FORM 10-K

 

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 January 3, 2003

 

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

(233,802,816 shares outstanding as of January 31, 2003)

 

New York Stock Exchange

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, 2003, was $5,646,330,643.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  No  ¨

 

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 2003 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

Index to Exhibits is located on pages 76 through 77.

 



 

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 in each of our business segments;

 

    business strategies and their intended results;

 

    the balance between supply of and demand for hotel rooms, timeshare units 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 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 adjustment to the continuing war on terrorism, and the potentially sharp decrease in travel that could occur if military action is taken in Iraq, North Korea or elsewhere;

 

    our ability to recover loan and guaranty advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise;

 

    the availability of capital to allow us and potential hotel owners to fund investments;

 

    the effect that internet reservation channels may have on the rates that we are able to charge for hotel rooms and timeshare intervals;

 

    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. Our operations are grouped into five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel, which represented 65, 12, 7, 14 and 2 percent, respectively, of total sales in the fiscal year ended January 3, 2003. Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which are now classified as discontinued operations.

 

In our Lodging business, we operate, develop and franchise hotels under 14 separate brand names and we operate, develop and market Marriott timeshare properties under 4 separate brand names. Our lodging business includes the Full-Service, Select-Service, Extended-Stay and Timeshare segments.

 

2


 

Financial information by industry segment and geographic area as of January 3, 2003 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 2,557 lodging properties worldwide, with 463,429 rooms as of January 3, 2003. In addition, we provide 4,316 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 ExecuStay

•      The Ritz-Carlton Hotels

 

•      Marriott Executive Apartments

•      Renaissance Hotels, Resorts and Suites

   

•      Ramada International

 

Timeshare

    (primarily Europe, Middle East and Asia/Pacific)

 

•      Marriott Vacation Club International

•      Bvlgari Hotels and Resorts

 

•      Horizons by Marriott Vacation Club International

   

•      The Ritz-Carlton Club

   

•      Marriott Grand Residence Club

Select-Service Lodging

   

•      Courtyard

   

•      Fairfield Inn

   

•      SpringHill Suites

   

 

3


 

Company-Operated Lodging Properties

 

At January 3, 2003, we operated 937 properties (242,520 rooms) under long-term management or lease agreements with property owners (together, the Operating Agreements) and 8 properties (1,525 rooms) 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 for a period of time 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 January 3, 2003, we had 1,612 franchised properties (219,384 rooms).

 

Summary of Properties by Brand

 

As of January 3, 2003 we operated or franchised the following properties by brand (excluding 4,316 corporate housing rental units):

 

    

Company-operated


  

Franchised


Brand


  

Properties


  

Rooms


  

Properties


  

Rooms


Full-Service Lodging

                   

Marriott Hotels, Resorts and Suites

  

262

  

112,731

  

188

  

52,469

The Ritz-Carlton Hotels

  

51

  

16,566

  

—  

  

—  

Renaissance Hotels, Resorts and Suites

  

84

  

32,381

  

42

  

13,418

Ramada International

  

4

  

727

  

142

  

20,503

Select-Service Lodging

                   

Courtyard

  

289

  

45,881

  

298

  

38,475

Fairfield Inn

  

2

  

890

  

501

  

47,324

SpringHill Suites

  

20

  

3,187

  

78

  

8,022

Extended-Stay Lodging

                   

Residence Inn

  

136

  

18,538

  

292

  

32,035

TownePlace Suites

  

34

  

3,665

  

70

  

7,039

Marriott Executive Apartments and other

  

10

  

1,908

  

1

  

99

Timeshare

                   

Marriott Vacation Club International

  

45

  

6,973

  

—  

  

—  

Horizons by Marriott Vacation Club International

  

2

  

146

  

—  

  

—  

The Ritz-Carlton Club

  

4

  

204

  

—  

  

—  

Marriott Grand Residence Club

  

2

  

248

  

—  

  

—  

    
  
  
  

Total

  

945

  

244,045

  

1,612

  

219,384

    
  
  
  

 

4


 

We plan to open over 150 hotels (25,000 – 30,000 rooms) during 2003. We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel developers to build or acquire new Marriott properties, which are important parts of our growth plans, is partially dependent on their access to and the availability and cost 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 internet access, 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, golf courses and many have spa facilities. The 13 Marriott Suites (approximately 3,400 rooms) are full-service suite hotels that typically contain approximately 200 to 300 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 23 hotels and resorts are located in gateway cities and upscale resort locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities in the JW Marriott Hotels & Resorts normally include larger guestrooms, more luxurious décor and furnishings, upgraded in-room amenities, “on-call” housekeeping, upgraded executive business centers and fitness centers/spas, and 24-hour room service.

 

We operate 13 conference centers (3,259 rooms), throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, 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 2002, 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 system profits are usually relatively stable and include only moderate seasonal fluctuations.

 

Marriott Hotels, Resorts and Suites

Geographic Distribution at January 3, 2003


  

Hotels


      

United States (42 states and the District of Columbia)

  

293

  

(120,308 rooms

)

    
      

Non-U.S. (56 countries and territories)

           

Americas (Non-U.S.)

  

31

      

Continental Europe

  

29

      

United Kingdom

  

50

      

Asia

  

28

      

Africa and the Middle East

  

15

      

Australia

  

4

      
    
      

Total Non-U.S.

  

157

  

(44,892 rooms

)

    
      

 

Ritz-Carlton hotels and resorts are renowned for their distinctive architecture and for the quality of their facilities, dining and personalized guest service. Most Ritz-Carlton hotels have 250 to 400 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 January 3, 2003


  

Hotels


      

United States (15 states and the District of Columbia)

  

32

  

(10,270 rooms

)

    
      

Non-U.S. (19 countries and territories)

  

19

  

(6,296 rooms

)

    
      

 

5


 

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 oriented 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 resort hotels have additional recreational facilities including golf, tennis, water sports and spa facilities.

 

Renaissance Hotels, Resorts and Suites

Geographic Distribution at January 3, 2003


  

Hotels


      

United States (24 states and the District of Columbia)

  

63

  

(23,961 rooms

)

    
      

Non-U.S. (28 countries and territories)

           

Americas (Non-U.S.)

  

10

      

Continental Europe

  

17

      

United Kingdom

  

7

      

Asia

  

20

      

Africa and the Middle East

  

8

      

Australia

  

1

      
    
      

Total Non-U.S.

  

63

  

(21,838 rooms

)

    
      

 

Ramada International is a moderately-priced brand targeted at business and leisure travelers. Each full-service Ramada International property includes a restaurant, a cocktail lounge and full-service meeting and banquet facilities. Ramada International hotels are located primarily in Europe and Asia in major cities, near major international airports and suburban office park locations. In addition to management and franchise fees associated with Ramada International, we receive a royalty fee for the use of the Ramada name in Canada. We also record, in accordance with the equity method of accounting, our proportionate share of the net income reported by the Marriott and Cendant joint venture that was formed in the first quarter of 2002 to further develop and expand the Ramada and Days Inn brands in the United States. In 2002, we opened 16 hotels with the Ramada brand name, outside the United States and Canada.

 

Ramada International

Geographic Distribution at January 3, 2003


  

Hotels


      

Americas (Non-U.S. and Canada)

  

3

      

Continental Europe

  

61

      

United Kingdom

  

59

      

Africa and the Middle East

  

6

      

Asia

  

15

      

Australia

  

2

      
    
      

Total (20 countries and territories)

  

146

  

(21,230 rooms

)

    
      

 

Bvlgari Hotels and Resorts.    As part of our ongoing strategy to expand our reach through partnerships with preeminent, world class companies, in early 2001, we announced our plans to launch a joint venture with Bulgari SpA to introduce distinctive new luxury hotel properties – Bvlgari Hotels and Resorts. The first property is expected to open in January 2004.

 

Select-Service Lodging

 

Courtyard is our upper 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 quality guest rooms and meeting rooms, limited restaurant and lounge facilities, a swimming pool and an exercise room. The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year end there were 587 Courtyards operating in 10 countries.

 

Courtyard

Geographic Distribution at January 3, 2003


  

Hotels


      

United States (45 states and the District of Columbia)

  

539

  

(75,905 rooms

)

    
      

Non-U.S. (10 countries and territories)

  

48

  

(8,451 rooms

)

    
      

 

6


 

Fairfield Inn is our hotel 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 year end there were 503 Fairfield Inns operating in the United States.

 

SpringHill Suites is our all-suite brand in the moderate-price tier targeting business travelers, leisure travelers and families. 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 range of amenities, including complimentary continental breakfast and exercise facilities. There were 98 properties located in the United States and Canada at January 3, 2003.

 

Extended-Stay Lodging

 

Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 416 Residence Inn hotels across North America.

 

Residence Inn

Geographic Distribution at January 3, 2003


    

    Hotels    


    

United States (47 states and the District of Columbia)

    

416

  

(49,002 rooms)

      
    

Canada

    

11

  

(1,495 rooms)

      
    

Mexico

    

1

  

(76 rooms)

      
    

 

TownePlace Suites is a moderately priced, extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. The typical TownePlace Suites hotel contains 100 studio, one-bedroom and two-bedroom suites. Each suite has a fully equipped kitchen and separate living area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-hour staffing and laundry facilities. At January 3, 2003, 104 TownePlace Suites (10,704 rooms) were located in 30 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. In late 2002, ExecuStay also became a corporate housing franchisor.

 

Marriott Executive Apartment and Other.    We provide temporary housing (serviced apartments) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some serviced apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At January 3, 2003, 11 serviced apartment properties (2,007 units), including six Marriott Executive Apartments, were located in seven countries and territories. All Marriott Executive Apartments are located outside the United States.

 

Timeshare

 

Marriott Vacation Club 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 external exchange company. Owners also can trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 2,300 Marriott hotels worldwide.

 

In 2002 we continued to grow Marriott Grand Residence Club (launched in 2001), our “fractional share” business line, and initiated sales in Mayfair, London. In this business line, fractional share owners purchase the right to stay at their property up to thirteen weeks each year. In addition, we continued to expand The Ritz-Carlton Club timeshare business line (launched in 2000) by initiating sales of both golf and spa memberships and personal residences in Jupiter, Florida. Lastly, we initiated sales at four new Marriott Vacation Club International locations: Canyon Villas

 

7


at Desert Ridge, Arizona; Paris, France; Aruba Surf Club, Aruba; and Playa Andaluza, Spain. We continue to offer timeshare intervals through Horizons by Marriott Vacation Club (Horizons), our moderate tier vacation ownership business line.

 

Marriott Vacation Club International’s owner base continues to expand, with 223,000 owners at year end 2002, compared to 195,000 in 2001.

 

Timeshare (all brands)

Geographic Distribution at January 3, 2003


    

Resorts


  

Units


Continental United States

    

39

  

5,692

Hawaii

    

4

  

705

Caribbean

    

4

  

477

Europe

    

5

  

643

Asia

    

1

  

54

      
  

Total

    

53

  

7,571

      
  

 

Other Activities

 

Marriott Golf manages 26 golf course facilities as part of our management of hotels 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 provides design, development, construction, refurbishment and procurement services to owners and franchisees of lodging properties and senior living communities on a voluntary basis outside the scope of and separate from their management or franchise contracts. Consistent with third party contractors, A&C provides these services for owners and franchisees of Marriott branded properties on a fee basis.

 

Competition

 

We encounter strong competition both as a lodging operator and as a franchisor. There are approximately 600 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. 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 2002, 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 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 36 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners. We believe that the location and quality of our lodging facilities, our marketing programs, reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.

 

8


 

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 among our brands, 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 over 18 million members, and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 22 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels.

 

Discontinued Operations

 

Marriott Senior Living Services

 

In our Senior Living Services business, we 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. Marriott International entered into a definitive Agreement on December 30, 2002 to sell our Senior Living Services business to Sunrise Assisted Living, Inc. and our remaining communities to CNL Retirement Partners, Inc. (CNL). We expect to complete the sale early in 2003. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We plan to restructure the debt and sell the 14 communities in 2003. We now report our Senior Living Services business as discontinued operations. See the Notes to Consolidated Financial Statements.

