $ | 0.235 |
| |||
2003 | 2002 | 2001 | ||||||||||
REVENUES | ||||||||||||
Base management fees1 | $ | 388 | $ | 379 | $ | 372 | ||||||
Franchise fees | 245 | 232 | 220 | |||||||||
Incentive management fees1 | 109 | 162 | 202 | |||||||||
Owned, leased, corporate housing and other revenue1 | 633 | 651 | 803 | |||||||||
Timeshare interval sales and services | 1,145 | 1,059 | 934 | |||||||||
Cost reimbursements1 | 6,192 | 5,739 | 5,237 | |||||||||
Synthetic fuel | 302 | 193 | — | |||||||||
9,014 | 8,415 | 7,768 | ||||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||
Owned, leased and corporate housing - direct | 505 | 580 | 663 | |||||||||
Timeshare - direct | 1,011 | 938 | 793 | |||||||||
Reimbursed costs1 | 6,192 | 5,739 | 5,237 | |||||||||
General, administrative and other1 | 523 | 510 | 655 | |||||||||
Synthetic fuel | 406 | 327 | — | |||||||||
8,637 | 8,094 | 7,348 | ||||||||||
OPERATING INCOME | 377 | 321 | 420 | |||||||||
Gains and other income | 106 | 132 | 78 | |||||||||
Interest expense | (110 | ) | (86 | ) | (109 | ) | ||||||
Interest income1 | 129 | 122 | 94 | |||||||||
Provision for loan losses1 | (7 | ) | (12 | ) | (48 | ) | ||||||
Equity in earnings (losses) - Synthetic fuel | 10 | — | — | |||||||||
- Other | (17 | ) | (6 | ) | (14 | ) | ||||||
INCOME FROM CONTINUING OPERATIONS, BEFORE | 488 | 471 | 421 | |||||||||
Benefit (provision) for income taxes | 43 | (32 | ) | (152 | ) | |||||||
INCOME FROM CONTINUING OPERATIONS BEFORE | 531 | 439 | 269 | |||||||||
Synthetic fuel minority interest | (55 | ) | — | — | ||||||||
INCOME FROM CONTINUING OPERATIONS | 476 | 439 | 269 | |||||||||
Discontinued Operations | ||||||||||||
Income (loss) from Senior Living Services, net of tax | 26 | (108 | ) | (29 | ) | |||||||
Loss from Distribution Services, net of tax | — | (54 | ) | (4 | ) | |||||||
NET INCOME | $ | 502 | $ | 277 | $ | 236 | ||||||
EARNINGS PER SHARE – Basic | ||||||||||||
Earnings from continuing operations | $ | 2.05 | $ | 1.83 | $ | 1.10 | ||||||
Earnings (loss) from discontinued operations | .11 | (.68 | ) | (.13 | ) | |||||||
Earnings per share | $ | 2.16 | $ | 1.15 | $ | .97 | ||||||
EARNINGS PER SHARE – Diluted | ||||||||||||
Earnings from continuing operations | $ | 1.94 | $ | 1.74 | $ | 1.05 | ||||||
Earnings (loss) from discontinued operations | .11 | (.64 | ) | (.13 | ) | |||||||
Earnings per share | $ | 2.05 | $ | 1.10 | $ | .92 | ||||||
DIVIDENDS DECLARED PER SHARE | $ | 0.295 | $ | 0.275 | $ | 0.255 | ||||||
See Notes Toto Consolidated Financial Statements
1 | See Footnote 22 “Related Party Transactions” of the Notes to Consolidated Financial Statements for disclosure of related party amounts. |
3343
MARRIOTT INTERNATIONAL, INC.
January 2, 2004 and January 3, 2003
($ in millions)
January 2, 2004 | January 3, 2003 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and equivalents | $ | 229 | $ | 198 | ||||
Accounts and notes receivable | 699 | 522 | ||||||
Prepaid taxes | 223 | 300 | ||||||
Other | 84 | 89 | ||||||
Assets held for sale | — | 664 | ||||||
1,235 | 1,773 | |||||||
Property and equipment | 2,513 | 2,560 | ||||||
Goodwill | 923 | 923 | ||||||
Other intangible assets | 526 | 495 | ||||||
Investments in affiliates – equity | 468 | 475 | ||||||
Investments in affiliates – notes receivable | 558 | 522 | ||||||
Notes and other receivables, net | ||||||||
Loans to timeshare owners | 152 | 153 | ||||||
Other notes receivable | 389 | 366 | ||||||
Other long-term receivables | 563 | 473 | ||||||
1,104 | 992 | |||||||
Other | 850 | 556 | ||||||
$ | 8,177 | $ | 8,296 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 584 | $ | 505 | ||||
Accrued payroll and benefits | 412 | 373 | ||||||
Casualty self-insurance | 43 | 32 | ||||||
Other payables and accruals | 667 | 662 | ||||||
Current portion of long-term debt | 64 | 221 | ||||||
Liabilities of businesses held for sale | — | 390 | ||||||
1,770 | 2,183 | |||||||
Long-term debt | 1,391 | 1,553 | ||||||
Casualty self-insurance reserves | 169 | 106 | ||||||
Other long-term liabilities | 1,009 | 881 | ||||||
Shareholders’ equity | ||||||||
Class A common stock | 3 | 3 | ||||||
Additional paid-in capital | 3,317 | 3,224 | ||||||
Retained earnings | 1,505 | 1,126 | ||||||
Deferred compensation | (81 | ) | (43 | ) | ||||
Treasury stock, at cost | (865 | ) | (667 | ) | ||||
Accumulated other comprehensive loss | (41 | ) | (70 | ) | ||||
3,838 | 3,573 | |||||||
$ | 8,177 | $ | 8,296 | |||||
See Notes to Consolidated Financial Statements
44
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001
($ in millions)
January 3, 2003 | December 28, 2001 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and equivalents | $ | 198 |
| $ | 812 |
| ||
Accounts and notes receivable |
| 524 |
|
| 479 |
| ||
Prepaid taxes |
| 300 |
|
| 223 |
| ||
Other |
| 89 |
|
| 72 |
| ||
Assets held for sale |
| 633 |
|
| 1,161 |
| ||
| 1,744 |
|
| 2,747 |
| |||
Property and equipment |
| 2,589 |
|
| 2,460 |
| ||
Goodwill |
| 923 |
|
| 977 |
| ||
Other intangible assets |
| 495 |
|
| 657 |
| ||
Investments in affiliates – equity |
| 493 |
|
| 314 |
| ||
Investments in affiliates – notes receivable |
| 584 |
|
| 505 |
| ||
Notes and other receivables, net | ||||||||
Loans to timeshare owners |
| 153 |
|
| 259 |
| ||
Other notes receivable |
| 304 |
|
| 311 |
| ||
Other long-term receivables |
| 473 |
|
| 472 |
| ||
| 930 |
|
| 1,042 |
| |||
Other |
| 538 |
|
| 405 |
| ||
$ | 8,296 |
| $ | 9,107 |
| |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 529 |
| $ | 607 |
| ||
Accrued payroll and benefits |
| 373 |
|
| 322 |
| ||
Casualty self insurance |
| 32 |
|
| 21 |
| ||
Other payables and accruals |
| 665 |
|
| 621 |
| ||
Current portion of long-term debt |
| 242 |
|
| 32 |
| ||
Liabilities of businesses held for sale |
| 366 |
|
| 367 |
| ||
| 2,207 |
|
| 1,970 |
| |||
Long-term debt |
| 1,492 |
|
| 2,301 |
| ||
Casualty self insurance reserves |
| 106 |
|
| 83 |
| ||
Other long-term liabilities |
| 857 |
|
| 868 |
| ||
Convertible debt |
| 61 |
|
| 407 |
| ||
Shareholders’ equity | ||||||||
Class A common stock |
| 3 |
|
| 3 |
| ||
ESOP preferred stock |
| — |
|
| — |
| ||
Additional paid-in capital |
| 3,181 |
|
| 3,378 |
| ||
Retained earnings |
| 1,126 |
|
| 941 |
| ||
Treasury stock, at cost |
| (667 | ) |
| (503 | ) | ||
Unearned ESOP shares |
| — |
|
| (291 | ) | ||
Accumulated other comprehensive loss |
| (70 | ) |
| (50 | ) | ||
| 3,573 |
|
| 3,478 |
| |||
$ | 8,296 |
| $ | 9,107 |
| |||
2003 | 2002 | 2001 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Income from continuing operations | $ | 476 | $ | 439 | $ | 269 | ||||||
Adjustments to reconcile to cash provided by operating activities: | ||||||||||||
Income (loss) from discontinued operations | 7 | 9 | (33 | ) | ||||||||
Discontinued operations – gain (loss) on sale/exit | 19 | (171 | ) | — | ||||||||
Depreciation and amortization | 160 | 187 | 222 | |||||||||
Minority interest in results of synthetic fuel operation | 55 | — | — | |||||||||
Income taxes | (171 | ) | (105 | ) | 9 | |||||||
Timeshare activity, net | (111 | ) | (63 | ) | (358 | ) | ||||||
Other | (59 | ) | 223 | 278 | ||||||||
Working capital changes: | ||||||||||||
Accounts receivable | (81 | ) | (31 | ) | 57 | |||||||
Other current assets | 11 | 60 | (20 | ) | ||||||||
Accounts payable and accruals | 115 | (32 | ) | (21 | ) | |||||||
Net cash provided by operating activities | 421 | 516 | 403 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Capital expenditures | (210 | ) | (292 | ) | (560 | ) | ||||||
Dispositions | 494 | 729 | 554 | |||||||||
Loan advances | (241 | ) | (237 | ) | (367 | ) | ||||||
Loan collections and sales | 280 | 124 | 71 | |||||||||
Other | (39 | ) | (7 | ) | (179 | ) | ||||||
Net cash provided by (used in) investing activities | 284 | 317 | (481 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||
Commercial paper, net | (102 | ) | 102 | (827 | ) | |||||||
Issuance of long-term debt | 14 | 26 | 1,329 | |||||||||
Repayment of long-term debt | (273 | ) | (946 | ) | (123 | ) | ||||||
(Redemption) issuance of convertible debt | — | (347 | ) | 405 | ||||||||
Issuance of Class A common stock | 102 | 35 | 76 | |||||||||
Dividends paid | (68 | ) | (65 | ) | (61 | ) | ||||||
Purchase of treasury stock | (373 | ) | (252 | ) | (235 | ) | ||||||
Cash received from minority interest in synthetic fuel operation | 26 | — | — | |||||||||
Net cash (used in) provided by financing activities | (674 | ) | (1,447 | ) | 564 | |||||||
INCREASE (DECREASE) IN CASH AND EQUIVALENTS | 31 | (614 | ) | 486 | ||||||||
CASH AND EQUIVALENTS, beginning of year | 198 | 812 | 326 | |||||||||
CASH AND EQUIVALENTS, end of year | $ | 229 | $ | 198 | $ | 812 | ||||||
See Notes Toto Consolidated Financial Statements
3445
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWSCOMPREHENSIVE INCOME
Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000
($ in millions)
2002 | 2001 | 2000 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Income from continuing operations | $ | 439 |
| $ | 269 |
| $ | 490 |
| |||
Adjustments to reconcile to cash provided by operating activities: | ||||||||||||
Income (loss) from discontinued operations |
| 9 |
|
| (33 | ) |
| (11 | ) | |||
Discontinued operations – loss on sale/exit |
| (171 | ) |
| — |
|
| — |
| |||
Depreciation and amortization |
| 187 |
|
| 222 |
|
| 195 |
| |||
Income taxes |
| (105 | ) |
| 9 |
|
| 133 |
| |||
Timeshare activity, net |
| (63 | ) |
| (358 | ) |
| (195 | ) | |||
Other |
| 223 |
|
| 278 |
|
| 54 |
| |||
Working capital changes: | ||||||||||||
Accounts receivable |
| (31 | ) |
| 57 |
|
| (53 | ) | |||
Other current assets |
| 60 |
|
| (20 | ) |
| 24 |
| |||
Accounts payable and accruals |
| (32 | ) |
| (21 | ) |
| 219 |
| |||
Net cash provided by operating activities |
| 516 |
|
| 403 |
|
| 856 |
| |||
INVESTING ACTIVITIES | ||||||||||||
Capital expenditures |
| (292 | ) |
| (560 | ) |
| (1,095 | ) | |||
Dispositions |
| 729 |
|
| 554 |
|
| 742 |
| |||
Loan advances |
| (237 | ) |
| (367 | ) |
| (389 | ) | |||
Loan collections and sales |
| 124 |
|
| 71 |
|
| 93 |
| |||
Other |
| (7 | ) |
| (179 | ) |
| (377 | ) | |||
Net cash provided by (used in) investing activities |
| 317 |
|
| (481 | ) |
| (1,026 | ) | |||
FINANCING ACTIVITIES | ||||||||||||
Commercial paper, net |
| 102 |
|
| (827 | ) |
| 46 |
| |||
Issuance of long-term debt |
| 26 |
|
| 1,329 |
|
| 338 |
| |||
Repayment of long-term debt |
| (946 | ) |
| (123 | ) |
| (26 | ) | |||
(Redemption) issuance of convertible debt |
| (347 | ) |
| 405 |
|
| — |
| |||
Issuance of Class A common stock |
| 35 |
|
| 76 |
|
| 58 |
| |||
Dividends paid |
| (65 | ) |
| (61 | ) |
| (55 | ) | |||
Purchase of treasury stock |
| (252 | ) |
| (235 | ) |
| (340 | ) | |||
Net cash (used in) provided by financing activities |
| (1,447 | ) |
| 564 |
|
| 21 |
| |||
(DECREASE) INCREASE IN CASH AND EQUIVALENTS |
| (614 | ) |
| 486 |
|
| (149 | ) | |||
CASH AND EQUIVALENTS, beginning of year |
| 812 |
|
| 326 |
|
| 475 |
| |||
CASH AND EQUIVALENTS, end of year | $ | 198 |
| $ | 812 |
| $ | 326 |
| |||
2003 | 2002 | 2001 | ||||||||||
Net income | $ | 502 | $ | 277 | $ | 236 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Foreign currency translation adjustments | 37 | (7 | ) | (14 | ) | |||||||
Other | (8 | ) | (13 | ) | 8 | |||||||
Total other comprehensive income (loss) | 29 | (20 | ) | (6 | ) | |||||||
Comprehensive income | $ | 531 | $ | 257 | $ | 230 | ||||||
See Notes Toto Consolidated Financial Statements
3546
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMESHAREHOLDERS’ EQUITY
Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000
($ in millions)
2002 | 2001 | 2000 | ||||||||||
Net income | $ | 277 |
| $ | 236 |
| $ | 479 |
| |||
Other comprehensive (loss) income (net of tax): | ||||||||||||
Foreign currency translation adjustments |
| (7 | ) |
| (14 | ) |
| (10 | ) | |||
Other |
| (13 | ) |
| 8 |
|
| 2 |
| |||
Total other comprehensive loss |
| (20 | ) |
| (6 | ) |
| (8 | ) | |||
Comprehensive income | $ | 257 |
| $ | 230 |
| $ | 471 |
| |||
See Notes To Consolidated Financial Statements
36
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
(in millions, except per share amounts)
Common shares outstanding | Class A common stock | Additional paid-in capital | Retained earnings | Unearned ESOP shares | Treasury stock, at cost | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||||
246.3 |
| Balance at January 1, 2000 | $ | 3 | $ | 2,738 |
| $ | 508 |
| $ | — |
| $ | (305 | ) | $ | (36 | ) | ||||||||||||||||||||||||||||||||||||
— |
| Net income |
| — |
| — |
|
| 479 |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||||||||||||||||||||
— |
| Dividends ($.235 per share) |
| — |
| — |
|
| (56 | ) |
| — |
|
| — |
|
| — |
| ||||||||||||||||||||||||||||||||||||
5.5 |
| Employee stock plan issuance and other |
| — |
| 852 |
|
| (80 | ) |
| (679 | ) |
| 186 |
|
| (8 | ) | ||||||||||||||||||||||||||||||||||||
(10.8 | ) | Purchase of treasury stock |
| — |
| — |
|
| — |
|
| — |
|
| (335 | ) |
| — |
| ||||||||||||||||||||||||||||||||||||
Common Shares | Class A Common Stock | Additional Paid-in Capital | Deferred Compensation | Retained Earnings | Unearned ESOP Shares | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||||||||||||||||
241.0 |
| Balance at December 29, 2000 |
| 3 |
| 3,590 |
|
| 851 |
|
| (679 | ) |
| (454 | ) |
| (44 | ) | Balance at December 30, 2000 | $ | 3 | $ | 3,629 | $ | (39 | ) | $ | 851 | $ | (679 | ) | $ | (454 | ) | $ | (44 | ) | |||||||||||||||||
— |
| Net income |
| — |
| — |
|
| 236 |
|
| — |
|
| — |
|
| — |
| Net income | — | — | — | 236 | — | — | — | ||||||||||||||||||||||||||||
— |
| Dividends ($.255 per share) |
| — |
| — |
|
| (62 | ) |
| — |
|
| — |
|
| — |
| Dividends ($.255 per share) | — | — | — | (62 | ) | — | — | — | |||||||||||||||||||||||||||
5.8 |
| Employee stock plan issuance and other |
| — |
| (212 | ) |
| (84 | ) |
| 388 |
|
| 186 |
|
| (6 | ) | Employee stock plan issuance and other | — | (202 | ) | (10 | ) | (84 | ) | 388 | 186 | (6 | ) | ||||||||||||||||||||||||
(6.1 | ) | Purchase of treasury stock |
| — |
| — |
|
| — |
|
| — |
|
| (235 | ) |
| — |
| ||||||||||||||||||||||||||||||||||||
(6.1) | Purchase of treasury stock | — | — | — | — | — | (235 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
240.7 |
| Balance at December 28, 2001 |
| 3 |
| 3,378 |
|
| 941 |
|
| (291 | ) |
| (503 | ) |
| (50 | ) | Balance at December 28, 2001 | 3 | 3,427 | (49 | ) | 941 | (291 | ) | (503 | ) | (50 | ) | ||||||||||||||||||||||||
— |
| Net income |
| — |
| — |
|
| 277 |
|
| — |
|
| — |
|
| — |
| Net income | — | — | — | 277 | — | — | — | ||||||||||||||||||||||||||||
— |
| Dividends ($.275 per share) |
| — |
| — |
|
| (67 | ) |
| — |
|
| — |
|
| — |
| Dividends ($.275 per share) | — | — | — | (67 | ) | — | — | — | |||||||||||||||||||||||||||
3.0 |
| Employee stock plan issuance and other |
| — |
| (197 | ) |
| (25 | ) |
| 291 |
|
| 90 |
|
| (20 | ) | Employee stock plan issuance and other | — | (203 | ) | 6 | (25 | ) | 291 | 90 | (20 | ) | |||||||||||||||||||||||||
(7.8 | ) | Purchase of treasury stock |
| — |
| — |
|
| — |
|
| — |
|
| (254 | ) |
| — |
| ||||||||||||||||||||||||||||||||||||
(7.8) | Purchase of treasury stock | — | — | — | — | — | (254 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
235.9 |
| Balance at January 3, 2003 | $ | 3 | $ | 3,181 |
| $ | 1,126 |
| $ | — |
| $ | (667 | ) | $ | (70 | ) | Balance at January 3, 2003 | 3 | 3,224 | (43 | ) | 1,126 | — | (667 | ) | (70 | ) | |||||||||||||||||||||||||
— | Net income | — | — | — | 502 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
— | Dividends ($.295 per share) | — | — | — | (68 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
5.8 | Employee stock plan issuance and other | — | 93 | (38 | ) | (55 | ) | — | 182 | 29 | |||||||||||||||||||||||||||||||||||||||||||||
(10.5) | Purchase of treasury stock | — | — | — | — | — | (380 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
231.2 | Balance at January 2, 2004 | $ | 3 | $ | 3,317 | $ | (81 | ) | $ | 1,505 | $ | — | $ | (865 | ) | $ | (41 | ) | |||||||||||||||||||||||||||||||||||||
See Notes Toto Consolidated Financial Statements
3747
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The consolidated financial statements present the results of operations, financial position and cash flows of Marriott International, Inc. (together with its subsidiaries, we, us or the Company).
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 as of the date of the financial statements, the reported amounts of sales and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. Certain
We have reclassified certain prior year amounts have been reclassified to conform to our 2003 presentation. As part of our income statement reclassification, gains, including timeshare note sale gains, and equity in earnings/losses from our joint ventures are reflected below operating income. In addition, general, administrative and other expenses now reflect general, administrative and other expenses for the 2002 presentation.entire company including domestic and international lodging, our ExecuStay business and our timeshare segment, as well as corporate expenses.
As a result of the sale in December 2002 of 12 of our Senior Living Services communities the definitive agreements we entered into to sell our senior livingand management business and nine of the remaining 23 communities, our plan to sell the remaining 14 communities and the discontinuation of our Distribution Services business, the balances and activities of two reportable segments, Senior Living Services and Distribution Services have been segregated and reported as discontinued operations for all periods presented.
