SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 7, 2001 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes |X| No |_|
Shares outstanding
Class at November 30, 2001
------------------------------------ ----------------------------
Class A Common Stock, 240,980,998
$0.01 par value
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
----------
Forward-Looking Statements ................................................................ 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended September 7, 2001
and September 8, 2000 ............................................................. 4
Condensed Consolidated Balance Sheet -
as of September 7, 2001 and December 29, 2000 ..................................... 5
Condensed Consolidated Statement of Cash Flows -
Thirty-Six Weeks Ended September 7, 2001 and September 8, 2000 .................... 6
Notes to Condensed Consolidated Financial Statements .................................. 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................................... 16
Quantitative and Qualitative Disclosures About Market Risk ............................ 23
Part II. Other Information and Signatures:
Legal Proceedings ..................................................................... 24
Changes in Securities ................................................................. 24
Defaults Upon Senior Securities ....................................................... 24
Submission of Matters to a Vote of Security Holders ................................... 24
Other Information ..................................................................... 24
Exhibits and Reports on Form 8-K ...................................................... 25
Signatures ............................................................................ 26
2
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms, timeshare units, senior living accommodations and corporate
apartments; our ability to obtain new operating contracts and franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel and senior living community owners; the effect of
international, national and regional economic conditions, including the duration
and severity of the current economic downturn in the United States and the
aftermath of the September 11, 2001 terrorist attacks on New York and
Washington; the availability of capital to allow us and potential hotel owners
to fund investments; the effect that internet hotel reservation channels may
have on rates that we are able to charge for hotel rooms; and other risks
described from time to time in our filings with the Securities and Exchange
Commission, including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, we caution you not to place undue reliance on such statements. We
also undertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
Twelve weeks ended Thirty-six weeks ended
------------------------------ ------------------------------
September 7, September 8, September 7, September 8,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(As revised) (As revised) (As revised) (As revised)
SALES
Management and franchise fees .............. $ 187 $ 215 $ 618 $ 633
Distribution services ...................... 385 356 1,143 1,044
Other ...................................... 521 478 1,519 1,385
------------ ------------ ------------ ------------
1,093 1,049 3,280 3,062
Other revenues from managed properties ..... 1,280 1,266 4,004 3,839
------------ ------------ ------------ ------------
2,373 2,315 7,284 6,901
OPERATING COSTS AND EXPENSES
Distribution services ...................... 384 351 1,137 1,045
Other ...................................... 531 482 1,500 1,361
------------ ------------ ------------ ------------
915 833 2,637 2,406
Other costs from managed properties ........ 1,280 1,266 4,004 3,839
------------ ------------ ------------ ------------
2,195 2,099 6,641 6,245
------------ ------------ ------------ ------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST .................................. 178 216 643 656
Corporate expenses .............................. (13) (29) (72) (80)
Interest expense ................................ (26) (22) (75) (72)
Interest income ................................. 23 9 59 19
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ...................... 162 174 555 523
Provision for income taxes ...................... 61 64 203 193
------------ ------------ ------------ ------------
NET INCOME ...................................... $ 101 $ 110 $ 352 $ 330
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE .................... $ .065 $ .06 $ .19 $ .175
============ ============ ============ ============
EARNINGS PER SHARE
Basic Earnings Per Share ................... $ .41 $ .46 $ 1.44 $ 1.37
============ ============ ============ ============
Diluted Earnings Per Share ................. $ .39 $ .43 $ 1.36 $ 1.30
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
September 7, December 29,
2001 2000
------------ ------------
ASSETS (Unaudited)
Current assets
Cash and equivalents ................................. $ 874 $ 334
Accounts and notes receivable ........................ 660 728
Inventory ............................................ 101 97
Other ................................................ 313 256
------------ ------------
1,948 1,415
------------ ------------
Property and equipment .................................. 3,110 3,241
Intangibles ............................................. 1,801 1,833
Investments in affiliates ............................... 828 747
Notes and other receivables ............................. 900 661
Other ................................................... 433 340
------------ ------------
$ 9,020 $ 8,237
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................... $ 732 $ 660
Other ................................................ 1,113 1,257
------------ ------------
1,845 1,917
------------ ------------
Long-term debt .......................................... 1,912 2,016
Other long-term liabilities ............................. 1,222 1,037
Convertible debt ........................................ 406 -
Shareholders' equity
ESOP preferred stock ................................. - -
Class A common stock, 255.6 million shares issued .... 3 3
Additional paid-in capital ........................... 3,426 3,590
Retained earnings .................................... 1,062 851
Unearned ESOP shares ................................. (372) (679)
Treasury stock, at cost .............................. (425) (454)
Accumulated other comprehensive income ............... (59) (44)
------------ ------------
3,635 3,267
------------ ------------
$ 9,020 $ 8,237
============ ============
See notes to condensed consolidated financial statements.
5
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
Thirty-six weeks ended
--------------------------------
September 7, September 8,
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income ................................................................ $ 352 $ 330
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization ......................................... 147 134
Income taxes and other ................................................ 151 198
Timeshare activity, net ............................................... (218) (122)
Working capital changes ............................................... 16 73
------------ ------------
Cash provided by operations ............................................... 448 613
------------ ------------
INVESTING ACTIVITIES
Dispositions .............................................................. 508 381
Capital expenditures ...................................................... (360) (627)
Note advances ............................................................. (147) (118)
Note collections and sales ................................................ 42 29
Other ..................................................................... (169) (160)
------------ ------------
Cash used in investing activities ......................................... (126) (495)
------------ ------------
FINANCING ACTIVITIES
Commercial paper activity, net ............................................ (423) (239)
Issuance of convertible debt .............................................. 405 -
Issuance of other long-term debt .......................................... 316 332
Repayment of other long-term debt ......................................... (13) (10)
Issuance of Class A common stock .......................................... 69 30
Dividends paid ............................................................ (45) (41)
Purchase of treasury stock ................................................ (91) (301)
------------ ------------
Cash provided by (used in) financing activities ........................... 218 (229)
------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS .................................... 540 (111)
CASH AND EQUIVALENTS, beginning of period ...................................... 334 489
------------ ------------
CASH AND EQUIVALENTS, end of period ............................................ $ 874 $ 378
============ ============
See notes to condensed consolidated financial statements.