 

At January 3, 2003 we operated 129 senior living communities in 29 states.

 

      

Communities


  

    Units (1)    


Independent full-service

           

-  owned

    

2

  

1,029

-  operated under long-term agreements

    

40

  

11,764

      
  
      

42

  

12,793

Assisted living

           

-  owned

    

21

  

2,810

-  operated under long-term agreements

    

66

  

8,127

      
  
      

87

  

10,937

      
  

Total senior living communities

    

129

  

23,730

      
  

 

(1)   Units represent independent living apartments plus beds in assisted living and nursing centers.

 

At January 3, 2003, we operated 42 independent full-service senior living communities, which offer both independent living apartments and personal assistance units for seniors. Most of these communities also offer licensed nursing care.

 

At January 3, 2003, we also operated 87 assisted living senior living communities principally under the names “Brighton Gardens by Marriott” and “Marriott MapleRidge”. 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.

 

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.

 

9


 

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.

 

Marriott Distribution Services

 

Prior to its discontinuance, MDS was a United States limited-line distributor of food and related supplies to Marriott businesses and unrelated third parties. In the third quarter of 2002, we completed a strategic review of the distribution services business and decided to exit the business. As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations of four facilities, we have exited the distribution services business. Accordingly, we now report this business in discontinued operations.

 

Employee Relations

 

At January 3, 2003, we had approximately 144,000 employees. Approximately 7,500 employees were represented by labor unions. We believe relations with our employees are positive.

 

Other Properties

 

In addition to the operating properties discussed above, we lease two office buildings with combined space of approximately 930,000 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 “Contingencies” footnote in the financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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 Share


        

High


  

Low


  

2001

 

First Quarter

  

$

47.81

  

$

37.25

  

$

0.060

   

Second Quarter

  

 

50.50

  

 

38.13

  

 

0.065

   

Third Quarter

  

 

49.72

  

 

40.50

  

 

0.065

   

Fourth Quarter

  

 

41.50

  

 

27.30

  

 

0.065

 

         

Stock Price


  

Dividends Declared Per Share


         

High


  

Low


  

2002

  

First Quarter

  

$

45.49

  

$

34.60

  

$

0.065

    

Second Quarter

  

 

46.45

  

 

37.25

  

 

0.070

    

Third Quarter

  

 

40.25

  

 

30.44

  

 

0.070

    

Fourth Quarter

  

 

36.62

  

 

26.25

  

 

0.070

 

At January 31, 2003, there were 233,802,816 shares of Class A Common Stock outstanding held by 55,122 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and Philadelphia 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 January 3, 2003.

 

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.

 

    

Fiscal Year2


    

2002


    

2001


    

2000


    

1999


  

1998


    

($ in millions, except per share data)

Income Statement Data:

                                        

Sales 1

  

$

8,441

 

  

$

7,786

 

  

$

7,911

 

  

$

7,041

  

$

6,311

    


  


  


  

  

Segment Financial Results 1,4

  

 

573

 

  

 

641

 

  

 

936

 

  

 

827

  

 

704

    


  


  


  

  

Income from Continuing Operations, after tax

  

 

439

 

  

 

269

 

  

 

490

 

  

 

399

  

 

372

Discontinued Operations, after tax

  

 

(162

)

  

 

(33

)

  

 

(11

)

  

 

1

  

 

18

    


  


  


  

  

Net Income

  

 

277

 

  

 

236

 

  

 

479

 

  

 

400

  

 

390

    


  


  


  

  

Per Share Data:

                                        

Diluted Earnings from Continuing Operations Per Share

  

 

1.74

 

  

 

1.05

 

  

 

1.93

 

  

 

1.51

  

 

1.39

Diluted (Loss)/Earnings from Discontinued Operations Per Share

  

 

(.64

)

  

 

(.13

)

  

 

(.04

)

  

 

—  

  

 

0.07

    


  


  


  

  

Diluted Earnings Per Share

  

 

1.10

 

  

 

.92

 

  

 

1.89

 

  

 

1.51

  

 

1.46

Cash Dividends Declared Per Share

  

 

.275

 

  

 

.255

 

  

 

.235

 

  

 

.215

  

 

.195

Balance Sheet Data (at end of year):

                                        

Total Assets

  

 

8,296

 

  

 

9,107

 

  

 

8,237

 

  

 

7,324

  

 

6,233

Long-Term and Convertible Debt 1

  

 

1,553

 

  

 

2,708

 

  

 

1,908

 

  

 

1,570

  

 

1,163

Shareholders’ Equity

  

 

3,573

 

  

 

3,478

 

  

 

3,267

 

  

 

2,908

  

 

2,570

Other Data:

                                        

Systemwide Sales 1,3

  

$

18,599

 

  

$

17,477

 

  

$

17,489

 

  

$

15,892

  

$

14,279


1   The current year and prior year balances have been adjusted to reflect our Senior Living Services and Distribution Services businesses as discontinued operations.

 

2   Fiscal year 2002 included 53 weeks; all other years included 52 weeks.

 

3   Systemwide sales comprise revenues generated from guests at managed, franchised, owned, and leased hotels and our Synthetic Fuel business. 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, segment financial results, net income, cash flows from operations, or any other operating measure prescribed by accounting principles generally accepted in the United States. In addition, systemwide sales may not be comparable to similarly titled measures, such as sales and revenues, which do not include gross sales generated by managed and franchised properties.

 

4   We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, interest income or income taxes.

 

 

12


ITEM 7. MANAGEMENT’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 January 3, 2003, December 28, 2001 and December 29, 2000. Systemwide sales include sales from our franchised properties, in addition to our owned, leased and managed properties.

 

CONSOLIDATED RESULTS

 

Continuing Operations

 

2002 Compared to 2001

 

Income from continuing operations, net of taxes increased 63 percent to $439 million and diluted earnings per share from continuing operations advanced 66 percent to $1.74. Income from continuing operations reflected $208 million of tax benefits associated with our Synthetic Fuel business and a $44 million gain on the sale of our investment in Interval International, offset by the $50 million charge to write-down the acquisition goodwill for ExecuStay and the decreased demand for hotels and executive apartments. The comparisons to 2001 reflected the $204 million pretax restructuring and other charges against continuing operations that we recorded in the fourth quarter of 2001.

 

Sales, which exclude sales from our discontinued Distribution Services and Senior Living Services businesses, increased 8 percent to $8.4 billion in 2002 reflecting the sales for our new Synthetic Fuel business and revenue from new lodging properties, partially offset by the decline in lodging demand. Systemwide sales, excluding sales from discontinued businesses, increased by 6 percent to $18.6 billion in 2002.

 

2001 Compared to 2000

 

Income and diluted earnings per share from continuing operations decreased 45 percent to $269 million and 46 percent to $1.05, respectively. Pretax restructuring and other charges totaling $204 million and lower lodging segment financial results, due to the decline in hotel performance, reduced income from continuing operations.

 

Sales of $7.8 billion in 2001 from our continuing operations were down slightly compared to the prior year, reflecting a decline in hotel performance, partially offset by revenue from new lodging properties. Systemwide sales, excluding sales from our discontinued businesses were $17.5 billion, flat with the prior year.

 

Marriott Lodging

 

                         

Annual Change


 

($ in millions)


  

2002


    

2001


    

2000


    

2002/2001


      

2001/2000


 

Sales

  

$

8,248

 

  

$

7,786

 

  

$

7,911

    

6

%

    

-2

%

    


  


  

                 

Segment financial results before restructuring costs, other charges, goodwill impairment and Interval International gain

  

$

713

 

  

$

756

 

  

$

936

    

-6

%

    

-19

%

Restructuring costs

  

 

—  

 

  

 

(44

)

  

 

—  

    

nm

 

    

nm

 

Other charges

  

 

—  

 

  

 

(71

)

  

 

—  

    

nm

 

    

nm

 

Interval International gain

  

 

44

 

  

 

—  

 

  

 

—  

    

nm

 

    

nm

 

Goodwill impairment

  

 

(50

)

  

 

—  

 

  

 

—  

    

nm

 

    

nm

 

    


  


  

                 

Segment financial results, as reported

  

$

707

 

  

$

641

 

  

$

936

    

10

%

    

-32

%

    


  


  

                 

 

13


 

2002 Compared to 2001

 

Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 10 percent increase in segment financial results and 6 percent higher sales in 2002. Results reflect a $44 million pretax gain related to the sale of our investment in Interval International, increased revenue associated with new properties partially offset by lower fees due to the decline in demand for hotel rooms. Our revenues from base fees totaled $379 million, an increase of 2 percent. Franchise fees totaled $232 million, an increase of 5 percent and incentive management fees were $162 million, a decline of 20 percent. The $50 million write-down of acquisition goodwill associated with our executive housing business, ExecuStay, reduced Lodging results in 2002. The 2002 comparisons are also impacted by the $115 million restructuring costs and other charges recorded in 2001.

 

14


 

We consider Revenue per Available Room (REVPAR) to be a meaningful indicator of our performance because it measures the period over period change in room revenues for comparable properties. We calculate REVPAR by dividing room sales for comparable properties by room nights available to guests for the period. REVPAR may not be comparable to similarly titled measures such as revenues. Comparable REVPAR, room rate and occupancy statistics used throughout this report are based on North American properties we operate. Statistics for Fairfield Inn and SpringHill Suites company-operated North American properties are not presented - since these brands only have a few properties that we operate, the information would not be meaningful (identified as nm in the tables below). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties. Systemwide statistics are based on comparable worldwide units reflecting constant foreign exchange rates. Occupancy, average daily rate and REVPAR for each of our principal established brands are shown in the following table.

 

    

Comparable Company-Operated North

American Properties


    

Comparable Worldwide Systemwide


 
    

2002


      

Change vs. 2001


    

2002


    

Change vs. 2001


 

Marriott Hotels, Resorts and Suites

                                 

Occupancy

  

 

70.1

%

    

%pts.

  

 

68.7

%

  

0.8

% pts.

Average daily rate

  

$

137.28

 

    

-4.8

%

  

$

126.87

 

  

-4.1

%

REVPAR

  

$

96.25

 

    

-4.8

%

  

$

87.20

 

  

-3.0

%

The Ritz-Carlton Hotels

                                 

Occupancy

  

 

66.1

%

    

0.6

%pts.

  

 

67.3

%

  

1.5

% pts.

Average daily rate

  

$

233.40

 

    

-5.2

%

  

$

213.15

 

  

-4.1

%

REVPAR

  

$

154.21

 

    

-4.3

%

  

$

143.47

 

  

-2.0

%

Renaissance Hotels, Resorts and Suites

                                 

Occupancy

  

 

65.1

%

    

-0.9

% pts.

  

 

66.6

%

  

1.4

% pts.

Average daily rate

  

$

131.77

 

    

-3.2

%

  

$

107.46

 

  

-3.5

%

REVPAR

  

$

85.80

 

    

-4.5

%

  

$

71.58

 

  

-1.4

%

Courtyard

                                 

Occupancy

  

 

69.1

%

    

-2.1

% pts.

  

 

69.3

%

  

-1.2

% pts.

Average daily rate

  

$

94.47

 

    

-5.1

%

  

$

91.24

 

  

-4.0

%

REVPAR

  

$

65.26

 

    

-7.9

%

  

$

63.23

 

  

-5.6

%

Fairfield Inn

                                 

Occupancy

  

 

nm

 

    

nm

 

  

 

66.0

%

  

-0.3

% pts.

Average daily rate

  

 

nm

 

    

nm

 

  

$

64.48

 

  

-0.8

%

REVPAR

  

 

nm

 

    

nm

 

  

$

42.59

 

  

-1.3

%

SpringHill Suites

                                 

Occupancy

  

 

nm

 

    

nm

 

  

 

68.2

%

  

1.6

% pts.

Average daily rate

  

 

nm

 

    

nm

 

  

$

77.96

 

  

-2.5

%

REVPAR

  

 

nm

 

    

nm

 

  

$

53.14

 

  

-0.2

%

Residence Inn

                                 

Occupancy

  

 

76.9

%

    

-0.6

%pts.

