SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X]
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 2, 1998
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 3, 2003
Commission File No. 1-13881

NEW
MARRIOTT MI,INTERNATIONAL, INC.
(To Be Renamed "Marriott International, Inc.")

Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)

Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
- ------------------------------------------------------------- ----------------------------------------------

Common Stock, $0.01 par value (100 shares outstanding as of New York Stock Exchange *
February 24, 1998) Chicago Stock Exchange*
Pacific Stock Exchange*
Class A Common Stock, $0.01 par value (no
(233,802,816 shares outstanding as of January 31, 2003) New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange*
as of February 24, 1998)
Exchange

* Subject to official notice of issuance.

The aggregate market value of shares of common stock held by non-affiliates at January 2, 199831, 2003, was $0.

$5,646,330,643.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes [_]x No [X]

¨
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'sregistrant’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. [_]

Documents Incorporated by Reference

¨
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the 19982003 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
Index to Exhibits is located on pages 4776 through 49.
77.
PART I

New Marriott MI, Inc. is a wholly owned subsidiary of Marriott International,
Inc. formed to conduct Marriott International, Inc.'s lodging, senior living and
distribution services businesses.
Throughout this report, Newwe refer to Marriott MI,International, Inc., together with its subsidiaries, is referredas “we,” “us,” or “the Company.”
Forward-Looking Statements
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 as "the Company." As
described herein, it is expectedour management. Forward-looking statements include the information concerning our possible or assumed future results of operations and statements preceded by, followed by or that all of the issued and outstanding common
stock of the Company will be distributed as a special dividend to shareholders
of Marriott International, Inc.

FORWARD-LOOKING STATEMENTS

When used throughout this report,include the words "believes," "anticipates,"
"expects," "intends," "hopes," "estimates," "projects"“believes”, “expects”, “anticipates”, “intends”, “plans”, “estimates”, or similar expressions.
Forward-looking statements involve risks, uncertainties and other similar
expressions, which are predictions of or indicate future events and trends
identifyassumptions. Actual results may differ materially from those expressed in these forward-looking statements. Such statements are subjectWe caution you not to a number of
risksput undue reliance on any forward-looking statements.
You should understand that the following important factors, in addition to those discussed in Exhibit 99 and uncertainties whichelsewhere in this annual report, could cause actual results to differ materially from those projected, including: dependence on arrangements with present and
future property owners; contract terms offered by competitors; expressed in such forward-looking statements.
competition withinin each of the Company'sour business segments;
business strategies and their intended results;
the balance between supply of and demand for hotel rooms, timeshare units and senior living accommodations; the Company'scorporate apartments;
our continued ability to renew existing operating contracts and franchise agreements and obtain new operating contracts and franchise agreements (in each case on
favorable terms); the Company'sagreements;
our ability to develop and maintain positive relations with current and potential hotel owners;
our ability to obtain adequate property and senior living community owners
and distribution services clients; liability insurance to protect against losses or to obtain such insurance at reasonable rates;
the effect of international, national and regional economic conditions; 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 Company's abilityeffect that internet reservation channels may have on the rates that we are able to achieve synergiescharge for hotel rooms and performance improvements
subsequent to closing on acquisitions; Marriott International, Inc.'s ability to
successfully complete its recently announced spinoff transaction; and timeshare intervals;
other risks described from time to time in the Company'sour filings with the Securities and Exchange Commission including those set forth on Exhibit 99 filed herewith.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements. The Company also undertakes no obligation to publicly update or
revise any forward-looking statement to reflect current or future events or
circumstances.

(the SEC).
ITEMS 1 ANDand 2. BUSINESS AND PROPERTIES

The Company is
We are a worldwide operator and franchisor of hotels and senior living
communities. The Company'srelated lodging facilities. Our operations are grouped in twointo five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Contract Services,Synthetic Fuel, which represented 77 percent65, 12, 7, 14 and 232 percent, respectively, of total sales in 1997.

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.
In itsour Lodging segment, the Company operatesbusiness, we operate, develop and franchises lodging facilitiesfranchise hotels under 1014 separate brand names and developswe operate, develop and operates vacation timesharing
resorts.

The Contract Services segment consists of two businesses.market Marriott Senior
Living Services developstimeshare properties under 4 separate brand names. Our lodging business includes the Full-Service, Select-Service, Extended-Stay and presently operates 89 senior living communities
offering independent living, assisted living and skilled nursing care for
seniors in the United States. Marriott Distribution Services supplies food and
related products to internal operations and to external customers throughout the
United States.

Proposed Spinoff
- ----------------

On October 1, 1997, Marriott International, Inc. announced a definitive
agreement to combine the operations of its Marriott Management Services Division
(MMS) with the North American operations of Sodexho Alliance, S.A. (Sodexho), a
worldwide food and management services organization. The combined company, to
be renamed Sodexho Marriott Services, Inc. (SMS), will be the largest provider
of food and facilities management services in North America. SMS common stock
is expected to be listed on the New York Stock Exchange.

Prior to the merger, all of the issued and outstanding common stock of the
Company will be distributed, on a pro rata basis, as a special dividend to
holders of Marriott International, Inc. common stock (the Spinoff). Marriott
International, Inc. has received a private letter ruling from the Internal
Revenue Service that the Spinoff will be tax-free to Marriott International,
Inc. and its shareholders. The Company will be renamed "Marriott International,
Inc." and its common stock will be listed on the New York Stock Exchange,
subject to official notice of issuance.

Timeshare segments.
2

The Spinoff and merger transactions are expected to be consummated on March
27, 1998, subject to customary conditions, including approval by Marriott
International, Inc.'s shareholders. A special meeting of shareholders is
scheduled to be held on March 17, 1998 for purposes of considering and acting on
the foregoing transactions and related matters. A proxy statement and proxy
card relating to the special meeting were mailed beginning on February 16, 1998
to shareholders of record of Marriott International, Inc. on January 28, 1998.

Upon consummation of the Spinoff, the Company will have two classes of common
stock. One class will have one vote per share (New Marriott Common Stock) and
one class will have ten votes per share (New Marriott Class A Common Stock).
Each holder of Marriott International, Inc. common stock on the record date for
the Spinoff will receive one share of New Marriott Common Stock and one share of
New Marriott Class A Common Stock for each share of Marriott International, Inc.
common stock owned on such date. The rights, powers and preferences of the two
classes of stock will otherwise be identical, except that the Board of Directors
may declare and pay a regular quarterly cash dividend on the New Marriott Common
Stock that may be up to 125 percent of the cash dividend declared and paid on
the New Marriott Class A Common Stock, and the New Marriott Common Stock has
certain customary minority rights protection provisions that apply if a person
or group of persons acquires over 15 percent of the outstanding shares of New
Marriott Class A Common Stock after the Spinoff, and does not at that time hold
at least the same percentage of New Marriott Common Stock.

The Company has entered into a $1.5 billion multicurrency revolving credit
agreement permitting borrowings by the Company following consummation of the
Spinoff. The facility has a term of five years and borrowings will bear
interest at the London Interbank Offered Rate (LIBOR) plus a spread, based on
the Company's public debt rating. Additionally, annual fees will be paid on the
facility at a rate also based on the Company's public debt rating.

Each outstanding zero-coupon convertible subordinated note (LYONs) of Marriott
International, Inc. will be convertible into 8.76 shares of New Marriott Common
Stock, 8.76 shares of New Marriott Class A Common Stock and 2.19 shares of SMS
common stock (after giving effect to a one-for-four reverse stock split). The
LYONs will be assumed by the Company, and SMS will assume nine percent of the
LYONs obligation, which percentage is based on an estimate of the relative
equity values of SMS and the Company.

On February 25, 1998, Marriott International, Inc. commenced a tender offer
and consent solicitation for all $600 million of its outstanding public senior
debt (the Marriott International Public Debt) and RHG Finance Corporation, a
subsidiary of Marriott International, Inc. (and which will be a subsidiary of
the Company upon the Spinoff), commenced a tender offer and consent solicitation
for all $120 million of its outstanding public debt (the RHG Public Debt), which
is guaranteed by Marriott International, Inc. In the event that the consent
solicitation for any of the four series of Marriott International Public Debt is
unsuccessful, the Company will assume the debt of such series that is not
purchased by Marriott International, Inc. in the tender offer, and any
untendered RHG Public Debt will constitute part of the Company's consolidated
debt and will be guaranteed by the Company. Under its agreements with Sodexho
and Marriott International, Inc., to the extent that the Company assumes any
such Marriott International Public Debt, or any RHG Public Debt is not purchased
in the tender offer, Marriott International, Inc. will make a cash payment to
the Company in an amount equal to the aggregate amount of such debt.

The Company and SMS will enter into agreements under which the Company will
distribute food and supplies and provide administrative and data processing
services to SMS. The rights to all Marriott trademarks and trade names will be
transferred to the Company, which will license to SMS, for a period of four
years, certain Marriott brand names used in the food service and facilities
management businesses.

Financial information by industry segment and geographic area as of January 2,
19983, 2003 and for the three fiscal years then ended, appears in the Combined
Statement of Income, the Summary of Significant Accounting Policies --
International Operations and the Business Segments notesnote to the Combinedour Consolidated Financial Statements included in Part II, Item 8.

Employee Relations
- ------------------

Atthis annual report.
Lodging
We operate or franchise 2,557 lodging properties worldwide, with 463,429 rooms as of January 2, 1998, the Company had approximately 117,000 employees.
Approximately 3,500 employees at properties managed by the Company were
represented by labor unions. The Company believes its relations with employees
are positive.

Other Properties
- ----------------2003. In addition, towe provide 4,316 furnished corporate housing units. We believe that our portfolio of lodging brands is the operating properties discussed below,broadest of any company in the Company leases an
870,000 square foot office building, locatedworld, and that we are the leader in Bethesda, Maryland, which serves
as the Company's headquarters. This lease has an initial term which expires in
2004, and includes options for an additional 15 years.

The Company believes its properties are in generally good physical condition
with need for only routine repair and maintenance.

LODGING

The Company's Lodging businesses included 1,478 operated or franchised hotels
with 297,086 rooms at January 2, 1998, under 10 distinct brands, serving all
segmentsquality tier of the lodging industry: Marriott Hotels, Resorts and Suites (full-
service); Ritz-Carlton (luxury); Renaissance (full-service); New World (full-
service); Ramada International (moderate-price, full-service); Residence Inn
(extended-stay); Courtyard hotels (moderate-price); Fairfield Inn and Suites
(economy); TownePlace Suites (moderate-price, extended-stay) and serviced
apartments including those operated under the Marriott Executive Residences
brand (extended-stay, international). The Company is also a leading developer
and operator of vacation timesharing properties (Marriott Vacation Club
International).

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
• Marriott Conference Centers • TownePlace Suites
• JW Marriott Hotels • Marriott ExecuStay
• The Ritz-Carlton Hotels • Marriott Executive Apartments
• Renaissance Hotels, Resorts and Suites
• Ramada International Timeshare
(primarily Europe, Middle East and Asia/Pacific) • Marriott Vacation Club International
• Bvlgari Hotels and Resorts • Horizons by Marriott Vacation Club International
• The Ritz-Carlton Club
• Marriott Grand Residence Club
Select-Service Lodging
• Courtyard
• Fairfield Inn
• SpringHill Suites
3
Company-Operated Lodging Properties
- -----------------------------------

At January 2, 1998, the Company3, 2003, we operated a total of 729937 properties (191,214(242,520 rooms) across its 10 lodging brands under long-term management or lease agreements with property owners (together, the Operating Agreements).

and 8 properties (1,525 rooms) as owned.
Terms of the Company'sour management agreements vary, but typically includewe earn a management fee which comprises a base fee, which is a percentage of the revenues of the hotel, and an incentive management fees andfee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs (both direct and indirect) of lodging operations. Such agreements are generally for initial periods of 20 to 30 years, with options to renew for up to 50 additional years. The Company'sOur 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 number 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 the operator haswe have not cured such deficiencies.

The Company's responsibilities
For lodging facilities that we manage, we are responsible for units it operates include hiring, training and supervising the managers and employees required to operate the facilities.
The Company providesfacilities 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. The Company prepares and implements annual budgets forFor lodging facilities that it operates. Additionally, the Company is responsible
for allocating funds, generally a fixed percentage of revenue, for periodic
renovation of buildingswe manage, we prepare and replacement of furnishings. The Company believesimplement annual operating budgets that its ongoing refurbishment program is adequateare subject to preserve the competitive
positionowner review and earning power of the hotels.

approval.
Franchised Lodging Properties
- -----------------------------

The Company has
We have franchising programs that permit the use of itscertain of our brand names and itsour lodging systems by other hotel owners and operators. Under these programs, the Company receiveswe generally receive an initial application fee and continuing royalty fees, which typically range from 4four percent to 6six percent of room revenues for all brands, plus 2two percent to 3three percent of food and beverage revenues for full-
servicecertain full-service hotels. In addition, franchisees contribute to theour national marketing and advertising programs, and pay fees for use of the Company'sour centralized reservation systems. At January 2, 1998, the Company3, 2003, we had 7491,612 franchised properties (105,872(219,384 rooms).

4
Summary of HotelsProperties by Brand
- --------------------------

The table below shows the distribution of hotels by brand as
As of January 2,
1998.

Company-operated Franchised
------------------------------ -------------------------------
Brand Units Rooms Units Rooms
- -------------------------------------------- ------------- -------------- -------------- --------------

Marriott Hotels, Resorts and Suites......... 204 87,423 122 37,148
Ritz-Carlton................................ 33 11,416 - -
Renaissance................................. 62 24,183 8 2,587
New World................................... 14 6,889 - -
Ramada International........................ 33 7,032 41 7,444
Residence Inn............................... 112 14,719 146 15,957
Courtyard................................... 210 30,731 139 17,015
Fairfield Inn and Suites.................... 51 7,133 293 25,721
TownePlace Suites........................... 2 184 - -
Marriott Executive Residences and Other..... 8 1,504 - -
------------- -------------- -------------- --------------
Total....................................... 729 191,214 749 105,872
============= ============== ============== ==============

A significant proportion of hotels3, 2003 we operated or franchised the following properties by brand (excluding 4,316 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
We plan to open over 150 hotels (25,000 January 2, 1998 were located outsideability

Brand - ------------------------------------------------- Marriott Hotels, Resorts and Suites.............. Ritz-Carlton..................................... Renaissance...................................... New World........................................ Ramada International............................. Residence Inn.................................... Courtyard........................................ Fairfield Inn and Suites......................... TownePlace Suites................................ Marriott Executive Residences and Other..........

Total............................................

availability and cost

– 30,000 rooms) during 2003. 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 Company at of hotel developers to build or acquire new Marriott properties, which are important parts of our growth plans, is partially dependent on their access to and the U.S., as follows: U.S. Non-U.S. -------------------------------- ---------------------------------- Units Rooms Units Rooms ------------- -------------- -------------- -------------- 254 101,641 72 22,930 20 7,166 13 4,250 31 14,145 39 12,625 - - 14 6,889 - - 74 14,476 254 30,125 4 551 338 46,715 11 1,031 344 32,854 - - 2 184 - - - - 8 1,504 ------------- -------------- -------------- -------------- 1,243 232,830 235 64,256 ============= ============== ============== ============== of capital.
Full-Service Lodging
Marriott Hotels, Resorts and Suites (including JW Marriott Hotels & Resorts and Marriott Conference Centers) primarily serve business and leisure travelers and meeting groups at locations in downtown and suburban areas, near airports and at resort locations. Most Marriott full-service hotels contain from 300 to 500 rooms. However, the 19 convention hotels (approximately 18,500
rooms) are largerrooms, and contain up to 1,900 rooms. Marriott full-service hotel
facilities typically includehave internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges and parking facilities. The 35
Marriott resort hotels (approximately 15,000 rooms) have additional recreational facilities, such as tennis courts, golf courses and golf courses.many have spa facilities. The 1013 Marriott Suites (approximately 2,6003,400 rooms) are full-service suite hotels that typically contain about 250approximately 200 to 300 suites, each consisting of a living room, bedroom and bathroom. These
propertiesMarriott Suites have only limited meeting space. The Company operates 25Unless otherwise indicated, references throughout this report to Marriott Hotels, Resorts and Suites include JW Marriott Hotels & Resorts and Marriott Conference Centers.
JW Marriott Hotels & Resorts is a world-class collection of distinctive hotels that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 23 hotels and resorts are located in gateway cities and upscale resort locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities in the JW Marriott Hotels & Resorts normally include larger guestrooms, more luxurious 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 with approximately 4,400 guest
rooms, located(3,259 rooms), throughout the United States. Some of the centers are used exclusively by employees of the sponsoring organization,organizations, while others are marketed to outside meeting groups and individuals. The centers typically include meeting room space, dining facilities, guest roomsguestrooms and recreational facilities. The Company receives management fees for operating
Room operations contributed the conference
centers under contracts which typically range from one to five years.
Management fees are generally based on a fixed amount or a percentagemajority of
revenues, and some of the management contracts provide for the Company to earn
incentive fees if certain financial targets are exceeded.

Room revenues for Marriott full-service hotels contributed approximately 61
percent of the Company's full-service hotel sales for fiscal year 1997,2002, with the remainder coming from food and beverage operations, recreational facilities and other services. Individual business and leisure travelers accounted for
approximately 62 percent of occupied room nights at the Company full-service
hotels for fiscal year 1997, with group meetings representing another 38
percent. Although business at many resort properties is seasonal depending on location, overall hotel system profits have beenare usually relatively stable and include only moderate seasonal fluctuations.

As of January 2, 1998, Marriott Hotels, Resorts and Suites were located in 41
states, the District of Columbia and 33 other countries. The Company expects to
add 21 operated or franchised Marriott Hotels, Resorts and Suites (approximately
6,100 rooms) during 1998. Of these hotel rooms, approximately 50 percent will
be located outside the United States.

At January 2, 1998, Marriott Hotels, Resorts and Suites operated or franchised
by the Company were located outside the U.S. in the United Kingdom (23 hotels),
Continental Europe (14 hotels), Asia (eight hotels), the Americas (17 hotels),
Africa and the Middle East (eight hotels) and Australia (two hotels).

Marriott Hotels, Resorts and Suites
Geographic Distribution at January 3, 2003
Hotels
United States (42 states and the District of Columbia) 293 (120,308 rooms )
Non-U.S. (56 countries and territories)
Americas (Non-U.S.) 31
Continental Europe 29
United Kingdom 50
Asia 28
Africa and the Middle East 15
Australia 4
Total Non-U.S. 157 (44,892 rooms )
Ritz-Carlton hotels and resorts are renowned for their distinctive architecture and for the quality of their facilities, dining and personalized guest service. Most Ritz-Carlton hotels have 200250 to 500400 guest rooms and typically include meeting and banquet facilities, a variety of restaurants and lounges, gift shops, swimming pools and parking facilities. Resort guests usuallyGuests at most of the Ritz-Carlton resorts have access to additional recreational amenities, such as tennis courts and golf courses.

As of January 2, 1998, Ritz-Carlton luxury hotels and resorts were located in
the United States and 12 other countries. It is expected that three Ritz-
Carlton hotels (approximately 1,000 rooms) will be opened during 1998.

Ritz-Carlton Hotels and Resorts
Geographic Distribution at January 3, 2003
Hotels
United States (15 states and the District of Columbia) 32 (10,270 rooms )
Non-U.S. (19 countries and territories) 19 (6,296 rooms )
5
Renaissanceis a global quality tierquality-tier brand, which targets business travelers, group meetings and leisure travelers. Renaissance hotels are generally located in downtown locations of major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotels contain 300 to 500 rooms; however, a few of the convention oriented hotels are larger, in size, and some hotels in non-gateway markets, particularly in Europe, are smaller. Renaissance hotels typically include an all-day dining restaurant, a specialty restaurant, club floors and a lounge, boardrooms, and convention and banquet facilities. There
are 15 Renaissance Resorts whichresort hotels have additional recreational facilities including golf, tennis, water sports and water sports. As of January 2, 1998, Renaissance
hotels were located in 15 states, the District of Columbia and 22 other
countries.

At January 2, 1998, Renaissance hotels operated or franchised by the Company
were located outside the U.S. in Continental Europe (16 hotels), Asia (12
hotels), the Americas (eight hotels), Africa and the Middle East (two hotels)
and Australia (one hotel).

New World primarily targets international business travelers. New World
hotels are located exclusively in the Asia-Pacific region and are concentrated
in the major business districts of gateway cities in China and Southeast Asia.
With hotels in the key gateway markets to China of Hong Kong, Beijing and
Shanghai, New World has expanded into China's secondary business centers. New
World hotels typically range in size from 300 to 600 rooms and offer multiple
restaurants and lounges, executive floors and a variety of recreational, banquet
and meetingspa facilities. As of January 2, 1998, New World hotels were located in
seven countries outside the U.S.

Renaissance Hotels, Resorts and Suites
Geographic Distribution at January 3, 2003
Hotels
United States (24 states and the District of Columbia) 63 (23,961 rooms )
Non-U.S. (28 countries and territories)
Americas (Non-U.S.) 10
Continental Europe 17
United Kingdom 7
Asia 20
Africa and the Middle East 8
Australia 1
Total Non-U.S. 63 (21,838 rooms )
Ramada International is a moderately priced, full-servicemoderately-priced brand targeted at business and leisure travelers. Each full-service Ramada International property includes a restaurant, a cocktail lounge and full-service meeting and banquet facilities. Ramada International hotels are located primarily in Europe and Asia in major and secondary cities, near major international airports and suburban office park locations. The Company also receivesIn addition to management and franchise fees associated with Ramada International, we receive a royalty fee from Cendant
Corporation (successor to HFS, Inc.) and Ramada Franchise Canada Limited for the use of 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 Cendant joint venture that was formed in the first quarter of 2002 to further develop and expand the Ramada and Days Inn brands in the United States. In 2002, we opened 16 hotels with the Ramada brand name, outside the United States and Canada, respectively.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 2, 1998, Ramada International hotels were located in 22
countries outside the U.S., including the United Kingdom (four hotels),
Continental Europe (48 hotels), Asia (11 hotels), Central and South America
(three hotels), Africa and the Middle East (five hotels) and Australia (three
hotels).

The Company expects to add 17 hotels (approximately 4,000 rooms) to the
Renaissance, New World and Ramada International brands during fiscal 1998.

2004.
Select-Service Lodging
Courtyard hotels is the Company'sour upper moderate-price limited serviceselect-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically have 8090 to 150 rooms. Well landscaped grounds include a courtyard with a pool and social areas. Most hotels feature quality guest rooms and meeting rooms, limited restaurant and lounge facilities, a swimming pool and an exercise room. The operating systems developed for these hotels allow Courtyard to be price competitiveprice-competitive while providing better value through superior facilities and guest service. As of January 2, 1998, Courtyard hotelsAt year end there were located587 Courtyards operating in 42 states, the
District of Columbia, Canada and the United Kingdom. The Company expects to add
36 properties (approximately 5,000 rooms) to its 10 countries.
Courtyard
Geographic Distribution at January 3, 2003
Hotels
United States (45 states and the District of Columbia) 539 (75,905 rooms )
Non-U.S. (10 countries and territories) 48 (8,451 rooms )
6
Fairfield Inn is our hotel system during
fiscal 1998, primarily through franchising.

Residence Inn is the U.S. market leaderbrand that competes in the extended-stay lodging segment,
which caters primarily to business, government and family travelers who stay
more than five consecutive nights. Residence Inns generally have 80 to 130
studio and two-story penthouse suites. Most inns feature a series of
residential style buildings with landscaped walkways, courtyards and
recreational areas. The inns do not have restaurants but offer complimentary
continental breakfast. Each suite contains a fully equipped kitchen, and many
suites have wood-burning fireplaces.

As of January 2, 1998, Residence Inns were located in 43 states, Canada and
Mexico. The Company expects to add 34 inns (approximately 4,000 rooms) to its
Residence Inn system during fiscal 1998, primarily through franchising.

Fairfield Inn and Suites is the Company's economy lodging product which
competes directly with major national economy motel chains.lower moderate price-tier. Aimed at cost-
consciousvalue-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 6560 to 135140 rooms and offers a swimming pool, complimentary continental breakfast and free local phone calls. At year end there were 503 Fairfield Inns operating in the United States.
SpringHill Suitesis our all-suite brand in the moderate-price tier targeting business travelers, leisure travelers and families. SpringHill Suites are designedtypically have 90 to meet the needs of
travelers who require more space and amenities.165 rooms. They feature suites that are 25 percent larger than thea typical Fairfield Innhotel guest room and offer a broaderbroad range of amenities.

