<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 26, 1999 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
<TABLE>
<CAPTION>
Shares outstanding
Class at April 23, 1999
- -------------------------------- ------------------------------
<S> <C>
Class A Common Stock,
$0.01 par value 249,508,379
</TABLE>
1
<PAGE>
MARRIOTT INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C> <C>
Forward-Looking Statements 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Twelve Weeks Ended March 26, 1999 and
March 27, 1998 4
Condensed Consolidated Balance Sheet -
as of March 26, 1999 and January 1, 1999 5
Condensed Consolidated Statement of Cash Flows -
Twelve Weeks Ended March 26, 1999 and March 27, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information and Signatures:
Legal Proceedings 20
Changes in Securities 20
Defaults Upon Senior Securities 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE>
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "hopes," "estimates," "projects," and other similar
expressions, which are predictions of or indicate future events and trends,
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of our business
segments; business strategies and their intended results; the balance between
supply of and demand for hotel rooms, timeshare units, senior living
accommodations and corporate apartments; our continued ability to obtain new
operating contracts and franchise agreements; our ability to develop and
maintain positive relations with current and potential hotel and senior living
community owners; the effect of international, national and regional economic
conditions; the availability of capital to allow us and potential hotel and
senior living community owners to fund investments; our ability, and that of
other parties upon which our businesses also rely, to modify or replace on a
timely basis, their computer software and other systems in order to function
properly prior to, in and beyond, the year 2000; and other risks described from
time to time in our filings with the Securities and Exchange Commission,
including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, you are cautioned not to place undue reliance on such statements.
We also undertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
3
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- -------- --------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve weeks ended
--------------------------------------------
March 26, 1999 March 27, 1998
------------------- -------------------
<S> <C> <C>
SALES........................................................................... $ 1,895 $ 1,715
OPERATING COSTS AND EXPENSES.................................................... 1,702 1,552
----------------- ---------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST.................................................................. 193 163
Corporate expenses.............................................................. (29) (25)
Interest expense................................................................ (11) (3)
Interest income................................................................. 7 10
----------------- ---------------
INCOME BEFORE INCOME TAXES...................................................... 160 145
Provision for income taxes...................................................... 60 56
----------------- ---------------
NET INCOME...................................................................... $ 100 $ 89
================= ===============
DIVIDENDS DECLARED PER SHARE.................................................... $ .05 $ -
================= ===============
(pro forma)
---------------
EARNINGS PER SHARE
Basic Earnings Per Share...................................................... $ .41 $ .35
================= ===============
Diluted Earnings Per Share.................................................... $ .38 $ .33
================= ===============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
March 26, January 1,
1999 1999
-------------------- --------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and equivalents...................................................... $ 335 $ 390
Accounts and notes receivable............................................. 632 605
Other..................................................................... 339 338
--------------- ---------------
1,306 1,333
--------------- ---------------
Property and equipment..................................................... 2,337 2,275
Intangibles................................................................ 1,818 1,712
Investments in affiliates.................................................. 278 228
Notes and other receivables................................................ 449 434
Other...................................................................... 264 251
--------------- ---------------
$ 6,452 $ 6,233
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................................... $ 469 $ 497
Other..................................................................... 875 915
--------------- ---------------
1,344 1,412
--------------- ---------------
Long-term debt............................................................. 940 944
Other long-term liabilities................................................ 1,058 984
Convertible subordinated debt.............................................. 326 323
Shareholders' equity
Class A common stock, 255.6 million shares issued......................... 3 3
Additional paid-in capital................................................ 2,726 2,713
Retained earnings......................................................... 242 218
Treasury stock, at cost................................................... (161) (348)
Accumulated other comprehensive income.................................... (26) (16)
--------------- ---------------
2,784 2,570
--------------- ---------------
$ 6,452 $ 6,233
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
Twelve weeks ended
---------------------------------------------
March 26, 1999 March 27, 1998
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 100 $ 89
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization....................................... 33 30
Income taxes and other.............................................. 50 26
Timeshare activity, net............................................. (12) 9
Working capital changes............................................. (36) (82)
--------------- --------------
Cash provided by operations............................................. 135 72
--------------- --------------
INVESTING ACTIVITIES
Acquisitions............................................................ (51) (48)
Dispositions............................................................ 186 38
Capital expenditures.................................................... (205) (115)
Note advances........................................................... (58) (4)
Note collections and sales.............................................. 5 8
Other................................................................... (38) (44)
--------------- --------------
Cash used in investing activities....................................... (161) (165)
--------------- --------------
FINANCING ACTIVITIES
Issuance of long-term debt.............................................. 2 452
Repayment of long-term debt............................................. (40) (122)
Issuance of Class A common stock........................................ 26 -
Dividends paid.......................................................... (12) -
Purchase of treasury stock.............................................. (5) -
Advances to Old Marriott................................................ - (104)
--------------- --------------
Cash (used in) provided by financing activities......................... (29) 226
--------------- --------------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS................................ (55) 133
CASH AND EQUIVALENTS, beginning of period.................................. 390 208
--------------- --------------
CASH AND EQUIVALENTS, end of period........................................ $ 335 $ 341
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements present the
results of operations, financial condition and cash flows of Marriott
International, Inc. (together with its subsidiaries, we, us or the Company),
formerly New Marriott MI, Inc., as if it were a separate entity for all
periods presented. Until March 27, 1998, we were a wholly-owned subsidiary of
the former Marriott International, Inc. (Old Marriott).
