SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 10, 1999 Commission File No. 1-13881 MARRIOTT INTERNATIONAL, INC. Delaware 52-2055918 (State of Incorporation) (I.R.S. Employer Identification Number) 10400 Fernwood Road Bethesda, Maryland 20817 (301) 380-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Shares outstanding Class at October 8, 1999 - ------------------------------- ---------------------------- Class A Common Stock, $0.01 par value 245,128,223 1
MARRIOTT INTERNATIONAL, INC. INDEX <TABLE> <CAPTION> Page No. ---------- <S> <C> <C> Forward-Looking Statements...................................................... 3 Part I. Financial Information (Unaudited): Condensed Consolidated Statements of Income - Twelve and Thirty-Six Weeks Ended September 10, 1999 and September 11, 1998.......................................................... 4 Condensed Consolidated Balance Sheet - as of September 10, 1999 and January 1, 1999................................ 5 Condensed Consolidated Statement of Cash Flows - Thirty-Six Weeks Ended September 10, 1999 and September 11, 1998............ 6 Notes to Condensed Consolidated Financial Statements.......................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 13 Quantitative and Qualitative Disclosures About Market Risk.................... 21 Part II. Other Information and Signatures: Legal Proceedings............................................................. 22 Changes in Securities......................................................... 22 Defaults Upon Senior Securities............................................... 22 Submission of Matters to a Vote of Security Holders........................... 22 Other Information............................................................. 22 Exhibits and Reports on Form 8-K.............................................. 23 Signatures.................................................................... 24 </TABLE> 2
Forward-Looking Statements When used throughout this report, the words "believes," "anticipates," "expects," "intends," "estimates," "projects," and other similar expressions, which are predictions of or indicate future events and trends, identify forward- looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected, including: competition within each of our business segments; business strategies and their intended results; the balance between supply of and demand for hotel rooms, timeshare units, senior living accommodations and corporate apartments; our ability to obtain new operating contracts and franchise agreements; our ability to develop and maintain positive relations with current and potential hotel and senior living community owners; the effect of international, national and regional economic conditions; the availability of capital to allow us and potential hotel and senior living community owners to fund investments; our ability, and that of other parties upon which our businesses also rely, to modify or replace on a timely basis, their computer software and other systems in order to function properly prior to, in and beyond, the year 2000; and other risks described from time to time in our filings with the Securities and Exchange Commission, including those set forth on Exhibit 99 filed herewith. Given these uncertainties, you are cautioned not to place undue reliance on such statements. We also undertake no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances. 3
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ MARRIOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in millions, except per share amounts) (Unaudited) <TABLE> <CAPTION> Twelve weeks ended Thirty-six weeks ended --------------------------------- ----------------------------------- September 10, September 11, September 10, September 11, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> SALES......................................... $ 1,995 $ 1,804 $ 5,932 $ 5,446 OPERATING COSTS AND EXPENSES.................. 1,807 1,640 5,335 4,933 --------------- --------------- --------------- --------------- OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST..................................... 188 164 597 513 Corporate expenses............................ (30) (25) (87) (74) Interest expense.............................. (12) (6) (34) (15) Interest income............................... 7 7 20 25 --------------- --------------- --------------- --------------- INCOME BEFORE INCOME TAXES.................... 153 140 496 449 Provision for income taxes.................... 57 54 186 173 --------------- --------------- --------------- --------------- NET INCOME.................................... $ 96 $ 86 $ 310 $ 276 =============== =============== =============== =============== DIVIDENDS DECLARED PER SHARE.................. $ .055 $ .05 $ .16 $ .15 =============== =============== =============== =============== EARNINGS PER SHARE Basic Earnings Per Share................. $ .39 $ .34 $ 1.25 $ 1.09 =============== =============== =============== =============== Diluted Earnings Per Share............... $ .36 $ .32 $ 1.16 $ 1.02 =============== =============== =============== =============== </TABLE> See notes to condensed consolidated financial statements. 4
MARRIOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET ($ in millions) <TABLE> <CAPTION> September 10, January 1, 1999 1999 ---------------- ---------------- ASSETS (Unaudited) <S> <C> <C> Current assets Cash and equivalents............................................... $ 324 $ 390 Accounts and notes receivable...................................... 681 605 Other.............................................................. 382 338 ----------- ------------- 1,387 1,333 ----------- ------------- Property and equipment.................................................. 2,697 2,275 Intangibles............................................................. 1,846 1,712 Investments in affiliates............................................... 262 228 Notes and other receivables............................................. 504 434 Other................................................................... 294 251 ----------- ------------- $ 6,990 $ 6,233 =========== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable................................................... $ 539 $ 497 Other.............................................................. 1,043 915 ----------- ------------- 1,582 1,412 ----------- ------------- Long-term debt.......................................................... 1,125 944 Other long-term liabilities............................................. 1,119 984 Convertible subordinated debt........................................... 333 323 Shareholders' equity Class A common stock, 255.6 million shares issued.................. 3 3 Additional paid-in capital......................................... 2,740 2,713 Retained earnings.................................................. 400 218 Treasury stock, at cost............................................ (279) (348) Accumulated other comprehensive income............................. (33) (16) ----------- ------------- 2,831 2,570 ----------- ------------- $ 6,990 $ 6,233 =========== ============= </TABLE> See notes to condensed consolidated financial statements. 5
MARRIOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ($ in millions) (Unaudited) <TABLE> <CAPTION> Thirty-six weeks ended ---------------------------------- September 10, September 11, 1999 1998 ---------------- ---------------- <S> <C> <C> OPERATING ACTIVITIES Net income....................................................... $ 310 $ 276 Adjustments to reconcile to cash provided by operations: Depreciation and amortization................................ 103 93 Income taxes and other....................................... 136 104 Timeshare activity, net...................................... (15) 41 Working capital changes...................................... 48 (65) ------------- -------------- Cash provided by operations...................................... 582 449 ------------- -------------- INVESTING ACTIVITIES Acquisitions..................................................... (62) (48) Dispositions..................................................... 270 116 Capital expenditures............................................. (667) (566) Note advances.................................................... (111) (24) Note collections and sales....................................... 40 165 Other............................................................ (106) (113) ------------- -------------- Cash used in investing activities................................ (636) (470) ------------- -------------- FINANCING ACTIVITIES Issuance of long-term debt....................................... 292 881 Repayment of long-term debt...................................... (156) (463) Issuance of Class A common stock................................. 36 7 Dividends paid................................................... (38) (24) Purchase of treasury stock....................................... (146) (291) Advances to Old Marriott......................................... - (117) ------------- -------------- Cash used in financing activities................................ (12) (7) ------------- -------------- DECREASE IN CASH AND EQUIVALENTS...................................... (66) (28) CASH AND EQUIVALENTS, beginning of period............................. 390 208 ------------- -------------- CASH AND EQUIVALENTS, end of period................................... $ 324 $ 180 ============= ============== </TABLE> See notes to condensed consolidated financial statements. 6
MARRIOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation --------------------- The accompanying condensed consolidated financial statements present the results of operations, financial condition and cash flows of Marriott International, Inc. (together with its subsidiaries, we, us or the Company), formerly New Marriott MI, Inc., as if we were a separate entity for all periods presented. Until March 27, 1998, we were a wholly-owned subsidiary of the former Marriott International, Inc. (Old Marriott). The accompanying condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles. We believe the disclosures made are adequate to make the information presented not misleading. However, you should read the condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (the Annual Report) for the fiscal year ended January 1, 1999. Capitalized terms not otherwise defined in this quarterly report have the meanings specified in the Annual Report. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Accordingly, ultimate results could differ from those estimates. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 10, 1999 and January 1, 1999, the results of operations for the twelve and thirty-six weeks ended September 10, 1999 and September 11, 1998, and cash flows for the thirty-six weeks ended September 10, 1999 and September 11, 1998. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities included in these financial statements. In November 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the sales and expenses of a managed entity in its financial statements. As a result of EITF 97-2, and related discussions with the staff of the Securities and Exchange Commission, in our 1998 fourth quarter we changed our accounting policy to no longer include in our financial statements the working capital and sales of managed hotels and managed senior living communities. Our financial statements for prior periods have been restated. This change in accounting policy resulted in reductions in each of sales and operating expenses of $459 million and $1,548 million for the twelve and thirty-six weeks ended September 11, 1998, respectively, with no impact on operating profit, net income, earnings per share, debt or shareholders' equity. 7
2. Spinoff ------- On March 27, 1998, Old Marriott distributed our common stock, on a pro rata basis, as a special dividend (the Spinoff) to holders of Old Marriott's common stock. We have carried over Old Marriott's historical cost basis in our assets and liabilities. Old Marriott received a private letter ruling from the Internal Revenue Service that the Spinoff would be tax-free to it and its shareholders. For each share of common stock in Old Marriott, shareholders received one share of our Common Stock and one share of our Class A Common Stock. On May 21, 1998, all outstanding shares of our Common Stock were converted, on a one-for-one basis, into shares of our Class A Common Stock. For further discussion of the Spinoff, please refer to our Annual Report. 8
