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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL 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 Fiscal Year Ended December 28, 2001 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------------------------------- ------------------------------------------
Class A Common Stock, $0.01 par value New York Stock Exchange
(241,570,904 shares outstanding as of January 31, 2002) Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
The aggregate market value of shares of common stock held by non-affiliates at
January 31, 2002, was $7,772,203,883.
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 [_]
Indicate by check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Documents Incorporated by Reference
Portions of the Proxy Statement prepared for the 2002 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
Index to Exhibits is located on pages 68 through 70.
PART I
Throughout this report, we refer to Marriott International, Inc., together
with its subsidiaries, as "we," "us," or "the Company."
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are based on
the beliefs and assumptions of our management, and on information currently
available to our management. Forward-looking statements include the information
concerning our possible or assumed future results of operations and statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. We caution you not to put undue reliance on any
forward-looking statements.
You should understand that the following important factors, in addition to
those discussed in Exhibit 99 and elsewhere in this annual report, could cause
results to differ materially from those expressed in such forward-looking
statements.
. competition for 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 continued 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;
. our ability to obtain adequate property and liability insurance
to protect against losses or to obtain such insurance at
reasonable rates;
. the effect of international, national and regional economic
conditions including the duration and severity of the current
economic downturn in the United States and the pace of the
lodging industry's recovery in the aftermath of the terrorist
attacks on New York and Washington;
. our ability to recover our loan and guaranty fundings from hotel
operations or from owners through the proceeds of hotel sales,
refinances or otherwise;
. the availability of capital to allow us and potential hotel
owners to fund investments;
. the effect that internet reservation channels may have on the
rates that we are able to charge for hotel rooms and timeshare
intervals; and
. other risks described from time to time in our filings with the
Securities and Exchange Commission (the SEC).
ITEMS 1 and 2. BUSINESS AND PROPERTIES
We are a worldwide operator and franchisor of hotels and related lodging
facilities, an operator of senior living communities, and a provider of
distribution services. Our operations are grouped into six business segments,
Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare,
Senior Living Services and Distribution Services, which represented 52, 9, 6,
10, 7 and 16 percent, respectively, of total sales in the fiscal year ended
December 28, 2001.
2
In our Lodging business, we operate, develop and franchise hotels under 14
separate brand names and we operate, develop and market Marriott timeshare
properties under four separate brand names. Our lodging business includes the
Full-Service, Select-Service, Extended-Stay and Timeshare segments.
In our Senior Living Services segment, we develop and operate 156 senior
living communities offering independent living, assisted living and skilled
nursing care for seniors in the United States.
Marriott Distribution Services (MDS) supplies food and related products to
external customers and to internal lodging and senior living services operations
throughout the United States.
Financial information by industry segment and geographic area as of
December 28, 2001 and for the three fiscal years then ended, appears in the
Business Segments note to our Consolidated Financial Statements included in this
annual report.
Lodging
We operate or franchise 2,398 lodging properties worldwide, with 435,983
rooms as of December 28, 2001. In addition, we provide 6,121 furnished corporate
housing units. We believe that our portfolio of lodging brands is the broadest
of any company in the world, and that we are the leader in the quality tier of
the vacation timesharing business. Consistent with our focus on management and
franchising, we own very few of our lodging properties. Our lodging brands
include:
Full-Service Lodging Extended-Stay Lodging
. Marriott Hotels, Resorts and Suites . Residence Inn
. Marriott Conference Centers . TownePlace Suites
. JW Marriott Hotels . Marriott Executive Apartments
. Renaissance Hotels, Resorts and Suites . ExecuStay by Marriott
. Ramada International Hotels and Resorts
(Europe, Middle East and Asia/Pacific) Timeshare
. Bvlgari Hotels and Resorts /1/ . Marriott Vacation Club International
. The Ritz-Carlton Hotel . Horizons by Marriott Vacation Club
. The Ritz-Carlton Club
Select-Service Lodging . Marriott Grand Residence Club
. Courtyard
. Fairfield Inn
. SpringHill Suites
/1 As part of our ongoing strategy to expand our reach through partnerships
with preeminent, world-class companies, in early 2001, we announced our
plans to launch a joint venture with Bulgari SpA to introduce a distinctive
new luxury hotel brand - Bvlgari Hotels and Resorts. The first property is
expected to open in 2003.
3
Company-Operated Lodging Properties
At December 28, 2001, we operated a total of 916 properties (235,102 rooms)
under long-term management or lease agreements with property owners (together,
the Operating Agreements) or as owned.
Terms of our management agreements vary, but typically we earn a management
fee which comprises a base fee, which is a percentage of the revenues of the
hotel, and an incentive management fee, which is based on the profits of the
hotel. Our management agreements also typically include reimbursement of costs
(both direct and indirect) of operations. Such agreements are generally for
initial periods of 20 to 30 years, with options to renew for up to 50 additional
years. Our lease agreements also vary, but typically include fixed annual
rentals plus additional rentals based on a percentage of annual revenues in
excess of a fixed amount. Many of the Operating Agreements are subordinated to
mortgages or other liens securing indebtedness of the owners. Additionally, a
number of the Operating Agreements permit the owners to terminate the agreement
if financial returns fail to meet defined levels and we have not cured such
deficiencies.
For lodging facilities that we manage, we are responsible for hiring,
training and supervising the managers and employees required to operate the
facilities and for purchasing supplies, for which we generally are reimbursed by
the owners. We provide centralized reservation services, and national
advertising, marketing and promotional services, as well as various accounting
and data processing services. For lodging facilities that we manage, we prepare
and implement annual operating budgets that are subject to owner review and
approval.
Franchised Lodging Properties
We have franchising programs that permit the use of certain of our brand
names and our lodging systems by other hotel owners and operators. Under these
programs, we generally receive an initial application fee and continuing royalty
fees, which typically range from four percent to six percent of room revenues
for all brands, plus two percent to three percent of food and beverage revenues
for certain full-service hotels. In addition, franchisees contribute to our
national marketing and advertising programs, and pay fees for use of our
centralized reservation systems. At December 28, 2001, we had 1,482 franchised
properties (200,881 rooms).
Summary of Properties by Brand
- ------------------------------
As of December 28, 2001 we operated or franchised the following properties
by brand (excluding 6,121 corporate housing rental units):
Company-operated Franchised
-------------------- --------------------
Brand Properties Rooms Properties Rooms
- ------------------------------------------------- ---------- ------- --------------------
Full-Service Lodging
- --------------------
Marriott Hotels, Resorts and Suites ........ 245 108,139 179 49,973
Ritz-Carlton ............................... 45 14,826 -- --
Renaissance Hotels, Resorts and Suites ..... 85 32,713 38 12,060
Ramada International ....................... 5 1,068 128 18,114
Select-Service Lodging
- ----------------------
Courtyard .................................. 286 45,046 267 33,739
Fairfield Inn .............................. 2 855 478 45,040
SpringHill Suites .......................... 18 2,868 66 6,724
Extended-Stay Lodging
- ---------------------
Residence Inn .............................. 132 17,524 260 28,539
TownePlace Suites .......................... 34 3,668 65 6,593
Marriott Executive Apartments and other .... 10 1,797 1 99
Timeshare
- ---------
Marriott Vacation Club International ....... 48 6,147 -- --
Horizons ................................... 2 146 -- --
Ritz-Carlton Club .......................... 3 106 -- --
Marriott Grand Residence Club .............. 1 199 -- --
--- ------- ----- -------
Total ........................................... 916 235,102 1,482 200,881
=== ======= ===== =======
4
We plan to open over 150 hotels (25,000 - 30,000 rooms) during 2002. We
believe that we have access to sufficient financial resources to finance our
growth, as well as to support our ongoing operations and meet debt service and
other cash requirements. Nonetheless, our ability to sell properties that we
develop, and the ability of hotel developers to build or acquire new Marriott
properties, which are important parts of our growth plans, is partially
dependent on the availability and price of capital.
Full-Service Lodging
- --------------------
Marriott Hotels, Resorts and Suites (including JW Marriott Hotels & Resorts
and Marriott Conference Centers) primarily serve business and leisure travelers
and meeting groups at locations in downtown and suburban areas, near airports
and at resort locations. Most Marriott full-service hotels contain from 300 to
500 rooms, and typically have swimming pools, gift shops, convention and banquet
facilities, a variety of restaurants and lounges and parking facilities.
Marriott resort hotels have additional recreational facilities, such as tennis
courts and golf courses. The 13 Marriott Suites (approximately 3,400 rooms) are
full-service suite hotels that typically contain approximately 260 suites, each
consisting of a living room, bedroom and bathroom. Marriott Suites have limited
meeting space. Unless otherwise indicated, references throughout this report to
Marriott Hotels, Resorts and Suites include JW Marriott Hotels & Resorts and
Marriott Conference Centers.
JW Marriott Hotels & Resorts is a world-class collection of distinctive
hotels that cater to accomplished, discerning travelers seeking an elegant
environment and personal service. These 20 hotels and resorts are located in
gateway cities and upscale resort locations throughout the world. In addition to
the features found in a typical Marriott full-service hotel, the facilities and
amenities in the JW Marriott Hotels & Resorts include larger guestrooms, more
luxurious decor and furnishings, upgraded in-room amenities, "on-call"
housekeeping, upgraded executive business centers and fitness centers/spas, and
24-hour room service.
We operate 13 conference centers (3,259 rooms), throughout the United
States. Some of the centers are used exclusively by employees of sponsoring
organization, while others are marketed to outside meeting groups and
individuals. The centers typically include meeting room space, dining
facilities, guestrooms and recreational facilities.
Room operations contributed the majority of hotel sales for fiscal year
2001, with the remainder coming from food and beverage operations, recreational
facilities and other services. Although business at many resort properties is
seasonal depending on location, overall hotel profits are usually relatively
stable and include only moderate seasonal fluctuations. In 2001, however, we
experienced significant declines as a result of the downturn in the economy.
Marriott Hotels, Resorts and Suites
Geographic Distribution at December 28, 2001 Hotels
- ---------------------------------------------------------- ------
United States (41 states and the District of Columbia) ... 279 (115,366 rooms)
===
Non-U.S. (53 countries and territories)
Americas (Non-U.S.) ................................... 31
Continental Europe .................................... 27
United Kingdom ........................................ 47
Asia .................................................. 24
Africa and the Middle East ............................ 12
Australia ............................................. 4
---
Total Non-U.S. ........................................... 145 (42,746 rooms)
===
Ritz-Carlton hotels and resorts are renowned for their distinctive
architecture and for the quality of their facilities, dining and guest service.
Most Ritz-Carlton hotels have 250 to 350 guest rooms and typically include
meeting and banquet facilities, a variety of restaurants and lounges, gift
shops, swimming pools and parking facilities. Guests at most of the Ritz-Carlton
resorts have access to additional recreational amenities, such as tennis courts
and golf courses.
Ritz-Carlton Hotels and Resorts
Geographic Distribution at December 28, 2001 Hotels
- ---------------------------------------------------------- ------
United States (12 states and the District of Columbia) ... 26 (8,796 rooms)
==
Non-U.S. (17 countries and territories) ................. 19 (6,030 rooms)
==
5
Renaissance is a global quality-tier brand, which targets business
travelers, group meetings and leisure travelers. Renaissance hotels are
generally located in downtown locations of major cities, in suburban office
parks, near major gateway airports and in destination resorts. Most hotels
contain 300 to 500 rooms; however, a few of the convention hotels are larger,
and some hotels in non-gateway markets, particularly in Europe, are smaller.
Renaissance hotels typically include an all-day dining restaurant, a specialty
restaurant, club floors and a lounge, boardrooms, and convention and banquet
facilities. Renaissance resorts have additional recreational facilities
including golf, tennis and water sports.
Renaissance Hotels, Resorts and Suites
Geographic Distribution at December 28, 2001 Hotels
- ---------------------------------------------------------- ------
United States (22 states and the District of Columbia) ... 58 (22,929 rooms)
==
Non-U.S. (28 countries and territories)
Americas (Non-U.S.) ................................... 9
Continental Europe .................................... 17
United Kingdom ........................................ 7
Asia .................................................. 22
Africa and the Middle East ............................ 9
Australia ............................................. 1
--
Total Non-U.S. ........................................... 65 (21,844 rooms)
==
Ramada International is a moderately-priced brand targeted at business and
leisure travelers. Each full-service Ramada International property includes a
restaurant, a cocktail lounge and full-service meeting and banquet facilities.
Ramada International hotels are located primarily in Europe in major and
secondary cities, near major international airports and suburban office park
locations. We also receive a royalty fee from Cendant Corporation and Ramada
Franchise Canada Limited for the use of the Ramada name in the United States and
Canada, respectively. In 2001, we converted 57 Jarvis hotels in Great Britain to
the Ramada brand name.
Ramada International Hotels and Resorts
Geographic Distribution at December 28, 2001 Hotels
- ------------------------------------------------- ------
Americas (Non-U.S.) ............................. 3
Continental Europe .............................. 55
Asia ............................................ 14
Africa and the Middle East ...................... 4
United Kingdom .................................. 57
---
Total (16 countries and territories) ............ 133 (19,182 rooms)
===
Select-Service Lodging
- ----------------------
Courtyard is our moderate-price select-service hotel product. Aimed at
individual business and leisure travelers as well as families, Courtyard hotels
maintain a residential atmosphere and typically have 90 to 150 rooms. Well
landscaped grounds include a courtyard with a pool and social areas. Most hotels
feature meeting rooms, limited restaurant and lounge facilities, and an exercise
room. The operating systems developed for these hotels allow Courtyard to be
price-competitive while providing better value through superior facilities and
guest service.
Courtyard
Geographic Distribution at December 28, 2001 Hotels
- ---------------------------------------------------------- ------
United States (44 states and the District of Columbia) ... 508 (71,035 rooms)
===
Non-U.S. (9 countries) .................................. 45 (7,750 rooms)
===
Fairfield Inn and Fairfield Inn & Suites is our hotel brand that competes
in the lower moderate price-tier. Aimed at value-conscious individual business
and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 60
to 140 rooms and offers a swimming pool, complimentary continental breakfast and
free local phone calls. At December 28, 2001, 480 Fairfield Inns (45,895 rooms)
were located in 48 states.
SpringHill Suites is our all-suite brand in the moderate-price tier of
lodging products. SpringHill Suites typically have 90 to 165 rooms. They feature
suites that are 25 percent larger than a typical hotel guest room and offer a
broad
6
range of amenities, including complimentary continental breakfast and exercise
facilities. At December 28, 2001, 84 properties (9,592 rooms) were located in 28
states and Canada.
Extended-Stay Lodging
- ---------------------
Residence Inn is the U.S. market leader among extended-stay lodging
products, which caters primarily to business, government and family travelers
who stay more than five consecutive nights. Residence Inns generally have 80 to
150 rooms, with a mix of studio, one-bedroom and two-bedroom suites. Most inns
feature a series of residential style buildings with landscaped walkways,
courtyards and recreational areas. The inns do not have restaurants but offer a
complimentary breakfast buffet. Each suite contains a fully equipped kitchen,
and many suites have wood-burning fireplaces.
Residence Inn
Geographic Distribution at December 28, 2001 Hotels
- ---------------------------------------------------------- ------
United States (46 states and the District of Columbia) ... 382 (44,692 rooms)
===
Canada ................................................... 9 (1,295 rooms)
===
Mexico ................................................... 1 (76 rooms)
===
TownePlace Suites is a moderately priced, extended-stay hotel product that
is designed to appeal to business and leisure travelers. The typical TownePlace
Suites hotel contains 100 high quality studio and two-bedroom suites. Each suite
has a fully equipped kitchen and separate living area. Each hotel provides
housekeeping services and has on-site exercise facilities, an outdoor pool,
24-hour staffing and laundry facilities. At December 28, 2001, 99 TownePlace
Suites (10,261 rooms) were located in 30 states.
We provide temporary housing (serviced apartments) for business executives
and others who need quality accommodations outside their home country, usually
for 30 or more days. Some serviced apartments operate under the Marriott
Executive Apartments brand, which is designed specifically for the long-term
international traveler. At December 28, 2001, ten serviced apartment properties
(1,896 units), including six Marriott Executive Apartments, were located in six
countries and territories. All Marriott Executive Apartments are located outside
the United States.
ExecuStay provides furnished corporate apartments for stays of one month or
longer nationwide. ExecuStay owns no residential real estate and provides units
primarily through short-term lease agreements with apartment owners and
managers.
Timeshare
- ---------
Marriott Vacation Club International develops, sells and operates vacation
timesharing resorts. Revenues are generated from three primary sources: (1)
selling fee simple and other forms of timeshare intervals, (2) operating the
resorts and (3) financing consumer purchases of timesharing intervals.
Many timesharing resorts are located adjacent to Marriott hotels, and
timeshare owners have access to certain hotel facilities during their vacation.
Owners can trade their annual interval for intervals at other Marriott
timesharing resorts or for intervals at certain timesharing resorts not
otherwise sponsored by Marriott through an affiliated exchange company. Owners
also can trade their unused interval for points in the Marriott Rewards frequent
stay program, enabling them to stay at over 2,000 Marriott hotels worldwide.
In 2001 we launched the Marriott Grand Residence Club, our "fractional
share" business line, with sales initiated in Lake Tahoe, California. In this
new business line, fractional share owners purchase the right to stay at their
property up to thirteen weeks each year. In addition, we continued to grow The
Ritz-Carlton Club timeshare business line (launched in 2000) by initiating sales
in both Bachelor Gulch, Colorado, and Jupiter, Florida. Lastly, we initiated
sales at three new Marriott Vacation Club International locations: Waiohai Beach
Club, Hawaii, Ko Olina, Hawaii, and Phuket Beach Club, Asia. We continue to
offer timeshare intervals through Horizons by Marriott Vacation Club (Horizons),
our moderate tier vacation ownership business line.
7
Marriott Vacation Club International's owner base continues to expand, with
195,000 owners at year end 2001, compared to 182,000 in 2000.
Marriott Vacation Club International (all brands)
Geographic Distribution at December 28, 2001 Resorts Units
- ------------------------------------------------- ------- -----
Continental United States ....................... 44 5,255
Hawaii .......................................... 4 576
Caribbean ....................................... 3 305
Europe .......................................... 2 408
Asia ............................................ 1 54
-- -----
Total ........................................... 54 6,598
== =====
Other Activities
Marriott Golf manages 26 golf course facilities for us and for other golf
course owners.
We operate 18 systemwide hotel reservation centers, 11 of them in the U.S.
and Canada and seven internationally, that handle reservation requests for
Marriott lodging brands worldwide, including franchised properties. We own one
of the U.S. facilities and lease the others.
Our Architecture and Construction Division assists in the design,
development, construction and refurbishment of lodging properties and senior
living communities and is paid a fee by the property owners.
Competition
We encounter strong competition both as a lodging operator and as a
franchisor. There are over 650 lodging management companies in the United
States, including several that operate more than 100 properties. These operators
are primarily private management firms, but also include several large national
chains that own and operate their own hotels and also franchise their brands.
Management contracts are typically long-term in nature, but most allow the hotel
owner to replace the management firm if certain financial or performance
criteria are not met.
Affiliation with a national or regional brand is prevalent in the U.S.
lodging industry. In 2001, over two-thirds of U.S. hotel rooms were
brand-affiliated. Most of the branded properties are franchises, under which the
operator pays the franchisor a fee for use of its hotel name and reservation
system. The franchising business is fairly concentrated, with the three largest
franchisors operating multiple brands accounting for a significant proportion of
all U.S. rooms.
Outside the United States branding is much less prevalent, and most markets
are served primarily by independent operators. We believe that chain affiliation
will increase in overseas markets as local economies grow, trade barriers are
reduced, international travel accelerates and hotel owners seek the economies of
centralized reservation systems and marketing programs.
Based on lodging industry data, we have nearly an eight percent share of
the U.S. hotel market (based on number of rooms), and less than a one percent
share of the lodging market outside the United States. We believe that our hotel
brands are attractive to hotel owners seeking a management company or franchise
affiliation, because our hotels typically generate higher occupancies and
Revenue per Available Room (REVPAR) than direct competitors in most market
areas. We attribute this performance premium to our success in achieving and
maintaining strong customer preference. Approximately 32 percent of our
ownership resort sales come from additional purchases by or referrals from
existing owners. We believe that the location and quality of our lodging
facilities, our marketing programs, reservation systems and our emphasis on
guest service and satisfaction are contributing factors across all of our
brands.
Properties that we operate or franchise are regularly upgraded to maintain
their competitiveness. Our management, lease, and franchise agreements provide
for the allocation of funds, generally a fixed percentage of revenue, for
periodic renovation of buildings and replacement of furnishings. We believe that
the ongoing refurbishment program is adequate to preserve the competitive
position and earning power of the hotels. We also strive to update and improve
the products and services we offer. We believe that by operating a number of
hotels in each of our brands,
8
we stay in direct touch with customers and react to changes in the marketplace
more quickly than chains which rely exclusively on franchising.
Marriott Rewards is a frequent guest program with a total of nearly 16
million members, and nine participating Marriott brands. The Marriott Rewards
program yields repeat guest business due to rewarding frequent stays with points
toward free hotel stays and other rewards, or airline miles with any of 20
participating airline programs. We believe that Marriott Rewards generates
substantial repeat business that might otherwise go to competing hotels.
