ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference to the description of legal proceedings in the "Contingent Liabilities" footnote in the financial statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Part II
ITEM 5.
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 the period since the March 27, 1998 Spinoff are as follows. No data are presented for the period prior to the Spinoff since we were not a publicly-held company during that time.
/1/ Total of $.045 for the first quarter (declared and paid in the second quarter), and $.05 second quarter dividend.
At January 31, 2000, there were 243,957,257 shares of Class A Common Stock outstanding held by 55,987 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.
ITEM 6.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for the Company derived from our financial statements as of and for the five fiscal years ended December 31, 1999.
Since the information in this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements. Per share data and Shareholders' Equity have not been presented for periods prior to 1998 because we were not a publicly-held company during that time.
_______________________ /1/Fiscal year 1996 includes 53 weeks, all other years include 52 weeks.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion presents an analysis of results of our operations for fiscal years ended December 31, 1999, January 1, 1999, and January 2, 1998. Comparable REVPAR, room rate and occupancy statistics used throughout this report are based on U.S. properties operated by us except for Fairfield Inn, which data also include franchised units. Systemwide sales and statistics include data from our owned, leased, managed and franchised properties.
In 1998 we changed our accounting policy to no longer include the working capital and sales of managed hotels and managed senior living communities in our financial statements. Instead, our sales include fees earned plus costs recovered from owners of managed properties. We restated prior periods and all references in the discussion below refer to financial statement data prepared under our new accounting policy. This restatement reflects reductions in sales of $2,240 million for 1998 and $1,810 million for 1997, compared to sales as previously calculated for those periods.
Consolidated Results
1999 Compared to 1998
Net income increased three percent to $400 million in 1999 and diluted earnings per share advanced three percent to $1.51. Overall profit growth in 1999 was curtailed by a $39 million pretax charge to reflect an agreement to settle pending litigation, (refer to the "Contingent Liabilities" footnote in the financial statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data") incremental costs of our Year 2000 readiness efforts, and an operating loss in our senior living services business.
Sales increased 10 percent to $8.7 billion in 1999, reflecting revenue gains at established hotels, and contributions from new lodging properties and senior living communities. Systemwide sales grew 10 percent to $17.7 billion in 1999.
1998 Compared to 1997
Net income increased 20 percent to $390 million in 1998. Diluted earnings per share advanced 23 percent to $1.46, reflecting higher net income and the impact of share repurchases. Profit growth was driven by strong performance for our U.S. lodging operations, and improved results for our distribution services business. Sales grew 10 percent to $8.0 billion, primarily due to the net addition of 496 hotels (including acquisitions) and 41 senior living communities from the beginning of 1997 through year-end 1998. Systemwide sales in 1998 were $16.0 billion, a 21 percent increase compared to the preceding year.
Marriott Lodging
1999 Compared to 1998
Marriott Lodging reported a 17 percent increase in operating profit and 12 percent higher sales in 1999. Results reflected higher room rates for U.S. hotels, contributions from new hotels worldwide, and strong interval sales in resort timesharing. We estimate that lodging operating profit in 1999 was attributable to base management fees (27 percent of total), franchise fees (17 percent) and land rent (three percent) that are based on fixed dollar amounts or percentages of sales. The balance was attributable to our timesharing business (15 percent), and to incentive management fees and other income based on the profits of the underlying properties (38 percent).
Across our Lodging brands, REVPAR for comparable company-operated U.S. properties grew by an average of 3.7 percent in 1999. Average room rates for these hotels rose 3.6 percent, while occupancy remained at 77.5 percent. Occupancy, average daily rate and REVPAR for each of our principal established brands is shown in the following table.
International hotel operations posted improved results in 1999, reflecting profit growth for properties in continental Europe, the Middle East, Latin America and the Caribbean region.
Marriott Vacation Club International achieved a 22 percent increase in contract sales in 1999, as well as higher income from resort management. Strong interval sales were generated at timeshare resorts in Florida, South Carolina, Hawaii and Spain. During 1999, we had 21 resorts in active sales, including the initial project (Orlando, Fla.) for Horizons by Marriott Vacation Club, a new product line targeting the moderate price tier of the timeshare market.
We added a net total of 194 hotels and timesharing resorts (27,600 rooms) across our lodging brands during 1999.
1998 Compared to 1997
Marriott Lodging reported a 24 percent increase in operating profit and 20 percent higher sales in 1998. Results reflected solid room rate growth at U.S. hotels, and contributions from new properties worldwide. We added a net
total of 176 hotels and resorts (27,800 rooms) to our lodging system in 1998. Lodging operating profit in 1998 was attributable to base management fees (28 percent of total), franchise fees (18 percent), land rent and other income (three percent), resort timesharing (13 percent), and incentive management fees and other profit participations (38 percent).
Across our lodging brands, REVPAR for comparable company-operated U.S. properties grew by an average of six percent in 1998. Average room rates for these hotels rose more than six percent, well in excess of inflation, while occupancy dipped one-half percentage point to 78 percent.
Results for our international hotel operations declined in 1998, as profit growth in Europe and Latin America was offset by the impact of difficult economic conditions in the Asia/Pacific region, and reduced travel in the Middle East.
Marriott Vacation Club International generated a 10 percent increase in contract sales in 1998, and higher income from resort management and financing activities. MVCI reported strong sales activity at major timeshare resorts in Florida, South Carolina, California, Hawaii, Spain and Aruba.
In March 1998, we increased our ownership interest in The Ritz-Carlton Hotel Company LLC to 99 percent from 49 percent. Sales for Marriott Lodging were up 11 percent in 1998 before the impact of consolidating this hotel management company.
Marriott Senior Living Services
1999 Compared to 1998
Marriott Senior Living Services posted a 17 percent increase in sales in 1999, as we added a net total of 31 new communities (4,216 living units) during the year. Occupancy for comparable communities increased by nearly one percentage point to 90 percent in 1999.
The division reported an operating loss in 1999, primarily as a result of $18 million of pre-opening costs for new communities, increased accounts receivable reserves, and one-time charges associated with our decision to slow new construction until market conditions improve.
1998 Compared to 1997
Marriott Senior Living Services opened 24 senior living communities in 1998, including 14 Brighton Gardens, our assisted living brand serving the quality tier. Profit comparisons for 1998 were affected by the mid-1997 sale of 29 senior living communities which we continue to operate under long-term agreements. Excluding the impact of this transaction, operating profit for the division increased by $5 million in 1998. Occupancy for comparable communities was unchanged for the year.
Marriott Distribution Services
1999 Compared to 1998
Operating profit for Marriott Distribution Services increased 24 percent in 1999 on a modest decline in sales. The division benefited from higher gross margins per case and reduced inventory losses compared to 1998.
1998 Compared to 1997
Operating profit for Marriott Distribution Services more than doubled in 1998, while sales declined 24 percent due to a reduction in the total number of accounts serviced. Results were boosted by the consolidation of distribution facilities, and realization of significant economies in warehouse operations and transportation.
