UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 30, 2005

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 3, 2003

 

Commission File No. 1-13881

 


 

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


 

Delaware

 

52-2055918

(State of Incorporation)

 

(I.R.S.IRS Employer Identification Number)No.)

10400 Fernwood Road, Bethesda, Maryland20817
(Address of Principal Executive Offices)(Zip Code)

 

10400 Fernwood Road

Bethesda, Maryland 20817

Registrant’s Telephone Number, Including Area Code (301) 380-3000


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classEach Class


 

Name of each exchangeEach Exchange on which registeredWhich Registered


Class A Common Stock, $0.01 par value

(233,802,816205,352,719 shares outstanding as of January 31, 2003)February 10, 2006)

 

New York Stock Exchange

Chicago Stock Exchange

Pacific Stock Exchange

Philadelphia Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE


 

The aggregate market valueIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of shares of common stock held by non-affiliates at January 31, 2003, was $5,646,330,643.the Securities Act.    Yes  x    No  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    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 check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of shares of common stock held by non-affiliates at June 17, 2005, was $11,467,928,697.

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement prepared for the 20032006 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 


Index to Exhibits is located on pages 76 through 77.


MARRIOTT INTERNATIONAL, INC.

 



FORM 10-K TABLE OF CONTENTS

 

PART IFISCAL YEAR ENDED DECEMBER 30, 2005

 

Page No.

Part I.

        Item 1.

Business

3

            Item 1A.

Risk Factors

16

            Item 1B.

Unresolved Staff Comments

19

        Item 2.

Properties

20

        Item 3.

Legal Proceedings

21

        Item 4.

Submission of Matters to a Vote of Security Holders

22

Part II.

        Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

        Item 6.

Selected Financial Data

24

        Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

            Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

53

        Item 8.

Financial Statements and Supplementary Data

55

        Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93

            Item 9A.

Controls and Procedures

93

            Item 9B.

Other Information

93

Part III.

        Item 10.

Directors and Executive Officers of the Registrant

94

        Item 11.

Executive Compensation

94

        Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

94

        Item 13.

Certain Relationships and Related Transactions

94

        Item 14.

Principal Accountant Fees and Services

94

Part IV.

        Item 15.

Exhibits and Financial Statement Schedules

98

Signatures

101

Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.” Unless otherwise specified, each reference to “2005” means our fiscal year ended December 30, 2005, each reference to “2004” means our fiscal year ended December 31, 2004, each reference to “2003” means our fiscal year ended January 2, 2004, and each reference to “2002” means our fiscal year ended January 3, 2003, and not, in each case, the corresponding calendar year.

 

Forward-Looking StatementsPART I

 

We have made forward-looking statements in this document that are based on the beliefs and assumptions of our management, and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations and statements preceded by, followed by or that include the words “believes”, “expects”, “anticipates”, “intends”, “plans”, “estimates”, or similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. We caution you not to put undue reliance on any forward-looking statements.

You should understand that the following important factors, in addition to 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.

competition in each of our business segments;

business strategies and their intended results;

the balance between supply of and demand for hotel rooms, timeshare units and corporate apartments;

our continued ability to obtain new operating contracts and franchise agreements;

our ability to develop and maintain positive relations with current and potential hotel owners;

our ability to obtain adequate property and liability insurance to protect against losses or to obtain such insurance at reasonable rates;

the effect of international, national and regional economic conditions, including the duration and severity of the current economic downturn in the United States and the pace of the lodging industry’s adjustment to the continuing war on terrorism, and the potentially sharp decrease in travel that could occur if military action is taken in Iraq, North Korea or elsewhere;

our ability to recover loan and guaranty advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise;

the availability of capital to allow us and potential hotel owners to fund investments;

the effect that internet reservation channels may have on the rates that we are able to charge for hotel rooms and timeshare intervals;

other risks described from time to time in our filings with the Securities and Exchange Commission (the SEC).

ITEMS 1 and 2. BUSINESS AND PROPERTIESItem 1. Business.

 

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, segments:

Segment


Percentage of 2005 Total
Sales


Full-Service Lodging

65%

Select-Service Lodging

11%

Extended-Stay Lodging

5%

Timeshare

15%

Synthetic Fuel

4%

We were organized as a corporation in Delaware in 1997 and Synthetic Fuel, which represented 65, 12, 7, 14 and 2 percent, respectively, of total salesbecame a public company in 1998 when we were “spun off” as a separate entity by the fiscal year ended January 3, 2003. Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which are now classified as discontinued operations.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 1413 separate brand names, and we develop, operate develop and market Marriott timeshare, fractional ownership and whole ownership properties under 4four separate brand names. Our lodging business includes the Full-Service, Select-Service, Extended-Stay and Timeshare segments.We also provide services to home/condominium owner associations.

 

2Our synthetic fuel operation consists of our interest in four coal-based synthetic fuel production facilities whose operations qualify for tax credits based on Section 29 of the Internal Revenue Code (“Section 29”) (redesignated as Section 45K for fiscal years 2006 and 2007).


 

Financial information by industry segment and geographic area as of January 3, 2003 and for the three2005, 2004, and 2003 fiscal years then ended appears in Footnote 19, “Business Segments” of the Business Segments noteNotes to our Consolidated Financial Statements included in this annual report.

 

Lodging

 

We operate or franchise 2,5572,741 lodging properties worldwide, with 463,429499,165 rooms as of January 3, 2003.year-end 2005. In addition, we provide 4,3161,850 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 and Suites

  

•  Residence Inn by Marriott®

•  Marriott Conference Centers

  

•  TownePlace Suites by Marriott®

•  JW Marriott® Hotels & Resorts

  

•  Marriott ExecuStay®

•  The Ritz-Carlton Hotels®

  

•  Marriott Executive Apartments®

•  Renaissance® Hotels & Resorts and Suites

   

•  Ramada InternationalBulgari Hotels & Resorts®

  Timeshare

Timeshare•  Marriott Vacation ClubSM International

Select-Service Lodging

•  The Ritz-Carlton Club®

    (primarily Europe, Middle East and Asia/Pacific)•  Courtyard by Marriott®

  

•  Grand Residences by Marriott Vacation Club International®

•  Bvlgari Hotels and ResortsFairfield Inn by Marriott®

  

•  Horizons by Marriott Vacation Club International®

•      The Ritz-Carlton Club

•      Marriott Grand Residence Club

Select-Service Lodging

•  Courtyard

•      Fairfield Inn

•      SpringHill Suites by Marriott®

   

 

3Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include JW Marriott Hotels & Resorts and Marriott Conference Centers.


Company-Operated Lodging Properties

 

At January 3, 2003,year-end 2005, we operated 9371,017 properties (242,520(261,800 rooms) under long-term management or lease agreements with property owners (together, the“the Operating Agreements)Agreements”) and 817 properties (1,525(5,317 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,operate, 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

Our timeshare operations develop, sell and implement annualoperate vacation timesharing resorts under four brands, and generate revenues from three primary sources: (1) selling fee simple and other forms of timeshare intervals and personal residences, (2) financing consumer purchases, and (3) operating budgets that are subject to owner review and approval.the resorts.

 

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,year-end 2005, we had 1,6121,707 franchised properties (219,384(232,048 rooms).

 

Seasonality

In general, business at company-operated and franchised properties is relatively stable and includes only moderate seasonal fluctuations. Business at some resort properties may be seasonal depending on location.

Relationship with Major Customer

We operate a number of properties, under long-term management agreements, that are owned or leased by Host Marriott Corporation (“Host Marriott”). In addition, Host Marriott is a partner in several partnerships that own properties operated by us under long-term management agreements. See Footnote 22, “Relationship with Major Customer” in the Notes to our Consolidated Financial Statements included in this annual report for more information.

Summary of Properties by Brand

 

As of January 3, 2003At year-end 2005, we operated or franchised the following properties by brand (excluding 4,3161,850 corporate housing rental units):

 

   

Company-operated


  

Franchised


Brand


  

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

Ramada International

  

4

  

727

  

142

  

20,503

Select-Service Lodging

            

Courtyard

  

289

  

45,881

  

298

  

38,475

Fairfield Inn

  

2

  

890

  

501

  

47,324

SpringHill Suites

  

20

  

3,187

  

78

  

8,022

Extended-Stay Lodging

            

Residence Inn

  

136

  

18,538

  

292

  

32,035

TownePlace Suites

  

34

  

3,665

  

70

  

7,039

Marriott Executive Apartments and other

  

10

  

1,908

  

1

  

99

Timeshare

            

Marriott Vacation Club International

  

45

  

6,973

  

—  

  

—  

Horizons by Marriott Vacation Club International

  

2

  

146

  

—  

  

—  

The Ritz-Carlton Club

  

4

  

204

  

—  

  

—  

Marriott Grand Residence Club

  

2

  

248

  

—  

  

—  

   
  
  
  

Total

  

945

  

244,045

  

1,612

  

219,384

   
  
  
  

4

   Company-Operated

  Franchised

Brand


  Properties

  Rooms

  Properties

  Rooms

Full-Service Lodging

            

Marriott Hotels & Resorts

  269  107,531  190  57,116

Marriott Conference Centers

  14  3,606  —    —  

JW Marriott Hotels & Resorts

  29  13,937  5  1,265

The Ritz-Carlton

  59  19,285  —    —  

Renaissance Hotels & Resorts

  90  33,449  47  14,783

Bulgari Hotel & Resort

  1  58  —    —  

Ramada International

  3  532  —    —  

Select-Service Lodging

            

Courtyard

  306  49,130  386  50,539

Fairfield Inn

  2  855  522  47,144

SpringHill Suites

  24  3,815  113  12,187

Extended-Stay Lodging

            

Residence Inn

  135  18,172  355  40,272

TownePlace Suites

  34  3,660  88  8,643

Marriott Executive Apartments

  16  2,753  1  99

Timeshare1

            

Marriott Vacation Club International

  44  9,401  —    —  

The Ritz-Carlton Club

  4  292  —    —  

Grand Residences by Marriott

  2  313  —    —  

Horizons by Marriott Vacation Club

  2  328  —    —  
   
  
  
  

Total

  1,034  267,117  1,707  232,048
   
  
  
  


1Includes products in active sales which are not ready for occupancy.

 

We plancurrently have more than 70,000 rooms in our development pipeline and expect to open over 150 hotels (25,000 – 30,000 rooms) during 2003.add approximately 25,000 hotel rooms and timeshare units to our system in 2006. 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, isplan, are partially dependent on their access to and the availability and cost of capital. See the “Liquidity and Capital Resources” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Summary of Properties by Country

At year-end 2005, we operated or franchised properties in the following 67 countries and territories:

Country


  Hotels

  Rooms

Americas

      

Argentina

  1  325

Aruba

  4  1,641

Brazil

  6  1,620

Canada

  49  10,914

Cayman Islands

  3  898

Chile

  2  485

Costa Rica

  3  569

Curacao

  1  247

Dominican Republic

  2  446

Ecuador

  1  257

Guatemala

  1  385

Honduras

  1  157

Jamaica

  1  427

Mexico

  10  2,736

Panama

  2  416

Peru

  1  300

Puerto Rico

  3  1,197

Saint Kitts and Nevis

  1  500

Trinidad and Tobago

  1  119

United States

  2,349  398,417

U.S. Virgin Islands

  4  821

Venezuela

  1  269
   
  

Total Americas

  2,447  423,146

Middle East and Africa

      

Bahrain

  1  264

Egypt

  8  3,290

Jordan

  3  609

Kuwait

  2  601

Qatar

  2  586

Saudi Arabia

  3  735

Tunisia

  1  221

United Arab Emirates

  6  1,150
   
  

Total Middle East and Africa

  26  7,456

Asia

      

China

  32  12,440

Guam

  1  357

India

  5  1,220

Indonesia

  4  1,452

Japan

  10  3,236

Malaysia

  7  2,977

Pakistan

  2  509

Philippines

  2  898

Singapore

  2  992

South Korea

  4  1,756

Thailand

  8  2,013

Vietnam

  2  874
   
  

Total Asia

  79  28,724

Country


  Hotels

  Rooms

Australia

  8  2,354

Europe

      

Armenia

  1  225

Austria

  6  1,569

Belgium

  4  721

Czech Republic

  3  656

Denmark

  1  395

France

  7  1,529

Georgia

  2  245

Germany

  40  8,519

Greece

  1  314

Hungary

  2  470

Israel

  2  960

Italy

  6  1,005

Kazakhstan

  1  120

Lebanon

  1  174

Netherlands

  3  945

Poland

  2  748

Portugal

  3  933

Romania

  1  402

Russia

  7  1,771

Spain

  6  1,470

Switzerland

  2  464

Turkey

  4  1,210
   
  

Total Europe

  105  24,845

United Kingdom

      

Ireland

  3  327

United Kingdom (England, Scotland and Wales)

  73  12,313
   
  

Total United Kingdom

  76  12,640
   
  

Total – All Countries and Territories

  2,741  499,165
   
  

 

Full-Service Lodging

 

Marriott Hotels & Resorts and Suites (including(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 Hotels & Resorts is a quality-tier brand comprised of full-service hotelsproperties. Typically, properties contain from 300400 to 500700 well appointed and spacious rooms, and typically havein-room high-speed internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges, room service, concierge lounges, wireless internet access in public places, and parking facilities. MarriottSixteen properties have over 1,000 rooms. Many resort hotelsproperties have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. The 13During 2005, most properties installed a new bedding package offering plusher mattresses and enhanced bedding components, including down comforters, duvets and cotton-rich linens. In 2005, we also unveiled the new Marriott Suites (approximately 3,400 rooms) are full-service suite hotels that typically contain approximately 200 to 300 suites, each consisting of a livingguest room bedroomwhich features contemporary residential design, warm colors, rich cherry wood, architectural detail, flat screen televisions, “plug and bathroom. Marriott Suites have limited meeting space. Unless otherwise indicated, references throughout this report to Marriott Hotels, Resortsplay” technology and Suites include bathrooms reflecting spa-like luxury.

JW Marriott Hotels & Resorts and is the Marriott Conference Centers.

JW Marriott Hotels & Resorts is a world-classbrand’s luxury collection of distinctive hotelsproperties and resorts that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 23 hotels and resorts34 properties (15,202 rooms) 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,property, the facilities and amenities in theat JW Marriott Hotels & Resorts properties 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 (3,606 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 property, the centers typically include expanded meeting room space, banquet and dining facilities, guestroomsguest rooms and recreational facilities.

Room operations contributed the majority of hotel sales for fiscal year 2002, 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, overall hotel system profits are usually relatively stable and include only moderate seasonal fluctuations.

Marriott Hotels & Resorts and Suites

Geographic Distribution at January 3, 2003year-end 2005


  

Hotels



   

United States (42 states and the District of Columbia)

  

293

332
  

(120,308 rooms

)

133,534 rooms)
   
   

Non-U.S. (56(57 countries and territories)

      

Americas (Non-U.S.)

  

31

35   

Continental Europe

  

29

34   

United Kingdom

  

50

55   

Asia

  

28

32   

AfricaThe Middle East and the Middle EastAfrica

  

15

14   

Australia

  

4

5   
   
   

Total Non-U.S.

  

157

175
  

(44,892 rooms

)

49,921 rooms)
   
   

 

The Ritz-Carlton is a leading global luxury lifestyle brand of hotels and resorts are renowned for their distinctive architecture and for the high quality level of their facilities, dining options 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, a club level, gift shops, high-speed internet access, 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 Hotels and Resorts

Geographic Distribution at January 3, 2003year-end 2005


  

Hotels



   

United States (15(14 states and the District of Columbia)

  

32

35
  

(10,270 rooms

)

11,616 rooms)
   
   

Non-U.S. (19(20 countries and territories)

  

19Americas (Non-U.S.)

  7

(6,296 roomsContinental Europe

5

)Asia

8

The Middle East and Africa

4
   
   

Total Non-U.S.

24(7,669 rooms)

 

 

5


Renaissance Hotels & Resortsis a distinctive and global quality-tier full-service brand whichthat targets individual business and leisure travelers and group meetings seeking stylish and leisure travelers.personalized environments. Renaissance hotelsHotels & Resorts properties are generally located inat downtown locations ofin major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotelsproperties contain from 300 to 500 rooms; however, a few of the convention oriented hotelsproperties are larger, and some hotelsproperties in non-gateway markets, particularly in Europe, are smaller. Renaissance hotelsproperties and services typically include an all-day dining restaurant, a specialty restaurant, club floorsfeature distinctive décor, in-room high-speed internet access, restaurants and a lounge, boardrooms,lounges, room service, swimming pools, gift shops, concierge lounges, and conventionmeeting and banquet facilities. Renaissance resort hotelsDuring 2005, most properties installed a new bedding package offering plusher mattresses and enhanced bedding components, including down comforters, duvets and cotton-rich linens. Resort properties typically have additional recreational and entertainment facilities and services, including golf courses, tennis courts, water sports, additional restaurants and spa facilities.

 

Renaissance Hotels & Resorts and Suites

Geographic Distribution at January 3, 2003year-end 2005


  

Hotels



   

United States (24(26 states and the District of Columbia)

  

63

67
  

(23,961 rooms

)

25,431 rooms)
   
   

Non-U.S. (28 countries and territories)

      

Americas (Non-U.S.)

  

10

8   

Continental Europe

  

17

28   

United Kingdom

  

7

   

Asia

  

20

23   

AfricaThe Middle East and the Middle EastAfrica

  

8

Australia

1

4   
   
   

Total Non-U.S.

  

63

70
  

(21,838 rooms

)

22,801 rooms)
   
   

 

Bulgari Hotels & Resorts.As part of our ongoing strategy to expand our reach through partnerships with pre-eminent world-class companies, in early 2001 we entered into a joint venture with jeweler and luxury goods designer Bulgari SpA to create and introduce distinctive new luxury hotel properties in prime locations – Bulgari Hotels & Resorts. The first property (58 rooms), the Bulgari Hotel Milano, opened in Milan, Italy, in 2004. The second property, the Bulgari Resort Bali, is expected to open in Spring 2006 and will include 59 private villas, two restaurants and comprehensive spa facilities. Other projects are currently in various stages of development in Europe, Asia, and North America.

Ramada International. We sold Ramada International, is a moderately-priced and predominantly franchised brand targeted at business and leisure travelers. Each full-servicetravelers outside the United States, to Cendant Corporation (“Cendant”) during the fourth quarter of 2004. We continue to manage three Ramada International property includesproperties (532 rooms) located outside of the United States at year-end 2005. Additionally, in the second quarter of 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, and as a restaurant, a cocktail loungeresult, Cendant acquired the trademarks 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 addition to management and franchise fees associated with Ramada International, we receive a royalty feelicenses for the use ofRamada and Days Inn lodging brands in the Ramada name in Canada. We also record, in accordance with the equity method of accounting, our proportionate share of the net income reported by the Marriott and CendantUnited States. The Two Flags joint venture that was originally formed in the first quarter of 2002 by us and Cendant to further develop and expand the Ramada and Days Inn brands in the United States. In 2002, we opened 16 hotels withWe contributed the domestic Ramada brand name, outsidelicense agreements and related intellectual property to the United States and Canada.

Ramada International

Geographic Distribution at January 3, 2003


Hotels


Americas (Non-U.S. and Canada)

3

Continental Europe

61

United Kingdom

59

Africa and the Middle East

6

Asia

15

Australia

2


Total (20 countries and territories)

146

(21,230 rooms

)


Bvlgari Hotels and Resorts.    As part of our ongoing strategy to expand our reach through partnerships with preeminent, world class companies, in early 2001, we announced our plans to launch a joint venture, with Bulgari SpA to introduce distinctive new luxury hotel properties – Bvlgari Hotels and Resorts. The first property is expected to open in January 2004.Cendant contributed the Days Inn license agreement and related intellectual property.

 

Select-Service Lodging

 

Courtyard is our upper moderate-priceupper-moderate-price select-service hotel product. Aimedproduct aimed primarily at individualtransient business and leisure travelers as well as families,travel. Courtyard hotels maintain a residential atmosphere and typically havecontain 90 to 150 rooms. Well landscapedrooms in suburban locales, and 140 to 340 rooms in downtown/urban locales. Well-landscaped grounds typically include a courtyard with a pool and social areas. Most hotelsHotels feature functionally designed quality guest rooms and meeting rooms, free in-room high-speed internet access (in North America), limited restaurant and lounge facilities, a swimming pool and an exercise room. During 2005, most properties installed a new bedding package offering plusher mattresses and enhanced bedding components, including cotton-rich linens, and most hotels includeThe Market, a self-serve food store open 24 hours a day. Through year-end 2005, 129 hotels have been reinvented, and reinventions of an additional 43 properties are expected to be completed by year-end 2006. Reinvented properties feature fresh, crisp designs for guest rooms, lobbies and public spaces, granite bathroom vanities, and new guest room furnishings with rich, new fabrics and colors. 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 endyear-end 2005, there were 587692 Courtyards operating in 1024 countries.

 

Courtyard

Geographic Distribution at January 3, 2003year-end 2005


  

Hotels



   

United States (45(47 states and the District of Columbia)

  

539

623
  

(75,905 rooms

)

87,539 rooms)
   
   

Non-U.S. (10(23 countries and territories)

  

48Americas (Non-U.S.)

  20

(8,451 roomsContinental Europe

27

)United Kingdom

12

Asia

5

The Middle East and Africa

2

Australia

3
   
   

Total Non-U.S.

69(12,130 rooms)

 

6


 

Fairfield Inn is our hotel brand that competes in the lower moderate price-tier.lower-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 free in-room high-speed internet access, a swimming pool, complimentary continental breakfast and free local phone calls. During 2005, most properties installed a new bedding package featuring plusher mattresses and enhanced bedding components, including cotton-rich linens. At year endyear-end 2005, there were 503388 Fairfield Inns and 136 Fairfield Inn & Suites (524 hotels total), operating in the United States.States, Canada and Mexico.

Fairfield Inn

Geographic Distribution at year-end 2005


Hotels

United States (48 states)

519(47,440 rooms)

Non-U.S. (2 countries)

Americas (Non-U.S.)

5(559 rooms)

 

SpringHill Suitesis our all-suite brand in the moderate-priceupper-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 free in-room high-speed internet access,The Market, a self-serve food store open 24 hours a day, complimentary continental“Suite Seasons” hot breakfast buffet and exercise facilities. During 2005, most properties installed a new bedding package featuring plusher mattresses and enhanced bedding components, including cotton-rich linens. There were 98137 properties (16,002 rooms) located in the United States, Canada and CanadaMexico at January 3, 2003.year-end 2005.

Extended-Stay Lodging

 

Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and lifeexperience all the comforts of home while away from home.traveling. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. During 2005, most properties installed a new bedding package featuring plusher mattresses and enhanced bedding components, including cotton-rich linens. A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 416490 Residence Inn hotels across North America. Through year-end 2005, 95 Residence Inns have been refreshed and feature modern residential touches including a work station/breakfast bar separating the kitchen from the living room, brighter color schemes and updated kitchens and bathrooms. An additional 24 properties are scheduled to be refreshed in 2006.

 

Residence Inn

Geographic Distribution at January 3, 2003year-end 2005


  

Hotels



   

United States (47 states and the District of Columbia)

  

416

473
  

(49,00256,204 rooms)

   
   

CanadaNon-U.S. (2 countries)

  

11

(1,495 rooms)


   

MexicoAmericas (Non-U.S.)

  

1

17
  

(762,240 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, free in-room high-speed internet access and laundry facilities. During 2005, most properties installed a new bedding package featuring plusher mattresses and enhanced bedding components, including cotton-rich linens. At January 3, 2003, 104year-end 2005, 122 TownePlace Suites (10,704(12,303 rooms) were located in 3036 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. In late 2002,managers and franchise agreements. The total number of units leased at year-end 2005, directly by Marriott ExecuStay also became a corporate housing franchisor.was approximately 2,000 and more than 3,000 were leased by our 14 franchisees. At year-end 2005, Marriott ExecuStay managed seven markets and had franchise relationships in 38 more, brining the total market count to 45.

 

Marriott Executive Apartment and Other.Apartments.We provide temporary housing (serviced apartments)(“Serviced Apartments”) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some serviced apartmentsServiced Apartments operate under theMarriott Executive Apartmentsbrand, which is designed specifically for the long-term international traveler. At January 3, 2003, 11 serviced apartmentyear-end 2005, four Serviced Apartments properties (2,007 units), including sixand 13 Marriott Executive Apartments (2,852 rooms total) were located in seven10 countries and territories. All Marriott Executive Apartments are located outside the United States.

 

Timeshare

 

Marriott Vacation Club Internationaldevelops, sellsWe develop, operate, and operates vacation timesharing resorts. Revenues are generated from three primary sources: (1) selling fee simplemarket timeshare, fractional, and other forms of timeshare intervals, (2) operating the resorts and (3) financing consumer purchases of timesharing intervals.

whole ownership properties under four brand names. Many timesharing resorts are located adjacent to MarriottMarriott-operated 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 2,3002,600 Marriott hotels worldwide. Our Timeshare segment operates under the following four brands:

 

The 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. Customers may purchase a one week interval or more at each resort. In 2002 we continued to growMarriott Grand Residence Club(launchedover 40 locations worldwide, this brand draws United States and international customers who vacation regularly with a focus on family, relaxation and recreational activities. In the United States, MVCI is located in 2001), our “fractional share” business line,Las Vegas, Nevada; in beach and/or golf communities in Arizona, California, the Carolinas, Florida and initiated salesHawaii, and 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 expandski resorts in California, Colorado and Utah. Internationally, MVCI has resorts in Aruba, France, Spain, St. Thomas, U.S. Virgin Islands and Thailand.

The Ritz-Carlton Club timeshare business line (launchedbrand is a luxury-tier real estate fractional ownership and personal residence ownership 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 all Ritz-Carlton Clubs. This brand is offered in 2000) by initiating sales of bothski, golf and spa membershipsbeach destinations in Colorado, St. Thomas, U.S. Virgin Islands, and Florida. Customers typically purchase three to five week intervals, but may also purchase a residence outright.

Grand Residences by Marriott is an upper-quality-tier fractional ownership and personal residencesresidence ownership brand for corporate and leisure customers. This brand is currently offering ownership in Jupiter, Florida. Lastly, we initiated sales at four new Marriott Vacation Club International locations: Canyon Villasprojects located in Lake Tahoe, California, and London, England. Customers typically purchase three to 13 week intervals.

 

7


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 (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. Horizons resorts are located in Orlando, Florida, and Branson, Missouri. Customers may purchase a one week interval or more at each resort.

We expect that our moderate tier vacationfuture timeshare growth will increasingly reflect opportunities presented by partnerships, joint ventures, and other business structures. We also anticipate that whole ownership business line.products, especially of the luxury Ritz-Carlton Club brand, will be the fastest growth opportunity within the Timeshare segment. In 2005, we initiated timeshare interval sales at Marriott Vacation Club International’s Frenchman’s Cove in St. Thomas, U.S. Virgin Islands, which is expected to open in late 2006. In addition, the following resorts opened for operations in 2005 under the Marriott Vacation Club International brand: Surf Watch in Hilton Head, South Carolina and Las Vegas Chateau in Las Vegas, Nevada.

 

Marriott Vacation Club International’s owner base continues to expand, with 223,000approximately 323,000 owners at year end 2002,year-end 2005, compared to 195,000 in 2001.approximately 283,600 at year-end 2004.

 

Timeshare (all brands)

Geographic Distribution at January 3, 2003


    

Resorts


  

Units


Timeshare (all brands)

Geographic Distribution at year-end 2005


  Resorts

  Units

Continental United States

    

39

  

5,692

  38  7,413

Hawaii

    

4

  

705

  4  1,059

Caribbean

    

4

  

477

  4  833

Europe

    

5

  

643

  5  885

Asia

    

1

  

54

  1  144
    
  
  
  

Total

    

53

  

7,571

  52  10,334
    
  
  
  

 

Other Activities

 

Marriott Golf manages 2628 golf course facilities as part of our management of hotels and for other golf course owners.

 

We operate 1817 systemwide hotel reservation centers, 11 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. Additionally, we focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further™ Best Rate Guarantee, which gives customers access to the same rates whether they book through our telephone reservation system, our web site or any other reservation channel; our strong Marriott Rewards loyalty program; and our information-rich and easy to use Marriott.com web site all encourage customers to make reservations using the Marriott web site. We have complete control over our inventory and pricing and utilize online and offline agents on an as-needed basis. With over 2,700 hotels, economies of scale enable us to minimize costs per occupied room, drive profits for our owners and maximize our fee revenue.

 

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 brandedMarriott-branded properties on a fee basis.

 

Competition

 

We encounter strong competition both as a lodging operator and as a franchisor. 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 that rely exclusively on franchising. There are approximately 600615 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. ManagementOur 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, over2005, 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 threefive 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.operators, although branding is more common for new hotel development. 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 eight8.5 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 generate higher occupancies and Revenue per Available Room (REVPAR)(“RevPAR”) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. Approximately 36 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 generally adequate to preserve the competitive position and earning power of the hotels. Wehotels and timeshare properties.

While service excellence is Marriott’s hallmark, we continually look for new ways to delight our guests. Currently, we are focused on elevating the Marriott experience beyond that of a traditional hotel stay to a total guest experience that encompasses exceptional style, personal luxury and superior service. This approach to hospitality, “The New Look and Feel of Marriott Now,” is influenced by the world’s foremost innovations in design, technology, culinary expertise, service and comfort. This evolution can be seen across all of our brands, in new and stylish hotel designs, luxurious bedding, exotic destinations, world-class spas and fitness centers and inspired cuisine. Each brand, luxury or moderately priced, will be more upscale and attuned to customer needs than ever before.

In early 2005, we launched Marriott’s At Your Service® program which focuses on the total guest experience from point of reservation to check-out. As part of the pre-arrival planning service, guests receive a personalized e-mail prior to check-in that includes local transportation, weather and restaurant information, as well as directions and maps. At a growing number of hotels and resorts, the service has been expanded as a “virtual concierge.” Guests are able to reserve spa treatments, room service for delivery upon arrival, and other amenities specific to each property. Guests may also striverequest complimentary amenities that each property offers, such as extra pillows, miniature refrigerators and early check-in/late check-out.

Later in 2005 we also streamlined the travel planning and booking process with the addition of Marriott Flexrez to updateAt Your Service. In addition to booking hotel rooms on Marriott.com, our online customers can now find competitive airfare and improvecar rental rates as well.

The vacation ownership industry is one of the productsfastest growing segments in hospitality and servicesis comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry in 1984, we offer.have become a recognized leader in vacation ownership worldwide. Competition in the timeshare, fractional ownership and whole ownership business is based primarily on the quality and location of timeshare resorts, trust in the brand, the pricing of product offerings 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. Approximately 37 percent of our timeshare ownership resort sales come from additional purchases 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 which rely exclusively on franchising.or referrals from existing owners.

 

Marriott Rewards is a frequent guest program with over 1823 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 2227 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In 2005, over 45 percent of our room nights were purchased by Marriott Rewards members. 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.

Discontinued OperationsSynthetic Fuel

 

Marriott Senior Living ServicesOperations

 

InOur synthetic fuel operation currently consists of our Senior Living Services business, we operate both “independent full-service”interest in four coal-based synthetic fuel production facilities (the “Facilities”), two of which are located at a coal mine in Saline County, Illinois, and “assisted living” senior living communities and provide related senior care services. Mosttwo of which are rental communities with monthly rates that depend on the amenities and services provided.located at a coal mine in Jefferson County, Alabama. We areplan to relocate one of the largest U.S. operatorsAlabama Facilities to a coal mine near Evansville, Indiana, over the next 90 days and expect the Facility to be fully operational by May 2006. Production at this Facility will be suspended during the duration of senior living communitiesthe dismantling, transportation and reassembly process. Three of the four plants are held in one entity, Synthetic American Fuel Enterprises II, LLC (“SAFE II”), and one of the quality tier. Marriott International enteredplants is held in a separate entity, Synthetic American Fuel Enterprises I, LLC (“SAFE I”). Section 29 provides tax credits for the production and sale of synthetic fuels produced from coal through 2007 (credits are not available for fuel produced after 2007). Although the Facilities incur significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense.

At both the Alabama and Illinois locations, the synthetic fuel operation has 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, with respect to the Alabama and Illinois locations, the synthetic fuel operation has long-term coal purchase agreements with the owners of the adjacent coal mines and long-term synthetic fuel sales contracts with a number of major utilities, including the Tennessee Valley Authority and Alabama Power Company. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel through 2007, covering approximately 80 percent of the productive capacity of the Facilities at those locations. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into a definitive Agreement on December 30, 2002spot contracts to buy coal from these or other coal mines and sell our Senior Living Services businesssynthetic fuel to Sunrise Assisted Living, Inc. and our remaining communities to CNL Retirement Partners, Inc. (CNL).these or different end users. We expect to completenegotiate similar site lease, coal purchase and synthetic fuel sales contracts for the Indiana site. The long-term contracts can generally be canceled by us in the event that we choose not to operate the Facilities or that the synthetic fuel produced at the Facilities does not qualify for tax credits under Section 29.

Although we anticipate that the coal mines adjacent to the synthetic fuel operation’s production sites will be able to fulfill the Facilities’ requirements for feedstock coal, if our feedstock suppliers become unable to supply the Facilities with enough coal to satisfy our requirements for any reason, we would have to curtail production, which would have a negative impact on our results of operations, or negotiate new coal supply agreements with third parties, which might not be available on similar terms. In addition, the synthetic fuel operation has synthetic fuel sale earlycontracts with approximately a dozen customers, a number of whom have contracted to purchase in 2003. Also,excess of 10 percent of the productive capacity at our Alabama and Illinois locations. Although we expect that those customers could be replaced by other purchasers, we cannot assure that we would be able to enter into replacement contracts on December 30, 2002,equivalent terms. As a result, the failure by one or more of those customers to perform their purchase obligations under those sale contracts could have a material adverse effect on the synthetic fuel operation.

The synthetic fuel operation has 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 a long-term license and binder purchase agreement with Headwaters Incorporated, which permits the operation to utilize a carboxylated polystyrene copolymer emulsion patented by Headwaters and manufactured by Dow Chemical that is mixed with coal to produce a qualified synthetic fuel.

As discussed in greater detail below in Item 1A “Risk Factors,” the tax credits available under Section 29 for the production and sale of synthetic fuel in any given year are phased out if oil prices in that year are above certain thresholds. As a result of high oil prices in the first several weeks of 2006, the synthetic fuel operation elected to suspend production of synthetic fuel in mid-January 2006. On February 17, 2006, we purchased 14 senior living communitiesrestarted production and have taken steps to minimize operating losses that could occur if more than a majority of the tax credits are phased out in 2006 as a result of high oil prices. We will continue to monitor the situation, and if circumstances warrant, we may again elect to suspend production in the future.

Our Investment

We acquired our initial interest in SAFE I and SAFE II from PacifiCorp Financial Services (“PacifiCorp”) in October 2001 for approximately $15$46 million in cash, plusand we began operating the assumptionFacilities in the first quarter of $2272002. We also make annual payments to PacifiCorp based on the amount of tax credits produced, up to a certain threshold.

On June 21, 2003, we sold an approximately 50 percent ownership interest in both SAFE I and SAFE II. We received cash and promissory notes totaling $25 million in debt, from an unrelated owner. We planat closing, and we receive additional proceeds based on the actual amount of tax credits allocated to restructure the debt and sell the 14 communities in 2003. We now report our Senior Living Services business as discontinued operations. See the Notes to Consolidated Financial Statements.purchaser.

 

At January 3,As a result of a put option associated with the June 21, 2003 sale of a 50 percent ownership interest, we operated 129 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

     
  

(1)Units represent independent living apartments plus beds in assisted living and nursing centers.

At January 3,consolidated the two synthetic fuel joint ventures from that date through November 6, 2003. Effective November 7, 2003, because the put option was voided, we operated 42 independent full-service senior living communities, which offer both independent living apartmentsbegan accounting for the synthetic fuel joint ventures using the equity method of accounting. Beginning March 26, 2004, as a result of adopting FIN 46(R), “Consolidation of Variable Interest Entities,” we have again consolidated the synthetic fuel joint ventures, and personal assistance units for seniors. Mostwe reflect our partner’s share of these communities also offer licensed nursing care.the operating losses as minority interest.

 

AtOn October 6, 2004, we entered into amendment agreements with our synthetic fuel partner that resulted in a shift in the allocation of tax credits between us. Our partner increased its allocation of tax credits generated by the SAFE I synthetic fuel facility from approximately 50 percent to 90 percent through March 31, 2005, and paid a higher price per tax credit to us for that additional share of tax credits. Effective April 1, 2005, our partner’s share of the tax credits from SAFE I returned to approximately 50 percent. Also on October 6, 2004, our partner reduced its allocation of tax credits generated by the three SAFE II synthetic fuel facilities from approximately 50 percent to roughly 8 percent through December 31, 2004 and to 1 percent from January 3, 2003,1, 2005 through May 31, 2005. Effective June 1, 2005, our partner’s share of the tax credits from the SAFE II facilities returned to approximately 50 percent.

In the 2005 third quarter, we entered into another amendment agreement with our synthetic fuel partner that gave our partner the right to have its approximately 50 percent ownership interest in SAFE II redeemed on November 30, 2005, or December 31, 2005. Our partner exercised the option to have its interest in SAFE II redeemed effective on December 31, 2005, subsequent to our 2005 fiscal year-end. As a result, we now own all of the interests in SAFE II. In consideration for the redeemed interest, we forgave the remaining outstanding promissory note balance of approximately $8 million related to our partner’s initial purchase of the interest in SAFE II and our partner was relieved of the obligation to make further earn-out payments with respect to SAFE II for periods after December 31, 2005. On that date, 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 is a quality-tier assisted living concepteliminated our partner’s minority interest in SAFE II 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.was $7 million.

 

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


TermsAs a result of the Senior Living Services management agreements vary but typically include base management fees, ranging from fourredemption of our partner’s interest in SAFE II, with respect to sixthe period beginning January 1, 2006, we will be allocated 100 percent of revenues, central administrative services reimbursements and incentive management fees. Such agreements are generally for initial periods of five to 30 years,the operating losses associated with options to renew for up to 25 additional years. Under the leases covering certainFacilities owned by SAFE II, we will receive 100 percent of the communities, we pay the owner fixed annual rent plus additional rent equaltax credits generated by those Facilities, and production decisions with respect to a percentage of the amount by which annual revenues exceed a fixed amount.those Facilities will be made based on our 100 percent ownership.

 

Marriott Distribution ServicesInternal Revenue Service Determinations

 

Prior to its discontinuance, MDS was aOn November 7, 2003, the United States limited-line distributor of foodInternal Revenue Service (“IRS”) issued private letter rulings to the synthetic fuel joint ventures confirming that the synthetic fuel produced by the Facilities is a “qualified fuel” under Section 29 and related supplies to Marriott businesses and unrelated third parties. Inthat the third quarter of 2002, we completed a strategic reviewresulting tax credit may be allocated among the members of the distribution 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 of four facilities, we have exited the distribution services business. Accordingly, we now report this business in discontinued operations.synthetic fuel joint ventures.

 

In July 2004, IRS field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp that included a challenge to the placed-in-service dates of the three SAFE II synthetic fuel facilities. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed in service before July 1, 1998. On June 7, 2005, the IRS National Office issued a Technical Advice Memorandum confirming that the three SAFE II synthetic fuel facilities that were under IRS review met the placed-in-service requirement under Section 29 of the Internal Revenue Code.

Employee Relations

 

At January 3, 2003,year-end 2005, we had approximately 144,000143,000 employees. Approximately 7,5009,000 employees were represented by labor unions. We believe relations with our employees are positive.

 

Other PropertiesEnvironmental Compliance

 

In additionOur compliance with laws and regulations relating to environmental protection and discharge of hazardous materials has not had a material impact on our capital expenditures, earnings or competitive position, and we do not anticipate any material impact from such compliance in the operating properties discussed above, we lease two office buildings with combined space of approximately 930,000 square feet in Bethesda, Maryland, where we are headquartered.future.

Internet Address and Company SEC Filings

 

Our internet address iswww.marriott.com. On the investor relations portion of our web site,www.mariott.com/investor, 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 Part III, Item 10 of this report for information about our executive officers.

Item 1A. Risk Factors.

Forward-Looking Statements

We make forward-looking statements in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about 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 and 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,” or similar expressions.

Forward-looking statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those expressed in these forward-looking statements, including risks and uncertainties described below and other factors that we describe from time to time in our periodic filings with the SEC. We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Risks and Uncertainties

We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. 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.

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers.We generally operate in markets that contain numerous competitors. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and to 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 those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share and reduce our earnings.

We are subject to the range of operating risks common to the hotel, timeshare and corporate apartment industries. The profitability of the hotels, vacation timeshare resorts and corporate apartments that we operate or franchise may be adversely affected by a number of factors, including:

(1)the availability of and demand for hotel rooms, timeshares and apartments;

(2)international, national and regional economic and geopolitical conditions;

(3)the impact of war and terrorist activity (including threats of terrorist activity) and heightened travel security measures instituted or business and leisure travel in response to war, terrorist activity or threats;

(4)the desirability of particular locations and changes in travel patterns;

(5)travelers’ fears of exposures to contagious diseases, such as Severe Acute Respiratory Syndrome (“SARS”) and Avian Flu;

(6)the occurrence of natural disasters, such as earthquakes, tsunamis or hurricanes;

(7)taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures and costs;

(8)the availability and cost of capital to allow us and potential hotel owners and joint venture partners to fund investments;

(9)regional and national development of competing properties;

(10)increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business, including recent increases in energy costs and further increases forecasted by the Department of Energy for the winter of 2006; and

(11)organized labor activities, including those in New York, San Francisco, Los Angeles, Waikiki Beach and Boston where some of our hotels are subject to collective bargaining agreements that will expire in 2006.

Any one or more of these factors could limit or reduce the demand, and therefore the prices we are able to obtain, for hotel rooms, timeshare units and corporate apartments or could increase our costs and therefore reduce the profit of our lodging businesses. In addition, reduced demand for hotels could also give rise to losses under loans, guarantees and minority equity investments that we have made in connection with hotels that we manage. Even where such factors do not reduce demand, our profit margins may suffer if we are unable to fully recover increased operating costs from our customers.