  

 

76.8

%

  

-0.5

% pts.

Average daily rate

  

$

97.36

 

    

-7.2

%

  

$

95.68

 

  

-5.6

%

REVPAR

  

$

74.87

 

    

-7.9

%

  

$

73.47

 

  

-6.2

%

TownePlace Suites

                                 

Occupancy

  

 

73.4

%

    

0.2

%pts.

  

 

72.4

%

  

2.0

% pts.

Average daily rate

  

$

62.78

 

    

-6.8

%

  

$

63.28

 

  

-4.9

%

REVPAR

  

$

46.08

 

    

-6.5

%

  

$

45.80

 

  

-2.3

%

 

15


 

Across our Lodging brands, REVPAR for comparable company-operated North American properties declined by an average of 5.7 percent in 2002. Average room rates for these hotels decreased 4.9 percent and occupancy declined slightly to 70.1 percent.

 

International Lodging reported an increase in the results of operations, reflecting the impact of the increase in travel in Asia and the United Kingdom. The favorable comparison is also impacted by the restructuring and other charges recorded in 2001.

 

Marriott Vacation Club International. Financial results increased 24 percent, reflecting a 5 percent increase in contract sales and note sale gains in 2002 of $60 million compared to $40 million in 2001, a gain of $44 million related to the sale of our investment in Interval International, partially offset by lower development profits and higher depreciation from recently added systems for customer support.

 

Lodging Development

 

Marriott Lodging opened 188 properties totaling over 31,000 rooms across its brands in 2002, while 25 hotels (approximately 4,700 rooms) exited the system. Highlights of the year included:

 

  Thirty-five properties (6,700 rooms), 21 percent of our total room additions for the year, were conversions from other brands.

 

  Approximately 25 percent of new rooms opened were outside the United States.

 

  We added 112 properties (14,500 rooms) to our Select-Service and Extended-Stay Brands.

 

  The opening of new Marriott Vacation Club International properties in France (Disneyland Paris), Spain and a Ritz-Carlton Club in Florida.

 

At year-end 2002, we had 300 hotel properties and more than 50,000 rooms under construction, awaiting conversion, or approved for development. We expect to open over 150 hotels and timesharing resorts (25,000 - 30,000 rooms) in 2003. These growth plans are subject to numerous risks and uncertainties, many of which are outside our control. See “Forward-Looking Statements” above and “Liquidity and Capital Resources” below.

 

2001 Compared to 2000

 

Marriott Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported a 32 percent decrease in segment financial results and 2 percent lower sales in 2001. Results reflected restructuring costs of $44 million and other charges of $71 million, including a $36 million reserve for third-party guarantees we expect to fund and not recover out of future cash flow, $12 million of reserves for accounts receivable deemed uncollectible, a write-off of two investments in management contracts and other assets of $8 million, $13 million of losses on the anticipated sale of three lodging properties, and a $2 million write-off associated with capitalized software costs arising from a decision to change a technology platform. Results also reflect lower fees due to the decline in demand for hotel rooms, partially offset by increased revenue associated with new properties. Incentive management fees declined 36 percent, base management fees declined 3 percent, and franchise fees increased 6 percent.

 

16


Occupancy, average daily rate and REVPAR for each of our principal established brands are shown in the following table.

 

    

Comparable Company-Operated North

American Properties


    

Comparable Worldwide Systemwide


 
    

2001


    

Change vs. 2000


    

2001


    

Change vs. 2000


 

Marriott Hotels, Resorts and Suites

                               

Occupancy

  

 

70.4

%

  

-7.1

% pts.

  

 

68.9

%

  

-5.7

% pts.

Average daily rate

  

$

142.96

 

  

-2.9

%

  

$

131.60

 

  

-1.6

%

REVPAR

  

$

100.62

 

  

-11.8

%

  

$

90.64

 

  

-9.1

%

The Ritz-Carlton Hotels

                               

Occupancy

  

 

66.9

%

  

-10.4

% pts.

  

 

67.6

%

  

-8.0

% pts.

Average daily rate

  

$

249.94

 

  

2.3

%

  

$

226.58

 

  

4.1

%

REVPAR

  

$

167.21

 

  

-11.5

%

  

$

153.25

 

  

-7.0

%

Renaissance Hotels, Resorts and Suites

                               

Occupancy

  

 

65.6

%

  

-7.7

% pts.

  

 

65.4

%

  

-4.7

% pts.

Average daily rate

  

$

137.79

 

  

-2.9

%

  

$

112.33

 

  

-1.8

%

REVPAR

  

$

90.39

 

  

-13.1

%

  

$

73.48

 

  

-8.3

%

Courtyard

                               

Occupancy

  

 

71.6

%

  

-6.3

% pts.

  

 

70.9

%

  

-4.9

% pts.

Average daily rate

  

$

99.45

 

  

1.2

%

  

$

94.61

 

  

1.2

%

REVPAR

  

$

71.24

 

  

-7.0

%

  

$

67.12

 

  

-5.3

%

Fairfield Inn

                               

Occupancy

  

 

nm

 

  

nm

 

  

 

66.3

%

  

-3.2

% pts.

Average daily rate

  

 

nm

 

  

nm

 

  

$

64.70

 

  

2.1

%

REVPAR

  

 

nm

 

  

nm

 

  

$

42.91

 

  

-2.6

%

SpringHill Suites

                               

Occupancy

  

 

nm

 

  

nm

 

  

 

70.0

%

  

-0.1

% pts.

Average daily rate

  

 

nm

 

  

nm

 

  

$

81.74

 

  

2.7

%

REVPAR

  

 

nm

 

  

nm

 

  

$

57.20

 

  

2.6

%

Residence Inn

                               

Occupancy

  

 

77.8

%

  

-5.1

% pts.

  

 

77.9

%

  

-3.9

% pts.

Average daily rate

  

$

105.46

 

  

-1.4

%

  

$

102.69

 

  

-0.2

%

REVPAR

  

$

82.05

 

  

-7.5

%

  

$

79.96

 

  

-5.0

%

TownePlace Suites

                               

Occupancy

  

 

74.6

%

  

1.2

%

  

 

73.0

%

  

-0.6

% pts.

Average daily rate

  

$

67.36

 

  

-2.5

%

  

$

65.22

 

  

0.2

%

REVPAR

  

$

50.28

 

  

-0.9

%

  

$

47.64

 

  

-0.7

%

 

Across our Lodging brands, REVPAR for comparable company-operated North American properties declined by an average of 10.4 percent in 2001. Average room rates for these hotels declined 2 percent, while occupancy declined 6.7 percentage points.

 

International 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.

 

Marriott Vacation Club International contributed over 20 percent of lodging segment financial results in 2001, after the impact of restructuring and other charges. Segment financial results increased 7 percent reflecting a

 

17


 

22 percent increase in contract sales, the 2001 acquisition of the Grand Residence Club in Lake Tahoe, California, and note sale gains in 2001 of $40 million compared to $22 million in 2000, partially offset by higher marketing and selling expenses and severance expenses of nearly $2 million associated with the Company’s restructuring plan.

 

Corporate Expenses, Interest and Taxes

 

Corporate Expenses

 

                     

Annual Change


 

($ in millions)


  

2002


  

2001


  

2000


    

2002/2001


      

2001/2000


 

Corporate expenses before restructuring costs and other charges

  

$

126

  

$

117

  

$

120

    

8

%

    

-3

%

Restructuring costs

  

 

—  

  

 

18

  

 

—  

    

nm

 

    

nm

 

Other charges

  

 

—  

  

 

22

  

 

—  

    

nm

 

    

nm

 

    

  

  

                 

Corporate expenses, as reported

  

$

126

  

$

157

  

$

120

    

-20

%

    

31

%

    

  

  

                 

 

2002 Compared to 2001

 

Corporate expenses decreased $31 million in 2002 to $126 million reflecting the following: (i) 2002 items, including higher insurance costs, higher litigation expenses, lower expenses associated with our deferred compensation plan, lower foreign exchange losses and the continued favorable impact of our cost containment initiatives; (ii) 2001 items, including restructuring charges of $18 million related to severance costs and facilities exit costs, a $35 million write-off of three investments in technology partners (including a $22 million charge recorded in the fourth quarter), $11 million in gains from the sale of affordable housing investments and the reversal of a $10 million insurance reserve related to a lawsuit at one of our hotels.

 

2001 Compared to 2000

 

Corporate expenses increased $37 million reflecting the impact of restructuring charges of $18 million related to severance costs and facilities exit costs, and other charges related to the fourth quarter write-off of a $22 million investment in one of our technology partners. In addition to these items, we also recorded $8 million of foreign exchange losses and in prior quarters we recorded a $13 million write-off of two investments in technology partners. These charges were partially offset by $11 million in gains from the sale of affordable housing tax credit investments, the favorable impact of cost containment action plans, and the reversal of a long-standing $10 million insurance reserve related to a lawsuit at one of our managed hotels. The reversal of the insurance reserve was the result of our conclusion that a settlement could be reached in an amount that would be covered by insurance. We determined that it was no longer probable that the loss contingency would result in a material outlay by us and accordingly, we reversed the reserve during the first quarter of 2001.

 

Interest Expense

 

2002 Compared to 2001

 

Interest expense decreased $23 million to $86 million reflecting the decrease in borrowing and interest rates.

 

2001 Compared to 2000

 

Interest expense increased $9 million to $109 million reflecting the impact of the issuance of Series E Notes in January 2001 and borrowings under our revolving credit facilities, partially offset by lower interest resulting from the payoff of commercial paper.

 

Interest Income and Income Tax

 

2002 Compared to 2001

 

Interest income increased $28 million, before reflecting reserves of $12 million for loans deemed uncollectible at four hotels. The increase in interest income was favorably impacted by amounts recognized which were previously

 

18


deemed uncollectible. The comparison to 2001 also reflects a $6 million charge for expected guarantee fundings recorded against interest income in the fourth quarter of 2001.

 

Our effective income tax rate for continuing operations decreased to approximately 6.8 percent in 2002 from 36.1 percent in 2001 primarily due to the impact of our Synthetic Fuel business. Excluding the impact of Synthetic Fuel, our effective income tax rate for continuing operations for 2002 was 39.6 percent. Our effective tax rate for discontinued operations decreased from 35.4 percent to 15.7 percent due to the impact of the taxes associated with the sale of stock in connection with the disposal of our Senior Living Services business.

 

2001 Compared to 2000

 

Interest income increased $34 million, before reflecting reserves of $48 million for loans deemed uncollectible as a result of certain hotels experiencing significant declines in profitability and the owners not being able to meet debt service obligations. The change in interest income was impacted by income associated with higher loan balances, including the loans made to the Courtyard joint venture in the fourth quarter of 2000, offset by $6 million of expected guarantee fundings and the impact of $14 million of income recorded in 2000 associated with an international loan that was previously deemed uncollectible.

 

Our effective income tax rate for continuing operations decreased to 36.1 percent in 2001 from 36.6 percent in 2000 as a result of modifications related to our deferred compensation plan and the impact of increased income in countries with lower effective tax rates.

 

Synthetic Fuel

 

In October 2001, we acquired four coal-based synthetic fuel production facilities (the Facilities) for $46 million in cash. The Synthetic Fuel produced at the Facilities qualifies for tax credits based on Section 29 of the Internal Revenue Code. Under Section 29, tax credits are not available for Synthetic Fuel produced after 2007. We began operating these Facilities in the first quarter of 2002. The operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be significantly accretive to our net income. Although the Facilities produce significant losses, these are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In the fiscal year 2002, our Synthetic Fuel business reflected sales of $193 million and a loss of $134 million, resulting in a tax benefit of $49 million and tax credits of $159 million.