Corporate expenses, interest and taxes
1999 Compared to 1998
Corporate expenses increased to $164 million in 1999 primarily due to a $39 million pretax charge associated with an agreement to settle pending litigation, together with increased systems-related costs, including $22 million of costs associated with our Year 2000 readiness program, compared to $12 million of Year 2000 readiness program costs in 1998. Interest expense more than doubled to $61 million as a result of borrowings to finance growth outlays and share repurchases. Our effective income tax rate decreased to approximately 37.3 percent in 1999 from 38.3 percent in 1998, primarily due to the impact of tax- oriented investments, and increased income in countries with lower effective tax rates.
1998 Compared to 1997
Corporate expenses rose 25 percent in 1998, and included $12 million of costs associated with our Year 2000 readiness program. Interest expense increased 36 percent in 1998 as a result of incremental borrowings to finance capital expenditures and share repurchases. Our effective income tax rate decreased to approximately 38.3 percent in 1998, from 39 percent in 1997, primarily due to increased income in countries with lower effective tax rates.
Lodging Development
Marriott Lodging opened 243 properties totaling 36,500 rooms across its brands in 1999, while 49 hotels (8,900 rooms) exited the system. Highlights of the year included:
. Twenty-five full-service properties (approximately 7,100 rooms) opened outside the United States. These include our first hotels in Armenia, Ecuador, El Salvador, Guam, The Netherlands Antilles, Portugal and Spain.
. Thirty-nine hotels (9,400 rooms) converted from independent status or competitor chains, including the 504-room Renaissance Worthington Hotel in Texas, and the 387-room JW Marriott Ihilani Resort & Spa at Ko Olina on the island of Oahu, Hawaii.
. A record 195 properties (approximately 23,500 rooms) added to our select service and extended-stay brands, including the renovation and conversion to Courtyard of historically significant urban properties in Philadelphia, Washington, D.C., Fort Worth, San Diego and Omaha.
. Development of new Marriott Vacation Club International resorts in Newport Beach, Calif., Panama City and Miami, Fla., Williamsburg, Va., and Maui, Hawaii, and a Horizons by Marriott Vacation Club resort in Orlando, Fla.
At year-end 1999, we had over 400 hotel properties (approximately 70,000 rooms) under construction or approved for development. We expect to open approximately 230 hotels and timesharing resorts (38,000 rooms) in 2000. Over a five-year period (1999 to 2003), we plan to add 175,000 rooms to our lodging system. 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.
Senior Living Services Development
During 1999, Marriott Senior Living Services neared completion of a major expansion program involving the opening of 60 new communities over a two-year period from mid-1998 through mid-2000. The division's development efforts in 1999 were focused on its popular Brighton Gardens assisted living brand, and Marriott MapleRidge, an assisted living concept designed for seniors who prefer a more intimate, family-like setting.
Due to oversupply conditions in some senior housing markets, we decided in 1999 to slow development of planned communities. Consequently, a number of projects in the early stages of development were postponed or cancelled. Marriott Senior Living Services is continuing to pursue development of new communities to be financed by third parties, and expects to resume active development of company-owned projects when market conditions improve.
Ten senior living communities under construction at year end 1999 are scheduled to open during 2000.
Liquidity And Capital Resources
We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. However, our ability to sell properties that we develop, and the ability of hotel or senior living community developers to build or acquire new Marriott-branded properties, which are important parts of our growth plans, are partially dependent on the availability and cost of capital. We are monitoring the status of the capital markets, and are evaluating the effect, that changes in capital market conditions may have on our ability to execute our announced growth plans.
Cash From Operations
Cash from operations was $711 million in 1999, $605 million in 1998, and $542 million in 1997. Net income is stated after depreciation expense of $96 million in 1999, $76 million in 1998 and $68 million in 1997, and after amortization expense of $66 million in 1999, $64 million in 1998 and $58 million in 1997. While our timesharing business generates strong operating cash flow, annual amounts are affected by the timing of cash outlays for the acquisition and development of new resorts, and cash received from purchaser financing. We include interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash.
Earnings before interest expense, income taxes, depreciation and amortization (EBITDA) increased to $860 million in 1999, compared to $802 million in 1998 and $679 million in 1997, and has grown at an 18 percent annual rate since 1995.
We consider EBITDA to be an indicator of our operating performance because it can be used to measure our ability to service debt, fund capital expenditures and expand our business. Nevertheless, you should not consider EBITDA an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity measure prescribed by generally accepted accounting principles.
A substantial portion of our EBITDA is based on fixed dollar amounts or percentages of sales. These include lodging base management and franchise fees and land rent. With more than 2,000 hotels and senior living communities in the Marriott system, no single property or region is critical to our financial results.
Our ratio of current assets to current liabilities was .92 at December 31, 1999, compared to .94 at January 1, 1999. Each of our businesses minimizes working capital through strict credit-granting policies, aggressive collection efforts and high inventory turnover.
Investing Activities Cash Flows
Acquisitions. We continually seek opportunities to enter new markets, increase market share or broaden service offerings through acquisitions. We entered the $3 billion corporate housing market in 1999 by acquiring ExecuStay Corporation, a leading provider of furnished apartments for executives and other professionals.
In 1998, we increased our ownership interest in The Ritz-Carlton Hotel Company LLC, a luxury hotel brand and management company, to 99 percent from 49 percent. We expect to acquire the remaining one percent of this company within the next several years. In 1997, we acquired Renaissance Hotel Group N.V., an operator and franchisor of approximately 150 hotels in 38 countries.
Dispositions. Asset sales generated proceeds of $436 million in 1999, $332 million in 1998 and $571 million in 1997. In 1999 we closed on the sales of 22 hotels and nine senior living communities. We also have negotiated asset sales agreements with aggregate proceeds of $82 million for sales expected to be completed in 2000 or 2001. We continue to operate these properties under long- term operating agreements.
Capital Expenditures and Other Investments. Capital expenditures of $929 million in 1999, $937 million in 1998 and $520 million in 1997, included development and construction of new hotels and senior living communities. Over time, we expect to sell certain lodging and senior living properties under development, or to be developed, while continuing to operate them under long- term agreements.
We also expect to continue to make other investments to grow our businesses, including loans, minority equity investments and development of new timeshare resorts in connection with adding units to our Lodging business.
We have made loans to owners of hotels and senior living communities which we operate or franchise. Loans outstanding under this program totaled $295 million at December 31, 1999 and $213 million at January 1, 1999. Unfunded commitments aggregating $193 million were outstanding at December 31, 1999. These loans typically are secured by mortgages on the projects. We participate in a program with an unaffiliated lender in which we may partially guarantee loans made to facilitate third party ownership of hotels and senior living services communities which we operate or franchise.
