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 June 18, 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 July 16, 1999
- -------------------------------- ------------------------------
Class A Common Stock,
$0.01 par value 248,783,298
1
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
-------------
Forward-Looking Statements............................................................. 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Twenty-Four Weeks Ended June 18, 1999 and
June 19, 1998.................................................................... 4
Condensed Consolidated Balance Sheet -
as of June 18, 1999 and January 1, 1999.......................................... 5
Condensed Consolidated Statement of Cash Flows -
Twenty-Four Weeks Ended June 18, 1999 and June 19, 1998.......................... 6
Notes to Condensed Consolidated Financial Statements............................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 13
Quantitative and Qualitative Disclosures About Market Risk......................... 21
Part II. Other Information and Signatures:
Legal Proceedings.................................................................. 22
Changes in Securities.............................................................. 22
Defaults Upon Senior Securities.................................................... 22
Submission of Matters to a Vote of Security Holders................................ 22
Other Information.................................................................. 22
Exhibits and Reports on Form 8-K................................................... 23
Signatures......................................................................... 24
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 that of other parties upon which our
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 our
filings with the Securities and Exchange Commission, including those set forth
on Exhibit 99 filed herewith. Given these uncertainties, 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 STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended Twenty-four weeks ended
--------------------------------------- -------------------------------------
June 18, 1999 June 19, 1998 June 18, 1999 June 19, 1998
----------------- ----------------- ----------------- ----------------
SALES........................................... $ 2,042 $ 1,927 $ 3,937 $ 3,642
OPERATING COSTS AND EXPENSES.................... 1,826 1,741 3,528 3,293
----------------- ----------------- ----------------- ----------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST................................... 216 186 409 349
Corporate expenses.............................. (28) (24) (57) (49)
Interest expense................................ (11) (6) (22) (9)
Interest income................................. 6 8 13 18
----------------- ----------------- ----------------- ----------------
INCOME BEFORE INCOME TAXES...................... 183 164 343 309
Provision for income taxes...................... 69 63 129 119
----------------- ----------------- ----------------- ----------------
NET INCOME...................................... $ 114 $ 101 $ 214 $ 190
================= ================= ================= ================
DIVIDENDS DECLARED PER SHARE.................... $ .055 $ .095 $ .105 $ .095
================= ================= ================= ================
EARNINGS PER SHARE
Basic Earnings Per Share...................... $ .46 $ .40 $ .87 $ .75
================= ================= ================= ================
Diluted Earnings Per Share.................... $ .42 $ .37 $ .80 $ .70
================= ================= ================= ================
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
June 18, January 1,
1999 1999
------------ ------------
ASSETS (Unaudited)
Current assets
Cash and equivalents...................................................... $ 240 $ 390
Accounts and notes receivable............................................. 649 605
Other..................................................................... 350 338
------------ ------------
1,239 1,333
------------ ------------
Property and equipment..................................................... 2,471 2,275
Intangibles................................................................ 1,843 1,712
Investments in affiliates.................................................. 270 228
Notes and other receivables................................................ 452 434
Other...................................................................... 284 251
------------ ------------
$ 6,559 $ 6,233
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................................... $ 483 $ 497
Other..................................................................... 938 915
------------ ------------
1,421 1,412
------------ ------------
Long-term debt............................................................. 849 944
Other long-term liabilities................................................ 1,087 984
Convertible subordinated debt.............................................. 329 323
Shareholders' equity
Class A common stock, 255.6 million shares issued......................... 3 3
Additional paid-in capital................................................ 2,735 2,713
Retained earnings......................................................... 323 218
Treasury stock, at cost................................................... (161) (348)
Accumulated other comprehensive income.................................... (27) (16)
------------ ------------
2,873 2,570
------------ ------------
$ 6,559 $ 6,233
============ ============
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Twenty-four weeks ended
---------------------------------------
June 18, June 19,