The accompanying condensed consolidated financial statements have not been
audited. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles. We believe the disclosures
made are adequate to make the information presented not misleading. However,
you should read the condensed consolidated financial statements in conjunction
with the consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K (the Annual Report) for the fiscal year ended
January 1, 1999. Capitalized terms not otherwise defined in this quarterly
report have the meanings specified in the Annual Report.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of sales and expenses
during the reporting period. Accordingly, ultimate results could differ from
those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly our financial position as of March
26, 1999 and January 1, 1999, and the results of operations and cash flows for
the twelve weeks ended March 26, 1999 and March 27, 1998. Interim results may
not be indicative of fiscal year performance because of seasonal and short-
term variations. We have eliminated all material intercompany transactions
and balances between entities included in these financial statements.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the sales and expenses of a managed entity in
its financial statements. As a result of EITF 97-2, and related discussions
with the staff of the Securities and Exchange Commission, in our 1998 fourth
quarter we changed our accounting policy to no longer include in our financial
statements the working capital and sales of managed hotels and managed senior
living communities. Our financial statements for prior periods have been
restated. This change in accounting policy resulted in reductions in each of
sales and operating expenses of $477 million for the twelve weeks ended March
27, 1998, with no impact on operating profit, net income, earnings per share,
debt or equity.
7
<PAGE>
2. Spinoff
-------
On March 27, 1998, Old Marriott distributed all of our issued and
outstanding common stock, on a pro rata basis, as a special dividend (the
Spinoff) to holders of Old Marriott's common stock, and the Company was
renamed "Marriott International, Inc." We have carried over Old Marriott's
historical cost basis in our assets and liabilities. Old Marriott received a
private letter ruling from the Internal Revenue Service that the Spinoff would
be tax-free to it and its shareholders. For each share of common stock in Old
Marriott, shareholders received one share of our Common Stock and one share of
our Class A Common Stock. On May 21, 1998, all outstanding shares of our
Common Stock were converted, on a one-for-one basis, into shares of our Class
A Common Stock. For further discussion of the Spinoff, please refer to our
Annual Report.
8
<PAGE>
3. Earnings Per Share
------------------
For periods prior to March 27, 1998, the number of weighted average shares
outstanding and the effect of dilutive securities used in the earnings per
share calculations are based upon the weighted average number of Old Marriott
shares outstanding, and the Old Marriott effect of dilutive securities for the
applicable period, adjusted (1) for the distribution ratio in the Spinoff of
one share of our Common Stock and one share of our Class A Common Stock for
every share of Old Marriott common stock, and (2) to reflect the conversion of
our Common Stock into Company Class A Common Stock on May 21, 1998.
The following table reconciles the earnings and number of shares used in the
basic and diluted earnings per share calculations (in millions, except per
share amounts).
<TABLE>
<CAPTION>
Twelve weeks ended
------------------------------------------
March 26, March 27,
1999 1998
------------------- -------------------
<S> <C> <C>
(pro forma)
Computation of Basic Earnings Per Share
Net income........................................................... $ 100 $ 89
================= =================
Weighted average shares outstanding.................................. 245.6 253.5
================= =================
Basic Earnings Per Share............................................. $ .41 $ .35
================= =================
Computation of Diluted Earnings Per Share
Net income........................................................... $ 100 $ 89
After-tax interest expense on convertible
subordinated debt................................................... 2 2
----------------- -----------------
Net income for diluted earnings per share............................ $ 102 $ 91
================= =================
Weighted average shares outstanding.................................. 245.6 253.5
Effect of Dilutive Securities
Employee stock option plan.......................................... 9.0 9.1
Deferred stock incentive plan....................................... 5.2 5.4
Convertible subordinated debt........................................ 9.5 9.5
----------------- -----------------
Shares for diluted earnings per share................................ 269.3 277.5
================= =================
Diluted Earnings Per Share........................................... $ .38 $ .33
================= =================
</TABLE>
We compute the effect of dilutive securities using the treasury stock
method and average market prices during the period. We use the if-converted
method for convertible subordinated debt.
