SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Amendment No. 1
[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 10, 1999March 24, 2000 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 8, 1999
- ------------------------------- ----------------------------[_]
Shares outstanding
Class at April 27, 2000
- -------------------------------- ------------------------------
Class A Common Stock, 239,619,008
$0.01 par value
245,128,223
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
-----------------------
Forward-Looking Statements......................................................Statements.................................................... 3
Part I. Financial Information (Unaudited):
Condensed Consolidated StatementsStatement of Income -
Twelve and Thirty-Six Weeks Ended September 10, 1999March 24, 2000 and September 11, 1998..........................................................March 26, 1999.................... 4
Condensed Consolidated Balance Sheet -
as of September 10, 1999March 24, 2000 and January 1, 1999................................December 31, 1999.............................. 5
Condensed Consolidated Statement of Cash Flows -
Thirty-SixTwelve Weeks Ended September 10, 1999March 24, 2000 and September 11, 1998............March 26, 1999.................... 6
Notes to Condensed Consolidated Financial Statements..........................Statements....................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................Operations............................................... 13
Quantitative and Qualitative Disclosures About Market Risk.................... 21Risk................. 17
Part II. Other Information and Signatures:
Legal Proceedings............................................................. 22Proceedings.......................................................... 18
Changes in Securities......................................................... 22Securities...................................................... 18
Defaults Upon Senior Securities............................................... 22Securities............................................ 18
Submission of Matters to a Vote of Security Holders........................... 22Holders........................ 18
Other Information............................................................. 22Information.......................................................... 18
Exhibits and Reports on Form 8-K.............................................. 23
Signatures.................................................................... 248-K........................................... 19
Signatures................................................................. 20
EXPLANATORY NOTE
As a result of a printer's error, this report on Form 10-Q/A Amendment No. 1
amends our Form 10-Q previously filed on May 4, 2000, to reflect changes made to
the Signatures page and the last paragraph of the Liquidity and Capital
Resources section of Management's Discussion and Analysis.
2
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "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 our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms, timeshare units, senior living accommodations and corporate
apartments; our ability to obtain new operating contracts and franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel and senior living community owners; the effect of
international, national and regional economic conditions; the availability of
capital to allow us and potential hotel and senior living community owners to
fund investments; our ability, and thatapproval of other parties upon which our
businesses also rely,the Boston Chicken, Inc. reorganization plan
referred to modify or replace on a timely basis, their computer
software and other systems in orderbelow; satisfaction of the conditions to function properly priorconsummation of the
litigation settlement transactions referred to in and
beyond, the year 2000;below; and other risks described
from time to time in our filings with the Securities and Exchange Commission,
including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, we caution you are cautioned not to place undue reliance on such statements. We
also undertake 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 10, September 11, September 10, September 11,--------------------------------
March 24, March 26,
2000 1999
1998 1999 1998
--------------- --------------- --------------- --------------------------- ------------
SALES.........................................SALES.............................................................. $ 1,9952,167 $ 1,804 $ 5,932 $ 5,4461,895
OPERATING COSTS AND EXPENSES.................. 1,807 1,640 5,335 4,933
--------------- --------------- --------------- ---------------EXPENSES....................................... 1,974 1,702
---------- ---------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST..................................... 188 164 597 513INTEREST..................................................... 193 193
Corporate expenses............................ (30) (25) (87) (74)expenses................................................. (26) (29)
Interest expense.............................. (12) (6) (34) (15)expense................................................... (23) (11)
Interest income...............................income.................................................... 5 7
7 20 25
--------------- --------------- --------------- ------------------------- ---------
INCOME BEFORE INCOME TAXES.................... 153 140 496 449TAXES......................................... 149 160
Provision for income taxes.................... 57 54 186 173
--------------- --------------- --------------- ---------------taxes......................................... 55 60
---------- ----------
NET INCOME....................................INCOME......................................................... $ 9694 $ 86 $ 310 $ 276
=============== =============== =============== ===============100
========== =========
DIVIDENDS DECLARED PER SHARE..................SHARE....................................... $ .055 $ .05
$ .16 $ .15
=============== =============== =============== ========================= =========
EARNINGS PER SHARE
Basic Earnings Per Share.................Share.......................................... $ .39 $ .34 $ 1.25 $ 1.09
=============== =============== =============== ===============.41
========== =========
Diluted Earnings Per Share...............Share........................................ $ .36.37 $ .32 $ 1.16 $ 1.02
=============== =============== =============== ===============.38
========== =========
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
September 10, January 1,March 24, December 31,
2000 1999
1999
---------------- ----------------
ASSETS---------- -----------
(Unaudited)
ASSETS
Current assets
Cash and equivalents...............................................equivalents.............................................. $ 324372 $ 390489
Accounts and notes receivable...................................... 681 605
Other.............................................................. 382 338
----------- -------------
1,387 1,333
----------- -------------receivable..................................... 805 740
Inventory......................................................... 117 93
Other............................................................. 270 278
---------- ----------
1,564 1,600
---------- ----------
Property and equipment.................................................. 2,697 2,275
Intangibles............................................................. 1,846 1,712equipment............................................. 3,098 2,845
Intangibles........................................................ 1,799 1,820
Investments in affiliates............................................... 262 228affiliates.......................................... 284 294
Notes and other receivables............................................. 504 434
Other................................................................... 294 251
----------- -------------receivables........................................ 508 473
Other.............................................................. 297 292
---------- ----------
$ 6,9907,550 $ 6,233
=========== =============7,324
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................payable.................................................. $ 539650 $ 497
Other.............................................................. 1,043 915
----------- -------------
1,582 1,412
----------- -------------628
Other............................................................. 1,019 1,115
---------- ----------
1,669 1,743
---------- ----------
Long-term debt.......................................................... 1,125 944debt..................................................... 2,068 1,676
Other long-term liabilities............................................. 1,119 984
Convertible subordinated debt........................................... 333 323liabilities........................................ 1,023 997
Shareholders' equity
Class A common stock, 255.6 million shares issued..................issued................. 3 3
Additional paid-in capital......................................... 2,740 2,713capital........................................ 2,755 2,738
Retained earnings.................................................. 400 218earnings................................................. 544 508
Treasury stock, at cost............................................ (279) (348)cost........................................... (472) (305)
