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.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 OR [_] 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
NEWMARRIOTT
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 through49.77. 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 MarriottMI,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 thatall 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 toa 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 causeactualresults to differ materially from thoseprojected, including: dependence on arrangements with present and future property owners; contract terms offered by competitors;expressed in such forward-looking statements.competitionwithinin each ofthe Company'sour business segments;business strategies and their intended results;the balance between supply of and demand for hotel rooms, timeshare units andsenior living accommodations; the Company'scorporate apartments;our continued ability torenew existing operating contracts and franchise agreements andobtain new operating contracts and franchiseagreements (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 andsenior 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 economicconditions;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;theCompany's abilityeffect that internet reservation channels may have on the rates that we are able toachieve synergiescharge for hotel rooms andperformance improvements subsequent to closing on acquisitions; Marriott International, Inc.'s ability to successfully complete its recently announced spinoff transaction; andtimeshare intervals;other risks described from time to time inthe Company'sour filings with the Securities and Exchange Commissionincluding 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 PROPERTIESThe Company isWe are a worldwide operator and franchisor of hotels and
senior living communities. The Company'srelated lodging facilities. Our operations are groupedin twointo five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare andContract Services,Synthetic Fuel, which represented77 percent65, 12, 7, 14 and232 percent, respectively, of total sales in1997.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 Lodgingsegment, the Company operatesbusiness, we operate, develop andfranchises lodging facilitiesfranchise hotels under1014 separate brand names anddevelopswe operate, develop andoperates vacation timesharing resorts. The Contract Services segment consists of two businesses.market MarriottSenior Living Services developstimeshare properties under 4 separate brand names. Our lodging business includes the Full-Service, Select-Service, Extended-Stay andpresently 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 theCombined Statement of Income, the Summary of Significant Accounting Policies -- International Operations and theBusiness Segmentsnotesnote tothe Combinedour Consolidated Financial Statements included inPart 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.3,Other Properties - ----------------2003. In addition,towe provide 4,316 furnished corporate housing units. We believe that our portfolio of lodging brands is theoperating properties discussed below,broadest of any company in theCompany leases an 870,000 square foot office building, locatedworld, and that we are the leader inBethesda, Maryland, which serves astheCompany'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 thelodging 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 ofvacation timesharingproperties (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 operateda total of 729937 properties(191,214(242,520 rooms)across its 10 lodging brandsunder 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 typicallyincludewe earn a management fee which comprises a base fee, which is a percentage of the revenues of the hotel, and an incentive managementfees andfee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs (both direct and indirect) oflodgingoperations. 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 andthe operator haswe have not cured such deficiencies.The Company's responsibilitiesFor lodging facilities that we manage, we are responsible for
units it operates includehiring, training and supervising the managers and employees required to operate thefacilities. 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 thatit operates. Additionally, the Company is responsible for allocating funds, generally a fixed percentage of revenue, for periodic renovation of buildingswe manage, we prepare andreplacement of furnishings. The Company believesimplement annual operating budgets thatits ongoing refurbishment program is adequateare subject topreserve the competitive positionowner review andearning power of the hotels.approval.Franchised Lodging Properties
- ----------------------------- The Company hasWe have franchising programs that permit the use of
itscertain of our brand names anditsour 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 from4four percent to6six percent of room revenues for all brands, plus2two percent to3three percent of food and beverage revenues forfull- servicecertain full-service hotels. In addition, franchisees contribute totheour national marketing and advertising programs, and pay fees for use ofthe Company'sour centralized reservation systems. At January2, 1998, the Company3, 2003, we had7491,612 franchised properties(105,872(219,384 rooms).4Summary of
HotelsProperties by Brand- -------------------------- The table below shows the distribution of hotels by brand asAs 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 – 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 January 2, 1998 were located outsideability 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 theU.S., as follows:availability and cost of capital.
U.S. Non-U.S. -------------------------------- ---------------------------------- Brand Units Rooms Units Rooms - ------------------------------------------------- ------------- -------------- -------------- --------------Marriott Hotels, Resorts and Suites.............. 254 101,641 72 22,930 Ritz-Carlton..................................... 20 7,166 13 4,250 Renaissance...................................... 31 14,145 39 12,625 New World........................................ - - 14 6,889 Ramada International............................. - - 74 14,476 Residence Inn.................................... 254 30,125 4 551 Courtyard........................................ 338 46,715 11 1,031 Fairfield Inn and Suites......................... 344 32,854 - - TownePlace Suites................................ 2 184 - - Marriott Executive Residences and Other.......... - - 8 1,504 ------------- -------------- -------------- -------------- Total............................................ 1,243 232,830 235 64,256 ============= ============== ============== ==============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, andcontain up to 1,900 rooms. Marriott full-service hotel facilitiestypicallyincludehave internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges and parking facilities.The 35Marriott resort hotels(approximately 15,000 rooms)have additional recreational facilities, such as tennis courts, golf courses andgolf courses.many have spa facilities. The1013 Marriott Suites (approximately2,6003,400 rooms) are full-service suite hotels that typically containabout 250approximately 200 to 300 suites, each consisting of a living room, bedroom and bathroom.These propertiesMarriott Suites haveonlylimited 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 ofthesponsoringorganization,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 operatingRoom 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 ofrevenues, and some of the management contracts provide for the Company to earn incentive fees if certain financial targets are exceeded. 5Room revenues for Marriott full-service hotels contributed approximately 61 percent of the Company's full-servicehotel sales for fiscal year1997,2002, 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 profitshave 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 to500400 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 15RenaissanceResorts whichresort hotels have additional recreational facilities including golf, tennis, water sports andwater 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 majorand secondarycities, 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 feefrom Cendant Corporation (successor to HFS, Inc.) and Ramada Franchise Canada Limitedfor 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 andCanada, 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). 6The 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
hotelsisthe Company'sour upper moderate-pricelimited serviceselect-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically have8090 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 beprice competitiveprice-competitive while providing better value through superior facilities and guest service.As of January 2, 1998, Courtyard hotelsAt year end there werelocated587 Courtyards operating in42 states, the District of Columbia, Canada and the United Kingdom. The Company expects to add 36 properties (approximately 5,000 rooms) to its10 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 theextended-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 atcost- consciousvalue-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has6560 to135140 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 tomeet the needs of travelers who require more space and amenities.165 rooms. They feature suites that are 25 percent larger thanthea typicalFairfield Innhotel guest room and offer abroaderbroad range ofamenities. As of January 2, 1998, Fairfield Innamenities, including complimentary continental breakfast andSuitesexercise facilities. There were 98 properties located in47 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 Innand 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. Thestandardtypical TownePlace Suites hotelconsists of two interior-corridor buildings containing 95 units consisting of high-quality one-contains 100 studio, one-bedroom and two-bedroomstudiosuites. Each suite has a fully equipped kitchen and separate livingarea.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
