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Marriott International 10-K 2005
FORM 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

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

 

For the Fiscal Year Ended December 31, 2004

 

OR

 

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

 

Commission File No. 1-13881

 


 

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   52-2055918
(State of Incorporation)   (IRS Employer Identification Number)
10400 Fernwood Road, Bethesda, Maryland   20817
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s Telephone Number, Including Area Code (301) 380-3000

 


 

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

 

Title of Each Class


 

Name of Each Exchange on Which Registered


Class A Common Stock, $0.01 par value

(225,768,576 shares outstanding as of February 10, 2005)

 

New York Stock Exchange

Chicago Stock Exchange

Pacific Stock Exchange

Philadelphia Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 


 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

The aggregate market value of shares of common stock held by non-affiliates at June 18, 2004, was $8,908,154,899.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement prepared for the 2005 Annual Meeting of Shareholders are incorporated by

reference into Part III of this report.

 


 

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Table of Contents

MARRIOTT INTERNATIONAL, INC.

 

FORM 10-K TABLE OF CONTENTS

 

FISCAL YEAR ENDED DECEMBER 31, 2004

 

          Page No.

Part I.

         

    Items 1 and 2.

  

Business and Properties

   3

    Item 3.

  

Legal Proceedings

   16

    Item 4.

  

Submission of Matters to a Vote of Security Holders

   17

Part II.

         

    Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   18

    Item 6.

  

Selected Financial Data

   19

    Item 7.

  

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

   20

    Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   40

    Item 8.

  

Financial Statements and Supplementary Data

   42

    Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   77

    Item 9A.

  

Controls and Procedures

   77

    Item 9B.

  

Other Information

   77

Part III.

         

    Item 10.

  

Directors and Executive Officers of the Registrant

   78

    Item 11.

  

Executive Compensation

   78

    Item 12.

  

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

   78

    Item 13.

  

Certain Relationships and Related Transactions

   78

    Item 14.

  

Principal Accountant Fees and Services

   78

Part IV.

         

    Item 15.

  

Exhibits and Financial Statement Schedules

   82
    

Signatures

   85

 

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Table of Contents

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

 

PART I

 

Items 1 and 2. Business and Properties.

 

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

 

Segment


   Percentage of Total Sales in
the Fiscal Year Ended
December 31, 2004


 

Full-Service Lodging

   66 %

Select-Service Lodging

   11 %

Extended-Stay Lodging

   5 %

Timeshare

   15 %

Synthetic Fuel

   3 %

 

We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”

 

In our Lodging business, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, we develop, operate and franchise hotels and corporate housing properties under 13 separate brand names, and we develop, operate and market Marriott timeshare properties under four separate brand names.

 

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

 

Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which we now classify as discontinued operations.

 

Financial information by industry segment and geographic area as of December 31, 2004, and for the three fiscal years then ended appears in the Business Segments note to our Consolidated Financial Statements included in this annual report.

 

Lodging

 

We operate or franchise 2,632 lodging properties worldwide, with 482,186 rooms as of December 31, 2004. In addition, we provide 2,504 furnished corporate housing rental units. We believe that our portfolio of lodging brands is the broadest of any company in the world, and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. Our lodging brands include:

 

Full-Service Lodging

 

  Marriott Hotels & Resorts

 

  Marriott Conference Centers

 

  JW Marriott Hotels & Resorts

 

  The Ritz-Carlton

 

  Renaissance Hotels & Resorts

 

  Bulgari Hotels & Resorts

 

Select-Service Lodging

 

  Courtyard

 

  Fairfield Inn

 

  SpringHill Suites

 

Extended-Stay Lodging

 

  Residence Inn

 

  TownePlace Suites

 

  Marriott ExecuStay

 

  Marriott Executive Apartments

 

Timeshare

 

  Marriott Vacation Club International

 

  The Ritz-Carlton Club

 

  Marriott Grand Residence Club

 

  Horizons by Marriott Vacation Club International

 

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Table of Contents

Company-Operated Lodging Properties

 

At December 31, 2004, we operated 968 properties (255,109 rooms) under long-term management or lease agreements with property owners (together, “the Operating Agreements”) and six properties (1,362 rooms) as owned.

 

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

 

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

 

Franchised Lodging Properties

 

We have franchising programs that permit the use of certain of our brand names and our lodging systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from 4 percent to 6 percent of room revenues for all brands, plus 2 percent to 3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs, and pay fees for use of our centralized reservation systems. At December 31, 2004, we had 1,658 franchised properties (225,715 rooms).

 

Summary of Properties by Brand

 

As of December 31, 2004, we operated or franchised the following properties by brand (excluding 2,504 corporate housing rental units):

 

     Company-Operated

   Franchised

Brand


   Properties

   Rooms

   Properties

   Rooms

Full-Service Lodging

                   

Marriott Hotels & Resorts

   226    100,780    216    59,764

Marriott Conference Centers

   14    3,577    —      —  

JW Marriott Hotels & Resorts

   30    13,833    4    1,205

The Ritz-Carlton

   57    18,611    —      —  

Renaissance Hotels & Resorts

   88    33,596    45    13,863

Bulgari Hotel & Resort

   1    58    —      —  

Ramada International

   4    727    —      —  

Select-Service Lodging

                   

Courtyard

   299    47,344    357    46,659

Fairfield Inn

   2    855    521    47,855

SpringHill Suites

   23    3,597    102    10,953

Extended-Stay Lodging

                   

Residence Inn

   132    17,791    331    37,268

TownePlace Suites

   34    3,661    81    8,049

Marriott Executive Apartments

   13    2,372    1    99

Timeshare

                   

Marriott Vacation Club International

   43    8,832    —      —  

The Ritz-Carlton Club

   4    261    —      —  

Marriott Grand Residence Club

   2    248    —      —  

Horizons by Marriott Vacation Club International

   2    328    —      —  
    
  
  
  

Total

   974    256,471    1,658    225,715
    
  
  
  

 

We currently have more than 55,000 rooms in our development pipeline and expect to add 25,000 to 30,000 hotel rooms and timeshare units to our system in 2005. We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel developers to build or acquire new

 

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Table of Contents

Marriott properties, important parts of our growth plan, are partially dependent on their access to and the availability and cost of capital. See “Liquidity and Capital Resources” caption in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Summary of Properties by Country

 

As of December 31, 2004, we operated or franchised properties in the following 66 countries and territories:

 

Country


   Hotels

   Rooms

Americas

         

Argentina

   1    325

Aruba

   4    1,586

Brazil

   5    1,506

Canada

   42    9,850

Cayman Islands

   2    532

Chile

   2    485

Costa Rica

   3    574

Curacao

   1    247

Dominican Republic

   2    446

Ecuador

   1    257

Guatemala

   1    385

Honduras

   1    157

Jamaica

   1    427

Mexico

   9    2,583

Panama

   2    416

Peru

   1    300

Puerto Rico

   3    1,197

Saint Kitts and Nevis

   1    500

Trinidad and Tobago

   1    119

United States

   2,264    385,845

U.S. Virgin Islands

   3    785

Venezuela

   1    269
    
  

Total Americas

   2,351    408,791

Middle East and Africa

         

Armenia

   1    225

Bahrain

   1    264

Egypt

   7    3,141

Israel

   2    960

Jordan

   3    609

Kuwait

   2    601

Lebanon

   1    174

Qatar

   2    586

Saudi Arabia

   3    735

Tunisia

   1    221

Turkey

   4    1,189

United Arab Emirates

   4    935
    
  

Total Middle East and Africa

   31    9,640

Asia

         

China

   30    11,493

Guam

   1    357

India

   5    1,195

Indonesia

   3    1,083

Japan

   9    2,875

Malaysia

   6    2,757

Pakistan

   2    509

Philippines

   2    898

Singapore

   2    992

South Korea

   4    1,762

Thailand

   7    1,887

Vietnam

   2    874
    
  

Total Asia

   73    26,682

 

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Table of Contents

Country


   Hotels

   Rooms

Australia

   8    2,354

Europe

         

Austria

   6    1,569

Belgium

   4    721

Czech Republic

   3    656

Denmark

   1    395

France

   6    1,431

Georgia

   2    245

Germany

   40    8,512

Greece

   1    314

Hungary

   2    470

Italy

   5    944

Netherlands

   3    945

Poland

   2    748

Portugal

   3    933

Romania

   1    402

Russia

   6    1,559

Spain

   6    1,398

Switzerland

   2    464
    
  

Total Europe

   93    21,706

United Kingdom

         

Ireland

   3    506

United Kingdom (England, Scotland and Wales)

   73    12,507
    
  

Total United Kingdom

   76    13,013
    
  

Total – All Countries and Territories

   2,632    482,186
    
  

 

Full-Service Lodging

 

Marriott Hotels & Resorts (including JW Marriott Hotels & Resorts and Marriott Conference Centers) is our global flagship brand, primarily serving business and leisure travelers and meeting groups at locations in downtown, urban and suburban areas, near airports and at resort locations. Marriott full-service hotels is a quality tier brand, with most hotels typically containing from 400 to 700 rooms, high-speed internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges, room service, concierge lounges and parking facilities. Fifteen hotels have over 1,000 rooms. Many Marriott resort hotels have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include JW Marriott Hotels & Resorts and Marriott Conference Centers.

 

JW Marriott Hotels & Resorts is the Marriott brand’s luxury collection of distinctive hotels that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 34 hotels and resorts are primarily located in gateway cities and upscale locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities at JW Marriott Hotels & Resorts normally include larger guest rooms, higher end décor and furnishings, upgraded in-room amenities, upgraded business centers and fitness centers/spas, and 24-hour room service.

 

We operate 14 Marriott Conference Centers (3,577 rooms) throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. In addition to the features found in a typical Marriott full-service hotel, the centers typically include expanded meeting room space, banquet and dining facilities, guest rooms and recreational facilities.

 

Rooms revenue contributed the majority of Marriott Hotels & Resorts’ revenues for fiscal year 2004, with the remainder coming from food and beverage operations, recreational facilities and other services. Overall hotel system profits are usually relatively stable and include only moderate seasonal fluctuations. Business at resort properties may be seasonal depending on location.

 

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Table of Contents

Marriott Hotels & Resorts

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (43 states and the District of Columbia)

  

318

   (129,831 rooms)
    
    

Non-U.S. (51 countries and territories)

         

Americas (Non-U.S.)

   34     

Continental Europe

   32     

United Kingdom

   55     

Asia

   30     

The Middle East and Africa

   16     

Australia

     5     
    
    

Total Non-U.S.

   172    (49,328 rooms)
    
    

 

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

 

The Ritz-Carlton

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (16 states and the District of Columbia)

   35    (11,629 rooms)
    
    

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

         

Americas (Non-U.S.)

   6     

Continental Europe

   4     

Asia

   7     

The Middle East and Africa

   5     
    
    

Total Non-U.S.

   22    (6,982 rooms)
    
    

 

Renaissance Hotels & Resorts is a distinctive and global quality-tier brand that targets individual business and leisure travelers and group meetings seeking stylish and personalized environments. Renaissance hotels are generally located at downtown locations in major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotels contain from 300 to 500 rooms; however, a few of the convention oriented hotels are larger, and some hotels in non-gateway markets, particularly in Europe, are smaller. Renaissance products and services typically include stylish décor, high-speed internet access, restaurants and lounges, room service, swimming pools, gift shops, concierge lounges, and meeting and banquet facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). Renaissance resort properties have additional recreational and entertainment facilities and services, including golf courses, tennis courts, water sports, additional restaurants and spa facilities.

 

Renaissance Hotels & Resorts

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (26 states and the District of Columbia)

   67    (25,473 rooms)
    
    

Non-U.S. (27 countries and territories)

         

Americas (Non-U.S.)