6
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial position and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the
Company).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United
States. We believe the disclosures made are adequate to make the
information presented not misleading. You should, however read the
financial statements in this report in conjunction with the consolidated
financial statements and notes to those financial statements included in
our Annual Report on Form 10-K (our Annual Report) for the fiscal year
ended December 29, 2000. Capitalized terms not otherwise defined in this
quarterly report have the meanings specified in our Annual Report.
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, and the
reported amounts of sales and expenses during the reporting period.
Accordingly, ultimate results could differ from those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all normal and recurring adjustments necessary to
present fairly our financial position as of September 7, 2001 and December
29, 2000, the results of operations for the twelve and thirty-six weeks
ended September 7, 2001 and September 8, 2000 and cash flows for the
thirty-six weeks ended September 7, 2001 and September 8, 2000. Interim
results may not be indicative of fiscal year performance because of
seasonal and short-term variations. We have eliminated all material
intercompany transactions and balances between entities included in these
financial statements.
Financial Statement Revision
We have revised the consolidated financial statements to change our method
of accounting for the Marriott Rewards Program in accordance with Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements." The effect of adopting SAB No. 101 on January 1, 2000 was to
increase both revenues and expenses by $63 million for the year ended
December 29, 2000, $28 million for the twelve weeks ended September 7, 2001
and by $65 million for the thirty-six weeks ended September 7, 2001.
However, there was no change in financial position, cashflows, net income
or basic and diluted earnings per share. In addition, we added disclosures
related to revenue recognition and certain other items to the notes to the
consolidated financial statements.
7
Revenue Recognition
Our sales include (1) management and franchise fees, (2) sales from our
distribution services business, (3) sales from lodging properties and
senior living communities owned or leased by us, and sales made by our
other businesses; and (4) certain other revenues from properties managed by
us. Management fees comprise a base fee, which is a percentage of the
revenues of hotels or senior living communities, and an incentive fee,
which is generally based on unit profitability. Franchise fees comprise
initial application fees and continuing royalties generated from our
franchise programs, which permit the hotel owners and operators to use
certain of our brand names. Other revenues from managed properties include
direct and indirect costs that are reimbursed to us by lodging and senior
living community owners for properties that we manage. Other revenues
include revenues from hotel properties and senior living communities that
we own or lease, along with sales from our timeshare and ExecuStay
businesses.
We recognize base fees as revenue when earned in accordance with the
contract. In interim periods 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. As of September 7, 2001 we
have recognized $165 million of incentive management fees, retention of
which is dependent on achievement of hotel profitability for the balance of
the year at levels specified in a number of our management contracts.
Distribution Services: We recognize revenue from our distribution services
business when goods have been shipped and title passes to the customer in
accordance with the terms of the applicable distribution contract.
Timeshare: We recognize revenue from timeshare interest sales in accordance
with Statement of Financial Accounting Standards (FAS) No. 66, "Accounting
for Sales of Real Estate." We recognize sales when a minimum of 10 percent
of the purchase price for the timeshare interval has been received, the
period of cancellation with refund has expired, receivables are deemed
collectible and certain minimum sales and construction levels have been
attained.
Owned and Leased Units: We recognize room sales and revenues from guest
services for our owned and leased units, including ExecuStay, when rooms
are occupied and services have been rendered.
Franchise Revenue: We recognize franchise fee revenues in accordance with
FAS No. 45, "Accounting for Franchise Fee Revenue." Franchise fees are
recognized as revenue in each accounting period as fees are earned and
become receivable from the franchisee.
Other Revenues from Managed Properties: We recognize other revenues from
managed properties when we incur the related reimbursable costs.
8
We recognized sales in the twelve and thirty-six weeks ended September 7,
2001 and September 8, 2000 as shown in the following table. Lodging
includes our Full Service, Select Service, Extended Stay, and Timeshare
business segments.
Twelve weeks ended
----------------------------------------------------------------------------------------------
September 7, 2001 September 8, 2000
------------------------------------------- -----------------------------------------------
Senior Senior
Living Distribution Living Distribution
Sales Lodging Services Services Total Lodging Services Services Total
--------- ---------- ---------- -------- ---------- ---------- ---------- ----------
($ in millions) (As revised) (As revised) (As revised) (As revised)
Management and franchise
fees .............................. $ 179 $ 8 $ - $ 187 $ 207 $ 8 $ - $ 215
Other ................................. 447 74 385 906 414 64 356 834
------- ------- ------- ------- ------- ------- ------- -------
626 82 385 1,093 621 72 356 1,049
Other revenues from managed
properties ........................ 1,197 83 - 1,280 1,185 81 - 1,266
------- ------- ------- ------- ------- ------- ------- -------
$ 1,823 $ 165 $ 385 $ 2,373 $ 1,806 $ 153 $ 356 $ 2,315
======= ======= ======= ======= ======= ======= ======= =======
Operating costs and expenses
Operating costs ....................... $ 452 $ 79 $ 384 $ 915 $ 405 $ 77 $ 351 $ 833
Other costs from managed
properties ........................ 1,197 83 - 1,280 1,185 81 - 1,266
------- ------- ------- ------- ------- ------- ------- -------
1,649 162 384 2,195 1,590 158 351 2,099
------- ------- ------- ------- ------- ------- ------- -------
Operating profit before
corporate expenses and
interest .......................... $ 174 $ 3 $ 1 $ 178 $ 216 $ (5) $ 5 $ 216
======= ======= ======= ======= ======= ======= ======= =======
Thirty-six weeks ended
---------------------------------------------------------------------------------------------
September 7, 2001 September 8, 2000
-------------------------------------------- -----------------------------------------------
Senior Senior
Living Distribution Living Distribution
Sales Lodging Services Services Total Lodging Services Services Total
--------- ---------- ---------- --------- --------- ---------- ----------- --------
($ in millions) (As revised) (As revised) (As revised) (As revised)
Management and franchise
fees ............................... $ 594 $ 24 $ - $ 618 $ 612 $ 21 $ - $ 633
Other .................................. 1,294 225 1,143 2,662 1,179 206 1,044 2,429
------- ------- ------- ------- ------- ------- ------- -------
1,888 249 1,143 3,280 1,791 227 1,044 3,062
Other revenues from managed
properties ......................... 3,759 245 - 4,004 3,614 225 - 3,839
------- ------- ------- ------- ------- ------- ------- -------
$ 5,647 $ 494 $ 1,143 $ 7,284 $ 5,405 $ 452 $ 1,044 $ 6,901
======= ======= ======= ======= ======= ======= ======= =======
Operating costs and expenses
Operating costs ........................ $ 1,260 $ 240 $ 1,137 $ 2,637 $ 1,128 $ 233 $ 1,045 $ 2,406
Other costs from managed
properties ......................... 3,759 245 - 4,004 3,614 225 - 3,839
------- ------- ------- ------- ------- ------- ------- -------
5,019 485 1,137 6,641 4,742 458 1,045 6,245
------- ------- ------- ------- ------- ------- ------- -------
Operating profit before
corporate expenses and
interest ........................... $ 628 $ 9 $ 6 $ 643 $ 663 $ (6) $ (1) $ 656
======= ======= ======= ======= ======= ======= ======= =======
9
2. Earnings Per Share
------------------
The following table reconciles the earnings and number of shares used in
the basic and diluted earnings per share calculations (in millions, except
per share amounts).