3. Earnings Per Share ------------------ For periods prior to March 27, 1998, the number of weighted average shares outstanding and the effect of dilutive securities used in the earnings per share calculations are based upon the weighted average number of Old Marriott shares outstanding, and the Old Marriott effect of dilutive securities for the applicable period, adjusted (1) for the distribution ratio in the Spinoff of one share of our Common Stock and one share of our Class A Common Stock for every share of Old Marriott common stock, and (2) to reflect the conversion of our Common Stock into our Class A Common Stock on May 21, 1998. The following table reconciles the earnings and number of shares used in the basic and diluted earnings per share calculations (in millions, except per share amounts). <TABLE> <CAPTION> Twelve weeks ended Thirty-six weeks ended ---------------------------------- ---------------------------------- September 10, September 11, September 10, September 11, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Computation of Basic Earnings Per Share Net income.................................. $ 96 $ 86 $ 310 $ 276 Weighted average shares outstanding......... 248.1 249.8 247.8 252.5 ---------------- ---------------- ---------------- ---------------- Basic Earnings Per Share.................... $ .39 $ .34 $ 1.25 $ 1.09 ================ ================ ================ ================ Computation of Diluted Earnings Per Share Net income.................................. $ 96 $ 86 $ 310 $ 276 After-tax interest expense on convertible subordinated debt.............. 2 2 5 5 ---------------- ---------------- ---------------- ---------------- Net income for diluted earnings per share... $ 98 $ 88 $ 315 $ 281 ================ ================ ================ ================ Weighted average shares outstanding......... 248.1 249.8 247.8 252.5 Effect of Dilutive Securities Employee stock purchase plan............... 0.1 0.1 0.2 0.1 Employee stock option plan................. 8.1 8.4 9.1 8.8 Deferred stock incentive plan.............. 5.4 5.7 5.4 5.7 Convertible subordinated debt............... 9.5 9.5 9.5 9.5 ---------------- ---------------- ---------------- ---------------- Shares for diluted earnings per share....... 271.2 273.5 272.0 276.6 ================ ================ ================ ================ Diluted Earnings Per Share.................. $ .36 $ .32 $ 1.16 $ 1.02 ================ ================ ================ ================ </TABLE> We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We use the if-converted method for convertible subordinated debt. 9
4. Acquisitions ------------ The Ritz-Carlton Hotel Company LLC. On March 19, 1998, we increased our ownership interest in The Ritz-Carlton Hotel Company LLC to approximately 98 percent for consideration of approximately $90 million. We expect to acquire the remaining ownership interest within the next several years. We accounted for the acquisition using the purchase method of accounting. Prior to March 19, 1998, we accounted for our investment in The Ritz-Carlton Hotel Company LLC using the equity method of accounting and we received distributions based on an annual, cumulative preferred return on invested capital. ExecuStay Corporation. On February 17, 1999, we completed a cash tender offer for approximately 44 percent of the outstanding common stock of ExecuStay Corporation (ExecuStay), a leading provider of leased corporate apartments in the United States. On February 24, 1999, substantially all of the remaining common stock of ExecuStay was converted into nonvoting preferred stock of ExecuStay which we acquired, on March 26, 1999, for approximately 2.1 million shares of our Class A Common Stock. Our aggregate purchase price totaled $116 million. We consolidated the 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. 5. Comprehensive Income -------------------- Total comprehensive income was $90 million for each of the twelve weeks ended September 10, 1999 and September 11, 1998, and $293 million and $291 million, respectively, for the thirty-six weeks ended September 10, 1999 and September 11, 1998. The principal difference between net income and total comprehensive income relates to foreign currency translation adjustments. 6. New Accounting Standards ------------------------ In 1999 we adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," issued by the American Institute of Certified Public Accountants, by expensing pre-opening costs for Company owned lodging and senior living communities as incurred. The adoption of SOP 98-5 resulted in pretax expenses of $4 million and $12 million, respectively, for the twelve and thirty-six weeks ended September 10, 1999. We will adopt FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which we do not expect to have a material effect on our consolidated financial statements, in or before the first quarter of 2001. 7. Business Segments ----------------- We are a diversified hospitality company operating in three business segments: Lodging, which includes the development, ownership, operation and franchising of lodging properties including vacation timesharing resorts; Senior Living Services, which consists of the development, ownership and operation of senior living communities; and Distribution Services, which operates a wholesale food distribution business. We evaluate the performance of our segments based primarily on operating profit before corporate expenses and interest. We do not allocate income taxes at the segment level. 10
The following table shows our sales and operating profit by business segment for the twelve and thirty-six weeks ended September 10, 1999 and September 11, 1998. <TABLE> <CAPTION> Twelve weeks ended Thirty-six weeks ended ---------------------------------- ---------------------------------- September 10, September 11, September 10, September 11, 1999 1998 1999 1998 -------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> SALES Lodging...................... $ 1,606 $ 1,428 $ 4,788 $ 4,288 Senior Living Services....... 128 112 372 325 Distribution Services........ 261 264 772 833 -------------- --------------- --------------- --------------- $ 1,995 $ 1,804 $ 5,932 $ 5,446 ============== =============== =============== =============== OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST Lodging...................... $ 180 $ 156 $ 577 $ 492 Senior Living Services....... 3 4 6 10 Distribution Services........ 5 4 14 11 -------------- --------------- --------------- --------------- $ 188 $ 164 $ 597 $ 513 ============== =============== =============== =============== </TABLE> Sales of Distribution Services do not include sales (made at market terms and conditions) to our other business segments of $36 million and $35 million for the twelve weeks ended September 10, 1999 and September 11, 1998, respectively, and $112 million and $105 million for the thirty-six weeks ended September 10, 1999 and September 11, 1998, respectively. 