9
<PAGE>
4. Acquisitions
------------
The Ritz-Carlton Hotel Company LLC. On March 19, 1998, we increased our
ownership interest in The Ritz-Carlton Hotel Company LLC to approximately 98
percent for consideration of approximately $90 million. We expect to acquire
the remaining two percent within the next several years. We accounted for the
acquisition using the purchase method of accounting. Prior to March 19, 1998,
we accounted for our investment in The Ritz-Carlton Hotel Company LLC using
the equity method of accounting and we received distributions based on an
annual, cumulative preferred return on invested capital.
ExecuStay Corporation. On February 17, 1999, we completed a cash tender
offer for approximately 44 percent of the outstanding common stock of
ExecuStay Corporation (ExecuStay), a leading provider of leased corporate
apartments in the United States. On February 24, 1999, substantially all of
the remaining common stock of ExecuStay was converted into nonvoting preferred
stock of ExecuStay which we acquired, on March 26, 1999, for approximately 2.1
million shares of our Class A Common Stock. Our aggregate purchase price
totaled $116 million. We consolidated the results of ExecuStay from February
24, 1999, and have accounted for the acquisition using the purchase method of
accounting. We amortize the resulting goodwill on a straight-line basis over
30 years.
5. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing transactions and other obligations. These guarantees are limited, in
the aggregate, to $161 million at March 26, 1999. New World Development and
another entity affiliated with Dr. Cheng, a member of our Board of Directors,
have severally indemnified us for guarantees by us of leases with minimum
annual payments of approximately $59 million.
Letters of credit outstanding on our behalf at March 26, 1999, totaled $73
million, the majority of which related to our self-insurance program. At
March 26, 1999, we had a repurchase obligation of $76 million related to notes
receivable from timeshare interval purchasers that have been sold with limited
recourse.
6. Comprehensive Income
--------------------
Total comprehensive income was $90 million and $85 million, respectively,
for the twelve weeks ended March 26, 1999 and March 27, 1998. The principal
difference between net income and total comprehensive income relates to
foreign currency translation adjustments.
7. New Accounting Standards
------------------------
In 1999 we adopted Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities," issued by the American Institute of Certified
Public Accountants, by expensing pre-opening costs for Company owned lodging
and senior living communities as incurred. The adoption of SOP 98-5 resulted
in a pre-tax expense of $5 million in the 1999 first quarter.
We will adopt FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which we do not expect to have a material effect on our
consolidated financial statements, in the fourth quarter of 2000.
10
<PAGE>
8. Business Segments
-----------------
We are a diversified hospitality company operating in three business segments:
Lodging, which includes the development, ownership, operation and franchising
of lodging properties including vacation timesharing resorts; Senior Living
Services, which consists of the development, ownership and operation of senior
living communities; and Distribution Services, which operates a wholesale food
distribution business. We evaluate the performance of our segments based
primarily on operating profit before corporate expenses and interest. We do
not allocate income taxes at the segment level.
The following table shows our sales and operating profit by business segment
for the twelve weeks ended March 26, 1999 and March 27, 1998.
<TABLE>
<CAPTION>
Twelve weeks ended
---------------------------------------------
March 26, 1999 March 27, 1998
-------------------- -------------------
<S> <C> <C>
(in millions)
Sales
Lodging.............................................................. $ 1,523 $ 1,319
Senior Living Services............................................... 120 105
Distribution Services................................................ 252 291
------------------ -----------------
$ 1,895 $ 1,715
================== =================
Operating profit before corporate expenses and interest
Lodging.............................................................. $ 187 $ 158
Senior Living Services............................................... 2 2
Distribution Services................................................ 4 3
------------------ -----------------
$ 193 $ 163
================== =================
</TABLE>
Sales of Distribution Services do not include sales made at market terms and
conditions to our other business segments of $37 million and $32 million for
the 12 weeks ended March 26, 1999 and March 27, 1998, respectively.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
RESULTS OF OPERATIONS/1/
Twelve Weeks Ended March 26, 1999 Compared to Twelve Weeks Ended March 27, 1998
- -------------------------------------------------------------------------------
We reported net income of $100 million for the 1999 first quarter, on sales of
$1,895 million. This represents a 12 percent increase in net income and a 10
percent increase in sales over the first quarter of 1998. Diluted earnings per
share of $.38 for the quarter increased 15 percent over the 1998 amount.
