SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 11, 1998March 26, 1999 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
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 [_]
Shares outstanding
Class at October 9, 1998
- --------------------- ------------------
Class A Common Stock,
$0.01 par value 242,775,247
Shares outstanding
Class at April 23, 1999
- -------------------------------- ------------------------------
Class A Common Stock,
$0.01 par value 249,508,379
1
MARRIOTT INTERNATIONAL, INC.
(Formerly "New Marriott MI, Inc.")
INDEX
Page No.
--------------------
Forward-Looking Statements 3
Part I. Financial Information (Unaudited):
Condensed Consolidated StatementsStatement of Income -
Twelve and Thirty-Six Weeks Ended September 11,March 26, 1999 and
March 27, 1998 and
September 12, 1997 4
Condensed Consolidated Balance Sheet -
as of September 11, 1998March 26, 1999 and January 2, 19981, 1999 5
Condensed Consolidated Statement of Cash Flows -
Thirty-SixTwelve Weeks Ended September 11,March 26, 1999 and March 27, 1998 and September 12, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
and Financial Condition 12
Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information and Signature:Signatures:
Legal Proceedings 20
Changes in Securities 20
Defaults Upon Senior Securities 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 21
SignatureSignatures 22
2
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "hopes," "estimates," "projects," and other similar
expressions, which are predictions of or indicate future events and trends,
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of the Company'sour business
segments; business strategies and their intended results; the balance between
supply of and demand for hotel rooms, timeshare units, and senior living
accommodations; the Company'saccommodations and corporate apartments; our continued ability to obtain new
operating contracts and franchise agreements; the Company'sour ability to develop and
maintain positive relations with current and potential hotel and retirementsenior living
community owners; the effect of international, national and regional economic
conditions; the availability of capital to allow the Companyus and potential hotel and
retirementsenior living community owners to fund investments; theour ability, and that of the Company,
and
other parties upon which the Company'sour businesses also rely, to modify or replace on a
timely basis, their computer software and other systems in order to function
properly prior to, in and beyond, the year 2000; and other risks described from
time to time in the Company'sour filings with the Securities and Exchange Commission,
including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, readersyou are cautioned not to place undue reliance on such statements.
The CompanyWe also undertakesundertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- -------- --------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended
Thirty-six weeks ended
------------------------------------ ----------------------------------
September 11, September 12, September 11, September 12,--------------------------------------------
March 26, 1999 March 27, 1998
1997 1998 1997
---------------- ---------------- ---------------- --------------------------------- -------------------
SALES
Lodging
Rooms..........................................SALES........................................................................... $ 1,1591,895 $ 991 $ 3,500 $ 2,950
Food and beverage.............................. 401 314 1,315 1,027
Other.......................................... 307 299 959 791
--------------- ---------------- ---------------- --------------
1,867 1,604 5,774 4,768
Contract Services.................................. 396 469 1,220 1,409
--------------- ---------------- ---------------- --------------
2,263 2,073 6,994 6,177
--------------- ---------------- ---------------- --------------1,715
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms..................................... 281 227 806 656
Food and beverage......................... 332 253 1,017 780
Remittances to hotel owners (including $147,
$137, $590 and $425, respectively, to
related parties) ......................... 379 340 1,301 1,020
Other operating expenses....................... 719 653 2,158 1,917EXPENSES.................................................... 1,702 1,552
----------------- --------------- ---------------- ---------------- --------------
1,711 1,473 5,282 4,373
Contract Services.................................. 388 464 1,199 1,374
--------------- ---------------- ---------------- --------------
2,099 1,937 6,481 5,747
--------------- ---------------- ---------------- --------------
OPERATING PROFIT Lodging .......................................... 156 131 492 395
Contract Services.................................. 8 5 21 35BEFORE CORPORATE EXPENSES
AND INTEREST.................................................................. 193 163
Corporate expenses.............................................................. (29) (25)
Interest expense................................................................ (11) (3)
Interest income................................................................. 7 10
----------------- --------------- ---------------- ---------------- --------------
Operating profit before corporate
expenses and interest..................... 164 136 513 430
Corporate expenses...................................... (25) (20) (74) (60)
Interest expense........................................ (6) (3) (15) (18)
Interest income......................................... 7 8 25 19
--------------- ---------------- ---------------- --------------
INCOME BEFORE INCOME TAXES ............................. 140 121 449 371TAXES...................................................... 160 145
Provision for income taxes.............................. 54 47 173 144taxes...................................................... 60 56
----------------- ---------------
---------------- ---------------- --------------
NET INCOME..............................................INCOME...................................................................... $ 86100 $ 74 $ 276 $ 22789
================= =============== ================ ================ ==============
BASIC EARNINGS PER SHARE................................ $ .34 $ .29 $ 1.09 $ .89
=============== ================ ================ ==============
DILUTED EARNINGS PER SHARE.............................. $ .32 $ .27 $ 1.02 $ .84
=============== ================ ================ ==============
DIVIDENDS DECLARED PER SHARE............................SHARE.................................................... $ .05 $ .15-
================= ===============
================(pro forma)
---------------
EARNINGS PER SHARE
Basic Earnings Per Share...................................................... $ .41 $ .35
================= ===============
Diluted Earnings Per Share.................................................... $ .38 $ .33
================= ===============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
September 11,March 26, January 2,
1998 1998
---------------- ----------------1,
1999 1999
-------------------- --------------------
ASSETS (Unaudited)
Current Assetsassets
Cash and equivalents.........................................................equivalents...................................................... $ 335 $ 289390
Accounts and notes receivable................................................ 807 724
Other........................................................................ 371 354
----------------- ----------------
1,513 1,367
----------------- ----------------receivable............................................. 632 605
Other..................................................................... 339 338
--------------- ---------------
1,306 1,333
--------------- ---------------
Property and equipment.......................................................... 2,021 1,537
Intangibles..................................................................... 1,722 1,448equipment..................................................... 2,337 2,275
Intangibles................................................................ 1,818 1,712
Investments in affiliates....................................................... 244 530affiliates.................................................. 278 228
Notes and other receivable...................................................... 383 414
Other........................................................................... 272 261
----------------- ----------------receivables................................................ 449 434
Other...................................................................... 264 251
--------------- ---------------
$ 6,1556,452 $ 5,557
================= ================6,233
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilitiesliabilities
Accounts payable.............................................................payable.......................................................... $ 865469 $ 839
Other ....................................................................... 877 800
----------------- ----------------
1,742 1,639
----------------- ----------------497
Other..................................................................... 875 915
--------------- ---------------
1,344 1,412
--------------- ---------------
Long-term debt.................................................................. 539 112debt............................................................. 940 944
Other long-term liabilities..................................................... 999 910liabilities................................................ 1,058 984
Convertible subordinated debt................................................... 319 310debt.............................................. 326 323
Shareholders' Equityequity
Class A common stock, 255.6 million shares issued............................issued......................... 3 -3
Additional paid-in capital................................................... 2,693 -capital................................................ 2,726 2,713
Retained earnings............................................................ 132 -earnings......................................................... 242 218