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net income.............................................................. $ 214 $ 190
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization....................................... 69 62
Income taxes and other.............................................. 63 73
Timeshare activity, net............................................. 13 34
Working capital changes............................................. 10 (95)
------------ ------------
Cash provided by operations............................................. 369 264
------------ ------------
INVESTING ACTIVITIES
Acquisitions............................................................ (55) (48)
Dispositions............................................................ 235 96
Capital expenditures.................................................... (394) (369)
Note advances........................................................... (68) (18)
Note collections and sales.............................................. 20 122
Other................................................................... (96) (74)
------------ ------------
Cash used in investing activities....................................... (358) (291)
------------ ------------
FINANCING ACTIVITIES
Issuance of long-term debt.............................................. 6 701
Repayment of long-term debt............................................. (144) (460)
Issuance of Class A common stock........................................ 34 2
Dividends paid.......................................................... (25) (12)
Purchase of treasury stock.............................................. (32) (116)
Advances to Old Marriott................................................ - (114)
------------ ------------
Cash (used in) provided by financing activities......................... (161) 1
------------ ------------
DECREASE IN CASH AND EQUIVALENTS........................................... (150) (26)
CASH AND EQUIVALENTS, beginning of period.................................. 390 208
------------ ------------
CASH AND EQUIVALENTS, end of period........................................ $ 240 $ 182
============ ============
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 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 thereto included in our Annual Report on Form 10-K (the Annual
Report) for the fiscal year ended January 1, 1999. Capitalized terms not
otherwise defined in 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 our opinion, the accompanying condensed consolidated financial
statements reflect all adjustments necessary to present fairly our
financial position as of June 18, 1999 and January 1, 1999, the results of
operations for the twelve and twenty-four weeks ended June 18, 1999 and
June 19, 1998, and cash flows for the twenty-four weeks ended June 18, 1999
and June 19, 1998. 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 $612 million and
$1,089 million for the twelve and twenty-four weeks ended June 19, 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 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. 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 Twenty-four weeks ended
------------------------------------ ------------------------------------
June 18, 1999 June 19, 1998 June 18, 1999 June 19, 1998
---------------- ---------------- ---------------- ----------------
Computation of Basic Earnings Per Share
Net income......................................... $ 114 $ 101 $ 214 $ 190
Weighted average shares outstanding................ 249.5 254.1 247.3 253.8
---------------- ---------------- ---------------- ----------------
Basic Earnings Per Share........................... $ .46 $ .40 $ .87 $ .75
================ ================ ================ ================
Computation of Diluted Earnings Per Share
Net income......................................... $ 114 $ 101 $ 214 $ 190
After-tax interest expense on convertible
subordinated debt................................. 2 2 4 4
---------------- ---------------- ---------------- ----------------
Net income for diluted earnings per share.......... $ 116 $ 103 $ 218 $ 194
================ ================ ================ ================
Weighted average shares outstanding................ 249.5 254.1 247.3 253.8
Effect of Dilutive Securities
Employee stock purchase plan...................... 0.1 - 0.1 -
Employee stock option plan........................ 9.2 9.1 9.4 9.1
Deferred stock incentive plan..................... 5.1 5.7 5.3 5.6
Convertible subordinated debt...................... 9.5 9.5 9.5 9.5
---------------- ---------------- ---------------- ----------------
Shares for diluted earnings per share.............. 273.4 278.4 271.6 278.0
================ ================ ================ ================
Diluted Earnings Per Share......................... $ .42 $ .37 $ .80 $ .70
================ ================ ================ ================
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 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 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. Comprehensive Income
--------------------
Total comprehensive income was $113 million and $115 million, respectively,
for the twelve weeks ended June 18, 1999 and June 19, 1998, and $203
million and $200 million, respectively, for the twenty-four weeks ended
June 18, 1999 and June 19, 1998. The principal difference between net
income and total comprehensive income relates to foreign currency
translation adjustments.
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 pre-tax expenses of $4 million and $9 million,
respectively, for the twelve and twenty-four weeks ended June 18, 1999.
We will adopt 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.
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
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 twenty-four weeks ended June 18, 1999 and June
19, 1998.
