<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 3, 1998 TO AUGUST 28, 1998
Commission File No. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
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(State of Incorporation) (I.R.S. Employer Identification Number)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
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(Address of principal executive offices) (Zip Code)
(301) 987-4431
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
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 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. [X]
As of November 11, 1998, the number of shares of common stock outstanding was
62,097,388. The aggregate market value of shares of common stock held by
non-affiliates at November 11, 1998 was $831,377,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended August 28, 1998 are
incorporated by reference into Part III of this report.
Index to Exhibits is located on pages 63 through 66 of this report.
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
TRANSITION REPORT ON FORM 10-K
FOR THE TRANSITION PERIOD FROM JANUARY 3, 1998 TO AUGUST 28, 1998
TABLE OF CONTENTS
PAGE
INTRODUCTION
Overview and Glossary of Terms 2
Forward-Looking Statements 4
Pro Forma Financial Information 5
PART I
Item 1. Business 12
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for the Company's Common Equity and Related
Shareholder Matters 19
Item 6. Selected Historical Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management 60
Item 13. Certain Relationships and Related Transactions 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 63
1
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INTRODUCTION
OVERVIEW AND GLOSSARY OF TERMS
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping, and
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. Upon the
consummation of the distribution of its lodging, senior living and distribution
services businesses to existing shareholders (see "Distributed Operations"
below), which occurred on March 27, 1998 (the last day of the first quarter of
1998), the Company then acquired the North American operations of Sodexho
Alliance, S.A., and the combined operations were renamed Sodexho Marriott
Services, Inc. The subsidiaries listed below represent the current direct
subsidiaries of the Company. Each of these direct subsidiaries, in turn, has one
or more subsidiaries.
- - Sodexho Marriott Operations, Inc. (a newly formed entity), with two main
operating subsidiaries: Sodexho Marriott Management, Inc.
(formerly Marriott Management Services Corp.) and its subsidiaries,
and International Catering Corporation and its subsidiaries;
- - Sodexho Financiere du Canada (acquired in the Transactions described in
Note 1 to the Consolidated Financial Statements); and
- - Sodexho Marriott Services Canada, Ltd. (formerly Marriott Corporation of
Canada, Ltd.).
Sodexho Financiere du Canada and subsidiaries and International Catering
Corporation and subsidiaries are collectively referred to as "Sodexho North
America." Similarly, the former Marriott Corporation of Canada, Ltd. and
subsidiaries and the former Marriott Management Services Corp. and subsidiaries
are collectively referred to as "MMS."
THE TRANSACTIONS
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Distribution to shareholders, the
Acquisition of Sodexho North America and the Refinancing of debt (the
"Transactions"). Below is an overview of the Transactions.
DISTRIBUTED OPERATIONS. On March 27, 1998, the Company distributed to its
shareholders the lodging segment and two of the three lines of business in the
contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, MMS, has become the principal
business of the Company. The lodging segment distributed to shareholders is
presented as Discontinued Operations in the historical financial statements of
the Company.
ACQUISITION. Immediately after the Distribution, on March 27, 1998, Sodexho
transferred to the Company the operations of Sodexho North America having a fair
market value of approximately $278 million, combined with a cash payment of $304
million in exchange for 29.9 million shares of the Company's common stock, after
giving effect to the one-for-four reverse stock split. The purchase price
includes approximately $3 million in transaction costs. As a result of the
issuance of new shares of the Company's common stock to Sodexho in connection
with the Acquisition, the shareholders who owned 100 percent of the Company
immediately prior to the Distribution owned approximately 51% immediately
thereafter.
THE REFINANCING. On March 27, 1998, the Company borrowed $615 million and $620
million under the Secured SMS Facility and Guaranteed SMS Facility, respectively
(see Note 8 to the Consolidated Financial Statements). The proceeds were used to
repurchase $713 million of the Company's $720 million publicly held debt and to
repay its $950 million outstanding obligations under the Company's existing $1.5
billion credit facility, which was cancelled immediately after such repayment.
Also, the Company repaid debt of $73 million assumed in the Acquisition. The
$304 million received from Sodexho was used in conjunction with the debt
proceeds to fund the debt repayments. The Company also received letters of
credit for $13 million under the Secured SMS Facility on March 27, 1998. The
Company's borrowing agreements contain various covenants, which, among other
things, require the Company to meet certain financial ratios and tests.
2
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Due to the extensive changes in the Company's business that resulted from the
Transactions, the Company is providing the following glossary of significant
terms used in this report for informational purposes. In certain places in this
document, where deemed meaningful for the reader's understanding, these
definitions may be repeated.
THE ACQUISITION. On March 27, 1998, the Company acquired Sodexho North America,
and Sodexho paid the Company $304 million, in exchange for approximately 48% of
the shares of the Company's common stock that were issued and outstanding
immediately after the Transactions.
ADJUSTED NET TANGIBLE ASSETS. The amount by which stockholders' equity exceeds
intangible assets with certain adjustments.
THE COMPANY. Sodexho Marriott Services, Inc. (together with its consolidated
subsidiaries), formerly Marriott International, Inc.
DISCONTINUED OPERATIONS. The Company's lodging business segment.
DISTRIBUTED OPERATIONS. The lodging, senior living services, and distribution
services businesses taken collectively.
THE DISTRIBUTION. On March 27, 1998, the Company distributed the stock of New
Marriott MI, Inc., which contained all of the assets and liabilities of the
Company's lodging, senior living services, and distribution services businesses,
to its shareholders in a tax-free transaction.
ICC. International Catering Corporation, and subsidiaries, combined with Sodexho
Financiere du Canada and subsidiaries, collectively referred to as Sodexho North
America.
MI. New Marriott MI, Inc. (together with its subsidiaries) was subsequently
renamed Marriott International, Inc.
MDS. Marriott Distribution Services, the Company's distribution services
business.
MMS. Marriott Management Services Corp., the remaining line of business in the
contract services segment, consisting of food service and facilities management,
which has become the principal business of the Company.
MMS- UK OPERATION. Marriott Management Services Corp.'s United Kingdom
operations sold in October 1997 to a subsidiary of Sodexho Alliance, S.A. in
anticipation of the Transactions.
MSLS. Marriott Senior Living Services, the Company's senior living services
business.