 

In January 2003, we entered into a contract with an unrelated third party to sell approximately a 50 percent interest in the Synthetic Fuel business. The transaction is subject to certain closing conditions, including the receipt of a satisfactory private letter ruling from the Internal Revenue Service regarding the new ownership structure. Contracts related to the potential sale are being held in escrow until closing conditions are met. If the conditions are not met by August 31, 2003, neither party will have an obligation to perform under the agreements. If the transaction is consummated, we expect to receive $25 million in promissory notes and cash as well as an earnout based on the amount of synthetic fuel produced. If the transaction is consummated, we expect to account for the remaining interest in the Synthetic Fuel business under the equity method of accounting.

 

DISCONTINUED OPERATIONS

 

Senior Living Services

 

2002 Compared to 2001

 

On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc. and to sell nine senior living communities to CNL Retirement Partners, Inc. (CNL) for approximately $259 million in cash. We expect to complete the sale early in 2003. On December 17, 2002, we sold twelve senior living communities to CNL for approximately $89 million in cash. We accounted for the sale under the full accrual method in accordance with Financial Accounting Standards (FAS) 66, and we recorded an after-tax loss of approximately $13 million. Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. We plan to restructure the debt and sell the communities in 2003. Management has approved and committed to a plan to sell these communities within 12 months. Accordingly, at January 3, 2003, the operating results of our Senior Living Services

 

19


segment are reported in discontinued operations, and the remaining assets are classified as assets held for sale on the balance sheet.

 

As a result of the transactions outlined above, we anticipate a total after-tax charge of $109 million. Since generally accepted accounting principles do not allow gains to be recognized until the underlying transaction closes, we cannot record the estimated after-tax gain of $22 million on the sale of the nine communities to CNL until the sale is completed, which we expect to occur in early 2003. As a result, we have recorded an after-tax charge of $131 million which is included in discontinued operations for the year ended January 3, 2003.

 

In December 2001, management approved and committed to a plan to exit the companion living concept of senior living services and sell the related properties within the next 12 months. We recorded an impairment charge of $60 million to adjust the carrying value of the properties to their estimated fair value at December 28, 2001. On October 1, 2002, we completed the sale of these properties for $62 million which exceeded our previous estimate of fair value by $11 million. We included the $11 million gain in discontinued operations for the year ended January 3, 2003.

 

Income from discontinued operations, net of taxes and excluding the loss on disposal of $131 million, was $23 million, an increase of $52 million over 2001 results. The increase reflects the impact of the 2001 plan to exit the companion living concept and its subsequent execution, higher per diems, recognition of a $2 million one-time pretax payment associated with the sale of the Crestline Senior Living communities to an unaffiliated third-party, lower amortization associated with our adoption of FAS No. 142, “Goodwill and other Intangible Assets,” in the first quarter of 2002 and lower depreciation, partially offset by higher insurance costs.

 

2001 Compared to 2000

 

Marriott Senior Living Services posted a 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 after tax loss of $45 million, reflecting pretax 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 (pretax) receivable no longer deemed collectible. These charges were partially offset by the favorable impact of the increase in comparable occupancy and the new units.

 

Distribution Services

 

2002 Compared to 2001

 

In the third quarter of 2002, we completed a previously announced strategic review of the distribution services business and decided to exit the business. As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations at four facilities, we have exited the distribution services business. Accordingly, we present the operating results of our distribution services business as discontinued operations and classify the remaining assets as held for sale at January 3, 2003 on the balance sheet. The after tax cost to exit the business was $40 million and included payments to third parties in connection with contractual agreements, severance costs and adjusting fixed assets to net realizable value. We present the exit costs together with the loss on operations of $14 million, net of taxes in discontinued operations for the year ended January 3, 2003. The $14 million after tax loss in 2002 represents a decline of $10 million from 2001 results. The decrease reflects the impact of lower sales and a pretax $2 million write-off in the first quarter of 2002 of an investment in a customer contract, offset by the 2001 restructuring and other charges of $5 million (pretax) for severance costs and the write-off of an accounts receivable balance from a customer that filed for bankruptcy.

 

2001 Compared to 2000

 

Financial results for Marriott Distribution Services (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 financial results was more than offset by the decline in business from one significant customer, transportation inefficiencies and restructuring and other charges of $5 million (pretax), including severance costs and the write-off of an accounts receivable balance from a customer that filed for bankruptcy in the fourth quarter of 2001.

 

20


 

2001 Restructuring Costs and Other Charges

 

The Company experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001 attacks on New York and Washington and the subsequent dramatic downturn in the economy. This decline resulted in reduced management and franchise fees, cancellation of development projects, and anticipated losses under guarantees and loans. In 2001, we responded by implementing certain companywide cost-saving measures, although we did not significantly change the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001 we recorded pretax restructuring costs of $62 million, including (1) $15 million in severance costs; (2) $19 million, primarily associated with a loss on a sublease of excess space arising from the reduction in personnel; and (3) $28 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. We also incurred $142 million of other charges including (1) $85 million related to reserves for guarantees and loan losses; (2) $12 million related to accounts receivable reserves; (3) $13 million related to the write-down of properties held for sale; and (4) $32 million related to the impairment of technology related investments and other write-offs. We have provided below detailed information related to the restructuring costs and other charges, which were recorded in the fourth quarter of 2001 as a result of the economic downturn and the unfavorable lodging environment.

 

2001 Restructuring Costs

 

Severance

 

Our restructuring plan resulted in the reduction of approximately 1,700 employees across our operations (the majority of which were terminated by December 28, 2001). In 2001, we recorded a workforce reduction charge of $15 million related primarily to severance and fringe benefits. The charge did not reflect amounts billed out separately to owners for property-level severance costs. In addition, we delayed filling vacant positions and reduced staff hours.

 

Facilities Exit Costs

 

As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $14 million for excess corporate facilities, primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. In addition, we recorded a $5 million charge for lease terminations resulting from cancellations of leased units by our corporate apartment business, primarily in downtown New York City.

 

Development Cancellations and Elimination of Product Line

 

We incur certain costs associated with the development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is developed. As a result of the dramatic downturn in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, in 2001, we expensed $28 million of previously capitalized costs.

 

2001 Other Charges

 

Reserves for Guarantees and Loan Losses

 

We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels experienced significant declines in profitability and the owners were not able to meet debt service obligations to the Company or in some cases, to other third-party lending institutions. As a result, in 2001, based upon cash flow projections, we expected to fund under certain guarantees, which were not deemed recoverable, and we expected that several of the loans made by us would not be repaid according to their original terms. Due to these expected non-recoverable guarantee fundings and expected loan losses, we recorded charges of $85 million in the fourth quarter of 2001.

 

21


 

Accounts Receivable-Bad Debts

 

In the fourth quarter of 2001, we reserved $12 million of accounts receivable which we deemed uncollectible following an analysis of these accounts, generally as a result of the unfavorable hotel operating environment.

 

Asset Impairments

 

We recorded a charge related to the impairment of an investment in a technology-related joint venture ($22 million), losses on the anticipated sale of three lodging properties ($13 million), write-offs of investments in management contracts and other assets ($8 million), and the write-off of capitalized software costs arising from a decision to change a technology platform ($2 million).

 

The following table summarizes our remaining restructuring liability ($ in millions):

 

      

Restructuring costs and other charges liability at December 28, 2001


    

Cash payments made in fiscal 2002


  

Charges reversed in fiscal 2002


    

Restructuring costs and other charges liability at January 3, 2003


Severance

    

$

6

    

$

4

  

$

—  

    

$

2

Facilities exit costs

    

 

17

    

 

4

  

 

2

    

 

11

      

    

  

    

Total restructuring costs

    

 

23

    

 

8

  

 

2

    

 

13

Reserves for guarantees and loan losses

    

 

33

    

 

10

  

 

2

    

 

21

Impairment of technology-related investments and other

    

 

1

    

 

1

  

 

—  

    

 

—  

      

    

  

    

Total

    

$

57

    

$

19

  

$

4

    

$

34

      

    

  

    

 

The remaining liability related to the workforce reduction and fundings under guarantees will be substantially paid by January 2004. The amounts related to the space reduction and resulting lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2012.

 

The following table provides further detail on the 2001 charges:

 

2001 Segment Financial Results Impact ($ in millions)

 

    

Full-

Service


  

Select-

Service


  

Extended-

Stay


  

Timeshare


  

Total


Severance

  

$

7

  

$

1

  

$

1

  

$

2

  

$

11

Facilities exit costs

  

 

—  

  

 

—  

  

 

5

  

 

—  

  

 

5

Development cancellations and Elimination of product line

  

 

19

  

 

4

  

 

5

  

 

—  

  

 

28

    

  

  

  

  

Total restructuring costs

  

 

26

  

 

5

  

 

11

  

 

2

  

 

44

Reserves for guarantees and loan losses

  

 

30

  

 

3

  

 

3

  

 

—  

  

 

36

Accounts receivable – bad debts

  

 

11

  

 

1

  

 

—  

  

 

—  

  

 

12

Write-down of properties held for sale

  

 

9

  

 

4

  

 

—  

  

 

—  

  

 

13

Impairment of technology-related investments and other

  

 

8

  

 

—  

  

 

2

  

 

—  

  

 

10

    

  

  

  

  

Total

  

$

84

  

$

13

  

$

16

  

$

2

  

$

115

    

  

  

  

  

 

22


 

2001 Corporate Expenses and Interest Impact ($ in millions)

 

    

Corporate expenses


    

Provision for

loan losses


  

Interest

income


    

Total corporate expenses and interest


Severance

  

$

4

    

$

—  

  

$

—  

    

$

4

Facilities exit costs

  

 

14

    

 

—  

  

 

—  

    

 

14

    

    

  

    

Total restructuring costs

  

 

18

    

 

—  

  

 

—  

    

 

18

Reserves for guarantees and loan losses

  

 

—  

    

 

43

  

 

6

    

 

49

Impairment of technology-related investments and other

  

 

22

    

 

—  

  

 

—  

    

 

22

    

    

  

    

Total

  

$

40

    

$

43

  

$

6

    

$

89

    

    

  

    

 

In addition to the above, in 2001, we recorded restructuring charges of $62 million and other charges of $5 million now reflected in our losses from discontinued operations. The restructuring liability related to discontinued operations was $3 million as of December 28, 2001 and $1 million as of January 3, 2003.

 

Liquidity and Capital Resources

 

We have credit facilities which support our commercial paper program and letters of credit. At January 3, 2003, our cash balances combined with our available borrowing capacity under the credit facilities amounted to nearly $2 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements, including the repayment of $200 million of senior notes due in November 2003. We monitor the status of the capital markets, and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We expect that part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, we may be unable to place some or all of our commercial paper, and may have to rely more on bank borrowings which may carry a higher cost than commercial paper.

 

We have presented a claim with an insurance company for lost management fees from the September 11, 2001 terrorist attacks. At this stage of the claims process, we have recognized $1 million in income from insurance proceeds. Although we expect to realize further proceeds we cannot currently estimate the amounts that may be paid to us.

 

Cash from Operations

 

Cash from operations was $516 million in 2002, $403 million in 2001, and $856 million in 2000. Income from continuing operations is stated after depreciation expense of $114 million in 2002, $110 million in 2001, and $94 million in 2000, and after amortization expense of $36 million in 2002, $68 million in 2001, and $67 million in 2000. While our timesharing business generates strong operating cash flow, the timing of cash outlays for the acquisition and development of new resorts, and cash received from purchaser financing affect annual amounts. We include timeshare interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. In 2002, the $63 million net cash outflow from timeshare activity included $102 million in timeshare development (the amount spent to build timeshare resorts less the costs of sales), $280 million of new timeshare mortgages net of collections, $60 million of note sale gains, a $16 million net reduction in Marriott Rewards accruals, $13 million of financially reportable sales in excess of closed sales, and $10 million of other cash outflows, offset by $387 million of note sale proceeds and $31 million of net fees received for servicing notes. In 2001, the $358 million net cash outflow from timeshare activity included $253 million in timeshare development, $320 million of new timeshare mortgages net of collections, $40 million of note sale gains and $27 million in capitalized marketing costs, offset by $199 million of note sale proceeds, $26 million of net fees received for servicing notes, $53 million of closed sales in excess of financially reportable sales and $4 million of other cash inflows. In 2000, the $195 million cash outflow from timeshare activity included $112 million in timeshare development, $210 million of new timeshare mortgages net of collections, $23 million of note sale gains, $25 million in capitalized marketing costs, $18 million of financially reportable sales in excess of closed sales and $3 million of other cash outflows, offset by $154 million of note sale proceeds, $17 million of net fees received for servicing notes and $25 million net increase in Marriott Rewards accruals.