Accumulated other comprehensive income............................. (33) (16)
----------- -------------
2,831 2,570
----------- -------------income............................ (40) (36)
---------- ----------
2,790 2,908
---------- ----------
$ 6,9907,550 $ 6,233
=========== =============7,324
========== ==========
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 10, September 11,-------------------------------
March 24, March 26,
2000 1999
1998
---------------- -------------------------- ----------
OPERATING ACTIVITIES
Net income.......................................................income........................................................ $ 31094 $ 276100
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................ 103 93amortization................................. 41 33
Income taxes and other....................................... 136 104other........................................ 53 50
Timeshare activity, net...................................... (15) 41net....................................... (68) (12)
Working capital changes...................................... 48 (65)
------------- --------------changes....................................... (99) (36)
--------- ---------
Cash provided by operations...................................... 582 449
------------- --------------operations....................................... 21 135
--------- ---------
INVESTING ACTIVITIES
Acquisitions..................................................... (62) (48)
Dispositions..................................................... 270 116Acquisitions...................................................... - (51)
Dispositions...................................................... 3 186
Capital expenditures............................................. (667) (566)expenditures.............................................. (247) (205)
Note advances.................................................... (111) (24)advances..................................................... (25) (58)
Note collections and sales....................................... 40 165
Other............................................................ (106) (113)
------------- --------------sales........................................ 4 5
Other............................................................. (19) (38)
--------- ---------
Cash used in investing activities................................ (636) (470)
------------- --------------activities................................. (284) (161)
--------- ---------
FINANCING ACTIVITIES
Commercial paper activity, net.................................... 394 (13)
Issuance of other long-term debt....................................... 292 881debt.................................. 3 2
Repayment of other long-term debt...................................... (156) (463)debt................................. (4) (27)
Issuance of Class A common stock................................. 36 7stock.................................. 3 26
Dividends paid................................................... (38) (24)paid.................................................... (14) (12)
Purchase of treasury stock....................................... (146) (291)
Advances to Old Marriott......................................... - (117)
------------- --------------stock........................................ (236) (5)
--------- ---------
Cash used inprovided by (used in) financing activities................................ (12) (7)
------------- --------------activities................... 146 (29)
--------- ---------
DECREASE IN CASH AND EQUIVALENTS...................................... (66) (28)EQUIVALENTS..................................... (117) (55)
CASH AND EQUIVALENTS, beginning of period.............................period............................ 489 390
208
------------- ----------------------- ---------
CASH AND EQUIVALENTS, end of period...................................period.................................. $ 324372 $ 180
============= ==============335
========= =========
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 conditionposition and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the Company),
formerly New Marriott MI, Inc., as if we were a separate entity for all
periods presented. Until March 27, 1998, we were a wholly-owned subsidiary of
the former Marriott International, Inc. (Old Marriott).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles. We believe the disclosures
made are adequate to make the information presented not misleading. However,
you should read the condensed consolidated financial statements in
conjunction with the consolidated financial statements and notes theretoto those
financial statements included in our Annual Report on Form 10-K (the(our Annual
Report) for the fiscal year ended January 1,December 31, 1999. Capitalized terms not
otherwise defined in this quarterly report have the meanings specified in theour
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 our opinion, the accompanying condensed consolidated financial statements
reflect all adjustments necessary to present fairly our financial position as
of September 10,March 24, 2000 and December 31, 1999 and January 1, 1999, the results of operations for the
twelve and thirty-six weeks ended September 10, 1999 and September 11, 1998, and
cash flows for the thirty-sixtwelve weeks ended September 10, 1999March 24, 2000 and September 11, 1998.March 26, 1999.
Interim results may not be indicative of fiscal year performance because of
seasonal and short-term variations. We have eliminated all material
intercompany transactions and balances between entities included in these
financial statements.
In November 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 our 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 $459 million and $1,548 million
for the twelve and thirty-six weeks ended September 11, 1998, respectively,
with no impact on operating profit, net income, earnings per share, debt or
shareholders' equity.
7
2. Spinoff
-------
On March 27, 1998, Old Marriott distributed our common stock, on a pro rata
basis, as a special dividend (the Spinoff) to holders of Old Marriott's
common stock. 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 our 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
Thirty-six weeks ended
---------------------------------- ----------------------------------
September 10, September 11, September 10, September 11,---------------------------------
March 24, March 26,
2000 1999
1998 1999 1998
---------------- ---------------- ---------------- ----------------------------- -------------
Computation of Basic Earnings Per Share
Net income..................................income.............................................. $ 9694 $ 86 $ 310 $ 276100
Weighted average shares outstanding......... 248.1 249.8 247.8 252.5
---------------- ---------------- ---------------- ----------------outstanding..................... 244.1 245.6
---------- -----------
Basic Earnings Per Share....................Share................................ $ .39 $ .34 $ 1.25 $ 1.09
================ ================ ================ ================.41
========== ===========
Computation of Diluted Earnings Per Share
Net income..................................income.............................................. $ 9694 $ 86 $ 310 $ 276100
After-tax interest expense on convertible
subordinated debt..............debt..................................... - 2
2 5 5
---------------- ---------------- ---------------- -------------------------- -----------
Net income for diluted earnings per share...share............... $ 9894 $ 88 $ 315 $ 281
================ ================ ================ ================102
========== ===========
Weighted average shares outstanding......... 248.1 249.8 247.8 252.5outstanding..................... 244.1 245.6
Effect of Dilutive Securities
Employee stock purchase plan............... 0.1 0.1 0.2 0.1
Employee stock option plan................. 8.1 8.4 9.1 8.8plan............................. 6.1 9.0
Deferred stock incentive plan.............. 5.4 5.7 5.4 5.7plan.......................... 5.1 5.2
Convertible subordinated debt...............debt........................... - 9.5
9.5 9.5 9.5
---------------- ---------------- ---------------- -------------------------- -----------
Shares for diluted earnings per share....... 271.2 273.5 272.0 276.6
================ ================ ================ ================share................... 255.3 269.3
========== ===========
Diluted Earnings Per Share..................Share.............................. $ .36.37 $ .32 $ 1.16 $ 1.02
================ ================ ================ ================.38
========== ===========
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.
98
4.3. 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 ownership interest 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 operating results
of ExecuStay from February 24, 1999, and have accounted for the acquisition
using the purchase method of accounting. We are amortizing the resulting
goodwill on a straight-line basis over 30 years.
5.4. Comprehensive Income
--------------------
Total comprehensive income was $89 million and $90 million, respectively,
for each of the twelve weeks ended September 10, 1999March 24, 2000 and September 11, 1998, and $293 million and $291 million,
respectively, for the thirty-six weeks ended September 10, 1999 and September
11, 1998.March 26, 1999. The principal
difference between net income and total comprehensive income relates to
foreign currency translation adjustments.
