<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 September 8, 2000 Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
Delaware 52-2055918
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [_]
Shares outstanding at
Class October 13, 2000
------------------------------------ ----------------------------
Class A Common Stock, 239,982,829
$0.01 par value
1
<PAGE>
MARRIOTT INTERNATIONAL, INC.
INDEX
Page No.
--------
Forward-Looking Statements.................................... 3
Part I. Financial Information (Unaudited):
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended September 8, 2000 and
September 10, 1999........................................ 4
Condensed Consolidated Balance Sheet -
as of September 8, 2000 and December 31, 1999............. 5
Condensed Consolidated Statement of Cash Flows -
Thirty-Six Weeks Ended September 8, 2000 and September
10, 1999 ................................................. 6
Notes to Condensed Consolidated Financial Statements........ 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Quantitative and Qualitative Disclosures About Market Risk.. 20
Part II. Other Information and Signatures:
Legal Proceedings........................................... 21
Changes in Securities....................................... 21
Defaults Upon Senior Securities............................. 21
Submission of Matters to a Vote of Security Holders......... 21
Other Information........................................... 21
Exhibits and Reports on Form 8-K............................ 22
Signatures.................................................. 23
2
<PAGE>
Forward-Looking Statements
When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms, timeshare units, senior living accommodations and corporate
apartments; our ability to obtain new operating contracts and franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel and senior living community owners; the effect of
international, national and regional economic conditions; the availability of
capital to allow us and potential hotel and senior living community owners to
fund investments; satisfaction of the conditions to consummation of the
litigation settlement transactions referred to below; and other risks described
from time to time in our filings with the Securities and Exchange Commission,
including those set forth on Exhibit 99 filed herewith. Given these
uncertainties, we caution you not to place undue reliance on such statements. We
also undertake no obligation to publicly update or revise any forward-looking
statement to reflect current or future events or circumstances.
3
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
-------------------------------
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twelve weeks ended Thirty-six weeks ended
------------------------------------- -----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
SALES ..................................... $ 2,303 $ 1,995 $ 6,861 $ 5,932
OPERATING COSTS AND EXPENSES .............. 2,087 1,807 6,205 5,335
--------------- --------------- -------------- --------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST ................... 216 188 656 597
Corporate expenses ........................ (29) (30) (80) (87)
Interest expense .......................... (22) (12) (72) (34)
Interest income ........................... 9 7 19 20
--------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES ................ 174 153 523 496
Provision for income taxes ................ 64 57 193 186
--------------- --------------- -------------- --------------
NET INCOME ................................ $ 110 $ 96 $ 330 $ 310
=============== =============== ============== ==============
DIVIDENDS DECLARED PER SHARE .............. $ .06 $ .055 $ .175 $ .16
=============== =============== ============== ==============
EARNINGS PER SHARE
Basic Earnings Per Share .................. $ .46 $ .39 $ 1.37 $ 1.25
=============== =============== ============== ==============
Diluted Earnings Per Share ................ $ .43 $ .36 $ 1.30 $ 1.16
=============== =============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
September 8, December 31,
2000 1999
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and equivalents ....................................................... $ 378 $ 489
Accounts and notes receivable .............................................. 668 740
Inventory .................................................................. 104 93
Other ...................................................................... 317 278
-------------- --------------
1,467 1,600
-------------- --------------
Property and equipment ........................................................ 3,088 2,845
Intangibles ................................................................... 1,816 1,820
Investments in affiliates ..................................................... 372 294
Notes and other receivables ................................................... 601 473
Other ......................................................................... 302 292
-------------- --------------
$ 7,646 $ 7,324
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................................... $ 564 $ 628
Other ...................................................................... 1,223 1,115
-------------- --------------
1,787 1,743
-------------- --------------
Long-term debt ................................................................ 1,756 1,676
Other long-term liabilities ................................................... 1,074 997
Shareholders' equity
ESOP preferred stock .......................................................
