QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK follow the guidelines of FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Selling and marketing costs capitalized under this approach were approxi- mately $126 million and $95 million at December 28, 2001, and December 29, 2000, respectively, and are included in other assets in the accompanying consolidated balance sheets. If a contract is canceled, unrecoverable direct selling and marketing costs are charged to expense, and deposits forfeited are recorded as income. We are exposed to market risk from changes in interest rates. We manage our exposure to this risk by monitoring available financing alternatives and through development and applica- tion of credit granting policies. Our strategy to manage expo- sure to changes in interest rates is unchanged from December 29, 2000. Furthermore, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how such exposure is managed in the near future. The following sensitivity analysis displays how changes in interest rates affect our earnings and the fair values of certain instruments we hold. We periodically sell notes receivable originated by our timeshare business in connection with the sale of timeshare intervals. We retain servicing assets and interests in the assets transferred to special purpose entities which are accounted for as interest only strips. The interest only strips are treated as “Trading” or “Available for Sale” securities under the provisions of FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” We report changes in the fair values of the interest only strips through the accompanying consolidated statement of income for trading securities and through the accompanying consolidated statement of comprehensive income for available- for-sale securities. We had interest only strips of $87 million at December 28, 2001 and $67 million at December 29, 2000. We hold notes receivable that earn interest at variable rates. Hypothetically, an immediate 1 percentage point change in interest rates would change annual interest income by $5 mil- lion and $3 million, based on the respective balances of these notes receivable at December 28, 2001 and December 29, 2000. Changes in interest rates also impact the fair value of our long-term fixed rate debt and long-term fixed rate notes receiv- able. Based on the balances outstanding at December 28, 2001 and December 29, 2000, a hypothetical immediate 1 percentage point change in interest rates would change the fair value of our long-term fixed rate debt by $53 million and $50 million, respectively, and would change the fair value of long-term fixed rate notes receivable by $22 million in each year. 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 or the estimated fair value of the collateral. We apply our loan impair- ment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. For loans that we have determined to be impaired, we recognize interest income on a cash basis. At December 28, 2001, our recorded investment in impaired loans was $110 million. Prior to the fourth quarter of 2001 our allowance for credit losses was $16 million. Following the charges recorded in the fourth quar- ter of 2001 (see the “Restructuring Costs and Other Charges” footnote) we have a $59 million allowance for credit losses, leav- ing $51 million of our investment in impaired loans for which there is no related allowance for credit losses. This annual report contains “forward-looking statements” within the meaning of federal securities law, including state- ments concerning the company’s outlook for 2002 and beyond; the number of new lodging properties expected to be added in 2002 and subsequent years; business strategies and their antici- pated results; and similar statements concerning anticipated future events and expectations that are not historical facts. The forward-looking statements in this report are subject to numer- ous risks and uncertainties, including the effects of economic conditions, the duration and severity of the current economic downturn in the United States and the pace of the lodging industry’s recovery in the aftermath of the terrorist attacks on New York and Washington; supply and demand changes for hotel rooms, vacation ownership intervals, corporate apart- ments and senior housing; competitive conditions in the lodg- ing, senior living and food service distribution industries; relationships with clients and property owners; the impact of government regulations; the impact of internet hotel reserva- tion channels; the availability of capital to finance growth; our ability to recover our loan and guaranty fundings; our ability to obtain adequate property and liability insurance; and our abil- ity to obtain new operating contracts, which could cause actual results to differ materially from those expressed in or implied by the statements herein. 20 Marriott International, Inc. 2001 Annual Report FORWARD-LOOKING STATEMENTS Loan Loss Reserves Interest Only Strips