ResidencesApartmentsbrand,that was introduced in February 1997 andwhich isbeing 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 timeshareinterests,intervals, (2) operating the resorts and (3) financing consumer purchases of timesharing intervals.SomeMany 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 anaffiliatedexternal exchange company. Owners also can trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over1,3002,300 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 theCompany 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. 7Additionally, 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 toover 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 Villas7
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 forthe Company andother 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 operatesWe operate 18 systemwide hotel reservation centers, 11 of them in
Omaha, Nebraska; Salt Lake City, Utah; Atlanta, Georgia; Los Angeles, California;the U.S. andLondon, EnglandCanada and seven internationally, that handle reservation requests for Marriott lodging brands worldwide, including franchisedunits. A further eight regional administrative office locations also serve as reservation centers. The Company ownsproperties. We own one of theOmaha facilityU.S. facilities andleaseslease theother facilities. The Company'sothers.Our Architecture and Construction
Division assists in thedivision provides design, development, construction, refurbishment andrefurbishmentprocurement services to owners and franchisees of lodging properties and senior livingcommunities.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 encountersWe encounter strong competition both as a
hotellodging operator and as a franchisor. There areover 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 multiplehotelbrands 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 sixBased 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, becauseitsour hotels typically generate higher occupancies andrevenueRevenue peravailable roomAvailable Room (REVPAR) than direct competitors in most market areas.The Company attributesWe attribute this performance premium toitsour 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 anditsour emphasis on guest service and satisfaction are contributingfactors. 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 ofrooms infunds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that theMarriott lodging system either opened or have been refurbished inongoing refurbishment program is adequate to preserve thepast five years. The Companycompetitive position and earning power of the hotels. We alsostrivesstrive tocontinuallyupdate and improve the products and servicesoffered. The Company believeswe offer. We believe that by operating a number of hotelsin each of itsamong our brands,it stayswe stay in direct touch with customers andreactsreact to changes in the marketplace more quickly than chains which rely exclusively on franchising.8Repeat guest business is enhanced by theMarriott 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 amulti-brandfrequent guest program with over 18 million members, andreplaced the Company's 14-year-old Honored Guest Awards program. In addition to the participation of sevennine participating Marriottbrands and Marriott Vacation Club International,brands. The Marriott Rewardshas formed a partnershipprogram yields repeat guest business by rewarding frequent stays withselect Ritz-Carlton hotelspoints toward free hotel stays andalso allows members to exchange points for frequent flyerother rewards, or airline miles withnine partner airlines. Management believesany of 22 participating airline programs. We believe thatthe 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
(developmentIn our Senior Living Services business, we operate both “independent full-service” and
operation of“assisted living” senior living communities andrelated 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 withdailymonthly 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 ofAt January
2, 1998, the Senior Living Services business3, 2003, we also operated4587 assisted living senior living communities principally under the names"Brighton“Brighton Gardens byMarriott," "Village Oaks," "National Guest Homes"Marriott” and"Hearthside."“Marriott MapleRidge”. Assistedliving seniorliving communities are for seniors whopresently require personalbenefit from assistance withhygiene, administration of medication, mobility and otherdaily activitieswhich do not require skilled nurses. Thesuch as bathing, dressing or medication. Brighton Gardensconceptisquality tiera quality-tier assisted living concept which generally has100 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 careunits 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 gearedforthe 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 residentssmalla smaller scale, more intimate setting and family-like living at a moderateprice 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 Hearthsideresidents.9
Terms of the
senior living servicesSenior Living Services management agreements vary but typically include base management fees, ranging from four tofivesix 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 theterms of the lease agreementsleases covering certain of the communities,the Company payswe pay the owner fixed annualrentalsrent plus additionalrentalsrent equal to a percentage of the amount by which annual revenuesin excess ofexceed a fixed amount.9The 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) isPrior 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 of3,000 product items per2002, we completed a strategic review of the distributioncenter. Thisservices businessunit originally focused on purchasing, warehousinganddistributing food and suppliesdecided toother 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 January2, 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 andoperatingsystems. Competition - ----------- The Company encounters strong competitionproperties discussed above, we lease two office buildings with combined space of approximately 930,000 square feet ineach 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 areemergingheadquartered.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 theMarriott name is also attractive to residentsneed for only routine repairs andtheir 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. 10maintenance. ITEM 3. LEGAL PROCEEDINGS
ThereLegal proceedings are
no material legal proceedings pending againstincorporated by reference to theCompany.“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.
11PART10
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 theNew 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 StockExchange, 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. 12Exchange. 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 January2, 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 shouldbereadin conjunction with "Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” andthe Combinedour Consolidated FinancialStatements 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 Results1,4
573
641
936
827
704
Income from Continuing Operations, after tax
439
269
490
399
372
Discontinued Operations, after tax
(162
)
(33
)
(11
)
1
18
Net Income
277
236
479
400
390
Per Share Data:
Diluted Earnings from Continuing Operations Per Share
1.74
1.05
1.93
1.51
1.39
Diluted (Loss)/Earnings from Discontinued Operations Per Share
(.64
)
(.13
)
(.04
)
—
0.07
Diluted Earnings Per Share
1.10
.92
1.89
1.51
1.46
Cash Dividends Declared Per Share
.275
.255
.235
.215
.195
Balance Sheet Data (at end of year):
Total Assets
8,296
9,107
8,237
7,324
6,233
Long-Term and Convertible Debt1
1,553
2,708
1,908
1,570
1,163
Shareholders’ Equity
3,573
3,478
3,267
2,908
2,570
Other Data:
Systemwide Sales1,3
$
18,599
$
17,477
$
17,489
$
15,892
$
14,279
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 ofa Changeour performance because it measures the growth inAccounting 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 andConvertible Subordinated Debt....... 422 681 180 102 113revenues, 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 OFOPERATIONS
RESULTS OF OPERATIONSGeneral
The following discussion presents an analysis of results of our operations
of the Companyfor fiscal years ended January2, 1998 (52 weeks), January3,1997 (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 andare based upon Company-operated U.S.managed properties.The Ramada International and New World brands do not have any U.S. properties. 1997CONSOLIDATED RESULTS
Continuing Operations
2002 Compared to
1996. Net income2001Income from continuing operations, net of taxes increased
2063 percent to$324$439 millionin 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 newunit 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 theLodging segment. LODGING operating profit was up 26 percent on 20 percent higher sales, benefitingdecline in hotel performance, reduced income fromfavorable 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 fromaverage 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, reportedan increase in average room rates of five percent to $185 and an increase in occupancy of four percentage points to 79 percent, resulting ina 10 percent increase inREVPAR. 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 andRamada 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 a17
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 inoccupancy. Integrationa tax benefit ofRHG$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 andsales, 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 Services19