Twelve weeks ended Thirty-six weeks ended
----------------------------- -----------------------------
September 7, September 8, September 7, September 8,
2001 2000 2001 2000
------------ ------------- ------------ -------------
Computation of Basic Earnings Per Share
Net income ...................................... $ 101 $ 110 $ 352 $ 330
Weighted average shares outstanding ............. 244.8 240.1 244.1 241.3
------------ ------------- ------------ -------------
Basic Earnings Per Share ........................ $ .41 $ .46 $ 1.44 $ 1.37
============ ============= ============ =============
Computation of Diluted Earnings Per Share
Net income ...................................... $ 101 $ 110 $ 352 $ 330
After-tax interest expense on convertible
debt .......................................... 2 - 3 -
------------ ------------- ------------ -------------
Net income for diluted earnings per share ....... $ 103 $ 110 $ 355 $ 330
============ ============= ============ =============
Weighted average shares outstanding ............. 244.8 240.1 244.1 241.3
Effect of Dilutive Securities
Employee stock purchase plan ................ - - 0.1 0.1
Employee stock option plan .................. 8.3 8.6 8.5 7.2
Deferred stock incentive plan ............... 5.3 5.5 5.3 5.5
Convertible debt ................................ 6.4 - 3.1 -
------------ ------------- ------------ -------------
Shares for diluted earnings per share ........... 264.8 254.2 261.1 254.1
============ ============= ============ =============
Diluted Earnings Per Share ...................... $ .39 $ .43 $ 1.36 $ 1.30
============ ============= ============ =============
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. We use the if-converted
method for convertible debt.
3. Marriott Rewards
----------------
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 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. The
liability for the Marriott Rewards program was $611 million at September 7,
2001 and $554 million at December 29, 2000, of which $390 million and $310
million, respectively, are included in other long-term liabilities in the
accompanying condensed consolidated balance sheet.
10
4. Dispositions
------------
In the first quarter of 2001, we closed on sales of eight lodging
properties and one senior living community for cash proceeds of $241
million, resulting in gains of $5 million. We recognized $4 million of the
gain and the balance will be recognized as certain contingencies in the
sales contracts expire. We will continue to operate seven of these hotels
under long-term management agreements.
In the second quarter of 2001, we sold four lodging properties for $102
million. We will continue to operate the hotels under long-term management
agreements. In the second quarter of 2001, in connection with the sale, the
buyer terminated lease agreements for three properties sold and leased back
to us in 1997 and 1998. In the third quarter of 2001, an additional six
lease agreements were terminated. We now manage these nine previously
leased properties under long-term management agreements, and gains on the
sale of these properties of $5 million were recognized in both the second
quarter and third quarter as a result of the lease cancellations.
In the second quarter of 2001 we sold land, at book value, for $31 million
to a joint venture which plans to build two resort hotels in Orlando,
Florida, for $547 million. We will provide development services and have
guaranteed completion of the project. The initial owners of the venture
have the right to sell 20 percent of the venture's equity to us upon the
opening of the hotels. At opening we also expect to hold approximately $120
million in mezzanine loans that we have agreed to advance to the joint
venture. We have provided the venture with additional credit facilities for
certain amounts due under the first mortgage loan and to provide for
limited minimum returns to the equity investors in the early years of the
project, although we expect fundings under such support to be less than $5
million.
In the third quarter of 2001, we sold two lodging properties, and some
undeveloped land, for cash proceeds of $146 million, resulting in gains of
$7 million. We recognized $1 million of the gain and the balance will be
recognized as certain contingencies in the sales contracts expire. We will
continue to operate the two hotels under long-term management agreements.
5. Comprehensive Income
--------------------
Total comprehensive income was $103 million and $109 million, respectively,
for the twelve weeks ended September 7, 2001 and September 8, 2000 and $337
million and $325 million, respectively, for the thirty-six weeks ended
September 7, 2001 and September 8, 2000. The principal difference between
net income and total comprehensive income relates to foreign currency
translation adjustments.
6. New Accounting Standards
------------------------
In the first quarter of 2001, we adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which resulted in no
material impact to our financial statements.