As of January 2, 1998, Fairfield Innamenities, including complimentary continental breakfast and Suitesexercise facilities. There were 98 properties located in 47 states.
The Company expectsthe United States and Canada at January 3, 2003.
Extended-Stay Lodging
Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. A friendly staff and welcome services like complimentary hot breakfast and evening social hours add 44 franchised Fairfieldto the sense of community. There are 416 Residence Inn and Suites (approximately
3,900 rooms) to its system during fiscal 1998.

hotels across North America.
Residence Inn
Geographic Distribution at January 3, 2003
Hotels
United States (47 states and the District of Columbia) 416 (49,002 rooms)
Canada 11 (1,495 rooms)
Mexico 1 (76 rooms)
TownePlace Suitesis a moderately priced, extended-stay hotel product that is designed to appeal to business and leisure travelers.travelers who stay for five nights or more. The standardtypical TownePlace Suites hotel consists of two interior-corridor buildings containing 95 units
consisting of high-quality one-contains 100 studio, one-bedroom and two-bedroom studio suites. Each suite has a fully equipped kitchen and separate living area.area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-
hour24-hour staffing and laundry facilities. The Company plans to open 18At January 3, 2003, 104 TownePlace Suites (approximately 1,900(10,704 rooms) during fiscal 1998.

Servicedwere located in 30 states.
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, ExecuStay also became a corporate housing franchisor.
Marriott Executive Apartment and Other. We provide temporary housing (serviced apartments) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some serviced apartments operate under theMarriott Executive Residences
Apartmentsbrand, that was introduced in February 1997 andwhich is being developeddesigned specifically for the long-term international traveler. At January 3, 2003, 11 serviced apartment properties (2,007 units), including six Marriott Executive Apartments, were located in seven countries and territories. All Marriott Executive Apartments are located outside the United States.
Timeshare
Marriott Vacation Club Internationaldevelops, sells and operates vacation timesharing resorts. ProfitsRevenues are generated from three primary sources: (1) selling fee simple and other forms of timeshare interests,intervals, (2) operating the resorts and (3) financing consumer purchases of timesharing intervals.

Some
Many timesharing resorts are located adjacent to Marriott hotels, and timeshare owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by the CompanyMarriott through an affiliatedexternal exchange company. Owners also can trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 1,3002,300 Marriott hotels worldwide.
In 1997,2002 we continued to growMarriott Grand Residence Club(launched in 2001), our “fractional share” business line, and initiated sales in Mayfair, London. In this business line, fractional share owners purchase the Company had 11 resorts in active sales, including the historic
Custom House in Boston, which is the Company's first urban timeshare project and
the Company's first European timeshare resort in Marbella, Spain.

Additionally, the Company announced its second European timeshare and golf
resort on the island of Mallorca in Spain. In 1997, the Company added 20,000 new
owners taking the Company's total timeshare ownersright to over 100,000.stay at their property up to thirteen weeks each year. In addition, the Company purchased a minoritywe continued to expandThe Ritz-Carlton Club timeshare business line (launched in 2000) by initiating sales of both golf and spa memberships and personal residences in Jupiter, Florida. Lastly, we initiated sales at four new Marriott Vacation Club International locations: Canyon Villas
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), our moderate tier vacation ownership business line.
Marriott Vacation Club International’s owner base continues to expand, with 223,000 owners at year end 2002, compared to 195,000 in Interval International, Inc., one
of the leading timeshare interval exchange companies.

As of January 2, 1998, the Company operated 32 timeshare resorts located in
the Continental U.S. (28 resorts), Hawaii (one resort), the Caribbean (two
resorts) and Europe (one resort).

2001.
Timeshare (all brands)
Geographic Distribution at January 3, 2003
Resorts
Units
Continental United States 39 5,692
Hawaii 4 705
Caribbean 4 477
Europe 5 643
Asia 1 54
Total 53 7,571
Other Activities
- -----------------

Marriott Golf manages 1726 golf course facilities as part of our management of hotels and for the Company and other golf course owners.

The Company has provided event planning and management services since 1996
under the brand name of Marquis Events International by Marriott. In 1996, the
Company was awarded a contract by the National Football League to be the
official provider of hospitality services such as catering, beverage services,
entertainment and decor to the NFL's corporate clientele for the 1997, 1998 and
1999 Super Bowls.

The Company operates
We operate 18 systemwide hotel reservation centers, 11 of them in Omaha, Nebraska;
Salt Lake City, Utah; Atlanta, Georgia; Los Angeles, California;the U.S. and London,
EnglandCanada and seven internationally, that handle reservation requests for Marriott lodging brands worldwide, including franchised units. A further eight regional administrative office
locations also serve as reservation centers. The Company ownsproperties. We own one of the Omaha
facilityU.S. facilities and leaseslease the other facilities.

The Company'sothers.
Our Architecture and Construction Division assists in thedivision provides design, development, construction, refurbishment and refurbishmentprocurement services to owners and franchisees of lodging properties and senior living communities.

communities on a voluntary basis outside the scope of and separate from their management or franchise contracts. Consistent with third party contractors, A&C provides these services for owners and franchisees of Marriott branded properties on a fee basis.
Competition
- -----------

The Company encounters
We encounter strong competition both as a hotellodging operator and as a franchisor. There are over 500 hotelapproximately 600 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Hotel managementManagement 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 1997, the majority2002, over two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the three largest franchisors operating multiple hotel 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. The Company believesWe 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.

The Company has approximately a six
Based on lodging industry data, we have an eight percent share of the U.S. lodginghotel market (based on number of rooms), and less than a one percent share of the lodging market outside the United States. The Company'sWe believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation, because itsour hotels typically generate higher occupancies and revenueRevenue per available roomAvailable Room (REVPAR) than direct competitors in most market areas. The Company attributesWe attribute this performance premium to itsour success in achieving and maintaining strong customer preference. The Company believes its superiorApproximately 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, nationalour marketing programs, reservation systems and itsour emphasis on guest service and satisfaction are contributing factors.

The Company's propertiesfactors across all of our brands.
8
Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. The vast majorityOur management, lease, and franchise agreements provide for the allocation of rooms infunds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that the Marriott lodging system
either opened or have been refurbished inongoing refurbishment program is adequate to preserve the past five years. The Companycompetitive position and earning power of the hotels. We also strivesstrive to continually update and improve the products and services offered.
The Company believeswe offer. We believe that by operating a number of hotels in each of itsamong our brands, it stayswe stay in direct touch with customers and reactsreact to changes in the marketplace more quickly than chains which rely exclusively on franchising.

Repeat guest business is enhanced by the
Marriott Rewards and Marriott Miles
programs, which reward frequent travelers with free stays at Marriott hotels or
free travel on participating airlines. Marriott Rewards, introduced in the
spring of 1997, is a multi-brand frequent guest program with over 18 million members, and replaced the
Company's 14-year-old Honored Guest Awards program. In addition to the
participation of sevennine participating Marriott brands and Marriott Vacation Club International,brands. The Marriott Rewards has formed a partnershipprogram yields repeat guest business by rewarding frequent stays with select Ritz-Carlton hotelspoints toward free hotel stays and also allows members to exchange points for frequent flyerother rewards, or airline miles with nine
partner airlines. Management believesany of 22 participating airline programs. We believe that the frequent stay programs generateMarriott Rewards generates substantial repeat business that might otherwise go to competing hotels.

The resort timesharing industry also is very competitive. Formerly dominated
by real estate development companies and entrepreneurs, the industry has
recently begun to attract well capitalized corporations with significant
experience in the lodging and hospitality-related industries. The Company
currently has about a six percent share of this rapidly growing industry's
annual worldwide sales of about $6 billion. The Company competes by offering
premium quality products at attractive locations to prospective timeshare
buyers, many of whom are familiar with the Company's strong commitment to
customer satisfaction through its hotel properties. Approximately 26 percent of
the Company's ownership resort sales come from additional purchases by or
referrals from existing owners.

CONTRACT SERVICES

The Contract Services segment includes two businesses:
Discontinued Operations
Marriott Senior Living Services (development
In our Senior Living Services business, we operate both “independent full-service” and operation of“assisted living” senior living communities and related
senior care services) and Marriott Distribution Services (distribution of food
and supplies).

Marriott Senior Living Services
- -------------------------------

Through its Senior Living Services business, the Company develops and operates
both "independent full-service" and "assisted living" senior living communities
and providesprovide related senior care services. Most are rental communities with dailymonthly rates that depend on the amenities and services provided. The Company isWe are one of the largest U.S. operatoroperators of senior living communities in the quality tier. As of January 2, 1998, theMarriott International entered into a definitive Agreement on December 30, 2002 to sell our Senior Living Services business to Sunrise Assisted Living, Inc. and our remaining communities to CNL Retirement Partners, Inc. (CNL). We expect to complete the sale early in 2003. 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 plan 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.
At January 3, 2003 we operated 44129 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, 2003, we operated 42 independent full-service senior living communities, which offer both independent living apartments and personal assistance units for seniors. Most of these communities also offer licensed nursing care.

As of
At January 2, 1998, the Senior Living Services business3, 2003, we also operated 4587 assisted living senior living communities principally under the names "Brighton“Brighton Gardens by Marriott," "Village Oaks," "National Guest Homes"Marriott” and "Hearthside."“Marriott MapleRidge”. Assisted
living senior living communities are for seniors who presently require personalbenefit from assistance with hygiene, administration of medication, mobility and other daily activities which do not require skilled nurses. Thesuch as bathing, dressing or medication. Brighton Gardens concept is quality tiera quality-tier assisted living concept which generally has 100 single resident90 assisted living suites and in certain locations, 30 to 45 nursing beds in a community. AlzheimerIn some communities, separate on-site centers also provide specialized care units
are also provided at 23 communities. Village Oaks and National Guest Homes are
moderately priced assisted living concepts which emphasize non-family companion
living and generally have 70 two-person suites in a community. These concepts
are geared for the cost-conscious senior who enjoys the companionship of another
unrelated individual. Hearthsideresidents 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 smalla smaller scale, more intimate setting and family-like living at a moderate price and single resident assisted living
suites.

price.
The assisted living concepts typically include three meals per day, linen and housekeeping services, security, transportation, and social and recreational activities. Additionally, skilled nursing and therapy services are generally available to Brighton Gardens and Hearthside residents.
9
Terms of the senior living servicesSenior Living Services management agreements vary but typically include base management fees, ranging from four to fivesix percent of revenues, central administrative services reimbursements and incentive management fees. Such agreements are generally for initial periods of five to 30 years, with options to renew for up to 25 additional years. Under the terms of the lease
agreementsleases covering certain of the communities, the Company payswe pay the owner fixed annual rentalsrent plus additional rentalsrent equal to a percentage of the amount by which annual revenues in excess ofexceed a fixed amount.

The senior living services market is one of the fastest-growing segments of
the U.S. economy and the Company is expanding its Senior Living Services
division to meet this growing demand. By the end of fiscal 1998, the Company
expects to operate approximately 120 senior living communities.

As of January 2, 1998, the Company operated 89 senior living communities in 24
states.

Communities Units/1/
---------------- --------------
Independent full-service

- owned........................................ 3 1,189
- operated under long-term agreements.......... 41 11,074
---------------- --------------
44 12,263
---------------- --------------

Assisted living
- owned........................................ 12 1,242
- operated under long-term agreements.......... 33 4,188
---------------- --------------
45 5,430
---------------- --------------
Total senior living communities................ 89 17,693
================ ==============

- ----------
/1/ Units represent independent and assisted living apartments plus beds in
nursing centers.

Marriott Distribution Services
- ------------------------------

Marriott Distribution Services (MDS) is
Prior to its discontinuance, MDS was a United States limited-line distributor of food and related supplies carrying an averageto Marriott businesses and unrelated third parties. In the third quarter of 3,000 product
items per2002, we completed a strategic review of the distribution center. Thisservices business unit originally focused on
purchasing, warehousing and distributing food and suppliesdecided to other Marriott
businesses. In recent years, however, MDS has steadily increased its third-
party business to about 65 percent of total sales volume in fiscal year 1997,
compared to less than 15 percent in fiscal year 1988.

MDS operated a nationwide network of 15 distribution centers asexit the business. As of January 2,
1998, including three centers opened during 1997. Leased3, 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.
Employee Relations
At January 3, 2003, we had approximately 144,000 employees. Approximately 7,500 employees were represented by labor unions. We believe relations with our employees are generally builtpositive.
Other Properties
In addition to the Company's specifications, and utilize a narrow aisle
concept and technology to enhance productivity.

MDS plans to pursue new business by leveraging its purchasing economies,
quality assurance programs and operating systems.

Competition
- -----------

The Company encounters strong competitionproperties discussed above, we lease two office buildings with combined space of approximately 930,000 square feet in each of its Contract Services
businesses.

Marriott Senior Living Services competes mostly with local and regional
providers of long-term health care and senior living services, although some
national providersBethesda, Maryland, where we are emergingheadquartered.
We believe our properties are in the assisted living market. Marriott Senior
Living Services is able to compete by operating well maintained facilities and
by providing quality health care, food service and other services at reasonable
prices. The reputation for service associatedgenerally good physical condition with the Marriott name is also
attractive to residentsneed for only routine repairs and their families. Additionally, Marriott Senior Living
Services has focused on developing relationships with professionals who often
refer seniors to senior living communities, such as hospital discharge planners
and ministers. By educating these groups on the assisted living concept, and
familiarizing them with the Marriott product and associates, Marriott Senior
Living Services generates a significant volume of referrals that helps its
senior living communities to quickly achieve high, stabilized occupancy levels.

MDS competes with numerous national, regional and local distribution companies
in the $134 billion U.S. food distribution industry. MDS attracts clients by
adopting competitive pricing policies and by maintaining one of the highest
order fill rates in the industry. In addition, MDS uses its purchasing leverage
and limited product lines to provide a favorable cost structure.

10
maintenance.
ITEM 3. LEGAL PROCEEDINGS

There
Legal proceedings are no material legal proceedings pending againstincorporated by reference to the Company.

“Contingencies” footnote in the financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

PART
10
Part II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

ITEM 5. MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The New Marriott Common Stockrange of prices of our common stock and dividends declared per share for each quarterly period within the New Marriottlast two years are as follows:
Stock Price
Dividends Declared Per Share
High
Low
2001 First Quarter $ 47.81 $ 37.25 $ 0.060
Second Quarter 50.50 38.13 0.065
Third Quarter 49.72 40.50 0.065
Fourth Quarter 41.50 27.30 0.065
Stock Price
Dividends Declared Per Share
High
Low
2002 First Quarter $ 45.49 $ 34.60 $ 0.065
Second Quarter 46.45 37.25 0.070
Third Quarter 40.25 30.44 0.070
Fourth Quarter 36.62 26.25 0.070
At January 31, 2003, there were 233,802,816 shares of Class A Common Stock have
been accepted for listingoutstanding held by 55,122 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, subject to
official notice of issuance.

At February 24, 1998, there were 100 shares of Company common stock
outstanding, all of which were held by Marriott International, Inc.

12
Exchange.
11
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for the Company derived from itsour financial statements as of and for the five fiscal years ended January 2, 1998.

The historical3, 2003.
Since the information set forth belowin 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 be read in conjunction with
"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and the Combinedour Consolidated Financial Statements and notes thereto, each
contained herein. Per share data has not been presented because the Company was
not a publicly held company during the periods presented below.

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 Results^1,4 573 641 936 827 704
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 Sales^1,3 $ 18,599 $ 17,477 $ 17,489 $ 15,892 $ 14,279
¹ The current year and prior year balances have been adjusted to reflect our Senior Living Services and Distribution Services businesses as discontinued operations.
² Fiscal Year
----------------------------------------------------------
1997 1996/1/ 1995 1994 1993
----------------------------------------------------------
(in millions)

INCOME STATEMENT DATA:
Sales............................................. $ 9,046 $ 7,267 $ 6,255 $ 5,746 $ 4,665
Operating Profit Before
Corporate Expensesyear 2002 included 53 weeks; all other years included 52 weeks.
³ Systemwide sales comprise revenues generated from guests at managed, franchised, owned, and Interest.................. 609 508 390 316 267
Income Before Cumulative Effectleased hotels and our Synthetic Fuel business. We consider systemwide sales to be a meaningful indicator of a Changeour performance because it measures the growth in Accounting Principle/2/........... 324 270 219 162 125
Net Income........................................ 324 270 219 162 95
BALANCE SHEET DATA (AT END OF YEAR):
Total Assets...................................... 5,557 4,198 3,179 2,401 2,285
Long-Termrevenues 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 Convertible Subordinated Debt....... 422 681 180 102 113
revenues, which do not include gross sales generated by managed and franchised properties.

- -----------------------
/1/ Fiscal year 1996 includes 53 weeks, all other years include 52 weeks.
/2/ Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993.

13
⁴ We 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
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

General
The following discussion presents an analysis of results of our operations of the
Company for fiscal years ended January 2, 1998 (52 weeks), January 3, 1997 (53
weeks)2003, December 28, 2001 and December 29, 1995 (52 weeks). Comparable statistics are used
throughout this report2000. Systemwide sales include sales from our franchised properties, in addition to our owned, leased and are based upon Company-operated U.S.managed properties. The
Ramada International and New World brands do not have any U.S. properties.

1997
CONSOLIDATED RESULTS
Continuing Operations
2002 Compared to 1996.

Net income2001
Income from continuing operations, net of taxes increased 2063 percent to $324$439 million in fiscal 1997, on a sales
increase of 24and diluted earnings per share from continuing operations advanced 66 percent to $9$1.74. Income from continuing operations reflected $208 million of tax benefits associated with our Synthetic Fuel business 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 driven by contributionsin 2002 reflecting the sales for our new Synthetic Fuel business and revenue from new unit
expansion, including acquisitions,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 strong profit growth fordiluted 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 Lodging
segment.

LODGING operating profit was up 26 percent on 20 percent higher sales,
benefitingdecline in hotel performance, reduced income from favorable conditionscontinuing operations.
Sales of $7.8 billion in 2001 from our continuing operations were down slightly compared to the U.S. lodging market, and
contributionsprior year, reflecting a decline in hotel performance, partially offset by revenue from new lodging properties. The revenue increase resultedSystemwide sales, excluding sales from average
REVPAR growth across all brands of eight percentour discontinued businesses were $17.5 billion, flat with the prior year.
Marriott Lodging
Annual Change
($ in millions)
2002
2001
2000
2002/2001
2001/2000
Sales $ 8,248 $ 7,786 $ 7,911 6 % -2 %
Segment financial results before restructuring costs, other charges, goodwill impairment and Interval International gain $ 713 $ 756 $ 936 -6 % -19 %
Restructuring costs — (44 ) — nm nm
Other charges — (71 ) — nm nm
Interval International gain 44 — — nm nm
Goodwill impairment (50 ) — — nm nm
Segment financial results, as reported $ 707 $ 641 $ 936 10 % -32 %
13
2002 Compared to 2001
Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and the net addition of 325
hotels (69,810 rooms), including the acquisition of Renaissance Hotel Group N.V.
(RHG). This revenue growth resulted in higher base management and franchise
fees. Revenue growth also contributed to higher house profits which resulted in
higher incentive management fees.

Profits for Marriott Hotels, Resorts and Suites increased in excess of 20
percent in fiscal 1997 on sales growth of seven percent, which reflects the
addition of a net of two units (881 rooms) in the U.S. and a net of eight units
(2,903 rooms) internationally. Comparable Company-operated U.S. hotels achieved
seven percent higher sales due to REVPAR increases of nine percent resulting
from room rate growth of nine percent to $129. These sales gains, coupled with
profit margin improvements, generated substantially higher incentive management
fees at many properties. Profits for international hotels also were higher,
primarily because of contributions from new properties in 1996 and 1997.

Ritz-CarltonTimeshare segments, reported an increase in average room rates of five percent to
$185 and an increase in occupancy of four percentage points to 79 percent,
resulting in a 10 percent increase in REVPAR.

RHG, which is comprisedsegment 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 fees due to the decline in demand for hotel rooms. Our revenues from base fees totaled $379 million, an increase of 2 percent. Franchise fees totaled $232 million, an increase of 5 percent and incentive management fees were $162 million, a decline of 20 percent. The $50 million write-down of acquisition goodwill associated with our executive housing business, ExecuStay, reduced Lodging results in 2002. The 2002 comparisons are also impacted by the $115 million restructuring costs and other charges recorded 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 shown 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 average of 5.7 percent in 2002. Average room rates for these hotels decreased 4.9 percent and occupancy declined slightly to 70.1 percent.
International Lodging reported an increase in the results of operations, reflecting the impact of the Renaissance, New Worldincrease in travel in Asia and Ramada International
brands, contributed $594the 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” above 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 since its March 29, 1997 acquisition.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 Company-operated U.S. Renaissanceeach 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 six7 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, partially offset by higher marketing and selling expenses and severance expenses of nearly $2 million associated with the Company’s restructuring plan.
Corporate Expenses, Interest and Taxes
Corporate Expenses
Annual Change
($ in millions)
2002
2001
2000
2002/2001
2001/2000
Corporate expenses before restructuring costs and other charges $ 126 $ 117 $ 120 8 % -3 %
Restructuring costs — 18 — nm nm
Other charges — 22 — nm nm
Corporate expenses, as reported $ 126 $ 157 $ 120 -20 % 31 %
2002 Compared to 2001
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 losses 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 investment in one of our technology partners. In addition to these items, we also recorded $8 million of foreign exchange losses and in prior quarters we recorded a $13 million write-off of two investments in technology partners. These charges were partially offset by $11 million in gains from the sale of affordable housing tax credit investments, the favorable impact of cost containment action plans, and the reversal of a long-standing $10 million insurance reserve related to a lawsuit at one of our managed hotels. The reversal of the insurance reserve was the result of our conclusion that a settlement could be reached in an amount that would be covered by insurance. We determined that it was no longer probable that the loss contingency would result in a material outlay by us and accordingly, we reversed the reserve during the first quarter of 2001.
Interest Expense
2002 Compared to 2001
Interest expense decreased $23 million to $86 million reflecting the decrease in borrowing and interest rates.
2001 Compared to 2000
Interest expense increased $9 million to $109 million reflecting the impact of the issuance of Series E Notes in January 2001 and borrowings under our revolving credit facilities, partially offset by lower interest resulting from the payoff of commercial paper.
Interest Income and Income Tax
2002 Compared to 2001
Interest income increased $28 million, before reflecting reserves of $12 million for loans deemed uncollectible at four hotels. The increase in interest income was favorably impacted by amounts recognized which were previously
18
deemed uncollectible. The comparison to 2001 also reflects a $6 million charge for expected guarantee fundings recorded against interest income in the fourth quarter of 2001.
Our effective income tax rate for continuing operations decreased to approximately 6.8 percent in 2002 from 36.1 percent in 2001 primarily due to the impact of our Synthetic Fuel business. Excluding the impact of Synthetic Fuel, our effective income tax rate for continuing operations for 2002 was 39.6 percent. Our effective tax rate for discontinued operations decreased from 35.4 percent to 15.7 percent due to the impact of the taxes associated with the sale of stock in connection with the disposal of our Senior Living Services business.
2001 Compared to 2000
Interest income increased $34 million, before reflecting reserves of $48 million for loans deemed uncollectible as a result of certain hotels experiencing significant declines in profitability and the owners not being able to meet debt service obligations. The change in interest income was impacted by income associated with higher room ratesloan balances, including the loans made to the Courtyard joint venture in the fourth quarter of 2000, offset by $6 million of expected guarantee fundings and the impact of $14 million of income recorded in 2000 associated with an international loan that was previously deemed uncollectible.
Our effective income tax rate for continuing operations decreased to 36.1 percent in 2001 from 36.6 percent in 2000 as a result of modifications related to our deferred compensation plan and the impact of increased income in countries with lower effective tax rates.
Synthetic Fuel
In October 2001, we acquired four coal-based synthetic fuel production facilities (the Facilities) for $46 million in cash. The Synthetic Fuel produced at the Facilities qualifies for tax credits based on Section 29 of the Internal Revenue Code. Under Section 29, tax credits are not available for Synthetic Fuel produced after 2007. We began operating these Facilities in the first quarter of 2002. The operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be significantly accretive to our net income. Although the Facilities produce significant losses, these are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In the fiscal year 2002, our Synthetic Fuel business reflected sales of $193 million and a slight decreaseloss of $134 million, resulting in occupancy. Integrationa tax benefit of RHG$49 million and tax credits of $159 million.
In January 2003, we entered into a contract with an unrelated third party to sell approximately a 50 percent interest in the Company's payroll, procurement, marketingSynthetic Fuel business. The transaction is subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service regarding the new ownership structure. Contracts related to the potential sale are being held in escrow until closing conditions are met. If the conditions are not met by August 31, 2003, neither party will have an obligation to perform under the agreements. If the transaction is consummated, we expect to receive $25 million in promissory notes and sales, reservationcash as well as an earnout based on the amount of synthetic fuel produced. If the transaction is consummated, we expect to account for the remaining interest in the Synthetic Fuel business under the equity method of accounting.
DISCONTINUED OPERATIONS
Senior Living Services
2002 Compared to 2001
On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc. and yieldto sell nine senior living communities to CNL Retirement Partners, Inc. (CNL) for approximately $259 million in cash. We expect to complete the sale early in 2003. On December 17, 2002, we sold twelve senior living communities to CNL for approximately $89 million in cash. We accounted for the sale under the full accrual method in accordance with Financial Accounting Standards (FAS) 66, and we recorded an after-tax loss of approximately $13 million. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. We plan to restructure the debt and sell the communities in 2003. Management has approved and committed to a plan to sell these communities within 12 months. Accordingly, at January 3, 2003, the operating results of our Senior Living Services
19
segment are reported in discontinued operations, and the remaining assets are classified as assets held for sale on the balance sheet.
As a result of the transactions outlined above, we anticipate a total after-tax charge of $109 million. Since generally accepted accounting principles do not allow gains to be recognized until the underlying transaction closes, we cannot record the estimated after-tax gain of $22 million on the sale of the nine communities to CNL until the sale is completed, which we expect to occur in early 2003. As a result, we have recorded an after-tax charge of $131 million which is included in discontinued operations for the year ended January 3, 2003.
In December 2001, management systems continuesapproved and committed to progress on schedulea plan to exit the companion living concept of senior living services and is expectedsell the related properties within the next 12 months. We recorded an impairment charge of $60 million to contributeadjust the carrying value of the properties to revenue gains and margin improvementstheir 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 1998.