Cash From Financing Activities
Long-term debt (including convertible subordinated debt at January 1, 1999) increased by $409 million in 1999 and $845 million in 1998, primarily to finance our capital expenditure and share repurchase programs.
Our financial objectives include diversifying our financing sources and optimizing the mix and maturity of our long-term debt. At year-end 1999, our long-term debt (including commercial paper borrowings of $781 million) had an average interest rate of 6.4 percent and an average maturity of approximately 5.8 years. The ratio of fixed rate long-term debt to total long-term debt was 53 percent as of December 31, 1999.
We issued $300 million of 10-year senior notes in September 1999 at a yield to maturity of 8.0 percent, and received net offering proceeds of $296 million. In 1998, we issued a total of $400 million of 5-year and 7-year senior notes at an average yield to maturity of 6.8 percent and received net offering proceeds of $396 million.
We have entered into revolving credit agreements which provide for borrowings of $1.5 billion expiring in March 2003, and $500 million expiring in February 2004. No loans were outstanding at year-end 1999 under these facilities, which support our commercial paper program and letters of credit. We had $1.2 billion of unused revolving credit available under these facilities as of December 31, 1999. Borrowings under these facilities bear interest at LIBOR plus a spread, based on our public debt rating.
We called for mandatory redemption of our Liquid Yield Option Notes (LYONs) in 1999. Approximately 64 percent of LYONs holders elected to convert their notes to common stock, for which we issued 6.1 million shares. The other 36 percent of LYONs holders received cash totaling $120 million, which reduced by 3.4 million common shares the dilutive impact of these convertible debt securities issued by a predecessor company in 1996. Nine percent of the cash redemption price was reimbursed to us by the predecessor company (Sodexho Marriott Services, Inc.).
In January 2000, we filed a "universal shelf" registration statement with the Securities and Exchange Commission. Together with the authority remaining under a universal shelf registration statement filed in April 1999, this gives us the flexibility to offer to the public up to $500 million of debt securities, common stock or preferred stock.
We determine our debt capacity based on the amount and variability of our cash flows. EBITDA coverage of gross interest cost was 9.1 times in 1999, and cash flow requirements under our loan agreements were exceeded by a substantial margin.
Share Repurchases. We periodically repurchase our common stock to replace shares needed for employee stock plans and for other corporate purposes. We purchased 10.8 million of our shares in 1999 at an average price of $33 per share, and 13.7 million shares in 1998 at an average price of $29 per share. On February 3, 2000 our Board of Directors authorized the repurchase of an additional 25 million shares.
Dividends. In April 1999, our Board of Directors increased the quarterly cash dividend by 10 percent to $.055 per share. We plan to continue to reinvest the major portion of our earnings in our business.
Other Matters
Boston Market
In 1996, MDS became the exclusive provider of distribution services to Boston Chicken, Inc. (BCI). On October 5, 1998, BCI and its Boston Market-controlled subsidiaries filed voluntary bankruptcy petitions for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court in Phoenix (the Court), and BCI and a franchisee announced closings of approximately 20 percent of the restaurants in the Boston Market chain. In December 1999, McDonald's Corporation (McDonald's) announced that it had reached a definitive agreement to purchase the majority of the assets of BCI, subject to confirmation of the BCI plan of reorganization, including Court approval. If approved, the purchase is expected to close in mid-2000, although no date has been established. MDS continues to provide distribution services to BCI and has been receiving payment of post-petition balances in accordance with the terms of its contract with BCI. In addition, the Court approved, and MDS has been paid, substantially all of MDS's pre-petition accounts receivable balances. Given the uncertainties involved in BCI's bankruptcy and the planned sale to McDonald's, we cannot predict the potential effect these events will have on our future results of operations and financial position. If our contract were to terminate, or if BCI or McDonald's ceased or further curtailed the operations of Boston Market, MDS might be unable to recover up to $21 million in contract investment, receivables and inventory, and MDS could have excess warehouse capacity and rolling stock.
Inflation
Inflation has been moderate in recent years, and has not had a significant impact on our businesses.
Year 2000 Readiness Disclosure
The "Year 2000 problem" arose because many computer programs and chip-based embedded technology systems used only the last two digits to refer to a year, and therefore could not properly recognize a year beginning with "20" instead of the familiar "19." If not corrected, many computer applications could have failed or created erroneous results.
State of Readiness. Prior to December 31, 1999, we adopted and completed an enterprise-wide multi-step process toward Year 2000 readiness of our information resource systems and other systems that use embedded computer chips. We also modified operational contingency plans to specifically address Year 2000 issues, and established information coordination centers to collect and report status and track and address problems had they occurred during the actual turn of the century.
As of March 3, 2000, we had not experienced any significant business disruption as a result of the Year 2000 problem. Although Year 2000 problems may not become evident until long after January 1, 2000, based on our Year 2000 readiness process and our experience at the end of 1999 and in early 2000, we also do not expect significant Year 2000 related business disruptions in the future.
Costs. Many of the costs of Year 2000 compliance have been or will be reimbursed to us or otherwise paid directly by owners and clients pursuant to existing contracts. Through December 31, 1999, we have expensed approximately $34 million of the pretax costs to address the Year 2000 problem. Although we do not expect to incur significant Year 2000 related costs after December 31, 1999, some of the Year 2000 costs incurred in prior years related to internal resources which we used to address the Year 2000 Problem. Those resources, which have now been redeployed, will continue to generate costs in 2000 and future years.
In addition, the Year 2000 problem heightened the need for timely completion of previously planned system modernization and replacement projects. We estimate that we will bear approximately $45 million to $50 million of the pretax costs for these projects, most of which will be capitalized and amortized over the useful lives of the assets.
ITEM 7A.
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 January 1, 1999. 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 our earnings and the fair values of certain instruments we hold are affected by changes in interest rates.
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 $3 million based on the balances of these notes receivable at December 31, 1999 and January 1, 1999.
Changes in interest rates also impact the fair value of our long-term fixed rate debt and long-term fixed rate notes receivable. Based on the balances outstanding at December 31, 1999 and January 1, 1999, a hypothetical immediate one percentage point change in interest rates would change the fair value of our long-term fixed rate debt by $41 million and $24 million, respectively, and would change the fair value of long-term fixed rate notes receivable by $5 million and $2 million, respectively.