8. Contingencies ------------- We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. These guarantees are limited, in the aggregate, to $152 million at September 10, 1999. New World Development and another entity affiliated with Dr. Cheng, a member of our Board of Directors, have severally indemnified us for guarantees by us of leases with minimum annual payments of approximately $59 million. Letters of credit outstanding on our behalf at September 10, 1999 totaled $72 million, the majority of which related to our self-insurance program. At September 10, 1999, we had a repurchase obligation of $86 million related to notes receivable from timeshare interval purchasers that have been sold with limited recourse. In addition to the foregoing, we are from time to time involved in legal proceedings which could, if adversely decided, result in losses to the Company. Although we believe that the lawsuits described below are without merit, and we intend to vigorously defend against the claims being made against us, we cannot assure you as to the outcome of these lawsuits nor can we currently estimate the range of any potential loss to the Company. Courtyard by Marriott II Limited Partnership (CBM II) A group of partners in CBM II filed a lawsuit, Whitey Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the 285/th/ Judicial District Court of Bexar County, Texas against Host Marriott, the Company and others alleging breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, tortious interference, violation of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with the formation, operation and management of CBM II and its hotels. The plaintiffs are seeking 11
unspecified damages. On January 29, 1998, two other limited partners, A.R. Milkes and D.R. Burklew, filed a petition in intervention seeking to convert the lawsuit into a class action. The defendants have filed an answer, the class has been certified, class counsel has been appointed, and discovery is underway. On March 11, 1999, Palm Investors, L.L.C., the assignee of a number of limited partnership units acquired through various tender offers, filed a plea in intervention to bring additional claims relating to the 1993 split of Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness. The original plaintiffs subsequently filed a second amended complaint on March 19, 1999 and in a third amended complaint, filed May 24, 1999, asserted as derivative claims some of the claims previously asserted as individual claims. On March 25, 1999, Equity Resource, an assignee, through various of its funds, of a number of limited partnership units, also filed a plea in intervention. A trial date of January 3, 2000 has been set. 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 has 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. On August 30, 1999, the court held a hearing to consider the defendant's motion to stay these proceedings until the committee makes its recommendation. The court has not yet ruled on this motion. On October 11, 1999, the special litigation committee filed a motion requesting a six-month postponement of the scheduled trial date, and asking that the committee be allowed to participate in the discovery process. The court has not yet heard or ruled on this motion. Courtyard by Marriott Limited Partnership I (CBM I) and CBM II Derivative Action. After intervening in the CBM II class action, Palm Investors and Equity Resource, together with Repp Properties, joined in a complaint filed in April 1999, Equity Resource Fund X et al. v. CBM One Corporation et al., Case No. 99-CI-04765, in the 57/th/ Judicial District Court of Bexar County, Texas. This action asserted as derivative claims, on behalf of CBM I and CBM II, the same kind of claims asserted individually in the Ford and Milkes actions described above. In September 1999, this complaint was withdrawn by the plaintiffs. Texas Multi-Partnership Lawsuits On March 16, 1998, limited partners in several limited partnerships sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092, in the 57/th/ Judicial District Court of Bexar County, Texas, alleging that the defendants conspired to sell hotels to the partnerships for inflated prices and that they charged the partnerships excessive management fees to operate the partnerships' hotels. The plaintiffs further allege that the defendants committed fraud, breached fiduciary duties and violated the provisions of various contracts. A Marriott International subsidiary manages each of the hotels involved and, as to some properties, the Company is the ground lessor and collects rent. The Company, several Marriott subsidiaries and J.W. Marriott, Jr. are among the several named defendants. The plaintiffs are seeking unspecified damages. Those allegations concerning CBM II have been transferred to the CBM II lawsuit described above. No trial date has been set. 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- RESULTS OF OPERATIONS The following discussion presents an analysis of results of our operations for each of the twelve and thirty-six weeks ended September 10, 1999 and September 11, 1998. Comparable REVPAR, room rate and occupancy statistics used throughout this report are based upon U.S. properties operated by us, except that data for Fairfield Inn also include comparable franchised units. In the fourth quarter of 1998, we changed our accounting policy to no longer include the working capital and sales of managed hotels and managed senior living communities in our financial statements. Instead, our sales include fees earned plus costs recovered from owners of managed hotels and managed senior living communities. We have restated prior periods and all references in the discussion below refer to financial statement data prepared under our new accounting policy. This new accounting policy reflects reductions in sales of $529 million and $459 million for the twelve weeks ended September 10, 1999 and September 11, 1998, respectively and $1,852 million and $1,548 million for the thirty-six weeks ended September 10, 1999 and September 11, 1998 respectively, compared to sales as previously calculated for those periods. Twelve Weeks Ended September 10, 1999 Compared to Twelve Weeks Ended September - ------------------------------------------------------------------------------ 11, 1998 - -------- We reported net income of $96 million for the 1999 third quarter, on sales of $1,995 million. This represents a 12 percent increase in net income and an 11 percent increase in sales over the third quarter of 1998. Diluted earnings per share of $.36 for the quarter increased 13 percent over the 1998 amount. Systemwide sales increased 11 percent, to $4.0 billion. Marriott Lodging reported a 15 percent increase in operating profit on 12 percent higher sales. The results reflect average REVPAR growth of three percent across our lodging brands, strong performance from Marriott Vacation Club International and contributions from new units. Systemwide lodging sales increased 12 percent to $3.6 billion. We added a net total of 48 lodging properties (5,753 units) during the third quarter of 1999, increasing our total properties to 1,812 (344,958 units). Properties by brand (excluding 6,300 rental units relating to ExecuStay) are as indicated in the following table. 13