The limited-service lodging brands reported eight percent higher sales and
more than 25 percent profit growth in fiscal 1997 benefitingdiscontinued operations for the year ended January 3, 2003.
Income from increased
incentive management fees on Company-operated properties and expansion of
franchising programs. The limited-service brands added adiscontinued operations, net of 149 properties
(16,390 rooms), primarily franchises, during fiscal 1997.

. Courtyard,taxes and excluding the Company's moderate-price brand,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 five9 percent increase in sales in 2001, as we added a net total of three new communities (369 units) during the year. Occupancy for comparable Company-operated units, as average room
rates and REVPAR were up eight percent, while occupancy remained at 81
percent.

. Residence Inn, the Company's extended-stay brand, generated five percent
growth in sales for comparable Company-operated units, as average room
rates climbed eightcommunities increased by nearly 2 percent to $95, while occupancy dipped slightly to
84 percent resulting in a six percent increase in REVPAR.

. Fairfield Inn and Suites, the Company's economy brand, reflected a decrease
of two85.3 percent in sales for comparable Company-operated units. A two
percent increase in average room rates2001.
The division reported an after tax loss of $45 million, reflecting pretax restructuring and other charges of $62 million, primarily related to $51 was offset by a slight
decline in occupancy to 75 percent, resulting in no change in REVPAR.

Marriott Vacation Club International posted a 21 percent increase in the number$60 million write-down of timeshare intervals sold and 51 percent growth in financially reported
sales under the percentage of completion method. The sales increase resulted
from strong performance in several locations, including Marriott Vacation Club
International's first European resort in Marbella, Spain, as well as Fort
Lauderdale and Orlando, Florida and Hilton Head, South Carolina. Increased
profits from resort development were offset by reduced financing income, due to
lower sales of timeshare notes receivable during fiscal 1997.

CONTRACT SERVICES reported a 29 percent decrease in operating profit on 44
percent higher sales in fiscal 1997. Profit comparisons between years are
effected by sales to investors during 1996 and 1997 of 4325 senior living communities whichheld for sale to their estimated fair value and the Company continueswrite-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.
Distribution Services
2002 Compared to operate under long-term agreements.
Before2001
In the third quarter of 2002, we completed a previously announced strategic review 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 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 these transactions, Contractlower 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 profits increased
four percent over fiscal 1996. Contract Services operating profit was also
adversely affected by start-up losses for new distribution centers and
distribution accounts.

Marriott Senior Living Services reported a(MDS) reflect the impact of an increase in sales increase of 28 percent in
fiscal 1997 over 1996, primarily duerelated to the openingcommencement of 17 communities during
1997new 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 two percentage point increasecustomer that filed for bankruptcy in occupancy,the fourth quarter of 2001.
20
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 95 percent,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 comparable properties. Operating profit declined as "ownership profits" from 43guarantees and loan losses; (2) $12 million related to accounts receivable reserves; (3) $13 million related to the write-down of properties soldheld for sale; and (4) $32 million related to investors since the beginningimpairment of 1996technology related investments and other write-offs. We have provided below detailed information related to the restructuring costs and other charges, which were replaced with
"managed operating profits."

Marriott Distribution Services' sales were up sharplyrecorded in fiscal 1997the fourth quarter of 2001 as a result of the addition of several major restaurant customerseconomic downturn and the netunfavorable lodging environment.
2001 Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700 employees across our operations (the majority of which were terminated by December 28, 2001). In 2001, we recorded a workforce reduction charge of $15 million related primarily to severance and fringe benefits. The charge did not reflect amounts billed out separately to owners for property-level severance costs. In addition, we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of two new distribution centers. Profits, however, were lowerthe workforce reduction and delay in fiscal 1997 duefilling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $14 million for excess corporate facilities, primarily related to start-uplease 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 new centers,development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as well as
costsincurred and they become part of integrating the new business into existing distribution centers.

Corporate expenses rose 21 percentcost basis of the property once it is developed. As a result of the dramatic downturn in 1997, duethe economy in the aftermath of the September 11, 2001 attacks, we decided to non-cash items associatedcancel 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 investments generatingfinancing 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 income tax benefits as well as modest
staff increasesdeclines in profitability and the owners were not able to accommodate growth and new business development. Interest
expense decreased 41 percent from fiscal 1996 duemeet debt service obligations to the saleCompany 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 29 Forum
Group communitiesloans made by us would not be repaid according to Host Marriott. Interest income declined 14 percent,
primarily duetheir original terms. Due to collections on,these expected non-recoverable guarantee fundings and salesexpected loan losses, we recorded charges of affiliate and other notes
receivable.

The Company's effective income tax rate increased to 39 percent in 1997,
compared to 38 percent in 1996, primarily due to the RHG acquisition. The
effective tax rate is expected to decline about one-half percentage point in
1998.

1996 Compared to 1995.

Net income increased 23 percent to $270$85 million in 1996, driven by
contributions from new unit expansion and strong profit growth for both the Lodging and Contract Services segments, partially offset by higher interest and
corporate expenses.

Sales were up 16 percent to $7.3 billion in 1996. The impactfourth quarter of 2001.
21
Accounts Receivable-Bad Debts
In the 53rd week
on 1996 resultsfourth quarter of operations was not significant.

LODGING operating profit was up 26 percent on 10 percent higher sales,
benefiting from favorable conditions in the U.S. lodging market, and
contributions from new properties. The Company added a net2001, we reserved $12 million of 146 hotels
(18,204 rooms) and opened four new vacation club resorts during the year.

Profits for Marriott Hotels, Resorts and Suites rose 24 percent in 1996 on
sales growthaccounts receivable which we deemed uncollectible following an analysis of nine percent reflecting the addition of a net of two units
(1,006 rooms) in the U.S. and a net of 17 units (3,768 rooms) internationally.
Comparable Company-operated U.S. hotels posted eight percent higher sales due to
room rate growth of seven percent to $118, and a one percentage point increase
in occupancy to 78 percent. These sales gains, coupled with profit margin
improvements, generated substantially higher incentive management fees at many
properties. Profits for international hotels also were higher, primarily because
of contributions from new properties.

The limited-service lodging brands reported 10 percent higher sales and 29
percent profit growth in 1996, also benefiting from increased incentive
management fees on Company-operated properties, and expansion of franchising
programs. The three brands added a net of 125 properties (12,888 rooms),
primarily franchises, during 1996.

. Courtyard posted an eight percent increase in sales for comparable Company-
operated units, as average room rates were up eight percent to $78, while
occupancy remained at 81 percent.

. Residence Inn generated eight percent growth in sales for comparable
Company-operated units, as average room rates climbed seven percent to $89,
while occupancy dipped slightly to 85 percent.

. Fairfield Inn and Suites achieved a six percent sales gain for comparable
Company-operated units, as average room rates were boosted 10 percent to
$50. Occupancy fell four percentage points to 77 percent, reflecting the
planned shift to higher rated business. The Company introduced Fairfield
Suites in 1996.

Marriott Vacation Club International posted a 25 percent increase in the
number of timeshare intervals sold and 17 percent growth in financially reported
sales under the percentage of completion method. Income from owner financing
activities and resort management also increased. Profits were flat, reflecting
higher marketing and selling costs associated with new resort locations, off-
site sales centers and establishing a European operations group.

Also contributing to 1996 lodging profit growth was higher income from the
Company's investment in The Ritz-Carlton Hotel Company LLC. For comparable U.S.
hotels, the luxury chain posted a 10 percent increase in sales as average room
rates increased four percent to $181 and occupancy increased to 75 percent. In
addition, house profit margins improved, benefiting from integration with
Marriott Lodging systems and programs.

CONTRACT SERVICES reported a 87 percent increase in operating profit on 52
percent higher sales in fiscal 1996 primarily due to the March 1996 acquisition
of the Forum Group.

Sales for Marriott Senior Living Services increased 117 percent in 1996, while
profits were up more than five fold from 1995 levels. Excluding the impact of
the Forum Group acquisition, sales increased 23 percent and profits increased 18
percent. Overall growth was generated by a gain in occupancy to 96 percent, and
a two percent increase in average per diem rates for comparable Marriott senior
living communities, strong move-in rates at 11 communities opened since the
beginning of 1995 and contributions from the acquired Forum Group communities.

Sales for Marriott Distribution Services grew 35 percent in 1996, as the
division opened five new distribution centers and added several major external
restaurant accounts. Profits were flat in 1996, as sales gains were offset by
start-up costs associated with the new centers and new business.

Corporate expenses rose 24 percent in 1996, reflecting higher outlays
associated with new business development and staff additions to facilitate the
Company's growth. Additionally, costs increased due to tax-related investments
which generated significant after-tax savings. Interest expense increased
significantlythese accounts, generally as a result of interestthe 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 on debt associated with the Forum
Group acquisition. Interest income declined five percent, primarily due to collectionsthe 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 salesInterest 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 affiliate$62 million and other notes receivable.charges of $5 million now reflected in our losses from discontinued operations. The Company's effective income tax rate declinedrestructuring liability related to 38 percent in 1996,
compareddiscontinued operations was $3 million as of December 28, 2001 and $1 million as of January 3, 2003.
Liquidity and Capital Resources
We have credit facilities which support our commercial paper program and letters of credit. At January 3, 2003, our cash balances combined with our available borrowing capacity under the credit facilities amounted to 39.4 percent in 1995. This favorable trend reflects the Company's
ongoing participation in jobsnearly $2 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and affordable housing tax credit programs.

LIQUIDITY AND CAPITAL RESOURCES

Growth Strategy
- ---------------

After the Spinoff, the Company will have substantial investment capacity with
which to pursuelong-term liquidity requirements, finance our long-term growth opportunities. The Company's lodging management and
franchise operations and its contract services businesses generate substantial
operating cash flow, with only modest reinvestment requirements. The Company's
lodging division expects to add more than 140,000 rooms over the five years
1998-2002, and to significantly expand its portfolio of vacation club resorts.
During the same period, the Company also expects to take advantage of
significant opportunities in the senior living services market by more than
tripling the number of senior living communities it operates.

The planned capital structure of the Company, following the Spinoff, is part
of an integrated strategy for a focused hospitality company with substantially
increased borrowing and investment capacity, as well as increased flexibility to

use its equity, where prudent, to participate aggressively in the ongoing global
consolidation of the lodging industry as well as the accelerating rate of
consolidation of the senior living industry within the United States. The
Company intends to pursue strategic acquisition opportunities.

The Company believes that it will have access to financial resources
sufficient to finance its growth, as well as to support ongoing operations andplans, meet debt service and fulfill other cash requirements.

requirements, including the repayment of $200 million of senior notes due in November 2003. 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, we may be unable to place some or all of our commercial paper, and may have to rely more on bank borrowings 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 Fromfrom Operations
- --------------------

Cash from operations was $521$516 million in 1997, $5042002, $403 million in 19962001, and $281$856 million in 1995. The operating cash flow2000. Income from continuing operations is stated after depreciation expense of $114 million in 1997 primarily reflects higher
earnings than 1996, offset by lower sales2002, $110 million in 2001, and $94 million in 2000, and after amortization expense of timeshare notes receivable.$36 million in 2002, $68 million in 2001, and $67 million in 2000. While the Company'sour timesharing business generates strong operating cash flow, annual
amounts are affected by the timing of cash outlays for the acquisition and development of new resorts, and cash inflows related toreceived from purchaser financing.
Intervalfinancing affect annual amounts. We include timeshare interval sales financed by the Company are not includedwe finance in operating cash flow
untilfrom operations when we collect cash is collectedpayments or the notes are sold for cash. Earnings Before Interest Expense, Income Taxes, DepreciationIn 2002, the $63 million net cash outflow from timeshare activity included $102 million in timeshare development (the amount spent to build timeshare resorts less the costs of sales), $280 million of new timeshare mortgages net of collections, $60 million of note sale gains, a $16 million net reduction in Marriott Rewards accruals, $13 million of financially reportable sales in excess of closed sales, and Amortization
(EBITDA) was $679$10 million $561of other cash outflows, offset by $387 million of note sale proceeds and $437$31 million of net fees received for fiscal years 1997,
1996servicing 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 1995, respectively, representing a 21 percent$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 1997Marriott Rewards accruals.
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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 a 28Distribution 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 increase in 1996. to $833 million.
The Company considersreconciliation of income from continuing operations, before income taxes to EBITDA is as follows:
($ in millions) 2002
2001
2000
Income from continuing operations, before taxes $ 471 $ 421 $ 771
Interest expense 86 109 100
Depreciation 114 110 94
Amortization 36 68 67
EBITDA from continuing operations $ 707 $ 708 $ 1,032
Synthetic Fuel loss, before taxes 134 — —
Depreciation-Synthetic Fuel (8 ) — —
EBITDA from continuing operations, excluding Synthetic Fuel $ 833 $ 708 $ 1,032
We consider EBITDA to be an indicator of itsour operating performance because EBITDAit can be used to measure the Company'sour ability to service debt, fund capital expenditures and expand itsour business. Nevertheless, EBITDAyou should not be considered asconsider EBITDA an alternative to net income operating profit,or cash flows from operations, or any other operating or
liquidity measureas prescribed by accounting principles generally accepted accounting principles. in the United States.
A substantial portion of the Company'sour EBITDA is based on fixed dollar amounts or percentages of sales. This includesThese include lodging base management andfees, franchise fees and land rent. With more than 1,450 hotel properties,almost 2,600 hotels in the Marriott system, no single operationproperty or customerregion is critical to the Company'sour financial results.

The Company's
Our ratio of current assets to current liabilities was .83 at
January 2, 1998, compared0.8 to .701 at January 3, 1997.2003, compared to 1.4 to 1 at December 28, 2001. Each of the Company'sour businesses minimizes working capital through cash management, strict credit-granting policies, aggressive collection efforts and high inventory turnover. WorkingAdditionally, we have significant borrowing capacity under our revolving credit agreements.
In 2002 we securitized $387 million of notes by selling notes receivable originated by our timeshare business. We recognized gains on these sales 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 for
managed hotels is generally advancedmarkets to provide financing to the Companyentities 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 hotel owners.

securitizations which are accounted for 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.
Investing Activities Cash Flows
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Acquisitions. The Company completed three major acquisitions during the last
three years: Renaissance Hotel Group N.V., a premier operator and franchisorWe continually seek opportunities to enter new markets, increase market share or broaden service offerings through acquisitions.
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Dispositions. Property sales generated proceeds of approximately 150 hotels, under three brands, in 38 countries; Forum Group, Inc.
(Forum), a leading provider of senior living services; and a 49 percent interest
in The Ritz-Carlton Hotel Company LLC, one of the world's premier luxury hotel
brands and management companies. The Company expects to exercise its right to
acquire the remaining 51 percent of The Ritz-Carlton Hotel Company LLC within
the next several years at prices based on Ritz-Carlton's cash flow.

Dispositions. On April 3, 1997, the Company agreed to sell and leaseback,
under long-term, limited-recourse leases, 14 limited service hotels for
approximately $149$729 million in cash. Concurrently,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 Company agreed to pay
security deposits of $15 million, which will be refunded upon expiration ofsales transactions. In 2002 we closed on the
leases. As of January 2, 1998, sales of all of the properties had closed,
resulting in a $20 million excess of the sales price over the net book value,
which will be recognized as a reduction of rent expense over the 17-year initial
lease terms. On October 10 1997, the Company agreed to sell,hotels and leaseback,
under long-term, limited-recourse leases, another nine limited service hotels
for approximately $129 million in cash. Concurrently, the Company agreed to pay
security deposits of $13 million, which will be refunded upon expiration of the
leases. At January 2, 1998, sales of three of these nine properties had closed,
resulting in a $7 million excess of the sales price over the net book value,
which will be recognized as a reduction of rent expense over the 15-year initial
lease terms. All of the aforementioned leases are renewable at the option of
the Company.

On April 11, 1997, the Company sold five41 senior living communities, for cash
considerationover half of approximately $79 million. On September 12, 1997, the Company
agreed to sell another seven senior living communities for cash consideration of
approximately $93 million. As of January 2, 1998, the sales of five of these
properties had closed. The Company willwhich we continue to operate all of these
communities under long-term management agreements.

On June 21, 1997, the Company sold 29 senior living communities acquired as
part of the Forum acquisition, to Host Marriott for approximately $550 million,
resulting in no gain or loss. The consideration included approximately $50
million to be received subsequent to 1997 as expansions at certain communities
are completed. The $500 million of consideration received during 1997 consisted
of $222 million in cash, $187 million of outstanding debt, $50 million of notes
receivable due June 20, 1998, and $41 million of notes receivable due January 1,
2001. The notes receivable from Host Marriott bear interest at nine percent.
Under the terms of the sale, Host Marriott purchased all of the common stock of
Forum which, at the time of the sale, included the 29 communities, certain
working capital and associated debt. The Company will continue to operate these
communities under long-term management agreements.

The Company sold four senior living communities during 1996 and three senior
living communities during 1995, retaining long-term operating agreements.
Capital Expenditures and Other Investments. Capital expenditures of $292 million in 1997,
19962002, $560 million in 2001, and 1995 of $520$1,095 million $293 millionin 2000 included development and $127 million, respectively,
included construction and development of new hotels and senior living communities and Courtyard, Residence Inn and TownePlace Suitesacquisitions of hotel properties. Capital expenditures
are expected to increase in 1998. The Company expects that, overOver time, it will
sellwe have sold certain lodging and senior living service properties under development, or to be developed, while continuing to operate them under long-term agreements. The Companyability of third-party purchasers to raise the necessary debt and equity capital depends 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 willexpect to continue to make other investments to grow its
businesses, including development of new timeshare resorts and loans and
minority equity investments in connection with adding units to our lodging business. These investments include loans, 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.
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 LodgingCorporation (Host Marriott), substantially all of the limited partners’ interests in two other limited partnerships, Courtyard by Marriott Limited Partnership (CBM I) and Senior Living Services businesses.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 hasassessed its potential investment and any potential loss on settlement based on post-acquisition cash flows. The purchase accounting was based on pre-acquisition cash flows and capital structure. As a result, the factors giving rise to the differences outlined above did not materially impact the Company’s previous assessment of any expense related to litigation. The post-settlement equity of the Joint Venture is considerably lower then the pre-acquisition equity due to additional indebtedness post-acquisition and the impact of changes to the management agreements made contemporaneously with the transaction.
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Fluctuations in the values of hotel real estate generally have little impact on the overall results of our Lodging businesses because (1) we own less than 1 percent of the total number of hotels that we operate or franchise; (2) management and franchise fees are generally based upon hotel revenues and profits versus hotel sales values; and (3) our management agreements generally do not terminate upon hotel sale.
We have made loans to owners of hotelhotels and senior living properties
which it operatescommunities that we operate or franchises. At January 2, 1998, andfranchise. Loans outstanding under this program, excluding timeshare notes, totaled $944 million at January 3, 1997, loans
outstanding pursuant to this program totaled $3512003, $860 million at December 28, 2001 and $186$592 million respectively.at December 29, 2000. Unfunded commitments aggregating $220$217 million were outstanding at January 2, 1998. These loans are typically secured by mortgages on the projects.
During 1997, $183, 2003, of which we expect to fund $140 million of proceeds were received from sales of such loans to
institutional investors. The Company participatesin 2003 and $156 million in total. We participate in a program with an unaffiliated lender in which the Companywe may provide credit enhancements forpartially guarantee loans made to facilitate third partythird-party ownership of Company-operatedhotels that we operate or franchised
hotels and senior living services communities.

The annual capital required by the Company to maintain its hotels and senior
living communities is modest. Most of the Company's operating agreements
require that specified percentages of sales be set aside for renovation and
refurbishment of the properties.

The Company, like most computer users, will be required to modify significant
portions of its computer software so that it will function properly prior to,franchise.
Cash from Financing Activities
Debt, including convertible debt, decreased $945 million in the year 2000 and beyond. The Company has assembled a dedicated team to address
the year 2000 issue. This team has completed an inventory of all systems
requiring modification, and has completed the remediation of some significant
systems. Many of the costs to be incurred will be reimbursed2002 due to the Company or
otherwise paid directly by owners and clients, pursuant to existing contracts.
Estimated pre-tax maintenance and modification costs to be borne by the Company
are approximately $25 to $30 million and will be expensed as incurred. These
amounts are subject to numerous estimation uncertainties including the extentredemption of work to be done, availability and cost of consultants and the extent of testing
required.

Cash From Financing Activities
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Non-interest bearing cash advances to or from Marriott International, Inc. are
made to allow both the Company and Marriott International, Inc. to meet their
respective cash requirements. Through such advances, the Company has had access
to funds from Marriott International, Inc.'s $1.5 billion revolving credit
facility and commercial paper program.

In 1996, the Company received proceeds of $288 million from the issuance of
zero coupon subordinated Liquid Yield Option Notes which have an aggregate
maturity value of $540 million in 2011. Each $1,000 LYON was issued at a
discount representing a yield to maturity of 4.25 percent.

Upon consummation of the Spinoff, each LYON will be convertible into 8.76
shares of New Marriott Common Stock, 8.76 shares of New Marriott Class A Common
Stock and 2.19 shares of SMS common stock (after giving effect to a one-for-four
reverse stock split). The LYONs will be assumed by the Company, and SMS will
assume nine85 percent of the LYONs obligation, which percentage is based on an
estimatein May 2002 and the pay down of our revolving credit facility, offset by the debt assumed as part of the relative equity valuesacquisition of SMSthe 14 senior living communities in December 2002. Debt increased by $799 million in 2001 primarily due to borrowings to finance our capital expenditure and share repurchase programs, and to maintain excess cash reserves totaling $645 million in the Company.aftermath of the September 11, 2001 terrorist attacks on New York and Washington.
Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt and reducing our working capital. At year-end 2002, our long-term debt, excluding convertible debt and debt associated with businesses held for sale, had an average interest rate of 6.8 percent and an average maturity of approximately 6.6 years. The Company will
remain liableratio of fixed rate long-term debt to total long-term debt was .91 as 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 holderspublic under these registration statements $300 million of debt securities at 7^7/8 percent, due 2009 and $300 million at 8^1/8 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 LYONs for any payments that SMS fails to
make on its allocable portion.

The Company has entered into a $1.5 billion multicurrency revolving credit
agreement permitting borrowings by the Company following consummationcommercial paper market do not affect our liquidity because of the Spinoff. The facility has a term of five years and borrowings willflexibility provided by our credit facilities. Borrowings under these facilities bear interest at LIBOR plus a spread, based on the Company'sour public debt rating. Additionally,
annual fees will
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 paidrequired to purchase LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay the facility at a rate alsopurchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock.
We determine our debt capacity based on the Company'samount 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 rating.

On February 25, 1998, Marriott International, Inc. commenced a tender offerratings of BBB+ from Standard and consent solicitationPoor’s and Baa2 from Moody’s, respectively.
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The following table summarizes our contractual obligations:
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
Our guarantees include $270 million for all $600commitments which will not be in effect until the underlying hotels are open and we begin to manage the properties. Our total unfunded loan commitments amounted to $217 million at January 3, 2003. We expect to fund $140 million within one year and $16 million in one to three years. We do not expect to fund the remaining $61 million of its outstanding public senior
debt (the Marriott International Public Debt)commitments, which expire as follows: $51 million within one year; $5 million in one to three years; $2 million in four to five years; and RHG Finance Corporation, a
subsidiary of Marriott International, Inc. (and which will be a subsidiary of
the Company upon the Spinoff), commenced a tender offer and consent solicitation
for all $120$3 million after five years.
Share Repurchases. We purchased 7.8 million of its outstanding public debt (the RHG Public Debt), which
is guaranteed by Marriott International, Inc. In the event that the consent
solicitation for anyour shares in 2002 at an average price of the four series$32.52 per share and 6.1 million of Marriott International Public Debt is
unsuccessful, the Company will assume the debtour shares in 2001 at an average price of such series that is not
purchased by Marriott International, Inc. in the tender offer, and any
untendered RHG Public Debt will constitute part$38.20 per share. As of the Company's consolidated
debt and will be guaranteed by the Company. Under its agreements with Sodexho
and Marriott International, Inc., to the extent that the Company assumes any
such Marriott International Public Debt, or any RHG Public Debt is not purchased
in the tender offer, Marriott International, Inc. will make a cash payment to
the Company in an amount equal to the aggregate amount of such debt.