NEW MARRIOTT MI, INC. Subsequently renamed Marriott International, Inc. ("MI"),
conducts business in the lodging segment, MDS and MSLS.
OTHER CONTRACT SERVICES. MDS and MSLS, which for the first quarter of the 1998
Transition Period and prior fiscal years were part of the Company's continuing
operations.
I&R COSTS. Integration and Restructuring costs related to the Transactions.
THE REFINANCING. On March 27, 1998, the Company and its indirect subsidiary, RHG
Finance Corporation, tendered for a total of $720 million principal amount of
their respective outstanding publicly held debt. In addition, the Company
refinanced its commercial paper and indebtedness outstanding under its revolving
credit facility, which totaled $950 million on March 27, 1998.
RETAINED BUSINESS. All operations not distributed.
REVERSE STOCK SPLIT. On March 27, 1998, the Company's common stock underwent a
one-for-four reverse stock split.
3
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SODEXHO. Sodexho Alliance, S.A., a worldwide food and management services
organization headquartered in France and a 48% shareholder of the Company.
SODEXHO NORTH AMERICA. Sodexho Financiere du Canada and subsidiaries, and
International Catering Corporation and subsidiaries (also known as Sodexho USA)
taken collectively.
STUB PERIOD. The 22-week period beginning March 27, 1998, the date of the
Transactions, and ending on August 28, 1998.
THE TRANSACTIONS. The Distribution, Acquisition, and Refinancing taken
collectively.
TRANSITION PERIOD. On April 15, 1998, the Board of Directors of the Company
approved the change of the fiscal year of the Company to the Friday nearest to
August 31 of each year. Prior to this change in fiscal year, the Company's
fiscal year ended on the Friday nearest to December 31 of each year. Thus, the
1998 fiscal year, which began on January 3, 1998, will end on August 28, 1998,
and is considered the Transition Period. The 1999 fiscal year, to begin on
August 29, 1998, will end on September 3, 1999, and will include 53 weeks.
TRANSITION REPORT. The Company's Transition Report on Form 10-K for the 34-week
period ended August 28, 1998.
FORWARD-LOOKING STATEMENTS
This report by the Company contains forward-looking statements within the
meaning of the federal securities laws. These statements are based on the
Company's current expectations and relate to anticipated future events that are
not historical facts, such as the Company's business strategies and their
intended results.
The forward-looking statements included in this report are subject to numerous
risks and uncertainties that could cause the Company's future activities and
results of operations to differ materially from those expressed or implied in
the forward-looking statements. These risks and uncertainties, which are further
discussed in Management's Discussion and Analysis of Results of Operations and
Financial Condition and other parts of this report, include: (i) the ability of
the Company to adapt to recent changes in its corporate structure related to the
Transactions, (ii) the potential adverse impact of the Company's substantial
indebtedness, (iii) competition in the food services and facilities management
industries, (iv) the effects of general economic conditions, (v) the ability of
the Company to retain clients and obtain new clients on satisfactory terms in
light of the Transactions, (vi) the ability of the Company to remedy any
computer-related issues that may result from the advent of the Year 2000, and
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission including those set forth in Exhibit 99 filed
herein.
As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on the forward-looking statements included in this report or that
may be made elsewhere from time to time by, or on behalf of, the Company. The
Company assumes no obligation to update any forward-looking statements.
4
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PRO FORMA FINANCIAL INFORMATION
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Transactions described fully in Notes
2, 3 and 4 to the Consolidated Financial Statements. As a result of these
changes, there are substantial differences in the comparability of the Company's
historical operating results presented in Parts I and II of this document and
the Company's ongoing operations. To assist readers in understanding the present
operations of the Company, management believes it is meaningful and relevant to
set forth in this report not only the actual results of operations for the
thirty-four weeks ended August 28, 1998 and the historical fiscal years 1997,
1996 and 1995 presented in Item 8 of this report, but also the pro forma
operating results and cash flow for the full fiscal years ended August 28, 1998,
August 29, 1997 and August 30, 1996, as well as the pro forma balance sheet as
of August 28, 1998. The pro forma operating results were prepared as if the
Transactions occurred at the beginning of each period. Therefore, the pro forma
operating results only include the Company's Retained Business and the acquired
operations of Sodexho North America.
Pro forma sales presented include the combined actual sales of the food and
facilities management services business of MMS and Sodexho North America. Pro
forma corporate expenses include the combined corporate overhead of both
businesses. No synergies are assumed, and integration and restructuring charges
of $31.1 million incurred in fiscal 1998 are excluded. However, an estimate of
$6.4 million in annual costs were included on a pro rata basis in all periods
presented until the date of the Transaction, representing incremental costs to
operate the Company as a separate public entity. After March 27, 1998, had the
Company fully completed the consolidation of the MMS and Sodexho North America
processing systems and related hiring of certain personnel, additional costs of
approximately $5 million pretax would have been incurred during the 22 week Stub
Period. Pro forma net income reflects approximately $15.9 million of
amortization expense for each year for the intangible assets related to the
Acquisition.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of all periods presented. Effective income tax rates of 48%, 54%, and 72% were
used for fiscal years 1998, 1997, and 1996, respectively. Pro forma results do
not include any extraordinary charges related to the Refinancing, the loss in
1997 from the sale of MMS- UK operations to Sodexho or any operating results
from the MMS- UK operations prior to its sale.
Pro forma basic earnings per share were calculated on a base of 61.9 million
shares for 1998, 1997 and 1996, which represents the number of shares
outstanding on August 28, 1998. Pro forma diluted earnings per share were
calculated on a base of 62.5 million, 62.5 million, and 62.3 million shares for
1998, 1997 and 1996, respectively. The dilutive shares are the result of the
Company's convertible debt, stock option plans and deferred stock incentive
plans.
Also included in this pro forma financial information section are the results of
operations for the 22 weeks Stub Period ended August 28, 1998. This period is
from the date of the Transactions (March 27, 1998) to the end of the Transition
Period (August 28, 1998). The stub period in addition to the Company's first
quarter of 1998 (12 weeks ended March 27, 1998) represent the cumulative 34-week
Transition Period presented in Item 8 of this report.