 

23


 

In 2002, other cash flows from operating activities of $223 million included an adjustment for $186 million related to the exit of our Senior Living Services and Distribution Services businesses, and an adjustment for $50 million related to the impairment of goodwill of our ExecuStay brand.

 

In 2001, other cash flows from operating activities of $278 million included an adjustment for $248 million, related to non-cash restructuring and other charges, necessary to reconcile net income to cash provided by operations.

 

Earnings before interest expense, income taxes, depreciation and amortization (EBITDA) (from continuing operations) was $707 million in 2002, $708 million in 2001, and $1,032 million in 2000. Excluding the impact of our Synthetic Fuel business, EBITDA would have increased by $125 million, or 18 percent to $833 million.

 

The reconciliation of income from continuing operations, before income taxes to EBITDA is as follows:

 

($ in millions)

  

2002


    

2001


  

2000


Income from continuing operations, before taxes

  

$

471

 

  

$

421

  

$

771

Interest expense

  

 

86

 

  

 

109

  

 

100

Depreciation

  

 

114

 

  

 

110

  

 

94

Amortization

  

 

36

 

  

 

68

  

 

67

    


  

  

EBITDA from continuing operations

  

$

707

 

  

$

708

  

$

1,032

Synthetic Fuel loss, before taxes

  

 

134

 

  

 

—  

  

 

—  

Depreciation-Synthetic Fuel

  

 

(8

)

  

 

—  

  

 

—  

    


  

  

EBITDA from continuing operations, excluding Synthetic Fuel

  

$

833

 

  

$

708

  

$

1,032

    


  

  

 

We consider EBITDA to be an indicator of 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 or cash flows from operations, as 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 almost 2,600 hotels in the Marriott system, no single property or region is critical to our financial results.

 

Our ratio of current assets to current liabilities was 0.8 to 1 at January 3, 2003, compared to 1.4 to 1 at December 28, 2001. Each of our businesses minimizes working capital through cash management, strict credit-granting policies, aggressive collection efforts and high inventory turnover. Additionally, we have significant borrowing capacity under our revolving credit agreements.

 

In 2002 we securitized $387 million of notes by selling notes receivable originated by our timeshare business. We recognized gains on these sales of $60 million in the year ended January 3, 2003. Our ability to continue to sell notes to such off-balance sheet entities depends on the continued ability of the capital 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 January 3, 2003, we had repurchase obligations of $12 million related to previously sold notes receivable, although we expect to incur no material losses in respect of those obligations. We retain interests in the securitizations which are accounted for as interest only strips, and in the year ended January 3, 2003, we received cash flows of $28 million arising from those retained interests. At January 3, 2003, the qualifying special purpose entities that had purchased notes receivable from us had aggregate assets of $682 million.

 

Investing Activities Cash Flows

 

Acquisitions. We continually seek opportunities to enter new markets, increase market share or broaden service offerings through acquisitions.

 

24


 

Dispositions. Property sales generated proceeds of $729 million in 2002, $554 million in 2001 and $742 million in 2000. Proceeds in 2002 are net of $36 million of financing and joint venture investments made by us in connection with the sales transactions. In 2002 we closed on the sales of 10 hotels and 41 senior living communities, over half of which we continue to operate under long-term operating agreements.

 

Capital Expenditures and Other Investments. Capital expenditures of $292 million in 2002, $560 million in 2001, and $1,095 million in 2000 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.

 

We also expect to continue to make other investments in connection with adding units to our lodging business. These investments include loans, minority equity investments and development of new timeshare resorts. In 2002, other investing activities outflows of $7 million included equity investments of $26 million, an investment in corporate owned life insurance of $11 million and other net cash outflows of $33 million, offset by cash proceeds of $63 million from the sale of our investment in Interval International. In 2001, other investing outflows of $179 million included equity investments of $33 million, an investment in corporate owned life insurance of $97 million and other net cash outflows of $131 million, partially offset by the sale of the affordable housing tax credit investments of $82 million. In 2000, other investing outflows of $377 million included equity investments of $170 million, an investment in corporate owned life insurance of $14 million and other net cash outflows of $193 million.

 

On February 23, 2000, we entered into an agreement to resolve litigation involving certain limited partnerships formed in the mid- to late 1980s. Under the agreement, we paid $31 million to partners in four limited partnerships and acquired, through an unconsolidated joint venture (the Courtyard Joint Venture) with affiliates of Host Marriott 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.

 

25


 

Fluctuations in the values of hotel real estate generally have little impact on the overall results of our Lodging businesses because (1) we own less than 1 percent of the total number of hotels that we operate or franchise; (2) management and franchise fees are generally based upon hotel revenues and profits versus hotel sales values; and (3) our management agreements generally do not terminate upon hotel sale.

 

We have made loans to owners of hotels and senior living communities that we operate or franchise. Loans outstanding under this program, excluding timeshare notes, totaled $944 million at January 3, 2003, $860 million at December 28, 2001 and $592 million at December 29, 2000. Unfunded commitments aggregating $217 million were outstanding at January 3, 2003, of which we expect to fund $140 million in 2003 and $156 million 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 that we operate or franchise.

 

Cash from Financing Activities

 

Debt, including convertible debt, decreased $945 million in 2002 due to the redemption of 85 percent of the LYONs in May 2002 and the pay down of our revolving credit facility, offset by the debt assumed as part of the acquisition of the 14 senior living communities in December 2002. Debt increased by $799 million in 2001 primarily due to borrowings to finance our capital expenditure and share repurchase programs, and to maintain excess cash reserves totaling $645 million in 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 2002, our long-term debt, excluding convertible debt and debt associated with businesses held for sale, had an average interest rate of 6.8 percent and an average maturity of approximately 6.6 years. The ratio of fixed rate long-term debt to total long-term debt was .91 as of January 3, 2003.

 

In April 1999, January 2000 and January 2001, we filed “universal shelf” registration statements with the Securities and Exchange Commission in the amounts of $500 million, $300 million and $300 million, respectively. As of January 31, 2003, we had offered and sold to the public under these registration statements $300 million of debt securities at 77/8 percent, due 2009 and $300 million at 81/8 percent, due 2005, leaving a balance of $500 million available for future offerings.

 

In January 2001, we issued, through a private placement, $300 million of 7 percent senior unsecured notes due 2008, and received net proceeds of $297 million. We completed a registered exchange offer for these notes on January 15, 2002.

 

We are a party to revolving credit agreements that provide for borrowings of $1.5 billion expiring in July 2006, and $500 million expiring in February 2004, which support our commercial paper program and letters of credit. At January 3, 2003, loans of approximately $21 million were outstanding under these facilities. Fluctuations in the availability of the 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.

 

On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, also known as LYONs, and received cash proceeds of $405 million. On May 9, 2002, we redeemed for cash the approximately 85 percent of the LYONs that were tendered for mandatory repurchase by the holders. The remaining LYONs are convertible into approximately 0.9 million shares of our Class A Common Stock and carry a yield to maturity of 0.75 percent. We may not redeem the LYONs prior to May 2004. We may at the option of the holders be required to purchase LYONs at their accreted value on May 8 of each of 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 determine our debt capacity based on the amount and variability of our cash flows. EBITDA (from continuing operations) coverage of gross interest cost was 5.5 times in 2002, and we met the cash flow requirements under our loan agreements. Excluding the impact of our Synthetic Fuel business, EBITDA coverage of gross interest would have been 6.5 times. At January 3, 2003, we had long-term public debt ratings of BBB+ from Standard and Poor’s and Baa2 from Moody’s, respectively.

 

26


 

The following table summarizes our contractual obligations:

 

         

Payments Due by Period


Contractual Obligations


  

Total


  

Less than 1 year


  

1-3 years


  

4-5 years


  

After 5 years


($ in millions)

                                  

Debt

  

$

1,734

  

$

242

  

$

550

  

$

121

  

$

821

Operating Leases

                                  

Recourse

  

 

971

  

 

107

  

 

174

  

 

121

  

 

569

Non-recourse

  

 

548

  

 

17

  

 

69

  

 

96

  

 

366

    

  

  

  

  

Total Contractual Cash Obligations

  

$

3,253

  

$

366

  

$

793

  

$

338

  

$

1,756

    

  

  

  

  

 

The totals above exclude recourse minimum lease payments of $341 million associated with the discontinued Senior Living and Distribution Services businesses, due as follows: less than 1 year $40 million; 1-3 years $68 million; 4-5 years $63 million; and after 5 years $170 million. Also excluded are non-recourse minimum lease payments of $82 million associated with the discontinued Senior Living Services business, due as follows: less than 1 year $2 million; 1-3 years $12 million; 4-5 years $13 million; and after 5 years $55 million. Excluded from the debt obligation is $155 million associated with the discontinued Senior Living Services business.

 

The following table summarizes our commitments:

 

    

Total Amounts Committed


  

Amount of Commitment

Expiration Per Period


Other Commercial Commitments


     

Less than 1 year


  

1-3 years


  

4-5 years


  

After 5 years


($ in millions)

                                  

Guarantees

  

$

827

  

$

77

  

$

100

  

$

264

  

$

386

Timeshare note repurchase obligations

  

 

12

  

 

—  

  

 

2

  

 

—  

  

 

10

    

  

  

  

  

Total

  

$

839

  

$

77

  

$

102

  

$

264

  

$

396

    

  

  

  

  

 

Our guarantees include $270 million for commitments which will not be in effect until the underlying hotels are open and we begin to manage the properties. Our total unfunded loan commitments amounted to $217 million at January 3, 2003. We expect to fund $140 million within one year and $16 million in one to three years. We do not expect to fund the remaining $61 million of commitments, which expire as follows: $51 million within one year; $5 million in one to three years; $2 million in four to five years; and $3 million after five years.

 

Share Repurchases. We purchased 7.8 million of our shares in 2002 at an average price of $32.52 per share and 6.1 million of our shares in 2001 at an average price of $38.20 per share. As of February 6, 2003, we had been authorized by our Board of Directors to repurchase 20 million shares.

 

Dividends. In May 2002, our Board of Directors increased the quarterly cash dividend by 8 percent to $.07 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 an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and require the use of complex judgment in their application.

 

27


 

Incentive Fees

 

We recognize incentive fees as revenue when earned in accordance with the terms of the management contract. In interim periods, we recognize as income the incentive fees that would be due to us as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us. If we recognized incentive fees only after the underlying full-year performance thresholds were certain, the revenue recognized for each year would be unchanged, but no incentive fees for any year would be recognized until the fourth quarter. We recognized incentive fee revenue of $162 million, $202 million and $316 million in 2002, 2001 and 2000, respectively.

 

Cost Reimbursements

 

For domestic properties that we manage, we are responsible to employees for salaries and wages and to subcontractors and other creditors for materials and services. We also have the discretionary responsibility to procure and manage the resources in performing our services under these contracts. We therefore include these costs and the reimbursement of the costs as part of our expenses and revenues. We recorded cost reimbursements (excluding senior living services) of $5.7 billion in 2002 and $5.2 billion in 2001 and $5.3 billion in 2000.

 

Real Estate Sales

 

We account for the sales of real estate in accordance with FAS No. 66, “Accounting for Sales of Real Estate.” We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $51 million in 2002, $16 million in 2001 and $18 million in 2000. Our ongoing ability to achieve sale accounting under FAS No. 66 depends on our ability to negotiate the structure of the sales transactions to comply with these rules.

 

Timeshare Sales

 

We also recognize revenue from the sale of timeshare interests in accordance with FAS No. 66. We recognize sales when we have received a minimum of 10 percent of the purchase price for the timeshare interval, the period of cancellation with refund has expired, receivables are deemed collectible and certain minimum sales and construction levels have been attained. For sales that do not meet these criteria, we defer all revenue using the deposit method.