Treasury stock, at cost...................................................... (272) -
Investments and net advances from Old Marriott............................... - 2,586
----------------- ----------------
2,556 2,586
----------------- ----------------cost................................................... (161) (348)
Accumulated other comprehensive income.................................... (26) (16)
--------------- ---------------
2,784 2,570
--------------- ---------------
$ 6,1556,452 $ 5,557
================= ================6,233
=============== ===============
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Thirty-sixTwelve weeks ended
-------------------------------------
September 11, September 12,---------------------------------------------
March 26, 1999 March 27, 1998
1997
----------------- ------------------------------------ --------------------
OPERATING ACTIVITIES
Net income.................................................................income.............................................................. $ 276100 $ 22789
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization.......................................... 93 85amortization....................................... 33 30
Income taxes and other................................................. 104 163other.............................................. 50 26
Timeshare activity, net................................................ 41 (45)net............................................. (12) 9
Working capital changes................................................ (6) 35
----------------- ----------------changes............................................. (36) (82)
--------------- --------------
Cash provided by operations................................................ 508 465
----------------- ----------------operations............................................. 135 72
--------------- --------------
INVESTING ACTIVITIES
Acquisitions...............................................................Acquisitions............................................................ (51) (48)
(856)
Dispositions............................................................... 109 437Dispositions............................................................ 186 38
Capital expenditures....................................................... (566) (328)
Loan advances.............................................................. (24) (63)
Loanexpenditures.................................................... (205) (115)
Note advances........................................................... (58) (4)
Note collections and sales................................................. 165 29
Other...................................................................... (91) (120)
----------------- ----------------sales.............................................. 5 8
Other................................................................... (38) (44)
--------------- --------------
Cash used in investing activities.......................................... (455) (901)
----------------- ----------------activities....................................... (161) (165)
--------------- --------------
FINANCING ACTIVITIES
IssuancesIssuance of long-term debt................................................ 881 10
Repaymentsdebt.............................................. 2 452
Repayment of long-term debt............................................... (463) (9)
Advances (to) from Old Marriott ........................................... (117) 535
Issuancesdebt............................................. (40) (122)
Issuance of Class A common stock.......................................... 7stock........................................ 26 -
Dividends paid............................................................. (24)paid.......................................................... (12) -
PurchasesPurchase of treasury stock................................................ (291)stock.............................................. (5) -
----------------- ----------------Advances to Old Marriott................................................ - (104)
--------------- --------------
Cash (used in) provided by financing activities............................ (7) 536
----------------- ----------------activities......................... (29) 226
--------------- --------------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS................................................ 46 100EQUIVALENTS................................ (55) 133
CASH AND EQUIVALENTS, beginning of period....................................... 289 239
----------------- ----------------period.................................. 390 208
--------------- --------------
CASH AND EQUIVALENTS, end of period.............................................period........................................ $ 335 $ 339
================= ================341
=============== ==============
See notes to condensed consolidated financial statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial condition and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the Company),
formerly New Marriott MI, Inc., as if it were a separate entity for all
periods presented. Until March 27, 1998, the Company waswe were a wholly-owned subsidiary of
the former Marriott International, Inc. (Old Marriott).
The accompanying condensed consolidated financial statements have not been
prepared without audit. Certainaudited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believesprinciples. We believe the disclosures
made are adequate to make the information presented not misleading. However,
you should read the condensed consolidated financial statements should be read in conjunction
with the combinedconsolidated financial statements and notes thereto included in the Company'sour
Annual Report on Form 10-K (the Annual Report) for the fiscal year ended
January 2, 1998.1, 1999. Capitalized terms not otherwise defined hereinin this quarterly
report have the meanings specified in the Annual Report.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of sales and expenses
during the reporting period. Accordingly, ultimate results could differ from
those estimates.
In theour opinion, of the Company, the accompanying condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly theour financial position of the Company as of September 11, 1998March
26, 1999 and January 2, 1998,1, 1999, and the results of operations for the thirty-six weeks and twelve weeks ended September 11,
1998 and September 12, 1997 and cash flows for
the thirty-sixtwelve weeks ended September 11, 1998March 26, 1999 and September 12, 1997.March 27, 1998. Interim results aremay
not necessarilybe indicative of fiscal year performance because of seasonal and short-termshort-
term variations. AllWe have eliminated all material intercompany transactions
and balances between Marriott International, Inc. and its subsidiaries have been
eliminated.
2. Spinoff
-------
On March 27, 1998, all of the issued and outstanding common stock of the
Company was distributed, on a pro rata basis, as a special dividend (the
Spinoff) to holders of common stock of Old Marriott, and the Company was
renamed "Marriott International, Inc." Old Marriott's historical cost basisentities included in the assets and liabilities of the Company has been carried over. Old
Marriott received a private letter ruling from the Internal Revenue Service
that the Spinoff would be tax-free to it and its shareholders. For each
share of common stock in Old Marriott, shareholders received one share of
Company Common Stock and one share of Company Class A Common Stock. On May
21, 1998, all outstanding shares of Company Common Stock were converted, on
a one-for-one basis, into shares of Company Class A Common Stock. Company
Class A Common Stock is listed on the New York Stock Exchange.
7
Also on March 27, 1998, Old Marriott was renamed Sodexho Marriott Services,
Inc. (SMS) and its food service and facilities management business was
combined with the North American operations of Sodexho Alliance, S.A.
(Sodexho), a worldwide food and management services organization.
For 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 entered into various agreements including the 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, pursuant to these agreements, the Company assumed
sponsorship of certain of Old Marriott's employee benefit plans and
insurance programs and succeeded to Old Marriott's liability to LYONs
holders under the LYONs Indenture, nine percent of which was assumed by
SMS.
Changes in Investments and Net Advances from Old Marriott represent the net
income of the Company plus the net cash transferred between Old Marriott
and the Company, and certain non-cash items.
Prior to the Spinoff, the Company operated as a unit of Old Marriott,
utilizing Old Marriott'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 Old Marriott's general
corporate funds. Similarly, operating expenses, capital expenditures and
other cash requirements of the Company were paid by Old Marriott and
charged directly or allocated to the Company. Certain assets and
liabilities related to the Company's operations were managed and controlled
by Old Marriott on a centralized basis. Prior to the Spinoff such assets
and liabilities were allocated to the Company based on the Company's use
of, or interest in, those assets and liabilities. In the opinion of
management, the methods for allocating costs, assets and liabilities prior
to the Spinoff were reasonable. The Company now performs these functions
independently and the costs incurred have not been materially different
from those allocated prior to the Spinoff.
3. Earnings Per Share
------------------
For periods prior to March 27, 1998, the number of weighted average shares
outstanding and the effect of dilutive securities used in the earnings per
share calculations are based upon the weighted average number of Old
Marriott shares outstanding, and the Old Marriott effect of dilutive
securities for the applicable period, adjusted (i) for the distribution
ratio in the Spinoff of one share of Company Common Stock and one share of
Company Class A Common Stock for every share of Old Marriott common stock,
and (ii) to reflect the conversion of Company Common Stock into Company
Class A Common Stock on May 21, 1998.
