MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Facilities Exit Costs Development Cancellations and Elimination of Product Line CONSOLIDATED RESULTS Restructuring Costs and Other Charges Other Charges Reserves for Guarantees and Loan Losses Restructuring Costs Severance Accounts Receivable – Bad Debts Asset Impairments The following discussion presents an analysis of results of our operations for fiscal years ended December 28, 2001, December 29, 2000, and December 31, 1999. Revenue per available room (REVPAR) is calculated by dividing room sales for comparable properties by room nights available to guests for the period. We consider REVPAR to be a meaningful indicator of our perform- ance because it measures the period over period change in room revenues for comparable properties. REVPAR may not be com- parable to similarly titled measures such as revenues. Comparable REVPAR, room rate and occupancy statistics used throughout this report are based on U.S. properties operated by us except for Fairfield Inn, which data also include franchised units. System- wide sales and statistics include data from our franchised proper- ties, in addition to our owned, leased and managed properties. Systemwide statistics are based on comparable worldwide units and reflect the impact of foreign exchange rates. The Company has experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001 attacks on New York and Washington and the subsequent dra- matic downturn in the economy. This decline has resulted in reduced management and franchise fees, cancellation of devel- opment projects, and anticipated losses under guarantees and loans. We have responded by implementing certain company- wide cost-saving measures, although we do not expect signifi- cant changes to the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001 we recorded pretax restructuring costs of $124 million, including (1)  $16 million in severance costs; (2) $20 million, primarily associ- ated with a loss on a sublease of excess space arising from the reduction in personnel; (3) $28 million related to the write-off of capitalized costs relating to development projects no longer deemed viable; and (4) $60 million related to the write-down of the Village Oaks brand of companion-style senior living com- munities, which are now classified as held for sale, to their  estimated fair value. Detailed information related to the restruc- turing costs and other charges, which were recorded in the fourth quarter of 2001 as a result of the economic downturn and the unfavorable lodging environment, is provided below. Our restructuring plan resulted in the reduction of approxi- mately 1,700 employees (the majority of which were terminated by December 28, 2001) across our operations. We recorded a workforce reduction charge of $16 million related primarily to severance and fringe benefits. The charge does not reflect amounts billed out separately to owners for property-level sev- erance costs. In addition, we delayed filling vacant positions and reduced staff hours. As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $15 million for excess corporate facilities, primarily related to lease terminations and noncancelable lease costs in excess of estimated sublease income. In addition, we recorded a $5 million charge for lease termina- tions resulting from cancellations of leased units by our corporate apartment business, primarily in downtown New York City. We incur certain costs associated with the development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is devel- oped. As a result of the dramatic downturn in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, we expensed $28 million of previously capi- talized costs. In addition, management has begun to actively engage in efforts to sell 25 Village Oaks senior living communi- ties. These communities offer companion living and are signifi- cantly different from our other senior living brands. As a result of the plan to exit this line of business, the assets associated with the 25 properties have been reclassified as assets held for sale and have accordingly been recorded at their estimated fair value, resulting in an impairment charge of $60 million. We issue guarantees to lenders and other third parties in connec- tion with financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels have expe- rienced significant declines in profitability and the owners have not been able to meet debt service obligations to the Company or in some cases, to other third-party lending institutions. As a result, based upon cash flow projections, we expect to fund under certain guarantees, which are not deemed recoverable, and we expect that several of the loans made by us will not be repaid according to their original terms. Due to the expected guarantee fundings deemed non-recoverable and the expected loan losses, we recorded charges of $85 million in the fourth quarter of 2001. In the fourth quarter of 2001, we reserved $17 million of accounts receivable following an analysis of these accounts which we deemed uncollectible, generally as a result of the unfavorable hotel operating environment. The Company recorded a charge related to the impairment of an investment in a technology-related joint venture ($22 mil- lion), losses on the anticipated sale of three lodging properties ($13 million), write-offs of investments in management Marriott International, Inc. 2001 Annual Report 11