<TABLE> <CAPTION> Properties as of September 10, 1999 ------------------------------------------------------------ Company-operated Franchised ---------------------------- ---------------------------- Properties Units Properties Units ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Marriott Hotels, Resorts and Suites............. 225 98,867 137 39,381 Ritz-Carlton.................................... 35 11,585 - - Renaissance..................................... 75 30,079 15 5,715 Ramada International............................ 7 1,325 19 4,221 Residence Inn................................... 136 18,296 183 19,928 Courtyard....................................... 254 38,980 199 24,769 TownePlace Suites............................... 22 2,260 26 2,553 Fairfield Inn................................... 51 7,138 353 30,906 SpringHill Suites............................... 4 438 26 2,623 Marriott Vacation Club International............ 38 4,367 - - Marriott Executive Apartments and other......... 7 1,527 - - ------------ ------------ ------------ ------------ Total..................................... 854 214,862 958 130,096 ============ ============ ============ ============ </TABLE> Marriott Hotels, Resorts and Suites posted a REVPAR increase of three percent due to a four percent increase in average room rates, to $131, partially offset by a slight decrease in occupancy to 80 percent. Profit margins increased as cost controls generated higher incentive management fees at many hotels. Renaissance hotels posted a REVPAR increase of one percent due to a two percent increase in average room rates to $120, partially offset by a one percentage point decrease in occupancy, to 71 percent. Ritz-Carlton reported an increase in average room rates of four percent, to $197, with occupancy up six percentage points to 80 percent, resulting in a 12 percent increase in REVPAR. Residence Inn, our quality tier extended-stay brand, posted a slight increase in REVPAR, due to a one percent increase in average room rates, to $100, and a one percentage point decrease in occupancy to 86 percent. Residence Inn opened 10 properties during the quarter. Courtyard, our moderate-price lodging brand, increased average room rates by four percent to $91, and occupancy decreased slightly to 82 percent, resulting in a REVPAR increase of three percent. Courtyard opened 14 properties during the quarter. Fairfield Inn, our economy lodging brand, posted a decrease in REVPAR of four percent due to a decrease in average room rates of one percent to $59, and a two percentage point decrease in occupancy to 77 percent. Fairfield Inn opened 12 properties during the quarter. Marriott Vacation Club International posted substantial profit growth in the 1999 quarter. We generated a 17 percent increase in contract sales, reflecting strong sales activity at timeshare resorts in Florida, California, South Carolina, Spain and Hawaii. Marriott Senior Living Services (SLS) posted 14 percent sales growth in the 1999 third quarter. Operating profit before corporate expenses and interest declined as pre-opening costs of $4 million and start up losses associated with new properties more than offset gains from property sales and profit growth from established communities. Occupancy for comparable communities decreased by 14
one percentage point to 90 percent for the quarter. At September 10, 1999, SLS operated 131 independent full-service and assisted living communities totaling approximately 23,200 units. Marriott Distribution Services (MDS) achieved higher profits in the quarter, despite slightly lower sales. The division benefited from realization of cost economies in transportation and warehouse operations, as well as higher gross margins per case. See "Liquidity and Capital Resources" below for a discussion of the possible future impact of the bankruptcy filing by a major MDS customer. Corporate activity. Interest expense increased by $6 million in the 1999 third quarter, primarily due to share repurchases and other investing activities. Corporate expenses increased due to Year 2000 modification costs of $3 million compared to $2 million in the 1998 quarter, and higher net costs associated with tax-oriented investments. The effective income tax rate decreased from 38.5 percent to 37.5 percent primarily due to the increased proportion of operations in countries with lower effective tax rates. Thirty-Six Weeks Ended September 10, 1999 Compared to Thirty-Six Weeks Ended - ----------------------------------------------------------------------------- September 11, 1998 - ------------------ We reported net income of $310 million for the first three quarters of 1999, on sales of $5,932 million. This represents a 12 percent increase in net income and a nine percent increase in sales over the same period in 1998. Diluted earnings per share of $1.16 increased 14 percent over the 1998 amount. Systemwide sales increased 10 percent, to $11.9 billion. Marriott Lodging reported a 17 percent increase in operating profit on 12 percent higher sales. The results reflect average REVPAR growth of three percent across our lodging brands, strong results from Marriott Vacation Club International and contributions from new units. Systemwide lodging sales increased 12 percent to $10.7 billion. Marriott Hotels, Resorts and Suites posted a three percent increase in average room rates, to $139, and a slight increase in occupancy to 79 percent, which generated a REVPAR increase of three percent. Renaissance hotels posted a REVPAR increase of two percent due to a one percentage point increase in occupancy to 72 percent, and a one percent increase in average room rates to $130. Ritz-Carlton reported an increase in average room rates of five percent, to $219, with occupancy up five percentage points to 80 percent, resulting in an 11 percent increase in REVPAR. Residence Inn posted slightly higher REVPAR, due to a small increase in occupancy to 85 percent, and a slight increase in average room rates to $99. Operating results include contributions from new units and gains related to the disposition of six properties during the 1999 period. We retained long-term operating agreements on these properties. Residence Inn opened 68 properties since the beginning of fiscal year 1998. Courtyard increased average room rates by two percent to $92, and occupancy increased slightly to 81 percent, resulting in a REVPAR increase of three percent. Courtyard opened 87 properties since the beginning of fiscal year 1998. 15