   8     

Continental Europe

   21     

United Kingdom

   8     

Asia

   21     

The Middle East and Africa

   8     
    
    

Total Non-U.S.

   66    (21,986 rooms)
    
    

 

Bulgari Hotels & Resorts. As part of our ongoing strategy to expand our reach through partnerships with pre-eminent world-class companies, in early 2001 we entered into a joint venture with Bulgari SpA to create and introduce distinctive new luxury hotel properties in prime locations – Bulgari Hotels & Resorts. The first property (58 rooms), the Bulgari Hotel Milano, opened in Milan, Italy, in May 2004. The second property announced is the Bulgari Resort Bali, currently under construction and scheduled to open in late 2005. Other projects are currently in various stages of development in Europe, Asia, and North America.

 

Ramada International. We sold Ramada International, a moderately-priced and predominantly franchised brand targeted at business and leisure travelers outside the United States, to Cendant Corporation (“Cendant”) during the fourth quarter of 2004. We continue to manage four Ramada International properties (727 rooms) located outside of the United States at December 31, 2004. Additionally, in the second quarter of 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, and as a result, Cendant acquired the trademarks and licenses for

 

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Table of Contents

the Ramada and Days Inn lodging brands in the United States. The Two Flags joint venture was originally formed in 2002 by us and Cendant to further develop and expand the Ramada and Days Inn brands in the United States. We contributed the domestic Ramada license agreements and related intellectual property to the joint venture, and Cendant contributed the Days Inn license agreement and related intellectual property.

 

Select-Service Lodging

 

Courtyard is our upper-moderate-price select-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically contain 90 to 150 rooms. Well landscaped grounds typically include a courtyard with a pool and social areas. Most hotels feature functionally designed quality guest rooms and meeting rooms, free in-room high-speed internet access, limited restaurant facilities, a swimming pool and an exercise room. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components), and most hotels will also have The Market (a self-serve food store open 24 hours a day). In addition, our Courtyard brand is undergoing a reinvention strategy designed to meet the evolving needs of the business traveler. Reinvented Courtyards feature fresh, crisp designs for guest rooms and public spaces and 24-hour food availability. Through year-end 2004, 87 hotels have been reinvented, and reinventions of an additional 71 properties are expected to be completed by year-end 2005. The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year-end 2004, there were 656 Courtyards operating in 21 countries.

 

Courtyard

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (45 states and the District of Columbia)

   595    (83,285 rooms)
    
    

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

         

Americas (Non-U.S.)

   17     

Continental Europe

   24     

United Kingdom

   11     

Asia

   5     

The Middle East and Africa

   1     

Australia

   3     
    
    

Total Non-U.S.

   61    (10,718 rooms)
    
    

 

Fairfield Inn is our hotel brand that competes in the lower-moderate-price tier. Aimed at value-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 60 to 140 rooms and offers free in-room high-speed internet access, a swimming pool, complimentary continental breakfast and free local phone calls. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). At year-end 2004, there were 409 Fairfield Inns and 114 Fairfield Inn & Suites (523 hotels total), operating in the United States, Canada and Mexico.

 

Fairfield Inn

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (49 states and the District of Columbia)

   519    (48,258 rooms)
    
    

Non-U.S. (2 countries)

         

Americas (Non-U.S.)

   4    (452 rooms)
    
    

 

SpringHill Suites is our all-suite brand in the upper-moderate-price tier targeting business travelers, leisure travelers and families. SpringHill Suites typically have 90 to 165 studio suites that are 25 percent larger than a typical hotel guest room. The brand offers a broad range of amenities, including free in-room high-speed internet access, complimentary hot breakfast buffet and exercise facilities. By the end of 2005, hotels are required to have a new superior bedding package (offering better mattress quality and enhanced bedding components). In 2005, the brand will introduce The Market (a self-serve food store open 24 hours a day). There were 125 properties (14,550 rooms) located in the United States and Canada at December 31, 2004.

 

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Extended-Stay Lodging

 

Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 463 Residence Inn hotels across North America.

 

Residence Inn

 

Geographic Distribution at December 31, 2004


   Hotels

    

United States (47 states and the District of Columbia)

   449    (53,172 rooms)
    
    

Non-U.S. (2 countries)

         

Americas (Non-U.S.)

   14    (1,887 rooms)
    
    

 

TownePlace Suites is a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. The typical TownePlace Suites hotel contains 100 studio, one-bedroom and two-bedroom suites. Each suite has a fully equipped kitchen and separate living area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-hour staffing, free in-room high-speed internet access and laundry facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). At December 31, 2004, 115 TownePlace Suites (11,710 rooms) were located in 35 states.

 

Marriott ExecuStay provides furnished corporate apartments for stays of one month or longer nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers and franchise agreements. Consistent with our plan to shift the business toward franchising, the total number of units leased by ExecuStay decreased and more than 20 franchise markets were added during 2004. At December 31, 2004, Marriott ExecuStay’s franchise program, launched in July 2002, included 14 franchisees covering 35 U.S. markets.

 

Marriott Executive Apartments. We provide temporary housing (“Serviced Apartments”) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some Serviced Apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At December 31, 2004, four Serviced Apartments properties and 10 Marriott Executive Apartments (2,471 rooms total) were located in nine countries and territories. All Marriott Executive Apartments are located outside the United States.

 

Timeshare

 

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

 

Many timesharing resorts are located adjacent to Marriott-operated hotels, and timeshare owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through a third-party exchange company. Owners can also trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 2,500 Marriott hotels worldwide.

 

Marriott Vacation Club International (“MVCI”) brand offers full-service villas featuring living and dining areas, one-, two- and three-bedroom options, full kitchen and washer/dryer. In 43 locations worldwide, this brand draws United States and international customers who vacation regularly with a focus on family, relaxation and recreational activities. In the United States, MVCI is located in Las Vegas, in beach and golf communities in Arizona, California, the Carolinas, Florida and Hawaii, and in ski resorts in California, Colorado and Utah. Internationally, MVCI has resorts in Aruba, France, Spain and Thailand.

 

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

 

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

 

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

 

We expect that our future timeshare growth will increasingly reflect opportunities presented by partnerships, joint ventures, and other business structures. In 2004, we initiated sales at our Las Vegas joint venture, and we expect to open the Las Vegas resort in the third quarter of 2005. Marriott Vacation Club International opened the following three resorts in 2004 under the MVCI brand: Aruba Surf Club in Aruba, Canyon Villas in Phoenix, Arizona, and Ocean Watch in Myrtle Beach, South Carolina. Our project in Hilton Head, South Carolina, opened for sales in 2004, and we expect that the resort will open in the second quarter of 2005.

 

Marriott Vacation Club International’s owner base continues to expand, with approximately 281,500 owners at year-end 2004, compared to approximately 256,000 at year-end 2003.

 

Timeshare (all brands)

 

Geographic Distribution at December 31, 2004


   Resorts

   Units

Continental United States

   38    7,001

Hawaii

   4    1,060

Caribbean

   3    694

Europe

   5    812

Asia

   1    102
    
  

Total

   51    9,669
    
  

 

Other Activities

 

Marriott Golf manages 31 golf course facilities as part of our management of hotels and for other golf course owners.

 

We operate 18 systemwide hotel reservation centers, 10 in the United States and Canada and eight in other countries and territories, that handle reservation requests for Marriott lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others. Additionally, we focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further Best Rate Guarantee, which gives customers access to the same rates whether they book through our telephone reservation system, our web site or any other reservation channel; our strong Marriott Rewards loyalty program; and our information-rich and easy to use Marriott.com web site all encourage customers to make reservations using the Marriott web site. We have complete control over our inventory and pricing and utilize online agents on an as-needed basis. The shift of hotel bookings to our web site from other online channels results in higher revenue, margins and profitability. With over 2,600 hotels, economies of scale enable us to reduce costs per occupied room, drive profits for our owners and increase our fee revenue.

 

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

 

Competition

 

We encounter strong competition both as a lodging operator and as a franchisor. There are approximately 675 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

 

Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2004, approximately two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the three largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.

 

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

 

Based on lodging industry data, we have less than an 8.4 percent share of the U.S. hotel market (based on number of rooms), and less than a 1 percent share of the lodging market outside the United States. We believe that our hotel

 

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

 

Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Our management, lease and franchise agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that these ongoing refurbishment programs are adequate to preserve the competitive position and earning power of the hotels and timeshare properties. While service excellence is Marriott’s hallmark, we continually look for new ways to delight our guests. Currently, we are focused on elevating the Marriott experience beyond that of a traditional hotel stay to a total guest experience that encompasses exceptional style, personal luxury and superior service. This approach to hospitality, “The New Look and Feel of Marriott Now,” is influenced by the world’s foremost innovations in design, technology, culinary expertise, service and comfort.

 

This evolution can begin to be seen across all of our brands, in new hotel designs, exotic destinations, enhanced fitness centers, sumptuous spas and expanded culinary offerings. Each brand, whether luxury or moderately priced, will be more upscale and attuned to customer needs than ever before. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains that rely exclusively on franchising.

 

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

 

Marriott Rewards is a frequent guest program with over 21 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 26 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In 2004, approximately 40 percent of our room nights were purchased by Marriott Rewards members. In addition, the ability of Marriott Vacation Club International timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brand.

 

Synthetic Fuel

 

Operations

 

Our synthetic fuel operation currently consists of our interest in four coal-based synthetic fuel production facilities (the “Facilities”), two of which are located at a coal mine in Saline County, Illinois, with the remaining two located at a coal mine in Jefferson County, Alabama. Three of the four plants are held in one entity, and one of the plants is held in a separate entity. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code (credits are not available for fuel produced after 2007). Although the Facilities incur significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense.

 

At both of the locations, the synthetic fuel operation has entered into long-term site leases at sites that are adjacent to large underground mines as well as barge load-out facilities on navigable rivers. In addition, the synthetic fuel operation has entered into long-term coal purchase agreements with the owners of the adjacent coal mines and long-term synthetic fuel sales contracts with the Tennessee Valley Authority and with Alabama Power Company, two major utilities. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel, covering approximately 80 percent of the productive capacity of the Facilities. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into spot contracts to buy coal from these or other coal mines and sell synthetic fuel to different end users. The operation is slightly seasonal as the synthetic fuel is mainly burned to produce electricity, and electricity use peaks in the summer in the markets served by the synthetic fuel operation. The long-term contracts can generally be cancelled by us in the event that we choose not to operate the Facilities or that the synthetic fuel produced at the Facilities does not qualify for tax credit under Section 29 of the Internal Revenue Code.

 

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

 

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

 

Our Investment

 

We acquired the Facilities from PacifiCorp Financial Services (“PacifiCorp”) in October 2001 for $46 million in cash. We began operating these Facilities in the first quarter of 2002.

 

On June 21, 2003, we sold an approximately 50 percent ownership interest in the synthetic fuel entities. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that we expect will continue over the life of the ventures based on the actual amount of tax credits allocated to the purchaser.

 

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

 

As a result of a put option associated with the June 21, 2003, sale of a 50 percent ownership interest, we consolidated the two synthetic fuel joint ventures from that date through November 6, 2003. Effective November 7, 2003, because the put option was voided, we began accounting for the synthetic fuel joint ventures using the equity method of accounting. Beginning March 26, 2004, as a result of adopting FIN 46(R), “Consolidation of Variable Interest Entities,” we have again consolidated the synthetic fuel joint ventures, and we reflect our partner’s share of the operating losses as minority interest.

 

Internal Revenue Service Placed-in-Service Challenge

 

In July 2004, IRS field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp that included a challenge to the placed-in-service dates of three of the four synthetic fuel facilities owned by one of our synthetic fuel joint ventures. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed in service before July 1, 1998.