Marriott Senior Living Services
In our Senior Living Services business, we develop and operate both
"independent full-service" and "assisted living" senior living communities and
provide related senior care services. Most are rental communities with monthly
rates that depend on the amenities and services provided. We are one of the
largest U.S. operators of senior living communities in the quality tier.
At December 28, 2001 we operated 156 senior living communities in 31
states.
Communities Units (1)
----------- ---------
Independent full-service
- owned ......................................... 3 1,193
- operated under long-term agreements ........... 45 11,972
--- ------
48 13,165
Assisted living
- owned ......................................... 47 5,198
- operated under long-term agreements ........... 61 7,924
--- ------
108 13,122
--- ------
Total senior living communities ...................... 156 26,287
=== ======
(1) Units represent independent living apartments plus beds in assisted living
and nursing centers.
At December 28, 2001, we operated 48 independent full-service senior living
communities, which offer both independent living apartments and personal
assistance units for seniors. Most of these communities also offer licensed
nursing care.
At December 28, 2001, we also operated 108 assisted living senior living
communities principally under the names "Brighton Gardens by Marriott,"
"Marriott MapleRidge, " and "Village Oaks." Assisted living communities are for
seniors who benefit from assistance with daily activities such as bathing,
dressing or medication. Brighton Gardens is a quality-tier assisted living
concept which generally has 90 assisted living suites and in certain locations,
30 to 45 nursing beds in a community. In some communities, separate on-site
centers also provide specialized care for residents with Alzheimer's or other
memory-related disorders. Marriott MapleRidge assisted living communities
consist of a cluster of six or seven 14-room cottages which offer residents a
smaller scale, more intimate setting and family-like living at a moderate price.
Management has begun to actively engage in efforts to sell all of the Village
Oaks senior living communities.
The assisted living concepts typically include three meals per day, linen
and housekeeping services, security, transportation, and social and recreational
activities. Additionally, skilled nursing and therapy services are generally
available to Brighton Gardens residents.
Terms of the senior living services management agreements vary but
typically include base management fees, ranging from four to six percent of
revenues, central administrative services reimbursements and incentive
management fees. Such agreements are generally for initial periods of five to 30
years, with options to renew for up to 25 additional years. Under the leases
covering certain of the communities, we pay the owner fixed annual rent plus
additional rent equal to a percentage of the amount by which annual revenues
exceed a fixed amount.
Our Senior Living Services business competes mostly with local and regional
providers of long-term health care and senior living services, although there
are some national providers in the assisted living market. We compete by
operating well-maintained facilities, and by providing quality health care, food
service and other services at
9
competitive prices. The reputation for service, quality care and know how
associated with the Marriott name is also attractive to residents and their
families. We have focused on developing relationships with professionals who
often refer seniors to senior living communities, such as hospital discharge
planners and physicians.
Marriott Distribution Services
MDS is a United States limited-line distributor of food and related
supplies, carrying an average of 3,000 product items per distribution center.
This segment originally focused on purchasing, warehousing and distributing food
and supplies to other Marriott businesses. However, MDS has increased its
third-party business to about 93 percent of total sales volume for the year
ended December 28, 2001. Through MDS, we compete with numerous national,
regional and local distribution companies in the $163 billion U.S. food
distribution industry.
MDS operated a nationwide network of 13 distribution centers at December
28, 2001. Leased facilities are generally built to our specifications, and
utilize a narrow aisle concept and technology to enhance productivity.
Employee Relations
At December 28, 2001, we had approximately 140,000 employees. Approximately
7,000 employees were represented by labor unions. We believe relations with our
employees are positive.
Other Properties
In addition to the operating properties discussed above, we lease two
office buildings with combined space of 1,025,000 square feet in Bethesda,
Maryland, where we are headquartered.
We believe our properties are in generally good physical condition with the
need for only routine repairs and maintenance.
ITEM 3. LEGAL PROCEEDINGS
Legal proceedings are incorporated by reference to the "Contingent
Liabilities" footnote in the financial statements set forth in Part II, Item 8,
"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
Part II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The range of prices of our common stock and dividends declared per share
for each quarterly period within the last two years are as follows:
Stock Price Dividends
---------------------- Declared Per
High Low Share
---------- --------- ------------
2000 First Quarter .................. $ 34 3/4 $ 26 1/8 $ 0.055
Second Quarter .................. 38 29 1/2 0.060
Third Quarter .................. 42 3/8 34 5/8 0.060
Fourth Quarter .................. 43 1/2 34 1/8 0.060
Stock Price Dividends
---------------------- Declared Per
High Low Share
---------- --------- ------------
2001 First Quarter .................. $ 47.81 $ 37.25 $ 0.060
Second Quarter .................. 50.50 38.13 0.065
Third Quarter .................. 49.72 40.50 0.065
Fourth Quarter .................. 41.50 27.30 0.065
At January 31, 2002, there were 241,570,904 shares of Class A Common Stock
outstanding held by 54,656 shareholders of record. Our Class A Common Stock is
traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange.
11
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for
the Company derived from our financial statements as of and for the five fiscal
years ended December 28, 2001.
Since the information in this table is only a summary and does not provide
all of the information contained in our financial statements, including the
related notes, you should read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements. Per share data and Shareholders' Equity have not been presented
prior to 1998 because we were not a publicly held company during that time.
Fiscal Year
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
($ in millions, except per share data)
Income Statement Data:
Sales .............................. $10,152 $10,080 $ 8,739 $ 7,968 $ 7,236
Operating Profit Before
Corporate Expenses and Interest ... 590 922 830 736 609
Net Income ......................... 236 479 400 390 324
Per Share Data:
Diluted Earnings Per Share ......... .92 1.89 1.51 1.46
Cash Dividends Declared ............ .255 .235 .215 .195
Balance Sheet Data (at end of year):
Total Assets ....................... 9,107 8,237 7,324 6,233 5,161
Long-Term and Convertible Debt ..... 2,815 2,016 1,676 1,267 422
Shareholders' Equity ............... 3,478 3,267 2,908 2,570
Other Data:
Systemwide Sales /1/ ............... $20,000 $19,781 $17,684 $16,024 $13,196
- ----------
/1 Systemwide sales comprise revenues generated from guests at managed,
franchised, owned, and leased hotels and senior living communities,
together with sales generated by our other businesses. We consider
systemwide sales to be a meaningful indicator of our performance because it
measures the growth in revenues of all of the properties that carry one of
the Marriott brand names. Our growth in profitability is in large part
driven by such overall revenue growth. Nevertheless, systemwide sales
should not be considered an alternative to revenues, operating profit, net
income, cash flows from operations, or any other operating measure
prescribed by accounting principles generally accepted in the United
States. In addition, systemwide sales may not be comparable to similarly
titled measures, such as sales and revenues, which do not include gross
sales generated by managed and franchised properties.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion presents an analysis of results of our operations
for fiscal years ended December 28, 2001, December 29, 2000, and December 31,
1999. Revenue per available room (REVPAR) is calculated by dividing room sales
for comparable properties by room nights available to guests for the period. We
consider REVPAR to be a meaningful indicator of our performance because it
measures the period over period change in room revenues for comparable
properties. REVPAR may not be comparable to similarly titled measures such as
revenues. Comparable REVPAR, room rate and occupancy statistics used throughout
this report are based on U.S. properties operated by us except for Fairfield
Inn, which data also include franchised units. Systemwide sales and statistics
include data from our franchised properties, in addition to our owned, leased
and managed properties. Systemwide statistics are based on comparable worldwide
units and reflect the impact of foreign exchange rates.
Consolidated Results
Restructuring Costs and Other Charges
The Company has experienced a significant decline in demand for hotel rooms
in the aftermath of the September 11, 2001 attacks on New York and Washington
and the subsequent dramatic downturn in the economy. This decline has resulted
in reduced management and franchise fees, cancellation of development projects,
and anticipated losses under guarantees and loans. We have responded by
implementing certain companywide cost-saving measures, although we do not
expect significant changes to the scope of our operations. As a result of our
restructuring plan, in the fourth quarter of 2001 we recorded pretax
restructuring costs of $124 million, including (1) $16 million in severance
costs; (2) $20 million, primarily associated with a loss on a sublease of excess
space arising from the reduction in personnel; (3) $28 million related to the
write-off of capitalized costs relating to development projects no longer deemed
viable; and (4) $60 million related to the write-down of the Village Oaks brand
of companion-style senior living communities, which are now classified as held
for sale, to their estimated fair value. Detailed information related to the
restructuring costs and other charges, which were recorded in the fourth quarter
of 2001 as a result of the economic downturn and the unfavorable lodging
environment, is provided below.
Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700
employees (the majority of which were terminated by December 28, 2001) across
our operations. We recorded a workforce reduction charge of $16 million related
primarily to severance and fringe benefits. The charge does not reflect amounts
billed out separately to owners for property-level severance costs. In addition,
we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of the workforce reduction and delay in filling vacant
positions, we consolidated excess corporate facilities. We recorded a
restructuring charge of approximately $15 million for excess corporate
facilities, primarily related to lease terminations and noncancelable lease
costs in excess of estimated sublease income. In addition, we recorded a $5
million charge for lease terminations resulting from cancellations of leased
units by our corporate apartment business, primarily in downtown New York City.
Development Cancellations and Elimination of Product Line
We incur certain costs associated with the development of properties,
including legal costs, the cost of land and planning and design costs. We
capitalize these costs as incurred and they become part of the cost basis of the
property once it is developed. As a result of the dramatic downturn in the
economy in the aftermath of the September 11, 2001 attacks, we decided to cancel
development projects that were no longer deemed viable. As a result, we expensed
$28 million of previously capitalized costs. In addition, management has begun
to actively engage in efforts to sell 25 Village Oaks senior living communities.
These communities offer companion living and are significantly different from
our other senior living brands. As a result of the plan to exit this line of
business, the
13
assets associated with the 25 properties have been reclassified as assets held
for sale and have accordingly been recorded at their estimated fair value,
resulting in an impairment charge of $60 million.
Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. We also advance loans to some
owners of properties that we manage. As a result of the downturn in the economy,
certain hotels have experienced significant declines in profitability and the
owners have not been able to meet debt service obligations to the Company or in
some cases, to other third-party lending institutions. As a result, based upon
cash flow projections, we expect to fund under certain guarantees, which are not
deemed recoverable, and we expect that several of the loans made by us will not
be repaid according to their original terms. Due to the expected guarantee
fundings deemed non-recoverable and the expected loan losses, we recorded
charges of $85 million in the fourth quarter of 2001.
Accounts Receivable - Bad Debts
In the fourth quarter of 2001, we reserved $17 million of accounts
receivable following an analysis of these accounts which we deemed
uncollectible, generally as a result of the unfavorable hotel operating
environment.
Asset Impairments
The Company recorded a charge related to the impairment of an investment in
a technology-related joint venture ($22 million), losses on the anticipated sale
of three lodging properties ($13 million), write-offs of investments in
management contracts and other assets ($8 million), and the write-off of
capitalized software costs arising from a decision to change a technology
platform ($2 million).
A summary of the restructuring costs and other charges recorded in the
fourth quarter of 2001 is detailed as follows ($ in millions):
Cash Restructuring costs
payments in and other charges
Non-cash fourth quarter liability at
Total charge charge 2001 December 28, 2001
------------ -------- -------------- -------------------
Severance ......................................... $ 16 $ 2 $ 6 $ 8
Facilities exit costs ............................. 20 -- 2 18
Development cancellations and
elimination of product line .................... 88 88 -- --
----- ----- --- ----
Total restructuring costs ......................... 124 90 8 26
Reserves for guarantees and
loan losses ..................................... 85 52 -- 33
Accounts receivable - bad debts ................... 17 17 -- --
Write-down of properties held for sale ............ 13 13 -- --
Impairment of technology-related
investments and other ........................... 32 31 -- 1
----- ----- --- ----
Total ............................................. $ 271 $ 203 $ 8 $ 60
===== ===== === ====
14
The remaining liability related to the workforce reduction and
fundings under guarantees will be substantially paid by the end of 2002.
The amounts related to the space reduction and resulting lease expense due
to the consolidation of facilities will be paid over the respective lease
terms through 2012.
Further detail regarding the charges is shown below:
Operating Profit Impact ($ in millions)
- ---------------------------------------
Senior
Full- Select- Extended- Living Distribution
Service Service Stay Timeshare Services Services Total
---------------------------------------------------------------------------
Severance ................................ $ 7 $ 1 $ 1 $ 2 $-- $ 1 $ 12
Facilities exit costs .................... -- -- 5 -- -- 1 6
Development cancellations and
elimination of product line ............ 19 4 5 -- 60 -- 88
---------------------------------------------------------------------------
Total restructuring costs ................ 26 5 11 2 60 2 106
Reserves for guarantees and loan losses .. 30 3 3 -- -- -- 36
Accounts receivable - bad debts .......... 11 1 -- -- 2 3 17
Write-down of properties held for sale ... 9 4 -- -- -- -- 13
Impairment of technology-related
investments and other .................. 8 -- 2 -- -- -- 10
---------------------------------------------------------------------------
Total .................................... $84 $13 $16 $ 2 $62 $ 5 $182
===========================================================================
Non-operating Impact ($ in millions)
- ---------------------------------------------------------
Total
corporate
Corporate Provision for Interest expenses and
expenses loan losses income interest
--------- ------------- -------- ------------
Severance ............................................... $ 4 $-- $-- $ 4
Facilities exit costs ................................... 14 -- -- 14
--- --- --- ---
Total restructuring costs ............................... 18 -- -- 18
Reserves for guarantees and loan losses ................. -- 43 6 49
Impairment of technology-related investments and other .. 22 -- -- 22
--- --- --- ---
Total ................................................... $40 $43 $ 6 $89
=== === === ===
2001 Compared to 2000
Net income and diluted earnings per share decreased 51 percent to $236
million and $.92, respectively. Net income was primarily impacted by pretax
restructuring and other charges totaling $271 million and lower lodging
operating profits due to the decline in hotel performance.
Sales of $10 billion in 2001 were flat compared to last year,
reflecting a decline in hotel performance, partially offset by revenue from
new Lodging and Distribution Services business and contributions from
established Senior Living communities. Systemwide sales increased slightly
to $20 billion.
2000 Compared to 1999
Net income increased 20 percent to $479 million and diluted earnings
per share advanced 25 percent to $1.89. Profit growth was driven by our
strong U.S. lodging operations, lower system-related costs associated with
the year 2000 and the impact on the 1999 financial results of a $39 million
pretax charge to reflect a litigation settlement. Results were also
impacted by a $15 million one-time write-off of a contract investment in
our Distribution Services segment in the first quarter of 2000.
15
Sales increased 15 percent to $10 billion in 2000, reflecting strong
revenue resulting from new and established hotels, contributions from
established Senior Living communities, as well as new customers in our
Distribution Services business. Systemwide sales increased by 12 percent to
$19.8 billion in 2000.
Marriott Lodging
Annual Change
---------------------
($ in millions) 2001 2000 1999 2001/2000 2000/1999
- ------------------------------------- ------ ------ ------ --------- ---------
Sales ............................... $7,786 $7,911 $7,041 -2% +12%
Operating profit before
restructuring costs and
other charges ..................... 756 936 827 -19% +13%
Restructuring costs ................. (44) -- -- nm --
Other charges ....................... (71) -- -- nm --
------ ------ ------
Operating profit, as reported ....... $ 641 $ 936 $ 827 -32% +13%
====== ====== ======
2001 Compared to 2000
Marriott Lodging, which includes our Full-Service, Select-Service,
Extended-Stay, and Timeshare segments, reported a 32 percent decrease in
operating profit and 2 percent lower sales in 2001. Results reflected
restructuring costs of $44 million and other charges of $71 million, including a
$36 million reserve for third-party guarantees we expect to fund and not recover
out of future cash flow, $12 million of reserves for accounts receivable deemed
uncollectible, a write-off of two investments in management contracts and other
assets of $8 million, $13 million of losses on the anticipated sale of three
lodging properties, and a $2 million write-off associated with capitalized
software costs arising from a decision to change a technology platform. Results
also reflect lower fees due to the decline in demand for hotel rooms, partially
offset by increased revenue associated with new properties. Lodging management
and franchise fee revenue declined 12 percent in 2001. Incentive fee revenue
declined 36 percent, base fees revenue declined 3 percent, and franchise fee
revenue increased 6 percent. Lodging operating profit in 2001 (including
overhead but excluding restructuring costs and other charges) was attributable
to base management fees (33 percent of total), franchise fees (21 percent) and
land rent (3 percent) that are based on fixed dollar amounts or percentages of
sales. The balance was attributable to our timesharing business (20 percent),
and to incentive management fees and other income based on the profits of the
underlying properties (23 percent).
16
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 10.4 percent in 2001. Average room rates
for these hotels declined 2 percent and occupancy declined 6.7 percentage
points. Occupancy, average daily rate and REVPAR for each of our principal
established brands are shown in the following table.
Comparable Comparable
U.S. properties Systemwide
-------------------- --------------------
Change vs. Change vs.
2001 2000 2001 2000
------- ---------- ------- ----------
Marriott Hotels, Resorts and Suites
Occupancy ........................ 70.4% -7.1% pts. 68.8% -5.9% pts.
Average daily rate ............... $142.96 -2.9% $132.55 -2.4%
REVPAR ........................... $100.62 -11.8% $ 91.19 -10.1%
Ritz-Carlton
Occupancy ........................ 66.9% -10.4% pts. 67.6% -8.1% pts.
Average daily rate ............... $249.94 +2.3% $226.58 +4.1%
REVPAR ........................... $167.21 -11.5% $153.25 -7.0%
Renaissance Hotels, Resorts and Suites
Occupancy ........................ 65.6% -7.7% pts. 66.2% -4.4% pts.
Average daily rate ............... $137.79 -2.9% $112.51 -4.3%
REVPAR ........................... $ 90.39 -13.1% $ 74.43 -10.4%
Residence Inn
Occupancy ........................ 77.8% -5.1% pts. 77.9% -3.9% pts.
Average daily rate ............... $105.46 -1.4% $102.71 -0.3%
REVPAR ........................... $ 82.05 -7.5% $ 80.02 -5.0%
Courtyard
Occupancy ........................ 71.6% -6.4% pts. 71.0% -4.9% pts.
Average daily rate ............... $ 99.45 +1.2% $ 94.68 +1.1%
REVPAR ........................... $ 71.24 -7.0% $ 67.21 -5.6%
Fairfield Inn
Occupancy ........................ 66.3% -3.2% pts. 66.3% -3.2% pts.
Average daily rate ............... $ 64.70 +2.1% $ 64.70 +2.1%
REVPAR ........................... $ 42.91 -2.6% $ 42.91 -2.7%
Marriott Vacation Club International contributed over 20 percent of lodging
operating profit in 2001, after the impact of restructuring and other charges.
Operating profit increased 7 percent, reflecting a 22 percent increase in
contract sales, the 2001 acquisition of the Grand Residence Club in Lake Tahoe,
California, and note sale gains in 2001 of $40 million compared to $22 million
in 2000, partially offset by higher marketing and selling expenses and severance
expenses of nearly $2 million associated with the Company's restructuring plan.
International Lodging reported a decrease in the results of operations,
reflecting the impact of the decline in international travel and restructuring
and other charges, partially offset by sales associated with new rooms. Over 35
percent of rooms added in 2001 were outside the United States.
17
Lodging Development
-------------------
Marriott Lodging opened 313 properties totaling nearly 50,000 rooms across
its brands in 2001, while 14 hotels (approximately 3,700 rooms) exited the
system. Highlights of the year included:
. Over 35 percent of new rooms opened were outside the United States. These
include our first hotels in Belgium, Denmark and Ireland.
. Development of a new Marriott Vacation Club International resort in Phuket,
Thailand, the EuroDisney resort, and the acquisition of The Grand Residence
Club property in Lake Tahoe, California.
. One hundred and fifty properties (19,100 rooms) were added to our
select-service and extended-stay brands.
. One hundred and forty-four properties (19,300 rooms), 39 percent of our
total room additions for the year, were conversions from other brands.
At year-end 2001, we had over 300 hotel properties and more than 55,000
rooms under construction or approved for development. We expect to open over 150
hotels and timesharing resorts (25,000 - 30,000 rooms) in 2002. These
growth plans are subject to numerous risks and uncertainties, many of which are
outside our control. See "Forward-Looking Statements" above and "Liquidity and
Capital Resources" below.
Marriott Lodging reported a 13 percent increase in operating profit on 12
percent higher sales in 2000. Results reflected solid room rate growth at U.S.
hotels and contributions from new properties worldwide. Lodging operating
profit in 2000 was attributable to base management fees (28 percent of total),
franchise fees (17 percent), land rent and other income (3 percent), resort
timesharing (15 percent), and incentive management fees and other profit
participations (37 percent).