In our opinion, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of January 2, 2004 and January 3, 2003, and December 28, 2001, the results of our operations and cash flows for the fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000.2001. We have eliminated all material intercompany transactions and balances between entities includedconsolidated in these financial statements.
Fiscal Year
Our fiscal year ends on the Friday which is nearest to December 31. The 2003 and 2001 fiscal years included 52 weeks, while the 2002 fiscal year includesincluded 53 weeks, while the 2001 and 2000 fiscal years include 52 weeks.
Revenue Recognition
Our salesrevenues include (1) base and incentive management fees, (2) franchise fees, (3) salesrevenues from lodging properties and other businesses owned or leased by us, (4) timeshare interval sales, (5) cost reimbursements, (5) other lodging revenue, and (6) sales made by our Synthetic Fuel business.synthetic fuel operation while consolidated. Management fees comprise a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on unithotel profitability. Franchise fees comprise initial application fees and continuing royalties generated from our franchise programs, which permit the hotel owners and operators to use certain of our brand names. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise. Other lodging revenue includes sales from our timeshare and ExecuStay businesses.
Management Fees:We recognize base fees as revenue when earned in accordance with the contract. In interim periods and at year end we recognize incentive fees that would be due as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us.
Timeshare:Franchise Fee Revenue:We recognize franchise fee revenue from timeshare interest sales in accordance with Statement of Financial Accounting Standards (FAS)(“FAS”) No. 66,45, “Accounting for Sales of Real Estate.Franchise Fee Revenue.” We recognize sales when a minimum of 10 percent offranchise fees as revenue in each accounting period as fees are earned and become receivable from the purchase price for the timeshare interval has been received, the period of cancellation with refund has expired, we deem the receivables collectible and have attained certain minimum sales and construction levels. For sales that do not meet these criteria, we defer all revenue using the deposit method.franchisee.
Owned and Leased Units:We recognize room sales and revenues from guest services for our owned and leased units, including ExecuStay, when rooms are occupied and services have been rendered.
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Franchise Fee Revenue:Timeshare Intervals:We recognize franchise fee revenue from timeshare interest sales in accordance with FAS No. 45,66, “Accounting for Franchise Fee Revenue.Sales of Real Estate.” We recognize franchise fees assales when (1) we have received a minimum of 10 percent of the purchase price for the timeshare interval, (2) the purchaser’s period to cancel for a refund has expired, (3) we
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deem the receivables to be collectible and (4) we have attained certain minimum sales and construction levels. We defer all revenue in each accounting period as fees are earned and become receivable fromusing the franchisee.deposit method for sales that do not meet all four of these criteria.
Cost Reimbursements:We recognize cost reimbursements from managed, franchised and franchisedtimeshare properties when we incur the related reimbursable costs.
Synthetic Fuel: We recognizeEffective November 7, 2003, we account for the synthetic fuel operation using the equity method of accounting. Prior to that date we recognized revenue from our Synthetic Fuel businessthe consolidated synthetic fuel joint venture when the synthetic fuel iswas produced and sold. We recognize additional revenue based on tax credits allocated to our joint venture partner when the tax credits are generated.
Other Revenue:In 2003, we recorded a $36 million insurance settlement for lost management fees associated with the New York Marriott World Trade Center hotel, which was destroyed in the 2001 terrorist attacks.
Ground Leases
We are both the lessor and lessee of land under long-term operating leases, which include scheduled increases in minimum rents. We recognize these scheduled rent increases on a straight-line basis over the initial lease terms.
Real Estate Sales
We account for the sales of real estate in accordance with FAS No. 66. We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $4 million in 2003, $51 million in 2002 and $16 million in 2001 and $18 million in 2000.2001.
Profit Sharing Plan
We contribute to a profit sharing plan for the benefit of employees meeting certain eligibility requirements and electing participation in the plan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. Excluding the discontinued Senior Living Services and Distribution Services businesses, we recognized compensation cost from profit sharing of $53 million in 2003, $54 million in 2002 and $52 million in 2001 and $50 million in 2000.2001. We recognized compensation cost from profit sharing of $1 million in 2003, $8 million in 2002 and $6 million in 2001, and $5 million in 2000 related to the discontinued Senior Living Services and Distribution Services businesses.
Self-Insurance Programs
We are self-insured for certain levels of property, liability, workers’ compensation and employee medical coverage. We accrue estimated costs of these self-insurance programs at the present value of projected settlements for known and incurred but not reported claims. We use a discount rate of 4.8 percent to determine the present value of the projected settlements, which we consider to be reasonable given our history of settled claims, including payment patterns and the fixed nature of the individual settlements.
Marriott Rewards
Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we accumulate and track on the members’ behalf, can be redeemed for hotel stays at most of our lodging operations, airline tickets, airline frequent flier program miles, rental cars, and a variety of other awards. Points cannot be redeemed for cash.
We provide Marriott Rewards as a marketing program to participating hotels. We charge the cost of operating the program, including the estimated cost of award redemption, to hotels based on members’ qualifying expenditures.
Effective January 1, 2000, we changed certain aspects of our method of accounting for the Marriott Rewards program in accordance with Staff Accounting Bulletin (SAB) No. 101. Under the new accounting method, weWe defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points. Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing,
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promotion, and communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.
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Our liability for the Marriott Rewards program was $784 million at January 2, 2004 and $683 million at January 3, 2003, and $631 million at December 28, 2001, of which we have included $418$502 million and $380$418 million, respectively, in other long-term liabilities in the accompanying consolidated balance sheet.
Rebates and Allowances
We participate in various vendor rebate and allowance arrangements as a manager of hotel properties. There are three types of programs that are common in the hotel industry that are sometimes referred to as “rebates” or “allowances”, including unrestricted rebates, marketing (restricted) rebates, and sponsorships. The primary business purpose of these arrangements is to secure favorable pricing for our hotel owners for various products and services or enhance resources for promotional campaigns co-sponsored by certain vendors. More specifically, unrestricted rebates are funds returned to the buyer, generally based upon volumes or quantities of goods purchased. Marketing (restricted) allowances are funds allocated by vendor agreements for certain marketing or other joint promotional initiatives. Sponsorships are funds paid by vendors, generally used by the vendor to gain exposure at meetings and events, which are accounted for as a reduction of the cost of the event.
We account for rebates and allowances as adjustments of the prices of the vendors’ products and services in accordance with EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” We show vendor costs and the reimbursement of those costs as reimbursed costs and cost reimbursements revenue, respectively, therefore rebates are reflected as a reduction of these line items.
Cash and Equivalents
We consider all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Loan Loss and Accounts Receivable Reserves
We measure 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, we establish 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. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis. At January 3, 2003,2, 2004, our recorded investment in impaired loans was $129$142 million. We have a $59$61 million allowance for credit losses, leaving $70$81 million of our investment in impaired loans for which there is no related allowance for credit losses.
The following table summarizes the activity in our accounts and notes receivable reserves for the years ended December 29, 2000, December 28, 2001, January 3, 2003, and January 3, 2003:2, 2004:
Accounts Receivable Reserve | Notes Receivable Reserve | Accounts Receivable Reserve | Notes Receivable Reserve | |||||||||||||
($ in millions) | ||||||||||||||||
January 1, 2000 | $ | 22 |
| $ | 8 |
| ||||||||||
Additions |
| 15 |
|
| 5 |
| ||||||||||
Write-offs |
| (14 | ) |
| (1 | ) | ||||||||||
December 29, 2000 |
| 23 |
|
| 12 |
| ||||||||||
December 30, 2000 | $ | 23 | $ | 12 | ||||||||||||
Additions |
| 38 |
|
| 48 |
| 38 | 48 | ||||||||
Write-offs |
| (11 | ) |
| (1 | ) | (11 | ) | (1 | ) | ||||||
December 28, 2001 |
| 50 |
|
| 59 |
| 50 | 59 | ||||||||
Additions |
| 10 |
|
| 12 |
| 10 | 12 | ||||||||
Write-offs |
| (20 | ) |
| (12 | ) | (20 | ) | (12 | ) | ||||||
January 3, 2003 | $ | 40 |
| $ | 59 |
| 40 | 59 | ||||||||
Additions | 8 | 15 | ||||||||||||||
Write-offs | (19 | ) | (5 | ) | ||||||||||||
Reversals | (6 | ) | (8 | ) | ||||||||||||
January 2, 2004 | $ | 23 | $ | 61 | ||||||||||||
Valuation of Goodwill and Other Long-Lived Assets
We reviewevaluate the carrying valuesfair value of long-lived assets when eventsgoodwill to assess potential impairments on an annual basis, or changes in circumstances indicateduring the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon future cash flow projections. We evaluate the potential impairment of other intangible assets whenever an assetevent or other circumstance indicates that we may not be recoverable. If we expectable to recover the carrying amount of the asset. Our evaluation is based
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upon future cash flow projections. We record an impairment loss for goodwill and other intangible assets when the carrying value of the intangible asset to generate cash flowsis less than the asset’s carrying value at the lowest level of identifiable cash flows, we recognize a loss for the difference between the asset’s carrying amount and its estimated fair value.
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 for sale or a signed sales contract exists.sale. Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense.
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Investments
We consolidate entities that we control due to holding a majority voting interest.control. We account for investments in joint ventures using the equity method of accounting when we exercise significant influence over the venture. If we do not exercise significant influence, we account for the investment using the cost method of accounting. We account for investments in limited partnerships and limited liability companies using the equity method of accounting when we own more than a minimal investment.
Summarized information relating to our unconsolidated affiliatesequity method investments is as follows: total assets, which primarily comprise hotel real estate managed by us, and total liabilities were approximately $4.1 billion and $2.9 billion, respectively, at January 3, 2003 and $4.3 billion and $3.1 billion, respectively, at December 28, 2001. Total sales and net loss were $1.3 billion and $59 million, respectively, for the year ended January 3, 2003 and $1.5 billion and $39 million, respectively, for the year ended December 28, 2001. Total sales and net income were $765 million and $14 million, respectively, for the year ended December 29, 2000.
($ in millions) | 2003 | 2002 | 2001 | |||||||||
Income Statement Summary | ||||||||||||
Sales | $ | 1,487 | $ | 1,322 | $ | 1,531 | ||||||
Net (loss) income | $ | (102 | ) | $ | (59 | ) | $ | (39 | ) | |||
2003 | 2002 | |||||||||||
Balance Sheet Summary | ||||||||||||
Assets (primarily comprised of hotel real estate managed by us) | $ | 4,171 | $ | 4,104 | ||||||||
Liabilities | $ | 3,275 | $ | 2,937 | ||||||||
Our ownership interest in these unconsolidated affiliatesequity method investments varies generally from 10 percent to 50 percent.
Costs Incurred to Sell Real Estate Projects
We capitalize direct costs incurred to sell real estate projects attributable to and recoverable from the sales of timeshare interests until the sales are recognized. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Selling and marketing costs capitalized under this approach were approximately $107$69 million and $126$107 million at January 2, 2004 and January 3, 2003, and December 28, 2001, respectively, and are included in property and equipment in the accompanying consolidated balance sheets. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense, and record deposits forfeited as income.
Interest Only StripsResidual Interests
We periodically sell notes receivable originated by our timeshare businesssegment in connection with the sale of timeshare intervals. We retain servicing assets and interestother interests in the assets transferred to special purpose entities that are accounted for as interest only strips.residual interests. We treat the residual interest only strips as “trading” or “available for sale” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.Securities.” At the end of each reporting period, we estimate the fair value of the residual interests, including servicing assets, using a discounted cash flow model. We report changes in the fair values of the interest only stripsthese residual interests through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available for sale securities. We had interest only stripsresidual interests of $203 million at January 2, 2004 and $135 million at January 3, 2003, and $87 million at December 28, 2001, which are recorded as other long-term receivables on the consolidated balance sheet.
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.
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We record all derivatives at fair value either as assets or liabilities. We recognize, currently in earnings, changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments. Changes in the fair value of the hedged item in a fair value hedge are recorded as an adjustment to the carrying amount of the hedged item and recognized in earnings in the same income statement line item as the change in the fair value of the derivative.
We record the effective portion of changes in fair value of derivatives designated as cash flow hedging instruments as a component of other comprehensive income and report the ineffective portion currently in earnings. We reclassify amounts included in other comprehensive income into earnings in the same period during which the hedged item affects earnings.
Foreign Operations
The U.S. dollar is the functional currency of our consolidated and unconsolidated entities operating in the United States. The functional currency for our consolidated and unconsolidated entities operating outside of the United States is generally the local currency of the country in which the entity is located. The Company’s consolidated and unconsolidated entities whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date and income statement accounts are translated using the average exchange rate for the period. Transaction adjustments from foreign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are included as a separate component of shareholder’s equity. We report gains and losses from foreign exchange of intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency transactions, currently in operating costs and expenses, and those amounted to a $7 million gain in 2003, a $6 million loss in 2002, and an $8 million loss in 2001.
New Accounting Standards
In May 2003, the Financial Accounting Standards Board issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The provisions of FAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, or our third quarter of 2003. FAS No. 150 has no material impact on our financial statements.
We adopted FAS No. 142, “Goodwill and Other Intangible Assets”Assets,” in the first quarter of 2002. FAS No. 142 requires that goodwill is not amortized, but rather reviewed annually for impairment. The initial adoption of FAS No. 142 did not result in an impairment charge to goodwill or other intangible assets and increased our fiscal 2002 net income by approximately $30 million.
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The following table presents the impact FAS No. 142 would have had on our income from continuing operations, basic and diluted earnings per share from continuing operations, per share, and basic and diluted net earnings per share for fiscal yearsyear ended December 28, 2001, and December 29, 2000, if we had adopted it in the first quarter of 2000 ($ in millions, except per share amounts):2001:
Fiscal years ended | ||||||
December 28, 2001 | December 29, 2000 | |||||
Reported income from continuing operations, after tax | $ | 269 | $ | 490 | ||
Goodwill amortization |
| 27 |
| 27 | ||
Adjusted income from continuing operations, after tax | $ | 296 | $ | 517 | ||
Reported net income | $ | 236 | $ | 479 | ||
Goodwill amortization |
| 32 |
| 31 | ||
Adjusted net income | $ | 268 | $ | 510 | ||
Reported basic earnings from continuing operations per share | $ | 1.10 | $ | 2.03 | ||
Goodwill amortization |
| .12 |
| .12 | ||
Adjusted basic earnings from continuing operations per share | $ | 1.22 | $ | 2.15 | ||
Reported basic net earnings per share | $ | .97 | $ | 1.99 | ||
Goodwill amortization |
| .13 |
| .13 | ||
Adjusted basic net earnings per share | $ | 1.10 | $ | 2.12 | ||
Reported diluted earnings from continuing operations per share | $ | 1.05 | $ | 1.93 | ||
Goodwill amortization |
| .10 |
| .11 | ||
Adjusted diluted earnings from continuing operations per share | $ | 1.15 | $ | 2.04 | ||
Reported diluted net earnings per share | $ | 92 | $ | 1.89 | ||
Goodwill amortization |
| .12 |
| .12 | ||
Adjusted diluted net earnings per share | $ | 1.04 | $ | 2.01 | ||
Fiscal year ended December 28, 2001 | |||||||||
Reported | Goodwill Amortization | Adjusted | |||||||
($ in millions, except per share amounts) | |||||||||
Income from continuing operations, after tax | $ | 269 | $ | 27 | $ | 296 | |||
Net income | 236 | 32 | 268 | ||||||
Basic earnings per share from continuing operations | 1.10 | .12 | 1.22 | ||||||
Basic net earnings per share | .97 | .13 | 1.10 | ||||||
Diluted earnings per share from continuing operations | 1.05 | .10 | 1.15 | ||||||
Diluted net earnings per share | .92 | .12 | 1.04 |
We adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in the first quarter of 2002. The adoption of FAS No. 144 did not have any impact to our financial statements.
We will adopt FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” in the first quarter of 2003. We do not expect theThe adoption of FAS No. 146 todid not have a material impact on our financial statements.
We have adopted the disclosure provisions of FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” FAS No. 148 requires expanded disclosure regarding stock-based compensation in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements and does not have a financial impact on our financial statements. The expanded disclosure will be required in our quarterly financial reports beginning in the first quarter of 2003.
We adopted the disclosure provisions of FASB Interpretation No. (FIN)(“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including DirectIndirect Guarantees of Indebtedness of Others,” in the fourth
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quarter of 2002. We will applyapplied the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002.in 2003, and there was no material impact on our financial statements.
Under FIN 45, at the inception of guarantees issued after December 31, 2002, we will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. We will account for any fundings under the guarantee as a reduction of the liability. After funding has ceased, we will recognize the remaining liability in the income statement on a straight-line basis over the remaining term of the guarantee. In general, we issue guarantees in connection with obtaining long-term management contracts, and thus in those cases the offsetting entry will be capitalized and amortized over the life of the management contract.52
Adoption of FIN 45 will have no impact to our historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45. The impact on future financial statements will depend on the nature and extent of issued guarantees but is not expected to have a material impact to us.
FIN 46, “Consolidation of Variable Interest Entities,” is(the “Interpretation”) was effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46(R), which was revised in December 2003, is effective for all entities to which the provisions of FIN 46 were not applied as of December 24, 2003. The provisions of FIN 46(R) must be applied to variable interests in variable interestall entities created before February 1, 2003subject to the Interpretation from the beginning of the thirdfirst quarter of 2003.2004. If an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses, if they occur, receives a majority of the entity’s expected residual returns, if they occur, or both. Where it is reasonably possible that the company will consolidate or disclose information about a variable interest entity, the company must disclose the nature, purpose, size and activity of the variable interest entity and the company’s maximum exposure to loss as a result of its involvement with the variable interest entity in all financial statements issued after January 31, 2003.
We do not believe that it is reasonably possible that the adoption of FIN 46 will result in our consolidation of any previously unconsolidated entities. The adoption of FIN 46 may result in additional disclosure about a limited number of investments in variable interest entities. We do not expect such disclosure to consolidate any previously unconsolidated entities as a result of adopting FIN 46(R).
Marriott currently consolidates four entities which will be material.deemed variable interest entities under FIN 46(R). These entities were established with the same partner to lease four Marriott branded hotels. The combined capital in the four variable interest entities is $6 million, which is used primarily to fund hotel working capital. Our equity at risk is $4 million, and we hold 55 percent of the common equity shares. In addition, we guarantee the lease obligations of one of the hotels to the landlord, our total remaining exposure under this guarantee is $2 million; and our total exposure to loss is $6 million.
FIN 4646(R) also requires us to disclose information about significant variable interests we hold in variable interest entities, including the nature, purpose, size, and activity of the variable interest entity and our maximum exposure to loss as a result of our involvement with the variable interest entity.
See the “Synthetic Fuel” footnote for discussion of the nature, purpose, and size of the two synthetic fuel joint ventures as well as the nature of our involvement and the timing of when our involvement began. The synthetic fuel joint ventures will be deemed variable interest entities under FIN 46(R). Our maximum exposure to loss is $83 million at January 2, 2004. We currently do not consolidate the joint ventures and will not upon adoption of FIN 46(R) since we do not bear the majority of the expected losses.
We have one other significant interest in an entity which will be deemed a variable interest entity under FIN 46(R). In February 2001, we entered into a shareholders’ agreement with an unrelated third party to form a joint venture to own and lease luxury hotels to be managed by us. In February 2002, the joint venture signed its first lease with a third party landlord. The initial capital structure of the joint venture is $4 million of debt and $4 million of equity. We hold 35 percent of the equity, or $1 million, and 65 percent of the debt, or $3 million, for a total investment of $4 million. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. Our total exposure under these guarantees is $17 million. Our maximum exposure to loss is $21 million. We currently do not consolidate the joint venture and will not upon adoption of FIN 46(R) since we do not bear the majority of the expected losses.
FIN 46(R) does not apply to qualifying special purpose entities, such as those sometimes used by us to sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. TheseWe will continue to account for these qualifying special purpose entities will continue to be accounted for in accordance with FAS No. 140.
Stock-based Compensation
At January 3, 2003, weWe have several stock-based employee compensation plans whichthat we describe more fully in the “Employee Stock Plans” footnote. We account for those plans using the intrinsic value method under the recognition and measurement principles of APBAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we do not reflect stock-based employee compensation cost in net income for our Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan. We recognized stock-based employee compensation cost of $19 million, $9 million $19 million and $14$19 million, net of tax, for deferred share grants, and restricted share grants and restricted stock units (2003 only) for 2003, 2002 and 2001, and 2000, respectively. The impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in capital is included in the denominator of the diluted pro forma shares for all years presented.
4353
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. We have included the impact of measured but unrecognized compensation ($cost and excess tax benefits credited to additional paid-in-capital in millions, except per share amounts):the calculation of the diluted pro forma shares for all years presented.