 

We strongly believe that all the Facilities meet the placed-in-service requirement. Although we are engaged in discussions with the IRS and are confident this issue will be resolved in our favor and not result in a material charge to us, we cannot assure you as to the ultimate outcome of this matter. If ultimately resolved against us, we could be prevented from realizing projected future tax credits and cause us to reverse previously utilized tax credits, requiring payment of substantial additional taxes. Since acquiring the plants, we have recognized approximately $435 million of tax credits from all four plants through December 31, 2004. The tax credits recognized through December 31, 2004, associated with the three facilities in question totaled approximately $330 million.

 

On October 6, 2004, we entered into amendment agreements with our synthetic fuel partner that result in a shift in the allocation of tax credits between us. On the synthetic fuel facility that is not being reviewed by the IRS, our partner increased its allocation of tax credits from approximately 50 percent to 90 percent through March 31, 2005, and pays a higher price per tax credit to us for that additional share of tax credits. With respect to the three synthetic fuel facilities under IRS review, our partner reduced its allocation of tax credits from approximately 50 percent to an average of roughly 5 percent through March 31, 2005. If the IRS’ placed-in-service challenge regarding the three facilities is not successfully resolved by March 31, 2005, our partner will have the right to return its ownership interest in those three facilities to us at that time. We will have the flexibility to continue to operate at current levels, reduce production and/or sell an interest to another party. If there is a successful resolution by March 31, 2005, our partner’s share of the tax credits from all four facilities will return to approximately 50 percent. In any event, on March 31, 2005, our share of the tax credits from the one facility not under review will return to approximately 50 percent.

 

Discontinued Operations

 

Senior Living Services

 

On December 30, 2002, we entered into definitive agreements to sell our senior living management business to Sunrise Senior Living, Inc. (“Sunrise”) and to sell nine senior living communities to CNL Retirement Properties, Inc. (“CNL”), and we recorded after-tax charges of $131 million in 2002 associated with our agreement to sell our senior living management business. We completed the sales to Sunrise and CNL, in addition to the related sale of a parcel of land to Sunrise in March 2003, for $266 million. We recorded after-tax gains of $19 million in 2003.

 

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

 

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Distribution Services

 

In the third quarter of 2002, we completed a strategic review of our Distribution Services business and decided to exit that business. As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations at four facilities, we completed our exit of the Distribution Services business. We recorded after-tax charges of $40 million in 2002 in connection with the decision to exit this business. Accordingly, we now report this business in discontinued operations.

 

Forward-Looking Statements

 

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

 

Forward-looking statements involve risks, uncertainties and assumptions, including risks described below and other risks that we describe from time to time in our periodic filings with the SEC, and our actual results may differ materially from those expressed in our forward-looking statements. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of the report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

Risks and Uncertainties

 

We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following.

 

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers. We generally operate in markets that contain numerous competitors. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share and reduce our earnings.

 

We are subject to the range of operating risks common to the hotel, timeshare and corporate apartment industries. The profitability of the hotels, vacation timeshare resorts and corporate apartments that we operate or franchise may be adversely affected by a number of factors, including:

 

  (1) the availability of and demand for hotel rooms, timeshares and apartments;

 

  (2) international, national and regional economic conditions;

 

  (3) the desirability of particular locations and changes in travel patterns;

 

  (4) taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures and costs;

 

  (5) the availability of capital to allow us and potential hotel owners and joint venture partners to fund investments;

 

  (6) regional and national development of competing properties; and

 

  (7) increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business.

 

Any one or more of these factors could limit or reduce the demand, and therefore the prices we are able to obtain, for hotel rooms, timeshare units and corporate apartments. In addition, reduced demand for hotels could also give rise to losses under loans, guarantees and minority equity investments that we have made in connection with hotels that we manage.

 

The uncertain pace of the lodging industry’s recovery will continue to impact our financial results and growth. Both the Company and the lodging industry were hurt by several events occurring over the last few years, including the global economic downturn, the terrorist attacks on New York and Washington, Severe Acute Respiratory Syndrome (SARS) and military action in Iraq. Business and leisure travel decreased and remained depressed as some potential travelers reduced or avoided discretionary travel in light of increased delays and safety concerns and economic declines stemming from an erosion in consumer confidence. Weaker hotel performance reduced management and franchise fees and gave rise to fundings or losses under loans, guarantees and minority investments that we have made in connection with some hotels that we manage, which, in turn, has had a material adverse impact on our financial performance. Although both the lodging and travel industries are recovering, the pace, duration and full extent of that recovery remain unclear. Accordingly, our financial results and growth could be harmed if that recovery stalls or is reversed.

 

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

 

Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements, franchise agreements and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue. Moreover, we may not be able to enter into future collaborations, or to renew or enter into agreements in the future, on terms that are as favorable to us as those under existing collaborations and agreements.

 

We may have disputes with the owners of the hotels that we manage or franchise. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners, but have not always been able to do so. Failure to resolve such disagreements has in the past resulted in litigation, and could do so in the future.

 

Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments. Our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management and franchise agreements, costs of construction and anticipated room rate structure.

 

We depend on capital to buy and maintain hotels, and we may be unable to access capital when necessary. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to recycle and raise new capital.

 

In the event of damage to or other potential losses involving properties that we own, manage or franchise, potential losses may not be covered by insurance. We have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain coverage at reasonable rates. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, that may be uninsurable or may be too expensive to justify insuring against. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, we may carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment or that of hotel owners, or in some cases could also result in certain losses being totally uninsured. As a result, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt or other financial obligations related to the property.

 

Risks relating to acts of God, terrorist activity and war could reduce the demand for lodging, which may adversely affect our revenues. Acts of God, such as natural disasters and the spread of contagious diseases, in locations where we own, manage or franchise significant properties and areas of the world from which we draw a large number of customers can cause a decline in the level of business and leisure travel and reduce the demand for lodging. Wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms, timeshare units and corporate apartments, or limit the prices that we are able to obtain for them, both of which could adversely affect our revenues.

 

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Increasing use of internet reservation services may adversely impact our revenues. Some of our hotel rooms are booked through internet travel intermediaries serving both the leisure, and increasingly, the corporate travel sectors. While Marriott’s Look No Further Best Rate Guarantee has greatly reduced the ability of these internet travel intermediaries to undercut the published rates of Marriott hotels, these internet travel intermediaries continue their attempts to commoditize hotel rooms, by aggressively marketing to price-sensitive travelers and corporate accounts and increasing the importance of general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their travel services rather than to our lodging brands. Although we expect to continue to maintain and even increase the strength of our brands in the online marketplace, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be harmed.

 

Changes in privacy law could adversely affect our ability to market our products effectively. Our timeshare business, and to a lesser extent our lodging segments, rely on a variety of direct marketing techniques, including telemarketing and mass mailings. Recent initiatives, such as the National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, have created some concern about the continuing effectiveness of telemarketing and mass mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain lists of potential customers from travel service providers with whom we have substantial relationships and market to some individuals on these lists directly. If the acquisition of these lists were outlawed or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.

 

Activities relating to our synthetic fuel operations could increase our tax liabilities. The Company earns revenues and generates tax credits from its synthetic fuel operations, which create a fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. The performance of the synthetic fuel operations depends in part on our ability to utilize the tax credits, which in turn is dependent on our financial performance. If our businesses do not generate sufficient profits, we might suffer losses associated with generating tax credits that we were unable to utilize. In addition, the IRS field audit team’s challenge to whether three of our synthetic fuel facilities satisfy statutory placed-in-service requirements could, if ultimately resolved against us, prevent us from realizing projected future tax credits and cause us to reverse previously utilized credits, requiring payment of substantial additional taxes. The ability of our synthetic fuel operations to generate tax credits could also be adversely impacted by the productivity of these operations, which may be diminished by problems related to supply, production and demand at any of the synthetic fuel facilities, the power plants that buy synthetic fuel from the joint venture or the coal mines where the joint venture buys coal, and by the reduction or elimination of projected future tax credits for synthetic fuel if average crude oil prices in 2005 and beyond exceed certain statutory thresholds, which could affect our ongoing production decisions.

 

Obligations associated with our exit from the Senior Living Services business may be larger than expected. Our agreement to sell the Senior Living Services business provides for indemnification of Sunrise Senior Living, Inc. based on pre-closing events and liabilities resulting from the consummation of the transaction. The amount of the indemnification obligations depends, in large part, on actions of third parties that are outside of our control. As a result, it is difficult to predict the ultimate impact of the indemnities, and the amount of these adjustments and indemnities could be larger than expected.

 

Employee Relations

 

At December 31, 2004, we had approximately 133,000 employees. Approximately 9,000 employees were represented by labor unions. We believe relations with our employees are positive.

 

Other Properties

 

In addition to the operating properties discussed above, we lease five office buildings with combined space of approximately 1.3 million square feet in Maryland and Florida where our corporate, Ritz-Carlton and Marriott Vacation Club International headquarters are located.

 

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

 

Internet Address and Company SEC Filings

 

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

 

Executive Officers of the Registrant

 

See Item 10 on page 78 of this report for information about our executive officers.

 

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Item 3. Legal Proceedings.

 

The CTF/HPI arbitration and litigation is described under the caption heading “Litigation and Arbitration” in Footnote 18 of the Notes to Consolidated Financial Statements set forth in Part II, Item 8, of this annual report and is hereby incorporated by reference.

 

In addition, on December 22, 2004, P.T. Karang Mas Sejahtera, the owner of The Ritz-Carlton Bali Resort and Spa, filed an action against the Company and The Ritz-Carlton Hotel Company, LLC in the Superior Court of the State of California for the County of Los Angeles alleging breach of the operating agreement governing the hotel, breach of fiduciary duty, fraudulent concealment, interference with contract and conspiracy to breach fiduciary duty. The complaint seeks unspecified damages, an accounting and a declaration that the owner has a right to terminate the operating agreement governing the hotel. On January 21, 2005, we removed the action to the U.S. District Court for the Central District of California, filed an answer and moved to transfer the action to the District of Maryland. No scheduling order has been entered at this time.

 

We believe that the claims made against us are without merit, and we intend to vigorously defend against them. However, we cannot assure you as to the outcome of these lawsuits, nor can we currently estimate the range of potential losses to the Company.

 

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

 

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Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

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Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information and Dividends

 

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

 

     Stock Price

  

Dividends
Declared Per
Share


     High

   Low

  

2003

                    

First Quarter

   $ 34.89    $ 28.55    $ 0.070

Second Quarter

     40.44      31.23      0.075

Third Quarter

     41.59      37.66      0.075

Fourth Quarter

     47.20      40.04      0.075
     Stock Price

  

Dividends
Declared Per
Share


     High

   Low

  

2004

                    

First Quarter

   $ 46.80    $ 40.64    $ 0.075

Second Quarter

     51.50      41.82      0.085

Third Quarter

     50.48      44.95      0.085

Fourth Quarter

     63.99      48.15      0.085

 

At February 10, 2005, there were 225,768,576 shares of Class A Common Stock outstanding held by 48,282 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and Philadelphia Stock Exchange. The year-end closing price for our stock was $62.98 on December 31, 2004, and $46.15 on January 2, 2004. All prices are reported on the consolidated transaction reporting system.