Across our full-service lodging brands (Marriott Hotels, Resorts and
Suites; Renaissance Hotels, Resorts and Suites; and The Ritz-Carlton Hotels),
REVPAR for comparable company-operated U.S. properties grew by an average of 7.2
percent in 2000. Average room rates for these hotels rose 6.3 percent, while
occupancy increased slightly to 77.4 percent. In 2000, as a result of the
termination of two Ritz-Carlton management agreements, we wrote off our $3
million
18
investment in these contracts. In addition, due to the bankruptcy of the owner
of one hotel, we reserved $6 million of our investment in that management
agreement.
Our domestic select-service and extended-stay brands (Residence Inn,
Courtyard, Fairfield Inn, TownePlace Suites and SpringHill Suites) added a total
of 161 properties (18,870 rooms) and deflagged seven properties (1,500 rooms),
primarily franchises, during the 2000 fiscal year. REVPAR for comparable
properties increased 5.5 percent.
Comparable Comparable
U.S. properties Systemwide
---------------------- -----------------------
Change vs. Change vs.
2000 1999 2000 1999
------- ----------- ------- ------------
Marriott Hotels, Resorts and Suites
Occupancy ........................ 78.2% +0.4% pts. 75.7% +0.4% pts.
Average daily rate ............... $149.50 +6.2% $136.37 +4.9%
REVPAR ........................... $116.95 +6.8% $103.27 +5.5%
Ritz-Carlton
Occupancy ........................ 77.5% +0.1% pts. 77.5% +2.0% pts.
Average daily rate ............... $242.26 +9.2% $228.01 +8.9%
REVPAR ........................... $187.75 +9.4% $176.75 +11.9%
Renaissance Hotels, Resorts and Suites
Occupancy ........................ 73.3% +2.0% pts. 70.9% +2.7% pts.
Average daily rate ............... $142.27 +4.5% $119.95 +3.0%
REVPAR ........................... $104.35 +7.5% $ 85.07 +7.0%
Residence Inn
Occupancy ........................ 83.5% +0.7% pts. 82.2% +0.8% pts.
Average daily rate ............... $104.88 +5.1% $102.25 +4.3%
REVPAR ........................... $ 87.61 +6.1% $ 84.10 +5.3%
Courtyard
Occupancy ........................ 78.9% -- pts. 77.0% +0.2% pts.
Average daily rate ............... $ 97.68 +5.7% $ 93.51 +4.9%
REVPAR ........................... $ 77.05 +5.7% $ 71.96 +5.1%
Fairfield Inn
Occupancy ........................ 69.7% -1.0% pts. 69.7% -1.0% pts.
Average daily rate ............... $ 61.32 +3.8% $ 61.32 +3.8%
REVPAR ........................... $ 42.75 +2.4% $ 42.75 +2.4%
Results for international lodging operations were favorable in 2000,
despite a decline in the value of the euro against the U.S. dollar, reflecting
strong demand in the Middle East, Asia, Europe and the Caribbean region.
Marriott Vacation Club International also posted favorable profit growth in
2000, reporting a 34 percent increase in contract sales. The increase in
contract sales reflects interest in our newest brands, Horizons by Marriott
Vacation Club in Orlando, Florida, and The Ritz-Carlton Club resorts in St.
Thomas, U.S. Virgin Islands, and Aspen, Colorado, as well as continued strong
demand for our timeshare properties in Hawaii, Aruba and California. The profit
growth in 2000 was impacted by a $6 million decline in gains from the sale of
notes receivable arising from lower note sale volume. At the end of the year, 24
resorts were in active sales, 23 resorts were sold out and an additional 13
resorts were under development.
19
The Marketplace by Marriott (Marketplace), our hospitality procurement business,
launched as an independent company. In January 2001, Marriott and Hyatt
Corporation formed a joint venture, Avendra LLC, and we each merged our
respective procurement businesses into it. Avendra LLC is an independent
professional procurement services company serving the North American hospitality
market and related industries. Bass Hotels & Resorts, Inc., ClubCorp USA Inc.
and Fairmont Hotels & Resorts, Inc. joined Avendra LLC in March 2001.
Marriott Senior Living Services
Annual Change
---------------------
($ in millions) 2001 2000 1999 2001/2000 2000/1999
----- ----- ----- --------- ---------
Sales ........................ $ 729 $ 669 $ 559 +9% +20%
Operating profit (loss) before
restructuring costs and
other charges ............ 17 (18) (18) nm --
Restructuring costs .......... (60) -- -- nm --
Other charges ................ (2) -- -- nm --
----- ----- -----
Operating loss, as reported .. $ (45) $ (18) $ (18) nm --
===== ===== =====
2001 Compared to 2000
Marriott Senior Living Services posted a 9 percent increase in sales in
2001, as we added a net total of three new communities (369 units) during the
year. Occupancy for comparable communities increased by nearly 2 percent to 85.3
percent in 2001.
The division reported an operating loss of $45 million, reflecting
restructuring and other charges of $62 million, primarily related to the $60
million write-down of 25 senior living communities held for sale to their
estimated fair value and the write-off of a $2 million receivable no longer
deemed collectible. These charges were partially offset by the favorable impact
of the increase in comparable occupancy and the new units.
2000 Compared to 1999
Marriott Senior Living Services posted a 20 percent increase in sales in
2000, reflecting the net addition of nine properties during the year and a 4
percentage point increase in occupancy for comparable communities to 88 percent.
Despite the increase in sales, profitability was impacted by start-up
inefficiencies for new properties, higher administrative expenses, pre-opening
costs for new communities, costs related to debt associated with facilities
developed by unaffiliated third parties, and charges associated with our
decision to limit new construction until the market improves, resulting in a
loss of $18 million.
Senior Living Services Development
----------------------------------
Due to oversupply conditions in some senior housing markets, we decided in
1999 to dramatically slow development of planned communities. Consequently, a
number of projects in the early stages of development were postponed or
canceled. Additional projects were canceled in 2000.
20
Marriott Distribution Services
Annual Change
--------------------
($ in millions) 2001 2000 1999 2001/2000 2000/1999
- ------------------------------ ------ ------ ------ --------- ---------
Sales ........................ $1,637 $1,500 $1,139 +9% +32%
Operating (loss) Profit before
restructuring costs and
other charges ............ (1) 4 21 nm -81%
Restructuring costs .......... (2) -- -- nm --
Other charges ................ (3) -- -- nm --
------ ------ ------
Operating (loss) profit,
as reported .............. $ (6) $ 4 $ 21 nm -81%
====== ====== ======
2001 Compared to 2000
Operating results for Marriott Distribution Services (MDS) reflect the
impact of an increase in sales related to the commencement of new contracts in
2001 and increased sales from contracts established in 2000. The impact of
higher sales on the operating results was more than offset by the decline in
business from one significant customer, transportation inefficiencies and
restructuring and other charges of $5 million, including severance costs and the
write-off of an accounts receivable balance from a customer that filed for
bankruptcy in the fourth quarter of 2001. The Company commenced a strategic
review of this business in January 2002.
2000 Compared to 1999
Marriott Distribution Services posted a 32 percent increase in sales for
2000, reflecting the commencement of service to three large restaurant chains in
the year. Operating profit declined $17 million as a result of start-up
inefficiencies associated with the new business and a $15 million pretax
write-off of an investment in a contract with Boston Chicken, Inc. and its
Boston Market-controlled subsidiaries, a major customer that filed for
bankruptcy in October 1998. McDonald's Corporation (McDonald's) acquired Boston
Market in 2000, and during the first quarter of 2000, MDS entered into an
agreement with McDonald's to continue providing distribution services to Boston
Market restaurants (refer to the "Intangible Assets" footnote in the financial
statements set forth in Part II, Item 8, "Financial Statements and Supplementary
Data").
Corporate Expenses, Interest and Taxes
Corporate Expenses
Annual Change
---------------------
($ in millions) 2001 2000 1999 2001/2000 2000/1999
- ---------------------------------- ---- ---- ---- --------- ---------
Corporate expenses before
restructuring costs and other
charges ....................... $117 $120 $164 -3% -27%
Restructuring costs .............. 18 - - nm -
Other charges .................... 22 - - nm -
---- ---- ----
Corporate expenses, as reported .. $157 $120 $164 +31% -27%
==== ==== ====
2001 Compared to 2000
Corporate expenses increased $37 million reflecting the impact of
restructuring charges of $18 million related to severance costs and facilities
exit costs, and other charges related to the fourth quarter write-off of a $22
million investment in one of our technology partners. In addition to these
items, we also recorded $8 million of foreign exchange losses and in prior
quarters we recorded a $13 million write-off of two investments in technology
partners. These charges were partially offset by $11 million in gains from the
sale of affordable housing tax credit investments, the favorable impact of cost
containment action plans, and the reversal of a long-standing $10 million
insurance reserve related to a lawsuit at one of our managed hotels. The
reversal of the insurance reserve was the result of us being approached in the
first quarter by the plaintiffs' counsel, who indicated that a settlement could
be reached in an amount that would be covered by insurance. We determined that
it was no longer probable that the loss contingency would result in a material
outlay by us and accordingly, we reversed the reserve during the first quarter
of 2001.
21
2000 Compared to 1999
Corporate expenses decreased $44 million in 2000 to $120 million primarily
due to a $39 million pretax charge in 1999 associated with a litigation
settlement and systems-related costs associated with Year 2000 that were
incurred in 1999, offset by costs incurred in 2000 associated with new corporate
systems and a $3 million charge due to a change in our vacation accrual policy.
Interest Expense
2001 Compared to 2000
Interest expense increased $9 million to $109 million reflecting the impact
of the issuance of Series E Notes in January 2001 and borrowings under our
revolving credit facilities, partially offset by lower interest resulting from
the payoff of commercial paper.
2000 Compared to 1999
Interest expense increased $39 million as a result of borrowings to finance
growth outlays and share repurchases.
Interest Income and Income Tax
2001 Compared to 2000
Interest income increased $34 million, before reflecting reserves of $48
million for loans deemed uncollectible as a result of certain hotels
experiencing significant declines in profitability and the owners not being able
to meet debt service obligations. The change in interest income was impacted by
income associated with higher loan balances, including the loans made to the
Courtyard joint venture in the fourth quarter of 2000, offset by $5 million of
expected guarantee fundings and the impact of $14 million of income recorded in
2000 associated with an international loan that was previously deemed
uncollectible.
Our effective income tax rate decreased to 36.2 percent in 2001 from 36.8
percent in 2000 as a result of modifications related to our deferred
compensation plan and the impact of increased income in countries with lower
effective tax rates.
2000 Compared to 1999
Interest income increased $23 million primarily due to the collection of
$14 million of interest associated with an international loan that was
previously reserved for and increased advances and loan fundings made during
2000.
Our effective income tax rate decreased to approximately 36.8 percent in
2000 from 37.3 percent in 1999 primarily due to increased income in countries
with lower effective tax rates.
Liquidity and Capital Resources
We have credit facilities which support our commercial paper program and
letters of credit. At December 28, 2001, our cash balances combined with our
available borrowing capacity under the credit facilities was nearly $2 billion.
We consider these resources, together with cash expected to be generated by
operations, adequate to meet our short-term and long-term liquidity
requirements, to finance our long-term growth plans, and to meet debt service
and other cash requirements. We expect that part of our financing and liquidity
needs will continue to be met through commercial paper borrowings and access to
long-term committed credit facilities. If the lodging industry recovers more
slowly than we anticipate, our ability to obtain commercial paper borrowings at
competitive rates may be impaired.
Cash from Operations
Cash from operations was $400 million in 2001, $850 million in 2000, and
$711 million in 1999. Net income is stated after depreciation expense of $142
million in 2001, $123 million in 2000, and $96 million in 1999, and after
22
amortization expense of $80 million in 2001, $72 million in 2000, and $66
million in 1999. While our timesharing business generates strong operating cash
flow, annual amounts are affected by the timing of cash outlays for the
acquisition and development of new resorts, and cash received from purchaser
financing. We include timeshare interval sales we finance in cash from
operations when we collect cash payments or the notes are sold for cash.
Earnings before interest expense, income taxes, depreciation and
amortization (EBITDA) decreased to $701 million in 2001 compared to $1,052
million in 2000, and $860 million in 1999.
We consider EBITDA to be an indicator of our operating performance because
it can be used to measure our ability to service debt, fund capital expenditures
and expand our business. Nevertheless, you should not consider EBITDA an
alternative to net income, operating profit, cash flows from operations, or any
other operating or liquidity measure prescribed by accounting principles
generally accepted in the United States.
A substantial portion of our EBITDA is based on fixed dollar amounts or
percentages of sales. These include lodging base management fees, franchise fees
and land rent. With over 2,500 hotels and senior living communities in the
Marriott system, no single property or region is critical to our financial
results.
Our ratio of current assets to current liabilities was 1.2 at December 28,
2001, compared to .9 at December 29, 2000. Each of our businesses minimizes
working capital through cash management, strict credit-granting policies,
aggressive collection efforts and high inventory turnover.
In 2001 we securitized $199 million of notes by selling notes receivable
originated by our timeshare business to special purpose entities. We recognized
gains on these sales of $40 million in the year ended December 28, 2001. Our
ability to continue to sell notes to such off-balance sheet entities depends on
the continued ability of the capital markets to provide financing to the
entities buying the notes. Also, our ability to continue to consummate such
securitizations would be impacted if the underlying quality of the notes
receivable originated by us were to deteriorate, although we do not expect such
a deterioration. In connection with these securitization transactions, at
December 28, 2001, we had repurchase obligations of $46 million related to
previously sold notes receivable, although we expect to incur no material losses
in respect of those obligations. We retain interests in the securitizations
which are accounted for as interest only strips, and in the year ended December
28, 2001, we received cash flows of $30 million arising from those retained
interests. At December 28, 2001, the special purpose entities that had purchased
notes receivable from us had aggregate assets of $499 million.
While our timesharing business generates strong operating cash flow, annual
amounts are affected by the timing of cash outlays for the acquisition and
development of new resorts, and cash received from purchaser financing. We
include interval sales we finance in cash from operations when we collect cash
payments or when the notes are sold for cash.
Investing Activities Cash Flows
Acquisitions. We continually seek opportunities to enter new markets,
increase market share or broaden service offerings through acquisitions.
Dispositions. Asset sales generated proceeds of $554 million in 2001, $742
million in 2000 and $436 million in 1999. Proceeds in 2001 are net of $109
million of financing and joint venture investments made by us in connection with
the sales transactions. In 2001 we closed on the sales of 18 hotels and one
senior living community, most of which we continue to operate under long-term
operating agreements.
Capital Expenditures and Other Investments. Capital expenditures of $560
million in 2001, $1,095 million in 2000, and $929 million in 1999 included
development and construction of new hotels and senior living communities and
acquisitions of hotel properties. Over time, we have sold certain lodging and
senior living properties under development, or to be developed, while continuing
to operate them under long-term agreements. The ability of third-party
purchasers to raise the necessary debt and equity capital depends on the
perceived risks inherent in the lodging industry, and other constraints inherent
in the capital markets as a whole. Although we expect to continue to consummate
such real estate sales, if we were unable to do so, our liquidity could decrease
and we could have increased exposure to the operating risks of owning real
estate. We monitor the status of the capital markets, and regularly evaluate the
effect that changes in capital market conditions may have on our ability to
execute our announced growth plans.
23
We also expect to continue to make other investments to grow our
businesses, including loans, minority equity investments and development of new
timeshare resorts in connection with adding units to our lodging business.
On February 23, 2000, we entered into an agreement to resolve litigation
involving certain limited partnerships formed in the mid- to late 1980s. Under
the agreement, we paid $31 million to partners in four limited partnerships and
acquired, through an unconsolidated joint venture (the Courtyard Joint Venture)
with affiliates of Host Marriott Corporation (Host Marriott), substantially all
of the limited partners' interests in two other limited partnerships, Courtyard
by Marriott Limited Partnership (CBM I) and Courtyard by Marriott II Limited
Partnership (CBM II). These partnerships own 120 Courtyard by Marriott hotels.
The Courtyard Joint Venture was financed with equity contributed in equal shares
by us and affiliates of Host Marriott and approximately $200 million in
mezzanine debt provided by us. Our total investment in the joint venture,
including mezzanine debt, is approximately $300 million.
In early 2000, the Company estimated the amount of the planned investment
in the Courtyard Joint Venture based upon (1) estimated post acquisition cash
flows, including anticipated changes in the related hotel management agreements
to be made contemporaneously with the investment; (2) the investee's new capital
structure; and (3) estimates of prevailing discount rates and capitalization
rates reflected in the market at that time. The investment in the Courtyard
Joint Venture was consummated late in the fourth quarter of 2000. For purposes
of purchase accounting, the Courtyard Joint Venture valued its investment in the
partnership units based on (1) pre-acquisition cash flows; (2) the
pre-acquisition capital structure; and (3) prevailing discount rates and
capitalization rates in December 2000.
Due to a number of factors, the equity values used in the purchase
accounting for the Courtyard Joint Venture's investment were different than
limited partner unit estimates included in the CBM I and CBM II Purchase Offer
and Consent Solicitations (the Solicitations). At a 20 percent discount rate,
the combined CBM I and CBM II estimates reflected in the Solicitations totaled
$254 million. In the purchase accounting, the corresponding equity value in the
Courtyard Joint Venture totaled $372 million. The principal differences between
these two amounts are attributed to the following: (1) the investment was
consummated almost one year subsequent to the time the original estimates were
prepared ($30 million); and (2) a lower discount rate (17 percent) and
capitalization rate reflecting changes in market conditions versus the date at
which the estimates in the solicitations were prepared ($79 million). The
Company assessed its potential investment and any potential loss on settlement
based on post-acquisition cash flows. The purchase accounting was based on
pre-acquisition cash flows and capital structure. As a result, the factors
giving rise to the differences outlined above did not materially impact the
Company's previous assessment of any expense related to litigation. The
post-settlement equity of the Joint Venture is considerably lower then the
pre-acquisition equity due to additional indebtedness post-acquisition and the
impact of changes to the management agreements made contemporaneously with the
transaction.
Fluctuations in the values of hotel real estate generally have little
impact on the overall results of our Lodging businesses because (1) we own less
than 1 percent of the total number of hotels that we operate or franchise; (2)
management and franchise fees are generally based upon hotel revenues and
profits versus hotel sales values; and (3) our management agreements generally
do not terminate upon hotel sale.
We have made loans to owners of hotels and senior living communities that
we operate or franchise. Loans outstanding under this program, excluding
timeshare notes, totaled $860 million at December 28, 2001, $592 million at
December 29, 2000, and $295 million at December 31, 1999. The balance at
December 28, 2001, is stated net of the reserve arising from the $43 million
charge discussed in the restructuring costs and other charges note. Unfunded
commitments aggregating $669 million were outstanding at December 28, 2001, of
which $187 million are expected to be funded in 2002 and $334 million are
expected to be funded in total. We participate in a program with an unaffiliated
lender in which we may partially guarantee loans made to facilitate third-party
ownership of hotels and senior living services communities that we operate or
franchise.
Synthetic Fuel. In October 2001, we acquired four coal-based synthetic fuel
production facilities (the Facilities) for $46 million in cash. The synthetic
fuel produced at the Facilities qualifies for tax credits based on Section 29 of
the Internal Revenue Code. Under Section 29, tax credits are not available for
synthetic fuel produced after 2007. We currently plan to commence operation of
the Facilities in 2002. We anticipate that the operation of the Facilities,
together with the benefit arising from the tax credits will be significantly
accretive to our net income. The operations of the Facilities are expected to
produce significant operating losses, although we anticipate that these will be
offset by the tax credits generated under Section 29, which we expect to reduce
our income tax expense. We expect that the
24
Facilities will be disclosed as a separate segment in our consolidated financial
statements while operating in 2002 through 2007, and at that point we do not
expect to report the Facilities as a separate segment as we do not expect it to
be material.
Cash from Financing Activities
Long-term debt, including convertible debt, increased by $799 million in
2001 and $340 million in 2000, primarily due to borrowings to finance our
capital expenditure and share repurchase programs, and to maintain excess cash
reserves totaling $645 million in the aftermath of the September 11, 2001
terrorist attacks on New York and Washington.
Our financial objectives include diversifying our financing sources,
optimizing the mix and maturity of our long-term debt and reducing our working
capital. At year-end 2001, our long-term debt, excluding convertible debt, had
an average interest rate of 5.2 percent and an average maturity of approximately
5.2 years. The ratio of fixed rate long-term debt to total long-term debt was
.58 as of December 28, 2001.
In April 1999, January 2000 and January 2001, we filed "universal shelf"
registration statements with the Securities and Exchange Commission in the
amounts of $500 million, $300 million and $300 million, respectively. As of
January 31, 2002, we had offered and sold to the public under these registration
statements, $300 million of debt securities at 7 7/8 %, due 2009 and $300
million at 8 1/8 %, due 2005, leaving a balance of $500 million available for
future offerings.
In January 2001, we issued, through a private placement, $300 million of 7
percent senior unsecured notes due 2008, and received net proceeds of $297
million. We agreed to make and complete a registered exchange offer for these
notes, and completed that exchange offer on January 15, 2002.