Class A common stock, 255.6 million shares issued .......................... 3 3
Additional paid-in capital ................................................. 3,663 2,738
Retained earnings .......................................................... 715 508
Unearned ESOP shares ....................................................... (830) -
Treasury stock, at cost .................................................... (481) (305)
Accumulated other comprehensive income ..................................... (41) (36)
-------------- --------------
3,029 2,908
-------------- --------------
$ 7,646 $ 7,324
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-six weeks ended
-------------------------------------
September 8, September 10,
2000 1999
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 330 $ 310
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization ........................................ 134 103
Income taxes and other ............................................... 198 136
Timeshare activity, net .............................................. (122) (15)
Working capital changes .............................................. 73 48
----------------- ----------------
Cash provided by operations .............................................. 613 582
----------------- ----------------
INVESTING ACTIVITIES
Acquisitions ............................................................. - (62)
Dispositions ............................................................. 381 270
Capital expenditures ..................................................... (627) (667)
Note advances ............................................................ (118) (111)
Note collections and sales ............................................... 29 40
Other .................................................................... (160) (106)
----------------- ----------------
Cash used in investing activities ........................................ (495) (636)
----------------- ----------------
FINANCING ACTIVITIES
Commercial paper activity, net ........................................... (239) 170
Issuance of long-term debt ............................................... 332 12
Repayment of long-term debt .............................................. (10) (46)
Issuance of Class A common stock ......................................... 30 36
Dividends paid ........................................................... (41) (38)
Purchase of treasury stock ............................................... (301) (146)
----------------- ----------------
Cash used in financing activities ........................................ (229) (12)
----------------- ----------------
DECREASE IN CASH AND EQUIVALENTS .............................................. (111) (66)
CASH AND EQUIVALENTS, beginning of period ..................................... 489 390
----------------- ----------------
CASH AND EQUIVALENTS, end of period ........................................... $ 378 $ 324
================= ================
</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).
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 December 31, 1999. Capitalized terms not
otherwise defined in this quarterly report have the meanings specified in
the Annual Report.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the financial statements, and the reported amounts of sales
and expenses during the reporting period. Accordingly, ultimate results
could differ from those estimates.
In our opinion, the accompanying condensed consolidated financial
statements reflect all adjustments necessary to present fairly our
financial position as of September 8, 2000 and December 31, 1999, the
results of operations for the twelve and thirty-six weeks ended September
8, 2000 and September 10, 1999, and cash flows for the thirty-six weeks
ended September 8, 2000 and September 10, 1999. 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.
7
<PAGE>
2. Earnings Per Share
------------------
The following table reconciles the earnings and number of shares used in
the basic and diluted earnings per share calculations (in millions, except
per share amounts).
<TABLE>
<CAPTION>
Twelve weeks ended Thirty-six weeks ended
------------------------------------- -----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
----------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Computation of Basic Earnings Per Share
Net income................................. $ 110 $ 96 $ 330 $ 310
Weighted average shares outstanding........ 240.1 248.1 241.3 247.8
----------------- ---------------- ---------------- --------------
Basic Earnings Per Share .................. $ .46 $ .39 $ 1.37 $ 1.25
================= ================ ================ ==============
Computation of Diluted Earnings Per Share
Net income................................. $ 110 $ 96 $ 330 $ 310
After-tax interest expense on convertible
subordinated debt ...................... - 2 - 5
----------------- ---------------- ---------------- --------------
Net income for diluted earnings per share.. $ 110 $ 98 $ 330 $ 315
================= ================ ================ ==============
Weighted average shares outstanding........ 240.1 248.1 241.3 247.8
Effect of Dilutive Securities
Employee stock purchase plan............ - 0.1 0.1 0.2
Employee stock option plan.............. 8.6 8.1 7.2 9.1
Deferred stock incentive plan........... 5.5 5.4 5.5 5.4
Convertible subordinated debt.............. - 9.5 - 9.5
----------------- ---------------- ---------------- --------------
Shares for diluted earnings per share...... 254.2 271.2 254.1 272.0
================= ================ ================ ==============
Diluted Earnings Per Share................. $ .43 $ .36 $ 1.30 $ 1.16
================= ================ ================ ==============
</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.
8
<PAGE>
3. Frequent Guest Program
----------------------
We accrue for the cost of redeeming points awarded to members of our
frequent guest program based on the discounted expected costs of
redemption. The liability for this program was $508 million at September 8,
2000, and $433 million at December 31, 1999, of which $372 million and $289
million, respectively, are included in other long-term liabilities in the
accompanying consolidated balance sheet.
4. Acquisition
-----------
ExecuStay Corporation. On February 17, 1999, we completed a cash tender
offer for approximately 44 percent of the outstanding common stock of
ExecuStay Corporation (ExecuStay), a leading provider of leased corporate
apartments in the United States. On February 24, 1999, substantially all of
the remaining common stock of ExecuStay was converted into nonvoting
preferred stock of ExecuStay which we acquired, on March 26, 1999, for
approximately 2.1 million shares of our Class A Common Stock. Our aggregate
purchase price totaled $116 million. We consolidated the operating results
of ExecuStay from February 24, 1999, and have accounted for the acquisition
using the purchase method of accounting. We are amortizing the resulting
goodwill on a straight-line basis over 30 years.
5. Dispositions
------------
Senior Living Services. On April 28, 2000, we sold 14 senior living
communities for cash proceeds of $194 million. We simultaneously entered
into long-term management agreements for the communities with a third party
tenant which leases the communities from the buyer. In connection with the
sale we provided a credit facility to the buyer to be used, if necessary,
to meet its debt service requirements. The buyer's obligation to repay us
under the facility is guaranteed by an unaffiliated third party. We also
extended a limited credit facility to the tenant to cover operating
shortfalls, if any.