 

Fourth Quarter 2004 Issuer Purchases of Equity Securities

 

(in millions, except per share amounts)

 

 

Period


   Total
Number of
Shares
Purchased


   Average
Price per
Share


   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)


  

Maximum

Number of Shares
That May Yet Be
Purchased Under
the Plans or
Programs (1)


September 11, 2004 – October 8, 2004

   0.1    $ 48.64    0.1    19.6

October 9, 2004 – November 5, 2004

   —        —      —      19.6

November 6, 2004 – December 3, 2004

   0.8      56.59    0.8    18.8

December 4, 2004 – December 31, 2004

   0.2      61.55    0.2    18.6

(1) On April 30, 2004, we announced that our Board of Directors increased by 20 million shares the authorization to repurchase our common stock for a total outstanding authorization of approximately 25 million shares on that date. That authorization is ongoing and does not have an expiration date. We repurchase shares in the open-market and in privately negotiated transactions.

 

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Item 6. Selected Financial Data.

 

The following table presents a summary of selected historical financial data for the Company derived from our financial statements as of and for the five fiscal years ended December 31, 2004.

 

Since the information in this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements.

 

($ in millions, except per share data)

 

   Fiscal Year 2

 
   2004

   2003

   2002

    2001

    2000

 

Income Statement Data:

                                      

Revenues 1

   $ 10,099    $ 9,014    $ 8,415     $ 7,768     $ 7,911  
    

  

  


 


 


Operating income 1

   $ 477    $ 377    $ 321     $ 420     $ 762  
    

  

  


 


 


Income from continuing operations

   $ 594    $ 476    $ 439     $ 269     $ 490  

Discontinued operations

     2      26      (162 )     (33 )     (11 )
    

  

  


 


 


Net income

   $ 596    $ 502    $ 277     $ 236     $ 479  
    

  

  


 


 


Per Share Data:                                       

Diluted earnings per share from continuing operations

   $ 2.47    $ 1.94    $ 1.74     $ 1.05     $ 1.93  

Diluted earnings (loss) per share from discontinued operations

     .01      .11      (.64 )     (.13 )     (.04 )
    

  

  


 


 


Diluted earnings per share

   $ 2.48    $ 2.05    $ 1.10     $ .92     $ 1.89  
    

  

  


 


 


Cash dividends declared per share

   $ .330    $ .295    $ .275     $ .255     $ .235  
    

  

  


 


 


Balance Sheet Data (at end of year):                                       

Total assets

   $ 8,668    $ 8,177    $ 8,296     $ 9,107     $ 8,237  

Long-term debt 1

     836      1,391      1,553       2,708       1,908  

Shareholders’ equity

     4,081      3,838      3,573       3,478       3,267  
Other Data:                                       

Base management fees 1

     435      388      379       372       383  

Incentive management fees 1

     142      109      162       202       316  

Franchise fees 1

     296      245      232       220       208  

1 Balances reflect our Senior Living Services and Distribution Services businesses as discontinued operations.
2 All fiscal years included 52 weeks, except for 2002, which included 53 weeks.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

BUSINESS AND OVERVIEW

 

We are a worldwide operator and franchisor of 2,632 hotels and related facilities. Our operations are grouped into five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel. In our Lodging business, we operate, develop and franchise under 13 separate brand names in 66 countries and territories. We also operate and develop Marriott timeshare properties under four separate brand names.

 

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

 

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

 

Lodging supply growth in the United States was low during 2004, while demand growth was high. In the United States, demand was strong in the Eastern and Western regions, while the Midwestern and South Central regions experienced more moderate increases in demand. Demand associated with business travel improved steadily in 2004, and leisure demand remained high. The weak U.S. dollar in relation to other currencies, particularly the euro, resulted in increased travel into the U.S. as overseas trips for many international travelers were less expensive. Conversely, many U.S. vacationers who might have traveled abroad, traveled domestically instead, as the weak dollar made overseas trips more costly.

 

Outside of the U.S. we experienced stronger demand versus the prior year, particularly in Asia and the Middle East. While demand in Latin America and the Caribbean was also good, Europe remains a challenge, as some economies have been slow to rebound.

 

We focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further Best Rate Guarantee, strong Marriott Rewards loyalty program, and information-rich, easy to use web site encourage customers to make reservations through Marriott.com. We have complete control over our inventory and pricing and utilize online agents on an as needed basis. The shift of hotel bookings to our web site from other online channels results in higher revenue, margins and profitability.

 

By the end of 2004, we had high-speed internet access available in over 2,400 hotels, far outpacing our competition, and we had wireless internet access in lobbies, meeting rooms and public spaces in more than 1,900 hotels.

 

CONSOLIDATED RESULTS

 

The following discussion presents an analysis of results of our operations for fiscal years ended December 31, 2004, January 2, 2004 (which we refer to as “2003”), and January 3, 2003 (which we refer to as “2002”).

 

Continuing Operations

 

Revenues

 

2004 Compared to 2003

 

Revenues increased 12 percent to $10,099 million in 2004, primarily reflecting higher fees related to increased demand for hotel rooms and unit expansion, as well as strong sales in our Timeshare segment.

 

2003 Compared to 2002

 

Revenues increased 7 percent to $9,014 million in 2003, reflecting revenue from new lodging properties, partially offset by lower demand for hotel rooms and consequently lower fees to us.

 

Operating Income

 

2004 Compared to 2003

 

Operating income increased $100 million to $477 million in 2004. The increase is primarily due to higher fees, which are related both to stronger REVPAR, driven by increased occupancy and average daily rate, and to the

 

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growth in the number of rooms, and strong timeshare results, which are mainly attributable to strong demand and improved margins, partially offset by higher general and administrative expenses. General, administrative and other expenses increased $84 million in 2004 to $607 million, primarily reflecting higher administrative expenses in both our lodging ($55 million) and timeshare businesses ($24 million), primarily associated with increased overhead costs related to the Company’s unit growth and increased development costs primarily associated with our Timeshare segment, and a $10 million reduction in foreign exchange gains, offset by $6 million of lower litigation expenses.

 

2003 Compared to 2002

 

Operating income increased 17 percent to $377 million in 2003. The favorable comparisons to 2002 include the impact of the $50 million write down of goodwill recorded in 2002 associated with our ExecuStay business, the 2003 receipt of $36 million of insurance proceeds associated with lost management fees resulting from the destruction of the Marriott World Trade Center hotel and lower 2003 operating losses from our synthetic fuel operation. In 2003, the synthetic fuel business generated operating losses of $104 million, compared to $134 million in 2002. Operating income in 2003 was hurt by $53 million of lower incentive fees, which resulted from the weak operating environment in domestic lodging. General, administrative and other expenses increased $13 million in 2003 to $523 million, reflecting higher litigation expenses related to two continuing and previously disclosed lawsuits, partially offset by the impact of the additional week in 2002 (our 2002 fiscal year included 53 weeks compared to 52 weeks in 2003). The expenses also reflect foreign exchange gains of $7 million, compared to losses of $6 million in 2002.

 

Gains and Other Income

 

The following table shows our gains and other income for the fiscal years ended December 31, 2004, January 2, 2004, and January 3, 2003.

 

($ in millions)

 

   2004

   2003

   2002

Timeshare note sale gains

   $ 64    $ 64    $ 60

Synthetic fuel earn-out payments received, net

     28      —        —  

Gains on sales of real estate

     44      21      28

Gains on sales of joint venture investments

     19      21      44

Other

     9      —        —  
    

  

  

     $ 164    $ 106    $ 132
    

  

  

 

Interest Expense

 

2004 Compared to 2003

 

Interest expense decreased $11 million to $99 million, reflecting the repayment of $234 million of senior debt in the fourth quarter of 2003 and other subsequent debt reductions, partially offset by lower capitalized interest resulting from fewer projects under construction, primarily related to our Timeshare segment.

 

2003 Compared to 2002

 

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

 

Interest Income, Provision for Loan Losses, and Income Tax

 

2004 Compared to 2003

 

Interest income, before the provision for loan losses, increased $17 million (13 percent) to $146 million, reflecting higher loan balances, including the $200 million note collected in the third quarter of 2004 related to the acquisition by Cendant Corporation of our interest in the Two Flags joint venture and higher interest rates. We recognized $9 million of interest income associated with the $200 million note, which was issued early in the 2004 second quarter. Our provision for loan losses for 2004 was a benefit of $8 million and includes $3 million of reserves for loans deemed uncollectible at three hotels, offset by the reversal of $11 million of reserves no longer deemed necessary.

 

Income from continuing operations before income taxes generated a tax provision of $100 million in 2004, compared to a tax benefit of $43 million in 2003. The difference is primarily attributable to the impact of the synthetic fuel joint venture, which generated a tax benefit and tax credits of $165 million in 2004, compared to $245 million in 2003 and to higher pre-tax income. In the third quarter of 2003, we sold a 50 percent interest in our synthetic fuel joint ventures, and we currently consolidate the joint ventures.

 

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Table of Contents

2003 Compared to 2002

 

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

 

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

 

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

 

Minority Interest

 

Minority interest increased from an expense of $55 million in 2003 to a benefit of $40 million in 2004, primarily as a result of the change in the ownership structure of the synthetic fuel joint ventures following our sale of 50 percent of our interest in the joint ventures. Due to the purchaser’s put option, which expired on November 6, 2003, minority interest for 2003 reflected our partner’s share of the synthetic fuel operating losses and their share of the associated tax benefit, along with their share of the tax credits from the June 21, 2003, sale date through the put option’s expiration date, when we began accounting for the ventures under the equity method of accounting. For 2004, minority interest reflects our partner’s share of the synthetic fuel losses from March 26, 2004, (when we began consolidating the ventures due to the adoption of FIN 46(R)) through year-end. For additional information, see the discussion relating to our “Synthetic Fuel” segment on page 31.

 

Income from Continuing Operations

 

2004 Compared to 2003

 

Income from continuing operations increased 25 percent to $594 million, and diluted earnings per share from continuing operations increased 27 percent to $2.47. The favorable results were primarily driven by strong hotel demand, new unit growth, strong timeshare results, higher interest income reflecting higher balances and rates, lower interest expense due to debt reductions, lower loan loss provisions, stronger synthetic fuel results and increased gains of $58 million, partially offset by higher income taxes excluding the synthetic fuel impact, and higher general and administrative expenses.

 

2003 Compared to 2002

 

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

 

Marriott Lodging

 

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

 

Revenues

 

 

($ in millions)

 

   2004

   2003

   2002

Full-Service

   $ 6,611    $ 5,876    $ 5,508

Select-Service

     1,118      1,000      967

Extended-Stay

     547      557      600

Timeshare

     1,502      1,279      1,147
    

  

  

Total lodging

     9,778      8,712      8,222

Synthetic Fuel

     321      302      193
    

  

  

     $ 10,099    $ 9,014    $ 8,415
    

  

  

 

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Income from Continuing Operations

 

($ in millions)

 

   2004

    2003

    2002

 

Full-Service

   $ 426     $ 407     $ 397  

Select-Service

     140       99       130  

Extended-Stay

     66       47       (3 )

Timeshare

     203       149       183  
    


 


 


Total lodging financial results

     835       702       707  

Synthetic Fuel (after-tax)

     107       96       74  

Unallocated corporate expenses

     (138 )     (132 )     (126 )

Interest income, provision for loan losses and interest expense

     55       12       24  

Income taxes (excluding Synthetic Fuel)

     (265 )     (202 )     (240 )
    


 


 


     $ 594     $ 476     $ 439  
    


 


 


 

2004 Compared to 2003

 

Lodging, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, reported financial results of $835 million in 2004, compared to $702 million in 2003, and revenues of $9,778 million in 2004, a 12 percent increase from revenues of $8,712 million in 2003. The results reflect an 18 percent increase in base, franchise and incentive fees from $742 million in 2003 to $873 million in 2004, favorable timeshare results and increased gains and joint venture results of $36 million. The increase in base and franchise fees was driven by higher REVPAR for comparable rooms, primarily resulting from both domestic and international occupancy and average daily rate increases and new unit growth. Systemwide REVPAR for comparable North American properties increased 8.5 percent, and REVPAR for our comparable North American company-operated properties increased 8.6 percent. Systemwide REVPAR for comparable international properties, including The Ritz-Carlton, increased 14.2 percent, and REVPAR for comparable international company-operated properties, including The Ritz-Carlton, increased 16.6 percent. The increase in incentive management fees during the year primarily reflects the impact of increased international demand, particularly in Asia and the Middle East, and increased business at properties throughout North America. We have added 166 properties (27,038 rooms) and deflagged 42 properties (7,335 rooms) since year-end 2003. Most of the deflagged properties were Fairfield Inns. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand. Worldwide REVPAR for comparable company-operated properties increased 10.5 percent, while worldwide REVPAR for comparable systemwide properties increased 9.6 percent.