2002 | 2001 | 2000 | ||||||||||||||||||||||
($ in millions, except per share amounts) | 2003 | 2002 | 2001 | |||||||||||||||||||||
Net income, as reported | $ | 277 |
| $ | 236 |
| $ | 479 |
| $ | 502 | $ | 277 | $ | 236 | |||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
| 9 |
|
| 19 |
|
| 14 |
| 19 | 9 | 19 | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| (64 | ) |
| (68 | ) |
| (58 | ) | |||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | (73 | ) | (64 | ) | (68 | ) | ||||||||||||||||||
Pro forma net income | $ | 222 |
| $ | 187 |
| $ | 435 |
| $ | 448 | $ | 222 | $ | 187 | |||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic – as reported | $ | 1.15 |
| $ | .97 |
| $ | 1.99 |
| $ | 2.16 | $ | 1.15 | $ | .97 | |||||||||
Basic – pro forma | $ | .93 |
| $ | .77 |
| $ | 1.80 |
| $ | 1.93 | $ | .93 | $ | .77 | |||||||||
Diluted – as reported | $ | 1.10 |
| $ | .92 |
| $ | 1.89 |
| $ | 2.05 | $ | 1.10 | $ | .92 | |||||||||
Diluted – pro forma | $ | .90 |
| $ | .74 |
| $ | 1.73 |
| $ | 1.84 | $ | .90 | $ | .74 | |||||||||
RELATIONSHIP WITH MAJOR CUSTOMER
2. | RELATIONSHIP WITH MAJOR CUSTOMER |
In December 1998,The revenues and financial results we recognized from lodging properties owned/leased by Host Marriott Corporation (Host Marriott) reorganized its business operations to qualify as a real estate investment trust (REIT). In conjunction with its conversion to a REIT,are shown in the following table:
($ in millions) | 2003 | 2002 | 2001 | ||||||
Revenues | $ | 2,357 | $ | 2,400 | $ | 2,265 | |||
Lodging financial results | 141 | 145 | 169 |
Additionally, Host Marriott spun off, in a taxable transaction, a new company called Crestline Capital Corporation (Crestline). As part of the Crestline spinoff, Host Marriott transferred to Crestline all of the senior living communities previously owned by Host Marriott, and Host Marriott entered into lease or sublease agreements with subsidiaries of Crestline for substantially all of Host Marriott’s lodging properties. Our lodging and senior living community management and franchise agreements with Host Marriott were also assigned to these Crestline subsidiaries. The lodging agreements now provide for us to manage the Marriott, Ritz-Carlton, Courtyard and Residence Inn hotels leased by the lessee. The lessee cannot take certain major actions relating to leased properties that we manage without our consent. Effective as of January 1, 2001, a Host Marriott taxable subsidiary acquired the lessee entities for the full-service hotels in the United States and took an assignment of the lessee entities’ interests in the leases for the hotels in Canada. On January 11, 2002, Crestline closed on the sale of its senior living communities to an unaffiliated third-party. The Company continues to manage these senior living communities.
We recognized sales of $2,547 million, $2,440 million and $2,746 million and lodging financial results of $150 million, $162 million and $235 million during 2002, 2001 and 2000, respectively, from lodging properties owned or leased by Host Marriott. Additionally, Host Marriott is a general partner in several unconsolidated partnerships that own lodging properties operated by us under long-term agreements. We recognizedThe sales, of $494 million, $546 millionlodging financial results and $622 million and income of $28 million, $40 million and $72 million in 2002, 2001 and 2000, respectively, from the lodging properties owned by these unconsolidated partnerships. We also leased land to certain of these partnerships and recognized land rent income of $18 million, $19 million and $21 million, respectively,recognized by the Company are shown in 2002, 2001 and 2000.the following table:
($ in millions) | 2003 | 2002 | 2001 | ||||||
Revenues | $ | 329 | $ | 387 | $ | 520 | |||
Lodging financial results, including equity in earnings (losses) | 7 | 29 | 55 | ||||||
Land rent income | 18 | 18 | 19 |
In December 2000, we acquired 120 Courtyard by Marriott hotels, through an unconsolidated joint venture (the Courtyard Joint Venture) with an affiliate of Host Marriott.Marriott Corporation. Prior to the formation of the Courtyard Joint Venture, Host Marriott Corporation was a general partner in the unconsolidated partnerships that owned the 120 Courtyard by Marriott hotels. Amounts recognized from lodging properties owned by unconsolidated partnerships discussed above include the following amounts related to these 120 Courtyard hotels: sales
($ in millions) | 2003 | 2002 | 2001 | ||||||
Revenues | $ | 268 | $ | 267 | $ | 282 | |||
Lodging financial results, including equity in earnings (losses) | 3 | 16 | 32 | ||||||
Land rent income | 18 | 18 | 18 | ||||||
Interest income | 31 | 27 | 26 |
54
In connection with the formation of $313 million, $316 million and $345 million, management fee income and equity results in the joint venture of $13 million, $25 million and $53 million and land rent income of $18 million, $18 million and $19 million in 2002, 2001 and 2000, respectively. In addition,Courtyard Joint Venture we recognized interest income of $27 million and $26 million in 2002 and 2001, respectively, on the $200 million mezzanine debt provided by usmade a loan to the joint venture. The balance on our mezzanine loan to the Courtyard Joint Venture was $215 million and $184 million as of January 2, 2004 and January 3, 2003, respectively. The proceeds of the mezzanine loan have not been, and will not be, used to pay our management fees, debt service, or land rent income. All management fees relating to the underlying hotels that we recognize in income are paid to us in cash by the Courtyard Joint Venture.
44
We have provided Host Marriott Corporation with financing for a portion of the cost of acquiring properties to be operated or franchised by us, and may continue to provide financing to Host Marriott Corporation in the future. The outstanding principal balance of these loans was $5$3 million and $7$5 million at January 2, 2004 and January 3, 2003, and December 28, 2001, respectively, and we recognized less than $1 million in 2003 and $1 million in each of 2002 2001 and 20002001 in interest and fee income under these credit agreements with Host Marriott.Marriott Corporation.
We have guaranteed the performance of Host Marriott Corporation and certain of its affiliates to lenders and other third parties. These guarantees were limited to $7$9 million at January 3, 2003.2, 2004. We have made no payments pursuant to these guarantees. We lease land to the Courtyard joint ventureJoint Venture that had an aggregate book value of $184 million at January 3, 2003.2, 2004. This land has been pledged to secure debt of the lessees. We have agreed to deferare currently deferring receipt of rentals on this land if necessary, to permit the lessees to meet their debt service requirements.
In recognition of the evolving changes in the lodging industry over the last ten years and the age of our agreements with Host Marriott, many provisions of which predated our 1993 Spin-off, and the need to provide clarity on a number of points and consistency on contractual terms over the large portfolio of Host Marriott owned hotels, we and Host Marriott concluded that we could mutually enhance the long term strength and growth of both companies by updating our existing relationship. Accordingly, in 2002 we negotiated certain changes to our management agreements for Host Marriott-owned hotels. The modifications were completed during the third quarter of 2002 and are effective as of the beginning of our 2002 fiscal year. These changes, among other things,
3. | NOTES RECEIVABLE |
The monetary effect of the changes will depend on future events such as the financial results of the hotels. We do not expect these modifications to have a material financial impact on us.
45
NOTES RECEIVABLE
2002 | 2001 | |||||||||||||||
($ in millions) | ||||||||||||||||
($ in millions) | 2003 | 2002 | ||||||||||||||
Loans to timeshare owners | $ | 169 |
| $ | 288 |
| $ | 167 | $ | 169 | ||||||
Lodging senior loans |
| 320 |
|
| 314 |
| 110 | 320 | ||||||||
Lodging mezzanine loans |
| 624 |
|
| 530 |
| ||||||||||
Senior Living Services loans |
| — |
|
| 16 |
| ||||||||||
Lodging mezzanine and other loans | 886 | 624 | ||||||||||||||
| 1,113 |
|
| 1,148 |
| 1,163 | 1,113 | |||||||||
Less current portion |
| (72 | ) |
| (73 | ) | (64 | ) | (72 | ) | ||||||
$ | 1,041 |
| $ | 1,075 |
| $ | 1,099 | $ | 1,041 | |||||||
Lodging mezzanine and other loans include the loan to the Courtyard joint venture.Joint Venture of $215 million and $184 million, respectively, at January 2, 2004 and January 3, 2003. The lodging mezzanine and other loans at January 2, 2004, also include the $92 million loan we provided to CNL Retirement Properties, Inc. (CNL) in connection with the sale of our senior living services business and a $20 million note receivable in connection with our sale of the 50.1 percent interest in the synthetic fuel operation. Amounts due within one year are classified as current assets in the accompanying consolidated balance sheet, including $16$15 million and $29$16 million, respectively, as of January 2, 2004 and January 3, 2003, and December 28, 2001, related to the loans to timeshare owners.
PROPERTY AND EQUIPMENTInterest income on notes receivable is recognized on an accrual basis unless the note is impaired.
2002 | 2001 | |||||||
($ in millions) | ||||||||
Land | $ | 386 |
| $ | 435 |
| ||
Buildings and leasehold improvements |
| 547 |
|
| 440 |
| ||
Furniture and equipment |
| 676 |
|
| 497 |
| ||
Timeshare properties |
| 1,270 |
|
| 1,167 |
| ||
Construction in progress |
| 180 |
|
| 330 |
| ||
| 3,059 |
|
| 2,869 |
| |||
Accumulated depreciation and amortization |
| (470 | ) |
| (409 | ) | ||
$ | 2,589 |
| $ | 2,460 |
| |||
Our notes receivable are due as follows: 2004- $64 million; 2005- $50 million; 2006 - $250 million; 2007- $182 million; 2008- $143 million; and $474 million thereafter.
4. | PROPERTY AND EQUIPMENT |
($ in millions) | 2003 | 2002 | ||||||
Land | $ | 424 | $ | 381 | ||||
Buildings and leasehold improvements | 606 | 531 | ||||||
Furniture and equipment | 680 | 665 | ||||||
Timeshare properties | 1,286 | 1,270 | ||||||
Construction in progress | 74 | 180 | ||||||
3,070 | 3,027 | |||||||
Accumulated depreciation and amortization | (557 | ) | (467 | ) | ||||
$ | 2,513 | $ | 2,560 | |||||
We record property and equipment at cost, including interest, rent and real estate taxes incurred during development and construction. Interest capitalized as a cost of property and equipment totaled $25 million in 2003, $43 million in 2002 and $61 million in 2001 and $52 million in 2000.2001. We capitalize the cost of improvements that extend the useful life of property and equipment when incurred. These capitalized costs may include structural costs, equipment, fixtures, floor and wall coverings and paint. All repairsrepair and maintenance costs are expensed as incurred. We compute
55
depreciation using the straight-line method over the estimated useful lives of the assets (three to 40 years). Depreciation expense, including amounts related to discontinued operations, totaled $132 million in 2003, $145 million in 2002, and $142 million in 2001. We amortize leasehold improvements over the shorter of the asset life or lease term.
ACQUISITIONS AND DISPOSITIONS
Courtyard Joint Venture
5. | ACQUISITIONS AND DISPOSITIONS |
In 2003, we sold three lodging properties for $138 million in cash, net of transaction costs. We accounted for the three property sales under the full accrual method in accordance with FAS No. 66, and we will continue to operate the properties under long-term management agreements. The buyer of one property leased the property for a term of 20 years to a consolidated joint venture between the buyer and us. The lease payments are fixed for the first quarterfive years and variable thereafter. Our gain on the sale of 2000, we entered into an agreementapproximately $6 million will be recognized on a straight-line basis in proportion to resolve litigation involvingthe gross rental charged to expense. The $4 million gain on the sale of the other two properties is deferred until certain limited partnerships formedcontingencies in the mid- to late 1980s. The agreement was reached with lead counsel tosales contract expire. During the plaintiffsyear, we also sold three parcels of land for $10 million in the lawsuits,cash, net of transaction costs, and with the special litigation committee appointed by the general partnerrecognized a pre-tax loss of two of the partnerships, Courtyard by Marriott Limited Partnership (CBM I) and Courtyard by Marriott II Limited Partnership (CBM II). The agreement was amended in September 2000, to increase the amount that CBM I settlement class members were to receive after deduction of court-awarded attorneys’ fees and expenses and to provide that the defendants, including the Company, would pay a portion of the attorneys’ fees and expenses of the CBM I settlement class.$1 million.
Under the agreement,During 2003 we acquired, through an unconsolidated joint venture with an affiliate of Host Marriott, substantially all of the limited partners’also sold our interests in CBM I and CBM II which own 120 Courtyard by Marriott hotels. We continue to managethree international joint ventures for approximately $25 million. In connection with the 120 hotels under long-term agreements. The joint venture was financed with equity contributed in equal shares by us and an affiliatesales we recorded pre-tax gains of Host Marriott and approximately $200 million in mezzanine debt provided by us. Our total investment in the joint venture, including the mezzanine debt, is
46
approximately $300$21 million. Final court approval of the CBM I and CBM II settlements was granted on October 24, 2000, and became effective on December 8, 2000.
The agreement also provided for the resolution of litigation with respect to four other limited partnerships. On September 28, 2000, the court entered a final order with respect to those partnerships, and on that same date, we and Host Marriott each paid into escrow approximately $31 million for payment to the plaintiffs in exchange for dismissal of the complaints and full releases.
We recorded a pretax charge of $39 million, which was included in corporate expenses in the fourth quarter of 1999, to reflect the settlement transactions.
Dispositions
In 2002, we sold three lodging properties and six pieces of undeveloped land for $330 million in cash. We will continue to operate two of the hotels under long-term management agreements. We accounted for two of the three property sales under the full accrual method in accordance with FAS No. 66. The buyer did not make adequate minimum initial investments in the remaining property, which we accounted for under the cost recovery method. The sale of one of the properties was to a joint venture in which we have a minority interest and was sold at a loss. We recognized no pre-tax gains in 2003 and $6 million of pretaxpre-tax gains in 2002 and will recognize the remaining $51 million of pretaxpre-tax gains in subsequent years, provided certain contingencies in the sales contracts expire.
In 2002, we also sold our 11 percent investment in Interval International, a timeshare exchange company, for approximately $63 million. In connection with the transaction, we recorded a pretaxpre-tax gain of approximately $44 million.
In 2001, we agreed to sell 18 lodging properties and three pieces of undeveloped land for $682 million. We continue to operate 17 of the hotelslodging properties under long-term management agreements. In 2001, we closed on 11 properties and three pieces of undeveloped land for $470 million, and in 2002, we closed on the remaining seven properties for $212 million. We accounted for six of the 18 property sales under the full accrual method in accordance with FAS No. 66. The buyers did not make adequate minimum initial investments in the remaining 12 properties, which we accounted for under the cost recovery method. Two of the properties were sold to joint ventures in which we have a minority interest. Where the full accrual method applied, we recognized profit proportionate to the outside interests in the joint venture at the date of sale. We recognized $6 million of pre-tax profit in 2003, $2 million of pretaxpre-tax profit in 2002, and $2 million of pretaxpre-tax losses in 2001 and will recognize the remaining $27$9 million of pretaxpre-tax deferred gains in subsequent years, provided certain contingencies in the sales contracts expire.
In 2001, in connection with the sale of four of the above lodging properties, we agreed to transfer 31 existing lodging property leases to a subsidiary of the lessor and subsequently enter into agreements with the new lessee to operate the hotels under long-term management agreements. These properties were previously sold and leased back by us in 1997, 1998 and 1999. As of January 3, 2003, 212, 2004, 24 of these leases had been transferred, and pretaxpre-tax gains of $5$8 million and $12$5 million previously deferred on the sale of these properties were recognized when our lease obligations ceased in 20022003 and 2001,2002, respectively.
In 2001, we sold land for $71 million to a joint venture at book value. The joint venture is buildingbuilt two resort hotels in Orlando, Florida. We are providing development services and have guaranteed completionFlorida that opened in the third quarter of the project. We expect the hotels to open in July 2003. At openingAs of January 2, 2004, we also expect to holdheld approximately $110$126 million in mezzanine loans that we have agreed to advanceadvanced to the joint venture. We have provided the venture with additional credit facilities for certain amounts due under the first mortgage loan. Since we have an option to repurchase the property at opening if certain events transpire, we haveWe accounted for the sale of the land as a financing transaction in accordance with FAS No. 66. We reflect sales proceeds of $71 million, less $50 million funded by our initial loans to66 as it did not meet the joint venture, as long-term debt in the accompanying consolidated balance sheet.criterion for sale accounting.
In 2001, we sold and leased back one lodging property for $15 million in cash, which generated a pretaxpre-tax gain of $2 million. We will recognize this gain as a reduction of rent expense over the initial lease term.
In 2001, we sold 100 percent of our limited partner interests in five affordable housing partnerships and 85 percent of our limited partner interest in a sixth affordable housing partnership for $82 million in cash. We recognized pretaxpre-tax gains of $13 million in connection with four of the sales. We will recognize pretaxpre-tax gains of $3 million related to the other two sales in subsequent years provided certain contingencies in the sales contract expire.
4756
In the fourth quarter of 2000 we sold land, at book value, for $46 million to a joint venture in which we hold a minority interest. The joint venture has built a resort hotel, which was partially funded with $46 million of mezzanine financing to be provided by us.
In 2000, we sold and leased back, under long-term, limited-recourse leases, three lodging properties for an aggregate purchase price of $103 million. We agreed to pay a security deposit of $3 million, which will be refunded at the end of the leases. The sales price exceeded the net book value by $3 million, which we will recognize as a reduction of rent expense over the 15-year initial lease terms.
In 2000, we agreed to sell 23 lodging properties for $519 million in cash. We continue to operate the hotels under long-term management agreements. As of January 3, 2003, all the properties had been sold, generating pretax gains of $31 million. We accounted for 14 of the 17 properties under the full accrual method in accordance with FAS No. 66. The buyers did not make adequate minimum initial investments in the remaining three properties, which we accounted for under the cost recovery method. Four of the 17 properties were sold to a joint venture in which we have a minority interest. Where the full accrual method applied, we recognized profit proportionate to the outside interests in the joint venture at the date of sale. We recognized $5 million, $13 million and $9 million of pretax gains in 2002, 2001 and 2000 respectively, and will recognize the remainder in subsequent years provided certain contingencies in the sales contracts expire. Unaffiliated third-party tenants lease 13 of the properties from the buyers. In 2000, one of these tenants replaced us as the tenant on nine other properties that we sold and leased back in 1997 and 1998. We now manage these nine previously leased properties under long-term management agreements, and deferred gains on the sale of these properties of $15 million were recognized as our leases were canceled throughout 2000. In connection with the sale of four of the properties, we provided $39 million of mezzanine funding and agreed to provide the buyer with up to $161 million of additional loans to finance future acquisitions of Marriott-branded hotels. We also acquired a minority interest in the joint venture that purchased the four hotels. During 2001 we funded $27 million under this loan commitment in connection with one of the 11 property sales described above.
In connection with the long-term, limited-recourse leases described above, Marriott International, Inc.the Company has guaranteed the lease obligations of the tenants, wholly-owned subsidiaries of Marriott International, Inc.,the Company for a limited period of time (generally three to five years). After the guarantees expire, the lease obligations become non-recourse to Marriott International, Inc.the Company.
In sales transactions where we retain a management contract, the terms and conditions of the management contract are comparable to the terms and conditions of the management agreementscontracts obtained directly with third-party owners in competitive bid processes.
Synthetic Fuel
During the third quarter of 2003, we completed the sale of an approximately 50 percent interest in the synthetic fuel operation. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that are expected to continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. See Assetsfootnote 8 for further discussion.
Senior Living Services – Discontinued Operations
In 2003, in accordance with definitive agreements entered into on December 30, 2002 to sell our senior living management business to Sunrise Senior Living, Inc. (“Sunrise”) and to sell nine senior living communities to CNL, we completed those sales (in addition to the related sale of a parcel of land to Sunrise) for $266 million and recognized a gain, net of taxes, of $23 million. In addition, in 2003 we sold 14 Brighton Gardens assisted living communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates and will continue to operate the 14 communities under long-term management agreements. We accounted for the sale in accordance with
FAS No. 66 and recorded a gain, net of taxes, of $1 million. See footnote 9, “Assets Held for Sale note for dispositions related to our discontinued Senior Living Services business.– Discontinued Operations.”
ASSET SECURITIZATIONS
6. | TIMESHARE NOTE SALES |
We periodically sell, with limited recourse, through special purpose entities, notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We continue to service the notes and transfer all proceeds collected to the special purpose entities. We retain servicing assets and other interests in the securitizationsnotes which are accounted for as interest only strips.residual interests. The interests are limited to the present value of cash available after paying financing expenses, program fees, and absorbing credit losses. We have included gains from the sales of timeshare notes receivable totaling $64 million in 2003, $60 million in 2002 and $40 million in 2001 in gains and $22 million in 2000 in other revenueincome in the consolidated statement of income.