5
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PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR FISCAL YEARS ENDED AUGUST 28, 1998, AUGUST 29, 1997 AND AUGUST 30, 1996
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
SALES
Corporate Services $1,336 $1,243 $1,203
Health Care 1,277 1,249 1,191
Education 1,150 1,083 1,046
Schools 333 302 260
Canada 145 153 157
Laundries/Other 65 59 58
------------------ ------------------ -------------------
TOTAL SALES 4,306 4,089 3,915
OPERATING COSTS AND EXPENSES
Corporate Services 1,261 1,175 1,145
Health Care 1,182 1,156 1,101
Education 1,085 1,028 992
Schools 317 288 250
Canada 140 149 153
Laundries/Other 61 56 56
------------------ ------------------ -------------------
TOTAL OPERATING COSTS AND EXPENSES 4,046 3,852 3,697
------------------ ------------------ -------------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 75 68 58
Health Care 95 93 90
Education 65 55 54
Schools 16 14 10
Canada 5 4 4
Laundries/Other 4 3 2
------------------ ------------------ -------------------
TOTAL OPERATING PROFIT 260 237 218
------------------ ------------------ -------------------
CORPORATE ITEMS:
Amortization of Intangible Assets (37) (38) (39)
Corporate Expenses (73) (74) (75)
Interest Expense, Net (87) (87) (87)
------------------ ------------------ -------------------
INCOME BEFORE INCOME TAXES 63 38 17
Provision for Income Taxes (30) (20) (12)
------------------ ------------------ -------------------
PRO FORMA NET INCOME $ 33 $ 18 $ 5
================== ================== ===================
------------------ ------------------ -------------------
PRO FORMA BASIC EARNINGS PER SHARE $0.53 $0.28 $0.08
================== ================== ===================
------------------ ------------------ -------------------
PRO FORMA DILUTED EARNINGS PER SHARE $0.52 $0.28 $0.08
================== ================== ===================
</TABLE>
6
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DISCUSSION OF PRO FORMA 1998 COMPARED WITH PRO FORMA 1997 RESULTS OF OPERATIONS
Total sales for 1998 were $4.3 billion, an increase of $217 million, or 5.3%,
over $4.1 billion for 1997. This growth was mostly attributable to solid
performance in the Corporate Services and Education divisions. Increases in the
Corporate Services and Education divisions were the result of high retention of
existing clients (approximately 95% for 1998), in addition to strong new sales
growth between the years. Corporate Services division's sales were also
favorably impacted by the continued implementation of the Crossroads Cuisines
retail strategy. Lower growth in the Health Care division in 1998 was mostly the
result of the challenging environment for the healthcare industry in 1998,
including decreased government reimbursements, consolidation in the industry and
several bankruptcies of health care institutions. Despite these challenges, the
Health Care division increased sales by $28 million, or 2.2%, over the prior
year. Management believes that these challenges present an opportunity for the
Company to gain new business, as client organizations are likely to seek
cost-effective outsourcing solutions. The Schools, Canada and Laundries/Other
divisions' sales collectively totaled $543 million for 1998, an increase of $29
million, or 5.6%, over the $514 million in aggregate sales for 1997.
Operating profit before corporate items (corporate expenses, interest expense,
and amortization of intangible assets) totaled $260 million for 1998, an
increase of $23 million, or 9.7%, over the $237 million in operating profit for
1997. This increase was driven by solid sales growth in the Corporate Services
and Education divisions in 1998. Operating margins, particularly in the
Education division, improved as the result of efficiencies in labor costs and
increased efficiencies in the procurement of food-related products gained during
the year. Operating profit in the Schools, Canada and Laundries/Other divisions
collectively totaled $25 million in 1998, an increase of $4 million or 19% over
1997. This double-digit increase was driven by strong growth in new business in
the Schools division.
Corporate expenses in 1998 were about even with the prior year, reflecting the
elimination of certain positions after the Transactions and the timing of
filling certain employee positions. Had the Company fully completed the
consolidation of the MMS and Sodexho North America processing systems and
related hiring of certain personnel, additional costs of approximately $5
million pretax would have been incurred during the 22 week Stub Period. Total
operating costs, corporate expenses and amortization of intangible assets
represent, in the aggregate, 96.5% of total sales for the year, compared with
1997's ratio of 96.9%. The Company anticipates this margin will continue to
improve in the periods ahead, as the Company continues the integration of the
MMS and Sodexho North America operations resulting in savings realized from
purchasing and administrative actions. These savings are anticipated to reach
$60 million annually by fiscal year 2001.
The growth in operating profit combined with relatively flat corporate items
contributed to an increase in pretax income of $25 million, or 66%, to $63
million for 1998. The effective tax rate for 1998 was 48%, a decrease from 54%
for 1997, mostly due to the proportion of nondeductible intangible amortization
expense in relation to total operating profit between the years. Net income
almost doubled in 1998 to $33 million, or $0.52 per diluted share, compared with
$18 million, or $0.28 per diluted share for 1997.
DISCUSSION OF PRO FORMA 1997 COMPARED WITH PRO FORMA 1996 RESULTS OF OPERATIONS
Total sales for 1997 were $4.1 billion, an increase of $174 million, or 4.4%,
compared with $3.9 billion for 1996. This growth was mostly attributable to
double-digit sales growth in the Schools division and solid performance in the
Health Care division. New sales fueled the increase in the Schools division,
while sales of additional services and retention in the 95% range contributed to
the Health Care division's growth. The Schools, Canada and Laundries/Other
divisions sales, in the aggregate, totaled $514 million for 1997, an increase of
$39 million, or 8.2%, over the $475 million of aggregate sales for 1996.
Operating profit before corporate items totaled $237 million for 1997, an
increase of $19 million, or 8.7%, over the $218 million in operating profit for
1996. This growth was driven by increased operating profit in the Corporate
Services division, led by the continued implementation of the Crossroads
Cuisines retail strategy, which increased the average check size. Also, the
Corporate Services division experienced a significant improvement in its
operating margins due to the alignment of its retail strategies. However,
operating profit growth in the Schools and Health Care divisions was hampered by
start-up costs associated with their respective new sales levels. Operating
profit in the Schools, Canada and Laundries/Other divisions totaled $21 million
in 1997, an increase of $5 million or over 31% when compared with 1996.