 

2003 Compared to 2002

 

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

 

Lodging Development

 

We opened 144 properties totaling 24,380 rooms, excluding Ramada International, across our brands in 2004, and 42 properties (7,335 rooms) were deflagged and exited the system. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand in 2004. Highlights of the year included:

 

    We converted 64 properties (10,565 rooms), or 39 percent of our total room additions for the year, from other brands.

 

    We opened over 30 percent of new rooms outside the United States.

 

    We added 109 properties (12,859 rooms) to our Select-Service and Extended-Stay brands.

 

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    We opened our first Bulgari Hotel & Resort in Milan, Italy, in May 2004. The second property is expected to open in Bali in 2005.

 

    We opened three new Marriott Vacation Club International properties in Aruba; Phoenix, Arizona; and Myrtle Beach, South Carolina.

 

We currently have more than 55,000 rooms in our development pipeline and expect to add 25,000 to 30,000 hotel rooms and timeshare units to our system in 2005. We expect to deflag approximately 4,000 rooms during 2005. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See “Forward-Looking Statements” above and “Liquidity and Capital Resources” below.

 

REVPAR

 

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

 

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

 

For North American properties (except for The Ritz-Carlton, which includes January through December), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended December 31, 2004, include the period from January 3, 2004, through December 31, 2004, while the statistics for the fiscal year ended January 2, 2004, include the period from January 4, 2003, through January 2, 2004.

 

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Table of Contents
     Comparable Company-Operated
North American Properties


    Comparable Systemwide
North American Properties


 
     2004

    Change vs. 2003

    2004

    Change vs. 2003

 

Marriott Hotels & Resorts (1)

                            

Occupancy

     72.0 %   2.8 %pts.     70.1 %   2.8 %pts.

Average daily rate

   $ 143.70     3.3 %   $ 135.15     3.3 %

REVPAR

   $ 103.46     7.4 %   $ 94.77     7.6 %

The Ritz-Carlton (2)

                            

Occupancy

     69.2 %   4.3 %pts.     69.2 %   4.3 %pts.

Average daily rate

   $ 257.16     5.9 %   $ 257.16     5.9 %

REVPAR

   $ 177.96     12.9 %   $ 177.96     12.9 %

Renaissance Hotels & Resorts

                            

Occupancy

     69.6 %   4.3 %pts.     69.1 %   4.2 %pts.

Average daily rate

   $ 135.54     1.7 %   $ 128.67     2.3 %

REVPAR

   $ 94.30     8.4 %   $ 88.92     8.9 %

Composite – Full-Service (3)

                            

Occupancy

     71.3 %   3.2 %pts.     69.9 %   3.1 %pts.

Average daily rate

   $ 153.66     3.6 %   $ 142.80     3.6 %

REVPAR

   $ 109.62     8.4 %   $ 99.82     8.4 %

Residence Inn

                            

Occupancy

     79.0 %   2.7 %pts.     78.6 %   2.9 %pts.

Average daily rate

   $ 99.49     3.8 %   $ 97.33     3.2 %

REVPAR

   $ 78.59     7.4 %   $ 76.52     7.1 %

Courtyard

                            

Occupancy

     70.3 %   3.2 %pts.     71.4 %   3.3 %pts.

Average daily rate

   $ 96.30     4.6 %   $ 97.18     4.9 %

REVPAR

   $ 67.66     9.6 %   $ 69.35     10.0 %

Fairfield Inn

                            

Occupancy

     nm     nm       66.6 %   1.9 %pts.

Average daily rate

     nm     nm     $ 67.97     3.1 %

REVPAR

     nm     nm     $ 45.29     6.2 %

TownePlace Suites

                            

Occupancy

     74.1 %   3.7 %pts.     74.9 %   4.3 %pts.

Average daily rate

   $ 65.77     4.0 %   $ 65.18     2.7 %

REVPAR

   $ 48.71     9.5 %   $ 48.81     9.0 %

SpringHill Suites

                            

Occupancy

     nm     nm       71.5 %   4.2 %pts.

Average daily rate

     nm     nm     $ 83.97     4.2 %

REVPAR

     nm     nm     $ 60.04     10.6 %

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

                            

Occupancy

     72.6 %   3.1 %pts.     72.2 %   3.0 %pts.

Average daily rate

   $ 94.52     4.4 %   $ 87.89     4.0 %

REVPAR

   $ 68.66     9.1 %   $ 63.42     8.5 %

Composite – All (5)

                            

Occupancy

     71.8 %   3.2 %pts.     71.2 %   3.1 %pts.

Average daily rate

   $ 132.36     3.8 %   $ 111.49     3.8 %

REVPAR

   $ 95.04     8.6 %   $ 79.35     8.5 %

(1) Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand.
(2) Statistics for The Ritz-Carlton are for January through December.
(3) Full-Service composite statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.

 

(4) Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.
(5) Composite – All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

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Systemwide international statistics by region are based on comparable worldwide units, excluding North America. The following table shows occupancy, average daily rate and REVPAR for international properties by region/brand.

 

     Comparable Company-Operated
International Properties (1), (2)


    Comparable Systemwide
International Properties (1), (2)


 
     Year Ended
December 31, 2004


    Change vs. 2003

    Year Ended
December 31, 2004


    Change vs. 2003

 

Caribbean and Latin America

                            

Occupancy

     71.2 %   4.3 %pts.     69.7 %   4.3 %pts.

Average daily rate

   $ 138.98     8.0 %   $ 131.61     7.7 %

REVPAR

   $ 98.91     14.9 %   $ 91.76     14.7 %

Continental Europe

                            

Occupancy

     70.8 %   2.8 %pts.     68.8 %   3.7 %pts.

Average daily rate

   $ 130.49     2.6 %   $ 130.74     2.2 %

REVPAR

   $ 92.38     6.8 %   $ 89.91     8.0 %

United Kingdom

                            

Occupancy

     76.9 %   2.0 %pts.     74.4 %   2.3 %pts.

Average daily rate

   $ 173.48     7.8 %   $ 142.47     3.1 %

REVPAR

   $ 133.37     10.7 %   $ 106.01     6.4 %

Middle East and Africa

                            

Occupancy

     73.2 %   8.1 %pts.     73.2 %   8.1 %pts.

Average daily rate

   $ 83.44     13.8 %   $ 83.44     13.8 %

REVPAR

   $ 61.10     28.1 %   $ 61.10     28.1 %

Asia Pacific (3)

                            

Occupancy

     75.5 %   9.8 %pts.     76.4 %   9.0 %pts.

Average daily rate

   $ 96.67     10.5 %   $ 99.61     8.2 %

REVPAR

   $ 72.98     27.0 %   $ 76.11     22.6 %

The Ritz-Carlton International

                            

Occupancy

     71.0 %   10.3 %pts.     71.0 %   10.3 %pts.

Average daily rate

   $ 205.06     3.8 %   $ 205.06     3.8 %

REVPAR

   $ 145.68     21.3 %   $ 145.68     21.3 %

Total Composite International (4)

                            

Occupancy

     73.3 %   6.6 %pts.     72.9 %   6.0 %pts.

Average daily rate

   $ 129.35     6.0 %   $ 128.44     4.8 %

REVPAR

   $ 94.75     16.6 %   $ 93.61     14.2 %

Total Worldwide (5)

                            

Occupancy

     72.2 %   4.0 %pts.     71.5 %   3.6 %pts.

Average daily rate

   $ 131.58     4.3 %   $ 114.61     4.1 %

REVPAR

   $ 94.97     10.5 %   $ 81.93     9.6 %

(1) International financial results are reported on a period-end basis, while international statistics are reported on a month-end basis.
(2) The comparison to 2003 is on a currency-neutral basis and includes results for January through December.
(3) Excludes Hawaii.
(4) Includes Hawaii.
(5) Includes international statistics for the twelve months ended December 31, 2004 and December 31, 2003 and North American statistics for the fifty-two weeks ended December 31, 2004 and January 2, 2004.

 

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

 

     Comparable Company-Operated
North American Properties


    Comparable Systemwide
North American Properties


 
     2003

    Change vs. 2002

    2003

    Change vs. 2002

 

Marriott Hotels & Resorts (1)

                            

Occupancy

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

Average daily rate

   $ 135.42     -2.1 %   $ 128.53     -1.8 %

REVPAR

   $ 93.81     -2.8 %   $ 86.87     -2.4 %

The Ritz-Carlton (2)

                            

Occupancy

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

Average daily rate

   $ 231.12     -0.8 %   $ 231.12     -0.8 %

REVPAR

   $ 151.85     1.0 %   $ 151.85     1.0 %

Renaissance Hotels & Resorts

                            

Occupancy

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

Average daily rate

   $ 132.12     -1.8 %   $ 123.97     -2.2 %

REVPAR

   $ 86.99     -0.4 %   $ 80.92     0.1 %

Composite – Full-Service (3)

                            

Occupancy

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

Average daily rate

   $ 144.17     -1.6 %   $ 134.92     -1.6 %

REVPAR

   $ 98.65     -1.8 %   $ 90.57     -1.6 %

Residence Inn

                            

Occupancy

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

Average daily rate

   $ 94.94     -1.9 %   $ 93.85     -1.4 %

REVPAR

   $ 73.09     -2.3 %   $ 71.47     -1.1 %

Courtyard

                            

Occupancy

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

Average daily rate

   $ 93.16     -1.2 %   $ 92.90     -0.6 %

REVPAR

   $ 63.01     -2.7 %   $ 63.65     -1.4 %

Fairfield Inn

                            

Occupancy

     nm     nm       64.1 %   -0.3 %pts.

Average daily rate

     nm     nm     $ 64.28     0.2 %

REVPAR

     nm     nm     $ 41.22     -0.4 %

TownePlace Suites

                            

Occupancy

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

Average daily rate

   $ 63.24     1.8 %   $ 63.34     -0.2 %

REVPAR

   $ 44.48     -1.0 %   $ 44.89     -0.1 %

SpringHill Suites

                            

Occupancy

     nm     nm       68.4 %   1.3 %pts.

Average daily rate

     nm     nm     $ 80.38     1.3 %

REVPAR

     nm     nm     $ 54.94     3.2 %

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

                            

Occupancy

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

Average daily rate

   $ 90.98     -1.1 %   $ 83.70     -0.6 %

REVPAR

   $ 63.64     -2.2 %   $ 57.95     -0.8 %

Composite – All (5)

                            

Occupancy

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

Average daily rate

   $ 124.45     -1.4 %   $ 105.86     -1.1 %

REVPAR

   $ 85.85     -1.9 %   $ 72.31     -1.3 %

(1) Marriott Hotels & Resorts includes our JW Marriott Hotels & Resorts brand.
(2) Statistics for The Ritz-Carlton are for January through December.
(3) Full-Service composite statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton brands.
(4) Select-Service and Extended-Stay composite statistics include properties for the Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.
(5) Composite – All statistics include properties for the Marriott Hotels & Resorts, Renaissance Hotels & Resorts, The Ritz-Carlton, Courtyard, Residence Inn, TownePlace Suites, Fairfield Inn and SpringHill Suites brands.