The uncertain pace and duration of the current growth environment in the lodging industry will continue to impact our financial results and growth.Both the Company and the lodging industry were hurt by several events occurring over the last few years, including the global economic downturn, the terrorist attacks on New York and Washington in September 2001, the global outbreak of SARS in 2003 and military action in Iraq. Business and leisure travel decreased and remained depressed as some potential travelers reduced or avoided discretionary travel in light of increased delays and safety concerns and economic declines stemming from an erosion in consumer confidence. Although both the lodging and travel industries have now largely recovered, the duration, pace and full extent of the current growth environment remains unclear. Moreover, the aftermath of Hurricanes Katrina, Rita, and Wilma and any negative long-term effect that Gulf Coast recovery efforts may have on the U.S. economy could set back or impede the progress of the industry’s and our recovery. Accordingly, our financial results and growth could be harmed if that recovery stalls or is reversed.

Our lodging operations are subject to international, national and regional conditions. Because we conduct our business 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 economic recovery in the United States, the prospects of improving economic performance in other regions, the unknown pace of any business travel recovery that results and the occurrence of any future incidents in the countries in which we operate.

Actions by organized labor could reduce our profits in certain major market cities. Employees at certain of our managed hotels are covered by collective bargaining agreements that will expire in 2006. These agreements affect 14 hotels in New York, San Francisco, Los Angeles, Waikiki Beach and Boston. Potential labor activities could cause the diversion of business to hotels that are not involved in the negotiations, loss of group business in the affected cities and perhaps other cities, and/or increased labor costs. In 2005, affected hotels in these cities contributed approximately 2 percent of our combined base management, incentive management and franchise fee revenue. In 2005, we earned approximately 6 percent of our combined base management, incentive management and franchise fee revenue from downtown hotels (union and non-union) in affected markets.

Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements, franchise agreements and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue. Moreover, we may not be able to enter into future collaborations, or to renew or enter into agreements in the future, on terms that are as favorable to us as those under existing collaborations and agreements.

We may have disputes with the owners of the hotels that we manage or franchise. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners but have not always been able to do so. Failure to resolve such disagreements has in the past resulted in litigation, and could do so in the future.

Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments.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 is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, changes in growth in demand compared to projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure.

We depend on capital to buy and maintain hotels, and we may be unable to access capital when necessary. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and maintenance 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 guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to recycle and raise new capital.

Our development activities expose us to project cost, completion and resale risks. We develop new hotel, timeshare, fractional ownership and personal residence ownership properties, both directly and through partnerships, joint ventures, and other business structures with third parties. Our involvement in the development of properties presents a number of risks, including that (1) construction delays, cost overruns, or acts of God such as earthquakes, hurricanes, floods or fires may increase overall project costs or result in project cancellations; (2) we may be unable to recover development costs we incur for projects that are not pursued to completion; (3) conditions within capital markets may limit our ability, or that of third parties with whom we do business, to raise capital for completion of projects that have commenced or development of future properties; and (4) properties that we develop could become less attractive due to changes in mortgage rates, market absorption, or oversupply, with the result that we may not be able to sell such properties for a profit or at the prices we anticipate.

Development activities which involve our co-investment with third parties may further increase completion risk or result in disputes which could increase project costs or impair project operations. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business, and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. Although we actively seek to minimize such risks before investing in partnerships, joint ventures, or similar structures, actions by another investor may present additional risks of project delay, increased project costs, or operational difficulties following project completion.

In the event of damage to or other potential losses involving properties that we own, manage or franchise, potential losses may not be covered by insurance. We have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary. 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 coverage at reasonable rates. There are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods or terrorist acts, that may be uninsurable or may be too expensive to justify insuring against. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, we may carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment or that of hotel owners or in some cases could also result in certain losses being totally uninsured. As a result, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt or other financial obligations related to the property.

Risks relating to acts of God, contagious disease, terrorist activity and war could reduce the demand for lodging, which may adversely affect our revenues. Acts of God, such as hurricanes, earthquakes and other natural disasters and the spread of contagious diseases, such as SARS and Avian Flu, in locations where we own, manage or franchise significant properties and areas of the world from which we draw a large number of customers can cause a decline in the level of business and leisure travel and reduce the demand for lodging. Wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms, timeshare units and corporate apartments or limit the prices that we are able to obtain for them, both of which could adversely affect our revenues.

An increase in the use of third-party internet reservation services could adversely impact our revenues. Some of our hotel rooms are booked through internet travel intermediaries, such as Travelocity.com®, Expedia.com® and Priceline.com®, serving both the leisure and, increasingly, the corporate travel and group meeting sectors. While Marriott’s Look No Further® Best Rate Guarantee has greatly reduced the ability of these internet travel intermediaries to undercut the published rates of Marriott hotels, these internet travel intermediaries continue their attempts to commoditize hotel rooms by aggressively marketing to price-sensitive travelers and corporate accounts and increasing the importance of general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their travel services rather than to our lodging brands. Although we expect to continue to maintain and even increase the strength of our brands in the online marketplace, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be harmed.

Changes in privacy law could adversely affect our ability to market our products effectively. Our Timeshare segment, and to a lesser extent our other lodging segments, rely on a variety of direct marketing techniques, including telemarketing and mass mailings. Recent initiatives, such as the National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, have created some concern about the continuing effectiveness of telemarketing and mass mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain lists of potential customers from travel service providers with whom we have substantial relationships and market to some individuals on these lists directly. If the acquisition of these lists were outlawed or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.

Operating risks at our synthetic fuel operations could reduce the tax benefits generated by those facilities. The Company owns an interest in four synthetic fuel production facilities. The Internal Revenue Code provides tax credits for the production and sale of synthetic fuels produced from coal through 2007. Although our synthetic fuel facilities incur significant losses, those losses are more than offset by the tax credits generated, which reduce our income tax expense. Problems related to supply, production and demand at any of the synthetic fuel facilities, the power plants and other end users that buy synthetic fuel from the facilities, or the coal mines from which the facilities buy coal could diminish the productivity of our synthetic fuel operations and adversely impact the ability of those operations to generate tax credits.

High oil prices in 2006 and beyond could reduce or eliminate the tax credits generated by our synthetic fuel facilities. The tax credits available under the Internal Revenue Code for the production and sale of synthetic fuel in any given year are phased out if the Reference Price of a barrel of oil for that year falls within a specified price range. The “Reference Price” of a barrel of oil is an estimate of the annual average wellhead price per barrel of domestic crude oil and is determined for each calendar year by the Secretary of the Treasury by April 1 of the following year. In 2003 and 2004, the Reference Price was approximately equal to 89 percent of the average price in those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil. The price range within which the tax credit is phased out was set in 1980 and is adjusted annually for inflation. In 2004, the phase-out range was $51.35 to $64.47. Because the Reference Price for a barrel of oil for 2004 was below that range, at $36.75, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2004.

Assuming a 2 percent inflation adjustment factor for 2005 and assuming that the ratio of the Reference Price to the average wellhead price of the benchmark NYMEX futures contract remains approximately the same in 2005 as it was in 2004, we currently estimate that, because the average NYMEX price for January through December 2005 was approximately $56.71, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2005. Assuming a 2 percent inflation adjustment factor for each of 2005 and 2006 and assuming that the ratio of the Reference Price to the average price of the benchmark NYMEX futures contract remains the same in 2006 as it was in 2004, we currently estimate that the tax credits available for production and sale of synthetic fuel in 2006 would begin to be phased out if the average price of the benchmark NYMEX futures contract in 2006 exceeds approximately $60 and would be fully phased out if the average price of the benchmark NYMEX futures contract in 2006 exceeds approximately $75. The average price of the benchmark NYMEX futures contract for 2006, through February 16, 2006 was $64.36. As a result of high oil prices in the first several weeks of 2006, the synthetic fuel operation elected to suspend production of synthetic fuel in mid-January 2006. On February 17, 2006, we restarted production and have taken steps to minimize operating losses that could occur if more than a majority of tax credits are phased out in 2006 as a result of high oil prices. We will continue to monitor the situation, and if circumstances warrant, we may again suspend production in the future.

We cannot predict with any accuracy the future price of a barrel of oil. If the Reference Price of a barrel of oil in 2006 or 2007 exceeds the applicable phase-out threshold for those years, the tax credits generated by our synthetic fuel facilities in those years could be reduced or eliminated, which would have a negative impact on our results of operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Company-operated properties are described in Part I, Item 1, “Business” earlier in this report. We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance.maintenance and periodic capital improvements. Most of our regional offices and reservation centers, both domestically and internationally, are located in leased facilities. We also lease space in six office buildings with combined space of approximately 1.3 million square feet in Maryland and Florida where our corporate, Ritz-Carlton and Marriott Vacation Club International headquarters are located.

ITEMItem 3. LEGAL PROCEEDINGSLegal Proceedings.

 

LegalFrom time to time, we are subject to certain legal proceedings are incorporated by reference to the “Contingencies” footnoteand 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 statements set forth in Part II, condition or operating results.

Item 8, “Financial Statements and Supplementary Data.”

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders.

 

None.

10

Part II


 

Part IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

ITEM5. MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

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

  

2004

            

First Quarter

  $46.80  $40.64  $0.075

Second Quarter

   51.50   41.82   0.085

Third Quarter

   50.48   44.95   0.085

Fourth Quarter

   63.99   48.15   0.085

 

      

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 Share


   High

  Low

  

2005

            

First Quarter

  $68.00  $60.71  $0.085

Second Quarter

   70.01   60.40   0.105

Third Quarter

   70.78   60.41   0.105

Fourth Quarter

   68.32   58.01   0.105

 

At January 31, 2003,February 10, 2006, there were 233,802,816250,352,719 shares of Class A Common Stock outstanding held by 55,12245,521 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 $66.97 on December 30, 2005 and $62.98 on December 31, 2004. All prices are reported on the consolidated transaction reporting system.

 

11Fourth Quarter 2005 Issuer Purchases of Equity Securities


 

ITEM(in millions, except per share amounts)

Period


  Total
Number of
Shares
Purchased


  Average
Price per
Share


  

Total Number of

Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)


  

Maximum

Number of Shares

That May Yet Be

Purchased Under

the Plans or

Programs(1)


September 10, 2005 – October 7, 2005

  2.3  $61.47  2.3  21.0

October 8, 2005 – November 4, 2005

  1.6   60.35  1.6  19.4

November 5, 2005 – December 2, 2005

  1.1   62.98  1.1  18.3

December 3, 2005 – December 30, 2005

  0.4   67.05  0.4  17.9

(1)On August 4, 2005, we announced that our Board of Directors increased by 25.0 million shares the authorization to repurchase our common stock for a total outstanding authorization of approximately 28.8 million shares on that date. That authorization is ongoing and does not have an expiration date. We repurchase shares in the open-market and in privately negotiated transactions.

Item 6. SELECTED HISTORICAL FINANCIAL DATASelected Financial Data.

 

The following table presents a summary of selected historical financial data for the Company derived from our financial statements as of and for the fiveour last seven fiscal years ended January 3, 2003.years.

 

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

   Fiscal Year2

($ in millions, except per share data)

 

  2005

  2004

  2003

  2002

  2001

  2000

  1999

Income Statement Data:

                            

Revenues1

  $11,550  $10,099  $9,014  $8,415  $7,768  $7,911  $7,026
   

  

  

  


 


 


 

Operating income1

  $555  $477  $377  $321  $420  $762  $621
   

  

  

  


 


 


 

Income from continuing operations

  $668  $594  $476  $439  $269  $490  $399

Discontinued operations

   1   2   26   (162)  (33)  (11)  1
   

  

  

  


 


 


 

Net income

  $669  $596  $502  $277  $236  $479  $400
   

  

  

  


 


 


 

Per Share Data:

                            

Diluted earnings per share from continuing operations

  $2.89  $2.47  $1.94  $1.74  $1.05  $1.93  $1.51

Diluted earnings (loss) per share from discontinued operations

   —     .01   .11   (.64)  (.13)  (.04)  —  
   

  

  

  


 


 


 

Diluted earnings per share

  $2.89  $2.48  $2.05  $1.10  $.92  $1.89  $1.51
   

  

  

  


 


 


 

Cash dividends declared per share

  $.400  $.330  $.295  $.275  $.255  $.235  $.215
   

  

  

  


 


 


 

Balance Sheet Data (at end of year):

                            

Total assets

  $8,530  $8,668  $  8,177  $  8,296  $  9,107  $  8,237  $  7,324

Long-term debt1

   1,681   836   1,391   1,553   2,708   1,908   1,570

Shareholders’ equity

   3,252   4,081   3,838   3,573   3,478   3,267   2,908

Other Data:

                            

Base management fees1

   497   435   388   379   372   383   352

Franchise fees1

   329   296   245   232   220   208   180

Incentive management fees1

   201   142   109   162   202   316   268

1The current year and prior year balances have been adjusted toBalances reflect our Senior Living Services and Distribution Services businesses as discontinued operations.

2Fiscal year 2002 included 53 weeks; all otherAll fiscal years included 52 weeks, except for 2002, which included 53 weeks.

3Systemwide sales comprise revenues generated from guests at managed, franchised, owned, and leased hotels and our Synthetic Fuel business. We consider systemwide sales to be a meaningful indicator of our performance because it measures the growth in revenues of all of the properties that carry one of the Marriott brand names. Our growth in profitability is in large part driven by such overall revenue growth. Nevertheless, systemwide sales should not be considered an alternative to revenues, operating profit, segment financial results, net income, cash flows from operations, or any other operating measure prescribed by accounting principles generally accepted in the United States. In addition, systemwide sales may not be comparable to similarly titled measures, such as sales and revenues, which do not include gross sales generated by managed and franchised properties.

4We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, interest income or income taxes.

12


ITEMItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

                OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations.

 

GeneralBUSINESS AND OVERVIEW

We are a worldwide operator and franchisor of 2,741 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 13 separate brand names in 67 countries and territories. 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 segment: (1) selling timeshare intervals and personal residences, (2) operating the resorts, and (3) financing customer purchases of timesharing intervals. In addition, we earn revenues from the limited number of hotels we own and lease and we earn revenues and generate tax credits from our synthetic fuel operations.

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 and losses as well as equity earnings or losses from our joint ventures and divisional general, administrative and other expenses to each of our segments.

Similar to conditions that existed last year, lodging supply growth in the United States was low during 2005, while demand growth was high. As a result, both occupancies and average daily rates continued to rise. Transient demand, both business and leisure, was strong in 2005, and we experienced particularly robust pricing power associated with that demand. In addition, our group rates are continuing to increase as business negotiated in earlier years at lower rates is being replaced with business negotiated at higher rates. In the United States, demand was strongest in the Eastern and Western regions, while the Midwestern and South Central regions experienced more moderate increases in demand. Demand was also strong in Hawaii.

 

The following discussion presents an analysisweak U.S. dollar, in relation to other currencies, helped increase travel, versus the prior year, into the United States. In addition, we saw increased demand associated with U.S. vacationers who were also impacted by the weak U.S. dollar and traveled domestically instead of resultsabroad. Outside of our operations for fiscal years ended January 3, 2003, December 28, 2001the United States we experienced stronger demand versus the prior year, particularly in China, Hong Kong, the Middle East, Mexico and December 29, 2000. Systemwide sales include salesthe Caribbean. Demand in Europe and South American countries continues to remain less robust, as some economies continue to emerge from our franchised properties, in addition to our owned, leased and managed properties.a slowdown.

 

See Part I, Item 1A, “Risk Factors” of this report for important information regarding forward-looking statements made in this report and risks and uncertainties that the Company faces.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for 2005, 2004 and 2003.

 

Continuing Operations

 

Revenues

20022005 Compared to 20012004

 

IncomeRevenues increased 14 percent to $11,550 million in 2005 from continuing$10,099 million in 2004, as a result of strong demand for hotel rooms worldwide. Year-over-year RevPAR increases were driven primarily by rate increases and to a lesser extent by occupancy improvement. The increase in revenue versus the prior year also reflects recognition in 2005 of $14 million of incentive fees that were calculated based on prior period results, but not earned and due until 2005. Higher timeshare interval, fractional, and whole ownership sales and services revenue reflecting higher financially reportable development revenue also improved our 2005 revenues. In addition, revenues increased due to the consolidation of our synthetic fuel operations from the start of the 2004 second quarter which resulted in the recognition of revenue for all of 2005 versus only three quarters in 2004, as we accounted for the synthetic fuel operations using the equity method of accounting in the 2004 first quarter. Further, owned and leased revenue increased significantly, primarily as a result of the purchase of 13 formerly managed properties (see the “CTF Holdings Ltd.” discussion later in this report under the “Acquisitions” caption in the “Liquidity and Capital Resources” section).

The 14 percent increase in total revenue includes $743 million of increased cost reimbursements revenue, to $7,671 million in 2005 from $6,928 million in the prior year. This revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon the costs incurred with no added mark-up, this revenue and related expense have no impact on either our operating income or net income. The increase in reimbursed costs is primarily attributable to the growth in the number of properties we manage.

We added 45 managed properties (4,519 rooms) to our system in 2005 (including the Whitbread properties more fully discussed later in this report under the caption “Marriott and Whitbread Joint Venture” in the “Liquidity and Capital Resources” section).

2004 Compared to 2003

Revenues increased 12 percent to $10,099 million in 2004 from $9,014 million in 2003, primarily reflecting higher fees related to increased demand for hotel rooms and unit expansion, as well as higher timeshare interval, fractional, and whole ownership sales and services revenue reflecting higher financially reportable development revenue.

Operating Income

2005 Compared to 2004

Operating income increased $78 million to $555 million in 2005 from $477 million in the prior year, primarily as a result of the following items: a combined base, incentive and franchise fee improvement of $154 million reflecting a stronger demand environment; $51 million of stronger timeshare interval, fractional, and whole ownership sales and services revenue net of taxes increased 63 percent to $439 milliondirect expenses reflecting higher financially reportable development revenue; and diluted earnings per share from continuing operations advanced 66 percent to $1.74. Income from continuing operations reflected $208$65 million of tax benefitsstronger owned, leased, corporate housing and other revenue net of direct expenses. The fee improvement versus the prior year also reflects the recognition in 2005 of $14 million of incentive fees that were calculated based on prior period results, but not earned and due until 2005. The increase in owned, leased, corporate housing and other revenue net of direct expenses is primarily attributable to properties acquired in 2005, including the CTF properties, the strong demand environment in 2005, and our receipt in 2005, of a $10 million termination fee associated with one property that left our system.

The favorable items noted above were partially offset by $146 million of increased general and administrative expenses and $46 million of lower synthetic fuel revenue net of synthetic fuel expenses. Increased general and administrative expenses were associated with our Synthetic Fuel businessLodging segments as unallocated general and a $44 million gain on the sale of our investment in Interval International, offset by the $50 million charge to write-down the acquisition goodwill for ExecuStay and the decreased demand for hotels and executive apartments. The comparisons to 2001 reflected the $204 million pretax restructuring and other charges against continuing operations that we recorded in the fourth quarter of 2001.

Sales, which exclude sales from our discontinued Distribution Services and Senior Living Services businesses, increased 8 percent to $8.4 billion in 2002 reflecting the sales for 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 $269 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 operationsadministrative expenses were down slightly compared to the prior year, reflectingyear. The increase in general, administrative and other expenses reflects a decline$94 million pre-tax charge impacting our Full-Service Lodging segment, primarily due to the non-cash write-off of deferred contract acquisition costs associated with the termination of management agreements (discussed more fully later in hotelthis report in the “CTF Holdings Ltd.” discussion under the “Investing Activities Cash Flows” caption in the “Liquidity and Capital Resources” section), and $30 million of pre-tax expenses associated with our bedding incentive program, impacting our Full-Service, Select-Service and Extended-Stay Lodging segments. We implemented the bedding incentive program in 2005 to ensure that guests could enjoy the comfort and luxury of our new bedding by year-end 2005. General and administrative expenses in 2005 also reflect pre-tax performance termination cure payments of $15 million associated with two properties, a $9 million pre-tax charge associated with three guarantees, increased other net overhead costs of $13 million including costs related to the Company’s unit growth, development and systems, and $2 million of increased foreign exchange losses partially offset by revenue from new lodging properties. Systemwide sales, excluding sales from our discontinued businesses were $17.5 billion, flat$5 million of lower litigation expenses. Additionally, in 2004, general and administrative expenses included a $13 million charge associated with the write-off of deferred contract acquisition costs.

Operating income for 2005 includes a synthetic fuel operating loss of $144 million versus $98 million of operating losses in the prior year.year, reflecting increased costs and the consolidation of our synthetic fuel operations from the start of the 2004 second quarter, which resulted in the recognition of revenue and expenses for all of 2005 versus only three quarters in 2004, as we accounted for the synthetic fuel operations using the equity method of accounting in the 2004 first quarter. For additional information, see our “Synthetic Fuel” segment discussion later in this report.

 

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


20022004 Compared to 20012003

 

Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 10 percentOperating income increased $100 million to $477 million in 2004 from $377 million in 2003. The increase in segment financial results and 6 percent higher sales in 2002. Results reflect a $44 million pretax gain related to the sale of our investment in Interval International, increased revenue associated with new properties partially offset by lower feesis primarily due to the decline in demand for hotel rooms. Our revenues from basehigher fees, totaled $379 million, an increase of 2 percent. Franchise fees totaled $232 million, an increase of 5 percentwhich are related both to stronger RevPAR, driven by increased occupancy 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 in 2001.

14


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 rate and occupancy statistics used throughout this report are based on North American properties we operate. Statistics for Fairfield Inn and SpringHill Suites company-operated North American properties are not presented - since these brands only have a few properties that we operate, the information would not be meaningful (identified as nm in the tables below). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties. Systemwide statistics are based on comparable worldwide units reflecting constant foreign exchange rates. Occupancy, average daily rate, and REVPAR for each of our principal established brands are shownto the growth in the following table.

   

Comparable Company-Operated North

American Properties


   

Comparable Worldwide Systemwide


 
   

2002


     

Change vs. 2001


   

2002


   

Change vs. 2001


 

Marriott Hotels, Resorts and Suites

                    

Occupancy

  

 

70.1

%

    

%pts.

  

 

68.7

%

  

0.8

% pts.

Average daily rate

  

$

137.28

 

    

-4.8

%

  

$

126.87

 

  

-4.1

%

REVPAR

  

$

96.25

 

    

-4.8

%

  

$

87.20

 

  

-3.0

%

The Ritz-Carlton Hotels

                    

Occupancy

  

 

66.1

%

    

0.6

%pts.

  

 

67.3

%

  

1.5

% pts.

Average daily rate

  

$

233.40

 

    

-5.2

%

  

$

213.15

 

  

-4.1

%

REVPAR

  

$

154.21

 

    

-4.3

%

  

$

143.47

 

  

-2.0

%

Renaissance Hotels, Resorts and Suites

                    

Occupancy

  

 

65.1

%

    

-0.9

% pts.

  

 

66.6

%

  

1.4

% pts.

Average daily rate

  

$

131.77

 

    

-3.2

%

  

$

107.46

 

  

-3.5

%

REVPAR

  

$

85.80

 

    

-4.5

%

  

$

71.58

 

  

-1.4

%

Courtyard

                    

Occupancy

  

 

69.1

%

    

-2.1

% pts.

  

 

69.3

%

  

-1.2

% pts.

Average daily rate

  

$

94.47

 

    

-5.1

%

  

$

91.24

 

  

-4.0

%

REVPAR

  

$

65.26

 

    

-7.9

%

  

$

63.23

 

  

-5.6

%

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

%

15


Across our Lodging brands, REVPAR for comparable company-operated North American properties declined by an averagenumber of 5.7 percent in 2002. Average room rates for these hotels decreased 4.9 percentrooms, and occupancy declined slightly to 70.1 percent.

International Lodging reported an increase in thestrong timeshare results, of operations, reflecting the impact of the increase in travel in Asia and the United Kingdom. The favorable comparison is also impacted by the restructuring and other charges recorded in 2001.

Marriott Vacation Club International. Financial results increased 24 percent, reflecting a 5 percent increase in contract sales and note sale gains in 2002 of $60 million compared to $40 million in 2001, 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 added systems for customer support.

Lodging Development

Marriott Lodging opened 188 properties totaling over 31,000 rooms across its brands in 2002, while 25 hotels (approximately 4,700 rooms) exited the system. Highlights of the year included:

Thirty-five properties (6,700 rooms), 21 percent of our total room additions for the year, were conversions from other brands.

Approximately 25 percent of new rooms opened were outside the United States.

We added 112 properties (14,500 rooms) to our Select-Service and Extended-Stay Brands.

The opening of new Marriott Vacation Club International properties in France (Disneyland Paris), Spain and a Ritz-Carlton Club in Florida.

At year-end 2002, we had 300 hotel properties 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” abovemainly attributable to strong demand and “Liquidity and Capital Resources” below.

2001 Compared to 2000

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 million 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, $13 million of losses on the anticipated sale of three lodging properties, 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, 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 decline in international travel and restructuring and other charges, partially offset by sales associated with new rooms. Over 35 percent 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 million compared to $22 million in 2000,improved margins, partially offset by higher marketinggeneral and sellingadministrative expenses. General, administrative and other expenses increased $84 million in 2004 to $607 million from $523 million in 2003, primarily reflecting higher administrative expenses in our Full-Service, Select-Service, and severance expenses of nearly $2 millionExtended-Stay segments ($55 million) and Timeshare segment ($24 million), primarily associated with increased overhead costs related to

the Company’s restructuring plan.

Corporate Expenses, Interestunit growth 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

Corporate expenses decreased $31 million in 2002 to $126 million reflecting the following: (i) 2002 items, including higher insurance costs, higher litigation expenses, lower expenses associated with our deferred compensation plan, lower foreign exchange lossestimeshare development, and the continued favorable impact of our cost containment initiatives; (ii) 2001 items, including restructuring charges of $18 million related to severance costs and facilities exit costs, a $35 million write-off of three investments in technology partners (including a $22 million charge recorded in the fourth quarter), $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.

2001 Compared to 2000

Corporate expenses increased $37 million reflecting the impact of restructuring charges of $18 million related to severance costs and facilities exit costs, and other charges related to the fourth quarter write-off of a $22 million investmentreduction in one of our technology partners. In addition to these items, we also recorded $8foreign exchange gains, offset by $6 million of foreign exchange losseslower litigation expenses. Higher general and in prior quarters we recordedadministrative expenses of $84 million also reflect a $13 million write-off of two investmentsdeferred contract acquisition costs as further discussed in technology partners. These charges were partially offset by $11 millionthe “2004 Compared to 2003” caption under the “Select-Service Lodging” heading later 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 of 2001.this report.

 

Gains and Other Income

The following table shows our gains and other income for 2005, 2004, and 2003.

($ in millions)

 

  2005

  2004

  2003

Timeshare note sale gains

  $69  $64  $64

Gains on sales of joint venture investments

   7   19   21

Synthetic fuel earn-out payments received, net

   32   28   —  

Gains on sales of real estate and other

   34   48   21

Other note sale/repayment gains

   25   5   —  

Income from cost method joint ventures

   14   —     —  
   

  

  

   $181  $164  $106
   

  

  

Interest Expense

 

20022005 Compared to 20012004

Interest expense increased $7 million (7 percent) to $106 million in 2005 from $99 million in the prior year, reflecting increased debt levels which helped to facilitate significantly higher capital expenditures and share repurchases in 2005. Interest expense in 2005 reflected our June 2005 Series F Senior Notes issuance, and, versus the prior year, higher commercial paper balances coupled with higher rates. Included within interest expense for 2005 are charges totaling $29 million relating to interest on accumulated cash inflows from owners, in advance of our cash outflows for various programs that we operate on the owners’ behalf, including the Marriott Rewards, Gift Certificates, and Self-Insurance programs. The increase over 2004 is related to higher liability balances and higher interest rates. Partially offsetting these increases were interest expense declines associated with the payoff, at maturity, of both our Series D Senior Notes in April 2005 and Series B Senior Notes in November 2005 and the capitalization of more interest associated with the development of timeshare properties.

2004 Compared to 2003

 

Interest expense decreased $23$11 million to $86$99 million in 2004 from $110 million in the prior year, reflecting the decreaserepayment of $234 million of senior debt in borrowingthe fourth quarter of 2003 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,other subsequent debt reductions, partially offset by lower capitalized interest resulting from the payofffewer projects under construction, primarily related to our Timeshare segment. Included within interest expense for 2004 and 2003 are charges totaling $11 million and $8 million, respectively, associated with programs operated on behalf of commercial paper.owners as described above.

 

Interest Income, Provision for Loan Losses, and Income Tax

 

20022005 Compared to 20012004

 

Interest income, before the provision for loan losses, decreased $67 million (46 percent) to $79 million in 2005 from $146 million in the prior year, primarily reflecting the impact of loans repaid to us. The repayments are described more fully under the “Loan Activity” caption in the “Liquidity and Capital Resources” section later in this report. Our provision for loan losses increased $28$36 million beforeversus the prior year reflecting reserves of $12 million for loans deemed uncollectible at four hotels. The increase in interest income was favorably impacted by amounts recognized which were previously

18


deemed uncollectible. The comparison to 2001 also reflects a $6an $11 million charge for expected guarantee fundings recorded against interest income in the fourth quarter2005 associated with one property and a pre-tax charge of 2001.

Our effective income tax rate for continuing operations decreased to approximately 6.8 percent$17 million in 2002 from 36.1 percent in 2001 primarily2005 due to the impactimpairment of our Synthetic Fuel business. ExcludingDelta Air Lines, Inc. aircraft leveraged lease, as discussed more fully under the impact of Synthetic Fuel, our effective income tax rate for“Investment in Leveraged Lease” caption in the “Liquidity and Capital Resources” section later in this report.

Income from continuing operations before income taxes and minority interest generated a tax provision of $94 million for 2002 was 39.6 percent. Our effective2005, compared to a tax rateprovision of $100 million for discontinued operations decreased from 35.4 percent to 15.7 percent due2004. The difference is primarily attributable to the impact of the taxes associated withsynthetic fuel joint ventures, which generated a net tax benefit of $190 million in 2005, compared to a net tax benefit of $165 million in 2004, and to a lower tax rate before the saleimpact of stockthe Synthetic Fuel segment 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 uncollectible2005, 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 witha higher loan balances, including the loans made to the Courtyard joint venture in the fourth quarterproportion 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. Higher taxes associated with higher pre-tax income in 2005 partially offset these favorable tax impacts. For additional information see the analysis of results of operations for the Synthetic Fuel segment later in this report.

2004 Compared to 2003

Interest income, before the provision for loan losses, increased $17 million (13 percent) to $146 million in 2004 from $129 million in the prior year, reflecting higher loan balances, including the $200 million note collected in the third quarter of 2004 related to the acquisition by Cendant Corporation of our interest in the Two Flags joint venture and higher interest rates. We recognized $9 million of interest income associated with the $200 million note, which was issued early in the 2004 second quarter. Our provision for loan losses for 2004 was a benefit of $8 million and includes $3 million of reserves for loans deemed uncollectible at three hotels, offset by the reversal of $11 million of reserves no longer deemed necessary.

Income from continuing operations before income taxes and minority interest generated a tax provision of $100 million in 2004, compared to a tax benefit of $43 million in 2003. The difference is primarily attributable to the impact of the synthetic fuel joint venture, which generated a tax benefit and tax credits of $165 million in 2004, compared to $245 million in 2003 and to higher pre-tax income. For additional information see the analysis of our results of operations for the Synthetic Fuel segment later in this report.

Equity in Earnings (Losses)

2005 Compared to 2004

Equity in earnings (losses) of equity method investees increased $78 million from a net loss of $42 million in 2004 to net earnings of $36 million in 2005. Twenty-eight million dollars of the increase is attributable to our synthetic fuel joint ventures which we reported as an equity investment in the 2004 first quarter, versus consolidation of the joint ventures for the periods thereafter. For additional information see the analysis of results of operations for the Synthetic Fuel segment later in this report. The remaining $50 million increase from the prior year is primarily attributable to significant 2005 asset sale gains in several joint ventures producing higher earnings from joint ventures and, to a lesser extent, the stronger 2005 lodging demand environment and the mix of investments in each year.

2004 Compared to 2003

Equity in earnings (losses) of equity method investees decreased to a net loss of $42 million in 2004 from a net loss of $7 million in 2003. In 2003, we recognized equity earnings of $24 million associated with our interest in the Two Flags joint venture, while in 2004 we only recognized $6 million of equity earnings due to the redemption of our interest. In addition, we had equity income from our synthetic fuel joint ventures of $10 million in 2003 compared to equity losses of $28 million in 2004. The improved business environment in 2004 and the mix of investments versus the prior year favorably impacted our equity income by $21 million, partially offsetting the aforementioned negative variances. For additional information see the analysis of results of operations for the Synthetic Fuel segment later in this report.

Minority Interest

2005 Compared to 2004

Minority interest increased from a benefit of $40 million in 2004 to a benefit of $45 million in 2005, primarily as a result of the change in the method of accounting for our synthetic fuel operations. For 2004, minority interest reflects our partner’s share of the synthetic fuel losses from March 26, 2004 (when we began consolidating the ventures due to the adoption of FIN 46(R)), through year-end. For 2005, minority interest reflects our partner’s share of the synthetic fuel losses for the entire year. As further described in the “Synthetic Fuel” caption in Part I, Item 1 “Business.” On the first day of our 2006 fiscal year, we redeemed our partner’s interest in SAFE II. Accordingly, in 2006, minority interest will only represent our partner’s share of the losses in SAFE I. For additional information see the analysis of results of operations for the Synthetic Fuel segment later in this report.

2004 Compared to 2003

Minority interest increased from an expense of $55 million in 2003 to a benefit of $40 million in 2004, primarily as a result of the impact of a change in the method of accounting for our synthetic fuel operations. Due to the purchaser’s put option, which expired on November 6, 2003, minority interest for 2003 reflected our partner’s share of the synthetic fuel operating losses and its share of the associated tax benefit, along with its share of the tax credits from the June 21, 2003, sale date through the put option’s expiration date, when we began accounting for the ventures under the equity method of accounting. For 2004, minority interest reflects our partner’s share of the synthetic fuel losses from March 26, 2004 (when we began consolidating the ventures due to the adoption of FIN 46(R)), through year-end. For additional information see the analysis of results of operations for the Synthetic Fuel segment later in this report.

Income from Continuing Operations

2005 Compared to 2004

Income from continuing operations increased $74 million (12 percent) to $668 million in 2005 versus the prior year, and diluted earnings per share from continuing operations increased $0.42 (17 percent) to $2.89. As discussed above in more detail, the increase in income from continuing operations from the prior year is primarily due to the strong demand environment, increased owned, leased and corporate housing and other revenue net of direct expenses (principally reflecting owned and leased properties acquired in the 2005 third quarter), increased timeshare interval, fractional, and whole ownership sales and services revenue net of direct expenses, stronger equity income, higher gains and other income, and lower taxes. As discussed above in more detail, increased general and administrative expenses reflecting, among other things, the write-off of deferred contract acquisition costs in connection with the CTF transaction and expenses associated with our bedding incentive program, lower synthetic fuel revenue net of synthetic fuel expenses, lower interest income, higher interest expense, and a higher loan loss provision partially offset these favorable items.

2004 Compared to 2003

Income from continuing operations increased $118 million (25 percent) to $594 million, and diluted earnings per share from continuing operations increased $0.53 (27 percent) to $2.47. The favorable results were primarily driven by strong hotel demand, new unit growth, strong timeshare results, higher interest income reflecting higher balances and rates, lower interest expense due to debt reductions, lower loan loss provisions, stronger synthetic fuel results and increased gains of $58 million, partially offset by higher income taxes excluding the synthetic fuel impact, and higher general and administrative expenses.

Business Segments

We are a diversified hospitality company with operations in five business segments:

Full-Service, which includes Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts and Bulgari Hotels & Resorts;

Select-Service, which includes Courtyard, Fairfield Inn and SpringHill Suites;

Extended-Stay, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and Marriott Executive Apartments;

Timeshare, which includes the development, marketing, operation and sale of timeshare, fractional, and whole ownership properties under the Marriott Vacation Club International, The Ritz-Carlton Club, Grand Residences by Marriott and Horizons by Marriott Vacation Club brands; and

Synthetic Fuel, which includes our interest in the operation of coal-based synthetic fuel production facilities.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest income, provision for loan losses, and interest expense. With the exception of the 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 in earnings (losses) from our joint ventures and divisional general, administrative and other expenses to each of our segments. Unallocated corporate expenses represent that portion of our general, administrative and other expenses and equity in earnings (losses) that are not allocable to 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.

Revenues

($ in millions)

 

  2005

  2004

  2003

Full-Service

  $7,535  $6,611  $5,876

Select-Service

   1,265   1,118   1,000

Extended-Stay

   608   547   557

Timeshare

   1,721   1,502   1,279
   

  

  

Total Lodging

   11,129   9,778   8,712

Synthetic Fuel

   421   321   302
   

  

  

   $11,550  $10,099  $9,014
   

  

  

Income from Continuing Operations

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $474  $426  $407 

Select-Service

   209   140   99 

Extended-Stay

   65   66   47 

Timeshare

   271   203   149 
   


 


 


Total Lodging financial results

   1,019   835   702 

Synthetic Fuel (after-tax)

   125   107   96 

Unallocated corporate expenses

   (137)  (138)  (132)

Interest income, provision for loan losses and interest expense

   (55)  55   12 

Income taxes (excluding Synthetic Fuel)

   (284)  (265)  (202)
   


 


 


   $668  $594  $476 
   


 


 


Equity in Earnings (Losses) of Equity Method Investees

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $    39  $    10  $8 

Select-Service

   (5)  (17)  (22)

Timeshare

   1   (7)  (4)

Synthetic Fuel

   —     (28)      10 

Corporate

   1   —     1 
   


 


 


   $36  $(42) $(7)
   


 


 


Marriott Lodging

Lodging includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments. 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.

We consider 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.

We added 134 properties (21,611 rooms) and deflagged 25 properties (4,755 rooms) in 2005. Most of the deflagged properties were Fairfield Inn properties.

2005 Compared to 2004

Lodging reported financial results of $1,019 million in 2005, compared to $835 million in 2004, and revenues of $11,129 million in 2005, a 14 percent increase from revenues of $9,778 million in 2004. The results as compared to the prior year reflect a $154 million (18 percent) increase in base, franchise and incentive fees from $873 million in 2004 to $1,027 million in 2005, stronger timeshare sales and services revenue net of direct expenses, stronger owned, leased, corporate housing and other revenue, net of direct expenses, improved equity income and higher gains. The increase in base and franchise fees was driven by higher RevPAR for comparable rooms, primarily resulting from both domestic and international rate increases and new unit growth. Incentive management fees increased $59 million (42 percent) in 2005 versus the prior year, reflecting the impact of increased travel worldwide driving strong property level profits. The increase also reflects recognition in 2005 of $14 million of incentive fees that were calculated based on prior period results, but not earned and due until 2005. In 2005, 50 percent of our managed properties paid incentive fees to us versus 32 percent in 2004. Increased general and administrative expenses of $146 million, as discussed in the earlier “Operating Income” discussion, partially offset these improvements.

Systemwide RevPAR, which includes data from our franchised properties, in addition to our owned, leased and managed properties, for comparable North American properties increased 9.5 percent, and RevPAR for our comparable North American company-operated properties increased 9.8 percent. Systemwide RevPAR for comparable international properties, increased 11.9 percent and RevPAR for comparable international company-operated properties increased 11.0 percent. Worldwide RevPAR for comparable company-operated properties increased 10.1 percent while worldwide RevPAR for comparable systemwide properties increased 9.9 percent. In addition, worldwide comparable managed property-level house profit margins increased 180 basis points.

2004 Compared to 2003

We added 166 properties (27,038 rooms) and deflagged 42 properties (7,335 rooms) from year-end 2003 to year-end 2004. Most of the deflagged properties were Fairfield Inn properties. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of the Ramada International Hotels & Resorts franchised brand.

Lodging reported financial results of $835 million in 2004, compared to $702 million in 2003, and revenues of $9,778 million in 2004, a 12 percent increase from revenues of $8,712 million in 2003. The results reflect a $131 million (18 percent) increase in base, franchise and incentive fees from $742 million in 2003 to $873 million in 2004, favorable Timeshare segment results and increased gains and joint venture results of $36 million. The increase in base and franchise fees was driven by higher RevPAR for comparable rooms, primarily resulting from both domestic and international occupancy and average daily rate increases and new unit growth. In 2004, 32 percent of our managed properties paid incentive fees to us versus 29 percent in the prior year.

Systemwide RevPAR for comparable North American properties increased 8.5 percent, and RevPAR for our comparable North American company-operated properties increased 8.6 percent. Systemwide RevPAR for comparable international properties increased 14.2 percent, and RevPAR for comparable international company-operated properties increased 16.6 percent. The increase in incentive management fees during the year primarily reflects the impact of increased international demand, particularly in Asia and the Middle East, and increased business at properties throughout North America. Worldwide RevPAR for comparable company-operated properties increased 10.5 percent, while worldwide RevPAR for comparable systemwide properties increased 9.6 percent.

Lodging Development

We opened 134 properties totaling 21,611 rooms, across our brands in 2005, and 25 properties (4,755 rooms), predominantly Fairfield Inn properties, were deflagged and exited the system. Highlights of the year included:

We converted 33 properties (5,846 rooms), or 27 percent of our gross room additions for the year, from other brands.

We opened over 20 percent of new rooms outside the United States.

We added 103 properties (12,656 rooms) to our Select-Service and Extended-Stay brands.

We opened two new Marriott Vacation Club International properties in Hilton Head, South Carolina and Las Vegas, Nevada.

We currently have more than 70,000 rooms under construction, awaiting conversion, or approved for development in our development pipeline, and we expect to add approximately 25,000 hotel rooms and timeshare units to our system in 2006. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See the “Forward-Looking Statements” and “Risks and Uncertainties” captions earlier in this report and the “Liquidity and Capital Resources” caption later in this report.

RevPAR

The following tables show, for 2005 and 2004, occupancy, average daily rate and RevPAR for each of our comparable North American principal established brands and for our international properties by either region or brand. We have not presented statistics for company-operated North American Fairfield Inn properties in these tables because we operate only a limited number of properties, as this brand is predominantly franchised and such information would not be meaningful (identified as “nm” in the tables that follow). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties.

For North American properties the occupancy, average daily rate and RevPAR statistics used throughout this report for 2005 include the period from January 1, 2005 through December 30, 2005, the statistics for 2004 include the period from January 3, 2004 through December 31, 2004, and the statistics for 2003 include the period from January 4, 2003 through January 2, 2004 (except in each case, for The Ritz-Carlton and International properties, which includes the period from January 1 through December 31).