Lodging. On June 15, 2000, we agreed to sell, subject to long-term
management agreements, 10 lodging properties for $145 million in cash.
Sales of eight of the properties were completed simultaneously with the
signing of the agreement, and the remaining two properties are expected to
be sold in the fourth quarter of 2000, upon completion of construction. The
properties will be leased from the buyer by an unaffiliated third party
tenant, which has also agreed to become the tenant on nine other properties
sold and leased back by us in 1997 and 1998. We now plan to manage these
nine previously leased properties under long-term management agreements,
and the gains on the sales of these properties will be recognized as our
leases are cancelled throughout 2000.
On August 22, 2000 we agreed to sell nine lodging properties for $100
million in cash. We will continue to operate the hotels under long-term
management contracts. Five of the hotels are currently open and the sale of
those properties has been completed. The properties will be leased from the
buyer by an unaffiliated third party tenant.
6. Comprehensive Income
--------------------
Total comprehensive income was $109 million and $90 million, respectively,
for the twelve weeks ended September 8, 2000 and September 10, 1999, and
$325 million and $293 million, respectively, for the thirty-six weeks ended
September 8, 2000 and September 10, 1999. The principal difference between
net income and total comprehensive income relates to foreign currency
translation adjustments.
9
<PAGE>
7. Intangible Assets
-----------------
In 1996, MDS became the exclusive provider of distribution services to
Boston Chicken, Inc. (BCI). On October 5, 1998, BCI and its Boston
Market-controlled subsidiaries filed voluntary bankruptcy petitions for
protection under Chapter 11 of the Federal Bankruptcy Code in the U.S.
Bankruptcy Court in Phoenix (the Court). In December 1999, McDonald's
Corporation (McDonald's) announced that it had reached a definitive
agreement to purchase the majority of the assets of BCI subject to
confirmation of the pending BCI plan of reorganization, including Court
approval. In March 2000, MDS reached an agreement with McDonald's on a new
contract providing for continuation of distribution services to Boston
Market restaurants. Because the existing distribution contract was
terminated upon confirmation of the pending reorganization, MDS wrote off
the unamortized balance of the existing investment, resulting in a $15
million pretax charge in the first quarter of 2000. In June 2000,
McDonald's completed its acquisition of Boston Market. MDS is now providing
distribution services under the contract with McDonald's.
8. New Accounting Standards
------------------------
We will adopt Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which we do not expect to
have a material effect on our consolidated financial statements, in or
before the first quarter of 2001.
We will adopt the SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," in the fourth quarter of 2000.
Implementation of SAB No. 101 is expected to have no material impact on
annual earnings or the timing of revenue and profit recognition between
quarters during the year.
We will adopt Financial Accounting Standard (FAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," in the fourth quarter of 2000. The implementation of FAS No.
140 will result in increased footnote disclosures, but is not expected to
have a material effect on our consolidated financial statements.
9. Business Segments
-----------------
We are a diversified hospitality company operating in three business
segments: Lodging, which includes the development, ownership, operation and
franchising of lodging properties including vacation timesharing resorts;
Senior Living Services, which consists of the development, ownership and
operation of senior living communities; and Distribution Services, which
operates a wholesale food distribution business. We evaluate the
performance of our segments based primarily on operating profit before
corporate expenses and interest. We do not allocate income taxes at the
segment level.
10
<PAGE>
The following table shows our sales and operating profit by business
segment for the twelve and thirty-six weeks ended September 8, 2000 and
September 10, 1999.
<TABLE>
<CAPTION>
Twelve weeks ended Thirty-six weeks ended
-------------------------------------- ------------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
SALES
Lodging ................................... $ 1,794 $ 1,606 $ 5,365 $ 4,788
Senior Living Services .................... 153 128 452 372
Distribution Services ..................... 356 261 1,044 772
----------------- ----------------- --------------- ----------------
$ 2,303 $ 1,995 $ 6,861 $ 5,932
================= ================= =============== ================
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST
Lodging ................................... $ 216 $ 180 $ 663 $ 577
Senior Living Services .................... (5) 3 (6) 6
Distribution Services ..................... 5 5 (1) 14
----------------- ----------------- --------------- ----------------
$ 216 $ 188 $ 656 $ 597
================= ================= =============== ================
</TABLE>
Sales of Distribution Services do not include sales (made at market terms
and conditions) to our other business segments of $40 million and $36
million for the twelve weeks ended September 8, 2000 and September 10,
1999, respectively, and $122 million and $112 million for the thirty-six
weeks ended September 8, 2000 and September 10, 1999, respectively.