7
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DISCUSSION OF PRO FORMA 1997 COMPARED WITH PRO FORMA 1996 RESULTS OF OPERATIONS,
CONTINUED
Corporate items remained flat during 1997. Total operating costs, corporate
expenses and amortization of intangible assets were $4.0 billion for 1997, or
96.9% of total sales, compared with 97.3% in 1996.
The growth in operating profit combined with the flat corporate items resulted
in an increase in pretax income of $21 million, or more than double 1996's
pretax income to $38 million for 1997. The effective tax rate for 1997 was 54%,
a substantial decrease from 72% for 1996, mostly due to the proportion of
nondeductible intangible amortization expense in relation to total operating
profit between the years. Net income tripled in 1997 to $18 million, or $0.28
per diluted share, compared with $5 million, or $0.08 per diluted share for
1996.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
After the Distribution, the Company has been focused on the integration of the
former MMS and Sodexho North America operations, capitalizing on its combined
market presence as well as focusing on attracting new accounts and enhancing
services to sustain growth. The Company is substantially more leveraged on a
relative basis than the Company was prior to the Distribution. The Company
anticipates that it would have long-term unsecured debt ratings, if obtained,
below investment grade based on its pro forma financial statements. The debt
resulting from the Refinancing contains restrictive covenants and requires
grants of security and guarantees by subsidiaries of the Company, which limit
the Company's ability to incur additional debt and engage in certain other
activities. Additionally, these debt covenants limit the Company's ability to
pay dividends.
The Company funds its capital requirements with a combination of existing cash
balances and operating cash flow. As of August 28, 1998, the Company had a $235
million revolving credit facility available at an interest rate of 6.82% to
provide funds for liquidity, seasonal borrowing needs and other general
corporate purposes. At August 28, 1998, $25 million of this facility was
outstanding, while an additional $26 million of this revolving credit facility
was utilized by letters of credit outstanding, principally related to insurance
programs. The Company believes that cash flow generated from operations and
current cash balances will be adequate to finance ongoing capital needs, as well
as meet debt service requirements. The Company's debt agreements do not restrict
the Company's ability to fund its planned growth initiatives from operating cash
flow and existing credit facilities.
Prior to the Transactions, Company had paid regular quarterly dividends. The
Company may pay quarterly dividends in the future, subject to the restrictive
covenants contained in the Company's credit facility agreements related to the
Refinancing and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to Earnings Before Interest, Taxes,
Depreciation and Amortization ratio ("EBITDA", as defined in the documentation
for the credit facility agreements) is less than 4 but not less than 3. This
restriction will no longer apply when such ratio is less than 3. The payment and
amount of cash dividends on the Company's common stock will be subject to the
sole discretion of the Company's Board, which will review the Company's dividend
policy at such times as may be deemed appropriate. The Board will closely
monitor the results of the Company's operations, capital requirements, and other
considerations to determine the dividend to be declared in future periods.
The Company is required to make quarterly cash interest payments on its term
facilities, as well as scheduled principal repayments on its Senior Secured
Credit Facility (as detailed in Note 8 to Consolidated Financial Statements).
Annual interest expense is estimated to be approximately $90 million based on
August 28, 1998 debt balances, with scheduled principal repayments amounting to
approximately: $70 million in 1999; $80 million in 2000; $80 million in 2001;
$90 million in 2002; $115 million in 2003 and $65 million in 2004.
8
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CONSOLIDATED CONDENSED BALANCE SHEET
AUGUST 28, 1998
($ IN MILLIONS)
<TABLE>
<CAPTION>
AUGUST 28,
1998
------------------
ASSETS
<S> <C>
Current assets
Cash and equivalents $ 79
Accounts and notes receivable 374
Inventories 54
Other 98
------------------
Total current assets 605
------------------
Property and equipment, net 82
Intangible assets 573
Other 81
------------------
$1,341
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 96
Accounts payable 222
Other current liabilities 377
------------------
Total current liabilities 695
Long-term debt 1,062
Other long-term liabilities 110
Convertible subordinated debt 29
Stockholders' deficit
Preferred stock, no par value, 1 million shares
authorized; no shares issued -
Common stock, $1 par value; 300 million shares
authorized, 62 million shares issued and outstanding 62
Additional paid-in capital 1,322
Accumulated deficit (1,946)
Accumulated other comprehensive income 7
------------------
Total stockholders' deficit (555)
------------------
Total liabilities and stockholders' deficit $1,341
==================
</TABLE>
9
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DISCUSSION OF PRO FORMA CASH FLOW
CASH FLOW FROM OPERATING ACTIVITIES
The Company's cash flow from operations is affected by a predictable seasonal
pattern. Cash flow from operations is strongest during the fall and spring, as
the demand for services fluctuates in the Education and Schools divisions.
Cash flow from operations, before the impact of changes in working capital, was
$115 million in 1998, $102 million in 1997 and $94 million in 1996. The increase
in the adjusted operating cash flow in 1998 was mostly the result of higher net
income in 1998 when compared with 1997. Working capital, defined as the net of
current assets and current liabilities, is favorable to the Company when current
liabilities exceed current assets. This negative working capital position is
primarily the result of the timing of cash payments in relationship to the
timing of cash received. The Company anticipates it will continue to have a
negative working capital position in future periods.
CASH FLOW FROM INVESTING ACTIVITIES
The Company invests cash primarily for capital expenditures related to new or
existing client relationships. Total capital expenditures were $60 million, $57
million and $58 million for fiscal years 1998, 1997 and 1996, respectively. The
Company anticipates expending $60 to $65 million for capital investments for
fiscal 1999. In addition, the Company intends to make, from time to time,
investments for business acquisitions.
CASH FLOW FROM FINANCING ACTIVITIES
The Company's net cash provided by financing activities reflects the Company's
management of its long-term liabilities, in addition to the Company's receipt of
funds from stock sales, as part of the Company's overall management of its cost
of capital. Pro forma cash flow from financing activities represent cash flow as
if the Refinancing had been in place on the first day of all periods presented.
Net cash provided by financing activities in 1998 totaled $49 million. Other
cash provided by financing activities totaled $106 million, reflecting the
transfer of insurance-related liabilities from MI, and was partially offset by
repayments of long-term debt totaling $57 million in 1998. Net cash provided by
financing activity was unchanged for 1997, while cash provided by financing
activity totaled $8 million for 1996.