We are a party to revolving credit agreements that provide for borrowings
of $1.5 billion expiring in July 2006, and $500 million expiring in February
2004, which support our commercial paper program and letters of credit. Loans of
$923 million were outstanding at December 28, 2001, under these facilities. The
large balance under these facilities at year-end was due in part to our decision
to draw down funds due to our desire to maintain excess cash reserves in the
aftermath of the September 11, 2001 terrorist attacks. Such fluctuations in the
availability of the commercial paper market do not affect our liquidity because
of the flexibility provided by our credit facilities. Borrowings under these
facilities bear interest at LIBOR plus a spread, based on our public debt
rating.
In 1999 we called for mandatory redemption of Liquid Yield Option Notes
(LYONs) that were issued in 1996. Approximately 64 percent of LYONs holders
elected to convert their notes to common stock, for which we issued 6.1 million
shares. The other 36 percent of LYONs holders received cash totaling $120
million, which reduced by 3.4 million common shares the dilutive impact of these
convertible debt securities issued by a predecessor company in 1996. Nine
percent of the cash redemption price was reimbursed to us by our predecessor
company (Sodexho Marriott Services, Inc.).
On May 8, 2001, we issued zero-coupon convertible senior notes due 2021,
also known as LYONs, and received cash proceeds of $405 million. The LYONs are
convertible into approximately 6.4 million shares of our Class A common stock
and carry a yield to maturity of 0.75 percent. Holders of the LYONs have the
option to redeem them on May 8 of each of 2002, 2004, 2011 and 2016 at their
then accreted value. We have adequate credit facilities committed to satisfy
this obligation if it occurs in 2002. We may choose to pay the purchase price
for redemptions or repurchases in cash and/or shares of our Class A Common
Stock.
We determine our debt capacity based on the amount and variability of our
cash flows. EBITDA coverage of gross interest cost was 4.1 times in 2001, and we
met the cash flow requirements under our loan agreements. At December 28, 2001,
we had long-term public debt ratings of BBB+ and Baa2 from Standard and Poor's
and Moody's, respectively.
25
Our contractual obligations and commitments are as summarized in the following
tables ($ in millions):
Payments Due by Period
---------------------------------------------------
Less than 1
Contractual Obligations Total year 1-3 years 4-5 years After 5 years
- --------------------------------------------------------------------------------------------------
($ in millions)
Long-Term Debt .................... $2,451 $ 43 $255 $1,433 $ 720
Operating Leases
Recourse ....................... 1,473 173 262 198 840
Non-recourse ................... 717 10 82 119 506
------ ---- ---- ------ ------
Total Contractual Cash
Obligations .................... $4,641 $226 $599 $1,750 $2,066
====== ==== ==== ====== ======
Amount of Commitment Expiration Per Period
---------------------------------------------------
Other Commercial Total Amounts Less than 1
Commitments Committed year 1-3 years 4-5 years After 5 years
- ---------------------------------------------------------------------------------------------------
($ in millions)
Guarantees .................. $574 $93 $139 $327 $15
Timeshare note repurchase
obligations .............. 46 -- 1 -- 45
---- --- ---- ---- ---
Total ....................... $620 $93 $140 $327 $60
==== === ==== ==== ===
Total unfunded loan commitments amounted to $669 million at December 28,
2001. We expect to fund $187 million within one year, $124 million in one to
three years, and $23 million in four to five years. We do not expect to fund the
remaining $335 million commitments, which expire as follows: $15 million within
one year; $16 million in one to three years; $4 million in four to five years;
and $300 million after five years.
Share Repurchases. We periodically repurchase our common stock to replace
shares needed for employee stock plans and for other corporate purposes. We
purchased 6.1 million of our shares in 2001 at an average price of $38.20 per
share and 10.8 million of our shares in 2000 at an average price of $31 per
share. As of December 28, 2001, we had been authorized by our Board of Directors
to repurchase an additional 13.5 million shares.
Dividends. In May 2001, our Board of Directors increased the quarterly cash
dividend by 8 percent to $.065 per share.
Other Matters
Inflation
Inflation has been moderate in recent years, and has not had a significant
impact on our businesses.
Critical Accounting Policies
Certain of our critical accounting policies require the use of judgment in
their application or require estimates of inherently uncertain matters. Our
accounting policies are in compliance with principles generally accepted in the
United States, although a change in the facts and circumstances of the
underlying transactions could significantly change the application of the
accounting policy and the resulting financial statement impact. We have listed
below those policies which we believe are critical and require the use of
complex judgment in their application.
Incentive Fees
We recognize base fees as revenue when earned in accordance with the terms
of the management contract. In interim periods, we recognize as income the
incentive fees that would be due to us as if the contract were to terminate at
that date, exclusive of any termination fees payable or receivable by us. If we
recognized incentive fees only after the underlying full-year performance
thresholds were certain, the revenue recognized for each year would be
unchanged, but no incentive fees for any year would be recognized until the
fourth quarter. We recognized incentive fees revenue of $202 million, $316
million and $268 million in 2001, 2000 and 1999, respectively.
26
Other Revenues from Managed Properties
For properties that we manage, we are responsible to employees for salaries
and wages and to subcontractors and other creditors for materials and services.
We also have the discretionary responsibility to procure and manage the
resources in performing our services under these contracts. We, therefore,
include these costs and the reimbursement of the costs as part of our expenses
and revenues. We recorded other revenues from properties managed by us of $5.6
billion in both 2001 and 2000 and $5.2 billion in 1999.
Real Estate Sales
We account for the sales of real estate in accordance with Statement of
Financial Accounting Standards (FAS) No. 66, "Accounting for Sales of Real
Estate." Gains on sales of real estate are reduced by the maximum exposure to
loss if we have continuing involvement with the property and do not transfer
substantially all of the risks and rewards of ownership. We reduced gains on
sales of real estate due to maximum exposure to loss by $16 million in 2001, $18
million in 2000 and $8 million in 1999. Our ongoing ability to achieve sale
accounting under FAS No. 66 depends on our ability to negotiate the structure of
the sales transactions to comply with these rules.
Timeshare Sales
We also recognize revenue from the sale of timeshare interests in
accordance with FAS No. 66. We recognize sales when a minimum of 10 percent of
the purchase price for the timeshare interval has been received, the period of
cancellation with refund has expired, receivables are deemed collectible and
certain minimum sales and construction levels have been attained. For sales that
do not meet these criteria, we defer all revenue using the percentage of
completion or the deposit method as applicable.
Costs Incurred to Sell Real Estate Projects
We capitalize direct costs incurred to sell real estate projects
attributable to and recoverable from the sales of timeshare interests until the
sales are recognized. Costs eligible for capitalization follow the guidelines of
FAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate
Projects." Selling and marketing costs capitalized under this approach were
approximately $126 million and $95 million at December 28, 2001, and December
29, 2000, respectively, and are included in other assets in the accompanying
consolidated balance sheets. If a contract is canceled, unrecoverable direct
selling and marketing costs are charged to expense, and deposits forfeited are
recorded as income.
Interest Only Strips
We periodically sell notes receivable originated by our timeshare business
in connection with the sale of timeshare intervals. We retain servicing assets
and interests in the assets transferred to special purpose entities which are
accounted for as interest only strips. The interest only strips are treated as
"Trading" or "Available for Sale" securities under the provisions of FAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." We report
changes in the fair values of the interest only strips through the accompanying
consolidated statement of income for trading securities and through the
accompanying consolidated statement of comprehensive income for
available-for-sale securities. We had interest only strips of $87 million at
December 28, 2001 and $67 million at December 29, 2000.
Loan Loss Reserves
We measure loan impairment based on the present value of expected future
cash flows discounted at the loan's original effective interest rate or the
estimated fair value of the collateral. For impaired loans, we establish a
specific impairment reserve for the difference between the recorded investment
in the loan and the present value of the expected future cash flows or the
estimated fair value of the collateral. We apply our loan impairment policy
individually to all loans in the portfolio and do not aggregate loans for the
purpose of applying such policy. For loans that we have determined to be
impaired, we recognize interest income on a cash basis. At December 28, 2001,
our recorded investment in impaired loans was $110 million. Prior to the fourth
quarter of 2001 our allowance for credit losses was $16 million. Following the
charges recorded in the fourth quarter of 2001 (see the "Restructuring Costs
27
and Other Charges" footnote) we have a $59 million allowance for credit losses,
leaving $51 million of our investment in impaired loans for which there is no
related allowance for credit losses.
Relationship with Host Marriott
In recognition of the significant changes in the lodging industry over the
last ten years and the age of our agreements with Host Marriott, many provisions
of which predate our 1993 Spinoff, we and Host Marriott concluded that we could
mutually enhance the long term strength and growth of both companies by updating
our existing relationship. Accordingly, we are currently negotiating certain
changes to our management agreements for Host Marriott-owned hotels. The
modifications under discussion would, if made, be effective as of the beginning
of our 2002 fiscal year and would remain subject to the consent of various
lenders to the properties and other third parties. If made, these changes would,
among other things,
. Provide Host Marriott with additional approval rights over budgets and
capital expenditures;
. Extend the effective management agreement termination dates for several
hotels;
. Expand the pool of hotels that Host Marriott could sell with franchise
agreements to one of our approved franchisees and revise the method of
determining the number of hotels that may be sold without a management
agreement or franchise agreement;
. Lower the incentive management fees payable to us by amounts dependent in
part on underlying hotel profitability at eight hotels;
. Reduce certain expenses to the properties and lower Host Marriott's working
capital requirements;
. Confirm that we and our affiliates may earn a profit (in addition to what
we earn through management fees) on certain transactions relating to Host
Marriott-owned properties, and establish the specific conditions under
which we may profit on future transactions; and
. Terminate our existing right to purchase up to 20 percent of Host
Marriott's outstanding common stock upon certain changes of control and
clarify our rights in each of our management agreements to prevent either a
sale of the hotel to our major competitors or specified changes in control
of Host Marriott involving our major competitors.
We cannot assure you that these negotiations will be successful, that the
changes will be substantially as we have described above, or that the consents
necessary to implement these changes will be obtained. The monetary effect of
the anticipated changes will depend on future events such as the operating
results of the hotels. We do not expect these modifications to have a material
financial impact on us.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We manage our
exposure to this risk by monitoring available financing alternatives and through
development and application of credit granting policies. Our strategy to manage
exposure to changes in interest rates is unchanged from December 29, 2000.
Furthermore, we do not foresee any significant changes in our exposure to
fluctuations in interest rates or in how such exposure is managed in the near
future.
The following sensitivity analysis displays how changes in interest rates
affect our earnings and the fair values of certain instruments we hold.
We hold notes receivable that earn interest at variable rates.
Hypothetically, an immediate 1 percentage point change in interest rates would
change annual interest income by $5 million and $3 million, based on the
respective balances of these notes receivable at December 28, 2001 and December
29, 2000.
Changes in interest rates also impact the fair value of our long-term fixed
rate debt and long-term fixed rate notes receivable. Based on the balances
outstanding at December 28, 2001 and December 29, 2000, a hypothetical immediate
1 percentage point change in interest rates would change the fair value of our
long-term fixed rate debt by $53 million and $50 million, respectively, and
would change the fair value of long-term fixed rate notes receivable by $22
million in each year.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
Page
----
Report of Independent Public Accountants ............................... 31
Consolidated Statement of Income ....................................... 32
Consolidated Balance Sheet ............................................. 33
Consolidated Statement of Cash Flows ................................... 34
Consolidated Statement of Comprehensive Income ......................... 35
Consolidated Statement of Shareholders' Equity ......................... 36
Notes to Consolidated Financial Statements ............................. 37
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Marriott International, Inc.:
We have audited the accompanying consolidated balance sheet of Marriott
International, Inc. and subsidiaries as of December 28, 2001 and December 29,
2000, and the related consolidated statements of income, cash flows,
comprehensive income and shareholders' equity for each of the three fiscal years
in the period ended December 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott International, Inc.
and subsidiaries as of December 28, 2001 and December 29, 2000, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 28, 2001 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 15, 2002
31
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999
($ in millions, except per share amounts)
2001 2000 1999
-------- -------- --------
SALES
Management and franchise fees............ $ 829 $ 940 $ 823
Distribution services ................... 1,637 1,500 1,139
Other.................................... 2,087 2,002 1,593
-------- -------- --------
4,553 4,442 3,555
Other revenues from managed properties.... 5,599 5,638 5,184
-------- -------- --------
10,152 10,080 8,739
-------- -------- --------
OPERATING COSTS AND EXPENSES
Distribution services.................... 1,641 1,496 1,118
Other.................................... 2,216 2,024 1,607
Restructuring costs...................... 106 -- --
-------- -------- --------
3,963 3,520 2,725
Other costs from managed properties...... 5,599 5,638 5,184
-------- -------- --------
9,562 9,158 7,909
-------- -------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................ 590 922 830
Corporate expenses........................ (139) (120) (164)
Interest expense.......................... (109) (100) (61)
Interest income........................... 94 60 37
Provision for loan losses................. (48) (5) (5)
Restructuring costs....................... (18) -- --
-------- -------- --------
INCOME BEFORE INCOME TAXES................ 370 757 637
Provision for income taxes................ 134 278 237
-------- -------- --------
NET INCOME................................ $ 236 $ 479 $ 400
======== ======== ========
Basic Earnings Per Share................ $ 0.97 $ 1.99 $ 1.62
======== ======== ========
Diluted Earnings Per Share.............. $ 0.92 $ 1.89 $ 1.51
======== ======== ========
See Notes To Consolidated Financial Statements
32
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
December 28, 2001 and December 29, 2000
($ in millions)
December 28, December 29,
2001 2000
------------ ------------
ASSETS
Current assets
Cash and equivalents.............................................. $ 817 $ 334
Accounts and notes receivable..................................... 611 728
Inventories, at lower of average cost or market................... 96 97
Prepaid taxes..................................................... 223 197
Other............................................................. 383 289
------- -------
2,130 1,645
------- -------
Property and equipment............................................... 2,930 3,011
Intangible assets.................................................... 1,764 1,833
Investments in affiliates............................................ 823 747
Notes and other receivables.......................................... 1,038 661
Other................................................................ 422 340
------- -------
$ 9,107 $ 8,237
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................. $ 697 $ 660
Accrued payroll and benefits...................................... 358 440
Self-insurance.................................................... 22 27
Other payables and accruals....................................... 725 790
------- -------
1,802 1,917
------- -------
Long-term debt....................................................... 2,408 2,016
Self-insurance....................................................... 86 122
Other long-term liabilities.......................................... 926 915
Convertible debt..................................................... 407 --
Shareholders' equity
ESOP preferred stock.............................................. -- --
Class A common stock, 255.6 million shares issued................. 3 3
Additional paid-in capital........................................ 3,378 3,590
Retained earnings................................................. 941 851
Unearned ESOP shares.............................................. (291) (679)
Treasury stock, at cost........................................... (503) (454)
Accumulated other comprehensive income, net of tax................ (50) (44)
------- -------
3,478 3,267
------- -------
$ 9,107 $ 8,237
======= =======
See Notes To Consolidated Financial Statements
33
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999
($ in millions)
2001 2000 1999
------- ------- -----
OPERATING ACTIVITIES
Net income........................................................ $ 236 $ 479 $ 400
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization................................... 222 195 162
Income taxes.................................................... 9 133 87
Timeshare activity, net......................................... (358) (195) (102)
Other........................................................... 275 48 19
Working capital changes:
Accounts receivable............................................. 57 (53) (126)
Inventories..................................................... 1 (4) (17)
Other current assets............................................ (21) 28 (38)
Accounts payable and accruals................................... (21) 219 326
------- ------- -----
Cash provided by operations ...................................... 400 850 711
------- ------- -----
INVESTING ACTIVITIES
Capital expenditures.............................................. (560) (1,095) (929)
Acquisitions...................................................... -- -- (61)
Dispositions...................................................... 554 742 436
Loan advances..................................................... (367) (389) (144)
Loan collections and sales........................................ 71 93 54
Other............................................................. (179) (377) (143)
------- ------- -----
Cash used in investing activities ................................ (481) (1,026) (787)
------- ------- -----
FINANCING ACTIVITIES
Commercial paper, net............................................. (827) 46 355
Issuance of long-term debt........................................ 1,329 338 366
Repayment of long-term debt ...................................... (123) (26) (63)
Issuance (redemption) of convertible debt......................... 405 -- (120)
Issuance of Class A common stock.................................. 76 58 43
Dividends paid.................................................... (61) (55) (52)
Purchase of treasury stock........................................ (235) (340) (354)
------- ------- -----
Cash provided by financing activities............................. 564 21 175
------- ------- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.......................... 483 (155) 99
CASH AND EQUIVALENTS, beginning of year.............................. 334 489 390
------- ------- -----
CASH AND EQUIVALENTS, end of year.................................... $ 817 $ 334 $ 489
======= ======= =====
See Notes To Consolidated Financial Statements
34
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999
($ in millions)
2001 2000 1999
----- ----- ------
Net income........................................... $ 236 $ 479 $ 400
Other comprehensive (loss) income (net of tax):
Foreign currency translation adjustments........... (14) (10) (18)
Other.............................................. 8 2 (2)
----- ----- -----
Total other comprehensive (loss) income.............. (6) (8) (20)
----- ----- -----
Comprehensive income................................. $ 230 $ 471 $ 380
===== ===== =====
See Notes To Consolidated Financial Statements
35
MARRIOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
December 28, 2001, December 29, 2000 and December 31, 1999
(in millions, except per share amounts)
Accumulated
Common Class A Additional other
shares common paid-in Retained Unearned Treasury comprehensive
outstanding stock capital earnings ESOP shares stock, at cost income
- ----------------------------------------------------------------------------------------------------------------------------------
243.4 Balance, January 1, 1999........... $ 3 $ 2,713 $ 218 $ -- $ (348) $ (16)
-- Net income......................... -- -- 400 -- -- --
-- Dividends ($.215 per share)........ -- -- (53) -- -- --
5.5 Employee stock plan issuance
and other....................... -- 29 (87) -- 172 (20)
2.1 ExecuStay acquisition.............. -- -- (4) -- 67 --
(10.8) Purchase of treasury stock......... -- -- -- -- (358) --
6.1 Conversion of convertible
subordinated debt............... -- (4) 34 -- 162 --
- ----------------------------------------------------------------------------------------------------------------------------------
246.3 Balance at December 31, 1999....... 3 2,738 508 -- (305) (36)
-- Net income......................... -- -- 479 -- -- --
-- Dividends ($.235 per share)........ -- -- (56) -- -- --
5.5 Employee stock plan issuance
and other....................... -- 852 (80) (679) 186 (8)
(10.8) Purchase of treasury stock......... -- -- -- -- (335) --
- ----------------------------------------------------------------------------------------------------------------------------------
241.0 Balance at December 29, 2000....... 3 3,590 851 (679) (454) (44)
-- Net income......................... -- -- 236 -- -- --
-- Dividends ($.255 per share)........ -- -- (62) -- -- --
5.8 Employee stock plan issuance and
other........................... -- (212) (84) 388 186 (6)
(6.1) Purchase of treasury stock......... -- -- -- -- (235) --
- ----------------------------------------------------------------------------------------------------------------------------------
240.7 Balance at December 28, 2001 $ 3 $ 3,378 $ 941 $(291) $ (503) $ (50)
==================================================================================================================================
See Notes To Consolidated Financial Statements
36
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements present the results of operations,
financial position and cash flows of Marriott International, Inc. (together with
its subsidiaries, we, us or the Company).
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, the reported amounts of
sales and expenses during the reporting period and the disclosures of contingent
liabilities. Accordingly, ultimate results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
Fiscal Year
Our fiscal year ends on the Friday nearest to December 31. All fiscal years
presented include 52 weeks.
Revenue Recognition
Our sales include (1) management and franchise fees, (2) sales from our
distribution services business, (3) sales from lodging properties and senior
living communities owned or leased by us, and sales made by our other
businesses; and (4) certain other revenues from properties managed by us.
Management fees comprise a base fee, which is a percentage of the revenues of
hotels or senior living communities, and an incentive fee, which is generally
based on unit profitability. Franchise fees comprise initial application fees
and continuing royalties generated from our franchise programs, which permit the
hotel owners and operators to use certain of our brand names. Other revenues
from managed properties include direct and indirect costs that are reimbursed to
us by lodging and senior living community owners for properties that we manage.
Other revenues include revenues from hotel properties and senior living
communities that we own or lease, along with sales from our timeshare and
ExecuStay businesses.
Management Fees: We recognize base fees as revenue when earned in accordance
with the contract. In interim periods and at year end we recognize incentive
fees that would be due as if the contract were to terminate at that date,
exclusive of any termination fees payable or receivable by us.
Distribution Services: We recognize revenue from our distribution services
business when goods have been shipped and title passes to the customer in
accordance with the terms of the applicable distribution contract.
Timeshare: We recognize revenue from timeshare interest sales in accordance with
Statement of Financial Accounting Standards (FAS) No. 66, "Accounting for Sales
of Real Estate." We recognize sales when a minimum of 10 percent of the purchase
price for the timeshare interval has been received, the period of cancellation
with refund has expired, receivables are deemed collectible and certain minimum
sales and construction levels have been attained. For sales that do not meet
these criteria, we defer all revenue using the percentage of completion or the
deposit method as applicable.
Owned and Leased Units: We recognize room sales and revenues from guest services
for our owned and leased units, including ExecuStay, when rooms are occupied and
services have been rendered.