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 toprogress on schedulea plan to exit the companion living concept of senior living services andis expectedsell the related properties within the next 12 months. We recorded an impairment charge of $60 million tocontributeadjust the carrying value of the properties torevenue 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 in1998. 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 of149 properties (16,390 rooms), primarily franchises, during fiscal 1997. . Courtyard,taxes and excluding theCompany'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 comparableCompany-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 insales 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. 14Marriott Vacation Club International posted a 21 percent increase inthenumber$60 million write-down oftimeshare 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 communitieswhichheld for sale to their estimated fair value and theCompany 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. Before2001In 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 salesincrease of 28 percent in fiscal 1997 over 1996, primarily duerelated to theopeningcommencement of17 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 atwo percentage point increasecustomer that filed for bankruptcy inoccupancy,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 forcomparable 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 propertiessoldheld for sale; and (4) $32 million related toinvestors sincethebeginningimpairment of1996technology related investments and other write-offs. We have provided below detailed information related to the restructuring costs and other charges, which werereplaced with "managed operating profits." Marriott Distribution Services' sales were up sharplyrecorded infiscal 1997the fourth quarter of 2001 as a result of theaddition of several major restaurant customerseconomic downturn and thenetunfavorable 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 infiscal 1997 duefilling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $14 million for excess corporate facilities, primarily related tostart-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 aswell as costsincurred and they become part ofintegratingthenew 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 in1997, duethe economy in the aftermath of the September 11, 2001 attacks, we decided tonon-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 significantincome tax benefits as well as modest staff increasesdeclines in profitability and the owners were not able toaccommodate growth and new business development. Interest expense decreased 41 percent from fiscal 1996 duemeet debt service obligations to thesaleCompany 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 the29 Forum Group communitiesloans made by us would not be repaid according toHost Marriott. Interest income declined 14 percent, primarily duetheir original terms. Due tocollections on,these expected non-recoverable guarantee fundings andsalesexpected loan losses, we recorded charges ofaffiliate 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 in1996, driven by contributions from new unit expansion and strong profit growth for boththeLodging 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 ofoperations 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 of146 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 ofnine 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. 15. 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 ofinterestthe 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, primarilydue tocollectionsthe 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 othernotes receivable.charges of $5 million now reflected in our losses from discontinued operations. TheCompany's effective income tax rate declinedrestructuring liability related to38 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 andaffordable 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 growthopportunities. 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 16use 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 cashrequirements.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 in1997, $5042002, $403 million in19962001, and$281$856 million in1995. The operating cash flow2000. Income from continuing operations is stated after depreciation expense of $114 million in1997 primarily reflects higher earnings than 1996, offset by lower sales2002, $110 million in 2001, and $94 million in 2000, and after amortization expense oftimeshare notes receivable.$36 million in 2002, $68 million in 2001, and $67 million in 2000. Whilethe Company'sour timesharing business generates strong operating cash flow,annual amounts are affected bythe timing of cash outlays for the acquisition and development of new resorts, and cashinflows related toreceived from purchaserfinancing. Intervalfinancing affect annual amounts. We include timeshare interval salesfinanced by the Company are not includedwe finance inoperatingcashflow untilfrom operations when we collect cashis 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, andAmortization (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 forfiscal 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 and1995, 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 in1997Marriott Rewards accruals.23
In 2002, other cash flows from operating activities of $223 million included an adjustment for $186 million related to the exit of our Senior Living Services and
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 becauseEBITDAit can be used to measurethe Company'sour ability to service debt, fund capital expenditures and expanditsour business. Nevertheless,EBITDAyou should notbe considered asconsider EBITDA an alternative to net incomeoperating profit,or cash flows from operations,or any other operating or liquidity measureas prescribed by accounting principles generally acceptedaccounting 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 managementandfees, franchise fees and land rent. Withmore than 1,450 hotel properties,almost 2,600 hotels in the Marriott system, no singleoperationproperty orcustomerregion is critical tothe Company'sour financial results.The Company'sOur 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 ofthe 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 theCompanyentities 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 thehotel 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
- -------------------------------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.24
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 incash. 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 theCompany agreed to pay security deposits of $15 million, which will be refunded upon expiration ofsales transactions. In 2002 we closed on theleases. As of January 2, 1998,sales ofall 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 October101997, the Company agreed to sell,hotels andleaseback, 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. 17On April 11, 1997, the Company sold five41 senior living communities,for cash considerationover half ofapproximately $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 operateall of these communitiesunderlong-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, retaininglong-term operating agreements.Capital Expenditures and Other Investments. Capital expenditures of $292 million in
1997, 19962002, $560 million in 2001, and1995 of $520$1,095 million$293 millionin 2000 included development and$127 million, respectively, includedconstructionand developmentof new hotels and senior living communities andCourtyard, 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 livingserviceproperties under development, or to be developed, while continuing to operate them under long-term agreements. TheCompanyability 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 otherinvestments to grow its businesses, including development of new timeshare resorts and loans and minority equityinvestments 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) andSenior 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.25
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 livingproperties which it operatescommunities that we operate orfranchises. 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 millionrespectively.at December 29, 2000. Unfunded commitments aggregating$220$217 million were outstanding at January2, 1998. These loans are typically secured by mortgages on the projects. During 1997, $183, 2003, of which we expect to fund $140 millionof 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 whichthe Companywe mayprovide credit enhancements forpartially guarantee loans made to facilitatethird partythird-party ownership ofCompany-operatedhotels that we operate orfranchised 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 theCompany 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 ofwork to be done, availability and cost of consultants and the extent of testing required. Cash From Financing Activities - ------------------------------ 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. 18In 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 LYONsobligation, 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 therelative equity valuesacquisition ofSMSthe 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 theCompany.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 77/8 percent, due 2009 and $300 million at 81/8 percent, due 2005, leaving a balance of $500 million available for future offerings.In January 2001, we issued, through a private placement, $300 million of 7 percent senior unsecured notes due 2008, and received net proceeds of $297 million. We completed a registered exchange offer for these notes on January 15, 2002.