10. Contingencies
-------------
We issue guarantees to lenders and other third parties in connection with
financing and other transactions. These guarantees were limited, in the
aggregate, to $218 million at September 8, 2000, including guarantees
involving major customers, with minimal expected funding. As of September
8, 2000, we had extended approximately $855 million of loan commitments to
owners of lodging and senior living communities under which we expect to
fund approximately $580 million by December 31, 2001 and $650 million in
total. Letters of credit outstanding on our behalf at September 8, 2000,
totaled $73 million, the majority of which related to our self-insurance
programs. At September 8, 2000, we had repurchase obligations of $105
million related to notes receivable from timeshare interval purchasers,
which have been sold with limited recourse.
New World Development and another affiliate of Dr. Cheng, a director of the
Company, have severally indemnified us for guarantees by us of leases with
minimum annual payments of approximately $59 million.
On February 23, 2000, we entered into an agreement, which was subsequently
embodied in a definitive agreement executed on March 9, 2000, to resolve
pending litigation described below involving certain limited partnerships
formed in the mid- to late 1980's. The agreement was reached with lead
counsel to the plaintiffs in the lawsuits described below, and with the
special litigation committee appointed by the general partner of two of the
partnerships, Courtyard by Marriott Limited Partnership (CBM I) and
Courtyard by Marriott II Limited Partnership (CBM II). The agreement was
amended on September 23, 2000 to increase the amount that CBM I settlement
class members will receive after deduction of court awarded attorneys' fees
and
11
<PAGE>
expenses and to provide that the defendants, including the Company, would
pay a portion of the attorneys' fees and expenses of the CBM I settlement
class.
Under the agreement, we expect to acquire, through an unconsolidated joint
venture with an affiliate of Host Marriott Corporation (Host Marriott),
substantially all of the limited partners' interests in CBM I and CBM II.
These partnerships own 120 Courtyard by Marriott hotels. We will continue
to manage the 120 hotels under long-term agreements. The joint venture will
be financed with equity contributed in equal shares by us and an affiliate
of Host Marriott and an estimated $200 million in mezzanine debt provided
by us. We expect our total investment in the joint venture, including
the mezzanine debt, to be approximately $300 million. A majority of the CBM
I and CBM II partners have approved the respective settlements and at
hearings held on September 28, 2000 and October 19, 2000 the court
determined that the terms of the CBM I and CBM II settlements were fair.
Final court approval of the CBM I and CBM II settlements was postponed
because certain third party consents required for consummation of the
settlement transaction are taking longer to obtain than the parties
anticipated, but a hearing on the final settlement order is now scheduled
for October 24, 2000 although that date is subject to further extension.
Because consummation of the settlement for CBM I and CBM II remains subject
to the receipt of third-party consents and final court approval, there is
no assurance that the settlement transactions with respect to CBM I and II
will be consummated and, if consummated terms could differ materially from
those described.
The agreement also provided for the resolution of litigation with respect
to four other limited partnerships. On September 28, 2000, the court
entered a final order with respect to those partnerships, and on that same
date, we and Host Marriott each paid into escrow approximately $31 million
for payment to the plaintiffs in the Texas Multi-Partnership lawsuit
described below in exchange for dismissal of the complaints and full
releases. That portion of the settlement and the release of the escrowed
funds is subject to appeal for a period of thirty days from the entry of
the final order.
We recorded a pretax charge of $39 million, which was included in corporate
expenses in the fourth quarter of 1999, to reflect the anticipated
settlement transactions. However, if the foregoing settlement transactions
are not consummated or a successful appeal is taken on the portions of the
settlement that have been rendered as final by the trial court, and either
a less favorable settlement is entered into, or the lawsuits are tried and
decided adversely to the Company, we could incur losses significantly
different than the pretax charge associated with the settlement agreement
described above.
Courtyard by Marriott II Limited Partnership Litigation
On June 7, 1996, a group of partners in CBM II filed a lawsuit against Host
Marriott, the Company and others, Whitey Ford, et al. v. Host Marriott
Corporation, et al., in the 285th Judicial District Court of Bexar County,
Texas, alleging breach of fiduciary duty, breach of contract, fraud,
negligent misrepresentation, tortious interference, violation of the Texas
Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with
the formation, operation and management of CBM II and its hotels. The
plaintiffs sought unspecified damages. On January 29, 1998, two other
limited partners, A.R. Milkes and D.R. Burklew, filed a petition in
12
<PAGE>
intervention seeking to convert the lawsuit into a class action, and a
class was certified. In March 1999, Palm Investors, L.L.C., the assignee of
a number of limited partnership units acquired through various tender
offers, and Equity Resource, an assignee of a number of limited partnership
units, through various of its funds, filed pleas in intervention, which
among other things added additional claims relating to the 1993 split of
Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness.