We will adopt FAS No. 142, "Goodwill and Other Intangible Assets," in the
first quarter of 2002. The new rules require that goodwill is not
amortized, but is reviewed annually for impairment. We estimate that
adoption of FAS No. 142 will result in an annual increase in net income of
approximately $30 million.
11
7. Business Segments
-----------------
We are a diversified hospitality company with operations in six business
segments:
. Full Service Lodging, which includes Marriott Hotels, Resorts and
Suites, The Ritz-Carlton Hotels, Renaissance Hotels, Resorts and
Suites, Ramada International and the fees we receive for the use of
the Ramada name in the United States and Canada;
. Select Service Lodging, which includes Courtyard, Fairfield Inn and
SpringHill Suites;
. Extended Stay Lodging, which includes Residence Inn, TownePlace
Suites, ExecuStay and Marriott Executive Apartments;
. Timeshare, which includes the operation, ownership, development and
marketing of Marriott's timeshare properties under the Marriott,
Ritz-Carlton Club and Horizons brands;
. Senior Living Services, which includes the operation, ownership and
development of senior living communities; and
. Distribution Services, which includes our wholesale food distribution
business.
We evaluate the performance of our segments based primarily on operating
profit before corporate expenses and interest. We do not allocate income
taxes at the segment level.
We have aggregated the brands and businesses presented within each of our
segments considering their similar economic characteristics, types of
customers, distribution channels, and the regulatory business environment
of the brands and operations within each segment.
12
The following table outlines our sales and operating profit by business segment
for the twelve and thirty-six weeks ended September 7, 2001 and September 8,
2000.
Twelve weeks ended Thirty-six weeks ended
---------------------------------- ------------------------------------
September 7, September 8, September 7, September 8,
2001 2000 2001 2000
-------------- --------------- ---------------- -----------------
($ in millions) (As revised) (As revised) (As revised) (As revised)
Sales
Full Service .......................... $ 1,170 $ 1,222 $ 3,779 $ 3,765
Select Service ........................ 209 215 645 623
Extended Stay ......................... 158 173 459 455
Timeshare ............................. 286 196 764 562
-------------- -------------- ---------------- ----------------
Total Lodging ......................... 1,823 1,806 5,647 5,405
Senior Living Services ................ 165 153 494 452
Distribution Services ................. 385 356 1,143 1,044
-------------- -------------- ---------------- ----------------
$ 2,373 $ 2,315 $ 7,284 $ 6,901
============== ============== ================ ================
Operating profit (loss) before corporate
expenses and interest
Full Service .......................... $ 70 $ 104 $ 314 $ 354
Select Service ........................ 45 47 133 139
Extended Stay ......................... 21 32 61 67
Timeshare ............................. 38 33 120 103
-------------- -------------- ---------------- ----------------
Total Lodging ......................... 174 216 628 663
Senior Living Services ................ 3 (5) 9 (6)
Distribution Services ................. 1 5 6 (1)
-------------- -------------- ---------------- ----------------
$ 178 $ 216 $ 643 $ 656
============== ============== ================ ================
Sales from Distribution Services exclude sales (made at market terms and
conditions) to our other business segments of $37 million and $40 million
for the twelve weeks ended September 7, 2001 and September 8, 2000,
respectively, and $117 million and $123 million for the thirty-six weeks
ended September 7, 2001 and September 8, 2000, respectively.
8. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees were
limited, in the aggregate, to $556 million at September 7, 2001, including
guarantees involving major customers. We are currently unable to estimate
the impact that the recent terrorist attacks on New York and Washington
could have on the extent to which we may fund under these guarantees. In
addition, we have made physical completion guarantees relating to three
hotel properties with minimal expected funding. As of September 7, 2001, we
had extended approximately $940 million of loan commitments to owners of
lodging properties and senior living communities under which we expected to
fund approximately $230 million by December 28, 2001, and $528 million in
total. Letters of credit outstanding on our behalf at September 7, 2001,
totaled $69 million, the majority of which related to our self-insurance
programs. At
13
September 7, 2001, we had repurchase obligations of $54 million related to
notes receivable from timeshare interval purchasers, which have been sold
with limited recourse.
New World Development and another affiliate of Dr. Henry Cheng Kar-Shun, a
director of the Company, have severally indemnified us for guarantees by us
of leases with minimum annual payments of approximately $59 million.
In addition to the foregoing, we are from time to time involved in legal
proceedings which could, if adversely decided, result in losses to the
Company. Although we believe that the lawsuit described below is without
merit, and we intend to vigorously defend against the claims being made
against us, we cannot assure you as to the outcome of this lawsuit nor can
we currently estimate the range of any potential loss to the Company.
On March 30, 2001, Green Isle Partners, Ltd., S.E. (Green Isle) filed a
63-page complaint in Federal district court in Delaware against The
Ritz-Carlton Hotel Company, L.L.C., The Ritz-Carlton Hotel Company of
Puerto Rico, Inc. (Ritz-Carlton Puerto Rico), Marriott International, Inc.,
Marriott Distribution Services, Inc., Marriott International Capital Corp.
and Avendra L.L.C. (Green Isle Partners, Ltd. S.E., v. The Ritz-Carlton
Hotel Company, L.L.C., et al, civil action no. 01-202). Ritz-Carlton Puerto
Rico manages The Ritz-Carlton San Juan Hotel, Spa and Casino located in San
Juan, Puerto Rico under an operating agreement with Green Isle dated
December 15, 1995 (the Operating Agreement).
The claim asserts 11 causes of action: three Racketeer Influenced and
Corrupt Organizations Act (RICO) claims, together with claims based on the
Robinson-Patman Act, breach of contract, breach of fiduciary duty, aiding
and abetting a breach of fiduciary duty, breach of implied duties of good
faith and fair dealing, common law fraud and intentional misrepresentation,
negligent misrepresentation, and fiduciary accounting. The complaint does
not request termination of the Operating Agreement.