 

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

 

     Comparable Company-Operated
International Properties (1), (2)


    Comparable Systemwide
International Properties (1), (2)


 
     Year Ended
December 31, 2003


    Change vs. 2002

    Year Ended
December 31, 2003


    Change vs. 2002

 

Caribbean and Latin America

                            

Occupancy

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

Average daily rate

   $ 126.45     2.7 %   $ 121.64     2.2 %

REVPAR

   $ 85.32     9.5 %   $ 79.49     8.5 %

Continental Europe

                            

Occupancy

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

Average daily rate

   $ 117.79     -5.4 %   $ 119.40     -4.0 %

REVPAR

   $ 79.92     -4.9 %   $ 77.50     -3.5 %

United Kingdom

                            

Occupancy

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

Average daily rate

   $ 148.14     -1.5 %   $ 125.44     -3.2 %

REVPAR

   $ 113.48     -2.4 %   $ 90.71     -4.2 %

Middle East and Africa

                            

Occupancy

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

Average daily rate

   $ 71.39     14.9 %   $ 71.58     14.6 %

REVPAR

   $ 47.49     15.7 %   $ 46.00     15.8 %

Asia Pacific (3)

                            

Occupancy

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

Average daily rate

   $ 85.25     -1.4 %   $ 93.13     0.5 %

REVPAR

   $ 55.86     -10.5 %   $ 63.10     -6.8 %

The Ritz-Carlton International

                            

Occupancy

     60.8 %   -5.9 %pts.     60.8 %   -5.9 %pts.

Average daily rate

   $ 188.91     -0.2 %   $ 188.91     -0.2 %

REVPAR

   $ 114.88     -9.0 %   $ 114.88     -9.0 %

Total Composite International (4)

                            

Occupancy

     66.9 %   -1.8 %pts.     67.0 %   -1.4 %pts.

Average daily rate

   $ 117.27     -0.4 %   $ 117.54     -0.3 %

REVPAR

   $ 78.46     -3.0 %   $ 78.73     -2.4 %

Total Worldwide (5)

                            

Occupancy

     68.4 %   -0.7 %pts.     68.1 %   -0.4 %pts.

Average daily rate

   $ 122.62     -1.1 %   $ 108.03     -1.0 %

REVPAR

   $ 83.93     -2.2 %   $ 73.52     -1.5 %

(1) International financial results are reported on a period-end basis, while international statistics are reported on a month-end basis.
(2) The comparison to 2002 is on a currency-neutral basis and includes results for January through December.
(3) Excludes Hawaii.
(4) Includes Hawaii.
(5) Includes international statistics for the twelve months ended December 31, 2003 and December 31, 2002 and North American statistics for the fifty-two and fifty-three weeks ended January 2, 2004 and January 3, 2003, respectively.

 

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Table of Contents

Full-Service Lodging

 

($ in millions)

 

                  Annual Change

 
   2004

   2003

   2002

   2004/2003

    2003/2002

 

Revenues

   $ 6,611    $ 5,876    $ 5,508    13 %   7 %
    

  

  

            

Segment results

   $ 426    $ 407    $ 397    5 %   3 %
    

  

  

            

 

2004 Compared to 2003

 

Full-Service Lodging includes our Marriott Hotels & Resorts, The Ritz-Carlton, Renaissance Hotels & Resorts, Ramada International and Bulgari Hotels & Resorts brands. The 2004 segment results reflect an $85 million increase in base management, incentive management and franchise fees, partially offset by $46 million of increased administrative costs, including costs related to unit growth and development, and the receipt in 2003 of $36 million of insurance proceeds. The increase in fees is largely due to stronger REVPAR, driven by occupancy and rate increases, and the growth in the number of rooms. Since year-end 2003, across our Full-Service Lodging segment, we have added 33 hotels (10,212 rooms), and deflagged six hotels (2,860 rooms) excluding Ramada International. As a result of the sale of our Ramada International Hotels & Resorts franchised brand, 210 properties (28,081 rooms) exited our system in 2004. The ongoing impact of this sale is not expected to be material to the Company.

 

Gains were up $7 million, primarily due to the exercise by Cendant of its option to redeem our interest in the Two Flags joint venture, which generated a gain of $13 million and a note receivable, which was repaid, generating a gain of $5 million. Joint venture results were up $2 million compared to the prior year. For 2003, our equity earnings included $24 million, attributable to our interest in the Two Flags joint venture, while our equity in earnings for 2004 reflects only a $6 million impact due to the redemption of our interest. The improved business environment contributed to the improvement in joint venture results for 2004, offsetting the decline attributable to the Two Flags joint venture.

 

REVPAR for Full-Service Lodging comparable company-operated North American hotels increased 8.4 percent to $109.62. Occupancy for these hotels increased to 71.3 percent, while average daily rates increased 3.6 percent to $153.66.

 

Demand associated with our international operations was strong across most regions, generating a 16.6 percent REVPAR increase for comparable company-operated hotels including The Ritz-Carlton. Occupancy increased 6.6 percentage points, while average daily rates increased to $129.35. Financial results increased 37 percent to $140 million, due to stronger demand, particularly in China, Hong Kong, Brazil and Egypt. The European markets generally remain challenging as the economies have been slow to rebound.

 

2003 Compared to 2002

 

The 3 percent increase in the Full-Service segment results includes the $36 million insurance payment received for lost management fees in connection with the loss of the New York Marriott World Trade Center hotel in the September 11, 2001, terrorist attacks. The 2003 results also reflect an $18 million increase in base management and franchise fees, largely due to the growth in the number of rooms. Across our Full-Service Lodging segment, we added 88 hotels (18,442 rooms) and deflagged 15 hotels (3,152 rooms). We typically earn incentive fees only after a managed hotel achieves a minimum level of owner profitability. As a result, lower revenue and lower property-level margins have reduced the number of hotels from which we earn incentive management fees. As a result, full-service incentive fees declined $41 million in 2003.

 

REVPAR for Full-Service Lodging North American systemwide hotels declined 1.6 percent to $90.57. Occupancy for these hotels was flat at 67.1 percent, while average daily rates declined 1.6 percent to $134.92.

 

Financial results for our international operations increased 9 percent to $102 million, reflecting $21 million of gains associated with the sale of our interests in three joint ventures and favorable foreign exchange rates, partially offset by an $8 million charge for guarantee fundings related to a hotel in Istanbul, a $7 million charge to write down our investment in a joint venture that sold a hotel at a loss in January 2004, and the impact of the war and Severe Acute Respiratory Syndrome (SARS) on international travel earlier in the year. REVPAR for our international systemwide hotels declined 2.4 percent. Occupancy declined 1.4 percentage points, while average daily rates remained relatively flat at $117.54.

 

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Table of Contents

Select-Service Lodging

 

($ in millions)

 

                  Annual Change

 
   2004

   2003

   2002

   2004/2003

    2003/2002

 

Revenues

   $ 1,118    $ 1,000    $ 967    12 %   3 %
    

  

  

            

Segment results

   $ 140    $ 99    $ 130    41 %   -24 %
    

  

  

            

 

2004 Compared to 2003

 

Select-Service Lodging includes our Courtyard, Fairfield Inn and SpringHill Suites brands. The increase in revenues over the prior year reflects stronger REVPAR, driven by occupancy and rate increases, and the growth in the number of rooms across our select-service brands. Base management, incentive management and franchise fees increased $31 million, and gains were $19 million higher than the prior year, reflecting land sales during the year as well as recognition of deferred gains associated with properties we previously owned. Joint venture results increased by $5 million as a result of the strong business environment. These increases were partially offset by an increase in administrative costs of $13 million. Most of the increase in administrative costs is associated with a transaction related to our Courtyard joint venture (discussed more fully below in “Liquidity and Capital Resources” under the heading “Courtyard Joint Venture”). We expect to enter into a new long-term management agreement with the joint venture in early 2005. As the termination of the existing management agreement is probable, in 2004 we wrote off our deferred contract acquisition costs related to the existing contract, resulting in a charge of $13 million. Across our Select-Service Lodging segment, we have added 89 hotels (10,556 rooms) and deflagged 35 hotels (4,395 rooms) since year-end 2003.

 

2003 Compared to 2002

 

The $31 million decrease in the Select-Service Lodging segment results reflects the impact of a $9 million reduction in base management, incentive management and franchise fees. The results also include $14 million of higher equity losses, primarily from our Courtyard joint venture, formed in 2000, which owns 120 Courtyard hotels.

 

In 2003, across our Select-Service Lodging segment, we added 66 hotels (8,054 rooms) and deflagged four hotels (731 rooms). Over 90 percent of the gross room additions were franchised.

 

Extended-Stay Lodging

 

($ in millions)

 

                   Annual Change

 
   2004

   2003

   2002

    2004/2003

    2003/2002

 

Revenues

   $ 547    $ 557    $ 600     -2 %   -7 %
    

  

  


           

Segment results

   $ 66    $ 47    $ (3 )   40 %   nm  
    

  

  


           

 

2004 Compared to 2003

 

Extended-Stay Lodging includes our Residence Inn, TownePlace Suites, Marriott Executive Apartments and Marriott ExecuStay brands. The decline in revenue is primarily attributable to the shift in the ExecuStay business from management to franchising. We entered into more than 20 new franchise markets in 2004, and only five managed markets remain at the end of 2004. Our base management fees increased $4 million, and our incentive management fees were essentially flat with last year, while our franchise fees, principally associated with our Residence Inn brand, increased $9 million. The increase in franchise fees is largely due to the growth in the number of rooms and an increase in REVPAR. Since year-end 2003, we have added 20 hotels (2,303 rooms) and deflagged one hotel (80 rooms) across our Extended-Stay segment. In addition, gains of $10 million in 2004 were favorable to the prior year by $4 million. ExecuStay experienced improved results compared to the prior year, resulting from increased occupancy, primarily in the New York market, coupled with lower operating costs associated with the shift in business towards franchising. The $2 million increase in general and administrative costs associated with supporting the segment’s hotel brands was more than offset by the $6 million decline in ExecuStay’s general and administrative costs associated with the shift toward franchising.

 

REVPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels increased 9.1 percent to $68.66. Occupancy for these hotels increased to 72.6 percent from 70.0 percent in 2003, while average daily rates increased 4.4 percent to $94.52.

 

2003 Compared to 2002

 

        In 2002, we recorded a $50 million charge in our Extended-Stay Lodging segment to write down the acquisition goodwill for ExecuStay. Our base and incentive management fees decreased $7 million and our franchise fees increased $6 million. In 2003, we added 31 hotels (3,837 rooms) across our Extended-Stay Lodging segment. Over 80 percent of the gross room additions were franchised. We deflagged one property (104 rooms), and we decreased our ExecuStay brand by 1,300 units.

 

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Table of Contents

REVPAR for Select-Service and Extended-Stay Lodging comparable company-operated North American hotels decreased 2.2 percent to $63.64. Occupancy for these hotels decreased to 70.0 percent, while average daily rates decreased 1.1 percent to $90.98.