Our commercial paper has been excluded from the above sensitivity analysis. 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 three months of year-end. As a result, there would be no material expected change in interest expense or fair value following a reasonably expected change in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Marriott International, Inc.:
We have audited the accompanying consolidated balance sheet of Marriott International, Inc. as of December 31, 1999 and January 1, 1999, and the related consolidated statements of income, cash flows and comprehensive income for each of the three fiscal years in the period ended December 31, 1999 and the consolidated statement of shareholders' equity for the period from March 27, 1998 to December 31, 1999. 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 generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marriott International, Inc. as of December 31, 1999 and January 1, 1999, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Vienna, VA February 29, 2000
MARRIOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF INCOME Fiscal Years Ended December 31, 1999, January 1, 1999 and January 2, 1998 ($ in millions, except per share amounts)
See Notes To Consolidated Financial Statements
MARRIOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET December 31, 1999 and January 1, 1999 ($ in millions)
See Notes To Consolidated Financial Statements
MARRIOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal Years Ended December 31, 1999, January 1, 1999 and January 2, 1998 ($ in millions)
See Notes To Consolidated Financial Statements
MARRIOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Fiscal Years Ended December 31, 1999, January 1, 1999 and January 2, 1998 ($ in millions)
MARRIOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Period From March 27, 1998 to December 31, 1999 (in millions, except per share amounts)
See Notes To Consolidated Financial Statements
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), formerly New Marriott MI, Inc., as if we were a separate entity for all periods presented. During periods prior to March 27, 1998, we were a wholly owned subsidiary of the former Marriott International, Inc. (Old Marriott) and financial statements for such periods have been prepared on a combined basis.
On March 27, 1998, all of our issued and outstanding common stock was distributed, on a pro rata basis, as a special dividend (the Spinoff) to holders of common stock of Old Marriott, and the Company was renamed "Marriott International, Inc." Old Marriott's historical cost basis in our assets and liabilities has been carried over. Old Marriott received a private letter ruling from the Internal Revenue Service that the Spinoff would be tax-free to it and its shareholders. For each share of common stock in Old Marriott, shareholders received one share of our Common Stock and one share of our Class A Common Stock. On May 21, 1998, all outstanding shares of our Common Stock were converted, on a one-for-one basis, into shares of our Class A Common Stock.
Also on March 27, 1998, Old Marriott was renamed Sodexho Marriott Services, Inc. (SMS) and its food service and facilities management business was combined with the North American operations of Sodexho Alliance, S.A. (Sodexho), a worldwide food and management services organization.
For purposes of governing certain of the ongoing relationships between us and SMS after the Spinoff and to provide for orderly transition, we entered into various agreements with SMS including the Employee Benefits and Other Employee Matters Allocation Agreement, Liquid Yield Option Notes (LYONs) Allocation Agreement, Tax Sharing Agreement, Trademark and Trade Name License Agreement, Noncompetition Agreement, Employee Benefit Services Agreement, Procurement Services Agreement, Distribution Services Agreement, and other transitional services agreements. Effective as of the Spinoff date, pursuant to these agreements, we assumed sponsorship of certain of Old Marriott's employee benefit plans and insurance programs and succeeded to Old Marriott's liability to LYONs holders under the LYONs Indenture, nine percent of which was assumed by SMS.
All material intercompany transactions and balances between entities included in these consolidated financial statements have been eliminated. Sales by us to SMS of $435 million in 1999, $434 million in 1998, and $434 million in 1997, have not been eliminated. Changes in Investments and Net Advances from Old Marriott represent our net income, the net cash transferred between Old Marriott and us, and certain non-cash items.
Prior to the Spinoff, we operated as a unit of Old Marriott, utilizing Old Marriott's centralized systems for cash management, payroll, purchasing and distribution, employee benefit plans, insurance and administrative services. As a result, substantially all cash received by us was deposited in and commingled with Old Marriott's general corporate funds. Similarly, our operating expenses, capital expenditures and other cash requirements were paid by Old Marriott and charged directly or allocated to us. Certain assets and liabilities related to our operations were managed and controlled by Old Marriott on a centralized basis. Prior to the Spinoff such assets and liabilities were allocated to us based on our use of, or interest in, those assets and liabilities. In our opinion, the methods for allocating costs, assets and liabilities prior to the Spinoff were reasonable. We now perform these functions independently and the costs incurred have not been materially different from those allocated prior to the Spinoff.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Accordingly, ultimate results could differ from those estimates. Certain amounts have been reclassified to conform to the 1999 presentation.
Fiscal Year
Our fiscal year ends on the Friday nearest to December 31. All fiscal years presented include 52 weeks.
Revenue Recognition
Our sales include fees and reimbursed costs for properties managed by us, together with sales by lodging properties and senior living communities owned or leased by us, and sales made by our other businesses. Fees comprise management fees and franchise fees received from third party owners of lodging properties and senior living communities. Reimbursed costs comprise costs recovered from owners of hotels and senior living communities.
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 annually by the Board of Directors. We recognized compensation cost of $46 million in 1999, $45 million in 1998 and $36 million in 1997.
Self-Insurance Programs
We are self-insured for certain levels of general liability, workers' compensation, employment practices and employee medical coverage. Estimated costs of these self-insurance programs are accrued at the present value of projected settlements for known and anticipated claims.
Frequent Guest Program
We accrue for the cost of redeeming points awarded to members of our frequent guest program based on the discounted expected costs of redemption. The liability for this program was $289 million at December 31, 1999, and $280 million at January 1, 1999, and is included in other long-term liabilities in the accompanying consolidated balance sheet.
Cash and Equivalents
We consider all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
New Accounting Standards
We will adopt FAS No. 133, "Accounting for Derivative Investments and Hedging Activities," which we do not expect to have a material effect on our consolidated financial statements, in or before the first quarter of 2001.
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." We adopted SOP 98-5 in the first quarter of 1999 by expensing pre- opening costs for Company owned lodging and senior living communities as incurred. The adoption of SOP 98-5 resulted in a pretax expense of $22 million in 1999.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
RELATIONSHIPS WITH MAJOR CUSTOMERS
In December 1998, Host Marriott Corporation (Host Marriott) reorganized its business operations to qualify as a real estate investment trust (REIT). In conjunction with its conversion to a REIT, Host Marriott spun off, in a taxable transaction, a new company called Crestline Capital Corporation (Crestline). As part of the Crestline spinoff, Host Marriott transferred to Crestline all of the senior living communities previously owned by Host Marriott, and Host Marriott entered into lease or sublease agreements with 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 Crestline. In the case of the lodging agreements, Host Marriott remains obligated under such agreements in the event that Crestline fails to perform its obligations thereunder. The lodging agreements now provide for us to manage the Marriott hotels, Ritz-Carlton hotels, Courtyard hotels and Residence Inns leased by Crestline. Our consent is required for Crestline to take certain major actions relating to leased properties that we manage.
We recognized sales of $2,553 million, $2,144 million and $1,700 million and operating profit before corporate expenses and interest of $221 million, $197 million and $140 million during 1999, 1998 and 1997, 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 $562 million, $712 million and $1,054 million and operating profit before corporate expenses and interest of $64 million, $83 million and $122 million in 1999, 1998 and 1997, 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 $24 million in both 1999 and 1998, and $23 million in 1997.