We are a party to revolving credit agreements that provide for borrowings of $1.5 billion expiring in July 2006, and $500 million expiring in February 2004, which support our commercial paper program and letters of credit. At January 3, 2003, loans of approximately $21 million were outstanding under these facilities. Fluctuations in the availability of the
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 theSpinoff. 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 onthe Company'sour public debt rating.Additionally, annual fees willOn May 8, 2001, we issued zero-coupon convertible senior notes due 2021, also known as LYONs, and received cash proceeds of $405 million. On May 9, 2002, we redeemed for cash the approximately 85 percent of the LYONs that were tendered for mandatory repurchase by the holders. The remaining LYONs are convertible into approximately 0.9 million shares of our Class A Common Stock and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prior to May 2004. We may at the option of the holders be
paidrequired to purchase LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay thefacility at a rate alsopurchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock.We determine our debt capacity based on the
Company'samount and variability of our cash flows. EBITDA (from continuing operations) coverage of gross interest cost was 5.5 times in 2002, and we met the cash flow requirements under our loan agreements. Excluding the impact of our Synthetic Fuel business, EBITDA coverage of gross interest would have been 6.5 times. At January 3, 2003, we had long-term public debtrating. On February 25, 1998, Marriott International, Inc. commenced a tender offerratings of BBB+ from Standard andconsent solicitationPoor’s and Baa2 from Moody’s, respectively.26
The following table summarizes our contractual obligations:
Payments Due by Period
Contractual Obligations
Total
Less than 1 year
1-3 years
4-5 years
After 5 years
($ 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 ofits 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; andRHG 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 ofthe four series$32.52 per share and 6.1 million ofMarriott International Public Debt is unsuccessful, the Company will assume the debtour shares in 2001 at an average price ofsuch series that is not purchased by Marriott International, Inc. in the tender offer, and any untendered RHG Public Debt will constitute part$38.20 per share. As ofthe Company's consolidated debt and will be guaranteed by the Company. Under its agreements with Sodexho and Marriott International, Inc., to the extent that the Company assumes any such Marriott International Public Debt, or any RHG Public Debt is not purchased in the tender offer, Marriott International, Inc. will make a cash payment to the Company in an amount equal to the aggregate amount of such debt. Dividends. The Company expects to pay quarterly dividends comparable to those historically paid by Marriott International, Inc. Share Repurchases. The Company hasFebruary 6, 2003, we had been authorized byitsour Board of Directors topurchase, subsequentrepurchase 20 million shares.Dividends. In May 2002, our Board of Directors increased the quarterly cash dividend by 8 percent to
the consummation of the Spinoff, up to approximately five million shares of New Marriott Common Stock and up to approximately five million shares of New Marriott Class A Common Stock. OTHER MATTERS$.07 per share.Other Matters
Inflation
- --------- The rate of inflationInflation 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.27
Incentive Fees
We recognize incentive fees as revenue when earned in accordance with the terms of the management contract. In interim periods, we recognize as income the incentive fees that would be due to us as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us. If we recognized incentive fees only after the underlying full-year performance thresholds were certain, the revenue recognized for each year would be unchanged, but no incentive fees for any year would be recognized until the fourth quarter. We recognized incentive fee revenue of $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 areaffectedtreated 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
holdingcertain instruments we hold.We hold notes receivable
whichthat earnainterest at variablerate of interest. Ifrates. Hypothetically, an immediate one percentage point change in interest ratesincreased by 10 percent,would change annual interest incomewould have increasedby$1$5 million and $5 million, based on the respective balancesduring the fiscal year endedof these notes receivable at January2, 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 ratesincreased 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 theCompany'sfair value of long-term fixed rate notes receivablebalances would have decreasedbyapproximately $4$20 millionbasedand $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 January2, 1998. The Company uses3, 2003, aforeign exchange swap to hedge a loan receivable denominatedhypothetical one percentage point change inUK pounds sterling, andinterestrate swap agreements to hedgerates would change interestrate 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. 19expense 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 CombinedAuditors32
Consolidated Statement of
Income....................................................... 22 CombinedIncome33
Consolidated Balance
Sheet............................................................. 23 CombinedSheet34
Consolidated Statement of Cash
Flows................................................... 24Flows35
Consolidated Statement of Comprehensive Income
36
Consolidated Statement of Shareholders’ Equity
37
Notes to
CombinedConsolidated FinancialStatements............................................. 25-40Statements38
2031
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTSAUDITORSTo the
ShareholderShareholders ofNewMarriottMI,International, Inc.:We have audited the accompanying
combinedconsolidated balance sheet ofNewMarriottMI,International, Inc. as of January2, 19983, 2003 andJanuary 3, 1997,December 28, 2001, and the relatedcombinedconsolidated statements of income,andcash flows, comprehensive income and shareholders’ equity for each of the three fiscal years in the period ended January2, 1998.3, 2003. These financial statements are the responsibility of theCompany'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
combinedfinancial statements referred to above present fairly, in all material respects, the financial position ofNewMarriottMI,International, Inc. as of January2, 19983, 2003 andJanuary 3, 1997,December 28, 2001, and the results ofitstheir operations anditstheir cash flows for each of the three fiscal years in the period ended January2, 1998,3, 2003 in conformity with accounting principles generally acceptedaccounting 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 21NEW5, 200332
MARRIOTT
MI,INTERNATIONAL, INC.COMBINEDCONSOLIDATED 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 22NEW MARRIOTT MI, INC. COMBINED BALANCE SHEET January 2, 1998 and January 3, 1997 ($ in millions)
January 2, January 3, 1998 1997 ---------------------- ---------------------- ASSETSCurrent 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 23NEW MARRIOTT MI, INC. COMBINED STATEMENT OF CASH FLOWSFiscal Years Ended January
2, 1998, January3,19972003, December 28, 2001 and December 29,1995 ($2000($ in
millions)millions, except per share amounts)
1997 1996 1995 ------------------- ------------------- ------------------- (52 weeks) (53 weeks) (52 weeks) OPERATING ACTIVITIESNet 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 =================== =================== ===================
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 Statements24NEW33
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 STATEMENTSSUMMARY 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 date25NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)of the financial statements,andthe reported amounts of sales and expenses during the reportingperiod.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'sOur fiscal year ends on the Friday nearest to December 31. The
19962002 fiscal year includes 53 weeks, while1997the 2001 and19952000 fiscal years include 52 weeks.Managed Operations The Company operates 509Revenue 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 in1997, 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 in1997, $4,5952001 and $18 million in1996 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. contributesWe 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 arebased onsalariesa specified percentage of salary deferrals by participating employees. Excluding the discontinued Senior Living Services andwagesDistribution Services businesses, we recognized compensation cost from profit sharing ofparticipating Company employees$54 million in 2002, $52 million in 2001 andtotaled $36$50 millionfor 1997, $29in 2000. We recognized compensation cost from profit sharing of $8 millionfor 1996in 2002, $6 million in 2001 and$22$5 millionfor 1995.in 2000 related to the discontinued Senior Living Services and Distribution Services businesses.Self-Insurance Programs
Marriott International, Inc. isWe are self-insured for certain levels of
generalproperty, liability,workers'workers’ compensationemployment practicesand employee medical coverage.EstimatedWe accrue estimated costs of these self-insurance programsare accruedat the present value of projected settlements for known andanticipatedincurred 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 andAdministrative Expensesthe fixed nature of the individual settlements.Marriott
International, Inc. provided certain corporate generalRewardsMarriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and,
administrative servicesto 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 theCompanymembers’ 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 expensereflectedrelating 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. 26NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)accompanying consolidated balance sheet.Cash and Equivalents
The Company considersWe 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 draftsLoan 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 cashmanagement 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 January2, 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 AssetsWe 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 andtotaledequipment 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 millionand $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 theCompany.consolidated balance sheet.New Accounting Standards
The Company will adopt Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income" andWe adopted FAS No.