Twelve weeks ended Twenty-four weeks ended
------------------------------------ -----------------------------------
June 18, 1999 June 19, 1998 June 18, 1999 June 19, 1998
--------------- ---------------- --------------- ----------------
SALES
Lodging........................................ $ 1,659 $ 1,541 $ 3,182 $ 2,860
Senior Living Services......................... 124 108 244 213
Distribution Services.......................... 259 278 511 569
--------------- ---------------- --------------- ----------------
$ 2,042 $ 1,927 $ 3,937 $ 3,642
=============== ================ =============== ================
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST
Lodging........................................ $ 210 $ 178 $ 397 $ 336
Senior Living Services......................... 1 4 3 6
Distribution Services.......................... 5 4 9 7
--------------- ---------------- --------------- ----------------
$ 216 $ 186 $ 409 $ 349
=============== ================ =============== ================
Sales of Distribution Services do not include sales made at market terms
and conditions to our other business segments of $39 million and $38
million for the twelve weeks ended June 18, 1999 and June 19, 1998,
respectively, and $76 million and $70 million for the twenty-four weeks
ended June 18, 1999 and June 19, 1998, respectively.
8. 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 $182 million at June 18, 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 June 18, 1999, totaled $70
million, the majority of which related to our self-insurance program. At
June 18, 1999, we had a repurchase obligation of $81 million related to
notes receivable from timeshare interval purchasers that have been sold
with limited recourse.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the
Company. Although we believe that the lawsuits described below are without
merit, and we intend to vigorously defend against the claims being made
against us, we cannot assure you as to the outcome of these lawsuits nor
can we currently estimate the range of any potential loss to the Company.
Courtyard by Marriott II Limited Partnership (CBM II)
A group of partners in CBM II filed a lawsuit, Whitey Ford, et al. v. Host
Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the
285/th/ 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
11
formation, operation and management of CBM II and its hotels. The
plaintiffs are seeking 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, the class has been certified, class
counsel has been appointed, and discovery is underway. On March 11, 1999,
Palm Investors, L.L.C., the assignee of a number of limited partnership
units acquired through various tender offers, filed a plea in intervention
to bring additional claims relating to the 1993 split of Marriott
Corporation and to the 1995 refinancing of CBM II's indebtedness. This plea
also seeks the addition of Ernst & Young, L.L.P. and E&Y Kenneth Leventhal
Real Estate Services Co. as additional defendants for their appraisal role
in the 1995 refinancing. 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.
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 asserts as derivative claims, on behalf of CBM I
and CBM II, the same kind of claims asserted individually in the Ford and
Milkes actions described above. The Company, certain of its officers and
directors and a subsidiary are named as defendants, among others. Although
no discovery has occurred, trial has been set for January 10, 2000.
Texas Multi-Partnership Lawsuits
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/ 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 transferred to the CBM II lawsuit described above. No trial date has
been set.
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 twenty-four weeks ended June 18, 1999 and June 19, 1998.
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
$659 million and $612 million for the twelve weeks ended June 18, 1999 and June
19, 1998, respectively, and $1,323 million and $1,089 million for the twenty-
four weeks ended June 18, 1999 and June 19, 1998 respectively, compared to sales
as previously calculated for those periods.
Twelve Weeks Ended June 18, 1999 Compared to Twelve Weeks Ended June 19, 1998
- -----------------------------------------------------------------------------
We reported net income of $114 million for the 1999 second quarter, on sales of
$2,042 million. This represents a 13 percent increase in net income and a six
percent increase in sales over the second quarter of 1998. Diluted earnings per
share of $.42 for the quarter increased 14 percent over the 1998 amount.
Systemwide sales increased 10 percent, to $4.2 billion.
Marriott Lodging reported an 18 percent increase in operating profit on eight
percent higher sales. The results reflect average REVPAR growth of three percent
across our lodging brands, including strong performance from Marriott Vacation
Club International and contributions from new units. Sales for full-service and
luxury hotel brands comprised 72 percent of total lodging sales in the 1999
quarter. Systemwide lodging sales increased 11 percent to $3.8 billion.
