MARRIOTT INTERNATIONAL INC
10-Q, 1996-05-03
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<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 22, 1996                 Commission File No. 1-12188


                          MARRIOTT INTERNATIONAL, INC.

Delaware                                                              52-0936594
(State of Incorporation)                 (I.R.S. Employer Identification Number)


                              10400 Fernwood Road
                            Bethesda, Maryland 20817
                                 (301) 380-3000


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

                           Yes [X]    No [_]                  Shares outstanding
       Class                                                   at April 19, 1996
- -------------------                                           ------------------
Common Stock, $1.00                                   
par value per share                                               127,677,429

                                       1
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.

                                     INDEX
<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                     <C> 
PART I.  Financial Information (Unaudited):

           Condensed Consolidated Statement of Income -
             Twelve Weeks Ended March 22, 1996 and
             March 24, 1995                                                  3

           Condensed Consolidated Balance Sheet -
             March 22, 1996 and December 29, 1995                            4

           Condensed Consolidated Statement of Cash Flows -
             Twelve Weeks Ended March 22, 1996 and March 24, 1995            5

           Notes to Condensed Consolidated Financial Statements            6-7

           Management's Discussion and Analysis of Results of Operations
             and Financial Condition                                      8-10
                              

 
PART II.   Other Information and Signature:

             Legal Proceedings                                              11

             Changes in Securities                                          11

             Defaults Upon Senior Securities                                11

             Submission of Matters to a Vote of Security Holders            11

             Other Events                                                   11

             Exhibits and Reports on Form 8-K                               11

             Signature                                                      12
 
- --------------------------------------------------------------------------------
</TABLE>

                                       2
<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 22,       March 24, 
                                                    1996            1995 
                                                  ---------       ---------
<S>                                               <C>             <C> 
SALES
  Lodging
     Rooms......................................   $  781          $  733
     Food and beverage..........................      303             294
     Other......................................      189             163
                                                   ------          ------
                                                    1,273           1,190
  Contract Services.............................      890             823
                                                   ------          ------
                                                    2,163           2,013
                                                   ------          ------

OPERATING COSTS AND EXPENSES
  Lodging
    Departmental direct costs
      Rooms.....................................      184             172
      Food and beverage.........................      231             221
    Other operating expenses....................      764             721
                                                   ------          ------
                                                    1,179           1,114
  Contract Services.............................      861             797
                                                   ------          ------
                                                    2,040           1,911
                                                   ------          ------

OPERATING PROFIT
  Lodging.......................................       94              76
  Contract Services.............................       29              26
                                                   ------          ------
    Operating profit before corporate expenses
     and interest...............................      123             102
Corporate expenses..............................      (15)            (17)
Interest expense................................      (14)             (8)
Interest income.................................        9              10
                                                   ------          ------
INCOME BEFORE INCOME TAXES......................      103              87
Provision for income taxes......................       40              35
                                                   ------          ------
NET INCOME......................................   $   63          $   52
                                                   ======          ======
EARNINGS PER SHARE..............................   $  .47          $  .40
                                                   ======          ======
CASH DIVIDENDS PER SHARE........................   $  .07          $  .07
                                                   ======          ======
</TABLE>

           See notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                 (IN MILLIONS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                   March 22,       December 29, 
                                                     1996              1995 
                                                   ---------       ------------
<S>                                                <C>             <C> 
                  ASSETS
 
Current Assets
  Cash and equivalents..........................    $  322            $  219
  Accounts and notes receivable.................       750               724
  Other.........................................       437               433
                                                    ------            ------
                                                     1,509             1,376
                                                    ------            ------
Property and Equipment..........................       857               832
Intangibles.....................................       396               402
Investments in Affiliates.......................       571               501
Notes Receivable................................       196               219
Other Assets....................................       767               688
                                                    ------            ------
                                                    $4,296            $4,018
                                                    ======            ======


     LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
  Accounts payable..............................    $  857            $  801
  Other current liabilities.....................       776               725
                                                    ------            ------
                                                     1,633             1,526
                                                    ------            ------
Long-Term Debt..................................       857               806
Other Long-Term Liabilities.....................       644               632
Shareholders' Equity
  Common stock..................................       129               129
  Additional paid-in capital....................       616               617
  Retained earnings.............................       447               395
  Treasury stock, at cost.......................       (30)              (87)
                                                    ------            ------
                                                     1,162             1,054
                                                    ------            ------
                                                    $4,296            $4,018
                                                    ======            ======
</TABLE>
           See notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN MILLIONS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                       Twelve Weeks Ended
                                                  ----------------------------
                                                  March 22,          March 24,
                                                     1996              1995
                                                  ---------          ---------
<S>                                               <C>                <C>  
OPERATING ACTIVITIES
  Net income....................................    $   63            $   52
  Adjustments to reconcile to cash
   from operations:
    Depreciation and amortization...............        31                27
    Income taxes and other......................        58                37
    Timeshare activity, net.....................         9               (47)
    Working capital changes.....................        (8)              (17)
                                                    ------            ------
  Cash from operations..........................       153                52
                                                    ------            ------

INVESTING ACTIVITIES
  Loans to Host Marriott Corporation............       (11)              (46)
  Loan repayments from Host Marriott Corporation         -                20
  Capital expenditures..........................       (44)              (31)
  Other.........................................       (50)              (97)
                                                    ------            ------
  Cash used in investing activities.............      (105)             (154)
                                                    ------            ------

FINANCING ACTIVITIES
  Issuances of long-term debt...................        51               115
  Repayments of long-term debt..................        (3)               (3)
  Issuances of common stock.....................        16                14
  Dividends paid................................        (9)               (9)
  Purchases of treasury stock...................         -                (2)
                                                    ------            ------
  Cash provided by financing activities.........        55               115
                                                    ------            ------
INCREASE IN CASH AND EQUIVALENTS................    $  103            $   13
                                                    ======            ====== 
</TABLE>
           See notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1. Basis of Presentation
   ---------------------
   The accompanying condensed consolidated financial statements of Marriott
   International, Inc. and its subsidiaries (the "Company") have been prepared
   without audit.  Certain information and footnote disclosures normally
   included in financial statements presented in accordance with generally
   accepted accounting principles have been condensed or omitted.  The Company
   believes the disclosures made are adequate to make the information presented
   not misleading. However, the condensed consolidated financial statements
   should be read in conjunction with the consolidated financial statements and
   notes thereto included in the Company's Annual Report on Form 10-K for the
   fiscal year ended December 29, 1995.  Capitalized terms not otherwise defined
   herein have the meanings specified in the Annual Report.

   In the opinion of the Company, the accompanying condensed consolidated
   financial statements reflect all adjustments (which include only normal
   recurring adjustments) necessary to present fairly the financial position of
   the Company as of March 22, 1996 and December 29, 1995, and the results of
   operations and cash flows for the twelve weeks ended March 22, 1996 and March
   24, 1995. Interim results are not necessarily indicative of fiscal year
   performance because of the impact of seasonal and short-term variations. All
   material intercompany transactions and balances between Marriott
   International, Inc., its subsidiaries and consolidated affiliates have been
   eliminated.

2. Earnings Per Share
   ------------------
   Earnings per share is computed on a fully diluted basis by dividing net
   income by the weighted average number of outstanding common shares plus other
   potentially dilutive securities, which totaled 134.8 million and 130.8
   million for the twelve weeks ended March 22, 1996 and March 24, 1995,
   respectively.

3. New Accounting Standards
   ------------------------
   The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
   Lived Assets and for Long-Lived Assets to Be Disposed Of" during the first
   quarter of 1996. Adoption of SFAS No. 121 did not have a material effect on
   the Company's consolidated financial statements. In accordance with SFAS No.
   123, "Accounting for Stock Based Compensation," the Company will disclose the
   fair value of options granted and stock issued under employee stock purchase
   plans in a footnote to its consolidated financial statements for the fiscal
   year ending January 3, 1997.