131, "Disclosures about Segments of an Enterprise142, “Goodwill andRelated 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 of1997, and2002. FAS No.129, "Disclosure142 requires that goodwill is not amortized, but rather reviewed annually for impairment. The initial adoption ofInformation 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 $30 million.41
The following table presents the impact FAS No. 142 would have had on our income from continuing operations, basic and diluted earnings from continuing operations per share, and basic and diluted net earnings per share for fiscal years ended December 28, 2001 and December 29, 2000, if we had adopted it in the
fourthfirst quarter of1997,2000 ($ 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 materialeffectimpact 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. TheCompany adopted FAS No. 128, "Earnings Per Share"expanded disclosure will be required in our quarterly financial reports beginning in thefourthfirst quarter of1997. 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 fourth42
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 aconsensusliability, with the offsetting entry being recorded based onEITF 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 addressesthe 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 managemententity may includecontracts, and thus in those cases therevenuesoffsetting entry will be capitalized andexpensesamortized over the life ofa managed entity in its financial statements. The Company is assessingthe 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 theworking capital, revenuesmeasurement provisions of FIN 45. The impact on future financial statements will depend on the nature andoperating expensesextent ofmanaged 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 itsmanagement agreements, it would no longer includeinvolvement with the variable interest entity initsall financial statementscertain 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 ofthose managed operations. Application of EITF 97-2APB Opinion No. 25, “Accounting for Stock Issued tothe 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 $14 million, net of tax, for deferred share grants and restricted share grants for 2002, 2001 and 2000, respectively. The impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in capital is included in the denominator of the diluted pro forma shares for all years presented.43
The following table illustrates the effect on net income and earnings per share
or equity. 27NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation ($ 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 CUSTOMERIn December 1998, Host Marriott Corporation (Host Marriott)
have entered into agreements which provide, among other things, for (i) the Companyreorganized its business operations tomanage 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 MarriottLodging Management Agreements), (ii)transferred to Crestline all of theCompany to managesenior living communities previously owned by Host Marriott,(theand Host MarriottSenior Living Management Agreements), (iii) Marriott International, Inc. to guaranteeentered into lease or sublease agreements with subsidiaries of Crestline for substantially all of HostMarriott's performance in connectionMarriott’s lodging properties. Our lodging and senior living community management and franchise agreements withcertain loans or other obligations (the Marriott International, Inc. Guarantees), and (iv) the Company to provideHost Marriottwith 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 theSpinoff,lessee entities’ interests in theCompany 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 manageMarriott 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 andoperating profit before corporate expenses and interestlodging financial results of$140$150 million,$95$162 million and$59$235 million during1997, 19962002, 2001 and1995,2000, respectively, fromthelodging properties owned or leased by Host Marriott. Additionally, Host Marriott is a general partner in several unconsolidated partnerships that own lodging properties operated bythe Companyus under long-term agreements.The CompanyWe recognized sales of$1,513$494 million,$1,769$546 million and$1,878$622 million andoperating profit before corporate expenses and interestincome of$122$28 million,$121$40 million and$115$72 million in1997, 19962002, 2001 and1995,2000, respectively, from the lodging properties owned by these unconsolidated partnerships.The CompanyWe alsoleasesleased land to certain of these partnerships and recognized land rent income of$23$18 million,$22$19 million and $21 million, respectively, in1997, 19962002, 2001 and1995, 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 theCompanyunconsolidated partnerships that owned the 120 Courtyard by Marriott hotels. Amounts recognized from lodging properties owned by unconsolidated partnerships above include the following amounts related tomanage 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 andoperating profit before corporate expenses$345 million, management fee income andinterest of $1 million under these agreements during 1997. The Company has provided, and may provideequity results in thefuture, 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 January2, 19983, 2003 andJanuary 3, 1997,December 28, 2001, respectively, andthe Companywe recognized$9 million, $17 million and $23$1 million in1997, 1996each of 2002, 2001 and1995, respectively,2000 in interest and fee income under these credit agreements with Host Marriott.Under the Marriott International, Inc. Guarantees, Marriott International, Inc. hasWe 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 January2, 1998. No3, 2003. We have made no paymentshave 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 toits shareholders throughprovide clarity on aspecial dividend allnumber of points and consistency on contractual terms over theoutstanding shares of common stocklarge portfolio of Host MarriottServices Corporation (Hostowned hotels, we and Host MarriottServices), which operates food, beverageconcluded that we could mutually enhance the long term strength andmerchandise 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 atairports,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 ontoll roadsunderlying hotel profitability. In 2002, the reduction was $2.5 million;Reduced certain expenses to the properties andat arenaslowered Host Marriott’s working capital requirements;Confirmed that we andother tourist attractions. The Company providesour affiliates may earn a profit (in addition to what we earn through management fees) on certainadministrative and data processing servicestransactions relating to Host Marriott-owned properties, and established the specific conditions under which we may profit on future transactions; andTerminated 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 MarriottServices 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 and1996, 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 thespecial dividend) $65 million in 1995. 28NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) The Company also provides certain administrative servicesloans toHost 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 recordedat 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 in1997, $92002, $61 million in19962001 and$8$52 million in1995. 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 arecapitalized. Depreciation is computedexpensed as incurred. We compute depreciation using the straight-line method over the estimated useful lives of theassets. Leaseholdassets (three to 40 years). We amortize leasehold improvementsare amortizedover the shorter of the asset life or lease term.LandACQUISITIONS 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 withHostMarriott. 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 theoutstanding common stock of Renaissance Hotel Group N.V. (RHG), an operatorlimited partners’ interests in CBM I andfranchisor 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 MarriottInternational, Inc.hotels. We continue to manage the 120 hotels under long-term agreements. Theacquisition has been accounted for using the purchase methodjoint venture was financed with equity contributed in equal shares by us and an affiliate ofaccounting. The purchase cost has been allocated to the assets acquiredHost Marriott andliabilities 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. 29NEW 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 ofapproximately $200million. The Company expects to acquire the remaining 51 percent within the next several years beginningmillion in1998. Themezzanine debt provided by us. Our total investment in theRitz-Carlton Hotel Company LLCjoint venture, including the mezzanine debt, isaccounted for using the equity method of accounting. The excess46