At the date of securitizationsale and at the end of each reporting period, we estimate the fair value of the interest only strips andresidual interests, including servicing assets, using a discounted cash flow model. These transactions utilize interest rate swaps to protect the net interest margin associated with the beneficial interest. We report changes in the fair value of the interest only stripsresidual interests that are treated as available-for-sale securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”,Securities,” through other comprehensive income in the accompanying consolidated balance sheet. We report in income changes in the fair value of interest only stripsresidual interests treated as trading securities under the provisions of FAS No. 115. We used the following key assumptions in measuringto measure the fair value of the interest only stripsresidual interests at the timedate of securitization and at the end of each ofsale during the years ended January 2, 2004, January 3, 2003, and December 28, 2001 and December 29, 2000:2001: average discount rate of 4.95 percent, 5.69 percent 6.89 percent and 7.826.89 percent, respectively; average expected annual prepayments, including defaults, of 15.4817.00 percent, 15.4316.41 percent and 12.72
48
15.38 percent, respectively; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 11985 months, 11869 months and 8670 months, respectively,respectively; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 44 months, 4042 months and 3844 months, respectively. Our key assumptions are based on experience. To date, actual results have not materially affected
We used the carryingfollowing key assumptions in measuring the fair value of the interests.residual interests for our four outstanding note sales at January 2, 2004. The fair value of the residual interests is $203 million and reflects an average discount rate of 5.62 percent; an average expected annual prepayment rate, including defaults, of 17.00 percent; an expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 63 months; and an expected weighted average life of prepayable notes receivable, including prepayments and defaults of 37 months.
Cash flows between us and third-party purchasers during the years ended January 2, 2004, January 3, 2003, and December 28, 2001, and December 29, 2000, were as follows: net proceeds to us from new securitizationstimeshare note sales of $231 million, $341 million $199 million and $144$199 million, respectively; repurchases by us of delinquentdefaulted loans (over 150 days overdue) of
57
$19 million, $16 million $13 million and $12$13 million, respectively; servicing fees received by us of $3 million, in 2002$3 million, and $2 million, in 2001 and 2000,respectively; and cash flows received onfrom our retained interests of $47 million, $28 million $30 million and $18$30 million, respectively.
At January 2, 2004, $733 million of principal remains outstanding in all sales in which we have a retained residual interest. Delinquencies of more than 90 days at January 2, 2004, amounted to $3 million. Losses on defaulted loans that were resolved during the year ended January 2, 2004, net of recoveries amounted to $9 million. We have been able to resell timeshare units underlying defaulted loans without incurring material losses.
On November 20,21, 2002, we repurchased notes receivable with a principal balance of $381 million and immediately sold $365 million of those notes, along with $135 million of additional notes, in a $500 million securitizationsale to an investor group. We have included net proceeds from these transactions of $89 million, including repayments of interest rate swaps on the $381 million of repurchased notes receivables,receivable, in the net proceeds from new securitizationstimeshare note sales disclosed above. We realized a gain of $14 million, primarily associated with the $135 million of additional notes sold, which is included in the $60 million gain on the sales of notes receivable for fiscal year 2002 disclosed above.
On December 12, 2000, we repurchased notes receivable with a principal balance of $359 million and immediately sold those notes, along with $19 million of additional notes, in a $378 million securitization to an investor group. We have included net proceeds from these transactions of $16 million in the net proceeds from securitizations of $144 million disclosed above. We realized a gain of $3 million, primarily associated with the $19 million of additional notes sold, which is included in the $22 million gain on the sales of notes receivable for fiscal year 2000 disclosed above.
At January 3, 2003, $682 million of principal remains outstanding in all securitizations in which we have a retained interest only strip. Delinquencies of more than 90 days at January 3, 2003, amounted to $2 million. Loans repurchased by the Company, net of obligors subsequently curing delinquencies, during the year ended January 3, 2003, amounted to $13 million. We have been able to resell timeshare units underlying repurchased loans without incurring material losses.
We have completed a stress test on the net presentfair value of the interest only strips and theresidual interests including servicing assets with the objective of measuring the change in value associated with independent changes in individual key variables. The methodology used applied unfavorable changes that would be considered statistically significant for the key variables of prepayment rate, discount rate, and weighted average remaining term. The net presentfair value of the interest only strips andresidual interests including servicing assets was $143$203 million at January 3, 2003,2, 2004, before any stress test changes were applied. An increase of 100 basis points in the prepayment rate would decrease the year-end valuation by $3 million, or 2 percent, and an increase of 200 basis points in the prepayment rate would decrease the year-end valuation by $6 million, or 43 percent. An increase of 100 basis points in the discount rate would decrease the year-end valuation by $3$4 million, or 2 percent, and an increase of 200 basis points in the discount rate would decrease the year-end valuation by $7$8 million, or 54 percent. A decline of two months in the weighted averageweighted-average remaining term would decrease the year-end valuation by $2 million, or 1 percent, and a decline of four months in the weighted averageweighted-average remaining term would decrease the year-end valuation by $4 million, or 32 percent.
MARRIOTT AND CENDANT CORPORATION JOINT VENTURE
7. | MARRIOTT AND CENDANT CORPORATION JOINT VENTURE |
In the first quarter of 2002, Marriott and Cendant Corporation (Cendant) completed the formation of a joint venture to further develop and expand the Ramada and Days Inn brands in the United States. We contributed the domestic Ramada license agreements and related intellectual property to the joint venture at their carrying value of approximately $200 million. Cendant contributed the Days Inn license agreement and related intellectual property with a fair value of approximately $205 million. We each own approximately 50 percent of the joint venture, with Cendant having the slightly larger interest. We account for our interest in the joint venture using the equity method. The joint venture can be dissolved at any time with the consent of both members and is scheduled to terminate in March 2012. In the event of dissolution, the joint venture’s assets will generally be distributed in accordance with each member’s capital
49
account. In addition, during certain periods of time commencing in March 2004, first Cendant and later Marriott will have a brief opportunity to cause a mandatory redemption of Marriott’s joint venture equity.
ASSETS HELD FOR SALE – DISCONTINUED OPERATIONS
8. | SYNTHETIC FUEL |
Senior Living ServicesIn October 2001, we acquired four coal-based synthetic fuel production facilities (the “Facilities”) for $46 million in cash. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code (credits are not available for fuel produced after 2007). We began operating these Facilities in the first quarter of 2002. Operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be, significantly accretive to our net income. Although the Facilities produce significant losses, these are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In fiscal year 2003, our synthetic fuel operation reflected sales of $302 million, equity income of $10 million, and an operating loss of $104 million, resulting in a tax benefit of $245 million, including tax credits of $211 million, offset by minority interest expense of $55 million.
On December 30, 2002,June 21, 2003, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc.completed the previously announced sale of an approximately 50 percent ownership interest in the synthetic fuel operation. We received cash and to sell nine senior living communities we own to CNL Retirement Partners, Inc. (CNL) for approximately $259promissory notes totaling $25 million in cash. We expect to complete the sales in early 2003. On December 17, 2002, we sold twelve senior living communities to CNL for approximately $89 million. We accounted for the sale under the full accrual method in accordance with FAS No. 66;at closing, and we recorded an after-tax lossare receiving additional profits that we expect will continue over the life of approximately $13 million. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancementventure based on the outstanding debt relatedactual amount of tax credits allocated to these communities.the purchaser. We plan to restructure the debt and sell the communitiesearned $56 million of such additional profits in 2003. Management has approved and committed toCertain post-closing conditions, including our receipt of satisfactory private letter rulings from the Internal Revenue Service, were satisfied during the fourth quarter. Those rulings confirm, among other things, both that the process used by our synthetic fuel operations produces a plan to sell these communities within 12 months. Accordingly,“qualified fuel” as required by Section 29 of the operating results of our senior living segment are reported in discontinued operationsInternal Revenue Code and the remaining assets and liabilities are classified as assets held for sale and liabilitiesvalidity of businesses held for sale, respectively, on the balance sheet at January 3,ownership structure of the joint venture with the purchaser of a 50 percent interest in our synthetic fuel operation. After reviewing the private letter rulings, the purchaser informed us in writing that it would not be
58
exercising a one-time “put option,” which would potentially have allowed it to return its ownership interest to us if satisfactory rulings had not been obtained prior to December 15, 2003.
As a result of the transactions outlined above,put option, we anticipate a total after-tax chargecontinued to consolidate the synthetic fuel operation through November 6, 2003. Effective November 7, 2003, because the put option was voided, we account for the synthetic fuel joint venture using the equity method of $109 million. Since generally accepted accounting principles do not allow gains to be recognized untilaccounting. The $24 million of additional profits we received from the underlying transaction closes, we cannot record the estimated after-tax gain of $22 million on the salejoint venture partner beginning November 7, 2003, along with our share of the nine communitiesequity in losses of the synthetic fuel joint venture, are reflected in the income statement under Equity in earnings/(losses) from synthetic fuel. The additional profits earned prior to CNL untilNovember 7, 2003, along with the sale is completed, which is expected to be in early 2003. As a result, we have recorded an after-tax charge of $131 million which isrevenue generated from the previously consolidated synthetic fuel joint venture, are included in discontinued operations forsynthetic fuel revenue in the year ended January 3, 2003.income statement.
9. | ASSETS HELD FOR SALE - DISCONTINUED OPERATIONS |
Senior Living Services
In December 2001, management approved and committed to a plan to exit the companion living concept of senior living services and sell the related properties within the next 12 months. We recorded an impairment charge of $60 million to adjust the carrying value of the properties to their estimated fair value for the year ended December 29,28, 2001. On October 1, 2002, we completed the sale of these properties for $62 million which exceeded our previous estimate of fair value by $11 million. We have included the $11 million gain in discontinued operations for the year ended January 3, 2003.
In the second quarter of 2002, we sold five senior living communities for $59 million. We continue to operate theceased operations of these communities under long-term management agreements.agreements after the sale of the business to Sunrise. We accounted for these sales under the full accrual method in accordance with FAS No. 66. We will recognize pretax gainscontinue to provide an operating profit guarantee to the buyer, and fundings under that guarantee are applied against the initial deferred gain of $6 million. As of January 2, 2004, the remaining deferred gain was $3 million.
On December 17, 2002, we sold 12 senior living communities to CNL for approximately $89 million. We accounted for the sale under the full accrual method in accordance with FAS No. 66; and we recorded an after-tax loss of approximately $6 million provided certain contingencies in$13 million. On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise and to sell nine senior living communities to CNL. We completed the sales contract expire.to Sunrise and CNL in addition to the related sale of a parcel of land to Sunrise in March 2003 for $266 million and recognized a gain, net of taxes, of $23 million.
AdditionalAlso, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to sell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the subordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates, and will continue to operate, the 14 communities under long-term management agreements. We recorded a gain, net of taxes, of $1 million.
For the year ended January 3, 2003, we had recorded an after-tax charge of $131 million associated with our agreement to sell our senior living management business. Accordingly, the operating results of our senior living segment are reported in discontinued operations during the years ended January 2, 2004, January 3, 2003 and December 28, 2001, and the remaining assets and liabilities were classified as assets held for sale and liabilities of businesses held for sale, respectively, on the balance sheet at January 3, 2003. There were no assets or liabilities remaining at January 2, 2004.
59
The following table provides additional income statement and balance sheet information regardingrelating to the Senior Living Services business is as follows ($ in millions):business:
2002 | 2001 | 2000 | ||||||||||||||||||||||
($ in millions) | 2003 | 2002 | 2001 | |||||||||||||||||||||
Income Statement Summary | ||||||||||||||||||||||||
Sales | $ | 802 |
| $ | 729 |
| $ | 669 |
| $ | 184 | $ | 802 | $ | 729 | |||||||||
Pretax income (loss) on operations |
| 37 |
|
| (45 | ) |
| (18 | ) | $ | 11 | $ | 37 | $ | (45 | ) | ||||||||
Tax (provision) benefit |
| (14 | ) |
| 16 |
|
| 5 |
| (4 | ) | (14 | ) | 16 | ||||||||||
Income (loss) on operations, net of tax |
| 23 |
|
| (29 | ) |
| (13 | ) | $ | 7 | $ | 23 | $ | (29 | ) | ||||||||
Pretax loss on disposal |
| (141 | ) |
| — |
|
| — |
| |||||||||||||||
Tax benefit |
| 10 |
|
| — |
|
| — |
| |||||||||||||||
Loss on disposal, net of tax |
| (131 | ) |
| — |
|
| — |
| |||||||||||||||
Pretax gain (loss) on disposal | $ | 31 | $ | (141 | ) | $ | — | |||||||||||||||||
Tax (provision) benefit | (12 | ) | 10 | — | ||||||||||||||||||||
Gain (loss) on disposal, net of tax | $ | 19 | $ | (131 | ) | $ | — | |||||||||||||||||
Balance Sheet Summary | ||||||||||||||||||||||||
Property, plant and equipment |
| 434 |
|
| 495 |
|
| 553 |
| $ | — | $ | 434 | $ | 495 | |||||||||
Goodwill |
| 115 |
|
| 115 |
|
| 120 |
| — | 115 | 115 | ||||||||||||
Other assets |
| 54 |
|
| 63 |
|
| 86 |
| — | 54 | 63 | ||||||||||||
Liabilities | $ | 317 |
| $ | 281 |
| $ | 287 |
| — | 317 | 281 |
The tax benefit in 2002 of $10 million associated with the loss on disposal includes $45 million of additional taxes related to goodwill with no tax basis.
50
Distribution Services
In the third quarter of 2002, we completed a previously announced strategic review of theour Distribution Services business and decided to exit thethat business. DuringWe completed that exit during the fourth quarter of 2002 we completed the exit of the MDS business. The exit was accomplished through a combination of transferring certain facilities, closing of other facilities and other suitable arrangements. In the year ended January 3, 2003, we recognized a pretax charge of $65 million in connection with the decision to exit this business. The charge includes: (1) $15 million for payments to third parties to subsidize their assumption of, or in some cases to terminate, existing distribution or warehouse lease contracts; (2) $9 million for severance costs; (3) $10 million related to the adjusting of fixed assets to net realizable values; (4) $2 million related to inventory losses; (5) $15 million for losses on equipment leases; (6) $10 million for losses on warehouse leases; and (7) $4 million of other associated charges. We expectFor the year ended January 2, 2004, we incurred exit costs, net of tax, of $2 million, primarily related to incur further expenses during 2003 in connectionongoing compensation costs associated with the wind downdown. We also reversed $2 million, net of the business, buttax, for previously estimated exit costs, which we currently are unable to estimate their magnitude.deemed no longer necessary.
AdditionalThe following table provides additional income statement and balance sheet information regardingrelating to the MDS disposal group is as follows:
($ in millions)Distribution Services business:
2002 | 2001 | 2000 | |||||||||||||||||||||
($ in millions) | 2003 | 2002 | 2001 | ||||||||||||||||||||
Income Statement Summary | |||||||||||||||||||||||
Sales | $ | 1,376 |
| $ | 1,637 |
| $ | 1,500 |
| $ | — | $ | 1,376 | $ | 1,637 | ||||||||
Pretax (loss) income from operations |
| (24 | ) |
| (6 | ) |
| 4 |
| ||||||||||||||
Tax benefit (provision) |
| 10 |
|
| 2 |
|
| (2 | ) | ||||||||||||||
(Loss) income on operations, net of tax |
| (14 | ) |
| (4 | ) |
| 2 |
| ||||||||||||||
Pretax loss from operations | $ | — | $ | (24 | ) | $ | (6 | ) | |||||||||||||||
Tax benefit | — | 10 | 2 | ||||||||||||||||||||
Loss on operations, net of tax | $ | — | $ | (14 | ) | $ | (4 | ) | |||||||||||||||
Pretax exit costs |
| (65 | ) |
| — |
|
| — |
| $ | — | $ | (65 | ) | $ | — | |||||||
Tax benefit |
| 25 |
|
| — |
|
| — |
| — | 25 | — | |||||||||||
Exit costs, net of tax |
| (40 | ) |
| — |
|
| — |
| $ | — | $ | (40 | ) | $ | — | |||||||
Balance Sheet Summary | |||||||||||||||||||||||
Property, plant and equipment |
| 9 |
|
| 25 |
|
| 28 |
| $ | — | $ | 9 | $ | 25 | ||||||||
Other assets |
| 21 |
|
| 191 |
|
| 166 |
| — | 21 | 191 | |||||||||||
Liabilities | $ | 49 |
| $ | 86 |
| $ | 83 |
| — | 49 | 86 |
At December 28, 2001,60
Other Assets Held for Sale
Included in assets held for sale included $87at January 3, 2003 is $31 million, ofrepresenting one full-service lodging properties, including $11property, which was subsequently sold in July 2003, for $39 million, of undeveloped land, $158 million of select-service properties and $27 million of extended-stay properties.subject to a long-term management agreement. Included in other liabilities of businesses held for sale at December 28, 2001, are $2January 3, 2003 is $24 million of liabilities related to the assetsfull-service lodging property held for sale.
During the fourth quarter of 2001, management approved and committed to a plan to sell two lodging properties and undeveloped land for an estimated sales price of $119 million. Seven additional lodging properties ($156 million purchase price) were subject to signed contracts at December 28, 2001. In 2001 we recorded an impairment charge to adjust the carrying value of three properties and the undeveloped land to their estimated fair value less cost to sell. All of the properties and undeveloped land were sold during the year ended January 3, 2003, with the exception of one lodging property and one piece of undeveloped land since no suitable buyers were located. The lodging property and undeveloped land have been reclassified as held and used and recorded at the fair value, which was lower than the carrying amount of the assets before they were classified as held for sale, less any depreciation expense that would have been recognized had the asset been continuously classified as held and used. There were no lodging properties held for sale on January 3, 2003.
10. | INTANGIBLE ASSETS |
INTANGIBLE ASSETS
2002 | 2001 | |||||||||||||||
($ in millions) | ||||||||||||||||
($ in millions) | 2003 | 2002 | ||||||||||||||
Management, franchise and license agreements | $ | 673 |
| $ | 837 |
| $ | 730 | $ | 673 | ||||||
Goodwill |
| 1,052 |
|
| 1,105 |
| 1,051 | 1,052 | ||||||||
| 1,725 |
|
| 1,942 |
| 1,781 | 1,725 | |||||||||
Accumulated amortization |
| (307 | ) |
| (308 | ) | (332 | ) | (307 | ) | ||||||
$ | 1,418 |
| $ | 1,634 |
| $ | 1,449 | $ | 1,418 | |||||||
We amortize intangible assets on a straight-line basis over periods of three to 40 years. Intangible amortization expense, including amounts related to discontinued operations, totaled $38$28 million in 2003, $42 million in 2002 $73and $80 million in 2001 and $64 million in 2000.2001.
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In the fourth quarter of 2002, we performed the annual goodwill impairment tests required by FAS No. 142. During the fourth quarter of 2002, we continued to experience softness in demand for corporate housing, and the ExecuStay business results did not start to recover as previously anticipated, particularly in New York. Additionally, we decided to convert certain geographical markets to franchises, which we anticipate will result in more stable, albeit lower, profit growth. Due to the increased focus on franchising, the continued weak operating environment, and a consequent delay in the expectations for recovery of this business from the current operating environment, we recorded a $50 million pretax charge in the fourth quarter of 2002. In calculating this impairment charge, we estimated the fair value of the ExecuStay reporting unit using a combination of discounted cash flow methodology and recent comparable transactions. We again performed an impairment test in 2003 and determined that no impairment charge was necessary for the 2003 fiscal year.
SHAREHOLDERS’ EQUITY
11. | SHAREHOLDERS’ EQUITY |
Eight hundred million shares of our Class A Common Stock, with a par value of $.01 per share, are authorized. Ten million shares of preferred stock, without par value, are authorized, 200,000 shares have been issued, 100,000 of which were for the Employee Stock Ownership Plan (ESOP) and 100,000 of which were for Capped Convertible Preferred Stock. As of December 28, 2001, 109,223January 2, 2004, there were no outstanding shares of preferred stock were outstanding, 29,124 of which related to the ESOP stock, and 80,099 of which were Capped Convertible Preferred Stock. As of January 3, 2003, noall the shares of preferred stock were outstanding as the Capped Convertible Preferred Stock shares were retired and cancelled.
On March 27, 1998, our Board of Directors adopted a shareholder rights plan under which one preferred stock purchase right was distributed for each share of our Class A Common Stock. Each right entitles the holder to buy 1/1000th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $175. The rights may not presently be exercised, but will be exercisable 10 days after a person or group acquires beneficial ownership of 20 percent or more of our Class A Common Stock, or begins a tender or exchange for 30 percent or more of our Class A Common Stock. Shares owned by a person or group on March 27, 1998, and held continuously thereafter, are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on the tenth anniversary of the adoption of the shareholder rights plan, unless previously exercised or redeemed by us for $.01 each. If we are involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right.