   Comparable Company-Operated
North American Properties


  Comparable Systemwide
North American Properties


 
   2005

  Change vs. 2004

  2005

  Change vs. 2004

 

Marriott Hotels & Resorts(1)

               

Occupancy

   73.2% 1.0% pts.  71.0% 1.2% pts.

Average Daily Rate

  $154.84  7.5% $144.03  6.9%

RevPAR

  $113.31  9.0% $102.21  8.7%

The Ritz-Carlton(2)

               

Occupancy

   71.0% 1.9% pts.  71.0% 1.9% pts.

Average Daily Rate

  $287.99  9.2% $287.99  9.2%

RevPAR

  $204.45  12.2% $204.45  12.2%

Renaissance Hotels & Resorts

               

Occupancy

   72.1% 3.0% pts.  71.3% 2.6% pts.

Average Daily Rate

  $149.90  7.8% $140.89  8.3%

RevPAR

  $108.01  12.5% $100.45  12.4%

Composite – Full-Service(3)

               

Occupancy

   72.8% 1.4% pts.  71.0% 1.4% pts.

Average Daily Rate

  $166.58  7.8% $152.81  7.3%

RevPAR

  $121.27  10.0% $108.51  9.6%

Residence Inn

               

Occupancy

   80.0% 1.0% pts.  79.5% 1.1% pts.

Average Daily Rate

  $108.09  7.3% $104.99  6.7%

RevPAR

  $86.46  8.6% $83.47  8.1%

Courtyard

               

Occupancy

   70.7% -0.2% pts.  72.2% 0.6% pts.

Average Daily Rate

  $106.50  9.4% $105.72  7.9%

RevPAR

  $75.32  9.1% $76.31  8.9%

Fairfield Inn

               

Occupancy

   nm  nm   69.5% 2.3% pts.

Average Daily Rate

   nm  nm  $74.47  8.1%

RevPAR

   nm  nm  $51.76  11.7%

TownePlace Suites

               

Occupancy

   75.4% 1.1% pts.  75.8% 1.1% pts.

Average Daily Rate

  $70.52  7.4% $72.11  9.3%

RevPAR

  $53.18  9.1% $54.62  10.8%

SpringHill Suites

               

Occupancy

   74.9% 3.4% pts.  74.0% 2.9% pts.

Average Daily Rate

  $93.89  11.0% $90.43  9.1%

RevPAR

  $70.36  16.3% $66.88  13.5%

Composite – Select-Service and Extended-Stay(4)

               

Occupancy

   73.8% 0.5% pts.  73.8% 1.3% pts.

Average Daily Rate

  $103.70  8.7% $96.11  7.6%

RevPAR

  $76.49  9.4% $70.97  9.5%

Composite – All(5)

               

Occupancy

   73.2% 1.0% pts.  72.7% 1.3% pts.

Average Daily Rate

  $141.14  8.2% $119.12  7.5%

RevPAR

  $103.29  9.8% $86.56  9.5%


(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 properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.

(4)Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.
(5)Composite – All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

   

Comparable Company-Operated

International Properties (1), (2)


  

Comparable Systemwide

International Properties (1), (2)


 
   2005

  Change vs. 2004

  2005

  Change vs. 2004

 

Caribbean and Latin America(3)

               

Occupancy

   73.6% 3.9% pts.  73.0% 4.6% pts.

Average Daily Rate

  $145.78  6.3% $138.31  5.9%

RevPAR

  $107.24  12.1% $101.02  13.1%

Continental Europe(3)

               

Occupancy

   70.5% 0.5% pts.  68.6% 1.0% pts.

Average Daily Rate

  $137.09  2.4% $138.63  4.3%

RevPAR

  $96.69  3.1% $95.10  5.9%

United Kingdom(3)

               

Occupancy

   76.9% 0.1% pts.  74.0% -1.1% pts.

Average Daily Rate

  $182.61  4.8% $162.96  4.6%

RevPAR

  $140.49  4.8% $120.53  3.1%

Middle East and Africa(3)

               

Occupancy

   73.2% 4.0% pts.  71.7% 4.5% pts.

Average Daily Rate

  $116.07  22.5% $114.45  21.2%

RevPAR

  $84.96  29.5% $82.10  29.3%

Asia Pacific(3), (4)

               

Occupancy

   75.8% 0.8% pts.  76.5% 1.5% pts.

Average Daily Rate

  $114.34  12.0% $118.63  12.5%

RevPAR

  $86.63  13.1% $90.79  14.7%

The Ritz-Carlton International

               

Occupancy

   71.6% 3.4% pts.  71.6% 3.4% pts.

Average Daily Rate

  $200.08  12.7% $200.08  12.7%

RevPAR

  $143.30  18.3% $143.30  18.3%

Total Composite International(5)

               

Occupancy

   74.0% 1.5% pts.  73.2% 1.8% pts.

Average Daily Rate

  $137.62  8.7% $136.57  9.1%

RevPAR

  $101.84  11.0% $100.02  11.9%

Total Worldwide(6)

               

Occupancy

   73.4% 1.2% pts.  72.8% 1.4% pts.

Average Daily Rate

  $140.26  8.3% $121.94  7.8%

RevPAR

  $102.94  10.1% $88.72  9.9%


(1)International financial results are reported on a period-end basis, while international statistics are reported on a month-end basis.
(2)The comparison to 2004 is on a currency-neutral basis and includes results for January through December. Excludes North America (except for Worldwide).
(3)Regional information includes the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and Courtyard brands. Does not include The Ritz-Carlton brand.
(4)Excludes Hawaii.
(5)Includes Hawaii.
(6)Includes international statistics for the twelve calendar months ended December 31, 2005 and December 31, 2004, and North American statistics for the fifty-two weeks ended December 30, 2005 and December 31, 2004. Includes the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

   Comparable Company-Operated
North American Properties


  Comparable Systemwide
North American Properties


 
   2004

  Change vs. 2003

  2004

  Change vs. 2003

 

Marriott Hotels & Resorts(1)

               

Occupancy

   72.0% 2.8% pts.  70.1% 2.8% pts.

Average Daily Rate

  $143.70  3.3% $135.15  3.3%

RevPAR

  $103.46  7.4% $94.77  7.6%

The Ritz-Carlton(2)

               

Occupancy

   69.2% 4.3% pts.  69.2% 4.3% pts.

Average Daily Rate

  $257.16  5.9% $257.16  5.9%

RevPAR

  $177.96  12.9% $177.96  12.9%

Renaissance Hotels & Resorts

               

Occupancy

   69.6% 4.3% pts.  69.1% 4.2% pts.

Average Daily Rate

  $135.54  1.7% $128.67  2.3%

RevPAR

  $94.30  8.4% $88.92  8.9%

Composite – Full-Service(3)

               

Occupancy

   71.3% 3.2% pts.  69.9% 3.1% pts.

Average Daily Rate

  $153.66  3.6% $142.80  3.6%

RevPAR

  $109.62  8.4% $99.82  8.4%

Residence Inn

               

Occupancy

   79.0% 2.7% pts.  78.6% 2.9% pts.

Average Daily Rate

  $99.49  3.8% $97.33  3.2%

RevPAR

  $78.59  7.4% $76.52  7.1%

Courtyard

               

Occupancy

   70.3% 3.2% pts.  71.4% 3.3% pts.

Average Daily Rate

  $96.30  4.6% $97.18  4.9%

RevPAR

  $67.66  9.6% $69.35  10.0%

Fairfield Inn

               

Occupancy

   nm  nm   66.6% 1.9% pts.

Average Daily Rate

   nm  nm  $67.97  3.1%

RevPAR

   nm  nm  $45.29  6.2%

TownePlace Suites

               

Occupancy

   74.1% 3.7% pts.  74.9% 4.3% pts.

Average Daily Rate

  $65.77  4.0% $65.18  2.7%

RevPAR

  $48.71  9.5% $48.81  9.0%

SpringHill Suites

               

Occupancy

   69.8% 4.8% pts.  71.5% 4.2% pts.

Average Daily Rate

  $88.53  5.5% $83.97  4.2%

RevPAR

  $61.82  13.2% $60.04  10.6%

Composite – Select-Service and Extended-Stay(4)

               

Occupancy

   72.6% 3.1% pts.  72.2% 3.0% pts.

Average Daily Rate

  $94.52  4.4% $87.89  4.0%

RevPAR

  $68.66  9.1% $63.42  8.5%

Composite – All(5)

               

Occupancy

   71.8% 3.2% pts.  71.2% 3.1% pts.

Average Daily Rate

  $132.36  3.8% $111.49  3.8%

RevPAR

  $95.04  8.6% $79.35  8.5%


(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 properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.

(4)Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.
(5)Composite – All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

   Comparable Company-Operated
International Properties (1), (2)


  Comparable Systemwide
International Properties (1), (2)


 
   2004

  Change vs. 2003

  2004

  Change vs. 2003

 

Caribbean and Latin America(3)

               

Occupancy

   71.2% 4.3% pts.  69.7% 4.3% pts.

Average Daily Rate

  $138.98  8.0% $131.61  7.7%

RevPAR

  $98.91  14.9% $91.76  14.7%

Continental Europe(3)

               

Occupancy

   70.8% 2.8% pts.  68.8% 3.7% pts.

Average Daily Rate

  $130.49  2.6% $130.74  2.2%

RevPAR

  $92.38  6.8% $89.91  8.0%

United Kingdom(3)

               

Occupancy

   76.9% 2.0% pts.  74.4% 2.3% pts.

Average Daily Rate

  $173.48  7.8% $142.47  3.1%

RevPAR

  $133.37  10.7% $106.01  6.4%

Middle East and Africa(3)

               

Occupancy

   73.2% 8.1% pts.  73.2% 8.1% pts.

Average Daily Rate

  $83.44  13.8% $83.44  13.8%

RevPAR

  $61.10  28.1% $61.10  28.1%

Asia Pacific(3), (4)

               

Occupancy

   75.5% 9.8% pts.  76.4% 9.0% pts.

Average Daily Rate

  $96.67  10.5% $99.61  8.2%

RevPAR

  $72.98  27.0% $76.11  22.6%

The Ritz-Carlton International

               

Occupancy

   71.0% 10.3% pts.  71.0% 10.3% pts.

Average Daily Rate

  $205.06  3.8% $205.06  3.8%

RevPAR

  $145.68  21.3% $145.68  21.3%

Total Composite International(5)

               

Occupancy

   73.3% 6.6% pts.  72.9% 6.0% pts.

Average Daily Rate

  $129.35  6.0% $128.44  4.8%

RevPAR

  $94.75  16.6% $93.61  14.2%

Total Worldwide(6)

               

Occupancy

   72.2% 4.0% pts.  71.5% 3.6% pts.

Average Daily Rate

  $131.58  4.3% $114.61  4.1%

RevPAR

  $94.97  10.5% $81.93  9.6%


(1)International financial results are reported on a period-end basis, while international statistics are reported on a month-end basis.
(2)The comparison to 2003 is on a currency-neutral basis and includes results for January through December. Excludes North America (except for Worldwide).
(3)Regional information includes the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and Courtyard brands. Does not include The Ritz-Carlton brand.
(4)Excludes Hawaii.
(5)Includes Hawaii.
(6)Includes international statistics for the twelve calendar months ended December 31, 2004 and December 31, 2003, and North American statistics for the fifty-two weeks ended December 31, 2004 and January 2, 2004. Includes the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

Full-Service Lodging includes ourMarriott Hotels & Resorts,The Ritz-Carlton,Renaissance Hotels &Resorts,Ramada International andBulgari Hotels & Resorts brands. As discussed more fully earlier in this report in Part I, under the Ramada International caption in the Item 1 “Business” section, we sold Ramada International in 2004.

            Annual Change

($ in millions)

 

  2005

  2004

  2003

  2005/2004

 2004/2003

Revenues

  $7,535  $6,611  $5,876  14% 13%
   

  

  

     

Segment results

  $474  $426  $407  11%   5%
   

  

  

     

2005 Compared to 2004

In 2005, across our Full-Service Lodging segment, we added 30 hotels (8,326 rooms) and deflagged seven hotels (2,446 rooms).

Compared to the prior year, our 2005 segment results reflect a $91 million increase in base management, incentive management and franchise fees and $73 million of increased owned, leased and other revenue net of direct expenses, which includes a $10 million termination fee payment to us associated with one property that left our system, partially offset by $6 million of severance payments and other costs associated with the temporary closing of a leased property undergoing renovation. The increase in fees is largely due to stronger RevPAR, driven primarily by rate increases which favorably impact property-level house profits, the growth in the number of rooms and the recognition in 2005 of $14 million of incentive fees that were calculated based on prior period earnings but not earned and due until 2005. The increase in owned, leased, and other revenue net of direct expenses is primarily attributable to properties acquired in 2005, all of which we expect to sell in 2006, including the CTF properties.

Further impacting segment results, gains and other income was $5 million higher than the prior year, while equity results increased by $29 million versus the prior year. The increase in gains and other income is primarily attributable to the following items: $9 million of higher gains in 2005 associated with the sale or repayment before maturity of loans receivable associated with several properties; $11 million of increased income in 2005 associated with cost method investments, partially offset by the $13 million gain in 2004 associated with the sale of our interest in the Two Flags Joint Venture. The increase in equity results is primarily attributable to several joint ventures which had significant asset sales in 2005 generating gains, and to a lesser extent, the favorable variance is also a result of a stronger demand environment and the mix of investments. The increase in income associated with cost method investments is primarily related to one new investment in 2005.

RevPAR for Full-Service Lodging comparable company-operated North American hotels increased 10.0 percent to $121.27. Occupancy for these hotels increased 1.4 percentage points while average daily rates increased 7.8 percent to $166.58.

Somewhat offsetting the net favorable variances noted above were $151 million of higher general and administrative costs. As noted in the preceding “Operating Income” discussion, during 2005 we recorded a $94 million pre-tax charge, primarily due to the non-cash write-off of deferred contract acquisition costs associated with the termination of CTF management agreements, and we incurred pre-tax expenses of $18 million related to our bedding incentive program, both of which impacted our general and administrative expenses. In 2005, we also recorded pre-tax performance termination cure payments of $15 million associated with two properties and $6 million of pre-tax charges associated with two guarantees, which impacted general and administrative expenses. In addition, in 2005 there were increased overhead costs associated with unit growth and development.

Financial results for our international operations were strong across most regions. Increased demand in 2005 generated an 11.0 percent RevPAR increase for comparable company-operated hotels over 2004. Additionally, occupancy increased 1.5 percentage points, while average daily rates increased to $137.62. In 2005 we experienced strong demand particularly in China, Mexico, the Caribbean and Egypt. The European markets generally continue to remain less robust.

2004 Compared to 2003

During 2004, across our Full-Service Lodging segment, we added 33 hotels (10,212 rooms), and deflagged six hotels (2,860 rooms) excluding Ramada International. As a result of the sale of the Ramada International Hotels & Resorts franchised brand, 210 properties (28,081 rooms) exited our system in 2004. The ongoing impact of this sale has not been material to the Company.

The 2004 segment results reflect an $85 million increase in base management, incentive management and franchise fees, partially offset by $46 million of increased administrative costs, including costs related to unit growth and development, and the receipt in 2003 of $36 million of insurance proceeds. The increase in fees is largely due to stronger RevPAR, driven by occupancy and rate increases, and the growth in the number of rooms.

Gains were up $7 million, primarily due to the exercise by Cendant of its option to redeem our interest in the Two Flags joint venture, which generated a gain of $13 million, and a note receivable, which was repaid, generating a gain of $5 million. Joint venture results were up $2 million compared to the prior year. For 2003, our equity earnings included $24 million, attributable to our interest in the Two Flags joint venture, while our equity in earnings for 2004 reflects only a $6 million impact due to the redemption of our interest. The improved business environment contributed to the improvement in joint venture results for 2004, offsetting the decline attributable to the Two Flags joint venture.

RevPAR for Full-Service Lodging comparable company-operated North American hotels increased 8.4 percent to $109.62. Occupancy for these hotels increased to 71.3 percent, while average daily rates increased 3.6 percent to $153.66.

Demand associated with our international operations was strong across most regions, generating a 16.6 percent RevPAR increase for comparable company-operated hotels. Occupancy increased 6.6 percentage points, while average daily rates increased to $129.35. Financial results increased 37 percent to $140 million, due to stronger demand, particularly in China, Hong Kong, Brazil and Egypt. The European markets generally remain challenging as the economies have been slow to rebound.

Select-Service Lodgingincludes ourCourtyard, Fairfield Inn andSpringHill Suites brands.

            Annual Change

($ in millions)

 

  2005

  2004

  2003

  2005/2004

 2004/2003

Revenues

  $1,265  $1,118  $1,000  13% 12%
   

  

  

     

Segment results

  $209  $140  $99  49% 41%
   

  

  

     

2005 Compared to 2004

Across our Select-Service Lodging segment, we added 66 hotels (8,363 rooms) and deflagged 18 hotels (2,309 rooms) in 2005. The deflagged properties were primarily associated with our Fairfield Inn brand.

The increase in revenues for 2005 over the prior year reflects stronger RevPAR, driven by occupancy and rate increases and the growth in the number of rooms across our select-service brands. The $69 million increase in segment results versus the prior year reflects a $35 million increase in base management, incentive management and franchise fees, $4 million of higher owned, leased and other revenue net of direct expenses, $12 million of higher gains and other income, a $12 million increase in equity results, and $6 million of lower general, administrative and other expenses. General, administrative and other expenses in 2005 included $8 million of higher pre-tax expenses associated with our bedding incentive program. In 2004, as discussed below, we wrote off deferred contract acquisition costs, impacting general and administrative expenses, totaling $13 million. The 2005 increase in gains and other income is primarily a result of the 2005 sale of a portfolio of land underlying 75 Courtyard hotels, which generated pre-tax gains of $17 million, a $10 million gain in 2005 associated with the repayment, before maturity, to us of the loan we made to the Courtyard joint venture and increased income of $3 million in 2005 associated with cost method joint ventures, partially offset by $20 million of gains in 2004 primarily associated with land sales. Stronger performance at our reinvented Courtyard properties, versus non-reinvented properties, is also contributing to the increase in revenue and segment results from the prior year. For additional information related to the Courtyard joint venture, see the “Courtyard Joint Venture” caption in “Liquidity and Capital Resources” later in this report.

2004 Compared to 2003

Across our Select-Service Lodging segment, we added 89 hotels (10,556 rooms) and deflagged 35 hotels (4,395 rooms) in 2004.

The increase in the Select-Service Lodging segment revenues for 2004 over the prior year reflects stronger RevPAR, driven by occupancy and rate increases, and the growth in the number of rooms across our select-service brands. Base management, incentive management and franchise fees increased $31 million, and gains were $19 million higher than the prior year, reflecting land sales during the year as well as recognition of deferred gains associated with properties we previously owned. Joint venture results increased by $5 million as a result of the strong business environment. These increases were partially offset by an increase in administrative costs of $13 million. Most of the increase in administrative costs is associated with a transaction related to our Courtyard joint venture (discussed more fully later in this report in “Liquidity and Capital Resources” under the heading “Courtyard Joint Venture”). As the termination of the existing management agreements associated with the Courtyard joint venture was probable in 2004, we wrote off our deferred contract acquisition costs related to the existing contracts, resulting in a charge of $13 million.

Extended-Stay Lodging includes ourResidence Inn,TownePlace Suites,Marriott Executive Apartments andMarriott ExecuStay brands.

            Annual Change

($ in millions)

 

  2005

  2004

  2003

  2005/2004

 2004/2003

Revenues

  $608  $547  $557  11% -2%
   

  

  

     

Segment results

  $65  $66  $47  -2% 40%
   

  

  

     

2005 Compared to 2004

Across the Extended-Stay Lodging segment, we added 37 hotels (4,293 rooms) in 2005.

Our base and incentive management fees in 2005 were $12 million higher than the prior year and our franchise fees, principally associated with our Residence Inn brand, also increased $12 million. The increase in management and franchise fees is largely due to higher RevPAR driven by increased demand and to the growth in the number of rooms. Owned, leased, corporate housing and other revenue, net of direct expenses declined $12 million compared to a year ago primarily as a result of our ExecuStay brand’s shift toward franchising. Gains and other income was $11 million lower than last year, primarily reflecting gains on sales of real estate in 2004 versus no gains in 2005. General and administrative costs were slightly higher, primarily reflecting 2005 pre-tax expenses of $4 million associated with our bedding incentive program and a $6 million charge in 2005 associated with the settlement of litigation, almost entirely offset by lower general, administrative and other expenses, including lower costs associated with ExecuStay’s shift toward franchising.

RevPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 9.4 percent to $76.49. Occupancy for these hotels increased slightly to 73.8 percent from 72.6 percent in 2004, while average daily rates increased 8.7 percent to $103.70.

2004 Compared to 2003

In 2004, we added 20 hotels (2,303 rooms) and deflagged one hotel (80 rooms) across our Extended-Stay Lodging segment.

The decline in our Extended-Stay Lodging segment revenue in 2004 is primarily attributable to the shift in the ExecuStay business from management to franchising. We entered into more than 20 new franchise markets in 2004, and only five managed markets remain at the end of 2004. Our base management fees increased $4 million, and our incentive management fees were essentially flat with last year, while our franchise fees, principally associated with our Residence Inn brand, increased $9 million. The increase in franchise fees is largely due to the growth in the number of rooms and an increase in RevPAR. In addition, gains of $10 million in 2004 were favorable to the prior year by $4 million. ExecuStay experienced improved results compared to the prior year, resulting from increased occupancy, primarily in the New York market, coupled with lower operating costs associated with the shift in business toward franchising. The $2 million increase in general and administrative costs associated with supporting the segment’s hotel brands was more than offset by the $6 million decline in ExecuStay’s general and administrative costs associated with ExecuStay’s shift toward franchising.

RevPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 9.1 percent to $68.66. Occupancy for these hotels increased to 72.6 percent from 70.0 percent in 2003, while average daily rates increased 4.4 percent to $94.52.

Timeshare includes ourMarriott Vacation Club International, The Ritz-Carlton Club, Grand Residences byMarriottandHorizons by Marriott Vacation Clubbrands.

            Annual Change

($ in millions)

 

  2005

  2004

  2003

  2005/2004

 2004/2003

Revenues

  $1,721  $1,502  $1,279  15% 17%
   

  

  

     

Segment results

  $271  $203  $149  33% 36%
   

  

  

     

2005 Compared to 2004

Timeshare revenues of $1,721 million and $1,502 million, in 2005 and 2004, respectively, include interval, fractional, and whole ownership sales, base management fees, resort rental fees and cost reimbursements. Timeshare contract sales, including sales made by our timeshare joint venture projects, which represent sales of timeshare interval, fractional, and whole ownership products before adjustment for percentage of completion accounting, were flat as compared to last year, reflecting limited available inventory at several projects in 2005 which are approaching sell-out status versus higher contract sales at those projects in the prior year. The favorable segment results compared with 2004 reflect a $51 million increase in timeshare interval, fractional, and whole ownership sales and services revenue net of direct expenses, primarily reflecting higher financially reportable development revenue under the percentage of completion accounting, a higher development margin, primarily resulting from the mix of units sold, and higher financing income reflecting a higher average notes receivable portfolio balance in 2005. In addition, compared with 2004, base fees increased $4 million, gains increased $6 million, equity earnings increased $8 million, and general and administrative expenses were flat. Improved equity results primarily reflect start-up losses in 2004 versus earnings in 2005 associated with one joint venture, and the increase in gains is attributable to note sales which generated gains of $69 million in 2005 compared to $64 million in 2004. In 2005 we also decided to cease development of one land parcel, and we recorded a $7 million charge in conjunction with the write-off of the previously capitalized costs which impacted our timeshare direct expenses.

2004 Compared to 2003

Timeshare segment revenues totaled $1,502 million and $1,279 million, in 2004 and 2003, respectively. Including our three joint ventures, contract sales increased 31 percent, primarily due to strong demand in South Carolina, Florida, Hawaii, California, St. Thomas, U.S. Virgin Islands and Aruba. The favorable segment results reflect a 9 percent increase in timeshare interval, fractional, and whole ownership sales services revenue, higher margins, primarily resulting from lower marketing and selling costs, and the mix of units sold, partially offset by $24 million of higher administrative expenses. Our note sales gain of $64 million was flat compared to the prior year. In addition, we adjusted the discount rate used in determining the fair value of our residual interests due to current trends in interest rates and recorded a $7 million charge in 2004. Reported revenue growth trailed contract sales growth because of a higher proportion of sales in joint venture projects and projects with lower average construction completion.

 

Synthetic Fuel

 

In October 2001, we acquired four coal-basedSee the “Synthetic Fuel” caption in the Part I, Item 1 “Business” section earlier in this report for information related to our synthetic fuel production facilities (the Facilities)investment and how we have accounted for $46 million in cash. that investment.

The tables below detail the impact of our Synthetic Fuel produced atsegment on our continuing operations for 2005, 2004 and 2003. Our management evaluates the Facilities qualifies for tax credits basedfigures presented in the “Before Syn. Fuel” columns because management expects the Synthetic Fuel segment will no longer have a material impact on Section 29 ofour business after the Internal Revenue Code. UnderCode Section 29 synthetic fuel tax credits expire at the end of 2007 and because the presentation reflects the results of our core Lodging operations. Management also believes that these presentations facilitate the comparison of our results with the results of other lodging companies. However, the figures presented in the “Before Syn. Fuel” columns are non-GAAP financial measures, may be calculated and/or presented differently than presentations of other companies, and are not available for Synthetic Fuel produced after 2007. We beganalternatives to operating these Facilities in the first quarter of 2002. The operation of the Facilities, together with theincome, total tax (provision) benefit, arisingincome from the tax credits, has been, and we expect will continuecontinuing operations, or any other operating measure prescribed by U.S. generally accepted accounting principles.

2005 Compared 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.2004

 

In January 2003, we entered into a contract with an unrelated third partyFor 2005, the synthetic fuel operation generated revenue of $421 million versus revenue of $321 million for the prior year, primarily due to sell approximately a 50 percent interestthe consolidation of our synthetic fuel operations from the start of the 2004 second quarter, which resulted in the Synthetic Fuel business. The transaction is subject to certain closing conditions, includingrecognition of revenue for the receipt of a satisfactory private letter ruling fromentire 2005 year compared with only three quarters in 2004, as we accounted for 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 underoperations using the equity method of accounting.accounting in the 2004 first quarter.

The $18 million increase in synthetic fuel income from continuing operations to $125 million from $107 million in 2004 is primarily due to our increased proportion of tax credits through May 31, 2005, associated with the SAFE II facilities that were then under IRS review and higher gains and other income, partially offset by our decreased proportion of tax credits through March 31, 2005, associated with the SAFE I facility that was not under IRS review. In addition, in 2005 production was slightly lower and raw materials prices were higher than in 2004. Gains and other income represents net earn-out payments received. Minority interest increased from a benefit of $40 million in 2004 to a benefit of $47 million in 2005, primarily as a result of the change in the method of accounting for our synthetic fuel operations. For 2004, minority interest reflects our partner’s share of the synthetic fuel losses from March 26, 2004 (when we began consolidating the ventures due to the adoption of FIN 46(R)) through year-end. For 2005, minority interest represents our partner’s share of the synthetic fuel losses for the entire year.

The table below details the impact of our Synthetic Fuel segment on our continuing operations for 2005 and 2004.

   2005

  2004

 

($ in millions)

 

  As
Reported


  Syn. Fuel
Impact


  Before
Syn. Fuel
Impact


  As
Reported


  Syn. Fuel
Impact


  Before
Syn. Fuel
Impact


 

Operating income (loss)

  $555  $(144) $699  $477  $(98) $575 

Gains and other income

   181   32   149   164   28   136 

Interest income, provision for loan losses and interest expense

   (55)  —     (55)  55   —     55 

Equity in earnings (losses)

   36   —     36   (42)  (28)  (14)
   


 


 


 


 


 


Income (loss) before income taxes and minority interest

   717   (112)  829   654   (98)  752 
   


 


 


 


 


 


Tax (provision) benefit

   (261)  23   (284)  (244)  21   (265)

Tax credits

   167   167   —     144   144   —   
   


 


 


 


 


 


Total tax (provision) benefit

   (94)  190   (284)  (100)  165   (265)
   


 


 


 


 


 


Income from continuing operations before minority interest

   623   78   545   554   67   487 

Minority interest

   45   47   (2)  40   40   —   
   


 


 


 


 


 


Income from continuing operations

  $668  $125  $543  $594  $107  $487 
   


 


 


 


 


 


2004 Compared to 2003

For 2004, the synthetic fuel operation generated revenue of $321 million versus revenue of $302 million for the prior year, primarily due to higher production.

The $11 million increase in synthetic fuel income from continuing operations to $107 million in 2004 from $96 million in the prior year is primarily due to slightly higher production in 2004. Gains and other income of $28 million represents net earn-out payments received. In addition, equity losses of $28 million include net earn-out payments made of $6 million. Minority interest increased from an expense of $55 million in 2003 to a benefit of $40 million in 2004, primarily as a result of the change in the ownership structure of the synthetic fuel joint ventures following our sale of 50 percent of our interest in the joint ventures. Minority interest for 2003 reflected our partner’s share of the synthetic fuel operating losses and its share of the associated tax benefit, along with its share of the tax credits from the June 21, 2003, sale date through the put option’s expiration date. For 2004, minority interest reflected our partner’s share of the synthetic fuel losses from March 26, 2004, when we began consolidating the ventures due to the adoption of FIN 46(R), through year-end.

The table below details the impact of our Synthetic Fuel segment on our continuing operations for 2004 and 2003.

   2004

  2003

 

($ in millions)

 

  As
Reported


  Syn. Fuel
Impact


  Before
Syn. Fuel
Impact


  As
Reported


  Syn. Fuel
Impact


  Before
Syn. Fuel
Impact


 

Operating income (loss)

  $477  $(98) $575  $377  $(104) $481 

Gains and other income

   164   28   136   106   —     106 

Interest income, provision for loan losses and interest expense

   55   —     55   12   —     12 

Equity in (losses) earnings

   (42)  (28)  (14)  (7)  10   (17)
   


 


 


 


 


 


Income (loss) before income taxes and minority interest

   654   (98)  752   488   (94)  582 
   


 


 


 


 


 


Tax (provision) benefit

   (244)  21   (265)  (168)  34   (202)

Tax credits

   144   144   —     211   211   —   
   


 


 


 


 


 


Total tax (provision) benefit

   (100)  165   (265)  43   245   (202)
   


 


 


 


 


 


Income from continuing operations before minority interest

   554   67   487   531   151   380 

Minority interest

   40   40   —     (55)  (55)  —   
   


 


 


 


 


 


Income from continuing operations

  $594  $107  $487  $476  $96  $380 
   


 


 


 


 


 


Impact of Future Adoption of Accounting Standards

Statement of Position 04-2, “Accounting for Real Estate Time-sharing Transactions”

In December 2004, the American Institute of Certified Public Accountants issued Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions,” (the “SOP”) and the Financial Accounting Standards Board (“FASB”) amended FAS No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. The SOP is effective for fiscal years beginning after June 15, 2005.

Under the SOP, we will charge the majority of the costs we incur to sell timeshares to expense when incurred. We will also record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction of revenue at the time that we recognize profit on a timeshare sale. We will also account for rental and other operations during holding periods as incidental operations, which require us to record any excess profits as a reduction of inventory costs.

We estimate that the initial adoption of the SOP in our 2006 first quarter, which we will report as a cumulative effect of a change in accounting principle in our fiscal year 2006 financial statements, will result in a one-time non-cash after-tax charge of approximately $110 million to $115 million, consisting primarily of the write-off of deferred selling costs and establishing the required reserves on notes. We estimate the ongoing impact of the adoption in subsequent periods will be immaterial.

FAS No. 123 (revised 2004), “Share-Based Payment”

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” We will adopt FAS No. 123R at the beginning of our 2006 fiscal year. We estimate the adoption of FAS No. 123R, using the modified prospective method, will result in incremental pre-tax expense in fiscal year 2006 of approximately $44 million, based on our current share-based payment compensation plans, assumptions reflecting currently available information and recent interpretations related to accounting for share-based awards granted to eligible retirees.

 

DISCONTINUED OPERATIONS

 

Senior Living Services

 

2002 Compared to 2001

On December 30, 2002, we entered into a definitive agreement to sellWe completed the sale of our senior living management business along with a parcel of land to Sunrise AssistedSenior Living, Inc. and to sellthe sale of nine senior living communities to CNL Retirement Partners,Properties, Inc. (CNL), in 2003 for approximately $259 million in cash.$266 million. 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 lossgain on disposal of approximately $13 million. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15$19 million and after-tax income from operations of $7 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 ofassociated with 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 at 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, net of taxes and excluding the loss on disposal 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 adoption of FAS No. 142, “Goodwill and other Intangible Assets,” 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) during the year. Occupancy for comparable communities increased by nearly 2 percent to 85.3 percent in 2001.

The division reported an after tax loss of $45 million, reflecting pretax restructuring and other charges of $62 million, primarily related to the $60 million write-down of 25 senior living communities held for sale to their estimated fair value and 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.business.

 

Distribution Services

 

2002 Compared to 2001

In the third quarter2005 and 2004, we had income, net of 2002, we completed a previously announced strategic reviewtax of $1 million and $2 million, respectively, associated with the distribution 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 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 at January 3, 2003 on the balance sheet. The after tax cost to exit the business was $40 million and included payments to third parties in connection with contractual agreements, severance costs and adjusting fixed assets to net realizable value. We present the exit costs together with the loss on operations of $14 million, net of taxes in discontinued operations for the year ended January 3, 2003. The $14 million after 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 sales related to the commencement 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 severance costs and the write-off of an accounts receivable balance from a customer that filed for bankruptcy in the fourth quarter of 2001.

202002.


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 on 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 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 CostsLIQUIDITY AND CAPITAL RESOURCES

 

Severance

Cash Requirements and 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.

Credit 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 Line

 

We incur certain costs associated with the developmentare party to a multicurrency revolving credit agreement that provides for aggregate borrowings 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$2.0 billion 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,2010, 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.

21


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), 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

   

  

  

  

  

22


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 supportsupports our commercial paper program and letters of credit. This facility became effective on June 6, 2005, replacing two multicurrency credit agreements in the same aggregate amount which would otherwise have expired in 2006. As with the facilities it replaced, borrowings under this new facility bear interest at LIBOR plus a spread based on our public debt rating. With the exception of the 2010 expiration date, the material terms of the new credit agreement are the same as those of the replaced agreements. We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

At January 3, 2003,year-end 2005 we had no loans and $93 million of letters of credit outstanding under this facility. We do not anticipate that fluctuations in the availability of the commercial paper market will affect our cash balances combined withliquidity because of the flexibility provided by our credit facility. At year-end 2005 our available borrowing capacity amounted to $1.611 billion and reflected borrowing capacity at $2.0 billion under the credit facilities amounted to nearly $2 billion.facility plus our cash balance of $203 million less the letters of credit outstanding under the facility of $93 million and a $499 million reserve for outstanding commercial paper supported by the facility. 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, includingrequirements. We periodically evaluate opportunities to sell additional debt or equity securities, obtain credit facilities from lenders, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position.

In the repaymentfourth quarter of $200 million2005 we began issuing short-term commercial paper in Europe in addition to our long-standing commercial paper program in the United States. Our U.S. and European commercial paper issuances are subject to the availability of senior notes duethe commercial paper market, as we have no commitments from buyers to purchase our commercial paper. We reserve unused capacity under our credit facility to repay outstanding commercial paper borrowings in November 2003. the event that the commercial paper market is not available to us for any reason when outstanding borrowings mature.

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 facility, 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 million in 2002, $68 million in 2001, and $67 million in 2000. for the last three fiscal years are as follows:

($ in millions)

 

  2005

  2004

  2003

Cash from operations

  $837  $891  $403

Depreciation expense

   156   133   132

Amortization expense

   28   33   28

While our timesharingtimeshare business generates strong operating cash flow, year-to-year cash flow varies based on the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing affect annual amounts.financing. We include timeshare interval, fractional, and whole ownership sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. In 2002,The following table shows the $63 million net cash outflowoperating activity from our timeshare activity included $102 million in timeshare development (the amount spent to build timeshare resorts lessbusiness (which does not include 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 million of net fees received for servicing notes. In 2001, 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.

23


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.

Earnings before interest expense, income taxes, depreciation and amortization (EBITDA) (from continuing operations) was $707 million in 2002, $708 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 reconciliationportion of income from continuing operations before income taxes to EBITDA is as follows:from our timeshare business):

 

($ 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

   


  

  

($ in millions)

 

  2005

  2004

  2003

 

Timeshare development, less the cost of sales

  $40  $93  $(94)

New timeshare mortgages, net of collections

   (441)  (459)  (247)

Loan repurchases

   (23)  (18)  (19)

Note sale gains

   (69)  (64)  (64)

Note sale proceeds

   399   312   231 

Financially reportable sales (in excess of) less than closed sales

   (57)  129   (4)

Collection on retained interests in notes sold and servicing fees

   90   94   50 

Other cash inflows

   55   26   36 
   


 


 


Net cash (outflows) inflows from timeshare activity

  $(6) $113  $(111)
   


 


 


 

We consider EBITDA to be an indicator of our operating performance because it can be used to measure ourOur ability to service debt, fundsell timeshare notes depends on the continued ability of the capital expenditures and expand our business. Nevertheless, you shouldmarkets to provide financing to the special purpose entities that buy the notes. We might have increased difficulty or be unable to consummate such sales if the underlying quality of the notes receivable we originate were to deteriorate, although we do not consider EBITDA an alternativeexpect such a deterioration. Loans to net income or cash flows from operations, as prescribed by accounting principles generally accepted in the United States.

A substantialtimeshare owners, including a current portion of our EBITDA is based on fixed dollar amounts or percentages$33 million, totaled $344 million at year-end 2005. Loans to timeshare owners, including a current portion of sales. These include lodging base management fees, franchise fees and land rent. With almost 2,600 hotels in the Marriott system, no single property or region is critical to our financial results.$26 million, totaled $315 million at year-end 2004.

 

Our ratio of current assets to current liabilities was roughly one to one at year-end 2005 and 0.8 to 1one at January 3, 2003, compared to 1.4 to 1 at December 28, 2001.year-end 2004. 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.facility should we need additional working capital.

 

In 2002 we securitized $387 millionOur ratios of notes by selling notes receivable originated by our timeshare business. We recognized gains on these salesearnings to fixed charges for the last five fiscal years, the calculations of $60 million in the year ended January 3, 2003. Our ability to continue to sell notes to such off-balance sheet entities depends on the continued ability of the capital markets to provide financing to the entities buying the notes. Also, our ability to continue to consummate such securitizations would be impacted if the underlying quality of the notes receivable originated by us were to deteriorate, although we do not expect such a deterioration. In connection with these securitization transactions, at January 3, 2003, we had repurchase obligations of $12 million related to previously sold notes receivable, although we expect to incur no material losses in respect of those obligations. We retain interests in the securitizations which are accounted fordetailed in Exhibit 12 to this report, are as interest only strips, and in the year ended January 3, 2003, we received cash flows of $28 million arising from those retained interests. At January 3, 2003, the qualifying special purpose entities that had purchased notes receivable from us had aggregate assets of $682 million.follows:

Fiscal Years

 
2005

  2004

  2003

  2002

  2001

 
4.3x 4.7x 3.6x 3.2x 2.4x

 

Investing Activities Cash Flows

Acquisitions.We continually seek opportunities to enter new markets, increase market share or broaden service offerings through acquisitions.

24


Dispositions. Property sales generated proceeds of $729 million in 2002, $554 million in 2001 and $742 million in 2000. Proceeds in 2002 are net of $36 million of financing and joint venture investments made by us in connection with the sales transactions. In 2002 we closed on the sales of 10 hotels and 41 senior living communities, over half of which we continue to operate under long-term operating agreements.

 

Capital Expenditures and Other Investments.Capital expenditures of $292$780 million in 2002, $5602005, $181 million in 2001,2004 and $1,095$210 million in 20002003 primarily included expenditures related to the development and construction of new hotels and senior living communities and acquisitions of hotel properties.properties, as well as improvements to existing properties and systems initiatives. Included in the 2005 capital expenditures are the properties purchased from CTF Holdings Ltd. as described below. Over time, we have sold certain lodging and senior living properties under development, orsubject to be developed, while continuing to operate them under long-term management 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 development 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 investment 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.investments.

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.

25


 

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 current hotel salesproperty values; and (3) our management agreements generally do not terminate upon hotel sale.

 

During the 2005 third quarter, we purchased from CTF Holdings Ltd. and certain of its affiliates (collectively “CTF”) 13 properties (in each case through a purchase of real estate, a purchase of the entity that owned the hotel, or an assignment of CTF’s leasehold rights) and certain joint venture interests from CTF for an aggregate price of $381 million. Prior to the sale, all of the properties were operated by us or our subsidiaries.

We plan to sell eight of the properties we have purchased to date to third-party owners, and the balances related to these properties are classified within the “Assets held for sale” and “Liabilities of assets held for sale” captions in our Consolidated Balance Sheet. One operating lease has terminated. We operate the four remaining properties under leases, three of which expire by 2012. Under the purchase and sale agreement we signed with CTF in the second quarter of 2005, we remain obligated to purchase two additional properties for $17 million, the acquisition of which was postponed pending receipt of certain third-party consents.

On the closing date we and CTF also modified management agreements on 29 other CTF-leased hotels, 28 located in Europe and one located in the United States. We became secondarily liable for annual rent payments for certain of these hotels when we acquired the Renaissance Hotel Group N.V. in 1997. We continue to manage 16 of these hotels under new long-term management agreements; however, due to certain provisions in the management agreements, we account for these contracts as operating leases. CTF placed approximately $89 million in trust accounts to cover possible shortfalls in cash flow necessary to meet rent payments under these leases. In turn, we released CTF from their guarantees in connection with these leases. Approximately $79 million remained in these trust accounts at the end of 2005. Our financial statements reflect us as lessee on these hotels. Minimum lease payments relating to these leases are as follows: $32 million in 2006; $33 million in 2007; $33 million in 2008; $33 million in 2009; $33 million in 2010 and $231 million thereafter, for a total of $395 million.