As discussed in our financial statements, in the fourth quarter of 1998 we
changed our accounting policy to no longer include the working capital and sales
of managed hotels and managed senior living communities in our financial
statements. Instead, our sales include fees earned plus costs recovered from
owners of managed hotels and managed senior living communities. We have
restated prior periods and all references in the discussion below refer to
financial statement data prepared under our new accounting policy. This new
accounting policy reflects reductions in sales of $664 million and $477 million
for the 1999 and 1998 first quarters, respectively, compared to sales as
previously calculated for those periods.
Lodging reported an 18 percent increase in operating profit on 15 percent higher
sales. The results reflect average REVPAR growth of four percent across our
lodging brands, including strong results from Marriott Vacation Club
International and contributions from new units. Sales for full-service and
luxury brands comprised 73 percent of total lodging sales in the 1999 quarter.
We added a net total of 51 properties (6,932 units) during the first quarter of
1999, increasing our total properties to 1,737 (335,225 units). Properties by
brand (excluding the 4,600 rental units we added as a result of the ExecuStay
acquisition) are as indicated in the following table.
<TABLE>
<CAPTION>
Properties at March 26, 1999
--------------------------------------------------------
Company-operated Franchised
------------------------- ----------------------------
Properties Units Properties Units
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Marriott Hotels, Resorts and Suites...................... 209 93,452 148 44,178
Ritz-Carlton............................................. 36 11,847 - -
Renaissance.............................................. 74 29,642 14 5,414
Ramada International..................................... 7 1,325 35 6,037
Residence Inn............................................ 128 17,190 177 19,210
Courtyard................................................ 247 37,762 180 21,893
TownePlace Suites........................................ 13 1,310 15 1,511
Fairfield Inn and SpringHill Suites...................... 55 7,574 354 31,320
Marriott Vacation Club International..................... 38 4,031 - -
Marriott Executive Residences and other.................. 7 1,529 - -
---------- ------------ ------------- ------------
Total.................................................... 814 205,662 923 129,563
========== ============ ============= ============
</TABLE>
____________
(1) Average daily rate, occupancy and REVPAR statistics are based on comparable
U.S. properties operated by us, except that data for Fairfield Inn also
include comparable franchised units.
12
<PAGE>
Marriott Hotels, Resorts and Suites posted a three percent increase in average
room rates, to $143, and a one percentage point increase in occupancy to 78
percent, which generated a REVPAR increase of four percent. Profits increased as
improved REVPAR generated higher base management, franchise and incentive fees
at many hotels.
Renaissance hotels posted a REVPAR increase of two percent due to a two
percentage point increase in occupancy to 71 percent, partially offset by a one
percent decrease in average room rates to $133. REVPAR was negatively impacted
by results of a few poorly performing properties.
Ritz-Carlton reported an increase in average room rates of six percent, to $236,
with occupancy up three percentage points to 77 percent, resulting in an 11
percent increase in REVPAR.
Residence Inn, our quality tier extended-stay brand, posted REVPAR consistent
with the 1998 first quarter, arising from a decrease in average room rates of
one percent to $98, offset by a one percentage point increase in occupancy to 82
percent. Operating results include contributions from new units and gains
related to the disposition of four properties during the 1999 quarter. We
retained long-term management agreements on these properties. Residence Inn
opened 11 properties during the quarter.
Courtyard, our moderate-price lodging brand, achieved a 15 percent increase in
sales. Courtyard's average room rates increased two percent to $91, and
occupancy increased by one percentage point to 79 percent, resulting in a REVPAR
increase of three percent. Courtyard opened 11 properties during the quarter.
Fairfield Inn, our economy lodging brand, posted an increase in average room
rates of one percent to $56, which was partially offset by a slight decrease in
occupancy to 69 percent, resulting in an increase in REVPAR of one percent.
Fairfield Inn opened 10 properties during the quarter.
Marriott Vacation Club International posted substantial profit growth in the
1999 first quarter. We generated a 32 percent increase in contract sales,
reflecting strong sales activity at timeshare resorts in Florida, California,
South Carolina, Spain and Aruba.
Marriott Senior Living Services reported higher sales in the 1999 first quarter.