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 or Crestline in the future. The outstanding principal balance of these loans was $11 million and $9 million at December 31, 1999 and January 1, 1999, respectively, and we recognized $1 million, $5 million and $9 million in 1999, 1998 and 1997, respectively, 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 $14 million at December 31, 1999. No payments have been made by us pursuant to these guarantees. We continue to have the right to purchase up to 20 percent of Host Marriott's outstanding common stock upon the occurrence of certain events generally involving a change of control of Host Marriott. This right expires in 2017, and Host Marriott has granted an exception to the ownership limitations in its charter to permit full exercise of this right, subject to certain conditions related to ownership limitations applicable to REITs generally. We lease land to Host Marriott that had an aggregate book value of $264 million at December 31, 1999. Most of this land has been pledged to secure debt of the lessees. We have agreed to defer receipt of rentals on this land, if necessary, to permit the lessees to meet their debt service requirements.
We are party to agreements which provide for us to manage the senior living communities owned by Crestline. We recognized sales of $177 million and $173 million and operating profit before corporate expenses and interest of $3 million and $5 million under these agreements during 1999 and 1998, respectively.
We are party to management agreements with entities owned or affiliated with another hotel owner which provide for us to manage hotel properties owned or leased by those entities. We recognized sales of $531 million and $560 million during 1999 and 1998, respectively, from these properties.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
PROPERTY AND EQUIPMENT
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 $33 million in 1999, $21 million in 1998 and $16 million in 1997. We capitalize replacements and improvements that extend the useful life of property and equipment. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We amortize leasehold improvements over the shorter of the asset life or lease term.
ACQUISITIONS AND DISPOSITIONS
ExecuStay
On February 17, 1999, we completed a cash tender offer for approximately 44 percent of the outstanding common stock of ExecuStay Corporation (ExecuStay), a leading provider of leased corporate apartments in the United States. On February 24, 1999, substantially all of the remaining common stock of ExecuStay was converted into nonvoting preferred stock of ExecuStay which we acquired, on March 26, 1999, for approximately 2.1 million shares of our Class A Common Stock. Our aggregate purchase price totaled $116 million. We consolidated the operating results of ExecuStay from February 24, 1999, and have accounted for the acquisition using the purchase method of accounting. We are amortizing the resulting goodwill on a straight-line basis over 30 years.
The Ritz-Carlton Hotel Company LLC
In 1995, we acquired a 49 percent beneficial ownership interest in The Ritz-Carlton Hotel Company LLC, which owns the management agreements on the Ritz-Carlton hotels and resorts, the licenses for the Ritz-Carlton trademarks and trade name as well as miscellaneous assets. The investment was acquired for a total consideration of approximately $200 million. On March 19, 1998, we increased our ownership interest in The Ritz-Carlton Hotel Company LLC to approximately 99 percent for additional consideration of approximately $90 million. We expect to acquire the remaining one percent within the next several years. We accounted for the acquisition using the purchase method of accounting. We allocated the purchase cost to the assets acquired and the liabilities assumed based on estimated fair values. We amortize the resulting goodwill on a straight-line basis over 40 years. We amortize the amounts allocated to management agreements on a straight-line basis over the estimated lives of the agreements. Prior to March 19, 1998, we accounted for our investment in The Ritz-Carlton Hotel Company LLC using the equity method of accounting.
For periods prior to March 19, 1998, we included our income from The Ritz- Carlton Hotel Company LLC in operating profit in the accompanying consolidated statements of income. We received distributions of $17 million in 1997 from The Ritz-Carlton Hotel Company LLC. This amount was based upon an annual, cumulative preferred return on invested capital.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Renaissance Hotel Group N.V.
On March 29, 1997, we acquired substantially all of the outstanding common stock of Renaissance Hotel Group N.V. (RHG), an operator and franchisor of approximately 150 hotels in 38 countries under the Renaissance, New World and Ramada International brands. The purchase cost of approximately $937 million was funded by Old Marriott. The acquisition has been accounted for using the purchase method of accounting. Goodwill is being amortized on a straight-line basis over 40 years. Amounts allocated to management, franchise and license agreements are being amortized on a straight-line basis over the lives of the agreements. The purchase cost has been allocated to the assets acquired and liabilities assumed based on estimated fair values.
We included RHG's operating results from the date of acquisition. Our unaudited pro forma sales and net income for 1997, calculated as if RHG had been acquired at the beginning of that year, were $7,383 million and $319 million, respectively. Unaudited pro forma results of operations include an adjustment for interest expense of $12 million, as if the acquisition borrowings had been incurred by us. Amortization expense deducted in determining net income reflects the impact of the excess of the purchase price over the net tangible assets acquired. The unaudited pro forma combined results of operations do not reflect our expected future results of operations.
Forum Group, Inc.
On June 21, 1997, we sold 29 senior living communities acquired as part of the 1996 Forum acquisition to Host Marriott for approximately $550 million, resulting in no gain or loss. The consideration included approximately $50 million to be received subsequent to 1997, as expansions at certain communities are completed. The $500 million of consideration received during 1997 consisted of $222 million in cash, $187 million of outstanding debt and $91 million of notes receivable bearing interest at nine percent which were repaid on April 1, 1998. Under the terms of the sale, Host Marriott purchased all of the common stock of Forum, which at the time of the sale owned the 29 communities, certain working capital and associated debt. We continue to operate these communities under long-term management agreements.
Other Dispositions
In 1999, we agreed to sell and leaseback, under long-term, limited-recourse leases, four hotels for approximately $59 million in cash. At the same time, we agreed to pay security deposits of $2 million which will be refunded at the end of the leases. As of December 31, 1999, the sale of one of these hotels had been completed, resulting in a sales price which exceeded the net book value by $1 million, which we will recognize as a reduction of rent expense over the 15-year initial lease term. We can renew the leases on all four hotels at our option.
During 1999, we agreed to sell, subject to long-term management agreements, four hotels and five senior living communities for $55 million and $90 million, respectively. As of December 31, 1999, sales of all four hotels and three of the senior living communities had been completed, for a total of $107 million, resulting in pretax gains of $10 million. We recognized $2 million of the gain in 1999, and the balance will be recognized provided certain contingencies in the sales contracts expire.
In 1999, we also sold an 89 percent interest in one hotel, and concurrently signed a long-term lease on the property. We are accounting for this transaction under the financing method, and the sales proceeds of $58 million are reflected as long-term debt in the accompanying consolidated balance sheet.
On December 29, 1998, we agreed to sell and leaseback, under long-term, limited-recourse leases, 17 hotels for approximately $202 million in cash. At the same time, we agreed to pay security deposits of $21 million which will be refunded at the end of the leases. As of December 31, 1999, all of the properties had been sold, resulting in a sales price which exceeded the net book value by $19 million, which is being recognized as a reduction of rent expense over the 15-year initial lease terms.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During 1998, we agreed to sell, subject to long-term management agreements, eight lodging properties and 11 senior living communities for consideration of $183 million and $178 million, respectively. As of December 31, 1999, sales of all of these properties had been completed, resulting in pretax gains of $69 million. We recognized $21 million and $12 million of these gains in 1999 and 1998, respectively. The balance will be recognized provided certain contingencies in the sales contracts expire.