 

Costs Incurred to Sell Real Estate Projects

 

We capitalize direct costs incurred to sell real estate projects attributable to and recoverable from the sales of timeshare interests until the sales are recognized. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”. Selling and marketing costs capitalized under this approach were approximately $107 million and $126 million at January 3, 2003, and December 28, 2001, respectively, and are included in property and equipment in the accompanying consolidated balance sheets. If a contract is canceled, unrecoverable direct selling and marketing costs are charged to expense and deposits forfeited are recorded as income.

 

Interest Only Strips

 

We periodically sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We retain servicing assets and interests in the assets transferred to special purpose entities that are accounted for as interest only strips. The 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 $135 million at January 3, 2003 and $87 million at December 28, 2001, which are recorded as long-term receivables on the consolidated balance sheet.

 

Loan Loss Reserves

 

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific

 

28


impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis. At January 3, 2003, our recorded investment in impaired loans was $129 million. We have a $59 million allowance for credit losses, leaving $70 million of our investment in impaired loans for which there is no related allowance for credit losses.

 

Marriott Rewards

 

Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies.

 

We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points. Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, and communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.

 

Avendra

 

In January 2001, Marriott and Hyatt Corporation formed a joint venture, Avendra LLC (Avendra), to be an independent professional procurement services company serving the North American hospitality market and related industries. Six Continents Hotels, Inc., ClubCorp USA Inc., and Fairmont Hotels & Resorts, Inc., joined Avendra in March 2001. We and the other four members contributed our respective procurement businesses to Avendra. Currently, our interest in Avendra is slightly less than 50 percent.

 

Avendra generally does not purchase and resell goods and services; instead, its customers purchase goods and services directly from Avendra’s vendors on terms negotiated by Avendra. Avendra earns revenue through agreements with its vendors which provide that the vendors pay Avendra an unrestricted allowance for purchases by its customers. Our hotel management agreements treat vendor-generated unrestricted allowances in three separate ways, and the requirements of those agreements are reflected in our Procurement Services Agreement with Avendra (PSA).

 

For purchases of goods and services by the majority of Marriott’s managed hotels, Avendra is permitted to retain unrestricted allowances, in an amount sufficient only to recover Avendra’s properly allocated costs of providing procurement services. Other management contracts allow Avendra to retain vendor allowances and earn a return which is competitive in the industry. This amount is capped by the PSA. Lastly, for purchases of goods and services by hotels owned by one of Marriott’s hotel owners, Avendra is not permitted to retain any of such unrestricted allowances; instead, Avendra charges a negotiated fee to Marriott, and Marriott in turn charges a negotiated fee to that owner. In 2002, we distributed to the hotels that we manage approximately $12 million in unrestricted rebates received from Avendra, and its predecessor, Marketplace by Marriott. If Marriott franchised hotels (not managed by Marriott) elect to purchase through Avendra, they negotiate separately with Avendra and are not bound by the terms of the PSA for our managed hotels. We account for our interest in Avendra under the equity method and recognized income of $2 million in 2002 and a loss of $1 million in 2001. After we have recovered our investment in Avendra and associated expenses through distributions from Avendra or a sale of all or any portion of our equity interest in Avendra, we will apply any further benefits to offset costs otherwise allocable to Marriott branded hotels.

 

29


 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates. We manage our exposure to this risk by monitoring available financing alternatives and through development and application of credit granting policies. Our strategy to manage exposure to changes in interest rates is unchanged from December 28, 2001. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how such exposure is managed in the near future.

 

The following sensitivity analysis displays how changes in interest rates affect our earnings and the fair values of certain instruments we hold.

 

We hold notes receivable that earn interest at variable rates. Hypothetically, an immediate one percentage point change in interest rates would change annual interest income by $5 million and $5 million, based on the respective balances of these notes receivable at January 3, 2003 and December 28, 2001.

 

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 January 3, 2003 and December 28, 2001, a hypothetical immediate one percentage point change in interest rates would change the fair value of our long-term fixed rate debt by $42 million and $53 million, respectively, and would change the fair value of long-term fixed rate notes receivable by $20 million and $22 million, respectively, in each year.

 

Although commercial paper is classified as long-term debt (based on our ability and intent to refinance it on a long-term basis) all commercial paper matures within two months of year-end. Based on the balance of commercial paper outstanding at January 3, 2003, a hypothetical one percentage point change in interest rates would change interest expense by $1 million on an annualized basis.

 

30


 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following financial information is included on the pages indicated:

 

    

Page


      

Report of Independent Auditors

  

32

      

Consolidated Statement of Income

  

33

      

Consolidated Balance Sheet

  

34

      

Consolidated Statement of Cash Flows

  

35

      

Consolidated Statement of Comprehensive Income

  

36

      

Consolidated Statement of Shareholders’ Equity

  

37

      

Notes to Consolidated Financial Statements

  

38

      

 

 

31


 

REPORT OF INDEPENDENT AUDITORS

 

To the Shareholders of Marriott International, Inc.:

 

We have audited the accompanying consolidated balance sheet of Marriott International, Inc. as of January 3, 2003 and December 28, 2001, 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 January 3, 2003. 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. as of January 3, 2003 and December 28, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 2003 in conformity with accounting principles generally accepted in the United States.

 

As discussed in the notes to the consolidated financial statements, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets.”

 

 

 

/s/ Ernst & Young LLP

 

McLean, Virginia

February 5, 2003

 

32


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME

Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000

($ in millions, except per share amounts)

 

    

2002


    

2001


    

2000


 

SALES

                          

Lodging

                          

Base management fees

  

$

379

 

  

$

372

 

  

$

383

 

Franchise fees

  

 

232

 

  

 

220

 

  

 

208

 

Incentive management fees

  

 

162

 

  

 

202

 

  

 

316

 

Owned and leased properties

  

 

383

 

  

 

478

 

  

 

650

 

Other revenue

  

 

1,353

 

  

 

1,277

 

  

 

1,052

 

Cost reimbursements

  

 

5,739

 

  

 

5,237

 

  

 

5,302

 

Synthetic Fuel

  

 

193

 

  

 

—  

 

  

 

—  

 

    


  


  


    

 

8,441

 

  

 

7,786

 

  

 

7,911

 

OPERATING COSTS AND EXPENSES

                          

Lodging

                          

Owned and leased – direct

  

 

384

 

  

 

456

 

  

 

573

 

Other lodging – direct

  

 

1,185

 

  

 

1,077

 

  

 

866

 

Reimbursed costs

  

 

5,739

 

  

 

5,237

 

  

 

5,302

 

Restructuring costs

  

 

—  

 

  

 

44

 

  

 

—  

 

Administrative and other

  

 

233

 

  

 

331

 

  

 

234

 

Synthetic Fuel

  

 

327

 

  

 

—  

 

  

 

—  

 

    


  


  


    

 

7,868

 

  

 

7,145

 

  

 

6,975

 

    


  


  


    

 

573

 

  

 

641

 

  

 

936

 

Corporate expenses

  

 

(126

)

  

 

(139

)

  

 

(120

)

Interest expense

  

 

(86

)

  

 

(109

)

  

 

(100

)

Interest income

  

 

122

 

  

 

94

 

  

 

60

 

Provision for loan losses

  

 

(12

)

  

 

(48

)

  

 

(5

)

Restructuring costs

  

 

—  

 

  

 

(18

)

  

 

—  

 

    


  


  


INCOME FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES

  

 

471

 

  

 

421

 

  

 

771

 

Provision for income taxes

  

 

(32

)

  

 

(152

)

  

 

(281

)

    


  


  


INCOME FROM CONTINUING OPERATIONS

  

 

439

 

  

 

269

 

  

 

490

 

Discontinued Operations

                          

Income (Loss) from Senior Living Services, net of tax

  

 

23

 

  

 

(29

)

  

 

(13

)

Loss on disposal of Senior Living Services, net of tax

  

 

(131

)

  

 

—  

 

  

 

—  

 

(Loss) Income from Distribution Services, net of tax

  

 

(14

)

  

 

(4

)

  

 

2

 

Exit costs - Distribution Services, net of tax

  

 

(40

)

  

 

—  

 

  

 

—  

 

    


  


  


NET INCOME

  

$

277

 

  

$

236

 

  

$

479

 

    


  


  


EARNINGS PER SHARE – Basic

                          

Earnings from continuing operations

  

$

1.83

 

  

$

1.10

 

  

$

2.03

 

Loss from discontinued operations

  

 

(.68

)

  

 

(.13

)

  

 

(.04

)

    


  


  


Earnings per share

  

$

1.15

 

  

$

.97

 

  

$

1.99

 

    


  


  


EARNINGS PER SHARE – Diluted

                          

Earnings from continuing operations

  

$

1.74

 

  

$

1.05

 

  

$

1.93

 

Loss from discontinued operations

  

 

(.64

)

  

 

(.13

)

  

 

(.04

)

    


  


  


Earnings per share

  

$

1.10

 

  

$

.92

 

  

$

1.89

 

    


  


  


DIVIDENDS DECLARED PER SHARE

  

$

0.275

 

  

$

0.255

 

  

$

0.235

 

    


  


  


 

See Notes To Consolidated Financial Statements

 

 

33


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

January 3, 2003 and December 28, 2001

($ in millions)

 

    

January 3,

2003


    

December 28,

2001


 

ASSETS

                 

Current Assets

                 

Cash and equivalents

  

$

198

 

  

$

812

 

Accounts and notes receivable

  

 

524

 

  

 

479

 

Prepaid taxes

  

 

300

 

  

 

223

 

Other

  

 

89

 

  

 

72

 

Assets held for sale

  

 

633

 

  

 

1,161

 

    


  


    

 

1,744

 

  

 

2,747

 

Property and equipment

  

 

2,589

 

  

 

2,460

 

Goodwill

  

 

923

 

  

 

977

 

Other intangible assets

  

 

495

 

  

 

657

 

Investments in affiliates – equity

  

 

493

 

  

 

314

 

Investments in affiliates – notes receivable

  

 

584

 

  

 

505

 

Notes and other receivables, net

                 

Loans to timeshare owners

  

 

153

 

  

 

259

 

Other notes receivable

  

 

304

 

  

 

311

 

Other long-term receivables

  

 

473

 

  

 

472

 

    


  


    

 

930

 

  

 

1,042

 

Other

  

 

538

 

  

 

405

 

    


  


    

$

8,296

 

  

$

9,107

 

    


  


LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Current liabilities

                 

Accounts payable

  

$

529

 

  

$

607

 

Accrued payroll and benefits

  

 

373

 

  

 

322

 

Casualty self insurance

  

 

32

 

  

 

21

 

Other payables and accruals

  

 

665

 

  

 

621

 

Current portion of long-term debt

  

 

242

 

  

 

32

 

Liabilities of businesses held for sale

  

 

366

 

  

 

367

 

    


  


    

 

2,207

 

  

 

1,970

 

Long-term debt

  

 

1,492

 

  

 

2,301

 

Casualty self insurance reserves

  

 

106

 

  

 

83

 

Other long-term liabilities

  

 

857

 

  

 

868

 

Convertible debt

  

 

61

 

  

 

407

 

Shareholders’ equity

                 

Class A common stock

  

 

3

 

  

 

3

 

ESOP preferred stock

  

 

—  

 

  

 

—  

 

Additional paid-in capital

  

 

3,181

 

  

 

3,378

 

Retained earnings

  

 

1,126

 

  

 

941

 

Treasury stock, at cost

  

 

(667

)

  

 

(503

)

Unearned ESOP shares

  

 

—  

 

  

 

(291

)

Accumulated other comprehensive loss

  

 

(70

)

  

 

(50

)

    


  


    

 

3,573

 

  

 

3,478

 

    


  


    

$

8,296

 

  

$

9,107

 

    


  


 

See Notes To Consolidated Financial Statements

 

34


 

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000

($ in millions)

 

    

2002


    

2001


    

2000


 

OPERATING ACTIVITIES

                          