For the remaining 13 European leased hotels, CTF may terminate management agreements with us if and when CTF obtains releases from landlords of our back-up guarantees. Pending completion of the CTF-landlord agreements, we continue to manage these hotels under modified management agreements and remain secondarily liable under certain of these leases. CTF has made available €35 million in cash collateral in the event that we are required to fund under such guarantees. As CTF obtains releases from the landlords and these hotels exit the system, our contingent liability exposure of approximately $217 million will decline.

We also continue to manage three hotels in the United Kingdom under amended management agreements with CTF and continue to manage 14 properties in Asia on behalf of New World Development Company Limited and its affiliates. CTF’s principals are officers, directors and stockholders of New World Development Company Limited. At the closing date, the owners of the United Kingdom and Asian hotels agreed to invest $17 million to renovate those properties.

We and CTF also exchanged legal releases effective as of the closing date, and litigation and arbitration that was outstanding between the two companies and their affiliates was dismissed.

Simultaneously with the closing on the foregoing transactions, CTF also sold five properties and one minority joint venture interest to Sunstone Hotel Investors, Inc. (“Sunstone”) for $419 million, eight properties to Walton Street Capital, L.L.C. (“Walton Street”) for $578 million, and two properties to Tarsadia Hotels (“Tarsadia”) for $29 million, in each case as substitute purchasers under our purchase and sale agreement with CTF. Prior to consummation of the sales, we also operated all of these properties. At closing, Walton Street and Sunstone entered into new long-term management agreements with us and agreed to invest a combined $68 million to further upgrade the 13 properties they acquired. The two properties purchased by Tarsadia are being operated under short-term management and franchise agreements.

When we signed the purchase and sale agreement for the foregoing transactions in the 2005 second quarter, we recorded a $94 million pre-tax charge primarily due to the non-cash write-off of deferred contract acquisition costs associated with the termination of the existing management agreements for properties involved in these transactions. As described above, we entered into new long-term management agreements with CTF, Walton Street and Sunstone at the closing of the transactions, and we expect to sell most of the properties we acquired subject to long-term management agreements.

In 2005, we also purchased two full-service properties for aggregate cash consideration of $146 million.

Dispositions.Property and asset sales generated cash proceeds of $298 million in 2005, $402 million in 2004 and $494 million in 2003. Property and asset sales in 2005 primarily consisted of land parcel sales, including those as described below, and we also sold two minority interests in joint ventures.

Late in 2005 we contributed land underlying an additional nine Courtyard hotels, worth approximately $40 million, to Courtyard by Marriott Land Joint Venture limited partnership (“CBM Land JV”), a joint venture the majority of which is owned by Sarofim Realty Advisors on behalf of an institutional investor, thereby obtaining a 23 percent equity stake in CBM Land JV. At the same time we completed the sale of a portfolio of land underlying

75 Courtyard hotels for approximately $246 million in cash to CBM Land JV. We recognized a pre-tax gain of $17 million in 2005, we deferred recognition of $5 million of pre-tax gain due to our minority interest in the joint venture, and we also deferred recognition of $40 million of pre-tax gain due to contingencies in the transaction documents. As those contingencies expire in subsequent years, we will recognize additional gains.

Loan Activity.We have made loans to owners of hotels and senior living communities that we operate or franchise. Loansfranchise, typically to facilitate the development of a new hotel. Over time we expect these owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. Loan collections and sales, net of advances during 2005, amounted to $650 million. Lodging senior loans outstanding totaled $59 million (which included a current portion of $2 million) at year-end 2005 and $75 million (which included a current portion of $17 million) at year-end 2004. Lodging mezzanine and other loans totaled $274 million (which included a current portion of $13 million) at year-end 2005 and $867 million (which included a current portion of $25 million) at year-end 2004. In 2005 our notes receivable balance associated with Lodging senior loans and Lodging mezzanine and other loans, declined by $609 million and primarily reflects the repayment of several loans including the loan associated with our Courtyard joint venture (described more fully below under this program, excluding timeshare notes, totaled $944 million at January 3, 2003, $860 million at December 28, 2001 and $592 million at December 29, 2000.the “Courtyard Joint Venture” caption). Unfunded commitments aggregating $217$11 million were outstanding at January 3, 2003,year-end 2005, of which we expect to fund $140$5 million in 20032006.

Investment in Leveraged Lease. At year-end 2005, we have a $23 million gross investment in an aircraft leveraged lease with Delta Air Lines, Inc., which we acquired in 1994. The gross investment is comprised of rentals receivable and $156the residual value of the aircraft offset by unearned income. On September 14, 2005, Delta filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and informed us that it wishes to restructure the lease. As a result, we believe our investment is impaired, and have recorded a pre-tax charge of approximately $17 million in total.2005, leaving a net exposure of $6 million.

Equity and Cost Method Investments

Cash outflows of $231 million in 2005 associated with equity and cost method investments primarily reflects our establishment in the 2005 second quarter of a 50/50 joint venture with Whitbread PLC (“Whitbread”) to acquire Whitbread’s portfolio of 46 franchised Marriott and Renaissance hotels totaling over 8,000 rooms, and for us to take over management of the entire portfolio of hotels upon the transfer of the hotels to the new joint venture. Whitbread sold its interest in the 46 hotels to the joint venture for approximately £995 million. Whitbread received approximately £710 million in cash (including £620 million from senior debt proceeds) and 50 percent of the preferred and ordinary shares of the joint venture and non-voting deferred consideration shares valued at £285 million. We participatecontributed approximately £90 million ($171 million) in the second quarter of 2005 for the remaining 50 percent of the preferred and ordinary shares of the joint venture. The joint venture is currently discussing the sale of the hotels with a potential purchaser. As the joint venture sells the hotels, our interest in the joint venture will be redeemed. The joint venture expects to sell the hotels in early 2006 subject to long-term management agreements with us.

In 2005 we also contributed cash of $35 million and a note of $40 million for a $75 million 50 percent interest in a program with an unaffiliated lenderjoint venture developing a mixed-use project, consisting of timeshare, fractional, and whole ownership products in which we may partially guarantee loans made to facilitate third-party ownership of hotels that we operate or franchise.Hawaii. We expect sales will begin in late 2006.

 

Cash from Financing Activities

 

Debt.Debt including convertible debt, decreased $945increased $412 million in 20022005, from $1,325 million to $1,737 million at year-end 2005, due to the redemptionissuance of 85$348 million (book value) of Series F Senior Notes (the “Series F Notes”), net commercial paper issuances of $499 million, and other debt increases of $69 million, partially offset by repayment upon maturity of $200 million for the Series B Senior Notes, repayment upon maturity of $275 million for the Series D Senior Notes and the $29 million (book value) debt decrease associated with the Series C and Series E debt exchange described below.Debt decreased $130 million in 2004, from $1,455 million to $1,325 million, due to the repurchase of all of our remaining zero-coupon convertible senior Liquid Yield Option Notes due 2021, also known as LYONs totaling $62 million, the maturity of $46 million of senior notes and other debt reductions of $22 million.

In June 2005, we sold $350 million aggregate principal amount of 4.625 percent Series F Notes. We received net proceeds of approximately $346 million from this offering, after deducting a discount and underwriting fees, and we used these proceeds to repay commercial paper borrowings and for general corporate purposes. Interest on the Series F Notes is payable on June 15 and December 15 of each year, which commenced on December 15, 2005. The Series F Notes will mature on June 15, 2012, and we may redeem the notes, in whole or in part, at any time or from time to time under the terms provided in the Form of 4.625% Series F Note due 2012.

In November 2005, we offered to holders of our outstanding 7 percent Series E Notes due 2008 and to holders of our outstanding 7.875 percent Series C Notes due 2009 (collectively “Old Notes”) an opportunity to exchange into new 5.81 percent Series G Notes and issued new Series G Notes in the aggregate total of $427 million to replace Old Notes that had been validly tendered for exchange and not withdrawn, comprised of $203 million of the LYONs in May 2002Series E Notes and the pay down of our revolving credit facility, offset by the debt assumed as part$224 million of the acquisitionSeries C Notes. In addition, we paid an exchange price of $31 million ($9 million for the Series E Notes and $22 million for the Series C Notes) which was equal to the sum of the 14 senior living communitiespresent values of the remaining scheduled payments of interest and principal on the Old Notes. Furthermore, holders who had Old Notes accepted for exchange received a cash payment of $7 million representing accrued and unpaid interest to, but not including, the settlement date.

The exchanges are not considered to be extinguishments, and accordingly, the exchange price payment, along with the existing unamortized discounts associated with the Series C Notes and Series E Notes, are being amortized as an adjustment of interest expense over the remaining term of the replacement debt instrument using the interest method. All other third-party costs related to the exchange were expensed as incurred.

Interest on the Series G Notes is payable on May 10 and November 10 of each year, beginning on May 10, 2006. The Series G Notes mature on November 10, 2015, and we may redeem the notes, in December 2002. Debt increased by $799 millionwhole or in 2001 primarily duepart, at any time or from time to borrowings to finance our capital expenditure and share repurchase programs, and to maintain excess cash reserves totaling $645 milliontime under the terms provided in the aftermathForm of the September 11, 2001 terrorist attacks on New York5.81% Series G Note due 2015.

Our Series C Notes, Series E Notes, Series F Notes, and Washington.Series G Notes were all issued under an indenture with JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as trustee, dated November 16, 1998.

 

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 2002,2005, our long-term debt excluding convertible debt and debt associated with businesses held for sale, had an average interest rate of 6.85.4 percent and an average maturity of approximately 6.66.3 years. The ratio of fixed ratefixed-rate long-term debt to total long-term debt was .91 as0.7 to one at year-end 2005. At the end of January 3, 2003.

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 of $500 million available for future offerings.

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 the LYONs that were tendered for mandatory repurchase by the holders. 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 prior to May 2004. We may at 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 amount 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.Moody’s.

 

26On December 8, 2005, we filed a “universal shelf” registration statement with the Securities and Exchange Commission covering an indeterminate amount of future offerings of debt securities, common stock or preferred stock, either separately or represented by warrants, depositary shares, rights or purchase contracts.

Share Repurchases.We purchased 25.7 million shares of our Class A Common Stock in 2005 at an average price of $64.23 per share, 14.0 million shares of our Class A Common Stock in 2004 at an average price of $46.65 per share, and 10.5 million shares of our Class A Common Stock in 2003 at an average price of $36.07 per share. As of year-end 2005, 17.9 million shares remained available for repurchase under authorizations from our Board of Directors. See Part I, Item 5 of this Form 10-K for additional information on the Company’s share repurchases.

Dividends.In May 2005, our Board of Directors increased the quarterly cash dividend by 24 percent to $0.105 per share.

Courtyard Joint Venture

During the 2005 second quarter, Sarofim Realty Advisors (“Sarofim”), on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the Courtyard joint venture, and we signed new long-term management agreements with the joint venture. The transaction has accelerated the pace of reinventions and upgrades at the joint venture’s 120 hotels. The termination of the previous management agreements was probable at year-end 2004. Accordingly, in 2004 we wrote off our deferred contract acquisition costs relating to the management agreements which existed at that time, resulting in a charge of $13 million.

Prior to Sarofim’s acquisition, we and Host Marriott owned equal shares in the 120-property joint venture. With the addition of the new equity, our interest in the joint venture declined to approximately 21 percent and Host Marriott’s interest declined to less than 4 percent. As part of the completed transaction, our mezzanine loan to the joint venture (including capitalized interest) totaling approximately $269 million was repaid.


Contractual Obligations and Off Balance Sheet Arrangements

 

The following table summarizes our contractual obligations:obligations as of year-end 2005:

 

      

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.

The following table summarizes our commitments:

   

Total Amounts Committed


  

Amount of Commitment

Expiration Per Period


Other Commercial Commitments


    

Less than 1 year


  

1-3 years


  

4-5 years


  

After 5 years


($ in millions)

                    

Guarantees

  

$

827

  

$

77

  

$

100

  

$

264

  

$

386

Timeshare note repurchase obligations

  

 

12

  

 

—  

  

 

2

  

 

—  

  

 

10

   

  

  

  

  

Total

  

$

839

  

$

77

  

$

102

  

$

264

  

$

396

   

  

  

  

  

      Payments Due by Period

Contractual Obligations

 

($ in millions)

 

  Total

  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Debt(1)

  $2,281  $127  $255  $222  $1,677

Capital lease obligations(1)

   16   1   2   2   11

Operating leases where we are the primary obligor:

                    

Recourse

   1,051   108   224   203   516

Non-recourse

   432   16   34   25   357

Operating leases where we are secondarily liable

   395   32   66   66   231

Other long-term liabilities

   49   —     7   —     42
   

  

  

  

  

Total contractual obligations

  $4,224  $284  $588  $518  $2,834
   

  

  

  

  


(1)      Includes principal as well as interest payments.

                    

The following table summarizes our commitments as of year-end 2005:

      Amount of Commitment Expiration Per Period

Other Commercial Commitments

 

($ in millions)

 

  Total Amounts
Committed


  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Total guarantees where we are the primary obligor

  $414  $114  $63  $49  $188

Total guarantees where we are secondarily liable

   537   59   111   105   262
   

  

  

  

  

Total other commercial commitments

  $951  $173  $174  $154  $450
   

  

  

  

  

 

Our guarantees listed above include $270$69 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.

The guarantees above include $320 million related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. 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. We do not expect to fund under these guarantees.

The guarantees above also include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $20 million and total remaining rent payments through the initial term plus available extensions of approximately $217 million. We are also secondarily obligated for real estate taxes and other charges associated with the leases. Third parties have severally indemnified us for all payments we may be required to make in connection with these obligations. Since we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted above, as of year-end 2005 our total unfunded loan commitments amounted to $217 million at January 3, 2003.$11 million. We expect to fund $140$5 million of those commitments within one year and $16 million in one to three years.year. We do not expect to fund the remaining $61$6 million of commitments, which expire as follows: $51$4 million within one year; $5 million in one to three years;year and $2 million in four to five years; and $3 million after five years.

Share Repurchases. We purchased 7.8

In 2005, we assigned to a third-party our previous commitment to fund up to $129 million to the Courtyard joint venture for the primary purpose of funding the costs of renovating its properties in 2005 and 2006. Under the agreement, the third-party assumed the lending obligation to the venture. As of year-end 2005, we funded $1 million and the third-party funded $22 million under this loan commitment. The commitment to fund is reduced to $27 million in September 2006 and expires in December 2009. In total, we expect that no more than $104 million of the $129 million commitment will be funded, and other than the $1 million we already funded, we expect the third-party to provide all future fundings. We do not anticipate making further fundings ourselves, but remain secondarily obligated to the Courtyard joint venture if the third-party fails to fund. At year-end 2005, that secondary obligation totaled $106 million and is not reflected in our sharesoutstanding loan commitments discussed 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 by our Board of Directors to repurchase 20 million shares.the preceding paragraph.

 

Dividends. In May 2002, our BoardAt year-end 2005 we also have commitments to invest $27 million of Directors increased the quarterly cash dividend by 8 percentequity for minority interests in three partnerships, which plan to $.07 per share.

Other Matters

Inflation

Inflation has been moderate in recent years,purchase both full-service and has not had a significant impact on our businesses.

Critical Accounting 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 compliance with principles generally acceptedselect-service hotels in the United States although a change inand Canada.

At year-end 2005 we also had $93 million of letters of credit outstanding on our behalf, the factsmajority of which related to our self-insurance programs. Surety bonds issued on our behalf as of year-end 2005 totaled $546 million, the majority of which were requested by federal, state or local governments related to our timeshare and circumstanceslodging operations and self-insurance programs.

As part of the underlying transactions could significantly changenormal course of business, we enter into purchase commitments to manage the applicationdaily operating needs of an accounting policyour hotels. Since we are reimbursed by the hotel owners, these obligations have minimal impact on our net income 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.cash flow.

 

27


Incentive FeesRELATED PARTY TRANSACTIONS

 

We recognize incentive fees as revenue when earnedhave equity method investments in entities that own properties for which we provide management and/or franchise services and 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)

 

  2005

  2004

  2003

 

Base management fees

  $83  $72  $56 

Incentive management fees

   14   8   4 

Cost reimbursements

   936   802   699 

Owned, leased, corporate housing and other revenue

   22   29   28 
   


 


 


Total revenue

  $1,055  $911  $787 
   


 


 


General, administrative and other

  $(19) $(33) $(11)

Reimbursed costs

   (936)  (802)  (699)

Gains and other income

   54   19   21 

Interest income

   31   74   77 

Reversal of (provision for) loan losses

   —     3   (2)

Equity in (losses) earnings – Synthetic fuel

   —     (28)  10 

Equity in earnings (losses) – Other

   36   (14)  (17)

Balance Sheet Data

($ in millions)

 

  2005

  2004

 

Current assets - accounts and notes receivable

  $48  $72 

Contract acquisition costs

   26   24 

Cost method investments

   121   —   

Equity method investments

   349   249 

Loans to equity method investees

   36   526 

Other long-term receivables

   —     3 

Other long-term assets

   166   38 

Long-term deferred tax asset, net

   19   17 

Current liabilities:

         

Accounts payable

   (2)  (3)

Other payables and accruals

   (45)  (4)

Other long-term liabilities

   (101)  (11)

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with the terms of theU.S. generally accepted accounting principles (GAAP) requires management contract. In interim periods, we recognize as income the incentive feesto make estimates and assumptions that wouldaffect reported amounts and related disclosures. Management considers an accounting estimate to 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 $162 million, $202 million and $316 million in 2002, 2001 and 2000, respectively.critical if:

 

Cost Reimbursements

it requires assumptions to be made that were uncertain at the time the estimate was made; and

 

For domestic properties that we manage, we are responsible to employees for salaries and wages and to subcontractors and other creditors for 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 cost reimbursements (excluding senior living services) of $5.7 billion in 2002 and $5.2 billion in 2001 and $5.3 billion in 2000.

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 $51 million in 2002, $16 million in 2001 and $18 million in 2000. 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 we have received a minimum of 10 percent of the purchase price for the timeshare interval, the period of cancellation with refund has expired, receivables are deemed collectible and certain minimum sales and construction levels have been attained. For sales that do not meet these criteria, we defer all revenue using the deposit method.

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 million and $126 million at 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, unrecoverable direct selling and marketing costs are charged to expense and deposits forfeited are recorded as income.

Interest Only Strips

We periodically sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We retain servicing assets and interests in the assets transferred to special purpose entities that are accounted for as interest only strips. The interest only strips are treated as “Trading” or “Available for Sale” securities under the provisions of FAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”. We report

changes in the fair valuesestimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the interest only strips through the accompanying consolidated statementBoard of income for trading securities and through the accompanying consolidated statement of comprehensive income for available-for-sale securities. We had interest only strips of $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 loanDirectors, and the present value ofAudit Committee has reviewed the expected future cash flows or the estimated fair value of the collateral. We apply our loan impairment policy individuallydisclosure presented below relating 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, our recorded investment in impaired loans was $129 million. We have a $59 million allowance for credit losses, leaving $70 million of our investment in impaired loans for which there is no related allowance for credit losses.them.

 

Marriott Rewards

 

Marriott Rewards is our frequent guest incentive marketingloyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

 

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 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, promotion, and communicatingcommunication with, and performing member services for the Marriott Rewards members. Due to the requirement that hotelsproperties reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotelsproperties 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 costcosts of the awards redeemed.

 

AvendraValuation of Goodwill

 

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 formedmake that determination based upon future cash flow projections which assume certain growth projections which may or may not occur. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

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 joint venture, Avendra LLC (Avendra), to be an independent professional procurement services company servingspecific impairment reserve for the North American hospitality market and related industries. Six Continents Hotels, Inc., ClubCorp USA Inc., and Fairmont Hotels & Resorts, Inc., joined Avendradifference between the recorded investment in March 2001. Wethe loan and the other four members contributedpresent value of the expected future cash flows, which assumes certain growth projections which may or may not occur, or the estimated fair value of the collateral. We apply our respective procurement businessesloan impairment policy individually to Avendra. Currently,all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At year-end 2005 our interestrecorded investment in Avendra is slightly less than 50 percent.

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 unrestrictedimpaired loans was $184 million. We have a $103 million allowance for purchases by its customers. Our hotel management agreements treat vendor-generated unrestricted allowances in three separate ways, and the requirementscredit losses, leaving $81 million 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 Avendraimpaired loans for which there is no related allowance for credit losses. At year-end 2004, our recorded investment in impaired loans was $181 million. During 2005 and associated expenses through distributions from Avendra or a sale of all or any portion of2004, our equity interestaverage investment in Avendra, we will apply any further benefits to offset costs otherwise allocable to Marriott branded hotels.impaired loans totaled $182 million and $161 million, respectively.

 

29

Legal Contingencies


We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

 

ITEMIncome Taxes

We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

Changes in existing laws and rates, and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

OTHER MATTERS

Inflation

Inflation has been moderate in recent years and has not had a significant impact on our businesses.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to market risk from changes in interest rates.rates, foreign exchange rates, and equity prices. 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 inforeign exchange rates or 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 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 million and $5 million, based onconnection with the respective balancessale of theseTimeshare segment notes receivable at January 3, 2003 and December 28, 2001.the fair value of our fixed-rate notes receivable.

 

Changes in interest rates also impact our floating-rate long-term debt and the fair-value of our fixed-rate long-term debt.

We are also subject to risk from changes in equity prices from our investments in common stock, which have a carrying value of $53 million at year-end 2005 and are accounted for as available-for-sale securities under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

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.

At year-end 2005 we were party to the following derivative instruments:

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.

Six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our Timeshare segment note sales. Historically, we were 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 $380 million, and they expire through 2022.

Forward foreign exchange and option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during 2005. The aggregate dollar equivalent of the notional amounts of the contracts is approximately $27 million, and they expire throughout 2006.

Forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets. The aggregate dollar equivalent of the notional amounts of the forward contracts is $544 million at year-end 2005, and they expire throughout 2006.

Forward foreign exchange contracts to manage currency exchange rate volatility associated with certain investments in foreign operations. The contracts have a dollar notional equivalent of $229 million at year-end 2005, and they expire throughout 2006.

The following table sets forth the scheduled maturities and the total fair value of our long-term fixed rate debtderivatives 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 change in interest rates would change the fair valueother financial instruments as of our long-term fixed rate debt by $42 million and $53 million, respectively, and would change the fair value of long-term fixed rate notes receivable by $20 million and $22 million, respectively, in each year.year-end 2005:

 

   Maturities by Period

 

($ in millions)

 

    2006  

    2007  

    2008  

    2009  

    2010  

  

There-

after


  

Total

Carrying

Amount


  

Total

Fair

Value


 

Assets - Maturities represent expected principal receipts, fair values represent assets.

 

    

Timeshare segment notes receivable

  $33  $42  $37  $31  $29  $172  $344  $344 

Average interest rate

                           12.76%    

Fixed-rate notes receivable

  $10  $21  $20  $2  $82  $29  $164  $166 

Average interest rate

                           10.38%    

Floating-rate notes receivable

  $5  $59  $20  $1  $7  $77  $169  $169 

Average interest rate

                           7.56%    

Residual interests

  $71  $47  $30  $18  $12  $18  $196  $196 

Average interest rate

                           8.56%    

Liabilities - Maturities represent expected principal payments, fair values represent liabilities.

 

 ��  

Fixed-rate debt

  $(51) $(11) $(102) $(88) $(12) $(903) $(1,167) $(1,214)

Average interest rate

                           6.04%    

Floating-rate debt

  $(1) $—    $—    $—    $—    $(499) $(500) $(500)

Average interest rate

                           4.211%    

NOTE: We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

 

    

Derivatives - Maturities represent notional amounts, fair values represent assets (liabilities).

 

    

Interest Rate Swaps:

                                 

Fixed to variable

  $—    $—    $—    $—    $65  $301  $7  $7 

Average pay rate

                           4.35%    

Average receive rate

                           5.03%    

Variable to fixed

  $—    $—    $—    $—    $43  $64  $(1) $(1)

Average pay rate

                           5.39%    

Average receive rate

                           5.08%    

Forward Foreign Exchange Contracts:

                                 

Fixed (euro) to Fixed ($U.S.)

  $375  $—    $—    $—    $—    $—    $—    $—   

Average exchange rate

                           1.188     

Fixed (GPB) to Fixed ($U.S.)

  $347  $—    $—    $—    $—    $—    $(2) $(2)

Average exchange rate

                           1.73     

Fixed (HKD) to Fixed ($U.S.)

  $43  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.13     

Fixed (MXN) to Fixed ($U.S.)

  $6  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.09     

Fixed (CZK) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.04     

Fixed (JPY) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.01     

Fixed (KRW) to Fixed ($U.S.)

  $3  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.001     

Fixed (CAD) to Fixed ($U.S.)

  $22  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.86     

Although commercial paper is classified as long-term debt (based on our ability

Item 8. Financial Statements 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.

30


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASupplementary Data.

 

The following financial information is included on the pages indicated:

 

   

Page


Management’s Report on Internal Control Over Financial Reporting


  56

Report of Independent AuditorsRegistered Public Accounting Firm on Internal Control Over Financial Reporting

  57

32Report of Independent Registered Public Accounting Firm

  58

Consolidated Statement of Income

  59

33Consolidated Balance Sheet

  60

Consolidated Balance Sheet

34

Consolidated Statement of Cash Flows

  

35

61

Consolidated Statement of Comprehensive Income

  

36

62

Consolidated Statement of Shareholders’ Equity

  

37

63

Notes to Consolidated Financial Statements

  

38

64

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

31Management of Marriott International, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.


 

The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.

Based on this assessment, management has concluded that as of December 30, 2005, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting, a copy of which appears on the next page of this annual report.

REPORT OF INDEPENDENT AUDITORSREGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

To the Board of Directors and Shareholders of Marriott International, Inc.:

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). Marriott International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Marriott International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Marriott International, Inc. as of January 3, 2003December 30, 2005 and December 28, 2001,31, 2004, 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.December 30, 2005, of Marriott International, Inc. and our report dated February 21, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 21, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Marriott International, Inc.:

We have audited the accompanying consolidated balance sheets of Marriott International, Inc. as of December 30, 2005 and December 31, 2004, 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 December 30, 2005. 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 auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (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 3, 2003December 30, 2005 and December 28, 2001,31, 2004, and the consolidated results of theirits operations and theirits cash flows for each of the three fiscal years in the period ended January 3, 2003December 30, 2005, in conformity with accounting principlesU.S. generally accepted in the United States.accounting principles.

 

As discussedWe also have audited, in accordance with the notes tostandards of the consolidatedPublic Company Accounting Oversight Board (United States), the effectiveness of Marriott International, Inc.’s internal control over financial statements,reporting as of December 30, 2005, based on criteria established in 2002Internal Control-Integrated Framework issued by the Company adopted StatementCommittee of Financial Accounting Standards No. 142, “GoodwillSponsoring Organizations of the Treadway Commission and other Intangible Assets.”

our report dated February 21, 2006, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

McLean, Virginia

February 5, 2003

3221, 2006


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME

Fiscal Years Ended January 3,2005, 2004, and 2003 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

 

   


  


  


   2005

  2004

  2003

 

REVENUES

             

Base management fees1

  $497  $435  $388 

Franchise fees

   329   296   245 

Incentive management fees1

   201   142   109 

Owned, leased, corporate housing and other revenue1

   944   730   633 

Timeshare interval, fractional, and whole ownership sales and services

   1,487   1,247   1,145 

Cost reimbursements1

   7,671   6,928   6,192 

Synthetic fuel

   421   321   302 
   


 


 


    11,550   10,099   9,014 
   


 


 


OPERATING COSTS AND EXPENSES

             

Owned, leased and corporate housing - direct

   778   629   505 

Timeshare - direct

   1,228   1,039   1,011 

Reimbursed costs1

   7,671   6,928   6,192 

General, administrative and other1

   753   607   523 

Synthetic fuel

   565   419   406 
   


 


 


    10,995   9,622   8,637 
   


 


 


OPERATING INCOME

   555   477   377 

Gains and other income1

   181   164   106 

Interest expense

   (106)  (99)  (110)

Interest income1

   79   146   129 

(Provision for) reversal of provision for loan losses1

   (28)  8   (7)

Equity in (losses) earnings - Synthetic fuel1

   —     (28)  10 

- Other1

   36   (14)  (17)
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST

   717   654   488 

(Provision for) benefit from income taxes

   (94)  (100)  43 
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST

   623   554   531 

Minority interest

   45   40   (55)
   


 


 


INCOME FROM CONTINUING OPERATIONS

   668   594   476 

Discontinued operations

   1   2   26 
   


 


 


NET INCOME

  $669  $596  $502 
   


 


 


EARNINGS PER SHARE – Basic

             

Earnings from continuing operations

  $3.09  $2.62  $2.05 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $3.09  $2.63  $2.16 
   


 


 


EARNINGS PER SHARE – Diluted

             

Earnings from continuing operations

  $2.89  $2.47  $1.94 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $2.89  $2.48  $2.05 
   


 


 


DIVIDENDS DECLARED PER SHARE

  $0.400  $0.330  $0.295 
   


 


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

 

See Notes Toto Consolidated Financial Statements

33


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

January 3, 2003Fiscal Years-End 2005 and December 28, 20012004

($ in millions)

 

  

January 3,

2003


   

December 28,

2001


   2005

 2004

 

ASSETS

         

Current Assets

      

Current assets

   

Cash and equivalents

  

$

198

 

  

$

812

 

  $203  $770 

Accounts and notes receivable

  

 

524

 

  

 

479

 

Prepaid taxes

  

 

300

 

  

 

223

 

Accounts and notes receivable1

   837   797 

Current deferred taxes, net

   211   162 

Assets held for sale

   555   23 

Other

  

 

89

 

  

 

72

 

   204   194 

Assets held for sale

  

 

633

 

  

 

1,161

 

  


  


  


 


  

 

1,744

 

  

 

2,747

 

   2,010   1,946 

Property and equipment

  

 

2,589

 

  

 

2,460

 

   2,341   2,389 

Intangible assets

   

Goodwill

  

 

923

 

  

 

977

 

   924   923 

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

 

Contract acquisition costs1

   466   513 
  


  


  


 


  

 

930

 

  

 

1,042

 

   1,390   1,436 

Other

  

 

538

 

  

 

405

 

Cost method investments1

   233   70 

Equity method investments1

   349   249 

Notes receivable

   

Loans to equity method investees1

   36   526 

Loans to timeshare owners

   311   289 

Other notes receivable

   282   374 
  


 


   629   1,189 

Other long-term receivables1

   339   326 

Deferred taxes, net1

   554   397 

Other1

   685   666 
  


  


  


 


  

$

8,296

 

  

$

9,107

 

  $8,530  $8,668 
  


  


  


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Current liabilities

         

Accounts payable

  

$

529

 

  

$

607

 

Current portion of long-term debt

  $56  $489 

Accounts payable1

   591   570 

Accrued payroll and benefits

  

 

373

 

  

 

322

 

   559   508 

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

 

Liability for guest loyalty program

   317   302 

Self-insurance reserves

   84   71 

Liabilities of assets held for sale

   30   —   

Other payables and accruals1

   355   416 
  


  


  


 


  

 

2,207

 

  

 

1,970

 

   1,992   2,356 

Long-term debt

  

 

1,492

 

  

 

2,301

 

   1,681   836 

Casualty self insurance reserves

  

 

106

 

  

 

83

 

Other long-term liabilities

  

 

857

 

  

 

868

 

Convertible debt

  

 

61

 

  

 

407

 

Liability for guest loyalty program

   768   640 

Self-insurance reserves

   180   163 

Other long-term liabilities1

   646   580 

Minority interest

   11   12 

Shareholders’ equity

         

Class A common stock

  

 

3

 

  

 

3

 

   3   3 

ESOP preferred stock

  

 

—  

 

  

 

—  

 

Additional paid-in capital

  

 

3,181

 

  

 

3,378

 

   3,564   3,423 

Retained earnings

  

 

1,126

 

  

 

941

 

   2,500   1,951 

Deferred compensation

   (137)  (108)

Treasury stock, at cost

  

 

(667

)

  

 

(503

)

   (2,667)  (1,197)

Unearned ESOP shares

  

 

—  

 

  

 

(291

)

Accumulated other comprehensive loss

  

 

(70

)

  

 

(50

)

Accumulated other comprehensive (loss) income

   (11)  9 
  


  


  


 


  

 

3,573

 

  

 

3,478

 

   3,252   4,081 
  


  


  


 


  

$

8,296

 

  

$

9,107

 

  $8,530  $8,668 
  


  


  


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

 

See Notes Toto Consolidated Financial Statements

34


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Fiscal Years Ended January 3,2005, 2004, and 2003 December 28, 2001 and December 29, 2000

($ in millions)

 

  

2002


   

2001


   

2000


   2005

 2004

 2003

 

OPERATING ACTIVITIES

            

Income from continuing operations

  

$

439

 

  

$

269

 

  

$

490

 

  $668  $594  $476 

Adjustments to reconcile to cash provided by operating activities:

            

Income (loss) from discontinued operations

  

 

9

 

  

 

(33

)

  

 

(11

)

Discontinued operations – loss on sale/exit

  

 

(171

)

  

 

—  

 

  

 

—  

 

Income from discontinued operations

   1   2   7 

Discontinued operations – gain on sale/exit

   —     —     19 

Depreciation and amortization

  

 

187

 

  

 

222

 

  

 

195

 

   184   166   160 

Minority interest in results of synthetic fuel operation

   (47)  (40)  55 

Income taxes

  

 

(105

)

  

 

9

 

  

 

133

 

   (86)  (63)  (171)

Timeshare activity, net

  

 

(63

)

  

 

(358

)

  

 

(195

)

   (6)  113   (111)

Other

  

 

223

 

  

 

278

 

  

 

54

 

   160   (77)  (73)

Working capital changes:

            

Accounts receivable

  

 

(31

)

  

 

57

 

  

 

(53

)

   (128)  (6)  (81)

Other current assets

  

 

60

 

  

 

(20

)

  

 

24

 

   (22)  (16)  11 

Accounts payable and accruals

  

 

(32

)

  

 

(21

)

  

 

219

 

   113   218   111 
  


  


  


  


 


 


Net cash provided by operating activities

  

 

516

 

  

 

403

 

  

 

856

 

   837   891   403 

INVESTING ACTIVITIES

            

Capital expenditures

  

 

(292

)

  

 

(560

)

  

 

(1,095

)

   (780)  (181)  (210)

Dispositions

  

 

729

 

  

 

554

 

  

 

742

 

   298   402   494 

Loan advances

  

 

(237

)

  

 

(367

)

  

 

(389

)

   (56)  (129)  (241)

Loan collections and sales

  

 

124

 

  

 

71

 

  

 

93

 

   706   276   280 

Equity and cost method investments

   (216)  (45)  (21)

Purchase of available-for-sale securities

   (15)  (30)  —   

Other

  

 

(7

)

  

 

(179

)

  

 

(377

)

   (67)  (6)  9 
  


  


  


  


 


 


Net cash provided by (used in) investing activities

  

 

317

 

  

 

(481

)

  

 

(1,026

)

Net cash (used in) provided by investing activities

   (130)  287   311 

FINANCING ACTIVITIES

            

Commercial paper, net

  

 

102

 

  

 

(827

)

  

 

46

 

   499   —     (102)

Issuance of long-term debt

  

 

26

 

  

 

1,329

 

  

 

338

 

   356   20   14 

Repayment of long-term debt

  

 

(946

)

  

 

(123

)

  

 

(26

)

   (523)  (99)  (273)

(Redemption) issuance of convertible debt

  

 

(347

)

  

 

405

 

  

 

—  

 

Redemption of convertible debt

   —     (62)  —   

Debt exchange consideration, net

   (29)  —     —   

Issuance of Class A common stock

  

 

35

 

  

 

76

 

  

 

58

 

   125   206   102 

Dividends paid

  

 

(65

)

  

 

(61

)

  

 

(55

)

   (84)  (73)  (68)

Purchase of treasury stock

  

 

(252

)

  

 

(235

)

  

 

(340

)

   (1,644)  (664)  (373)

Earn-outs received, net

   26   35   17 
  


  


  


  


 


 


Net cash (used in) provided by financing activities

  

 

(1,447

)

  

 

564

 

  

 

21

 

Net cash used in financing activities

   (1,274)  (637)  (683)
  


  


  


  


 


 


(DECREASE) INCREASE IN CASH AND EQUIVALENTS

  

 

(614

)

  

 

486

 

  

 

(149

)

   (567)  541   31 

CASH AND EQUIVALENTS, beginning of year

  

 

812

 

  

 

326

 

  

 

475

 

   770   229   198 
  


  


  


  


 


 


CASH AND EQUIVALENTS, end of year

  

$

198

 

  

$

812

 

  

$

326

 

  $203  $770  $229 
  


  


  


  


 


 


 

See Notes Toto Consolidated Financial Statements

35


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Fiscal Years Ended January 3,2005, 2004, and 2003 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

 

   


  


  


     2005  

    2004  

    2003  

 

Net income

  $669  $596  $502 

Other comprehensive (loss) income, net of tax:

             

Net foreign currency translation adjustments

   (25)  43   37 

Net (loss)/gain on derivative instruments designated as cash flow hedges

   (2)  7   (8)

Net unrealized gain associated with available-for-sale securities

   7   —     —   
   


 

  


Total other comprehensive (loss) income

   (20)  50   29 
   


 

  


Comprehensive income

  $649  $646  $531 
   


 

  


 

See Notes Toto Consolidated Financial Statements

36


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Fiscal Years Ended January 3,2005, 2004, and 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

)

    

 

—  

 



     

  


  


    


    


    


241.0

 

  

Balance at December 29, 2000

  

 

3

  

 

3,590

 

  

 

851

 

    

 

(679

)

    

 

(454

)

    

 

(44

)

—  

 

  

Net income

  

 

—  

  

 

—  

 

  

 

236

 

    

 

—  

 

    

 

—  

 

    

 

—  

 

—  

 

  

Dividends ($.255 per share)

  

 

—  

  

 

—  

 

  

 

(62

)

    

 

—  

 

    

 

—  

 

    

 

—  

 

5.8

 

  

Employee stock plan issuance and other

  

 

—  

  

 

(212

)

  

 

(84

)

    

 

388

 

    

 

186

 

    

 

(6

)

(6.1

)

  

Purchase of treasury stock

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(235

)

    

 

—  

 



     

  


  


    


    


    


240.7

 

  

Balance at December 28, 2001

  

 

3

  

 

3,378

 

  

 

941

 

    

 

(291

)

    

 

(503

)

    

 

(50

)

—  

 

  

Net income

  

 

—  

  

 

—  

 

  

 

277

 

    

 

—  

 

    

 

—  

 

    

 

—  

 

—  

 

  

Dividends ($.275 per share)

  

 

—  

  

 

—  

 

  

 

(67

)

    

 

—  

 

    

 

—  

 

    

 

—  

 

3.0

 

  

Employee stock plan issuance and other

  

 

—  

  

 

(197

)

  

 

(25

)

    

 

291

 

    

 

90

 

    

 

(20

)

(7.8

)

  

Purchase of treasury stock

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(254

)

    

 

—  

 



     

  


  


    


    


    


235.9

 

  

Balance at January 3, 2003

  

$

3

  

$

3,181

 

  

$

1,126

 

    

$

—  

 

    

$

(667

)

    

$

(70

)



     

  


  


    


    


    


Common

Shares
Outstanding


     Class A
Common
Stock


  Additional
Paid-in
Capital


  Deferred
Compensation


  Retained
Earnings


  Treasury
Stock, at
Cost


  Accumulated
Other
Comprehensive
(Loss) Income


 
235.9  

Balance at fiscal year-end 2002

  $3  $3,224  $(43) $1,126  $(667) $(70)
—    

Net income

   —     —     —     502   —     —   
—    

Dividends ($0.295 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 fiscal year-end 2003

   3   3,317   (81)  1,505   (865)  (41)
—    

Net income

   —     —     —     596   —     —   
—    

Dividends ($0.330 per share)

   —     —     —     (75)  —     —   
8.6  

Employee stock plan issuance and other

   —     106   (27)  (75)  322   50 
(14.0) 

Purchase of treasury stock

   —     —     —     —     (654)  —   


    

  

  


 


 


 


225.8  

Balance at fiscal year-end 2004

   3   3,423   (108)  1,951   (1,197)  9 
—    

Net income

   —     —     —     669   —     —   
—    

Dividends ($0.400 per share)

   —     —     —     (87)  —     —   
5.8  

Employee stock plan issuance and other

   —     141   (29)  (33)  180   (20)
(25.7) 

Purchase of treasury stock

   —     —     —     —     (1,650)  —   


    

  

  


 


 


 


205.9  

Balance at fiscal year-end 2005

  $3  $3,564  $(137) $2,500  $(2,667) $(11)


    

  

  


 


 


 


 

See Notes Toto Consolidated Financial Statements

37


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 principlesU.S. generally accepted in the United Statesaccounting principles 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 salesrevenues and expenses during the reporting periodperiods and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. CertainWe have reclassified certain prior year amounts have been reclassified to conform to the 2002our 2005 presentation.

 

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 3, 2003at fiscal year-end 2005 and December 28, 2001,fiscal year-end 2004 and the results of our operations and cash flows for the fiscal years ended January 3, 2003, December 28, 20012005, 2004, and December 29, 2000.2003. 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 nearest to December 31. The 2002All fiscal years presented include 52 weeks. Unless otherwise specified, each reference to “2005” means our fiscal year includes 53 weeks, whileended December 30, 2005, each reference to “2004” means our fiscal year ended December 31, 2004, each reference to “2003” means our fiscal year ended January 2, 2004, and each reference to “2002” means our fiscal year ended January 3, 2003, and not, in each case, the 2001 and 2000 fiscal years include 52 weeks.corresponding calendar year.

 

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, fractional, and whole ownership sales and services, (5) cost reimbursements, (5) other lodging revenue, and (6) sales made by our Synthetic Fuel business.the 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.

 

Base and Incentive Management Fees:We recognize base fees as revenue when earned in accordance with the contract. In interim periods and at year endyear-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 fees as revenue in each accounting period as fees are earned from timeshare interest sales in accordance with Statement of Financial Accounting Standards (FAS) No. 66, “Accounting for Sales of Real Estate.” We recognize sales when a minimum of 10 percent of 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.

 

38Timeshare and Fractional Intervals: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 to cancel for a refund has expired, (3) we deem the receivables to be collectible, and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and profit are deferred and recognized in earnings using the percentage of completion method.