8
The following table illustrates the reconciliation of the earnings and
number of shares used in the basic and diluted earnings per share
calculations (in millions, except per share amounts).
Twelve weeks ended Thirty-six weeks ended
----------------------------------- ------------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
Computation of Basic Earnings Per Share
Net income................................... $ 86 $ 74 $ 276 $ 227
Weighted average shares outstanding.......... 249.8 254.6 252.5 253.7
---------------- ---------------- ---------------- ----------------
Basic Earnings Per Share .................... $ .34 $ .29 $ 1.09 $ .89
================ ================ ================ ================
Computation of Diluted Earnings Per Share
Net income................................... $ 86 $ 74 $ 276 $ 227
After-tax interest expense on convertible
subordinated debt......................... 2 2 5 5
---------------- ---------------- ---------------- ----------------
Net income for diluted earnings per share. $ 88 $ 76 $ 281 $ 232
================ ================ ================ ================
Weighted average shares outstanding.......... 249.8 254.6 252.5 253.7
Effect of Dilutive Securities
Employee stock purchase plan.............. 0.1 - 0.1 -
Employee stock option plan................ 8.4 9.3 8.8 7.8
Deferred stock incentive plan............. 5.7 6.0 5.7 5.8
Convertible subordinated debt............. 9.5 9.5 9.5 9.5
---------------- ---------------- ---------------- ----------------
Shares for diluted earnings per share... 273.5 279.4 276.6 276.8
---------------- ---------------- ---------------- ----------------
Diluted Earnings Per Share................... $ .32 $ .27 $ 1.02 $ .84
================ ================ ================ ================
The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. The if-converted method
is used for convertible subordinated debt.
4. Acquisitions
------------
Renaissance Hotel Group N.V. On March 29, 1997, the Company acquired
substantially all of the outstanding common stock of Renaissance Hotel
Group N.V. (RHG). The purchase cost of $937 million was funded by Old
Marriott. The Company's reported results of operations include RHG's
operating results from the date of acquisition. Unaudited pro forma results
of operations
9
of the Company for the thirty-six weeks ended September 12, 1997, as if RHG
had been acquired on January 4, 1997, would have resulted in sales of
$6,375 million, net income of $222 million, and diluted earnings per share
of $.82 after deducting pro forma interest expense of $12 million as if the
acquisition borrowings had been incurred by the Company. The unaudited pro
forma results of operations do not reflect the Company's expected future
results of operations.
The Ritz-Carlton Hotel Company LLC. On March 19, 1998, the Company
increased its ownership interest in The Ritz-Carlton Hotel Company LLC to
approximately 98 percent for consideration of approximately $90 million.
The Company expects to acquire the remaining two percent within the next
several years. The acquisition has been accounted for using the purchase
method of accounting. Prior to March 19, 1998, the Company's investment in
The Ritz-Carlton Hotel Company LLC was accounted for using the equity
method of accounting.
5. Commitments
-----------
The Company issues guarantees to lenders and other third parties in
connection with financing transactions and other obligations. These
guarantees are limited, in the aggregate, to $183 million at September 11,
1998, including $79 million applicable to guarantees by or debt obligations
of Host Marriott, partnerships in which Host Marriott is the general
partner or other affiliated entities. New World and another affiliate of
Dr. Cheng (a Director of the Company) have severally indemnified the
Company for guarantees by RHG of leases with minimum annual payments of
approximately $59 million.
As of September 11, 1998, the Company had extended approximately $166
million of loan commitments to owners of lodging and senior living
properties. Letters of credit outstanding on the Company's behalf at
September 11, 1998, totaled $89 million, the majority of which related to
the Company's self-insurance program. At September 11, 1998, the Company
had a repurchase obligation of $79 million related to notes receivable from
timeshare interval purchasers that have been sold with limited recourse.
6. Comprehensive Income
--------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) No. 130, "Reporting Comprehensive Income" by including footnote
disclosure of comprehensive income. All components of other comprehensive
income up to the date of the Spinoff were reflected within Investments and
Net Advances from Old Marriott during such periods. Total comprehensive
income was $90 million and $71 million, respectively, for the twelve weeks
ended September 11, 1998 and September 12, 1997, and was $291 million and
$215 million, respectively, for the thirty-six weeks ended September 11,
1998 and September 12, 1997. The principal difference between net income
and total comprehensive income relates to foreign currency translation
adjustments.
7. New Accounting Standards
------------------------
The Company will adopt FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fourth quarter of 1998. The
Company is evaluating the impact of this statement on its consolidated financial statements. The Company will adopt FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is expected to have
no material effect on the Company's consolidated financial statements, in
the fourth quarter of 2000.
10
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The Company will adopt SOP 98-5 in the fourth quarter
of 1998 by expensing pre-opening costs for Company owned lodging and senior
living communities as incurred. This is expected to have no material impact
on the Company's 1998 consolidated financial statements, although future
periods may be impacted.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the sales and expenses of a managed entity in
its financial statements. As a result of EITF 97-2, and related discussions
with the staff of the Securities and Exchange Commission, in theour 1998 fourth
quarter we changed our accounting policy to no longer include in our financial
statements the working capital and sales of managed hotels and managed senior
living communities. Our financial statements for prior periods have been
restated. This change in accounting policy resulted in reductions in each of
sales and operating expenses of $477 million for the twelve weeks ended March
27, 1998, with no impact on operating profit, net income, earnings per share,
debt or equity.
7
2. Spinoff
-------
On March 27, 1998, Old Marriott distributed all of our issued and
outstanding common stock, on a pro rata basis, as a special dividend (the
Spinoff) to holders of Old Marriott's common stock, and the Company was
renamed "Marriott International, Inc." We have carried over Old Marriott's
historical cost basis in our assets and liabilities. Old Marriott received a
private letter ruling from the Internal Revenue Service that the Spinoff would
be tax-free to it and its shareholders. For each share of common stock in Old
Marriott, shareholders received one share of our Common Stock and one share of
our Class A Common Stock. On May 21, 1998, all outstanding shares of our
Common Stock were converted, on a one-for-one basis, into shares of our Class
A Common Stock. For further discussion of the Spinoff, please refer to our
Annual Report.
8
3. Earnings Per Share
------------------
For periods prior to March 27, 1998, the number of weighted average shares
outstanding and the effect of dilutive securities used in the earnings per
share calculations are based upon the weighted average number of Old Marriott
shares outstanding, and the Old Marriott effect of dilutive securities for the
applicable period, adjusted (1) for the distribution ratio in the Spinoff of
one share of our Common Stock and one share of our Class A Common Stock for
every share of Old Marriott common stock, and (2) to reflect the conversion of
our Common Stock into Company Class A Common Stock on May 21, 1998.
The following table reconciles the earnings and number of shares used in the
basic and diluted earnings per share calculations (in millions, except per
share amounts).