On April 3, 1997, we agreed to sell and leaseback, under long-term, limited-recourse leases, 14 hotels for approximately $149 million in cash. At the same time, we agreed to pay security deposits of $15 million, which will be refunded at the end of the leases. As of January 2, 1998, all of the properties had been sold, resulting in a sales price which exceeded the net book value by $20 million, which is being recognized as a reduction of rent expense over the 17-year initial lease terms. On October 10, 1997, we agreed to sell and leaseback, under long-term, limited-recourse leases, another nine limited service hotels for approximately $129 million in cash. At the same time, we agreed to pay security deposits of $13 million, which will be refunded at the end of the leases. At January 1, 1999, all of the properties had been sold, resulting in a sales price which exceeded the net book value by $17 million, which is being recognized as a reduction of rent expense over the 15-year initial lease terms. We can renew all of these leases at our option.
On April 11, 1997, we sold five senior living communities for cash consideration of approximately $79 million. On September 12, 1997, we agreed to sell another seven senior living communities for cash consideration of approximately $95 million. The sale of all of these properties resulted in a pretax gain of $19 million, which is being recognized over a period of up to four years, provided contingencies in the sales contracts expire. We continue to operate all of these communities under long-term management agreements.
We periodically sell, with limited recourse, notes receivable originated by Marriott Vacation Club International in connection with the sale of timesharing intervals. Net proceeds from these transactions totaled $195 million in 1999, $165 million in 1998 and $68 million in 1997. Pretax gains from these transactions increased by $3 million in 1999 compared to 1998, and by $17 million in 1998 compared to 1997. At December 31, 1999, we had a repurchase obligation of $86 million with respect to mortgage note sales.
INTANGIBLE ASSETS
We amortize intangible assets on a straight-line basis over periods of three to 40 years. Intangible amortization expense totaled $62 million in 1999, $54 million in 1998 and $42 million in 1997.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
INCOME TAXES
Total deferred tax assets and liabilities as of December 31, 1999 and January 1, 1999, were as follows:
The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities as of December 31, 1999 and January 1, 1999 follows:
At December 31, 1999, we had approximately $12 million of tax credits which expire through 2019.
We have made no provision for U.S. income taxes, or additional foreign taxes, on the cumulative unremitted earnings of non-U.S. subsidiaries ($145 million as of December 31, 1999) because we consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned to us or a U.S. affiliate, or if we sell our interests in the affiliates. We cannot practically estimate the amount of additional taxes which might be payable on the unremitted earnings.
The provision for income taxes consists of:
The current tax provision does not reflect the benefit attributable to us relating to the exercise of employee stock options of $44 million in 1999, $39 million in 1998 and $38 million in 1997. The taxes applicable to other comprehensive income are not material.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A reconciliation of the U.S. statutory tax rate to our effective income tax rate follows:
Cash paid for income taxes, net of refunds, was $150 million in 1999, $164 million in 1998 and $143 million in 1997.
As part of the Spinoff, we entered into a tax sharing agreement with SMS which reflects each party's rights and obligations with respect to deficiencies and refunds, if any, of federal, state or other taxes relating to the business of Old Marriott and the Company prior to the Spinoff.
During periods prior to the Spinoff, we were included in the consolidated federal income tax return of Old Marriott. The income tax provision reflects the portion of Old Marriott's historical income tax provision attributable to our operations. We believe that the income tax provision, as reflected, is comparable to what the income tax provision would have been if we had filed a separate return during the periods presented.
LEASES
Our future obligations under operating leases at December 31, 1999, are summarized below:
Most leases have initial terms of up to 20 years, and contain one or more renewal options, generally for five or 10 year periods. The leases provide for minimum rentals, and additional rentals based on the operations of the leased property. The total minimum lease payments above include $837 million representing obligations of consolidated subsidiaries which are non-recourse to Marriott International, Inc.
Rent expense consists of:
MARRIOTT INTERNATIONAL, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
LONG-TERM DEBT
Our long-term debt at December 31, 1999 and January 1, 1999, consisted of the following:
In April 1999, we filed a "universal shelf" registration statement with the Securities and Exchange Commission. That registration statement, which became effective on May 4, 1999, originally allowed us to offer to the public up to $500 million of debt securities, Class A Common Stock and/or preferred stock. This "universal shelf" format provides us with additional flexibility to meet our financing needs.
On September 20, 1999, we sold $300 million principal amount of 7-7/8 percent Series C Notes, which mature in 2009, in a public offering made under our shelf registration statement. We received net proceeds of approximately $296 million from this offering, after paying underwriting discounts, commissions and offering expenses.
In January 2000, we filed a second "universal shelf" registration statement for $300 million in debt securities, Class A Common Stock and/or preferred stock, which together with the remaining availability under the April 1999 registration statement, allows us to offer to the public up to $500 million of securities.
In November 1998, we issued, through a private placement, $400 million of unsecured senior notes (Series A and B Notes). Proceeds net of discounts totaled $396 million. On April 23, 1999, we commenced a registered exchange offer to exchange the privately placed Series A and B Notes for publicly registered new notes on substantially identical terms. All of the privately placed Series A and B Notes were tendered for exchange, and new notes were issued to the holders on May 31, 1999.
In March 1998 and February 1999, respectively, we entered into $1.5 billion and $500 million multicurrency revolving credit facilities (the Facilities) each with terms of five years. Borrowings bear interest at the London Interbank Offered Rate (LIBOR) plus a spread, based on our public debt rating. Additionally, annual fees are paid on the Facilities at a rate also based on our public debt rating. Commercial paper, supported by the Facilities, is classified as long-term debt based on our ability and intent to refinance it on a long-term basis.
We are in compliance with covenants in our loan agreements which require the maintenance of certain financial ratios and minimum shareholders' equity, and also include, among other things, limitations on additional indebtedness and the pledging of assets.
The 1999 statement of cash flows excludes $215 million of convertible subordinated debt that was converted to equity in November, 1999, $54 million of debt that we assumed during 1999, and $15 million of notes receivable we received in a 1999 asset sale that we subsequently sold for cash. The 1998 statement of cash flows excludes $31 million of notes receivable forgiven as part consideration for the 1998 acquisition of The Ritz-Carlton Hotel Company LLC, and $12 million of long-term debt assumed in 1998. The 1997 statement of cash flows excludes $226 million of debt assumed by Host Marriott, $91 million of notes receivable related to the sale of 29 senior living communities to Host Marriott and $12 million of debt assumed in the RHG acquisition. Non-recourse debt of $62 million extinguished without cash payment in 1997 is not reflected in the statement of cash flows.
MARRIOTT INTERNATIONAL, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Aggregate debt maturities are: 2000 - $18 million; 2001 - $15 million; 2002 - $795 million; 2003 - $219 million; 2004 - $14 million and $633 million thereafter.
Cash paid for interest was $63 million in 1999, $23 million in 1998 and $11 million in 1997.