Dividends. The Company expects to pay quarterly dividends comparable to those
historically paid by Marriott International, Inc.

Share Repurchases. The Company hasFebruary 6, 2003, we had been authorized by itsour Board of Directors to purchase, subsequentrepurchase 20 million shares.
Dividends. In May 2002, our Board of Directors increased the quarterly cash dividend by 8 percent to the consummation of the Spinoff, up to approximately
five million shares of New Marriott Common Stock and up to approximately five
million shares of New Marriott Class A Common Stock.

OTHER MATTERS

$.07 per share.
Other Matters
Inflation
- ---------

The rate of inflation
Inflation has been moderate in recent years, and accordingly, has not had a significant impact on our businesses.
Critical Accounting Policies
Certain of our critical accounting policies require the Company's businesses.

Market Risk Disclosures
- -----------------------use of judgment in their application or require estimates of inherently uncertain matters. Our accounting policies are in compliance with principles generally accepted in the United States, although a change in the facts and circumstances of the underlying transactions could significantly change the application of an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and require the use of complex judgment in their application.
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Incentive Fees
We recognize incentive fees as revenue when earned in accordance with the terms of the management contract. In interim periods, we recognize as income the incentive fees that would be due to us as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us. If we recognized incentive fees only after the underlying full-year performance thresholds were certain, the revenue recognized for each year would be unchanged, but no incentive fees for any year would be recognized until the fourth quarter. We recognized incentive fee revenue of $162 million, $202 million and $316 million in 2002, 2001 and 2000, respectively.
Cost Reimbursements
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 Company's earningsinterest only strips are affectedtreated 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 values of the interest only strips through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available-for-sale securities. We had interest only 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 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.
Marriott Rewards
Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies.
We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas 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 communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.
Avendra
In January 2001, Marriott and Hyatt Corporation formed a joint venture, Avendra LLC (Avendra), to be an independent professional procurement services company serving the North American hospitality market and related industries. Six Continents Hotels, Inc., ClubCorp USA Inc., and Fairmont Hotels & Resorts, Inc., joined Avendra in March 2001. We and the other four members contributed our respective procurement businesses to Avendra. Currently, our interest 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 unrestricted allowance for purchases by its customers. Our hotel management agreements treat vendor-generated unrestricted allowances in three separate ways, and the requirements of those agreements are reflected in our Procurement Services Agreement with Avendra (PSA).
For purchases of goods and services by the majority of Marriott’s managed hotels, Avendra is permitted to retain unrestricted allowances, in an amount sufficient only to recover Avendra’s properly allocated costs of providing procurement services. Other management contracts allow Avendra to retain vendor allowances and earn a return which is competitive in the industry. This amount is capped by the PSA. Lastly, for purchases of goods and services by hotels owned by one of Marriott’s hotel owners, Avendra is not permitted to retain any of such unrestricted allowances; instead, Avendra charges a negotiated fee to Marriott, and Marriott in turn charges a negotiated fee to that owner. In 2002, we distributed to the hotels that we manage approximately $12 million in unrestricted rebates received from Avendra, and its predecessor, Marketplace by Marriott. If Marriott franchised hotels (not managed by Marriott) elect to purchase through Avendra, they negotiate separately with Avendra and are not bound by the terms of the PSA for our managed hotels. We account for our interest in Avendra under the equity method and recognized income of $2 million in 2002 and a loss of $1 million in 2001. After we have recovered our investment in Avendra and associated expenses through distributions from Avendra or a sale of all or any portion of our equity interest in Avendra, we will apply any further benefits to offset costs otherwise allocable to Marriott branded hotels.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We manage our exposure to this risk by monitoring available financing alternatives and through development and application of credit granting policies. Our strategy to manage exposure to changes in interest rates as a resultis unchanged from December 28, 2001. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how such exposure is managed in the near future.
The following sensitivity analysis displays how changes in interest rates affect our earnings and the fair values of holding certain instruments we hold.
We hold notes receivable whichthat earn ainterest at variable rate of interest. Ifrates. Hypothetically, an immediate one percentage point change in interest rates increased by 10 percent,would change annual interest income would have increased by $1$5 million and $5 million, based on the respective balances during the fiscal year endedof these notes receivable at January 2, 1998.
3, 2003 and December 28, 2001.
Changes in interest rates also impact the fair value of the Company'sour long-term fixed rate debt and long-term fixed rate notes receivable. IfBased on the balances outstanding at January 3, 2003 and December 28, 2001, a hypothetical immediate one percentage point change in interest rates increased by 10 percent,would change the fair value of our long-term fixed rate debt by $42 million and $53 million, respectively, and would change the Company'sfair value of long-term fixed rate notes receivable balances would have decreased by approximately $4$20 million basedand $22 million, respectively, in each year.
Although commercial paper is classified as long-term debt (based on balancesour ability and intent to refinance it on a long-term basis) all commercial paper matures within two months of year-end. Based on the balance of commercial paper outstanding at January 2, 1998.

The Company uses3, 2003, a foreign exchange swap to hedge a loan receivable
denominatedhypothetical one percentage point change in UK pounds sterling, and interest rate swap agreements to hedgerates would change interest rate exposures relating to the Company's timeshare mortgage financing
program. The fair value of these arrangements, and the exposures to loss in
earnings, fair value and cash flows arising from these arrangements are not
material to the Company.

19
expense by $1 million on an annualized basis.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
Page
------------
Report of Independent Public Accountants........................................... 21
CombinedAuditors 32
Consolidated Statement of Income....................................................... 22
CombinedIncome 33
Consolidated Balance Sheet............................................................. 23
CombinedSheet 34
Consolidated Statement of Cash Flows................................................... 24
Flows 35
Consolidated Statement of Comprehensive Income 36
Consolidated Statement of Shareholders’ Equity 37
Notes to CombinedConsolidated Financial Statements............................................. 25-40
Statements 38

20
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

AUDITORS
To the ShareholderShareholders of New Marriott MI,International, Inc.:
We have audited the accompanying combinedconsolidated balance sheet of New Marriott MI,International, Inc. as of January 2, 19983, 2003 and January 3, 1997,December 28, 2001, and the related combinedconsolidated statements of income, and cash flows, comprehensive income and shareholders’ equity for each of the three fiscal years in the period ended January 2, 1998.3, 2003. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of New Marriott MI,International, Inc. as of January 2, 19983, 2003 and January 3, 1997,December 28, 2001, and the results of itstheir operations and itstheir cash flows for each of the three fiscal years in the period ended January 2, 1998,3, 2003 in conformity with accounting principles generally accepted accounting
principles.

/s/ ARTHUR ANDERSENin the United States.
As discussed in the notes to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets.”
/s/ Ernst & Young LLP

Washington, D.C.
McLean, Virginia
February 19, 1998

NEW 5, 2003
32
MARRIOTT MI,INTERNATIONAL, INC.
COMBINED
CONSOLIDATED STATEMENT OF INCOME
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

1997 1996 1995
----------------- ----------------- ----------------
(52 weeks) (53 weeks) (52 weeks)

SALES
Lodging
Rooms...................................................... $ 4,288 $ 3,619 $ 3,273
Food and beverage.......................................... 1,577 1,361 1,289
Other...................................................... 1,143 874 765
----------------- ----------------- ----------------
7,008 5,854 5,327
Contract Services........................................... 2,038 1,413 928
----------------- ----------------- ----------------
9,046 7,267 6,255
----------------- ----------------- ----------------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms..................................................... 964 843 772
Food and beverage......................................... 1,195 1,038 973
Remittances to hotel owners (including $541, $438 and $300,
respectively, to related parties)......................... 1,493 1,256 1,120
Other operating expenses................................... 2,787 2,265 2,102
----------------- ----------------- ----------------
6,439 5,402 4,967
Contract Services........................................... 1,998 1,357 898
----------------- ----------------- ----------------
8,437 6,759 5,865
----------------- ----------------- ----------------

OPERATING PROFIT
Lodging..................................................... 569 452 360
Contract Services........................................... 40 56 30
----------------- ----------------- ----------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST................................................ 609 508 390
Corporate expenses........................................... (88) (73) (59)
Interest expense............................................. (22) (37) (9)
Interest income.............................................. 32 37 39
----------------- ----------------- ----------------
INCOME BEFORE INCOME TAXES................................... 531 435 361
Provision for income taxes................................... 207 165 142
----------------- ----------------- ----------------
NET INCOME................................................... $ 324 $ 270 $ 219
================= ================= ================

EARNINGS PER SHARE
Pro Forma Basic Earnings per Share (Unaudited).............. $ 1.27 $ 1.06 $ .88
================= ================= ================

Pro Forma Diluted Earnings per Share (Unaudited)............ $ 1.19 $ .99 $ .83
================= ================= ================

See Notes To Combined Financial Statements

NEW MARRIOTT MI, INC.
COMBINED BALANCE SHEET
January 2, 1998 and January 3, 1997
($ in millions)

January 2, January 3,
1998 1997
---------------------- ----------------------
ASSETS

Current assets
Cash and equivalents......................................... $ 289 $ 239
Accounts and notes receivable................................ 724 426
Inventories, at lower of average cost or market.............. 129 124
Prepaid taxes................................................ 159 149
Other........................................................ 66 46
---------------------- ----------------------
1,367 984
---------------------- ----------------------

Property and equipment........................................ 1,537 1,824
Intangible assets............................................. 1,448 333
Investments in affiliates..................................... 530 491
Notes and other receivable.................................... 414 292
Other......................................................... 261 274
---------------------- ----------------------
$ 5,557 $ 4,198
====================== ======================

LIABILITIES AND EQUITY

Current liabilities
Accounts payable............................................. $ 839 $ 716
Accrued payroll and benefits................................. 333 264
Self-insurance............................................... 57 50
Other payables and accruals.................................. 410 374
---------------------- ----------------------
1,639 1,404
---------------------- ----------------------

Long-term debt................................................ 112 384
Self-insurance................................................ 196 191
Other long-term liabilities................................... 714 478
Convertible subordinated debt................................. 310 297
Equity
Investments and net advances from Marriott
International, Inc.......................................... 2,586 1,444
---------------------- ----------------------
$ 5,557 $ 4,198
====================== ======================

See Notes To Combined Financial Statements

NEW MARRIOTT MI, INC.
COMBINED STATEMENT OF CASH FLOWS

Fiscal Years Ended January 2, 1998, January 3, 19972003, December 28, 2001 and December 29, 1995
($2000
($ in millions)

1997 1996 1995
------------------- ------------------- -------------------
(52 weeks) (53 weeks) (52 weeks)
OPERATING ACTIVITIES

Net income.............................................. $ 324 $ 270 $ 219
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization.......................... 126 89 67
Income taxes........................................... 64 69 61
Timeshare activity, net................................ (118) (95) (192)
Other.................................................. 86 61 46
Working capital changes:
Accounts receivable.................................... (82) (30) (31)
Inventories............................................ - 13 (6)
Other current assets................................... (8) 2 (8)
Accounts payable and accruals.......................... 129 125 125
------------------- ------------------- -------------------
Cash provided by operations............................. 521 504 281
------------------- ------------------- -------------------

INVESTING ACTIVITIES
Capital expenditures.................................... (520) (293) (127)
Acquisitions............................................ (859) (307) (210)
Dispositions............................................ 559 65 42
Loans to Host Marriott Corporation...................... (5) (16) (210)
Loan repayments from Host Marriott Corporation.......... 6 141 250
Other loan advances..................................... (90) (73) (143)
Other loan collections and sales........................ 41 155 37
Other................................................... (180) (158) (120)
------------------- ------------------- -------------------
Cash used in investing activities....................... (1,048) (486) (481)
------------------- ------------------- -------------------

FINANCING ACTIVITIES
Issuances of long-term debt............................. 16 - 11
Repayments of long-term debt............................ (15) (133) (14)
Issuance of convertible subordinated debt............... - 288 -
Advances from (to) Marriott International, Inc.......... 576 (132) 215
------------------- ------------------- -------------------
Cash provided by financing activities................... 577 23 212
------------------- ------------------- -------------------
INCREASE IN CASH AND EQUIVALENTS 50 41 12
CASH AND EQUIVALENTS, beginning of year.................. 239 198 186
------------------- ------------------- -------------------
CASH AND EQUIVALENTS, end of year........................ $ 289 $ 239 $ 198
=================== =================== ===================
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
See Notes To CombinedConsolidated Financial Statements

NEW
33
MARRIOTT MI,INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
January 3, 2003 and December 28, 2001
($ in millions)
January 3,
2003
December 28,
2001
ASSETS
Current Assets
Cash and equivalents $ 198 $ 812
Accounts and notes receivable 524 479
Prepaid taxes 300 223
Other 89 72
Assets held for sale 633 1,161
1,744 2,747
Property and equipment 2,589 2,460
Goodwill 923 977
Other intangible assets 495 657
Investments in affiliates – equity 493 314
Investments in affiliates – notes receivable 584 505
Notes and other receivables, net
Loans to timeshare owners 153 259
Other notes receivable 304 311
Other long-term receivables 473 472
930 1,042
Other 538 405
$ 8,296 $ 9,107
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 529 $ 607
Accrued payroll and benefits 373 322
Casualty self insurance 32 21
Other payables and accruals 665 621
Current portion of long-term debt 242 32
Liabilities of businesses held for sale 366 367
2,207 1,970
Long-term debt 1,492 2,301
Casualty self insurance reserves 106 83
Other long-term liabilities 857 868
Convertible debt 61 407
Shareholders’ equity
Class A common stock 3 3
ESOP preferred stock — —
Additional paid-in capital 3,181 3,378
Retained earnings 1,126 941
Treasury stock, at cost (667 ) (503 )
Unearned ESOP shares — (291 )
Accumulated other comprehensive loss (70 ) (50 )
3,573 3,478
$ 8,296 $ 9,107
See Notes To Consolidated Financial Statements
34
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
($ in millions)
2002
2001
2000
OPERATING ACTIVITIES
Income from continuing operations $ 439 $ 269 $ 490
Adjustments to reconcile to cash provided by operating activities:
Income (loss) from discontinued operations 9 (33 ) (11 )
Discontinued operations – loss on sale/exit (171 ) — —
Depreciation and amortization 187 222 195
Income taxes (105 ) 9 133
Timeshare activity, net (63 ) (358 ) (195 )
Other 223 278 54
Working capital changes:
Accounts receivable (31 ) 57 (53 )
Other current assets 60 (20 ) 24
Accounts payable and accruals (32 ) (21 ) 219
Net cash provided by operating activities 516 403 856
INVESTING ACTIVITIES
Capital expenditures (292 ) (560 ) (1,095 )
Dispositions 729 554 742
Loan advances (237 ) (367 ) (389 )
Loan collections and sales 124 71 93
Other (7 ) (179 ) (377 )
Net cash provided by (used in) investing activities 317 (481 ) (1,026 )
FINANCING ACTIVITIES
Commercial paper, net 102 (827 ) 46
Issuance of long-term debt 26 1,329 338
Repayment of long-term debt (946 ) (123 ) (26 )
(Redemption) issuance of convertible debt (347 ) 405 —
Issuance of Class A common stock 35 76 58
Dividends paid (65 ) (61 ) (55 )
Purchase of treasury stock (252 ) (235 ) (340 )
Net cash (used in) provided by financing activities (1,447 ) 564 21
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (614 ) 486 (149 )
CASH AND EQUIVALENTS, beginning of year 812 326 475
CASH AND EQUIVALENTS, end of year $ 198 $ 812 $ 326
See Notes To Consolidated Financial Statements
35
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Fiscal Years Ended January 3, 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
See Notes To Consolidated Financial Statements
36
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000
(in millions, except per share amounts)
Common
shares
outstanding
Class A
common
stock
Additional
paid-in
capital
Retained
earnings
Unearned ESOP shares
Treasury stock, at cost
Accumulated other comprehensive loss
246.3 Balance at January 1, 2000 $ 3 $ 2,738 $ 508 $ — $ (305 ) $ (36 )
— Net income — — 479 — — —
— Dividends ($.235 per share) — — (56 ) — — —
5.5 Employee stock plan issuance and other — 852 (80 ) (679 ) 186 (8 )
(10.8 ) Purchase of treasury stock — — — — (335 ) —
241.0 Balance at December 29, 2000 3 3,590 851 (679 ) (454 ) (44 )
— Net income — — 236 — — —
— Dividends ($.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 )
See Notes To Consolidated Financial Statements
37
MARRIOTT INTERNATIONAL, INC.
NOTES TO COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation

On October 1, 1997,
The consolidated financial statements present the results of operations, financial position and cash flows of Marriott International, Inc. announced a definitive
agreement to combine the operations of its Marriott Management Services Division
with the North American operations of Sodexho Alliance, S.A. (Sodexho), a
worldwide food and management services organization. Prior to the merger, all
of the issued and outstanding common stock of New Marriott MI, Inc. (together with its subsidiaries, we, us or the Company) will be distributed, on a pro rata basis, as
a special dividend to holders of Marriott International, Inc. common stock (the
Spinoff). For each share of common stock in Marriott International, Inc.,
shareholders will receive one share of Company Common Stock and one share of
Company Class A Common Stock. The Spinoff and merger are expected to be
consummated on March 27, 1998, subject to customary conditions, including
approval by Marriott International, Inc.'s shareholders. A special meeting of
shareholders is scheduled to be held on March 17, 1998 for purposes of
considering and acting on the foregoing transactions and related matters.

Marriott International, Inc. has received a private letter ruling from the
Internal Revenue Service that the Spinoff will be tax-free to Marriott
International, Inc. and its shareholders. The Company will be renamed "Marriott
International, Inc." and its common stock will be listed on the New York Stock
Exchange, subject to official notice of issuance.

For the purposes of governing certain of the ongoing relationships between the
Company and SMS after the Spinoff and to provide for orderly transition, the
Company and SMS will enter into various agreements including the Distribution
Agreement, Employee Benefits and Other Employment Matters Allocation Agreement,
Liquid Yield Option Notes (LYONs) Allocation Agreement, Tax Sharing Agreement,
Trademark and Trade Name License Agreement, Noncompetition Agreement, Employee
Benefit Services Agreement, Procurement Services Agreement, Distribution
Services Agreement and other transitional services agreements. Effective as of
the Spinoff date, these agreements will provide, among other things, that the
Company will assume sponsorship of certain of Marriott International, Inc.'s
employee benefit plans and insurance programs as well as succeed to Marriott
International, Inc.'s liability to LYONs holders under the LYONs Indenture, a
portion of which will be assumed by SMS.

These combined financial statements present the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. Marriott International, Inc.'s historical basis in the
assets and liabilities of the Company has been carried over. All material
intercompany transactions and balances between entities included in these
combined financial statements have been eliminated. Sales by the Company to
Marriott International, Inc., of $434 million in 1997, $406 million in 1996 and
$325 million in 1995 have not been eliminated. Changes in Investments and Net
Advances from Marriott International, Inc. represent the net income of the
Company plus the net cash transferred between Marriott International, Inc. and
the Company and certain non-cash items.

The Company has operated as a unit of Marriott International, Inc., utilizing
Marriott International, Inc.'s centralized systems for cash management, payroll,
purchasing and distribution, employee benefit plans, insurance and
administrative services. As a result, substantially all cash received by the
Company was deposited in and commingled with Marriott International, Inc.'s
general corporate funds. Similarly, operating expenses, capital expenditures and
other cash requirements of the Company were paid by Marriott International, Inc.
and charged directly or allocated to the Company. Certain assets and liabilities
related to the Company's operations are managed and controlled by Marriott
International, Inc. on a centralized basis. Such assets and liabilities have
been allocated to the Company based on the Company's use of, or interest in,
those assets and liabilities. In the opinion of management, Marriott
International, Inc.'s methods for allocating costs, assets and liabilities are
believed to be reasonable. After the Spinoff, the Company intends to perform
these functions independently and expects that the costs incurred will not be
materially different from those currently allocated.

The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date 25

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

of the financial statements, and the reported amounts of sales and expenses during the reporting period.period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the 2002 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 living 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, 2003 and December 28, 2001, the results of operations and cash flows for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000. We have eliminated all material intercompany transactions and balances between entities included in these financial statements.
Fiscal Year

The Company's
Our fiscal year ends on the Friday nearest to December 31. The 19962002 fiscal year includes 53 weeks, while 1997the 2001 and 19952000 fiscal years include 52 weeks.

Managed Operations

The Company operates 509
Revenue Recognition
Our sales include (1) base and incentive management fees, (2) franchise fees, (3) sales from lodging properties owned or leased by us, (4) cost reimbursements, (5) other lodging revenue, and (6) sales made by our Synthetic Fuel business. Management fees comprise a base fee, which is a percentage of the revenues of hotels, and 55 senior living communitiesan incentive fee, which is generally based on unit profitability. Franchise fees comprise initial application fees and continuing royalties generated from our franchise programs, which permit the hotel owners and operators to use certain of our brand names. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise. Other lodging revenue includes sales from our timeshare and ExecuStay businesses.
Management Fees: We recognize base fees as revenue when earned in accordance with the contract. In interim periods and at year end we recognize incentive fees that would be due as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us.
Timeshare:We recognize revenue 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.
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.
38
Franchise Fee Revenue: We recognize franchise fee revenue in accordance with FAS No. 45, “Accounting for Franchise Fee Revenue.” We recognize franchise fees as revenue in each accounting period as fees are earned and become receivable from the franchisee.
Cost Reimbursements: We recognize cost reimbursements from managed and franchised properties when we incur the related reimbursable costs.
Synthetic Fuel: We recognize revenue from our Synthetic Fuel business when the synthetic fuel is produced and sold.
Ground Leases
We are both the lessor and lessee of land under long-
term management agreements whereby remittanceslong-term operating leases, which include scheduled increases in minimum rents. We recognize these scheduled rent increases on a straight-line basis over the initial lease terms.
Real Estate Sales
We account for the sales of real estate in accordance with FAS No. 66. We reduce gains on sales of real estate by the maximum exposure to owners,loss if we have continuing involvement with the property and do not transfer substantially all of $1,350 million,
$1,056 millionthe risks and $960rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $51 million in 1997, 1996 and 1995, respectively, are based
primarily on profits.

Working capital and operating results of managed hotels and senior living
communities operated by the Company's employees are consolidated because the
operating responsibilities associated with such entities are substantially the
same as if they were owned. The combined financial statements include the
following related to managed hotels and senior living communities operated by
the Company's employees: current assets and current liabilities of $512 million
at January 2, 1998 and $320 million at January 3, 1997; sales of $5,5152002, $16 million in 1997, $4,5952001 and $18 million in 1996 and $4,071 million in 1995; and operating
expenses, including remittances to owners, of $5,181 million in 1997, $4,322
million in 1996 and $3,830 million in 1995.

International Operations

The combined statement of income includes the following related to
international operations: sales of $333 million in 1997, $224 million in 1996
and $189 million in 1995; and operating profit before corporate expenses and
interest of $49 million in 1997, $21 million in 1996 and $19 million in 1995.

2000.
Profit Sharing Plan

Marriott International, Inc. contributes
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 annually by the Board
of Directors of Marriott International, Inc. The Company's contributions are
based on salariesa specified percentage of salary deferrals by participating employees. Excluding the discontinued Senior Living Services and wagesDistribution Services businesses, we recognized compensation cost from profit sharing of participating Company employees$54 million in 2002, $52 million in 2001 and totaled $36$50 million for 1997, $29in 2000. We recognized compensation cost from profit sharing of $8 million for 1996in 2002, $6 million in 2001 and $22$5 million for 1995.

in 2000 related to the discontinued Senior Living Services and Distribution Services businesses.
Self-Insurance Programs

Marriott International, Inc. is
We are self-insured for certain levels of generalproperty, liability, workers'workers’ compensation employment practices and employee medical coverage. EstimatedWe accrue estimated costs of these self-insurance programs are accrued at the present value of projected settlements for known and anticipatedincurred but not reported claims. GeneralWe 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 Administrative Expenses

the fixed nature of the individual settlements.
Marriott International, Inc. provided certain corporate generalRewards
Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, administrative services 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 Companymembers’ behalf can be redeemed for hotel stays at most of our lodging operations, airline tickets, airline frequent flier program miles, rental cars, and a variety of other awards. Points cannot be redeemed for cash.
We provide Marriott Rewards as a marketing program to participating hotels. We charge the cost of those services was
allocatedoperating the program, including the estimated cost of award redemption, to hotels based on members’ qualifying expenditures.
Effective January 1, 2000, we changed certain aspects of our method of accounting for the Marriott Rewards program in accordance with Staff Accounting Bulletin (SAB) No. 101. Under the new accounting method, we defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the Companyfair 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 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 communicating with, and performing member services provided.

