10-K 1 d10k.htm FORM 10-K Form 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended January 2, 2004

 

Commission File No. 1-13881

 

MARRIOTT INTERNATIONAL, INC.

 

Delaware   52-2055918
(State of Incorporation)   (I.R.S. Employer Identification Number)

 

10400 Fernwood Road

Bethesda, Maryland 20817

(301) 380-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each exchange on which registered


Class A Common Stock, $0.01 par value

(230,054,286 shares outstanding as of January 30, 2004)

 

New York Stock Exchange

Chicago Stock Exchange

Pacific Stock Exchange

Philadelphia Stock Exchange

 

The aggregate market value of shares of common stock held by non-affiliates at June 20, 2003, was $6,973,761,505.

 

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

 

Yes x        No ¨

 

Indicate by check mark if disclosure by delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

 

Yes x        No ¨

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement prepared for the 2004 Annual Meeting of Shareholders are incorporated by

reference into Part III of this report.

 


 

1


MARRIOTT INTERNATIONAL, INC.

 

FORM 10-K TABLE OF CONTENTS

 

FISCAL YEAR ENDED JANUARY 2, 2004

 

          Page No.

Forward-Looking Statements

   3

Risks and Uncertainties

   3

Part I.

         

Items 1 and 2.

  

Business and Properties

   5

Item 3.

  

Legal Proceedings

   15

Item 4.

  

Submission of Matters to a Vote of Security Holders

   16

Part II.

         

Item 5.

  

Market Price and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

   17

Item 6.

  

Selected Historical Financial Data

   18

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   39

Item 8.

  

Financial Statements and Supplementary Data

   41

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   77

Item 9A.

  

Controls and Procedures

   77

Part III.

         

Item 10.

  

Executive Officers of the Company

   78

Item 11.

  

Executive Compensation

   78

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   78

Item 13.

  

Certain Relationships and Related Transactions

   78

Item 14.

  

Principal Accountant Fees and Services

   78

Part IV.

         

Item 15.

  

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   82

Signatures

   84

 

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Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.”

 

Forward-Looking Statements

 

We make forward-looking statements in this report based on the beliefs and assumptions of our management, and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Business Overview,” “Liquidity and Capital Resources” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.

 

Forward-looking statements involve risks, uncertainties and assumptions, and our actual results may differ materially from those expressed in our forward-looking statements. We therefore caution you not to rely unduly on any forward-looking statement.

 

Risks and Uncertainties

 

You should understand that the following important factors, as well as those discussed in Exhibit 99 and elsewhere in this report, could cause results to differ materially from those expressed in such forward-looking statements. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following.

 

  Competition in each of our business segments. Each of our hotel brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from other market opportunities.

 

  Supply of and demand for hotel rooms, timeshare units and corporate apartments. The availability of and demand for hotel rooms, timeshare units and corporate apartments is directly affected by overall economic conditions, regional and national development of competing hotels and timeshare resorts, local supply and demand for extended stay and corporate apartments, and the recovery in business travel. While we monitor the projected and actual estimates of room supply and availability, the demand for and occupancy rate of hotel rooms and timeshare units, and the occupancy rates of apartments and extended stay lodging properties in all markets in which we conduct business, we cannot assure you that current factors relating to supply and demand will work to contain revenue growth and business volume.

 

  Consistency in Owner Relations. Our responsibility under our management agreements to manage each hotel and enforce the standards required for our brands may, in some instances, be subject to interpretation. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners.

 

  Increase in the costs of conducting our business; Insurance. We take appropriate steps to monitor cost increases in energy, healthcare, insurance, transportation and fuel costs and other expenses central to the conduct of our business. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain such coverage at reasonable rates, particularly in light of continued terrorist activities and threats. We therefore cannot assure you that we will be successful in obtaining such insurance without increases in cost or decreases in coverage levels.

 

  International, national and regional economic conditions. Because we conduct our business activities on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years our business has been hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the uncertain magnitude and duration of the apparent economic recovery in the United States, the prospects of improving economic performance in other regions, and the unknown pace of any business travel recovery that results.

 

  Threat and spread of communicable diseases. The impact of any significant recurrence of Severe Acute Respiratory Syndrome (“SARS”), or the uncontained spread of any contagious or volatile disease will affect our business.

 

 

Recovery of loan and guarantee investments and recycling of capital; availability of new capital resources. The availability of capital to allow us and potential and current hotel owners to fund new hotel investments, as well as refurbishment and improvement of existing hotels, depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and

 

3


 

guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also effect our ability to recycle and raise new capital.

 

  Effect of Internet reservation services. Internet room distribution and reservation channels may adversely affect the rates we may charge for hotel rooms and the manner in which our brands can compete in the marketplace with other brands. We believe that we are taking adequate steps to resolve this competitive threat, but cannot assure you that these steps will prove or remain successful.

 

  Change in laws and regulations. Our business may be affected by changes in accounting standards, timeshare sales regulations and state and federal tax laws.

 

  Recent privacy initiatives and State and Federal limitations on marketing and solicitation. The National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, may affect the amount and timing of our sales of timeshare units and other products.

 

  Interruption of the synthetic fuel operations. Problems related to supply, production, and demand at any of the synthetic fuel facilities, the power plants that buy synthetic fuel from the joint venture or the coal mines where the joint venture buys coal, could be caused by accidents, personnel issues, severe weather or similar unpredictable events.

 

  Litigation. We cannot predict with certainty the cost of defense, the cost of prosecution, or the ultimate outcome of litigation filed by or against us, including remedies or damage awards.

 

  Disaster. We cannot assure you that our ability to provide fully integrated business continuity solutions in the event of a disaster will occur without interruption to, or effect on, the conduct of our business.

 

  Barriers to growth and market entry. Factors influencing real estate development generally, including site availability, financing, planning, zoning and other local approvals, and other limitations which may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure, all affect and potentially limit our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands.

 

  Other risks described from time to time in our filings with the Securities and Exchange Commission (the SEC). We continually evaluate the risks and possible mitigating factors to such risks and provide additional and updated information in our SEC filings.

 

4


PART I

 

ITEMS 1 and 2. BUSINESS AND PROPERTIES

 

We are a worldwide operator and franchisor of hotels and related lodging facilities. Our operations are grouped into the following five business segments:

 

Segment


   Percentage of total
sales in the
fiscal year ended
January 2, 2004


 

Full-Service Lodging

   65 %

Select-Service Lodging

   11 %

Extended-Stay Lodging

   6 %

Timeshare

   14 %

Synthetic Fuel

   4 %

 

Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which we now classify as discontinued operations. We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”

 

In our Lodging business, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, we develop, operate and franchise hotels and corporate housing properties under 14 separate brand names and we develop, operate, and market Marriott timeshare properties under four separate brand names.

 

Our Synthetic Fuel operation consists of our minority interest in four coal-based synthetic fuel production facilities whose operations qualify for tax credits based on Section 29 of the Internal Revenue Code.

 

Financial information by industry segment and geographic area as of January 2, 2004 and for the three fiscal years then ended, appears in the Business Segments note to our Consolidated Financial Statements included in this annual report.

 

Lodging

 

We operate or franchise 2,718 lodging properties worldwide, with 490,564 rooms as of January 2, 2004. In addition, we provide 2,978 furnished corporate housing rental units. We believe that our portfolio of lodging brands is the broadest of any company in the world, and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. Our lodging brands include:

 

Full-Service Lodging   Extended-Stay Lodging

•      Marriott Hotels & Resorts

 

•      Residence Inn

•      Marriott Conference Centers

 

•      TownePlace Suites

•      JW Marriott Hotels & Resorts

 

•      Marriott ExecuStay

•      The Ritz-Carlton

 

•      Marriott Executive Apartments and Other

•      Renaissance Hotels & Resorts

   

•      Ramada International

  Timeshare

•      (primarily Europe, Middle East and Asia/Pacific)

 

•      Marriott Vacation Club International

•      Bulgari Hotels & Resorts

 

•      Horizons by Marriott Vacation Club International

   

•      The Ritz-Carlton Club

Select-Service Lodging  

•      Marriott Grand Residence Club

•      Courtyard

   

•      Fairfield Inn

   

•      SpringHill Suites

   

 

5


Company-Operated Lodging Properties

 

At January 2, 2004, we operated 947 properties (249,503 rooms) under long-term management or lease agreements with property owners (together, the Operating Agreements) and six properties (1,413 rooms) as owned.

 

Terms of our management agreements vary, but typically we earn a management fee which comprises a base fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs (both direct and indirect) of operations. Such agreements are generally for initial periods of 20 to 30 years, with options to renew for up to 50 additional years. Our lease agreements also vary, but typically include fixed annual rentals plus additional rentals based on a percentage of annual revenues in excess of a fixed amount. Many of the Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Additionally, most of the Operating Agreements permit the owners to terminate the agreement if financial returns fail to meet defined levels for a period of time and we have not cured such deficiencies.

 

For lodging facilities that we manage, we are responsible for hiring, training and supervising the managers and employees required to operate the facilities and for purchasing supplies, for which we generally are reimbursed by the owners. We provide centralized reservation services and national advertising, marketing and promotional services, as well as various accounting and data processing services. For lodging facilities that we manage, we prepare and implement annual operating budgets that are subject to owner review and approval.

 

Franchised Lodging Properties

 

We have franchising programs that permit the use of certain of our brand names and our lodging systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from 4 percent to 6 percent of room revenues for all brands, plus 2 percent to 3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs, and pay fees for use of our centralized reservation systems. At January 2, 2004, we had 1,765 franchised properties (239,648 rooms).

 

Summary of Properties by Brand

 

As of January 2, 2004 we operated or franchised the following properties by brand (excluding 2,978 corporate housing rental units):

 

     Company-Operated

   Franchised

Brand


   Properties

   Rooms

   Properties

   Rooms

Full-Service Lodging

                   

Marriott Hotels & Resorts

   226    100,328    201    56,494

Marriott Conference Centers

   14    3,457    —      —  

JW Marriott Hotels & Resorts

   28    12,686    3    1,009

The Ritz-Carlton

   56    18,347    —      —  

Renaissance Hotels & Resorts

   84    32,807    42    12,807

Ramada International

   4    727    188    25,423

Select-Service Lodging

                   

Courtyard

   294    46,705    322    41,509

Fairfield Inn

   2    855    522    49,351

SpringHill Suites

   22    3,452    88    9,230

Extended-Stay Lodging

                   

Residence Inn

   130    17,497    319    35,817

TownePlace Suites

   32    3,472    79    7,909

Marriott Executive Apartments and Other

   12    2,223    1    99

Timeshare

                   

Marriott Vacation Club International

   41    7,622    —      —  

The Ritz-Carlton Club

   4    234    —      —  

Marriott Grand Residence Club

   2    248    —      —  

Horizons by Marriott Vacation Club International

   2    256    —      —  
    
  
  
  

Total

   953    250,916    1,765    239,648
    
  
  
  

 

6


We plan to open over 175 hotels (25,000 to 30,000 rooms) during 2004. We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel developers to build or acquire new Marriott properties, important parts of our growth plan, is partially dependent on their access to and the availability and cost of capital. See “Liquidity and Capital Resources” caption in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Summary of Properties by Country

 

As of January 2, 2004 we operated or franchised properties in the following 68 countries and territories:

 

Country


   Hotels

   Rooms

Americas

         

Argentina

   2    401

Aruba

   4    1,500

Brazil

   5    1,506

Canada

   35    8,733

Cayman Islands

   1    309

Chile

   2    485

Costa Rica

   3    574

Curacao

   1    247

Dominican Republic

   3    692

Ecuador

   1    257

Guatemala

   2    544

Jamaica

   2    1,135

Mexico

   10    3,184

Panama

   1    296

Peru

   1    300

Puerto Rico

   3    1,195

Saint Kitts & Nevis

   1    500

United States

   2,188    373,686

U.S. Virgin Islands

   3    785

Venezuela

   1    269
    
  

Total Americas

   2,269    396,598

Middle East and Africa

         

Armenia

   1    115

Bahrain

   2    387

Egypt

   7    3,029

Israel

   2    960

Jordan

   3    609

Kuwait

   2    601

Lebanon

   1    174

Oman

   1    93

Pakistan

   2    509

Qatar

   3    1,044

Saudi Arabia

   4    773

Tunisia

   1    221

Turkey

   5    1,507

United Arab Emirates

   5    1,106
    
  

Total Middle East and Africa

   39    11,128

 

7


Country


   Hotels

   Rooms

Asia

         

China

   39    13,877

Guam

   1    357

India

   8    1,590

Indonesia

   5    1,641

Japan

   10    3,059

Malaysia

   6    2,659

Philippines

   2    898

Republic of Korea

   1    380

Singapore

   2    983

South Korea

   4    1,763

Thailand

   8    2,082

Vietnam

   2    888
    
  

Total Asia

   88    30,177

Australia

   11    2,679

Europe

         

Austria

   6    1,569

Belgium

   3    530

Czech Republic

   5    812

Denmark

   1    395

Finland

   5    1,392

France

   6    1,343

Georgia

   1    127

Germany

   84    14,064

Greece

   1    258

Hungary

   2    470

Italy

   7    1,194

Netherlands

   3    945

Poland

   2    748

Portugal

   3    933

Romania

   1    402

Russia

   5    1,457

Spain

   6    1,368

Sweden

   29    1,953

Switzerland

   10    1,587
    
  

Total Europe

   180    31,547

United Kingdom

         

Ireland

   1    148

United Kingdom (England, Scotland and Wales)

   130    18,287
    
  

Total United Kingdom

   131    18,435
    
  

Total – All Countries and Territories

   2,718    490,564
    
  

 

Full-Service Lodging

 

Marriott Hotels & Resorts (including JW Marriott Hotels & Resorts and Marriott Conference Centers) is our global flagship brand, primarily serving business and leisure travelers and meeting groups at locations in downtown, urban, and suburban areas, near airports and at resort locations. Marriott full-service hotels is a quality tier brand, with most hotels typically containing from 400 to 700 rooms, internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges, room service, concierge lounges, and parking facilities. Many Marriott resort hotels have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include JW Marriott Hotels & Resorts and Marriott Conference Centers.

 

8


JW Marriott Hotels & Resorts is the Marriott brand’s luxury collection of distinctive hotels that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 31 hotels and resorts are primarily located in gateway cities and upscale locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities at JW Marriott Hotels & Resorts normally include larger guest rooms, higher end décor and furnishings, upgraded in-room amenities, upgraded business centers and fitness centers/spas, and 24-hour room service.

 

We operate 14 Marriott Conference Centers (3,457 rooms), throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. In addition to the features found in a typical Marriott full-service hotel, the centers typically include expanded meeting room space, banquet and dining facilities, guest rooms and recreational facilities.

 

Rooms revenue contributed the majority of Marriott Hotels & Resorts’ revenues for fiscal year 2003, with the remainder coming from food and beverage operations, recreational facilities and other services. Overall hotel system profits are usually relatively stable and include only moderate seasonal fluctuations. Business at resort properties may be seasonal depending on location.

 

Marriott Hotels & Resorts

Geographic Distribution at January 2, 2004


   Hotels

    

United States (42 states and the District of Columbia)

   307    (126,319 rooms)
    
    

Non-U.S. (50 countries and territories)

         

Americas (Non-U.S.)

   33     

Continental Europe

   31     

United Kingdom

   51     

Asia

   27     

The Middle East and Africa

   18     

Australia

   5     
    
    

Total Non-U.S.