Operating profit before corporate expenses and interest increased slightly as
gains from property sales and improved performance at established communities
were largely offset by pre-opening costs of $5 million and start-up costs of new
communities. Occupancy for comparable communities increased by three percentage
points to 91 percent for the quarter. At March 26, 1999, the division operated
121 independent full-service and assisted living communities totaling
approximately 21,800 units.
Marriott Distribution Services (MDS) achieved higher profits in the quarter,
despite lower sales. The division benefited from consolidation of its food
distribution facilities, and the realization of operating efficiencies following
a period of rapid expansion in 1996-97. See "Liquidity and Capital Resources"
below for a discussion of the possible future impact to MDS of the bankruptcy
filing by a major MDS customer.
13
<PAGE>
Corporate activity. Interest expense increased by $8 million in the 1999 first
quarter, primarily due to investing activities and share repurchases since the
Spinoff. Corporate expenses increased primarily due to Year 2000 modification
costs of $5 million compared to $3 million in the 1998 quarter. The effective
income tax rate decreased from 38.5 percent to 37.5 percent primarily due to the
increased proportion of operations in countries with relatively low effective
tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents totaled $335 million at March 26, 1999, a decrease of $55
million from year end. Cash provided by operations of $135 million increased 88
percent over 1998. Net income is stated after recording depreciation expense of
$19 million and $15 million in 1999 and 1998, respectively, and after
amortization expense of $14 million and $15 million in 1999 and 1998,
respectively. EBITDA increased by $26 million, or 15 percent, to $204 million.
EBITDA is an indicator of operating performance which can be used to measure the
Company's ability to service debt, fund capital expenditures and expand its
business. However, EBITDA is not an alternative to net income, operating
profit, cash from operations, or any other operating or liquidity measure
prescribed by generally accepted accounting principles.
Net cash used in investing activities totaled $161 million for the quarter, and
included our acquisition of ExecuStay, expenditures for developing limited-
service lodging properties and senior living communities together with note
advances. Cash generated from dispositions of $186 million resulted primarily
from the sales of limited-service lodging properties and senior living
communities under master transactions initiated in 1998. We continue to operate
these properties under long-term agreements.
We continue to grow our businesses, in part, by investing in new units. We
expect our principal investments to continue to include loans, minority equity
interests, business acquisitions and direct development and ownership of certain
lodging and senior living services projects. We expect to sell certain lodging
and senior living service properties currently under development, or to be
developed, while continuing to operate them under long-term agreements.
We believe that cash generated by operations, together with our borrowing
capacity and proceeds from the sale of assets, will be sufficient to finance our
planned growth and capital requirements. Nonetheless, our ability to sell
properties that we develop, and the ability of hotel or senior living community
developers to build or acquire new Marriott properties, both of which are
important components of our growth plans, are to some extent dependent on the
availability and price of capital. We are monitoring the status of the capital
markets, and other conditions which could affect our ability to execute our
announced growth plans.
We purchased 0.2 million shares of Class A Common Stock in the twelve weeks
ended March 26, 1999, at a cost of $5 million. As of March 26, 1999, we had
been authorized by our Board of Directors to purchase an additional 6.1 million
shares.
14
<PAGE>
In 1996, MDS became the exclusive provider of distribution services to Boston
Chicken Inc. (BCI). On October 5, 1998, BCI and its Boston Market-controlled
subsidiaries filed voluntary bankruptcy petitions in the U.S. Bankruptcy Court
(the Court) for protection under Chapter 11 of the Federal Bankruptcy Code. The
bankruptcy resulted in the closing of approximately 21 percent of the
restaurants in the Boston Market chain. MDS continues to distribute to BCI and
has been receiving payment of post-petition balances in accordance with the
terms of its contracts with BCI. In addition, the Court has approved, and MDS
has received, payment for substantially all of its pre-petition accounts
receivable balances. However, the final effect on our future results of
operations and financial position depends on the final resolution of BCI's
bankruptcy. Under certain circumstances, if the contract were to terminate, or
if BCI were to cease or further curtail its operations: (1) MDS may be unable to
recover some or all of an aggregate of approximately $32 million in contract
investment, receivables and inventory; and (2) MDS could have more warehouse
capacity and rolling stock than it needs.
In November 1998 we issued, through a private placement, $400 million of
unsecured senior notes. On April 23, 1999, we commenced a registered exchange
offer to exchange the privately placed senior notes for publicly registered new
notes on substantially identical terms. Unless we choose to extend it, the
exchange offer will close on May 24, 1999.