Income from continuing operations

  

$

439

 

  

$

269

 

  

$

490

 

Adjustments to reconcile to cash provided by operating activities:

                          

Income (loss) from discontinued operations

  

 

9

 

  

 

(33

)

  

 

(11

)

Discontinued operations – loss on sale/exit

  

 

(171

)

  

 

—  

 

  

 

—  

 

Depreciation and amortization

  

 

187

 

  

 

222

 

  

 

195

 

Income taxes

  

 

(105

)

  

 

9

 

  

 

133

 

Timeshare activity, net

  

 

(63

)

  

 

(358

)

  

 

(195

)

Other

  

 

223

 

  

 

278

 

  

 

54

 

Working capital changes:

                          

Accounts receivable

  

 

(31

)

  

 

57

 

  

 

(53

)

Other current assets

  

 

60

 

  

 

(20

)

  

 

24

 

Accounts payable and accruals

  

 

(32

)

  

 

(21

)

  

 

219

 

    


  


  


Net cash provided by operating activities

  

 

516

 

  

 

403

 

  

 

856

 

INVESTING ACTIVITIES

                          

Capital expenditures

  

 

(292

)

  

 

(560

)

  

 

(1,095

)

Dispositions

  

 

729

 

  

 

554

 

  

 

742

 

Loan advances

  

 

(237

)

  

 

(367

)

  

 

(389

)

Loan collections and sales

  

 

124

 

  

 

71

 

  

 

93

 

Other

  

 

(7

)

  

 

(179

)

  

 

(377

)

    


  


  


Net cash provided by (used in) investing activities

  

 

317

 

  

 

(481

)

  

 

(1,026

)

FINANCING ACTIVITIES

                          

Commercial paper, net

  

 

102

 

  

 

(827

)

  

 

46

 

Issuance of long-term debt

  

 

26

 

  

 

1,329

 

  

 

338

 

Repayment of long-term debt

  

 

(946

)

  

 

(123

)

  

 

(26

)

(Redemption) issuance of convertible debt

  

 

(347

)

  

 

405

 

  

 

—  

 

Issuance of Class A common stock

  

 

35

 

  

 

76

 

  

 

58

 

Dividends paid

  

 

(65

)

  

 

(61

)

  

 

(55

)

Purchase of treasury stock

  

 

(252

)

  

 

(235

)

  

 

(340

)

    


  


  


Net cash (used in) provided by financing activities

  

 

(1,447

)

  

 

564

 

  

 

21

 

    


  


  


(DECREASE) INCREASE IN CASH AND EQUIVALENTS

  

 

(614

)

  

 

486

 

  

 

(149

)

CASH AND EQUIVALENTS, beginning of year

  

 

812

 

  

 

326

 

  

 

475

 

    


  


  


CASH AND EQUIVALENTS, end of year

  

$

198

 

  

$

812

 

  

$

326

 

    


  


  


 

See Notes To Consolidated Financial Statements

 

35


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000

($ in millions)

 

    

2002


    

2001


    

2000


 

Net income

  

$

277

 

  

$

236

 

  

$

479

 

Other comprehensive (loss) income (net of tax):

                          

Foreign currency translation adjustments

  

 

(7

)

  

 

(14

)

  

 

(10

)

Other

  

 

(13

)

  

 

8

 

  

 

2

 

    


  


  


Total other comprehensive loss

  

 

(20

)

  

 

(6

)

  

 

(8

)

    


  


  


Comprehensive income

  

$

257

 

  

$

230

 

  

$

471

 

    


  


  


 

See Notes To Consolidated Financial Statements

 

36


 

MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Fiscal Years Ended January 3, 2003, December 28, 2001 and December 29, 2000

(in millions, except per share amounts)

 

Common

shares

outstanding


         

Class A

common

stock


  

Additional

paid-in

capital


    

Retained

earnings


      

Unearned ESOP shares


      

Treasury stock, at cost


      

Accumulated other comprehensive loss


 

246.3

 

  

Balance at January 1, 2000

  

$

3

  

$

2,738

 

  

$

508

 

    

$

—  

 

    

$

(305

)

    

$

(36

)

—  

 

  

Net income

  

 

—  

  

 

—  

 

  

 

479

 

    

 

—  

 

    

 

—  

 

    

 

—  

 

—  

 

  

Dividends ($.235 per share)

  

 

—  

  

 

—  

 

  

 

(56

)

    

 

—  

 

    

 

—  

 

    

 

—  

 

5.5

 

  

Employee stock plan issuance and other

  

 

—  

  

 

852

 

  

 

(80

)

    

 

(679

)

    

 

186

 

    

 

(8

)

(10.8

)

  

Purchase of treasury stock

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(335

)

    

 

—  

 



       

  


  


    


    


    


241.0

 

  

Balance at December 29, 2000

  

 

3

  

 

3,590

 

  

 

851

 

    

 

(679

)

    

 

(454

)

    

 

(44

)

—  

 

  

Net income

  

 

—  

  

 

—  

 

  

 

236

 

    

 

—  

 

    

 

—  

 

    

 

—  

 

—  

 

  

Dividends ($.255 per share)

  

 

—  

  

 

—  

 

  

 

(62

)

    

 

—  

 

    

 

—  

 

    

 

—  

 

5.8

 

  

Employee stock plan issuance and other

  

 

—  

  

 

(212

)

  

 

(84

)

    

 

388

 

    

 

186

 

    

 

(6

)

(6.1

)

  

Purchase of treasury stock

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(235

)

    

 

—  

 



       

  


  


    


    


    


240.7

 

  

Balance at December 28, 2001

  

 

3

  

 

3,378

 

  

 

941

 

    

 

(291

)

    

 

(503

)

    

 

(50

)

—  

 

  

Net income

  

 

—  

  

 

—  

 

  

 

277

 

    

 

—  

 

    

 

—  

 

    

 

—  

 

—  

 

  

Dividends ($.275 per share)

  

 

—  

  

 

—  

 

  

 

(67

)

    

 

—  

 

    

 

—  

 

    

 

—  

 

3.0

 

  

Employee stock plan issuance and other

  

 

—  

  

 

(197

)

  

 

(25

)

    

 

291

 

    

 

90

 

    

 

(20

)

(7.8

)

  

Purchase of treasury stock

  

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

    

 

(254

)

    

 

—  

 



       

  


  


    


    


    


235.9

 

  

Balance at January 3, 2003

  

$

3

  

$

3,181

 

  

$

1,126

 

    

$

—  

 

    

$

(667

)

    

$

(70

)



       

  


  


    


    


    


 

See Notes To Consolidated Financial Statements

 

37


 

MARRIOTT INTERNATIONAL, INC.

NOTES TO 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 2002 presentation.

 

As a result of the sale in December 2002 of 12 of our Senior Living Services communities, the definitive agreements we entered into to sell our senior living management business and nine of the remaining 23 communities, our plan to sell the remaining 14 communities and the discontinuation of our Distribution Services business, the balances and activities of two reportable segments, Senior Living Services and Distribution Services have been segregated and reported as discontinued operations for all periods presented.

 

In our opinion, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of January 3, 2003 and December 28, 2001, the results of operations and cash flows for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000. We have eliminated all material intercompany transactions and balances between entities included in these financial statements.

 

Fiscal Year

 

Our fiscal year ends on the Friday nearest to December 31. The 2002 fiscal year includes 53 weeks, while the 2001 and 2000 fiscal years include 52 weeks.

 

Revenue Recognition

 

Our sales include (1) base and incentive management fees, (2) franchise fees, (3) sales from lodging properties owned or leased by us, (4) cost reimbursements, (5) other lodging revenue, and (6) sales made by our Synthetic Fuel business. Management fees comprise a base fee, which is a percentage of the revenues of hotels, and 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. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise. Other lodging revenue includes sales from our timeshare and ExecuStay businesses.

 

Management Fees: We recognize base fees as revenue when earned in accordance with the contract. In interim periods and at year end we recognize incentive fees that would be due as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us.

 

Timeshare: We recognize revenue from timeshare interest sales in accordance with Statement of Financial Accounting Standards (FAS) No. 66, “Accounting for Sales of Real Estate.” We recognize sales when a minimum of 10 percent of the purchase price for the timeshare interval has been received, the period of cancellation with refund has expired, we deem the receivables collectible and have attained certain minimum sales and construction levels. For sales that do not meet these criteria, we defer all revenue using the deposit method.

 

Owned and Leased Units: We recognize room sales and revenues from guest services for our owned and leased units, including ExecuStay, when rooms are occupied and services have been rendered.

 

38


Franchise Fee Revenue: We recognize franchise fee revenue in accordance with FAS No. 45, “Accounting for Franchise Fee Revenue.” We recognize franchise fees as revenue in each accounting period as fees are earned and become receivable from the franchisee.

 

Cost Reimbursements: We recognize cost reimbursements from managed and franchised properties when we incur the related reimbursable costs.

 

Synthetic Fuel: We recognize revenue from our Synthetic Fuel business when the synthetic fuel is produced and sold.

 

Ground Leases

 

We are both the lessor and lessee of land under long-term 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 $51 million in 2002, $16 million in 2001 and $18 million in 2000.

 

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. Excluding the discontinued Senior Living Services and Distribution Services businesses, we recognized compensation cost from profit sharing of $54 million in 2002, $52 million in 2001 and $50 million in 2000. We recognized compensation cost from profit sharing of $8 million in 2002, $6 million in 2001 and $5 million in 2000 related to the discontinued Senior Living Services and Distribution Services businesses.

 

Self-Insurance Programs

 

We are self-insured for certain levels of property, liability, workers’ compensation 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 4.8 percent to determine the present value of the projected settlements, which we consider to be reasonable given our history of settled claims, including payment patterns 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 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. Points cannot be redeemed for cash.

 

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,

 

39


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.

 

Our liability for the Marriott Rewards program was $683 million at January 3, 2003, and $631 million at December 28, 2001, of which we have included $418 million and $380 million, respectively, in other long-term liabilities in the 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 January 3, 2003, our recorded investment in impaired loans was $129 million. We have a $59 million allowance for credit losses, leaving $70 million of our investment in impaired loans for which there is no related allowance for credit losses.

 

The following table summarizes the activity in our accounts and notes receivable reserves for the years ended December 29, 2000, December 28, 2001 and January 3, 2003:

 

    

Accounts Receivable Reserve


    

Notes Receivable Reserve


 

($ in millions)

                 

January 1, 2000

  

$

22

 

  

$

8

 

Additions

  

 

15

 

  

 

5

 

Write-offs

  

 

(14

)

  

 

(1

)

    


  


December 29, 2000

  

 

23

 

  

 

12

 

Additions

  

 

38

 

  

 

48

 

Write-offs

  

 

(11

)

  

 

(1

)

    


  


December 28, 2001

  

 

50

 

  

 

59

 

Additions

  

 

10

 

  

 

12

 

Write-offs

  

 

(20

)

  

 

(12

)

    


  


January 3, 2003

  

$

40

 

  

$

59

 

    


  


 

Valuation of 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.

 

40


 

Investments

 

We consolidate entities that we control due to holding a majority voting interest. We account for investments in joint ventures using the equity method of accounting when we exercise significant influence over the venture. If we do not exercise significant influence, we account for the investment using the cost method of accounting. We account for investments in limited partnerships and limited liability companies using the equity method of accounting when we own more than a minimal investment.

 

Summarized information relating to our unconsolidated affiliates is as follows: total assets, which primarily comprise hotel real estate managed by us, and total liabilities were approximately $4.1 billion and $2.9 billion, respectively, at January 3, 2003 and $4.3 billion and $3.1 billion, respectively, at December 28, 2001. Total sales and net loss were $1.3 billion and $59 million, respectively, for the year ended January 3, 2003 and $1.5 billion and $39 million, respectively, for the year ended December 28, 2001. Total sales and net income were $765 million and $14 million, respectively, for the year ended December 29, 2000. Our ownership interest in these unconsolidated affiliates varies generally from 10 percent to 50 percent.