During the second quarter of 2000 we established an employee stock ownership plan solely to fund employer contributions to the profit sharing plan. The ESOP acquired 100,000 shares of special-purpose Company convertible preferred stock (ESOP Preferred Stock) for $1 billion. The ESOP Preferred Stock has a stated value and liquidation preference of $10,000 per share, pays a quarterly dividend of 1 percent of the stated value, and is convertible into our Class A Common Stock at any time based on the amount of our contributions to the ESOP and the market price of the common stock on the conversion date, subject to certain caps and a floor price. We hold a note from the ESOP, which is eliminated upon consolidation, for the purchase price of the ESOP Preferred Stock. The shares of ESOP Preferred Stock are pledged as collateral for the repayment of the ESOP’s note, and those
61
shares are released from the pledge as principal on the note is repaid. Shares of ESOP Preferred Stock released from the pledge may be redeemed for cash based on the value of the common stock into which those shares may be converted. Principal and interest payments on the ESOP’s debt were forgiven periodically to fund contributions to the ESOP and release shares of ESOP Preferred Stock. Unearned ESOP shares have been reflected within shareholders’ equity and are amortized as shares of ESOP Preferred Stock are released and cash is allocated to employees’ accounts. The fair market value of the unearned ESOP shares at December 28, 2001 was $263 million. The last of the shares of ESOP Preferred Stock were released to fund contributions as of July 18, 2002 at which time the remainder of the principal and interest due on the ESOP’s note was forgiven. As of January 3, 2003,2, 2004, there were no outstanding shares of ESOP Preferred Stock.
Accumulated other comprehensive loss of $70$41 million and $50$70 million at January 2, 2004 and January 3, 2003, and December 28, 2001, respectively, consists primarily of fair value changes of certain financial instruments and foreign currency translation adjustments.
52
INCOME TAXES
12. | INCOME TAXES |
Total deferred tax assets and liabilities as of January 2, 2004 and January 3, 2003, and December 28, 2001, were as follows:
2002 | 2001 | |||||||||||||||
($ in millions) | ||||||||||||||||
($ in millions) | 2003 | 2002 | ||||||||||||||
Deferred tax assets | $ | 717 |
| $ | 481 |
| $ | 797 | $ | 717 | ||||||
Deferred tax liabilities |
| (348 | ) |
| (353 | ) | (331 | ) | (348 | ) | ||||||
Net deferred taxes | $ | 369 |
| $ | 128 |
| $ | 466 | $ | 369 | ||||||
The tax effect of each type of temporary difference and carryforwardcarry forward that gives rise to a significant portion of deferred tax assets and liabilities as of January 2, 2004 and January 3, 2003, and December 28, 2001, were as follows:
2002 | 2001 | |||||||||||||||
($ in millions) | ||||||||||||||||
Self insurance | $ | 35 |
| $ | 50 |
| ||||||||||
($ in millions) | 2003 | 2002 | ||||||||||||||
Self-insurance | $ | 20 | $ | 35 | ||||||||||||
Employee benefits |
| 162 |
|
| 162 |
| 170 | 162 | ||||||||
Deferred income |
| 52 |
|
| 35 |
| 81 | 52 | ||||||||
Other reserves |
| 70 |
|
| 59 |
| 81 | 70 | ||||||||
Disposition reserves |
| 73 |
|
| 23 |
| 11 | 73 | ||||||||
Frequent guest program |
| 64 |
|
| 58 |
| 56 | 64 | ||||||||
Tax credits |
| 122 |
|
| 34 |
| 198 | 122 | ||||||||
Net operating loss carryforwards | 42 | 42 | ||||||||||||||
Timeshare operations |
| (18 | ) |
| (28 | ) | (8 | ) | (18 | ) | ||||||
Property, equipment and intangible assets |
| (136 | ) |
| (187 | ) | (125 | ) | (136 | ) | ||||||
Other, net |
| (55 | ) |
| (78 | ) | (23 | ) | (44 | ) | ||||||
Net deferred taxes | $ | 369 |
| $ | 128 |
| ||||||||||
Deferred taxes | 503 | 422 | ||||||||||||||
Less: Valuation allowance | (37 | ) | (53 | ) | ||||||||||||
Net Deferred Taxes | $ | 466 | $ | 369 | ||||||||||||
At January 3, 2003,2, 2004, we had approximately $45$42 million of tax credits that expire through 2022 and $772023, $156 million of tax credits that do not expire.expire and $42 million of net operating losses that expire through 2022.
We have made no provision for U.S. income taxes or additional foreign taxes, on the cumulative unremitted earnings of non-U.S. subsidiaries ($263298 million as of January 3, 2003)2, 2004) because we consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned to us or a U.S. affiliate or if we sell our interests in the affiliates. We cannot practically estimate the amount of additional taxes that might be payable on the unremitted earnings.
62
The provisionbenefit (provision) for income taxes consists of:
2002 | 2001 | 2000 | |||||||||||
($ in millions) | |||||||||||||
Current | - Federal | $ | 129 |
| $ | 138 |
| $ | 212 | ||||
- State |
| 42 |
|
| 17 |
|
| 28 | |||||
- Foreign |
| 31 |
|
| 21 |
|
| 26 | |||||
| 202 |
|
| 176 |
|
| 266 | ||||||
Deferred | - Federal |
| (146 | ) |
| (28 | ) |
| 5 | ||||
- State |
| (24 | ) |
| 4 |
|
| 10 | |||||
- Foreign |
| — |
|
| — |
|
| — | |||||
| (170 | ) |
| (24 | ) |
| 15 | ||||||
$ | 32 |
| $ | 152 |
| $ | 281 | ||||||
($ in millions) | 2003 | 2002 | 2001 | |||||||||
Current - Federal | $ | 5 | $ | (129 | ) | $ | (138 | ) | ||||
- State | (28 | ) | (42 | ) | (17 | ) | ||||||
- Foreign | (25 | ) | (31 | ) | (21 | ) | ||||||
(48 | ) | (202 | ) | (176 | ) | |||||||
Deferred - Federal | 73 | 146 | 28 | |||||||||
- State | 2 | 24 | (4 | ) | ||||||||
- Foreign | 16 | — | — | |||||||||
91 | 170 | 24 | ||||||||||
$ | 43 | $ | (32 | ) | $ | (152 | ) | |||||
The current tax provision does not reflect the benefits attributable to us relating to our ESOP of $70 million in 2002 and $101 million in 2001 or the exercise of employee stock options of $40 million in 2003, $25 million in 2002 and $55 million in 2001 and $42 million in 2000.2001. The taxes applicable to other comprehensive income are not material.
53
A reconciliation of the U.S. statutory tax rate to our effective income tax rate for continuing operations follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||
U.S. statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of U.S. tax benefit | 4.0 |
| 3.7 |
| 3.6 |
| 3.8 | 4.0 | 3.7 | |||||||||
Foreign income | (1.5 | ) | (2.9 | ) | (1.4 | ) | (1.1 | ) | (1.5 | ) | (2.9 | ) | ||||||
Reduction of valuation allowance | (3.2 | ) | — | — | ||||||||||||||
Tax credits | (34.8 | ) | (3.6 | ) | (3.1 | ) | (43.9 | ) | (34.8 | ) | (3.6 | ) | ||||||
Goodwill | 3.6 |
| 2.5 |
| 1.4 |
| — | 3.6 | 2.5 | |||||||||
Other, net | 0.5 |
| 1.4 |
| 1.1 |
| 0.6 | 0.5 | 1.4 | |||||||||
Effective rate | 6.8 | % | 36.1 | % | 36.6 | % | (8.8 | )% | 6.8 | % | 36.1 | % | ||||||
Cash paid for income taxes, net of refunds, was $144 million in 2003, $107 million in 2002 and $125 million in 2001 and $145 million in 2000.2001.
13. LEASES
We have summarized our future obligations under operating leases at January 3, 20032, 2004 below:
Fiscal Year | ($ in millions) | ($ in millions) | ||||
2003 | $ | 124 | ||||
2004 |
| 124 | $ | 147 | ||
2005 |
| 119 | 149 | |||
2006 |
| 110 | 134 | |||
2007 |
| 107 | 145 | |||
2008 | 145 | |||||
Thereafter |
| 935 | 1,066 | |||
Total minimum lease payments | $ | 1,519 | $ | 1,786 | ||
Most leases have initial terms of up to 20 years and contain one or more renewal options, generally for five-orfive- or 10-year periods. These leases provide for minimum rentals and additional rentals based on our operations of the leased property. The total minimum lease payments above include $548$623 million representing obligations of consolidated subsidiaries that are non-recourse to Marriott International, Inc.
The totals above exclude minimum lease payments of $6 million, $5 million, $4 million, $3 million, $2 million, and $3 million for 2003, 2004, 2005, 2006, 2007, and thereafter, respectively, related to the discontinued Distribution Services business. Also excluded are minimum lease payments of $36 million for each of 2003 and 2004, $35 million for each of 2005 and 2006, $36 million for 2007 and $222 million for thereafter related to the discontinued Senior Living Services business. The total future minimum lease payments associated with Senior Living Services business include $82 million representing obligations of consolidated subsidiaries that are non-recourse to Marriott International, Inc.63
Rent expense consists of:
2002 | 2001 | 2000 | ||||||||||||||||
($ in millions) | ||||||||||||||||||
($ in millions) | 2003 | 2002 | 2001 | |||||||||||||||
Minimum rentals | $ | 134 | $ | 131 | $ | 120 | $ | 134 | $ | 131 | $ | 131 | ||||||
Additional rentals |
| 75 |
| 87 |
| 95 | 68 | 75 | 87 | |||||||||
$ | 209 | $ | 218 | $ | 215 | $ | 202 | $ | 206 | $ | 218 | |||||||
The totals above exclude minimum rent expenses of $34$8 million, $33$34 million and $33 million, and additional rent expenses of $4$1 million, $4 million and $2$4 million, for 2003, 2002 2001 and 2000,2001, respectively, related to the discontinued
54
Senior Living Services business. The totals also do not include minimum rent expenses of $42 million $20 million, and $18$20 million for 2002 2001 and 2000,2001, respectively, related to the discontinued Distribution Services business.
LONG-TERM DEBT
14. | LONG-TERM DEBT |
Our long-term debt at January 2, 2004 and January 3, 2003, and December 28, 2001, consisted of the following:
2002 | 2001 | |||||||
($ in millions) | ||||||||
Senior notes (Series A through E), average interest rate of 7.4% at January 3, 2003, maturing through 2009 | $ | 1,300 |
| $ | 1,300 |
| ||
Commercial paper, average interest rate of 2.1% at January 3, 2003 |
| 102 |
|
| — |
| ||
Revolver, average interest rate of 5.4% at January 3, 2003 |
| 21 |
|
| 923 |
| ||
Mortgage debt |
| 181 |
|
| — |
| ||
Other |
| 130 |
|
| 110 |
| ||
| 1,734 |
|
| 2,333 |
| |||
Less current portion |
| (242 | ) |
| (32 | ) | ||
$ | 1,492 |
| $ | 2,301 |
| |||
The totals above exclude long-term debt of $144 million and short-term debt of $11 million at January 3, 2003 and long-term debt of $107 million and short-term debt of $11 million at December 28, 2001 related to the discontinued Senior Living Services business.
2003 | 2002 | |||||||
($ in millions) | ||||||||
Senior Notes: | ||||||||
Series A, matured November 15, 2003 | $ | — | $ | 200 | ||||
Series B, interest rate of 6.875%, maturing November 15, 2005 | 200 | 200 | ||||||
Series C, interest rate of 7.875%, maturing September 15, 2009 | 299 | 299 | ||||||
Series D, interest rate of 8.125%, maturing April 1, 2005 | 275 | 300 | ||||||
Series E, interest rate of 7.0%, maturing January 15, 2008 | 293 | 299 | ||||||
Other senior notes, interest rate of 3.114% at January 2, 2004, maturing April 1, 2004 | 46 | 3 | ||||||
Commercial paper, average interest rate of 2.1% at January 3, 2003 | — | 102 | ||||||
Mortgage debt, interest rate of 7.9%, maturing May 1, 2025 | 178 | 181 | ||||||
Other | 102 | 129 | ||||||
LYONs | 62 | 61 | ||||||
1,455 | 1,774 | |||||||
Less current portion | (64 | ) | (221 | ) | ||||
$ | 1,391 | $ | 1,553 | |||||
As of January 3, 20032, 2004 all debt, other than mortgage debt and $11 million of other debt, is unsecured.
In April 1999, January 2000 and January 2001, we filed “universal shelf” registration statements with the Securities and Exchange Commission in the amount of $500 million, $300 million and $300 million, respectively. As of January 3, 2003, we had offered and sold to the public $600 million of debt securities under these registration statements, leaving a balance ofWe have $500 million available for future offerings.offerings under “universal shelf” registration statements we have filed with the SEC.
In January 2001, we issued, through a private placement, $300 million of 7 percent Series E Notes due 2008, and received net proceeds of $297 million. On January 15, 2002 we completed a registered exchange offer to exchange these notes for publicly registered new notes on substantially identical terms.
In July 2001 and February 1999, respectively, we entered into $1.5 billion and $500 millionWe are party to two multicurrency revolving credit facilities (the Facilities) each with termsthat provide for aggregate borrowings of five years.up to $2 billion; a $1.5 billion facility entered into in July 2001 which expires in July 2006; and a $500 million facility entered into in August 2003 which expires in August 2006. Borrowings under the facilities bear interest at the London Interbank Offered Rate (LIBOR) plus a spread, based on our public debt rating. Additionally, we pay annual fees on the Facilitiesfacilities at a rate also based on our public debt rating. We classify commercial paper, which is supported by the Facilities,facilities, as long-term debt based on our ability and intent to refinance it on a long-term basis.
We are in compliance with covenants in our loan agreements, which require the maintenance of certain financial ratios and minimum shareholders’ equity, and also include, among other things, limitations on additional indebtedness and the pledging of assets.
TheOur 2002 statement of cashflows excludescash flows does not include the assumption of $227 million of debt associated with theour acquisition of 14 Senior Living communities, the contribution of the Ramada license agreements to the joint venture with Cendant at their carrying value of approximately $200 million, and $23 million of other joint venture investments. TheOur 2001 statement of cash flows excludesdoes not include $109 million, of financing and joint venture investments made by us in connection with asset sales. The 2000 statement of cashflows excludes $79 million of financing and joint venture investments made by us in connection with asset sales.
64
Aggregate debt maturities for continuing operations, excluding convertible debt are: 2003- $2422004—$64 million; 2004 - $272005—$495 million; 2005 - $5232006—$13 million; 2006 - $1102007—$10 million; 2007 - $11
2008—$303 million and $821$570 million thereafter.
Cash paid for interest (including discontinued operations), net of amounts capitalized was $94 million in 2003, $71 million in 2002 and $68 million in 2001 and $742001.
We have outstanding approximately $70 million in 2000.
55
CONVERTIBLE DEBT
On May 8, 2001, we received gross proceedsface amount of $405 million from the sale ofour zero-coupon convertible senior notes due 2021, known as LYONs. OnLYONs which are due in 2021. These LYONs, which we issued on May 9, 2002, we redeemed for cash the approximately 85 percent of the LYONs that were tendered for mandatory repurchase by the holders.
The remaining LYONs8, 2001, are convertible into approximately 0.9 million shares of our Class A Common Stock, have a face value of $70 million and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prior toon or after May 8, 2004. WeThe holders may also at thetheir option of the holders be requiredrequire us to purchase the LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay the purchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock.
We amortized the issuance costs of the LYONs into interest expense over the one-year period ended May 8, 2002. We classify LYONs as long-term debt based on our ability and intent to refinance the obligation with long-term debt if we are required to repurchase the LYONs.
EARNINGS PER SHARE
15. | EARNINGS PER SHARE |
The following table illustrates the reconciliation of the earnings and number of shares used in the basic and diluted earnings per share calculations (in millions, except per share amounts).calculations.
2002 | 2001 | 2000 | ||||||||||||||||
(in millions, except per share amounts) | 2003 | 2002 | 2001 | |||||||||||||||
Computation of Basic Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 439 | $ | 269 | $ | 490 | $ | 476 | $ | 439 | $ | 269 | ||||||
Weighted average shares outstanding |
| 240.3 |
| 243.3 |
| 241.0 | 232.5 | 240.3 | 243.3 | |||||||||
Basic earnings per share from continuing operations | $ | 1.83 | $ | 1.10 | $ | 2.03 | $ | 2.05 | $ | 1.83 | $ | 1.10 | ||||||
Computation of Diluted Earnings Per Share | ||||||||||||||||||
Income from continuing operations | $ | 439 | $ | 269 | $ | 490 | $ | 476 | $ | 439 | $ | 269 | ||||||
After-tax interest expense on convertible debt |
| 4 |
| — |
| — | — | 4 | — | |||||||||
Income from continuing operations for diluted earnings per share | $ | 443 | $ | 269 | $ | 490 | $ | 476 | $ | 443 | $ | 269 | ||||||
Weighted average shares outstanding |
| 240.3 |
| 243.3 |
| 241.0 | 232.5 | 240.3 | 243.3 | |||||||||
Effect of dilutive securities | ||||||||||||||||||
Employee stock purchase plan |
| — |
| — |
| 0.1 | — | — | — | |||||||||
Employee stock option plan |
| 6.2 |
| 7.9 |
| 7.5 | 6.6 | 6.2 | 7.9 | |||||||||
Deferred stock incentive plan |
| 5.2 |
| 5.5 |
| 5.4 | 4.8 | 5.2 | 5.5 | |||||||||
Restricted stock units | 0.6 | — | — | |||||||||||||||
Convertible debt |
| 2.9 |
| — |
| — | 0.9 | 2.9 | — | |||||||||
Shares for diluted earnings per share |
| 254.6 |
| 256.7 |
| 254.0 | 245.4 | 254.6 | 256.7 | |||||||||
Diluted earnings per share from continuing operations | $ | 1.74 | $ | 1.05 | $ | 1.93 | $ | 1.94 | $ | 1.74 | $ | 1.05 | ||||||
We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. The determination as to dilution is based on earnings from continuing operations. TheIn accordance with FAS No. 128 “Earnings per Share,” the calculation of diluted earnings per share does not include the following items because the inclusion would have an antidilutive impactoption exercise prices are greater than the average market price for our Class A Common Stock for the applicable period: (a) for the year ended January 3, 2003, 6.9 million options and (b)
(a) | for the year ended January 2, 2004, 5.7 million stock options; |
(b) | for the year ended January 3, 2003, 6.9 million stock options; and |
(c) | for the year ended December 28, 2001, 5.1 million stock options. |
In addition to item (c) above, the calculation of diluted earnings per share for the year ended December 28, 2001, also excludes $5 million of after-tax interest expense on convertible debt and 4.1 million shares issuable upon conversion of convertible debt, and 5.1 million options.as their inclusion would increase, rather than decrease, diluted earnings per share.
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EMPLOYEE STOCK PLANS
16. | EMPLOYEE STOCK PLANS |
We issue stock options, deferred shares, restricted shares and restricted sharesstock units under our 19982002 Comprehensive Stock and Cash Incentive Plan (Comprehensive Plan). Under the Comprehensive Plan, we may award to participating employees (1) options to purchase our Class A Common Stock (Stock Option Program and Supplemental Executive Stock Option awards), (2) deferred shares of our Class A Common Stock, and (3) restricted shares of our Class A Common Stock, and (4) restricted stock units of our Class A Common Stock. In addition we have an employee stock purchase plan (Stock Purchase Plan). In accordance with the provisionsprovision of Opinion No. 25 of the Accounting Principles Board, we recognize no compensation cost for the Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan. We recognize compensation cost for the restricted stock, deferred shares and restricted stock unit awards.
Deferred shares granted to directors, officers and key employees under the Comprehensive Plan generally vest over 5 to 10 years in annual installments commencing one year after the date of grant. We accrue compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. We granted 0.1 million deferred shares during 2002.2003. Compensation cost, net of tax, recognized during 2003, 2002 and 2001 and 2000 was $9$7 million, $25$6 million and $18$16 million, respectively. At January 2, 2004, there was approximately $21 million in deferred compensation related to deferred shares.
Restricted shares under the Comprehensive Plan are issued to officers and key employees and distributed over a number of years in annual installments, subject to certain prescribed conditions including continued employment. We recognize compensation expense for the restricted shares over the restriction period equal to the fair market value of the shares on the date of issuance. We awarded 0.10.2 million restricted shares under this plan during 2002.2003. We recognized compensation cost, net of $5tax, of $4 million in 2003, $3 million in 2002 and $4$3 million in each2001. At January 2, 2004, there was approximately $16 million in deferred compensation related to restricted shares.
Restricted stock units under the Comprehensive Plan are issued to certain officers and key employees and vest over four years in annual installments commencing one year after the date of 2001 and 2000.grant. We accrue compensation expense for the fair market value of the shares on the date of grant. Included in the 2003 compensation costs is $8 million, net of tax, related to the grant of approximately 1.9 million units under the restricted stock unit plan which was started in the first quarter of 2003. At January 2, 2004, there was approximately $44 million in deferred compensation related to unit grants. Under the unit plan, fixed grants will be awarded annually to certain employees.
Under the Stock Purchase Plan, eligible employees may purchase our Class A Common Stock through payroll deductions at the lower of the market value at the beginning or end of each plan year.