In April 1999 we filed a "universal shelf" registration statement with the
Securities and Exchange Commission. That registration statement, which became
effective on May 4, 1999, allows us to offer to the public up to $500 million
of debt securities, Class A Common Stock and/or preferred stock. Although we
have no current plans to issue Class A Common or preferred stock under the
registration statement, this "universal shelf" format maximizes our ability to
respond to unanticipated financing needs.
Year 2000 Readiness Disclosure
- ------------------------------
The "Year 2000 problem" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications
could fail or create erroneous results.
State of Readiness. We have adopted the following eight-step process toward
- ------------------
Year 2000 readiness:
1. Awareness: fostering understanding of, and commitment to, the problem and
its potential risks;
2. Inventory: identifying and locating systems and technology components that
may be affected;
3. Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues;
4. Planning: defining the technical solutions and labor and work plans
necessary for each affected system;
5. Remediation/Replacement: completing the programming to renovate or replace
the problem software or hardware;
6. Testing and Compliance Validation: conducting testing, followed by
independent validation by a separate internal verification team;
15
<PAGE>
7. Implementation: placing the corrected systems and technology back into the
business environment; and
8. Quality Assurance: utilizing an internal audit team to review significant
projects for adherence to quality standards and program methodology.
We have grouped our systems and technology into three categories for purposes of
Year 2000 compliance:
1. Information resource applications and technology (IT Applications) --
enterprise-wide systems supported by the Company's centralized information
technology organization (IR);
2. Business-initiated systems (BIS) -- systems that have been initiated by an
individual business unit, and that are not supported by IR; and
3. Building Systems -- non-IT equipment at properties that use embedded
computer chips, such as elevators, automated room key systems and HVAC
equipment.
We are prioritizing our efforts based on how severe an effect noncompliance
would have on customer service, core business processes or revenues, and whether
there are viable, non-automated fallback procedures (System Criticality).
16
<PAGE>
We measure completion of each phase based on documentation and quantified
results weighted for System Criticality. The following table reflects the
status of our Year 2000 readiness process at March 26, 1999.
<TABLE>
<CAPTION>
Step IT Applications BIS Building Systems
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Awareness Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- ---------------------------------------------------------------------------------------------------------------------
Assessment Complete Substantially complete Substantially complete
- ---------------------------------------------------------------------------------------------------------------------
Planning Complete Substantially complete Substantially complete
- ---------------------------------------------------------------------------------------------------------------------
Remediation/ Replacement Over 95 percent complete Substantially complete Substantially complete;
critical systems targeted
for completion by
September 1999
- ---------------------------------------------------------------------------------------------------------------------
Testing and Compliance Validation Testing over 95 percent Testing is in progress.* Initial testing is
complete; Compliance Compliance Validation is approximately 80 percent
Validation completed for in progress complete *, for which
approximately 75 percent less than 10 percent
of key systems, with most require further
remaining work in its remediation/ replacement
final stage and re-testing.
Substantial completion
for critical systems
targeted for September
1999;
Compliance Validation is
in progress
- ---------------------------------------------------------------------------------------------------------------------
Implementation Approximately 80 percent Approximately 40 percent In progress
of implementation complete; on track for
projects complete, with completion by the end of
rollout to business the second quarter 1999
locations underway
- ---------------------------------------------------------------------------------------------------------------------
Quality Assurance In progress for In progress In progress
approximately 80 percent
of IT applications
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Testing for third party BIS and Building Systems may consist of our receipt
and evaluation of vendor compliance documentation and, where appropriate,
further verification by us of compliance.
Year 2000 compliance communications with our significant third party suppliers,
vendors and business partners, including our franchisees are ongoing. Our
efforts are focused on the connections most critical to customer service, core
business processes and revenues, including those third parties that support our
most critical enterprise-wide IT Applications, franchisees generating the most
17
<PAGE>
revenues, suppliers of the most widely used Building Systems and BIS, the top
100 suppliers, by dollar volume, of non-IT products and services, and financial
institutions providing the most critical payment processing functions. We have
received responses from a majority of the firms in this group. A majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or by us to achieve
timely Year 2000 compliance for their products.
We have established a common approach for testing and addressing Year 2000
compliance issues for our managed and franchised properties. This includes
guidance for properties we operate, and a Year 2000 "Toolkit" for franchisees
containing relevant Year 2000 compliance information. We are also utilizing a
Year 2000 best-practices sharing system.
Costs. Many of the costs of Year 2000 compliance will be reimbursed to us or
otherwise paid directly by owners and clients pursuant to existing contracts.