Franchise Fee Revenue:Timeshare Whole Ownership: We recognize franchise fee revenue in accordance with FAS No. 45, “Accounting for Franchise Fee Revenue.” We recognize franchise fees as revenue in eachsales under the full accrual method of accounting period as fees are earnedwhen we receive our proceeds and become receivable from the franchisee.transfer title at settlement.

 

Cost Reimbursements: We recognize cost reimbursements from managed, franchised and franchisedtimeshare properties when we incur the related reimbursable costs.

 

Synthetic Fuel: Prior to November 7, 2003, and after March 25, 2004, we accounted for the synthetic fuel operation by consolidating the joint ventures. We recognize revenue from our Synthetic Fuel businessthe synthetic fuel operation when the synthetic fuel is produced and sold. From November 7, 2003, through March 25, 2004, we accounted for the synthetic fuel operation using the equity method of accounting. See Footnote 2 “Synthetic Fuel” for additional information.

Other Revenueincludes land rental income and 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.term.

 

Real Estate Sales

 

We account for the sales of real estate in accordance with FASFinancial Accounting Standards (“FAS”) No. 66.66, “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 $51$45 million in 2002, $162005, $1 million in 20012004 and $18$4 million in 2000.2003. 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 contracts obtained directly with third-party owners in competitive bid processes.

 

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 $54 million in 2002, $52 million in 2001 and $50 million in 2000. We recognized compensation cost from profit sharing of $8$69 million in 2002, $62005, $70 million in 20012004 and $5$53 million in 20002003. We recognized additional compensation cost from profit sharing of $1 million in 2003 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 marketingloyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products 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 flierflyer program miles, rental cars and a variety of other awards. Pointsawards; however, points cannot be redeemed for cash.

We provide Marriott Rewards as a marketing program to participating hotels.properties. We charge the cost of operating the program, including the estimated cost of award redemption, to hotelsproperties 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,

39


promotion, and communicatingcommunication 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 costcosts of the awards redeemed.

Our liability for the Marriott Rewards program was $683$1,085 million at January 3, 2003,year-end 2005, and $631$942 million at December 28, 2001, of which we have included $418 million and $380 million, respectively, in other long-term liabilities in the accompanying consolidated balance sheet.year-end 2004.

 

Guarantees

We record a liability for the fair value of a guarantee on the date a guarantee is issued or modified. The offsetting entry depends on the circumstances in which the guarantee was issued. Funding under the guarantee reduces the recorded liability. When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee.

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. 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 aan initial maturity of three months or less at date of purchase to be cash equivalents.

 

Restricted Cash

Restricted cash, totaling $126 million and $105 million at year-end 2005 and year-end 2004, respectively, is recorded in other long-term assets in the accompanying Consolidated Balance Sheet. Restricted cash primarily consists of deposits received on timeshare interval, fractional, and whole ownership sales that are held in escrow until the contract is closed.

Assets Held for Sale

We consider properties to be assets held for sale when all of the following criteria are met:

management commits to a plan to sell a property;

it is unlikely that the disposal plan will be significantly modified or discontinued;

the property is available for immediate sale in its present condition;

actions required to complete the sale of the property have been initiated;

sale of the property is probable and we expect the completed sale will occur within one year; and

the property is actively being marketed for sale at a price that is reasonable given its current market value.

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.

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, our recorded investment in impaired loans was $129 million. We have a $59 million allowance for credit losses, leaving $70 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 and January 3, 2003:

   

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

 

Additions

  

 

38

 

  

 

48

 

Write-offs

  

 

(11

)

  

 

(1

)

   


  


December 28, 2001

  

 

50

 

  

 

59

 

Additions

  

 

10

 

  

 

12

 

Write-offs

  

 

(20

)

  

 

(12

)

   


  


January 3, 2003

  

$

40

 

  

$

59

 

   


  


Valuation of Long-Lived AssetsGoodwill

 

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 an asset may not be recoverable. If we expect an asset to generate cash flows less than the asset’s carryingasset. We evaluate the fair value of goodwill at the lowestreporting unit level of identifiableand make that determination based upon future cash flows, we recognize aflow projections. We record an impairment loss for the difference between the asset’s carrying amount and its fair value.

Assets Held for Sale

We consider properties to be assets held for salegoodwill when management approves and commits to a formal plan to actively market a property for sale or a signed sales contract exists. Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value orintangible asset is less than its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense.value.

40


 

Investments

 

WeExcept as otherwise required by FIN 46(R), “Consolidation of Variable Interest Entities,” 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 affiliates 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. Our ownership interest in these unconsolidated affiliatesequity method investments varies generally from 10 percent to 50 percent.

The fair value of our available-for-sale securities totaled $53 million at year-end 2005. Gains in accumulated other comprehensive loss associated with our available-for-sale securities totaled $8 million at year-end 2005. At year-end 2005 there were no losses in accumulated other comprehensive income associated with our available-for-sale securities.

 

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$92 million and $126$89 million at January 3, 2003year-end 2005 and December 28, 2001,year-end 2004, respectively, and are included in property and equipment in the accompanying consolidated balance sheets.Consolidated Balance Sheet. 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.interval, fractional, and whole ownership products. 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 interest only stripsresidual interests, excluding servicing assets, 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, excluding servicing assets, using a discounted cash flow model. We report changes in the fair values of the interest only stripsthese residual interests, excluding servicing assets, through the accompanying consolidated statementConsolidated Statement of incomeIncome. Servicing assets are classified as held to maturity under the provisions of FAS No. 115 and are recorded at amortized cost.

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 securitiesor speculative purposes.

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 throughof derivatives designated as fair value hedging instruments. Changes in the accompanying consolidated statementfair value of comprehensive income for available for sale securities. We had interest only strips of $135 million at January 3, 2003 and $87 million at December 28, 2001, whichthe hedged item in a fair value hedge are recorded as long-term receivables onan adjustment to the consolidated balance sheet.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 currency of the country in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars, and we do the same, as needed, for unconsolidated entities whose functional currency is not the


U.S. dollar. 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 weighted average exchange rate for the period. Translation 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 rate changes related to 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 $5 million loss in 2005, a $3 million loss in 2004, and a $7 million gain in 2003.

New Accounting StandardsCourtyard Joint Venture

 

We adopted FAS No. 142, “Goodwill and Other Intangible Assets”During the 2005 second quarter, Sarofim Realty Advisors (“Sarofim”), on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the first quarterCourtyard joint venture, and we signed new long-term management agreements with the joint venture. The transaction has accelerated the pace of 2002. FAS No. 142 requiresreinventions and upgrades at the joint venture’s 120 hotels. The termination of the previous management agreements was probable at year-end 2004. Accordingly, in 2004 we wrote off our deferred contract acquisition costs relating to the management agreements which existed at that goodwill is not amortized, but rather reviewed annually for impairment. The initial adoptiontime, resulting in a charge 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$13 million.

 

41Prior to Sarofim’s acquisition, we and Host Marriott owned equal shares in the 120-property joint venture. With the addition of the new equity, our interest in the joint venture declined to approximately 21 percent and Host Marriott’s interest declined to less than 4 percent. As part of the completed transaction, our mezzanine loan to the joint venture (including capitalized interest) totaling approximately $269 million was repaid.


Contractual Obligations and Off Balance Sheet Arrangements

 

The following table presentssummarizes our contractual obligations as of year-end 2005:

      Payments Due by Period

Contractual Obligations

 

($ in millions)

 

  Total

  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Debt(1)

  $2,281  $127  $255  $222  $1,677

Capital lease obligations(1)

   16   1   2   2   11

Operating leases where we are the primary obligor:

                    

Recourse

   1,051   108   224   203   516

Non-recourse

   432   16   34   25   357

Operating leases where we are secondarily liable

   395   32   66   66   231

Other long-term liabilities

   49   —     7   —     42
   

  

  

  

  

Total contractual obligations

  $4,224  $284  $588  $518  $2,834
   

  

  

  

  


(1)      Includes principal as well as interest payments.

                    

The following table summarizes our commitments as of year-end 2005:

      Amount of Commitment Expiration Per Period

Other Commercial Commitments

 

($ in millions)

 

  Total Amounts
Committed


  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Total guarantees where we are the primary obligor

  $414  $114  $63  $49  $188

Total guarantees where we are secondarily liable

   537   59   111   105   262
   

  

  

  

  

Total other commercial commitments

  $951  $173  $174  $154  $450
   

  

  

  

  

Our guarantees listed above include $69 million for guarantees that will not be in effect until the impact FAS No. 142 would have had on our incomeunderlying 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 continuing operations, basicthe sale of hotels.

The guarantees above include $320 million related to Senior Living Services lease obligations and diluted earnings from continuing operations per share,lifecare bonds for which we are secondarily liable. Sunrise is the primary obligor of the leases and basica portion of the lifecare bonds, and diluted net earnings per share for fiscal years ended December 28, 2001 and December 29, 2000, if we had adopted it inCNL 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 2000 ($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. We do not expect to fund under these guarantees.

The guarantees above also include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $20 million and total remaining rent payments through the initial term plus available extensions of approximately $217 million. We are also secondarily obligated for real estate taxes and other charges associated with the leases. Third parties have severally indemnified us for all payments we may be required to make in connection with these obligations. Since we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted above, as of year-end 2005 our total unfunded loan commitments amounted to $11 million. We expect to fund $5 million of those commitments within one year. We do not expect to fund the remaining $6 million of commitments, which expire as follows: $4 million within one year and $2 million after five years.

In 2005, we assigned to a third-party our previous commitment to fund up to $129 million to the Courtyard joint venture for the primary purpose of funding the costs of renovating its properties in 2005 and 2006. Under the agreement, the third-party assumed the lending obligation to the venture. As of year-end 2005, we funded $1 million and the third-party funded $22 million under this loan commitment. The commitment to fund is reduced to $27 million in September 2006 and expires in December 2009. In total, we expect that no more than $104 million of the $129 million commitment will be funded, and other than the $1 million we already funded, we expect the third-party to provide all future fundings. We do not anticipate making further fundings ourselves, but remain secondarily obligated to the Courtyard joint venture if the third-party fails to fund. At year-end 2005, that secondary obligation totaled $106 million and is not reflected in our outstanding loan commitments discussed in the preceding paragraph.

At year-end 2005 we also have commitments to invest $27 million of equity for minority interests in three partnerships, which plan to purchase both full-service and select-service hotels in the United States and Canada.

At year-end 2005 we also had $93 million of letters of credit outstanding on our behalf, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of year-end 2005 totaled $546 million, the majority of which were requested by federal, state or local governments related to our timeshare and lodging operations and self-insurance programs.

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.

RELATED PARTY TRANSACTIONS

We have equity method investments in entities that own properties for which we provide management and/or franchise services and 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)

 

  2005

  2004

  2003

 

Base management fees

  $83  $72  $56 

Incentive management fees

   14   8   4 

Cost reimbursements

   936   802   699 

Owned, leased, corporate housing and other revenue

   22   29   28 
   


 


 


Total revenue

  $1,055  $911  $787 
   


 


 


General, administrative and other

  $(19) $(33) $(11)

Reimbursed costs

   (936)  (802)  (699)

Gains and other income

   54   19   21 

Interest income

   31   74   77 

Reversal of (provision for) loan losses

   —     3   (2)

Equity in (losses) earnings – Synthetic fuel

   —     (28)  10 

Equity in earnings (losses) – Other

   36   (14)  (17)

Balance Sheet Data

($ in millions)

 

  2005

  2004

 

Current assets - accounts and notes receivable

  $48  $72 

Contract acquisition costs

   26   24 

Cost method investments

   121   —   

Equity method investments

   349   249 

Loans to equity method investees

   36   526 

Other long-term receivables

   —     3 

Other long-term assets

   166   38 

Long-term deferred tax asset, net

   19   17 

Current liabilities:

         

Accounts payable

   (2)  (3)

Other payables and accruals

   (45)  (4)

Other long-term liabilities

   (101)  (11)

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if:

it requires assumptions to be made that were uncertain at the time the estimate was made; and

changes in the estimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.

Marriott Rewards

Marriott Rewards is our frequent guest loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

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 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, promotion, communication with, and performing member services for the Marriott Rewards members. Due to the requirement that properties reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from properties 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 costs of the awards redeemed.

Valuation of Goodwill

We 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 make that determination based upon future cash flow projections which assume certain growth projections which may or may not occur. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

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 impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows, which assumes certain growth projections which may or may not occur, 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. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At year-end 2005 our recorded investment in impaired loans was $184 million. We have a $103 million allowance for credit losses, leaving $81 million of our investment in impaired loans for which there is no related allowance for credit losses. At year-end 2004, our recorded investment in impaired loans was $181 million. During 2005 and 2004, our average investment in impaired loans totaled $182 million and $161 million, respectively.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

Income Taxes

We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

Changes in existing laws and rates, and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

OTHER MATTERS

Inflation

Inflation has been moderate in recent years and has not had a significant impact on our businesses.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates, foreign exchange rates, and equity prices. We manage our exposure to these risks by monitoring available financing alternatives, through development and application of credit granting policies 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 how such exposure is managed in the future.

We are exposed to interest rate risk on our floating-rate notes receivable, our residual interests retained in connection with the sale of Timeshare segment notes receivable and the fair value of our fixed-rate notes receivable.

Changes in interest rates also impact our floating-rate long-term debt and the fair-value of our fixed-rate long-term debt.

We are also subject to risk from changes in equity prices from our investments in common stock, which have a carrying value of $53 million at year-end 2005 and are accounted for as available-for-sale securities under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

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.

At year-end 2005 we were party to the following derivative instruments:

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.

Six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our Timeshare segment note sales. Historically, we were 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 $380 million, and they expire through 2022.

Forward foreign exchange and option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during 2005. The aggregate dollar equivalent of the notional amounts of the contracts is approximately $27 million, and they expire throughout 2006.

Forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets. The aggregate dollar equivalent of the notional amounts of the forward contracts is $544 million at year-end 2005, and they expire throughout 2006.

Forward foreign exchange contracts to manage currency exchange rate volatility associated with certain investments in foreign operations. The contracts have a dollar notional equivalent of $229 million at year-end 2005, and they expire throughout 2006.

The following table sets forth the scheduled maturities and the total fair value of our derivatives and other financial instruments as of year-end 2005:

   Maturities by Period

 

($ in millions)

 

    2006  

    2007  

    2008  

    2009  

    2010  

  

There-

after


  

Total

Carrying

Amount


  

Total

Fair

Value


 

Assets - Maturities represent expected principal receipts, fair values represent assets.

 

    

Timeshare segment notes receivable

  $33  $42  $37  $31  $29  $172  $344  $344 

Average interest rate

                           12.76%    

Fixed-rate notes receivable

  $10  $21  $20  $2  $82  $29  $164  $166 

Average interest rate

                           10.38%    

Floating-rate notes receivable

  $5  $59  $20  $1  $7  $77  $169  $169 

Average interest rate

                           7.56%    

Residual interests

  $71  $47  $30  $18  $12  $18  $196  $196 

Average interest rate

                           8.56%    

Liabilities - Maturities represent expected principal payments, fair values represent liabilities.

 

 ��  

Fixed-rate debt

  $(51) $(11) $(102) $(88) $(12) $(903) $(1,167) $(1,214)

Average interest rate

                           6.04%    

Floating-rate debt

  $(1) $—    $—    $—    $—    $(499) $(500) $(500)

Average interest rate

                           4.211%    

NOTE: We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

 

    

Derivatives - Maturities represent notional amounts, fair values represent assets (liabilities).

 

    

Interest Rate Swaps:

                                 

Fixed to variable

  $—    $—    $—    $—    $65  $301  $7  $7 

Average pay rate

                           4.35%    

Average receive rate

                           5.03%    

Variable to fixed

  $—    $—    $—    $—    $43  $64  $(1) $(1)

Average pay rate

                           5.39%    

Average receive rate

                           5.08%    

Forward Foreign Exchange Contracts:

                                 

Fixed (euro) to Fixed ($U.S.)

  $375  $—    $—    $—    $—    $—    $—    $—   

Average exchange rate

                           1.188     

Fixed (GPB) to Fixed ($U.S.)

  $347  $—    $—    $—    $—    $—    $(2) $(2)

Average exchange rate

                           1.73     

Fixed (HKD) to Fixed ($U.S.)

  $43  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.13     

Fixed (MXN) to Fixed ($U.S.)

  $6  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.09     

Fixed (CZK) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.04     

Fixed (JPY) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.01     

Fixed (KRW) to Fixed ($U.S.)

  $3  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.001     

Fixed (CAD) to Fixed ($U.S.)

  $22  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.86     

Item 8. Financial Statements and Supplementary Data.

The following financial information is included on the pages indicated:

Page

Management’s Report on Internal Control Over Financial Reporting

56

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

57

Report of Independent Registered Public Accounting Firm

58

Consolidated Statement of Income

59

Consolidated Balance Sheet

60

Consolidated Statement of Cash Flows

61

Consolidated Statement of Comprehensive Income

62

Consolidated Statement of Shareholders’ Equity

63

Notes to Consolidated Financial Statements

64

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Marriott International, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.

Based on this assessment, management has concluded that as of December 30, 2005, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting, a copy of which appears on the next page of this annual report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of Marriott International, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). Marriott International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Marriott International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Marriott International, Inc. as of December 30, 2005 and December 31, 2004, 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 December 30, 2005, of Marriott International, Inc. and our report dated February 21, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 21, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Marriott International, Inc.:

We have audited the accompanying consolidated balance sheets of Marriott International, Inc. as of December 30, 2005 and December 31, 2004, 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 December 30, 2005. 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 the standards of the Public Company Accounting Oversight Board (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 December 30, 2005 and December 31, 2004, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Marriott International, Inc.’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 21, 2006

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME

Fiscal Years 2005, 2004, and 2003

($ in millions, except per share amounts):

 

     

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

     

    

   2005

  2004

  2003

 

REVENUES

             

Base management fees1

  $497  $435  $388 

Franchise fees

   329   296   245 

Incentive management fees1

   201   142   109 

Owned, leased, corporate housing and other revenue1

   944   730   633 

Timeshare interval, fractional, and whole ownership sales and services

   1,487   1,247   1,145 

Cost reimbursements1

   7,671   6,928   6,192 

Synthetic fuel

   421   321   302 
   


 


 


    11,550   10,099   9,014 
   


 


 


OPERATING COSTS AND EXPENSES

             

Owned, leased and corporate housing - direct

   778   629   505 

Timeshare - direct

   1,228   1,039   1,011 

Reimbursed costs1

   7,671   6,928   6,192 

General, administrative and other1

   753   607   523 

Synthetic fuel

   565   419   406 
   


 


 


    10,995   9,622   8,637 
   


 


 


OPERATING INCOME

   555   477   377 

Gains and other income1

   181   164   106 

Interest expense

   (106)  (99)  (110)

Interest income1

   79   146   129 

(Provision for) reversal of provision for loan losses1

   (28)  8   (7)

Equity in (losses) earnings - Synthetic fuel1

   —     (28)  10 

- Other1

   36   (14)  (17)
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST

   717   654   488 

(Provision for) benefit from income taxes

   (94)  (100)  43 
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST

   623   554   531 

Minority interest

   45   40   (55)
   


 


 


INCOME FROM CONTINUING OPERATIONS

   668   594   476 

Discontinued operations

   1   2   26 
   


 


 


NET INCOME

  $669  $596  $502 
   


 


 


EARNINGS PER SHARE – Basic

             

Earnings from continuing operations

  $3.09  $2.62  $2.05 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $3.09  $2.63  $2.16 
   


 


 


EARNINGS PER SHARE – Diluted

             

Earnings from continuing operations

  $2.89  $2.47  $1.94 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $2.89  $2.48  $2.05 
   


 


 


DIVIDENDS DECLARED PER SHARE

  $0.400  $0.330  $0.295 
   


 


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

 

See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

Fiscal Years-End 2005 and 2004

($ in millions)

   2005

  2004

 

ASSETS

         

Current assets

         

Cash and equivalents

  $203  $770 

Accounts and notes receivable1

   837   797 

Current deferred taxes, net

   211   162 

Assets held for sale

   555   23 

Other

   204   194 
   


 


    2,010   1,946 

Property and equipment

   2,341   2,389 

Intangible assets

         

Goodwill

   924   923 

Contract acquisition costs1

   466   513 
   


 


    1,390   1,436 

Cost method investments1

   233   70 

Equity method investments1

   349   249 

Notes receivable

         

Loans to equity method investees1

   36   526 

Loans to timeshare owners

   311   289 

Other notes receivable

   282   374 
   


 


    629   1,189 

Other long-term receivables1

   339   326 

Deferred taxes, net1

   554   397 

Other1

   685   666 
   


 


   $8,530  $8,668 
   


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Current liabilities

         

Current portion of long-term debt

  $56  $489 

Accounts payable1

   591   570 

Accrued payroll and benefits

   559   508 

Liability for guest loyalty program

   317   302 

Self-insurance reserves

   84   71 

Liabilities of assets held for sale

   30   —   

Other payables and accruals1

   355   416 
   


 


    1,992   2,356 

Long-term debt

   1,681   836 

Liability for guest loyalty program

   768   640 

Self-insurance reserves

   180   163 

Other long-term liabilities1

   646   580 

Minority interest

   11   12 

Shareholders’ equity

         

Class A common stock

   3   3 

Additional paid-in capital

   3,564   3,423 

Retained earnings

   2,500   1,951 

Deferred compensation

   (137)  (108)

Treasury stock, at cost

   (2,667)  (1,197)

Accumulated other comprehensive (loss) income

   (11)  9 
   


 


    3,252   4,081 
   


 


   $8,530  $8,668 
   


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Fiscal Years 2005, 2004, and 2003

($ in millions)

   2005

  2004

  2003

 

OPERATING ACTIVITIES

             

Income from continuing operations

  $668  $594  $476 

Adjustments to reconcile to cash provided by operating activities:

             

Income from discontinued operations

   1   2   7 

Discontinued operations – gain on sale/exit

   —     —     19 

Depreciation and amortization

   184   166   160 

Minority interest in results of synthetic fuel operation

   (47)  (40)  55 

Income taxes

   (86)  (63)  (171)

Timeshare activity, net

   (6)  113   (111)

Other

   160   (77)  (73)

Working capital changes:

             

Accounts receivable

   (128)  (6)  (81)

Other current assets

   (22)  (16)  11 

Accounts payable and accruals

   113   218   111 
   


 


 


Net cash provided by operating activities

   837   891   403 

INVESTING ACTIVITIES

             

Capital expenditures

   (780)  (181)  (210)

Dispositions

   298   402   494 

Loan advances

   (56)  (129)  (241)

Loan collections and sales

   706   276   280 

Equity and cost method investments

   (216)  (45)  (21)

Purchase of available-for-sale securities

   (15)  (30)  —   

Other

   (67)  (6)  9 
   


 


 


Net cash (used in) provided by investing activities

   (130)  287   311 

FINANCING ACTIVITIES

             

Commercial paper, net

   499   —     (102)

Issuance of long-term debt

   356   20   14 

Repayment of long-term debt

   (523)  (99)  (273)

Redemption of convertible debt

   —     (62)  —   

Debt exchange consideration, net

   (29)  —     —   

Issuance of Class A common stock

   125   206   102 

Dividends paid

   (84)  (73)  (68)

Purchase of treasury stock

   (1,644)  (664)  (373)

Earn-outs received, net

   26   35   17 
   


 


 


Net cash used in financing activities

   (1,274)  (637)  (683)
   


 


 


(DECREASE) INCREASE IN CASH AND EQUIVALENTS

   (567)  541   31 

CASH AND EQUIVALENTS, beginning of year

   770   229   198 
   


 


 


CASH AND EQUIVALENTS, end of year

  $203  $770  $229 
   


 


 


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Fiscal Years 2005, 2004, and 2003

($ in millions)

     2005  

    2004  

    2003  

 

Net income

  $669  $596  $502 

Other comprehensive (loss) income, net of tax:

             

Net foreign currency translation adjustments

   (25)  43   37 

Net (loss)/gain on derivative instruments designated as cash flow hedges

   (2)  7   (8)

Net unrealized gain associated with available-for-sale securities

   7   —     —   
   


 

  


Total other comprehensive (loss) income

   (20)  50   29 
   


 

  


Comprehensive income

  $649  $646  $531 
   


 

  


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Fiscal Years 2005, 2004, and 2003

(in millions, except per share amounts)

Common

Shares
Outstanding


     Class A
Common
Stock


  Additional
Paid-in
Capital


  Deferred
Compensation


  Retained
Earnings


  Treasury
Stock, at
Cost


  Accumulated
Other
Comprehensive
(Loss) Income


 
235.9  

Balance at fiscal year-end 2002

  $3  $3,224  $(43) $1,126  $(667) $(70)
—    

Net income

   —     —     —     502   —     —   
—    

Dividends ($0.295 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 fiscal year-end 2003

   3   3,317   (81)  1,505   (865)  (41)
—    

Net income

   —     —     —     596   —     —   
—    

Dividends ($0.330 per share)

   —     —     —     (75)  —     —   
8.6  

Employee stock plan issuance and other

   —     106   (27)  (75)  322   50 
(14.0) 

Purchase of treasury stock

   —     —     —     —     (654)  —   


    

  

  


 


 


 


225.8  

Balance at fiscal year-end 2004

   3   3,423   (108)  1,951   (1,197)  9 
—    

Net income

   —     —     —     669   —     —   
—    

Dividends ($0.400 per share)

   —     —     —     (87)  —     —   
5.8  

Employee stock plan issuance and other

   —     141   (29)  (33)  180   (20)
(25.7) 

Purchase of treasury stock

   —     —     —     —     (1,650)  —   


    

  

  


 


 


 


205.9  

Balance at fiscal year-end 2005

  $3  $3,564  $(137) $2,500  $(2,667) $(11)


    

  

  


 


 


 


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 U.S. generally accepted accounting principles 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 revenues and expenses during the reporting periods and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. 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 impactreclassified certain prior year amounts to conform to our 2005 presentation.

As a result of the sale of our Senior Living Services communities and management business, the balances and activities of Senior Living 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 at fiscal year-end 2005 and fiscal year-end 2004 and the results of our operations and cash flows for fiscal years 2005, 2004, and 2003. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements.

 

Fiscal Year

Our fiscal year ends on the Friday nearest to December 31. All fiscal years presented include 52 weeks. Unless otherwise specified, each reference to “2005” means our fiscal year ended December 30, 2005, each reference to “2004” means our fiscal year ended December 31, 2004, each reference to “2003” means our fiscal year ended January 2, 2004, and each reference to “2002” means our fiscal year ended January 3, 2003, and not, in each case, the corresponding calendar year.

Revenue Recognition

Our revenues include (1) base and incentive management fees, (2) franchise fees, (3) revenues from lodging properties and other businesses owned or leased by us, (4) timeshare interval, fractional, and whole ownership sales and services, (5) cost reimbursements, and (6) sales made by the 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 hotel 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.

Base and Incentive Management Fees:We will adopt FAS No. 146, “Accountingrecognize 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.

Franchise Fee Revenue: We recognize franchise fees as revenue in each accounting period as fees are earned from the franchisee.

Owned and Leased Units:We recognize room sales and revenues from guest services for Costs Associatedour owned and leased units when rooms are occupied and services have been rendered.

Timeshare and Fractional Intervals: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 to cancel for a refund has expired, (3) we deem the receivables to be collectible, and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and profit are deferred and recognized in earnings using the percentage of completion method.

Timeshare Whole Ownership: We recognize sales under the full accrual method of accounting when we receive our proceeds and transfer title at settlement.

Cost Reimbursements: We recognize cost reimbursements from managed, franchised and timeshare properties when we incur the related reimbursable costs.

Synthetic Fuel: Prior to November 7, 2003, and after March 25, 2004, we accounted for the synthetic fuel operation by consolidating the joint ventures. We recognize revenue from the synthetic fuel operation when the synthetic fuel is produced and sold. From November 7, 2003, through March 25, 2004, we accounted for the synthetic fuel operation using the equity method of accounting. See Footnote 2 “Synthetic Fuel” for additional information.

Other Revenueincludes land rental income and other revenue. In 2003, we recorded a $36 million insurance settlement for lost management fees associated with Exit or Disposal Activities,”the New York Marriott World Trade Center hotel, which was destroyed in the first quarter of 2003. We do not expect the adoption of FAS No. 146 to have a material impact on our financial statements.2001 terrorist attacks.

Ground Leases

 

We have adoptedare both the disclosure provisionslessor and lessee of FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” FAS No. 148 requires expanded disclosure regarding stock-based compensationland 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 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.initial lease term.

Real Estate Sales

 

We adoptedaccount for the disclosure provisionssales of FASB Interpretationreal estate in accordance with Financial Accounting Standards (“FAS”) No. (FIN) 45, “Guarantor’s Accounting66, “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 Disclosure Requirementsdo 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 $45 million in 2005, $1 million in 2004 and $4 million in 2003. 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 contracts obtained directly with third-party owners in competitive bid processes.

Profit Sharing Plan

We contribute to a profit sharing plan for Guarantees, Including Direct Guaranteesthe benefit of Indebtedness of Others,”employees meeting certain eligibility requirements and electing participation in the fourthplan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. We recognized compensation cost from profit sharing of $69 million in 2005, $70 million in 2004 and $53 million in 2003. We recognized additional compensation cost from profit sharing of $1 million in 2003 related to the discontinued Senior Living Services and Distribution Services businesses.

 

42


quarter of 2002. We will apply the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002.Self-Insurance Programs

 

Under FIN 45,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 inceptionpresent value of guarantees issued after December 31, 2002,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 will recordconsider 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 loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

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 guaranteefuture 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, promotion, communication 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 costs of the awards redeemed. Our liability for the Marriott Rewards program was $1,085 million at year-end 2005, and $942 million at year-end 2004.

Guarantees

We record a liability withfor the fair value of a guarantee on the date a guarantee is issued or modified. The offsetting entry being recorded baseddepends on the circumstances in which the guarantee was issued. We will account for any fundingsFunding under the guarantee as a reduction ofreduces the recorded liability. AfterWhen no funding has ceased, we will recognizeis forecasted, the remaining liability in theis amortized into income statement on a straight-line basis over the remaining term of the guarantee. In general, we issue guarantees

Rebates and Allowances

We participate in connectionvarious 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. 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 obtainingan initial maturity of three months or less at date of purchase to be cash equivalents.

Restricted Cash

Restricted cash, totaling $126 million and $105 million at year-end 2005 and year-end 2004, respectively, is recorded in other long-term assets in the accompanying Consolidated Balance Sheet. Restricted cash primarily consists of deposits received on timeshare interval, fractional, and whole ownership sales that are held in escrow until the contract is closed.

Assets Held for Sale

We consider properties to be assets held for sale when all of the following criteria are met:

management contracts, and thus in those casescommits to a plan to sell a property;

it is unlikely that the offsetting entrydisposal plan will be capitalized and amortized over significantly modified or discontinued;

the lifeproperty is available for immediate sale in its present condition;

actions required to complete the sale of the management contract.property have been initiated;

sale of the property is probable and we expect the completed sale will occur within one year; and

the property is actively being marketed for sale at a price that is reasonable given its current market value.

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.

 

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 dependLoan Loss Reserves

We measure loan impairment based on the naturepresent 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 extentthe present value of issued guarantees but isthe 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 expectedaggregate loans for the purpose of applying such policy. For loans that we have determined to havebe impaired, we recognize interest income on a material impact to us.cash basis.

Valuation of Goodwill

 

We 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 make that determination based upon future cash flow projections. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

Investments

Except as otherwise required by FIN 46,46(R), “Consolidation of Variable Interest Entities,” is effective immediatelywe consolidate entities that we control. We account for all enterprisesinvestments 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. Our ownership interest in these equity method investments varies generally from 10 percent to 50 percent.

The fair value of our available-for-sale securities totaled $53 million at year-end 2005. Gains in accumulated other comprehensive loss associated with variable interestsour available-for-sale securities totaled $8 million at year-end 2005. At year-end 2005 there were no losses in variable interest entities created after January 31, 2003. FIN 46 provisions must be appliedaccumulated other comprehensive income associated with our available-for-sale securities.

Costs Incurred to variable interests in variable interest entities created before February 1, 2003 from the beginning of the third quarter of 2003. 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.Sell Real Estate Projects

 

We do not believe that itcapitalize 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 $92 million and $89 million at year-end 2005 and year-end 2004, respectively, and are included in property and equipment in the accompanying Consolidated Balance Sheet. If a contract 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 disclosurecanceled, we charge unrecoverable direct selling and marketing costs to be material.expense and record deposits forfeited as income.

 

FIN 46 does not apply to qualifying special purpose entities, such as those used by us toResidual Interests

We periodically sell notes receivable originated by our timeshare businesssegment in connection with the sale of timeshare intervals. These qualifying special purposeinterval, fractional, and whole ownership products. We retain servicing assets and other interests in the assets transferred to entities will continue to bethat are accounted for in accordance with FAS No. 140.

Stock-based Compensation

At January 3, 2003, we have several stock-based employee compensation plans, which we describe more fully inas residual interests. We treat the “Employee Stock Plans” footnote. We account for those plans using the intrinsic value methodresidual interests, excluding servicing assets, as “trading” securities under the recognition and measurement principles of 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 $9 million, $19 million and $14 million, net of tax, for deferred share grants and restricted share grants for 2002, 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.

43


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. 123,115, “Accounting for Stock-Based Compensation,Certain Investments in Debt and Equity Securities.At the end of each reporting period, we estimate the fair value of the residual interests, excluding servicing assets, using a discounted cash flow model. We report changes in the fair values of these residual interests, excluding servicing assets, through the accompanying Consolidated Statement of Income. Servicing assets are classified as held to stock-based employee compensation ($ in millions, except per share amounts):maturity under the provisions of FAS No. 115 and are recorded at amortized cost.

   

2002


   

2001


   

2000


 

Net income, as reported

  

$

277

 

  

$

236

 

  

$

479

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

  

 

9

 

  

 

19

 

  

 

14

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

  

 

(64

)

  

 

(68

)

  

 

(58

)

   


  


  


Pro forma net income

  

$

222

 

  

$

187

 

  

$

435

 

   


  


  


Earnings per share:

               

Basic – as reported

  

$

1.15

 

  

$

.97

 

  

$

1.99

 

   


  


  


Basic – pro forma

  

$

.93

 

  

$

.77

 

  

$

1.80

 

   


  


  


Diluted – as reported

  

$

1.10

 

  

$

.92

 

  

$

1.89

 

   


  


  


Diluted – pro forma

  

$

.90

 

  

$

.74

 

  

$

1.73

 

   


  


  


 

RELATIONSHIP WITH MAJOR CUSTOMERDerivative Instruments

In December 1998, 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, 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 salesuse derivative instruments as part 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 recognized sales of $494 million, $546 million 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 landour overall strategy to certain of these partnerships and recognized land rent income of $18 million, $19 million and $21 million, respectively, in 2002, 2001 and 2000.

In December 2000, we acquired 120 Courtyard by Marriott hotels, through an unconsolidated joint venture (the Courtyard Joint Venture)manage our exposure to market risks associated with an affiliate of Host Marriott. Prior to the formation of the Courtyard Joint Venture, Host Marriott 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 above include the following amounts related to these 120 Courtyard hotels: sales 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, we recognized interest income of $27 million and $26 million in 2002 and 2001, respectively, on the $200 million mezzanine debt provided by us to the joint venture.

44


We have provided Host Marriott 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 in the future. The outstanding principal balance of these loans was $5 million and $7 million at January 3, 2003 and December 28, 2001, respectively, and we recognized $1 million in each of 2002, 2001 and 2000fluctuations in interest rates and fee income under these credit agreements with Host Marriott.

We have guaranteed the performanceforeign currency exchange rates. As a matter of Host Marriott and certain of its affiliates to lenders and other third parties. These guarantees were limited to $7 million at January 3, 2003. We have made no payments pursuant to these guarantees. We lease land to the Courtyard joint venture that had an aggregate book value of $184 million at January 3, 2003. This land has been pledged to secure debt of the lessees. We have agreed to defer 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,policy, 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,

Provided Host Marriott with additional approval rights over budgets and capital expenditures;

Extended the term of our management agreements for five hotels that were subject to termination in the short term, and two core system hotels that provide additional years at the end of the current term;

Changed the pool of hotels that Host Marriott could sell with franchise agreements to one of our approved franchisees and revised the method of determining the number of hotels that may be sold without a management agreement or franchise agreement;

Lowered the incentive management fees payable to us by amounts that will depend in part on underlying hotel profitability. In 2002, the reduction was $2.5 million;

Reduced certain expenses to the properties and lowered Host Marriott’s working capital requirements;

Confirmed that we and our affiliates may earn a profit (in addition to what we earn through management fees) on certain transactions relating to Host Marriott-owned properties, and established the specific conditions under which we may profit on future transactions; and

Terminated our prior right to make significant purchases of Host Marriott’s outstanding common stock upon certain changes of control and clarified our rights in each of our management agreements to prevent either a sale of the hotel to our major competitors or specified changes in control of Host Marriott involving our major competitors.

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.use derivatives for trading or speculative purposes.

45


NOTES RECEIVABLE

   

2002


   

2001


 
   

($ in millions)

 

Loans to timeshare owners

  

$

169

 

  

$

288

 

Lodging senior loans

  

 

320

 

  

 

314

 

Lodging mezzanine loans

  

 

624

 

  

 

530

 

Senior Living Services loans

  

 

—  

 

  

 

16

 

   


  


   

 

1,113

 

  

 

1,148

 

Less current portion

  

 

(72

)

  

 

(73

)

   


  


   

$

1,041

 

  

$

1,075

 

   


  


Lodging mezzanine loans include the loan to the Courtyard joint venture. Amounts due within one year are classified as current assets in the accompanying consolidated balance sheet, including $16 million and $29 million, respectively, as of January 3, 2003 and December 28, 2001, related to the loans to timeshare owners.

PROPERTY AND EQUIPMENT

   

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

 

   


  


 

We record propertyall 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 equipment at cost, including interest, rentof 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 real estate taxes incurred during development and construction. Interest capitalizedrecognized 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 costcomponent of propertyother comprehensive income and equipment totaled $43 millionreport the ineffective portion currently in 2002, $61 millionearnings. We reclassify amounts included in 2001 and $52 millionother comprehensive income into earnings in 2000. We capitalize the cost of improvements that extendsame period during which 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 repairs and maintenance costs are expensed as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the assets (three to 40 years). We amortize leasehold improvements over the shorter of the asset life or lease term.hedged item affects earnings.

 

ACQUISITIONS AND DISPOSITIONSForeign 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 currency of the country in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars, and we do the same, as needed, for unconsolidated entities whose functional currency is not the


U.S. dollar. 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 weighted average exchange rate for the period. Translation 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 rate changes related to 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 $5 million loss in 2005, a $3 million loss in 2004, and a $7 million gain in 2003.

Courtyard Joint Venture

 

InDuring the 2005 second quarter, Sarofim Realty Advisors (“Sarofim”), on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the Courtyard joint venture, and we signed new long-term management agreements with the joint venture. The transaction has accelerated the pace of reinventions and upgrades at the joint venture’s 120 hotels. The termination of the previous management agreements was probable at year-end 2004. Accordingly, in 2004 we wrote off our deferred contract acquisition costs relating to the management agreements which existed at that time, resulting in a charge of $13 million.

Prior to Sarofim’s acquisition, we and Host Marriott owned equal shares in the 120-property joint venture. With the addition of the new equity, our interest in the joint venture declined to approximately 21 percent and Host Marriott’s interest declined to less than 4 percent. As part of the completed transaction, our mezzanine loan to the joint venture (including capitalized interest) totaling approximately $269 million was repaid.

Contractual Obligations and Off Balance Sheet Arrangements

The following table summarizes our contractual obligations as of year-end 2005:

      Payments Due by Period

Contractual Obligations

 

($ in millions)

 

  Total

  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Debt(1)

  $2,281  $127  $255  $222  $1,677

Capital lease obligations(1)

   16   1   2   2   11

Operating leases where we are the primary obligor:

                    

Recourse

   1,051   108   224   203   516

Non-recourse

   432   16   34   25   357

Operating leases where we are secondarily liable

   395   32   66   66   231

Other long-term liabilities

   49   —     7   —     42
   

  

  

  

  

Total contractual obligations

  $4,224  $284  $588  $518  $2,834
   

  

  

  

  


(1)      Includes principal as well as interest payments.

                    

The following table summarizes our commitments as of year-end 2005:

      Amount of Commitment Expiration Per Period

Other Commercial Commitments

 

($ in millions)

 

  Total Amounts
Committed


  Less Than
1 Year


  1-3 Years

  3-5 Years

  After 5 Years

Total guarantees where we are the primary obligor

  $414  $114  $63  $49  $188

Total guarantees where we are secondarily liable

   537   59   111   105   262
   

  

  

  

  

Total other commercial commitments

  $951  $173  $174  $154  $450
   

  

  

  

  

Our guarantees listed above include $69 million for guarantees 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.

The guarantees above include $320 million related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. 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 2000, we entered into an agreement to resolve litigation involving certain limited partnerships formed in the mid- to late 1980s. The agreement was reached with lead counsel to the plaintiffs in the lawsuits, and with the special litigation committee appointed2003, these pre-existing guarantees were guarantees by the general partnerCompany of twoobligations of the partnerships, Courtyard by Marriott Limited Partnership (CBM I)consolidated Senior Living Services subsidiaries. Sunrise and Courtyard by Marriott II Limited Partnership (CBM II). The agreement was amendedCNL have indemnified us for any guarantee fundings we may be called on to make in September 2000,connection with these lease obligations and lifecare bonds. We do not expect 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.

Under the agreement, we acquired, through an unconsolidated joint venture with an affiliate of Host Marriott, substantially all of the limited partners’ interests in CBM I and CBM II which own 120 Courtyard by Marriott hotels. We continue to manage the 120 hotelsfund under long-term agreements. The joint venture was financed with equity contributed in equal shares by us and an affiliate 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 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.these guarantees.

 

The agreementguarantees above also providedinclude lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $20 million and total remaining rent payments through the initial term plus available extensions of approximately $217 million. We are also secondarily obligated for real estate taxes and other charges associated with the leases. Third parties have severally indemnified us for all payments we may be required to make in connection with these obligations. Since we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted above, as of year-end 2005 our total unfunded loan commitments amounted to $11 million. We expect to fund $5 million of those commitments within one year. We do not expect to fund the remaining $6 million of commitments, which expire as follows: $4 million within one year and $2 million after five years.