Fairfield Inn posted an increase in average room rates of one percent to $58, which was offset by a two percentage point decrease in occupancy to 74 percent, resulting in a decrease in REVPAR of one percent. Fairfield Inn opened 64 properties since the beginning of fiscal year 1998. Marriott Vacation Club International posted substantial profit growth in the first three quarters of 1999, reflecting a 21 percent increase in contract sales. Marriott Senior Living Services reported 15 percent higher sales in the first three quarters of 1999. Operating profit before corporate expenses and interest declined as pre-opening costs of $12 million and start-up costs of new communities more than offset gains from property sales and improved performance at established communities. Occupancy for comparable communities increased by one percentage point to 90 percent for the period. Marriott Distribution Services achieved higher profits in the period, despite seven percent lower sales, reflecting increased operating efficiencies. Corporate activity. Interest expense increased by $19 million in the 1999 period, primarily due to investing activities and share repurchases since the Spinoff. Corporate expenses increased primarily due to Year 2000 modification costs of $15 million compared to $8 million in the first three quarters of 1998. The effective income tax rate decreased from 38.5 percent to 37.5 percent primarily due to the increased proportion of operations in countries with lower effective tax rates. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents totaled $324 million at September 10, 1999, a decrease of $66 million from year end. Cash provided by operations of $582 million increased 30 percent over 1998. Net income is stated after recording depreciation expense of $55 million and $49 million for the thirty-six weeks ended September 10, 1999 and September 11, 1998, respectively, and after amortization expense of $48 million and $44 million for the thirty-six weeks ended September 10, 1999 and September 11, 1998, respectively. EBITDA for the thirty-six weeks ended September 10, 1999 increased by $76 million, or 14 percent, to $633 million. EBITDA is an indicator of operating performance which can be used to measure the Company's ability to service debt, fund capital expenditures and expand its business. However, EBITDA is not an alternative to net income, operating profit, cash from operations, or any other operating or liquidity measure prescribed by generally accepted accounting principles. Net cash used in investing activities totaled $636 million for the thirty-six weeks ended September 10, 1999, and included our acquisition of ExecuStay, expenditures for developing limited-service lodging properties and senior living communities, together with note advances. Cash generated from dispositions of $270 million resulted primarily from the sales of limited-service lodging properties and senior living communities under master transactions initiated in 1998. We continue to operate these properties under long-term agreements. We continue to grow our businesses, in part, by investing in new units. We expect our principal investments to continue to include notes, minority equity interests, business acquisitions and direct development and ownership of certain lodging and senior living services projects. We expect to sell certain lodging and senior living service properties currently under development, or to be developed, while continuing to operate them under long-term agreements. 16
We believe that cash generated by operations, together with our borrowing capacity and proceeds from the sale of assets, will be sufficient to finance our planned growth and capital requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel and senior living community developers to build or acquire new Marriott properties, both of which are important components of our growth plans, are to some extent dependent on the availability and price of capital. We continually monitor the status of the capital markets, and other conditions which could affect our ability to execute our announced growth plans. We purchased 4.5 million shares of our Class A Common Stock in the thirty-six weeks ended September 10, 1999, at a cost of $158 million. On September 30, 1999, our Board authorized the repurchase of an additional 10 million shares, resulting in a total authorization of 10.6 million shares as of September 30, 1999. In April 1999, we filed a "universal shelf" registration statement with the Securities and Exchange Commission. That registration statement, which became effective on May 4, 1999, 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. 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 may elect to convert each LYON into 17.52 shares of our Class A Common Stock and 2.19 shares of SMS common stock at any time prior to the close of business on November 8, 1999. If none of the holders of the 540,200 outstanding LYONs elect to convert, the aggregate redemption payment would total $335 million. Pursuant to the LYONs Allocation Agreement entered into with SMS as part of the Spinoff, SMS is obligated to fund nine percent of the aggregate LYONs redemption payment. Our 91 percent share of the redemption payment would then be $305 million, which we plan to fund with commercial paper borrowings. In 1996, MDS became the exclusive provider of distribution services to Boston Chicken Inc. (BCI). On October 5, 1998, BCI and its Boston Market-controlled subsidiaries filed voluntary bankruptcy petitions in the U.S. Bankruptcy Court (the Court) for protection under Chapter 11 of the Federal Bankruptcy Code. The bankruptcy resulted in the closing of approximately 21 percent of the restaurants in the Boston Market chain. MDS continues to distribute to BCI and has been receiving payment of post-petition balances in accordance with the terms of its contracts with BCI. In addition, the Court has approved, and MDS has received, payment for substantially all of its pre-petition accounts receivable balances. However, the final effect on our future results of operations and financial position depends on the final resolution of BCI's bankruptcy. Under certain circumstances, if the contract were to terminate, or if BCI were to cease or further curtail its operations: (1) MDS may be unable to recover some or all of an aggregate of approximately $32 million in contract investment, receivables and inventory; and (2) MDS could have excess warehouse capacity and rolling stock. 17