   165    (47,655 rooms)
    
    

 

The Ritz-Carlton hotels and resorts are renowned for their distinctive architecture and for the quality of their facilities, dining and exceptional personalized guest service. Most Ritz-Carlton hotels have 250 to 400 guest rooms and typically include meeting and banquet facilities, a variety of restaurants and lounges, gift shops, swimming pools and parking facilities. Guests at most of the Ritz-Carlton resorts have access to additional recreational amenities, such as tennis courts, golf courses and health spas.

 

The Ritz-Carlton

Geographic Distribution at January 2, 2004


   Hotels

    

United States (16 states and the District of Columbia)

   35    (11,669 rooms)
    
    

Non-U.S. (20 countries and territories)

   21    (6,678 rooms)
    
    

 

Renaissance Hotels & Resorts is a distinctive and global quality-tier brand, that targets individual business and leisure travelers, and group meetings seeking stylish and personalized environments. Renaissance hotels are generally located at downtown locations in major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotels contain from 300 to 500 rooms; however, a few of the convention oriented hotels are larger, and some hotels in non-gateway markets, particularly in Europe, are smaller. Renaissance products and services typically include stylish décor, internet access, restaurants and lounges, room service, swimming pools, gift shops, concierge lounges, and meeting and banquet facilities. Renaissance resort properties have additional recreational and entertainment facilities and services including golf courses, tennis courts, water sports, additional restaurants and spa facilities.

 

Renaissance Hotels & Resorts

Geographic Distribution at January 2, 2004


   Hotels

    

United States (25 states and the District of Columbia)

   64    (24,299 rooms)
    
    

Non-U.S. (26 countries and territories)

         

Americas (Non-U.S.)

   8     

Continental Europe

   19     

United Kingdom

   7     

Asia

   20     

The Middle East and Africa

   8     

Australia

   —       
    
    

Total Non-U.S.

   62    (21,315 rooms)
    
    

 

9


Ramada International is a moderately-priced brand targeted at business and leisure travelers outside the United States. Each full-service Ramada International property includes a restaurant, a cocktail lounge and full-service meeting and banquet facilities. Ramada International hotels are located primarily in Europe and Asia in major cities, near major international airports and suburban office park locations. In 2002, Marriott and Cendant Corporation (Cendant) completed the formation of a joint venture to further develop and expand the Ramada and Days Inn brands in the United States. In addition to management and franchise fees associated with Ramada International, we receive a royalty fee for the use of the Ramada name in Canada and we recognize our share of the joint venture’s earnings. In 2003, we opened 49 hotels with the Ramada brand name outside the United States and Canada.

 

Ramada International

Geographic Distribution at January 2, 2004


   Hotels

    

Americas (Non-U.S. and Canada)

   3     

Continental Europe

   99     

United Kingdom

   61     

The Middle East and Africa

   6     

Asia

   19     

Australia

   4     
    
    

Total (23 countries and territories)

   192    (26,150 rooms)
    
    

 

Bulgari Hotels & Resorts. As part of our ongoing strategy to expand our reach through partnerships with pre-eminent world-class companies, in early 2001 we entered into a joint venture with Bulgari SpA to create and introduce distinctive new luxury hotel properties in prime locations – Bulgari Hotels & Resorts. The first property, the Bulgari Hotel Milano, is scheduled to open in Milan, Italy in May 2004. The second property announced is the Bulgari Resort Bali, currently in development and scheduled to open in late 2005. Other projects are currently in development in Europe, Asia, and North America.

 

Select-Service Lodging

 

Courtyard is our upper moderate-price select-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically contain 90 to 150 rooms. Well landscaped grounds typically include a courtyard with a pool and social areas. Most hotels feature functionally designed quality guest rooms and meeting rooms, limited restaurant facilities, a swimming pool and an exercise room. In 2003, most Courtyard hotels introduced free in-room high-speed internet and in 2004, this will be a standard feature along with The Market (a self-serve food store open 24 hours a day). The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year end, there were 616 Courtyards operating in 15 countries.

 

Courtyard

Geographic Distribution at January 2, 2004


   Hotels

    

United States (45 states and the District of Columbia)

   563    (78,836 rooms)
    
    

Non-U.S. (14 countries and territories)

   53    (9,378 rooms)
    
    

 

Fairfield Inn is our hotel brand that competes in the lower moderate-price tier. Aimed at value-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 60 to 140 rooms and offers a swimming pool, complimentary continental breakfast and free local phone calls. At year-end there were 445 Fairfield Inns and 79 Fairfield Inn & Suites (524 hotels total), operating in the United States and Mexico.

 

SpringHill Suites is our all-suite brand in the upper moderate-price tier targeting business travelers, leisure travelers and families. SpringHill Suites typically have 90 to 165 studio suites that are 25 percent larger than a typical hotel guest room. The brand offers a broad range of amenities including complimentary continental breakfast and exercise facilities. In 2004, the brand will also introduce free in-room high-speed internet and The Market (a self-serve food store open 24 hours a day). There were 110 properties located in the United States and Canada at January 2, 2004.

 

10


Extended-Stay Lodging

 

Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 449 Residence Inn hotels across North America.

 

Residence Inn

Geographic Distribution at January 2, 2004


  

Hotels


    

United States (47 states and the District of Columbia)

   436    (51,519 rooms)
    
    

Canada

   12    (1,719 rooms)
    
    

Mexico

   1    (76 rooms)
    
    

 

TownePlace Suites is a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. The typical TownePlace Suites hotel contains 100 studio, one-bedroom and two-bedroom suites. Each suite has a fully equipped kitchen and separate living area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-hour staffing and laundry facilities. At January 2, 2004, 111 TownePlace Suites (11,381 rooms) were located in 34 states.

 

Marriott ExecuStay provides furnished corporate apartments for stays of one month or longer nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers and franchise agreements. In 2003, consistent with our plan to shift the business toward franchising, the total number of units leased by ExecuStay decreased and 10 franchise markets were added. At January 2, 2004, Marriott ExecuStay’s franchise program, launched in July 2002, included eight franchisees covering 11 U.S. markets.

 

Marriott Executive Apartments and other. We provide temporary housing (serviced apartments) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some serviced apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At January 2, 2004, 13 serviced apartment properties (2,322 units), including nine Marriott Executive Apartments, were located in eight countries and territories. All Marriott Executive Apartments are located outside the United States.

 

Timeshare

 

Marriott Vacation Club International develops, sells and operates vacation timesharing resorts under four brands. Revenues are generated from three primary sources: (1) selling fee simple and other forms of timeshare intervals, (2) financing consumer purchases of timesharing intervals, and (3) operating the resorts.

 

Many timesharing resorts are located adjacent to Marriott hotels, and timeshare owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through a third party exchange company. Owners can also trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 2,400 Marriott hotels worldwide.

 

Marriott Vacation Club International (MVCI) brand offers full service villas featuring living and dining areas, one, two and three bedroom options, full kitchen and washer/dryer. In 41 locations worldwide this brand draws U.S. and international customers who vacation regularly with a focus on family, relaxation, and recreational activities. In the U.S., MVCI is located in beach and golf communities in California, Hawaii, the Carolinas and Florida and in ski resorts in Colorado, California and Utah. MVCI has a growing international presence with resorts in Thailand, France and Spain.

 

The Ritz-Carlton Club brand is a luxury tier real estate fractional brand that combines the benefits of second home ownership with personalized services and amenities. This brand is designed as a private club whose members have access to all Ritz-Carlton Clubs. This brand is offered in ski, golf and beach destinations in Colorado, St. Thomas, U.S.V.I., and Florida.

 

Marriott Grand Residence Club is an upper quality tier fractional ownership brand for corporate and leisure customers. This new brand is currently offering ownership in projects located in Lake Tahoe, California and London.

 

11


Horizons by Marriott Vacation Club International is Marriott Vacation Club’s moderately priced timeshare brand whose product offerings and customer base are currently focused on facilitating family vacations in entertainment communities. Today, Horizons resorts are located in Orlando and Branson, Missouri.

 

We expect that our future timeshare growth will increasingly reflect opportunities presented by partnerships, joint ventures, and other business structures. In 2003 MVCI entered into a joint venture with a third-party builder to build a new project in Las Vegas. We also entered into a sales and marketing agreement in connection with an existing non-Marriott project. Marriott Vacation Club International opened six resorts in 2003: four under the MVCI brand (Ko’Olina and Waiohai in Hawaii, Playa Andaluza in Spain, and Village d’Ile de France outside of Paris) together with The Ritz-Carlton Club in Jupiter, Florida and the Grand Residence Club in London. Our project in Myrtle Beach, South Carolina opened for sales in 2003, and we expect that the resort will open in June 2004. MVCI continues to offer timeshare intervals in its moderate-tier brand, Horizons by Marriott Vacation Club International.

 

Marriott Vacation Club International’s owner base continues to expand, with 256,000 owners at year end 2003, compared to 223,000 in 2002.

 

Timeshare (all brands)

Geographic Distribution at January 2, 2004


   Resorts

   Units

Continental United States

   36    6,255

Hawaii

   4    747

Caribbean

   3    608

Europe

   5    696

Asia

   1    54
    
  

Total

   49    8,360
    
  

 

Other Activities

 

Marriott Golf manages 23 golf course facilities as part of our management of hotels and for other golf course owners.

 

We operate 19 systemwide hotel reservation centers, 13 of them in the United States and Canada and six in other countries and territories, that handle reservation requests for Marriott lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others.

 

Our Architecture and Construction (A&C) division provides design, development, construction, refurbishment and procurement services to owners and franchisees of lodging properties on a voluntary basis outside the scope of and separate from their management or franchise contracts. Consistent with third-party contractors, A&C provides these services for owners and franchisees of Marriott branded properties on a fee basis.

 

Competition

 

We encounter strong competition both as a lodging operator and as a franchisor. There are approximately 600 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

 

Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2003, approximately two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the three largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.

 

Outside the United States branding is much less prevalent, and most markets are served primarily by independent operators. We believe that chain affiliation will increase in overseas markets as local economies grow, trade barriers are reduced, international travel accelerates and hotel owners seek the economies of centralized reservation systems and marketing programs.

 

Based on lodging industry data, we have an 8 percent share of the U.S. hotel market (based on number of rooms), and less than a 1 percent share of the lodging market outside the United States. We believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically

 

12


generate higher occupancies and Revenue per Available Room (REVPAR) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. Approximately 34 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.

 

Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Our management, lease, and franchise agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that these ongoing refurbishment programs are adequate to preserve the competitive position and earning power of the hotels and timeshare properties. We also strive to update and improve the products and services we offer. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains that rely exclusively on franchising.

 

The vacation ownership industry is one of the fastest growing segments in hospitality and is comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry in 1984, we have become a recognized leader in vacation ownership worldwide. Competition in the timeshare business is based primarily on the quality and location of timeshare resorts, the pricing of timeshare intervals and the availability of program benefits, such as exchange programs. We believe that our focus on offering distinct vacation experiences, combined with our financial strength, diverse market presence, strong brands and well-maintained properties, will enable us to remain competitive.

 

Marriott Rewards is a frequent guest program with nearly 20 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 24 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In addition, the ability of Marriott Vacation Club International timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brand.

 

Synthetic Fuel

 

Our synthetic fuel operation consists of our minority ownership interest in four coal-based synthetic fuel production facilities, two of which are located at a coal mine in Saline County, Illinois and the remaining two are located at a coal mine in Jefferson County, Alabama. The operation creates a fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. This tax credit program expires on December 31, 2007. We held all of the ownership in the synthetic fuel business prior to June 21, 2003, when we completed a previously announced sale of an approximately 50 percent ownership interest in the operation.

 

At both of the locations, the synthetic fuel operation has entered into long-term site leases at sites that are adjacent to large underground mines as well as barge load-out facilities on navigable rivers. In addition, the synthetic fuel operation has entered into long-term fixed-price coal purchase agreements with the owners of the adjacent coal mines and long-term fixed-price synthetic fuel sales contracts with the Tennessee Valley Authority and with Alabama Power Company, two major utilities. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel, covering approximately 80 percent of the productive capacity of the facilities. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into short-term spot contracts to buy coal from other coal mines and sell synthetic fuel to these or different end users. The operation is slightly seasonal as the synthetic fuel is mainly burned to produce electricity and electricity use peaks in the Summer in the markets served by the synthetic fuel operation.

 

In addition, the synthetic fuel operation has entered into a long-term operations and maintenance agreement with an experienced manager of synthetic fuel facilities. This manager is responsible for staffing the facilities, operating and maintaining the machinery and conducting routine maintenance on behalf of the synthetic fuel operation.

 

Finally, the synthetic fuel operation has entered into a long-term license and binder supply agreement with Headwaters Incorporated, which permits the operation to utilize a carboxylated polystyrene copolymer emulsion patented by Headwaters and manufactured by Dow Chemical to facilitate converting the coal into a qualified synthetic fuel.

 

On November 7, 2003, the U.S. Internal Revenue Service issued private letter rulings to the synthetic fuel joint venture confirming that the synthetic fuel produced by the facilities is a “qualified fuel” under Section 29 of the Internal Revenue Code and that the resulting tax credit may be allocated among the members of the Synthetic Fuel joint venture.

 

Discontinued Operations

 

Marriott Senior Living Services

 

On December 17, 2002, we sold 12 senior living communities to CNL Retirement Properties, Inc. (“CNL”) for approximately $89 million in cash. We accounted for the sale under the full accrual method in accordance with Statement of Financial Accounting Standards (“FAS”) No. 66, and we recorded an after-tax loss of approximately $13 million. On December 30, 2002, we entered into definitive agreements to sell our senior living management

 

13


business to Sunrise Senior Living, Inc. (Sunrise) and to sell nine senior living communities to CNL. We completed these sales to Sunrise and CNL in addition to the related sale of a parcel of land to Sunrise on March 28, 2003, for $266 million and recognized a gain, net of taxes, of $23 million.

 

Also, on December 30, 2002, we purchased 14 senior living communities for approximately $15 million in cash, plus the assumption of $227 million in debt, from an unrelated owner. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to sell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the subordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates and will continue to operate the 14 communities under long-term management agreements. We accounted for the sale in accordance with FAS No. 66 and recorded a gain, net of taxes, of $1 million.

 

For the year ended January 3, 2003, we recorded an after-tax charge of $131 million associated with our agreement to sell our senior living management business.

 

As a result of the above transactions we now report this business in discontinued operations.

 

Marriott Distribution Services

 

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

 

Employee Relations

 

At January 2, 2004, we had approximately 128,000 employees. Approximately 7,100 employees were represented by labor unions. We believe relations with our employees are positive.

 

Other Properties

 

In addition to the operating properties discussed above, we lease five office buildings with combined space of approximately 1,140,000 square feet in Bethesda, Maryland, Chevy Chase, Maryland and Orlando, Florida where our corporate, Ritz-Carlton and Marriott Vacation Club International headquarters are located, respectively.

 

We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements.

 

Internet Address and Company SEC Filings

 

Our internet address is www.marriott.com. On our website, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing.

 

Executive Officers of the Registrant

 

See Item 10 on page 79 of this report for information about our executive officers.