5. Intangible Assets
-----------------
In 1996, MDS became the exclusive provider of distribution services to
Boston Chicken, Inc. (BCI). On October 5, 1998, BCI and its Boston Market-
controlled subsidiaries filed voluntary bankruptcy petitions for protection
under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy
Court in Phoenix (the Court). In December 1999, McDonald's Corporation
(McDonald's) announced that it had reached a definitive agreement to
purchase the majority of the assets of BCI, subject to confirmation of the
pending BCI plan of reorganization, including Court approval. In March
2000, MDS reached an agreement with McDonald's on a new contract providing
for continuation of distribution services to Boston Market restaurants. The
new contract, which would replace MDS's existing distribution contract with
BCI, will be subject to confirmation of BCI's pending plan of
reorganization by the Court. Because the existing distribution contract
will be terminated upon confirmation of the pending reorganization, MDS
wrote off the unamortized balance of the existing investment, resulting in
a $15 million pretax charge in the first quarter of 2000. MDS continues to
provide distribution services to BCI and has been receiving payment of
post-petition receivables in accordance with the terms of its contract with
BCI.
6. 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
pretax expenses of $4 million and $12 million, respectively, for the twelve
and thirty-six weeks ended September 10, 1999.
We will adopt FASFinancial Accounting Standard (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 or
before the first quarter of 2001.
We will adopt the SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," in the second quarter of 2000.
Implementation of SAB No. 101 is expected to have no impact on annual
earnings but may shift the timing of revenue and profit recognition to
later quarters during the year.
7. 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
9
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.
10
The following table shows our sales and operating profit by business
segment for the twelve and thirty-six weeks ended September 10, 1999March 24, 2000 and September
11, 1998.March 26, 1999.
Twelve weeks ended
Thirty-six weeks ended
---------------------------------- ----------------------------------
September 10, September 11, September 10, September 11,------------------------------------
March 24, March 26,
2000 1999
1998 1999 1998
-------------- --------------- --------------- ---------------------------- -------------
SALES
Lodging......................Sales
Lodging.............................................................. $ 1,6061,711 $ 1,428 $ 4,788 $ 4,2881,523
Senior Living Services....... 128 112 372 325Services............................................... 149 120
Distribution Services........ 261 264 772 833
-------------- --------------- --------------- ---------------Services................................................ 307 252
---------- ----------
$ 1,9952,167 $ 1,8041,895
========== ==========
Operating profit before corporate
expenses and interest
Lodging.............................................................. $ 5,932203 $ 5,446
============== =============== =============== ===============
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST
Lodging...................... $ 180 $ 156 $ 577 $ 492187
Senior Living Services....... 3Services............................................... 2 2
Distribution Services................................................ (12) 4
6 10
Distribution Services........ 5 4 14 11
-------------- --------------- --------------- ------------------------- ----------
$ 188193 $ 164 $ 597 $ 513
============== =============== =============== ===============193
========== ==========
Sales of Distribution Services do not include sales (made at market terms
and conditions) to our other business segments of $36$39 million and $35$37
million for the twelve weeks ended September 10,March 24, 2000 and March 26, 1999, and September 11,
1998, respectively, and $112 million and $105 million for the thirty-six
weeks ended September 10, 1999 and September 11, 1998,
respectively.
8. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees arewere limited,
in the aggregate, to $152$179 million at September 10, 1999.March 24, 2000, including guarantees
involving major customers, with expected funding of zero. As of March 24,
2000, we had extended approximately $336 million of loan commitments to
owners of lodging and senior living properties. Letters of credit
outstanding on our behalf at March 24, 2000, totaled $76 million, the
majority of which related to our self-insurance programs. At March 24, 2000,
we had repurchase obligations of $94 million related to notes receivable
from timeshare interval purchasers, which have been sold with limited
recourse.
New World Development and another entity affiliated withaffiliate of Dr. Cheng, a memberdirector of our
Board of Directors,the
Company, have severally indemnified us for guarantees by us of leases with
minimum annual payments of approximately $59 million.
LettersOn February 23, 2000, we entered into an agreement, which was subsequently
embodied in a definitive agreement executed on March 9, 2000, to resolve
pending litigation described below involving certain limited partnerships
formed in the mid- to late 1980's. Consummation of credit outstanding on our behalf at Septemberthe settlement is subject
to numerous conditions, including the receipt of third-party consents and
10
1999 totaled
$72 million, the majority of which related to our self-insurance program. At
September 10, 1999, we had a repurchase obligation of $86 million related to
notes receivable from timeshare interval purchasers that have been sold
court approval. The agreement was reached with limited recourse.
In additionlead counsel to the
foregoing, we are from time to time involvedplaintiffs in legal
proceedings which could, if adversely decided, result in losses to the
Company. Although we believe that the lawsuits described below, are without
merit, and we intend to vigorously defend againstwith the claims being made
against us, we cannot assure you as tospecial litigation
committee appointed by the outcomegeneral partner of these lawsuits nor can
we currently estimatetwo of the range of any potential loss to the Company.partnerships,
Courtyard by Marriott Limited Partnership (CBM I) and Courtyard by Marriott
II Limited Partnership (CBM II)
A. Because of the numerous conditions to be
satisfied, including approval by the court and consent of the requisite
holders of limited partnership units, there can be no assurances that the
settlement transactions will be consummated and, if consummated, terms could
differ materially from those described below.
Under the agreement, we will acquire, through an unconsolidated joint
venture with Host Marriott, all of the limited partners' interests in CBM I
and CBM II for approximately $372 million. These partnerships own 120
Courtyard by Marriott hotels. The purchase price will be financed with $185
million in mezzanine debt loaned to the joint venture by us and with equity
contributed in equal shares by us and an affiliate of Host Marriott. We will
continue to manage these 120 hotels under long-term agreements. Also, we and
Host Marriott each have agreed to pay approximately $31 million to the
plaintiffs in the Texas Multi-Partnership lawsuit described below in
exchange for dismissal of the complaints and full releases.
We recorded a pretax charge of $39 million which was included in corporate
expenses in the fourth quarter of 1999, to reflect anticipated settlement
transactions. However, if the foregoing settlement transactions are not
consummated, and either a less favorable settlement is entered into, or the
lawsuits are tried and decided adversely to the Company, we could incur
losses significantly different than the pretax charge associated with the
settlement agreement described above.