CONVERTIBLE SUBORDINATED DEBT
On March 25, 1996, Old Marriott issued $540 million (principal amount at maturity) of zero coupon convertible subordinated debt in the form of LYONs due 2011. The LYONs were issued and recorded at a discount representing a yield to maturity of 4.25 percent. Accretion was recorded as interest expense and an increase to the carrying value. Gross proceeds from the LYONs issuance were $288 million. Upon consummation of the Spinoff, we assumed the LYONs, and SMS assumed a nine percent share of the LYONs obligation based on the relative equity values of SMS and the Company at the Spinoff.
The LYONs were redeemable by us at any time on or after March 25, 1999 for cash equal to the issue price plus accrued original issue discount. On October 7, 1999, we delivered a mandatory redemption notice to the holders of the LYONs indicating our plan to redeem them on November 8, 1999 for $619.65 in cash per LYON. Holders of 347,000 LYONs elected to convert each LYON into 17.52 shares of our Class A Common Stock and 2.19 shares of SMS common stock prior to the close of business on November 8, 1999. The aggregate redemption payment for the remaining 193,000 LYONs totaled $120 million. Pursuant to the LYONs Allocation Agreement entered into with SMS as part of the Spinoff, SMS funded nine percent of the aggregate LYONs redemption payment. We funded the redemption payment with proceeds from commercial paper borrowings. Unamortized deferred financing costs of $2 million relating to the LYONs that were redeemed were recognized as interest expense in 1999.
SHAREHOLDERS' EQUITY
Eight hundred million shares of our Class A Common Stock with a par value of $.01 per share are authorized. Ten million shares of preferred stock, without par value, are authorized, with none issued.
On March 27, 1998, our Board of Directors adopted a shareholder rights plan under which one preferred stock purchase right was distributed for each share of our Class A Common Stock. Each right entitles the holder to buy 1/1000/th/ of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $175. The rights will be exercisable ten days after a person or group acquires beneficial ownership of 20 percent or more of our Class A Common Stock, or begins a tender or exchange for 30 percent or more of our Class A Common Stock. Shares owned by a person or group on March 27, 1998 and held continuously thereafter are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on the tenth anniversary of the adoption of the shareholder rights plan, unless exercised or previously redeemed by us for $.01 each. If we are involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right.
As of December 31, 1999, we have been authorized by our Board of Directors to purchase up to 5.5 million shares of our Class A Common Stock.
MARRIOTT INTERNATIONAL, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
EARNINGS PER SHARE
For periods prior to the Spinoff, the earnings per share calculations are pro forma, and the number of weighted average shares outstanding and the effect of dilutive securities are based upon the weighted average number of Old Marriott shares outstanding, and the Old Marriott effect of dilutive securities for the applicable period, adjusted (1) for the distribution ratio in the Spinoff of one share of our Common Stock and one share of our Class A Common Stock for every share of Old Marriott common stock and (2) to reflect the conversion of our Common Stock into our Class A Common Stock on May 21, 1998.
The following table illustrates the reconciliation of the earnings and number of shares used in the basic and diluted earnings per share calculations (in millions, except per share amounts).
We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. For periods prior to November 8, 1999, when all of our convertible subordinated debt was redeemed or converted, we used the if-converted method for purposes of calculating diluted earnings per share.
MARRIOTT INTERNATIONAL, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
INVESTMENTS AND NET ADVANCES FROM OLD MARRIOTT
The following is an analysis of Old Marriott's investment in the Company:
EMPLOYEE STOCK PLANS
In connection with the Spinoff, we issued stock options, deferred shares and restricted shares with the same value as the respective Old Marriott awards as of the Spinoff under our 1998 Comprehensive Stock and Cash Incentive Plan (Comprehensive Plan). Under the Comprehensive Plan, we may award to participating employees (1) options to purchase our Class A Common Stock (Stock Option Program and Supplemental Executive Stock Option awards), (2) deferred shares of our Class A Common Stock and (3) restricted shares of our Class A Common Stock. In addition we have an employee stock purchase plan (Stock Purchase Plan). In accordance with the provisions of Opinion No. 25 of the Accounting Principles Board, we recognize no compensation cost for the Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan.
Deferred shares granted to officers and key employees under the Comprehensive Plan generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer receipt of shares until termination or retirement. We accrue compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. We awarded 0.4 million deferred shares during 1999. Compensation cost recognized during 1999, 1998 and 1997 was $15 million, $12 million and $9 million, respectively.
Restricted shares under the Comprehensive Plan are issued to officers and key employees and distributed over a number of years in annual installments, subject to certain prescribed conditions including continued employment. We recognize compensation expense for the restricted shares over the restriction period equal to the fair market value of the shares on the date of issuance. We awarded 0.1 million restricted shares under this plan during 1999. We recognized compensation cost of $4 million, $3 million and $2 million in 1999, 1998 and 1997, respectively.
Under the Stock Purchase Plan, eligible employees may purchase our Class A Common Stock through payroll deductions at the lower of the market value at the beginning or end of each plan year.
Employee stock options may be granted to officers and key employees at exercise prices equal to the market price of our Class A Common Stock on the date of grant. Nonqualified options expire up to 15 years after the date of grant. Most options under the Stock Option Program are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant. In February 1997, 2.1 million Supplemental Executive Stock Option awards were awarded to certain of our officers. The options vest after eight years but could vest earlier if our stock price meets certain performance criteria. These options have an exercise price of $25 and 0.2 million of them were forfeited during 1998. None of them were exercised during 1999, 1998 or 1997 and 1.9 million remained outstanding at December 31, 1999.
For the purposes of the following disclosures required by FAS No. 123, "Accounting for Stock-Based Compensation," the fair value of each option granted during 1999, 1998 and 1997 was $14, $11 and $13, respectively. We estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions noted in the following table.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Pro forma compensation cost for the Stock Option Program, the Supplemental Executive Stock Option awards and employee purchases pursuant to the Stock Purchase Plan subsequent to December 30, 1994, recognized in accordance with FAS No. 123, would reduce our net income as follows (in millions, except per share amounts):
A summary of our Stock Option Program activity during 1999 and 1998 is presented below:
At December 31, 1999, 49.2 million shares were reserved under the Comprehensive Plan (including 31.5 million shares under the Stock Option Program and 1.9 million shares of the Supplemental Executive Stock Option awards) and 4.2 million shares were reserved under the Stock Purchase Plan.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock options issued under the Stock Option Program outstanding at December 31, 1999 were as follows:
FAIR VALUE OF FINANCIAL INSTRUMENTS
We assume that the fair values of current assets and current liabilities are equal to their reported carrying amounts. The fair values of noncurrent financial assets and liabilities are shown below.
We value notes and other receivables based on the expected future cash flows discounted at risk adjusted rates. We determine valuations for long-term debt, convertible subordinated debt and other long-term liabilities based on quoted market prices or expected future payments discounted at risk adjusted rates.