 

14


ITEM 3. LEGAL PROCEEDINGS

 

Current Proceedings

 

The CTF/HPI arbitration and litigation and the Strategic Hotel litigation are described under the caption heading “Litigation and Arbitration” in Footnote 19 of the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of this annual report and are hereby incorporated by reference. We believe that the claims made against us in each of those proceedings are without merit, and we intend to vigorously defend against them. However, we cannot assure you as to the outcome of these lawsuits, nor can we currently estimate the range of potential losses to the Company.

 

From time to time we are also subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.

 

Recently Terminated Proceedings

 

Senior Housing and Five Star litigation. The Company and Marriott Senior Living Services, Inc. (“SLS”) (which on March 28, 2003, became a subsidiary of Sunrise Senior Living) were parties to actions in the Circuit Court for Montgomery County, Maryland and the Superior Court for Middlesex County, Massachusetts both initiated on November 27, 2002 (the Massachusetts court subsequently dismissed the Massachusetts action on March 4, 2003). These actions related to 31 senior living communities that SLS operates for Senior Housing Properties Trust (“SNH”) and Five Star Quality Care, Inc. (“FVE”), and SNH/FVE’s attempt to terminate the operating agreements for these communities. In the fourth quarter of 2003, the parties entered into settlement discussions and on January 7, 2004, the parties settled the suit on terms not material to us. The parties expect to receive formal notice of dismissal from the Maryland court in the near future.

 

Whitehouse Hotel litigation. On April 7, 2003, Whitehouse Hotel Limited Partnership and WH Holdings, L.L.C., the owners of the New Orleans Ritz-Carlton Hotel, filed suit against us and The Ritz-Carlton Hotel Company, L.L.C. (“Ritz-Carlton”) in the Civil District Court for the Parish of New Orleans, Louisiana. On October 24, 2003 the parties settled the suit on terms not material to us and on November 3, 2003 the suit was dismissed with prejudice upon joint motion of the parties.

 

Shareholders Derivative Actions (also recently resolved)

 

On January 16, 2003, Daniel and Raizel Taubenfeld filed a shareholder’s derivative action in Delaware Chancery Court against each member of our Board of Directors and against Avendra LLC. The company was named as a nominal defendant. The individual defendants were accused of exposing the company to accusations and lawsuits which allege wrongdoing on the part of the company. The complaint alleged that, as a result, the company’s reputation had been damaged leading to business losses and the compelled renegotiation of some management contracts. The substantive allegations of the complaint were derived exclusively from prior press reports. The plaintiffs made no damage claim against us, nor did they assert any specific damage amount against the individual defendants. Both the directors and the Company moved to dismiss this action. The court granted that motion on October 28, 2003, dismissing the complaint with prejudice as to the named plaintiffs only.

 

On July 2, 2003, the Taubenfelds also initiated an action in Delaware Chancery Court pursuant to Section 220 of the Delaware General Corporation Law, to obtain access to certain of the Company’s books and records, which remains outstanding. Amalgamated Bank brought a similar shareholder action for access to books and records under Section 220 in Delaware Chancery Court on July 8, 2003. During the fourth quarter of 2003, we entered into separate settlement agreements with the Taubenfelds and with Amalgamated Bank pursuant to which we will produce a limited number of documents. Once confidentiality agreements are entered into, these two proceedings will also be dismissed.

 

15


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

 

None.

 

16


Part II

 

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information and Dividends

 

The range of prices of our common stock and dividends declared per share for each quarterly period within the last two years are as follows:

 

         Stock Price

  

Dividends

Declared Per
Share


         High

   Low

  
2002  

First Quarter

   $ 45.49    $ 34.60    $ 0.065
   

Second Quarter

     46.45      37.25      0.070
   

Third Quarter

     40.25      30.44      0.070
   

Fourth Quarter

     36.62      26.25      0.070
         Stock Price

  

Dividends

Declared Per
Share


         High

   Low

  
2003   First Quarter    $ 34.89    $ 28.55    $ 0.070
   

Second Quarter

     40.44      31.23      0.075
   

Third Quarter

     41.59      37.66      0.075
   

Fourth Quarter

     47.20      40.04      0.075

 

At January 30, 2004, there were 230,054,286 shares of Class A Common Stock outstanding held by 47,202 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. The year-end closing price for our stock was $34.28 on January 3, 2003 and $46.15 on January 2, 2004.

 

17


ITEM 6. SELECTED HISTORICAL FINANCIAL DATA

 

The following table presents summary selected historical financial data for the Company derived from our financial statements as of and for the five fiscal years ended January 2, 2004.

 

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.

 

($ in millions, except per share data)    Fiscal Year 2

     2003

   2002

    2001

    2000

    1999

Income Statement Data:

                                     

Revenues 1

   $ 9,014    $ 8,415     $ 7,768     $ 7,911     $ 7,026
    

  


 


 


 

Operating income 1

     377      321       420       762       621
    

  


 


 


 

Income from continuing operations

     476      439       269       490       399

Discontinued operations

     26      (162 )     (33 )     (11 )     1
    

  


 


 


 

Net income

   $ 502    $ 277     $ 236     $ 479     $ 400
    

  


 


 


 

Per Share Data:

                                     

Diluted earnings per share from continuing operations

   $ 1.94    $ 1.74     $ 1.05     $ 1.93     $ 1.51

Diluted earnings (loss) per share from discontinued operations

     .11      (.64 )     (.13 )     (.04 )     —  
    

  


 


 


 

Diluted earnings per share

   $ 2.05    $ 1.10     $ .92     $ 1.89     $ 1.51
    

  


 


 


 

Cash dividends declared per share

     .295      .275       .255       .235       .215

Balance Sheet Data (at end of year):

                                     

Total assets

   $ 8,177    $ 8,296     $ 9,107     $ 8,237     $ 7,324

Long-term debt 1

     1,391      1,553       2,708       1,908       1,570

Shareholders’ equity

     3,838      3,573       3,478       3,267       2,908

Other Data:

                                     

Base management fees 1

     388      379       372       383       352

Incentive management fees 1

     109      162       202       316       268

Franchise fees 1

     245      232       220       208       180

1 Balances reflect our Senior Living Services and Distribution Services businesses as discontinued operations.

 

2 All fiscal years included 52 weeks, except for 2002, which included 53 weeks.

 

18


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

BUSINESS AND OVERVIEW

 

We are a worldwide operator and franchisor of 2,718 hotels and related facilities. Our operations are grouped into five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel. In our Lodging business, we operate, develop and franchise under 14 separate brand names in 68 countries. We also operate and develop Marriott timeshare properties under four separate brand names.

 

We earn base, incentive and franchise fees based upon the terms of our management and franchise agreements. Revenues are also generated from the following sources associated with our timeshare business: (1) selling timeshare intervals, (2) operating the resorts, and (3) financing customer purchases of timesharing intervals. In addition, we earn revenues and generate tax credits from our Synthetic Fuel joint venture.

 

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, and interest income. With the exception of our Synthetic Fuel segment, we do not allocate income taxes to our segments. As timeshare note sales are an integral part of the timeshare business, we include timeshare note sale gains in our timeshare segment results and we allocate other gains as well as equity income (losses) from our joint ventures to each of our segments.

 

This historically challenging time in the lodging industry has demonstrated Marriott International’s resilience, the strength of our business model, superior brands, strong management team and dedicated associates. We are optimistic about a stronger business climate in 2004. And with the final disposition of our senior living and distribution services businesses in 2003, we look forward to operating as a focused lodging and timeshare company for the first time in our 76-year history. In 2003, we grew productivity at the hotel level leveraging our buying power and systems. Greater integration of sophisticated scheduling systems reduced hours worked per occupied room by over 10 percent in 2003 over 2000 levels for participating hotels. In addition, food and supply costs were reduced due to greater participation in our centralized procurement and accounts payable systems. By pooling risk among our managed hotel portfolio, we continued to purchase insurance at a lower cost than any property could purchase alone.

 

By the end of 2003, we had high-speed internet access available in approximately 1,400 hotels, far outpacing our competition. We also introduced wireless internet access in lobbies, meeting rooms and public spaces in over 900 hotels in the U.S. during the year.

 

CONSOLIDATED RESULTS

 

The following discussion presents an analysis of results of our operations for fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001.

 

Continuing Operations

 

Revenues

 

($ in millions)

 

     2003

   2002

   2001

Full-Service

   $ 5,876    $ 5,508    $ 5,260

Select-Service

     1,000      967      864

Extended-Stay

     557      600      635

Timeshare

     1,279      1,147      1,009
    

  

  

Total lodging

     8,712      8,222      7,768

Synthetic fuel

     302      193      —  
    

  

  

     $ 9,014    $ 8,415    $ 7,768
    

  

  

 

19


Income from Continuing Operations

 

 

($ in millions)    2003

    2002

    2001

 
                          

Full-Service

   $ 407     $ 397     $ 294  

Select-Service

     99       130       145  

Extended-Stay

     47       (3 )     55  

Timeshare

     149       183       147  
    


 


 


Total lodging financial results (pretax)

     702       707       641  

Synthetic fuel (after tax)

     96       74       —    

Unallocated corporate expenses

     (132 )     (126 )     (157 )

Interest income, provision for loan losses and interest expense

     12       24       (63 )

Income taxes (excluding Synthetic fuel)

     (202 )     (240 )     (152 )
    


 


 


     $ 476     $ 439     $ 269  
    


 


 


 

2003 Compared to 2002

 

Revenues from continuing operations increased 7 percent to $9 billion in 2003 reflecting revenue from new lodging properties, partially offset by lower demand for hotel rooms and consequently lower fees to us.

 

Income from continuing operations, net of taxes, increased 8 percent to $476 million, and diluted earnings per share from continuing operations advanced 11 percent to $1.94. Synthetic Fuel operations contributed $96 million in 2003 compared to $74 million in 2002. Our lodging financial results declined $5 million, to $702 million in 2003. The comparisons from 2002 benefit from the $50 million pretax charge to write-down acquisition goodwill for ExecuStay in 2002, offset by the $44 million pretax gain on the sale of our investment in Interval International in 2002, and further benefit from our 2003 receipt of a $36 million insurance settlement for lost management fees associated with the New York Marriott World Trade Center hotel, which was destroyed in the 2001 terrorist attacks.

 

2002 Compared to 2001

 

Revenues from continuing operations increased 8 percent to $8.4 billion in 2002 reflecting the sales of our new Synthetic Fuel operation and revenue from new lodging properties, partially offset by a slowdown in the economy and the resulting decline in lodging demand.

 

Income from continuing operations, net of taxes, increased 63 percent to $439 million, and diluted earnings per share from continuing operations advanced 66 percent to $1.74. Income from continuing operations reflected $74 million associated with our synthetic fuel operation, the results also reflected a $44 million pretax 2002 gain on the sale of our investment in Interval International, offset by the $50 million pretax 2002 charge to write-down the acquisition goodwill for ExecuStay and the decreased 2002 demand for hotel rooms and executive apartments. The comparisons to 2001 include the impact of the $204 million pretax restructuring and other charges that we recorded against continuing operations in the fourth quarter of 2001.

 

Operating Income

 

2003 Compared to 2002

 

Operating income increased 17 percent to $377 million in 2003. The favorable comparisons to 2002 include the impact of the $50 million write-down of goodwill recorded in 2002 associated with our ExecuStay business, the 2003 receipt of $36 million of insurance proceeds associated with lost management fees resulting from the destruction of the Marriott World Trade Center hotel and lower 2003 operating losses from our Synthetic Fuel operation. In 2003, our Synthetic Fuel business generated operating losses of $104 million, compared to $134 million in 2002. Operating income in 2003 was hurt by $53 million of lower incentive fees, which resulted from the weak operating environment in domestic lodging.

 

2002 Compared to 2001

 

Operating income decreased 24 percent to $321 million largely as a result of the $50 million write-down of goodwill associated with our ExecuStay business. In addition, we recorded $134 million of operating losses associated with our Synthetic Fuel operation, which commenced operations in 2002. The comparisons to 2001 are impacted by the $155 million restructuring and other charges recorded against operating income in 2001 and a $40 million reduction in incentive fees resulting from the decline in hotel demand.

 

20


Marriott Lodging

 

We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.

 

2003 Compared to 2002

 

Lodging, which includes our Full-Service, Select-Service, Extended-Stay, and Timeshare segments, reported financial results of $702 million in 2003, compared to $707 million in 2002 and revenues of $8,712 million in 2003, a 6 percent increase, compared to revenues of $8,222 million in 2002. The lodging revenue and financial results include the receipt of a $36 million insurance settlement for lost revenues associated with the New York World Trade Center hotel. Our revenues from base management fees totaled $388 million, an increase of 2 percent, reflecting 3 percent growth in the number of managed rooms and a 1.9 percent decline in REVPAR for our North American managed hotels. Incentive management fees were $109 million, a decline of 33 percent, reflecting the decline in REVPAR as well as lower property level house profit. House profit margins declined 2.7 percentage points, largely due to lower average room rates, higher wages, insurance and utility costs, and lower telephone profits, offset by continued productivity improvements. Franchise fees totaled $245 million, an increase of 6 percent. The comparison to 2002 includes the impact of the $50 million pretax write-down of ExecuStay goodwill recorded in 2002, partially offset by a $44 million pretax gain related to the sale of our investment in Interval International.

 

2002 Compared to 2001

 

Lodging financial results increased 10 percent to $707 million, and revenues increased 6 percent to $8,222 million. Results reflected a $44 million pretax gain related to the sale of our investment in Interval International, a timeshare exchange company, and increased revenue associated with new properties partially offset by lower fees due to the decline in demand for hotel rooms. Our revenues from base management fees totaled $379 million, an increase of 2 percent. Franchise fees totaled $232 million, an increase of 5 percent and incentive management fees were $162 million, a decline of 20 percent. The $50 million write-down of acquisition goodwill associated with our executive housing business, ExecuStay, reduced Lodging results in 2002. The 2002 comparisons are also impacted by $115 million restructuring costs and other charges recorded against lodging results in 2001.

 

Lodging Development

 

Marriott Lodging opened 185 properties totaling over 31,000 rooms across its brands in 2003, while 24 hotels (approximately 4,000 rooms) exited the system. Highlights of the year included:

 

  We converted 72 properties (10,050 rooms), or 32 percent of our total room additions for the year from other brands.

 

  We opened approximately 35 percent of new rooms outside the United States.

 

  We added 97 properties (11,900 rooms) to our Select-Service and Extended-Stay brands.

 

  We opened six new Marriott Vacation Club International properties in Hawaii, Spain, France, London, Florida and South Carolina.

 

At year-end 2003, we had over 300 hotel properties and approximately 50,000 rooms under construction, awaiting conversion, or approved for development. We expect to open over 175 hotels and timeshare resorts (approximately 25,000 to 30,000 rooms) in 2004. 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.

 

REVPAR

 

We consider Revenue per Available Room (REVPAR) to be a meaningful indicator of our performance because it measures the period over period change in room revenues for comparable properties. We calculate REVPAR by dividing room sales for comparable properties by room nights available to guests for the period. REVPAR may not be comparable to similarly titled measures such as revenues.

 

The following table shows occupancy, average daily rate and REVPAR for each of our comparable principal established brands. We have not presented statistics for company-operated North American Fairfield Inn and SpringHill Suites properties here (or in the comparable information for the prior years presented later in this report) because we operate only a small number of properties as both these brands are predominantly franchised and such information would not be meaningful for those brands (identified as “nm” in the tables below). Systemwide

 

21


statistics include data from our franchised properties, in addition to our owned, leased and managed properties. Systemwide International statistics by region are based on comparable worldwide units, excluding North America.