We estimate that we will bear approximately $40-$50 million of the pre-tax costs
to address the Year 2000 problem. Some of these costs relate to internal
resources which will be redeployed in 2000, and, as such, represent costs which
we will continue to bear in future years. The Year 2000 costs, approximately
$17 million (on a pre-tax basis) of which have been incurred through March 26,
1999, have been and will be expensed as incurred.
In addition, we had previously planned and/or begun implementing several system
replacement projects to modernize and improve our systems. The Year 2000
problem heightened the need for the timely completion and some project schedules
have been accelerated. These project costs have been included in our budgeting
process and internal forecasts and already form part of our financial plans.
Like the Year 2000 costs referred to in the preceding paragraph, many of these
systems replacement costs will be reimbursed to us or otherwise paid directly by
owners and clients pursuant to existing contracts. We estimate that we will
bear approximately $45-$50 million of the pre-tax costs of these system
replacements, most of which will be capitalized and amortized over the useful
lives of the assets.
The costs we will actually incur will depend on a number of factors which cannot
be accurately predicted, including the extent and difficulty of the Remediation
and other work to be done, the availability and cost of consultants, the extent
of testing required to demonstrate Year 2000 compliance, and our ability to
timely collect all payments due to us under existing contracts.
Year 2000 Contingency Plans. Our centralized services and the properties we
operate already have contingency plans in place covering a variety of possible
events, including natural disasters, interruption of utility service, general
computer failure, and the like. We are reviewing these contingency plans for
modifications to address specific Year 2000 issues, and expect modification of
master contingency plans to be substantially complete by the end of the second
quarter of 1999, with conforming changes to be added to individual unit
contingency plans during the third quarter.
Risks Posed By Our Year 2000 Issues. We currently believe that the Year 2000
problem will not have a material adverse effect on us, our business or our
financial condition. However, we cannot assure you that our Year 2000
remediation or remediation by others will be completed properly and on time, and
failure to do so could materially and adversely effect us. We also cannot
predict the actual effects of the Year 2000 problem on us, which depends on a
number of uncertainties such as:
18
<PAGE>
. the factors listed above under "Costs";
. whether our franchisees and other significant third parties address the Year
2000 issue properly and on time;
. whether broad-based or systemic economic failures may occur, which could
include:
. disruptions in passenger transportation or transportation systems
generally;
. loss of utility and/or telecommunications services;
. errors or failures in financial transactions or payment processing systems
such as credit cards;
. the severity and duration of such failures; and
. whether we are sued or become subject to other proceedings regarding any Year
2000-related events and the outcome of any such suit or proceedings.
As part of our contingency planning, we are analyzing the most reasonably likely
worst-case scenario that could result from Year 2000-related failures. Our best
estimate of this scenario, based on current information, follows. Failure by
others to achieve Year 2000 compliance could cause short-term disruptions in
travel patterns, caused by actual or perceived problems with travel systems, and
temporary disruptions in the supply of utility, telecommunications and financial
services, which may be local or regional in scope. These events could lead
travelers to accelerate travel to late 1999, postpone travel to later in 2000 or
cancel travel plans, which could in turn affect lodging patterns and occupancy.
Such failures could be more pronounced in some areas outside the U.S. where we
understand that Year 2000 compliance efforts may not be as advanced. In
addition, failure by us or others to achieve Year 2000 compliance could cause
short-term operational inconveniences and inefficiencies for us. This may
temporarily divert management's time and attention from ordinary business
activities. We will, to the extent reasonably achievable, seek to prevent
and/or mitigate these effects through our compliance and contingency planning
efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
January 1, 1999.
19
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There are no material legal proceedings pending against us.
Item 2. Changes in Securities
- ------------------------------
On March 26, 1999, we merged ExecuStay into one of our subsidiaries. During this
merger, we issued 0.4484 shares of our Class A Common Stock in exchange for each
outstanding share of ExecuStay's Class A Preferred Stock and 0.4829 shares of
our Class A Common Stock in exchange for each outstanding share of ExecuStay's
Class B Preferred Stock. We issued a total of 2,081,951 shares of our Class A
Common Stock.
These shares of our Class A Common Stock were issued in a transaction that
qualified as a private placement under Section 4(2) under the Securities Act of
1933, as amended (the Securities Act). This transaction qualified as a private
placement because, among other reasons:
. we offered the Class A Common Stock to a total of 22 people;
. we did not engage in any general solicitation or general advertising in
connection with this offering;
. we reasonably believed that all of the offerees were accredited investors
within the meaning of Regulation D under the Securities Act; and
. all of the shares of our Class A Common Stock issued in this transaction
bear a legend restricting the resale of such stock.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
12 Statement of Computation of Ratio of Earnings
to Fixed Charges.