CONTINGENT LIABILITIES
We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. These guarantees were limited, in the aggregate, to $193 million at December 31, 1999, including guarantees involving major customers, with expected funding of zero. As of December 31, 1999, we had extended approximately $352 million of loan commitments to owners of lodging and senior living properties. Letters of credit outstanding on our behalf at December 31, 1999, totaled $74 million, the majority of which related to our self-insurance programs. At December 31, 1999, we had repurchase obligations of $86 million related to notes receivable from timeshare interval purchasers, which have been sold with limited recourse.
New World Development and another affiliate of Dr. Cheng, a director of the Company, have severally indemnified us for guarantees by us of leases with minimum annual payments of approximately $59 million.
On February 23, 2000, we entered into an agreement, which was subsequently embodied in a definitive agreement executed on March 9, 2000, to resolve pending litigation described below involving certain limited partnerships formed in the mid- to late 1980's. Consummation of the settlement is subject to numerous conditions, including the receipt of third-party consents and court approval. The agreement was reached with lead counsel to the plaintiffs in the lawsuits described below, 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). Because of the numerous conditions to be satisfied, there can be no assurances that the settlement transactions will be consummated and, if consummated, terms could differ materially from those described below.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under the agreement, we will acquire, through an unconsolidated joint venture with Host Marriott, all of the limited partners' interests in CBM I and CBM II for approximately $372 million. These partnerships own 120 Courtyard by Marriott hotels. The purchase price will be financed with $185 million in mezzanine debt loaned to the joint venture by us and with equity contributed in equal shares by us and Host Marriott. We will continue to manage these 120 hotels under long- term agreements. Also, we and Host Marriott each have agreed to pay approximately $31 million to the plaintiffs in the Texas Multi-Partnership lawsuit described below in exchange for dismissal of the complaints and full releases.
We recorded a pretax charge of $39 million which is included in corporate expenses in the fourth quarter of 1999, to reflect these anticipated settlement transactions. However, if the foregoing settlement transactions are not consummated, and either a less favorable settlement is entered into, or the lawsuits are tried and decided adversely to the Company, we could incur losses significantly different than the pretax charge associated with the settlement agreement described above.
Courtyard by Marriott II Limited Partnership On June 7, 1996, a group of partners in CBM II filed a lawsuit against Host Marriott, the Company and others, Whitey Ford, et al. v. Host Marriott Corporation, et al., in the 285/th/ Judicial District Court of Bexar County, Texas, alleging breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, tortious interference, violation of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with the formation, operation and management of CBM II and its hotels. The plaintiffs sought unspecified damages. On January 29, 1998, two other limited partners, A.R. Milkes and D. R. Burklew, filed a petition in intervention seeking to convert the lawsuit into a class action, and a class was certified. In March 1999, Palm Investors, L.L.C., the assignee of a number of limited partnership units acquired through various tender offers, and Equity Resource, an assignee, through various of its funds, of a number of limited partnership units, filed pleas in intervention, which among other things added additional claims relating to the 1993 split of Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness. On August 17, 1999, the general partner of CBM II appointed an independent special litigation committee to investigate the derivative claims described above and to recommend to the general partner whether it is in the best interests of CBM II for the derivative litigation to proceed. The general partner agreed to adopt the recommendation of the committee. Under Delaware law, the recommendation of a duly appointed independent litigation committee is binding on the general partner and the limited partners. Following certain adjustments to the underlying complaints, including the assertion as derivative claims some of the claims previously filed as individual claims, a final amended class action complaint was filed on January 6, 2000. Trial, which was scheduled to begin in late February, 2000, has been postponed pending approval and consummation of the settlement described above.
Texas Multi-Partnership Lawsuit On March 16, 1998, limited partners in several limited partnerships sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et al., in the 57/th/ Judicial District Court of Bexar County, Texas, alleging that the defendants conspired to sell hotels to the partnerships for inflated prices and that they charged the partnerships excessive management fees to operate the partnerships' hotels. The plaintiffs further allege that the defendants committed fraud, breached fiduciary duties and violated the provisions of various contracts. A Marriott International subsidiary manages each of the hotels involved and, as to some properties, the Company is the ground lessor and collects rent. The Company, several Marriott subsidiaries and J.W. Marriott, Jr. are among the several named defendants. The plaintiffs are seeking unspecified damages.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
BUSINESS SEGMENTS
We are a diversified hospitality company with operations in three business segments: Lodging, which includes the franchising, ownership, operation and development of lodging properties including vacation timesharing resorts; Senior Living Services, which consists of the operation, ownership and development of senior living communities; and Distribution Services, which operates a wholesale food distribution business. We evaluate the performance of our segments based primarily on operating profit before corporate expenses and interest. We do not allocate income taxes at the segment level.
Sales of Distribution Services exclude sales (made at market terms and conditions) to other segments of $166 million, $155 million and $159 million in 1999, 1998 and 1997, respectively.
Segment operating expenses include selling, general and administrative expenses directly related to the operations of the businesses, aggregating $529 million in 1999, $496 million in 1998 and $435 million in 1997.
The consolidated financial statements include the following related to international operations: sales of $392 million in 1999, $323 million in 1998, and $294 million in 1997; operating profit before corporate expenses and interest of $66 million in 1999, $49 million in 1998, and $50 million in 1997; and fixed assets of $102 million in 1999, $102 million in 1998, and $112 million in 1997.
MARRIOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share data)
/1/ The quarters consist of 12 weeks, except the fourth quarter, which consists of 16 weeks. /2/ Systemwide sales comprise revenues generated from guests at owned, leased, managed and franchised hotels and senior living communities, together with sales of our other businesses. /3/ The sum of the earnings per share for the four quarters may differ from annual earnings per share due to the required method of computing the weighted average number of shares in interim periods.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 and 13.
As described below, certain information appearing in our Proxy Statement to be furnished to shareholders in connection with the 2000 Annual Meeting of Shareholders, is incorporated by reference in this Form 10-K Annual Report.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to our executive officers.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The response to this portion of Item 14 is submitted under Item 8 of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) EXHIBITS
Any shareholder who wants a copy of the following Exhibits may obtain one from us upon request at a charge that reflects the reproduction cost of such Exhibits. Requests should be made to the Secretary, Marriott International, Inc., Marriott Drive, Department 52/862, Washington, D.C. 20058.
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(b) REPORTS ON FORM 8-K
On September 20, 1999, we filed a report describing the issuance of $300 million of 7-7/8 percent Series C Notes due 2009 in an underwritten public offering.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 we have duly caused this Form 10-K to be signed on our behalf by the undersigned, thereunto duly authorized, on this 10th day of March, 2000.
MARRIOTT INTERNATIONAL, INC.
By /s/ J.W. Marriott, Jr. --------------------------- J.W. Marriott, Jr. Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on our behalf in their capacities and on the date indicated above.
S-1