Interest Expense

The interestfor 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 reflectedrelating to the cost of the awards redeemed.
Our liability for the Marriott Rewards program was $683 million at January 3, 2003, and $631 million at December 28, 2001, of which we have included $418 million and $380 million, respectively, in other long-term liabilities in the combined statement of income is based
upon the historical debt of the Company.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

accompanying consolidated balance sheet.
Cash and Equivalents

The Company considers
We consider all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Marriott
International, Inc. uses drafts
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 itsthe loan and the present value of the expected future cash management system.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 2,
19983, 2003, our recorded investment in impaired loans was $129 million. We have a $59 million allowance for credit losses, leaving $70 million of our investment in impaired loans for which there is no related allowance for credit losses.
The following table summarizes the activity in our accounts and notes receivable reserves for the years ended December 29, 2000, December 28, 2001 and January 3, 1997, outstanding drafts2003:
Accounts Receivable Reserve
Notes Receivable Reserve
($ 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 Marriott International, Inc.
allocatedLong-Lived Assets
We review the carrying values of long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If we expect an asset to generate cash flows less than the Companyasset’s carrying value at the lowest level of identifiable cash flows, we recognize a loss for the difference between the asset’s carrying amount and its fair value.
Assets Held for Sale
We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property for sale or a signed sales contract exists. 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.
40
Investments
We consolidate entities that we control due to holding a majority voting interest. 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 affiliates varies generally from 10 percent to 50 percent.
Costs Incurred to Sell Real Estate Projects
We capitalize direct costs incurred to sell real estate projects attributable to and recoverable from the sales of timeshare interests until the sales are recognized. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Selling and marketing costs capitalized under this approach were approximately $107 million and $126 million at January 3, 2003 and December 28, 2001, respectively, and are included in accounts payableproperty and totaledequipment in the accompanying consolidated balance sheets. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense, and record deposits forfeited as income.
Interest Only Strips
We periodically sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We retain servicing assets and interest in the assets transferred to special purpose entities that are accounted for as interest only strips. We treat the interest only strips as “trading” or “available for sale” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. We report changes in the fair values of the interest only strips through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available for sale securities. We had interest only strips of $135 million and $124 million, respectively. At January 2, 1998 andat January 3, 1997,
cash included $1402003 and $87 million and $133 million, respectively, related to managed
properties. Marriott International, Inc.'s centralized cash has been allocated
toat December 28, 2001, which are recorded as long-term receivables on the Company.

consolidated balance sheet.
New Accounting Standards

The Company will adopt Statement of Financial Accounting Standards (FAS) No.
130, "Reporting Comprehensive Income" and
We adopted FAS No. 131, "Disclosures about
Segments of an Enterprise142, “Goodwill and Related Information" during 1998. The Company is
evaluating the impact of these statements on its combined financial statements.
FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was adopted duringOther Intangible Assets” in the first quarter of 1997,
and2002. FAS No. 129, "Disclosure142 requires that goodwill is not amortized, but rather reviewed annually for impairment. The initial adoption of Information about Capital Structure" wasFAS No. 142 did not result in an impairment charge to goodwill or other intangible assets and increased our fiscal 2002 net income by approximately $30 million.
41
The following table presents the impact FAS No. 142 would have had on our income from continuing operations, basic and diluted earnings from continuing operations per share, and basic and diluted net earnings per share for fiscal years ended December 28, 2001 and December 29, 2000, if we had adopted it in the fourthfirst quarter of 1997,2000 ($ 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
We adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in the first quarter of 2002. The adoption of FAS No. 144 did not have any impact to our financial statements.
We will adopt FAS No. 146, “Accounting for Costs Associated with noExit or Disposal Activities,” in the first quarter of 2003. We do not expect the adoption of FAS No. 146 to have a material effectimpact on our financial statements.
We have adopted the Company's combineddisclosure provisions of FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” FAS No. 148 requires expanded disclosure regarding stock-based compensation in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements and does not have a financial impact on our financial statements. The Company adopted FAS No. 128, "Earnings Per Share"expanded disclosure will be required in our quarterly financial reports beginning in the fourthfirst quarter of 1997. A comparison to pro forma earnings per share as previously calculated
follows:

(unaudited)
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------

Pro Forma Primary Earnings Per Share as previously calculated............ $ 1.21 $ 1.00 $ .83
============= ============= =============
Pro Forma Fully Diluted Earnings Per Share as previously calculated...... $ 1.19 $ .99 $ .83
============= ============= =============

Pro Forma Basic Earnings Per Share....................................... $ 1.27 $ 1.06 $ .88
============= ============= =============
Pro Forma Diluted Earnings Per Share..................................... $ 1.19 $ .99 $ .83
============= ============= =============

On November 20, 1997,2003.
We adopted the Emerging Issues Task Forcedisclosure provisions of FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others,” in the fourth
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.
Under FIN 45, at the inception of guarantees issued after December 31, 2002, we will record the fair value of the Financial
Accounting Standards Board reachedguarantee as a consensusliability, with the offsetting entry being recorded based on EITF 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which the guarantee was issued. We will account for any fundings under the guarantee as a reduction of the liability. After funding has ceased, we will recognize the remaining liability in the income statement on a straight-line basis over the remaining term of the guarantee. In general, we issue guarantees in connection with obtaining long-term management entity may includecontracts, and thus in those cases the revenuesoffsetting entry will be capitalized and expensesamortized over the life of a managed entity in its financial statements.

The Company is assessing the management contract.
Adoption of FIN 45 will have no impact of EITF 97-2 on its long-standing policy
of including in itsto our historical financial statements as existing guarantees are not subject to the working capital, revenuesmeasurement provisions of FIN 45. The impact on future financial statements will depend on the nature and operating expensesextent of managed hotels and retirement communities operatedissued guarantees but is not expected to have a material impact to us.
FIN 46, “Consolidation of Variable Interest Entities,” is effective immediately for all enterprises with the Company's employees. If the Company concludes that EITF 97-2 shouldvariable interests in variable interest entities created after January 31, 2003. FIN 46 provisions must be applied 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 management agreements, it would no longer includeinvolvement with the variable interest entity in itsall financial statements certain working capitalissued after January 31, 2003.
We do not believe that it is reasonably possible that the adoption of FIN 46 will result in our consolidation of any previously unconsolidated entities. The adoption of FIN 46 may result in additional disclosure about a limited number of investments in variable interest entities. We do not expect such disclosure to be material.
FIN 46 does not apply to qualifying special purpose entities, such as those used by us to sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. These qualifying special purpose entities will continue to be 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 in the “Employee Stock Plans” footnote. We account for those plans using the intrinsic value method under the recognition and revenuesmeasurement principles of those managed
operations. Application of EITF 97-2APB Opinion No. 25, “Accounting for Stock Issued to the Company's financial statements as
of and for the 52 weeks ended January 2, 1998, would have reduced each of
revenues and operating expenses by approximately $1.3 billion, and would have no
impact on operating profit,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 or equity.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation ($ in millions, except per share amounts):
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 HOST MARRIOTT AND HOST MARRIOTT SERVICES

Marriott International, Inc., the Company andMAJOR CUSTOMER
In December 1998, Host Marriott Corporation (Host Marriott) have entered into agreements which provide, among other things, for
(i) the Companyreorganized its business operations to manage and franchise lodging properties owned or leased byqualify as a real estate investment trust (REIT). In conjunction with its conversion to a REIT, Host Marriott (thespun off, in a taxable transaction, a new company called Crestline Capital Corporation (Crestline). As part of the Crestline spinoff, Host Marriott Lodging Management Agreements), (ii)transferred to Crestline all of the
Company to manage senior living communities previously owned by Host Marriott, (theand Host Marriott Senior Living Management Agreements), (iii) Marriott International,
Inc. to guaranteeentered into lease or sublease agreements with subsidiaries of Crestline for substantially all of Host Marriott's performance in connectionMarriott’s lodging properties. Our lodging and senior living community management and franchise agreements with certain loans
or other obligations (the Marriott International, Inc. Guarantees), and (iv) the
Company to provide Host Marriott with various administrative services (the
Service Agreements). Upon consummationwere 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 Spinoff,lessee entities’ interests in the Company will replace
Marriott International, Inc. under these agreements and guarantees. Marriott
International, Inc. has the right to purchase up to 20 percent of the voting
stock of Host Marriott if certain events involving a change of control occur.
This right will be assigned to the Company upon consummation of the Spinoff.

The Host Marriott Lodging Management Agreements provideleases 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 Marriott hotels, Courtyard hotels and Residence Inns owned or leased by
Host Marriott. Each Host Marriott Lodging Management Agreement, when entered
into, reflects market terms and conditions and is substantially similar to the
terms of management agreements with third-party owners regarding lodging
facilities of a similar type. The Companythese senior living communities.
We recognized sales of $2,302$2,547 million, $1,787$2,440 million and $1,274$2,746 million and operating profit before corporate expenses
and interestlodging financial results of $140$150 million, $95$162 million and $59$235 million during 1997, 19962002, 2001 and 1995,2000, respectively, from the 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 the Companyus under long-term agreements. The CompanyWe recognized sales of $1,513$494 million, $1,769$546 million and $1,878$622 million and operating profit before corporate expenses
and interestincome of $122$28 million, $121$40 million and $115$72 million in 1997, 19962002, 2001 and 1995,2000, respectively, from the lodging properties owned by these unconsolidated partnerships. The CompanyWe also leasesleased land to certain of these partnerships and recognized land rent income of $23$18 million, $22$19 million and $21 million, respectively, in 1997,
19962002, 2001 and 1995, respectively.

The2000.
In December 2000, we acquired 120 Courtyard by Marriott hotels, through an unconsolidated joint venture (the Courtyard Joint Venture) with an affiliate of Host Marriott. Prior to the formation of the Courtyard Joint Venture, Host Marriott Senior Living Management Agreements provide forwas a general partner in the Companyunconsolidated 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 manage independent full-service senior living communities owned or leased by
Host Marriott. These agreements, entered into on June 21, 1997, reflect market
terms and conditions and are substantially similar to management agreements with
third-party owners. The Company recognizedthese 120 Courtyard hotels: sales of $126$313 million, $316 million and operating
profit before corporate expenses$345 million, management fee income and interest of $1 million under these
agreements during 1997.

The Company has provided, and may provideequity results in the future, financingjoint 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 Company, including partial consideration for Host Marriott's
purchase of 29 senior living communities from the Company.future. The outstanding principal balance of these loans was $135$5 million and $37$7 million at January 2,
19983, 2003 and January 3, 1997,December 28, 2001, respectively, and the Companywe recognized $9 million,
$17 million and $23$1 million in 1997, 1996each of 2002, 2001 and 1995, respectively,2000 in interest and fee income under these credit agreements with Host Marriott.

Under the Marriott International, Inc. Guarantees, Marriott International,
Inc. has
We have guaranteed the performance of Host Marriott and certain of its affiliates to lenders and other third parties. These guarantees were limited to $107$7 million at January 2, 1998. No3, 2003. We have made no payments have been made by Marriott
International, Inc. pursuant to these guarantees. On December 29, 1995,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, distributedmany provisions of which predated our 1993 Spin-off, and the need to its shareholders throughprovide clarity on a special dividend allnumber of points and consistency on contractual terms over the outstanding shares of common stocklarge portfolio of Host Marriott Services Corporation (Hostowned hotels, we and Host Marriott Services), which operates food, beverageconcluded that we could mutually enhance the long term strength and merchandise concessionsgrowth 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 airports,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 toll roadsunderlying hotel profitability. In 2002, the reduction was $2.5 million;
Reduced certain expenses to the properties and at arenaslowered Host Marriott’s working capital requirements;
Confirmed that we and other
tourist attractions. The Company providesour affiliates may earn a profit (in addition to what we earn through management fees) on certain administrative and data
processing servicestransactions 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 Services for whichinvolving our major competitors.
The monetary effect of the Company charged $10changes will depend on future events such as the financial results of the hotels. We do not expect these modifications to have a material financial impact on us.
45
NOTES RECEIVABLE
2002
2001
($ in millions)
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 $11$29 million, in 1997respectively, as of January 3, 2003 and 1996, respectively. In addition, the
Company provides and distributes food and supplies to Host Marriott Services,
for which the Company charged $80 million in 1997, $77 million in 1996 and
(priorDecember 28, 2001, related to the special dividend) $65 million in 1995.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

The Company also provides certain administrative servicesloans to Host Marriott
(including the services provided to Host Marriott Services prior to the special
dividend) for which the Company charged $17 million in 1997, $19 million in 1996
and $25 million in 1995, including reimbursements.

timeshare owners.
PROPERTY AND EQUIPMENT
1997 1996
-------------------- --------------------
(in millions)

Land................................................................ $ 425 $ 433
Buildings and leasehold improvements................................ 486 847
Furniture and equipment............................................. 329 323
Timeshare properties................................................ 379 335
Construction in progress............................................ 230 183
-------------------- --------------------
1,849 2,121
Accumulated depreciation and amortization........................... (312) (297)
-------------------- --------------------
$ 1,537 $ 1,824
==================== ====================

Property
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 property and equipment is recorded at cost, including interest, rent and real estate taxes incurred during development and construction. Interest capitalized as a cost of property and equipment totaled $16$43 million in 1997, $92002, $61 million in 19962001 and $8$52 million in 1995. Replacements and2000. 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 repairs and maintenance costs are capitalized. Depreciation is
computedexpensed as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the assets. Leaseholdassets (three to 40 years). We amortize leasehold improvements are amortized over the shorter of the asset life or lease term. Land
ACQUISITIONS AND DISPOSITIONS
Courtyard Joint Venture
In 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 appointed by the general partner of two of the partnerships, Courtyard by Marriott Limited Partnership (CBM I) and Courtyard by Marriott II Limited Partnership (CBM II). The agreement was amended in September 2000, to increase the amount that CBM I settlement class members were to receive after deduction of court-awarded attorneys’ fees and expenses and to provide that the defendants, including the Company, would pay a portion of the attorneys’ fees and expenses of the CBM I settlement class.
Under the agreement, we acquired, through an unconsolidated joint venture with an aggregate book valueaffiliate of $264 million at January 2,
1998 is leased to certain partnerships affiliated with Host Marriott. Most of
this land has been pledged to secure debt of these lessees. The Company has
agreed to defer receipt of rentals on this land, if necessary, to permit the
lessees to meet their debt service requirements.

ACQUISITIONS AND DISPOSITIONS

Renaissance Hotel Group N.V.

On March 29, 1997, the Company acquiredMarriott, substantially all of the outstanding
common stock of Renaissance Hotel Group N.V. (RHG), an operatorlimited partners’ interests in CBM I and franchisor
of approximately 150 hotels in 38 countries under the Renaissance, New World and
Ramada International brands. The purchase cost, of approximately $937 million,
was fundedCBM II which own 120 Courtyard by Marriott International, Inc.hotels. We continue to manage the 120 hotels under long-term agreements. The acquisition has been accounted
for using the purchase methodjoint venture was financed with equity contributed in equal shares by us and an affiliate of accounting. The purchase cost has been
allocated to the assets acquiredHost Marriott and liabilities assumed based on estimated fair
values as follows:

(in millions)

Current assets............................................................... $ 141
Hotel management, franchise and license agreements........................... 380
Other assets................................................................. 7
Current liabilities.......................................................... (119)
Long-term debt............................................................... (12)
Other long-term liabilities.................................................. (106)
Investments and net advances from Marriott International, Inc................ (128)
Goodwill..................................................................... 774
----------------
Purchase cost................................................................ $ 937
================

Goodwill is being amortized on a straight-line basis over 40 years. Amounts
allocated to management, franchise and license agreements are being amortized on
a straight-line basis over the lives of the agreements.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

The Company included RHG's operating results from the date of acquisition.
Summarized below are the unaudited pro forma combined results of operations of
the Company for 1997 and 1996, as if RHG had been acquired at the beginning of
the respective fiscal years (in millions).

1997 1996
---------------------- ----------------------

Sales..................................................... $ 9,244 $ 8,123
====================== ======================
Net income................................................ $ 319 $ 242
====================== ======================

Unaudited pro forma results of operations include an adjustment for interest
expense of $12 million and $53 million for 1997 and 1996, respectively, as if
the acquisition borrowings had been incurred by the Company. Amortization
expense deducted in determining net income reflects the impact of the excess of
the purchase price over the net tangible assets acquired. The unaudited pro
forma combined results of operations do not reflect the Company's expected
future results of operations.

Dr. Henry Cheng Kar-Shun is the Managing Director of New World Development
Company Limited (New World Development) and, together with his family and
affiliated corporations, owns or otherwise controls approximately 35 percent of
New World Development's common stock. Effective June 1, 1997, Dr. Cheng was
appointed to the Board of Directors of Marriott International, Inc. Dr. Cheng,
New World Development and their affiliates own all or a portion of 87 hotels
that are operated by the Company and, prior to the Company's acquisition of RHG,
owned a majority of RHG common stock. New World Development and other affiliates
of Dr. Cheng have indemnified the Company for certain lease, debt, guarantee and
other obligations resulting from the formation of RHG as a hotel management
company in 1995.

The Ritz-Carlton Hotel Company LLC

On April 24, 1995, the Company acquired a 49 percent beneficial ownership
interest in The Ritz-Carlton Hotel Company LLC, which owns the management
agreements on the Ritz-Carlton hotels and resorts, the licenses for the Ritz-
Carlton trademarks and trade name as well as miscellaneous assets. The
investment was acquired for a total consideration of approximately $200 million.
The Company expects to acquire the remaining 51 percent within the next several
years beginningmillion in 1998. Themezzanine debt provided by us. Our total investment in the Ritz-Carlton Hotel Company LLCjoint venture, including the mezzanine debt, is
accounted for using the equity method of accounting.

The excess
46
approximately $300 million. Final court approval of the Company's investmentCBM I and CBM II settlements was granted on October 24, 2000, and became effective on December 8, 2000.
The agreement also provided for the resolution of litigation with respect to four other limited partnerships. On September 28, 2000, the court entered a final order with respect to those partnerships, and on that same date, we and Host Marriott each paid into escrow approximately $31 million for payment to the plaintiffs in The Ritz-Carlton Hotel Company LLC
over its shareexchange for dismissal of the net tangible assets is being amortized over 25 years. The
Company's income from The Ritz-Carlton Hotel Company LLC iscomplaints and full releases.
We recorded a pretax charge of $39 million, which was included in lodging
operating profitcorporate expenses in the accompanying combined statementfourth quarter of income. The Company
received distributions1999, to reflect the settlement transactions.
Dispositions
In 2002, we sold three lodging properties and six pieces of $17 million, $20 million and $6undeveloped land for $330 million in 1997, 1996
and 1995, respectively, from its investment in The Ritz-Carlton Hotel Company
LLC. Such amounts were based upon an annual, cumulative preferred return on
invested capital.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

Forum Group, Inc.

On March 25, 1996, a wholly owned subsidiary of the Company acquired all of
the outstanding shares of common stock of Forum Group, Inc. (Forum), an operator
of 43 senior living communities, 34 of which were owned or partially owned by
Forum, for total cash consideration of approximately $303 million. The
acquisition was accounted for using the purchase method of accounting. The
purchase cost was allocated to the assets acquired and liabilities assumed based
on estimated fair values as follows:

(in millions)
Current assets............................ $ 40
Property and equipment.................... 531
Other assets.............................. 29
Current liabilities....................... (45)
Long-term debt............................ (363)
Other long-term liabilities............... (58)
Goodwill.................................. 169
---------------
Purchase cost............................. $ 303
===============

Goodwill is being amortized on a straight-line basis over 35 years.

On June 21, 1997, the Company sold 29 senior living communities acquired as
part of the Forum acquisition, to Host Marriott for approximately $550 million,
resulting in no gain or loss. The consideration included approximately $50
million to be received subsequent to 1997, as expansions at certain communities
are completed. The $500 million of consideration received during 1997 consisted
of $222 million in cash, $187 million of outstanding debt, $50 million of notes
receivable due on June 20, 1998, and $41 million of notes receivable due on
January 1, 2001. The notes receivable from Host Marriott bear interest at nine
percent. Under the terms of sale, Host Marriott purchased all of the common
stock of Forum which at the time of the sale included the 29 communities,
certain working capital and associated debt. The Companycash. We will continue to operate these communitiestwo of the hotels under long-term management agreements. Other Property Sales

On April 3, 1997,We accounted for two of the Companythree property sales under the full accrual method in accordance with FAS No. 66. The buyer did not make adequate minimum initial investments in the remaining property, which we accounted for under the cost recovery method. The sale of one of the properties was to a joint venture in which we have a minority interest and was sold at a loss. We recognized $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.
In 2002, we also sold our 11 percent investment in Interval International, a timeshare exchange company, for approximately $63 million. In connection with the transaction, we recorded a pretax gain of approximately $44 million.
In 2001, we agreed to sell 18 lodging properties and leaseback,three pieces of undeveloped land for $682 million. We continue to operate 17 of the hotels under long-term limited-recourse leases, 14 limited service hotelsmanagement agreements. In 2001, we closed on 11 properties and three pieces of undeveloped land for approximately $149$470 million, and in cash. Concurrently,2002, we closed on the Companyremaining 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.
In 2001, in connection with the sale of four of the above lodging properties, we agreed to pay security deposits of
$15 million, which will be refunded upon expirationtransfer 31 existing lodging property leases to a subsidiary of the leases.lessor and subsequently enter into agreements with the new lessee to operate the hotels under long-term management agreements. These properties were previously sold and leased back by us in 1997, 1998 and 1999. As of January 2, 1998, sales3, 2003, 21 of allthese leases had been transferred, and pretax gains of $5 million and $12 million previously deferred 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 properties had closed, resultingproject. We expect the hotels to open in a $20July 2003. At opening we also expect to hold approximately $110 million excessin 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 price overproceeds of $71 million, less $50 million funded by our initial loans to the net book value,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 be recognizedrecognize this gain as a reduction of rent expense over the 17-year initial lease terms. On October 10,
1997, the Company agreed to sellterm.
In 2001, we sold 100 percent of our limited partner interests in five affordable housing partnerships and leaseback, under long-term, limited-
recourse leases, another nine85 percent of our limited service hotelspartner interest in a sixth affordable housing partnership for approximately $129$82 million in cash. Concurrently,We recognized pretax gains of $13 million in connection with four of the Companysales. 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 depositsdeposit of $13$3 million, which will be refunded upon expirationat the end of the leases. As of
January 2, 1998, sales of three of these nine properties had closed, resulting
in a $7 million excess of theThe sales price overexceeded the net book value by $3 million, which we will be
recognizedrecognize as a reduction of rent expense over the 15-year initial lease terms.
All
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 aforementioned leases are renewable17 properties under the full accrual method in accordance with FAS No. 66. The buyers did not make adequate minimum initial investments in the remaining three properties, which we accounted for under the cost recovery method. Four of the 17 properties were sold to a joint venture in which we have a minority interest. Where the full accrual method applied, we recognized profit proportionate to the outside interests in the joint venture at the optiondate of sale. We recognized $5 million, $13 million and $9 million of pretax gains in 2002, 2001 and 2000 respectively, and will recognize the remainder in subsequent years provided certain contingencies in the sales contracts expire. Unaffiliated third-party tenants lease 13 of the Company.