Courtyard by Marriott II Limited Partnership Litigation
On June 7, 1996, a group of partners in CBM II filed a lawsuit against Host
Marriott, the Company and others, Whitey Ford, et al. v. Host Marriott
Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the 285/th/285th Judicial District Court of Bexar County,-
Texas, against Host
Marriott, the Company and others alleging breach of fiduciary duty, breach of contract, fraud,
negligent misrepresentation, tortious interference, violation of the Texas
Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with
the formation, operation and management of CBM II and its hotels. The
plaintiffs are seeking
11
sought unspecified damages. On January 29, 1998, two other
limited partners, A.R. Milkes and D.R. Burklew, filed a petition in
intervention seeking to convert the lawsuit into a class action. The defendants have filed an answer, theaction, and a class
has been certified, class counsel has been appointed, and discovery is
underway. Onwas certified. In March 11, 1999, Palm Investors, L.L.C., the assignee of a
number of limited partnership units acquired through various tender offers,
and Equity Resource, an assignee, through various of its funds, of a number
of limited partnership units, filed a pleapleas in intervention, to bringwhich among other
things added additional claims relating to the 1993 split of Marriott
Corporation and to the 1995 refinancing of CBM II's indebtedness. The original plaintiffs subsequently filed a second amended
complaint on March 19, 1999 and in a third amended complaint, filed May 24,
1999, asserted as derivative claims some of the claims previously asserted
as individual claims. On March 25, 1999, Equity Resource, an assignee,
through various of its funds, of a number of limited partnership units, also
filed a plea in intervention. A trial date of January 3, 2000 has been set. On August
17, 1999, the general partner of CBM II appointed an independent special
litigation committee to investigate the derivative claims described above
and to recommend to the general partner whether it is in the best interests
of CBM II for the derivative litigation to proceed. The general partner
has agreed to adopt the recommendation of the committee. Under Delaware law, the
recommendation of a duly appointed independent litigation committee is
binding on the general partner and the limited partners. On
August 30, 1999,Following certain
adjustments to the court held a hearing to considerunderlying complaints, including the defendant's motion
to stay these proceedings until the committee makes its recommendation. The
court has not yet ruled on this motion. On October 11, 1999, the special
litigation committee filed a motion requesting a six-month postponement of
the scheduled trial date, and asking that the committee be allowed to
participate in the discovery process. The court has not yet heard or ruled
on this motion.
Courtyard by Marriott Limited Partnership I (CBM I) and CBM II Derivative
Action.
After intervening in the CBM II class action, Palm Investors and
Equity Resource, together with Repp Properties, joined in a complaint filed
in April 1999, Equity Resource Fund X et al. v. CBM One Corporation et al.,
Case No. 99-CI-04765, in the 57/th/ Judicial District Court of Bexar County,
Texas. This action assertedassertion as
derivative claims some of the claims previously filed as individual claims,
a final amended class action complaint was filed on behalfJanuary 6, 2000. Trial,
which was scheduled to begin in late February, 2000, was postponed pending
approval and consummation of CBM I and CBM
II, the same kind of claims asserted individually in the Ford and Milkes
actionssettlement described above.
In September 1999, this complaint was withdrawn by
the plaintiffs.11
Texas Multi-Partnership LawsuitsLawsuit
On March 16, 1998, limited partners in several limited partnerships
sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
International, Inc., et al., Case No. 98-CI-04092, in the 57/th/57th Judicial District Court of Bexar
County, Texas, alleging that the defendants conspired to sell hotels to the
partnerships for inflated prices and that they charged the partnerships
excessive management fees to operate the partnerships' hotels. The
plaintiffs further allege that the defendants committed fraud, breached
fiduciary duties and violated the provisions of various contracts. A
Marriott International subsidiary manages each of the hotels involved and,
as to some properties, the Company is the ground lessor and collects rent.
The Company, several Marriott subsidiaries and J.W. Marriott, Jr. are among
the several named defendants. The plaintiffs are seeking unspecified
damages.
Those allegations concerning CBM II have been
transferred9. Subsequent Event
----------------
On April 28, 2000, we sold 14 senior living communities for cash proceeds of
$194 million. We simultaneously entered into long-term management agreements
for the communities with a third party tenant which leases the communities
from the buyer. In connection with the sale we provided a credit facility to
the CBM II lawsuit described above. No trial date has been
set.buyer to be used, if necessary, to meet its debt service requirements.
Fundings under the facility are guaranteed by an unaffiliated third party.
We also extended a limited credit facility to the tenant to cover operating
shortfalls, if any.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
each of the twelve and thirty-six weeks ended September 10, 1999March 24, 2000 and September
11, 1998.March 26, 1999. Comparable REVPAR,
room rate and occupancy statistics used throughout this report are based upon
U.S. properties operated by us, except that data for Fairfield Inn also include
comparable franchised units.
In the fourth quarter of 1998, we changed our accounting policy to no longer
include the working capital and sales of managed hotels and managed senior
living communities in our financial statements. Instead, our sales include fees
earned plus costs recovered from owners of managed hotels and managed senior
living communities. We have restated prior periods and all references in the
discussion below refer to financial statement data prepared under our new
accounting policy. This new accounting policy reflects reductions in sales of
$529 million and $459 million for the twelve weeks ended September 10, 1999 and
September 11, 1998, respectively and $1,852 million and $1,548 million for the
thirty-six weeks ended September 10, 1999 and September 11, 1998 respectively,
compared to sales as previously calculated for those periods.
Twelve Weeks Ended September 10, 1999March 24, 2000 Compared to Twelve Weeks Ended SeptemberMarch 26, 1999
- ------------------------------------------------------------------------------
11, 1998
- ---------------------------------------------------------------------------------------
We reported net income of $96$94 million for the 1999 third2000 first quarter on sales of
$1,995$2,167 million. This represents a 12six percent increasedecrease in net income and an 11a 14
percent increase in sales over the thirdfirst quarter of 1998.1999. Diluted earnings per
share of $.36$.37 for the quarter increased 13decreased three percent overas compared to the 19981999
amount. Overall profit growth in 2000 was curtailed by a $15 million pretax
charge relating to our distribution services business (see "Intangible Assets"
in the footnotes to the condensed consolidated financial statements included in
Item 1. above). Systemwide sales increased 11 percent, to $4.0$4.3 billion.
Marriott Lodging reported a 15nine percent increase in operating profit on 12
percent higher sales. The results reflect average REVPAR growth of three percent
across our lodging brands, strong performance from Marriott Vacation Club
International and contributions from new units. Systemwide lodging sales increased 12 percent to $3.6$3.8 billion.
We added a net total of 4846 lodging properties (5,753(7,300 units) during the thirdfirst quarter
of 1999,2000, and deflagged 6 properties (1,400 rooms), increasing our total
properties to 1,812 (344,9581,920 (361,753 units). Properties by brand (excluding 6,3006,200
rental units relating to ExecuStay) are as indicated in the following table.