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 thenet 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 theaccompanying combined statementfourth quarter ofincome. 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 in1997, 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. 30NEW 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 operatethese communitiestwo of the hotels under long-term management agreements.Other Property Sales On April 3, 1997,We accounted for two of theCompanythree 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-termlimited-recourse leases, 14 limited service hotelsmanagement agreements. In 2001, we closed on 11 properties and three pieces of undeveloped land forapproximately $149$470 million, and incash. Concurrently,2002, we closed on theCompanyremaining 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 theleases.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 January2, 1998, sales3, 2003, 21 ofallthese 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 ina $20July 2003. At opening we also expect to hold approximately $110 millionexcessin 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 salesprice overproceeds of $71 million, less $50 million funded by our initial loans to thenet 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 the17-yearinitial leaseterms. 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 limitedservice hotelspartner interest in a sixth affordable housing partnership forapproximately $129$82 million in cash.Concurrently,We recognized pretax gains of $13 million in connection with four of theCompanysales. 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 refundedupon 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 priceoverexceeded the net book value by $3 million, which we willbe recognizedrecognize as a reduction of rent expense over the 15-year initial lease terms.AllIn 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 theoptiondate 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 theCompany.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 operateall of thesethe communities under long-term management agreements.During 1996,We accounted for these sales under theCompany 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 thenet 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 millionwill be recognized as a reduction of rent expense over the 20-year initial lease terms. 31NEW 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 Internationalin 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 in1997other 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 millionin 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 January2, 1998,3, 2003, with theCompanyexception 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 hada repurchase obligation of $70 million with respect to these mortgage note sales. Additionally,theCompany sold, without recourse, first mortgage loansasset been continuously classified as held and used. There were no lodging properties held for sale onMarriott 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 amortizedon a straight-line basis over periods of three to 40 years.AmortizationIntangible amortization expense, including amounts related to discontinued operations, totaled$42$38 million in1997, $122002, $73 million in19962001 and$6$64 million in1995.2000.51
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 1/1000th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $175. The rights may not presently be exercised, but will be exercisable 10 days after a person or group acquires beneficial ownership of 20 percent or more of our Class A Common Stock, or begins a tender or exchange for 30 percent or more of our Class A Common Stock. Shares owned by a person or group on March 27, 1998, and held continuously thereafter, are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on the tenth anniversary of the adoption of the shareholder rights plan, unless previously exercised or redeemed by us for $.01 each. If we are involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right.
During the second quarter of 2000 we established an employee stock ownership plan solely to fund employer contributions to the profit sharing plan. The ESOP acquired 100,000 shares of special-purpose Company convertible preferred stock (ESOP Preferred Stock) for $1 billion. The ESOP Preferred Stock has a stated value and liquidation preference of $10,000 per share, pays a quarterly dividend of 1 percent of the stated value, and is convertible into our Class A Common Stock at any time based on the amount of our contributions to the ESOP and the market price of the common stock on the conversion date, subject to certain caps and a floor price. We hold a note from the ESOP, which is eliminated upon consolidation, for the purchase price of the ESOP Preferred Stock. The shares of ESOP Preferred Stock are pledged as collateral for the repayment of the ESOP’s note, and those shares are released from the pledge as principal on the note is repaid. Shares of ESOP Preferred Stock released from the pledge may be redeemed for cash based on the value of the common stock into which those shares may be converted. Principal and interest payments on the ESOP’s debt were forgiven periodically to fund contributions to the ESOP and release shares of ESOP Preferred Stock. Unearned ESOP shares have been reflected within shareholders’ equity and are amortized as shares of ESOP Preferred Stock are released and cash is allocated to employees’ accounts. The fair market value of the unearned ESOP shares at December 28, 2001 was $263 million. The last of the shares of ESOP Preferred Stock were released to fund contributions as of July 18, 2002 at which time the remainder of the principal and interest due on the ESOP’s note was forgiven. As of January 3, 2003, there were no outstanding shares of ESOP Preferred Stock.
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 andJanuary 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 ============== ==============32NEW 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 madeon the cumulative unremitted earnings of non-U.S. subsidiaries ($60263 million as of January2, 1998)3, 2003) becausemanagement considerswe consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned tothe Companyus or a U.S. affiliate or ifthe Company sells itswe sell our interests in the affiliates.It is not practicable toWe cannot practically estimate the amount of additional taxeswhichthat 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 tothe Companyus relating to our ESOP of $70 million in 2002 and $101 million in 2001 or the exercise of employee stock options ofMarriott International, Inc. of $38$25 million in1997, $272002, $55 million in19962001 and$20$42 million in1995.2000. 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 in1997, $962002, $125 million in19962001 and$81$145 million in1995. 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. 33NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) LEASES Summarized below are the Company'ssummarized our future obligations under operating leases at January2, 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 rentalswhich arebased ontheour 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-termOur long-term debt at January
2, 19983, 2003 andJanuary 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 creditagreement permitting borrowings by the Company following consummation of the Spinoff. The facility has a termfacilities (the Facilities) each with terms of fiveyears and borrowings willyears. Borrowings bear interest at the London Interbank Offered Rate (LIBOR) plus a spread, based onthe Company'sour public debt rating. Additionally, we pay annual feeswill be paidon thefacilityFacilities at a rate also based onthe 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, ofdebt assumedfinancing and joint venture investments made byHost Marriott and $91us in connection with asset sales. The 2000 statement of cashflows excludes $79 million ofnotes receivable related to the sale of 29 senior living communities to Host Marriottfinancing and$12 million of debt assumedjoint venture investments made by us inthe 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 34NEW 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 - $11million; 2000 - $8 million; 2001 - $9 million; 2002 - $8million and$76$821 million thereafter.Cash paid for interest (including discontinued operations), net of amounts capitalized was
$11$71 million in1997, $192002, $68 million in1996,2001 and$2$74 million in1995.2000.55
CONVERTIBLE
SUBORDINATEDDEBTOn