On August 17, 1999, the general partner of CBM II appointed an independent
special litigation committee to investigate the derivative claims described
above and to recommend to the general partner whether it was in the best
interests of CBM II for the derivative litigation to proceed. The general
partner agreed to adopt the recommendation of the committee. Under Delaware
law, the recommendation of a duly appointed independent litigation
committee is binding on the general partner and the limited partners.
Following certain adjustments to the underlying complaints, including the
assertion as derivative claims some of the claims previously filed as
individual claims, a final amended class action complaint was filed on
January 6, 2000. Trial, which was scheduled to begin in late February 2000,
was postponed pending approval and consummation of the settlement described
above.
Texas Multi-Partnership Lawsuits
On March 16, 1998, limited partners in several limited partnerships
sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial
District Court of Bexar County, Texas, alleging that the defendants
conspired to sell hotels to the partnerships for inflated prices and that
they charged the partnerships excessive management fees to operate the
partnerships' hotels. The plaintiffs further allege that the defendants
committed fraud, breached fiduciary duties and violated the provisions of
various contracts. A Marriott International subsidiary manages each of the
hotels involved and, as to some properties, the Company is the ground
lessor and collects rent. The Company, several Marriott subsidiaries and
J.W. Marriott, Jr. are among the several named defendants. The plaintiffs
are seeking unspecified damages. This lawsuit is subject to the settlement
described above.
11. Employee Stock Ownership Plan
-----------------------------
During the second quarter of 2000 we established an employee stock
ownership plan (the ESOP) to fund employer contributions to the profit
sharing plan. The ESOP acquired 100,000 shares of special-purpose Company
convertible preferred stock (ESOP Preferred Stock) for $1.0 billion. The
ESOP Preferred Stock has a stated value and liquidation preference of
$10,000 per share and pays a quarterly dividend of one percent of the
stated value. It is convertible into our Class A Common Stock at any time
based on the amount of our contributions to the ESOP and the market price
of the common stock on the conversion date, subject to certain caps and a
floor price. We hold a note from the ESOP, which is eliminated upon
consolidation, for the purchase price of the ESOP Preferred Stock. The
shares of ESOP Preferred Stock are pledged as collateral for the repayment
of the ESOP's note, and those shares are released from the pledge as
principal on the note is repaid. Shares of ESOP Preferred Stock released
from the pledge may be redeemed for cash based on the value of the common
stock into which those shares may be converted. Principal and interest
payments on the ESOP's debt are expected to be forgiven periodically to
fund contributions to the ESOP and release shares of ESOP Preferred Stock.
Unearned ESOP shares are reflected within shareholders' equity and will be
amortized as shares of ESOP Preferred Stock are released and cash is
allocated to employees' accounts.
13
<PAGE>
12. Subsequent Event
----------------
On September 28, 2000, we sold four lodging properties for a purchase price
of $274 million. We will continue to operate the four hotels under
long-term management agreements. In connection with the sale of the four
hotels we provided $39 million in mezzanine loans, and also agreed to
provide the buyer with up to $161 million of additional mezzanine loans to
finance future acquisitions of Marriott-branded hotels. We also acquired a
minority interest in the joint venture which purchased the hotels.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of our operations for
each of the twelve and thirty-six weeks ended September 8, 2000 and September
10, 1999. Comparable REVPAR, room rate and occupancy statistics used throughout
this report are based upon U.S. properties operated by us, except that data for
Fairfield Inn also include comparable franchised units.
Twelve Weeks Ended September 8, 2000 Compared to Twelve Weeks Ended September
-----------------------------------------------------------------------------
10, 1999
--------
We reported net income of $110 million for the 2000 third quarter, on sales of
$2,303 million. This represents a 15 percent increase in both net income and
sales over the third quarter of 1999. Diluted earnings per share of $.43 for the
quarter increased 19 percent over the 1999 amount. Systemwide sales increased to
$4.5 billion.
Marriott Lodging reported a 20 percent increase in operating profit on 12
percent higher sales. Systemwide lodging sales increased to $3.9 billion.
We added a total of 53 lodging properties (8,600 units) during the third quarter
of 2000, and deflagged five properties (2,300 units), increasing our total
properties to 2,010 (373,511 units). Properties by brand (excluding 7,300 rental
units relating to ExecuStay) are as indicated in the following table.