Franchise Revenue: We recognize franchise fee revenues in accordance with FAS
No. 45, "Accounting for Franchise Fee Revenue." Franchise fees are recognized as
revenue in each accounting period as fees are earned and become receivable from
the franchisee.
37
Other Revenues from Managed Properties: We recognize other revenues from managed
properties when we incur the related reimbursable costs.
We recognized sales and operating profit (loss) in the years ended December 28,
2001, December 29, 2000 and December 31, 1999 as shown in the following tables.
Lodging includes our Full-Service, Select-Service, Extended-Stay, and Timeshare
business segments.
2001
-------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
($ in millions) ------- -------- ------------ -------
Management and franchise fees ................................ $ 794 $ 35 $ -- $ 829
Other ........................................................ 1,755 332 1,637 3,724
------ ------- -------- -------
2,549 367 1,637 4,553
Other revenues from managed properties ....................... 5,237 362 -- 5,599
------ ------- -------- -------
7,786 729 1,637 10,152
------ ------- -------- -------
Operating costs and expenses
Operating costs .............................................. 1,864 352 1,641 3,857
Other costs from managed properties .......................... 5,237 362 -- 5,599
Restructuring costs .......................................... 44 60 2 106
------ ------- -------- -------
7,145 774 1,643 9,562
------ ------- -------- -------
Operating profit (loss) before corporate expenses and interest $ 641 $ (45) $ (6) $ 590
====== ======= ======== =======
2000
-------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
($ in millions) ------- -------- ------------ -------
Management and franchise fees ................................ $ 907 $ 33 $ -- $ 940
Other ........................................................ 1,702 300 1,500 3,502
------ ------- -------- -------
2,609 333 1,500 4,442
Other revenues from managed properties ...................... 5,302 336 -- 5,638
------ ------- -------- -------
7,911 669 1,500 10,080
------ ------- -------- -------
Operating costs and expenses
Operating costs .............................................. 1,673 351 1,496 3,520
Other costs from managed properties .......................... 5,302 336 -- 5,638
------ ------- -------- -------
6,975 687 1,496 9,158
------ ------- -------- -------
Operating profit (loss) before corporate expenses and interest $ 936 $ (18) $ 4 $ 922
====== ======= ======== =======
38
1999
-------------------------------------------
Senior
Living Distribution
Sales Lodging Services Services Total
($ in millions) ------- -------- ------------ -------
Management and franchise fees ................................... $ 800 $ 23 $ -- $ 823
Other ........................................................... 1,326 267 1,139 2,732
------ ------- -------- -------
2,126 290 1,139 3,555
Other revenues from managed properties .......................... 4,915 269 -- 5,184
------ ------- -------- -------
7,041 559 1,139 8,739
------ ------- -------- -------
Operating costs and expenses
Operating costs ................................................. 1,299 308 1,118 2,725
Other costs from managed properties ............................. 4,915 269 -- 5,184
------ ------- -------- -------
6,214 577 1,118 7,909
------ ------- -------- -------
Operating profit (loss) before corporate expenses and interest .. $ 827 $ (18) $ 21 $ 830
====== ======= ======== =======
Ground Leases
We are both the lessor and lessee of land under long-term operating leases,
which include scheduled increases in minimum rents. We recognize these scheduled
rent increases on a straight-line basis over the initial lease terms.
Real Estate Sales
We account for the sales of real estate in accordance with FAS No. 66. We
reduce gains on sales of real estate by the maximum exposure to loss if we have
continuing involvement with the property and do not transfer substantially all
of the risks and rewards of ownership. We reduced gains on sales of real estate
due to maximum exposure to loss by $16 million in 2001, $18 million in 2000 and
$8 million in 1999.
Profit Sharing Plan
We contribute to a profit sharing plan for the benefit of employees meeting
certain eligibility requirements and electing participation in the plan.
Contributions are determined based on a specified percentage of salary deferrals
by participating employees. We recognized compensation cost from profit sharing
of $58 million in 2001, $55 million in 2000 and $46 million in 1999.
Self-Insurance Programs
We are self-insured for certain levels of general liability, workers'
compensation, employment practices and employee medical coverage. We accrue
estimated costs of these self-insurance programs at the present value of
projected settlements for known and incurred but not reported claims. We use a
discount rate of 5 percent to determine the present value of the projected
settlements, which we consider to be reasonable given our history of settled
claims, including payment patterns and the fixed nature of the individual
settlements.
Marriott Rewards
Marriott Rewards is our frequent guest incentive marketing program.
Marriott Rewards members earn points based on their spending at our lodging
operations and, to a lesser degree, through participation in affiliated
partners' programs, such as those offered by airlines and credit card companies.
Points can be redeemed at most Marriott company-operated and franchised
properties. Points cannot be redeemed for cash.
Points which we accumulate and track on the members' behalf can be redeemed
for hotel stays at most of our lodging operations, airline tickets, airline
frequent flier program miles, rental cars, and a variety of other awards.
39
We provide Marriott Rewards as a marketing program to participating hotels.
We charge the cost of operating the program, including the estimated cost of
award redemption, to hotels based on members' qualifying expenditures.
Effective January 1, 2000, we changed certain aspects of our method of
accounting for the Marriott Rewards program in accordance with Staff Accounting
Bulletin (SAB) No. 101. Under the new accounting method, we defer revenue
received from managed, franchised, and Marriott-owned/leased hotels and program
partners equal to the fair value of our future redemption obligation. We
determine the fair value of the future redemption obligation based on
statistical formulas which project timing of future point redemption based on
historical levels, including an estimate of the "breakage" for points that will
never be redeemed, and an estimate of the points that will eventually be
redeemed. These factors determine the required liability for outstanding points.
Our management and franchise agreements require that we be reimbursed currently
for the costs of operating the program, including marketing, promotion, and
communicating with, and performing member services for the Marriott Rewards
members. Due to the requirement that hotels reimburse us for program operating
costs as incurred, we receive and recognize the balance of the revenue from
hotels in connection with the Marriott Rewards program at the time such costs
are incurred and expensed. We recognize the component of revenue from program
partners that corresponds to program maintenance services over the expected life
of the points awarded. Upon the redemption of points, we recognize as revenue
the amounts previously deferred, and recognize the corresponding expense
relating to the cost of the awards redeemed.
Prior to January 1, 2000, we recognized the amounts we received in respect
of the Marriott Rewards program from managed, owned and leased hotels as revenue
together with an associated expense at the time the points were awarded. No
revenues or expenses were recorded in respect of franchised hotels or program
partners. The adoption of the change in accounting policy described above had
the effect of increasing sales and expenses by $63 million in the year ended
December 29, 2000. The adoption had no impact on net income, and we expect the
ongoing impact to our financial statements to be immaterial.
Our liability for the Marriott Rewards program was $631 million at December
28, 2001 and $554 million at December 29, 2000, of which $380 million and $310
million, respectively, are included in other long-term liabilities in the
accompanying consolidated balance sheet.
Cash and Equivalents
We consider all highly liquid investments with a maturity of three months
or less at date of purchase to be cash equivalents.
Loan Loss and Accounts Receivable Reserves
We measure loan impairment based on the present value of expected future
cash flows discounted at the loan's original effective interest rate or the
estimated fair value of the collateral. For impaired loans, we establish a
specific impairment reserve for the difference between the recorded investment
in the loan and the present value of the expected future cash flows or the
estimated fair value of the collateral. We apply our loan impairment policy
individually to all loans in the portfolio and do not aggregate loans for the
purpose of applying such policy. For loans that we have determined to be
impaired, we recognize interest income on a cash basis. At December 28, 2001,
our recorded investment in impaired loans was $110 million. Prior to the fourth
quarter of 2001 our allowance for credit losses was $16 million. Following the
charges recorded in the fourth quarter of 2001 (see the "Restructuring Costs and
Other Charges" footnote) we have a $59 million allowance for credit losses,
leaving $51 million of our investment in impaired loans for which there is no
related allowance for credit losses. We recognized no net interest income on
these loans during 2001.
40
Accounts and Notes Receivable Reserves:
The following table summarizes the activity in our accounts and notes
receivable reserves for the years ended December 31, 1999, December 29, 2000 and
December 28, 2001:
Accounts Receivable Notes Receivable
($ in millions) Reserve Reserve
January 1, 1999 ....................... $ 12 $ 4
Additions ............................. 16 5
Write-offs ............................ (6) (1)
---- ----
December 31, 1999 ..................... 22 8
Additions ............................. 15 5
Write-offs ............................ (14) (1)
---- ----
December 29, 2000 ..................... 23 12
Additions ............................. 27 48
Write-offs ............................ (11) (1)
---- ----
December 28, 2001 ..................... $ 39 $ 59
==== ====
Valuation of Long-Lived Assets
We review the carrying values of long-lived assets when events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If we expect an asset to generate cash flows less than the asset's
carrying value at the lowest level of identifiable cash flows, we recognize a
loss for the difference between the asset's carrying amount and its fair value.
Assets Held for Sale
We consider properties to be assets held for sale when management approves
and commits to a formal plan to actively market a property for sale or a signed
sales contract exists. Upon designation as an asset held for sale, we record the
carrying value of each property at the lower of its carrying value or its
estimated fair value, less estimated costs to sell, and we stop recording
depreciation expense.
Investments
We consolidate entities that we control due to holding a majority voting
interest. We account for investments in joint ventures using the equity method
of accounting when we exercise significant influence over the venture. If we do
not exercise significant influence, we account for the investment using the cost
method of accounting. We account for investments in limited partnerships and
limited liability companies using the equity method of accounting when we own
more than a minimal investment. Summarized information relating to our
unconsolidated affiliates is as follows: total assets, which primarily comprise
hotel real estate managed by us, and total liabilities were approximately $4.3
billion and $3.1 billion at December 28, 2001, and $3.7 billion and $2.6 billion
at December 29, 2000. Total sales and net loss were $1.5 billion and $39 million
for the year ended December 28, 2001 and $765 million and $14 million for the
year ended December 29, 2000. Total sales and net income were $518 million and
$3 million for the year ended December 31, 1999. Our ownership interest in these
unconsolidated affiliates varies, but is typically around 15 percent to 25
percent.
Costs Incurred to Sell Real Estate Projects
We capitalize direct costs incurred to sell real estate projects
attributable to and recoverable from the sales of timeshare interests until the
sales are recognized. Costs eligible for capitalization follow the guidelines of
FAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate
Projects." Selling and marketing costs capitalized under this approach were
approximately $126 million and $95 million at December 28, 2001 and December 29,
2000, respectively, and are included in other assets in the accompanying
consolidated balance sheets. If a contract is canceled, we charge unrecoverable
direct selling and marketing costs to expense, and record deposits forfeited as
income.
41
Interest Only Strips
We periodically sell notes receivable originated by our timeshare business
in connection with the sale of timeshare intervals. We retain servicing assets
and interest in the assets transferred to special purpose entities which are
accounted for as interest only strips. We treat the interest only strips as
"Trading" or "Available for Sale" securities under the provisions of FAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." We
report changes in the fair values of the interest only strips through the
accompanying consolidated statement of income for Trading securities and through
the accompanying consolidated statement of comprehensive income for Available
for Sale securities. We had interest only strips of $87 million at December 28,
2001 and $67 million at December 29, 2000.
New Accounting Standards
We will adopt FAS No. 144, "Financial Statement Treatment Issues Relating
to Assets Held for Sale," in the first quarter of 2002. The adoption of FAS No.
144 will not have a financial statement impact for assets currently held for
sale; however, assets determined to be held for sale beginning in 2002, may
result in the classification of the transaction as discontinued operations, if
certain criteria are met.
We will adopt FAS No. 142, "Goodwill and Other Intangible Assets," in the
first quarter of 2002. The new rules require that goodwill is not amortized, but
rather reviewed annually for impairment. We estimate that adoption of FAS No.
142 will result in an annual increase in our net income of approximately $30
million.
In the first quarter of 2001, we adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which resulted in no material
impact to our financial statements.
RELATIONSHIPS WITH MAJOR CUSTOMERS
In December 1998, Host Marriott Corporation (Host Marriott) reorganized its
business operations to qualify as a real estate investment trust (REIT). In
conjunction with its conversion to a REIT, Host Marriott spun off, in a taxable
transaction, a new company called Crestline Capital Corporation (Crestline). As
part of the Crestline spinoff, Host Marriott transferred to Crestline all of the
senior living communities previously owned by Host Marriott, and Host Marriott
entered into lease or sublease agreements with subsidiaries of Crestline for
substantially all of Host Marriott's lodging properties. Our lodging and senior
living community management and franchise agreements with Host Marriott were
also assigned to these Crestline subsidiaries. The lodging agreements now
provide for us to manage the Marriott, Ritz-Carlton, Courtyard and Residence Inn
hotels leased by the lessee. The lessee cannot take certain major actions
relating to leased properties that we manage without our consent. Effective as
of January 1, 2001, a Host Marriott taxable subsidiary acquired the lessee
entities for the full-service hotels in the United States and took an assignment
of the lessee entities' interests in the leases for the hotels in Canada. On
January 11, 2002, Crestline closed on the sale of its senior living communities
to an unaffiliated third-party. The Company continues to manage these senior
living communities.
We recognized sales of $2,440 million, $2,746 million and $2,553 million
and operating profit before corporate expenses and interest of $162 million,
$235 million and $221 million during 2001, 2000 and 1999, respectively, from
lodging properties owned or leased by Host Marriott. Additionally, Host Marriott
is a general partner in several unconsolidated partnerships that own lodging
properties operated by us under long-term agreements. We recognized sales of
$546 million, $622 million and $562 million and operating profit before
corporate expenses and interest of $40 million, $72 million and $64 million in
2001, 2000 and 1999, respectively, from the lodging properties owned by these
unconsolidated partnerships. We also leased land to certain of these
partnerships and recognized land rent income of $19 million in 2001, $21 million
in 2000 and $21 million in 1999.
In December 2000, we acquired 120 Courtyard by Marriott hotels, through an
unconsolidated joint venture (the Courtyard Joint Venture) with an affiliate of
Host Marriott. Prior to the formation of the Courtyard Joint Venture, Host
Marriott was a general partner in the unconsolidated partnerships that owned the
120 Courtyard by Marriott hotels. Sales of $316 million, $345 million and $334
million, operating profit before corporate expenses and interest of $25 million,
$53 million and $50 million and land rent income of $18 million, $19 million and
$18 million in 2001, 2000 and 1999, respectively, related to the 120 Courtyard
by Marriott hotels are included above in amounts
42
recognized from lodging properties owned by unconsolidated partnerships. In
addition, we recognized interest income of $26 million and $5 million in 2001
and 2000, respectively, on the $200 million mezzanine debt provided by us to the
joint venture.
We have provided Host Marriott with financing for a portion of the cost of
acquiring properties to be operated or franchised by us, and may continue to
provide financing to Host Marriott in the future. The outstanding principal
balance of these loans was $7 million and $9 million at December 28, 2001, and
at December 29, 2000, respectively, and we recognized $1 million in 2001, 2000
and 1999 in interest and fee income under these credit agreements with Host
Marriott.
We have guaranteed the performance of Host Marriott and certain of its
affiliates to lenders and other third parties. These guarantees were limited to
$9 million at December 28, 2001. We have made no payments pursuant to these
guarantees. As of December 28, 2001, we had the right to purchase up to 20
percent of Host Marriott's outstanding common stock upon the occurrence of
certain events generally involving a change of control of Host Marriott. This
right expires in 2017, and Host Marriott has granted an exception to the
ownership limitations in its charter to permit full exercise of this right,
subject to certain conditions related to ownership limitations applicable to
REITs generally. We lease land to Host Marriott that had an aggregate book value
of $184 million at December 28, 2001. This land has been pledged to secure debt
of the lessees. We have agreed to defer receipt of rentals on this land, if
necessary, to permit the lessees to meet their debt service requirements.
We continue to manage the senior living communities that were owned by
Crestline but sold to a third-party on January 11, 2002. We recognized sales of
$194 million, $185 million and $177 million and operating profit before
corporate expenses and interest of $6 million, $3 million and $3 million under
these agreements during 2001, 2000 and 1999, respectively.
We are party to management agreements with entities owned by or affiliated
with another hotel owner which provide for us to manage hotel properties owned
or leased by those entities. We recognized sales of $511 million, $557 million
and $531 million during 2001, 2000 and 1999, respectively, from these
properties.
NOTES RECEIVABLE
Our notes receivable at December 28, 2001, and December 29, 2000 comprised
the following categories. At December 28, 2001: senior living loans and
timeshare loans ($356 million); lodging senior loans ($271 million); lodging
mezzanine loans, including the loan to the Courtyard Joint Venture ($521
million). At December 29, 2000: senior living loans and timeshare loans ($190
million); lodging senior loans ($150 million); lodging mezzanine loans,
including the loan to the Courtyard Joint Venture ($418 million). Notes
receivable due from affiliates totaling $540 million at December 28, 2001 and
$395 million at December 29, 2000 are included in investments in affiliates in
the accompanying consolidated balance sheet. Amounts due within one year of $73
million at December 28, 2001 and $59 million at December 29, 2000 are classified
as current assets in the accompanying consolidated balance sheet.
PROPERTY AND EQUIPMENT
2001 2000
------- --------
($ in millions)
Land .................................................... $ 505 $ 584
Buildings and leasehold improvements .................... 860 1,074
Furniture and equipment ................................. 620 619
Timeshare properties .................................... 1,167 914
Construction in progress ................................ 337 324
------- -------
3,489 3,515
Accumulated depreciation and amortization ............... (559) (504)
------- -------
$ 2,930 $ 3,011
======= =======
We record property and equipment at cost, including interest, rent and real
estate taxes incurred during development and construction. Interest capitalized
as a cost of property and equipment totaled $61 million in 2001,
43
$52 million in 2000 and $33 million in 1999. We capitalize the cost of
improvements that extend the useful life of property and equipment when
incurred. These capitalized costs may include structural costs, equipment,
fixtures, floor and wall coverings and paint. All repairs and maintenance costs
are expensed as incurred. We compute depreciation using the straight-line method
over the estimated useful lives of the assets (three to 40 years). We amortize
leasehold improvements over the shorter of the asset life or lease term.
ACQUISITIONS AND DISPOSITIONS
ExecuStay
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 inclusive of $63
million of our Class A Common Stock. Unaudited pro forma sales, net income and
diluted earnings per share for 1999, calculated as if ExecuStay had been
acquired at the beginning of that year, were $8,762 million, $399 million and
$1.50, respectively. The unaudited pro forma combined results of operations do
not reflect our expected future results of operations.
We consolidated the operating results of ExecuStay from February 24, 1999,
and have accounted for the acquisition using the purchase method of accounting.
We have been amortizing the resulting goodwill on a straight-line basis over 30
years.
Courtyard Joint Venture
In the first quarter of 2000, we entered into an agreement to resolve
litigation involving certain limited partnerships formed in the mid- to late
1980s. The agreement was reached with lead counsel to the plaintiffs in the
lawsuits, and with the special litigation committee appointed by the general
partner of two of the partnerships, Courtyard by Marriott Limited Partnership
(CBM I) and Courtyard by Marriott II Limited Partnership (CBM II). The agreement
was amended in September 2000, to increase the amount that CBM I settlement
class members were to receive after deduction of court-awarded attorneys' fees
and expenses and to provide that the defendants, including the Company, would
pay a portion of the attorneys' fees and expenses of the CBM I settlement class.
Under the agreement, we acquired, through an unconsolidated joint venture
with an affiliate of Host Marriott Corporation (Host Marriott), substantially
all of the limited partners' interests in CBM I and CBM II which own 120
Courtyard by Marriott hotels. We continue to manage the 120 hotels under
long-term agreements. The joint venture was financed with equity contributed in
equal shares by us and an affiliate of Host Marriott and approximately $200
million in mezzanine debt provided by us. Our total investment in the joint
venture, including the mezzanine debt, is approximately $300 million. Final
court approval of the CBM I and CBM II settlements was granted on October 24,
2000, and became effective on December 8, 2000.
The agreement also provided for the resolution of litigation with respect
to four other limited partnerships. On September 28, 2000, the court entered a
final order with respect to those partnerships, and on that same date, we and
Host Marriott each paid into escrow approximately $31 million for payment to the
plaintiffs in 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 the settlement transactions.
Dispositions
In 2001, we agreed to sell 18 lodging properties and three pieces of
undeveloped land for $680 million in cash. We will continue to operate 17 of the
hotels under long-term management agreements. As of December 28, 2001, sales of
11 of those properties and the undeveloped land had been completed for proceeds
of $470 million. Six of the 11 properties are accounted for under the full
accrual method in accordance with FAS No. 66. The buyers did not make adequate
minimum initial investments in the remaining five properties, which we accounted
for under the
44
cost recovery method. The sale of two of the properties were to joint ventures
in which we have a minority interest. Where the full accrual method applied, we
recognized profit proportionate to the outside interests in the joint venture at
the date of sale. We recognized $2 million of net losses in 2001 and will
recognize the remaining $16 million of gains in subsequent years, provided
certain contingencies in the sales contracts expire.