 

Timeshare

 

($ in millions)

 

                  Annual Change

 
   2004

   2003

   2002

   2004/2003

    2003/2002

 

Revenues

   $ 1,502    $ 1,279    $ 1,147    17 %   12 %
    

  

  

            

Segment results

   $ 203    $ 149    $ 183    36 %   -19 %
    

  

  

            

 

2004 Compared to 2003

 

Timeshare includes our Marriott Vacation Club International, The Ritz-Carlton Club, Marriott Grand Residence Club and Horizons by Marriott Vacation Club International brands. Timeshare revenues of $1,502 million and $1,279 million, in 2004 and 2003, respectively, include interval sales, base management fees and cost reimbursements. Including our three joint ventures, contract sales, which represent sales of timeshare intervals before adjustment for percentage of completion accounting, increased 31 percent, primarily due to strong demand in South Carolina, Florida, Hawaii, California, St. Thomas and Aruba. The favorable segment results reflect a 9 percent increase in timeshare interval sales and services, higher margins, primarily resulting from lower marketing and selling costs, and the mix of units sold, partially offset by $24 million of higher administrative expenses. Our note sales gain of $64 million was flat compared to the prior year. In addition, we adjusted the discount rate used in determining the fair value of our residual interests due to current trends in interest rates and recorded a $7 million charge in 2004. Reported revenue growth trailed contract sales growth because of a higher proportion of sales in joint venture projects and projects with lower average construction completion.

 

2003 Compared to 2002

 

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

 

Synthetic Fuel

 

For 2004, the synthetic fuel operation generated revenue of $321 million and income from continuing operations of $107 million, comprised of: operating losses of $98 million; and equity losses of $28 million (which included net earn-out payments made of $6 million); entirely offset by net earn-out payments received of $28 million; a $21 million tax benefit; tax credits which amounted to $144 million; and a minority interest benefit of $40 million reflecting our partner’s share of the operating losses.

 

For 2003, the synthetic fuel operation generated revenue of $302 million and income from continuing operations of $96 million, comprised of: operating losses of $104 million (which included net earn-out payments made of $14 million); minority interest expense of $55 million, reflecting our partner’s share of the tax credits, tax benefits, and operating losses; entirely offset by equity income of $10 million; a $34 million tax benefit; and tax credits which amounted to $211 million.

 

The $11 million increase in income from continuing operations attributable to the synthetic fuel operation to $107 million from $96 million is primarily due to slightly higher production in 2004.

 

In July 2004, Internal Revenue Service (“IRS”) field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp, the previous owner of the synthetic fuel facilities, that included a challenge to the placed-in-service dates of three of the four synthetic fuel facilities owned by one of our synthetic fuel joint ventures. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed-in-service before July 1, 1998.

 

We strongly believe that all the facilities meet the placed-in-service requirement. Although we are engaged in discussions with the IRS and are confident this issue will be resolved in our favor and not result in a material charge to us, we cannot assure you as to the ultimate outcome of this matter. If ultimately resolved against us we could be prevented from realizing projected future tax credits and cause us to reverse previously utilized tax credits, requiring payment of substantial additional taxes. Since acquiring the plants, we have recognized approximately $435 million of tax credits from all four plants through December 31, 2004. The tax credits recognized through December 31, 2004, associated with the three facilities in question totaled approximately $330 million.

 

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Table of Contents

On October 6, 2004, we entered into amendment agreements with our synthetic fuel partner that result in a shift in the allocation of tax credits between us. On the synthetic fuel facility that is not being reviewed by the IRS, our partner increased its allocation of tax credits from approximately 50 percent to 90 percent through March 31, 2005, and pays a higher price per tax credit to us for that additional share of tax credits. With respect to the three synthetic fuel facilities under IRS review, our partner reduced its allocation of tax credits from approximately 50 percent to an average of roughly 5 percent through March 31, 2005. If the IRS’ placed-in-service challenge regarding the three facilities is not successfully resolved by March 31, 2005, our partner will have the right to return its ownership interest in those three facilities to us at that time. We will have the flexibility to continue to operate at current levels, reduce production and/or sell an interest to another party. If there is a successful resolution by March 31, 2005, our partner’s share of the tax credits from all four facilities will return to approximately 50 percent. In any event, on March 31, 2005, our share of the tax credits from the one facility not under review will return to approximately 50 percent.

 

Impact of Future Adoption of Accounting Standards

 

Statement of Position 04-2, “Accounting for Real Estate Time-sharing Transactions”

 

In December 2004, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 04-2, “Accounting for Real Estate Time-sharing Transactions,” and the Financial Accounting Standards Board (“FASB”) amended Financial Accounting Standards (“FAS”) No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. The SOP will be effective for fiscal years beginning after June 15, 2005.

 

Under the SOP, the majority of the costs incurred to sell timeshares will be charged to expense when incurred. In regards to notes receivable issued in conjunction with a sale, an estimate of uncollectibility that is expected to occur must be recorded as a reduction of revenue at the time that profit is recognized on a timeshare sale. Rental and other operations during holding periods must be accounted for as incidental operations, which require that any excess costs be recorded as a reduction of inventory costs.

 

We estimate that the initial adoption of the SOP, which will be reported as a cumulative effect of a change in accounting principle in our Fiscal Year 2006 financial statements, will result in a non-cash one-time pre-tax charge of approximately $150 million, consisting primarily of the write-off of deferred selling costs and establishing the required reserve on notes. We estimate that the ongoing impact of adoption will not be significant.

 

FAS No. 123 (revised 2004), “Share-Based Payment”

 

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”), which is a revision of FAS No. 123, “Accounting for Stock-Based Compensation.” FAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” We will adopt FAS No. 123R at the beginning of our 2005 third quarter.

 

FAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recorded as an expense based on their fair values. The grant-date fair value of employee share options and similar instruments will be estimated using an option-pricing model adjusted for any unique characteristics of a particular instrument. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

 

We estimate that adoption of FAS No. 123R, using the modified prospective method, will result in incremental pre-tax expense in fiscal year 2005 of approximately $20 million, based on our current share-based payment compensation plans and a mid-year adoption.

 

DISCONTINUED OPERATIONS

 

Senior Living Services

 

On December 30, 2002, we entered into a definitive agreement to sell our senior living management business to Sunrise and to sell nine senior living communities to CNL. We recorded after-tax charges of $131 million in 2002 associated with our agreement to sell our senior living management business. We completed the sales to Sunrise and CNL and a related sale of a parcel of land to Sunrise in March 2003 for $266 million. We recorded after-tax gains of $19 million in 2003.

 

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Table of Contents

Distribution Services

 

In the third quarter of 2002, we completed a previously announced strategic review of our Distribution Services business and decided to exit that business. We completed that exit during the fourth quarter of 2002 through a combination of transferring certain facilities, closing other facilities and other suitable arrangements. We recorded after-tax charges of $40 million in 2002 in connection with the decision to exit this business.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Requirements and Our Credit Facilities

 

We are party to two multicurrency revolving credit agreements that provide for borrowings of up to $2 billion, expiring in 2006 ($1.5 billion expiring in July and $500 million expiring in August), which support our commercial paper program and letters of credit. At December 31, 2004, we had no loans outstanding under these facilities. Fluctuations in the availability of the commercial paper market do not affect our liquidity because of the flexibility provided by our credit facilities. Borrowings under these facilities bear interest at LIBOR plus a spread based on our public debt rating. At December 31, 2004, our cash balances combined with our available borrowing capacity under the credit facilities amounted to approximately $2.7 billion. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service and fulfill other cash requirements, including the repayment of our Series D senior notes totaling $275 million and our Series B senior notes totaling $200 million, both of which mature in 2005.

 

We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We expect that part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, or if disruptions in the commercial paper market take place as they did in the immediate aftermath of September 11, 2001, we may be unable to place some or all of our commercial paper on a temporary or extended basis, and may have to rely more on borrowings under the credit facilities, which may carry a higher cost than commercial paper.

 

Cash from Operations

 

Cash from operations, depreciation expense and amortization expense for the last three fiscal years are as follows:

 

($ in millions)

 

   2004

   2003

   2002

Cash from operations

   $ 891    $ 403    $ 516

Depreciation expense

     133      132      145

Amortization expense

     33      28      42

 

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

 

($ in millions)

 

   2004

    2003

    2002

 

Timeshare development, less the cost of sales

   $ 93     $ (94 )   $ (102 )

New timeshare mortgages, net of collections

     (459 )     (247 )     (218 )

Loan repurchases

     (18 )     (19 )     (16 )

Note sale gains

     (64 )     (64 )     (60 )

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

     129       (4 )     (13 )

Note sale proceeds

     312       231       341  

Collection on retained interests in notes sold and servicing fees

     94       50       31  

Other cash inflows (outflows)

     26       36       (26 )
    


 


 


Net cash inflows (outflows) from timeshare activity

   $ 113     $ (111 )   $ (63 )
    


 


 


 

Our ability to sell timeshare notes depends on the continued ability of the capital markets to provide financing to the special purpose entities that buy the notes. We might have increased difficulty or be unable to consummate such sales if the underlying quality of the notes receivable we originate were to deteriorate, although we do not expect such a deterioration.

 

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Table of Contents

Our ratio of current assets to current liabilities was 0.8 to 1 at both December 31, 2004, and January 2, 2004. Each of our businesses minimizes working capital through cash management, strict credit-granting policies, aggressive collection efforts and high inventory turnover. We also have significant borrowing capacity under our revolving credit facilities should we need additional working capital.

 

Investing Activities Cash Flows

 

Capital Expenditures and Other Investments. Capital expenditures of $181 million in 2004, $210 million in 2003 and $292 million in 2002 primarily included expenditures related to the development and construction of new hotels and acquisitions of hotel properties, as well as improvement to existing properties and systems initiatives. Over time, we have sold lodging properties under development, subject to long-term management agreements. The ability of third-party purchasers to raise the necessary debt and equity capital depends in part on the perceived risks inherent in the lodging industry and other constraints inherent in the capital markets as a whole. Although we expect to continue to consummate such real estate sales, if we were unable to do so, our liquidity could decrease and we could have increased exposure to the operating risks of owning real estate. We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We also expect to continue to make other investments in connection with adding units to our lodging business. These investments include loans and minority equity investments.

 

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

 

Dispositions. Property and asset sales generated cash proceeds of $402 million in 2004, $494 million in 2003 and $729 million in 2002. In 2004, we closed on the sales of two hotels, and we continue to operate both of the hotels under long-term management agreements. We also disposed of 30 land parcels, our Ramada International Hotels & Resorts franchised brand, our interest in the Two Flags joint venture, two other minority interests in joint ventures and other miscellaneous assets.

 

Loan Activity. We have made loans to owners of hotels that we operate or franchise, typically to facilitate the development of a new hotel. Over time we expect these owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. We have also made loans to the synthetic fuel joint venture partner and to the purchaser of our senior living business. Loan collections, net of advances during 2004, amounted to $147 million. Loans outstanding, excluding timeshare notes, totaled $942 million at December 31, 2004, $996 million at January 2, 2004, and $944 million at January 3, 2003. Unfunded commitments aggregating $42 million were outstanding at December 31, 2004, of which we expect to fund $12 million in 2005 and $26 million in total.

 

Other Investing Activities

 

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

 

($ in millions)

 

   2004

    2003

    2002

 

Equity investments

   $ (75 )   $ (22 )   $ (26 )

Investment in corporate-owned life insurance

     (8 )     (12 )     (11 )

Other net cash inflows (outflows)

     2       22       (33 )

Cash proceeds on sale of investment in Interval International

     —         —         63  
    


 


 


Other investing outflows

   $ (81 )   $ (12 )   $ (7 )
    


 


 


 

Cash from Financing Activities

 

Debt

 

Debt decreased $130 million in 2004, from $1,455 million to $1,325 million, due to the repurchase of all of our remaining zero-coupon convertible senior Liquid Yield Option Notes due 2021, also known as LYONs (“the LYONs”) totaling $62 million, the maturity of $46 million of senior notes and other debt reductions of $22 million. Debt decreased by $319 million in 2003, due to the $200 million repayment, at maturity, of Series A debt in November 2003 and the net pay down of $161 million of commercial paper and other debt.