The claim includes allegations of: (i) national, non-competitive contracts
and attendant kick-back schemes; (ii) concealing transactions with
affiliates; (iii) false entries in the books and manipulation of accounts
payable and receivable; (iv) excessive compensation schemes and fraudulent
expense accounts; (v) charges of prohibited overhead costs to the project;
(vi) charges of prohibited procurement costs; (vii) inflation of Group
Service Expense; (viii) the use of prohibited or falsified revenues; (ix)
attempts to oust Green Isle from ownership; (x) creating a financial crisis
and then attempting to exploit it by seeking an economically oppressive
contract in connection with a loan; (xi) providing incorrect cash flow
figures and failing to appropriately reveal and explain revised cash flow
figures.
The complaint seeks as damages the $140 million which Green Isle claims to
have invested in the hotel (which includes $85 million in third party
debt), which the plaintiffs seek to treble to $420 million under RICO and
the Robinson-Patman Act.
On May 25, 2001, defendants moved to dismiss the complaint or,
alternatively, to stay or transfer. Briefing of the motion is complete but
oral argument has not yet been scheduled. On June 25, 2001, Green Isle
filed its Chapter 11 Bankruptcy Petition in the Southern District of
Florida.
14
9. Convertible Debt
----------------
On May 8, 2001 we received cash proceeds of $405 million from the sale of
zero-coupon convertible senior notes due 2021, known as LYONs.
The LYONs are convertible into approximately 6.4 million shares of our
Class A common stock and carry a yield to maturity of 0.75 percent. We may
not redeem the LYONs prior to May 8, 2004, but may at the option of the
holders be required to purchase the LYONs at their accreted value on May 8
of each of 2002, 2004, 2011 and 2016. We may choose to pay the purchase
price for redemptions or repurchases in cash and/or shares of our Class A
common stock.
We are amortizing the issuance costs of the LYONs into interest expense
over the one-year period ending May 8, 2002. The LYONs are classified as
long-term based on our ability and intent to refinance the obligation with
long-term debt if we are required to repurchase the LYONs.
10. Subsequent Events
-----------------
The Company has been adversely affected in the aftermath of the recent
terrorist attacks on New York and Washington. Since the attacks, our hotels
have experienced significant short-term declines in occupancy compared to
the prior year. At present, it is not possible to predict either the
severity or duration of such declines in the medium- or long-term, or the
potential impact on the Company's results of operations, financial
condition or cash flows. However, as a result of the significant short-term
declines in occupancy, the Company has taken steps to reduce costs,
including reductions in staff. The Company is undertaking a comprehensive
analysis of its cost structure including, among other things, overall
staffing levels and facilities related costs. Furthermore, the Company is
evaluating hotel financial performance subsequent to September 11, 2001 and
its impact on the Company's investments and contingent obligations.
Declines in hotel profitability reduce management and franchise fees and
could give rise to fundings or losses under investments and contingent
obligations that we have made in connection with hotels that we manage or
franchise. The outcome of the Company's analysis may result in charges to
operations and potentially a material adverse impact on our financial
position, results of operations and cashflows.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
the twelve and thirty-six weeks ended September 7, 2001 and September 8, 2000.
Revenue per available room (REVPAR) is calculated by dividing room sales for
comparable properties by room nights available to guests for the period. We
consider REVPAR to be a meaningful indicator of our performance because it
measures the period over period growth in room revenues for comparable
properties. REVPAR may not be comparable to similarly titled measures such as
revenues. Comparable REVPAR, room rate and occupancy statistics used throughout
this report are based upon U.S. properties operated by us, except that data for
Fairfield Inn also include comparable franchised units.
Twelve Weeks Ended September 7, 2001 Compared to Twelve Weeks Ended September 8,
--------------------------------------------------------------------------------
2000
----
We reported net income of $101 million for the 2001 third quarter on sales of
$2,373 million. This represents an eight percent decrease in net income and a
three percent increase in sales compared to the third quarter of 2000. Diluted
earnings per share of $.39 decreased by nine percent compared to the 2000 third
quarter. Revenues, excluding other revenues from managed properties, of $1.1
billion for the quarter increased four percent over last year.
Marriott Lodging reported a 19 percent decrease in operating profit while sales
increased slightly to $1,823 million. Lodging revenues, excluding other revenues
from managed properties, of $626 million increased slightly compared to the same
quarter a year ago. Lodging revenues were impacted by the transfer of several
hotels from owned to managed status and lower incentive fees resulting from
lower REVPAR, offset by unit additions.
We added a total of 118 lodging properties (14,862 units) during the third
quarter of 2001, and deflagged four properties (938 units), increasing our total
properties to 2,342 (425,911 units). Properties by brand (excluding 7,171 rental
units relating to ExecuStay) are as indicated in the following table.
Properties as of September 7, 2001
-----------------------------------------------------------
Company-operated Franchised
---------------------------- -----------------------------
Properties Rooms Properties Rooms
------------- ------------- ------------- --------------
Marriott Hotels, Resorts and Suites ......................... 246 109,316 176 48,501
Ritz-Carlton ................................................ 43 14,073 - -
Renaissance Hotels, Resorts and Suites ...................... 82 31,159 36 11,486
Ramada International ........................................ 5 1,068 124 17,405
Residence Inn ............................................... 132 17,524 248 27,068
Courtyard ................................................... 284 44,290 259 32,591
Fairfield Inn ............................................... 52 7,526 419 37,389
TownePlace Suites ........................................... 33 3,542 63 6,412
SpringHill Suites ........................................... 16 2,426 61 6,097
Marriott Vacation Club International ........................ 53 6,255 - -
Marriott Executive Apartments and other ..................... 10 1,783 - -
------------- ------------- ------------- --------------
Total .................................................... 956 238,962 1,386 186,949
============= ============= ============= ==============
16
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 10.0 percent in the third quarter 2001.
Occupancy declined 5.6 percentage points to 74.9 percent and average room rates
declined 3.4 percent.
Occupancy, average daily rate and REVPAR for each of our principal established
brands are shown in the following table.
Twelve weeks
ended Change vs.