                                       6
<PAGE>
 
4. Commitments
   -----------
   The Company has guaranteed to lenders and other third-parties the performance
   of certain affiliates in connection with financing transactions and other
   obligations. These guarantees are limited, in the aggregate, to $325 million
   at March 22, 1996, including $148 million applicable to guarantees by or debt
   obligations of Host Marriott Corporation ("Host Marriott"). As of March 22,
   1996, the Company has extended approximately $100 million of mortgage loan
   commitments to unaffiliated owners of lodging and senior living properties.
   Also, $33 million of advances to Host Marriott were outstanding, as of March
   22, 1996, in accordance with the terms of the $225 million Host Marriott
   Credit Agreement. These advances were repaid by Host Marriott early in the
   second quarter of 1996.

5. Convertible Subordinated Debt
   -----------------------------
   On March 25, 1996 the Company received gross proceeds of $288 million through
   the issuance of $540 million aggregate principal amount at maturity of Liquid
   Yield Option Notes due 2011 (Zero Coupon--Subordinated) (the "LYONs").  The
   LYONs were issued at a discount representing a yield to maturity of 4.25%,
   and are redeemable, at the Company's option, at any time on or after March
   25, 1999.  The LYONs are redeemable at the option of the holders on March 25,
   1999 and March 25, 2006. Each $1,000 principal amount at maturity of LYONs is
   convertible, at any time, into 8.760 shares of the Company's common stock.

6. Acquisitions
   ------------
   On March 25, 1996, a wholly owned indirect subsidiary of the Company acquired
   22,341,879 shares, approximately 99.1%, of the outstanding shares of common
   stock of Forum Group, Inc. ("Forum"), a leading provider of senior living and
   health care services.  The Company paid total cash consideration of
   approximately $290 million ($13.00 per share) for the common stock it
   acquired, plus approximately $7 million for certain warrants to purchase
   common stock.  The remaining 197,952 shares of outstanding Forum common stock
   that are not owned by the Company will be converted into the right to receive
   $13.00 per share, in cash, upon the merger of the Company with Forum. 
   The merger is expected to be completed in June 1996.  A Current Report on
   Form 8-K, dated March 25, 1996, including unaudited Pro Forma Condensed
   Combined Financial Statements of the Company reflecting the acquisition of
   Forum, is on file with the Securities and Exchange Commission.

                                       7
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- ---------------------------------------------------------------------------
        FINANCIAL CONDITION
        -------------------


Results of Operations
- ---------------------


  The Company reported net income of $63 million for its 1996 first quarter, a
21 percent increase over $52 million in the corresponding 1995 quarter.

  Earnings per share for the quarter were 47 cents, up 18 percent from 40 cents
in the 1995 first quarter.  Sales were $2,163 million in the 1996 quarter, an
increase of seven percent from $2,013 million in the preceding year.

  Lodging operations recorded a 24 percent increase in operating profit on seven
percent sales growth in the 1996 first quarter.  Profits advanced for all
lodging brands, driven by room rate increases in excess of inflation, higher
incentive management fees, and contributions from new properties.  Results also
were boosted by strong performance from the Company's vacation club business,
and income from its 49 percent interest in the Ritz-Carlton hotel management
company.

  The Company added a net total of 137 hotel properties (22,970 rooms) over the
past 12 months, including properties added from the acquisition of a 49%
interest in The Ritz-Carlton Hotel Company, LLC.  A net total of 32 hotel
properties (3,760 rooms) was added during the first quarter of 1996.  Among the
first quarter additions was the new 612-room Ritz-Carlton Millenia Singapore.
The Marriott International Lodging Group now encompasses 1,069 properties
totaling more than 212,000 rooms and over 2,500 timesharing units.

  Marriott Hotels, Resorts and Suites, the Company's full-service lodging
division, reported average room rates of $118 for comparable U.S. properties, a
five percent gain over the 1995 quarter.  Occupancy rose one percentage point,
to 75 percent.  International hotels also posted higher sales and profits, paced
by contributions from recently opened full-service hotel properties.

  The Company's three limited-service lodging product lines all reported growth
in revenue per available room (REVPAR) of five percent or more for comparable
units in the 1996 first quarter.

  Courtyard, the Company's moderate price lodging product, achieved a seven
percent increase in average room rates for comparable units, to $76.  Occupancy
remained at 78 percent.