In 2005, we assigned to a third-party our previous commitment to fund up to $129 million to the Courtyard joint venture for the resolutionprimary purpose of litigation with respect to four other limited partnerships. On September 28, 2000,funding the court entered a final order with respect to those partnerships,costs of renovating its properties in 2005 and on that same date, we and Host Marriott each paid into escrow approximately $31 million for payment2006. Under the agreement, the third-party assumed the lending obligation to the plaintiffsventure. As of year-end 2005, we funded $1 million and the third-party funded $22 million under this loan commitment. The commitment to fund is reduced to $27 million in exchange for dismissalSeptember 2006 and expires in December 2009. In total, we expect that no more than $104 million of the complaints$129 million commitment will be funded, and full releases.other than the $1 million we already funded, we expect the third-party to provide all future fundings. We do not anticipate making further fundings ourselves, but remain secondarily obligated to the Courtyard joint venture if the third-party fails to fund. At year-end 2005, that secondary obligation totaled $106 million and is not reflected in our outstanding loan commitments discussed in the preceding paragraph.

At year-end 2005 we also have commitments to invest $27 million of equity for minority interests in three partnerships, which plan to purchase both full-service and select-service hotels in the United States and Canada.

At year-end 2005 we also had $93 million of letters of credit outstanding on our behalf, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of year-end 2005 totaled $546 million, the majority of which were requested by federal, state or local governments related to our timeshare and lodging operations and self-insurance programs.

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.

RELATED PARTY TRANSACTIONS

 

We recordedhave equity method investments in entities that own properties for which we provide management and/or franchise services and receive a pretax chargefee. 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)

 

  2005

  2004

  2003

 

Base management fees

  $83  $72  $56 

Incentive management fees

   14   8   4 

Cost reimbursements

   936   802   699 

Owned, leased, corporate housing and other revenue

   22   29   28 
   


 


 


Total revenue

  $1,055  $911  $787 
   


 


 


General, administrative and other

  $(19) $(33) $(11)

Reimbursed costs

   (936)  (802)  (699)

Gains and other income

   54   19   21 

Interest income

   31   74   77 

Reversal of (provision for) loan losses

   —     3   (2)

Equity in (losses) earnings – Synthetic fuel

   —     (28)  10 

Equity in earnings (losses) – Other

   36   (14)  (17)

Balance Sheet Data

($ in millions)

 

  2005

  2004

 

Current assets - accounts and notes receivable

  $48  $72 

Contract acquisition costs

   26   24 

Cost method investments

   121   —   

Equity method investments

   349   249 

Loans to equity method investees

   36   526 

Other long-term receivables

   —     3 

Other long-term assets

   166   38 

Long-term deferred tax asset, net

   19   17 

Current liabilities:

         

Accounts payable

   (2)  (3)

Other payables and accruals

   (45)  (4)

Other long-term liabilities

   (101)  (11)

CRITICAL ACCOUNTING ESTIMATES

The preparation of $39 million, whichfinancial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if:

it requires assumptions to be made that were uncertain at the time the estimate was included in corporate expensesmade; and

changes in the fourth quarterestimate or different estimates that could have been selected could have a material effect on our consolidated results of 1999,operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to reflect the settlement transactions.them.

 

DispositionsMarriott Rewards

 

Marriott Rewards is our frequent guest loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

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 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, promotion, communication with, and performing member services for the Marriott Rewards members. Due to the requirement that properties reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from properties 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 costs of the awards redeemed.

Valuation of Goodwill

We 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 make that determination based upon future cash flow projections which assume certain growth projections which may or may not occur. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

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 impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows, which assumes certain growth projections which may or may not occur, 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. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At year-end 2005 our recorded investment in impaired loans was $184 million. We have a $103 million allowance for credit losses, leaving $81 million of our investment in impaired loans for which there is no related allowance for credit losses. At year-end 2004, our recorded investment in impaired loans was $181 million. During 2005 and 2004, our average investment in impaired loans totaled $182 million and $161 million, respectively.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

Income Taxes

We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

Changes in existing laws and rates, and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

OTHER MATTERS

Inflation

Inflation has been moderate in recent years and has not had a significant impact on our businesses.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates, foreign exchange rates, and equity prices. We manage our exposure to these risks by monitoring available financing alternatives, through development and application of credit granting policies 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 how such exposure is managed in the future.

We are exposed to interest rate risk on our floating-rate notes receivable, our residual interests retained in connection with the sale of Timeshare segment notes receivable and the fair value of our fixed-rate notes receivable.

Changes in interest rates also impact our floating-rate long-term debt and the fair-value of our fixed-rate long-term debt.

We are also subject to risk from changes in equity prices from our investments in common stock, which have a carrying value of $53 million at year-end 2005 and are accounted for as available-for-sale securities under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

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.

At year-end 2005 we were party to the following derivative instruments:

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.

Six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our Timeshare segment note sales. Historically, we were 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 $380 million, and they expire through 2022.

Forward foreign exchange and option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during 2005. The aggregate dollar equivalent of the notional amounts of the contracts is approximately $27 million, and they expire throughout 2006.

Forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets. The aggregate dollar equivalent of the notional amounts of the forward contracts is $544 million at year-end 2005, and they expire throughout 2006.

Forward foreign exchange contracts to manage currency exchange rate volatility associated with certain investments in foreign operations. The contracts have a dollar notional equivalent of $229 million at year-end 2005, and they expire throughout 2006.

The following table sets forth the scheduled maturities and the total fair value of our derivatives and other financial instruments as of year-end 2005:

   Maturities by Period

 

($ in millions)

 

    2006  

    2007  

    2008  

    2009  

    2010  

  

There-

after


  

Total

Carrying

Amount


  

Total

Fair

Value


 

Assets - Maturities represent expected principal receipts, fair values represent assets.

 

    

Timeshare segment notes receivable

  $33  $42  $37  $31  $29  $172  $344  $344 

Average interest rate

                           12.76%    

Fixed-rate notes receivable

  $10  $21  $20  $2  $82  $29  $164  $166 

Average interest rate

                           10.38%    

Floating-rate notes receivable

  $5  $59  $20  $1  $7  $77  $169  $169 

Average interest rate

                           7.56%    

Residual interests

  $71  $47  $30  $18  $12  $18  $196  $196 

Average interest rate

                           8.56%    

Liabilities - Maturities represent expected principal payments, fair values represent liabilities.

 

 ��  

Fixed-rate debt

  $(51) $(11) $(102) $(88) $(12) $(903) $(1,167) $(1,214)

Average interest rate

                           6.04%    

Floating-rate debt

  $(1) $—    $—    $—    $—    $(499) $(500) $(500)

Average interest rate

                           4.211%    

NOTE: We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

 

    

Derivatives - Maturities represent notional amounts, fair values represent assets (liabilities).

 

    

Interest Rate Swaps:

                                 

Fixed to variable

  $—    $—    $—    $—    $65  $301  $7  $7 

Average pay rate

                           4.35%    

Average receive rate

                           5.03%    

Variable to fixed

  $—    $—    $—    $—    $43  $64  $(1) $(1)

Average pay rate

                           5.39%    

Average receive rate

                           5.08%    

Forward Foreign Exchange Contracts:

                                 

Fixed (euro) to Fixed ($U.S.)

  $375  $—    $—    $—    $—    $—    $—    $—   

Average exchange rate

                           1.188     

Fixed (GPB) to Fixed ($U.S.)

  $347  $—    $—    $—    $—    $—    $(2) $(2)

Average exchange rate

                           1.73     

Fixed (HKD) to Fixed ($U.S.)

  $43  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.13     

Fixed (MXN) to Fixed ($U.S.)

  $6  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.09     

Fixed (CZK) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.04     

Fixed (JPY) to Fixed ($U.S.)

  $2  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.01     

Fixed (KRW) to Fixed ($U.S.)

  $3  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.001     

Fixed (CAD) to Fixed ($U.S.)

  $22  $—    $—    $—    $—    $—    $—    $—   

Average Exchange Rate

                           0.86     

Item 8. Financial Statements and Supplementary Data.

The following financial information is included on the pages indicated:

Page

Management’s Report on Internal Control Over Financial Reporting

56

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

57

Report of Independent Registered Public Accounting Firm

58

Consolidated Statement of Income

59

Consolidated Balance Sheet

60

Consolidated Statement of Cash Flows

61

Consolidated Statement of Comprehensive Income

62

Consolidated Statement of Shareholders’ Equity

63

Notes to Consolidated Financial Statements

64

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Marriott International, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In 2002,connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.

Based on this assessment, management has concluded that as of December 30, 2005, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting, a copy of which appears on the next page of this annual report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of Marriott International, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). Marriott International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we soldplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Marriott International, Inc. maintained effective internal control over financial reporting as of December 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Marriott International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Marriott International, Inc. as of December 30, 2005 and December 31, 2004, 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 December 30, 2005, of Marriott International, Inc. and our report dated February 21, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 21, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Marriott International, Inc.:

We have audited the accompanying consolidated balance sheets of Marriott International, Inc. as of December 30, 2005 and December 31, 2004, 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 December 30, 2005. 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 the standards of the Public Company Accounting Oversight Board (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 December 30, 2005 and December 31, 2004, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Marriott International, Inc.’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 21, 2006

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME

Fiscal Years 2005, 2004, and 2003

($ in millions, except per share amounts)

   2005

  2004

  2003

 

REVENUES

             

Base management fees1

  $497  $435  $388 

Franchise fees

   329   296   245 

Incentive management fees1

   201   142   109 

Owned, leased, corporate housing and other revenue1

   944   730   633 

Timeshare interval, fractional, and whole ownership sales and services

   1,487   1,247   1,145 

Cost reimbursements1

   7,671   6,928   6,192 

Synthetic fuel

   421   321   302 
   


 


 


    11,550   10,099   9,014 
   


 


 


OPERATING COSTS AND EXPENSES

             

Owned, leased and corporate housing - direct

   778   629   505 

Timeshare - direct

   1,228   1,039   1,011 

Reimbursed costs1

   7,671   6,928   6,192 

General, administrative and other1

   753   607   523 

Synthetic fuel

   565   419   406 
   


 


 


    10,995   9,622   8,637 
   


 


 


OPERATING INCOME

   555   477   377 

Gains and other income1

   181   164   106 

Interest expense

   (106)  (99)  (110)

Interest income1

   79   146   129 

(Provision for) reversal of provision for loan losses1

   (28)  8   (7)

Equity in (losses) earnings - Synthetic fuel1

   —     (28)  10 

- Other1

   36   (14)  (17)
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST

   717   654   488 

(Provision for) benefit from income taxes

   (94)  (100)  43 
   


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST

   623   554   531 

Minority interest

   45   40   (55)
   


 


 


INCOME FROM CONTINUING OPERATIONS

   668   594   476 

Discontinued operations

   1   2   26 
   


 


 


NET INCOME

  $669  $596  $502 
   


 


 


EARNINGS PER SHARE – Basic

             

Earnings from continuing operations

  $3.09  $2.62  $2.05 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $3.09  $2.63  $2.16 
   


 


 


EARNINGS PER SHARE – Diluted

             

Earnings from continuing operations

  $2.89  $2.47  $1.94 

Earnings from discontinued operations

   —     .01   .11 
   


 


 


Earnings per share

  $2.89  $2.48  $2.05 
   


 


 


DIVIDENDS DECLARED PER SHARE

  $0.400  $0.330  $0.295 
   


 


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

Fiscal Years-End 2005 and 2004

($ in millions)

   2005

  2004

 

ASSETS

         

Current assets

         

Cash and equivalents

  $203  $770 

Accounts and notes receivable1

   837   797 

Current deferred taxes, net

   211   162 

Assets held for sale

   555   23 

Other

   204   194 
   


 


    2,010   1,946 

Property and equipment

   2,341   2,389 

Intangible assets

         

Goodwill

   924   923 

Contract acquisition costs1

   466   513 
   


 


    1,390   1,436 

Cost method investments1

   233   70 

Equity method investments1

   349   249 

Notes receivable

         

Loans to equity method investees1

   36   526 

Loans to timeshare owners

   311   289 

Other notes receivable

   282   374 
   


 


    629   1,189 

Other long-term receivables1

   339   326 

Deferred taxes, net1

   554   397 

Other1

   685   666 
   


 


   $8,530  $8,668 
   


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Current liabilities

         

Current portion of long-term debt

  $56  $489 

Accounts payable1

   591   570 

Accrued payroll and benefits

   559   508 

Liability for guest loyalty program

   317   302 

Self-insurance reserves

   84   71 

Liabilities of assets held for sale

   30   —   

Other payables and accruals1

   355   416 
   


 


    1,992   2,356 

Long-term debt

   1,681   836 

Liability for guest loyalty program

   768   640 

Self-insurance reserves

   180   163 

Other long-term liabilities1

   646   580 

Minority interest

   11   12 

Shareholders’ equity

         

Class A common stock

   3   3 

Additional paid-in capital

   3,564   3,423 

Retained earnings

   2,500   1,951 

Deferred compensation

   (137)  (108)

Treasury stock, at cost

   (2,667)  (1,197)

Accumulated other comprehensive (loss) income

   (11)  9 
   


 


    3,252   4,081 
   


 


   $8,530  $8,668 
   


 



1See Footnote 21, “Related Party Transactions,” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Fiscal Years 2005, 2004, and 2003

($ in millions)

   2005

  2004

  2003

 

OPERATING ACTIVITIES

             

Income from continuing operations

  $668  $594  $476 

Adjustments to reconcile to cash provided by operating activities:

             

Income from discontinued operations

   1   2   7 

Discontinued operations – gain on sale/exit

   —     —     19 

Depreciation and amortization

   184   166   160 

Minority interest in results of synthetic fuel operation

   (47)  (40)  55 

Income taxes

   (86)  (63)  (171)

Timeshare activity, net

   (6)  113   (111)

Other

   160   (77)  (73)

Working capital changes:

             

Accounts receivable

   (128)  (6)  (81)

Other current assets

   (22)  (16)  11 

Accounts payable and accruals

   113   218   111 
   


 


 


Net cash provided by operating activities

   837   891   403 

INVESTING ACTIVITIES

             

Capital expenditures

   (780)  (181)  (210)

Dispositions

   298   402   494 

Loan advances

   (56)  (129)  (241)

Loan collections and sales

   706   276   280 

Equity and cost method investments

   (216)  (45)  (21)

Purchase of available-for-sale securities

   (15)  (30)  —   

Other

   (67)  (6)  9 
   


 


 


Net cash (used in) provided by investing activities

   (130)  287   311 

FINANCING ACTIVITIES

             

Commercial paper, net

   499   —     (102)

Issuance of long-term debt

   356   20   14 

Repayment of long-term debt

   (523)  (99)  (273)

Redemption of convertible debt

   —     (62)  —   

Debt exchange consideration, net

   (29)  —     —   

Issuance of Class A common stock

   125   206   102 

Dividends paid

   (84)  (73)  (68)

Purchase of treasury stock

   (1,644)  (664)  (373)

Earn-outs received, net

   26   35   17 
   


 


 


Net cash used in financing activities

   (1,274)  (637)  (683)
   


 


 


(DECREASE) INCREASE IN CASH AND EQUIVALENTS

   (567)  541   31 

CASH AND EQUIVALENTS, beginning of year

   770   229   198 
   


 


 


CASH AND EQUIVALENTS, end of year

  $203  $770  $229 
   


 


 


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Fiscal Years 2005, 2004, and 2003

($ in millions)

     2005  

    2004  

    2003  

 

Net income

  $669  $596  $502 

Other comprehensive (loss) income, net of tax:

             

Net foreign currency translation adjustments

   (25)  43   37 

Net (loss)/gain on derivative instruments designated as cash flow hedges

   (2)  7   (8)

Net unrealized gain associated with available-for-sale securities

   7   —     —   
   


 

  


Total other comprehensive (loss) income

   (20)  50   29 
   


 

  


Comprehensive income

  $649  $646  $531 
   


 

  


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Fiscal Years 2005, 2004, and 2003

(in millions, except per share amounts)

Common

Shares
Outstanding


     Class A
Common
Stock


  Additional
Paid-in
Capital


  Deferred
Compensation


  Retained
Earnings


  Treasury
Stock, at
Cost


  Accumulated
Other
Comprehensive
(Loss) Income


 
235.9  

Balance at fiscal year-end 2002

  $3  $3,224  $(43) $1,126  $(667) $(70)
—    

Net income

   —     —     —     502   —     —   
—    

Dividends ($0.295 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 fiscal year-end 2003

   3   3,317   (81)  1,505   (865)  (41)
—    

Net income

   —     —     —     596   —     —   
—    

Dividends ($0.330 per share)

   —     —     —     (75)  —     —   
8.6  

Employee stock plan issuance and other

   —     106   (27)  (75)  322   50 
(14.0) 

Purchase of treasury stock

   —     —     —     —     (654)  —   


    

  

  


 


 


 


225.8  

Balance at fiscal year-end 2004

   3   3,423   (108)  1,951   (1,197)  9 
—    

Net income

   —     —     —     669   —     —   
—    

Dividends ($0.400 per share)

   —     —     —     (87)  —     —   
5.8  

Employee stock plan issuance and other

   —     141   (29)  (33)  180   (20)
(25.7) 

Purchase of treasury stock

   —     —     —     —     (1,650)  —   


    

  

  


 


 


 


205.9  

Balance at fiscal year-end 2005

  $3  $3,564  $(137) $2,500  $(2,667) $(11)


    

  

  


 


 


 


See Notes to Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 U.S. generally accepted accounting principles 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 revenues and expenses during the reporting periods and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. We have reclassified certain prior year amounts to conform to our 2005 presentation.

As a result of the sale of our Senior Living Services communities and management business, the balances and activities of Senior Living 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 at fiscal year-end 2005 and fiscal year-end 2004 and the results of our operations and cash flows for fiscal years 2005, 2004, and 2003. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements.

Fiscal Year

Our fiscal year ends on the Friday nearest to December 31. All fiscal years presented include 52 weeks. Unless otherwise specified, each reference to “2005” means our fiscal year ended December 30, 2005, each reference to “2004” means our fiscal year ended December 31, 2004, each reference to “2003” means our fiscal year ended January 2, 2004, and each reference to “2002” means our fiscal year ended January 3, 2003, and not, in each case, the corresponding calendar year.

Revenue Recognition

Our revenues include (1) base and incentive management fees, (2) franchise fees, (3) revenues from lodging properties and six pieces of undeveloped land for $330 million in cash. We will continue to operate twoother businesses owned or leased by us, (4) timeshare interval, fractional, and whole ownership sales and services, (5) cost reimbursements, and (6) sales made by the synthetic fuel operation while consolidated. Management fees comprise a base fee, which is a percentage of the revenues of hotels, under long-term management agreements. and an incentive fee, which is generally based on hotel 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.

Base and Incentive Management Fees:We accountedrecognize 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.

Franchise Fee Revenue: We recognize franchise fees as revenue in each accounting period as fees are earned from the franchisee.

Owned and Leased Units:We recognize room sales and revenues from guest services for twoour owned and leased units when rooms are occupied and services have been rendered.

Timeshare and Fractional Intervals:We recognize sales when (1) we have received a minimum of 10 percent of the three propertypurchase price for the timeshare interval, (2) the purchaser’s period to cancel for a refund has expired, (3) we deem the receivables to be collectible, and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue and profit are deferred and recognized in earnings using the percentage of completion method.

Timeshare Whole Ownership: We recognize sales under the full accrual method in accordance with FAS No. 66. The buyer did not make adequate minimum initial investments inof accounting when we receive our proceeds and transfer title at settlement.

Cost Reimbursements: We recognize cost reimbursements from managed, franchised and timeshare properties when we incur the remaining property, whichrelated reimbursable costs.

Synthetic Fuel: Prior to November 7, 2003, and after March 25, 2004, we accounted for under the cost recovery method. The salesynthetic fuel operation by consolidating the joint ventures. We recognize revenue from the synthetic fuel operation when the synthetic fuel is produced and sold. From November 7, 2003, through March 25, 2004, we accounted for the synthetic fuel operation using the equity method 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 $6 million of pretax gains in 2002 and will recognize the remaining $51 million of pretax gains in subsequent years, provided certain contingencies in the sales contracts expire.accounting. See Footnote 2 “Synthetic Fuel” for additional information.

 

Other Revenueincludes land rental income and other revenue. 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,2003, we recorded a pretax gain of approximately $44 million.$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.

 

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 hotels 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 $2 million of pretax profit in 2002 and $2 million of pretax losses in 2001 and will recognize the remaining $27 million of pretax deferred gains in subsequent years, provided certain contingencies in the sales contracts expire.Ground Leases

 

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 ofWe are both the lessor and subsequently enter into agreements with the new lessee to operate the hotelsof land under long-term management agreements. These properties were previously sold and leased back by usoperating leases, which include scheduled increases in 1997, 1998 and 1999. As of January 3, 2003, 21 ofminimum rents. We recognize these leases had been transferred, and pretax gains of $5 million and $12 million previously deferredscheduled rent increases on the sale of these properties were recognized when our lease obligations ceased in 2002 and 2001, respectively.

In 2001, we sold land for $71 million to a joint venture at book value. The joint venture is building two resort hotels in Orlando, Florida. We are providing development services and have guaranteed completion of the project. We expect the hotels to open in July 2003. At opening we also expect to hold approximately $110 million in mezzanine loans that we have agreed to advance 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 have 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 to the joint venture, as long-term debt in the accompanying consolidated balance sheet.

In 2001, we sold and leased back one lodging property for $15 million in cash, which generated a pretax gain of $2 million. We will recognize this gain as a reduction of rent expensestraight-line basis 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 partnershipReal Estate Sales

We account for $82 million in cash. We recognized pretax gains of $13 million in connection with four of the sales. We will recognize pretax gains of $3 million related to the other two sales in subsequent years provided certain contingencies in the sales contract expire.

47


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 methodreal estate in accordance with FASFinancial Accounting Standards (“FAS”) No. 66. The buyers did66, “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 make adequate minimum initial investments in the remaining three properties, which we accounted for under the cost recovery method. Fourtransfer substantially all 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 daterisks and rewards of sale.ownership. 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 deferredreduced gains on the salesales of these properties of $15real estate due to maximum exposure to loss by $45 million were recognized as our leases were canceled throughout 2000. In connection with the sale of four of the properties, we provided $39in 2005, $1 million of mezzanine fundingin 2004 and agreed to provide the buyer with up to $161$4 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. has guaranteed the lease obligations of the tenants, wholly-owned subsidiaries of Marriott International, Inc., 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.

2003. 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.

 

See Assets HeldProfit Sharing Plan

We contribute to a profit sharing plan for Sale note for dispositionsthe 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. We recognized compensation cost from profit sharing of $69 million in 2005, $70 million in 2004 and $53 million in 2003. We recognized additional compensation cost from profit sharing of $1 million in 2003 related to ourthe 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 loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional, and whole ownership products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

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 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, promotion, communication 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 costs of the awards redeemed. Our liability for the Marriott Rewards program was $1,085 million at year-end 2005, and $942 million at year-end 2004.

Guarantees

We record a liability for the fair value of a guarantee on the date a guarantee is issued or modified. The offsetting entry depends on the circumstances in which the guarantee was issued. Funding under the guarantee reduces the recorded liability. When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee.

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. 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 an initial maturity of three months or less at date of purchase to be cash equivalents.

Restricted Cash

Restricted cash, totaling $126 million and $105 million at year-end 2005 and year-end 2004, respectively, is recorded in other long-term assets in the accompanying Consolidated Balance Sheet. Restricted cash primarily consists of deposits received on timeshare interval, fractional, and whole ownership sales that are held in escrow until the contract is closed.

Assets Held for Sale

We consider properties to be assets held for sale when all of the following criteria are met:

management commits to a plan to sell a property;

it is unlikely that the disposal plan will be significantly modified or discontinued;

the property is available for immediate sale in its present condition;

actions required to complete the sale of the property have been initiated;

sale of the property is probable and we expect the completed sale will occur within one year; and

the property is actively being marketed for sale at a price that is reasonable given its current market value.

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.

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 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.

Valuation of Goodwill

We 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 make that determination based upon future cash flow projections. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

Investments

Except as otherwise required by FIN 46(R), “Consolidation of Variable Interest Entities,” we consolidate entities that we 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. Our ownership interest in these equity method investments varies generally from 10 percent to 50 percent.

The fair value of our available-for-sale securities totaled $53 million at year-end 2005. Gains in accumulated other comprehensive loss associated with our available-for-sale securities totaled $8 million at year-end 2005. At year-end 2005 there were no losses in accumulated other comprehensive income associated with our available-for-sale securities.

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 $92 million and $89 million at year-end 2005 and year-end 2004, respectively, and are included in property and equipment in the accompanying Consolidated Balance Sheet. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense and record deposits forfeited as income.

Residual Interests

We periodically sell notes receivable originated by our timeshare segment in connection with the sale of timeshare interval, fractional, and whole ownership products. We retain servicing assets and other interests in the assets transferred to entities that are accounted for as residual interests. We treat the residual interests, excluding servicing assets, as “trading” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At the end of each reporting period, we estimate the fair value of the residual interests, excluding servicing assets, using a discounted cash flow model. We report changes in the fair values of these residual interests, excluding servicing assets, through the accompanying Consolidated Statement of Income. Servicing assets are classified as held to maturity under the provisions of FAS No. 115 and are recorded at amortized cost.

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.

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 currency of the country in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars, and we do the same, as needed, for unconsolidated entities whose functional currency is not the


U.S. dollar. 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 weighted average exchange rate for the period. Translation 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 rate changes related to 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 $5 million loss in 2005, a $3 million loss in 2004, and a $7 million gain in 2003.

New Accounting Standards

In December 2004, the American Institute of Certified Public Accountants issued Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions,” (the “SOP”) and the Financial Accounting Standards Board (“FASB”) amended FAS No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. The SOP is effective for fiscal years beginning after June 15, 2005.

Under the SOP, we will charge the majority of the costs we incur to sell timeshares to expense when incurred. We will also record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction of revenue at the time that we recognize profit on a timeshare sale. We will also account for rental and other operations during holding periods as incidental operations, which require us to record any excess profits as a reduction of inventory costs.

We estimate that the initial adoption of the SOP in our 2006 first quarter, which we will report as a cumulative effect of a change in accounting principle in our fiscal year 2006 financial statements, will result in a one-time non-cash after-tax charge of approximately $110 million to $115 million, consisting primarily of the write-off of deferred selling costs and establishing the required reserves on notes. We estimate the ongoing impact of the adoption in subsequent periods will be immaterial.

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” We will adopt FAS No. 123R at the beginning of our 2006 fiscal year. We estimate the adoption of FAS No. 123R, using the modified prospective method, will result in incremental pre-tax expense in fiscal year 2006 of approximately $44 million, based on our current share-based payment compensation plans, assumptions reflecting currently available information and recent interpretations related to accounting for share-based awards granted to eligible retirees.

Share-based Compensation

We have several share-based employee compensation plans that we account for using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25. Accordingly, we do not reflect share-based employee compensation cost in net income for our Stock Option Program or the Supplemental Executive Stock Option awards. We recognized stock-based employee compensation cost of $40 million, $31 million and $19 million, net of tax, for deferred share grants, restricted share grants and restricted stock units for 2005, 2004 and 2003, respectively.

Shares issued to eligible retirees are fully vested at the grant date although they are delivered over a future period. Our policy is to recognize compensation expense over the share delivery period unless the employee terminates his or her employment, in which case the remaining compensation expense is recognized at the date of termination.

Upon adoption of FAS No. 123R, compensation expense will be recognized at the date the shares are fully vested.


The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of FAS No. 123 to share-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 the calculation of the diluted pro forma shares for all years presented. In addition, we have included the estimated impact of reimbursements from third parties.

($ in millions, except per share amounts)

 

  2005

  2004

  2003

 

Net income, as reported

  $669  $596  $502 

Add: Share-based employee compensation expense included in reported net income, net of related tax effects

   40   31   19 

Deduct: Total share-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects and estimated reimbursed costs

   (61)  (58)  (48)
   


 


 


Pro forma net income

  $648  $569  $473 
   


 


 


Earnings per share:

             

Basic – as reported

  $3.09  $2.63  $2.16 
   


 


 


Basic – pro forma

  $2.99  $2.51  $2.03 
   


 


 


Diluted – as reported

  $2.89  $2.48  $2.05 
   


 


 


Diluted – pro forma

  $2.79  $2.35  $1.94 
   


 


 


2.SYNTHETIC FUEL

Operations

Our synthetic fuel operation currently consists of our interest in four coal-based synthetic fuel production facilities (the “Facilities”), two of which are located at a coal mine in Saline County, Illinois, and two of which are located at a coal mine in Jefferson County, Alabama. We plan to relocate one of the Alabama Facilities to a coal mine near Evansville, Indiana, over the next 90 days and expect the Facility to be fully operational by May 2006. Production at this Facility will be suspended during the duration of the dismantling, transportation and reassembly process. Three of the four plants are held in one entity, Synthetic American Fuel Enterprises II, LLC (“SAFE II”), and one of the plants is held in a separate entity, Synthetic American Fuel Enterprises I, LLC (“SAFE I”). Section 29 of the Internal Revenue Code (redesignated as Section 45K for fiscal years 2006 and 2007) (“Section 29”) provides tax credits for the production and sale of synthetic fuels produced from coal through 2007 (credits are not available for fuel produced after 2007). Although the Facilities incur significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense.

At both the Alabama and Illinois locations, the synthetic fuel operation has 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, with respect to the Alabama and Illinois locations, the synthetic fuel operation has long-term coal purchase agreements with the owners of the adjacent coal mines and long-term synthetic fuel sales contracts with a number of major utilities, including the Tennessee Valley Authority and Alabama Power Company. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel through 2007, covering approximately 80 percent of the productive capacity of the Facilities at those locations. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into spot contracts to buy coal from these or other coal mines and sell synthetic fuel to these or different end users. We expect to negotiate similar site lease, coal purchase and synthetic fuel sales contracts for the Indiana site. The long-term contracts can generally be canceled by us in the event that we choose not to operate the Facilities or that the synthetic fuel produced at the Facilities does not qualify for tax credits under Section 29.

Although we anticipate that the coal mines adjacent to the synthetic fuel operation’s production sites will be able to fulfill the Facilities’ requirements for feedstock coal, if our feedstock suppliers become unable to supply the Facilities with enough coal to satisfy our requirements for any reason, we would have to curtail production, which would have a negative impact on our results of operations, or negotiate new coal supply agreements with third parties, which might not be available on similar terms. In addition, the synthetic fuel operation has synthetic fuel sale contracts with approximately a dozen customers, a number of whom have contracted to purchase in excess of 10 percent of the productive capacity at our Alabama and Illinois locations. Although we expect that those customers could be replaced by other purchasers, we cannot assure that we would be able to enter into replacement contracts on equivalent terms. As a result, the failure by one or more of those customers to perform their purchase obligations under those sale contracts could have a material adverse effect on the synthetic fuel operation.

The synthetic fuel operation has 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 a long-term license and binder purchase agreement with Headwaters Incorporated, which permits the operation to utilize a carboxylated polystyrene copolymer emulsion patented by Headwaters and manufactured by Dow Chemical that is mixed with coal to produce a qualified synthetic fuel.

As discussed in greater detail below in Footnote 17, “Contingencies,” under the heading “Synthetic Fuel,” the tax credits available under Section 29 for the production and sale of synthetic fuel in any given year are phased out if oil prices in that year are above certain thresholds. As a result of high oil prices in the first several weeks of 2006, the synthetic fuel operation elected to suspend production of synthetic fuel in mid-January 2006. On February 17, 2006, we restarted production and have taken steps to minimize operating losses that could occur if more than a majority of the tax credits are phased out in 2006 as a result of high oil prices. We will continue to monitor the situation, and if circumstances warrant, we may again elect to suspend production in the future.

Our Investment

We acquired our initial interest in SAFE I and SAFE II from PacifiCorp Financial Services (“PacifiCorp”) in October 2001 for $46 million in cash, and we began operating the Facilities in the first quarter of 2002. We also make annual payments to PacifiCorp based on the amount of tax credits produced, up to a certain threshold. On June 21, 2003, we sold an approximately 50 percent ownership interest in both SAFE I and SAFE II. We received cash and promissory notes totaling $25 million at closing, and we receive additional proceeds based on the actual amount of tax credits allocated to the purchaser.

As a result of a put option associated with the June 21, 2003 sale of a 50 percent ownership interest, we consolidated the two synthetic fuel joint ventures from that date through November 6, 2003. Effective November 7, 2003, because the put option was voided, we began accounting for the synthetic fuel joint ventures using the equity method of accounting. Beginning March 26, 2004, as a result of adopting FIN 46(R), “Consolidation of Variable Interest Entities,” we have again consolidated the synthetic fuel joint ventures, and we reflect our partner’s share of the operating losses as minority interest.

On October 6, 2004, we entered into amendment agreements with our synthetic fuel partner that resulted in a shift in the allocation of tax credits between us. Our partner increased its allocation of tax credits generated by the SAFE I synthetic fuel facility from approximately 50 percent to 90 percent through March 31, 2005, and paid a higher price per tax credit to us for that additional share of tax credits. Effective April 1, 2005, our partner’s share of the tax credits from SAFE I returned to approximately 50 percent. Also on October 6, 2004, our partner reduced its allocation of tax credits generated by the three SAFE II synthetic fuel facilities from approximately 50 percent to roughly 8 percent through December 31, 2004 and to 1 percent from January 1, 2005 through May 31, 2005. Effective June 1, 2005, our partner’s share of the tax credits from the SAFE II facilities returned to approximately 50 percent.

In the 2005 third quarter, we entered into another amendment agreement with our synthetic fuel partner that gave our partner the right to have its approximately 50 percent ownership interest in SAFE II redeemed on November 30, 2005, or December 31, 2005. Our partner exercised the option to have its interest in SAFE II redeemed effective on December 31, 2005, subsequent to our 2005 fiscal year-end. As a result, we now own all of the interests in SAFE II. In consideration for the redeemed interest, we forgave the remaining outstanding promissory note balance of approximately $8 million related to our partner’s initial purchase of the interest in SAFE II and our partner was relieved of the obligation to make further earn-out payments with respect to SAFE II for periods after December 31, 2005. On that date, we eliminated our partner’s minority interest in SAFE II which was $7 million.

As a result of the redemption of our partner’s interest in SAFE II, with respect to the period beginning January 1, 2006, we will be allocated 100 percent of the operating losses associated with the Facilities owned by SAFE II, we will receive 100 percent of the tax credits generated by those Facilities, and production decisions with respect to those Facilities will be made based on our 100 percent ownership.

Internal Revenue Service Determinations

On November 7, 2003, the United States Internal Revenue Service (“IRS”) issued private letter rulings to the synthetic fuel joint ventures confirming that the synthetic fuel produced by the Facilities is a “qualified fuel” under Section 29 and that the resulting tax credit may be allocated among the members of the synthetic fuel joint ventures.

In July 2004, IRS field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp that included a challenge to the placed-in-service dates of the three SAFE II synthetic fuel facilities. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility

must have been placed in service before July 1, 1998. On June 7, 2005, the IRS National Office issued a Technical Advice Memorandum confirming that the three SAFE II synthetic fuel facilities that were under IRS review met the placed-in-service requirement under Section 29 of the Internal Revenue Code.

3.DISCONTINUED OPERATIONS

Senior Living Services

Late in 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Senior Living, Inc. (“Sunrise”) and to sell nine senior living communities to CNL Retirement Properties, Inc. (“CNL”) and recorded an after-tax charge of $131 million. We completed the sales to Sunrise and CNL, in addition to the related sale of a parcel of land to Sunrise in March 2003, for $266 million. Late in 2002 we also 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 after-tax gains of $19 million in 2003 in connection with these transactions, and we recorded after-tax income from operations of $7 million in 2003 associated with our discontinued senior living services business.

 

ASSET SECURITIZATIONSDistribution Services

In 2005 and 2004, we had income, net of tax, of $1 million and $2 million, respectively, associated with the distribution services business we exited in 2002.

4.INCOME TAXES

Total deferred tax assets and liabilities as of year-end 2005, and year-end 2004, were as follows:

($ in millions)

 

  2005

  2004

 

Deferred tax assets

  $932  $834 

Deferred tax liabilities

   (167)  (275)
   


 


Net deferred taxes

  $765  $559 
   


 


The tax effect of each type of temporary difference and carry-forward that gives rise to a significant portion of deferred tax assets and liabilities as of year-end 2005, and year-end 2004, were as follows:

($ in millions)

 

  2005

  2004

 

Self-insurance

  $33  $24 

Employee benefits

   232   194 

Deferred income

   42   35 

Other reserves

   64   78 

Frequent guest program

   94   65 

Tax credits (primarily associated with synthetic fuel)

   345   269 

Net operating loss carry-forwards

   81   51 

Timeshare financing

   (25)  (22)

Property, equipment and intangible assets

   (50)  (123)

Other, net

   (25)  3 
   


 


Deferred taxes

   791   574 

Less: valuation allowance

   (26)  (15)
   


 


Net deferred taxes

  $765  $559 
   


 


At year-end 2005, we had approximately $68 million of tax credits that expire through 2025, $277 million of tax credits that do not expire and $291 million of net operating losses, of which $104 million expire through 2024. The valuation allowance related to foreign net operating losses increased as a result of additional losses that we believe may not be realized, partially offset by additional valuation allowance reversals.

We have made no provision for U.S. income taxes or additional foreign taxes on the cumulative unremitted earnings of non-U.S. subsidiaries ($431 million as of year-end 2005) 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 sold our interests in the affiliates. We cannot practically estimate the amount of additional taxes that might be payable on the unremitted earnings. We conduct business in countries that grant a “holiday” from income taxes for a 10 year period. The holidays expire through 2014. The aggregate amount of taxes not incurred due to tax “holidays” is $56 million ($0.24 per diluted share).

On October 22, 2004, the American Jobs Creation Act (the “Jobs Act”) was signed into law. The Jobs Act included a special one-time dividends received deduction of 85 percent of certain foreign earnings that are repatriated to the United States, as defined in the Jobs Act. We reviewed the effects of the repatriation provision in accordance with recently issued Treasury Department guidance, and decided not to repatriate any foreign earnings under the Jobs Act.

The (provision for) benefit from income taxes consists of:

($ in millions)

 

  2005

  2004

  2003

 

Current - Federal

  $(207) $(153) $5 

    - State

   (52)  (34)  (28)

    - Foreign

   (35)  (29)  (25)
   


 


 


    (294)  (216)  (48)

Deferred - Federal

   173   90   73 

      - State

   19   5   2 

      - Foreign

   8   21   16 
   


 


 


    200   116   91 
   


 


 


   $(94) $(100) $43 
   


 


 


The current tax provision does not reflect the benefits attributable to us relating to the exercise of employee stock options of $87 million in 2005, $79 million in 2004 and $40 million in 2003. Included in the above amounts are tax credits of $172 million in 2005, $148 million in 2004, and $214 million in 2003. The taxes applicable to other comprehensive income are not material.

A reconciliation of the U.S. statutory tax rate to our effective income tax rate for continuing operations follows:

   2005

  2004

  2003

 

U.S. statutory tax rate

  35.0% 35.0% 35.0%

State income taxes, net of U.S. tax benefit

  3.0  2.9  3.8 

Minority interest

  2.3  2.4  —   

Reduction in deferred taxes

  —    2.2  —   

Change in valuation allowance

  1.6  (3.3) (3.2)

Foreign income

  (4.6) (1.4) (1.1)

Tax credits (primarily associated with synthetic fuel)

  (24.1) (22.6) (43.9)

Other, net

  0.1  0.1  0.6 
   

 

 

Effective rate

  13.3% 15.3% (8.8)%
   

 

 

Cash paid for income taxes, net of refunds, was $182 million in 2005, $164 million in 2004 and $144 million in 2003.

5.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)

 

  2005

  2004

  2003

Computation of Basic Earnings Per Share

            

Income from continuing operations

  $668  $594  $476

Weighted average shares outstanding

   216.4   226.6   232.5
   

  

  

Basic earnings per share from continuing operations

  $3.09  $2.62  $2.05
   

  

  

Computation of Diluted Earnings Per Share

            

Income from continuing operations for diluted earnings per share

  $668  $594  $476
   

  

  

Weighted average shares outstanding

   216.4   226.6   232.5

Effect of dilutive securities

            

Employee stock option plan

   9.5   8.4   6.6

Deferred stock incentive plan

   3.7   4.3   4.8

Restricted stock units

   1.6   0.9   0.6

Convertible debt

   —     0.3   0.9
   

  

  

Shares for diluted earnings per share

   231.2   240.5   245.4
   

  

  

Diluted earnings per share from continuing operations

  $2.89  $2.47  $1.94
   

  

  

We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We determine dilution based on earnings from continuing operations.

In accordance with FAS No. 128, “Earnings per Share,” we did not include the following stock options in our calculation of diluted earnings per share because the option exercise prices were greater than the average market price for our Class A Common Stock for the applicable period:

(a) for 2005, no stock options;

(b) for 2004, no stock options; and

(c) for 2003, 5.7 million stock options.

6.PROPERTY AND EQUIPMENT

($ in millions)

 

  2005

  2004

 

Land

  $259  $371 

Buildings and leasehold improvements

   659   642 

Furniture and equipment

   827   771 

Timeshare properties

   1,249   1,186 

Construction in progress

   132   100 
   


 


    3,126   3,070 

Accumulated depreciation

   (785)  (681)
   


 


   $2,341  $2,389 
   


 


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 $30 million in 2005, $16 million in 2004, and $25 million in 2003. 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 repair and maintenance costs are expensed as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the assets (three to 40 years). Depreciation expense totaled $156 million in 2005, $133 million in 2004, and $132 million in 2003. We amortize leasehold improvements over the shorter of the asset life or lease term.

7.ACQUISITIONS AND DISPOSITIONS

2005 Acquisitions

During the third quarter, we purchased from CTF Holdings Ltd. and certain of its affiliates (collectively “CTF”) 13 properties (in each case through a purchase of real estate, a purchase of the entity that owned the hotel, or an assignment of CTF’s leasehold rights) and certain joint venture interests from CTF for an aggregate price of $381 million. Prior to the sale, all of the properties were operated by us or our subsidiaries.