PRO FORMA UNAUDITED CONDENSED CASH FLOW
FOR THE FISCAL YEARS ENDED 1998, 1997 AND 1996
($ IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 28, AUGUST 29, AUGUST 30,
1998 1997 1996
------------------ ------------------- ------------------
(52 WEEKS) (52 WEEKS) (53 WEEKS)
CASH PROVIDED BY OPERATING ACTIVITIES
- -------------------------------------
<S> <C> <C> <C>
Net income $ 33 $ 18 $ 5
Adjust to reconcile net income to net cash:
Depreciation expense 45 46 50
Amortization of intangible assets 37 38 39
Net changes in certain working capital items (39) (12) (31)
------------------ ------------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 76 90 63
------------------ ------------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES
- -----------------------------------
Capital expenditures (60) (57) (58)
Other (27) (30) (17)
------------------ ------------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (87) (87) (75)
------------------ ------------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES
- -----------------------------------
Repayments of long-term debt (57) - -
Other 106 - 8
------------------ ------------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49 - 8
------------------ ------------------- ------------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 38 $ 3 $ (4)
================== =================== ==================
</TABLE>
10
<PAGE>
PRO FORMA RESULTS OF OPERATIONS FOR THE 22 WEEKS ENDED AUGUST 1998 AND 1997
Set forth below are the pro forma financial results of operations for the 22
weeks Stub Period ended August 28, 1998. The Stub Period and the Company's first
quarter of 1998 (12 weeks ended March 27, 1998) together represent the
cumulative 34-week Transition Period. The 13 weeks ended August 1998 reflect the
Company's new fiscal fourth quarter.
PRO FORMA UNAUDITED RESULTS OF OPERATIONS
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
9 weeks ended 13 weeks ended 22 weeks ended
------------------------ ------------------------ -------------------------
May 29, May 30, August 28, August 29, August 28, August 29,
1998 1997 1998 1997 1998 1997
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SALES $ 782 $ 743 $ 935 $ 887 $1,717 $ 1,630
OPERATING COSTS AND EXPENSES 726 697 905 850 1,631 1,547
----------- ------------ ------------ ----------- ------------ ------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS 56 46 30 37 86 83
Amortization of intangible assets (6) (6) (9) (9) (15) (15)
Corporate expenses (9) (14) (14) (22) (23) (36)
Interest expense, net (16) (15) (22) (22) (38) (37)
----------- ------------ ------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 25 11 (15) (16) 10 (5)
Provision (benefit) for income taxes (12) (6) 7 9 (5) 3
----------- ------------ ------------ ----------- ------------ ------------
PRO FORMA NET INCOME (LOSS) $ 13 $ 5 $ (8) $ (7) $ 5 $ (2)
=========== ============ ============ =========== ============ ============
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.20 $ 0.08 $(0.12) $(0.12) $ 0.08 $ (0.04)
----------- ------------ ------------ ----------- ------------ ------------
Diluted $ 0.20 $ 0.08 $(0.12) $(0.12) $ 0.08 $ (0.04)
=========== ============ ============ =========== ============ ============
</TABLE>
Pro forma sales for the 22 week periods ended August 28, 1998, and August 29,
1997 include the combined actual sales of the food and facilities management
services business of MMS and Sodexho North America. Pro forma corporate expenses
include the combined corporate overhead of both businesses. No synergies are
assumed and integration and restructuring costs totaling $22 million are
excluded from the 1998 periods presented. However, an estimate of $2.7 million
was included for 1997 representing incremental costs to operate as a separate
public company. In addition, had the Company fully completed the consolidation
of the MMS and Sodexho North America processing systems and related hiring of
certain personnel, additional costs of approximately $5 million pretax would
have been incurred during the 1998 22 week Stub Period.
Pro forma sales for the quarters ended August 28, 1998, and 1997 include the
combined actual sales of the food and facilities management services business of
MMS and Sodexho North America. Pro forma corporate expenses include the combined
corporate overhead of both businesses. No synergies are assumed and integration
and restructuring costs totaling $14 million have been excluded from the 1998
periods presented. However, an estimate of $1.6 million was included for 1997
representing incremental costs to operate as a separate public company. In
addition, had the Company fully completed the consolidation of the MMS and
Sodexho North America processing systems and related hiring of certain
personnel, additional costs of approximately $3 million pretax would have been
incurred during the 1998 22 week Stub Period.
Pro forma amortization of intangible assets and interest expense for all periods
represent the estimated costs as if the Transactions had occurred on the first
day of all periods presented.
11
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. Food services
include food and beverage procurement, preparation and menu planning, as well as
the operation and maintenance of food service and catering facilities, generally
on a client's premises. Facilities management services include plant operations
and maintenance, energy management, grounds keeping, and housekeeping and
custodial services.
The Company was formerly named Marriott International, Inc. Upon consummation of
the Distribution, Acquisition, and Refinancing (the "Transactions"), which
occurred on March 27, 1998 (the last day of the first quarter of 1998), Marriott
International, Inc. was renamed Sodexho Marriott Services, Inc. As of March 27,
1998, the principal business of the Company changed from lodging and contract
services to food and facilities management services. This change was the result
of the Distribution and the Acquisition. In connection with the Distribution and
Acquisition, the Company refinanced its debt. The Transactions are explained in
more detail below and in the Company's Notes 2, 3 and 4 of the Consolidated
Financial Statements included in this report. Due to the extensive changes in
the Company's business that resulted from the Transactions, the Company is
providing for informational purposes the following description of its business
as it now exists.
INDUSTRY AND MARKETPLACE
The food and facilities management services industry is rapidly changing. Major
industry dynamics are:
- Stable industry revenues from an existing client base.
- Continued growth in the outsourcing of food service and
facilities management as a result of: focus by customers on core
competencies and outsourcing of their non-core services, general
economic growth, and increasing cost pressures.
- Increasing market penetration by large, well-capitalized
participants due to their ability to provide more cost-effective
services as a result of economies of scale, a broader range of
services than local and regional participants, and national and
international coverage to large clients.
- An increase in the retail orientation of contract catering due to
the proliferation of alternative retail outlets, including quick
serve restaurants.
- Strong industry dynamics towards a "one-stop shopping"
alternative for all outsourcing needs, including food service and
facilities management.