Twelve weeks ended
------------------------------------------
March 26, March 27,
1999 1998
------------------- -------------------
(pro forma)
Computation of Basic Earnings Per Share
Net income........................................................... $ 100 $ 89
================= =================
Weighted average shares outstanding.................................. 245.6 253.5
================= =================
Basic Earnings Per Share............................................. $ .41 $ .35
================= =================
Computation of Diluted Earnings Per Share
Net income........................................................... $ 100 $ 89
After-tax interest expense on convertible
subordinated debt................................................... 2 2
----------------- -----------------
Net income for diluted earnings per share............................ $ 102 $ 91
================= =================
Weighted average shares outstanding.................................. 245.6 253.5
Effect of Dilutive Securities
Employee stock option plan.......................................... 9.0 9.1
Deferred stock incentive plan....................................... 5.2 5.4
Convertible subordinated debt........................................ 9.5 9.5
----------------- -----------------
Shares for diluted earnings per share................................ 269.3 277.5
================= =================
Diluted Earnings Per Share........................................... $ .38 $ .33
================= =================
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. We use the if-converted
method for convertible subordinated debt.
9
4. Acquisitions
------------
The Ritz-Carlton Hotel Company LLC. On March 19, 1998, we increased our
ownership interest in The Ritz-Carlton Hotel Company LLC to approximately 98
percent for consideration of approximately $90 million. We expect to acquire
the remaining two percent within the next several years. We accounted for the
acquisition using the purchase method of accounting. Prior to March 19, 1998,
we accounted for our investment in The Ritz-Carlton Hotel Company LLC using
the equity method of accounting and we received distributions based on an
annual, cumulative preferred return on invested capital.
ExecuStay Corporation. On February 17, 1999, we completed a cash tender
offer for approximately 44 percent of the outstanding common stock of
ExecuStay Corporation (ExecuStay), a leading provider of leased corporate
apartments in the United States. On February 24, 1999, substantially all of
the remaining common stock of ExecuStay was converted into nonvoting preferred
stock of ExecuStay which we acquired, on March 26, 1999, for approximately 2.1
million shares of our Class A Common Stock. Our aggregate purchase price
totaled $116 million. We consolidated the results of ExecuStay from February
24, 1999, and have accounted for the acquisition using the purchase method of
accounting. We amortize the resulting goodwill on a straight-line basis over
30 years.
5. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees are limited, in
the aggregate, to $161 million at March 26, 1999. New World Development and
another entity affiliated with Dr. Cheng, a member of our Board of Directors,
have severally indemnified us for guarantees by us of leases with minimum
annual payments of approximately $59 million.
Letters of credit outstanding on our behalf at March 26, 1999, totaled $73
million, the majority of which related to our self-insurance program. At
March 26, 1999, we had a repurchase obligation of $76 million related to notes
receivable from timeshare interval purchasers that have been sold with limited
recourse.
6. Comprehensive Income
--------------------
Total comprehensive income was $90 million and $85 million, respectively,
for the twelve weeks ended March 26, 1999 and March 27, 1998. The principal
difference between net income and total comprehensive income relates to
foreign currency translation adjustments.
7. New Accounting Standards
------------------------
In 1999 we adopted Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities," issued by the American Institute of Certified
Public Accountants, by expensing pre-opening costs for Company owned lodging
and senior living communities as incurred. The adoption of SOP 98-5 resulted
in a pre-tax expense of $5 million in the 1999 first quarter.
We will change itsadopt FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which we do not expect to have a material effect on our
consolidated financial statements, in the fourth quarter of 2000.
10
8. Business Segments
-----------------
We are a diversified hospitality company operating in three business segments:
Lodging, which includes the development, ownership, operation and franchising
of lodging properties including vacation timesharing resorts; Senior Living
Services, which consists of the development, ownership and operation of senior
living communities; and Distribution Services, which operates a wholesale food
distribution business. We evaluate the performance of our segments based
primarily on operating profit before corporate expenses and interest. We do
not allocate income taxes at the segment level.
The following table shows our sales and operating profit by business segment
for the twelve weeks ended March 26, 1999 and March 27, 1998.
Twelve weeks ended
---------------------------------------------
March 26, 1999 March 27, 1998
-------------------- -------------------
(in millions)
Sales
Lodging.............................................................. $ 1,523 $ 1,319
Senior Living Services............................................... 120 105
Distribution Services................................................ 252 291
------------------ -----------------
$ 1,895 $ 1,715
================== =================
Operating profit before corporate expenses and interest
Lodging.............................................................. $ 187 $ 158
Senior Living Services............................................... 2 2
Distribution Services................................................ 4 3
------------------ -----------------
$ 193 $ 163
================== =================
Sales of Distribution Services do not include sales made at market terms and
conditions to our other business segments of $37 million and $32 million for
the 12 weeks ended March 26, 1999 and March 27, 1998, respectively.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
RESULTS OF OPERATIONS/1/
Twelve Weeks Ended March 26, 1999 Compared to Twelve Weeks Ended March 27, 1998
- -------------------------------------------------------------------------------
We reported net income of $100 million for the 1999 first quarter, on sales of
$1,895 million. This represents a 12 percent increase in net income and a 10
percent increase in sales over the first quarter of 1998. Diluted earnings per
share of $.38 for the quarter increased 15 percent over the 1998 amount.
As discussed in our financial statements, in the fourth quarter of 1998 we
changed our accounting policy to no longer include the working capital and sales
of managed hotels and retirementmanaged senior living communities in itsour financial
statements. Instead, the Company'sour sales will include fees earned plus costs recovered from
owners of managed hotels and retirementmanaged senior living communities. PriorWe have
restated prior periods will be restated. Reflecting this
changeand all references in the discussion below refer to
financial statement data prepared under our new accounting policy. This new
accounting policy reflects reductions in the Company's financial statements would
have reduced eachsales of sales and operating expenses by approximately $673$664 million and $412$477 million
for the twelve weeks ended September 11,1999 and 1998 and
September 12, 1997,first quarters, respectively, and by approximately $1,765 million and
$1,237 millioncompared to sales as
previously calculated for the thirty-six weeks ended September 11, 1998 and
September 12, 1997, respectively, and each of current assets and current
liabilities by approximately $538 million, as of September 11, 1998, with
no impact on operating profit, net income, earnings per share, debt or
equity.
11
Item 2. Management's Discussion and Analysis of Results of Operations and
- --------------------------------------------------------------------------
Financial Condition
- -------------------
RESULTS OF OPERATIONS/(1)/
Twelve Weeks Ended September 11, 1998 Compared to Twelve Weeks Ended September
- ------------------------------------------------------------------------------
12, 1997
- --------
The Companythose periods.
Lodging reported net income of $86 million for the 1998 third quarter, on
sales of $2,263 million. This represents a 16 percent increase in net income and
a nine percent increase in sales over the third quarter of 1997. Diluted
earnings per share of $.32 for the quarter increased 19 percent over the 1997
amount.
Lodging operations reported a 19an 18 percent increase in operating profit on 1615 percent higher
sales. The results reflect room rateaverage REVPAR growth at U.S. hotels well
in excess of inflation,four percent across our
lodging brands, including strong results from Marriott Vacation Club
International and contributions from new units, as well as weaker
operating results in Asia, offset by higher financing income for Marriott
Vacation Club International. Lodging sales increased six percent before the
impact of consolidating The Ritz-Carlton Hotel Company LLC.units. Sales for full-service and
luxury brands comprised 73 percent of total lodging sales.