  Fairfield Inn, the Company's economy lodging product, posted average room
rates for comparable units of $46, an 11 percent increase over the first quarter
of 1995.  Occupancy declined to 75% from 78% in the preceding year due to the
planned shift to higher rated business.

                                       8
<PAGE>
 
  Residence Inn, the Company's extended stay lodging product, reported an
increase in average room rates for comparable units of five percent, to $86,
while occupancy declined less than one-half percentage point, remaining above
84%.

  Marriott Vacation Club International generated substantial profit growth in
the 1996 first quarter, paced by strong sales at timesharing resorts in Desert
Springs, California, and Kauai, Hawaii, as well as higher financing income.  The
number of timeshare intervals sold rose 20 percent over the 1995 first quarter.

  Contract Services reported an operating profit increase of 12 percent for the
  -----------------                                                            
1996 first quarter, on eight percent sales growth.

  Marriott Management Services posted gains in both sales and profits for the
quarter despite the impact of weather-related closings in its education and
corporate accounts.  The division benefited from solid performance by its health
care operations, as well as contributions from the United Kingdom-based cleaning
and catering company acquired in late 1995.

  Marriott Senior Living Services achieved strong sales and profit increases
during the 1996 first quarter, as the eight assisted living communities opened
in 1995 continued to fill up rapidly.  Occupancy for comparable communities
increased nearly one percentage point, to 96%.  Shortly after quarter-end, the
Company successfully completed a tender offer for Forum Group, Inc. ("Forum"), a
major operator of senior living communities.  With the addition of Forum, the
division now has 69 facilities with more than 14,500 living units, including a
new full-service community which opened during the 1996 first quarter.

  Marriott Distribution Services, which supplies food and related products to
the Company's operations and external clients, added major new customers and
generated increased sales in the 1996 first quarter.  Profits were flat,
reflecting disruptions in service caused by severe winter weather in several
regions, and start-up costs at new facilities.  The division opened distribution
centers in Texas and in central Florida during the quarter.

  Interest expense rose $6 million in the 1996 first quarter largely as a result
of incremental borrowings to finance business growth.  Corporate expenses were
reduced 12%, reflecting higher income from certain investments.  The Company's
effective tax rate declined one percentage point to 39% in the 1996 quarter, due
to the impact of certain investments and tax credits.

Liquidity and Capital Resources
- -------------------------------

  Cash and equivalents totaled $322 million at March 22, 1996, an increase of
$103 million from year-end 1995, reflecting increased cash flow from operations
and proceeds from commercial paper issued to finance the acquisition of Forum
Group, Inc. subsequent to quarter-end.  Cash flow from operations increased $101
million over 1995 principally due to higher earnings and 1996 proceeds from the
sale of timeshare notes receivable.

                                       9
<PAGE>
 
  EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) increased 21% to $148 million for the first quarter of 1996.  The
Company's cash flow coverage of total interest cost continues to substantially
exceed the level required under its credit facilities.

  Cash used in investing activities totaled $105 million.  Major items during
the 1996 first quarter included $57 million invested in connection with Host
Marriott's acquisition of a controlling interest in two full-service hotels
(over 900 rooms) in Mexico City, which will be added to the Company-operated
hotel system during 1996, and $44 million for capital expenditures.

  During the first quarter, the Company filed a shelf registration with the
Securities and Exchange Commission which provides for the issuance, from time to
time, of up to $500 million in debt in addition to $50 million which remains
available under another shelf registration.   At the end of the 1996 first
quarter, the Company had approximately $850 million available under its $1
billion revolving credit facility.

  The Company plans to grow its Lodging and Contract Services businesses, in
part, by investing to add new units.  Such investments will continue to include
mortgage loans, minority equity interests, business acquisitions and direct
ownership of certain lodging and senior living services projects.  The Company
expects that cash generated by operations, together with its borrowing capacity,
will be sufficient to finance its planned growth and capital requirements.


Forward-Looking Statements
- --------------------------

  Statements in this report which are not strictly historical are "forward-
looking" and are subject to the many risks and uncertainties which affect the
Company's businesses.  These uncertainties, which include competition within the
lodging and contract services industries, the balance between supply and demand
for hotel rooms, timesharing resorts and senior living facilities, the Company's
continued ability to obtain new management contracts and franchise agreements,
the effect of economic conditions, and the availability of capital to finance
planned growth, are described in the Company's filings with the Securities and
Exchange Commission, including Exhibit 99.1 to this report.