We added a net total of 27 properties (3,980 units) during the second quarter of
1999, increasing our total properties to 1,764 (339,205 units). In the second
quarter we withdrew the Ramada International flag from 16 properties in Germany
due to non-payment of franchise fees. No material profit impact is expected to
arise from this action. Properties by brand (excluding 5,100 rental units
relating to ExecuStay) are as indicated in the following table.
13
Properties as of June 18, 1999
--------------------------------------------------------
Company-operated Franchised
------------------------- -------------------------
Properties Units Properties Units
---------- --------- ---------- ---------
Marriott Hotels, Resorts and Suites.............. 212 94,362 151 44,115
Ritz-Carlton..................................... 36 11,875 - -
Renaissance...................................... 74 29,574 14 5,415
Ramada International............................. 7 1,325 19 4,221
Residence Inn.................................... 133 17,924 177 19,288
Courtyard........................................ 253 38,817 187 22,988
TownePlace Suites................................ 17 1,785 20 1,985
Fairfield Inn.................................... 51 7,136 341 29,965
SpringHill Suites................................ 4 438 23 2,286
Marriott Vacation Club International............. 38 4,177 - -
Marriott Executive Apartments and other.......... 7 1,529 - -
---------- --------- --------- ---------
Total.......................................... 832 208,942 932 130,263
========== ========= ========= =========
Marriott Hotels, Resorts and Suites posted a three percent increase in average
room rates, to $143, and maintained occupancy of 80 percent, which generated a
REVPAR increase of three percent. Profit margins increased as cost controls
generated higher incentive management fees at many hotels.
Renaissance hotels posted a REVPAR increase of three percent due to a one
percentage point increase in occupancy to 75 percent, and a two percent increase
in average room rates, to $136.
Ritz-Carlton reported an increase in average room rates of four percent, to
$228, with occupancy up four percentage points to 82 percent, resulting in a 10
percent increase in REVPAR.
Residence Inn, our quality tier extended-stay brand, posted a one percentage
point increase in REVPAR, due to a slight increase in average room rates, to
$100, and a small increase in occupancy to 86 percent. Residence Inn opened nine
properties during the quarter.
Courtyard, our moderate-price lodging brand, increased average room rates by two
percent to $92, and occupancy increased slightly to 82 percent, resulting in a
REVPAR increase of two percent. Courtyard opened 14 properties during the
quarter.
Fairfield Inn, our economy lodging brand, posted an increase in average room
rates of two percent to $59, which was offset by a two percentage point decrease
in occupancy to 75 percent, resulting in a slight decrease in REVPAR. Fairfield
Inn opened seven properties during the quarter.
Marriott Vacation Club International posted substantial profit growth in the
1999 quarter. We generated a 16 percent increase in contract sales, reflecting
strong sales activity at timeshare resorts in Florida, California, South
Carolina, Spain and Aruba.
Marriott Senior Living Services posted 15 percent sales growth in the 1999
second quarter. Operating profit before corporate expenses and interest
declined as profit growth from established communities was offset by pre-opening
costs of $4 million and start up losses associated with new properties.
Occupancy for comparable communities increased by one percentage point to 90
14
percent for the quarter. At June 18, 1999, the division operated 125 independent
full-service and assisted living communities totaling approximately 22,300
units.
Marriott Distribution Services (MDS) achieved higher profits in the quarter,
despite lower sales. The division benefited from realization of cost economies
in transportation and warehouse operations, as well as higher gross margins per
case. See "Liquidity and Capital Resources" below for a discussion of the
possible future impact of the bankruptcy filing by a major MDS customer.
Corporate activity. Interest expense increased by $5 million in the 1999 second
quarter, primarily due to investing activities and share repurchases since the
Spinoff. Corporate expenses increased primarily due to Year 2000 modification
costs of $7 million compared to $3 million in the 1998 quarter. 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.
Twenty-Four Weeks Ended June 18, 1999 Compared to Twenty-Four Weeks Ended June
- ------------------------------------------------------------------------------
19, 1998
- --------
We reported net income of $214 million for the first half of 1999, on sales of
$3,937 million. This represents a 13 percent increase in net income and an eight
percent increase in sales over the same period in 1998. Diluted earnings per
share of $.80 increased 14 percent over the 1998 amount. Systemwide sales
increased 10 percent, to $7.9 billion.