 

Costs Incurred to Sell Real Estate Projects

 

We capitalize direct costs incurred to sell real estate projects attributable to and recoverable from the sales of timeshare interests until the sales are recognized. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Selling and marketing costs capitalized under this approach were approximately $107 million and $126 million at January 3, 2003 and December 28, 2001, respectively, and are included in property and equipment in the accompanying consolidated balance sheets. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense, and record deposits forfeited as income.

 

Interest Only Strips

 

We periodically sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We retain servicing assets and interest in the assets transferred to special purpose entities that are accounted for as interest only strips. We treat the interest only strips as “trading” or “available for sale” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. We report changes in the fair values of the interest only strips through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available for sale securities. We had interest only strips of $135 million at January 3, 2003 and $87 million at December 28, 2001, which are recorded as long-term receivables on the consolidated balance sheet.

 

New Accounting Standards

 

We adopted FAS No. 142, “Goodwill and Other Intangible Assets” in the first quarter of 2002. FAS No. 142 requires that goodwill is not amortized, but rather reviewed annually for impairment. The initial adoption of FAS No. 142 did not result in an impairment charge to goodwill or other intangible assets and increased our fiscal 2002 net income by approximately $30 million.

 

41


 

The following table presents the impact FAS No. 142 would have had on our income from continuing operations, basic and diluted earnings from continuing operations per share, and basic and diluted net earnings per share for fiscal years ended December 28, 2001 and December 29, 2000, if we had adopted it in the first quarter of 2000 ($ in millions, except per share amounts):

 

      

Fiscal years ended


      

December 28,

2001


    

December 29,

2000


Reported income from continuing operations, after tax

    

$

269

    

$

490

Goodwill amortization

    

 

27

    

 

27

      

    

Adjusted income from continuing operations, after tax

    

$

296

    

$

517

      

    

Reported net income

    

$

236

    

$

479

Goodwill amortization

    

 

32

    

 

31

      

    

Adjusted net income

    

$

268

    

$

510

      

    

Reported basic earnings from continuing operations per share

    

$

1.10

    

$

2.03

Goodwill amortization

    

 

.12

    

 

.12

      

    

Adjusted basic earnings from continuing operations per share

    

$

1.22

    

$

2.15

      

    

Reported basic net earnings per share

    

$

.97

    

$

1.99

Goodwill amortization

    

 

.13

    

 

.13

      

    

Adjusted basic net earnings per share

    

$

1.10

    

$

2.12

      

    

Reported diluted earnings from continuing operations per share

    

$

1.05

    

$

1.93

Goodwill amortization

    

 

.10

    

 

.11

      

    

Adjusted diluted earnings from continuing operations per share

    

$

1.15

    

$

2.04

      

    

Reported diluted net earnings per share

    

$

92

    

$

1.89

Goodwill amortization

    

 

.12

    

 

.12

      

    

Adjusted diluted net earnings per share

    

$

1.04

    

$

2.01

      

    

 

We adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in the first quarter of 2002. The adoption of FAS No. 144 did not have any impact to our financial statements.

 

We will adopt FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” in the first quarter of 2003. We do not expect the adoption of FAS No. 146 to have a material impact on our financial statements.

 

We have adopted the disclosure provisions of FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” FAS No. 148 requires expanded disclosure regarding stock-based compensation in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements and does not have a financial impact on our financial statements. The expanded disclosure will be required in our quarterly financial reports beginning in the first quarter of 2003.

 

We adopted the disclosure provisions of FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others,” in the fourth

 

42


quarter of 2002. We will apply the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002.

 

Under FIN 45, at the inception of guarantees issued after December 31, 2002, we will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. We will account for any fundings under the guarantee as a reduction of the liability. After funding has ceased, we will recognize the remaining liability in the income statement on a straight-line basis over the remaining term of the guarantee. In general, we issue guarantees in connection with obtaining long-term management contracts, and thus in those cases the offsetting entry will be capitalized and amortized over the life of the management contract.

 

Adoption of FIN 45 will have no impact to our historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45. The impact on future financial statements will depend on the nature and extent of issued guarantees but is not expected to have a material impact to us.

 

FIN 46, “Consolidation of Variable Interest Entities,” is effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46 provisions must be applied to variable interests in variable interest entities created before February 1, 2003 from the beginning of the third quarter of 2003. If an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses if they occur, receives a majority of the entity’s expected residual returns if they occur, or both. Where it is reasonably possible that the company will consolidate or disclose information about a variable interest entity, the company must disclose the nature, purpose, size and activity of the variable interest entity and the company’s maximum exposure to loss as a result of its involvement with the variable interest entity in all financial statements issued after January 31, 2003.

 

We do not believe that it is reasonably possible that the adoption of FIN 46 will result in our consolidation of any previously unconsolidated entities. The adoption of FIN 46 may result in additional disclosure about a limited number of investments in variable interest entities. We do not expect such disclosure to be material.

 

FIN 46 does not apply to qualifying special purpose entities, such as those used by us to sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. These qualifying special purpose entities will continue to be accounted for in accordance with FAS No. 140.

 

Stock-based Compensation

 

At January 3, 2003, we have several stock-based employee compensation plans, which we describe more fully in the “Employee Stock Plans” footnote. We account for those plans using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we do not reflect stock-based employee compensation cost in net income for our Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan. We recognized stock-based employee compensation cost of $9 million, $19 million and $14 million, net of tax, for deferred share grants and restricted share grants for 2002, 2001 and 2000, respectively. The impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in capital is included in the denominator of the diluted pro forma shares for all years presented.

 

43


 

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation ($ in millions, except per share amounts):

 

    

2002


    

2001


    

2000


 

Net income, as reported

  

$

277

 

  

$

236

 

  

$

479

 

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

  

 

9

 

  

 

19

 

  

 

14

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

  

 

(64

)

  

 

(68

)

  

 

(58

)

    


  


  


Pro forma net income

  

$

222

 

  

$

187

 

  

$

435

 

    


  


  


Earnings per share:

                          

Basic – as reported

  

$

1.15

 

  

$

.97

 

  

$

1.99

 

    


  


  


Basic – pro forma

  

$

.93

 

  

$

.77

 

  

$

1.80

 

    


  


  


Diluted – as reported

  

$

1.10

 

  

$

.92

 

  

$

1.89

 

    


  


  


Diluted – pro forma

  

$

.90

 

  

$

.74

 

  

$

1.73

 

    


  


  


 

RELATIONSHIP WITH MAJOR CUSTOMER

 

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 $2,547 million, $2,440 million and $2,746 million and lodging financial results of $150 million, $162 million and $235 million during 2002, 2001 and 2000, 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 $494 million, $546 million and $622 million and income of $28 million, $40 million and $72 million in 2002, 2001 and 2000, 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 $18 million, $19 million and $21 million, respectively, in 2002, 2001 and 2000.

 

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. Amounts recognized from lodging properties owned by unconsolidated partnerships above include the following amounts related to these 120 Courtyard hotels: sales of $313 million, $316 million and $345 million, management fee income and equity results in the joint venture of $13 million, $25 million and $53 million and land rent income of $18 million, $18 million and $19 million in 2002, 2001 and 2000, respectively. In addition, we recognized interest income of $27 million and $26 million in 2002 and 2001, respectively, on the $200 million mezzanine debt provided by us to the joint venture.

 

44


 

We have provided Host Marriott with financing for a portion of the cost of acquiring properties to be operated or franchised by us, and may continue to provide financing to Host Marriott in the future. The outstanding principal balance of these loans was $5 million and $7 million at January 3, 2003 and December 28, 2001, respectively, and we recognized $1 million in each of 2002, 2001 and 2000 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 $7 million at January 3, 2003. We have made no payments pursuant to these guarantees. We lease land to the Courtyard joint venture that had an aggregate book value of $184 million at January 3, 2003. This land has been pledged to secure debt of the lessees. We have agreed to defer receipt of rentals on this land, if necessary, to permit the lessees to meet their debt service requirements.

 

In recognition of the evolving changes in the lodging industry over the last ten years and the age of our agreements with Host Marriott, many provisions of which predated our 1993 Spin-off, and the need to provide clarity on a number of points and consistency on contractual terms over the large portfolio of Host Marriott owned hotels, 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, in 2002 we negotiated certain changes to our management agreements for Host Marriott-owned hotels. The modifications were completed during the third quarter of 2002 and are effective as of the beginning of our 2002 fiscal year. These changes, among other things,

 

    Provided Host Marriott with additional approval rights over budgets and capital expenditures;

 

    Extended the term of our management agreements for five hotels that were subject to termination in the short term, and two core system hotels that provide additional years at the end of the current term;

 

    Changed the pool of hotels that Host Marriott could sell with franchise agreements to one of our approved franchisees and revised the method of determining the number of hotels that may be sold without a management agreement or franchise agreement;

 

    Lowered the incentive management fees payable to us by amounts that will depend in part on underlying hotel profitability. In 2002, the reduction was $2.5 million;

 

    Reduced certain expenses to the properties and lowered Host Marriott’s working capital requirements;

 

    Confirmed 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 established the specific conditions under which we may profit on future transactions; and

 

    Terminated our prior right to make significant purchases of Host Marriott’s outstanding common stock upon certain changes of control and clarified our rights in each of our management agreements to prevent either a sale of the hotel to our major competitors or specified changes in control of Host Marriott involving our major competitors.

 

The monetary effect of the changes will depend on future events such as the financial results of the hotels. We do not expect these modifications to have a material financial impact on us.

 

 

45


 

NOTES RECEIVABLE

 

    

2002


    

2001


 
    

($ in millions)

 

Loans to timeshare owners

  

$

169

 

  

$

288

 

Lodging senior loans

  

 

320

 

  

 

314

 

Lodging mezzanine loans

  

 

624

 

  

 

530

 

Senior Living Services loans

  

 

—  

 

  

 

16

 

    


  


    

 

1,113

 

  

 

1,148

 

Less current portion

  

 

(72

)

  

 

(73

)

    


  


    

$

1,041

 

  

$

1,075

 

    


  


 

Lodging mezzanine loans include the loan to the Courtyard joint venture. Amounts due within one year are classified as current assets in the accompanying consolidated balance sheet, including $16 million and $29 million, respectively, as of January 3, 2003 and December 28, 2001, related to the loans to timeshare owners.

 

PROPERTY AND EQUIPMENT

 

    

2002


    

2001


 
    

($ in millions)

 

Land

  

$

386

 

  

$

435

 

Buildings and leasehold improvements

  

 

547

 

  

 

440

 

Furniture and equipment

  

 

676

 

  

 

497

 

Timeshare properties

  

 

1,270

 

  

 

1,167

 

Construction in progress

  

 

180

 

  

 

330

 

    


  


    

 

3,059

 

  

 

2,869

 

Accumulated depreciation and amortization

  

 

(470

)

  

 

(409

)

    


  


    

$

2,589

 

  

$

2,460

 

    


  


 

We record property and equipment at cost, including interest, rent and real estate taxes incurred during development and construction. Interest capitalized as a cost of property and equipment totaled $43 million in 2002, $61 million in 2001 and $52 million in 2000. 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

 

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, 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

 

46


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 2002, we sold three lodging properties and six pieces of undeveloped land for $330 million in cash. We will continue to operate two of the hotels under long-term management agreements. We accounted for two of the three property sales under the full accrual method in accordance with FAS No. 66. The buyer did not make adequate minimum initial investments in the remaining property, which we accounted for under the cost recovery method. The sale of one of the properties was to a joint venture in which we have a minority interest and was sold at a loss. We recognized $6 million of pretax gains in 2002 and will recognize the remaining $51 million of pretax gains in subsequent years, provided certain contingencies in the sales contracts expire.

 

In 2002, we also sold our 11 percent investment in Interval International, a timeshare exchange company, for approximately $63 million. In connection with the transaction, we recorded a pretax gain of approximately $44 million.

 

In 2001, we agreed to sell 18 lodging properties and three pieces of undeveloped land for $682 million. We continue to operate 17 of the hotels under long-term management agreements. In 2001, we closed on 11 properties and three pieces of undeveloped land for