- Minimal capital requirements due to several factors, including
low capital expenditures because operations are generally
conducted at client sites using client equipment; low fixed costs,
permitting rapid response to market conditions; and predictable
cash flow from client payments, reducing or eliminating working
capital needs.
MARKET POSITION
The Company has its origins in two well-established food service providers, MMS
and Sodexho North America. The Company is the market leader in the North
American contract food services industry, which the Company's management
believes is generally underpenetrated by large contractors. Market leadership
makes the Company well positioned to grow faster than the overall market. The
Company has a unique opportunity to leverage its position as the market leader
in food service by cross-selling its facilities management services to existing
food-service-only clients. Management of the Company believes that the
facilities management industry remains even more underpenetrated by large
contractors than the contract food services industry.
12
<PAGE>
ITEM 1. BUSINESS, CONTINUED
The Company operates primarily in four business segments as discussed below
(also see Note 14 to the Consolidated Financial Statements):
CORPORATE SERVICES. Although the market for food service in business
and industry is relatively highly penetrated, customers are responding favorably
to the growth in retail orientation by food service contractors. The market for
multi-service national providers (food and facilities) is growing as large
corporations are moving toward outsourcing all of their non-core services on a
multi-site and multi-service basis. This represents an opportunity to leverage
from food contracting to the less developed facilities management market. The
government market is expected to increase as federal departments and agencies
implement large-scale outsourcing of non-core functions. The Corporate Services
segment represents approximately 38% of the Company's current revenues.
HEALTH CARE. The health care industry continues its transformation from
a fee-for-service to a managed care and capitated rate environment. This market
dynamic has shifted the risk and burden of cost control from insurance providers
to the health care institutions themselves, forcing them to focus not only on
the cost component of clinical care, but also on the cost of all services
including food and facilities management. These cost pressures are driving the
trend toward consolidation of health care institutions and guaranteed cost
contracts for hospital services, and have contributed to several institutional
bankruptcies. While management of the Company recognizes the challenges of these
trends, it also believes that the health care market remains significantly
underpenetrated. The Health Care segment represents approximately 28% of the
Company's current revenues.
EDUCATION. The campus dining marketplace, principally in colleges and
universities, continues to shift from residential board plans to more
retail-oriented operations driven by (i) the growing proportion of non-resident
day and evening students on campuses, (ii) the taste and service preferences of
today's young consumers and (iii) colleges' and universities' desire to provide
their students with greater flexibility. Traditional straight-line cafeterias
are being replaced by scatter systems and food courts. These trends, coupled
with cost pressures, are causing public and private institutions to consider
outsourcing as a viable choice. The Education segment represents approximately
18% of the Company's current revenues.
SCHOOLS. The current fiscal climate is forcing school districts
(kindergarten through Grade 12) to minimize costs while improving the
performance of non-instructional areas. Over the last several years, 150-200
school systems per year have decided to begin outsourcing their food services.
Also, new federal regulations require that school meals meet more stringent food
specifications and production techniques to comply with "Nutrient Standards"
guidelines. Some school districts may turn to contractors to help comply with
these guidelines. The Schools segment represents approximately 9% of the
Company's current revenues.
The Company also operates two additional segments-- Canada and Laundry Services.
These two segments collectively represent approximately 7% of the Company's
current revenues.
COMPETITION
The food and facilities management services business in North America is
comprised of a large number of local, regional and national service providers.
The Company's strongest competition comes from larger, well-capitalized
participants due to their ability to provide (i) cost-effective services as a
result of economies of scale, (ii) a broader range of services than local and
regional participants and (iii) national coverage to large clients.
Many educational institutions, health care providers and businesses consider
cost to be an important factor when selecting companies to provide food and
facilities management services. The Company expects to continue being a
successful low-cost services provider due to its (i) significant purchasing
economies of scale for food service and facilities management supplies, (ii)
sophisticated site labor management controls, (iii) low administrative overhead
and (iv) strong information and accounting systems which allow the Company's
management and clients to monitor costs closely.
Clients also consider the quality of food and facilities management services to
be an important factor in addition to price. Accordingly, the Company's ability
to maintain a level of quality in keeping with client expectations will continue
to be an important competitive factor.
13
<PAGE>
ITEM 1. BUSINESS, CONTINUED
THE TRANSACTIONS
DISTRIBUTED OPERATIONS. On March 27, 1998, the Company distributed to its
shareholders, on a pro rata basis, all outstanding shares of New Marriott MI,
Inc., a wholly owned subsidiary of the Company, in a tax-free distribution (the
"Distribution"). New Marriott MI, Inc., subsequently renamed Marriott
International, Inc. (together with subsidiaries, "MI") conducts business in the
lodging segment and in two of the three lines of business previously in the
Company's contract services segment - MSLS and MDS. The lodging, MSLS and MDS
business are collectively referred to as the Distributed Operations. The third
line of business in the contract services segment, MMS, is now the principal
business of the Company.
ACQUISITION. Immediately after the Distribution, on March 27, 1998, Sodexho
transferred to the Company the operations of Sodexho North America having a fair
market value of approximately $278 million, and simultaneously made a cash
payment of $304 million in exchange for 29.9 million shares of the Company's
common stock, after giving effect to the one-for-four reverse stock split, as
detailed in Note 9 to the Consolidated Financial Statements. The purchase price
included approximately $3 million in transaction costs. As a result of the
issuance of new shares of the Company's common stock to Sodexho in connection
with the Acquisition, the shareholders who owned 100 percent of the Company
immediately prior to the Distribution owned approximately 51% immediately
thereafter.
The Acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated to the fair market value of assets acquired and
liabilities assumed as follows:
<TABLE>
<CAPTION>
($ in millions)
-----------------
<S> <C>
Current assets $ 142
Other assets 52
Customer relationships 120
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (18)
Other liabilities (37)
Debt (73)
Deferred taxes, net (9)
Goodwill 238
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
</TABLE>
Immediately after the Acquisition, the Company refinanced the $73 million of
debt assumed, as discussed in Note 8 to the Consolidated Financial Statements.