Employee stock options may be granted to officers and key employees at exercise prices equal to the market price of our Class A Common Stock on the date of grant. Nonqualified options expire 10 years after the date of grant, except those issued from 1990 through 2000, which expire 15 years after the date of the grant. Most options under the Stock Option Program are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant. In February 1997, 2.12.2 million Supplemental Executive Stock Option awards were awarded to certain of our officers. The options vest after eight years but could vest earlier if our stock price meets certain performance criteria. None of these options, which have an exercise price of $25, were exercised during 2003, 2002 or 2001 or 2000 and 1.92.0 million remained outstanding at January 3, 2003.2, 2004.
For the purposes of the disclosures required by FAS No. 123, “Accounting for Stock-Based Compensation”,Compensation,” the fair value of each option granted during 2003, 2002 and 2001 was $11, $14 and 2000 was $14, $16, and $15, respectively. We estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model,method, using the assumptions noted in the following table:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
Annual dividends | $ | 0.28 |
| $ | 0.26 |
| $ | 0.24 |
| $ | 0.30 | $ | 0.28 | $ | 0.26 | |||||||||
Expected volatility |
| 32 | % |
| 32 | % |
| 30 | % | 32 | % | 32 | % | 32 | % | |||||||||
Risk-free interest rate |
| 3.6 | % |
| 4.9 | % |
| 5.8 | % | 3.5 | % | 3.6 | % | 4.9 | % | |||||||||
Expected life (in years) |
| 7 |
|
| 7 |
|
| 7 |
| 7 | 7 | 7 |
Pro forma compensation cost for the Stock Option Program, the Supplemental Executive Stock Option awards and employee purchases pursuant to the Stock Purchase Plan subsequent to December 30, 1994, would reduce our net income as described in the “Summary of Significant Accounting Policies” as required by FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASBFinancial Accounting Standards Board (“FASB”) Statement No. 123.”
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A summary of our Stock Option Program activity during 2003, 2002 2001 and 20002001 is presented below:
Number of options (in millions) | Weighted average exercise price | |||||||||||
Outstanding at January 1, 2000 | 33.8 |
| $ | 22 | ||||||||
Granted during the year | 0.6 |
|
| 36 | ||||||||
Exercised during the year | (3.9 | ) |
| 16 | ||||||||
Forfeited during the year | (0.5 | ) |
| 32 | ||||||||
Number of (in millions) | Weighted Average Exercise Price | |||||||||||
Outstanding at December 29, 2000 | 30.0 |
|
| 23 | ||||||||
Outstanding at December 30, 2000 | 30.0 | $ | 23 | |||||||||
Granted during the year | 13.4 |
|
| 36 | 13.4 | 36 | ||||||
Exercised during the year | (4.2 | ) |
| 18 | (4.2 | ) | 18 | |||||
Forfeited during the year | (0.9 | ) |
| 34 | (0.9 | ) | 34 | |||||
Outstanding at December 28, 2001 | 38.3 |
|
| 29 | 38.3 | 29 | ||||||
Granted during the year | 1.4 |
|
| 37 | 1.4 | 37 | ||||||
Exercised during the year | (1.6 | ) |
| 22 | (1.6 | ) | 22 | |||||
Forfeited during the year | (0.6 | ) |
| 37 | (0.6 | ) | 37 | |||||
Outstanding at January 3, 2003 | 37.5 |
| $ | 29 | 37.5 | 29 | ||||||
Granted during the year | 4.0 | 30 | ||||||||||
Exercised during the year | (4.6 | ) | 22 | |||||||||
Forfeited during the year | (0.7 | ) | 37 | |||||||||
Outstanding at January 2, 2004 | 36.2 | $ | 29 |
There were 25.1 million, 24.9 million 20.2 million and 20.520.2 million exercisable options under the Stock Option Program at January 2, 2004, January 3, 2003 and December 28, 2001, and December 29, 2000, respectively, with weighted average exercise prices of $28, $25 $22 and $19,$22, respectively.
At January 3, 2003, 60.62, 2004, 55.1 million shares were reserved under the Comprehensive Plan (including 39.438.1 million shares under the Stock Option Program and 1.9 million shares of the Supplemental Executive Stock Option awards) and 1.55.9 million shares were reserved under the Stock Purchase Plan.
Stock options issued under the Stock Option Program outstanding at January 3, 2003,2, 2004, were as follows:
Outstanding | Exercisable | |||||||||||||||||||||
Range of exercise prices | Number of options (in millions) | Weighted average remaining life (in years) | Weighted average exercise price | Number of options (in millions) | Weighted average exercise price | |||||||||||||||||
Outstanding | Exercisable | |||||||||||||||||||||
Range of | Number of Options (in millions) | Weighted Average Remaining Life (in Years) | Weighted Average Exercise Price | Number of Options (in millions) | Weighted Average Exercise Price | |||||||||||||||||
$ 3 to 5 | 0.8 | 3 | $ | 3 | 0.8 | $ | 3 | 0.7 | 2 | $3 | 0.7 | $3 | ||||||||||
6 to 9 | 2.3 | 5 |
| 7 | 2.3 |
| 7 | 1.5 | 4 | 7 | 1.5 | 7 | ||||||||||
10 to 15 | 2.9 | 7 |
| 13 | 2.9 |
| 13 | 2.2 | 6 | 13 | 2.2 | 13 | ||||||||||
16 to 24 | 1.8 | 8 |
| 17 | 1.8 |
| 17 | 1.5 | 7 | 17 | 1.5 | 17 | ||||||||||
25 to 37 | 22.7 | 10 |
| 31 | 15.5 |
| 30 | 23.6 | 9 | 31 | 15.9 | 31 | ||||||||||
38 to 49 | 7.0 | 9 |
| 44 | 1.6 |
| 45 | 6.7 | 8 | 44 | 3.3 | 45 | ||||||||||
$ 3 to 49 | 37.5 | 9 | $ | 29 | 24.9 | $ | 25 | 36.2 | 8 | $30 | 25.1 | $28 | ||||||||||
FAIR VALUE OF FINANCIAL INSTRUMENTS
17. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
We believe that the fair values of current assets and current liabilities approximate their reported carrying amounts. The fair values of noncurrent financial assets, liabilities and liabilitiesderivatives are shown below.
2002 | 2001 | |||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||||||
($ in millions) | ($ in millions) | |||||||||||
Notes and other receivables | $ | 1,506 | $ | 1,514 | $ | 1,588 | $ | 1,645 | ||||
Long-term debt, convertible debt and other long-term liabilities |
| 1,305 |
| 1,379 |
| 2,645 |
| 2,686 |
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2003 | 2002 | |||||||||||||||
($ in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Notes and other receivables | $ | 1,740 | $ | 1,778 | $ | 1,506 | $ | 1,514 | ||||||||
Long-term debt and other long-term liabilities | $ | 1,373 | $ | 1,487 | $ | 1,482 | $ | 1,556 | ||||||||
Derivative instruments | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (2 | ) | ||||
We value notes and other receivables based on the expected future cash flows discounted at risk adjusted rates. We determine valuations for long-term debt and other long-term liabilities based on quoted market prices or expected future payments discounted at risk adjusted rates.
CONTINGENCIES67
18. | DERIVATIVE INSTRUMENTS |
During the year ended January 2, 2004, we entered into an interest rate swap agreement under which we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. The aggregate notional amount of the swap is $92 million and it matures in 2010. The swap is classified as a fair value hedge, and the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, is recognized in interest income. The fair value of the swap was a liability of approximately $3 million at January 2, 2004. The hedge is highly effective and therefore no net gain or loss was reported in earnings during the year ended January 2, 2004.
At January 2, 2004, we had six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our timeshare note sales. We are required by purchasers and/or rating agencies to utilize interest rate swaps to protect the excess spread within our sold note pools. The aggregate notional amount of the swaps is $726 million, and they expire through 2022. These swaps are not accounted for as hedges under FAS No. 133. The fair value of the swaps is a net asset of approximately $1 million at January 2, 2004 and a net liability of $2 million at January 3, 2003. We recorded $1 million, $21 million, and $8 million of expense during the years ended January 2, 2004, January 3, 2003 and December 28, 2001, respectively. These expenses were largely offset by income resulting from the change in fair value of the retained interests and note sale gains in response to changes in interest rates.
During the year ended January 2, 2004, we entered into an interest rate swap to manage interest rate risk associated with the forecasted fourth quarter 2003 timeshare note sale. The swap was not accounted for as a hedge under FAS No. 133. The swap was terminated upon the sale of the notes and resulted in an expense of $4 million during the year ended January 2, 2004 which is reflected in the net $1 million expense stated above.
On December 31, 2003, we entered into 24 foreign exchange option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during fiscal year 2004. The aggregate dollar equivalent of the notional amounts of the option contracts is approximately $37 million, and the forward option contracts expire throughout 2004. The option contracts are classified as cash flow hedges, and changes in fair value are recorded as a component of other comprehensive income. The fair value of the forward contracts is approximately $1 million at January 2, 2004. The hedges are highly effective. There was no net gain or loss reported in earnings during the year ended January 2, 2004, relating to similar contracts that expired during that year.
During the year ended January 2, 2004, we entered into two forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets denominated in Pound Sterling. The aggregate dollar equivalent of the notional amounts of the forward contracts is $34 million at January 2, 2004. The forward exchange contracts are not accounted for as hedges in accordance with FAS No. 133. The fair value of the forward contracts is approximately zero at January 2, 2004. We recorded approximately $2 million of expense relating to these two forward foreign exchange contracts during the year ended January 2, 2004. This expense was offset by income recorded from translating the related monetary assets denominated in Pound Sterling into U.S. dollars.
19. | CONTINGENCIES |
Guarantees, Loan Commitments and Letters of Credit
We issue guarantees to certain lenders and hotel owners primarily to obtain long term management contracts. The guarantees generally have a stated maximum amount of funding and the terms are generallya term of five years or less. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are not adequateinadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the affected hotels do not attain specified levels of operating profit are not obtained.profit.
We also enter into project completion guarantees with certain lenders in conjunction with hotels and timeshare units whichthat we are being built by us.building.
We also enter into guarantees in conjunction with the sale of notes receivable originated by our timeshare business. These guarantees have terms of between seven and ten years. The terms of the guarantees require us to repurchase a limited amount of non-performing loans under certain circumstances.
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Our guarantees include $387 million related to Senior Living Services lease obligations and lifecare bonds. Sunrise is the primary obligor of the leases and a portion of the lifecare bonds, and CNL is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. Our guarantees also include $47 million of other guarantees associated with the Sunrise sale transaction. As a result of the settlement with Five Star, discussed in Item 3, $41 million of these guarantees, included below, expired subsequent to January 2, 2004.
The maximum potential amount of future fundings and the current carrying amount of the liability for expected future fundings at January 3, 20032, 2004 are as follows ($ in millions):follows:
Guarantee type | Maximum amount of future fundings | Current liability for future fundings at January 3, 2003 | ||||||||||
($ in millions) Guarantee Type | Maximum Amount of Future Fundings | Liability for Future Fundings at January 2, 2004 | ||||||||||
Debt service | $ | 382 | $ | 12 | $ | 378 | $ | 12 | ||||
Operating profit |
| 366 |
| 12 | 312 | 21 | ||||||
Project completion |
| 57 |
| — | 18 | — | ||||||
Timeshare |
| 12 |
| — | 19 | — | ||||||
Senior Living Services | 434 | — | ||||||||||
Other |
| 22 |
| — | 40 | 3 | ||||||
$ | 839 | $ | 24 | $ | 1,201 | $ | 36 | |||||
Our guarantees listed above include $270$238 million for commitments whichguarantees that will not be in effect until the underlying hotels are open and we begin to manage the properties. The guarantee fundings to lenders and hotel owners are generally recoverable in the form of a loanas loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. When we repurchase non-performing timeshare loans, we will either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.
As of January 3, 2003,2, 2004, we had extended approximately $217$80 million of loan commitments to owners of lodging properties and senior living communities under which we expect to fund approximately $140$44 million by January 2,December 3l, 2004, and $156$60 million in total. We do not expect to fund the remaining $20 million of commitments, which expire as follows: $8 million in one to three years; and $12 million after five years.
Letters of credit outstanding on our behalf at January 3, 20032, 2004 totaled $94$103 million, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of January 3, 20032, 2004 totaled $480$386 million, the majority of which were requested by federal, state, or local governments related to our timeshare and lodging operations and self-insurance programs.
Third-partiesThird parties have severally indemnified us for guarantees by us of leases with minimum annual payments of approximately $57 million.$78 million, as well as for real estate taxes and other charges associated with the leases.
Litigation and Arbitration
Green Isle litigation. This litigation pertains to The Ritz-Carlton San Juan (Puerto Rico) Hotel, Spa and Casino which we manage under an operating agreement for Green Isle Partners, Ltd., S.E. (Green Isle). On March 30,
59
2001, Green Isle filed a complaint in the U.S. District Court in Delaware against us (including several of our subsidiaries) and Avendra LLC, asserting 11 causes of action: three Racketeer Influenced and Corrupt Organizations Act (RICO) claims, together with claims based on the Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach of implied duties of good faith and fair dealing, common law fraud and intentional misrepresentation, negligent misrepresentation, and fiduciary accounting. These assorted claims include allegations of: (i) national, non-competitive contracts and attendant kick-back schemes; (ii) concealing transactions with affiliates; (iii) false entries in the books and manipulation of accounts payable and receivable; (iv) excessive compensation schemes and fraudulent expense accounts; (v) charges of prohibited overhead costs to the project; (vi) charges of prohibited procurement costs; (vii) inflation of Group Service Expense; (viii) the use of prohibited or falsified revenues; (ix) attempts to oust Green Isle from ownership; (x) creating a financial crisis and then attempting to exploit it by seeking an economically oppressive contract in connection with a loan; (xi) providing incorrect cash flow figures and failing appropriately to reveal and explain revised cash flow figures. The complaint sought damages of $140 million, which Green Isle claims to have invested in the hotel (which includes $85 million in third party debt), which the plaintiffs sought to treble to $420 million under RICO and the Robinson-Patman Act. The complaint did not request termination of our operating agreement.
On June 25, 2001, Green Isle filed a Chapter 11 Bankruptcy Petition in the Southern District of Florida and in that proceeding sought to reject our operating agreement. The claims against us, including the attempt to eliminate our management agreement in bankruptcy, were subsequently transferred to the U.S. District Court in Puerto Rico, where on October 7, 2002 they were dismissed with prejudice, meaning that the claims may not be refiled or pursued elsewhere. Green Isle has appealed that decision. We have moved in the bankruptcy proceeding to dismiss the parallel claims based on the dismissal with prejudice in federal court. On December 11, 2002, a Disclosure Statement and Plan of Reorganization was filed in the bankruptcy proceeding on behalf of RECP San Juan Investors LLC and The Ritz-Carlton Hotel Company LLC. If confirmed, the Plan would operate to discharge the Green Isle litigation claims. The outcome of the bankruptcy proceedings is unknown at this time.
CTF/HPI arbitration and litigation. On April 8, 2002, we initiated an arbitration proceeding against CTF Hotel Holdings, Inc. (CTF) and its affiliate, Hotel Property Investments (B.V.I.) Ltd. (HPI), in connection with a dispute over procurement issues for certain Renaissance hotels and resorts that we manage for CTF and HPI. On April 12, 2002, CTF filed a lawsuit in U.S. District Court in Delaware against us and Avendra LLC, alleging that, in connection with procurement at 20 of those hotels, we engaged in improper acts of self-dealing, and claiming breach of fiduciary, contractual and other duties; fraud; misrepresentation; and violations of the RICO and the Robinson-Patman Acts. CTF also claims that we breached an agreement relating to CTF’s right to conduct an audit of certain aspects relating to the management of these hotels. CTF seeks various remedies, including a stay of the arbitration proceedings against CTF and unspecified actual, treble and punitive damages. We subsequently amended our arbitration demand to incorporate all of the issues in the CTF lawsuit. On May 22, 2002 theThe district court enjoined the arbitration with respect to CTF, but granted our request to stay the court proceedings pending the resolution of the arbitration with respect to HPI. Both parties have appealed thisthat ruling. The arbitration panel has established a schedule which calls foris scheduled to begin hearing the arbitration hearing to commencematter on October 14, 2003.
In Town Hotels litigation. On May 23, 2002, In Town Hotels filed suit against us in the U.S. District Court for the Southern District of West Virginia and subsequently filed an amended complaint on August 26, 2002, to include Avendra LLC alleging that, in connection with the management, procurement and rebates related to the Charleston, West Virginia Marriott, we misused confidential information related to the hotel, improperly allocated corporate overhead to the hotel, engaged in improper self dealing with regard to procurement and rebates, failed to disclose information related to the above to In Town Hotels, and breached obligations owed to In Town Hotels by refusing to replace the hotel’s general manager and by opening two additional hotel properties in the Charleston area, and claiming breach of contract, breach of implied duties of good faith and fair dealing, breach of fiduciary duty, conversion, violation of the West Virginia Unfair Trade Practices Act, fraud, misrepresentation, negligence, violations of the Robinson-Patman Act, and other related causes of action. In Town Hotels seeks various remedies, including unspecified compensatory and exemplary damages, return of $18.5 million in management fees, and a declaratory judgment terminating the management agreement. The parties are about to commence discovery and trial is presently scheduled for MarchApril 6, 2004.
Strategic Hotel litigation. On August 20, 2002, several direct or indirect subsidiaries of Strategic Hotel Capital, L.L.C. (Strategic) filed suit against us in the Superior Court of Los Angeles County, California in a dispute related to the management, procurement, and rebates related to three California hotels that we manage for Strategic. Strategic alleges that we misused confidential information related to the hotels, improperly allocated corporate overhead to
60
the hotels, engaged in improper self dealing with regard to procurement and rebates, and failed to disclose
69
information related to the above to Strategic. Strategic also claims breach of contract, breach of the implied duty of good faithfiduciary and fair dealing, breach of fiduciary duty,other duties, unfair and deceptive business practices, and unfair competition, and other related causes of action. Strategic seeks various remedies, including unspecified compensatory and exemplary damages, and a declaratory judgment terminating our management agreements. On August 20, 2002, weWe have filed a cross complaint against Strategic alleging a breach of Strategic’s covenant not to sue, a breach of the covenant of good faith and fair dealing, breach of an agreement to arbitrate, and a breach of the California unfair competition statute. The California Unfair Competition Statute. Acase is currently in discovery, referee has been appointed, but no trial date has been set.
Senior Housing and Five Star litigation. Marriott Senior Living Services, Inc. (SLS) operates 31 senior living communities for Senior Housing (SNH) and Five Star (FVE). After several months of discussions between the parties to resolve certain ongoing operational and cost allocation issues, on November 13, 2002, SNH/FVE served a Notice of Default asserting various alleged defaults and purported material breaches by SLS under the applicable operating agreements. SLS responded to the various issues raised by SNH/FVE and denies that it is in default or material breach of the agreements.
On November 27, 2002, in response to SNH/FVE’s repeated indications that they would attempt to terminate the Operating Agreements, we filed suit in the Circuit Court for Montgomery County, Maryland, seeking, among other relief, a declaration that SLS is not in default or material breach of its operating agreements and a declaration that SNH/FVE had anticipatorily breached the operating agreements by violating the termination provisions of those contracts. We also sought, and obtained later that same day, a temporary restraining order (TRO) prohibiting SNH/FVE from terminating or attempting to terminate SLS’s operating agreements, or from evicting or attempting to evict SLS from the 31 communities, until the court further addresses the parties’ dispute at a preliminary injunction hearing. Also on November 27, 2002, SNH/FVE attempted to terminate SLS’s operating agreements by sending SLS a purported “Notice of Termination.” That attempted termination was stayed, however, by the court’s issuance of the TRO. On January 8, 2003, following the preliminary injunction hearing, the court granted Marriott and SLS a preliminary injunction enjoining SNH/FVE from terminating or attempting to terminate the Operating Agreements prior to the trial on the merits. That trial is not expected until later in 2003 or in 2004.
Also on November 27, 2002, after Marriott and SLS had filed their action in Maryland, SNH/FVE filed suit against us and SLS in the Superior Courtset for Middlesex County, Massachusetts. That action seeks declaratory relief regarding the legal rights and duties of SLS and SNH/FVE under SLS’s operating agreements, and injunctive and declaratory relief prohibiting us and SLS from removing the Marriott name and proprietary marks from the 31 communities, allowing SNH/FVE to use the Marriott name and proprietary marks even if we sell SLS, and prohibiting us from selling SLS without SNH/FVE’s consent. On December 20, 2002, the Massachusetts court denied SNH/FVE’s motion for a preliminary injunction, and that denial was affirmed on appeal on December 31, 2002. SNH/FVE subsequently amended their claim for preliminary relief, adding a new claim that the relationship between the owner and operator in each of the 31 operating agreements is one of principal and agent and thus is terminable at any time. The company and SLS have opposed this new claim and, in the Maryland action, have moved to have SNH/FVE held in contempt on the ground that the newly filed Massachusetts claim violates the Maryland preliminary injunction.January 24, 2005.
We believe that each of the foregoing lawsuitsCTF, HPI and Strategic’s claims against us isare without merit, and we intend to vigorously defend against the claims being made against us.them. However, we cannot assure you as to the outcome of any of these lawsuitsthe arbitration or the related litigation; nor can we currently estimate the range of potential losses to the Company.