<TABLE>
<CAPTION>
Properties as of September 8, 2000
----------------------------------------------------------
Company-operated Franchised
---------------------------- -----------------------------
Properties Rooms Properties Rooms
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Marriott Hotels, Resorts and Suites ....................... 235 103,174 150 42,466
Ritz-Carlton .............................................. 37 12,394 - -
Renaissance Hotels, Resorts and Suites ..................... 75 29,591 26 9,066
Ramada International ...................................... 7 1,325 19 4,093
Residence Inn ............................................. 138 17,927 206 22,355
Courtyard ................................................. 274 42,401 229 28,747
Fairfield Inn .............................................. 51 7,138 379 33,219
TownePlace Suites ......................................... 29 3,025 48 4,667
SpringHill Suites ......................................... 8 966 45 4,351
Marriott Vacation Club International ...................... 45 4,965 - -
Marriott Executive Apartments and other ................... 9 1,641 - -
------------- ------------- -------------- -------------
Total .................................................. 908 224,547 1,102 148,964
============= ============= ============== =============
</TABLE>
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties grew by an average of 8.5 percent in the third quarter 2000. Average
room rates for these hotels rose 7.0 percent and occupancy increased to 81.0
percent. Occupancy, average daily rate and REVPAR for each of our principal
established brands is shown in the following table.
15
<PAGE>
<TABLE>
<CAPTION>
Twelve weeks
ended Change vs.
September 8, 2000 1999
---------------------- --------------------
<S> <C> <C>
Marriott Hotels, Resorts and Suites
Occupancy ....................................... 80.6% +0.8% pts.
Average daily rate .............................. $ 142.37 +7.8%
REVPAR .......................................... $ 114.70 +8.8%
Ritz-Carlton
Occupancy ....................................... 80.1% +1.1% pts.
Average daily rate .............................. $ 222.28 +12.2%
REVPAR .......................................... $ 177.98 +13.8%
Renaissance Hotels, Resorts and Suites
Occupancy ....................................... 75.2% +3.8% pts.
Average daily rate .............................. $ 130.77 +6.0%
REVPAR .......................................... $ 98.31 +11.6%
Residence Inn
Occupancy ....................................... 87.0% +1.0% pts.
Average daily rate .............................. $ 105.83 +5.3%
REVPAR .......................................... $ 92.04 +6.4%
Courtyard
Occupancy ....................................... 82.2% +0.8% pts.
Average daily rate .............................. $ 96.65 +5.0%
REVPAR .......................................... $ 79.44 +6.0%
Fairfield Inn
Occupancy ....................................... 76.6% - pts.
Average daily rate .............................. $ 63.60 +3.9%
REVPAR .......................................... $ 48.74 +3.9%
</TABLE>
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties grew by an average of 9.8 percent in the 2000
third quarter. Average room rates for these hotels rose 8.0 percent, while
occupancy increased slightly over one percentage point to 79.7 percent.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites and SpringHill Suites) added a net of 33
properties, primarily franchises, during the third quarter of 2000. REVPAR for
comparable properties increased 5.9 percent to $77.75.
Results for International Lodging operations continued to be favorable in the
third quarter 2000, despite a decline in the value of the Euro against the U.S.
dollar, reflecting strong demand in the Middle East and Europe.
Marriott Vacation Club International also posted favorable profit growth in the
2000 third quarter, reporting a 55 percent increase in contract sales. The
results reflect interest in our newest brands, Horizons in Orlando, Florida and
Ritz-Carlton Club resorts in St. Thomas, U.S. Virgin Islands, and Aspen,
Colorado, as well as continued strong demand for our timeshare properties in
Hawaii, Aruba and California. At the end of the quarter, 20 resorts were in
active sales, 25 resorts were sold-out and an additional four resorts were under
development.
16
<PAGE>
The Marketplace by Marriott (Marketplace), our hospitality procurement business,
reported a 22 percent increase in operating profit in the third quarter. Within
the next few months, we plan to form a joint venture including Marketplace, the
procurement businesses of Hyatt Hotels Corporation, Bass Hotels and Resorts and
ClubCorp USA, Inc., an owner and operator of country clubs and golf courses. The
venture will form an independent comprehensive electronic procurement network
servicing the hospitality industry.
Marriott Senior Living Services (SLS) posted 20 percent sales growth in the 2000
third quarter reflecting the net addition of 20 properties operated in the last
12 months and an 88 percent increase in occupancy for comparable communities.
Despite the increase in sales, profitability was impacted by start-up
inefficiencies for new properties, higher administrative expenses, and costs
related with the development, start-up and debt associated with one facility
developed by an unaffiliated third party, resulting in a $5 million operating
loss. SLS opened two communities during the third quarter and now operates 151
facilities totaling 25,544 residential units.
Marriott Distribution Services (MDS) posted a 36 percent increase in sales in
the 2000 third quarter, reflecting the commencement of service to three large
restaurant chains beginning this year. Operating profit was flat compared to
last year as a result of start-up inefficiencies associated with the new
business.
Corporate activity. Interest expense in the third quarter increased by $10
million as a result of borrowings to finance growth and share repurchases, as
well as higher interest rates. Corporate expenses decreased three percent in the
2000 third quarter due to the systems development expenses associated with year
2000 that were incurred in 1999. The effective income tax rate decreased from
37.5 percent to 37.0 percent primarily due to the increased proportion of
operations in countries with lower effective tax rates.