REFINANCING. On March 27, 1998, the Company borrowed $615 million and $620
million under the Secured Facility and Guaranteed Facility, respectively, both
of which are described below. The proceeds were used to repurchase $713 million
of the Company's publicly held debt, as discussed in the following paragraph,
and to repay its $950 million outstanding obligations under the Company's
existing $1.5 billion credit facility, which was cancelled immediately after
such repayment. Also, the Company repaid debt of $73 million assumed in the
Acquisition. The $304 million received from Sodexho (see Note 2 to the
Consolidated Financial Statements) was used together with the proceeds of the
new debt to fund the debt repayments. The Company also received letters of
credit for $13 million under the Secured Facility on March 27, 1998.
14
<PAGE>
ITEM 1. BUSINESS, CONTINUED
The Secured Facility consists of a $235 million revolving credit facility and a
$500 million six year term loan facility. It bears interest at rates based on a
bank prime rate, the Federal funds rate, or the London interbank offered rate
for Eurodollar deposits ("LIBOR"), payable in arrears quarterly. The Company is
currently paying interest at 6.79%. Of the revolving credit facility, up to $100
million may be used to cover letters of credit. As of August 28, 1998, the
Company had letters of credit outstanding of $26 million. The facility is
collateralized by liens on the inventory, accounts receivable, and stock of the
principal subsidiaries of Sodexho Marriott Operations, Inc. As of August 28,
1998, $184 million of borrowing capacity was available under this facility.
The Guaranteed Facility is a $620 million seven-year term loan. It bears
interest at rates based on a bank prime rate, the Federal funds rate, or LIBOR,
payable in arrears quarterly. The Company is currently paying interest at 6.14%.
The Company pays Sodexho an annual fee of 0.5% of the Guaranteed Facility
balance, or $3 million, to serve as guarantor of the loan.
Additional credit facilities totaling about $12 million from the Canadian
operations of both MMS and Sodexho remained in place. As of August 28, 1998, all
of this borrowing capacity was available under these facilities.
In connection with the Distribution, the Company tendered for $720 million
principal amount of its outstanding publicly held debt, $600 million related to
the Series A through D Senior Notes and $120 million related to the Renaissance
Hotel Group (RHG) Financing. Approximately $593 million of the Series A through
D Senior Notes were tendered at a premium of $45 million (pretax). The
untendered Series A through D Senior Notes remain a liability of the Company.
<TABLE>
<CAPTION>
Face Amount Prior to Untendered Debt at
Tender March 27, 1998 March 27, 1998
-------------------------- ------------------------
($ in millions)
<S> <C> <C>
Series A $ 150 $ 2
Series B 200 1
Series C 150 3
Series D 100 1
-------------------------- ------------------------
$ 600 $ 7
========================== ========================
</TABLE>
Approximately $117 million of the $120 million in RHG Finance outstanding
Guaranteed Notes were tendered at a premium of $20 million (pretax). The Company
paid an additional $3.5 million in cash to MI representing the untendered RHG
debt that became a liability of MI. The debt extinguishment was financed through
the Secured Facility and the Guaranteed Facility discussed above, as well as the
$304 million received from Sodexho in connection with the Acquisition.
As part of the Distribution, the Company and MI agreed that total indebtedness
retained by the Company after the Distribution would equal $1.444 billion.
Because the Company's indebtedness totaled $1.698 billion after effecting the
Distribution, MI paid the Company the difference of $254 million, which the
Company used to repay debt as detailed above.
As a result of the foregoing, the Company incurred an extraordinary charge for
costs associated with the early extinguishment of debt of $71 million, $44
million after-tax, or $0.85 per diluted share for the 34 week period ended
August 28, 1998.
The Company's borrowing agreements contain various covenants, which, among other
things, require the Company to meet certain financial ratios and tests. Each of
the borrowing agreements is described generally in pages 121 through 123 of the
Proxy Statement for the Special Meeting of Stockholders of Marriott
International, Inc. dated March 17, 1998, which is incorporated by reference
into this report, and is included as an exhibit to this report.
15
<PAGE>
ITEM 1. BUSINESS, CONTINUED
INTEGRATION AND RESTRUCTURING
Integration and restructuring actions, such as those taken in the current year
and which may be taken in future years, reflect the Company's efforts to change
in anticipation of marketplace trends. These actions are intended to integrate
and realign resources for more effective and efficient execution of operating
strategies. The integration costs recorded in the Transition Period include,
among other items, training and relocating employees, incremental overhead
during the integration phase, systems modifications, and other one-time costs
related to the integration of MMS and Sodexho North America. Integration costs
totaling $24 million pretax were reflected in the results of operations for the
Transition Period, with approximately $14 million pretax expected to be incurred
in fiscal 1999.
Restructuring actions totaling approximately $37 million were recorded in the
first quarter of the 1998 Transition Period, $7 million of which was recorded as
a charge to operations related to termination benefits for approximately 50
employees and office closure costs related to MMS. Restructuring costs represent
costs, such as employee termination benefits and office closure costs, that are
incurred to terminate certain duplicate activities. The gross acquisition
reserve of $30 million disclosed in Note 4 to the Consolidated Financial
Statements principally represents costs associated with termination benefits for
approximately 350 employees and office closure costs related to the former
Sodexho North America operations.
When completed, these actions currently underway are expected to generate
one-third of the anticipated annual cost savings of approximately $60 million
pretax. The remaining two-thirds of these anticipated savings relate to greater
purchasing economies. Management believes it will achieve these synergies by the
end of fiscal 2001. The anticipated cost savings are expected to make funds
available to pay down debt and fund activities to enhance the Company's
competitive position.
As part of the integration of accounting systems, the Company has undertaken to
ensure that client contract and billing information converted to the central
accounting system is verifiable and supportable. Where needed, the Company is
taking steps to confirm such information with its clients.
ARRANGEMENTS BETWEEN THE COMPANY AND MI
Pursuant to the Distribution agreement, the Company and New Marriott MI, Inc.
("New Marriott", subsequently renamed Marriott International, Inc.) agreed upon
the allocation of assets and liabilities related to the MMS business and the New
Marriott business. In this regard, the Company agreed generally to indemnify New
Marriott against liabilities that relate to the MMS business, and New Marriott
agreed generally to indemnify the Company against liabilities that relate to the
New Marriott business. The Company and New Marriott also entered into a number
of agreements governing their relationship after March 27, 1998. These
agreements include (i) a tax-sharing agreement, (ii) an employee benefits
allocation agreement, (iii) a trademark license agreement, (iv) a noncompetition
agreement, (v) a LYONs allocation agreement, as well as other additional
agreements between the companies. Each of these agreements is described
generally in pages 43 through 48 of the Proxy Statement for the Special Meeting
of Stockholders of Marriott International, Inc. dated March 17, 1998, which is
incorporated by reference into this report, and is included as an exhibit to
this report.