Asales in the 1999 quarter.
We added a net total of 42 hotels (5,325 rooms) were added51 properties (6,932 units) during the thirdfirst quarter of
1998,1999, increasing the Company'sour total hotelsproperties to 1,596 (315,289 rooms)1,737 (335,225 units). HotelsProperties by
brand (excluding the 4,600 rental units we added as a result of the ExecuStay
acquisition) are as indicated in the following table.
HotelsProperties at September 11, 1998
------------------------------------------------------March 26, 1999
--------------------------------------------------------
Company-operated Franchised
--------------------------- ------------------------------------------------- ----------------------------
Properties Units RoomsProperties Units
Rooms---------- ------------ ------------- ------------ ---------- -------------
Marriott Hotels, Resorts and Suites ......................Suites...................... 209 90,312 138 41,517
Ritz-Carlton ............................................. 34 11,62893,452 148 44,178
Ritz-Carlton............................................. 36 11,847 - -
Renaissance .............................................. 69 27,354Renaissance.............................................. 74 29,642 14 5,414
Ramada International..................................... 7 1,325 35 6,037
Residence Inn............................................ 128 17,190 177 19,210
Courtyard................................................ 247 37,762 180 21,893
TownePlace Suites........................................ 13 4,985
New World ................................................ 7 3,651 - -
Ramada International ..................................... 9 1,700 39 6,576
Courtyard ................................................ 238 35,905 158 19,059
Residence Inn ............................................ 120 15,845 165 18,0581,310 15 1,511
Fairfield Inn and Suites ................................. 52 7,258 328 28,930
TownePlace Suites ........................................ 2 190 7 697SpringHill Suites...................... 55 7,574 354 31,320
Marriott Vacation Club International..................... 38 4,031 - -
Marriott Executive Residences and Other .................. 8 1,624other.................. 7 1,529 - -
---------- ------------ ------------- ------------
---------- -------------
Total .................................................... 748 195,467 848 119,822
=============Total.................................................... 814 205,662 923 129,563
========== ============ ========== ============= ============
In October 1998, the Company announced plans to convert its 13 Fairfield Suites
(1,287 rooms) together with 14 properties under construction to SpringHill
Suites, a newly developed brand in the upper-moderate-extended-stay tier.
Renaissance hotels posted a REVPAR increase of six percent due to a five percent
increase in average room rates to $118 and a one percentage point increase in
occupancy to 72 percent.
- ------------____________
(1) Average daily rate, occupancy and REVPAR statistics are based on comparable
Company-operated U.S. properties operated by us, except that data for Fairfield Inn and Suites,
which data also
include comparable franchised units.
12
Renaissance is now integrated into the Marriott reservation system, as well as
sales, marketing and other programs.
Sales for Marriott Hotels, Resorts and Suites increased six percent over the
prior year period. A sixposted a three percent increase in average
room rates, to $129,
partially offset by$143, and a slight decreaseone percentage point increase in occupancy to 8078
percent, which generated a REVPAR increase of fivefour percent. Profits increased as
improved REVPAR generated higher base management, franchise and incentive fees
at many hotels.
Renaissance hotels posted a REVPAR increase of two percent due to a two
percentage point increase in occupancy to 71 percent, partially offset by a one
percent decrease in average room rates to $133. REVPAR was negatively impacted
by results of a few poorly performing properties.
Ritz-Carlton reported an increase in average room rates of ninesix percent, to $189,$236,
with occupancy downup three percentage points to 7677 percent, resulting in a
fivean 11
percent increase in REVPAR.
The results of Ritz-Carlton properties have
been consolidated following the increase in the Company's ownership interest to
approximately 98 percent on March 19, 1998, resulting in sales of approximately
$163 million during the 1998 quarter, with no impact on net income.
The combined limited-service lodging brands reported 10 percent higher sales.
Profit growth over the prior year reflected increased base and incentive
management fees on Company-operated properties and the expansion of franchising
programs. The limited-service brands added a net of 38 properties (4,269 rooms),
primarily franchises, during the third quarter of 1998.
. The Company'sResidence Inn, our quality tier extended-stay brand, Residence Inn, posted REVPAR consistent
with the 1998 first quarter, arising from a REVPAR increase of four percent, due to an increasedecrease in average room rates of
threeone percent to $100, and$98, offset by a one percentage point increase in occupancy to 8782
percent. Operating results include contributions from new units and gains
related to the disposition of four properties during the 1999 quarter. We
retained long-term management agreements on these properties. Residence Inn
opened eight11 properties during the quarter.
. Courtyard, the Company'sour moderate-price lodging brand, achieved a 1015 percent increase in
sales. Courtyard's average room rates increased sixtwo percent to $89, while$91, and
occupancy decreasedincreased by one percentage point to 8279 percent, resulting in a REVPAR
increase of fivethree percent. Courtyard opened 1211 properties during the quarter.
. Fairfield Inn, and Suites, the Company'sour economy lodging brand, posted an increase in average room
rates of threeone percent to $58,$56, which was partially offset by a slight decrease in
occupancy to 8069 percent, resulting in an increase in REVPAR of twoone percent.
Fairfield Inn and Suites opened 1510 properties during the quarter.
Marriott Vacation Club International posted substantial profit growth in the
1998 third1999 first quarter. The divisionWe generated a 1432 percent increase in contract sales,
reflecting strong sales activity at timeshare resorts in Florida, California,
South Carolina, HawaiiSpain and Spain, as well as higher financing income.
Contract Services reported operating profit of $8 million on sales of $396
million in the 1998 third quarter, representing a 60 percent increase and a 16
percent decrease, respectively, from the third quarter of 1997. Both businesses
contributed to the increase in operating profit.Aruba.
Marriott Senior Living Services reported higher sales and profits in the 1998
third1999 first quarter.
ResultsOperating profit before corporate expenses and interest increased slightly as
gains from property sales and improved performance at established communities
were aidedlargely offset by contributions from 17 senior living
communities added over the past 12 months including three assisted living
facilities opened in the 1998 third quarter.pre-opening costs of $5 million and start-up costs of new
communities. Occupancy for comparable communities remained at 94increased by three percentage
points to 91 percent for the quarter. At September 11, 1998,March 26, 1999, the division operated
98121 independent full-service and assisted living communities totaling
approximately 18,80021,800 units.
13
Marriott Distribution Services (MDS) achieved higher profits in the 1998 third quarter,
despite lower sales. The division benefited from consolidation of its food
distribution facilities, and the realization of operating efficiencies following
a period of rapid expansion in 1996-97. See "Liquidity and Capital Resources"
below for a discussion of the possible future impact to MDS of the recent bankruptcy
filing by a major MDS customer.
13
Corporate activity. Interest expense increased by $3$8 million in the 1999 first
quarter, primarily due to
1998 investing activities and share repurchases since the
Spinoff. Interest
income decreased by $1 million reflecting lower notes receivable balances.