March 25, 1996, $540May 8, 2001, we received gross proceeds of $405 million(principal amount at maturity)from the sale ofzero couponzero-coupon convertiblesubordinated debt insenior notes due 2021, known as LYONs. On May 9, 2002, we redeemed for cash theformapproximately 85 percent of the LYONsdue 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 theholder, into 8.76 shares of Marriott International, Inc.'s common stock. The LYONs were issued at a discount representing a yieldholders be required tomaturity 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 thediscounted 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 ofCompany Common Stock, 8.76 shares of Companyour Class A CommonStock 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 LYONsobligation, which percentage isinto interest expense over the one-year period ended May 8, 2002. We classify LYONs as long-term based onan estimate ofour ability and intent to refinance therelative 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 toredeem each LYON on March 25, 1999, or March 25, 2006, for $603.71 or $810.36 per LYON, respectively. In such event,repurchase theCompany 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. 35NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) PRO FORMALYONs.EARNINGS PER SHARE
- UNAUDITEDThe following table illustrates the reconciliation of the earnings and
pro formanumber of shares used in the basic and dilutedpro formaearnings 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 computedusing the treasury stock method and average market prices during the period. Theif-converted methoddetermination as to dilution isusedbased 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 convertiblesubordinated debt. INVESTMENTS AND NET ADVANCES FROM MARRIOTT INTERNATIONAL, INC. The following is an analysisdebt and 4.1 million shares issuable upon conversion ofMarriott 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 ============== ============== ==============36NEW 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 1996We 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 participatingCompanyemployees(i)(1) options to purchaseMarriott International, Inc.'s common stockour Class A Common Stock (Stock Option Program and Supplemental Executive Stock Option awards),(ii)(2) deferred shares ofMarriott International, Inc.'s common stockour Class A Common Stock and(iii)(3) restricted shares ofMarriott International, Inc.'s common stock.our Class A Common Stock. In additionMarriott 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 costis recognizedfor 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 sharesto Company employees under this planduring1997 and 1996, respectively.2002. Compensation cost recognized during19972002, 2001 and19962000 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 millionand 0.2 millionrestricted sharesto Company employeesunder this plan during19972002. We recognized compensation cost of $5 million in 2002 and1996, respectively. Compensation cost recognized was $2$4 million in each of19972001 and1996.2000.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 ofMarriott International, Inc.'s stockour Class A Common Stock on the date of grant. Nonqualified options expireup 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 ofone-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 certainCompany employees, whichof our officers. The options vest after eightyears. However,years but could vest earlier ifMarriott International, Inc.'sour stock price meets certain performancecriteria 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 orforfeited during 1997.2000 and 1.9 million remained outstanding at January 3, 2003.For the purposes of the
followingdisclosures required by FAS No. 123,"Accounting“Accounting for Stock-BasedCompensation,"Compensation”, the fair value of each option grantedhas 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 followingassumptions:table:
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
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 reducethe Company'sour net income asfollows (in millions):
1997 1996 1995 ------------- -------------- -------------Net income as reported..................... $ 324 $ 270 $ 219 Pro forma net income....................... $ 309 $ 261 $ 21637NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) The weighted-average fair valuedescribed in the “Summary ofeach 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 and1995 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 Programis 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 theforegoing pro forma reductions inStock Option Program and 1.9 million shares of theCompany'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 theSpinoff, 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 thesame 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
TheWe 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 631Notes
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-termdebt, convertible subordinateddebt and other long-term liabilitiesare determinedbased on quoted market prices or expected future payments discounted at risk adjusted rates.CONTINGENT LIABILITIESCONTINGENCIES
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 theaggregate,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 millionat 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 includedin the$231 million above) and guarantees by RHGfourth quarter ofleases 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 ofloan commitments to ownersaccounts receivable which we deemed uncollectible following an analysis oflodging and senior living properties. Lettersthese accounts, generally as a result ofcredit 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 themajoritywrite-off ofthe remainder relatedcapitalized software costs arising from a decision toMarriott 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. 38NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued) BUSINESS SEGMENTSmillions):
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 ============ ============ ==============
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 in1997, $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 in1996 and $380 million in 1995. 39NEW MARRIOTT MI, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)the Synthetic Fuel business under the equity method of accounting.68
QUARTERLY FINANCIAL DATA
-– UNAUDITED($($ in millions, except per share data)
Fiscal Year 20021,2,4
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
Sales3
$
1,808
$
2,034
$
1,924
$
2,675
$
8,441
Segment Financial Results3,5
147
149
128
149
573
Income from Continuing Operations, after tax
82
127
114
116
439
Discontinued Operations, after tax
—
2
(11
)
(153
)
(162
)
Net Income (Loss)
82
129
103
(37
)
277
Diluted Earnings from Continuing Operations Per Share
.32
.49
.45
.47
1.74
Diluted Earnings from Discontinued Operations Per Share
—
.01
(.04
)
(.62
)
(.64
)
Diluted Earnings Per Share
$
.32
$
.50
$
.41
$
(.15
)
$
1.10
Fiscal Year 20011,2,4
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
Sales3
$
1,935
$
1,889
$
1,823
$
2,139
$
7,786
Segment Financial Results3,5
223
231
174
13
641
Income from Continuing Operations, after tax
119
125
99
(74
)
269
Discontinued Operations, after tax
2
5
2
(42
)
(33
)
Net Income (Loss)
121
130
101
(116
)
236
Diluted Earnings from Continuing Operations Per Share
.46
.49
.38
(.31
)
1.05
Diluted Earnings from Discontinued Operations Per Share
.01
.01
.01
(.17
)
(.13
)
Diluted Earnings Per Share
$
.47
$
.50
$
.39
$
(.48
)
$
.92
1997/1/ ---------------------------------------------------------------- First Second Third Fourth1 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 .99interest 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. 4069
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None. 41On 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'sProxy Statement we will furnish tobe furnished toour shareholders in connection with the19982002 Annual Meeting of Shareholdersis incorporatedby 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 executiveofficers 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 isChairman of the
Marriott International, Chairman of the Marriott Inc.Board and ChiefExecutive Officer
of the Company. International, Inc. Board and Chief He70
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. Hebecame Presidentof Marriott Corporationand a director in 1964, Chief Executive Officerof Marriott Corporationin 1972 and Chairman of the Boardof Marriott Corporationin 1985. Mr. Marriottremains a director of Host Marriott andalso is a director ofHost Marriott Services. He is also a director of General Motors Corporationthe National Urban League and theU.S.-Russia Business Council.Naval Academy Endowment Trust. He serves on the Board of Trustees of theMayo Foundation,National Geographic Society andGeorgetown University. HeThe J. Willard & Alice S. Marriott Foundation, and ison the President's Advisory Committeea member ofthe American Red Cross andthe Executive Committee of the World Travel & Tourism Council andis a member ofthe BusinessCouncil andCouncil. If theBusiness 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 Chairmanof the Marriott International, Inc. Boardand Chief Executive Officer of the Company since its inception in 1997, and served as Chairman and Chief Executive Officer of Old MarriottInternational, Inc. sincefrom October1993. He will become1993 to March 1998. Mr. Marriott has served as a director of the Companyuponsince March 1998. J.W. Marriott, Jr. is theSpinoff. 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 in1968. Mr. Vice President; Clist served1998 asgeneral managerPresident ofseveral hotels before President -Marriott Lodgingbeing named Regional Vice President, Midwest Region for United States andCanadaMarriott 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 LodgingProducts and Markets in 1989.International. In 2000, the Company added the New England Region to his Canadian responsibilities. Prior to joining Marriott, Mr.ClistCooper wasnamed Executive VicePresident andGeneral ManagerChief Operating Officer of Delta Hotels and Resorts. Mr. Cooper is the Chairman of the Board of Governors forFairfield Inn in 1990,University of Guelph. He is a fellow of the Board of Trustees forboth Fairfield Innthe Educational Institute of the American Hotel andCourtyard in 1991,Motel Association and is a member of the Board forFairfield Inn, Courtyard and Residence Inn in 1993.the Canadian Tourism Commission. Mr.ClistCooper was appointed to his current position inJanuary 1994.February 2001.Edwin D. Fuller