properties from the buyers. In 2000, one of these tenants replaced us as the tenant on nine other properties that we sold and leased back in 1997 and 1998. We now manage these nine previously leased properties under long-term management agreements, and deferred gains on the sale of these properties of $15 million were recognized as our leases were canceled throughout 2000. In connection with the sale of four of the properties, we provided $39 million of mezzanine funding and agreed to provide the buyer with up to $161 million of additional loans to finance future acquisitions of Marriott-branded hotels. We also acquired a minority interest in the joint venture that purchased the four hotels. During 2001 we funded $27 million under this loan commitment in connection with one of the 11 property sales described above.
In connection with the long-term, limited-recourse leases described above, Marriott International, Inc. 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.
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 agreements obtained directly with third-party owners in competitive bid processes.
See Assets Held for Sale note for dispositions related to our discontinued Senior Living Services business.
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. We continue to service the notes and transfer all proceeds collected to the special purpose entities. We retain servicing assets and interests in the securitizations which are accounted for as interest only strips. The interests are limited to the present value of cash available after paying financing expenses, program fees, and absorbing credit losses. We have included gains from the sales of timeshare notes receivable totaling $60 million in 2002, $40 million in 2001 and $22 million in 2000 in other revenue in the consolidated statement of income.
At the date of securitization and at the end of each reporting period, we estimate the fair value of the interest only strips and servicing assets using a discounted cash flow model. These transactions utilize interest rate swaps to protect the net interest margin associated with the beneficial interest. We report changes in the fair value of the interest only strips that are treated as available-for-sale securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, through other comprehensive income in the accompanying consolidated balance sheet. We report income changes in the fair value of interest only strips treated as trading securities under the provisions of FAS No. 115. We used the following key assumptions in measuring the fair value of the interest only strips 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: average discount rate of 5.69 percent, 6.89 percent and 7.82 percent, respectively; average expected annual prepayments, including defaults, of 15.48 percent, 15.43 percent and 12.72
48
percent, respectively; expected weighted average life of prepayable notes receivable, excluding prepayments, of 119 months, 118 months and 86 months, respectively, and expected weighted average life of prepayable notes receivable, including prepayments, of 44 months, 40 months, and 38 months, respectively. Our key assumptions are based on experience. To date, actual results have not materially affected the carrying value of the interests.
Cash flows between us and third-party purchasers during the years ended January 3, 2003, December 28, 2001 and December 29, 2000, were as follows: net proceeds to us from new securitizations of $341 million, $199 million and $144 million, respectively; repurchases by us of delinquent loans (over 150 days overdue) of $16 million, $13 million and $12 million, respectively; servicing fees received by us of $3 million in 2002 and $2 million in 2001 and 2000, and cash flows received on retained interests of $28 million, $30 million and $18 million, respectively.
On April 11, 1997,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, $682 million of principal remains outstanding in all securitizations in which we have a retained interest only strip. Delinquencies of more than 90 days at January 3, 2003, amounted to $2 million. Loans repurchased by the Company, net of obligors subsequently curing delinquencies, during the year ended January 3, 2003, amounted to $13 million. We have been able to resell timeshare units underlying repurchased loans without incurring material losses.
We have completed a stress test on the net present value of the interest only strips and the servicing assets with the objective of measuring the change in value associated with independent changes in individual key variables. The methodology used applied unfavorable changes that would be considered statistically significant for the key variables of prepayment rate, discount rate, and weighted average remaining term. The net present value of the interest only strips and servicing assets was $143 million at January 3, 2003, before any stress test changes were applied. An increase of 100 basis points in the prepayment rate would decrease the year-end valuation by $3 million, or 2 percent, and an increase of 200 basis points in the prepayment rate would decrease the year-end valuation by $6 million, or 4 percent. An increase of 100 basis points in the discount rate would decrease the year-end valuation by $3 million, or 2 percent, and an increase of 200 basis points in the discount rate would decrease the year-end valuation by $7 million, or 5 percent. A decline of two months in the weighted average remaining term would decrease the year-end valuation by $2 million, or 1 percent, and a decline of four months in the weighted average remaining term would decrease the year-end valuation by $4 million, or 3 percent.
MARRIOTT AND CENDANT CORPORATION JOINT VENTURE
In the first quarter of 2002, Marriott and Cendant Corporation (Cendant) completed the formation of a joint venture to further develop and expand the Ramada and Days Inn brands in the United States. We contributed the domestic Ramada license agreements and related intellectual property to the joint venture at their carrying value of approximately $200 million. Cendant contributed the Days Inn license agreement and related intellectual property with a fair value of approximately $205 million. We each own approximately 50 percent of the joint venture, with Cendant having the slightly larger interest. We account for our interest in the joint venture using the equity method. The joint venture can be dissolved at any time with the consent of both members and is scheduled to terminate in March 2012. In the event of dissolution, the joint venture’s assets will generally be distributed in accordance with each member’s capital
49
account. In addition, during certain periods of time commencing in March 2004, first Cendant and later Marriott will have a brief opportunity to cause a mandatory redemption of Marriott’s joint venture equity.
ASSETS HELD FOR SALE – DISCONTINUED OPERATIONS
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.
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 approved and committed to a plan to exit the companion living concept of senior living services and sell the related properties within the next 12 months. We recorded an impairment charge of $60 million to adjust the carrying value of the properties to their estimated fair value for the year ended December 29, 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 cash
consideration of approximately $79$59 million. On September 12, 1997, the Company
agreed to sell another seven senior living communities for cash consideration of
approximately $93 million. As of January 2, 1998, the sales of five of these
properties had closed. The Company willWe continue to operate all of thesethe communities under long-term management agreements. During 1996,We accounted for these sales under the Company sold and leased back four senior living communities
for cash considerationfull accrual method in accordance with FAS No. 66. We will recognize pretax gains of approximately $53 million. $6 million provided certain contingencies in the sales contract expire.
Additional information regarding the Senior Living Services business is as follows ($ 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 excesstax 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 sales
price overDistribution Services business and decided to exit the net book valuebusiness. During the fourth quarter of $92002 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 will be recognized as a reduction of
rent expense over the 20-year initial lease terms.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

Note Sales

The Company periodically sells, with limited recourse, notes receivable
originated by Marriott Vacation Club International in connection with the decision to exit this business. The charge includes: (1) $15 million for payments to third parties to subsidize their assumption of, or in some cases to terminate, existing distribution or warehouse lease contracts; (2) $9 million for severance costs; (3) $10 million related to the adjusting of fixed assets to net realizable values; (4) $2 million related to inventory losses; (5) $15 million for losses on equipment leases; (6) $10 million for losses on warehouse leases; and (7) $4 million of other associated charges. We expect to incur further expenses during 2003 in connection with the wind down of the business, but we currently are unable to estimate their magnitude.
Additional information regarding the MDS disposal group is as follows:
($ 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 timesharing intervals. Net proceeds from these transactions totaled $68full-service lodging properties, including $11 million of undeveloped land, $158 million of select-service properties and $27 million of extended-stay properties. Included in 1997other 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 $148committed 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 in 1996. Atpurchase 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 2, 1998,3, 2003, with the Companyexception 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 a
repurchase obligation of $70 million with respect to these mortgage note sales.
Additionally, the Company sold, without recourse, first mortgage loansasset been continuously classified as held and used. There were no lodging properties held for sale on Marriott lodging and senior living properties of $18 million in 1997 and $113
million in 1996.

January 3, 2003.
INTANGIBLE ASSETS
1997 1996
------------ ------------
(in millions)

Hotel management, franchise and license agreements........ $ 587 $ 178
Goodwill.................................................. 937 190
Other..................................................... 31 30
------------ ------------
1,555 398
Accumulated amortization.................................. (107) (65)
------------ ------------
$ 1,448 $ 333
============ ============

Intangible
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 assets are amortized on a straight-line basis over periods of three to 40 years. AmortizationIntangible amortization expense, including amounts related to discontinued operations, totaled $42$38 million in 1997, $122002, $73 million in 19962001 and $6$64 million in 1995.

2000.
51
In the fourth quarter of 2002 we performed the annual goodwill impairment tests required by FAS No. 142. During the fourth quarter, we continued to experience softness in demand for corporate housing, and the ExecuStay business results did not start to recover as previously anticipated, particularly in New York. Additionally, we decided to convert certain geographical markets to franchises, which we anticipate will result in more stable, albeit lower, profit growth. Due to the increased focus on franchising, the continued weak operating environment, and a consequent delay in the expectations for recovery of this business from the current operating environment, we recorded a $50 million pretax charge in the fourth quarter of 2002. In calculating this impairment charge, we estimated the fair value of the ExecuStay reporting unit using a combination of discounted cash flow methodology and recent comparable transactions.
SHAREHOLDERS’ EQUITY
Eight hundred million shares of our Class A Common Stock with a par value of $.01 per share are authorized. Ten million shares of preferred stock, without par value, are authorized, 200,000 shares have been issued, 100,000 of which were for the Employee Stock Ownership Plan (ESOP) and 100,000 of which were for Capped Convertible Preferred Stock. As of December 28, 2001, 109,223 shares of 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.
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 1/1000^th 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.
Accumulated other comprehensive loss of $70 million and $50 million at January 3, 2003 and December 28, 2001, respectively, consists primarily of fair value changes of certain financial instruments and foreign currency translation adjustments.
52
INCOME TAXES
Total deferred tax assets and liabilities as of January 2, 19983, 2003 and January 3,
1997,December 28, 2001, were as follows:
1997 1996
-------------- --------------
(in millions)

Deferred tax assets.................................. $ 388 $ 389
Deferred tax liabilities............................. (378) (304)
-------------- --------------
Net deferred taxes................................... $ 10 $ 85
============== ==============
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 2, 19983, 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, 1997 follows:

1997 1996
-------------- --------------
(in millions)

Self-insurance...................................... $ 103 $ 103
Employee benefits................................... 93 106
Deferred income..................................... 15 15
Other reserves...................................... 27 25
Frequent stay programs.............................. 99 78
Partnership interests............................... (31) (37)
Property, equipment and intangible assets........... (178) (118)
Finance leases...................................... (44) (25)
Other, net.......................................... (74) (62)
-------------- --------------
Net deferred taxes.................................. $ 10 $ 85
============== ==============

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

No2003, 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, has been made
on the cumulative unremitted earnings of non-U.S. subsidiaries ($60263 million as of January 2, 1998)3, 2003) because management considerswe consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned to the Companyus or a U.S. affiliate or if the
Company sells itswe sell our interests in the affiliates. It is not practicable toWe cannot practically estimate the amount of additional taxes whichthat might be payable on the unremitted earnings.
The provision for income taxes consists of:
1997 1996 1995
------------ ------------ ------------
(in millions)

Current - Federal............................ $ 168 $ 102 $ 46
- State.............................. 34 21 16
- Foreign............................ 43 13 15
------------ ------------ ------------
245 136 77
------------ ------------ ------------
Deferred - Federal............................ (34) 24 57
- State.............................. (3) 4 10
- Foreign............................ (1) 1 (2)
------------ ------------ ------------
(38) 29 65
------------ ------------ ------------
$ 207 $ 165 $ 142
============ ============ ============
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 benefitbenefits attributable to the Companyus relating to our ESOP of $70 million in 2002 and $101 million in 2001 or the exercise of employee stock options of Marriott International,
Inc. of $38$25 million in 1997, $272002, $55 million in 19962001 and $20$42 million in 1995.

2000. The taxes applicable to other comprehensive income are not material.
53
A reconciliation of the U.S. statutory tax rate to the Company'sour effective income tax rate follows:
1997 1996 1995
------------ ------------ ------------

U.S. statutory tax rate........................ 35.0% 35.0% 35.0%
State income taxes, net of U.S. tax benefit.... 4.0 4.0 4.8
Corporate-owned life insurance................. (0.8) (0.8) (1.3)
Tax credits.................................... (3.4) (2.2) (1.5)
Goodwill amortization.......................... 1.6 0.6 0.2
Other, net..................................... 2.6 1.4 2.2
------------ ------------ ------------
Effective rate................................ 39.0% 38.0% 39.4%
============ ============ ============
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 $143$107 million in 1997, $962002, $125 million in 19962001 and $81$145 million in 1995.

As part of the Spinoff, SMS and the Company will enter into a tax sharing
agreement which reflects each party's rights and obligations with respect to
deficiencies and refunds, if any, of federal, state or other taxes relating to
the business of Marriott International, Inc. and the Company prior to the
Spinoff.

The Company is included in the consolidated federal income tax return of
Marriott International, Inc. The income tax provision reflects the portion of
Marriott International, Inc.'s historical income tax provision attributable to
the operations of the Company. Management believes the income tax provision, as
reflected, is comparable to what the income tax provision would2000.
LEASES
We have been if the
Company had filed a separate return during the periods presented.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

LEASES

Summarized below are the Company'ssummarized our future obligations under operating leases at January 2, 1998:

Operating
Leases
--------------
(in millions)
Fiscal Year

1998................................................... $ 135
1999................................................... 131
2000................................................... 126
2001................................................... 122
2002................................................... 123
Thereafter............................................. 1,149
--------------
Total minimum lease payments........................... $ 1,786
==============

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 yearfive-or 10-year periods. TheThese leases provide for minimum rentals and additional rentals which are based on theour 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:

1997 1996 1995
---------- ---------- ----------
(in millions)

Minimum rentals............... $ 123 $ 110 $ 102
Additional rentals............ 127 133 102
---------- ---------- ----------
$ 250 $ 243 $ 204
========== ========== ==========

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

Long-term
Our long-term debt at January 2, 19983, 2003 and January 3, 1997,December 28, 2001, consisted of the following:
1997 1996
------------ ------------
(in millions)

Secured debt......................................... $ - $ 283
Unsecured debt:
Endowment deposits (non-interest bearing)........... 108 107
Other............................................... 28 14
------------ ------------
136 404
Less current portion................................. 24 20
------------ ------------
$ 112 $ 384
============ ============
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 Company hastotals 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 a $1.5 billion and $500 million multicurrency revolving credit agreement permitting borrowings by the Company following consummation of the
Spinoff. The facility has a termfacilities (the Facilities) each with terms of five years and borrowings willyears. Borrowings bear interest at the London Interbank Offered Rate (LIBOR) plus a spread, based on the Company'sour public debt rating. Additionally, we pay annual fees will be paid on the facilityFacilities at a rate also based on the Company'sour 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 1997 combined2002 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 $226$109 million, of debt
assumedfinancing and joint venture investments made by Host Marriott and $91us in connection with asset sales. The 2000 statement of cashflows excludes $79 million of notes receivable related to the sale
of 29 senior living communities to Host Marriottfinancing and $12 million of debt assumedjoint venture investments made by us in the RHG acquisition. The 1996 combined statement of cash flows excludes $363
million of Forum debt assumed at the date of acquisition by the Company. Non-
recourse debt of $62 million and $29 million

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

extinguished without cash payments in 1997 and 1996, respectively, and $77
million assumed in 1995 is not reflected in the statement of cash flows.

connection with asset sales.
Aggregate debt maturities for continuing operations, excluding convertible debt are: 19982003- $242 million; 2004 - $24$27 million; 19992005 - $523 million; 2006 - $110 million; 2007 - $11 million; 2000 -
$8 million; 2001 - $9 million; 2002 - $8 million and $76$821 million thereafter.
Cash paid for interest (including discontinued operations), net of amounts capitalized was $11$71 million in 1997, $192002, $68 million in 1996,2001 and $2$74 million in 1995.

2000.
55
CONVERTIBLE SUBORDINATED DEBT
On March 25, 1996, $540May 8, 2001, we received gross proceeds of $405 million (principal amount at maturity)from the sale of zero couponzero-coupon convertible subordinated debt insenior notes due 2021, known as LYONs. On May 9, 2002, we redeemed for cash the formapproximately 85 percent of the LYONs due 2011 was issued. Each
$1,000 LYON isthat were tendered for mandatory repurchase by the holders.
The remaining LYONs are convertible at any time,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 holder, into 8.76
shares of Marriott International, Inc.'s common stock. The LYONs were issued at
a discount representing a yieldholders be required to maturity of 4.25 percent. The Company
recordedpurchase the LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay the discounted amount at issuance. Accretion is recorded
as interest expense and an increase to the carrying value. Gross proceeds from
the LYONs issuance were $288 million.

Upon consummation of the Spinoff, each LYON will be convertible into 8.76purchase price for redemptions or repurchases in cash and/or shares of Company Common Stock, 8.76 shares of Companyour Class A Common Stock and
2.19 shares of SMS common stock (after giving effect to a one-for-four reverse
stock split). The LYONs will be assumed byStock.
We amortized the Company, and SMS will assume nine
percentissuance costs of the LYONs obligation, which percentage isinto interest expense over the one-year period ended May 8, 2002. We classify LYONs as long-term based on an estimate ofour ability and intent to refinance the relative equity values of SMS and the Company. The Company will be liable to the
holders of the LYONs for any payments that SMS fails to make on its allocable
portion.

At the option of the holder, the Company may beobligation with long-term debt if we are required to redeem each LYON
on March 25, 1999, or March 25, 2006, for $603.71 or $810.36 per LYON,
respectively. In such event,repurchase the Company may elect to redeem the LYONs for cash,
common stock, or any combination thereof.

The LYONs are redeemable by the obligor at any time on or after March 25,
1999, for cash equal to the issue price plus accrued original issue discount.
The LYONs are expressly subordinated to the senior indebtedness of the issuer,
including guarantees, as defined in the indenture governing the LYONs (Senior
Indebtedness). Marriott International, Inc.'s Senior Indebtedness amounted to
$1.8 billion at January 2, 1998. Following the Spinoff, the Company's
obligations under the LYONs will be subordinated to the Company's Senior
Indebtedness, and SMS's obligations under the LYONs will be subordinated to the
Company's and SMS's Senior Indebtedness.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

PRO FORMA LYONs.
EARNINGS PER SHARE - UNAUDITED

The following table illustrates the reconciliation of the earnings and pro
forma number of shares used in the basic and diluted pro forma earnings per share calculations (in millions, except per share amounts).
1997 1996 1995
------------- ------------- -------------

Computation of Pro Forma Basic Earnings Per Share

Net income............................................. $ 324 $ 270 $ 219
Pro forma weighted average shares outstanding.......... 254.2 254.9 249.6
------------- ------------- -------------
Pro Forma Basic Earnings Per Share.................. $ 1.27 $ 1.06 $ .88
============= ============= =============
Computation of Pro Forma Diluted Earnings Per Share

Net income............................................. $ 324 $ 270 $ 219
After-tax interest expense on convertible
subordinated debt..................................... 8 6 -
------------- ------------- -------------
Net income for pro forma diluted earnings per
share.............................................. $ 332 $ 276 $ 219
------------- ------------- -------------
Pro forma weighted average shares outstanding.......... 254.2 254.9 249.6

Pro Forma Effect of Dilutive Securities
Employee stock purchase plan........................ 0.1 0.5 0.2
Employee stock option plan.......................... 8.7 8.9 7.0
Deferred stock incentive plan....................... 5.4 5.8 6.2
Convertible subordinated debt....................... 9.5 7.3 -
------------- ------------- -------------
Shares for pro forma diluted earnings per share..... 277.9 277.4 263.0
------------- ------------- -------------
Pro Forma Diluted Earnings Per Share................ $ 1.19 $ .99 $ .83
============= ============= =============

The pro forma
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 is computed using the treasury stock method and average market prices during the period. The if-converted
methoddetermination as to dilution is usedbased 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 subordinated debt.

INVESTMENTS AND NET ADVANCES FROM MARRIOTT INTERNATIONAL, INC.

The following is an analysisdebt and 4.1 million shares issuable upon conversion of Marriott International, Inc.'s investment in
the Company:

(in millions)
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------

Balance at beginning of year............................ $ 1,444 $ 1,251 $ 763
Net income.............................................. 324 270 219
Net cash transactions with Marriott International, Inc.. 576 (132) 215
Employee stock plan issuance and other.................. 242 55 54
-------------- -------------- --------------
Balance at end of year.................................. $ 2,586 $ 1,444 $ 1,251
============== ============== ==============

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

convertible debt, and 5.1 million options.
56
EMPLOYEE STOCK PLANS

Under Marriott International, Inc.'s 1996
We issue stock options, deferred shares and restricted shares under our 1998 Comprehensive Stock and Cash Incentive Plan (Comprehensive Plan), Marriott International, Inc.. Under the Comprehensive Plan, we may award to participating Company employees (i)(1) options to purchase Marriott International, Inc.'s common
stockour Class A Common Stock (Stock Option Program and Supplemental Executive Stock Option awards), (ii)(2) deferred shares of Marriott International, Inc.'s common stockour Class A Common Stock and (iii)(3) restricted shares of Marriott International, Inc.'s common stock.our Class A Common Stock. In addition Marriott International, Inc. haswe have 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 is recognized for the Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan.
Deferred shares granted to officers and key employees under the Comprehensive Plan generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer receipt of shares
until termination or retirement. The Company accruesWe accrue compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. Marriott International, Inc. awarded 0.2 million and 0.4We granted 0.1 million deferred shares to Company employees under this plan during 1997 and 1996,
respectively.2002. Compensation cost recognized during 19972002, 2001 and 19962000 was $9 million, $25 million and $8$18 million, respectively.
Restricted shares under the Comprehensive Plan are issued to officers and key employees and distributed over a number of years in annual installments, subject to certain prescribed conditions including continued employment. The Company
recognizesWe 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. Marriott International, Inc.We awarded 0.1 million and 0.2 million restricted shares to Company employees under this plan during 19972002. We recognized compensation cost of $5 million in 2002 and 1996, respectively.
Compensation cost recognized was $2$4 million in each of 19972001 and 1996.

2000.
Under the Stock Purchase Plan, eligible employees may purchase Marriott
International, Inc. common stockour Class A Common Stock through payroll deductions at the lower of the market value at the beginning or end of each plan year.
Employee stock options may be granted to officers and key employees at exercise prices not less thanequal to the market price of Marriott International, Inc.'s
stockour Class A Common Stock on the date of grant. Nonqualified options expire up to10 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-fourthone quarter at the end of each of the first four years following the date of grant. In February 1997, Marriott International, Inc.
issued one2.1 million Supplemental Executive Stock Option awards were awarded to certain Company
employees, whichof our officers. The options vest after eight years. However,years but could vest earlier if Marriott International,
Inc.'sour stock price meets certain performance criteria thecriteria. None of these options, may vest
sooner. These optionswhich have an exercise price of $54 and none of them$25, were exercised during 2002, 2001 or forfeited during 1997.

2000 and 1.9 million remained outstanding at January 3, 2003.
For the purposes of the following disclosures required by FAS No. 123, "Accounting“Accounting for Stock-Based Compensation,"Compensation”, the fair value of each option granted has beenduring 2002, 2001 and 2000 was $14, $16 and $15, respectively. We estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, withusing the assumptions noted in the following assumptions:

1997 1996 1995
------------- -------------- -------------

Annual dividends........................... $ .35 $ .32 $ .28
Expected volatility........................ 24% 25% 26%
Risk free interest rate.................... 6.2% 6.1% 5.9%
Expected life (in years)................... 7 7 7
table:
2002
2001
2000
Annual dividends $ 0.28 $ 0.26 $ 0.24
Expected volatility 32 % 32 % 30 %
Risk-free interest rate 3.6 % 4.9 % 5.8 %
Expected life (in years) 7 7 7
Pro forma compensation cost for the Stock Option Program, the Supplemental Executive Stock Option awards and employee purchases pursuant to the Stock Purchase Plan subsequent to December 30, 1994, recognized in accordance with FAS
No. 123, would reduce the Company'sour net income as follows (in millions):

1997 1996 1995
------------- -------------- -------------

Net income as reported..................... $ 324 $ 270 $ 219
Pro forma net income....................... $ 309 $ 261 $ 216

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

The weighted-average fair valuedescribed in the “Summary of each option grantedSignificant Accounting Policies” as required by FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.”
57
A summary of our Stock Option Program activity during 1997, 19962002, 2001 and 1995 was $22, $192000 is presented below:
Number of
options
(in millions)
Weighted
average exercise
price
Outstanding at January 1, 2000 33.8 $ 22
Granted during the year 0.6 36
Exercised during the year (3.9 ) 16
Forfeited during the year (0.5 ) 32
Outstanding at December 29, 2000 30.0 23
Granted during the year 13.4 36
Exercised during the year (4.2 ) 18
Forfeited during the year (0.9 ) 34
Outstanding at December 28, 2001 38.3 29
Granted during the year 1.4 37
Exercised during the year (1.6 ) 22
Forfeited during the year (0.6 ) 37
Outstanding at January 3, 2003 37.5 $ 29
There were 24.9 million, 20.2 million and $12, respectively. Since the pro forma compensation cost
for20.5 million exercisable options under the Stock Option Program is recognized overat January 3, 2003, December 28, 2001 and December 29, 2000, respectively, with weighted average exercise prices of $25, $22 and $19, respectively.
At January 3, 2003, 60.6 million shares were reserved under the vesting period,Comprehensive Plan (including 39.4 million shares under the foregoing pro forma reductions inStock Option Program and 1.9 million shares of the Company's net income are not
representative of anticipated amounts in future years.

In connection withSupplemental Executive Stock Option awards) and 1.5 million shares were reserved under the Spinoff, stockStock Purchase Plan.
Stock options deferred shares and restricted
shares which have been granted to Company employees by Marriott International,
Inc. will be canceled and new awards withissued under the same value will be issued to them
by the Company under a new comprehensive stock incentive plan.

Stock Option Program outstanding at January 3, 2003, 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
10 to 15 2.9 7 13 2.9 13
16 to 24 1.8 8 17 1.8 17
25 to 37 22.7 10 31 15.5 30
38 to 49 7.0 9 44 1.6 45
$ 3 to 49 37.5 9 $ 29 24.9 $ 25
FAIR VALUE OF FINANCIAL INSTRUMENTS

The
We believe that the fair values of current assets and current liabilities are assumed to be
equal toapproximate their reported carrying amounts. The fair values of noncurrent financial assets and liabilities are shown below.
1997 1996
--------------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount value
----------- ----------- ----------- -----------

(in millions)
Notes and other receivable......................... $ 672 $ 685 $ 479 $ 479
Long-term debt, convertible subordinated debt and
other long-term liabilities...................... 490 478 674 631

Notes
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
We value notes and other receivable are valuedreceivables based on the expected future cash flows discounted at risk adjusted rates. ValuationsWe determine valuations for long-term debt, convertible
subordinated debt and other long-term liabilities are determined based on quoted market prices or expected future payments discounted at risk adjusted rates.