 

     Comparable Company-Operated
North American Properties


   

Comparable Systemwide

North American Properties


 
     2003

    Change vs. 2002

    2003

    Change vs. 2002

 

Marriott Hotels & Resorts (1)

                            

Occupancy

     69.3 %   -0.5 % pts.     67.6 %   -0.4 % pts.

Average daily rate

   $ 135.42     -2.1 %   $ 128.53     -1.8 %

REVPAR

   $ 93.81     -2.8 %   $ 86.87     -2.4 %

The Ritz-Carlton (2)

                            

Occupancy

     65.7 %   1.1 % pts.     65.7 %   1.1 % pts.

Average daily rate

   $ 231.12     -0.8 %   $ 231.12     -0.8 %

REVPAR

   $ 151.85     1.0 %   $ 151.85     1.0 %

Renaissance Hotels & Resorts

                            

Occupancy

     65.8 %   0.9 % pts.     65.3 %   1.5 % pts.

Average daily rate

   $ 132.12     -1.8 %   $ 123.97     -2.2 %

REVPAR

   $ 86.99     -0.4 %   $ 80.92     0.1 %

Composite – Full-Service (3)

                            

Occupancy

     68.4 %   -0.1 % pts.     67.1 %   0.0 % pts.

Average daily rate

   $ 144.17     -1.6 %   $ 134.92     -1.6 %

REVPAR

   $ 98.65     -1.8 %   $ 90.57     -1.6 %

Courtyard

                            

Occupancy

     67.6 %   -1.0 % pts.     68.5 %   -0.6 % pts.

Average daily rate

   $ 93.16     -1.2 %   $ 92.90     -0.6 %

REVPAR

   $ 63.01     -2.7 %   $ 63.65     -1.4 %

Fairfield Inn

                            

Occupancy

     nm     nm       64.1 %   -0.3 % pts.

Average daily rate

     nm     nm     $ 64.28     0.2 %

REVPAR

     nm     nm     $ 41.22     -0.4 %

SpringHill Suites

                            

Occupancy

     nm     nm       68.4 %   1.3 % pts.

Average daily rate

     nm     nm     $ 80.38     1.3 %

REVPAR

     nm     nm     $ 54.94     3.2 %

Residence Inn

                            

Occupancy

     77.0 %   -0.3 % pts.     76.2 %   0.2 % pts.

Average daily rate

   $ 94.94     -1.9 %   $ 93.85     -1.4 %

REVPAR

   $ 73.09     -2.3 %   $ 71.47     -1.1 %

TownePlace Suites

                            

Occupancy

     70.3 %   -2.0 % pts.     70.9 %   0.0 % pts.

Average daily rate

   $ 63.24     1.8 %   $ 63.34     -0.2 %

REVPAR

   $ 44.48     -1.0 %   $ 44.89     -0.1 %

Composite – Select-Service & Extended-Stay (4)

                            

Occupancy

     70.0 %   -0.8 % pts.     69.2 %   -0.2 % pts.

Average daily rate

   $ 90.98     -1.1 %   $ 83.70     -0.6 %

REVPAR

   $ 63.64     -2.2 %   $ 57.95     -0.8 %

Composite – All (5)

                            

Occupancy

     69.0 %   -0.4 % pts.     68.3 %   -0.1 % pts.

Average daily rate

   $ 124.45     -1.4 %   $ 105.86     -1.1 %

REVPAR

   $ 85.85     -1.9 %   $ 72.31     -1.3 %

 

1 Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand.

 

2 Statistics for The Ritz-Carlton are for January through December.

 

3 Full-Service composite statistics include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.

 

4 Select-Service and Extended-Stay composite statistics include the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

5 Composite statistics – All include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

22


For North American properties (except for The Ritz-Carlton as noted on the previous page), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended January 2, 2004, include the period from January 4, 2003 through January 2, 2004, while the statistics for the fiscal year ended January 3, 2003, include the period from December 29, 2001 through January 3, 2003.

 

The following table shows occupancy, average daily rate and REVPAR for international properties by region.

 

     Comparable Company-Operated
International Properties (1)


    Comparable Systemwide
International Properties (1)


 
     Year Ended
December 31, 2003


    Change vs. 2002

    Year Ended
December 31, 2003


    Change vs. 2002

 

Caribbean & Latin America

                            

Occupancy

     67.5 %   4.2 % pts.     65.3 %   3.8 % pts.

Average daily rate

   $ 126.45     2.7 %   $ 121.64     2.2 %

REVPAR

   $ 85.32     9.5 %   $ 79.49     8.5 %

Continental Europe

                            

Occupancy

     67.9 %   0.3 % pts.     64.9 %   0.3 % pts.

Average daily rate

   $ 117.79     -5.4 %   $ 119.40     -4.0 %

REVPAR

   $ 79.92     -4.9 %   $ 77.50     -3.5 %

United Kingdom

                            

Occupancy

     76.6 %   -0.7 % pts.     72.3 %   -0.8 % pts.

Average daily rate

   $ 148.14     -1.5 %   $ 125.44     -3.2 %

REVPAR

   $ 113.48     -2.4 %   $ 90.71     -4.2 %

Middle East & Africa

                            

Occupancy

     66.5 %   0.4 % pts.     64.3 %   0.6 % pts.

Average daily rate

   $ 71.39     14.9 %   $ 71.58     14.6 %

REVPAR

   $ 47.49     15.7 %   $ 46.00     15.8 %

Asia Pacific (2)

                            

Occupancy

     65.5 %   -6.7 % pts.     67.8 %   -5.3 % pts.

Average daily rate

   $ 85.25     -1.4 %   $ 93.13     0.5 %

REVPAR

   $ 55.86     -10.5 %   $ 63.10     -6.8 %

Composite International (3)

                            

Occupancy

     67.6 %   -1.3 % pts.     67.5 %   -1.0 % pts.

Average daily rate

   $ 109.62     0.1 %   $ 112.14     0.0 %

REVPAR

   $ 74.14     -1.8 %   $ 75.69     -1.5 %

 

1 The comparison to 2002 is on a currency neutral basis and includes results for January through December.

 

2 Excludes Hawaii.

 

3 Includes Hawaii.

 

23


The following table shows occupancy, average daily rate and REVPAR for each of our principal established brands for 2002 compared to 2001.

 

     Comparable Company-Operated
North American Properties


    Comparable Systemwide North
American Properties


 
     2002

    Change vs. 2001

    2002

    Change vs. 2001

 

Marriott Hotels & Resorts (1)

                            

Occupancy

     70.1 %   0.0 % pts.     68.4 %   0.3 % pts.

Average daily rate

   $ 137.28     -4.8 %   $ 130.65     -4.8 %

REVPAR

   $ 96.25     -4.8 %   $ 89.30     -4.4 %

The Ritz-Carlton (2)

                            

Occupancy

     66.1 %   0.6 % pts.     66.1 %   0.6 % pts.

Average daily rate

   $ 233.40     -5.2 %   $ 233.40     -5.2 %

REVPAR

   $ 154.21     -4.3 %   $ 154.21     -4.3 %

Renaissance Hotels & Resorts

                            

Occupancy

     65.1 %   -0.9 % pts.     63.6 %   -0.5 % pts.

Average daily rate

   $ 131.77     -3.2 %   $ 123.43     -3.0 %

REVPAR

   $ 85.80     -4.5 %   $ 78.56     -3.8 %

Composite – Full-Service (3)

                            

Occupancy

     69.1 %   -0.1 % pts.     67.6 %   0.2 % pts.

Average daily rate

   $ 144.07     -4.7 %   $ 135.57     -4.6 %

REVPAR

   $ 99.51     -4.8 %   $ 91.59     -4.4 %

Courtyard

                            

Occupancy

     69.1 %   -2.1 % pts.     69.7 %   -1.2 % pts.

Average daily rate

   $ 94.47     -5.1 %   $ 93.41     -4.3 %

REVPAR

   $ 65.26     -7.9 %   $ 65.13     -5.9 %

Fairfield Inn

                            

Occupancy

     nm     nm       66.0 %   -0.3 % pts.

Average daily rate

     nm     nm     $ 64.48     -0.8 %

REVPAR

     nm     nm     $ 42.59     -1.3 %

SpringHill Suites

                            

Occupancy

     nm     nm       68.2 %   1.6 % pts.

Average daily rate

     nm     nm     $ 77.96     -2.5 %

REVPAR

     nm     nm     $ 53.14     -0.2 %

Residence Inn

                            

Occupancy

     76.9 %   -0.6 % pts.     76.8 %   -0.5 % pts.

Average daily rate

   $ 97.36     -7.2 %   $ 95.68     -5.6 %

REVPAR

   $ 74.87     -7.9 %   $ 73.47     -6.2 %

TownePlace Suites

                            

Occupancy

     73.4 %   0.2 % pts.     72.4 %   2.0 % pts.

Average daily rate

   $ 62.78     -6.8 %   $ 63.28     -4.9 %

REVPAR

   $ 46.08     -6.5 %   $ 45.80     -2.3 %

Composite – Select-Service & Extended-Stay (4)

                            

Occupancy

     71.5 %   -1.5 % pts.     70.8 %   -0.5 % pts.

Average daily rate

   $ 93.16     -5.9 %   $ 85.92     -4.3 %

REVPAR

   $ 66.65     -7.8 %   $ 60.86     -5.0 %

Composite – All (5)

                            

Occupancy

     70.1 %   -0.6 % pts.     69.4 %   -0.2 % pts.

Average daily rate

   $ 123.43     -4.9 %   $ 107.58     -4.4 %

REVPAR

   $ 86.47     -5.7 %   $ 74.62     -4.7 %

 

1 Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand.

 

2 Statistics for The Ritz-Carlton are for January through December.

 

3 Full-Service composite statistics include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.

 

4 Select-Service and Extended-Stay composite statistics include the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

5 Composite statistics – All include the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

24


For North American properties (except for The Ritz-Carlton as noted on the previous page), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended January 3, 2003 include the period from December 29, 2001 through January 3, 2003, while the statistics for the fiscal year ended December 28, 2001 include the period from December 30, 2000 through December 28, 2001.

 

Occupancy, average daily rate, and REVPAR by region for international properties are shown in the following table.

 

     Comparable Company-Operated
International Properties (1)


    Comparable Systemwide
International Properties (1)


 
     Year Ended
December 31, 2002


    Change vs. 2001

    Year Ended
December 31, 2002


    Change vs. 2001

 

Caribbean & Latin America

                            

Occupancy

     66.3 %   -0.6 % pts.     63.5 %   -1.0 % pts.

Average daily rate

   $ 129.33     -1.2 %   $ 124.25     -2.6 %

REVPAR

   $ 85.73     -2.2 %   $ 78.87     -4.1 %

Continental Europe

                            

Occupancy

     67.1 %   0.4 % pts.     64.2 %   -0.3 % pts.

Average daily rate

   $ 106.82     -2.3 %   $ 108.58     -1.0 %

REVPAR

   $ 71.71     -1.7 %   $ 69.67     -1.4 %

United Kingdom

                            

Occupancy

     77.3 %   2.9 % pts.     74.0 %   1.6 % pts.

Average daily rate

   $ 139.98     -0.3 %   $ 123.59     -3.0 %

REVPAR

   $ 107.50     3.6 %   $ 91.43     -0.8 %

Middle East & Africa

                            

Occupancy

     66.2 %   5.4 % pts.     66.2 %   5.4 % pts.

Average daily rate

   $ 72.84     -6.3 %   $ 72.84     -6.3 %

REVPAR

   $ 48.19     2.0 %   $ 48.19     2.0 %

Asia Pacific (2)

                            

Occupancy

     72.8 %   4.8 % pts.     73.5 %   4.2 % pts.

Average daily rate

   $ 81.13     -0.8 %   $ 87.35     -0.7 %

REVPAR

   $ 59.08     6.2 %   $ 64.17     5.2 %

Composite International (3)

                            

Occupancy

     69.7 %   2.9 % pts.     69.1 %   2.3 % pts.

Average daily rate

   $ 101.81     -2.0 %   $ 105.22     -2.2 %

REVPAR

   $ 70.95     2.2 %   $ 72.71     1.1 %

 

1 The comparison to 2001 is on a currency neutral basis and includes results for January through December.

 

2 Excludes Hawaii.

 

3 Includes Hawaii.

 

25


Full-Service Lodging                   Annual Change

 
($ in millions)    2003

   2002

   2001

   2003/2002

    2002/2001

 

Revenues

   $ 5,876    $ 5,508    $ 5,260    7 %   5 %
    

  

  

            

Segment results

   $ 407    $ 397    $ 294    3 %   35 %
    

  

  

            

 

2003 Compared to 2002

 

Full-Service Lodging, which includes the Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts, Ramada International and Bulgari Hotels & Resorts brands, had revenues of $5,876 million, a 7 percent increase over prior year, and segment results of $407 million compared to $397 million in 2002. The 3 percent increase in results includes the $36 million insurance payment received for lost management fees in connection with the loss of the New York Marriott World Trade Center hotel in the September 11, 2001 terrorist attacks. The 2003 results also reflect an $18 million increase in base management and franchise fees, largely due to the growth in the number of rooms. Across our Full-Service Lodging segment, we added 88 hotels (18,000 rooms) and deflagged 15 hotels (3,000 rooms). We typically earn incentive fees only after a managed hotel achieves a minimum level of owner profitability. As a result, lower revenue and lower property-level margins have reduced the number of hotels from which we earn incentive management fees. As a result, full-service incentive fees declined $41 million in 2003.

 

REVPAR for Full-Service Lodging North American systemwide hotels declined 1.6 percent to $90.57. Occupancy for these hotels was flat at 67.1 percent, while average room rates declined 1.6 percent to $134.92. REVPAR for our International systemwide hotels declined 1.5 percent. Occupancy declined 1 percentage point, while average room rates remained flat at $112.14.

 

Our international operations increased 9 percent to $102 million, reflecting $21 million of gains associated with the sale of our interests in three joint ventures and favorable foreign exchange rates, partially offset by an $8 million charge for guarantee fundings related to a hotel in Istanbul, a $7 million charge to write-down our investment in a joint venture that sold a hotel at a loss in January 2004, and the impact of the war and Severe Acute Respiratory Syndrome (SARS) on international travel earlier in the year.

 

2002 Compared to 2001

 

Full-Service Lodging had revenues of $5,508 million, a 5 percent increase over prior year, and segment results of $397 million, an increase of 35 percent. The comparison reflects $84 million of restructuring and other charges recorded in the fourth quarter of 2001. The 2002 results also reflect a $9 million increase in base management fees, largely due to the growth in the number of managed rooms. Franchise fees decreased $6 million primarily as a result of the transfer of the Ramada license agreements to the joint venture formed with Cendant Corporation. In 2001, we had franchise revenue associated with the Ramada license agreements, while in 2002 we had equity in earnings of the joint venture, the impact of the change in the Ramada structure was partially offset by higher franchise fees resulting from the growth in the number of franchised rooms. Across our Full-Service Lodging segment, we added 60 hotels (15,000 rooms) and deflagged 12 hotels (3,300 rooms). Full-Service incentive fees were down $27 million due to the decline in the number of properties from which we earn incentive fees.

 

REVPAR for Full-Service Lodging North American systemwide hotels declined 4.4 percent. Occupancy for these hotels was up slightly to 67.6 percent, while the average room rates declined 4.6 percent.