Corporate expenses increased primarily due to Year 2000 software modification
costs of $2 million.$5 million compared to $3 million in the 1998 quarter. The effective
income tax rate decreased from 3938.5 percent to 38.537.5 percent primarily due to the
increased proportion of foreign operations in countries with relatively low effective
tax rates.
Thirty-Six Weeks Ended September 11, 1998 Compared to Thirty-Six Weeks Ended
- ----------------------------------------------------------------------------
September 12, 1997
- ------------------
The Company reported net income of $276 million for the three quarters, on sales
of $6,994 million. This represents a 22 percent increase in net income and a 13
percent increase in sales over the same period in 1997. Diluted earnings per
share of $1.02 for the period increased 21 percent over the corresponding 1997
period.
Lodging operating profits were up 25 percent, on a sales increase of 21 percent.
The revenue increase primarily resulted from REVPAR growth across all brands and
the addition of 476 hotels since the beginning of 1997. This revenue growth
resulted in the Company earning higher base management and franchise fees and
also contributed to higher house profits which resulted in higher incentive
management fees. The Company experienced weaker operating results in Asia,
partially offset by higher financing income for Marriott Vacation Club
International. Lodging sales increased 13 percent before the impact of
consolidating The Ritz-Carlton Hotel Company LLC. Sales for full-service and
luxury brands comprised 74 percent of total lodging sales.
Sales for Marriott Hotels, Resorts and Suites increased seven percent over the
prior year period. An eight percent increase in average room rates, to $137,
partially offset by a one percentage point decline in occupancy to 79 percent,
generated a REVPAR increase of six percent. Profits increased as improved REVPAR
generated higher base management fees and higher house profits, resulting in
increased incentive fees at many hotels.
Renaissance hotels achieved a REVPAR increase of seven percent due to a seven
percent increase in room rates to $129, with occupancy maintained at 71 percent.
Renaissance is now integrated into the Marriott reservation system, as well as
sales, marketing and other programs.
Ritz-Carlton reported an increase in average room rates of 10 percent, to $206,
while occupancy decreased two percentage points to 77 percent, resulting in a
seven percent increase in REVPAR.
Limited-service brands represented about 19 percent of total lodging sales for
the first three quarters, and each of the brands increased REVPAR for this
period.
. Residence Inn posted a REVPAR increase of four percent, due to an increase in
average room rates of five percent to $100, partially offset by a decrease in
occupancy to 85 percent. Sales
14
growth in 1998, of 11 percent, also benefited from the addition of 61
properties since the beginning of fiscal year 1997.
. Courtyard achieved an 11 percent increase in sales. Courtyard's average room
rates increased eight percent to $90, while occupancy dropped by one
percentage point to 81 percent, resulting in a REVPAR increase of six percent.
Sales and profits also reflect the addition of 82 units since the beginning of
fiscal year 1997.
. Fairfield Inn and Suites achieved a three percent increase in REVPAR, driven
by a four percent increase in average room rates to $57, partially offset by a
one percentage point decrease in occupancy to 76 percent. Fairfield Inn and
Suites has opened 96 properties since the beginning of fiscal year 1997.
Marriott Vacation Club International generated an 11 percent increase in
contract sales. The Company experienced increased profits from resort
development, together with higher financing income.
Contract Services reported operating profit of $21 million on sales of $1,220
million in 1998, representing 40 percent and 13 percent decreases, respectively,
from the first three quarters of 1997. Profit growth was impacted by the June
1997 sale of 29 senior living communities, which the Company continues to
operate under long-term agreements. Operating profit for Contract Services
nearly doubled over the first three quarters of 1997 after adjusting for the
impact of this transaction.
Marriott Senior Living Services reported 16 percent higher sales for the first
three quarters of 1998. Results were boosted by contributions from 26 senior
living communities added since the beginning of 1997. Occupancy for comparable
communities remained at 94 percent.
Marriott Distribution Services generated higher profits in the first three
quarters of 1998, despite lower sales, reflecting increased operating
efficiencies. Refer to the Liquidity and Capital Resources section for a
discussion of the possible future impact of the bankruptcy of a major customer.
Corporate activity. Interest expense decreased by $3 million, primarily due to
Host Marriott's assumption of $187 million of mortgage debt associated with the
June 1997 sale of 29 senior living communities, partially offset by the interest
arising from 1998 investing activities and share repurchases since the Spinoff.
Interest income increased by $6 million reflecting higher notes receivable
balances. Corporate expenses increased primarily due to Year 2000 software
modification costs of $8 million. The effective income tax rate decreased from
39 percent to 38.5 percent primarily due to the increased proportion of foreign
operations in countries with relatively low effective tax rates.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents totaled $335 million at September 11, 1998, an increaseMarch 26, 1999, a decrease of $46$55
million from year end. Cash provided by operations of $508$135 million increased nine88
percent over 1997.1998. Net income is stated after recording depreciation expense of
$19 million and $15 million in 1999 and 1998, respectively, and after
amortization expense of $14 million and $15 million in 1999 and 1998,
respectively. EBITDA increased by $83$26 million, or 1815 percent, to $557$204 million.
EBITDA is an indicator of operating performance which can be used to measure the
Company's ability to service debt, fund capital expenditures and expand its
business. However, EBITDA is not an alternative to net income, operating
profit, cash from operations, or any other operating or liquidity measure
prescribed by generally accepted accounting principles.
Net cash used in investing activities totaled $455$161 million for the first three
quartersquarter, and
included our acquisition of 1998, primarily comprising the increase in the Company's ownership
interest in The Ritz-Carlton Hotel Company LLC, together withExecuStay, expenditures for the development of limited-servicedeveloping limited-
service lodging properties and senior living communities partially offset by proceeds from loan collections and sales.together with note
advances. Cash generated from dispositions of $109$186 million wasresulted primarily
due tofrom the sales of limited-service lodging properties and senior living
communities. The Company
continuescommunities under master transactions initiated in 1998. We continue to operate
these properties under long-term agreements.
The Company continuesWe continue to grow itsour businesses, in part, by investing in new units. The Company'sWe
expect our principal investments are expected to continue to include loans, minority equity
interests, business acquisitions and direct development and ownership of certain
lodging and senior living services projects. The
Company expectsWe expect to sell certain lodging
and senior living service properties currently under development, or to be
developed, while continuing to operate them under long-term agreements.
The Company believesWe believe that cash generated by operations, together with itsour borrowing
capacity and proceeds from the sale of assets, will be sufficient to finance itsour
planned growth and capital requirements. Nonetheless, the Company'sour ability to sell
properties that it develops,we develop, and the ability of hotel or senior living community
developers to build or acquire new Marriott properties, both of which are
important components of the Company'sour growth plans, are to some extent dependent on the
availability and price of capital. The Company isWe are monitoring the status of the capital
markets, and other conditions which have shown unusual volatility during
the past several months, and is in the process of evaluating the effect, if any,
that capital market conditions may have on itscould affect our ability to execute itsour
announced growth plans.
If this analysis demonstrates that the Company's growth plans
should be modified, new growth plans may be necessary.