Thirty-Six Weeks Ended September 8, 2000 Compared to Thirty-Six Weeks Ended
---------------------------------------------------------------------------
September 10, 1999
------------------
We reported net income of $330 million for the first three quarters of 2000 on
sales of $6,861 million. This represents a six percent increase in net income
and a 16 percent increase in sales over the same period in 1999. Diluted
earnings per share of $1.30 increased 12 percent over the 1999 amount.
Systemwide sales increased to $14 billion.
Marriott Lodging reported a 15 percent increase in operating profit on 12
percent higher sales. Systemwide lodging sales increased to $12 billion.
We added a total of 146 lodging properties (22,100 units) during the first three
quarters, and deflagged 16 properties (4,500 units).
17
<PAGE>
Across our Lodging brands, REVPAR for comparable company-operated U.S.
properties grew by an average of 6.4 percent in 2000. Average room rates for
these hotels rose 5.9 percent, while occupancy increased to 79.5 percent.
Occupancy, average daily rate and REVPAR for each of our principal established
brands is shown in the following table.
<TABLE>
<CAPTION>
Thirty-six
weeks ended Change vs.
September 8, 2000 1999
---------------------- ------------------
<S> <C> <C>
Marriott Hotels, Resorts and Suites
Occupancy ....................................... 79.6% +0.5% pts.
Average daily rate .............................. $ 146.88 +6.0%
REVPAR .......................................... $ 116.90 +6.6%
Ritz-Carlton
Occupancy ....................................... 80.4% +0.6% pts.
Average daily rate .............................. $ 240.87 +9.2%
REVPAR .......................................... $ 193.66 +10.0%
Renaissance Hotels, Resorts and Suites
Occupancy ....................................... 75.1% +2.3% pts.
Average daily rate .............................. $ 140.09 +4.5%
REVPAR .......................................... $ 105.24 +7.9%
Residence Inn
Occupancy ....................................... 84.8% +0.7% pts.
Average daily rate .............................. $ 104.52 +4.6%
REVPAR .......................................... $ 88.61 +5.4%
Courtyard
Occupancy ....................................... 80.3% -0.1% pts.
Average daily rate .............................. $ 97.04 +5.0%
REVPAR .......................................... $ 77.93 +4.9%
Fairfield Inn
Occupancy ....................................... 72.1% -1.0% pts.
Average daily rate .............................. $ 61.45 +3.8%
REVPAR .......................................... $ 44.29 +2.3%
</TABLE>
Across our full-service lodging brands (Marriott Hotels, Resorts and Suites,
Ritz-Carlton and Renaissance Hotels, Resorts and Suites), REVPAR for comparable
company-operated U.S. properties grew by an average of 7.2 percent during the
first three quarters of 2000. Average room rates for these hotels rose 6.1
percent, while occupancy increased to 79 percent.
Our domestic select-service and extended-stay brands (Residence Inn, Courtyard,
Fairfield Inn, TownePlace Suites, SpringHill Suites) added a net of 153
properties, primarily franchises, since the third quarter of 1999. During the
first three quarters of 2000, REVPAR for these brands increased 4.8 percent.
Marriott Vacation Club International posted strong profit growth during the
first three quarters of 2000, reporting a 31 percent increase in contract sales.
Results reflect continued solid demand for timeshares in Hawaii, Aruba and
California, as well as a growing interest in our newest brands, Horizons in
Orlando, Florida and Ritz-Carlton Club resorts in St. Thomas, U.S. Virgin
Islands, and Aspen, Colorado.
18
<PAGE>
Marriott Senior Living Services posted a 22 percent increase in sales in the
first three quarters of 2000. Despite the increase in sales, profitability was
impacted by start-up inefficiencies for new properties, pre-opening expenses,
write-offs relating to development cancellations, higher administrative expenses
and costs related to debt associated with facilities developed by unaffiliated
third parties, resulting in a $6 million operating loss.
Marriott Distribution Services posted a 35 percent increase in sales, reflecting
the commencement of service to three large restaurant chains beginning this
year. The operating profits associated with the new business were more than
offset by a $15 million pretax write-off of its investment in a contract with
Boston Chicken, Inc. (BCI), a major customer that filed for bankruptcy in
October 1998. McDonald's Corporation (McDonald's) acquired Boston Market in
2000, and during the first quarter of 2000, MDS reached an agreement with
McDonald's to continue providing distribution services to Boston Market
restaurants (see the "Intangible Assets" footnote to the condensed consolidated
financial statements included in Item 1).
Corporate activity. Interest expense increased $38 million in the 2000 period as
a result of borrowings to finance growth outlays and share repurchases.