27 Financial Data Schedule for the Company.
99 Forward-Looking Statements.
(b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARRIOTT INTERNATIONAL, INC.
May 6, 1999
/s/ Arne M. Sorenson
----------------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Stephen E. Riffee
----------------------------
Stephen E. Riffee
Vice President, Finance and
Chief Accounting Officer
22
<PAGE>
EXHIBIT 12
MARRIOTT INTERNATIONAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions, except ratio)
<TABLE>
<CAPTION>
Twelve Weeks Ended
March 26, 1999
------------------
<S> <C>
Income before income taxes $160
Loss related to equity method investees 2
------
162
Add/(deduct):
Fixed charges 31
Interest capitalized (7)
------
EARNINGS AVAILABLE FOR FIXED CHARGES $186
======
Fixed charges:
Interest expensed and capitalized(1) $ 18
Estimate of the interest within rent expense 13
------
TOTAL FIXED CHARGES $ 31
======
------
RATIO OF EARNINGS TO FIXED CHARGES 6.0
======
</TABLE>
(1) "Interest expensed and capitalized" includes amortized premiums, discounts
and capitalized expenses related to indebtedness.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 JAN-01-1999
<PERIOD-START> JAN-02-1999 JAN-03-1998
<PERIOD-END> MAR-26-1999 MAR-27-1998
<CASH> 335 0
<SECURITIES> 0 0
<RECEIVABLES> 632 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,306 0
<PP&E> 2,337 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 6,452 0
<CURRENT-LIABILITIES> 1,344 0
<BONDS> 0 0
0 0
0 0
<COMMON> 3 0
<OTHER-SE> 2,781 0
<TOTAL-LIABILITY-AND-EQUITY> 6,452 0
<SALES> 1,895 1,715
<TOTAL-REVENUES> 1,895 1,715
<CGS> 0 0
<TOTAL-COSTS> 1,702 1,552
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11 3
<INCOME-PRETAX> 160 145
<INCOME-TAX> 60 56
<INCOME-CONTINUING> 100 89
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 100 89
<EPS-PRIMARY> 0.41 0.35
<EPS-DILUTED> 0.38 0.33
</TABLE>
<PAGE>
EXHIBIT 99
Forward-Looking Statements
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report or presented elsewhere by management.
Dependence on Others: Our present growth strategy for development of additional
lodging and senior living facilities entails entering into and maintaining
various arrangements with present and future property owners, including Host
Marriott Corporation and New World Development Company Limited. There can be no
assurance that any of our current strategic arrangements will continue, or that
we will be able to enter into future collaborations.
Contract Terms for New Units: The terms of the operating contracts, distribution
agreements, franchise agreements and leases for each of our lodging facilities
and senior living communities are influenced by contract terms offered by our
competitors at the time such agreements are entered into. Accordingly, we
cannot assure you that contracts entered into or renewed in the future will be
on terms that are as favorable to us as those under existing agreements.
Competition: The profitability of hotels, vacation timeshare resorts, senior
living communities, corporate apartments, and distribution centers we operate is
subject to general economic conditions, competition, the desirability of
particular locations, the relationship between supply of and demand for hotel
rooms, vacation timeshare resorts, senior living facilities, corporate
apartments, and distribution services, and other factors. We generally operate
in markets that contain numerous competitors and our continued success will
depend, in large part, upon our ability to compete in such areas as access,
location, quality of accommodations, amenities, specialized services, cost
containment and, to a lesser extent, the quality and scope of food and beverage
services and facilities.
Supply and Demand: The lodging industry may be adversely affected by (1) supply
additions, (2) international, national and regional economic conditions, (3)
changes in travel patterns, (4) taxes and government regulations which influence
or determine wages, prices, interest rates, construction procedures and costs,
and (5) the availability of capital to allow us and potential hotel and senior
living community owners to fund investments. Our timeshare and senior living
service businesses are also subject to the same or similar uncertainties and,
accordingly, we cannot assure you that the present level of demand for timeshare
intervals and senior living communities will continue, or that there will not be
an increase in the supply of competitive units, which could reduce the prices at
which we are able to sell or rent units.
Year 2000 Compliance: Our failure or a failure by third parties with whom we do
business to successfully address the Year 2000 problem, as described in Part I,
Item 2 of this Report (Management's Discussion and Analysis of Financial
Condition and Results of Operations), could materially and adversely affect us,
our business or our financial condition.