 

International lodging reported an increase in the results of operations, reflecting the impact of the increase in travel in Asia and the United Kingdom. The favorable comparison also reflects the restructuring and other charges recorded in the fourth quarter of 2001.

 

Select-Service Lodging                   Annual Change

($ in millions)    2003

   2002

   2001

   2003/2002

  2002/2001

Revenues

   $ 1,000    $ 967    $ 864    3%   12%
    

  

  

        

Segment results

   $ 99    $  130    $ 145    -24%   -10%
    

  

  

        

 

26


2003 Compared to 2002

 

Select-Service Lodging, which includes the Courtyard, Fairfield Inn and SpringHill Suites brands, had revenues of $1 billion, a 3 percent increase over the prior year, and segment results of $99 million compared to $130 million in 2002. The $31 million decrease reflects the impact of a $12 million reduction in base and incentive management fees, partially offset by a $3 million increase in franchise fees. The results also include $12 million of higher equity losses primarily from our Courtyard joint venture, formed in 2000, which owns 120 Courtyard hotels.

 

In 2003, across our Select-Service Lodging segment, we added 66 hotels (8,000 rooms) and deflagged four hotels (700 rooms). Over 90 percent of the gross room additions were franchised.

 

2002 Compared to 2001

 

Select-Service Lodging had revenues of $967 million, a 12 percent increase compared to the prior year, and segment results of $130 million compared to $145 million in 2002. The comparison to 2001 reflects $13 million of restructuring and other charges recorded in the fourth quarter of 2001. The $15 million decrease in segment results reflects the impact of an $11 million reduction in base and incentive management fees, offset by a $13 million increase in franchise fees. The results also include $8 million of equity losses in 2002 compared to earnings of $5 million in 2001, primarily related to our Courtyard joint ventures.

 

In 2002, across our Select-Service Lodging segment, we added 80 hotels (10,600 rooms) and deflagged 9 hotels (1,100 rooms). Eighty-two percent of the gross room additions were franchised.

 

Extended-Stay Lodging                    Annual Change

($ in millions)    2003

   2002

    2001

   2003/2002

  2002/2001

Revenues

   $ 557    $ 600     $ 635    -7%   -6%
    

  


 

        

Segment results

   $ 47    $ (3 )   $ 55    nm   nm
    

  


 

        

 

2003 Compared to 2002

 

Extended-Stay Lodging, which includes the Residence Inn, TownePlace Suites, Marriott Executive Apartments and Marriott ExecuStay brands, had revenues of $557 million, a decrease of 7 percent, and segment results of $47 million compared to an operating loss of $3 million in 2002. In 2002, we recorded a $50 million charge to write-down the acquisition goodwill for ExecuStay. Our base and incentive management fees decreased $7 million and our franchise fees increased $6 million.

 

In 2003 we added 31 hotels (3,800 rooms) across our Extended-Stay Lodging segment. Over 80 percent of the gross room additions were franchised. We deflagged one property (100 rooms), and we decreased our ExecuStay brand by 1,300 units.

 

2002 Compared to 2001

 

Extended-Stay Lodging had revenues of $600 million, a decrease of 6 percent, and an operating loss of $3 million compared to income of $55 million in 2001. In 2002, we recorded a $50 million charge to write-down the acquisition goodwill for ExecuStay. Our base and incentive management fees decreased $7 million, and our franchise fees increased $5 million. The comparisons to 2001 were also impacted by $16 million of restructuring and other charges recorded in the fourth quarter of 2001.

 

In 2002, across our Extended-Stay Lodging segment, we added 44 hotels (5,400 rooms). Over 80 percent of the gross room additions were franchised. We deflagged three properties (300 rooms), and we decreased our ExecuStay brand by 1,800 units.

 

27


Timeshare                   Annual Change

($ in millions)    2003

   2002

   2001

   2003/2002

  2002/2001

Revenues

   $ 1,279    $ 1,147    $ 1,009    12%   14%
    

  

  

        

Segment results

   $ 149    $ 183    $ 147    -19%   24%
    

  

  

        

 

2003 Compared to 2002

 

The results of our Timeshare segment (Marriott Vacation Club International, Horizons by Marriott Vacation Club International, The Ritz-Carlton Club and Marriott Grand Residence Club) decreased 19 percent to $149 million, while revenues increased 12 percent. Note sale gains in 2003 were $64 million compared to $60 million in 2002. Contract sales increased 16 percent and were strong at timeshare resorts in the Caribbean, Hawaii, and South Carolina and soft in Lake Tahoe, Orlando and Williamsburg. The comparison to 2002 reflects the $44 million gain in 2002 on the sale of our investment in Interval International. Timeshare revenues of $1,279 million and $1,147 million, in 2003 and 2002, respectively, includes interval sales, base management fees and cost reimbursements.

 

2002 Compared to 2001

 

The financial results of our Timeshare segment increased 24 percent to $183 million, reflecting a 14 percent increase in revenues, note sale gains in 2002 of $60 million compared to $40 million in 2001, and a gain of $44 million related to the sale of our investment in Interval International, partially offset by lower development profits and higher depreciation on systems for customer support. Contract sales increased 5 percent.

 

Synthetic Fuel

 

In October 2001, we acquired four coal-based synthetic fuel production facilities (the “Facilities”) for $46 million in cash. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code (credits are not available for fuel produced after 2007). We began operating these Facilities in the first quarter of 2002. Operation of the Facilities, together with the benefit arising from the tax credits, has been, and we expect will continue to be, significantly accretive to our net income. Our synthetic fuel operation generated net income of $96 million and $74 million in fiscal years 2003 and 2002, respectively. Although the Facilities produce significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense. In fiscal year 2003, our synthetic fuel operation reflected sales of $302 million, equity income of $10 million and an operating loss of $104 million, resulting in a tax benefit of $245 million, including tax credits of $211 million, offset by minority interest expense of $55 million.

 

On June 21, 2003, we completed the previously announced sale of an approximately 50 percent ownership interest in the synthetic fuel operation. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that we expect will continue over the life of the venture based on the actual amount of tax credits allocated to the purchaser. We earned $56 million of such additional profits in 2003. Certain post closing conditions, including our receipt of satisfactory private letter rulings from the Internal Revenue Service, were satisfied during the fourth quarter. Those rulings confirm, among other things, both that the process used by our synthetic fuel operations produces a “qualified fuel” as required by Section 29 of the Internal Revenue Code and the validity of the joint venture ownership structure with the 50 percent purchaser. After reviewing the private letter rulings, the purchaser informed us in writing that it would not be exercising a one-time “put option,” which would potentially have allowed it to return its ownership interest to us if satisfactory rulings had not been obtained prior to December 15, 2003.

 

As a result of the put option, we continued to consolidate the synthetic fuel operation through November 6, 2003. Effective November 7, 2003, because the put option was voided, we account for the Synthetic Fuel joint venture using the equity method of accounting. The $24 million of additional profits we received from the joint venture partner beginning November 7, 2003, along with our share of the equity in losses of the synthetic fuel joint venture, are reflected in the income statement under Equity in

earnings/(losses) from synthetic fuel. The additional profits earned prior to November 7, 2003, along with the revenue generated from the previously consolidated synthetic fuel joint venture, are included in synthetic fuel revenue in the income statement.

 

We will continue to record the benefit of our share of the tax credits in our financial statements as a reduction of our tax provision. Going forward, we expect net income will continue to benefit from our participation in the joint venture because of the subsequent tax benefits and credits, as well as the earn-out payments from our venture partner; however, the ultimate impact will depend on the production levels of the synthetic fuel operation and is directly tied to the amount of coal produced.

 

28


General, Administrative and Other Expenses

 

2003 Compared to 2002

 

General, administrative and other expenses increased $13 million in 2003 to $523 million, reflecting higher litigation expenses related to two continuing and previously disclosed lawsuits, partially offset by the impact of the additional week in 2002 (our 2002 fiscal year included 53 weeks compared to 52 weeks in 2003). The expenses also reflect foreign exchange gains of $7 million, compared to losses of $6 million in 2002.

 

2002 Compared to 2001

 

General, administrative and other expenses decreased $145 million in 2002 to $510 million, primarily reflecting the following: (i) 2002 items, including a $9 million reserve recorded in connection with a lawsuit involving the sale of a hotel previously managed by us, $3 million of higher litigation expenses, and $9 million of lower expenses associated with our deferred compensation plan; (ii) 2001 items, including $155 million of restructuring costs and other charges recorded in the fourth quarter of 2001 associated with the downturn in the economy and the impact of the September 11, 2001 attacks, $13 million related to the write-down of two investments in technology partners; $29 million of goodwill amortization expense (in accordance with FAS No. 142, we ceased amortizing goodwill in 2002) $11 million in gains from the sale of affordable housing investments and the reversal of a $10 million insurance reserve related to a lawsuit at one of our hotels.

 

Gains and Other Income

 

The following table shows our gains and other income for the fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001.

 

($ in millions)    2003

   2002

   2001

Timeshare note sale gains

   $ 64    $ 60    $ 40

Gains on sale of real estate

     21      28      38

Gains on sales of three international joint ventures

     21      —        —  

Gain on sale of investment in Interval International

     —        44      —  
    

  

  

     $ 106    $ 132    $ 78
    

  

  

 

Interest Expense

 

2003 Compared to 2002

 

Interest expense increased $24 million to $110 million reflecting interest on the mortgage debt assumed in the fourth quarter of 2002 associated with the acquisition of 14 senior living communities, and lower capitalized interest resulting from fewer projects under construction, primarily related to our timeshare segment. In the fourth quarter of 2003, $234 million of senior debt was repaid. The weighted average interest rate on the repaid debt was 7 percent.

 

2002 Compared to 2001

 

Interest expense decreased $23 million to $86 million, reflecting the decrease in borrowing and interest rates, partially offset by lower capitalized interest.

 

Interest Income and Income Tax

 

2003 Compared to 2002

 

Interest income increased $7 million (6 percent) to $129 million. The provision for loan losses for 2003 was $7 million and includes $15 million of reserves for loans deemed uncollectible at six hotels, offset by the reversal of $8 million of reserves no longer deemed necessary.

 

Income from continuing operations before income taxes and minority interest generated a tax benefit of $43 million in 2003, compared to a tax provision of $32 million in 2002. The difference is primarily attributable to the impact of our Synthetic Fuel operation, which generated a tax benefit and tax credits of $245 million in 2003, compared to $208 million in 2002. Excluding the impact of our Synthetic Fuel operation, our pretax income was lower in 2003, which also contributed to the favorable tax impact.

 

Our effective tax rate for discontinued operations increased from 15.7 percent to 39 percent due to the impact of the taxes in 2002 associated with the sale of stock in connection with the disposal of our Senior Living Services business.

 

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2002 Compared to 2001

 

Interest income increased $28 million to $122 million, before reflecting reserves of $12 million for loans deemed uncollectible at four hotels. The increase in interest income was favorably impacted by amounts recognized that were previously deemed uncollectible. The comparison to 2001 also reflects a $6 million charge for expected guarantee fundings recorded against interest income in the fourth quarter of 2001.

 

Our effective income tax rate for continuing operations decreased to approximately 6.8 percent in 2002 from 36.1 percent in 2001, primarily due to the impact of our Synthetic Fuel operation which generated a tax benefit and tax credits of $208 million. Our effective tax rate for discontinued operations decreased from 35.4 percent to 15.7 percent due to the impact of the taxes associated with the sale of stock in connection with the disposal of our Senior Living Services business.

 

DISCONTINUED OPERATIONS

 

Senior Living Services

 

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

 

In the second quarter of 2002, we sold five senior living communities for $59 million. We ceased operating these communities under our previously existing long-term management agreements. We accounted for these sales under the full accrual method in accordance with FAS No. 66. We continue to provide an operating profit guarantee to the buyer, and fundings under that guarantee are applied against the initial deferred gain of $6 million. As of January 2, 2004, the remaining deferred gain was $3 million.

 

On December 17, 2002, we sold 12 senior living communities to CNL for approximately $89 million. We accounted for the sale under the full accrual method in accordance with FAS No. 66, and we recorded an after-tax loss of approximately $13 million. On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise Assisted Living, Inc. and to sell nine senior living communities to CNL. We completed the sales to Sunrise and CNL and a related sale of a parcel of land to Sunrise, in March 2003 for $266 million and recognized a gain, net of taxes, of $23 million.

 

On December 30, 2002, we purchased 14 senior living communities from an unrelated owner for approximately $15 million in cash, plus the assumption of $227 million in debt. We had previously agreed to provide a form of credit enhancement on the outstanding debt related to these communities. Management approved and committed to a plan to sell these communities within 12 months. As part of that plan, on March 31, 2003, we acquired all of the subordinated credit-enhanced mortgage securities relating to the 14 communities in a transaction in which we issued $46 million of unsecured Marriott International, Inc. notes, due April 2004. In the 2003 third quarter, we sold the 14 communities to CNL for approximately $184 million. We provided a $92 million acquisition loan to CNL in connection with the sale. Sunrise currently operates and will continue to operate the 14 communities under long-term management agreements. We recorded a gain, net of taxes, of $1 million.

 

For the year ended January 3, 2003, we had recorded an after-tax charge of $131 million associated with our agreement to sell our senior living management business. Accordingly, we report the operating results of our senior living segment in discontinued operations during the years ended January 2, 2004 and January 3, 2003 and the remaining assets and liabilities were classified as assets held for sale and liabilities of businesses held for sale, respectively, on the balance sheet at January 3, 2003.

 

Distribution Services

 

In the third quarter of 2002, we completed a previously announced strategic review of our Distribution Services business and decided to exit that business. We completed that exit during the fourth quarter of 2002 through a combination of transferring certain facilities, closing other facilities and other suitable arrangements. In the year ended January 3, 2003, we recognized a pretax charge of $65 million in connection with the decision to exit this business. The charge includes: (1) $15 million for payments to third parties to subsidize their assumption of, or in some cases to terminate, existing distribution or warehouse lease contracts; (2) $9 million for severance costs; (3) $10 million related to the adjusting of fixed assets to net realizable values; (4) $2 million related to inventory losses; (5) $15 million for losses on equipment leases; (6) $10 million for losses on warehouse leases; and

 

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(7) $4 million of other associated charges. For the year ended January 2, 2004, we incurred exit costs, net of tax, of $2 million, primarily related to ongoing compensation costs associated with the wind down. We also reversed $2 million, net of tax, for previously estimated exit costs, which we deemed no longer necessary.

 

2001 Restructuring Costs and Other Charges

 

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

We are party to two multicurrency revolving credit agreements that provide for aggregate borrowings of up to $2 billion, expiring in 2006 ($1.5 billion expiring in July and $500 million expiring in August), which support our commercial paper program and letters of credit. We entered into the $500 million facility during the third quarter of 2003, replacing a similar facility that would have expired in February 2004. At January 2, 2004, we had no loans outstanding under these facilities. Fluctuations in the availability of the commercial paper market do not affect our liquidity because of the flexibility provided by our credit facilities. Borrowings under these facilities bear interest at LIBOR plus a spread, based on our public debt rating. At January 2, 2004, our cash balances combined with our available borrowing capacity under the credit facilities amounted to approximately $2.1 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements. We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We expect that part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, or if disruptions in the commercial paper market take place as they did in the immediate aftermath of September 11, 2001, we may be unable to place some or all of our commercial paper on a temporary or extended basis, and may have to rely more on borrowings under the credit facilities, which may carry a higher cost than commercial paper.