52Vice President;
President and Managing Director –
Marriott Lodging International
57
Edwin D. Fuller joined Marriott
Corporationin 1972 andVice President;held several sales positions before being appointed Vice Presidentand Managing Director - President -of Marketing in 1979.After serving as general Marriott Lodging International manager at several Marriott hotels, Mr. FullerHe becameaRegional 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 ofMarriottInternational LodgingInternationalin1990. Mr. Fuller1994, and wasappointedpromoted to his current position inJanuary 1994.1997.4372
Name and Title
Age
Business Experience
- -------------------------------------- ---------- ------------------------------------------------------------Paul E. Johnson, Jr. 50 Paul E. Johnson, Jr. joined Marriott Corporation in 1983Brendan 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 asExecutive 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 Resources59
Brendan M. Keegan joined Marriott Corporation in 1971, in
Senior Vice President -the Corporate Organization Development Department andHuman Resourcessubsequently 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 Groupwhich now comprises the Company's Contract Services Group. In April 1997,in 1986. Mr. Keegan was appointed Senior Vice President of Human Resources forthe Company'sour worldwide human resources functions, including compensation, benefits, labor and employee relations, employment and human resources planning and developmentand employee communications. Robert T. Pras 56 Robert T. Pras joined Marriott Corporationin1979 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, andDistribution. 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. Praswas 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
56Executive Vice President and
General Counsel
61
Joseph Ryan joined
the CompanyOld Marriott inDecember1994 as Executive Vice President and GeneralExecutive Vice President and GeneralCounsel. Prior toCounselthat time, he was a partner in the law firm ofO'MelvenyO’Melveny & Myers, serving as the Managing Partner from 1993 until his departure. He joinedO'MelvenyO’Melveny & Myers in 1967 and was admitted as a partner in 1976.44
NameWilliam 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 andDirector, President and ChiefChief Operating Officer of the Company since 1997 (including service in the same capacity with Old MarriottInternational, 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 VicePresident-FinancePresident—Finance and Treasurer of Marriott Corporation. He was elected Chief Financial Officer and Executive Vice President of Marriott Corporationand promoted to Chief Financial OfficerinApril1988. InFebruary1992, he was elected President of the Marriott ServiceGroup, which now comprises Marriott International, Inc.'s Contract ServicesGroup.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 theSuburban Hospital Foundation.NCAA Leadership Advisory Board. Mr. Shawhas beenserved as a director of Old MarriottInternational,(subsequently named Sodexho, Inc.since May 1997and now a wholly owned subsidiary of Sodexho Alliance) from March 1998 through June 2001. He has served as a director of the Company sinceits inception inMarch 1997.Michael A. Stein 48 Michael A. Stein joined Marriott Corporation in 1989 asArne M. Sorenson
Executive Vice President,
andChief
Vice President, Finance and Chief Accounting Officer. InFinancial Officer,1990, he assumed responsibility forandPresident, 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 PresidentFinanceof 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 andCorporate Controller1993 in the distribution of Old MarriottCorporation and also assumed responsibility forby MarriottCorporation'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 ofMarriott 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
54Executive Vice President-
Lodging Development
59
James M. Sullivan joined Marriott Corporation in 1980,
Vice President;departed in 1983 to acquire, manage, expand andExecutive Vice President -subsequently sell a successful restaurant chain, andLodging Developmentreturned 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 inDecember1995.45
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
47Vice 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-AtlanticExecutive Vice President - MarriottRegion in 1991. Mr. Weisz had previously served asLodging andSenior Vice President of Rooms Operations before beingPresident - Marriott Vacation Clubappointed as Vice President of the Revenue ManagementInternationalGroup. Mr. Weisz became Senior Vice President of Sales and Marketing for Marriott Hotels, Resorts and Suites inAugust1992 and Executive Vice President-– Lodging Brands inAugust1994.In December 1996,Mr. Weisz was appointedPresident, Marriott Vacation Club International.to his current position in 1996.46Code 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 therelated instructions or are inapplicablenotes to the financial statements andtherefore have been omitted. (3) EXHIBITSis incorporated herein by reference.
(3) EXHIBITS Any shareholder who
desireswants a copy of the following Exhibits may obtaina copyone from us upon requestfrom the Companyat 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
Exhibitfiled with the SEC and the applicable exhibit isNo. Descriptionincorporated 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 theRegistrant.Company.Exhibit No.
3.13 tothe Company'sour Form10 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, 1998.47
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 Form10-Qof Marriott International, Inc.for the fiscal quarter ended June20, 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; andtrustee.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 onLiquid 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 onAllocation Agreement dated as of September 30, 1997by February 13, 1998. and betweenwith Sodexho MarriottInternational,Services, Inc.and the Registrant. 10.2 1998 Comprehensive Stock and Cash Incentive Plan. Appendix L in the Company'sExhibit 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 ofNoncompetition Agreement
by and amongbetween Sodexho MarriottExhibit No. 10.3 to the Company's Form 10 filed on International,Services, Inc. and theRegistrant. February 13,Company.Exhibit No. 10.1 to our Form 10-Q for the fiscal quarter ended March 27, 1998.
10.4
Form ofTax Sharing Agreement
by and amongwith Sodexho MarriottAppendix E in the Company's Form 10 filed on International,Services, Inc., the Registrantand SodexhoFebruary 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; andExhibit 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 endedDecember 29, 1995 (First Amendment).48
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 ExhibitNo. 10.410.2 to our Form10-K of Marriott International, Inc.10-Q for the fiscalyearquarter endedDecember 29, 1995September 6, 2002 (Amendment No. 1).10.7 Acquisition10.6
$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 ofFebruary 17, 1997, Exhibit No. 10.2Ratio of Earnings toForm 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 stockholdersof Marriott International, Inc.). 27 Financial Data Schedule for the Registrant.Filed
herewith. 99with 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 ofthe 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. 492002. 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 onitsour behalf by the undersigned, thereunto duly authorized, on this6th14th day ofMarch, 1998. NEW MARRIOTT MI, INC. By /s/ J.W. Marriott, Jr. ------------------------------ J.W. Marriott, Jr. Chief Executive OfficerFebruary, 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 Companyin 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 theBoardSecurities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) andDirector /s/ Joseph Ryan - ---------------------------------- Joseph Ryan, Director /s/ Michael A. Stein - ---------------------------------- Michael A. Stein, Director S-1
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 |