13
Properties as of September 10, 1999
------------------------------------------------------------March 24, 2000
----------------------------------------------------------
Company-operated Franchised
---------------------------- -------------------------------------------------------
Properties UnitsRooms Properties UnitsRooms
------------ ------------ ------------------------- ------------
Marriott Hotels, Resorts and Suites............. 225 98,867Suites................. 234 102,447 137 39,381
Ritz-Carlton....................................39,493
Ritz-Carlton........................................ 35 11,58511,554 - -
Renaissance..................................... 75 30,079 15 5,715Renaissance Hotels, Resorts and Suites.............. 76 30,284 23 8,456
Ramada International............................International................................ 7 1,325 19 4,2214,246
Residence Inn...................................Inn....................................... 136 18,296 183 19,928
Courtyard....................................... 254 38,980 199 24,76918,222 197 21,408
Courtyard........................................... 268 41,394 210 26,429
TownePlace Suites............................... 22 2,260 26 2,553Suites................................... 28 2,898 40 3,897
Fairfield Inn...................................Inn....................................... 51 7,138 353 30,906366 32,086
SpringHill Suites............................... 4 438 26 2,623Suites................................... 7 804 34 3,349
Marriott Vacation Club International............ 38 4,367International................ 45 4,796 - -
Marriott Executive Apartments and other.........other............. 7 1,527 - -
------------ ------------ ------------ ------------
Total..................................... 854 214,862 958 130,096
============ ============ ============ ============--------- --------- ---------- ---------
Total........................................... 894 222,389 1,026 139,364
========= ========= ========== =========
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties grew by an average of 3.1 percent in 2000. Average room rates for
these hotels rose 4.8 percent, while occupancy decreased to 75.6 percent.
These results reflected a slow start to the year, as many travelers
stayed home in early January due to Y2K concerns, followed by a steady pick up
in demand as the first quarter progressed. Occupancy, average daily rate and
REVPAR for each of our principal established brands is shown in the following
table.
13
Twelve weeks ended Change vs.
March 24, 2000 1999
------------------ --------------
Marriott Hotels, Resorts and Suites
Occupancy................................................ 75.9% -1.2% pts.
Average daily rate....................................... $ 147.97 +4.6%
REVPAR................................................... $ 112.33 +3.0%
Ritz-Carlton
Occupancy................................................ 77.5% -0.7% pts.
Average daily rate....................................... $ 251.79 +6.1%
REVPAR................................................... $ 195.14 +5.2%
Renaissance Hotels, Resorts and Suites
Occupancy................................................ 71.6% +0.5% pts.
Average daily rate....................................... $ 140.64 +4.2%
REVPAR................................................... $ 100.67 +4.9%
Residence Inn
Occupancy................................................ 81.0% -0.6% pts.
Average daily rate....................................... $ 102.43 +3.4%
REVPAR................................................... $ 82.95 +2.6%
Courtyard
Occupancy................................................ 76.2% -1.8% pts.
Average daily rate....................................... $ 96.09 +4.4%
REVPAR................................................... $ 73.26 +2.1%
Fairfield Inn
Occupancy................................................ 65.6% -2.6% pts.
Average daily rate....................................... $ 59.44 +4.4%
REVPAR................................................... $ 39.00 +0.5%
Across Marriott's full-service lodging brands (Marriott Hotels, Resorts and
Suites, posted aRitz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR increasefor
comparable company-operated U.S. properties grew by an average of three3.5 percent due to a four percent increase in
averagethe 2000 first quarter. Average room rates to $131, partially offset
by a slight decrease infor these hotels rose nearly five
percent, while occupancy to 80 percent. Profit margins increased as
cost controls generated higher incentive management fees at many hotels.
Renaissance hotels posted a REVPAR increase of one percent due to a two percent
increase in average room rates to $120, partially offset by adeclined one percentage point decrease in occupancy, to 7175 percent.
Ritz-Carlton reported an increase in average room rates of four percent, to
$197, with occupancy up six percentage points to 80 percent, resulting in a 12
percent increase in REVPAR.Our domestic select-service and extended-stay brands (Fairfield Inn, Courtyard,
Residence Inn, our quality tier extended-stay brand, postedSpringHill Suites and TownePlace Suites) have added a slight increase innet of 162
properties, primarily franchises, since the first quarter of 1999.
REVPAR due to a one percent increase in average room rates, to $100, and a one
percentage point decrease in occupancy to 86 percent.for comparable Residence Inn, opened 10
propertiesCourtyard and Fairfield Inn brands
increased 1.8 percent during the quarter. Courtyard, our moderate-priceWhile REVPAR comparisons were stronger
in the northeast and west, softer results in the midwest reflected industry
supply growth in certain markets.
Results for international lodging brand, increased average room rates by
four percent to $91,operations rebounded in the 2000 first
quarter, reflecting solid profit growth for properties in Asia and occupancy decreased slightly to 82 percent, resultingEgypt, as
well as in Europe, despite a REVPAR increasedecline in the value of three percent. Courtyard opened 14 properties during
the quarter.
Fairfield Inn, our economy lodging brand, posted a decrease in REVPAR of four
percent due to a decrease in average room rates of one percent to $59, and a two
percentage point decrease in occupancy to 77 percent. Fairfield Inn opened 12
properties duringEuro against the quarter.U.S.
dollar.
Marriott Vacation Club International posted substantial profit growth in the
1999 quarter. We generated2000 first quarter on a 1714 percent increase in contract sales, reflectingsales. Results
reflected strong sales activity atin our quality-tier timeshare
14
resorts in Florida,Hawaii, California, South
Carolina, SpainUtah and Hawaii.Aruba. We also began selling fractional
ownership interests at our first two Ritz-Carlton Club resorts in Aspen,
Colorado and St. Thomas, U.S. Virgin Islands.
Marriott Senior Living Services (SLS) posted 1424 percent sales growth in the 1999
third quarter. Operating profit before corporate expenses and interest declined
as pre-opening costs of $4 million and start up losses associated with new
properties more than offset gains from property sales and profit growth from
established communities. Occupancy2000
first quarter, reflecting an increase in occupancy for comparable communities decreased by
14
oneof
five percentage pointpoints to 9087 percent, and the net addition of 25 units since the
first quarter 1999. Operating profit for the quarter. At September 10, 1999, SLS
operated 131 independent full-service and assisted livingdivision was flat, as improved
performance for established communities totaling
approximately 23,200 units.was offset by start-up costs for the new
properties.