Year 2000 Readiness Disclosure The "Year 2000 problem" has arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. State of Readiness. We have adopted the following eight-step process toward Year 2000 readiness: 1. Awareness: fostering understanding of, and commitment to, the problem and its potential risks; 2. Inventory: identifying and locating systems and technology components that may be affected; 3. Assessment: reviewing these components for Year 2000 compliance, and assessing the scope of Year 2000 issues; 4. Planning: defining the technical solutions and labor and work plans necessary for each affected system; 5. Remediation/Replacement: completing the programming to renovate or replace the problem software or hardware; 6. Testing and Compliance Validation: conducting testing, followed by independent validation by a separate internal verification team; 7. Implementation: placing the corrected systems and technology back into the business environment; and 8. Quality Assurance: utilizing an internal audit team to review significant projects for adherence to quality standards and program methodology. We have grouped our systems and technology into three categories for purposes of Year 2000 compliance: 1. Information resource applications and technology (IT Applications) -- enterprise-wide systems supported by the Company's centralized information technology organization (IR); 2. Business-initiated systems (BIS) -- systems that have been initiated by an individual business unit, and that are not supported by IR; and 3. Building Systems -- non-IT equipment at properties that use embedded computer chips, such as elevators, automated room key systems and HVAC equipment. We are prioritizing our efforts based on how severe an effect noncompliance would have on customer service, core business processes or revenues, and whether there are viable, non-automated fallback procedures (System Criticality). 18
We measure completion of each phase based on documentation and quantified results weighted for System Criticality. The table below reflects the status of our Year 2000 readiness process at September 10, 1999. Based on progress achieved to date for areas under our control, we expect minimal business disruptions to arise as a result of the Year 2000 readiness for the categories reflected in the table. Nonetheless, we have prepared contingency plans (described in more detail below) which address unforeseen circumstances and events beyond our control. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------------- Step IT Applications BIS Building Systems ========================================================================================================================= <S> <C> <C> <C> Awareness Complete Complete Complete ------------------------------------------------------------------------------------------------------------------------- Inventory Complete Complete Complete ------------------------------------------------------------------------------------------------------------------------- Assessment Complete Complete Complete ------------------------------------------------------------------------------------------------------------------------- Planning Complete Complete Complete ------------------------------------------------------------------------------------------------------------------------- Remediation/ Over 95 percent Over 95 percent complete Over 95 percent Replacement complete complete ------------------------------------------------------------------------------------------------------------------------- Testing and Testing over 95 percent Testing is approximately Initial testing is over Compliance Validation complete; Compliance 80 percent complete.* 95 percent complete.* Validation completed for Compliance Validation is Compliance validation over 90 percent of key in progress* is in progress systems, with most remaining work in its final stage ------------------------------------------------------------------------------------------------------------------------- Implementation Approximately 85 percent Approximately 85 percent Over 95 percent complete of implementation complete ** projects complete. Additionally, for the remaining projects involving rollout to business locations, we have made substantial progress and we expect to complete by year end 1999 ------------------------------------------------------------------------------------------------------------------------- Quality Assurance In progress for In progress In progress approximately 80 percent of IT applications ------------------------------------------------------------------------------------------------------------------------- </TABLE> * Testing for third party BIS and Building Systems may consist of our receipt and evaluation of vendor compliance documentation and, where appropriate, further verification by us of compliance. ** Completion of certain BIS items is dependent on third party software patches which we have not yet received. Year 2000 compliance communications with our significant third party suppliers, vendors and business partners, including our franchisees, are ongoing. Our efforts are focused on the connections most critical to customer service, core business processes and revenues, including those 19