We plan to sell eight of the properties we have purchased to date to third-party owners, and the balances related to these full-service properties are classified within the “Assets held for sale” and “Liabilities of assets held for sale” captions in our Consolidated Balance Sheet. One operating lease has terminated. We operate the four remaining properties under leases, three of which expire by 2012. Under the purchase and sale agreement we signed with CTF in the second quarter of 2005, we remain obligated to purchase two additional properties for $17 million, the acquisition of which was postponed pending receipt of certain third-party consents.

On the closing date we and CTF also modified management agreements on 29 other CTF-leased hotels, 28 located in Europe and one located in the United States. We became secondarily liable for annual rent payments for certain of these hotels when we acquired the Renaissance Hotel Group N.V. in 1997. We continue to manage 16 of these hotels under new long-term management agreements; however, due to certain provisions in the management agreements, we account for these contracts as operating leases. CTF placed approximately $89 million in trust accounts to cover possible shortfalls in cash flow necessary to meet rent payments under these leases. In turn, we released CTF from their guarantees in connection with these leases. Approximately $79 million remained in these trust accounts at the end of 2005. Our financial statements reflect us as lessee on these hotels. Minimum lease payments relating to these leases are as follows: $32 million in 2006; $33 million in 2007; $33 million in 2008; $33 million in 2009; $33 million in 2010; and $231 million thereafter, for a total of $395 million.

For the remaining 13 European leased hotels, CTF may terminate management agreements with us if and when CTF obtains releases from landlords of our back-up guarantees. Pending completion of the CTF-landlord agreements, we continue to manage these hotels under modified management agreements and remain secondarily liable under certain of these leases. CTF has made available €35 million in cash collateral in the event that we are required to fund under such guarantees. As CTF obtains releases from the landlords and these hotels exit the system, our contingent liability exposure of approximately $217 million will decline.

We also continue to manage three hotels in the United Kingdom under amended management agreements with CTF and continue to manage 14 properties in Asia on behalf of New World Development Company Limited and its affiliates. CTF’s principals are officers, directors and stockholders of New World Development Company Limited. At the closing date, the owners of the United Kingdom and Asian hotels agreed to invest $17 million to renovate those properties.

We and CTF also exchanged legal releases effective as of the closing date, and litigation and arbitration that was outstanding between the two companies and their affiliates was dismissed.

Simultaneously with the closing on the foregoing transactions, CTF also sold five properties and one minority joint venture interest to Sunstone Hotel Investors, Inc. (“Sunstone”) for $419 million, eight properties to Walton Street Capital, L.L.C. (“Walton Street”) for $578 million, and two properties to Tarsadia Hotels (“Tarsadia”) for $29 million, in each case as substitute purchasers under our purchase and sale agreement with CTF. Prior to consummation of the sales, we also operated all of these properties. At closing, Walton Street and Sunstone entered into new long-term management agreements with us and agreed to invest a combined $68 million to further upgrade the 13 properties they acquired. The two properties purchased by Tarsadia are being operated under short-term management and franchise agreements.

When we signed the purchase and sale agreement for the foregoing transactions in the 2005 second quarter, we recorded a $94 million pre-tax charge primarily due to the non-cash write-off of deferred contract acquisition costs associated with the termination of the existing management agreements for properties involved in these transactions. As described above, we entered into new long-term management agreements with CTF, Walton Street and Sunstone at the closing of the transactions, and we expect to sell most of the properties we acquired subject to long-term management agreements.

In 2005 we also purchased two full-service properties, one in Paris, France, and the other in Munich, Germany, for aggregate cash consideration of $146 million. We plan to sell these two full-service properties to third-party owners, and the balances related to these properties are classified within the “Assets held for sale” and “Liabilities of assets held for sale” line items on our Consolidated Balance Sheet.

2005 Dispositions

Late in 2005, we contributed land underlying an additional nine Courtyard hotels, worth approximately $40 million, to CBM Land Joint Venture limited partnership (“CBM Land JV”), a joint venture the majority of which is owned by Sarofim Realty Advisors (“Sarofim”) on behalf of an institutional investor, thereby obtaining a 23 percent equity stake in CBM Land JV. At the same time we completed the sale of a portfolio of land underlying 75 Courtyard by Marriott hotels for approximately $246 million in cash to CBM Land JV. In conjunction with this transaction, we recognized a pre-tax gain of $17 million in 2005, we deferred recognition of $5 million of pre-tax gain due to our minority interest in the joint venture, and we also deferred recognition of $40 million of pre-tax gain due to contingencies in the transaction documents. As those contingencies expire in subsequent years, we will recognize additional gains.

We also sold a number of other land parcels in 2005 for $38 million in cash, net of transaction costs, and recognized pre-tax gains totaling $6 million, and we sold two minority interests in joint ventures for $14 million in cash and recognized pre-tax gains totaling $7 million.

2004 Dispositions

We sold two lodging properties for $79 million in cash, net of transaction costs, recognized pre-tax gains totaling $6 million and deferred recognition of gains totaling $1 million due to our continuing involvement with the two properties. None of the deferred gains were recognized in 2005. We accounted for both sales under the full accrual method in accordance with FAS No. 66, “Accounting for Sales of Real Estate,” and will continue to operate the properties under long-term management agreements. We also sold 30 land parcels for $55 million in cash, net of transaction costs, and we recorded pre-tax gains of $12 million.

Additionally, we sold our Ramada International Hotels & Resorts franchised brand, which consisted primarily of investments in franchise contracts and trademarks and licenses outside of the United States, to Cendant Corporation’s Hotel Group for $33 million in cash, net of transaction costs, and recorded a pre-tax gain of $4 million.

Cendant exercised its option to redeem our interest in the Two Flags joint venture, and as a result Cendant acquired the trademarks and licenses for the Ramada and Days Inn lodging brands in the United States. We recorded a pre-tax gain of approximately $13 million in connection with this transaction. We also sold our interests in two joint ventures for $13 million in cash and recognized pre-tax gains of $6 million.

2003 Dispositions

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 five years and variable thereafter. Our gain on the sale of $5 million will be recognized on a straight-line basis in proportion to the gross rental charged to expense, and we recognized $1 million of pre-tax gains in each of 2003, 2004, and 2005. We recognized a $1 million gain in 2003 associated with the sale of the other two properties and there are no remaining deferred gains. During the year, we also sold three parcels of land for $10 million in cash, net of transaction costs, and recognized a pre-tax loss of $1 million. Additionally, we sold our interests in three international joint ventures for approximately $25 million and recorded pre-tax gains of approximately $21 million.

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 proceeds based on the actual amount of tax credits allocated to the purchaser. See Footnote 2, “Synthetic Fuel” for further discussion.

8.GOODWILL AND INTANGIBLE ASSETS

($ in millions)

 

  2005

  2004

 

Contract acquisition costs and other

  $679  $738 

Accumulated amortization

   (213)  (225)
   


 


   $466  $513 
   


 


Goodwill

  $1,052  $1,051 

Accumulated amortization

   (128)  (128)
   


 


   $924  $923 
   


 


We capitalize costs incurred to acquire management, franchise, and license agreements that are both direct and incremental. We amortize these costs on a straight-line basis over the initial term of the agreements, typically 15 to 30 years. Amortization expense totaled $28 million in 2005, $33 million in 2004, and $28 million in 2003.

9.MARRIOTT AND WHITBREAD JOINT VENTURE

During the 2005 second quarter we established a 50/50 joint venture with Whitbread PLC (“Whitbread”) to acquire Whitbread’s portfolio of 46 franchised Marriott and Renaissance hotels totaling over 8,000 rooms, and for us to take over management of the entire portfolio of hotels upon the transfer of the hotels to the new joint venture. Whitbread sold its interest in the 46 hotels to the joint venture for approximately £995 million. Whitbread received approximately £710 million in cash (including £620 million from senior debt proceeds) and 50 percent of the preferred and ordinary shares of the joint venture and non-voting deferred consideration shares valued at £285 million. We contributed approximately £90 million ($171 million) in the second quarter of 2005 for the remaining 50 percent of the preferred and ordinary shares of the joint venture. The joint venture is currently discussing the sale of the hotels with a potential purchaser. As the joint venture sells the hotels, our interest in the joint venture will be redeemed. The joint venture expects to sell properties in early 2006 subject to long-term management agreements with us.

10.NOTES RECEIVABLE

($ in millions)

 

  2005

  2004

 

Loans to timeshare owners

  $   344  $315 

Lodging senior loans

   59   75 

Lodging mezzanine and other loans

   274   867 
   


 


    677   1,257 

Less current portion

   (48)  (68)
   


 


   $629  $1,189 
   


 


Amounts due within one year are classified as current assets in the caption accounts and notes receivable in the accompanying Consolidated Balance Sheet, including $33 million and $26 million, respectively, as of year-end 2005 and year-end 2004 related to the loans to timeshare owners.

Our notes receivable are due as follows: 2006 - $48 million; 2007 - $122 million; 2008 - $77 million; 2009 - $34 million; 2010 - $118 million; and $278 million thereafter. The notes receivable balance is net of unamortized discounts totaling $28 million.

At year-end 2005, our recorded investment in impaired loans was $184 million. We have a $103 million allowance for credit losses, leaving $81 million of our investment in impaired loans for which there is no related allowance for credit losses. At year-end 2004, our recorded investment in impaired loans was $181 million. During 2005 and 2004, our average investment in impaired loans totaled $182 million and $161 million, respectively.

Gains from the sale of notes receivable totaled approximately $94 million, $69 million, and $64 million during 2005, 2004, and 2003, respectively.

The following table summarizes the activity related to our notes receivable reserve for 2003, 2004, and 2005:

($ in millions)

 

  Notes
Receivable
Reserve


 

Year-end 2002 balance

  $110 

Additions

   15 

Reversals

   (8)

Write-offs

   (15)

Transfers and other

   28 
   


Year-end 2003 balance

   130 

Additions

   3 

Reversals

   (11)

Write-offs

   (44)

Transfers and other

   14 
   


Year-end 2004 balance

   92 

Additions

   11 

Reversals

   —   

Write-offs

   (9)

Transfers and other

   9 
   


Year-end 2005 balance

  $103 
   


11.ASSET SECURITIZATIONS

 

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.interval, fractional, and whole ownership products. 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 and program fees, and absorbing credit losses. We have included gains from the sales of timeshare notes receivable totaling $60$69 million in 2002, $402005 and $64 million in 2001each of 2004 and $22 million2003 in 2000 ingains and other revenueincome in the consolidated statementaccompanying Consolidated Statement of income.Income. We had residual interests of $196 million and $190 million, respectively, at year-end 2005 and year-end 2004 which are recorded in the accompanying Consolidated Balance Sheet as other long-term receivables of $125 million and $127 million, respectively, and other current assets of $71 million and $63 million, respectively.

 

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, excluding servicing assets, using a discounted cash flow model. These transactions may utilize interest rate swaps to protect the net interest margin associated with the beneficial interest. We report in income changes in the fair value of the interest only strips thatresidual interests, excluding servicing assets, as they are treated as available-for-saleconsidered trading securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, through other comprehensive incomeSecurities.” During 2005 and 2004, we recorded trading gains of $2 million and $3 million, respectively, and in 2003 we recorded trading losses of $7 million. We used the accompanying consolidated balance sheet. We report income changes infollowing key assumptions to measure the fair value of interest only strips treated as trading securities under the provisionsresidual interests, excluding servicing assets, at the date of FAS No. 115. sale during 2005, 2004, and 2003: average discount rate of 8.56 percent, 7.80 percent and 4.95 percent, respectively; average expected annual prepayments, including defaults, of 23.56 percent, 18.61 percent and 17.00 percent, respectively; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 79 months, 83 months and 85 months, respectively; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 38 months, 42 months and 44 months, respectively. Our key assumptions are based on experience.

We used the following key assumptions in measuring the fair value of the interest only stripsresidual interests, excluding servicing assets, in our eight outstanding note sales at the time of securitization and at the end of each of the years ended January 3, 2003, December 28, 2001 and December 29, 2000:year-end 2005: an average discount rate of 5.69 percent, 6.89 percent and 7.82 percent, respectively;8.68 percent; an average expected annual prepayments,prepayment rate, including defaults, of 15.48 percent, 15.43 percent and 12.72

48


percent, respectively;19.19 percent; an expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 119 months, 118 months65 months; and 86 months, respectively, andan expected weighted average life of prepayable notes receivable, including prepayments and defaults of 44 months, 40 months, and 38 months, respectively. Our key assumptions are35 months.

At the date of sale, we measure servicing assets at their allocated previous carrying amount based on experience. To date, actual results have not materially affectedrelative fair value. Servicing assets are classified as held to maturity under the carrying valueprovisions of the interests.FAS No. 115 and are recorded at amortized cost.

Cash flows between us and third-party purchasers during the years ended January 3,2005, 2004, and 2003, December 28, 2001 and December 29, 2000, were as follows: net proceeds to us from new securitizationstimeshare note sales of $341$399 million, $199$312 million and $144$231 million, respectively; repurchases by us of delinquentdefaulted loans (over 150 days overdue) of $16$23 million, $13$18 million and $12$19 million, respectively; servicing fees received by us of $4 million, $4 million and $3 million, in 2002 and $2 million in 2001 and 2000,respectively; and cash flows received onfrom our retained interests of $28$85 million, $30$90 million and $18$47 million, respectively.

 

On November 20, 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 securitization 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, in the net proceeds from new securitizations 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, $682year-end 2005, $961 million of principal remains outstanding in all securitizationssales in which we have a retained interest only strip.residual interest. Delinquencies of more than 90 days at January 3, 2003,year-end 2005, amounted to $2$5 million. Loans repurchased by the Company, netNet of obligors subsequently curing delinquencies,recoveries, we incurred no losses on defaulted loans that were resolved during the year ended January 3, 2003, amounted to $13 million.2005. We have been able to resell timeshare units underlying repurchaseddefaulted loans without incurring material losses.

 

We have completed a stress test on the net presentfair value of the interest only strips and the servicing assetsresidual interests 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 and servicing assetsresidual interests was $143$196 million at January 3, 2003,year-end 2005, 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 21.7 percent, and an increase of 200 basis points in the prepayment rate would decrease the year-end valuation by $6$7 million, or 43.4 percent. An increase of 100 basis points in the discount rate would decrease the year-end valuation by $3$4 million, or 22.1 percent, and an increase of 200 basis points in the discount rate would decrease the year-end valuation by $7$8 million, or 54.1 percent. A decline of two months in the weighted averageweighted-average remaining term would decrease the year-end valuation by $2 million, or 11.0 percent, and a decline of four months in the weighted averageweighted-average remaining term would decrease the year-end valuation by $4 million, or 32.0 percent.

 

12.LONG-TERM DEBT

MARRIOTT AND CENDANT CORPORATION JOINT VENTURE

Our long-term debt at year-end 2005, and year-end 2004 consisted of the following:

 

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

Senior Living Services

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 we own to CNL Retirement Partners, Inc. (CNL) for approximately $259 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; 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, the operating results of our senior living segment are reported in discontinued operations and the remaining assets and liabilities are classified as assets held for sale and liabilities of businesses held for sale, respectively, on the balance sheet at January 3, 2003.

($ in millions)

 

  2005

  2004

 

Senior Notes:

         

Series B, interest rate of 6.875%, matured November 15, 2005

  $—    $200 

Series C, interest rate of 7.875%, maturing September 15, 2009

   76   299 

Series D, interest rate of 8.125%, matured April 1, 2005

   —     275 

Series E, interest rate of 7.000%, maturing January 15, 2008

   91   293 

Series F, interest rate of 4.625%, maturing June 15, 2012

   348   —   

Series G, interest rate of 5.810%, maturing November 10, 2015

   396   —   

Commercial paper, average interest rate of 4.4% at year-end 2005

   499   —   

Mortgage debt, average interest rate of 7.9%, maturing May 1, 2025

   171   174 

Other

   156   84 
   


 


    1,737   1,325 

Less current portion

   (56)  (489)
   


 


   $1,681  $836 
   


 


 

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 is expected to be 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 approvedyear-end 2005, all debt, other than mortgage debt 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, 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 the communities under long-term management agreements. We accounted for these sales under the full accrual method in accordance with FAS No. 66. We will recognize pretax gains of approximately $6 million provided certain contingencies in the sales contract expire.

Additional information regarding the Senior Living Services business is as follows ($ in millions):

   

2002


   

2001


   

2000


 

Sales

  

$

802

 

  

$

729

 

  

$

669

 

Pretax income (loss) on operations

  

 

37

 

  

 

(45

)

  

 

(18

)

Tax (provision) benefit

  

 

(14

)

  

 

16

 

  

 

5

 

Income (loss) on operations, net of tax

  

 

23

 

  

 

(29

)

  

 

(13

)

Pretax loss on disposal

  

 

(141

)

  

 

—  

 

  

 

—  

 

Tax benefit

  

 

10

 

  

 

—  

 

  

 

—  

 

Loss on disposal, net of tax

  

 

(131

)

  

 

—  

 

  

 

—  

 

Property, plant and equipment

  

 

434

 

  

 

495

 

  

 

553

 

Goodwill

  

 

115

 

  

 

115

 

  

 

120

 

Other assets

  

 

54

 

  

 

63

 

  

 

86

 

Liabilities

  

$

317

 

  

$

281

 

  

$

287

 

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 the Distribution Services business and decided to exit the business. 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$46 million of other associated charges. We expect to incur further expenses during 2003 in connection with the wind down of the business, but we currently are unable to estimate their magnitude.

Additional information regarding the MDS disposal groupdebt, is as follows:unsecured.

($ in millions)

   

2002


   

2001


   

2000


 

Sales

  

$

1,376

 

  

$

1,637

 

  

$

1,500

 

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 exit costs

  

 

(65

)

  

 

—  

 

  

 

—  

 

Tax benefit

  

 

25

 

  

 

—  

 

  

 

—  

 

Exit costs, net of tax

  

 

(40

)

  

 

—  

 

  

 

—  

 

Property, plant and equipment

  

 

9

 

  

 

25

 

  

 

28

 

Other assets

  

 

21

 

  

 

191

 

  

 

166

 

Liabilities

  

$

49

 

  

$

86

 

  

$

83

 

At December 28, 2001, assets held for sale included $87 million of full-service lodging properties, including $11 million of undeveloped land, $158 million of select-service properties and $27 million of extended-stay properties. Included in other liabilities at December 28, 2001, are $2 million of liabilities related to the assets 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.

INTANGIBLE ASSETS

   

2002


   

2001


 
   

($ in millions)

 

Management, franchise and license agreements

  

$

673

 

  

$

837

 

Goodwill

  

 

1,052

 

  

 

1,105

 

   


  


   

 

1,725

 

  

 

1,942

 

Accumulated amortization

  

 

(307

)

  

 

(308

)

   


  


   

$

1,418

 

  

$

1,634

 

   


  


 

We amortize intangible assetsare party to a multicurrency revolving credit agreement that provides for aggregate borrowings of $2 billion expiring in 2010, which supports our commercial paper program and letters of credit. This facility became effective on June 6, 2005, replacing two multicurrency credit agreements in the same aggregate amount which would have otherwise expired in 2006. As with the facilities it replaced, borrowings under this new facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus a straight-line basis over periods of three to 40 years. Intangible amortization expense, including amounts related to discontinued operations, totaled $38 million in 2002, $73 million in 2001 and $64 million in 2000.spread based on our public debt rating. Additionally, we pay annual fees on the facility at a rate also based on our public debt rating.

51


 

In the fourth quarter of 20022005 we performedbegan issuing short-term commercial paper in Europe in addition to our long-standing commercial paper program in the annual goodwill impairment tests requiredUnited States. Our United States and European commercial paper issuances are subject to the availability of the commercial paper market, as we have no commitment from buyers to purchase our commercial paper. We reserve unused capacity under our credit facility to repay outstanding commercial paper borrowings in the event that the commercial paper market is not available to us for any reason when outstanding borrowings mature. We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

In June 2005, we sold $350 million aggregate principal amount of 4.625 percent Series F Notes due 2012 (the “Series F Notes”). We received net proceeds of approximately $346 million from this offering, after deducting a

discount and underwriting fees, and we used these proceeds to repay commercial paper borrowings and for general corporate purposes. Interest on the Series F Notes is payable on June 15 and December 15 of each year, commencing on December 15, 2005. The Series F Notes will mature on June 15, 2012, and we may redeem the notes, in whole or in part, at any time or from time to time under the terms provided in the Form of Series F Note.

In November 2005, we offered to holders of our outstanding 7 percent Series E Notes due 2008 and to holders of our outstanding 7.875 percent Series C Notes due 2009 (collectively “Old Notes”) an opportunity to exchange into new 5.81 percent Series G Notes (the “Series G Notes”), and we issued new Series G Notes in the aggregate total of $427 million to replace Old Notes that had been validly tendered for exchange and not withdrawn, comprised of $203 million of the Series E Notes and $224 million of the Series C Notes. In addition, we paid an exchange price of $31 million ($9 million for the Series E Notes and $22 million for the Series C Notes) which was equal to the sum of the present values of the remaining scheduled payments of interest and principal on the Old Notes. Furthermore, holders who had Old Notes accepted for exchange received a cash payment of $7 million representing accrued and unpaid interest to, but not including, the settlement date.

The exchanges are not considered to be extinguishments, and accordingly, the exchange price payment, along with the existing unamortized discounts associated with the Series C Notes and Series E Notes, are being amortized as an adjustment of interest expense over the remaining term of the replacement debt instrument using the interest method. All other third-party costs related to the exchange were expensed as incurred.

Interest on the Series G Notes is payable on May 10 and November 10 of each year, beginning on May 10, 2006. The Series G Notes mature on November 10, 2015, and we may redeem the notes, in whole or in part, at any time or from time to time under the terms provided in the Form of Series G Note.

Our Series C Notes, Series E Notes, Series F Notes, and Series G Notes were all issued under an indenture with JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as trustee, dated as of November 16, 1998.

On December 8, 2005, we filed a “universal shelf” registration statement with the SEC covering an indeterminate amount of future offerings of debt securities, common stock or preferred stock, either separately or represented by FAS No. 142. Duringwarrants, depositary share, rights or purchase contracts.

We are in compliance with covenants in our loan agreements, that require the fourth quarter, we continued to experience softness in demand for corporate housing,maintenance of certain financial ratios and minimum shareholders’ equity, and also include, among other things, limitations on additional indebtedness 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 recoverypledging 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.assets.

 

SHAREHOLDERS’ EQUITYAggregate debt maturities are: 2006 - $56 million; 2007 - $16 million; 2008 - $107 million; 2009 - $93 million; 2010 - $17 million and $1,448 million thereafter.

Cash paid for interest, net of amounts capitalized, was $87 million in 2005, $88 million in 2004 and $94 million in 2003.

13.SHAREHOLDERS’ EQUITY

 

Eight hundred million shares of our Class A Common Stock, with a par value of $.01 per share, are authorized. Tenauthorized, and 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.authorized. As of December 28, 2001, 109,223the 2005 fiscal year-end, there were 205.9 million shares of our Class A Common Stock outstanding and no shares of our preferred stock were outstanding, 29,124 of which related to the ESOP and 80,099 of which were Capped Convertible Preferred Stock. As of January 3, 2003, no shares of preferred stock were outstanding as the Capped Convertible Preferred Stock shares were retired and cancelled.outstanding.

 

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 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, there were no outstanding shares of ESOP Preferred Stock.

AccumulatedOur accumulated other comprehensive loss of $70$11 million and $50our accumulated other comprehensive income of $9 million, respectively, at January 3, 2003year-end 2005 and December 28, 2001, respectively, consistsyear-end 2004 consist primarily of fair value changes of certain financial instruments and foreign currency translation adjustments.

 

52


INCOME TAXES

Total deferred tax assets and liabilities as of January 3, 2003 and December 28, 2001, were as follows:

   

2002


   

2001


 
   

($ in millions)

 

Deferred tax assets

  

$

717

 

  

$

481

 

Deferred tax liabilities

  

 

(348

)

  

 

(353

)

   


  


Net deferred taxes

  

$

369

 

  

$

128

 

   


  


The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities as of January 3, 2003 and December 28, 2001, were as follows:

   

2002


   

2001


 
   

($ in millions)

 

Self insurance

  

$

35

 

  

$

50

 

Employee benefits

  

 

162

 

  

 

162

 

Deferred income

  

 

52

 

  

 

35

 

Other reserves

  

 

70

 

  

 

59

 

Disposition reserves

  

 

73

 

  

 

23

 

Frequent guest program

  

 

64

 

  

 

58

 

Tax credits

  

 

122

 

  

 

34

 

Timeshare operations

  

 

(18

)

  

 

(28

)

Property, equipment and intangible assets

  

 

(136

)

  

 

(187

)

Other, net

  

 

(55

)

  

 

(78

)

   


  


Net deferred taxes

  

$

369

 

  

$

128

 

   


  


At January 3, 2003, we had approximately $45 million of tax credits that expire through 2022 and $77 million of tax credits that do not expire.

We have made no provision for U.S. income taxes, or additional foreign taxes, on the cumulative unremitted earnings of non-U.S. subsidiaries ($263 million as of January 3, 2003) 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.

The 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

     


  


  

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 $25 million in 2002, $55 million in 2001 and $42 million in 2000. 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 follows:

   

2002


   

2001


   

2000


 

U.S. statutory tax rate

  

35.0

%

  

35.0

%

  

35.0

%

State income taxes, net of U.S. tax benefit

  

4.0

 

  

3.7

 

  

3.6

 

Foreign income

  

(1.5

)

  

(2.9

)

  

(1.4

)

Tax credits

  

(34.8

)

  

(3.6

)

  

(3.1

)

Goodwill

  

3.6

 

  

2.5

 

  

1.4

 

Other, net

  

0.5

 

  

1.4

 

  

1.1

 

   

  

  

Effective rate

  

6.8

%

  

36.1

%

  

36.6

%

   

  

  

Cash paid for income taxes, net of refunds, was $107 million in 2002, $125 million in 2001 and $145 million in 2000.

LEASES

We have summarized our future obligations under operating leases at January 3, 2003 below:

Fiscal Year


  

($ in millions)


2003

  

$

124

2004

  

 

124

2005

  

 

119

2006

  

 

110

2007

  

 

107

Thereafter

  

 

935

   

Total minimum lease payments

  

$

1,519

   

Most leases have initial terms of up to 20 years and contain one or more renewal options, generally for five-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 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.

Rent expense consists of:

   

2002


  

2001


  

2000


   

($ in millions)

Minimum rentals

  

$

134

  

$

131

  

$

120

Additional rentals

  

 

75

  

 

87

  

 

95

   

  

  

   

$

209

  

$

218

  

$

215

   

  

  

The totals above exclude minimum rent expenses of $34 million, $33 million, and $33 million and additional rent expenses of $4 million, $4 million, and $2 million for 2002, 2001 and 2000, 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 million for 2002, 2001 and 2000, respectively, related to the discontinued Distribution Services business.

LONG-TERM DEBT

Our long-term debt at 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.

As of January 3, 2003 all debt, other than mortgage 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 of $500 million available for future offerings.

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 million multicurrency revolving credit facilities (the Facilities) each with terms of five years. Borrowings 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 Facilities at a rate also based on our public debt rating. We classify commercial paper, which is supported by the 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.

The 2002 statement of cashflows excludes the assumption of $227 million of debt associated with the 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. The 2001 statement of cash flows excludes $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.

Aggregate debt maturities for continuing operations, excluding convertible debt are: 2003- $242 million; 2004 - $27 million; 2005 - $523 million; 2006 - $110 million; 2007 - $11 million and $821 million thereafter.

Cash paid for interest (including discontinued operations), net of amounts capitalized was $71 million in 2002, $68 million in 2001 and $74 million in 2000.

55


CONVERTIBLE DEBT

On May 8, 2001, we received gross proceeds of $405 million from the sale of zero-coupon convertible senior notes due 2021, known as LYONs. 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 LYONs 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 to May 8, 2004. We may at the option of the holders be required 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 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

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).

   

2002


  

2001


  

2000


Computation of Basic Earnings Per Share

            

Income from continuing operations

  

$

439

  

$

269

  

$

490

Weighted average shares outstanding

  

 

240.3

  

 

243.3

  

 

241.0

   

  

  

Basic earnings per share from continuing operations

  

$

1.83

  

$

1.10

  

$

2.03

   

  

  

Computation of Diluted Earnings Per Share

            

Income from continuing operations

  

$

439

  

$

269

  

$

490

After-tax interest expense on convertible debt

  

 

4

  

 

—  

  

 

—  

   

  

  

Income from continuing operations for diluted earnings per share

  

$

443

  

$

269

  

$

490

   

  

  

Weighted average shares outstanding

  

 

240.3

  

 

243.3

  

 

241.0

Effect of dilutive securities

            

Employee stock purchase plan

  

 

—  

  

 

—  

  

 

0.1

Employee stock option plan

  

 

6.2

  

 

7.9

  

 

7.5

Deferred stock incentive plan

  

 

5.2

  

 

5.5

  

 

5.4

Convertible debt

  

 

2.9

  

 

—  

  

 

—  

   

  

  

Shares for diluted earnings per share

  

 

254.6

  

 

256.7

  

 

254.0

   

  

  

Diluted earnings per share from continuing operations

  

$

1.74

  

$

1.05

  

$

1.93

   

  

  

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. The calculation of diluted earnings per share does not include the following because the inclusion would have an antidilutive impact for the applicable period: (a) for the year ended January 3, 2003, 6.9 million options and (b) for the year ended December 28, 2001, $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.

56


EMPLOYEE STOCK PLANS

14.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)(the “Comprehensive Plan”). Under the Comprehensive Plan, we may award to participating employees (1) options to purchase our Class A Common Stock (Stock Option ProgramProgram) and Supplemental Executive Stock Option awards),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, in 2004 and 2003 we havehad an employee stock purchase plan (Stock Purchase Plan). In accordance with the provisions 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. In August 2005 the Board of Directors amended the Comprehensive Plan to provide participants the ability during a limited timeframe in 2005 to elect to accelerate the schedule for distribution of certain vested deferred shares. The amendment does not alter the previously established vesting schedule. We expect to issue 3.3 million shares under the program in the first quarter of 2006.

 

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 millionseven thousand deferred shares during 2002.2005. Compensation cost, net of tax, recognized during 2002, 20012005, 2004, and 20002003 was $9$4 million $25in each of 2005 and 2004, and $7 million and $18in 2003. At year-end 2005, there was approximately $8 million respectively.in deferred compensation related to deferred shares.

 

RestrictedWe issue restricted shares under the Comprehensive Plan are issued to officers and key employees and distributeddistribute those restricted shares 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 0.1 millionno restricted shares under this plan during 2002.2005. We recognized compensation cost, net of $5tax, of $3 million in 20022005, $4 million in 2004, and $4 million in each2003. At year-end 2005, there was approximately $6 million in deferred compensation related to restricted shares.

We issue restricted stock units under the Comprehensive Plan to certain officers and key employees and those units vest over four years in annual installments commencing one year after the date of 2001grant. We recognize compensation expense for the fair market value of the shares over the vesting period. Included in the 2005 and 2000.2004 compensation costs are $34 million and $23 million, respectively, net of tax, related to the grant of approximately 1.5 million units and 1.6 million units, respectively, under the restricted stock unit plan, which was started in the first quarter of 2003. At year-end 2005, there was approximately $123 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 in 2004 and 2003, eligible employees maywere able to 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. We did not offer the Stock Purchase Plan in 2005. The plan was discontinued in 2005.

 

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. Nonevested in 2005. Six hundred thousand of these options, which have an exercise price of $25, werehave been exercised during 2002, 2001 or 2000 and 1.90.2 million options have been cancelled. At year-end 2005 1.4 million options remained outstanding at January 3, 2003.outstanding.

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 2002, 20012005, 2004, and 20002003 was $14, $16$26, $17, and $15,$11, respectively. WeIn 2004 and 2003, we estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, usingmethod. In 2005 we used a binomial method to estimate the fair value of each option granted. The assumptions for all years are noted in the following table:

 

  

2002


   

2001


   

2000


   2005

 2004

 2003

 

Annual dividends

  

$

0.28

 

  

$

0.26

 

  

$

0.24

 

  $0.36  $0.32  $0.30 

Expected volatility

  

 

32

%

  

 

32

%

  

 

30

%

   30%  31%  32%

Risk-free interest rate

  

 

3.6

%

  

 

4.9

%

  

 

5.8

%

   4.1%  3.7%  3.5%

Expected life (in years)

  

 

7

 

  

 

7

 

  

 

7

 

   8   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.”

57


 

A summary of our Stock Option Program and Supplemental Executive Stock Option awards activity during 2002, 20012005, 2004 and 20002003 is presented below:

 

    

Number of

options

(in millions)


     

Weighted

average exercise

price


Outstanding at January 1, 2000

    

33.8

 

    

$

22

  Number of
Options
(in millions)


 Weighted
Average Exercise
Price


Outstanding at year-end 2002

  39.4  $29

Granted during the year

    

0.6

 

    

 

36

  4.0   30

Exercised during the year

    

(3.9

)

    

 

16

  (4.6)  22

Forfeited during the year

    

(0.5

)

    

 

32

  (0.7)  37
    

       

 

Outstanding at December 29, 2000

    

30.0

 

    

 

23

Outstanding at year-end 2003

  38.1   29

Granted during the year

    

13.4

 

    

 

36

  1.8   46

Exercised during the year

    

(4.2

)

    

 

18

  (7.3)  30

Forfeited during the year

    

(0.9

)

    

 

34

  (0.3)  38
    

       

 

Outstanding at December 28, 2001

    

38.3

 

    

 

29

Outstanding at year-end 2004

  32.3   31

Granted during the year

    

1.4

 

    

 

37

  0.7   64

Exercised during the year

    

(1.6

)

    

 

22

  (4.5)  27

Forfeited during the year

    

(0.6

)

    

 

37

  (0.1)  23
    

       

 

Outstanding at January 3, 2003

    

37.5

 

    

$

29

Outstanding at year-end 2005

  28.4  $32
    

       

 

 

There were 24.924.0 million, 20.222.0 million and 20.525.1 million exercisable options under the Stock Option Program and Supplemental Executive Stock Option awards at January 3,year-end 2005, year-end 2004, and year-end 2003, December 28, 2001 and December 29, 2000, respectively, with weighted average exercise prices of $25, $22$31, $29 and $19,$28, respectively.

 

At January 3, 2003, 60.6year-end 2005, 45.0 million shares were reserved under the Comprehensive Plan (including 39.4including 28.4 million shares under the Stock Option Program and 1.9 million shares of the Supplemental Executive Stock Option awards) and 1.5 million shares were reserved under the Stock Purchase Plan.awards.

 

Stock options issued under the Stock Option Program and Supplemental Executive Stock Option awards outstanding at January 3, 2003,year-end 2005, 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


$ 3 to 5

  

0.8

    

3

  

$

3

  

0.8

  

$

3

6 to 9

  

2.3

    

5

  

 

7

  

2.3

  

 

7

    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


$ 6 to 9

    1.0    2    $7    1.0    $7

10 to 15

  

2.9

    

7

  

 

13

  

2.9

  

 

13

    1.4    4     13    1.4     13

16 to 24

  

1.8

    

8

  

 

17

  

1.8

  

 

17

    1.6    6     20    1.6     20

25 to 37

  

22.7

    

10

  

 

31

  

15.5

  

 

30

    17.1    7     31    15.0     31

38 to 49

  

7.0

    

9

  

 

44

  

1.6

  

 

45

    6.6    7     44    5.0     44

50 to 65

    0.7    10     64    —       —  
  
          
       
              
     

$ 3 to 49

  

37.5

    

9

  

$

29

  

24.9

  

$

25

$ 6 to 65

    28.4    7    $32    24.0    $31
  
          
       
              
     

FAIR VALUE OF FINANCIAL INSTRUMENTS

15.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 noncurrentnon-current financial assets, liabilities and liabilitiesderivatives are shown below.in the following table.

 

   

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

58


   2005

  2004

($ in millions)

 

  Carrying
Amount


  

Fair

Value


  Carrying
Amount


  

Fair

Value


Notes and other long-term assets

  $1,374  $1,412  $1,702  $1,770
   

  

  

  

Long-term debt and other long-term liabilities

  $1,636  $1,685  $848  $875
   

  

  

  

Derivative instruments

  $6  $6  $—    $—  
   

  

  

  

 

We value notes and other receivables based on the expected future cash flows discounted at risk adjustedrisk-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 adjustedrisk-adjusted rates.

 

16.DERIVATIVE INSTRUMENTS

CONTINGENCIES

During 2003, 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 under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS No. 133”), 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 $1 million asset at year-end 2005, and a $3 million liability at year-end 2004. The hedge is highly effective, and therefore, no net gain or loss was reported during 2005, 2004, and 2003.

During 2005, we entered into two interest rate swap agreements to manage the volatility of the U.S. Treasury component of the interest rate risk associated with the forecasted issuance our Series F Senior Notes and the exchange of our Series C and E Senior Notes for new Series G Senior Notes. Both swaps were designated as cash flow hedges under FAS No. 133 and were terminated upon pricing of the notes. Both swaps were highly effective in offsetting fluctuations in the U.S. Treasury component. Thus, there was no net gain or loss reported in earnings during 2005. The total amount for these swaps was recorded in other comprehensive income and was a net loss of $2 million during 2005, which will be amortized to interest expense using the interest method over the life of the notes.

At year-end 2005, 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. Historically, we were 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 $380 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 $5 million at year-end 2005, and a net asset of approximately $3 million at year-end 2004. We recorded a $2 million net gain during 2005 and 2004, and a $3 million net gain during 2003.

During 2005, 2004, and 2003, we entered into interest rate swaps to manage interest rate risk associated with forecasted timeshare note sales. During 2005, one swap was designated as a cash flow hedge under FAS No. 133 and was highly effective in offsetting interest rate fluctuations. The amount of the ineffectiveness is immaterial. The second swap entered into in 2005 did not qualify for hedge accounting. The non-qualifying swaps resulted in a loss of $3 million during 2005, a gain of $2 million during 2004 and a loss of $4 million during 2003. These amounts are included in the gains from the sales of timeshare notes receivable.

During 2005, 2004, and 2003, we entered into forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets. The aggregate dollar equivalent of the notional amount of the contracts is $544 million at year-end 2005. The forward exchange contracts do not qualify as hedges in accordance with FAS No. 133. The fair value of the forward contracts is a liability of $2 million at year-end 2005 and zero at year-end 2004. We recorded a $26 million gain during 2005 and a $3 million and $2 million net loss during 2004 and 2003, respectively, relating to these forward foreign exchange contracts. The net gains and losses for all years were offset by income and losses recorded from translating the related monetary assets denominated in foreign currencies into U.S. dollars.

During 2005, 2004, and 2003, we entered into foreign exchange option and forward contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates. The aggregate dollar equivalent of the notional amounts of the contracts is $27 million at year-end 2005. These contracts have terms of less than one year and are classified as cash flow hedges. Changes in their fair values are recorded as a component of other comprehensive income. The fair value of the option contracts is approximately zero at year-end 2005 and 2004. During 2004, it was determined that certain derivatives were no longer effective in offsetting the hedged item. Thus, cash flow hedge accounting treatment was discontinued and the ineffective contracts resulted in a loss of $1 million, which was reported in earnings for 2004. The remaining hedges were highly effective and there was no net gain or loss reported in earnings for 2005, 2004, and 2003. As of year-end 2005, there were no deferred gains or losses on existing contracts accumulated in other comprehensive income that we expect to reclassify into earnings over the next year.

During 2005, we entered into forward foreign exchange contracts to manage currency exchange rate volatility associated with certain investments in foreign operations. One contract was designated as a hedge in the net investment of a foreign operation under FAS No. 133. The hedge was highly effective and resulted in a $1 million net loss in the cumulative translation adjustment at year-end 2005. Certain contracts did not qualify as hedges under FAS No. 133 and resulted in a gain of $3 million for 2005. The contracts offset the losses associated with translation adjustments for various investments in foreign operations. The contracts have an aggregate dollar equivalent of the notional amounts of $229 million and a fair value of approximately zero at year-end 2005.

17.CONTINGENCIES

 

Guarantees Loan Commitments and Letters of Credit

 

We issue guarantees to certain lenders and hotel owners primarily to obtain long termlong-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 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 which are being built by us.

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.

The maximum potential amount of future fundings and the current carrying amount of the liability for expected future fundings at January 3, 2003 are as follows ($ in millions):

Guarantee type


    

Maximum

amount of future fundings


    

Current liability for future fundings at January 3, 2003


Debt service

    

$

 382

    

$

12

Operating profit

    

 

366

    

 

12

Project completion

    

 

57

    

 

—  

Timeshare

    

 

12

    

 

—  

Other

    

 

22

    

 

—  

     

    

     

$

 839

    

$

24

     

    

Our guarantees include $270 million for commitments which will not be in effect until the underlying hotels are open and we begin to manage the properties. Thecan generally recover guarantee fundings to lenders and hotel owners are generally recoverable in the form of a loan andas loans which are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. WhenWe also enter into project completion guarantees with certain lenders in conjunction with hotels and timeshare units that 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.our joint venture partners are building.

 

The maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at year-end 2005, are as follows:

($ in millions)

 

Guarantee Type


  Maximum
Potential Amount
of Future Fundings


  Liability for Future
Fundings at
Year-end 2005


Debt service

  $81  $5

Operating profit

   240   23

Project completion

   26   —  

Other

   67   4
   

  

Total guarantees where we are the primary obligor

  $414  $32
   

  

Our guarantees of $414 million listed above include $69 million for guarantees that will not be in effect until the underlying hotels open and we begin to operate the properties. Guarantees not in effect are comprised of $13 million of debt service profit guarantees and $56 million of operating profit guarantees.

In addition to the guarantees noted above, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability or damage occurring as a result of the actions of the other joint venture owner or our own actions.

The guarantees of $414 million in the table above also do not include $320 million of guarantees related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. 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 in 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. We do not expect to fund under the guarantees.