The CompanyWe purchased 9.30.2 million shares of Class A Common Stock in the twenty-fourtwelve weeks
ended September 11, 1998,March 26, 1999, at a cost of $291$5 million. As of September 11, 1998, the CompanyMarch 26, 1999, we had
been authorized by itsour Board of Directors to purchase a further 10.7an additional 6.1 million
shares.
14
In 1996, MDS became the exclusive provider of distribution services to Boston
Chicken Inc. (BCI). In May 1998, BCI disclosed that its independent auditors had
expressed substantial doubt about BCI's ability to continue as a going concern.
On October 5, 1998, BCI and its Boston Market-controlled
subsidiaries filed voluntary bankruptcy petitions in the U.S. Bankruptcy Court
(the Court) for protection under Chapter 11 of the Federal Bankruptcy CodeCode. The
bankruptcy resulted in the U.S. Bankruptcy Court for the Districtclosing of Arizona in
Phoenix (the Court), and announced restaurant closings representing
approximately 16 percent of the restaurants in the Boston Market chain.
Subsequently, a franchisee of BCI announced closings of a further five21 percent of the
restaurants in the Boston Market chain. MDS continues to distribute to BCI and
has been receiving payment of post-petition balances in accordance with the
terms of its contractual
16
relationshipcontracts with BCI. In addition, the Court has approved, and MDS
has received, payment for substantially all of its pre-petition accounts
receivable balances. The impact of BCI's bankruptcy onHowever, the Company depends on numerous
uncertainties, and management is still in the process of assessing the potentialfinal effect on the Company'sour future results of
operations and financial position.position depends on the final resolution of BCI's
bankruptcy. Under certain circumstances, if the contract were to terminate, or
if BCI were to cease or further curtail its operations: (i)(1) MDS may be unable to
recover some or all of an aggregate of approximately $32 million in contract
investment, receivables and inventory; and (ii)(2) MDS could have more warehouse
capacity and rolling stock in excessthan it needs.
In November 1998 we issued, through a private placement, $400 million of
its likely future requirements.
YEARunsecured senior notes. On April 23, 1999, we commenced a registered exchange
offer to exchange the privately placed senior notes for publicly registered new
notes on substantially identical terms. Unless we choose to extend it, the
exchange offer will close on May 24, 1999.
In April 1999 we filed a "universal shelf" registration statement with the
Securities and Exchange Commission. That registration statement, which became
effective on May 4, 1999, allows us to offer to the public up to $500 million
of debt securities, Class A Common Stock and/or preferred stock. Although we
have no current plans to issue Class A Common or preferred stock under the
registration statement, this "universal shelf" format maximizes our ability to
respond to unanticipated financing needs.
Year 2000 PROBLEMReadiness Disclosure
- ------------------------------
The "Year 2000 problem" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications
could fail or create erroneous results.
As required by recent guidance from the
Securities and Exchange Commission (SEC) applicable to all public companies, the
following disclosure provides more detail regarding the Company's Year 2000
compliance than previous reports filed by the Company.
State of Readiness. The Company hasWe have adopted anthe following eight-step process toward
- ------------------
Year 2000 readiness, consisting of the following: (i)readiness:
1. Awareness: fostering understanding of, and commitment to, the problem and
its potential risks;
(ii)2. Inventory: identifying and locating systems and technology components that
may be affected;
(iii)3. Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues;
(iv)4. Planning: defining the technical solutions and labor and work plans
necessary for each affected system;
(v)5. Remediation/Replacement: completing the programming to renovate or replace
the problem software or hardware;
(vi)6. Testing and Compliance Validation: conducting testing, followed by
independent validation by a separate internal verification team;
(vii)15
7. Implementation: placing the corrected systems and technology back into the
business environment; and
(viii)8. Quality Assurance: utilizing a dedicatedan internal audit team to review significant
projects for adherence to quality standards and program methodology.
The Company hasWe have grouped itsour systems and technology into three categories for purposes of
Year 2000 compliance:
(i) information1. Information resource applications and technology (IT Applications) --
enterprise-wide systems supported by the Company's centralized information
technology organization (IR);
(ii)2. Business-initiated systems (BIS) -- systems that have been initiated by an
individual business unit, and that are not supported by the Company's IR
organization;IR; and
(iii)3. Building Systems -- non-IT equipment at properties that use embedded
computer chips, such as elevators, automated room key systems and HVAC
equipment.
The Company isWe are prioritizing itsour efforts based on how severe an effect noncompliance
would have on customer service, core business processes or revenues, and whether
there are viable, non-automated fallback procedures (System Criticality).
The Company measures the16
We measure completion of each phase based on documenteddocumentation and quantified
results weighted for System Criticality. AsThe following table reflects the
status of the end of the 1998our Year 2000 readiness process at March 26, 1999.
Step IT Applications BIS Building Systems
- ---------------------------------------------------------------------------------------------------------------------
Awareness Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------
Assessment Complete Substantially complete Substantially complete
- ---------------------------------------------------------------------------------------------------------------------
Planning Complete Substantially complete Substantially complete
- ---------------------------------------------------------------------------------------------------------------------
Remediation/ Replacement Over 95 percent complete Substantially complete Substantially complete;
critical systems targeted
for completion by
September 1999
- ---------------------------------------------------------------------------------------------------------------------
Testing and Compliance Validation Testing over 95 percent Testing is in progress.* Initial testing is
complete; Compliance Compliance Validation is approximately 80 percent
Validation completed for in progress complete *, for which
approximately 75 percent less than 10 percent
of key systems, with most require further
remaining work in its remediation/ replacement
final stage and re-testing.
Substantial completion
for critical systems
targeted for September
1999;
Compliance Validation is
in progress
- ---------------------------------------------------------------------------------------------------------------------
Implementation Approximately 80 percent Approximately 40 percent In progress
of implementation complete; on track for
projects complete, with completion by the end of
rollout to business the second quarter 1999
locations underway
- ---------------------------------------------------------------------------------------------------------------------
Quality Assurance In progress for In progress In progress
approximately 80 percent
of IT applications
- ---------------------------------------------------------------------------------------------------------------------
* Testing for third quarter, the Awareness and Inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key
17
systems, with most of the remaining work in its final stage. Forparty BIS and Building Systems Assessmentmay consist of our receipt
and Planning were in the mid- to upper-rangeevaluation of completion, with a substantial amountvendor compliance documentation and, where appropriate,
further verification by us of work in process, while the progress
level for Remediation/Replacement and Testing and Compliance Validation had not
yet been documented and quantified. Quality Assurance is also in progress for IT
Applications and is scheduled to begin for BIS and Building Systems in the near
future. The Company's goal is to substantially complete the
Remediation/Replacement and Testing phases for its System Critical IT
Applications by the end of 1998, with 1999 reserved for unplanned contingencies
and for Compliance Validation and Quality Assurance. For System Critical BIS and
Building Systems, the same level of completion is targeted for June 1999 and
September 1999, respectively.
The Company has initiatedcompliance.