 

Cash from Operations

 

Cash from operations, depreciation expense and amortization expense for the last three fiscal years are presented in the following table:

 

($ in millions)    2003

   2002

   2001

Cash from operations

   $ 421    $ 516    $ 403

Depreciation expense

     132      145      142

Amortization expense

     28      42      80

 

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While our timeshare business generates strong operating cash flow, the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing affects annual amounts. We include timeshare interval sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. The net operating activity from our timeshare business (which excludes the portion of net income from our timeshare business, as that number is a component of income from continuing operations) is shown in the following table:

 

($ in millions)    2003

    2002

    2001

 

Timeshare development, less the cost of sales

   $ (94 )   $ (102 )   $ (253 )

New timeshare mortgages, net of collections

     (284 )     (280 )     (320 )

Note sale gains

     (64 )     (60 )     (40 )

Financially reportable sales, (in excess of) less than closed sales

     (4 )     (13 )     53  

Note sale proceeds

     281       387       199  

Net fees received for servicing notes

     17       31       26  

Other cash inflows (outflows)

     37       (26 )     (23 )
    


 


 


Net cash outflows from timeshare activity

   $ (111 )   $ (63 )   $ (358 )
    


 


 


 

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

 

In 2001, other cash flows from operating activities of $278 million included an adjustment for $248 million, related to non-cash restructuring and other charges.

 

Earnings before interest expense, income taxes, depreciation and amortization (EBITDA) was $745 million in 2003, $551 million in 2002 and $701 million in 2001. 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. However, EBITDA is a non-GAAP financial measure, and is not an alternative to net income, financial results, or any other operating measure prescribed by accounting principles generally accepted in the United States.

 

The reconciliation of net income to EBITDA is as follows:

 

($ in millions)    2003

    2002

    2001

 

Net income

   $ 502     $ 277     $ 236  

Interest expense

     110       86       109  

Tax (benefit) provision—continuing operations

     (43 )     32       152  

Tax provision (benefit)—discontinued operations

     16       (31 )     (18 )

Depreciation

     132       145       142  

Amortization

     28       42       80  
    


 


 


     $ 745     $ 551     $ 701  
    


 


 


 

Reducing net income are losses associated with our synthetic fuel operations of $104 million and $134 million, respectively, for the years ended January 2, 2004 and January 3, 2003. Also effecting our 2003 net income is equity in earnings from Synthetic Fuel of $10 million and minority interest expense of $55 million. The Synthetic Fuel operating losses include depreciation expense of

$8 million for both the years ended January 2, 2004 and January 3, 2003. There was no loss or depreciation expense associated with our synthetic fuel operations for the year ended December 28, 2001, since operations did not commence until to 2002.

 

Also included in net income above is income from our discontinued senior living services business of $26 million in 2003 and losses of $108 million and $29 million, for 2002 and 2001, respectively, as well as losses from our discontinued distribution services business of $54 million and $4 million, respectively for 2002 and 2001. There were no losses associated with our distribution services business in 2003. Included above is depreciation and amortization expense related to our discontinued operations of $37 million and $44 million in 2002 and 2001, respectively. There was no depreciation or amortization expense for our discontinued operations in 2003.

 

A substantial portion of both our net income and therefore EBITDA is based on fixed dollar amounts or percentages of sales. These include lodging base management fees, franchise fees and land rent. With over 2,700 hotels in the Marriott system, no single property or region is critical to our financial results.

 

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Our ratio of current assets to current liabilities was 0.7 to 1 at January 2, 2004, compared to 0.8 to 1 at January 3, 2003. Each of our businesses minimizes working capital through cash management, strict credit-granting policies, aggressive collection efforts and high inventory turnover. We also have significant borrowing capacity under our revolving credit facilities should we need additional working capital.

 

In 2003 we sold $281 million of notes receivable originated by our timeshare business. We recognized gains on these sales of $64 million in the year ended January 2, 2004. Our ability to continue to sell these timeshare notes depends on the continued ability of the capital markets to provide financing to the special purpose entities that buy the notes. Also, we might have increased difficulty or be unable to consummate such sales if the underlying quality of the notes receivable we originate were to deteriorate, although we do not expect such a deterioration. In connection with these timeshare note sales, at January 2, 2004, we had repurchase obligations of $19 million related to notes receivable we have sold. We do not expect to incur material losses in respect of those obligations. We retain interests in the notes, which are accounted for as residual interests, and in the year ended January 2, 2004, we received cash flows of $47 million from those retained interests. At January 2, 2004, the special purpose entities that had purchased notes receivable from us had aggregate assets of $733 million.

 

Investing Activities Cash Flows

 

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

 

Dispositions. Property sales generated cash proceeds of $494 million in 2003, $729 million in 2002 and $554 million in 2001. Proceeds in 2003 are net of a $92 million note receivable and closing costs and other items totaling $25 million. In 2003, we closed on the sales of three hotels and 23 senior living communities. We continue to operate all of the hotels under long-term operating agreements.

 

Capital Expenditures and Other Investments. Capital expenditures of $210 million in 2003, $292 million in 2002 and $560 million in 2001 included development and construction of new hotels and senior living communities and acquisitions of hotel properties. Over time, we have sold certain lodging and senior living properties under development, or to be developed, while continuing to operate them under long-term agreements. The ability of third-party purchasers to raise the necessary debt and equity capital depends in part on the perceived risks inherent in the lodging industry and other constraints inherent in the capital markets as a whole. Although we expect to continue to consummate such real estate sales, if we were unable to do so, our liquidity could decrease and we could have increased exposure to the operating risks of owning real estate. We monitor the status of the capital markets, and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We also expect to continue to make other investments in connection with adding units to our lodging business. These investments include loans and minority equity investments.

 

A summary of our other investing outflows is shown in the table below.

 

($ in millions)    2003

    2002

    2001

 

Equity investments

   $ (22 )   $ (26 )   $ (33 )

Investment in corporate owned life insurance

     (12 )     (11 )     (97 )

Other net cash outflows

     (5 )     (33 )     (131 )

Cash proceeds on sale of investment in Interval International

     —         63       —    

Sale of affordable housing tax credit investments

     —         —         82  
    


 


 


Other investing outflows

   $ (39 )   $ (7 )   $ (179 )
    


 


 


 

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

 

We have made loans to owners of hotels that we operate or franchise. We have also made loans to the synthetic fuel joint venture partner and to the purchaser of our senior living business. Loans outstanding, excluding timeshare notes, totaled $996 million at January 2, 2004, $944 million at January 3, 2003, and $860 million at December 28, 2001. Unfunded commitments aggregating $80 million were outstanding at January 2, 2004, of which we expect to fund $44 million in 2004 and $60 million in total. We participate in a program with an unaffiliated lender in which we may partially guarantee loans made to facilitate third-party ownership of hotels that we operate or franchise.

 

33


Cash from Financing Activities

 

Debt decreased $319 million in 2003, due to the $200 million repayment, at maturity, of Series A debt in November 2003 and the net pay down of $161 million of commercial paper and other debt. Debt decreased by $945 million in 2002, due to the redemption of 85 percent of the LYONs in May 2002 and the pay down of our revolving credit facility, offset by the debt assumed in connection with the acquisition of 14 senior living communities in December 2002.

 

Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt and reducing our working capital. At year-end 2003, our long-term debt had an average interest rate of 7.0 percent and an average maturity of approximately 5.8 years. The ratio of fixed-rate long-term debt to total long-term debt was 0.99 as of January 2, 2004. At January 2, 2004, we had long-term public debt ratings of BBB+ from Standard and Poor’s and Baa2 from Moody’s.

 

We have $500 million available for future offerings under “universal shelf” registration statements we have filed with the SEC.

 

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

 

On May 8, 2001, we issued zero-coupon convertible senior notes due 2021, also known as LYONs, and received cash proceeds of $405 million. On May 9, 2002, we redeemed for cash approximately 85 percent of that issue which the LYONs holders tendered for mandatory repurchase. The remaining LYONs are convertible into approximately 0.9 million shares of our Class A Common Stock and carry a yield to maturity of 0.75 percent. We may redeem the LYONs on or after May 8, 2004. The holders may also at their option require us to purchase the LYONs at their accreted value on May 8 of each of 2004, 2011 and 2016. We may choose to pay the purchase price for redemptions or repurchases in cash and/or shares of our Class A Common Stock.

 

Contractual Obligations and Off Balance Sheet Arrangements

 

The following table summarizes our contractual obligations as of January 2, 2004:

 

          Payments Due by Period

Contractual Obligations


   Total

   Less Than
1 Year


   1-3 Years

   3-5 Years

   After 5 Years

($ in millions)                         

Debt

   $ 1,455    $ 64    $ 508    $ 313    $ 570

Capital lease obligations

     11      1      2      1      7

Operating leases

                                  

Recourse

     1,163      105      189      196      673

Non-recourse

     623      42      94      94      393

Other long-term liabilities

     70      9      8      8      45
    

  

  

  

  

Total contractual cash obligations

   $ 3,322    $ 221    $ 801    $ 612    $ 1,688
    

  

  

  

  

 

The following table summarizes our commitments as of January 2, 2004:

 

          Amount of Commitment Expiration Per Period

Other Commercial Commitments


   Total Amounts
Committed


   Less Than
1 Year


   1-3 Years

   3-5 Years

   After 5 Years

($ in millions)                         

Guarantees

   $ 1,182    $ 133    $ 354    $ 249    $ 446

Timeshare note repurchase obligations

     19      —        —        —        19
    

  

  

  

  

Total

   $ 1,201    $ 133    $ 354    $ 249    $ 465
    

  

  

  

  

 

34


Our guarantees listed above include $238 million for guarantees that will not be in effect until the underlying hotels are open and we begin to manage the properties. Our guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. When we repurchase non- performing timeshare loans, we either collect the outstanding loan balance in full or foreclose on the asset and subsequently resell it.

 

Our guarantees include $387 million related to Senior Living Services lease obligations and lifecare bonds. Sunrise is the primary obligor of the leases and a portion of the lifecare bonds, and CNL is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. Our guarantees also include $47 million of other guarantees associated with the Sunrise sale transaction. As a result of the settlement with Five Star, discussed in Item 3, $41 million of these guarantees included above expired subsequent to January 2, 2004.

 

Our total unfunded loan commitments amounted to $80 million at January 2, 2004. We expect to fund $44 million of those commitments within one year and $16 million in one to three years. We do not expect to fund the remaining $20 million of commitments, which expire as follows: $8 million in one to three years; and $12 million after five years.

 

As part of the normal course of business we enter into purchase commitments to manage the daily operating needs of our hotels. Since we are reimbursed by the hotel owners, these obligations have minimal impact on our net income and cash flow.

 

 

35


Related Party Transactions

 

We have equity method investments in entities that own hotels for which we provide management and/or franchise services and we receive a fee. In addition, in some cases we provide loans, preferred equity, or guarantees to these entities. The following tables present financial data resulting from transactions with these related parties:

 

Income Statement Data

 

($ in millions)    2003

    2002

    2001

 

Base management fees

   $ 56     $ 48     $ 48  

Incentive management fees

     4       4       4  

Cost reimbursements

     699       557       559  

Other income

     28       26       28  
    


 


 


Total Revenue

   $ 787     $ 635     $ 639  
    


 


 


General, administrative and other

   $ (11 )   $ (11 )   $ (15 )

Reimbursed costs

     (699 )     (557 )     (559 )

Interest income

     77       66       51  

Provision for loan losses

     (2 )     (5 )     —    
Balance Sheet Data                         
($ in millions)    2003

    2002

       

Due to equity method investees

   $ (2 )   $ (1 )        

Due from equity method investees

     623       532          

 

Share Repurchases. We purchased 10.5 million of our shares in 2003 at an average price of $36.07 per share, 7.8 million of our shares in 2002 at an average price of $32.52 per share, and 6.1 million of our shares in 2001 at an average price of $38.20 per share. As of January 2, 2004, 13 million shares remained available for repurchase under authorizations from our Board of Directors.

 

Dividends. In May 2003, our Board of Directors increased the quarterly cash dividend by 7 percent to $0.075 per share.

 

Other Matters

 

Inflation. Inflation has been moderate in recent years and has not had a significant impact on our businesses.

 

Critical Accounting Policies. Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Our accounting policies comply with principles generally accepted in the United States, although a change in the facts and circumstances of the underlying transactions could significantly change the application of an accounting policy and the resulting financial statement impact. We have listed below those policies that we believe are critical and require the use of complex judgment in their application.

 

Incentive Fees

 

We recognize incentive fees as revenue when earned in accordance with the terms of the management contract. In interim periods, we recognize as income the incentive fees that would be due to us as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us. If we recognized incentive fees only after the underlying full-year performance thresholds were certain, the revenue recognized for each year would be unchanged, but no incentive fees for any year would be recognized until the fourth quarter. We recognized incentive fee revenue of $109 million, $162 million and $202 million in 2003, 2002 and 2001, respectively.

 

Cost Reimbursements

 

We incur certain reimbursable costs on behalf of managed hotel properties and franchisees. In accordance with Emerging Issues Task Force (EITF) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” we report cost reimbursements from managed properties and franchisees as revenue, and we report the costs incurred on behalf of managed properties and franchisees as expenses. Cost

 

36


reimbursements are based upon the costs incurred with no added margin or mark-up. These reimbursed costs relate primarily to payroll costs at domestic properties that we manage, but also include costs associated with certain materials and services.

 

Our financial statements reflect cost reimbursements of $6.2 billion in 2003, $5.7 billion in 2002, and $5.2 billion in 2001.

 

Real Estate Sales

 

We account for the sales of real estate in accordance with FAS No. 66, “Accounting for Sales of Real Estate.” We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $4 million in 2003, $51 million in 2002 and $16 million in 2001. Our ongoing ability to achieve sale accounting under FAS No. 66 depends on our ability to negotiate the structure of the sales transactions to comply with these rules.

 

Timeshare Sales

 

We also recognize revenue from the sale of timeshare interests in accordance with FAS No. 66. We recognize sales when (1) we have received a minimum of 10 percent of the purchase price for the timeshare interval, (2) the purchaser’s period to cancel for a refund has expired, (3) we deem the receivables to be collectible, and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria.

 

Costs Incurred to Sell Real Estate Projects

 

We capitalize direct costs incurred to sell real estate projects that are attributable to and recoverable from the sales of timeshare interests until we have recognized the sale. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Under this approach, we capitalized selling and marketing costs of approximately $69 million and $107 million at January 2, 2004, and January 3, 2003, respectively, and have included those costs in property and equipment in the accompanying consolidated balance sheets. If a contract is cancelled, we charge unrecoverable direct selling and marketing costs to expense and record forfeited deposits as income.

 

Residual Interests

 

We periodically sell the notes receivable originated by our timeshare segment in connection with the sale of timeshare intervals. We retain servicing assets and other interests in the assets transferred to entities that are accounted for as residual interests. The residual interests are treated as “trading” or “available for sale” securities under the provisions of FAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”At the end of each reporting period, we estimate the fair value of the residual interests, including servicing assets, using a discounted cash flow model. We report changes in the fair values of these residual interests through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available-for-sale securities. We had residual interests of $203 million at January 2, 2004 and $135 million at January 3, 2003, which are recorded as long-term receivables on the consolidated balance sheet.

 

Loan Loss Reserves

 

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At January 2, 2004, our recorded investment in impaired loans was $142 million. We have a $61 million allowance for credit losses, leaving $81 million of our investment in impaired loans for which there is no related allowance for credit losses.