                                       10
<PAGE>
 
PART II. OTHER INFORMATION

Item 1.  Legal Proceedings
- --------------------------

  There are no material legal proceedings pending against the Company.

  Part I, Item 3 of the Company's Annual Report on Form 10-K for the fiscal year
  ended December 29, 1995 is incorporated by reference.

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 Events
- ---------------------

  None.


Item 6.  Exhibits and Reports on Form 8-K
- -----------------------------------------

(a)  Exhibits

  Exhibit
    No.        Description


    12         Computation of Ratio of Earnings to Fixed Charges


    99.1       Forward-Looking Statements


    99.2       Part I, Item 3 of the Company's Annual Report on Form 10-K for
               the fiscal year ended December 29, 1995


(b)  Reports on Form 8-K


   On February 16, 1996, the Company filed a report describing its agreement to
   acquire Forum Group, Inc. and merge it with the Company's Senior Living
   Services business.

                                       11
<PAGE>
 
                              SIGNATURE

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 3, 1996                        /s/ Michael A. Stein
                                   ------------------------------------
                                   Michael A. Stein
                                   Executive Vice President,
                                   Chief Financial Officer and
                                   Acting Corporate Controller

                                       12

<PAGE>
 
                                                                      Exhibit 12


                         MARRIOTT INTERNATIONAL, INC. 
               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                             (DOLLARS IN MILLIONS)

<TABLE> 
<CAPTION> 
                                                   Twelve Weeks                           Fiscal Year
                                                       Ended
                                                --------------------    ------------------------------------------------
                                                March 22,  March 24,
                                                  1996       1995       1995       1994       1993       1992       1991
                                                ---------  ---------    ----       ----       ----       ----       ----
<S>                                             <C>        <C>          <C>        <C>        <C>        <C>        <C> 
Income Before Cumulative Effect of a Change
 in Accounting Principle                           $63        $52       $247       $200       $159       $134       $133

Add / (Deduct):
  Tax on Income Before Cumulative Effect of a
   Change in Accounting Principle                   40         35        165        142        116        103         97
  Fixed Charges                                     25         21        107         84         73         72         62
  Interest Capitalized as Property and Equipment    (1)        (2)        (8)        (4)        (3)        (2)        (4)
  Income / (Loss) Related to certain 
   50%-or-Less-Owned-Affiliates                      -         (1)         -         (2)        (1)         2          2
                                                ------     ------     ------     ------     ------     ------     ------
Earnings Available for Fixed Charges              $127       $105       $511       $420       $344       $309       $290
                                                ======     ======     ======     ======     ======     ======     ======
Fixed Charges:
  Interest Including Amounts Capitalized as
   Property and Equipment                          $15        $10        $61        $36        $30        $27        $28
  Portion of Rental Expense Representative of
   Interest                                         10         10         45         45         40         44         33
  Share of Interest Expense of certain
   50%-or-Less-Owned-Affiliates                      -          1          1          3          3          1          1
                                                ------     ------     ------     ------     ------     ------     ------
Total Fixed Charges                                $25        $21       $107        $84        $73        $72        $62
                                                ======     ======     ======     ======     ======     ======     ======

                                                ------     ------     ------     ------     ------     ------     ------
Ratio of Earnings to Fixed Charges                 5.1        5.0        4.8        5.0        4.7        4.3        4.7
                                                ======     ======     ======     ======     ======     ======     ======
</TABLE> 

For the purpose of computing the ratio of earnings to fixed charges as
prescribed by the rules and regulations of the Commission, earnings represents
income before cumulative effect of a change in accounting principle, plus, when
applicable, (a) taxes on such income, (b) fixed charges, and (c) the Company's
equity interest in losses of certain 50%-or-less-owned-affiliates; less (x)
undistributed earnings of 50%-or-less-owned-affiliates, and (y) interest
capitalized. Fixed charges represent interest (including amounts capitalized),
amortization of deferred financing costs, the portion of rental expense deemed
representative of interest and, when applicable, the Company's share of the
interest expense of certain 50%-or-less-owned-affiliates.