September 7, 2001 2000
---------------------- ------------------
Marriott Hotels, Resorts and Suites
Occupancy ........................................... 74.8% -5.2% pts.
Average daily rate .................................. $ 133.05 -5.4%
REVPAR .............................................. $ 99.49 -11.6%
Ritz-Carlton
Occupancy ........................................... 70.0% -8.5% pts.
Average daily rate .................................. $ 220.24 +1.2%
REVPAR .............................................. $ 154.23 -9.7%
Renaissance Hotels, Resorts and Suites
Occupancy ........................................... 68.2% -7.1% pts.
Average daily rate .................................. $ 125.01 -4.2%
REVPAR .............................................. $ 85.21 -13.3%
Residence Inn
Occupancy ........................................... 81.7% -4.6% pts.
Average daily rate .................................. $ 105.77 -1.8%
REVPAR .............................................. $ 86.41 -7.1%
Courtyard
Occupancy ........................................... 75.5% -6.0% pts.
Average daily rate .................................. $ 97.81 +0.4%
REVPAR .............................................. $ 73.85 -7.0%
Fairfield Inn
Occupancy ........................................... 72.9% -3.4% pts.
Average daily rate .................................. $ 65.07 +1.3%
REVPAR .............................................. $ 47.47 -3.2%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of 11.6 percent in the
2001 third quarter. Average room rates decreased 4.7 percent and occupancy
declined 5.7 percentage points.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites and SpringHill Suites) added a net of 35 hotel
properties, primarily franchises, during the third quarter of 2001. REVPAR for
comparable properties declined by an average of 6.9 percent. Occupancy decreased
5.3 percentage points and average room rates declined slightly.
Our timeshare brands posted a 15 percent increase in operating profit in the
third quarter of 2001 on a 57 percent increase in contract sales. Results
reflect strong demand at timeshares in California and Florida, and the second
quarter 2001 acquisition of the Grand Residence Club
17
property in Lake Tahoe, California. Note sale gains of $13 million in the
quarter, compared to $7 million in the year ago quarter, also contributed to
stronger comparisons. The results were negatively impacted by higher sales and
marketing costs.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined seven percentage points versus the year earlier
quarter. Margins were impacted by lower REVPAR, the transfer of several hotels
from owned to managed status, higher sales and marketing costs in the timeshare
brands and lower margins in the ExecuStay business.
Marriott Senior Living Services (SLS) posted eight percent sales growth in the
2001 third quarter, reflecting a slight increase in occupancy for comparable
communities to 85.8 percent. SLS posted operating profits of $3 million compared
to a $5 million loss a year ago. The favorable comparison is due to costs
incurred in 2000 related to development, start-up and debt associated with one
facility developed by an unaffiliated third party, as well as cost control
measures adopted in 2001.
Marriott Distribution Services reported an eight percent increase in sales in
the 2001 third quarter and $1 million of operating profits, a decrease of $4
million from the prior year. The unfavorable variance is due to the decline in
business from a significant customer. Although a substantial amount of this
business has been replaced, there were operating inefficiencies associated with
the new accounts.
Corporate activity. Interest expense increased 18 percent to $26 million
reflecting an increase in borrowings, partially offset by lower interest rates.
Interest income increased by $14 million to $23 million in the 2001 third
quarter due to income associated with higher loan balances, including loans made
to the Courtyard joint venture in the fourth quarter of 2000. Corporate expenses
declined 55 percent in the third quarter to $13 million, primarily due to a $4
million gain on the sale of tax investments, the impact of cost containment
initiatives and a $2 million decline in our net deferred compensation expense.
The effective tax rate increased slightly to 37.5 percent in the third quarter
as a result of modifications related to our deferred compensation plan,
partially offset by the impact of increased income in countries with lower
effective tax rates.
Thirty-Six Weeks Ended September 7, 2001 Compared to Thirty-Six Weeks Ended
---------------------------------------------------------------------------
September 8, 2000
-----------------
We reported net income of $352 million for the first three quarters of 2001 on
sales of $7,284 million. This represents a seven percent increase in net income
and a six percent increase in sales over the same period in 2000. Diluted
earnings per share of $1.36 for the first three quarters of the year increased 5
percent compared to 2000. Overall profit growth in 2001 was favorably impacted
by a $15 million pretax charge, recorded in 2000, related to the write-off of a
contract investment by our distribution services business. Revenues, excluding
other revenues from managed properties, of $3.3 billion for the first three
quarters of 2001 increased seven percent over last year.
18
Marriott Lodging reported a five percent decrease in operating profit to $628
million, on four percent higher sales. Lodging revenues, excluding other
revenues from managed properties, of $1.9 billion increased five percent over
last year.
We added a total of 251 lodging properties (37,080 units) during the first three
quarters of 2001, and deflagged 8 properties (1,638 units).
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties declined by an average of 4.1 percent in the first three quarters of
2001. Occupancy declined 4.3 percentage points to 74.6 percent, while average
room rates rose 1.5 percent.
Thirty-six
weeks ended
September 7, 2001 Change vs. 2000
---------------------- ------------------
Marriott Hotels, Resorts and Suites
Occupancy............................. 74.6% -4.5% pts.
Average daily rate.................... $ 146.55 +0.5%
REVPAR................................ $ 109.34 -5.3%
Ritz-Carlton
Occupancy............................. 72.1% -7.6% pts.
Average daily rate.................... $ 260.60 +7.2%
REVPAR................................ $ 187.89 -3.0%
Renaissance Hotels, Resorts and Suites
Occupancy............................. 70.4% -4.7% pts.
Average daily rate.................... $ 140.12 +0.2%
REVPAR................................ $ 98.67 -6.0%
Residence Inn
Occupancy............................. 80.4% -3.7% pts.
Average daily rate.................... $ 108.47 +1.8%
REVPAR................................ $ 87.24 -2.7%
Courtyard
Occupancy............................. 75.2% -4.1% pts.