 

Marriott Rewards

 

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

 

We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas that project timing of future point redemption based on historical levels,

 

37


including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points. Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, and communicating with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the cost of the awards redeemed.

 

Valuation of Goodwill and Other Long-Lived Assets

 

We evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon future cash flow projections. We evaluate the potential impairment of other intangible assets whenever an event or other circumstance indicates that we may be able to recover the carrying amount of the asset. Our evaluation is based upon future cash flow projections. We record an impairment loss for goodwill and other intangible assets when the carrying value of the intangible asset is less than its estimated fair value.

 

38


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates and changes in foreign exchange rates. We manage our exposure to these risks by monitoring available financing alternatives, through development and application of credit granting policies and by entering into derivative arrangements. We do not foresee any significant changes in either our exposure to fluctuations in interest rates or foreign exchange rates or in how such exposure is managed in the future.

 

We are exposed to interest rate risk on our floating rate timeshare and notes receivable, our residual interests retained in connection with the sale of timeshare intervals, and the fair value of our fixed rate notes receivable.

 

Changes in interest rates also impact our floating rate long-term debt and the fair value of our fixed rate long-term debt.

 

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.

 

At January 2, 2004, we were party to the following derivative instruments:

 

An interest rate swap agreement under which we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. The aggregate notional amount of the swap is $92 million and it matures in 2010.

 

Six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our timeshare note sales. We are required by purchasers and/or rating agencies to utilize interest rate swaps to protect the excess spread within our sold note pools. The aggregate notional amount of the swaps is $726 million, and they expire through 2022.

 

Twenty-four forward foreign exchange contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during fiscal year 2004. The aggregate dollar equivalent of the notional amounts of the forward contracts is approximately $37 million, and the forward contracts expire throughout 2004.

 

Two forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets denominated in Pounds Sterling. The aggregate dollar equivalent of the notional amounts of the forward contracts is $34 million at January 2, 2004.

 

39


The following table sets forth the scheduled maturities and the total fair value of our derivatives and other financial instruments as of January 2, 2004:

 

     Maturities by Period

 
       2004  

    2005

      2006  

      2007  

    2008

    There -
after


    Total
Carrying
Amount


    Total
Fair
Value


 

Assets - Maturities represent principal receipts, fair values represent assets.

 

                                       

Timeshare notes receivable

   $ 15     $ 21     $ 17     $ 13     $ 13     $ 88     $ 167     $ 167  

Average interest rate

                                                     12.4%          

Fixed rate notes receivable

   $ 26     $ 1     $ 190     $ 29     $ 89     $ 362     $ 697     $ 725  

Average interest rate

                                                     11.02%          

Floating rate notes receivable

   $ 23     $ 28     $ 43     $ 140     $ 41     $ 24     $ 299     $ 299  

Average interest rate

                                                     6.24%          

Residual interests

   $ 83     $ 39     $ 28     $ 19     $ 14     $ 20     $ 203     $ 203  

Average interest rate

                                                     5.62%          

Liabilities - Maturities represent principal payments, fair values represent liabilities.

 

               

Fixed rate debt

   $ (63 )   $ (495 )   $ (13 )   $ (9 )   $ (303 )   $ (505 )   $ (1,388 )   $ (1,401 )

Average interest rate

                                                     7.27%          

Floating rate debt

   $ (1 )   $ —       $ —       $ (1 )   $ —       $ (3 )   $ (5 )   $ (5 )

Average interest rate

                                                     .01%          

Convertible debt

   $ —       $ —       $ —       $ —       $ —       $ (62 )   $ (62 )   $ (43 )

Average interest rate

                                                     0.75%          

Derivatives - Maturities represent notional amounts, fair values represent assets (liabilities).

 

               

Interest Rate Swaps:

                                                                

Fixed to variable

   $ —       $ —       $ —       $ —       $ —       $ 590     $ (10 )   $ (10 )

Average pay rate

                                                     4.53%          

Average receive rate

                                                     1.34%          

Variable to fixed

   $ —       $ —       $ —       $ —       $ —       $ 228     $ 8     $ 8  

Average pay rate

                                                     1.65%          

Average receive rate

                                                     5.33%       101  

Forward Foreign Exchange Contracts:

                                                                

Fixed (Euro) to Fixed ($U.S.)

   $ 22     $ —       $ —       $ —       $ —       $ —       $ 1       $ 1    

Fixed (GPB) to Fixed ($U.S.)

   $ 49     $ —       $ —       $ —       $ —       $ —       $ —       $ —    

 

40


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following financial information is included on the pages indicated:

 

     Page

Report of Independent Auditors

   42

Consolidated Statement of Income

   43

Consolidated Balance Sheet

   44

Consolidated Statement of Cash Flows

   45

Consolidated Statement of Comprehensive Income

   46

Consolidated Statement of Shareholders’ Equity

   47

Notes to Consolidated Financial Statements

   48

 

41


REPORT OF INDEPENDENT AUDITORS

 

To the Shareholders of Marriott International, Inc.:

 

We have audited the accompanying consolidated balance sheet of Marriott International, Inc. as of January 2, 2004 and
January 3, 2003, and the related consolidated statements of income, cash flows, comprehensive income and shareholders’ equity for each of the three fiscal years in the period ended January 2, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marriott International, Inc. as of January 2, 2004 and January 3, 2003, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 2, 2004 in conformity with accounting principles generally accepted in the United States.

 

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

 

/s/ Ernst & Young LLP

 

McLean, Virginia

February 3, 2004

 

42


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME

Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001

($ in millions, except per share amounts)

 

     2003

    2002

    2001

 

REVENUES

                        

Base management fees1

   $ 388     $ 379     $ 372  

Franchise fees

     245       232       220  

Incentive management fees1

     109       162       202  

Owned, leased, corporate housing and other revenue1

     633       651       803  

Timeshare interval sales and services

     1,145       1,059       934  

Cost reimbursements1

     6,192       5,739       5,237  

Synthetic fuel

     302       193       —    
    


 


 


       9,014       8,415       7,768  
    


 


 


OPERATING COSTS AND EXPENSES

                        

Owned, leased and corporate housing - direct

     505       580       663  

Timeshare - direct

     1,011       938       793  

Reimbursed costs1

     6,192       5,739       5,237  

General, administrative and other1

     523       510       655  

Synthetic fuel

     406       327       —    
    


 


 


       8,637       8,094       7,348  
    


 


 


OPERATING INCOME

     377       321       420  

Gains and other income

     106       132       78  

Interest expense

     (110 )     (86 )     (109 )

Interest income1

     129       122       94  

Provision for loan losses1

     (7 )     (12 )     (48 )

Equity in earnings (losses) - Synthetic fuel

     10       —         —    

- Other

     (17 )     (6 )     (14 )
    


 


 


INCOME FROM CONTINUING OPERATIONS, BEFORE
INCOME TAXES AND MINORITY INTEREST

     488       471       421  

Benefit (provision) for income taxes

     43       (32 )     (152 )
    


 


 


INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST

     531       439       269  

Synthetic fuel minority interest

     (55 )     —         —    
    


 


 


INCOME FROM CONTINUING OPERATIONS

     476       439       269  

Discontinued Operations

                        

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

     26       (108 )     (29 )

Loss from Distribution Services, net of tax

     —         (54 )     (4 )
    


 


 


NET INCOME

   $ 502     $ 277     $ 236  
    


 


 


EARNINGS PER SHARE – Basic

                        

Earnings from continuing operations

   $ 2.05     $ 1.83     $ 1.10  

Earnings (loss) from discontinued operations

     .11       (.68 )     (.13 )
    


 


 


Earnings per share

   $ 2.16     $ 1.15     $ .97  
    


 


 


EARNINGS PER SHARE – Diluted

                        

Earnings from continuing operations

   $ 1.94     $ 1.74     $ 1.05  

Earnings (loss) from discontinued operations

     .11       (.64 )     (.13 )
    


 


 


Earnings per share

   $ 2.05     $ 1.10     $ .92  
    


 


 


DIVIDENDS DECLARED PER SHARE

   $ 0.295     $ 0.275     $ 0.255  
    


 


 


 

See Notes to Consolidated Financial Statements

 

1 See Footnote 22 “Related Party Transactions” of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

 

43


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

January 2, 2004 and January 3, 2003

($ in millions)

 

     January 2, 2004

    January 3, 2003

 
ASSETS                 

Current assets

                

Cash and equivalents

   $ 229     $ 198  

Accounts and notes receivable

     699       522  

Prepaid taxes

     223       300  

Other

     84       89  

Assets held for sale

     —         664  
    


 


       1,235       1,773  

Property and equipment

     2,513       2,560  

Goodwill

     923       923  

Other intangible assets

     526       495  

Investments in affiliates – equity

     468       475  

Investments in affiliates – notes receivable

     558       522  

Notes and other receivables, net

                

Loans to timeshare owners

     152       153  

Other notes receivable

     389       366  

Other long-term receivables

     563       473  
    


 


       1,104       992  

Other

     850       556  
    


 


     $ 8,177     $ 8,296  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Current liabilities

                

Accounts payable

   $ 584     $ 505  

Accrued payroll and benefits

     412       373  

Casualty self-insurance

     43       32  

Other payables and accruals

     667       662  

Current portion of long-term debt

     64       221  

Liabilities of businesses held for sale

     —         390  
    


 


       1,770       2,183  

Long-term debt

     1,391       1,553  

Casualty self-insurance reserves

     169       106  

Other long-term liabilities

     1,009       881  

Shareholders’ equity

                

Class A common stock

     3       3  

Additional paid-in capital

     3,317       3,224  

Retained earnings

     1,505       1,126  

Deferred compensation

     (81 )     (43 )

Treasury stock, at cost

     (865 )     (667 )

Accumulated other comprehensive loss

     (41 )     (70 )
    


 


       3,838       3,573  
    


 


     $ 8,177     $ 8,296  
    


 


 

See Notes to Consolidated Financial Statements

 

44


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001

($ in millions)

 

     2003

    2002

    2001

 

OPERATING ACTIVITIES

                        

Income from continuing operations

   $ 476     $ 439     $ 269  

Adjustments to reconcile to cash provided by operating activities:

                        

Income (loss) from discontinued operations

     7       9       (33 )

Discontinued operations – gain (loss) on sale/exit

     19       (171 )     —    

Depreciation and amortization

     160       187       222  

Minority interest in results of synthetic fuel operation

     55       —         —    

Income taxes

     (171 )     (105 )     9  

Timeshare activity, net

     (111 )     (63 )     (358 )

Other

     (59 )     223       278  

Working capital changes:

                        

Accounts receivable

     (81 )     (31 )     57  

Other current assets

     11       60       (20 )

Accounts payable and accruals

     115       (32 )     (21 )
    


 


 


Net cash provided by operating activities

     421       516       403  

INVESTING ACTIVITIES

                        

Capital expenditures

     (210 )     (292 )     (560 )

Dispositions

     494       729       554  

Loan advances

     (241 )     (237 )     (367 )

Loan collections and sales

     280       124       71  

Other

     (39 )     (7 )     (179 )
    


 


 


Net cash provided by (used in) investing activities

     284       317       (481 )

FINANCING ACTIVITIES

                        

Commercial paper, net

     (102 )     102       (827 )

Issuance of long-term debt

     14       26       1,329  

Repayment of long-term debt

     (273 )     (946 )     (123 )

(Redemption) issuance of convertible debt

     —         (347 )     405  

Issuance of Class A common stock

     102       35       76  

Dividends paid

     (68 )     (65 )     (61 )

Purchase of treasury stock

     (373 )     (252 )     (235 )

Cash received from minority interest in synthetic fuel operation

     26       —         —    
    


 


 


Net cash (used in) provided by financing activities

     (674 )     (1,447 )     564  
    


 


 


INCREASE (DECREASE) IN CASH AND EQUIVALENTS

     31       (614 )     486  

CASH AND EQUIVALENTS, beginning of year

     198       812       326  
    


 


 


CASH AND EQUIVALENTS, end of year

   $ 229     $ 198     $ 812  
    


 


 


 

See Notes to Consolidated Financial Statements

 

45


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001

($ in millions)

 

     2003

    2002

    2001

 

Net income

   $ 502     $ 277     $ 236  

Other comprehensive income (loss), net of tax:

                        

Foreign currency translation adjustments

     37       (7 )     (14 )

Other

     (8 )     (13 )     8  
    


 


 


Total other comprehensive income (loss)

     29       (20 )     (6 )
    


 


 


Comprehensive income

   $ 531     $ 257     $ 230  
    


 


 


 

See Notes to Consolidated Financial Statements

 

46


MARRIOTT INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Fiscal Years Ended January 2, 2004, January 3, 2003 and December 28, 2001

(in millions, except per share amounts)

 

Common

Shares
Outstanding


        Class A
Common
Stock


   Additional
Paid-in
Capital


    Deferred
Compensation


    Retained
Earnings


    Unearned
ESOP
Shares


    Treasury
Stock, at
Cost


    Accumulated
Other
Comprehensive
Loss


 
241.0   

Balance at December 30, 2000

   $ 3    $ 3,629     $ (39 )   $ 851     $ (679 )   $ (454 )   $ (44 )
—     

Net income

     —        —         —         236       —         —         —    
—     

Dividends ($.255 per share)

     —        —         —         (62 )     —         —         —    
5.8   

Employee stock plan issuance and other

     —        (202 )     (10 )     (84 )     388       186       (6 )
(6.1)   

Purchase of treasury stock

     —        —         —         —         —         (235 )     —    

       

  


 


 


 


 


 


240.7   

Balance at December 28, 2001

     3      3,427       (49 )     941       (291 )     (503 )     (50 )
—     

Net income

     —        —         —         277       —         —         —    
—     

Dividends ($.275 per share)

     —        —         —         (67 )     —         —         —    
3.0   

Employee stock plan issuance and other

     —        (203 )     6       (25 )     291       90       (20 )
(7.8)   

Purchase of treasury stock

     —        —         —         —         —         (254 )     —    

       

  


 


 


 


 


 


235.9   

Balance at January 3, 2003

     3      3,224       (43 )     1,126       —         (667 )     (70 )
—     

Net income

     —        —         —         502       —         —         —    
—     

Dividends ($.295 per share)

     —        —         —         (68 )     —         —         —    
5.8   

Employee stock plan issuance and other

     —        93       (38 )     (55 )     —         182       29  
(10.5)   

Purchase of treasury stock

     —        —         —         —         —         (380 )     —    

       

  


 


 


 


 


 


231.2   

Balance at January 2, 2004

   $ 3    $ 3,317     $ (81 )   $ 1,505     $ —       $ (865 )   $ (41 )

       

  


 


 


 


 


 


 

See Notes to Consolidated Financial Statements

 

47


MARRIOTT INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements present the results of operations, financial position and cash flows of Marriott International, Inc. (together with its subsidiaries, we, us or the Company).

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of sales and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.

 

We have reclassified certain prior year amounts to conform to our 2003 presentation. As part of our income statement reclassification, gains, including timeshare note sale gains, and equity in earnings/losses from our joint ventures are reflected below operating income. In addition, general, administrative and other expenses now reflect general, administrative and other expenses for the entire company including domestic and international lodging, our ExecuStay business and our timeshare segment, as well as corporate expenses.