In 2001, in connection with the sale of four of the above lodging
properties, we agreed to transfer 31 existing lodging property leases to a
subsidiary of the lessor and subsequently enter into agreements with the new
lessee to operate the hotels under long-term management agreements. These
properties were previously sold and leased back by us in 1997, 1998 and 1999. As
of December 28, 2001, 12 of these leases had been transferred, and gains of $12
million deferred on the sale of these properties were recognized when our lease
obligations ceased.
In 2001, we sold land for $71 million to a joint venture at book value. The
joint venture is building two resort hotels in Orlando, Florida, for $547
million. We are providing development services and have guaranteed completion of
the project. The initial owners of the venture have the right to sell 20 percent
of the venture's equity to us upon the opening of the hotels. We expect the
hotels to open in July 2003. At opening we also expect to hold approximately
$120 million in mezzanine loans that we have agreed to advance to the joint
venture. We have provided the venture with additional credit facilities for
certain amounts due under the first mortgage loan and to provide for limited
minimum returns to the equity investors in the early years of the project. As we
have an option to repurchase the property at opening if certain events
transpire, we have accounted for the sale of the land as a financing transaction
in accordance with FAS No. 66. Sales proceeds of $71 million, less $50 million
funded by our initial loans to the joint venture, are reflected as long-term
debt in the accompanying consolidated balance sheet.
In 2001, we sold and leased back one lodging property for $15 million in
cash, which generated a pretax gain of $2 million. This gain will be recognized
as a reduction of rent expense over the initial lease term.
In 2001, we sold one senior living community at book value for $4 million
in cash.
In 2001, we sold 100 percent of our limited partner interests in five
affordable housing partnerships and 85 percent of our limited partner interest
in a sixth affordable housing partnership for $82 million in cash. We recognized
pretax gains of $13 million in connection with four of the sales. We will
recognize pretax gains of $3 million related to the other two sales in
subsequent years provided certain contingencies in the sales contract expire.
In the fourth quarter of 2000 we sold land, at book value, for $46 million
to a joint venture in which we hold a minority interest. The joint venture is
building a resort hotel, which will be partially funded with up to $92 million
of mezzanine financing to be provided by us. We have also provided the joint
venture with a $45 million senior debt service guarantee.
In 2000, we sold and leased back, under long-term, limited-recourse leases,
three lodging properties and one senior living community for an aggregate
purchase price of $118 million. We agreed to pay a security deposit of $3
million for the lodging properties, which will be refunded at the end of the
leases. The sales price exceeded the net book value by $4 million, which we will
recognize as a reduction of rent expense over the 15-year initial lease terms.
In 2000, we agreed to sell 23 lodging properties for $519 million in cash.
We will continue to operate the hotels under long-term management agreements. As
of December 28, 2001, all the properties had been sold, generating pretax gains
of $30 million. Fourteen of the 17 properties are accounted for under the full
accrual method in accordance with FAS No. 66. The buyers did not make adequate
minimum initial investments in the remaining three properties, which we
accounted for under the cost recovery method. The sale of four of the 17
properties was to a joint venture in which we have a minority interest. Where
the full accrual method applied, we recognized profit proportionate to the
outside interests in the joint venture at the date of sale. We recognized $14
million and $9 million of pretax gains in 2001 and 2000 respectively, and will
recognize the remainder in subsequent years provided certain contingencies in
the sales contracts expire. Unaffiliated third-party tenants will lease 13 of
the properties from the buyers. In 2000, one of these tenants replaced us as the
tenant on nine other properties sold and leased back by us in 1997 and 1998. We
now manage these nine previously leased properties under long-term management
agreements, and deferred gains on the sale of these properties of $15 million
were recognized as our leases were canceled throughout 2000. In connection with
the sale of four of the properties, we provided $39 million of mezzanine funding
and agreed to provide the buyer with up to $161 million of additional loans to
finance
45
future acquisitions of Marriott-branded hotels. We also acquired a minority
interest in the joint venture that purchased the four hotels. During 2001 we
funded $27 million under this loan commitment in connection with one of the 11
property sales described above.
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
buyer to be used, if necessary, to meet its debt service requirements. The
buyer's obligation to repay us under the facility is guaranteed by an
unaffiliated third-party. We also extended a limited credit facility to the
tenant to cover operating shortfalls, if any. We accounted for the sale under
the cost recovery method, and will recognize the resulting gain when the credit
facilities expire.
In 1999, we sold an 89 percent interest in one hotel and concurrently
signed a long-term lease on the property. We are accounting for this transaction
under the financing method, and the sales proceeds of $58 million are reflected
as long-term debt in the accompanying consolidated balance sheet.
In 1999, we agreed to sell and leaseback, under long-term, limited-recourse
leases, four hotels for approximately $59 million in cash. At the same time, we
agreed to pay security deposits of $2 million, which will be refunded at the end
of the leases. As of December 29, 2000, all of the properties had been sold,
resulting in a sales price that exceeded the net book value by $4 million, which
we will recognize as a reduction of rent expense over the 15-year initial lease
terms. We can renew the leases on all four hotels at our option.
During 1999, we sold four hotels and three senior living communities for
$55 million and $52 million, respectively, resulting in pretax gains of $10
million. We recognized $2 million of the gain in 2000 and 1999, and no gain in
2001. The balance will be recognized provided certain contingencies in the sales
contracts expire. We operate these properties under long-term management
agreements.
In connection with the long-term, limited-recourse leases described above,
Marriott International, Inc. has guaranteed the lease obligations of the
tenants, wholly-owned subsidiaries of Marriott International, Inc., for a
limited period of time (generally three to five years). After the guarantees
expire, the lease obligations become non-recourse to Marriott International,
Inc.
In sales transactions where we retain a management contract, the terms and
conditions of the management contract are comparable to the terms and conditions
of the management agreements obtained directly with third-party owners in
competitive bid processes.
ASSET SECURITIZATIONS
We periodically sell, with limited recourse, through special purpose
entities, notes receivable originated by our timeshare business in connection
with the sale of timeshare intervals. We continue to service the notes and
transfer all proceeds collected to the special purpose entities. We retain
servicing assets and interests in the securitizations which are accounted for as
interest only strips. The interests are limited to the present value of cash
available after paying financing expenses, program fees, and absorbing credit
losses. Gains from the sales of timeshare notes receivable totaled $40 million
in 2001, $22 million in 2000 and $29 million in 1999 and are included in other
sales in the consolidated statement of income.
At the date of securitization and at the end of each reporting period, we
estimate the fair value of the interest only strips and servicing assets using a
discounted cash flow model. These transactions utilize interest rate swaps to
protect the net interest margin associated with the beneficial interest. We
report changes in the fair value of the interest only strips that are treated as
available-for-sale securities under the provisions of FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," through other
comprehensive income in the accompanying consolidated balance sheet. We report
in income changes in the fair value of interest only strips treated as trading
securities under the provisions of FAS No. 115. The key assumptions used in
measuring the fair value of the interest only strips at the time of
securitization and at the end of the two years ended December 28, 2001 and
December 29, 2000, were as follows: average discount rate of 6.89 percent and
7.82 percent, respectively; average expected annual prepayments, including
defaults, of 15.43 percent and 12.72 percent, respectively; and expected
weighted average life of prepayable notes receivable of 118 months and 86
months, respectively. Our key
46
assumptions are based on experience. To date, actual results have not materially
affected the carrying value of the interests.
Cash flows between us and third-party purchasers during the years ended
December 28, 2001 and December 29, 2000, were as follows: net proceeds to us
from new securitizations of $199 million and $144 million, respectively,
repurchases by us of delinquent loans (over 150 days overdue) of $11 million and
$12 million, respectively, servicing fees received by us of $2 million in each
year, and cash flows received on retained interests of $30 million and $18
million, respectively.
On December 12, 2000, we repurchased notes receivable with a principal
balance of $359 million and immediately sold those notes, along with $19 million
of additional notes, in a $378 million securitization to an investor group. We
have included net proceeds from these transactions of $16 million in the net
proceeds from securitizations of $144 million disclosed above. We realized a
gain of $3 million, primarily associated with the $19 million of additional
notes sold, which is included in the $22 million gain on the sales of notes
receivable for fiscal year 2000 disclosed above.
At December 28, 2001, $499 million of principal remains outstanding in all
securitizations in which we have a retained interest only strip. Delinquencies
of more than 90 days at December 28, 2001, amounted to $5 million. Loans
repurchased by the Company, net of obligors subsequently curing delinquencies,
during the year ended December 28, 2001, amounted to $4 million. We have been
able to resell timeshare units underlying repurchased loans without incurring
material losses.
We have completed a stress test on the net present value of the interest
only strips and the servicing assets with the objective of measuring the change
in value associated with independent changes in individual key variables. The
methodology used applied unfavorable changes that would be considered
statistically significant for the key variables of prepayment rate, discount
rate, and weighted average remaining term. The net present value of the interest
only strips and servicing assets was $90 million at December 28, 2001, before
any stress test changes were applied. An increase of 100 basis points in the
prepayment rate would decrease the year-end valuation by $2 million, or 2
percent, and an increase of 200 basis points in the prepayment rate would
decrease the year-end valuation by $4 million, or 4 percent. An increase of 100
basis points in the discount rate would decrease the year-end valuation by $2
million, or 2 percent, and an increase of 200 basis points in the discount rate
would decrease the year-end valuation by $3 million, or 4 percent. A decline of
two months in the weighted average remaining term would decrease the year-end
valuation by $1 million, or 2 percent, and a decline of four months in the
weighted average remaining term would decrease the year-end valuation by $3
million, or 3 percent.
Assets Held for Sale
Included in other current assets at December 28, 2001 and December 29, 2000
are $324 million and $230 million, respectively, of assets held for sale. At
December 28, 2001, assets held for sale consisted of $316 million of property,
plant and equipment and $8 million of other related assets. Included in other
current liabilities at December 28, 2001, are $8 million of liabilities related
to the assets held for sale.
At December 28, 2001, assets held for sale included $76 million of
full-service lodging properties, $158 million of select-service properties, $27
million of extended-stay properties, $14 million of undeveloped land and $49
million of senior living services properties. At December 29, 2000, assets held
for sale included $143 million of full-service lodging properties, $66 million
of select-service properties and $21 million of extended-stay properties.
During the fourth quarter of 2001, management approved and committed to a
plan to sell two lodging properties and undeveloped land for an estimated sales
price of $119 million. Seven additional lodging properties ($156 million) were
subject to signed sales contracts at December 28, 2001. We recorded an
impairment charge to adjust the carrying value of three properties and the
undeveloped land to their estimated fair value less cost to sell. See the
Restructuring Costs and Other Charges footnote. All properties held for sale at
December 29, 2000 were under signed sales contracts and were sold in 2001.
In December 2001, management approved and committed to a plan to exit the
companion living concept of senior living services and sell the related
properties within the next 12 months. We recorded a $60 million impairment
charge to adjust the carrying value of the properties to their estimated fair
value. See the Restructuring Costs and
47
Other Charges footnote. These properties generated sales of $42 million, $42
million, and $37 million and operating profits of $1 million, $2 million, and $2
million in 2001, 2000 and 1999, respectively.
INTANGIBLE ASSETS
2001 2000
------- --------
($ in millions)
Management, franchise and license agreements ............ $ 847 $ 861
Goodwill ................................................ 1,245 1,245
Other ................................................... 19 7
------- -------
2,111 2,113
Accumulated amortization ................................ (347) (280)
------- -------
$ 1,764 $ 1,833
======= =======
We amortize intangible assets on a straight-line basis over periods of
three to 40 years. Intangible amortization expense totaled $73 million in 2001,
$64 million in 2000 and $62 million in 1999.
SHAREHOLDERS' EQUITY
Eight hundred million shares of our Class A Common Stock with a par value
of $.01 per share are authorized. Ten million shares of preferred stock, without
par value, are authorized, 200,000 shares have been issued, 100,000 of which are
for the Employee Stock Ownership Plan (ESOP) and 100,000 of which are for Capped
Convertible Preferred Stock. As of December 28, 2001, 109,223 shares were
outstanding, 29,124 of which relate to the ESOP and 80,099 of which are Capped
Convertible Preferred Stock.
On March 27, 1998, our Board of Directors adopted a shareholder rights plan
under which one preferred stock purchase right was distributed for each share of
our Class A Common Stock. Each right entitles the holder to buy 1/1000th of a
share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of $175. The rights will be exercisable 10 days
after a person or group acquires beneficial ownership of 20 percent or more of
our Class A Common Stock, or begins a tender or exchange for 30 percent or more
of our Class A Common Stock. Shares owned by a person or group on March 27,
1998, and held continuously thereafter, are exempt for purposes of determining
beneficial ownership under the rights plan. The rights are nonvoting and will
expire on the tenth anniversary of the adoption of the shareholder rights plan,
unless exercised or previously redeemed by us for $.01 each. If we are involved
in a merger or certain other business combinations not approved by the Board of
Directors, each right entitles its holder, other than the acquiring person or
group, to purchase common stock of either the Company or the acquirer having a
value of twice the exercise price of the right.
As of December 28, 2001, we had been authorized by our Board of Directors
to repurchase an additional 13.5 million shares of our Class A Common Stock.
During the second quarter of 2000 we established an employee stock
ownership plan solely to fund employer contributions to the profit sharing plan.
The ESOP acquired 100,000 shares of special-purpose Company convertible
preferred stock (ESOP Preferred Stock) for $1 billion. The ESOP Preferred Stock
has a stated value and liquidation preference of $10,000 per share, pays a
quarterly dividend of 1 percent of the stated value, and is convertible into our
Class A Common Stock at any time based on the amount of our contributions to the
ESOP and the market price of the common stock on the conversion date, subject to
certain caps and a floor price. We hold a note from the ESOP, which is
eliminated upon consolidation, for the purchase price of the ESOP Preferred
Stock. The shares of ESOP Preferred Stock are pledged as collateral for the
repayment of the ESOP's note, and those shares are released from the pledge as
principal on the note is repaid. Shares of ESOP Preferred Stock released from
the pledge may be redeemed for cash based on the value of the common stock into
which those shares may be converted. Principal and interest payments on the
ESOP's debt are expected to be forgiven periodically to fund contributions to
the ESOP and release shares of ESOP Preferred Stock. Unearned ESOP shares are
reflected within shareholders' equity and are amortized as shares of ESOP
Preferred Stock are released and cash is allocated to employees' accounts. The
fair market value of the unearned ESOP shares at December 28, 2001 and December
29, 2000 was $263 million and $676 million, respectively.
48
Accumulated other comprehensive income of $50 million and $44 million at
December 28, 2001 and December 29, 2000, respectively, consists primarily of
foreign currency translation adjustments.
INCOME TAXES
Total deferred tax assets and liabilities as of December 28, 2001 and
December 29, 2000, were as follows:
2001 2000
----- -----
($ in millions)
Deferred tax assets .................................. $ 481 $ 471
Deferred tax liabilities ............................. (353) (399)
----- -----
Net deferred taxes ................................... $ 128 $ 72
===== =====
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as of
December 28, 2001, and December 29, 2000, were as follows:
2001 2000
----- -----
($ in millions)
Self-insurance ....................................... $ 50 $ 65
Employee benefits .................................... 162 169
Deferred income ...................................... 35 45
Other reserves ....................................... 52 13
Frequent guest program ............................... 58 65
Timeshare operations ................................. (28) (33)
Property, equipment and intangible assets ............ (157) (213)
Other, net ........................................... (44) (39)
----- -----
Net deferred taxes ................................... $ 128 $ 72
===== =====
At December 28, 2001, we had approximately $34 million of tax credits that
expire through 2021.
We have made no provision for U.S. income taxes, or additional foreign
taxes, on the cumulative unremitted earnings of non-U.S. subsidiaries ($203
million as of December 28, 2001) because we consider these earnings to be
permanently invested. These earnings could become subject to additional taxes if
remitted as dividends, loaned to us or a U.S. affiliate, or if we sell our
interests in the affiliates. We cannot practically estimate the amount of
additional taxes that might be payable on the unremitted earnings.
The provision for income taxes consists of:
2001 2000 1999
------- --------------- -----
($ in millions)
Current - Federal ....................... $ 149 $ 216 $117
- State ......................... 18 28 26
- Foreign ....................... 21 26 24
----- ----- ----
188 270 167
----- ----- ----
Deferred - Federal ....................... (55) (2) 58
- State ......................... 1 10 12
- Foreign ....................... -- -- --
----- ----- ----
(54) 8 70
----- ----- ----
$ 134 $ 278 $237
===== ===== ====
49
The current tax provision does not reflect the benefits attributable to us
relating to our ESOP of $101 million in 2001 and $109 million in 2000 or the
exercise of employee stock options of $55 million in 2001, $42 million in 2000
and $44 million in 1999. The taxes applicable to other comprehensive income are
not material.
A reconciliation of the U.S. statutory tax rate to our effective income tax
rate follows:
2001 2000 1999
---- ---- ----
U.S. statutory tax rate .......................... 35.0% 35.0% 35.0%
State income taxes, net of U.S. tax benefit ...... 3.7 3.6 3.9
Foreign income ................................... (3.3) (1.4) (0.3)
Tax credits ...................................... (4.1) (3.1) (5.4)
Goodwill amortization ............................ 3.3 1.6 1.8
Other, net ....................................... 1.6 1.1 2.3
---- ---- ----
Effective rate ................................... 36.2% 36.8% 37.3%
==== ==== ====
Cash paid for income taxes, net of refunds, was $125 million in 2001, $145
million in 2000 and $150 million in 1999.
LEASES
Our future obligations under operating leases at December 28, 2001, are
summarized below:
Fiscal Year ($ in millions)
- ----------- ---------------
2002 ............................................... $ 183
2003 ............................................... 176
2004 ............................................... 168
2005 ............................................... 163
2006................................................. 154
Thereafter ......................................... 1,346
-------
Total minimum lease payments ....................... $2,190
=======
Most leases have initial terms of up to 20 years, and contain one or more
renewal options, generally for five- or 10-year periods. The leases provide for
minimum rentals, and additional rentals based on our operations of the leased
property. The total minimum lease payments above include $718 million
representing obligations of consolidated subsidiaries that are non-recourse to
Marriott International, Inc.
Rent expense consists of:
2001 2000 1999
---- --------------- ----
($ in millions)
Minimum rentals ............................... $184 $171 $158
Additional rentals ............................ 91 97 102
---- ---- ----
$275 $268 $260
==== ==== ====
50
LONG-TERM DEBT
Our long-term debt at December 28, 2001, and December 29, 2000, consisted
of the following:
2001 2000
------- -------
($ in millions)
Senior notes, average interest rate of 7.4% at December 28, 2001,
maturing through 2009 ......................................... $ 1,300 $ 1,001
Commercial paper ................................................ -- 827
Revolver, average interest rate of 2.5% at December 28, 2001 .... 923 24
Endowment deposits (non-interest bearing) ....................... 120 108
Other ........................................................... 108 98
------- -------
2,451 2,058
Less current portion ............................................ (43) (42)
------- -------
$ 2,408 $ 2,016
======= =======
The debt is unsecured with the exception of $13 million, which is secured
by real estate.
In April 1999, January 2000 and January 2001, we filed "universal shelf"
registration statements with the Securities and Exchange Commission in the
amount of $500 million, $300 million and $300 million, respectively. As of
December 28, 2001, we had offered and sold to the public $600 million of debt
securities under these registration statements, leaving a balance of $500
million available for future offerings.
In January 2001, we issued, through a private placement, $300 million of 7
percent Series E Notes due 2008, and received net proceeds of $297 million. We
agreed to make and complete a registered exchange offer to exchange these notes
for publicly registered new notes on substantially identical terms, which we
completed on January 15, 2002.
In March 2000, we sold $300 million principal amount of 8-1/8 percent
Series D Notes, which mature in 2005, in a public offering made under our shelf
registration statements. We received net proceeds of $298 million.
In September 1999, we sold $300 million principal amount of 7-7/8 percent
Series C Notes, which mature in 2009, in a public offering made under our shelf
registration statement. We received net proceeds of $296 million.
In November 1998, we sold, through a private placement, $400 million of
unsecured senior notes (Series A and B Notes). Proceeds net of discounts totaled
$396 million. On April 23, 1999, we commenced a registered exchange offer to
exchange the privately placed Series A and B Notes for publicly registered new
notes on identical terms. All of the privately placed Series A and B Notes were
tendered for exchange, and new notes were issued to the holders on May 31, 1999.
In July 2001 and February 1999, respectively, we entered into $1.5 billion
and $500 million multicurrency revolving credit facilities (the Facilities) each
with terms of five years. Borrowings bear interest at the London Interbank
Offered Rate (LIBOR) plus a spread, based on our public debt rating.
Additionally, annual fees are paid on the Facilities at a rate also based on our
public debt rating. At December 29, 2000, commercial paper, which was supported
by the Facilities, is classified as long-term debt based on our ability and
intent to refinance it on a long-term basis.
We are in compliance with covenants in our loan agreements, which require
the maintenance of certain financial ratios and minimum shareholders' equity,
and also include, among other things, limitations on additional indebtedness and
the pledging of assets.