CONTINGENT LIABILITIES
CONTINGENCIES
Guarantees, Loan Commitments and Letters of Credit
We issue guarantees to certain lenders and hotel owners primarily to obtain long term management contracts. The guarantees have a stated maximum amount of funding and the terms are generally five years or less. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are not adequate 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 specified levels of operating profit are not obtained.
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. The guarantee fundings to lenders and hotel owners are generally recoverable in the form of a loan and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. When we repurchase non-performing timeshare loans, we will either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.
As of January 3, 2003, we had extended approximately $217 million of loan commitments to owners of lodging properties and senior living communities under which we expect to fund approximately $140 million by January 2, 2004, and $156 million in total.
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, 2003 totaled $480 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 Arbitration
Green Isle litigation. This litigation pertains to The Ritz-Carlton San Juan (Puerto Rico) Hotel, Spa and Casino which we manage under an operating agreement for Green Isle Partners, Ltd., S.E. (Green Isle). On March 30,
59
2001, Green Isle filed a complaint in the U.S. District Court in Delaware against us (including several of our subsidiaries) and Avendra LLC, asserting 11 causes of action: three Racketeer Influenced and Corrupt Organizations Act (RICO) claims, together with claims based on the Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach of implied duties of good faith and fair dealing, common law fraud and intentional misrepresentation, negligent misrepresentation, and fiduciary accounting. These assorted claims include allegations of: (i) national, non-competitive contracts and attendant kick-back schemes; (ii) concealing transactions with affiliates; (iii) false entries in the books and manipulation of accounts payable and receivable; (iv) excessive compensation schemes and fraudulent expense accounts; (v) charges of prohibited overhead costs to the project; (vi) charges of prohibited procurement costs; (vii) inflation of Group Service Expense; (viii) the use of prohibited or falsified revenues; (ix) attempts to oust Green Isle from ownership; (x) creating a financial crisis and then attempting to exploit it by seeking an economically oppressive contract in connection with a loan; (xi) providing incorrect cash flow figures and failing appropriately to reveal and explain revised cash flow figures. The complaint sought damages of $140 million, which Green Isle claims to have invested in the hotel (which includes $85 million in third party debt), which the plaintiffs sought to treble to $420 million under RICO and the Robinson-Patman Act. The complaint did not request termination of our operating agreement.
On June 25, 2001, Green Isle filed a Chapter 11 Bankruptcy Petition in the Southern District of Florida and in that proceeding sought to reject our operating agreement. The claims against us, including the attempt to eliminate our management agreement in bankruptcy, were subsequently transferred to the U.S. District Court in Puerto Rico, where on October 7, 2002 they were dismissed with prejudice, meaning that the claims may not be refiled or pursued elsewhere. Green Isle has appealed that decision. We have moved in the bankruptcy proceeding to dismiss the parallel claims based on the dismissal with prejudice in federal court. On December 11, 2002, a Disclosure Statement and Plan of Reorganization was filed in the bankruptcy proceeding on behalf of RECP San Juan Investors LLC and The Ritz-Carlton Hotel Company LLC. If confirmed, the Plan would operate to discharge the Green Isle litigation claims. The outcome of the bankruptcy proceedings is unknown at this time.
CTF/HPI arbitration and litigation. On April 8, 2002, we initiated an arbitration proceeding against CTF Hotel Holdings, Inc. (CTF) and its affiliate, Hotel Property Investments (B.V.I.) Ltd. (HPI), in connection with a dispute over procurement issues for certain Renaissance hotels and resorts that we manage for CTF and HPI. On April 12, 2002, CTF filed a lawsuit in U.S. District Court in Delaware against us and Avendra LLC, alleging that, in connection with procurement at 20 of those hotels, we engaged in improper acts of self-dealing, and claiming breach of fiduciary, contractual and other duties; fraud; misrepresentation; and violations of the RICO and the Robinson-Patman Acts. CTF also claims that we breached an agreement relating to CTF’s right to conduct an audit of certain aspects relating to the management of these hotels. CTF seeks various remedies, including a stay of the arbitration proceedings against CTF and unspecified actual, treble and punitive damages. We subsequently amended our arbitration demand to incorporate all of the issues in the CTF lawsuit. On May 22, 2002 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, International,we misused confidential information related to the hotel, improperly allocated corporate overhead to the hotel, engaged in improper self dealing with regard to procurement and rebates, failed to disclose information related to the above to In Town Hotels, and breached obligations owed to In Town Hotels by refusing to replace the hotel’s general manager and by opening two additional hotel properties in the Charleston area, and claiming breach of contract, breach of implied duties of good faith and fair dealing, breach of fiduciary duty, conversion, violation of the West Virginia Unfair Trade Practices Act, fraud, misrepresentation, negligence, violations of the Robinson-Patman Act, and other related causes of action. In Town Hotels seeks various remedies, including unspecified compensatory and exemplary damages, return of $18.5 million in management fees, and a declaratory judgment terminating the management agreement. The parties are about to commence discovery and trial is presently scheduled for 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. Marriott Senior Living Services, Inc. (SLS) operates 31 senior living communities for Senior Housing (SNH) and Five Star (FVE). After several months of discussions between the parties to resolve certain ongoing operational and cost allocation issues, on November 13, 2002, SNH/FVE served a Notice of Default asserting various alleged defaults and purported material breaches by SLS under the applicable operating agreements. SLS responded to the various issues raised by SNH/FVE and denies that it is in default or material breach of the agreements.
On November 27, 2002, in response to SNH/FVE’s repeated indications that they would attempt to terminate the Operating Agreements, we filed suit in the Circuit Court for Montgomery County, Maryland, seeking, among other relief, a declaration that SLS is not in default or material breach of its operating agreements and a declaration that SNH/FVE had anticipatorily breached the operating agreements by violating the termination provisions of those contracts. We also sought, and obtained later that same day, a temporary restraining order (TRO) prohibiting SNH/FVE from terminating or attempting to terminate SLS’s operating agreements, or from evicting or attempting to evict SLS from the 31 communities, until the court further addresses the parties’ dispute at a preliminary injunction hearing. Also on November 27, 2002, SNH/FVE attempted to terminate SLS’s operating agreements by sending SLS a purported “Notice of Termination.” That attempted termination was stayed, however, by the court’s issuance of the TRO. On January 8, 2003, following the preliminary injunction hearing, the court granted Marriott and SLS a preliminary injunction enjoining SNH/FVE from terminating or attempting to terminate the Operating Agreements prior to the trial on the merits. That trial is not expected until later in 2003 or in 2004.
Also on November 27, 2002, after Marriott and SLS had filed their action in Maryland, SNH/FVE filed suit against us and SLS in the Superior 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
61
and no specific damage number is asserted as to the individual defendants. Management of the company believes that this derivative action is without merit.
Legal proceeding settled in December 2002.
In response to demands by John J. Flatley and Gregory Stoyle, as agents for The 1993 Flatley Family Trust (collectively, Flatley) to convert our management agreement with Flatley for the Boston Marriott Quincy Hotel into a franchise agreement and threats to terminate our management agreement, on August 1, 2002, we filed a suit against Flatley in the U.S. District Court in Maryland seeking a declaratory judgment that we were not in breach of our management agreement, claiming breach of contract, breach of the duty of good faith and fair dealing, and violation of the Massachusetts Unfair Business Practices Act by Flatley, and seeking unspecified compensatory and exemplary damages. On August 5, 2002, Flatley and the Crown Hotel Nominee Trust (Crown) filed a countersuit in the U.S. District Court, District of Massachusetts, alleging that we and Avendra LLC engaged in improper acts of self dealing and claiming breach of contract, breach of the duty of good faith and fair dealing, violation of the Massachusetts Unfair Business Practices Act, tortious interference with contract, breach of fiduciary duty, misrepresentation, negligence, fraud, violations of the Robinson-Patman Act and other related causes of action. Flatley and Crown sought various remedies, including unspecified compensatory and exemplary damages, and termination of our management agreement.On December 20, 2002, the parties entered into a settlement agreement on terms favorable to the Company and both lawsuits have been dismissed.
62
BUSINESS SEGMENTS
We are a diversified hospitality company with operations in five business segments:
• Full-Service Lodging, which includes Marriott Hotels, Resorts and Suites; The Ritz-Carlton Hotels; RenaissanceHotels, Resorts and Suites; and Ramada International;
• Select-Service Lodging, which includes Courtyard, Fairfield Inn and SpringHill Suites;
• Extended-Stay Lodging, which includes Residence Inn, TownePlace Suites, Marriott ExecuStay and MarriottExecutive Apartments;
• Timeshare, which includes the operation, ownership, development and marketing of timeshare properties under the Marriott Vacation Club International, The Ritz-Carlton Club, Horizons and Marriott Grand Residence Club brands; and
• Synthetic Fuel, which includes the operation of our coal-based synthetic fuel production facilities. Our SyntheticFuel business generated a tax benefit of $49 million and tax credits of $159 million in the year ended January 3, 2003.
In addition to the segments above, in 2002 we announced our intent to sell our Senior Living Services business segment and exited our Distribution Services business segment.
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, interest income or income taxes (segment financial results).
We have aggregated the brands and businesses presented within each of our segments considering their similar economic characteristics, types of customers, distribution channels, and the regulatory business environment of the brands and operations within each segment.
Sales
($ in millions)
2002
2001
2000
Full-Service $ 5,474 $ 5,238 $ 5,520
Select-Service 967 864 901
Extended-Stay 600 635 668
Timeshare 1,207 1,049 822
Total Lodging 8,248 7,786 7,911
Synthetic Fuel 193 — —
$ 8,441 $ 7,786 $ 7,911
Segment Financial Results
($ in millions)
2002
2001
2000
Full-Service $ 397 $ 294 $ 510
Select-Service 130 145 192
Extended-Stay (3 ) 55 96
Timeshare 183 147 138
Total Lodging 707 641 936
Synthetic Fuel (134 ) — —
$ 573 $ 641 $ 936
63
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 million in 2002, $819 million in 2001 and $745 million in 2000. The selling, general and administrative expenses in 2001 excluded $133 million associated with restructuring and other charges.
The consolidated financial statements include the following related to international operations: sales of $450 million in 2002, $477 million in 2001 and $455 million in 2000; financial results of $94 million in 2002, $42 million in 2001 and $73 million in 2000; and fixed assets of $308 million in 2002, $230 million in 2001 and $239 million in 2000.
The majority of our equity method investments are investments in entities that own lodging properties. Results for Full-Service equity method investments included income of $5 million in 2002, including income recognized from our ownership interest in the Marriott and Cendant Joint Venture, a loss of $11 million in 2001, and income of $2 million in 2000. We recognized a loss of $8 million in 2002, income of $5 million in 2001 and a loss of $1 million in 2000 from Select-Service equity method investments. We recognized a loss of $2 million in 2002 and a loss of $1 million in 2001 from Timeshare equity method investments. We recognized income of $2 million in 2002 related to our corporate investment in Avendra, LLC a procurement services affiliate, and losses of $3 million related to our investments in affordable housing and CTM/Exxon Mobil Travel Guide, LLC. We recognized losses of $7 million in 2001 related to our investments in Avendra, LLC and affordable housing, and we recognized losses of $7 million in 2000 related to our investment in affordable housing.
The substantial majority of revenues that we recognized from unconsolidated affiliates is from our minority interests in entities which own certain of our hotels. We recognized base and incentive fee revenues from our unconsolidated affiliates of $74 million, $71 million, and $53 million, respectively, in 2002, 2001, and 2000. Revenues related to reimbursable costs for these investments were $580 million, $580 million, and $250 million, respectively, in 2002, 2001, and 2000.
Debt service on our mezzanine loan to the Courtyard Joint Venture was current on January 3, 2003. The proceeds of the mezzanine loan have not been, and will not be used to pay our management fees, debt service, or land rent income. All management fees relating to the underlying hotels that we recognize in income are paid to us in cash by the Courtyard Joint Venture. For the fiscal year ended January 3, 2003, we recognized $8 million of equity losses arising from our ownership interest in the Courtyard Joint Venture.
2001 RESTRUCTURING COSTS AND OTHER CHARGES
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
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 development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is developed. As a result of the dramatic downturn in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, in 2001, we expensed $28 million of previously capitalized costs.
2001 Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. These
guarantees are limited,We also advance loans to some owners of properties that we manage. As a result of the downturn in the aggregate,economy, certain hotels experienced significant declines in profitability and the owners were not able to $231meet 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 at January 2, 1998,
including the Marriott International, Inc. Guarantees, with expected funding of
zero. New World Development and another affiliate of Dr. Cheng have severally
indemnified Marriott International, Inc. for loan guarantees with a maximum
funding of $18 million (which are included in the $231 million above) and
guarantees by RHGfourth quarter of leases with minimum annual payments2001.
Accounts Receivable – Bad Debts
In the fourth quarter of approximately $59
million. As of January 2, 1998, Marriott International, Inc. had extended
approximately $2202001, we reserved $12 million of loan commitments to ownersaccounts receivable which we deemed uncollectible following an analysis of lodging and senior
living properties. Lettersthese accounts, generally as a result of credit outstanding on Marriott International,
Inc.'s behalf at January 2, 1998, totaled $95 million, of which $38 millionthe unfavorable hotel operating environment.
Asset Impairments
We recorded a charge related to the Company's repurchase obligation for notes receivable originated
by Marriott Vacation Club Internationalimpairment 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 majoritywrite-off of the remainder
relatedcapitalized software costs arising from a decision to Marriott International, Inc.'s self-insurance program. Upon
consummation of the Spinoff, the Company will replace SMS as guarantor or
obligor under the guarantees and commitments, or will indemnify SMSchange a technology platform ($2 million).
66
The following table summarizes our remaining restructuring liability ($ in respect
of them.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

BUSINESS SEGMENTS

1997 1996 1995
------------ ------------ --------------
(in millions)

Identifiable assets
Lodging.................................... $ 3,995 $ 2,414 $ 2,329
Contract Services.......................... 968 1,279 377
Corporate.................................. 594 505 473
------------ ------------ --------------
$ 5,557 $ 4,198 $ 3,179
============ ============ ==============
Capital expenditures
Lodging.................................... $ 271 $ 158 $ 76
Contract Services.......................... 233 122 44
Corporate.................................. 16 13 7
------------ ------------ --------------
$ 520 $ 293 $ 127
============ ============ ==============
Depreciation and amortization
Lodging.................................... $ 89 $ 55 $ 45
Contract Services.......................... 25 24 11
Corporate.................................. 12 10 11
------------ ------------ --------------
$ 126 $ 89 $ 67
============ ============ ==============
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 Company is a diversified hospitality company with operations in two
business segments: Lodging, which includes development, ownership, operation
and franchising of lodging properties under 10 brand names and development and
operation of vacation timesharing resorts; and Contract Services, consisting of
the development, ownership and operation of senior living communities and
wholesale food distribution.

The results of operations of the Company's business segments are reported in
the combined statement of income. Segment operating expenses include selling,
general and administrative expenses directlyremaining 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 contract with an unrelated third party to sell approximately a 50 percent interest in the businesses, aggregating $518Synthetic Fuel business. The transaction is subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service regarding the new ownership structure. Contracts related to the potential sale are being held in escrow until closing conditions are met. If the conditions are not met by August 31, 2003, neither party will have an obligation to perform under the agreements. If the transaction is consummated, we expect to receive $25 million in 1997, $446 millionpromissory 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 1996 and $380
million in 1995.

NEW MARRIOTT MI, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)

the Synthetic Fuel business under the equity method of accounting.
68
QUARTERLY FINANCIAL DATA -– UNAUDITED

($
($ in millions, except per share data)
Fiscal Year 2002^1,2,4
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
Sales³ $ 1,808 $ 2,034 $ 1,924 $ 2,675 $ 8,441
Segment Financial Results^3,5 147 149 128 149 573
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 2001^1,2,4
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
Sales³ $ 1,935 $ 1,889 $ 1,823 $ 2,139 $ 7,786
Segment Financial Results^3,5 223 231 174 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

1997/1/
----------------------------------------------------------------
First Second Third Fourth ¹ Fiscal Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ------------

Systemwide revenues/2/........................ $ 2,586 $ 3,173 $ 3,127 $ 4,310 $ 13,196
Sales......................................... 1,909 2,195 2,073 2,869 9,046
Operating profit beforeyear 2002 included 53 weeks and fiscal year 2001 included 52 weeks.
² The quarters consisted of 12 weeks, except the fourth quarter of 2002, which consisted of 17 weeks and the fourth quarter of 2001 which consisted of 16 weeks.
³ The current year and prior year balances have been adjusted to exclude the Senior Living Services and Distribution Services discontinued operations.
⁴ The sum of the earnings per share for the four quarters differs from annual earnings per share due to the required method of computing the weighted average shares in interim periods.
⁵ We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, and
interest..................................... 135 159 136 179 609
Net income.................................... 69 84 74 97 324
Pro forma diluted earnings per share/3,4/..... .26 .31 .27 .36 1.19
- ----------------------------------------------------------------------------------------------------------------

1996/1/
----------------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ------------

Systemwide revenues/2/........................ $ 2,001 $ 2,323 $ 2,277 $ 3,298 $ 9,899
Sales......................................... 1,509 1,696 1,645 2,417 7,267
Operating profit before corporate expenses and
interest..................................... 101 129 115 163 508
Net income.................................... 64 62 59 85 270
Pro forma diluted earnings per share/3,4/..... .22 .23 .22 .31 .99
interest expense, interest income or income taxes.

- --------------------------------------------------------------------------------
/1/ The quarters consist of 12 weeks, except the fourth quarter, which includes
16 weeks in 1997 and 17 weeks in 1996.
/2/ Systemwide revenues represent sales of the Company plus revenues of
franchised lodging properties and other properties not operated with the
Company's employees, less fees generated by such properties (that are already
included in sales of the Company).
/3/ Pro forma earnings per share data reflect the adoption, in the fourth
quarter of 1997, of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
/4/ The sum of the earnings per share for the four quarters differs from annual
per share due to the required method of computing weighted average number of
shares in interim periods.

40
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

41
On May 3, 2002, upon the recommendation of our Audit Committee, the Board of Directors dismissed Arthur Andersen LLP (Arthur Andersen) as our independent auditors and appointed Ernst & Young LLP (Ernst & Young) to serve as Marriott International’s independent auditors for the fiscal year ending on January 3, 2003. The change in auditors was effective May 3, 2002.
Arthur Andersen’s reports on Marriott International’s consolidated financial statements for the fiscal years ended December 28, 2001 and December 29, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal 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) of Regulation S-K.
Since the date of their appointment, there were: (i) no disagreements with Ernst & Young on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Ernst & Young’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
70
PART III
ITEMS 10, 11, 12, and 13.

13, 14.
As described below, we incorporate certain information appearing in the Company's Proxy Statement we will furnish to be furnished toour shareholders in connection with the 19982002 Annual Meeting of Shareholders is incorporated by reference in this Form 10-K Annual Report.

ITEM 10. This information is incorporated by reference to the
"Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" sections of the Company's
Proxy Statement to be furnished to shareholders in
connection with the 1998 Annual Meeting. Information
regarding executive officers is included below.

ITEM 11. This information is incorporated by reference to the
"Executive Compensation" section of the Company's
Proxy Statement to be furnished to shareholders in
connection with the 1998 Annual Meeting.

ITEM 12. This information is incorporated by reference to the
"Security Ownership of Certain Beneficial Owners and
Management" section of the Company's Proxy Statement
to be furnished to shareholders in connection with
the 1998 Annual Meeting.

ITEM 13. This information is incorporated by reference to the
"Certain Transactions" section of the Company's
Proxy Statement to be furnished to shareholders in
connection with the 1998 Annual Meeting.

42
ITEM 10. We incorporate this information by reference to the “Directors Standing For Election,” “Directors Continuing In Office” and “Section 16(a) Beneficial Ownership Reporting Compliance” sections of our Proxy Statement. We have included information regarding our executive officers 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 “Stock Ownership” section of our Proxy Statement.
ITEM 13. We incorporate this information by reference to the “Certain Transactions” section of our Proxy Statement.
ITEM 14. In January 2003, we carried out an evaluation, under the supervision and with the participation of the company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures 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.
71
EXECUTIVE OFFICERS
Set forth below is certain information with respect to theour executive officers
of the Company, each of whom currently holds the same positions with Marriott
International, Inc. Such persons will relinquish their positions with Marriott
International, Inc. on the Spinoff date. However, William J. Shaw will continue
as Chairman of the SMS Board.

officers.
Name and Title
Age
Business Experience
- -------------------------------------- ---------- ------------------------------------------------------------
J. W. Marriott, Jr. 65 Mr. Marriott is
Chairman of the Marriott International,
Chairman of the Marriott Inc. Board and Chief
Executive Officer of the Company.
International, Inc. Board and Chief He 70 Mr. Marriott joined Marriott Corporation (now known as Host Marriott Corporation) in 1956, and has been a
Executive Officer member of the Board of Directors of Marriott Corporation
/ Host Marriott / Marriott International since 1964. He
became President of Marriott Corporationand a director in 1964, Chief Executive Officer of Marriott Corporation in 1972 and Chairman of the Board of Marriott Corporation in 1985. Mr. Marriott remains a director of Host Marriott andalso is a director of Host Marriott Services. He is also a
director of General Motors Corporationthe National Urban League and the U.S.-Russia
Business Council.Naval Academy Endowment Trust. He serves on the Board of Trustees of the Mayo Foundation, National Geographic Society and Georgetown University. HeThe J. Willard & Alice S. Marriott Foundation, and is on the President's Advisory
Committeea member of the American Red Cross and the Executive Committee of the World Travel & Tourism Council and is a
member of the Business Council andCouncil. If the Business
Roundtable.sale of stock 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. Mr. Marriott has served as Chairman of the
Marriott International, Inc. Board and Chief Executive Officer of the Company since its inception in 1997, and served as Chairman and Chief Executive Officer of Old Marriott International, Inc. sincefrom October 1993. He will become1993 to March 1998. Mr. Marriott has served as a director of the Company uponsince March 1998. J.W. Marriott, Jr. is the Spinoff.

Todd Clist 56 Todd Clistfather of John W. Marriott, III.
Simon Cooper
Vice President;
President and Chief Operating Officer,
The Ritz-Carlton Hotel Company, L.L.C. 57 Simon Cooper joined Marriott CorporationInternational in 1968. Mr.
Vice President; Clist served1998 as general managerPresident of several hotels before
President - Marriott Lodging being named Regional Vice President, Midwest Region for
United States and Canada Marriott Hotels, Resorts and Suites in 1980. Mr. Clist
became Executive Vice President of Marketing for Marriott
Hotels, Resorts and Suites in 1985, and Senior Vice President of Marriott Lodging Products and Markets in 1989.International. In 2000, the Company added the New England Region to his Canadian responsibilities. Prior to joining Marriott, Mr. ClistCooper was named Executive Vice President and General
ManagerChief Operating Officer of Delta Hotels and Resorts. Mr. Cooper is the Chairman of the Board of Governors for Fairfield Inn in 1990,University of Guelph. He is a fellow of the Board of Trustees for both Fairfield Innthe Educational Institute of the American Hotel and Courtyard in 1991,Motel Association and is a member of the Board for Fairfield Inn, Courtyard
and Residence Inn in 1993.the Canadian Tourism Commission. Mr. ClistCooper was appointed to his current position in January 1994.

February 2001.
Edwin D. Fuller 52
Vice President;
President and Managing Director –
Marriott Lodging International 57 Edwin D. Fuller joined Marriott Corporation in 1972 and
Vice President; held several sales positions before being appointed Vice President and Managing Director - President -of Marketing in 1979. After serving as general
Marriott Lodging International manager at several Marriott hotels, Mr. FullerHe became a Regional Vice President in 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 MarriottInternational Lodging International in 1990. Mr. Fuller1994, and was appointedpromoted to his current position in January 1994.
1997.

43
72
Name and Title
Age
Business Experience
- -------------------------------------- ---------- ------------------------------------------------------------

Paul E. Johnson, Jr. 50 Paul E. Johnson, Jr. joined Marriott Corporation in 1983
Brendan M. Keegan
Vice President; in Corporate Financial Planning & Analysis. In 1987, he
President - Marriott was promoted to Group Vice President of Finance and
Senior Living Services Development for the Marriott Service Group and later
assumed responsibility for real estate development for
Marriott Senior Living Services. During 1989, he served
as Vice President and General Manager of Marriott
Corporation's Travel Plazas division. Mr. Johnson
subsequently served as Vice President and General Manager
of Marriott Family Restaurants from December 1989 through
1991. In October 1991, he was appointed as
Executive Vice President and General Manager of Marriott Senior
Living Services, and in June 1996 he was appointed to his
current position.

Brendan M. Keegan 54 – Human Resources 59 Brendan M. Keegan joined Marriott Corporation in 1971, in Senior Vice President - the Corporate Organization Development Department and
Human Resources subsequently held several human resources positions, including Vice President of Organization Development and Executive Succession Planning. In 1986, Mr. KeeganHe was named Senior Vice President, Human Resources, Marriott Service Group which now comprises the Company's Contract
Services Group. In April 1997,in 1986. Mr. Keegan was appointed Senior Vice President of Human Resources for the
Company'sour worldwide human resources functions, including compensation, benefits, labor and employee relations, employment and human resources planning and development and
employee communications.

Robert T. Pras 56 Robert T. Pras joined Marriott Corporation in 1979 as
Vice President; Executive Vice President of Fairfield Farm Kitchens, the
President - Marriott predecessor of Marriott Distribution Services. In 1981,
Distribution Services Mr. Pras became Executive Vice President of Procurement1997, and Distribution. In May 1986, Mr. Pras was appointed to
the additional position of General Manager of Marriott
Corporation's Continuing Care Retirement Communities. He
was named Executive Vice President and General Manager of
Marriott Distribution Services in 1990. Mr. Pras was appointed to his current position in 1998.
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 1997.