Marriott Distribution Services (MDS) achieved higher profitsposted 22 percent sales growth in the 2000
first quarter, despite slightly lower sales. The division benefited from realizationreflecting the commencement of cost
economiesservice to three large restaurant
chains beginning this year. MDS reported a $12 million operating loss in transportation and warehouse operations, as well as higher gross
margins per case. See "Liquidity and Capital Resources" below forthe
2000 first quarter due to the $15 million pretax write-off of its investment in
a discussioncontract with Boston Chicken, Inc. (BCI), a major customer currently
undergoing reorganization in bankruptcy. McDonald's Corporation has entered into
a definitive agreement to acquire substantially all of the possible future impactassets of BCI,
subject to confirmation of the bankruptcy filingrelated plan of reorganization by a majorthe Bankruptcy
Court. MDS customer.has reached an agreement with McDonald's to continue providing
distribution services to Boston Chicken restaurants (see "Intangible Assets" in
the footnotes to the condensed consolidated financial statements included in
Item 1. above).
Corporate activity. Interest expense in first quarter 2000 increased by $6$12
million in the 1999 third
quarter, primarilyas a result of borrowings to finance growth outlays and share
repurchases. Corporate expenses decreased $3 million due to share repurchases and other investing activities.
Corporate expenses increased due to Year 2000systems-related
modification costs of $3$5 million compared toassociated with year 2000 incurred in the first
quarter 1999, offset by incremental costs of $2 million in the 1998 quarter, and higher net costs2000 associated with
tax-oriented investments.new corporate systems. The effective income tax rate decreased from 38.537.5
percent to 37.537.0 percent primarily due to the increased proportion of operations
in countries with lower effective tax rates.
Thirty-Six Weeks Ended September 10, 1999 Compared to Thirty-Six Weeks Ended
- -----------------------------------------------------------------------------
September 11, 1998
- ------------------
We reported net income of $310 million for the first three quarters of 1999, on
sales of $5,932 million. This represents a 12 percent increase in net income and
a nine percent increase in sales over the same period in 1998. Diluted earnings
per share of $1.16 increased 14 percent over the 1998 amount. Systemwide sales
increased 10 percent, to $11.9 billion.
Marriott Lodging reported a 17 percent increase in operating profit on 12
percent higher sales. The results reflect average REVPAR growth of three percent
across our lodging brands, strong results from Marriott Vacation Club
International and contributions from new units. Systemwide lodging sales
increased 12 percent to $10.7 billion.
Marriott Hotels, Resorts and Suites posted a three percent increase in average
room rates, to $139, and a slight increase in occupancy to 79 percent, which
generated a REVPAR increase of three percent.
Renaissance hotels posted a REVPAR increase of two percent due to a one
percentage point increase in occupancy to 72 percent, and a one percent increase
in average room rates to $130.
Ritz-Carlton reported an increase in average room rates of five percent, to
$219, with occupancy up five percentage points to 80 percent, resulting in an 11
percent increase in REVPAR.
Residence Inn posted slightly higher REVPAR, due to a small increase in
occupancy to 85 percent, and a slight increase in average room rates to $99.
Operating results include contributions from new units and gains related to the
disposition of six properties during the 1999 period. We retained long-term
operating agreements on these properties. Residence Inn opened 68 properties
since the beginning of fiscal year 1998.
Courtyard increased average room rates by two percent to $92, and occupancy
increased slightly to 81 percent, resulting in a REVPAR increase of three
percent. Courtyard opened 87 properties since the beginning of fiscal year
1998.
15
Fairfield Inn posted an increase in average room rates of one percent to $58,
which was offset by a two percentage point decrease in occupancy to 74 percent,
resulting in a decrease in REVPAR of one percent. Fairfield Inn opened 64
properties since the beginning of fiscal year 1998.
Marriott Vacation Club International posted substantial profit growth in the
first three quarters of 1999, reflecting a 21 percent increase in contract
sales.
Marriott Senior Living Services reported 15 percent higher sales in the first
three quarters of 1999. Operating profit before corporate expenses and interest
declined as pre-opening costs of $12 million and start-up costs of new
communities more than offset gains from property sales and improved performance
at established communities. Occupancy for comparable communities increased by
one percentage point to 90 percent for the period.
Marriott Distribution Services achieved higher profits in the period, despite
seven percent lower sales, reflecting increased operating efficiencies.
Corporate activity. Interest expense increased by $19 million in the 1999
period, primarily due to investing activities and share repurchases since the
Spinoff. Corporate expenses increased primarily due to Year 2000 modification
costs of $15 million compared to $8 million in the first three quarters of 1998.
The effective income tax rate decreased from 38.5 percent to 37.5 percent
primarily due to the increased proportion of operations in countries with lower
effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
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. However, our ability to sell properties that we
develop, and the ability of hotel or senior living community developers to build
or acquire new Marriott-branded properties, which are important parts of our
growth plans, are partially dependent on the availability and cost of capital.
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.
Cash and equivalents totaled $324$372 million at September 10, 1999,March 24, 2000, a decrease of $66$117
million from year end. Cash provided by operations of $582 million
increased 30 percent over 1998.end 1999. Net income is stated after recording depreciation
expense of $55$26 million and $49$19 million for the thirty-sixtwelve weeks ended September 10,March 24, 2000
and March 26, 1999, and September 11, 1998, respectively, and after amortization expense of $48$15 million
and $44$14 million, respectively, for the thirty-six weeks
ended September 10, 1999 and September 11, 1998, respectively.same time periods. EBITDA for the thirty-sixtwelve
weeks ended September 10, 1999March 24, 2000 increased by $76$9 million, or 14four percent, to $633$213
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 $636$284 million for the thirty-sixtwelve weeks
ended September 10, 1999,March 24, 2000, and included our acquisitionprincipally consisted of ExecuStay,capital expenditures for developing limited-service
lodging properties and senior living
communities, together with notenotes receivable advances. Cash generated from dispositions of
$270 million resulted primarily from the sales of limited-service lodging
properties and senior living communities under master transactions initiated in
1998. We continue to operate these properties under long-term agreements.
We continue to grow our businesses, in part, by investing in new units. We
expect our principal investments to continue to include notes, minority equity
interests, business acquisitions and direct development and ownership of certain
lodging and senior living services projects. We 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.