Average daily rate.................... $ 101.29 +3.8%
REVPAR................................ $ 76.15 -1.6%
Fairfield Inn
Occupancy............................. 68.3% -3.2% pts.
Average daily rate.................... $ 63.94 +3.2%
REVPAR................................ $ 43.65 -1.5%
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties declined by an average of 5.1 percent during
the first three quarters of 2001. Occupancy fell 4.7 percentage points, while
average room rates increased one percent.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites, SpringHill Suites) added a net of 160 hotel
properties, primarily franchises, since the third quarter of 2000. During the
first three quarters of 2001,
19
REVPAR for these brands decreased 1.9 percent, reflecting a 3.9 percentage point
decline in occupancy and a 3.1 percent increase in the average room rate.
Our timeshare brands posted a 17 percent increase in profit during the first
three quarters of 2001 on a 32 percent increase in contract sales. Results
reflect continued demand in California and Florida, and the second quarter 2001
acquisition of the Grand Residence Club property in Lake Tahoe, California. The
profit from the development activity was negatively impacted by increased
marketing and sales costs.
The overall lodging profit margin, before other revenues and other costs from
managed properties, declined 3.7 percentage points in the first three quarters
of 2001 versus the same period in the prior year. The decline in margin reflects
lower incentive fees related to the Courtyard joint venture and the impact of
lower RevPar, the transfer of several hotels from owned to managed status,
higher sales and marketing costs in the timeshare brands and lower margins in
the ExecuStay business. The lower incentive fees resulting from the Courtyard
joint venture are offset by higher interest income associated with the loans
made to the joint venture.
Marriott Senior Living Services posted a nine percent increase in sales in the
first three quarters of 2001, reflecting a 2.5 percentage point increase in
occupancy for comparable communities to 85.5 percent. The business posted
operating profits of $9 million, compared to a loss of $6 million a year ago.
The favorable comparison was positively impacted by costs incurred in 2000
related to start-up inefficiencies for new properties, debt associated with one
facility developed by an unaffiliated third party, higher pre-opening expenses
and write-offs associated with development cancellations. At September 7, 2001,
we operated 152 facilities (25,742 units).
Marriott Distribution Services posted a nine percent increase in sales in the
first three quarters of 2001, reflecting the commencement of new contracts in
2001 and increased sales from contracts established in 2000, partially offset by
the decline in business from one significant customer. Operating profit of $6
million compared favorably to a loss of $1 million in the first three quarters
of 2000, due to the prior year write-off of the $15 million investment in a
contract with Boston Market, Inc., offset by operating inefficiencies resulting
from the commencement of new contracts.
Corporate activity. Interest expense increased $3 million to $75 million,
reflecting an increase in borrowings, partially offset by lower interest rates.
Interest income increased substantially to $59 million in the first three
quarters of 2001, due to income associated with higher loan balances, including
the loans made to the Courtyard joint venture in the fourth quarter of 2000.
Corporate expenses decreased $8 million, reflecting the $11 million gain from
the sale of four affordable housing tax credit investments and the reversal of a
long-standing $10 million insurance reserve related to a lawsuit at one of our
hotels, lower expenses as a result of our cost containment initiatives, offset
by the $13 million write-off of two investments in technology partnerships,
lower deferred compensation expense, and lower foreign exchange gains. The
reversal of the insurance reserve was as a result of us being approached in the
first quarter by the plaintiffs' counsel, who indicated that a settlement could
be reached in an amount that would be covered by insurance. We determined that
it was no longer probable that the loss contingency would result in a material
outlay by us and accordingly, we reversed the reserve during the first quarter.
The effective tax rate decreased to 36.5 percent as a result of modifications
related to our deferred compensation plan and the impact of increased income in
countries with lower effective tax rates.
20
Avendra LLC. In January 2001 we contributed our hospitality procurement business
into a newly formed joint venture, together with the procurement business of
Hyatt Hotels Corporation. The joint venture, Avendra LLC, is an independent
professional procurement services company serving the North American hospitality
market and selected industries. Bass Hotels and Resorts, Inc., ClubCorp USA
Inc., and Fairmont Hotels and Resorts, Inc. joined Avendra LLC in May 2001.
OUTLOOK FOR FOURTH QUARTER OF FISCAL 2001 AND FISCAL 2002
This outlook is based on preliminary indications only and actual results for the
fourth quarter and fiscal 2001 may differ. See "Forward-Looking Statements" at
the beginning of this report.
For the remainder of 2001, we expect our business environment to remain
unusually challenging. For internal planning purposes, the Company is assuming
that REVPAR for its fourth quarter will decline 25 to 35 percent from last
year's fourth quarter. Although we cannot predict our fourth quarter earnings
with confidence, based on these assumptions, fourth quarter earnings could be
$0.20 to $0.30 per share.
Similarly, while the level of uncertainty is substantially higher for 2002 than
would normally be expected at this time, we are basing our internal estimates on
three to five percent lower REVPAR than 2001, or roughly 15 percent lower REVPAR
than 2000 levels. Based on these assumptions, after taking into account $0.12
per share of incremental earnings from the new accounting rules relating to
goodwill, our 2002 earnings per share could be roughly flat with 2001 levels,
with quarterly earnings and REVPAR comparisons improving over the course of
2002.
We expect investment spending for the full year 2001 to be roughly the same as
earlier forecasts, totaling $1.3 to $1.4 billion. We expect investment spending
levels in 2002 to decline at least one-third compared to 2001.
As a result of current industry conditions, we anticipate that fundings under
our guarantees and other charges related to our loan portfolio and employee
severance could occur in the fourth quarter. We are not yet able to estimate the
extent of any such fundings or charges.
See "Liquidity and Capital Resources" for a further discussion of our financial
position and our liquidity.
21
LIQUIDITY AND CAPITAL RESOURCES
We have credit facilities, which support our commercial paper program and
letters of credit. At September 7, 2001, our cash balances combined with our
available borrowing capacity under the credit facilities was over $2 billion. We
consider these resources, together with cash expected to be generated by
operations, adequate to meet our short-term and long-term liquidity
requirements, to finance our long-term growth plans, and to meet debt service
and other cash requirements. We 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.