The 2001 and 2000 statement of cash flows exclude $109 million and $79
million, respectively of financing and joint venture investments made by us in
connection with asset sales. The 1999 statement of cash flows excludes $215
million of convertible subordinated debt that was converted to equity in
November 1999, $54 million of debt that we assumed during 1999, and $15 million
of notes receivable we received in a 1999 asset sale that we subsequently sold
for cash.
51
Aggregate debt maturities, excluding convertible debt are: 2002 - $43
million; 2003 - $239 million; 2004 - $16 million; 2005 - $518 million; 2006 -
$915 million; and $720 million thereafter.
Cash paid for interest, net of amounts capitalized was $68 million in 2001,
$74 million in 2000 and $30 million in 1999.
CONVERTIBLE DEBT
On May 8, 2001, we received cash proceeds of $405 million from the sale of
zero-coupon convertible senior notes due 2021, known as LYONs.
The LYONs are convertible into approximately 6.4 million shares of our
Class A Common Stock and carry a yield to maturity of 0.75 percent. We may not
redeem the LYONs prior to May 8, 2004, but may at the option of the holders be
required to purchase the LYONs at their accreted value on May 8 of each of 2002,
2004, 2011 and 2016. We may choose to pay the purchase price for redemptions or
repurchases in cash and/or shares of our Class A Common Stock.
We are amortizing the issuance costs of the LYONs into interest expense
over the one-year period ending May 8, 2002. The LYONs are classified as
long-term based on our ability and intent to refinance the obligation with
long-term debt if we are required to repurchase the LYONs.
On March 25, 1996, the company formerly named "Marriott International,
Inc." (Old Marriott) issued $540 million (principal amount at maturity) of zero
coupon convertible subordinated debt in the form of LYONs due 2011. The LYONs
were issued and recorded at a discount representing a yield to maturity of 4.25
percent. Accretion was recorded as interest expense and an increase to the
carrying value. Gross proceeds from the LYONs issuance were $288 million. We
assumed the LYONs when we were spun off (the Spinoff) as a separate entity by
Old Marriott in March 1998, and Old Marriott, renamed Sodexho Marriott Services,
Inc. (SMS), assumed a 9 percent share of the LYONs obligation based on the
relative equity values of SMS and the Company at the Spinoff.
The LYONs were redeemable by us at any time on or after March 25, 1999, for
cash equal to the issue price plus accrued original issue discount. On October
7, 1999, we delivered a mandatory redemption notice to the holders of the LYONs
indicating our plan to redeem them on November 8, 1999, for $619.65 in cash per
LYON. Holders of 347,000 LYONs elected to convert each LYON into 17.52 shares of
our Class A Common Stock and 2.19 shares of SMS common stock prior to the close
of business on November 8, 1999. The aggregate redemption payment for the
remaining 193,000 LYONs totaled $120 million. Pursuant to the LYONs Allocation
Agreement entered into with SMS as part of the Spinoff, SMS funded 9 percent of
the aggregate LYONs redemption payment. We funded the redemption payment with
proceeds from commercial paper borrowings. Unamortized deferred financing costs
of $2 million relating to the LYONs that were redeemed were recognized as
interest expense in 1999.
52
EARNINGS PER SHARE
The following table illustrates the reconciliation of the earnings and
number of shares used in the basic and diluted earnings per share calculations
(in millions, except per share amounts).
2001 2000 1999
------- -------- -------
Computation of Basic Earnings Per Share
Net income .............................. $ 236 $ 479 $ 400
Weighted average shares outstanding ..... 243.3 241.0 247.5
------- -------- -------
Basic Earnings Per Share ................ $ .97 $ 1.99 $ 1.62
======= ======== =======
Computation of Diluted Earnings Per Share
Net income .............................. $ 236 $ 479 $ 400
After-tax interest expense on convertible
debt .................................. -- -- 7
------- -------- -------
Net income for diluted earnings per share $ 236 $ 479 $ 407
======= ======== =======
Weighted average shares outstanding ..... 243.3 241.0 247.5
Effect of Dilutive Securities
Employee stock purchase plan .......... -- 0.1 0.2
Employee stock option plan ............ 7.9 7.5 8.7
Deferred stock incentive plan ......... 5.5 5.4 5.4
Convertible debt ........................ -- -- 8.0
------- -------- -------
Shares for diluted earnings per share ... 256.7 254.0 269.8
======= ======== =======
Diluted Earnings Per Share .............. $ .92 $ 1.89 $ 1.51
======= ======== =======
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. The calculation of diluted
earnings per share for the year ended December 28, 2001, excludes $5 million of
after-tax interest expense on convertible debt and 4.1 million shares issuable
upon conversion of convertible debt, and 5.1 million options granted in 2001,
inclusion of which would have had an antidilutive impact on diluted earnings per
share.
EMPLOYEE STOCK PLANS
We issue stock options, deferred shares and restricted shares under our
1998 Comprehensive Stock and Cash Incentive Plan (Comprehensive Plan). Under the
Comprehensive Plan, we may award to participating employees (1) options to
purchase our Class A Common Stock (Stock Option Program and Supplemental
Executive Stock Option awards), (2) deferred shares of our Class A Common Stock
and (3) restricted shares of our Class A Common Stock. In addition we have an
employee stock purchase plan (Stock Purchase Plan). In accordance with the
provisions of Opinion No. 25 of the Accounting Principles Board, we recognize no
compensation cost for the Stock Option Program, the Supplemental Executive Stock
Option awards or the Stock Purchase Plan.
Deferred shares granted to officers and key employees under the
Comprehensive Plan generally vest over 10 years in annual installments
commencing one year after the date of grant. We accrue compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. We granted 0.8 million deferred shares during 2001. Compensation
cost recognized during 2001, 2000 and 1999 was $25 million, $18 million and $15
million, respectively.
53
Restricted shares under the Comprehensive Plan are issued to officers and
key employees and distributed over a number of years in annual installments,
subject to certain prescribed conditions including continued employment. We
recognize compensation expense for the restricted shares over the restriction
period equal to the fair market value of the shares on the date of issuance. We
awarded 0.2 million restricted shares under this plan during 2001. We recognized
compensation cost of $4 million in each of 2001, 2000 and 1999.
Under the Stock Purchase Plan, eligible employees may purchase our Class A
Common Stock through payroll deductions at the lower of the market value at the
beginning or end of each plan year.
Employee stock options may be granted to officers and key employees at
exercise prices equal to the market price of our Class A Common Stock on the
date of grant. Nonqualified options expire 10 years after the date of grant,
except those issued from 1990 through 2000, which expire 15 years after the date
of the grant. Most options under the Stock Option Program are exercisable in
cumulative installments of one quarter at the end of each of the first four
years following the date of grant. In February 1997, 2.1 million Supplemental
Executive Stock Option awards were awarded to certain of our officers. The
options vest after eight years but could vest earlier if our stock price meets
certain performance criteria. These options have an exercise price of $25 and
0.2 million of them were forfeited during 1998. None of them were exercised
during 2001, 2000 or 1999 and 1.9 million remained outstanding at December 28,
2001.
For the purposes of the following disclosures required by FAS No. 123,
"Accounting for Stock-Based Compensation," the fair value of each option granted
during 2001, 2000 and 1999 was $16, $15 and $14, respectively. We estimated the
fair value of each option granted on the date of grant using the Black-Scholes
option-pricing model, using the assumptions noted in the following table:
2001 2000 1999
----- ----- -----
Annual dividends ............................... $ .26 $ .24 $ .22
Expected volatility ............................ 32% 30% 29%
Risk-free interest rate ........................ 4.9% 5.8% 6.7%
Expected life (in years) ....................... 7 7 7
Pro forma compensation cost for the Stock Option Program, the Supplemental
Executive Stock Option awards and employee purchases pursuant to the Stock
Purchase Plan subsequent to December 30, 1994, recognized in accordance with FAS
No. 123, would reduce our net income as follows (in millions, except per share
amounts):
2001 2000 1999
----- ------ ------
Net income as reported ......................... $ 236 $ 479 $ 400
Pro forma net income ........................... $ 187 $ 435 $ 364
Diluted earnings per share as reported ......... $ .92 $ 1.89 $ 1.51
Pro forma diluted earnings per share ........... $ .73 $ 1.71 $ 1.38
54
A summary of our Stock Option Program activity during 2001, 2000 and 1999
is presented below:
Number of Weighted
options average exercise
(in millions) price
------------- -------------------
Outstanding at January 1, 1999 ....................... 31.5 $19
Granted during the year ......................... 6.9 33
Exercised during the year ....................... (4.2) 12
Forfeited during the year ....................... (0.4) 30
----
Outstanding at December 31, 1999 ..................... 33.8 22
---- ---
Granted during the year ......................... 0.6 36
Exercised during the year ....................... (3.9) 16
Forfeited during the year ....................... (0.5) 32
----
Outstanding at December 29, 2000 ..................... 30.0 23
---- ---
Granted during the year ......................... 13.4 36
Exercised during the year ....................... (4.2) 18
Forfeited during the year ....................... (0.9) 34
----
Outstanding at December 28, 2001 ..................... 38.3 $29
==== ===
There were 20.2 million, 20.5 million and 19.3 million exercisable options
under the Stock Option Program at December 28, 2001, December 29, 2000 and
December 31, 1999, respectively, with weighted average exercise prices of $22,
$19 and $16, respectively.
At December 28, 2001, 54.1 million shares were reserved under the
Comprehensive Plan (including 40.3 million shares under the Stock Option Program
and 1.9 million shares of the Supplemental Executive Stock Option awards) and
2.1 million shares were reserved under the Stock Purchase Plan.
Stock options issued under the Stock Option Program outstanding at December
28, 2001, were as follows:
Outstanding Exercisable
------------------------------------------ ------------------------
Weighted Weighted Weighted
Range of Number of average average Number of average
exercise options remaining life exercise options exercise
prices (in millions) (in years) price (in millions) price
- ------------ ------------ -------------- -------- ------------ --------
$ 3 to 5 0.9 4 $ 3 0.9 $ 3
6 to 9 2.5 6 7 2.5 7
10 to 15 3.1 8 13 3.1 13
16 to 24 1.9 9 17 1.9 17
25 to 37 23.8 11 31 11.7 30
38 to 49 6.1 10 45 0.1 41
------------ ------------
$ 3 to 49 38.3 10 $ 29 20.2 $22
============ ============ ============== ======== ============ ========
55
FAIR VALUE OF FINANCIAL INSTRUMENTS
We assume that the fair values of current assets and current liabilities
are equal to their reported carrying amounts. The fair values of noncurrent
financial assets and liabilities are shown below.
2001 2000
------------------ ------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- ------
($ in millions) ($ in millions)
Notes and other receivables ................ $1,588 $1,645 $1,180 $1,206
Long-term debt, convertible debt and other
long-term liabilities ................... 2,754 2,743 1,998 1,974
We value notes and other receivables based on the expected future cash
flows discounted at risk adjusted rates. We determine valuations for long-term
debt and other long-term liabilities based on quoted market prices or expected
future payments discounted at risk adjusted rates.
CONTINGENT LIABILITIES
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees were limited, in
the aggregate, to $574 million at December 28, 2001, including guarantees
involving major customers. As discussed below (see "Restructuring Costs and
Other Charges"), we expect to fund $33 million of guarantee obligations in 2002.
In addition, we have made an uncapped physical completion guaranty relating to
one hotel property with minimal expected funding. As of December 28, 2001, we
had extended approximately $669 million of loan commitments to owners of lodging
properties and senior living communities under which we expect to fund
approximately $187 million by January 3, 2003, and $334 million in total.
Letters of credit outstanding on our behalf at December 28, 2001, totaled $77
million, the majority of which related to our self-insurance programs. At
December 28, 2001, we had repurchase obligations of $46 million related to notes
receivable from timeshare interval purchasers, which have been sold with limited
recourse.
New World Development and another affiliate of Dr. Henry Cheng Kar-Shun
have severally indemnified us for guarantees by us of leases with minimum annual
payments of approximately $57 million.
On March 30, 2001, Green Isle Partners, Ltd., S.E. (Green Isle) filed a
63-page complaint in Federal district court in Delaware against The Ritz-Carlton
Hotel Company, L.L.C., The Ritz-Carlton Hotel Company of Puerto Rico, Inc.
(Ritz-Carlton Puerto Rico), Marriott International, Inc., Marriott Distribution
Services, Inc., Marriott International Capital Corp. and Avendra L.L.C. (Green
Isle Partners, Ltd. S.E., v. The Ritz-Carlton Hotel Company, L.L.C., et al,
civil action no. 01-202). Ritz-Carlton Puerto Rico manages The Ritz-Carlton San
Juan Hotel, Spa and Casino located in San Juan, Puerto Rico, under an operating
agreement with Green Isle dated December 15, 1995 (the Operating Agreement).
The claim asserts 11 causes of action: three Racketeer Influenced and
Corrupt Organizations Act (RICO) claims, together with claims based on the
Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding and
abetting a breach of fiduciary duty, breach of implied duties of good faith and
fair dealing, common law fraud and intentional misrepresentation, negligent
misrepresentation, and fiduciary accounting. The complaint does not request
termination of the Operating Agreement.
The claim includes allegations of: (i) national, non-competitive contracts
and attendant kick-back schemes; (ii) concealing transactions with affiliates;
(iii) false entries in the books and manipulation of accounts payable and
receivable; (iv) excessive compensation schemes and fraudulent expense accounts;
(v) charges of prohibited overhead costs to the project; (vi) charges of
prohibited procurement costs; (vii) inflation of Group Service Expense; (viii)
the use of prohibited or falsified revenues; (ix) attempts to oust Green Isle
from ownership; (x) creating a financial crisis and then attempting to exploit
it by seeking an economically oppressive contract in connection with a loan;
(xi) providing incorrect cash flow figures and failing to appropriately reveal
and explain revised cash flow figures.
56
The complaint seeks as damages the $140 million, which Green Isle claims to
have invested in the hotel (which includes $85 million in third-party debt),
which the plaintiffs seek to treble to $420 million under RICO and the
Robinson-Patman Act.
On November 11, 2001, the court granted defendants' motion to transfer and
subsequently did transfer the matter to the United States District Court for the
district of Puerto Rico. On May 25, 2001, defendants moved to dismiss the
complaint or, alternatively, to stay or transfer. On June 25, 2001, Green Isle
filed its Chapter 11 Bankruptcy Petition in the Southern District of Florida.
Although we believe that the lawsuit described above is without merit, and
we intend to vigorously defend against the claims being made against us, we
cannot assure you as to the outcome of this lawsuit nor can we currently
estimate the range of any potential loss to the Company.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the Company.
BUSINESS SEGMENTS
We are a diversified hospitality company with operations in six business
segments: Full-Service Lodging, which includes Marriott Hotels, Resorts and
Suites, The Ritz-Carlton Hotel, Renaissance Hotels, Resorts and Suites, Ramada
International and the fees we receive for the use of the Ramada name in the
United States and Canada; Select-Service Lodging, which includes Courtyard,
Fairfield Inn and SpringHill Suites; Extended-Stay Lodging, which includes
Residence Inn, TownePlace Suites, ExecuStay and Marriott Executive Apartments;
Timeshare, which includes the operation, ownership, development and marketing of
Marriott's timeshare properties under the Marriott, Ritz-Carlton Club, Horizons
and Grand Residences brands; Senior Living Services, which includes the
operation, ownership and development of senior living communities; and
Distribution Services, which includes our 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.
57
We have aggregated the brands and businesses presented within each of our
segments considering their similar economic characteristics, types of customers,
distribution channels, and the regulatory business environment of the brands and
operations within each segment.
2001 2000 1999
-------- -------- -------
($ in millions)
Sales
Full-Service ............................. $ 5,238 $ 5,520 $ 5,091
Select-Service ........................... 864 901 788
Extended-Stay ............................ 635 668 537
Timeshare ................................ 1,049 822 625
-------- -------- -------
Total Lodging ......................... 7,786 7,911 7,041
Senior Living Services ................... 729 669 559
Distribution Services .................... 1,637 1,500 1,139
-------- -------- -------
$ 10,152 $ 10,080 $ 8,739
======== ======== =======
Operating profit (loss) before corporate
expenses and interest
Full-Service ............................. $ 294 $ 510 $ 469
Select-Service ........................... 145 192 167
Extended-Stay ............................ 55 96 68
Timeshare ................................ 147 138 123
-------- -------- -------
Total Lodging ....................... 641 936 827
Senior Living Services ................... (45) (18) (18)
Distribution Services .................... (6) 4 21
-------- -------- -------
$ 590 $ 922 $ 830
======== ======== =======
Depreciation and amortization
Full-Service ............................. $ 81 $ 86 $ 74
Select-Service ........................... 10 8 4
Extended-Stay ............................ 16 15 11
Timeshare ................................ 34 22 19
-------- -------- -------
Total Lodging ........................ 141 131 108
Senior Living Services ................... 32 28 21
Distribution Services .................... 13 6 6
Corporate ................................ 36 30 27
-------- -------- -------
$ 222 $ 195 $ 162
======== ======== =======
58
2001 2000 1999
------ -------------- ------
($ in millions)
Assets
Full-Service ............................. $3,394 $3,453 $2,861
Select-Service ........................... 931 995 620
Extended-Stay ............................ 366 399 395
Timeshare ................................ 2,109 1,634 1,283
------ ------ ------
Total Lodging ........................ 6,800 6,481 5,159
Senior Living Services ................. 690 784 980
Distribution Services .................. 216 194 187
Corporate .............................. 1,401 778 998
------ ------ ------
$9,107 $8,237 $7,324
====== ====== ======
Capital expenditures
Full-Service ............................. $ 186 $ 554 $ 180
Select-Service ........................... 140 262 182
Extended-Stay ............................ 52 83 121
Timeshare ................................ 75 66 36
------ ------ ------
Total Lodging ........................ 453 965 519
Senior Living Services ................... 26 76 301
Distribution Services .................... 2 6 3
Corporate ................................ 79 48 106
------ ------ ------
$ 560 $1,095 $ 929
====== ====== ======
Sales from Distribution Services exclude sales (made at market terms and
conditions) to other business segments of $157 million, $176 million and $166
million in 2001, 2000 and 1999, respectively.
Segment operating expenses include selling, general and administrative
expenses directly related to the operations of the businesses, aggregating $698
million in 2001, $682 million in 2000 and $592 million in 1999.
The consolidated financial statements include the following related to
international operations: sales of $477 million in 2001, $455 million in 2000
and $392 million in 1999; operating profit before corporate expenses and
interest of $42 million in 2001, $73 million in 2000 and $66 million in 1999;
and fixed assets of $211 million in 2001, $241 million in 2000 and $137 million
in 1999.
RESTRUCTURING COSTS AND OTHER CHARGES
The Company has experienced a significant decline in demand for hotel rooms
in the aftermath of the September 11, 2001 attacks on New York and Washington
and the subsequent dramatic downturn in the economy. This decline has resulted
in reduced management and franchise fees, cancellation of development projects,
and anticipated losses under guarantees and loans. We have responded by
implementing certain companywide cost-saving measures, although we do not expect
any significant changes to the scope of our operations. As a result of our
restructuring plan, we incurred restructuring costs of $124 million, including
(1) $16 million in severance costs; (2) $20 million, primarily associated with
loss on a sublease of excess space arising from the reduction in personnel; (3)
$28 million related to the write-off of capitalized costs relating to
development projects no longer deemed viable; and (4) $60 million related to the
write-down of the Village Oaks brand of companion-style senior living
communities, which are now classified as held for sale, to their estimated fair
value. Detailed information related to the restructuring costs and other
charges, which were recorded in the fourth quarter of 2001 as a result of the
economic downturn and the unfavorable lodging environment, is provided below.
59
Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700
employees (the majority of which were terminated by December 28, 2001) across
the Company. We recorded a workforce reduction charge of $16 million related
primarily to severance and fringe benefits. The charge does not reflect amounts
billed out separately to owners for property-level severance costs. In addition,
we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of the workforce reduction and delay in filling vacant
positions, we consolidated excess corporate facilities. We recorded a
restructuring charge of approximately $15 million for excess corporate
facilities, primarily related to lease terminations and noncancelable lease
costs in excess of estimated sublease income. In addition, we recorded a $5
million charge for lease terminations resulting from cancellations of leased
units by our ExecuStay corporate apartment business, primarily in downtown New
York City.
Development Cancellations and Elimination of Product Line
We incur certain costs associated with the development of properties,
including legal costs, the cost of land and planning and design costs. We
capitalize these costs as incurred and they become part of the cost basis of the
property once it is developed. As a result of the dramatic downturn in the
economy in the aftermath of the September 11, 2001 attacks, we decided to cancel
development projects no longer deemed viable. As a result, we expensed $28
million of previously capitalized costs. In addition, management has begun to
actively engage in efforts to sell 25 Village Oaks senior living communities.
These communities offer companion living and are significantly different from
our other senior living brands. As a result of the plan to exit this line of
business, we have reclassified the assets associated with the 25 properties as
assets held for sale and accordingly recorded those assets at their estimated
fair value, resulting in an impairment charge of $60 million.
Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. We also advance loans to some
owners of properties that we manage. As a result of the downturn in the economy,
certain hotels have experienced significant declines in profitability and the
owners have not been able to meet debt service obligations to the Company or in
some cases, to third-party lending institutions. As a result, based upon cash
flow projections, we expect to fund under certain guarantees, which are not
deemed recoverable, and we expect that several of the loans made by us will not
be repaid according to their original terms. Due to the expected guarantee
fundings deemed nonrecoverable and the expected loan losses, we recorded charges
of $85 million in the fourth quarter of 2001.
Accounts Receivable - Bad Debts
In the fourth quarter of 2001, we reserved $17 million of accounts
receivable following an analysis of these accounts which we deemed
uncollectible, generally as a result of the unfavorable hotel operating
environment.
Asset Impairments and Other Charges
The Company recorded a charge related to the impairment of an investment in
a technology-related joint venture ($22 million), losses on the anticipated sale
of three lodging properties ($13 million), write-offs of investments in
management contracts and other assets ($8 million), and the write-off of
capitalized software costs arising from a decision to change a technology
platform ($2 million).
60
A summary of the restructuring costs and other charges recorded in the
fourth quarter of 2001 is detailed as follows ($ in millions):
Restructuring
costs and other
Cash payments charges liability
Non-cash in fourth at December 28,
Total charge charge quarter 2001 2001
------------ -------- ------------- -----------------
Severance ......................................... $ 16 $ 2 $ 6 $ 8
Facilities exit costs ............................. 20 ---- 2 18
Development cancellations and elimination
of product line ............................... 88 88 -- --
---- ---- --- ---
Total restructuring costs ......................... 124 90 8 26
Reserves for guarantees and
loan losses .................................... 85 52 -- 33
Accounts receivable - bad debts ................... 17 17 -- --
Write-down of properties held for sale ............ 13 13 -- --
Impairment of technology-related
investments and other .......................... 32 31 -- 1
---- ---- --- ---
Total ............................................. $271 $203 $ 8 $60
==== ==== === ===
The remaining liability related to the workforce reduction and fundings
under guarantees will be substantially paid by the end of 2002. The amounts
related to the space reduction and resulting lease expense due to the
consolidation of facilities will be paid over the respective lease terms through
2012.
Further detail regarding the charges is shown below:
Operating Profit Impact ($ in millions)
- ---------------------------------------
Senior
Full- Select- Extended- Living Distribution
Service Service Stay Timeshare Services Services Total
------- ------- --------- --------- -------- ------------ -----
Severance .............................. $ 7 $ 1 $ 1 $ 2 $-- $ 1 $ 12
Facilities exit costs .................. -- -- 5 -- -- 1 6
Development cancellations and
elimination of product line ......... 19 4 5 -- 60 -- 88
--- --- --- --- --- --- ----
Total restructuring costs .............. 26 5 11 2 60 2 106
Reserves for guarantees and loan losses 30 3 3 -- -- -- 36
Accounts receivable - bad debts ........ 11 1 -- -- 2 3 17
Write-down of properties held for sale . 9 4 -- -- -- -- 13
Impairment of technology-related
investments and other ............... 8 -- 2 -- -- -- 10
--- --- --- --- --- --- ----
Total .................................. $84 $13 $16 $ 2 $62 $ 5 $182
=== === === === === === ====
Non-operating Impact ($ in millions)
- -----------------------------------
Total
corporate
Corporate Provision for Interest expenses and
expenses loan losses income interest
--------- ------------- -------- ------------
Severance ............................................... $ 4 $-- $-- $ 4
Facilities exit costs ................................... 14 -- -- 14
--- --- --- ---
Total restructuring costs ............................... 18 -- -- 18
Reserves for guarantees and loan losses ................. -- 43 6 49
Impairment of technology-related investments and other .. 22 -- -- 22
--- --- --- ---
Total ................................................... $40 $43 $ 6 $89
=== === === ===
61
SUBSEQUENT EVENTS (UNAUDITED)
In March 2002, Marriott and Cendant Corporation ("Cendant") completed the
formation of a joint venture to further develop and expand the Ramada and Days
Inn brands in the United States. We contributed to the joint venture the
domestic Ramada license agreements and related intellectual property at their
carrying value of approximately $200 million. We also contributed a $205 million
note receivable from us and the joint venture assumed a $205 million note
payable to us, which eliminate upon consolidation. Cendant contributed the Days
Inn license agreement and related intellectual property with a carrying value of
approximately $205 million. We each own approximately 50 percent of the joint
venture, with Cendant having the slightly larger interest. We will account for
our interest in the joint venture using the equity method. The joint venture can
be dissolved at any time with the consent of both members and is scheduled to
terminate in March 2012. In the event of dissolution, the joint venture's assets
will generally be distributed in accordance with each member's capital account.
In addition, during certain periods of time commencing in March 2004, first the
joint venture and later Marriott will have a brief opportunity to cause a
mandatory redemption of Marriott's joint venture equity.
QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share data)
2001/1/
-----------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Sales ......................................... $ 2,461 $ 2,450 $ 2,373 $ 2,868 $10,152
Operating profit (loss) before corporate
expenses and interest ...................... $ 226 $ 239 $ 178 $ (53) $ 590
Net income (loss) ............................. $ 121 $ 130 $ 101 $ (116) $ 236
Diluted earnings (loss) per share/2/ .......... $ .47 $ .50 $ .39 $ (.48) $ .92
2000/1/
-----------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Sales ......................................... $ 2,177 $ 2,409 $ 2,315 $ 3,179 $10,080
Operating profit (loss) before corporate
expenses and interest ...................... $ 193 $ 247 $ 216 $ 266 $ 922
Net income .................................... $ 94 $ 126 $ 110 $ 149 $ 479
Diluted earnings per share .................... $ .37 $ .50 $ .43 $ .59 $ 1.89
/1 The quarters consist of 12 weeks, except the fourth quarter, which consists
of 16 weeks.
/2 In 2001 the sum of the earnings per share for the four quarters differs
from annual earnings per share due to the required method of computing the
weighted average shares in interim periods.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
63
PART III
ITEMS 10, 11, 12 and 13.
As described below, certain information appearing in our Proxy Statement to
be furnished to shareholders in connection with the 2002 Annual Meeting of
Shareholders, is incorporated by reference in this Form 10-K Annual Report.
ITEM 10. We incorporate this information by reference to
the "Directors Standing For Election," "Directors
Continuing In Office" and "Section 16(a)
Beneficial Ownership Reporting Compliance"
sections of our Proxy Statement which we will
furnish to our shareholders in connection with our
2002 Annual Meeting. We have included information
regarding our executive officers below.
ITEM 11. We incorporate this information by reference to
the "Executive Compensation" section of our Proxy
Statement.
ITEM 12. We incorporate this information by reference to
the "Stock Ownership" section of our Proxy
Statement.
ITEM 13. We incorporate this information by reference to
the "Certain Transactions" section of our Proxy
Statement.
64
EXECUTIVE OFFICERS
Set forth below is certain information with respect to our
executive officers.
Name and Title Age Business Experience
- --------------------------------------------- -------- ------------------------------------------------------------
J. W. Marriott, Jr. 69 Mr. Marriott joined Marriott Corporation (now known as
Chairman of the Board and Chief Executive Host Marriott Corporation) in 1956, became President and a
Officer director in 1964, Chief Executive Officer in 1972 and
Chairman of the Board in 1985. Mr. Marriott also is a
director of Host Marriott Corporation, General Motors
Corporation and the Naval Academy Endowment Trust. He
serves on the Board of Trustees of the National Geographic
Society and The J. Willard & Alice S. Marriott Foundation,
and is a member of the Executive Committee of the World
Travel & Tourism Council and the Business Council. Mr.
Marriott has served as Chief Executive Officer of the
Company since its inception in 1997, and served as
Chairman and Chief Executive Officer of Old Marriott from
October 1993 to March 1998. Mr. Marriott has served as a
director of the Company since March 1998.
Simon Cooper 56 Simon Cooper joined Marriott International in 1998 as
Vice President; President of Marriott Lodging Canada and Senior Vice
President and Chief Operating Officer, President of Marriott Lodging International. In 2000, the
The Ritz-Carlton Hotel Company, L.L.C. Company added the New England Region to his Canadian
responsibilities. Prior to joining Marriott, Mr. Cooper
was President and Chief Operating Officer of Delta Hotels
and Resorts. Mr. Cooper is the Chairman of the Board of
Governors for University of Guelph. He is a fellow of the
Board of Trustees for the Educational Institute of the
American Hotel and Motel Association and is a member of
the Board for the Canadian Tourism Commission. Mr. Cooper
was appointed to his current position in February 2001.
Edwin D. Fuller 57 Edwin D. Fuller joined Marriott in 1972 and held several
Vice President; sales positions before being appointed Vice President of
President and Managing Director - Marketing in 1979. He became Regional Vice President in the
Marriott Lodging International Midwest Region in 1985, Regional Vice President of the
Western Region in 1988, and in 1990 was promoted to Senior
Vice President & Managing Director of International Lodging,
with a focus on developing the international group of
hotels. He was named Executive Vice President and Managing
Director of International Lodging in 1994, and was promoted
to his current position in 1997.
65
Name and Title Age Business Experience
- --------------------------------------------- -------- ------------------------------------------------------------
Brendan M. Keegan 58 Brendan M. Keegan joined Marriott Corporation in 1971, in
Vice President; the Corporate Organization Development Department and
Executive Vice President - subsequently held several human resources positions,
Human Resources including Vice President of Organization Development and
Executive Succession Planning. He was named Senior Vice
President, Human Resources, Marriott Service Group in
1986. Mr. Keegan was appointed Senior Vice President of
Human Resources for our worldwide human resources
functions, including compensation, benefits, labor and
employee relations, employment and human resources
planning and development in 1997, and was appointed to his
current position in 1998.
William W. McCarten 53 William W. McCarten was named as President of Marriott
Vice President; Services Group (Marriott Senior Living Services and Marriott
President - Marriott Services Group Distribution Services) in January 2001. Most recently, Mr.
McCarten served as President and Chief Executive Officer of
HMS Host Corporation (formerly Host Marriott Services
Corporation) from 1995 to December 2000. He joined Marriott
Corporation in 1979, was elected Vice President, Corporate
Controller and Chief Accounting Officer in 1985 and Senior
Vice President in 1986. He was named Executive Vice
President, Host and Travel Plazas in 1991 and President,
Host and Travel Plazas in 1992. In 1993 he became President
of Host Marriott Corporation's Operating Group and in 1995
was elected President and Chief Executive Officer and a
director of HMS Host Corporation. Mr. McCarten is a past
chairman of the Advisory Board of the McIntire School at the
University of Virginia.
Terry Petty 52 Terry Petty joined Marriott Corporation in 1984 as Vice
Executive Vice President; President of Marketing and Planning for the newly
North American Lodging Operations acquired Host International business and subsequently
held the following positions: Vice President of Consumer
Marketing, Marriott Hotels; General Manager, Atlanta
Perimeter Marriott Hotel; Vice President of Operations
for Marriott Vacation Club International, and Senior
Vice President of Hotels for the Western Region. Mr.
Petty was appointed to his current position in 2000.
Joseph Ryan 60 Joseph Ryan joined Old Marriott in 1994 as
Executive Vice President and Executive Vice President and General Counsel.
General Counsel Prior to that time, he was a partner in the law
firm of O'Melveny & Myers, serving as the Managing
Partner from 1993 until his departure. He joined
O'Melveny & Myers in 1967 and was admitted as a
partner in 1976.
66
Name and Title Age Business Experience
- ------------------------------------------ -------- ------------------------------------------------------------
William J. Shaw 56 Mr. Shaw has served as President and Chief Operating Officer
Director, President and of the Company since 1997 (including service in the same
Chief Operating Officer capacity with Old Marriott until March 1998). He joined
Marriott Corporation in 1974, was elected Corporate
Controller in 1979 and a Vice President in 1982. In 1986,
Mr. Shaw was elected Senior Vice President--Finance and
Treasurer of Marriott Corporation. He was elected Chief
Financial Officer and Executive Vice President of Marriott
Corporation in 1988. In 1992, he was elected President of
the Marriott Service Group. He also serves on the Board of
Trustees of the University of Notre Dame and the Suburban
Hospital Foundation. Mr. Shaw served as a director of Old
Marriott (subsequently named Sodexho, Inc. and now a wholly
owned subsidiary of Sodexho Alliance) from May 1997 through
June 2001. He has served as a director of the Company since
March 1998.
Arne M. Sorenson 43 Arne M. Sorenson joined Old Marriott in 1996 as Senior
Executive Vice President and Vice President of Business Development. He was
Chief Financial Officer instrumental in our acquisition of the Renaissance Hotel
Group in 1997. Prior to joining Marriott, he was a
partner in the law firm of Latham & Watkins in
Washington, D.C., where he played a key role in 1992 and
1993 in the distribution of Old Marriott by Marriott
Corporation. Mr. Sorenson was appointed Executive Vice
President and Chief Financial Officer in 1998.
James M. Sullivan 58 James M. Sullivan joined Marriott Corporation in 1980,
Executive Vice President - departed in 1983 to acquire, manage, expand and subsequently
Lodging Development sell a successful restaurant chain, and returned to Marriott
Corporation in 1986 as Vice President of Mergers and
Acquisitions. Mr. Sullivan became Senior Vice President,
Finance - Lodging in 1989, Senior Vice President - Lodging
Development in 1990 and was appointed to his current
position in 1995.
Stephen P. Weisz 51 Stephen P. Weisz joined Marriott Corporation in 1972 and
Vice President; was named Regional Vice President of the Mid-Atlantic
President - Marriott Vacation Club Region in 1991. Mr. Weisz had previously served as
International Senior Vice President of Rooms Operations before being
appointed as Vice President of the Revenue Management
Group. Mr. Weisz became Senior Vice President of Sales
and Marketing for Marriott Hotels, Resorts and Suites in
1992 and Executive Vice President - Lodging Brands in
1994. Mr. Weisz was appointed to his current position in
1996.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The response to this portion of Item 14 is submitted under Item 8 of
this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Information relating to schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission is included in the notes to the financial statements and is
incorporated herein by reference.
(3) EXHIBITS
Any shareholder who wants a copy of the following Exhibits may obtain
one from us upon request at a charge that reflects the reproduction
cost of such Exhibits. Requests should be made to the Secretary,
Marriott International, Inc., Marriott Drive, Department 52/862,
Washington, D.C. 20058.
Incorporation by Reference
(where a report or registration statement is
indicated below, that document has been
Exhibit previously filed with the SEC and the applicable
No. Description exhibit is incorporated by reference thereto)
- -----------------------------------------------------------------------------------------------------------------------
3.1 Third Amended and Restated Certificate of Exhibit No. 3 to our Form 10-Q for the fiscal
Incorporation of the Company. quarter ended June 18, 1999.
3.2 Amended and Restated Bylaws. Exhibit No. 3.3 to our Form 10-K for the fiscal
year ended January 1, 1999.
3.3 Amended and Restated Rights Agreement dated Exhibit No. 4.1 to our Form 10-Q for the fiscal
as of August 9, 1999 with The Bank of New quarter ended September 10, 1999.
York,Rights Agent.
3.4 Certificate of Designation,Preferences and Exhibit No. 3.1 to our Form 10-Q for the fiscal
Rights of the Marriott International,Inc.ESOP quarter ended June 16, 2000.
Convertible Preferred Stock.
3.5 Certificate of Designation, Preferences and Exhibit No. 3.2 to our Form 10-Q for the fiscal
Rights of the Marriott International,Inc. quarter ended June 16, 2000.
Capped Convertible Preferred Stock.
4.1 Indenture dated November 16,1998 with The Exhibit No. 4.1 to our Form 10-K for the fiscal
Chase Manhattan Bank, as Trustee. year ended January 1, 1999.
4.2 Form of 6.625% Series A Note due 2003. Exhibit No. 4.2 to our Form 10-K for the fiscal
year ended January 1, 1999.
4.3 Form of 6.875% Series B Note due 2005. Exhibit No. 4.3 to our Form 10-K for the fiscal
year ended January 1, 1999.
68
4.4 Form of 7.875% Series C Note due 2009. Exhibit No. 4.1 to our Form 8-K dated September 20,
1999.
4.5 Form of 8.125% Series D Note due 2005. Exhibit No. 4.1 to our Form 8-K dated March 28,
2000.
4.6 Form of 7.0% Series E Note due 2008. Exhibit No. 4.1 (f) to our Form S-3 filed on
January 17, 2001.
4.7 Indenture, dated as of May 8,2001,relating to Exhibit No. 4.2 to our Form S-3 filed on May 25,
the Liquid Yield Option Notes due 2021,with 2001.
Bank of New York, as trustee.
10.1 Employee Benefits and Other Employment Matters Exhibit No. 10.1 to our Form 10 filed on February
Allocation Agreement dated as of September 30, 13, 1998.
1997 with Sodexho Marriott Services, Inc.
10.2 1998 Comprehensive Stock and Cash Incentive Appendix L in our Form 10 filed on February 13,
Plan. 1998.
10.3 Amended and restated Marriott International, Attachment A to our definitive proxy statement
Inc. 1998 Comprehensive Stock and Cash filed on March 23, 2000.
Incentive Plan.
10.4 Noncompetition Agreement between Sodexho Exhibit No. 10.1 to our Form 10-Q for the fiscal
Marriott Services, Inc. and the Company. quarter ended March 27, 1998.
10.5 Tax Sharing Agreement with Sodexho Marriott Exhibit No. 10.2 to our Form 10-Q for the fiscal
Services, Inc. and Sodexho Alliance, S.A. quarter ended March 27, 1998.
10.6 Distribution Agreement with Host Marriott Exhibit No. 10.3 to Form 8-K of Old Marriott dated October
Corporation, as amended. 25, 1993; Exhibit No. 10.2 to Form 10-K of Old Marriott for
the fiscal year ended December 29, 1995 (First Amendment);
Exhibit Nos. 10.4 and 10.5 to our Form 10-Q for the fiscal
quarter ended March 27, 1998 (Second and Third Amendments);
and Exhibit nos. 10.5 (a) and 10.5 (b) to our Form 10-K for
the fiscal year ended December 31, 1999 (Fourth and Fifth
Amendments); Exhibit No. 10.5 to our Form 10-K for the
fiscal year ended December 29, 2000 (Sixth Amendment).
10.7 Restated Noncompetition Agreement with Host Exhibit No. 10.6 to our Form 10-Q for the fiscal
Marriott Corporation. quarter ended March 27, 1998.
10.8 $500 million Credit Agreement dated February Exhibit No. 4.8 to our Form 10-K for the fiscal
19, 1998 with Citibank,N.A.,as administrative year ended January 1, 1999.
Agent, and certain banks.
69
10.9 $1.5 Billion Credit Agreement dated July 31, Exhibit No. 10 to our Form 10-Q for the fiscal
2001 with Citibank, N.A. as Administrative quarter ended September 7, 2001.
Agent, and certain banks.
12 Statement of Computation of Ratio of Earnings Filed with this report.
to Fixed Charges.
21 Subsidiaries of Marriott International, Inc. Filed with this report.
23 Consent of Arthur Andersen LLP. Filed with this report.
99.1 Forward-Looking Statements. Filed with this report.
99.2 Letter to the Securities and Exchange Filed with this report.
Commission regarding representations
made by Arthur Andersen LLP.
70
(b) REPORTS ON FORM 8-K
On October 4, 2001, we filed a report indicating that we issued a press
release on the same day which described our earnings for the fiscal quarter
ended September 7, 2001 and discussed the impact on our business of the
September 11, 2001 attacks on New York and Washington.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 we have duly caused this Form 10-K to be signed on our
behalf by the undersigned, thereunto duly authorized, on this 22nd day of
March, 2002.
MARRIOTT INTERNATIONAL, INC.
By /s/ J.W. Marriott, Jr.
--------------------------------------------------
J.W. Marriott, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed by the following persons on our behalf in their
capacities and on the date indicated above.
PRINCIPAL EXECUTIVE OFFICER:
/s/ J.W. Marriott, Jr.
- -----------------------------------------------------
J.W. Marriott, Jr. Chairman of the Board, Chief Executive Officer
and Director
PRINCIPAL FINANCIAL OFFICER:
/s/ Arne M. Sorenson
- -----------------------------------------------------
Arne M. Sorenson Executive Vice President,
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Linda A. Bartlett
- -----------------------------------------------------
Linda A. Bartlett Vice President, Controller
DIRECTORS:
/s/ Ann M. Fudge
- ----------------------------------------------------- --------------------------------------------------
Ann M. Fudge, Director W. Mitt Romney, Director
/s/ Gilbert M. Grosvenor /s/ Roger W. Sant
- ----------------------------------------------------- --------------------------------------------------
Gilbert M. Grosvenor, Director Roger W. Sant, Director
/s/ Richard E. Marriott /s/ William J. Shaw
- ----------------------------------------------------- --------------------------------------------------
Richard E. Marriott, Director William J. Shaw, Director
/s/ Floretta Dukes McKenzie /s/ Lawrence M. Small
- ----------------------------------------------------- --------------------------------------------------
Floretta Dukes McKenzie, Director Lawrence M. Small, Director
/s/ Harry J. Pearce
- -----------------------------------------------------
Harry J. Pearce, Director
S-1