16
We believe that cash generated by operations, together with our borrowing
capacity and proceeds from the sale of assets, will be sufficient to finance our
planned growth and capital requirements. Nonetheless, our ability to sell
properties that we develop, and the ability of hotel and senior living community
developers to build or acquire new Marriott properties, both of which are
important components of our growth plans, are to some extent dependent on the
availability and price of capital. We continually monitor the status of the
capital markets, and other conditions which could affect our ability to execute
our announced growth plans.
We purchased 4.58.2 million shares of our Class A Common Stock in the thirty-sixtwelve weeks
ended September 10, 1999,March 24, 2000, at a cost of $158$243 million. On September 30,
1999,As of March 24, 2000, we had
been authorized by our Board authorized theof Directors to repurchase of an additional 1022.3
million shares,
resulting in a total authorization of 10.6 million shares as of September 30,
1999.shares.
In April 1999,January 2000, we filed a "universal shelf" registration statement with the
Securities and Exchange Commission. ThatCommission which, together with the authority remaining
under a universal shelf registration statement which became
effective on May 4,filed in April 1999, originally allowedpermitted us
to offer to the public up to $500 million of debt securities, Class A Common Stock and/or preferred stock.
This "universal shelf" format provides us with additional flexibility to meet
our financing needs.securities. On September 20, 1999,March 27, 2000, we
sold $300 million principal amount of 7-7/8-1/8 percent Series CD Notes, which mature
in 2009,2005, in a public offering made under our shelf registration statement.statements. We
received net proceeds of approximately $296$298 million from this offering, after
paying underwriting discounts, commissions and offering expenses. On October 7, 1999, we delivered a mandatory redemption noticeAfter giving
effect to the holdersissuance of the LYONs indicatingSeries D Notes, we have remaining capacity under
our planJanuary 2000 shelf registration statement to redeem them on November 8, 1999 for $619.65 in
cash per LYON. Holders may electoffer to convert each LYON into 17.52 sharesthe public up to $200
million of our
Class A Common Stock and 2.19 shares of SMSdebt securities, common stock at any time prior to
the close of business on November 8, 1999. If none of the holders of the
540,200 outstanding LYONs elect to convert, the aggregate redemption payment
would total $335 million. Pursuant to the LYONs Allocation Agreement entered
into with SMS as part of the Spinoff, SMS is obligated to fund nine percent of
the aggregate LYONs redemption payment. Our 91 percent share of the redemption
payment would then be $305 million, which we plan to fund with commercial paper
borrowings.or preferred stock.
In 1996, MDS became the exclusive provider of distribution services to
Boston
Chicken Inc. (BCI).Einstein/Noah Bagel Corp. (ENBC), which operates over 460 bagel shops in 29
states. In March 2000, ENBC disclosed that its independent auditors had
expressed substantial doubt about ENBC's ability to continue as a going concern,
due to its inability to meet certain financial obligations. On October 5, 1998, BCIApril 27, 2000,
ENBC and its Boston Market-controlled
subsidiariesmajority-owned operating subsidiary filed voluntary bankruptcy
petitions in the U.S. Bankruptcy Court
(the Court) for protection under Chapter 11 of the Federal Bankruptcy Code. The
bankruptcy resultedCode in the
closingU.S. Bankruptcy Court for the District of approximately 21 percentArizona in Phoenix. On April 28, 2000,
the Court approved a $31 million debtor-in-possession credit facility to allow
for operation of the restaurantscompanies during reorganization, and also approved the
payment in the Boston Market chain.ordinary course of business of prepetition trade creditor claims,
including those of MDS, subject to recovery by the debtors under certain
circumstances. MDS continues to distribute to BCIENBC and has been receiving full
payment of post-petition balances in
16
accordance with the terms of its contracts with BCI. In addition, the Court has approved, and MDS
has received, payment for substantially all of its pre-petition accounts
receivable balances. However, the final effect on our future results of
operations and financial position depends on the final resolution of BCI's
bankruptcy. Under certain circumstances, ifcontractual agreement. If the contract were to
terminate, or if BCIENBC were to cease or further curtailsubstantially reduce its operations: (1)operations, MDS
may be unable to recover some or all of an aggregate of approximately $32$18
million in contract investment, receivables and inventory; and (2) MDS could have excess warehouse
capacity and rolling stock.
17
Year 2000 Readiness 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.
State of Readiness. We have adopted the following eight-step process toward
Year 2000 readiness:
1. Awareness: fostering understanding of, and commitment to, the problem and its
potential risks;
2. Inventory: identifying and locating systems and technology components that
may be affected;
3. Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues;
4. Planning: defining the technical solutions and labor and work plans necessary
for each affected system;
5. Remediation/Replacement: completing the programming to renovate or replace
the problem software or hardware;
6. Testing and Compliance Validation: conducting testing, followed by
independent validation by a separate internal verification team;
7. Implementation: placing the corrected systems and technology back into the
business environment; and
8. Quality Assurance: utilizing an internal audit team to review significant
projects for adherence to quality standards and program methodology.
We have grouped our systems and technology into three categories for purposes of
Year 2000 compliance:
1. Information resource applications and technology (IT Applications) --
enterprise-wide systems supported by the Company's centralized information
technology organization (IR);
2. Business-initiated systems (BIS) -- systems that have been initiated by an
individual business unit, and that are not supported by IR; and
3. Building Systems -- non-IT equipment at properties that use embedded computer
chips, such as elevators, automated room key systems and HVAC equipment.
We are prioritizing our 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).
18
We measure completion of each phase based on documentation and quantified
results weighted for System Criticality. The table below reflects the status of
our Year 2000 readiness process at September 10, 1999. Based on progress
achieved to date for areas under our control, we expect minimal business
disruptions to arise as a result of the Year 2000 readiness for the categories
reflected in the table. Nonetheless, we have prepared contingency plans
(described in more detail below) which address unforeseen circumstances and
events beyond our control.
-------------------------------------------------------------------------------------------------------------------------
Step IT Applications BIS Building Systems
=========================================================================================================================
Awareness Complete Complete Complete
-------------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
-------------------------------------------------------------------------------------------------------------------------
Assessment Complete Complete Complete
-------------------------------------------------------------------------------------------------------------------------
Planning Complete Complete Complete
-------------------------------------------------------------------------------------------------------------------------
Remediation/ Over 95 percent Over 95 percent complete Over 95 percent
Replacement complete complete
-------------------------------------------------------------------------------------------------------------------------
Testing and Testing over 95 percent Testing is approximately Initial testing is over
Compliance Validation complete; Compliance 80 percent complete.* 95 percent complete.*
Validation completed for Compliance Validation is Compliance validation
over 90 percent of key in progress* is in progress
systems, with most
remaining work in its
final stage
-------------------------------------------------------------------------------------------------------------------------
Implementation Approximately 85 percent Approximately 85 percent Over 95 percent complete
of implementation complete **
projects complete.