Year 2000 compliance communications with itsour significant third party suppliers,
vendors and business partners, including its
franchisees. The Company is focusing itsour franchisees are ongoing. Our
efforts are focused on the business interfacesconnections most critical to its customer service, core
business processes and revenues, including those third parties that support theour
most critical enterprise-wide IT Applications, franchisees generating the most
17
revenues, suppliers of the most widely used Building Systems and BIS, the top
100 suppliers, by dollar volume, of non-IT products and services, and financial
institutions providing the most critical payment processing functions. ResponsesWe have
been received responses from a majority of the firms in this group. The Company is also establishingA majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or by us to achieve
timely Year 2000 compliance for their products.
We have established a common approach for testing and addressing Year 2000
compliance issues for itsour managed and franchised properties. This includes
a guidance protocol for Company-operated properties we operate, and a Year 2000 "Toolkit" for franchisees
containing relevant Year 2000 compliance information. The Company isWe are also utilizing a
Year 2000 best-practices sharing system.
Costs. Many of the costs of Year 2000 compliance will be reimbursed to the
Companyus or
otherwise paid directly by owners and clients pursuant to existing contracts.
The Company estimatesWe estimate that we will bear approximately $40-$50 million of the pre-tax costs to be borne by it
to address the Year 2000 problemproblem. Some of these costs relate to internal
resources which will be redeployed in 2000, and, as such, represent costs which
we will continue to bear in future years. The Year 2000 costs, approximately
$40-$50$17 million (on a pre-tax basis) of which have been incurred through March 26,
1999, have been and will be expensed as incurred.
Through the third fiscal quarter of 1998, approximately
$8 million of these costs (on a pre-tax basis) have been incurred and expensed.
In addition, the Companywe had previously planned and/or begun implementing several system
replacement projects to modernize and improve itsour systems. The Year 2000
problem heightened the need for the timely completion and some project schedules
have been accelerated. These project costs have been included in the
Company'sour budgeting
process and its internal forecasts and already form part of the Company'sour financial plans.
Like the Year 2000 costs referred to in the preceding paragraph, many of these
systems replacement costs will be reimbursed to the Companyus or otherwise paid directly by
owners and clients pursuant to existing contracts. The Company estimatesWe estimate that we will
bear approximately $45-$50 million of the pre-tax costs to be borne by
it fromof these system
replacements, will be approximately $40-$45 million, most of which will be capitalized and amortized over the useful
lives of the assets.
The actual costs to be incurred by the Companywe will actually incur will depend on a number of factors which cannot
be accurately predicted, including the extent and difficulty of the remediationRemediation
and other work to be done, the availability and cost of consultants, the extent
of testing required to demonstrate Year 2000 compliance, and the Company'sour ability to
timely collect all payments due to itus under existing contracts.
18
Year 2000 Contingency Plans. The Company'sOur centralized services and Company-operatedthe properties we
operate already have detailed contingency plans in place covering a variety of possible
events, including natural disasters, interruption of utility service, general
computer failure, and the like. The Company isWe are reviewing these existing contingency plans for
potential modificationmodifications to address specific Year 2000 issues, and expectsexpect modification of
master contingency plans to continue this processbe substantially complete by the end of the second
quarter of 1999, with conforming changes to be added to individual unit
contingency plans during the next
four fiscal quarters.third quarter.
Risks of the Company'sPosed By Our Year 2000 Issues. Based on current information, the
Company believesWe currently believe that the Year 2000
problem will not have a material adverse effect on the Company, itsus, our business or itsour
financial condition. There can,
however, be no assurancesHowever, we cannot assure you that our Year 2000
remediation or remediation by the Company or third
partiesothers will be completed properly and timely completed,on time, and
failure to do so could have a
material adversematerially and adversely effect on the Company, its business and its financial
condition. The Companyus. We also cannot
predict the actual effects to it of the Year 2000 problem on us, which depends on numerousa
number of uncertainties such as:
(i)18
. the factors listed above under Costs; (ii)"Costs";
. whether our franchisees and other significant third parties including its
franchisees, properly and timely address the Year
2000 issue; (iii)issue properly and on time;
. whether broad-based or systemic economic failures may occur, and the severity and
duration of such failures, which could
includeinclude:
. disruptions in passenger transportation or transportation systems
generally,generally;
. loss of utility and/or telecommunications services, andservices;
. errors or failures in financial transactions or payment processing systems
such as credit cards;
. the severity and (iv)duration of such failures; and
. whether the Company
becomes thewe are sued or become subject of litigation orto other proceedings regarding any Year
2000-related events and the outcome of any such litigationsuit or proceedings.
As part of itsour contingency planning, the Company iswe are analyzing the most reasonably likely
worst-case scenario that could result from Year 2000-related failures. The Company'sOur best
estimate of this scenario, based on current information, follows. Failure by
third partiesothers to achieve Year 2000 compliance could cause short-term disruptions in
travel patterns, potentially caused by actual or perceived problems with travel systems, (such as the air traffic
control system), and potential
temporary disruptions in the supply of utility, telecommunications and financial
services, which may be local or regional in scope. These events could lead
travelers to accelerate travel to late 1999, postpone travel to later in 2000 or
cancel travel plans, which could in turn affect lodging patterns and occupancy.
Such failures could be more pronounced in certainsome areas outside the U.S. where we
understand that Year 2000 compliance efforts aremay not
believed to be as advanced. In
addition, failure by either the Companyus or third
partiesothers to achieve Year 2000 compliance could cause
short-term operational inconveniences and inefficiencies for the Company.us. This may
temporarily divert management's time and attention from ordinary business
activities. ToWe will, to the extent reasonably achievable, the Company will seek to prevent
and/or mitigate thethese effects of such possible failures through itsour compliance and contingency planning
efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes to the Company'sour exposures to market risk since
January 2, 1998.1, 1999.
19
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There are no material legal proceedings pending against the Company.us.
Item 2. Changes in Securities
- ------------------------------
None.On March 26, 1999, we merged ExecuStay into one of our subsidiaries. During this
merger, we issued 0.4484 shares of our Class A Common Stock in exchange for each
outstanding share of ExecuStay's Class A Preferred Stock and 0.4829 shares of
our Class A Common Stock in exchange for each outstanding share of ExecuStay's
Class B Preferred Stock. We issued a total of 2,081,951 shares of our Class A
Common Stock.
These shares of our Class A Common Stock were issued in a transaction that
qualified as a private placement under Section 4(2) under the Securities Act of
1933, as amended (the Securities Act). This transaction qualified as a private
placement because, among other reasons:
. we offered the Class A Common Stock to a total of 22 people;
. we did not engage in any general solicitation or general advertising in
connection with this offering;
. we reasonably believed that all of the offerees were accredited investors
within the meaning of Regulation D under the Securities Act; and
. all of the shares of our Class A Common Stock issued in this transaction
bear a legend restricting the resale of such stock.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
20
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------------------------------------------------
(a) Exhibits
Exhibit No. Description
--- ----------- -----------
12 Statement of Computation of Ratio of Earnings
to Fixed Charges.
27 Financial Data Schedule for the Registrant.Company.
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
21
SIGNATURESIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
October 23, 1998May 6, 1999
/s/ Arne M. Sorenson
----------------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Stephen E. Riffee
----------------------------
Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
22