Marriott Lodging reported an 18 percent increase in operating profit on 11
percent higher sales. The results reflect average REVPAR growth of three percent
across our lodging brands, including strong results from Marriott Vacation Club
International and contributions from new units. Sales for full-service and
luxury hotel brands comprised 73 percent of total lodging sales in 1999.
Systemwide lodging sales increased 12 percent to $7.1 billion.
Marriott Hotels, Resorts and Suites posted a three percent increase in average
room rates, to $143, and a slight increase in occupancy to 79 percent, which
generated a REVPAR increase of three percent.
Renaissance hotels posted a REVPAR increase of three percent due to a two
percentage point increase in occupancy to 73 percent, and a one percent increase
in average room rates to $135.
Ritz-Carlton reported an increase in average room rates of five percent, to
$231, with occupancy up four percentage points to 80 percent, resulting in a 10
percent increase in REVPAR.
Residence Inn posted slightly higher REVPAR, due to a one percentage point
increase in occupancy to 84 percent, partially offset by a slight decrease 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 58 properties since the beginning of fiscal year 1998.
Courtyard increased average room rates by two percent to $92, and occupancy
increased by one percentage point to 81 percent, resulting in a REVPAR increase
of two percent. Courtyard opened 73 properties since the beginning of fiscal
year 1998.
15
Fairfield Inn posted an increase in average room rates of two percent to $58,
which was offset by a one percentage point decrease in occupancy to 72 percent,
resulting in a slight increase in REVPAR. Fairfield Inn opened 52 properties
since the beginning of fiscal year 1998.
Marriott Vacation Club International posted substantial profit growth in the
first two quarters of 1999. We generated a 24 percent increase in contract
sales.
Marriott Senior Living Services reported higher sales in the 1999 first half.
Operating profit before corporate expenses and interest declined as pre-opening
costs of $9 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 two percentage points to 91
percent for the period.
Marriott Distribution Services achieved higher profits in the period, despite
lower sales, reflecting increased operating efficiencies.
Corporate activity. Interest expense increased by $13 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 $12 million compared to $6 million in the 1998 first half. 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
Cash and equivalents totaled $240 million at June 18, 1999, a decrease of $150
million from year end. Cash provided by operations of $369 million increased 40
percent over 1998. Net income is stated after recording depreciation expense of
$39 million and $31 million for the twenty-four weeks ended June 18, 1999 and
June 19, 1998, respectively, and after amortization expense of $30 million and
$31 million for the twenty-four weeks ended June 18, 1999 and June 19, 1998,
respectively. EBITDA for the twenty-four weeks ended June 18, 1999 increased by
$54 million, or 14 percent, to $434 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 $358 million for the twenty-four
weeks ended June 18, 1999, and included our acquisition of ExecuStay,
expenditures for developing limited-service lodging properties and senior living
communities, together with note advances. Cash generated from dispositions of
$235 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 0.9 million shares of our Class A Common Stock in the twenty-four
weeks ended June 18, 1999, at a cost of $32 million. As of June 18, 1999, we had
been authorized by our Board of Directors to purchase an additional 5.4 million
shares.
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 in the U.S. Bankruptcy Court
(the Court) for protection under Chapter 11 of the Federal Bankruptcy Code. The
bankruptcy resulted in the closing of approximately 21 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 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, if the contract were to terminate, or
if BCI were to cease or further curtail its operations: (1) MDS may be unable to
recover some or all of an aggregate of approximately $32 million in contract
investment, receivables and inventory; and (2) MDS could have more warehouse
capacity and rolling stock than it needs.
In November 1998, we issued, through a private placement, $400 million of
unsecured 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. All of the privately placed senior notes
were tendered for exchange, and new notes were issued to the holders on May 31,
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 provides us with
additional flexibility to efficiently fulfill our financing needs.
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.