 

As a result of the sale of our Senior Living Services communities and management business and the discontinuation of our Distribution Services business, the balances and activities of two reportable segments, Senior Living Services and Distribution Services have been segregated and reported as discontinued operations for all periods presented.

 

In our opinion, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of January 2, 2004 and January 3, 2003, the results of our operations and cash flows for the fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements.

 

Fiscal Year

 

Our fiscal year ends on the Friday which is nearest to December 31. The 2003 and 2001 fiscal years included 52 weeks, while the 2002 fiscal year included 53 weeks.

 

Revenue Recognition

 

Our revenues include (1) base and incentive management fees, (2) franchise fees, (3) revenues from lodging properties and other businesses owned or leased by us, (4) timeshare interval sales, (5) cost reimbursements, and (6) sales made by our synthetic fuel operation while consolidated. Management fees comprise a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on hotel profitability. Franchise fees comprise initial application fees and continuing royalties generated from our franchise programs, which permit the hotel owners and operators to use certain of our brand names. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise.

 

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

 

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

 

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

 

Timeshare Intervals: We recognize revenue from timeshare interest sales in accordance with FAS No. 66, “Accounting for Sales of Real Estate.” We recognize sales when (1) we have received a minimum of 10 percent of the purchase price for the timeshare interval, (2) the purchaser’s period to cancel for a refund has expired, (3) we

 

48


deem the receivables to be collectible and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria.

 

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

 

Synthetic Fuel: Effective November 7, 2003, we account for the synthetic fuel operation using the equity method of accounting. Prior to that date we recognized revenue from the consolidated synthetic fuel joint venture when the synthetic fuel was produced and sold. We recognize additional revenue based on tax credits allocated to our joint venture partner when the tax credits are generated.

 

Other Revenue: In 2003, we recorded a $36 million insurance settlement for lost management fees associated with the New York Marriott World Trade Center hotel, which was destroyed in the 2001 terrorist attacks.

 

Ground Leases

 

We are both the lessor and lessee of land under long-term operating leases, which include scheduled increases in minimum rents. We recognize these scheduled rent increases on a straight-line basis over the initial lease terms.

 

Real Estate Sales

 

We account for the sales of real estate in accordance with FAS No. 66. We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. We reduced gains on sales of real estate due to maximum exposure to loss by $4 million in 2003, $51 million in 2002 and $16 million in 2001.

 

Profit Sharing Plan

 

We contribute to a profit sharing plan for the benefit of employees meeting certain eligibility requirements and electing participation in the plan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. Excluding the discontinued Senior Living Services and Distribution Services businesses, we recognized compensation cost from profit sharing of $53 million in 2003, $54 million in 2002 and $52 million in 2001. We recognized compensation cost from profit sharing of $1 million in 2003, $8 million in 2002 and $6 million in 2001, related to the discontinued Senior Living Services and Distribution Services businesses.

 

Self-Insurance Programs

 

We are self-insured for certain levels of property, liability, workers’ compensation and employee medical coverage. We accrue estimated costs of these self-insurance programs at the present value of projected settlements for known and incurred but not reported claims. We use a discount rate of 4.8 percent to determine the present value of the projected settlements, which we consider to be reasonable given our history of settled claims, including payment patterns and the fixed nature of the individual settlements.

 

Marriott Rewards

 

Marriott Rewards is our frequent guest incentive marketing program. Marriott Rewards members earn points based on their spending at our lodging operations and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines and credit card companies. Points, which we accumulate and track on the members’ behalf, can be redeemed for hotel stays at most of our lodging operations, airline tickets, airline frequent flier program miles, rental cars, and a variety of other awards. Points cannot be redeemed for cash.

 

We provide Marriott Rewards as a marketing program to participating hotels. We charge the cost of operating the program, including the estimated cost of award redemption, to hotels based on members’ qualifying expenditures.

 

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

 

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Our liability for the Marriott Rewards program was $784 million at January 2, 2004 and $683 million at January 3, 2003, of which we have included $502 million and $418 million, respectively, in other long-term liabilities in the accompanying consolidated balance sheet.

 

Rebates and Allowances

 

We participate in various vendor rebate and allowance arrangements as a manager of hotel properties. There are three types of programs that are common in the hotel industry that are sometimes referred to as “rebates” or “allowances”, including unrestricted rebates, marketing (restricted) rebates, and sponsorships. The primary business purpose of these arrangements is to secure favorable pricing for our hotel owners for various products and services or enhance resources for promotional campaigns co-sponsored by certain vendors. More specifically, unrestricted rebates are funds returned to the buyer, generally based upon volumes or quantities of goods purchased. Marketing (restricted) allowances are funds allocated by vendor agreements for certain marketing or other joint promotional initiatives. Sponsorships are funds paid by vendors, generally used by the vendor to gain exposure at meetings and events, which are accounted for as a reduction of the cost of the event.

 

We account for rebates and allowances as adjustments of the prices of the vendors’ products and services in accordance with EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” We show vendor costs and the reimbursement of those costs as reimbursed costs and cost reimbursements revenue, respectively, therefore rebates are reflected as a reduction of these line items.

 

Cash and Equivalents

 

We consider all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.

 

Loan Loss and Accounts Receivable Reserves

 

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis. At January 2, 2004, our recorded investment in impaired loans was $142 million. We have a $61 million allowance for credit losses, leaving $81 million of our investment in impaired loans for which there is no related allowance for credit losses.

 

The following table summarizes the activity in our accounts and notes receivable reserves for the years ended December 28, 2001, January 3, 2003, and January 2, 2004:

 

     Accounts
Receivable
Reserve


    Notes
Receivable
Reserve


 
($ in millions)             

December 30, 2000

   $ 23     $ 12  

Additions

     38       48  

Write-offs

     (11 )     (1 )
    


 


December 28, 2001

     50       59  

Additions

     10       12  

Write-offs

     (20 )     (12 )
    


 


January 3, 2003

     40       59  

Additions

     8       15  

Write-offs

     (19 )     (5 )

Reversals

     (6 )     (8 )
    


 


January 2, 2004

   $ 23     $ 61  
    


 


 

Valuation of Goodwill and Other Long-Lived Assets

 

We evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon future cash flow projections. We evaluate the potential impairment of other intangible assets whenever an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Our evaluation is based

 

50


upon future cash flow projections. We record an impairment loss for goodwill and other intangible assets when the carrying value of the intangible asset is less than its estimated fair value.

 

Assets Held for Sale

 

We consider properties to be assets held for sale when management approves and commits to a formal plan to actively market a property for sale. Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we stop recording depreciation expense.

 

Investments

 

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

 

Summarized information relating to our equity method investments is as follows:

 

($ in millions)    2003

    2002

    2001

 
                          

Income Statement Summary

                        

Sales

   $ 1,487     $ 1,322     $ 1,531  
    


 


 


Net (loss) income

   $ (102 )   $ (59 )   $ (39 )
    


 


 


     2003

    2002

       

Balance Sheet Summary

                        

Assets (primarily comprised of hotel real estate managed by us)

   $ 4,171     $ 4,104          
    


 


       

Liabilities

   $ 3,275     $ 2,937          
    


 


       

 

Our ownership interest in these equity method investments varies generally from 10 percent to 50 percent.

 

Costs Incurred to Sell Real Estate Projects

 

We capitalize direct costs incurred to sell real estate projects attributable to and recoverable from the sales of timeshare interests until the sales are recognized. Costs eligible for capitalization follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Selling and marketing costs capitalized under this approach were approximately $69 million and $107 million at January 2, 2004 and January 3, 2003, respectively, and are included in property and equipment in the accompanying consolidated balance sheets. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense, and record deposits forfeited as income.

 

Residual Interests

 

We periodically sell notes receivable originated by our timeshare segment in connection with the sale of timeshare intervals. We retain servicing assets and other interests in the assets transferred to entities that are accounted for as residual interests. We treat the residual interest as “trading” or “available for sale” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” At the end of each reporting period, we estimate the fair value of the residual interests, including servicing assets, using a discounted cash flow model. We report changes in the fair values of these residual interests through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available for sale securities. We had residual interests of $203 million at January 2, 2004 and $135 million at January 3, 2003, which are recorded as other long-term receivables on the consolidated balance sheet.

 

Derivative Instruments

 

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.

 

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We record all derivatives at fair value either as assets or liabilities. We recognize, currently in earnings, changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments. Changes in the fair value of the hedged item in a fair value hedge are recorded as an adjustment to the carrying amount of the hedged item and recognized in earnings in the same income statement line item as the change in the fair value of the derivative.

 

We record the effective portion of changes in fair value of derivatives designated as cash flow hedging instruments as a component of other comprehensive income and report the ineffective portion currently in earnings. We reclassify amounts included in other comprehensive income into earnings in the same period during which the hedged item affects earnings.

 

Foreign Operations

 

The U.S. dollar is the functional currency of our consolidated and unconsolidated entities operating in the United States. The functional currency for our consolidated and unconsolidated entities operating outside of the United States is generally the local currency of the country in which the entity is located. The Company’s consolidated and unconsolidated entities whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date and income statement accounts are translated using the average exchange rate for the period. Transaction adjustments from foreign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are included as a separate component of shareholder’s equity. We report gains and losses from foreign exchange of intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency transactions, currently in operating costs and expenses, and those amounted to a $7 million gain in 2003, a $6 million loss in 2002, and an $8 million loss in 2001.

 

New Accounting Standards

 

In May 2003, the Financial Accounting Standards Board issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The provisions of FAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, or our third quarter of 2003. FAS No. 150 has no material impact on our financial statements.

 

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

 

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

 

     Fiscal year ended December 28, 2001

     Reported

   Goodwill
Amortization


   Adjusted

($ in millions, except per share amounts)

                    
                      

Income from continuing operations, after tax

   $ 269    $ 27    $ 296

Net income

     236      32      268

Basic earnings per share from continuing operations

     1.10      .12      1.22

Basic net earnings per share

     .97      .13      1.10

Diluted earnings per share from continuing operations

     1.05      .10      1.15

Diluted net earnings per share

     .92      .12      1.04

 

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

 

We adopted the disclosure provisions of FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” in the fourth quarter of 2002. We applied the recognition and measurement provisions for guarantees issued in 2003, and there was no material impact on our financial statements.

 

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FIN 46, “Consolidation of Variable Interest Entities,” (the “Interpretation”) was effective for all enterprises with variable interests in variable interest entities created after January 31, 2003. FIN 46(R), which was revised in December 2003, is effective for all entities to which the provisions of FIN 46 were not applied as of December 24, 2003. The provisions of FIN 46(R) must be applied to all entities subject to the Interpretation from the beginning of the first quarter of 2004. If an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. Where it is reasonably possible that the company will consolidate or disclose information about a variable interest entity, the company must disclose the nature, purpose, size and activity of the variable interest entity and the company’s maximum exposure to loss as a result of its involvement with the variable interest entity in all financial statements issued after January 31, 2003. We do not expect to consolidate any previously unconsolidated entities as a result of adopting FIN 46(R).

 

Marriott currently consolidates four entities which will be deemed variable interest entities under FIN 46(R). These entities were established with the same partner to lease four Marriott branded hotels. The combined capital in the four variable interest entities is $6 million, which is used primarily to fund hotel working capital. Our equity at risk is $4 million, and we hold 55 percent of the common equity shares. In addition, we guarantee the lease obligations of one of the hotels to the landlord, our total remaining exposure under this guarantee is $2 million; and our total exposure to loss is $6 million.

 

FIN 46(R) also requires us to disclose information about significant variable interests we hold in variable interest entities, including the nature, purpose, size, and activity of the variable interest entity and our maximum exposure to loss as a result of our involvement with the variable interest entity.

 

See the “Synthetic Fuel” footnote for discussion of the nature, purpose, and size of the two synthetic fuel joint ventures as well as the nature of our involvement and the timing of when our involvement began. The synthetic fuel joint ventures will be deemed variable interest entities under FIN 46(R). Our maximum exposure to loss is $83 million at January 2, 2004. We currently do not consolidate the joint ventures and will not upon adoption of FIN 46(R) since we do not bear the majority of the expected losses.

 

We have one other significant interest in an entity which will be deemed a variable interest entity under FIN 46(R). In February 2001, we entered into a shareholders’ agreement with an unrelated third party to form a joint venture to own and lease luxury hotels to be managed by us. In February 2002, the joint venture signed its first lease with a third party landlord. The initial capital structure of the joint venture is $4 million of debt and $4 million of equity. We hold 35 percent of the equity, or $1 million, and 65 percent of the debt, or $3 million, for a total investment of $4 million. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. Our total exposure under these guarantees is $17 million. Our maximum exposure to loss is $21 million. We currently do not consolidate the joint venture and will not upon adoption of FIN 46(R) since we do not bear the majority of the expected losses.

 

FIN 46(R) does not apply to qualifying special purpose entities, such as those sometimes used by us to sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We will continue to account for these qualifying special purpose entities in accordance with FAS No. 140.

 

Stock-based Compensation

 

We have several stock-based employee compensation plans that we account for using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we do not reflect stock-based employee compensation cost in net income for our Stock Option Program, the Supplemental Executive Stock Option awards or the Stock Purchase Plan. We recognized stock-based employee compensation cost of $19 million, $9 million and $19 million, net of tax, for deferred share grants, restricted share grants and restricted stock units (2003 only) for 2003, 2002 and 2001, respectively.

 

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The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. We have included the impact of measured but unrecognized compensation cost and excess tax benefits credited to additional paid-in-capital in the calculation of the diluted pro forma shares for all years presented.

 

($ in millions, except per share amounts)    2003

    2002

    2001

 

Net income, as reported

   $ 502     $ 277     $ 236  

Add: Stock-based employee compensation

expense included in reported net income,

net of related tax effects

     19       9       19  

Deduct: Total stock-based employee

compensation expense determined under fair

value-based method for all awards, net of related

tax effects

     (73 )     (64 )     (68 )
    


 


 


Pro forma net income

   $ 448     $ 222     $ 187  
    


 


 


Earnings per share:

                        

Basic – as reported

   $ 2.16     $ 1.15     $ .97  
    


 


 


Basic – pro forma

   $ 1.93     $ .93     $ .77  
    


 


 


Diluted – as reported

   $ 2.05     $ 1.10     $ .92  
    


 


 


Diluted – pro forma

   $ 1.84     $ .90     $ .74  
    


 


 


 

 

2. RELATIONSHIP WITH MAJOR CUSTOMER

 

The revenues and financial results we recognized from lodging properties owned/leased by Host Marriott Corporation are shown in the following table:

 

($ in millions)    2003

   2002

   2001

Revenues

   $ 2,357    $ 2,400    $ 2,265

Lodging financial results

     141      145      169

 

Additionally, Host Marriott Corporation is a general partner in several unconsolidated partnerships that own lodging properties operated by us under long-term agreements. The sales, lodging financial results and land rent income recognized by the Company are shown in the following table:

 

($ in millions)    2003

   2002

   2001

Revenues

   $ 329    $ 387    $ 520

Lodging financial results, including equity in earnings (losses)

     7      29      55

Land rent income

     18      18      19

 

In December 2000, we acquired 120 Courtyard by Marriott hotels, through an unconsolidated joint venture (the Courtyard Joint Venture) with an affiliate of Host Marriott Corporation. Prior to the formation of the Courtyard Joint Venture, Host Marriott Corporation was a general partner in the unconsolidated partnerships that owned the 120 Courtyard by Marriott hotels. Amounts recognized f