Corporate expenses decreased $7 million due to system-related modification costs
associated with year 2000 that were incurred in 1999, offset by costs incurred
in 2000 associated with new corporate systems. The effective income tax rate
decreased from 37.5 percent to 37 percent primarily due to the increased
proportion of operations in countries with lower effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
We believe that we have access to sufficient financial resources to finance our
growth, as well as to support our ongoing operations and meet debt service and
other cash requirements. However, our ability to sell properties that we
develop, and the ability of hotel or senior living community developers to build
or acquire new Marriott-branded properties, which are important parts of our
growth plans, are partially dependent on the availability and cost of capital.
We 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.
Cash and equivalents totaled $378 million at September 8, 2000, a decrease of
$111 million from year end, reflecting excess cash on hand at December 31, 1999
to cover potential impacts associated with the Year 2000 problem. Cash provided
by operations of $613 million increased five percent over 1999, reflecting
strong net income, offset by outlays relating to timeshare activity. While our
timesharing business generates strong operating cash flow, the reported amounts
are affected by the difference in the timing of revenue recognition and cash
received as well as cash outlays for the development of new resorts. Net income
is stated after recording depreciation expense of $84 million and $55 million
for the thirty-six weeks ended September 8, 2000 and September 10, 1999,
respectively, and after amortization expense of $50 million and $48 million for
the same periods. EBITDA for the thirty-six weeks ended September 8, 2000
increased by $96 million, or 15 percent, to $729 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.
Cash used in investing activities totaled $495 million for the thirty-six weeks
ended September 8, 2000, and included the acquisition of three hotels for $171
million, one of which was sold for $78
19
<PAGE>
million on September 28, 2000 (see the "Subsequent Event" footnote to the
condensed consolidated financial statements included in Item 1). Cash used in
investing activities also included other capital expenditures for lodging
properties and notes receivable advances, offset by disposition proceeds from
the sale of 15 senior living communities and 15 lodging properties.
We purchased 10.4 million shares of our Class A Common Stock in the thirty-six
weeks ended September 8, 2000, at a cost of $317 million. As of September 8,
2000 we had been authorized by our Board of Directors to repurchase an
additional 20.1 million shares.
In January 2000, we filed a "universal shelf" registration statement with the
Securities and Exchange Commission which, together with the authority remaining
under a universal shelf registration statement filed in April 1999, permitted us
to offer to the public up to $500 million of securities. On March 27, 2000, we
sold $300 million principal amount of 8-1/8 percent Series D Notes, which mature
in 2005, in a public offering made under our shelf registration statements. We
received net proceeds of approximately $298 million from this offering, after
paying underwriting discounts, commissions and offering expenses. After giving
effect to the issuance of the Series D Notes, we have remaining capacity under
our January 2000 shelf registration statement to offer to the public up to $200
million of debt securities, common stock or preferred stock.
In 1996, MDS became the exclusive provider of distribution services to
Einstein/Noah Bagel Corp. (ENBC), which operates over 460 bagel shops in 29
states. In March 2000, ENBC disclosed that its independent auditors had
expressed substantial doubt about ENBC's ability to continue as a going concern,
due to its inability to meet certain financial obligations. On April 27, 2000,
ENBC and its majority-owned operating subsidiary filed voluntary bankruptcy
petitions for protection under Chapter 11 of the Federal Bankruptcy code in the
U.S. Bankruptcy Court for the District of Arizona in Phoenix. On April 28, 2000,
the bankruptcy court approved a $31 million debtor-in-possession credit facility
to allow for operation of the companies during reorganization, and also approved
the payment in the ordinary course of business of prepetition trade creditor
claims, including those of MDS, subject to recovery by the debtors under certain
circumstances. On July 27, 2000, the Bankruptcy Court entered an order approving
ENBC's assumption of the MDS contract. MDS continues to distribute to ENBC and
has been receiving full payment in accordance with the terms of its contractual
agreement. If ENBC were to cease or substantially reduce its operations, MDS may
be unable to recover some or all of an aggregate of approximately $5 million in
contract investment and $12 million in receivables and inventory.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
There have been no material changes to our exposures to market risk since
December 31, 1999.
20
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote in the financial statements set forth in Part I,
"Financial Information."
Item 2. Changes in Securities
------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
Item 5. Other Information
--------------------------
None.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
10 First Amendment to the Settlement Agreement dated as of
September 23, 2000 among A.R. Milkes, Robert M. Haas,
Sr., and other plaintiffs and intervenors identified
therein and the Company, Host Marriott Corporation, and
other identified defendants, each by and through their
respective counsels of record.
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.
22
<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.
20th day of October, 2000
/s/ Arne M. Sorenson
------------------------------
Arne M. Sorenson
Executive Vice President and
Chief Financial Officer
/s/ Linda A. Bartlett
------------------------------
Linda A. Bartlett
Vice President, and Controller
(Principal Accounting Officer)
23