17
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 following table reflects the status
of our Year 2000 readiness process at June 18, 1999.
- ---------------------------------------------------------------------------------------------------------------------------
Step IT Applications BIS Building Systems
===========================================================================================================================
Awareness Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------------
Assessment Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------------
Planning Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------------
Remediation/ Replacement Over 95 percent complete Substantially complete; Substantially complete;
critical systems targeted critical systems
for completion by targeted for completion
September 1999 by September 1999
- ---------------------------------------------------------------------------------------------------------------------------
Testing and Compliance Validation Testing over 95 percent Testing is in progress.* Initial testing is over
complete; Compliance Compliance Validation is 95 complete *, for
Validation completed for in progress which approximately
over 85 percent of key five percent require
systems, with most further remediation/
remaining work in its replacement and
final stage re-testing.
Completion for critical
systems targeted for
September 1999;
Compliance Validation
is in progress
- ---------------------------------------------------------------------------------------------------------------------------
Implementation Approximately 80 percent Substantially complete ** In progress
of implementation
projects complete, with
rollout to business
locations underway
- ---------------------------------------------------------------------------------------------------------------------------
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 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
19
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 $40-$50 million of the pre-tax 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 bear in future years. The Year 2000 costs, approximately $24 million
(on a pre-tax basis) of which have been incurred through June 18, 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 the 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-$50 million of the pre-tax costs of these system replacements,
most of which will be capitalized and amortized over the useful lives of the
assets.
The costs we will actually incur will depend 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 substantially complete, with
conforming changes to be added to individual unit contingency plans during the
third quarter. Contingency drills and preparations will be conducted during the
third and fourth quarters.
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
20
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 depends
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 are analyzing 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
January 1, 1999.
21
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
- ------------------------------------------------------------
We held our Annual Meeting of Shareholders on April 30, 1999. The shareholders
(1) re-elected directors J. W. Marriott, Jr., W. Mitt Romney and William J. Shaw
to terms of office expiring at the 2002 Annual Meeting of Shareholders, (2)
ratified the appointment of Arthur Andersen LLP as independent auditors, (3)
approved the amendment of our certificate of incorporation to reflect the
elimination of one of our two classes of common stock, (4) approved the
amendment of our certificate of incorporation to increase the number of
authorized shares of Class A Common Stock to 800 million, and (5) defeated a
shareholder proposal to adopt cumulative voting for the election of directors.
The following table sets forth the votes cast with respect to each of these
matters.
- ---------------------------------------------------------------------------------------------------------------------------
MATTER FOR AGAINST WITHHELD ABSTAIN BROKER
NON-VOTES
- ---------------------------------------------------------------------------------------------------------------------------
Re-election of J.W. Marriott, Jr. 2,069,863,960 11,475,120
- ---------------------------------------------------------------------------------------------------------------------------
Re-election of W. Mitt Romney 2,069,011,170 12,327,910
- ---------------------------------------------------------------------------------------------------------------------------
Re-election of William J. Shaw 2,070,090,960 11,248,120
- ---------------------------------------------------------------------------------------------------------------------------
Ratification of appointment of
Arthur Andersen LLP as
independent auditors 2,070,014,700 2,538,700 8,785,680
- ---------------------------------------------------------------------------------------------------------------------------
Approval of the amendment of our
certificate of incorporation to
reflect the elimination of one
of our two classes of common
stock 2,067,021,850 5,324,920 8,992,310
- ---------------------------------------------------------------------------------------------------------------------------
Approval of the amendment of our
certificate of incorporation to
increase the number of
authorized shares of Class A
Common Stock to 800 million 2,028,963,730 42,538,180 9,837,170
- ---------------------------------------------------------------------------------------------------------------------------
Proposal to adopt cumulative
voting for the election of
directors 322,683,500 1,517,570,290 47,034,800 194,050,490
- ---------------------------------------------------------------------------------------------------------------------------
Item 5. Other Information
- --------------------------
None.
22
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
3 Third Amended and Restated Certificate of Incorporation.
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.
23
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.
July 29, 1999
/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
(Chief Accounting Officer)
24