third parties that support our most critical enterprise-wide IT Applications, franchisees generating the most revenues, suppliers of the most widely used Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT products and services, and financial institutions providing the most critical payment processing functions. We have received responses from a majority of the firms in this group. A majority of these respondents have either given assurances of timely Year 2000 compliance or have identified the necessary actions to be taken by them or by us to achieve timely Year 2000 compliance for their products. Where we have not received satisfactory responses we are addressing the potential risks of failure through our contingency planning process. We have established a common approach for testing and addressing Year 2000 compliance issues for our managed and franchised properties. This includes guidance for properties we operate, and a Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance information. We are also utilizing a Year 2000 best-practices sharing system. We are monitoring the progress of the managed and franchised properties towards Year 2000 compliance. Costs. Many of the costs of Year 2000 compliance will be reimbursed to us or otherwise paid directly by owners and clients pursuant to existing contracts. We estimate that we will bear approximately $35 million to $40 million of the pretax costs to address the Year 2000 problem. Some of these costs relate to internal resources which will be redeployed in 2000, and, as such, represent costs which we will continue to incur in future years. The Year 2000 costs, approximately $27 million (on a pretax basis) of which have been incurred through September 10, 1999, have been and will be expensed as incurred. In addition, we had previously planned and/or begun implementing several system replacement projects to modernize and improve our systems. The Year 2000 problem heightened the need for timely completion and some project schedules have been accelerated. These project costs have been included in our budgeting process and internal forecasts and already form part of our financial plans. Like the Year 2000 costs referred to in the preceding paragraph, many of these systems replacement costs will be reimbursed to us or otherwise paid directly by owners and clients pursuant to existing contracts. We estimate that we will bear approximately $45 million to $50 million of the pretax costs of these systems replacements, most of which will be capitalized and amortized over the useful lives of the assets. The amount of costs we will actually incur depends on a number of factors which cannot be accurately predicted, including the extent and difficulty of the Remediation and other work to be done, the availability and cost of consultants, the extent of testing required to demonstrate Year 2000 compliance, and our ability to timely collect all payments due to us under existing contracts. Year 2000 Contingency Plans. Our centralized services and the properties we operate already have contingency plans in place covering a variety of possible events, including natural disasters, interruption of utility service, general computer failure, and the like. We have reviewed these contingency plans and have made appropriate modifications to address specific Year 2000 issues. The modification of master contingency plans is complete, with conforming changes added to individual unit contingency plans during the third quarter. Contingency drills and preparations are being conducted. In addition, to provide support and coordination during the actual turn of the century, we have established information and coordination centers to collect and report status and track and address problems as they occur. 20
Risks Posed By Our Year 2000 Issues. We currently believe that the Year 2000 problem will not have a material adverse effect on us, our business or our financial condition. However, we cannot assure you that our Year 2000 remediation or remediation by others will be completed properly and on time, and failure to do so could materially and adversely effect us. We also cannot predict the actual effects of the Year 2000 problem on us, which depend on a number of uncertainties such as: . the factors listed above under "Costs"; . whether our franchisees and other significant third parties address the Year 2000 issue properly and on time; . whether broad-based or systemic economic failures may occur, which could include: . disruptions in passenger transportation or transportation systems generally; . loss of utility and/or telecommunications services; . errors or failures in financial transactions or payment processing systems such as credit cards; . the severity and duration of such failures; and . whether we are sued or become subject to other proceedings regarding any Year 2000-related events and the outcome of any such suit or proceedings. As part of our contingency planning, we have analyzed the most reasonably likely worst-case scenario that could result from Year 2000-related failures. Our best estimate of this scenario, based on current information, follows. Failure by others to achieve Year 2000 compliance could cause short-term disruptions in travel patterns, caused by actual or perceived problems with travel systems, and temporary disruptions in the supply of utility, telecommunications and financial services, which may be local or regional in scope. These events could lead travelers to accelerate travel to late 1999, postpone travel to later in 2000 or cancel travel plans, which could in turn affect lodging occupancy patterns. Such failures could be more pronounced in some areas outside the U.S. where we understand that Year 2000 compliance efforts may not be as advanced. In addition, failure by us or others to achieve Year 2000 compliance could cause short-term operational inconveniences and inefficiencies for us. This may temporarily divert management's time and attention from ordinary business activities. We will, to the extent reasonably achievable, seek to prevent and/or mitigate these effects through our compliance and contingency planning efforts. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- There have been no material changes to our exposures to market risk since January 1, 1999. 21
PART II -- OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Incorporated by reference to the description of legal proceedings in the "Contingencies" footnote in the financial statements set forth in Part I, "Financial Information." Item 2. Changes in Securities - ------------------------------ None. Item 3. Defaults Upon Senior Securities - ---------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. Item 5. Other Information - -------------------------- None. 22
Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Exhibit No. Description ----------- ----------- 4.1 Amended and Restated Rights Agreement, dated as of August 9, 1999, with the Bank of New York, as Rights Agent. 12 Statement of Computation of Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule for the Company. 99 Forward-Looking Statements. (b) Reports on Form 8-K None. 23
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARRIOTT INTERNATIONAL, INC. October 25, 1999 /s/ Arne M. Sorenson ____________________________ Arne M. Sorenson Executive Vice President and Chief Financial Officer /s/ Linda A. Bartlett ____________________________ Linda A. Bartlett Senior Vice President, Finance and Corporate Controller (Principal Accounting Officer) 24