In addition to the foregoing, we are from time to time involved in legal proceedings which could, if adversely decided, result in losses to the Company.
Shareholder’s derivative action against our directors.
On January 16, 2003, Daniel and Raizel Taubenfeld filed a shareholder’s derivative action in Delaware state court against each member of our Board of Directors and against Avendra LLC. The company is named as a nominal defendant. The individual defendants are accused of exposing the company to accusations and lawsuits which allege wrongdoing on the part of the company. The complaint alleges that, as a result, the company’s reputation has been damaged leading to business losses and the compelled renegotiation of some management contracts. The substantive allegations of the complaint are derived exclusively from prior press reports. No damage claim is made against us
61
and no specific damage number is asserted as to the individual defendants. Management of the company believes that this derivative action is without merit.
Legal proceeding settled in December 2002.
In response to demands by John J. Flatley and Gregory Stoyle, as agents for The 1993 Flatley Family Trust (collectively, Flatley) to convert our management agreement with Flatley for the Boston Marriott Quincy Hotel into a franchise agreement and threats to terminate our management agreement, on August 1, 2002, we filed a suit against Flatley in the U.S. District Court in Maryland seeking a declaratory judgment that we were not in breach of our management agreement, claiming breach of contract, breach of the duty of good faith and fair dealing, and violation of the Massachusetts Unfair Business Practices Act by Flatley, and seeking unspecified compensatory and exemplary damages. On August 5, 2002, Flatley and the Crown Hotel Nominee Trust (Crown) filed a countersuit in the U.S. District Court, District of Massachusetts, alleging that we and Avendra LLC engaged in improper acts of self dealing and claiming breach of contract, breach of the duty of good faith and fair dealing, violation of the Massachusetts Unfair Business Practices Act, tortious interference with contract, breach of fiduciary duty, misrepresentation, negligence, fraud, violations of the Robinson-Patman Act and other related causes of action. Flatley and Crown sought various remedies, including unspecified compensatory and exemplary damages, and termination of our management agreement.On December 20, 2002, the parties entered into a settlement agreement on terms favorable to the Company and both lawsuits have been dismissed.
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BUSINESS SEGMENTS
20. | BUSINESS SEGMENTS |
We are a diversified hospitality company with operations in five business segments:
• | Full-Service Lodging, which includes Marriott Hotels & Resorts, |
• | Select-Service Lodging, which includes Courtyard, Fairfield Inn and SpringHill Suites; |
• | Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and |
• | Timeshare, which includes the development, marketing, operation |
• | Synthetic Fuel, which includes our interest in the operation of |
In addition to the segments above, in 2002 we announced our intent to sell, and subsequently did sell, our Senior Living Services business segment and exited our Distribution Services business segment.
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, and interest income orincome. With the exception of our Synthetic Fuel segment, we do not allocate income taxes (segment financial results).to our segments. As timeshare note sales are an integral part of the timeshare business, we include timeshare note sale gains in our timeshare segment results and we allocate other gains as well as equity income (losses) from our joint ventures to each of our segments.
We have aggregated the brands and businesses presented within each of our segments considering their similar economic characteristics, types of customers, distribution channels, and the regulatory business environment of the brands and operations within each segment.
SalesRevenues
($ in millions)
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||
Full-Service | $ | 5,474 | $ | 5,238 | $ | 5,520 | $ | 5,876 | $ | 5,508 | $ | 5,260 | ||||||
Select-Service |
| 967 |
| 864 |
| 901 | 1,000 | 967 | 864 | |||||||||
Extended-Stay |
| 600 |
| 635 |
| 668 | 557 | 600 | 635 | |||||||||
Timeshare |
| 1,207 |
| 1,049 |
| 822 | 1,279 | 1,147 | 1,009 | |||||||||
Total Lodging |
| 8,248 |
| 7,786 |
| 7,911 | ||||||||||||
Synthetic Fuel |
| 193 |
| — |
| — | ||||||||||||
Total lodging | 8,712 | 8,222 | 7,768 | |||||||||||||||
Synthetic fuel | 302 | 193 | — | |||||||||||||||
$ | 8,441 | $ | 7,786 | $ | 7,911 | $ | 9,014 | $ | 8,415 | $ | 7,768 | |||||||
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Segment Financial ResultsIncome from Continuing Operations
($ in millions)
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||
Full-Service | $ | 397 |
| $ | 294 | $ | 510 | $ | 407 | $ | 397 | $ | 294 | |||||||||
Select-Service |
| 130 |
|
| 145 |
| 192 | 99 | 130 | 145 | ||||||||||||
Extended-Stay |
| (3 | ) |
| 55 |
| 96 | 47 | (3 | ) | 55 | |||||||||||
Timeshare |
| 183 |
|
| 147 |
| 138 | 149 | 183 | 147 | ||||||||||||
Total Lodging |
| 707 |
|
| 641 |
| 936 | |||||||||||||||
Synthetic Fuel |
| (134 | ) |
| — |
| — | |||||||||||||||
Total lodging financial results (pretax) | 702 | 707 | 641 | |||||||||||||||||||
Synthetic fuel (after tax) | 96 | 74 | — | |||||||||||||||||||
Unallocated corporate expenses | (132 | ) | (126 | ) | (157 | ) | ||||||||||||||||
Interest income, provision for loan losses and interest expense | 12 | 24 | (63 | ) | ||||||||||||||||||
Income taxes (excluding Synthetic fuel) | (202 | ) | (240 | ) | (152 | ) | ||||||||||||||||
$ | 573 |
| $ | 641 | $ | 936 | $ | 476 | $ | 439 | $ | 269 | ||||||||||
Equity in Earnings (Losses) of Equity Method Investees ($ in millions)
|
Equity in Earnings (Losses) of Equity Method Investees ($ in millions)
|
| ||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||
Full-Service | $ | 8 | $ | 5 | $ | (11 | ) | |||||||||||||||
Select-Service | (22 | ) | (8 | ) | 5 | |||||||||||||||||
Timeshare | (4 | ) | (2 | ) | (1 | ) | ||||||||||||||||
Synthetic fuel | 10 | — | — | |||||||||||||||||||
Corporate | 1 | (1 | ) | (7 | ) | |||||||||||||||||
$ | (7 | ) | $ | (6 | ) | $ | (14 | ) | ||||||||||||||
Depreciation and Amortization ($ in millions)
| Depreciation and Amortization ($ in millions)
|
| ||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||
Full-Service | $ | 54 | $ | 54 | $ | 81 | ||||||||||||||||
Select-Service | 10 | 9 | 10 | |||||||||||||||||||
Extended-Stay | 10 | 10 | 16 | |||||||||||||||||||
Timeshare | 49 | 38 | 34 | |||||||||||||||||||
Total lodging | 123 | 111 | 141 | |||||||||||||||||||
Corporate | 29 | 31 | 37 | |||||||||||||||||||
Synthetic fuel | 8 | 8 | — | |||||||||||||||||||
Discontinued operations | — | 37 | 44 | |||||||||||||||||||
$ | 160 | $ | 187 | $ | 222 | |||||||||||||||||
Assets ($ in millions)
|
Assets ($ in millions)
|
| ||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||
Full-Service | $ | 3,436 | $ | 3,423 | $ | 3,394 | ||||||||||||||||
Select-Service | 833 | 771 | 931 | |||||||||||||||||||
Extended-Stay | 286 | 274 | 366 | |||||||||||||||||||
Timeshare | 2,350 | 2,225 | 2,109 | |||||||||||||||||||
Total lodging | 6,905 | 6,693 | 6,800 | |||||||||||||||||||
Corporate | 1,189 | 911 | 1,369 | |||||||||||||||||||
Synthetic fuel | 83 | 59 | 49 | |||||||||||||||||||
Discontinued operations | — | 633 | 889 | |||||||||||||||||||
$ | 8,177 | $ | 8,296 | $ | 9,107 | |||||||||||||||||
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Equity Method Investments
Depreciation and amortization | 2002 | 2001 | 2000 | ||||||
($ in millions) | |||||||||
Full-Service | $ | 54 | $ | 81 | $ | 86 | |||
Select-Service |
| 9 |
| 10 |
| 8 | |||
Extended-Stay |
| 10 |
| 16 |
| 15 | |||
Timeshare |
| 38 |
| 34 |
| 22 | |||
Total Lodging |
| 111 |
| 141 |
| 131 | |||
Corporate |
| 31 |
| 37 |
| 30 | |||
Synthetic Fuel |
| 8 |
| — |
| — | |||
Discontinued Operations |
| 37 |
| 44 |
| 34 | |||
$ | 187 | $ | 222 | $ | 195 | ||||
Assets | 2002 | 2001 | 2000 | ||||||
($ in millions) | |||||||||
Full-Service | $ | 3,423 | $ | 3,394 | $ | 3,453 | |||
Select-Service |
| 771 |
| 931 |
| 995 | |||
Extended-Stay |
| 274 |
| 366 |
| 399 | |||
Timeshare |
| 2,225 |
| 2,109 |
| 1,634 | |||
Total Lodging |
| 6,693 |
| 6,800 |
| 6,481 | |||
Corporate |
| 911 |
| 1,369 |
| 778 | |||
Synthetic Fuel |
| 59 |
| 49 |
| — | |||
Discontinued Operations |
| 633 |
| 889 |
| 978 | |||
$ | 8,296 | $ | 9,107 | $ | 8,237 | ||||
Goodwill | 2002 | 2001 | 2000 | ||||||
($ in millions) | |||||||||
Full-Service | $ | 851 | $ | 851 | $ | 876 | |||
Select-Service |
| — |
| — |
| — | |||
Extended-Stay |
| 72 |
| 126 |
| 130 | |||
Timeshare |
| — |
| — |
| — | |||
Total Lodging | $ | 923 | $ | 977 | $ | 1,006 | |||
Capital expenditures | 2002 | 2001 | 2000 | ||||||
($ in millions) | |||||||||
Full-Service | $ | 138 | $ | 186 | $ | 554 | |||
Select-Service |
| 23 |
| 140 |
| 262 | |||
Extended-Stay |
| 39 |
| 52 |
| 83 | |||
Timeshare |
| 36 |
| 75 |
| 66 | |||
Total Lodging |
| 236 |
| 453 |
| 965 | |||
Corporate |
| 20 |
| 30 |
| 48 | |||
Synthetic Fuel |
| 7 |
| 49 |
| — | |||
Discontinued Operations |
| 29 |
| 28 |
| 82 | |||
$ | 292 | $ | 560 | $ | 1,095 | ||||
($ in millions)
2003 | 2002 | 2001 | |||||||
Full–Service | $ | 310 | $ | 327 | $ | 138 | |||
Select–Service | 95 | 114 | 109 | ||||||
Timeshare | 22 | 13 | 19 | ||||||
Total lodging | 427 | 454 | 266 | ||||||
Corporate | 41 | 21 | 15 | ||||||
$ | 468 | $ | 475 | $ | 281 | ||||
Goodwill
($ in millions)
2003 | 2002 | 2001 | |||||||
Full-Service | $ | 851 | $ | 851 | $ | 851 | |||
Select-Service | — | — | — | ||||||
Extended-Stay | 72 | 72 | 126 | ||||||
Timeshare | — | — | — | ||||||
Total lodging | $ | 923 | $ | 923 | $ | 977 | |||
64
2003 | 2002 | 2001 | |||||||
Full-Service | $ | 93 | $ | 138 | $ | 186 | |||
Select-Service | 38 | 23 | 140 | ||||||
Extended-Stay | 3 | 39 | 52 | ||||||
Timeshare | 45 | 36 | 75 | ||||||
Total lodging | 179 | 236 | 453 | ||||||
Corporate | 16 | 20 | 30 | ||||||
Synthetic fuel | — | 7 | 49 | ||||||
Discontinued operations | 15 | 29 | 28 | ||||||
$ | 210 | $ | 292 | $ | 560 | ||||
Segment expenses include selling general and administrative expenses (excluding amounts attributable to our Senior Living Services and Distributions Services businesses) directly related to the operations of the businesses, aggregating $835$453 million in 2003, $423 million in 2002 $819and $388 million in 2001 and $745 million in 2000. The2001. Over 90 percent of the selling general and administrative expenses in 2001 excluded $133 million associated with restructuring and other charges.are related to our Timeshare segment.
The consolidated financial statements include the following related to international operations: sales of $563 million in 2003, $450 million in 2002 and $477 million in 2001 and $4552001; financial results of $102 million in 2000; financial results of2003, $94 million in 2002 and $42 million in 2001 and $73 million in 2000;2001; and fixed assets of $395 million in 2003, $308 million in 2002 and $230 million in 2001 and $239 million in 2000.2001. No individual country other than the United States constitutes a material portion of our sales, financial results or fixed assets.
The majority of our equity method investments are investments in entities that own lodging properties. Results for Full-Service equity method investments included income of $5 million in 2002, including income recognized from our ownership interest in the Marriott and Cendant Joint Venture, a loss of $11 million in 2001, and income of $2 million in 2000. We recognized a loss of $8 million in 2002, income of $5 million in 2001 and a loss of $1 million in 2000 from Select-Service equity method investments. We recognized a loss of $2 million in 2002 and a loss of $1 million in 2001 from Timeshare equity method investments. We recognized income of $2 million in 2002 related to our corporate investment in Avendra, LLC a procurement services affiliate, and losses of $3 million related to our investments in affordable housing and CTM/Exxon Mobil Travel Guide, LLC. We recognized losses of $7 million in 2001 related to our investments in Avendra, LLC and affordable housing, and we recognized losses of $7 million in 2000 related to our investment in affordable housing.
The substantial majority of revenues that we recognized from unconsolidated affiliates is from our minority interests in entities which own certain of our hotels. We recognized base and incentive fee revenues from our unconsolidated affiliates of $74 million, $71 million, and $53 million, respectively, in 2002, 2001, and 2000. Revenues related to reimbursable costs for these investments were $580 million, $580 million, and $250 million, respectively, in 2002, 2001, and 2000.
Debt service on our mezzanine loan to the Courtyard Joint Venture was current on January 3, 2003. The proceeds of the mezzanine loan have not been, and will not be used to pay our management fees, debt service, or land rent income. All management fees relating to the underlying hotels that we recognize in income are paid to us in cash by the Courtyard Joint Venture. For the fiscal year ended January 3, 2003, we recognized $8 million of equity losses arising from our ownership interest in the Courtyard Joint Venture.
2001 RESTRUCTURING COSTS AND OTHER CHARGES
21. | 2001 RESTRUCTURING COSTS AND OTHER CHARGES |
Restructuring Costs and Other Charges
The Company experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001 attacks onin New York and Washington and the subsequent dramatic downturn in the economy. This decline resulted in reduced management and franchise fees, cancellation of development projects, and anticipated losses underassociated with guarantees and loans. In 2001, we responded by implementing certain companywide cost-saving measures, although we did not significantly change the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001 we recorded pretaxpre-tax restructuring costs of $62 million, including (1) $15 million in severance costs; (2) $19 million primarily associated with a loss on a sublease of excess space arising from the reduction in personnel; and (3) $28 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. We also incurred $142 million of other charges including (1) $85 million related to reserves for guarantees and loan losses; (2) $12 million related to accounts receivable reserves; (3) $13 million related to the write-down of properties held for sale; and (4) $32 million related to the impairment of technology related investments and other write-offs. We have provided below detailed information related to the restructuring costs and other charges, which were recorded in the fourth quarter of 2001 as a result of the economic downturn and the unfavorable lodging environment.
72
2001Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700 employees across our operations (the majority of which were terminated by December 28, 2001). In 2001, we recorded a workforce reduction charge of
65
$15 $15 million related primarily to severance and fringe benefits. The charge did not reflect amounts billed out separately to owners for property-level severance costs. In addition, we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities. Wefacilities in 2001. At that time, we recorded a restructuring charge of approximately $14 million for excess corporate facilities, primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. In addition,2001, we also recorded a $5 million charge for lease terminations resulting from cancellations of leased units by our corporate apartment business, primarily in downtown New York City.
Development Cancellations and Elimination of Product Line
We incur certain costs associated with the development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as incurred, and they become part of the cost basis of the property once it is developed. As a result of the dramatic downturn in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, in 2001, we expensed $28 million of previously capitalized costs.
2001 Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels experienced significant declines in profitability and the owners were not able to meet debt service obligations to the Company or in some cases, to other third-party lending institutions. As a result, in 2001, based upon cash flow projections, we expected to fundmake fundings under certain guarantees which werethat we did not deemed recoverable,expect to recover, and we expected that several of the loans made by us would not be repaid according to their original terms. Due to these expected non-recoverable guarantee fundings and expected loan losses, we recorded charges of $85 million in the fourth quarter of 2001.
Accounts Receivable –- Bad Debts
In the fourth quarter of 2001, we reserved $12 million of accounts receivable which we deemed uncollectible following an analysis of these accounts, generally as a result of the unfavorable hotel operating environment.
Asset Impairments
WeIn 2001, we recorded a charge related to the impairment of an investment in a technology-related joint venture ($
($22 million), losses on the anticipated sale of three lodging properties ($13 million), write-offs of investments in management contracts and other assets ($8 million), and the write-off of capitalized software costs arising from a decision to change a technology platform ($2 million).
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The following table summarizes our remaining restructuring liability ($ in millions):
Restructuring costs and other charges liability at December 28, 2001 | Cash payments made in fiscal 2002 | Charges reversed in fiscal 2002 | Restructuring costs and other charges liability at January 3, 2003 | Restructuring Costs January 3, 2003 | Cash Payments Made in the Year Ended January 2, 2004 | Charges (Reversed) Accrued in the Year Ended January 2, 2004 | Restructuring Costs January 2, 2004 | |||||||||||||||||||
Severance | $ | 6 | $ | 4 | $ | — | $ | 2 | $ | 2 | $ | (1 | ) | $ | (1 | ) | $ | — | ||||||||
Facilities exit costs |
| 17 |
| 4 |
| 2 |
| 11 | 11 | (2 | ) | 4 | 13 | |||||||||||||
Total restructuring costs |
| 23 |
| 8 |
| 2 |
| 13 | 13 | (3 | ) | 3 | 13 | |||||||||||||
Reserves for guarantees and loan losses |
| 33 |
| 10 |
| 2 |
| 21 | 21 | (14 | ) | — | 7 | |||||||||||||
Impairment of technology-related investments and other |
| 1 |
| 1 |
| — |
| — | ||||||||||||||||||
Total | $ | 57 | $ | 19 | $ | 4 | $ | 34 | $ | 34 | $ | (17 | ) | $ | 3 | $ | 20 | |||||||||
As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities in 2001. At that time, we recorded a restructuring charge of approximately $14 million primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. The liability is paid over the lease term which ends in 2012; and as of January 2, 2004, the balance was $13 million. In 2003, we revised our estimates to reflect the impact of higher property taxes, the delay in filling excess space and a reduction in the expected sublease rate we are able to charge, resulting in an increase in the liability of $4 million.
The remaining liability related to the workforce reduction and fundings under guarantees will be substantially paid by January 2004.2005. The amounts related to the space reduction and resulting lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2012.
The following tables provide further detail on the 2001 charges:
2001 Segment Financial ResultsOperating Income Impact ($ in millions)
Full- Service | Select- Service | Extended- Stay | Timeshare | Total | Full-Service | Select-Service | Extended-Stay | Timeshare | Unallocated Corporate Expenses | Total | |||||||||||||||||||||||
Severance | $ | 7 | $ | 1 | $ | 1 | $ | 2 | $ | 11 | $ | 7 | $ | 1 | $ | 1 | $ | 2 | $ | 4 | $ | 15 | |||||||||||
Facilities exit costs |
| — |
| — |
| 5 |
| — |
| 5 | — | — | 5 | — | 14 | 19 | |||||||||||||||||
Development cancellations and Elimination of product line |
| 19 |
| 4 |
| 5 |
| — |
| 28 | |||||||||||||||||||||||
Development cancellations and elimination of product line | 19 | 4 | 5 | — | — | 28 | |||||||||||||||||||||||||||
Total restructuring costs |
| 26 |
| 5 |
| 11 |
| 2 |
| 44 | 26 | 5 | 11 | 2 | 18 | 62 | |||||||||||||||||
Reserves for guarantees and loan losses |
| 30 |
| 3 |
| 3 |
| — |
| 36 | 30 | 3 | 3 | — | — | 36 | |||||||||||||||||
Accounts receivable – bad debts |
| 11 |
| 1 |
| — |
| — |
| 12 | 11 | 1 | — | — | — | 12 | |||||||||||||||||
Write-down of properties held for sale |
| 9 |
| 4 |
| — |
| — |
| 13 | 9 | 4 | — | — | — | 13 | |||||||||||||||||
Impairment of technology-related investments and other |
| 8 |
| — |
| 2 |
| — |
| 10 | 8 | — | 2 | — | 22 | 32 | |||||||||||||||||
Total | $ | 84 | $ | 13 | $ | 16 | $ | 2 | $ | 115 | $ | 84 | $ | 13 | $ | 16 | $ | 2 | $ | 40 | $ | 155 | |||||||||||
2001 Corporate ExpensesInterest Income and InterestProvision for Loan Losses Impact ($ in millions)
Corporate expenses | Provision for loan losses | Interest income | Total corporate expenses and interest | |||||||||
Severance | $ | 4 | $ | — | $ | — | $ | 4 | ||||
Facilities exit costs |
| 14 |
| — |
| — |
| 14 | ||||
Total restructuring costs |
| 18 |
| — |
| — |
| 18 | ||||
Reserves for guarantees and loan losses |
| — |
| 43 |
| 6 |
| 49 | ||||
Impairment of technology-related investments and other |
| 22 |
| — |
| — |
| 22 | ||||
Total | $ | 40 | $ | 43 | $ | 6 | $ | 89 | ||||
Provision for loan losses | Interest income | Total | |||||||
Reserves for guarantees and loan losses | $ | 43 | $ | 6 | $ | 49 | |||
In addition to the above, in 2001, we recorded restructuring charges of $62 million and other charges of $5 million now reflected in our losses from discontinued operations. The restructuring liability related to discontinued operations was $3 million as of December 28, 2001 and $1 million as of January 3, 2003. We had no remaining restructuring liability related to discontinued operations as of January 2, 2004.