Additionally, the guarantees of $414 million in the table above do not include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $20 million and total remaining rent payments through the initial term plus available extensions of approximately $217 million. We are also secondarily obligated for real estate taxes and other charges associated with the leases. CTF has made available €35 million in cash collateral in the event that we are required to fund under such guarantees. As CTF obtains releases from the landlords and these hotels exit the system, our contingent liability exposure of January 3, 2003,approximately $217 million will decline. Since we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

Commitments and Letters of Credit

In addition to the guarantees noted above, as of year-end 2005, we had extended approximately $217$11 million of loan commitments to owners of lodging properties, and senior living communities under which we expect to fund approximately $140$5 million by January 2, 2004,year-end 2006. We do not expect to fund the remaining $6 million of commitments, which expire as follows: $4 million within one year; and $156$2 million after five years. At year-end 2005, we also have commitments to invest up to $27 million of equity for minority interests in partnerships that plan to purchase both full-service and select-service hotels.

In 2005, we assigned to a third-party our previous commitment to fund up to $129 million to the Courtyard joint venture for the primary purpose of funding the costs of renovating its properties in 2005 and 2006. Under the agreement the third-party assumed the lending obligation to the venture. As of year-end 2005, we funded $1 million and the third-party funded $22 million under this loan commitment. The commitment to fund is reduced to $27 million in total.September 2006 and expires in December 2009. In total, we expect that no more than $104 million of the $129 million commitment will be funded, and other than the $1 million we already funded, we expect the third-party to provide all future fundings. We do not anticipate making further fundings ourselves, but remain secondarily obligated to the Courtyard joint venture if the third-party fails to fund. At year-end 2005, that secondary obligation totaled $106 million.

 

LettersAt year-end 2005, we also had $93 million of letters of credit outstanding on our behalf, at January 3, 2003 totaled $94 million, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of January 3, 2003at year-end 2005, totaled $480$546 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-parties have severally indemnified us for guarantees by us of leases with minimum annual payments of approximately $57 million.

Litigation and ArbitrationSynthetic Fuel

 

Green Isle litigation. This litigation pertainsThe tax credits available under the Internal Revenue Code for the production and sale of synthetic fuels were established by Congress to encourage the development of alternative domestic energy sources. Congress deemed that the incentives provided by the tax credits would not be necessary if the price of oil increased beyond certain thresholds as prices would then provide a more natural market for these alternative fuels. As a result, the tax credits available under the Internal Revenue Code for the production and sale of synthetic fuel in any given calendar year are phased out if the Reference Price of a barrel of oil for that year falls within a specified range. The Ritz-Carlton San Juan (Puerto Rico) Hotel, SpaReference Price of a barrel of oil is an estimate of the annual average wellhead price per barrel of domestic crude oil and Casinois determined for each calendar year by the Secretary of the Treasury by April 1 of the following year. In 2003 and 2004, the Reference Price was roughly equal to 89 percent of the average price in those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil. The price range within which the credit is phased out was set in 1980 and is adjusted annually for inflation. In 2004, the Reference Price phase-out range was $51.35 to $64.47. Because the Reference Price of a barrel of oil for 2004 was below that range, at $36.75, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2004. Assuming a 2 percent inflation adjustment factor for 2005 and assuming that the ratio of the Reference Price to the average wellhead price of the benchmark NYMEX futures contract remains approximately the same in 2005 as it was in 2004, we manage under an operating agreementcurrently estimate that, because the average NYMEX price for Green Isle Partners, Ltd., S.E. (Green Isle). On March 30,January through December 2005 was approximately $56.71, there was no reduction of the tax credits available for synthetic fuel produced and sold in 2005.

 

59


2001, Green Isle filedWe cannot predict with any accuracy the future price of a complaintbarrel of oil. If the Reference Price of a barrel of oil in 2006 or 2007 exceeds the applicable phase-out threshold for those years, the tax credits generated by our synthetic fuel facilities in those years could be reduced or eliminated, which would have a negative impact on our results of operations. As a result of the high oil prices in the U.S. District Courtfirst several weeks of 2006, the synthetic fuel operation elected to suspend production of synthetic fuel in Delaware against us (including severalmid-January 2006. On February 17, 2006 we restarted production and have taken steps to minimize operating losses that could occur if more than a majority of our subsidiaries)the tax credits are phased out in 2006 as a result of high oil prices. We will continue to monitor the situation, 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 entriesif circumstances warrant, we may again elect to suspend production 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 contractfuture.

See Footnote 2, “Synthetic Fuel,” earlier 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 issuesreport, 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 the 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 this ruling. The arbitration panel has established a schedule which calls for the arbitration hearing to commence 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 confidentialadditional information related to the hotel, improperly allocated corporate overheadsynthetic fuel operations.

Investment in Leveraged Lease

At year-end 2005, we have a $23 million gross investment in an aircraft leveraged lease with Delta Air Lines, Inc. (“Delta”) which we acquired in 1994. The gross investment is comprised of rentals receivable and the residual value of the aircraft offset by unearned income. On September 14, 2005, Delta filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and informed us that it wishes to restructure the hotel, engagedlease. As a result, we believe our investment is impaired, and have recorded a pre-tax charge of approximately $17 million in improper self dealing2005, leaving a net exposure of $6 million.

18.LEASES

We have summarized our future obligations under operating leases at year-end 2005, below:

Fiscal Year


  ($ in millions)

2006

  $124

2007

   132

2008

   126

2009

   116

2010

   112

Thereafter

   873
   

Total minimum lease payments where we are the primary obligor

  $1,483
   

Most leases have initial terms of up to 20 years and contain one or more renewal options, generally for five- 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 $432 million, representing obligations of consolidated subsidiaries that are non-recourse to Marriott International, Inc.

As discussed in Footnote 7, we became secondarily liable for annual rent payments for certain of these hotels when we acquired the Renaissance Hotel Group N.V. in 1997. We continue to manage 16 of these hotels under new long-term management agreements; however, due to certain provisions in the management agreements, we account for these contracts as operating leases. CTF has placed approximately $89 million in trust accounts to cover possible shortfalls in cash flow necessary to meet rent payments under these leases. In turn, we released CTF affiliates from their guarantees in connection with regardthese leases. Approximately $79 million remained in these trust accounts at the end of 2005. Minimum lease payments relating to procurementthese leases, which are not reflected in the $1,483 million above, are as follows: $32 million in 2006, $33 million in 2007, $33 million in 2008, $33 million in 2009, $33 million in 2010, and rebates, failed to disclose information$231 million thereafter, for a total of $395 million.

Rent expense consists of:

($ in millions)

 

    2005  

    2004  

    2003  

Minimum rentals

  $211  $216  $201

Additional rentals

   86   93   68
   

  

  

   $297  $309  $269
   

  

  

The totals above exclude minimum rent expenses of $8 million and additional rent expenses of $1 million, for 2003, 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 March 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 information related to the above to Strategic. Strategic also claims breach of contract, breach of the implied duty of good faith and fair dealing, breach of fiduciary duty, 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, we 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. A discovery referee has been appointed, but no trial date has been set.

Senior Housing and Five Star litigation. Marriottdiscontinued 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 Court 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.

We believe that each of the foregoing lawsuits against us is without merit, and we intend to vigorously defend against the claims being made against us. However, we cannot assure you as to the outcome of any of these lawsuits 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

61business.


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.

62


BUSINESS SEGMENTS

19.BUSINESS SEGMENTS

 

We are a diversified hospitality company with operations in five business segments:

 

  Full-Service Lodging, which includes Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts and Suites; The Ritz-Carlton Hotels; RenaissanceHotels, Resorts and Suites; and Ramada International;Bulgari 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 MarriottExecutiveMarriott Executive Apartments;

  Timeshare, which includes the development, marketing, operation ownership, development and marketingownership of timeshare properties under the Marriott Vacation Club International, The Ritz-Carlton Club, Horizons and Marriott Grand Residence Club and Horizons by Marriott Vacation Club brands; and

  Synthetic Fuel, which includes our interest in the operation of our coal-based synthetic fuel production facilities. Our SyntheticFuel business generated a tax benefit of $49 million and tax credits of $159 million in the year ended January 3, 2003.

 

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,income, provision for loan losses and interest income orexpense. With the exception of the 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 in earnings (losses) from our joint ventures and divisional general, administrative and other expenses to each of our segments. Unallocated corporate expenses represent that portion of our general, administrative and other expenses and equity in earnings (losses) that are not allocable to 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


($ in millions)

  2005

 2004

 2003

 

Full-Service

  

$

5,474

  

$

5,238

  

$

5,520

  $7,535  $6,611  $  5,876 

Select-Service

  

 

967

  

 

864

  

 

901

   1,265   1,118   1,000 

Extended-Stay

  

 

600

  

 

635

  

 

668

   608   547   557 

Timeshare

  

 

1,207

  

 

1,049

  

 

822

   1,721   1,502   1,279 
  

  

  

  


 


 


Total Lodging

  

 

8,248

  

 

7,786

  

 

7,911

   11,129   9,778   8,712 

Synthetic Fuel

  

 

193

  

 

—  

  

 

—  

   421   321   302 
  

  

  

  


 


 


  

$

8,441

  

$

7,786

  

$

7,911

  $11,550  $10,099  $9,014 
  

  

  

  


 


 


Income from Continuing Operations

   

($ in millions)

  2005

   2004  

   2003  

 

Full-Service

  $474  $426  $407 

Select-Service

   209   140   99 

Extended-Stay

   65   66   47 

Timeshare

   271   203   149 
  


 


 


Total Lodging financial results

   1,019   835   702 

Synthetic Fuel (after-tax)

   125   107   96 

Unallocated corporate expenses

   (137)  (138)  (132)

Interest income, provision for loan losses and interest expense

   (55)  55   12 

Income taxes (excluding Synthetic Fuel)

   (284)  (265)  (202)
  


 


 


  $668  $594  $476 
  


 


 


Equity in Earnings (Losses) of Equity Method Investees             

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $39  $10  $8 

Select-Service

   (5)  (17)  (22)

Timeshare

   1   (7)  (4)

Synthetic Fuel

   —     (28)  10 

Corporate

   1   —     1 
   


 


 


   $36  $(42) $(7)
   


 


 


Depreciation and Amortization             

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $81  $64  $54 

Select-Service

   17   12   10 

Extended-Stay

   7   9   10 

Timeshare

   46   49   49 
   


 


 


Total Lodging

   151   134   123 

Synthetic Fuel

   10   8   8 

Corporate

   23   24   29 
   


 


 


   $184  $166  $160 
   


 


 


Assets             

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $3,754  $3,230  $3,436 

Select-Service

   376   817   833 

Extended-Stay

   237   241   286 

Timeshare

   2,454   2,321   2,350 
   


 


 


Total Lodging

   6,821   6,609   6,905 

Synthetic Fuel

   104   116   83 

Corporate

   1,605   1,943   1,189 
   


 


 


   $8,530  $8,668  $8,177 
   


 


 


Equity Method Investments             

($ in millions)

 

  2005

  2004

  2003

 

Full-Service

  $171  $120  $310 

Select-Service

   50   77   95 

Timeshare

   115   31   22 
   


 


 


Total Lodging

   336   228   427 

Corporate

   13   21   41 
   


 


 


   $349  $249  $468 
   


 


 


Goodwill

($ in millions)

 

  2005

  2004

  2003

Full-Service

  $852  $851  $851

Select-Service

   —     —     —  

Extended-Stay

   72   72   72

Timeshare

   —     —     —  
   

  

  

Total Lodging

  $924  $923  $923
   

  

  

 

Segment Financial ResultsCapital Expenditures

($ in millions)

 

  

2002


   

2001


  

2000


($ in millions)

  2005

  2004

  2003

Full-Service

  

$

397

 

  

$

294

  

$

510

  $697  $95  $93

Select-Service

  

 

130

 

  

 

145

  

 

192

   4   16   38

Extended-Stay

  

 

(3

)

  

 

55

  

 

96

   6   1   3

Timeshare

  

 

183

 

  

 

147

  

 

138

   27   38   45
  


  

  

  

  

  

Total Lodging

  

 

707

 

  

 

641

  

 

936

   734   150   179

Synthetic Fuel

  

 

(134

)

  

 

—  

  

 

—  

   46   —     —  

Corporate

   —     31   16

Discontinued Operations

   —     —     15
  


  

  

  

  

  

  

$

573

 

  

$

641

  

$

936

  $780  $181  $210
  


  

  

  

  

  

 

63Our tax provision of $94 million for 2005 includes a tax provision of $284 million before the impact of our Synthetic Fuel segment; our tax provision of $100 million for 2004 includes a tax provision of $265 million before the impact of our Synthetic Fuel segment; and our tax benefit of $43 million for 2003 includes a tax provision of $202 million before the impact of our Synthetic Fuel segment.


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

   

  

  

64


 

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$577 million in 2002, $8192005, $454 million in 20012004 and $745$452 million in 2000. The2003. Approximately 95 percent, 94 percent, and 95 percent for 2005, 2004, and 2003, respectively, 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: salesoperations (which are predominately related to our Full-Service segment): Revenues of $450$1,109 million in 2002, $4772005, $968 million in 20012004, and $455$711 million in 2000;2003; Lodging financial results of $94$192 million in 2002, $422005 (36 percent from Asia, 31 percent from the Americas excluding the U.S., 15 percent from the United Kingdom, 8 percent from Europe, 7 percent from the Middle East and Africa, and 3 percent from Australia), $140 million in 20012004 and $73$102 million in 2000;2003; and fixed assets of $308$767 million in 2002, $2302005, $358 million in 20012004 and $239$336 million in 2000.2003. No individual country, other than the United States, constitutes a material portion of our revenues, financial results or fixed assets.

 

20.VARIABLE INTEREST ENTITIES

The

FIN 46, “Consolidation of Variable Interest Entities” (“the Interpretation”), was effective for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46(R), which was revised in December 2003, was effective for all entities to which the provisions of FIN 46 were not applied as of December 24, 2003. We applied the provisions of FIN 46(R) to all entities subject to the Interpretation as of March 26, 2004. Under FIN 46(R), if an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs 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,entity’s expected losses, receives 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 ofentity’s expected residual returns, or both, 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

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 on 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 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.

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 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“primary beneficiary.”

 

As a result of the workforce reduction and delay in filling vacant positions,adopting FIN 46(R), we consolidated excess corporate facilities. We recorded a restructuring chargeour two synthetic fuel joint ventures as of approximately $14March 26, 2004. At year-end 2005, the ventures had working capital of $25 million, and the book value of the synthetic fuel facilities was $19 million. The ventures have no long-term debt. See Footnote 2, “Synthetic Fuel,” of the Notes to Consolidated Financial Statements for excess corporate facilities, primarilyadditional disclosure related to our synthetic fuel operation, including 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.

We currently consolidate four other entities that are variable interest entities under FIN 46(R). These entities were established with the same partner to lease terminationsfour Marriott-branded hotels. The combined capital in the four variable interest entities is $3 million, which is used primarily to fund hotel working capital. Our equity at risk is $2 million, and noncancelable lease costs in excesswe hold 55 percent 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 Linethe common equity shares.

 

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 ithave one other significant interest in an entity that is developed. As a result of the dramatic downturn in the economy in the aftermath of the September 11,variable interest entity under FIN 46(R). In February 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.

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), 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).

66


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 tables provide 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

   

  

  

  

  

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.

67


SUBSEQUENT EVENT

In January 2003, we entered into a contractshareholders’ agreement with an unrelated third party to sellform 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. We hold 35 percent of the equity and 65 percent of the debt. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. Our maximum exposure to loss is $15 million. We do not consolidate the joint venture since we do not bear the majority of the expected losses or expected residual returns.

In conjunction with the transaction with CTF described more fully in Footnote 7, “Acquisitions and Dispositions,” under the caption “2005 Acquisitions” we manage 15 hotels on behalf of four tenant entities 100 percent owned by CTF, which lease the 15 hotels from third-party owners. The entities have minimal equity and minimal assets comprised of hotel working capital. CTF has placed money in a trust account to cover cash flow shortfalls and to meet rent payments. At year-end 2005, the trust account held approximately $51 million. The entities are variable interest entities under FIN 46(R). We do not consolidate the entities as we do not bear the majority of the expected losses. We are liable for rent payments for nine of the 15 hotels in the event that there is a cash flow shortfall and there is no money left in the trust. Future minimum lease payments through the end of the lease term for these nine hotels total approximately $143 million. In addition, we have guaranteed to CTF that we will fund rent shortfalls for the remaining six hotels of up to $36 million.

We also manage one hotel on behalf of a tenant entity 100 percent owned by CTF, which leases the hotel from a third-party owner. The entity has minimal equity and minimal assets comprised of hotel working capital. CTF has placed money in a trust account to cover cash flow shortfalls and to meet rent payments. At year-end 2005, there is approximately $28 million in the trust. The entity is a variable interest entity under FIN 46(R). We consolidate the entity as we bear the majority of the expected losses. We are liable for rent payments for this hotel in the event that there is a cash flow shortfall and there is not money left in the trust. Future minimum lease payments through the end of the lease term total $216 million.

As described in Footnote 9, “Marriott and Whitbread Joint Venture,” in the 2005 second quarter we formed a joint venture with Whitbread for the purpose of acquiring a portfolio of 46 hotels from Whitbread to be managed by us. The joint venture is a variable interest entity under FIN 46(R). The purchase price of the portfolio was approximately £995 million. As of the end of our 2005 fourth quarter, our maximum exposure to loss from our investment in this joint venture is $161 million. We do not consolidate the joint venture since we do not bear the majority of the expected losses or expected residual returns.

21.RELATED PARTY TRANSACTIONS

We have equity method investments in entities that own properties where we provide management and/or franchise services and receive a fee. In addition, in some cases we provide loans, preferred equity or guarantees to these entities. Our ownership interest in these equity method investments generally varies from 10 to 50 percent.

The following tables present financial data resulting from transactions with these related parties:

Income Statement Data

             
($ in millions)  2005

  2004

  2003

 

Base management fees

  $83  $72  $56 

Incentive management fees

   14   8   4 

Cost reimbursements

   936   802   699 

Owned, leased, corporate housing and other revenue

   22   29   28 
   


 


 


Total revenue

  $1,055  $911  $787 
   


 


 


General, administrative and other

  $(19) $(33) $(11)

Reimbursed costs

   (936)  (802)  (699)

Gains and other income

   54   19   21 

Interest income

   31   74   77 

Reversal of (provision for) loan losses

   —     3   (2)

Equity in (losses) earnings – Synthetic fuel

   —     (28)  10 

Equity in earnings (losses) – Other

   36   (14)  (17)

Balance Sheet Data

             
($ in millions)  2005

  2004

    

Current assets - accounts and notes receivable

  $48  $72     

Contract acquisition costs

   26   24     

Cost method investments

   121   —       

Equity method investments

   349   249     

Loans to equity method investees

   36   526     

Other long-term receivables

   —     3     

Other long-term assets

   166   38     

Long-term deferred tax assets, net

   19   17     

Current liabilities:

             

Accounts payable

   (2)  (3)    

Other payables and accruals

   (45)  (4)    

Other long-term liabilities

   (101)  (11)    

Summarized information relating to the entities in which we have equity method investments is as follows:

($ in millions)

 

  2005

  2004

  2003

 

Income Statement Summary

             

Sales

  $1,975  $1,617  $1,487 
   

  


 


Net income (loss)

  $259  $(69) $(102)
   

  


 


($ in millions)

 

  2005

  2004

    

Balance Sheet Summary

             

Assets (primarily comprised of hotel real estate managed by us)

  $5,589  $3,834     
   

  


    

Liabilities

  $3,654  $3,223     
   

  


    

22.RELATIONSHIP WITH MAJOR CUSTOMER

As of year-end 2005, Host Marriott Corporation (“Host Marriott”) owned or leased 159 lodging properties operated by us under long-term agreements. The revenues recognized from lodging properties owned or leased by Host Marriott (which are included in our Full-Service, Select-Service, and Extended-Stay segments) for the last three fiscal years are shown in the following table:

($ in millions)

 

  2005

  2004

  2003

Revenues

  $2,427  $2,423  $2,357

Additionally, Host Marriott is a partner in several unconsolidated partnerships that own lodging properties operated by us under long-term agreements. As of year-end 2005, Host Marriott was affiliated with 121 such properties operated by us. The revenues associated with those properties (which are included in our Full-Service and Select-Service segments) that were recognized by the Company for the last three fiscal years are shown in the following table:

($ in millions)

 

  2005

  2004

  2003

Revenues

  $   352  $   329  $   329

In December 2000, we acquired 120 Courtyard by Marriott hotels through the Courtyard joint venture, an unconsolidated joint venture with an affiliate of Host Marriott, and we and Host Marriott owned equal shares in the joint venture. Prior to the formation of the Courtyard joint venture, Host Marriott was a general partner in the unconsolidated partnerships that owned the 120 Courtyard by Marriott hotels. During the 2005 second quarter, Sarofim Realty Advisors, on behalf of an institutional investor, completed the acquisition of a 75 percent interest in the Synthetic Fuel business. The transaction is subject to certain closing conditions, includingCourtyard joint venture, and we signed new long-term management agreements with the receiptjoint venture. With the addition 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 remainingequity, our interest in the Synthetic Fuel business underjoint venture has declined to approximately 21 percent and Host Marriott’s interest declined to less than 4 percent. As part of the equity methodcompleted transaction, our mezzanine loan to the joint venture (including accrued interest) totaling approximately $269 million was repaid. The transaction has accelerated the pace of accounting.

68reinventions and upgrades at the joint venture’s 120 hotels.


QUARTERLY FINANCIAL DATA – UNAUDITED

 

($ in millions, except per share data)

   Fiscal Year 2005(1),(3)

($ in millions, except per share data)

 

  First
Quarter


  Second
Quarter


  Third
Quarter


  Fourth
Quarter


  Fiscal
Year


Revenues(2)

  $2,534  $2,661  $2,714  $3,641  $11,550
   

  

  

  

  

Operating income(2)

  $158  $41  $135  $221  $555
   

  

  

  

  

Income from continuing operations

  $145  $138  $148  $237  $668

Discontinued operations, after tax

   —     —     1   —     1
   

  

  

  

  

Net income

  $145  $138  $149  $237  $669
   

  

  

  

  

Diluted earnings per share from continuing operations

  $.61  $.59  $.65  $1.07  $2.89

Diluted earnings per share from discontinued operations

   —     —     —     —     —  
   

  

  

  

  

Diluted earnings per share

  $.61  $.59  $.65  $1.07  $2.89
   

  

  

  

  

 

   

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

 

   

  

  


  


  


   

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

 

   

  

  

  


  


   Fiscal Year 2004(1),(3)

($ in millions, except per share data)

 

  First
Quarter


  Second
Quarter


  Third
Quarter


  Fourth
Quarter


  Fiscal
Year


Revenues(2)

  $2,252  $2,402  $2,304  $3,141  $10,099
   

  

  

  

  

Operating income(2)

  $151  $118  $99  $109  $477
   

  

  

  

  

Income from continuing operations

  $114  $160  $132  $188  $594

Discontinued operations, after tax

   —     —     1   1   2
   

  

  

  

  

Net income

  $114  $160  $133  $189  $596
   

  

  

  

  

Diluted earnings per share from continuing operations

  $.47  $.67  $.55  $.79  $2.47

Diluted earnings per share from discontinued operations

   —     —     .01   —     .01
   

  

  

  

  

Diluted earnings per share

  $.47  $.67  $.56  $.79  $2.48
   

  

  

  

  


1(1)Fiscal year 2002 included 53 weeks and fiscal year 2001 included 52 weeks.
2The quarters consisted of 12 weeks, except for the fourth quarter, of 2002, which consisted of 17 weeks and the fourth quarter of 2001 which consisted of 16 weeks.
3(2)The current year and prior year balances have been adjusted to exclude theBalances reflect Senior Living Services and Distribution Services businesses as discontinued operations.
4(3)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.
5We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, interest income or income taxes.

69


ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

                DISCLOSUREChanges in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

On May 3, 2002, uponNone.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

As of the recommendationend 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 Audit Committee, the Board of Directors dismissed Arthur Andersen LLP (Arthur Andersen) as our independent auditorsdisclosure controls 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 years ended December 28, 2001 and December 29, 2000 did not contain an adverse opinion or disclaimer of opinion, nor wereprocedures (as such reports qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years 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)Rules 13a-15(e) and 15d-15(e) of Regulation S-K.the Securities Exchange Act of 1934 (the “Exchange Act”)), and 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. Based upon the foregoing evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

Since the date of their appointment, there were: (i) no disagreements with Ernst & YoungInternal Control Over Financial Reporting

See “Management’s Report 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 matterInternal Control Over Financial Reporting” included in connection with their report on our consolidated financial statements for the fiscal years ended January 3, 2003, December 28, 2001Part II, Item 8 “Financial Statements and December 29, 2000; and (ii) thereSupplementary Data.” There were no reportable events as definedchanges in Item 304(a)(1)(v) of Regulation S-K.internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

70Item 9B. Other Information.


 

None.

PART III

 

ITEMSItems 10, 11, 12, 13, 14.

 

As described below, we incorporate certain information appearing in the Proxy Statement we will furnish to our shareholders in connection with the 20022006 Annual Meeting of Shareholders by reference in this Form 10-K Annual Report.

 

ITEM 10.

  

We incorporate this information by reference to the “Directors Standing For Election,” “Directors Continuing In Office” andOffice,” “Section 16(a) Beneficial Ownership Reporting Compliance”Compliance,” “Audit Committee” and “Selection of Director Nominees” sections of our Proxy Statement. We have included information regarding our executive officers and our Code of Ethics below.

ITEM 11.

  

We incorporate this information by reference to the “Executive Compensation” section of our Proxy Statement.

ITEM 12.

  

We incorporate this information by reference to the “Securities Authorized for Issuance Under Equity Compensation Plans” and the “Stock Ownership” sectionsections of our Proxy Statement.

ITEM 13.

  

We incorporate this information by reference to the “Certain Relationships and Related Transactions” section of our Proxy Statement.

ITEM 14.

  

In January 2003, we carried out an evaluation, underWe incorporate this information by reference to the supervision“Principal Independent Auditor Fee Disclosure” and with the participation“Pre-Approval of the company’s management, including our Chief Executive OfficerIndependent Auditor Fees and Chief Financial Officer, of the effectiveness of the design and operationServices Policy” sections of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that 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. In addition, there have been no significant changes in the company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Proxy Statement.

71


EXECUTIVE OFFICERS OF THE REGISTRANT

 

Set forth below is certain information with respect to our executive officers. The information set forth below is as of February 1, 2006.

 

Name and Title


  

Age



  

Business Experience


J. W.J.W. Marriott, Jr.

Chairman of the Board and Chief

Chief Executive Officer

  

70

73
  

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 and the Naval Academy Endowment Trust. He serves on the Board of Trustees of the National Geographic Society and The J. Willard & Alice S. Marriott Foundation and is a member of the Executive Committee of the World Travel & Tourism Council and the National Business Council. IfIn addition, he is Chairman of the salePresident’s Export Council, a presidential advisory committee on export trade and serves as Chairman of stockthe Leadership Council of Marriott Senior Living Services Inc. to Sunrise Assisted Living Inc. (“Sunrise”) is consummated, upon the closing, we anticipate that Mr. Marriott will join the Sunrise Board of Directors.Laura Bush Foundation for America’s Libraries. Mr. Marriott has served as Chairman and Chief Executive Officer of the Company since its inception, in 1997, and served as Chairman and Chief Executive Officer of the company formerly known as Marriott International, Inc. (“Old MarriottMI”) (subsequently named Sodexho, Inc. and now a wholly owned subsidiary of Sodexho Alliance) from October 1993 tountil the Company’s spin-off from Old MI in March 1998. Mr. Marriott has served as a director of the Company since March 1998.

J.W. Marriott, Jr. is the father of John W. Marriott III.III, the non-employee Vice Chairman of the Company’s Board of Directors.

Simon Cooper

Vice President;

President and Chief Operating Officer,

The Ritz-Carlton Hotel Company, L.L.C.

  

57

60
  

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. Mr. Cooper is the Chairman of the Board of Governors for University of Guelph. He is a fellow of the Board of Trustees for the Educational Institute of the American Hotel and Motel Association and is a member of the Board for the Canadian Tourism Commission.Association. Mr. Cooper was appointed to his current position in February 2001.

Edwin D. Fuller

Vice President;

President and Managing Director –  -

Marriott Lodging International

  

57

60
  

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 inof the Midwest Region in 1985, Regional Vice President of the Western Region in 1988, and in 1990 was promoted to Senior Vice President & Managing Director of International Lodging, with a focus on developing the international group of hotels. He was named Executive Vice President and Managing Director of International Lodging in 1994, and was promoted to his current position in 1997.

72


Name and Title


Age


Business Experience


Brendan M. Keegan

Vice President;

Executive Vice President –

Human Resources

  

59

62
  

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 Seniorto his current position of Executive Vice President of Human Resources for our worldwide human resources functions, including compensation, benefits, labor and employee relations, employment and human resources planningstaffing and development, in 1997, and was appointed to his current position in 1998.

1997.

John W. Marriott, III

Executive Vice President – Lodging

41

John Marriott, III joined Marriott in 1977 and became Executive Vice President – Lodging for Marriott International in January 2003. He is responsible for leading Global Sales and Marketing, Brand Management and North American Lodging Operations. Prior to his current position, Mr. Marriott served as Executive Vice President of Global Sales and Marketing, as well as Senior Vice President for Marriott’s Mid-Atlantic Region. He has also worked in the company’s treasury department and held numerous management positions, including Executive Assistant to the Chairman, Director of Marketing, and Director of Food and Beverage. Early in his career, Mr. Marriott served as a sales manager and restaurant manager, and he started with the company working in a hotel kitchen. Mr. Marriott has served on the Board of Directors for Marriott International since August 2002. In April 2002, Mr. Marriott was named by the U.S. Department of Commerce and the Japanese government to co-chair a special taskforce to promote travel between the United States and Japan. John W. Marriott, III is the son of J.W. Marriott, Jr.

William W. McCarten

President – Marriott Services Group

54

William W. McCarten was named as President of Marriott Services Group (Marriott Senior Living Services and Marriott Distribution Services) in January 2001. Most recently, Mr. McCarten served as President and Chief Executive Officer of HMSHost Corporation (formerly Host Marriott Services Corporation) from 1995 to December 2000. He joined Marriott Corporation in 1979, was elected Vice President, Corporate Controller and Chief Accounting Officer in 1985 and Senior Vice President in 1986. He was named Executive Vice President, Host and Travel Plazas in 1991 and President, Host and Travel Plazas in 1992. In 1993 he became President of Host Marriott Corporation’s Operating Group and in 1995 was elected President and Chief Executive Officer and a director of HMSHost Corporation. Mr. McCarten is a past chairman of the Advisory Board of the McIntire School at the University of Virginia.

73


Name and Title


  

Age



  

Business Experience


Robert J. McCarthy

Executive Vice President,

North American Lodging Operations

  

49

52
  

Robert J. McCarthy was named Executive Vice President, North American Lodging Operations, in January 2003.2006. From March 2000January 2003 until January 2003,2006, Mr. McCarthy was Executive Vice President, Operations Planning and Support for Marriott Lodging.North American Lodging Operations. 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.

1995, and Executive Vice President, Operations Planning and Support for Marriott Lodging in March 2000.

Joseph Ryan

Executive Vice President and

General Counsel

  

61

63
  

Joseph Ryan joined Old Marriott in 1994 as Executive Vice President and General Counsel. Prior to that time, he was a partner in the law firm of O’Melveny & Myers, serving as the Managing Partner from 1993 until his departure. He joined O’Melveny & Myers in 1967 and was admitted as a partner in 1976.

William J. Shaw

Director, President and

Chief Operating Officer

  

57

60
  

William J. Shaw has served as President and Chief Operating Officer of the Company since 1997 (including service in the same capacity with Old MarriottMI until March 1998). He joined Marriott Corporation in 1974, was elected Corporate Controller in 1979 and a Corporate Vice President in 1982. In 1986, Mr. Shaw was elected Senior Vice President—FinancePresident-Finance and Treasurer of Marriott Corporation. He was elected Chief Financial Officer and Executive Vice President of Marriott Corporation in 1988. In 1992, he was elected President of the Marriott Service Group. He also serves on the Board of Trustees of the University of Notre Dame, Suburban Hospital Foundation and, the NCAA Leadership Advisory Board.Board and the Board of the Wolf Trap Foundation for the Performing Arts. Mr. Shaw served as a director of Old Marriott (subsequently named Sodexho, Inc. and now a wholly owned subsidiary of Sodexho Alliance)MI from March 1998 through June 2001. He has served as a director of the Company since March 1997.

Arne M. Sorenson

Executive Vice President,

Chief Financial Officer and

President - Continental European

Lodging

  

44

47
  

Arne M. Sorenson joined Old MarriottMI in 1996 as Senior Vice President of Business Development. He was instrumental in our acquisition of the Renaissance Hotel Group in 1997. Prior to joining Marriott, he was a partner in the law firm of Latham & Watkins in Washington, D.C., where he played a key role in 1992 and 1993 in the distribution of Old MarriottMI by Marriott Corporation. Mr. Sorenson was appointed Executive Vice President and Chief Financial Officer in 1998 and assumed the additional title of President, Continental European Lodging, in January 2003.

74


Name and Title


Age


Business Experience


James M. Sullivan

Executive Vice President-  President -

Lodging Development

  

59

62
  

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.

Name and Title


  Age  

Business Experience


Stephen P. Weisz

Vice President;

President – Marriott Vacation Club International

  

52

55
  

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 as Vice President of the Revenue Management Group. Mr. Weisz became Senior Vice President of Sales and Marketing for Marriott Hotels Resorts and& Suites in 1992 and Executive Vice President – Lodging Brands in 1994. Mr. Weisz was appointed to his current position in 1996.

 

Code of Ethics

 

The Company has long maintained and enforced an Ethical Conduct policyPolicy 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 and to each member of our Board of Directors. We have attached a copyposted our Code of our EthicalEthics (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 copy of our Ethical Policy on our website, atwww.marriott.com/investorPolicy), in the near future.“Corporate Governance” section of our Investor Relations web site,http://ir.shareholder.com/mar/corporategovernance.cfm. 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, Principal Accounting Officer, or principal accounting officer,member of the Board of Directors, will also be posted to www.marriott.com/investor.http://ir.shareholder.com/mar/corporategovernance.cfm.

75


PART IV

 

ITEMItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KExhibits and Financial Statement Schedules.

 

(a)LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

 

(1)FINANCIAL STATEMENTS

(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

(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

(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

that document has been previously filed with the SEC

and the applicable exhibit is incorporated by

reference thereto)


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, 1999.1999 (File No. 001-13881).

3.2

  

Amended and Restated Bylaws.

  

Filed with this report.Exhibit No. 3.2 to our Form 10-K for the fiscal year ended January 3, 2003 (File No. 001-13881).

3.34.1

Form of Common Stock Certificate.

Exhibit No. 4.5 to our Form S-3ASR filed December 8, 2005 (File No. 333-130212).

4.2

  

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, 1999.1999 (File No. 001-13881).

3.44.3

  

CertificateForm of Designation, Preferences and Rights of the Marriott International, Inc. ESOP Convertible Preferred Stock.Certificate.

  

Exhibit No. 3.199.4 to our Form 10-Q for the fiscal quarter ended June 16, 2000.8-A/A filed April 3, 1998 (File No. 001-13881).

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.

4.14.4

  

Indenture dated November 16, 1998, with JPMorgan Chase Bank, N.A., as Trustee, formerly known as The Chase Manhattan Bank, as Trustee.Bank.

  

Exhibit No. 4.1 to our Form 10-K for the fiscal year ended January 1, 1999.1999 (File No. 001-13881).

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.

76


4.4  4.5

  

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.filed on September 21, 1999 (File No. 001-13881).

4.6

  

Form of 7.0% Series E Note due 2008.

  

Exhibit No. 4.1 (f)4.1(f) to our Form S-3 filed on January 17, 2001.2001 (File No. 333-53860).

4.7

  

Indenture, dated asForm of May 8, 2001, relating to the Liquid Yield Option Notes4.625% Series F Note due 2021, with Bank of New York, as trustee.2012.

  

Exhibit No. 4.2 to our Form S-38-K filed on May 25, 2001.June 14, 2005 (File No. 001-13881).

10.14.8

  

Employee Benefits Form of 5.81% Series G Note due 2015.

Exhibit No. 4.3 to our Form 8-K filed November 15, 2005 (File No. 001-13881).

Exhibit No.


Description


Incorporation by Reference

(where a report is indicated below, that

document has been previously filed with the SEC

and Other Employment Matters Allocationthe applicable exhibit is incorporated by

reference thereto)


4.9

Registration Rights Agreement, dated as of September 30, 1997 with SodexhoNovember 10, 2005, among Marriott Services,International, Inc., and Deutsche Bank Securities Inc., Barclay Capital Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (pertaining to the 5.81% Series G Notes due 2015).

    

Exhibit No. 10.14.1 to our Form 108-K filed on February 13, 1998.November 15, 2005 (File No. 001-13881).

10.2*10.1

  

2002 Comprehensive Stock and Cash IncentiveMarriott International, Inc. Executive Officer Deferred Compensation Plan.

Appendix B in our definitive proxy statement filed on March 28, 2002.

10.3

Noncompetition Agreement between Sodexho Marriott Services, Inc. and the Company.

    

Exhibit No. 10.1 to our Form 10-Q for the fiscal quarter ended March 27, 1998.September 10, 2004 (File No. 001-13881).

10.4*10.2

  

Tax Sharing Agreement with Sodexho Marriott Services,International, Inc. Executive Officer Incentive Plan and Sodexho Alliance, S.A.Executive Officer Individual Performance Plan.

    

Exhibit No. 10.2 to our Form 10-Q for the fiscal quarter ended March 27, 1998.September 10, 2004 (File No. 001-13881).

10.5*10.3

  

$500 million Credit Agreement dated February 19, 1998,2002 Comprehensive Stock and Cash Incentive Plan, as amended, with Citibank, N.A., as Administrative Agent,Amended and certain banks.Restated effective May 6, 2005.

    

Exhibit No. 4.899 to our Form 10-K8-K filed May 19, 2005 (File No. 001-13881).

*10.4

Second Amendment to the 2002 Comprehensive Stock and Cash Incentive Plan.

Filed with this report.

*10.5

Form of Employee Non-Qualified Stock Option Agreement for the fiscal year ended January 1, 1999,Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Filed with this report.

*10.6

Form of Non-Employee Director Non-Qualified Stock Option Agreement for the Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Exhibit 10.2No. 10.4 to our Form 10-Q for the fiscal quarter ended September 6, 2002 (Amendment10, 2004 (File No. 1)001-13881).

10.6*10.7

Form of Executive Restricted Stock Unit Agreement for the Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Filed with this report.

*10.8

Form of Alternate Executive Restricted Stock Unit Agreement for the Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Filed with this report.

*10.9

Form of MI Shares Agreement for the Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Filed with this report.

*10.10

Form of Stock Appreciation Right Agreement for the Marriott International, Inc. 2002 Comprehensive Stock and Cash Incentive Plan.

Exhibit No. 10 to our Form 8-K filed February 6, 2006 (File No. 001-13881).

*10.11

Summary of Marriott International, Inc. Director Compensation.

Exhibit No. 10 to our Form 8-K filed December 27, 2005 (File No. 001-13881).

Exhibit No.    


Description    


Incorporation by Reference

(where a report is indicated below, that

document has been previously filed with the SEC

and the applicable exhibit is incorporated by

reference thereto)


10.12

  

$1.52.0 billion Credit Agreement dated July 31, 2001,

as amended, of June 3, 2005,
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 Exhibit8-K filed June 8, 2005 (File No. 10.1 to our Form 10-Q for the fiscal quarter ended September 6, 2002 (Amendment No. 1)001-13881).

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.

99-131.1

  

Forward-Looking Statements.Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).

  

Filed with this report.

99-231.2

  

Ethical Conduct Policy.Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).

  

Filed with this report.

(b)

32

  REPORTS ON FORM 8-K

Section 1350 Certifications.

Furnished with this report.


*Denotes management contract or compensatory plan.

The Company did not file any report on Form 8-K during the fourth quarter of 2002.

77


SIGNATURES

 

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 14th22nd day of February, 2003.2006.

 

MARRIOTT INTERNATIONAL, INC.

 

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

J.W. Marriott, Jr.

PRINCIPAL FINANCIAL OFFICER:

   

/s/ Arne M. Sorenson


Arne M. Sorenson

  

Executive Vice President and

Chief Financial Officer

Arne M. Sorenson

PRINCIPAL ACCOUNTING OFFICER:

   

/s/ Michael J. Green        Carl T. Berquist


Michael J. Green

  

Executive Vice President, FinanceFinancial

Information and Principal Accounting OfficerEnterprise Risk Management

Carl T. Berquist

DIRECTORS:

   

/s/ Ann M. FudgeJohn W. Marriott III


Ann M. Fudge,John W. Marriott III, Vice Chairman of the Board

/s/ George Muñoz


George Muñoz, Director

/s/ Richard S. Braddock


Richard S. Braddock, Director

  

/s/ Harry J. Pearce


Harry J. Pearce, Director

/s/ Lawrence W. Kellner


Lawrence W. Kellner, Director

/s/    Gilbert M. Grosvenor


Gilbert M. Grosvenor, Director

  

/s/ Roger W. Sant


Roger W. Sant, Director

/s/ Debra L. Lee


Debra L. Lee, Director

/s/ William J. Shaw


William J. Shaw, Director

  

/s/    John W. Marriott III


John W. Marriott III, Director

/s/ Floretta Dukes McKenzie


Floretta Dukes McKenzie, Director

  

/s/ George Muñoz


George Muñoz, Director

/s/    Harry J. Pearce


Harry J. Pearce, Director

/s/    Lawrence M. Small


Lawrence M. Small, Director


CERTIFICATIONS


I, J.W. Marriott, Jr., certify that:

1.I have reviewed this annual report on Form 10-K of Marriott International, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

February 5, 2003

/s/    J.W. Marriott, Jr.


    

J.W. Marriott, Jr.

Chairman of the Board and

Chief Executive Officer


I, Arne M. Sorenson, certify that:

1.I have reviewed this annual report on Form 10-K of Marriott International, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

February 5, 2003

/s/    Arne M. Sorenson


Arne M. Sorenson

Executive Vice President and

Chief Financial Officer

 

101


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.

February 5, 2003

/s/    J.W. Marriott, Jr.


J.W. Marriott, Jr.

Chairman of the Board

and Chief Executive Officer

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.

February 5, 2003

/s/    Arne M. Sorenson


Arne M. Sorenson

Chief Financial Officer