<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          JAN-03-1997
<PERIOD-END>                               MAR-22-1996
<CASH>                                             322
<SECURITIES>                                         0
<RECEIVABLES>                                      750
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                  1509
<PP&E>                                            1225
<DEPRECIATION>                                     368
<TOTAL-ASSETS>                                    4296
<CURRENT-LIABILITIES>                             1633
<BONDS>                                            857
                                0
                                          0
<COMMON>                                           129
<OTHER-SE>                                        1033
<TOTAL-LIABILITY-AND-EQUITY>                      4296
<SALES>                                              0
<TOTAL-REVENUES>                                  2163
<CGS>                                                0
<TOTAL-COSTS>                                     2040
<OTHER-EXPENSES>                                    15
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                  14
<INCOME-PRETAX>                                    103
<INCOME-TAX>                                        40
<INCOME-CONTINUING>                                 63
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                        63
<EPS-PRIMARY>                                      .47
<EPS-DILUTED>                                      .47
        

</TABLE>

<PAGE>
 
                                                                    Exhibit 99.1


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 and presented elsewhere by management from time to time.

Dependence on Others:  The Company's present growth strategy for development of
additional lodging and senior living facilities entails entering into various
arrangements with present and future property owners, including Host Marriott
Corporation.  There can be no assurance that any of the Company's current
strategic arrangements will be continued, or that the Company will be able to
enter into future collaborations.

Contract Terms for New Units:  The terms of the operating contracts and
franchise agreements for each of the Company's lodging facilities, retirement
communities, and contract services units are influenced by contract terms
offered by the Company's competitors at the time such agreements are entered
into.  Accordingly, there can be no assurance that contracts entered into or
renewed in the future will be on terms that are as favorable to the Company as
those under existing agreements.

Competition:  The profitability of hotels and retirement communities operated by
the Company is subject to general economic conditions, competition, the
desirability of particular locations, the relationship between supply of and
demand for hotel rooms and senior living facilities, and other factors.  The
Company generally operates hotels and retirement communities in markets that
contain numerous competitors, and the continued success of the Company's hotels
and retirement communities in their respective markets will be dependent, in
large part, upon those facilities' ability to compete in such areas as access,
location, quality of accommodations, amenities, specialized services (in the
case of retirement communities), rate structure and, to a lesser extent, the
quality and scope of food and beverage facilities.

Supply and Demand:  During the 1980s, construction of lodging facilities in the
United States resulted in an excess supply of available rooms, and the
oversupply had an adverse effect on occupancy levels and room rates in the
industry.  Although the current outlook for the industry has improved, the
lodging industry may be adversely affected in the future by (i) national and
regional economic conditions, (ii) changes in travel patterns, (iii) taxes and
government regulations which influence or determine wages, prices, interest
rates, construction procedures and costs, and (iv) the availability of capital.
The Company's timeshare business is also subject to the same uncertainties, and
accordingly there can be no assurance that the present level of demand for
timeshare intervals will continue, or that there will not be an increase in the
supply of competitive timeshare units, which could reduce the prices at which
the Company is able to sell units.

<PAGE>
 
                                                                    Exhibit 99.2


PART I, ITEM 3 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 29, 1995


ITEM 3.  LEGAL PROCEEDINGS


There are no material legal proceedings pending against the Company.


The information in this paragraph is required by Security and Exchange
Commission regulations that mandate disclosure of any environmental-related fine
that may exceed $100,000.  In January 1996, asbestos-containing material was
inadvertently removed by an independent contractor hired by the Company in
connection with certain renovations at a facility managed by the Company.  The
Company promptly caused the material to be contained and the condition fully
remediated in accordance with all applicable governmental regulations.  The U.S.
Occupational Safety and Health Administration ("OSHA") has investigated the
matter and may take action to impose a fine against the Company, although the
Company believes that it has meritorious defenses against and intends to
vigorously contest any monetary sanction.  OSHA has indicated that the maximum
amount of any fine would be less than $2,000,000.  The Company believes that
resolution of this matter will not have a material effect on the Company or its
business or assets.


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