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22. | RELATED PARTY TRANSACTIONS |
We have equity method investments in entities that own hotels where we provide management and/or franchise services for which we receive a fee. In addition, in some cases we provide loans, preferred equity, or guarantees to these entities. The following tables present financial data resulting from transactions with these related parties:
SUBSEQUENT EVENTIncome Statement Data
2003 | 2002 | 2001 | ||||||||||
($ in millions) | ||||||||||||
Base management fees | $ | 56 | $ | 48 | $ | 48 | ||||||
Incentive management fees | 4 | 4 | 4 | |||||||||
Cost reimbursements | 699 | 557 | 559 | |||||||||
Other revenue | 28 | 26 | 28 | |||||||||
Total Revenue | $ | 787 | $ | 635 | $ | 639 | ||||||
General, administrative and other | $ | (11 | ) | $ | (11 | ) | $ | (15 | ) | |||
Reimbursed costs | (699 | ) | (557 | ) | (559 | ) | ||||||
Interest income | 77 | 66 | 51 | |||||||||
Provision for loan losses | (2 | ) | (5 | ) | — |
In January 2003, we entered into a contract with an unrelated third party to sell approximately a 50 percent interest in the Synthetic Fuel business. The transaction is subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service regarding the new ownership structure. Contracts related to the potential sale are being held in escrow until closing conditions are met. If the conditions are not met by August 31, 2003, neither party will have an obligation to perform under the agreements. If the transaction is consummated, we expect to receive $25 million in promissory notes and cash as well as an earnout based on the amount of synthetic fuel produced. If the transaction is consummated, we expect to account for the remaining interest in the Synthetic Fuel business under the equity method of accounting.
Balance Sheet Data
2003 | 2002 | |||||||
($ in millions) | ||||||||
Due to equity method investees | $ | (2 | ) | $ | (1 | ) | ||
Due from equity method investees | 623 | 532 |
68
75
QUARTERLY FINANCIAL DATA – UNAUDITED
($ in millions, except per share data)
Fiscal Year 20021,2,4 | ||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | ||||||||||||||
Sales3 | $ | 1,808 | $ | 2,034 | $ | 1,924 |
| $ | 2,675 |
| $ | 8,441 |
| |||||
Segment Financial Results3,5 |
| 147 |
| 149 |
| 128 |
|
| 149 |
|
| 573 |
| |||||
Income from Continuing Operations, after tax |
| 82 |
| 127 |
| 114 |
|
| 116 |
|
| 439 |
| |||||
Discontinued Operations, after tax |
| — |
| 2 |
| (11 | ) |
| (153 | ) |
| (162 | ) | |||||
Net Income (Loss) |
| 82 |
| 129 |
| 103 |
|
| (37 | ) |
| 277 |
| |||||
Diluted Earnings from Continuing Operations Per Share |
| .32 |
| .49 |
| .45 |
|
| .47 |
|
| 1.74 |
| |||||
Diluted Earnings from Discontinued Operations Per Share |
| — |
| .01 |
| (.04 | ) |
| (.62 | ) |
| (.64 | ) | |||||
Diluted Earnings Per Share | $ | .32 | $ | .50 | $ | .41 |
| $ | (.15 | ) | $ | 1.10 |
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Fiscal Year 20031,2,4 | ||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | ||||||||||||||
Sales3 | $ | 2,023 | $ | 2,016 | $ | 2,109 | $ | 2,866 | $ | 9,014 | ||||||||
Operating income3 | 58 | 68 | 90 | 161 | 377 | |||||||||||||
Income from continuing operations, after taxes and minority interest | 87 | 126 | 93 | 170 | 476 | |||||||||||||
Discontinued operations, after tax | 29 | (1 | ) | (1 | ) | (1 | ) | 26 | ||||||||||
Net income | 116 | 125 | 92 | 169 | 502 | |||||||||||||
Diluted earnings per share from continuing operations | .36 | .52 | .38 | .69 | 1.94 | |||||||||||||
Diluted earnings (losses) per share from discontinued operations | .12 | (.01 | ) | (.01 | ) | — | .11 | |||||||||||
Diluted earnings per share | $ | .48 | $ | .51 | $ | .37 | $ | .69 | $ | 2.05 | ||||||||
Fiscal Year 20011,2,4 | |||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||
Sales3 | $ | 1,935 | $ | 1,889 | $ | 1,823 | $ | 2,139 |
| $ | 7,786 |
| |||||
Segment Financial Results3,5 |
| 223 |
| 231 |
| 174 |
| 13 |
|
| 641 |
| |||||
Income from Continuing Operations, after tax |
| 119 |
| 125 |
| 99 |
| (74 | ) |
| 269 |
| |||||
Discontinued Operations, after tax |
| 2 |
| 5 |
| 2 |
| (42 | ) |
| (33 | ) | |||||
Net Income (Loss) |
| 121 |
| 130 |
| 101 |
| (116 | ) |
| 236 |
| |||||
Diluted Earnings from Continuing Operations Per Share |
| .46 |
| .49 |
| .38 |
| (.31 | ) |
| 1.05 |
| |||||
Diluted Earnings from Discontinued Operations Per Share |
| .01 |
| .01 |
| .01 |
| (.17 | ) |
| (.13 | ) | |||||
Diluted Earnings Per Share | $ | .47 | $ | .50 | $ | .39 | $ | (.48 | ) | $ | .92 |
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Fiscal Year 20021,2,4 | ||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | ||||||||||||||
Sales3 | $ | 1,795 | $ | 2,019 | $ | 1,908 | $ | 2,693 | $ | 8,415 | ||||||||
Operating income3 | 109 | 100 | 75 | 37 | 321 | |||||||||||||
Income from continuing operations, after taxes and minority interest | 82 | 127 | 114 | 116 | 439 | |||||||||||||
Discontinued operations, after tax | — | 2 | (11 | ) | (153 | ) | (162 | ) | ||||||||||
Net income (loss) | 82 | 129 | 103 | (37 | ) | 277 | ||||||||||||
Diluted earnings per share from continuing operations | .32 | .49 | .45 | .47 | 1.74 | |||||||||||||
Diluted earnings (losses) per share from discontinued operations | — | .01 | (.04 | ) | (.62 | ) | (.64 | ) | ||||||||||
Diluted earnings (losses) per share | $ | .32 | $ | .50 | $ | .41 | $ | (.15 | ) | $ | 1.10 | |||||||
1 | Fiscal year 2003 included 52 weeks and fiscal year 2002 included 53 |
2 | The quarters consisted of 12 weeks, except the fourth quarter of |
3 |
4 | The sum of the earnings per share for the four quarters differs from annual earnings per share due to the required method of computing the weighted average shares in interim periods. |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On May 3, 2002, upon the recommendation of our Audit Committee, the Board of Directors dismissed Arthur Andersen LLP (Arthur Andersen) as our independent auditors and appointed Ernst & Young LLP (Ernst & Young) to serve as Marriott International’s independent auditors for the fiscal year ending on January 3, 2003. The change in auditors was effective May 3, 2002.
Arthur Andersen’s reports on Marriott International’s consolidated financial statements for the fiscal yearsyear ended
December 28, 2001 and December 29, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal yearsyear ended December 28, 2001 and December 29, 2000 and through May 3, 2002, there were: (i) no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such periods; and (ii) there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.
During each of 2000 and 2001 and through the date of their appointment, Marriott did not consult Ernst & Young with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or (ii) any matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any “reportable event,” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Since the date of their appointment, there were:have been: (i) no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for the fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001 and December 29, 2000;2001; and (ii) there werehave been no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. | CONTROLS AND PROCEDURES |
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As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives. You should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no changes in the internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting. Based upon the foregoing evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to timely alert them to any material information relating to the Company (including its consolidated subsidiaries) that must be included in our periodic SEC filings.
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PART III
As described below, we incorporate certain information appearing in the Proxy Statement we will furnish to our shareholders in connection with the 20022004 Annual Meeting of Shareholders by reference in this Form 10-K Annual Report.
We incorporate this information by reference to the “Directors Standing For Election,” “Directors Continuing In Office” and “Section 16(a) Beneficial Ownership Reporting Compliance” sections of our Proxy Statement. We have included information regarding our executive officers and our Code of Ethics below. | ||
We incorporate this information by reference to the “Executive Compensation” section of our Proxy Statement. | ||
We incorporate this information by reference to the “Stock Ownership” section of our Proxy Statement. | ||
We incorporate this information by reference to the “Certain Transactions” section of our Proxy Statement. | ||
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to our executive officers.
Name and Title | Age | Business Experience | ||
Chairman of the Board and Chief Executive Officer |
| Mr. Marriott joined Marriott Corporation (now known as Host Marriott Corporation) in 1956, became President and a director in 1964, Chief Executive Officer in 1972 and Chairman of the Board in 1985. Mr. Marriott also is a director of the National Urban League, Mr. Marriott has served as Chairman and Chief Executive Officer of the Company since its inception, | ||
Simon Cooper
President and Chief Operating Officer, The Ritz-Carlton Hotel Company, L.L.C. |
| Simon Cooper joined Marriott International in 1998 as President of Marriott Lodging Canada and Senior Vice President of Marriott Lodging International. In 2000, the Company added the New England Region to his Canadian responsibilities. Prior to joining Marriott, Mr. Cooper was President and Chief Operating Officer of Delta Hotels and Resorts. | ||
Edwin D. Fuller Vice President; President and Managing Director Marriott Lodging International |
| Edwin D. Fuller joined Marriott in 1972 and held several sales positions before being appointed Vice President of Marketing in 1979. He became Regional Vice President |
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Brendan M. Keegan Vice President; Executive Vice President – Human Resources |
| Brendan M. Keegan joined Marriott Corporation in 1971, in the Corporate Organization Development Department and subsequently held several human resources positions, including Vice President of Organization Development and Executive Succession Planning. He was named Senior Vice President, Human Resources, Marriott Service Group in 1986. Mr. Keegan was appointed |
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Name and Title | Age | Business Experience | ||||
John W. Marriott III Executive Vice President – Lodging |
| John W. Marriott III joined Marriott in | ||||
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Robert J. McCarthy Executive Vice President – North American Lodging Operations |
| Robert J. McCarthy was named Executive Vice President, North American Lodging Operations in January 2003. From March 2000 until January 2003, Mr. McCarthy was Executive Vice President, Operations Planning and Support for Marriott Lodging. He joined Marriott in 1975, became Regional Director of Sales/Marketing for Marriott Hotels, Resorts and Suites in 1982, Director of Marketing for Marriott Suite Hotels/Compact Hotels in 1985, Vice President Operations and Marketing for Fairfield Inn and Courtyard in 1991 and Senior Vice President for the Northeast Region for Marriott Lodging in 1995. | ||
Joseph Ryan Executive Vice President and General Counsel |
| Joseph Ryan joined Old | ||
William J. Shaw Director, President and Chief Operating Officer |
| William J. Shaw has served as President and Chief Operating Officer of the Company since 1997 (including service in the same capacity with Old |
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Name and Title | Age | Business Experience | ||
Arne M. Sorenson Executive Vice President, Chief Financial Officer, and President, Continental European Lodging |
| Arne M. Sorenson joined Old |
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James M. Sullivan Executive Vice Lodging Development |
| James M. Sullivan joined Marriott Corporation in 1980, departed in 1983 to acquire, manage, expand and subsequently sell a successful restaurant chain, and returned to Marriott Corporation in 1986 as Vice President of Mergers and Acquisitions. Mr. Sullivan became Senior Vice President, Finance – Lodging in 1989, Senior Vice President – Lodging Development in 1990 and was appointed to his current position in 1995. | ||||
Stephen P. Weisz Vice President; President – Marriott Vacation Club International |
| Stephen P. Weisz joined Marriott Corporation in 1972 and was named Regional Vice President of the Mid-Atlantic Region in 1991. Mr. Weisz had previously served as Senior Vice President of Rooms Operations before being appointed |
Code of Ethics
The Company has long maintained and enforced an Ethical Conduct policy that applies toall Marriott associates, including our chief executive officer, chief financial officer,Chief Executive Officer, Chief Financial Officer, and principal accounting officer.Principal Accounting Officer. We have attached a copy ofposted our Ethical Conduct Policy, which has been in substantially its current form since the mid-1980s, as Exhibit 99-2 to this report. We also plan to post a copyin the Corporate Governance section of our Ethical Policy on ourInvestor Relations website, atwww.marriott.com/investorhttp:/ir.shareholder.com/mar/corporategovernance.cfm, in the near future.. Any future changes or amendments to our Ethical Conduct Policy, and any waiver of our Ethical Conduct Policy that applies to our chief executive officer, chief financial officer,Chief Executive Officer, Chief Financial Officer, or principal accounting officer,Principal Accounting Officer, will also be posted to www.marriott.com/investor.http:/ir.shareholder.com/mar/corporategovernance.cfm.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
(a) | LIST OF DOCUMENTS FILED AS PART OF THIS REPORT |
(1) | FINANCIAL STATEMENTS |
The response to this portion of Item 15 is submitted under Item 8 of this Report on Form 10-K.
(2) | FINANCIAL STATEMENT SCHEDULES |
Information relating to schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange CommissionSEC is included in the notes to the financial statements and is incorporated herein by reference.
(3) | EXHIBITS |
Any shareholder who wants a copy of the following Exhibits may obtain one from us upon request at a charge that reflects the reproduction cost of such Exhibits. Requests should be made to the Secretary, Marriott International, Inc., Marriott Drive, Department 52/862, Washington, D.C. 20058.
Exhibit No. | Description | Incorporation by Reference (where a report or registration statement is indicated below, that | ||
3.1 | Third Amended and Restated Certificate of Incorporation of the Company. | Exhibit No. 3 to our Form 10-Q for the fiscal quarter ended June 18, 1999. | ||
3.2 | Amended and Restated Bylaws. |
January 3, 2003. | ||
3.3 | Amended and Restated Rights Agreement dated as of August 9, 1999 with The Bank of New York, as Rights Agent. | Exhibit No. 4.1 to our Form 10-Q for the fiscal quarter ended September 10, 1999. | ||
3.4 | Certificate of Designation, Preferences and Rights of the Marriott International, Inc. ESOP Convertible Preferred Stock. | Exhibit No. 3.1 to our | ||
3.5 | Certificate of Designation, Preferences and Rights of the Marriott International, Inc. Capped Convertible Preferred Stock. | Exhibit No. 3.2 to our Form 10-Q for the fiscal quarter ended June 16, 2000. | ||
4.1 | Indenture dated November 16, 1998 with The Chase Manhattan Bank, as Trustee. | Exhibit No. 4.1 to our Form 10-K for the fiscal year ended January 1, 1999. | ||
4.2 | Form of 6.625% Series A Note due 2003. | Exhibit No. 4.2 to our Form 10-K for the fiscal year ended January 1, 1999. | ||
4.3 | Form of 6.875% Series B Note due 2005. | Exhibit No. 4.3 to our Form 10-K for the fiscal year ended January 1, 1999. |
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4.4 | Form of 7.875% Series C Note due 2009. | Exhibit No. 4.1 to our Form 8-K dated September 20, 1999. | ||
4.5 | Form of 8.125% Series D Note due 2005. | Exhibit No. 4.1 to our Form 8-K dated March 28, 2000. | ||
4.6 | Form of 7.0% Series E Note due 2008. | Exhibit No. 4.1 (f) to our Form S-3 filed on January 17, 2001. |
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No. | Description | Incorporation by Reference (where a report or registration statement is indicated below, that | ||
4.7 | Indenture, dated as of May 8, 2001, relating to the Liquid Yield Option Notes due 2021, with Bank of New York, as | Exhibit No. 4.2 to our Form S-3 filed on May 25, 2001. | ||
10.1 | Employee Benefits and Other Employment Matters Allocation Agreement dated as of September 30, 1997 with Sodexho Marriott Services, Inc. | Exhibit No. 10.1 to our Form 10 filed on February 13, 1998. | ||
10.2 | 2002 Comprehensive Stock and Cash Incentive Plan. | Appendix B in our definitive proxy statement filed on March 28, 2002. | ||
10.3 |
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| Tax Sharing Agreement with Sodexho Marriott Services, Inc. and Sodexho Alliance, S.A. | Exhibit No. 10.2 to our Form 10-Q for the fiscal quarter ended March 27, 1998. | ||
| $500 million Credit Agreement dated August 5, 2003, with Citibank, N.A. | Exhibit No. | ||
10.6 | $1.5 billion Credit Agreement dated July 31, 2001, as amended, with Citibank, N.A. as Administrative Agent, and certain banks. | Exhibit No. 10 to our Form 10-Q for the fiscal quarter ended September 7, 2001, and Exhibit | ||
12 | Statement of Computation of Ratio of Earnings to Fixed Charges. | Filed with this report. | ||
21 | Subsidiaries of Marriott International, Inc. | Filed with this report. | ||
23 | Consent of Ernst & Young LLP. | Filed with this report. | ||
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| Filed with this report. | ||
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| Filed with this report. | ||
32 | Section 1350 Certifications. | Filed with this report. | ||
99 | Forward-Looking Statements. | Filed with this report. |
(b) | REPORTS ON FORM 8-K |
The Company did not file anyOn October 9, 2003 we furnished a report on Form 8-K duringreporting our financial results for the fourth quarter of 2002.ended September 12, 2003.
On November 7, 2003 we filed a report on Form 8-K announcing that the Audit Committee of our board of directors had approved the appointment of Ernst & Young LLP as the principal accountant of Marriott International, Inc. Employees’ Profit Sharing, Retirement and Savings Plan and Trust, replacing KPMG LLP.
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On November 12, 2003 we filed information on Form 8-K reporting the receipt of satisfactory private letter rulings from the Internal Revenue Service relating to our synthetic fuel business, and we furnished information on Form 8-K related to a Security Analyst Meeting we held on November 11, 2003.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this
Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, on this 14th23rd day of February, 2003.
2004.
MARRIOTT INTERNATIONAL, INC. | ||
By | /s/ J.W. Marriott, Jr. | |
J.W. Marriott, Jr. | ||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on our behalf in theirthe capacities indicated and on the date indicated above.
PRINCIPAL EXECUTIVE OFFICER: | ||||
/s/ J.W. Marriott, Jr. | ||||
J.W. Marriott, Jr. | Chairman of the Board, Chief Executive Officer and Director |
PRINCIPAL FINANCIAL OFFICER: | ||||
/s/ Arne M. Sorenson | ||||
Arne M. Sorenson | Executive Vice President and Chief Financial Officer |
PRINCIPAL ACCOUNTING OFFICER: | ||||
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/s/
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CERTIFICATIONS
I, J.W. Marriott, Jr., certify that:
Carl T. Berquist | ||||||||
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I, Arne M. Sorenson, certify that:
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Executive Vice President,
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I, J.W. Marriott, Jr., certify that the Form 10-K for the year ended January 3, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in the Form 10-K for the year ended January 3, 2003 fairly presents, in all material respects, the financial condition and results of operations of the issuer.
DIRECTORS: | ||||||
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/s/ Gilbert M. Grosvenor | /s/ Roger W. Sant | |||||
Gilbert M. Grosvenor, Director |
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/s/ William J. Shaw | /s/ John W. Marriott
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I, Arne M. Sorenson, certify that the Form 10-K for the year ended January 3, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in the Form 10-K for the year ended January 3, 2003 fairly presents, in all material respects, the financial condition and results of operations of the issuer.
William J. Shaw, Director | John W. Marriott III, Director | |||||||
/s/ Floretta Dukes McKenzie | /s/ George Muñoz | |||||||
Floretta Dukes McKenzie, Director | George Muñoz, Director | |||||||
/s/ Harry J. Pearce | /s/ Lawrence M. Small | |||||||
Harry J. Pearce, Director | Lawrence M. Small, Director | |||||||
/s/ Lawrence W. Kellner | ||||||||
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Lawrence W. Kellner, Director |
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