 

Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt and reducing our working capital. At year-end 2004, our long-term debt had an average interest rate of 7.5 percent and an average maturity of approximately 2.5 years. The ratio of fixed-rate long-term debt to total long-term debt was slightly lower than one as of December 31, 2004. At December 31, 2004, we had long-term public debt ratings of BBB+ from Standard and Poor’s and Baa2 from Moody’s.

 

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

 

Share Repurchases. We purchased 14.0 million of our shares in 2004 at an average price of $46.65 per share, 10.5 million of our shares in 2003 at an average price of $36.07 per share, and 7.8 million of our shares in 2002 at an average price of $32.52 per share. As of December 31, 2004, 18.6 million shares remained available for repurchase under authorizations from our Board of Directors.

 

Dividends. In May 2004, our Board of Directors increased the quarterly cash dividend by 13 percent to $0.085 per share.

 

Pending Transaction

 

Courtyard Joint Venture

 

In December 2004, we and Host Marriott announced the signing of a purchase and sale agreement by which an institutional investor would obtain a 75 percent interest in the Courtyard Joint Venture. We expect the transaction, which is subject to certain closing conditions, to close in early 2005, although we cannot assure you that the sale will be completed. Currently, we and Host Marriott own equal shares in the 120 property joint venture, and with the addition of the new equity, our percentage interest in the joint venture will decline from 50 percent to 21 percent. As a result of the transaction, the pace of the Courtyard hotel reinventions, a program that renovates and upgrades Courtyard hotels, will be accelerated.

 

Upon closing of the transaction:

 

    We expect that our existing mezzanine loan to the joint venture (including accrued interest) totaling approximately $249 million at December 31, 2004, will be repaid;

 

    We expect to make available to the joint venture a seven-year subordinated loan of approximately $144 million to be funded as reinventions are completed in 2005 and 2006;

 

    We expect to enter into a new long-term management agreement with the joint venture. As the termination of the existing management agreement is probable, we have written off our deferred contract costs related to the existing contract in the 2004 fourth quarter, resulting in a charge of $13 million; and

 

    Upon closing of the transaction, we expect to record a gain associated with the repayment of the mezzanine loan, which will be substantially offset by our portion of the joint venture’s costs of prepaying an existing senior loan.

 

On an ongoing basis, we expect our interest income will decline as a result of the repayment of the mezzanine loan, and we expect lower book losses from the joint venture due to the reduction of our equity interest and improved performance at the hotels. On a long-term basis, we expect that the Courtyard reinventions will promote continued growth and maintain and enhance customer preference.

 

Contractual Obligations and Off Balance Sheet Arrangements

 

The following table summarizes our contractual obligations as of December 31, 2004:

 

          Payments Due by Period

Contractual Obligations

($ in millions)


   Total

   Less Than
1 Year


   1-3 Years

   3-5 Years

   After 5 Years

Debt 1

   $ 1,723    $ 575    $ 147    $ 702    $ 299

Capital lease obligations 1

     16      1      2      2      11

Operating leases

                                  

Recourse

     1,035      93      195      205      542

Non-recourse

     544      28      38      31      447

Other long-term liabilities

     56      —        6      6      44
    

  

  

  

  

Total contractual cash obligations

   $ 3,374    $ 697    $ 388    $ 946    $ 1,343
    

  

  

  

  


1 Includes principal as well as interest payments.

 

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The following table summarizes our commitments as of December 31, 2004:

 

          Amount of Commitment Expiration Per Period

Other Commercial Commitments

($ in millions)


   Total Amounts
Committed


   Less Than
1 Year


   1-3 Years

   3-5 Years

   After 5 Years

Total guarantees where Marriott International is the primary obligor

   $ 601    $ 64    $ 203    $ 121    $ 213

Total guarantees where Marriott International is secondarily liable

     1,909      108      209      211      1,381
    

  

  

  

  

Total other commercial commitments

   $ 2,510    $ 172    $ 412    $ 332    $ 1,594
    

  

  

  

  

 

Our guarantees listed above include $91 million for guarantees that will not be in effect until the underlying hotels are open and we begin to manage the properties. Our guarantee fundings to lenders and hotel owners are generally recoverable as loans and are generally repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels.

 

The guarantees above include $349 million related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. Sunrise is the primary obligor of the leases and a portion of the lifecare bonds, and CNL is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business at the end of the first quarter of 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. We do not expect to fund under these guarantees.

 

The guarantees above also include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $63 million and total remaining rent payments through the initial term plus available extensions of approximately $1.56 billion. We are also secondarily obligated for real estate taxes and other charges associated with the leases. Third parties have severally indemnified us for all payments we may be required to make in connection with these obligations. Since we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.

 

In addition to the guarantees noted above, as of December 31, 2004, our total unfunded loan commitments amounted to $42 million at December 31, 2004. We expect to fund $12 million of those commitments within one year and $14 million in the following year. We do not expect to fund the remaining $16 million of commitments, which expire as follows: $14 million within one year and $2 million after five years.

 

At December 31, 2004, we also have commitments to invest $37 million of equity for a minority interest in two partnerships, which plan to purchase both full-service and select-service hotels in the United States.

 

At December 31, 2004, we also had $96 million of letters of credit outstanding on our behalf, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of December 31, 2004, totaled $486 million, the majority of which were requested by federal, state or local governments related to our timeshare and lodging operations and self-insurance programs.

 

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

 

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RELATED PARTY TRANSACTIONS

 

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

 

 

Income Statement Data                   

              ($ in millions)

   2004

    2003

    2002

 

Base management fees

   $ 72     $ 56     $ 48  

Incentive management fees

     8       4       4  

Cost reimbursements

     802       699       557  

Owned, leased, corporate housing and other revenue

     29       28       26  
    


 


 


Total revenue

   $ 911     $ 787     $ 635  
    


 


 


General, administrative and other

   $ (33 )   $ (11 )   $ (11 )

Reimbursed costs

     (802 )     (699 )     (557 )

Gains and other income

     19       21       44  

Interest income

     74       77       66  

Reversal of (provision for) loan losses

     3       (2 )     (5 )

Equity in earnings (losses) – Synthetic fuel

     (28 )     (10 )     —    

Equity in earnings (losses) – Other

     (14 )     (17 )     (6 )
Balance Sheet Data                         

              ($ in millions)

   2004

    2003

       

Current assets - accounts and notes receivable

   $ 72     $ 118          

Contract acquisition costs

     24       42          

Equity method investments

     249       468          

Loans to equity method investees

     526       558          

Other long-term receivables

     3       —            

Other long-term assets

     38       30          

Current liabilities:

                        

Accounts payable

     (3 )     (2 )        

Other payables and accruals

     (4 )     (1 )        

Other long-term liabilities

     (11 )     (10 )        

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if:

 

    it requires assumptions to be made that were uncertain at the time the estimate was made; and

 

    changes in the estimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition.

 

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.

 

Marriott Rewards

 

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

 

We defer revenue received from managed, franchised and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas which project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgmental factors determine the required liability for outstanding points.

 

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Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, communication with, and performing member services for the Marriott Rewards members. Due to the requirement that hotels reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from hotels in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded.

 

Upon the redemption of points, we recognize as revenue the amounts previously deferred, and recognize the corresponding expense relating to the costs of the awards redeemed.

 

Valuation of Goodwill

 

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

 

Loan Loss Reserves

 

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows, which assumes certain growth projections which may or may not occur, or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At December 31, 2004, our recorded investment in impaired loans was $181 million. We have a $92 million allowance for credit losses, leaving $89 million of our investment in impaired loans for which there is no related allowance for credit losses.

 

Legal Contingencies

 

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

 

Income Taxes

 

We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

 

Changes in existing laws and rates, and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

 

OTHER MATTERS

 

Audit Services

 

Our independent registered public accounting firm, Ernst & Young LLP (“E&Y”), recently notified the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board and the Audit Committee of our Board of Directors that certain non-audit services E&Y performed in China and Japan for a large number of public companies, including Marriott, have raised questions regarding E&Y’s independence in its performance of audit services.

 

With respect to Marriott, from 2001 through 2004, E&Y performed tax calculation and preparation services for Marriott employees located in China and Japan, and affiliates of E&Y made payment of the relevant taxes on behalf of Marriott. The payment of those taxes involved handling of Company-related funds, which is not permitted under SEC auditor independence rules. These actions by affiliates of E&Y have been discontinued, and both the amount of the taxes and the fees paid to E&Y in connection with these services are de minimis.

 

The Audit Committee and E&Y discussed E&Y’s independence with respect to the Company in light of the foregoing facts. E&Y informed the Audit Committee that it does not believe that the holding and paying of those funds impaired E&Y’s independence with respect to the Company. The Company, based on its own review, also is

 

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not aware of any additional non-audit services that may compromise E&Y’s independence in performing audit services for the Company.

 

Inflation

 

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

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

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

 

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

 

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

 

At December 31, 2004, we were party to the following derivative instruments:

 

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

 

  Six outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our timeshare note sales. We are required by purchasers and/or rating agencies to utilize interest rate swaps to protect the excess spread within our sold note pools. The aggregate notional amount of the swaps is $535 million, and they expire through 2022.

 

  Forward foreign exchange and option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during fiscal year 2005. The aggregate dollar equivalent of the notional amounts of the contracts is approximately $36 million, and they expire throughout 2005.

 

  Forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets denominated in pounds sterling. The aggregate dollar equivalent of the notional amounts of the forward contracts is $36 million at December 31, 2004.

 

 

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The following table sets forth the scheduled maturities and the total fair value of our derivatives and other financial instruments as of December 31, 2004:

 

($ in millions)

 

   Maturities by Period

 
   2005

    2006

    2007

    2008

    2009

    Thereafter

    Total
Carrying
Amount


    Total
Fair
Value


 

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

                                                                

Timeshare notes receivable

   $ 26     $ 31     $ 28     $ 26     $ 26     $ 178     $ 315     $ 315  

Average interest rate

                                                     12.79 %        

Fixed-rate notes receivable

   $ 12     $ 230     $ 20     $ 26     $ 1     $ 300     $ 589     $ 641  

Average interest rate

                                                     12.21 %        

Floating-rate notes receivable

   $ 30     $ 53     $ 86     $ 24     $ 4     $ 156     $ 353     $ 353  

Average interest rate

                                                     7.15 %        

Residual interests

   $ 63     $ 47     $ 28     $ 20     $ 13     $ 19     $ 190     $ 190  

Average interest rate

                                                     7.77 %        

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

                                                                

Fixed-rate debt

   $ (488 )   $ (14 )   $ (12 )   $ (306 )   $ (311 )   $ (192 )   $ (1,323 )   $ (1,348 )

Average interest rate

                                                     7.44 %        

Floating-rate debt

   $ (1 )   $ (1 )   $  —       $ —       $ —       $ —       $ (2 )   $ (2 )

Average interest rate

                                                     2.08 %        

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

                                                                

Interest Rate Swaps:

                                                                

Fixed to variable

   $ —       $  —       $ —       $ —       $ —       $ 468     $ (2 )   $ (2 )

Average pay rate

                                                     4.36 %        

Average receive rate

                                                     2.64 %        

Variable to fixed

   $ —       $ —       $ —       $ —       $ —       $ 159     $ 2     $ 2  

Average pay rate

                                                     2.96 %        

Average receive rate

                                                     5.23 %        

Forward Foreign Exchange Contracts:

                                                                

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

   $ 21     $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Average exchange rate

                                                     1.30          

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

   $ 51     $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Average exchange rate

                                                     1.88          

 

 

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Item 8. Financial Statements and Supplementary Data.

 

The following financial information is included on the pages indicated:

 

</
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Management’s Report on Internal Control Over Financial Reporting

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