Additionally, for the
remaining projects
involving rollout to
business locations, we
have made substantial
progress and we expect to
complete by year end 1999
-------------------------------------------------------------------------------------------------------------------------
Quality Assurance In progress for In progress In progress
approximately 80 percent
of IT applications
-------------------------------------------------------------------------------------------------------------------------
* Testing for third party BIS and Building Systems may consist of our receipt
and evaluation of vendor compliance documentation and, where appropriate,
further verification by us of compliance.
** Completion of certain BIS items is dependent on third party software
patches which we have not yet received.
Year 2000 compliance communications with our significant third party suppliers,
vendors and business partners, including our franchisees, are ongoing. Our
efforts are focused on the connections most critical to customer service, core
business processes and revenues, including those
19
third parties that support our most critical enterprise-wide IT Applications,
franchisees generating the most 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. We have received responses from a majority of the
firms in this group. A 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. Where we have not received satisfactory responses we are
addressing the potential risks of failure through our contingency planning
process.
We have established a common approach for testing and addressing Year 2000
compliance issues for our managed and franchised properties. This includes
guidance for properties we operate, and a Year 2000 "Toolkit" for franchisees
containing relevant Year 2000 compliance information. We are also utilizing a
Year 2000 best-practices sharing system. We are monitoring the progress of the
managed and franchised properties towards Year 2000 compliance.
Costs. Many of the costs of Year 2000 compliance will be reimbursed to us or
otherwise paid directly by owners and clients pursuant to existing contracts.
We estimate that we will bear approximately $35 million to $40 million of the
pretax costs to address the Year 2000 problem. Some of these costs relate to
internal resources which will be redeployed in 2000, and, as such, represent
costs which we will continue to incur in future years. The Year 2000 costs,
approximately $27 million (on a pretax basis) of which have been incurred
through September 10, 1999, have been and will be expensed as incurred.
In addition, we had previously planned and/or begun implementing several system
replacement projects to modernize and improve our systems. The Year 2000
problem heightened the need for timely completion and some project schedules
have been accelerated. These project costs have been included in our budgeting
process and internal forecasts and already form part of our financial plans.
Like the Year 2000 costs referred to in the preceding paragraph, many of these
systems replacement costs will be reimbursed to us or otherwise paid directly by
owners and clients pursuant to existing contracts. We estimate that we will
bear approximately $45 million to $50 million of the pretax costs of these
systems replacements, most of which will be capitalized and amortized over the
useful lives of the assets.
The amount of costs we will actually incur depends on a number of factors which
cannot be accurately predicted, including the extent and difficulty of the
Remediation and other work to be done, the availability and cost of consultants,
the extent of testing required to demonstrate Year 2000 compliance, and our
ability to timely collect all payments due to us under existing contracts.
Year 2000 Contingency Plans. Our centralized services and the properties we
operate already have contingency plans in place covering a variety of possible
events, including natural disasters, interruption of utility service, general
computer failure, and the like. We have reviewed these contingency plans and
have made appropriate modifications to address specific Year 2000 issues. The
modification of master contingency plans is complete, with conforming changes
added to individual unit contingency plans during the third quarter.
Contingency drills and preparations are being conducted.
In addition, to provide support and coordination during the actual turn of the
century, we have established information and coordination centers to collect and
report status and track and address problems as they occur.
20
Risks Posed By Our Year 2000 Issues. We currently believe that the Year 2000
problem will not have a material adverse effect on us, our business or our
financial condition. However, we cannot assure you that our Year 2000
remediation or remediation by others will be completed properly and on time, and
failure to do so could materially and adversely effect us. We also cannot
predict the actual effects of the Year 2000 problem on us, which depend on a
number of uncertainties such as:
. the factors listed above under "Costs";
. whether our franchisees and other significant third parties address the Year
2000 issue properly and on time;
. whether broad-based or systemic economic failures may occur, which could
include:
. disruptions in passenger transportation or transportation systems
generally;
. loss of utility and/or telecommunications services;
. errors or failures in financial transactions or payment processing
systems such as credit cards;
. the severity and duration of such failures; and
. whether we are sued or become subject to other proceedings regarding any Year
2000-related events and the outcome of any such suit or proceedings.
As part of our contingency planning, we have analyzed the most reasonably likely
worst-case scenario that could result from Year 2000-related failures. Our best
estimate of this scenario, based on current information, follows. Failure by
others to achieve Year 2000 compliance could cause short-term disruptions in
travel patterns, caused by actual or perceived problems with travel systems, and
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 occupancy patterns.
Such failures could be more pronounced in some areas outside the U.S. where we
understand that Year 2000 compliance efforts may not be as advanced. In
addition, failure by us or others to achieve Year 2000 compliance could cause
short-term operational inconveniences and inefficiencies for us. This may
temporarily divert management's time and attention from ordinary business
activities. We will, to the extent reasonably achievable, seek to prevent
and/or mitigate these effects through our compliance and contingency planning
efforts.inventory.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
January 1,December 31, 1999.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information."
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
4.1 Amended and Restated Rights10.1 Settlement Agreement dated as of AugustMarch 9, 1999, with2000 among A.R.
Milkes, Robert M. Haas, Sr., and other plaintiffs and
intervenors identified therein and the BankCompany, Host
Marriott Corporation, and other identified defendants, each
by and through their respective counsel of New York, as Rights Agent.record.
10.2 Amended and restated Marriott International, Inc. 1998
Comprehensive Stock and Cash Incentive Plan (incorporated by
reference to Attachment A to the Company's definitive proxy
statement filed on March 23, 2000).
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
27 Financial Data Schedule for the Company.
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
23On February 24, 2000, we filed a report describing a tentative agreement to
resolve pending litigation involving certain limited partnerships which we
expected to result in a pretax charge of $30 million to $40 million. The
agreement became definitive on March 9, 2000, and as a result we recorded a $39
million pretax charge in the fourth quarter of 1999. We also described our
plans to form an unconsolidated joint venture with Host Marriott Corporation to
acquire all of the limited partners' interests in Courtyard by Marriott Limited
Partnership and Courtyard by Marriott II Limited Partnership, for approximately
$372 million.
19
SIGNATURES
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 25, 19995th day of May, 2000
/s/ Arne M. Sorenson
____________________________------------------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Linda A. Bartlett
____________________________------------------------------
Linda A. Bartlett
Senior Vice President Finance and
Corporate Controller
(Principal Accounting Officer)
2420