The Company has been adversely affected in the aftermath of the recent terrorist
attacks on New York and Washington. Since the attacks, our hotels have
experienced significant short-term declines in occupancy compared to the prior
year. At present, it is not possible to predict either the severity or duration
of such declines in the medium- or long-term, or the potential impact on the
Company's results of operations, financial condition or cash flows. However, as
a result of the significant short-term declines in occupancy, the Company has
taken steps to reduce costs, including reductions in staff. The Company is
undertaking a comprehensive analysis of its cost structure including, among
other things, overall staffing levels and facilities related costs. Furthermore,
the Company is evaluating hotel financial performance subsequent to September
11, 2001 and its impact on the Company's investments and contingent obligations.
Declines in hotel profitability reduce management and franchise fees and could
give rise to fundings or losses under investments and contingent obligations
that we have made in connection with hotels that we manage or franchise. The
outcome of the Company's analysis may result in charges to operations and
potentially a material adverse impact on our financial position, results of
operations and cashflows.
Cash and equivalents totaled $874 million at September 7, 2001, an increase of
$540 million from year-end 2000. Cash balances increased due to temporary levels
of excess cash on hand following the issuance of convertible debt in the 2001
second quarter. Cash provided by operations decreased 27 percent compared to the
same period in 2000 as a result of timeshare activity and changes in working
capital associated with timing differences. Net income is stated after recording
depreciation expense of $93 million and $84 million for the thirty-six weeks
ended September 7, 2001 and September 8, 2000, respectively, and after
amortization expense of $54 million and $50 million, respectively, for the same
time periods. Earnings before interest expense, income taxes, depreciation and
amortization (EBITDA) for the thirty-six weeks ended September 7, 2001 of $777
million increased by $48 million, or seven percent, compared to the same period
in 2000. EBITDA is an indicator of operating performance which can be used to
measure the Company's ability to service debt, fund capital expenditures and
expand its business. However, EBITDA is not an alternative to net income,
operating profit, cash from operations, or any other operating or liquidity
measure prescribed by accounting principles generally accepted in the United
States.
Net cash used in investing activities totaled $126 million for the thirty-six
weeks ended September 7, 2001, and consisted of capital expenditures for lodging
properties, note advances and the net impact of tax related investment
transactions, offset by proceeds from the disposition of real estate.
We purchased 3.9 million shares of our Class A common stock in the thirty-six
weeks ended September 7, 2001, at a cost of $161 million. As of September 7,
2001, we had been authorized by our Board of Directors to repurchase an
additional 15.7 million shares.
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
22
$300 million, respectively. As of September 7, 2001, we had offered and sold to
the public under these registration statements, $300 million of debt securities
at 7 7/8%, due 2009 and $300 million at 8 1/8%, due 2005, leaving a balance of
$500 million available for future offerings.
In January 2001, we issued, through a private placement, $300 million of seven
percent senior unsecured notes, due 2008, and received net proceeds of $297
million. We agreed to make and complete a registered exchange offer for these
notes and, if required, to implement a resale shelf registration statement. A
registration statement for the exchange offer has been filed with the Securities
and Exchange Commission but it is not yet effective. Under the terms of the note
issue, we will pay additional interest to the holders of these notes if we fail
to complete the registered exchange offer on a timely basis. We expect the
registered exchange offer to be completed in the fourth quarter of 2001 and
while we will make some additional interest payments, we do not expect those
payments to be significant.
On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, known
as LYONs, and received cash proceeds of $405 million. The LYONs are convertible
into approximately 6.4 million shares of our Class A common stock and carry a
yield to maturity of 0.75 percent.
In 1996, MDS became the exclusive provider of distribution services to
Einstein/Noah Bagel Corp. (ENBC), which operates over 450 bagel shops in 29
states and the District of Columbia. In March 2000, ENBC disclosed that its
independent auditors had expressed substantial doubt about ENBC's ability to
continue as a going concern, due to its inability to meet certain financial
obligations. On April 27, 2000, ENBC and its majority-owned operating subsidiary
filed voluntary bankruptcy petitions for protection under Chapter 11 of the
Federal Bankruptcy code in the U.S. Bankruptcy Court for the District of Arizona
in Phoenix. On April 28, 2000, the Court approved a $31 million
debtor-in-possession credit facility to allow for operation of the companies
during reorganization, and also approved the payment in the ordinary course of
business of prepetition trade creditor claims, including those of MDS, subject
to recovery by the debtors under certain circumstances. On July 27, 2000, the
Court entered an order approving ENBC's assumption of the MDS contract. MDS
continues to distribute to ENBC and has been receiving full payment in
accordance with the terms of its contractual agreement. On June 19, 2001, ENBC
was acquired by New World Coffee-Manhattan Bagel Inc. and the contract was
assumed by the new owner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
December 29, 2000.
23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information."
Item 2. Changes in Securities
------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
Item 5. Other Information
--------------------------
None.
24
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
4 Indenture, dated as of May 8, 2001, relating to
the Liquid Yield Option Notes due 2021, with Bank
of New York, as trustee (incorporated by reference
to Exhibit 4.2 to our Registration Statement on
Form S-3, Registration Number 333-66406).
10 $1,500,000,000 Credit Agreement dated July 31,
2001 with Citibank, N.A., as Administrative Agent,
and certain banks (incorporated by reference to
Exhibit 10 to our Form 10-Q for the fiscal quarter
ended September 7, 2001).
12 Statement of Computation of Ratio of Earnings to
Fixed Charges (incorporated by reference to
Exhibit 12 to our Form 10-Q for the fiscal quarter
ended September 7, 2001).
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
10th day of December, 2001
/s/ Arne M. Sorenson
--------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Linda A. Bartlett
---------------------
Linda A. Bartlett
Vice President and Controller
(Principal Accounting Officer)
26