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 Robert J. McCarthy was named Executive Vice President, North American Lodging Operations in January 2003. From March 2000 until January 2003, Mr. McCarthy was Executive Vice President, Operations Planning and Support for Marriott Lodging. He joined Marriott in 1975, became Regional Director of Sales/Marketing for Marriott Hotels, Resorts and Suites in 1982, Director of Marketing for Marriott Suite Hotels/Compact Hotels in 1985, Vice President Operations and Marketing for Fairfield Inn and Courtyard in 1991 and Senior Vice President for the Northeast Region for Marriott Lodging in 1995.
Joseph Ryan 56
Executive Vice President and
General Counsel 61 Joseph Ryan joined the CompanyOld Marriott in December 1994 as Executive Vice President and General Executive Vice President and General Counsel. Prior to
Counsel that time, he was a partner in the law firm of O'MelvenyO’Melveny & Myers, serving as the Managing Partner from 1993 until his departure. He joined O'MelvenyO’Melveny & Myers in 1967 and was admitted as a partner in 1976.

Name
William J. Shaw
Director, President and Title Age Business Experience
- -------------------------------------- ---------- ------------------------------------------------------------
Chief Operating Officer 57 William J. Shaw 52 On March 31, 1997, William J. Shaw becamehas served as President and
Director, President and Chief Chief Operating Officer of the Company since 1997 (including service in the same capacity with Old Marriott International, Inc.
Operating Officer Mr. Shawuntil 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 and promoted to Chief Financial Officer in
April 1988. In February 1992, he was elected President of the Marriott Service Group, which now comprises
Marriott International, Inc.'s Contract Services Group.
Mr. Shaw was elected Executive Vice President and
President - Marriott Service Group in October 1993. Mr.
Shaw is also Chairman of the Board of Directors of Host
Marriott Services. He also serves on the Board of Trustees of the University of Notre Dame, Loyola College
in MarylandSuburban Hospital Foundation and the Suburban Hospital Foundation.NCAA Leadership Advisory Board. Mr. Shaw has beenserved as a director of Old Marriott International,(subsequently named Sodexho, Inc. since May 1997 and now a wholly owned subsidiary of Sodexho Alliance) from March 1998 through June 2001. He has served as a director of the Company since its
inception inMarch 1997.

Michael A. Stein 48 Michael A. Stein joined Marriott Corporation in 1989 as
Arne M. Sorenson
Executive Vice President, and
Chief Vice President, Finance and Chief Accounting Officer. In Financial Officer, 1990, he assumed responsibility forand
President, Continental European Lodging 44 Arne M. Sorenson joined Old Marriott Corporation's financial planning and analysis functions.
In 1991, he was electedin 1996 as Senior Vice President Financeof 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 Corporate Controller1993 in the distribution of Old Marriott Corporation and also
assumed responsibility forby Marriott Corporation's
internal audit function. In October 1993, heCorporation. Mr. Sorenson was appointed Executive Vice President and Chief Financial Officer in 1998 and assumed the additional title of Marriott International, Inc. Prior to joining
Marriott Corporation, Mr. Stein spent 18 years with
Arthur Andersen LLP (formerly Arthur Andersen & Co.)
where, since 1982, he was a partner.

President, Continental European Lodging in January 2003.
74
Name and Title
Age
Business Experience
James M. Sullivan 54
Executive Vice President-
Lodging Development 59 James M. Sullivan joined Marriott Corporation in 1980, Vice President; departed in 1983 to acquire, manage, expand and Executive Vice President - subsequently sell a successful restaurant chain, and
Lodging Development 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 December 1995.

Name and Title Age Business Experience
- -------------------------------------- ---------- ------------------------------------------------------------

William R. Tiefel 63 William R. Tiefel joined Marriott Corporation in 1961 and
Executive Vice President and was named President of Marriott Hotels, Resorts and
President - Marriott Lodging Group Suites in 1988. He had previously served as resident
manager and general manager at several Marriott hotels
prior to being appointed Regional Vice President and
later Executive Vice President of Marriott Hotels,
Resorts and Suites and Marriott Ownership Resorts. Mr.
Tiefel was elected Executive Vice President of Marriott
Corporation in November 1989. In March 1992, he was
elected President, Marriott Lodging Group and assumed
responsibility for all of Marriott International, Inc.'s
lodging brands. In October 1993, he was appointed to his
current position.

Stephen P. Weisz 47
Vice President;
President – Marriott Vacation Club International 52 Stephen P. Weisz joined Marriott Corporation in 1972 and Vice President; was named Regional Vice President of the Mid-Atlantic
Executive Vice President - Marriott Region in 1991. Mr. Weisz had previously served as Lodging and Senior Vice President of Rooms Operations before being President - Marriott Vacation Club appointed as Vice President of the Revenue Management
International Group. Mr. Weisz became Senior Vice President of Sales and Marketing for Marriott Hotels, Resorts and Suites in August 1992 and Executive Vice President -– Lodging Brands in August 1994. In December 1996, Mr. Weisz was appointed President, Marriott Vacation Club International.
to his current position in 1996.

46
Code of Ethics
The Company has long maintained and enforced an Ethical Conduct policy that applies toall Marriott associates, including our chief executive officer, chief financial officer, and principal accounting officer. We have attached a copy of our Ethical Conduct Policy, which has been in substantially its current form since the mid-1980s, as Exhibit 99-2 to this report. We also plan to post a copy of our Ethical Policy on our website, atwww.marriott.com/investor, in the near future. Any future changes or amendments to our Ethical Conduct Policy, and any waiver of our Ethical Conduct Policy that applies to our chief executive officer, chief financial officer, or principal accounting officer, will also be posted to www.marriott.com/investor.
75
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The response to this portion of Item 1415 is submitted under Item 8 of this Report on Form 10-K.

(2) FINANCIAL STATEMENT SCHEDULES

All
(2) FINANCIAL STATEMENT SCHEDULES
Information relating to schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are
not required underis included in the related instructions or are inapplicablenotes to the financial statements and therefore have been omitted.

(3) EXHIBITS

is incorporated herein by reference.
(3) EXHIBITS
Any shareholder who desireswants a copy of the following Exhibits may obtain a copyone from us upon request from the Company 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
(where a report or registration statement is indicated below,
that document has been previously
Exhibit filed with the SEC and the applicable exhibit is No. Description incorporated by reference thereto)
- -----------------------------------------------------------------------------------------------------------------------
2.1 Distribution Agreement dated as of September 30, 1997 Appendix A in the Company's Form 10 filed on
between Marriott International, Inc.
3.1 Third Amended and the February 13, 1998.
Registrant.

2.2 Agreement and Plan of Merger dated as of September 30, Appendix B in the Company's Form 10 filed on
1997 by and among Marriott International, Inc., February 13, 1998.
Marriott-ICC Merger Corp., the Registrant, Sodexho
Alliance, S.A. and International Catering Corporation.

2.3 Omnibus Restructuring Agreement dated as of September Appendix C in the Company's Form 10 filed on
30, 1997 by and among Marriott International, Inc., February 13, 1998.
Marriott-ICC Merger Corp., the Registrant, Sodexho
Alliance, S.A. and International Catering Corporation.

2.4 Amendment Agreement dated as of January 28, 1998 by Appendix D in the Company's Form 10 filed on
and among Marriott International, Inc., Marriott-ICC February 13, 1998.
Merger Corp., the Registrant, Sodexho Alliance, S.A.
and International Catering Corporation.

3.1Restated Certificate of Incorporation of the Registrant. Company. Exhibit No. 3.13 to the Company'sour Form 10 filed on
February 13, 1998.

3.2 Form of Amended and Restated Certificate of Appendix J in the Company's Form 10 filed on
Incorporation of the Registrant (to become effective February 13, 1998.
upon the Spinoff).

3.3 Bylaws of the Registrant. Exhibit No. 3.3 to the Company's Form 10 filed on
February 13, 1998.

3.4 Form of Amended and Restated Bylaws of the Registrant Appendix K in the Company's Form 10 filed on
(to become effective upon the Spinoff). February 13, 1998.

Incorporation by Reference
(where a report or registration statement is
indicated below, that document has been previously
Exhibit filed with the SEC and the applicable exhibit is
No. Description incorporated by reference thereto)
- -----------------------------------------------------------------------------------------------------------------------
4.1 Indenture with Chemical Bank, as Trustee, as Exhibit Nos. 4(i) and 4(ii) to Form 8-K of
supplemented. Marriott International, Inc. dated December 9,
1993 (Original Indenture and First Supplemental
Indenture); Exhibit No. 4(ii) to Form 8-K of
Marriott International, Inc. dated April 19, 1995
(Second Supplemental Indenture); Exhibit No. 4.2
to Form 8-K of Marriott International, Inc. dated
June 7, 1995 (Third Supplemental Indenture); and
Exhibit No. 4.2 to Form 8-K of Marriott
International, Inc. dated December 11, 1995
(Fourth Supplemental Indenture)./(1)/

4.2 Indenture with The First National Bank of Chicago, as Exhibit 2.02 to RHG Finance Corporation's Annual
Trustee, as supplemented. Report on Form 20-F for the fiscal year ended June
30, 1996; and Exhibit No. 4 to Form 10-Q of
Marriott International, Inc. for the fiscal quarter ended June 20, 1997 (First18, 1999.
3.2 Amended and Second
Supplemental Indentures)./(2)/

4.3 IndentureRestated Bylaws. Filed with this report.
3.3 Amended and Restated Rights Agreement dated as of August 9, 1999 with The Bank of New York, as Trustee, Rights Agent. Exhibit No. 4.1 to our Form 10-Q for the fiscal quarter ended September 10, 1999.
3.4 Certificate of Designation, Preferences and Rights of the Marriott International, Inc. ESOP Convertible Preferred Stock. Exhibit No. 3.1 to our Form 10-Q for the fiscal quarter ended June 16, 2000.
3.5 Certificate of Designation, Preferences and Rights of the Marriott International, Inc. Capped Convertible Preferred Stock. Exhibit No. 3.2 to our Form 10-Q for the fiscal quarter ended June 16, 2000.
4.1 Indenture dated November 16, 1998 with The Chase Manhattan Bank, as Trustee. Exhibit No. 4.1 to our Form 10-K for the fiscal year ended January 1, 1999.
4.2 Form of 6.625% Series A Note due 2003. Exhibit No. 4.2 to our Form 10-K for the fiscal year ended January 1, 1999.
4.3 Form of 6.875% Series B Note due 2005. Exhibit No. 4.3 to our Form 10-K for the fiscal year ended January 1, 1999.
76
4.4 Form of 7.875% Series C Note due 2009. Exhibit No. 4.1 to our Form 8-K dated September 20, 1999.
4.5 Form of Marriott8.125% Series D Note due 2005. Exhibit No. 4.1 to our Form 8-K dated March 28, 2000.
4.6 Form of 7.0% Series E Note due 2008. Exhibit No. 4.1 (f) to our Form S-3 filed on January 17, 2001.
4.7 Indenture, dated as of May 8, 2001, relating to the Liquid Yield Option Notes due 2021, with Bank of New York, as supplemented. International, Inc. dated March 25, 1996; and
trustee. Exhibit No. 4.2 to our Form 8-K of Marriott
International, Inc. dated March 25, 1996 (First
Supplemental Indenture).

4.4 Form of Second Supplemental Indenture relating to the Exhibit No. 4.4 to the Company's Form 10S-3 filed on Liquid Yield Option Notes. February 13, 1998.

May 25, 2001.
10.1 Employee Benefits and Other Employment Matters Exhibit No. 10.1 to the Company's Form 10 filed on Allocation Agreement dated as of September 30, 1997 by February 13, 1998.
and betweenwith Sodexho Marriott International,Services, Inc. and the
Registrant.

10.2 1998 Comprehensive Stock and Cash Incentive Plan. Appendix L in the Company's Exhibit No. 10.1 to our Form 10 filed on February 13, 1998.
10.2 2002 Comprehensive Stock and Cash Incentive Plan. Appendix B in our definitive proxy statement filed on March 28, 2002.
10.3 Form of Noncompetition Agreement by and amongbetween Sodexho Marriott Exhibit No. 10.3 to the Company's Form 10 filed on
International,Services, Inc. and the Registrant. February 13,Company. Exhibit No. 10.1 to our Form 10-Q for the fiscal quarter ended March 27, 1998.
10.4 Form of Tax Sharing Agreement by and amongwith Sodexho Marriott Appendix E in the Company's Form 10 filed on
International,Services, Inc., the Registrant and Sodexho February 13, 1998.
Alliance, S.A.

10.5 Distribution Agreement with Host Marriott, as amended. Exhibit No. 10.3 to Form 8-K of Marriott
International, Inc. dated October 25, 1993; and
Exhibit No. 10.2 to our Form 10-Q for the fiscal quarter ended March 27, 1998.
10.5 $500 million Credit Agreement dated February 19, 1998, as amended, with Citibank, N.A., as Administrative Agent, and certain banks. Exhibit No. 4.8 to our Form 10-K of Marriott
International, Inc. for the fiscal year ended December 29, 1995 (First Amendment).

Incorporation by Reference
(where a report or registration statement is
indicated below, that document has been previously
Exhibit filed with the SEC and the applicable exhibit is
No. Description incorporated by reference thereto)
- -----------------------------------------------------------------------------------------------------------------------
10.6 Noncompetition Agreement with Host Marriott and Host Exhibit No. 10.7 to Form 8-K of Marriott
Marriott Services Corporation, as amended. International, Inc. dated October 25, 1993;January 1, 1999, and Exhibit No. 10.410.2 to our Form 10-K of Marriott
International, Inc.10-Q for the fiscal yearquarter ended December 29, 1995September 6, 2002 (Amendment No. 1).

10.7 Acquisition
10.6 $1.5 billion Credit Agreement dated July 31, 2001,
as of February 17, 1997,amended, with Citibank, N.A. as Administrative Agent, and certain banks. Exhibit No. 10 to our Form 10-Q for the fiscal quarter ended September 7, 2001, and Exhibit No. 10.1 to our Form 8-K10-Q for the fiscal quarter ended September 6, 2002 (Amendment No. 1).
12 Statement of Marriott
by and between Marriott International, Inc. and International, Inc. dated February 19, 1997.
Renaissance Hotel Group N.V.

10.8 Shareholder Agreement, dated asComputation of February 17, 1997, Exhibit No. 10.2Ratio of Earnings to Form 8-K of Marriott
by and between Marriott International, Inc. and International, Inc. dated February 19, 1997.
Diamant Hotel Investments N.V.

10.9 Form of LYONs Allocation Agreement between the Exhibit No. 10.9 to the Company's Form 10 filed on
Registrant and Marriott International, Inc. February 13, 1998.

10.10 $1.5 billion Credit AgreementFixed Charges. Filed with Citibank, N.A., as Filed herewith.
Administrative Agent, and certain banks, as Banks,
dated February 19, 1998.

this report.
21 Subsidiaries of the Registrant (at or prior to the Exhibit No. 21 to the Company's Form 10 filed on
time at which the common stock of the Registrant is February 13, 1998.
distributed to stockholders of Marriott International, Inc.).

27 Financial Data Schedule for the Registrant. Filed herewith.

99 with this report.
23 Consent of Ernst & Young LLP. Filed with this report.
99-1 Forward-Looking Statements. Filed herewith.
with this report.
99-2 Ethical Conduct Policy. Filed with this report.

_____________________________

/(1)/ These agreements are currently between Marriott International, Inc. and
Chemical Bank, as Trustee. If consent solicitations with respect to
(b) REPORTS ON FORM 8-K
The Company did not file any report on Form 8-K during the securities evidenced by these agreements are successful, the Registrant will not
become a party to the agreements. However, if any such consent solicitation is
not successful, the relevant securities will become obligationsfourth quarter of the
Registrant and one or more supplemental indentures assigning the rights and
obligations of Marriott International, Inc. to the Registrant will be executed.

/(2)/ The obligations of Marriott International, Inc. (as guarantor) will be
assumed by the Registrant pursuant to a supplemental indenture which may include
additional changes to this Indenture if the consent solicitation with respect to
these securities is successful.

(b) REPORTS ON FORM 8-K

None.

49
2002.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company haswe have duly caused this Form 10-K to be signed on itsour behalf by the undersigned, thereunto duly authorized, on this 6th14th day of March, 1998.

NEW MARRIOTT MI, INC.

By /s/ J.W. Marriott, Jr.
------------------------------
J.W. Marriott, Jr.
Chief Executive Officer

February, 2003.
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 of the Company in their capacities and on the date indicated above.

PRINCIPAL EXECUTIVE OFFICER:

/s/
PRINCIPAL EXECUTIVE OFFICER:
/s/ J.W. Marriott, Jr.
J.W. Marriott, Jr. Chairman of the Board, Chief Executive Officer and Director
PRINCIPAL FINANCIAL OFFICER:
/s/ Arne M. Sorenson
Arne M. Sorenson Executive Vice President, Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Michael J. Green
Michael J. Green Vice President, Finance and Principal Accounting Officer
DIRECTORS:
/s/ Ann M. Fudge
Ann M. Fudge, 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/ 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
I, J.W. Marriott, Jr. Chief Executive Officer

PRINCIPAL FINANCIAL OFFICER:

/s/ Michael A. Stein
- ----------------------------------
Michael A. Stein Executive Vice President,
Chief Financial Officer
and Director

PRINCIPAL ACCOUNTING OFFICER:

/s/ Stephen E. Riffee
- ----------------------------------
Stephen E. Riffee Vice President, Finance and
Chief Accounting Officer

DIRECTORS:

/s/ William J. Shaw
- ----------------------------------
William J. Shaw, Chairman, 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 BoardSecurities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and Director

/s/ Joseph Ryan
- ----------------------------------
Joseph Ryan, Director

/s/ Michael A. Stein
- ----------------------------------
Michael A. Stein, Director

S-1

Title of each class		Name of each exchange on which registered ~~- ------------------------------------------------------------- ----------------------------------------------~~ Common Stock, $0.01 par value (100 shares outstanding as of New York Stock Exchange * February 24, 1998) Chicago Stock Exchange* Pacific Stock Exchange*
Class A Common Stock, $0.01 par value ~~(no~~ (233,802,816 shares outstanding as of January 31, 2003)		New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Philadelphia Stock ~~Exchange* as of February 24, 1998)~~ Exchange

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

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

Full-Service Lodging		Extended-Stay Lodging
• Marriott Hotels, Resorts and Suites		• Residence Inn
• Marriott Conference Centers		• TownePlace Suites
• JW Marriott Hotels		• Marriott ExecuStay
• The Ritz-Carlton Hotels		• Marriott Executive Apartments
• Renaissance Hotels, Resorts and Suites
• Ramada International		Timeshare
(primarily Europe, Middle East and Asia/Pacific)		• Marriott Vacation Club International
• Bvlgari Hotels and Resorts		• Horizons by Marriott Vacation Club International
		• The Ritz-Carlton Club
		• Marriott Grand Residence Club
Select-Service Lodging
• Courtyard
• Fairfield Inn
• SpringHill Suites

Delaware		52-2055918
(State of Incorporation)		(I.R.S. Employer Identification Number)

	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

Marriott Hotels, Resorts and Suites Geographic Distribution at January 3, 2003	Hotels
United States (42 states and the District of Columbia)	293	(120,308 rooms	)

Non-U.S. (56 countries and territories)
Americas (Non-U.S.)	31
Continental Europe	29
United Kingdom	50
Asia	28
Africa and the Middle East	15
Australia	4

Total Non-U.S.	157	(44,892 rooms	)

Ritz-Carlton Hotels and Resorts Geographic Distribution at January 3, 2003	Hotels
United States (15 states and the District of Columbia)	32	(10,270 rooms	)

Non-U.S. (19 countries and territories)	19	(6,296 rooms	)

Renaissance Hotels, Resorts and Suites Geographic Distribution at January 3, 2003	Hotels
United States (24 states and the District of Columbia)	63	(23,961 rooms	)

Non-U.S. (28 countries and territories)
Americas (Non-U.S.)	10
Continental Europe	17
United Kingdom	7
Asia	20
Africa and the Middle East	8
Australia	1

Total Non-U.S.	63	(21,838 rooms	)

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	)

Courtyard Geographic Distribution at January 3, 2003	Hotels
United States (45 states and the District of Columbia)	539	(75,905 rooms	)

Non-U.S. (10 countries and territories)	48	(8,451 rooms	)

Residence Inn Geographic Distribution at January 3, 2003	Hotels
United States (47 states and the District of Columbia)	416	(49,002 rooms)

Canada	11	(1,495 rooms)

Mexico	1	(76 rooms)

Timeshare (all brands) Geographic Distribution at January 3, 2003	Resorts	Units
Continental United States	39	5,692
Hawaii	4	705
Caribbean	4	477
Europe	5	643
Asia	1	54

Total	53	7,571

	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

		Stock Price				Dividends Declared Per Share
		High		Low		Dividends Declared Per Share
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

	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 Results^1,4		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 Sales^1,3	$	18,599		$	17,477		$	17,489		$	15,892	$	14,279

									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	%

	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	%

	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

	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

	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 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

			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

	Total Amounts Committed		Amount of Commitment Expiration Per Period
Other Commercial Commitments	Total Amounts Committed		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

		Page ~~------------~~
Report of Independent ~~Public Accountants........................................... 21 Combined~~Auditors		32
Consolidated Statement of ~~Income....................................................... 22 Combined~~Income		33
Consolidated Balance ~~Sheet............................................................. 23 Combined~~Sheet		34
Consolidated Statement of Cash ~~Flows................................................... 24~~ Flows		35
Consolidated Statement of Comprehensive Income		36
Consolidated Statement of Shareholders’ Equity		37
Notes to ~~Combined~~Consolidated Financial ~~Statements............................................. 25-40~~ Statements		38

	January 3, 2003			December 28, 2001
ASSETS
Current Assets
Cash and equivalents	$	198		$	812
Accounts and notes receivable		524			479
Prepaid taxes		300			223
Other		89			72
Assets held for sale		633			1,161

		1,744			2,747

Property and equipment		2,589			2,460
Goodwill		923			977
Other intangible assets		495			657
Investments in affiliates – equity		493			314
Investments in affiliates – notes receivable		584			505

Notes and other receivables, net
Loans to timeshare owners		153			259
Other notes receivable		304			311
Other long-term receivables		473			472

		930			1,042

Other		538			405

	$	8,296		$	9,107

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable	$	529		$	607
Accrued payroll and benefits		373			322
Casualty self insurance		32			21
Other payables and accruals		665			621
Current portion of long-term debt		242			32
Liabilities of businesses held for sale		366			367

		2,207			1,970

Long-term debt		1,492			2,301
Casualty self insurance reserves		106			83
Other long-term liabilities		857			868
Convertible debt		61			407

Shareholders’ equity
Class A common stock		3			3
ESOP preferred stock		—			—
Additional paid-in capital		3,181			3,378
Retained earnings		1,126			941
Treasury stock, at cost		(667	)		(503	)
Unearned ESOP shares		—			(291	)
Accumulated other comprehensive loss		(70	)		(50	)

		3,573			3,478

	$	8,296		$	9,107

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	)

	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

	Fiscal years ended
	December 28, 2001		December 29, 2000
Reported income from continuing operations, after tax	$	269	$	490
Goodwill amortization		27		27

Adjusted income from continuing operations, after tax	$	296	$	517

Reported net income	$	236	$	479
Goodwill amortization		32		31

Adjusted net income	$	268	$	510

Reported basic earnings from continuing operations per share	$	1.10	$	2.03
Goodwill amortization		.12		.12

Adjusted basic earnings from continuing operations per share	$	1.22	$	2.15

Reported basic net earnings per share	$	.97	$	1.99
Goodwill amortization		.13		.13

Adjusted basic net earnings per share	$	1.10	$	2.12

Reported diluted earnings from continuing operations per share	$	1.05	$	1.93
Goodwill amortization		.10		.11

Adjusted diluted earnings from continuing operations per share	$	1.15	$	2.04

Reported diluted net earnings per share	$	92	$	1.89
Goodwill amortization		.12		.12

Adjusted diluted net earnings per share	$	1.04	$	2.01

Fiscal Year	($ in millions)
2003	$	124
2004		124
2005		119
2006		110
2007		107
Thereafter		935

Total minimum lease payments	$	1,519

	Number of options (in millions)		Weighted average exercise price
Outstanding at January 1, 2000	33.8		$	22
Granted during the year	0.6			36
Exercised during the year	(3.9	)		16
Forfeited during the year	(0.5	)		32

Outstanding at December 29, 2000	30.0			23
Granted during the year	13.4			36
Exercised during the year	(4.2	)		18
Forfeited during the year	(0.9	)		34

Outstanding at December 28, 2001	38.3			29
Granted during the year	1.4			37
Exercised during the year	(1.6	)		22
Forfeited during the year	(0.6	)		37

Outstanding at January 3, 2003	37.5		$	29

	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
10 to 15	2.9	7		13	2.9		13
16 to 24	1.8	8		17	1.8		17
25 to 37	22.7	10		31	15.5		30
38 to 49	7.0	9		44	1.6		45

$ 3 to 49	37.5	9	$	29	24.9	$	25

	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

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