ARRANGEMENTS BETWEEN THE COMPANY AND SODEXHO
The Company has entered into various agreements with Sodexho that govern its
relationship with that entity. These agreements include (i) a royalty agreement,
(ii) an assistance agreement, (iii) a stockholder agreement, as well as other
additional agreements between the companies including guarantees of certain
liabilities of the Company by Sodexho. Each of these agreements is described
generally in pages 48 through 50 of the Proxy Statement for the Special Meeting
of Stockholders of Marriott International, Inc. dated March 17, 1998, which is
incorporated by reference into this report, and is included as an exhibit to
this report.
16
<PAGE>
ITEM 1. BUSINESS, CONTINUED
GOVERNMENT REGULATION
The Company is subject to various governmental regulations relating to its
operations, including, but not limited to, employment, health, safety and
environmental regulations as well as regulations applicable to government
contractors. The Company has installed various controls and procedures designed
to ensure compliance with these regulations.
EMPLOYEES
The Company has approximately 100,000 employees on its payroll in the U.S. and
Canada, and manages approximately 60,000 people on its clients' payrolls. An
estimated 8,800 non-management employees are represented by organized labor
unions for collective bargaining purposes. The Company believes its relations
with its employees are positive.
INFLATION
The Company's expenses are impacted by inflation. While price increases
generally can be instituted as inflation occurs, many contracts require certain
approvals before prices can be increased, which may temporarily have an adverse
impact on profit margins. Management believes that over time, however, the
Company will be able to raise prices, as appropriate, and sustain profit
margins.
ACCOUNTING PERIOD
On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to the end of August, effective immediately. This change resulted
in a 34-week Transition Period from the end of fiscal 1997 to the end of the new
fiscal year on August 28, 1998. In addition, the new fiscal 1999 year will have
53 weeks, ending on September 3, 1999. The Company's 1997 and 1995 historical
fiscal years, ending on the Friday nearest the end of December, contained 52
weeks, while the 1996 historical fiscal year contained 53 weeks.
17
<PAGE>
ITEM 2. PROPERTIES
The Company presently occupies approximately 42,800 square feet for its
headquarters office space in Bethesda, Maryland in a building leased by the
Company from Marriott International, Inc. (MI). In June 1998, the Company
entered into a 10 year lease, ending in December 2008, with 2 renewable periods
of 5 years each, for approximately 80,000 square feet of space at 9801
Washingtonian Boulevard, Gaithersburg, Maryland. Also in June 1998, the Company
entered an amended agreement with MI to vacate the Bethesda headquarters office
space no later than December 31, 1998. The Company plans to move all of its 250
headquarters employees to this new location by December 31, 1998, as well as
approximately 150 employees from other offices.
In addition, all of the Company's operating divisions lease their respective
headquarters office space as follows: Avon, Connecticut (Health Care Services);
Altamonte Springs, Florida (Education Services); and Downers Grove, Illinois
(School Services). The headquarters for the Corporate Services division is
located with the Company's headquarters in Gaithersburg, Maryland. These
operating division leases generally run for initial terms of three to five years
with renewal options. The Company also has a long-term lease for its office
facility in Buffalo, New York, where all of the centralized accounting and
processing activities for North America take place. The Company owns three
laundry facilities (Walla Walla, Washington; Tucson, Arizona; and Phoenix,
Arizona) and leases three additional laundry facilities (Birmingham, Alabama;
Gilroy, California; and Compton, California).
As a result of the Acquisition, the Company also occupies approximately one-half
of an 80,000 square-foot office building that it owns in Waltham, Massachusetts;
approximately 25,000 square feet of office and warehouse space in Trumbull,
Connecticut; approximately 15,000 square feet of office space in Mobile,
Alabama; approximately 20,000 square feet of building space in Sunnyvale,
California; and approximately 15,000 square feet of building space in Allston,
Massachusetts. The Company also owns a 30,000 square foot office building in
Montreal, Canada.
The Waltham office facility was sold in October 1998. The Company does not
anticipate any adverse impact to the financial condition or results of
operations from the sale of this facility. In relationship to the sale of the
Waltham office space, the Company entered into an agreement for approximately
25,000 square feet of office space in Lexington, Massachusetts, beginning in
December 1998, for a seven year period, with a five year renewal option.
Approximately 100 employees will occupy the Lexington office facility.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK. The comparability of stock prices in the table below is affected
by the Transactions which occurred on March 27, 1998. The range of the Company's
common stock prices and dividends declared per share for the Transition Period
and the past two fiscal years are as follows (restated to reflect the
one-for-four reverse stock split):
<TABLE>
<CAPTION>
Dividends
Declared Per
High Low Share
--------------- --------------- --------------
<S> <C> <C> <C> <C>
TRANSITION PERIOD 1998 Quarter ended March 27, 1998 $330 1/2 $243 3/4 $.36
Nine weeks ended May 29, 1998 31 3/8 24 5/16 -
Quarter ended August 28, 1998 33 1/16 25 3/4 -
FISCAL YEAR 1997 First Quarter 229 198 1/2 .32
Second Quarter 256 1/2 198 1/2 .36
Third Quarter 287 240 .36
Fourth Quarter 307 260 1/2 .36
FISCAL YEAR 1996 First Quarter 210 1/2 149 .32
Second Quarter 200 177 .32
Third Quarter 229 1/2 193 1/2 .32
Fourth Quarter 239 1/2 205 1/2 .32
</TABLE>
At August 28, 1998, there were 61.87 million shares of common stock outstanding
held by approximately 52,000 shareholders of record. The Company's common stock
is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange.
DIVIDEND POLICY. Prior to the Transactions, the Company had paid regular
quarterly dividends. The Company may pay quarterly dividends if the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements related to the Refinancing and other relevant considerations. In
general, the restrictive covenants do not permit the Company to pay dividends to
shareholders in an amount greater than 40 percent of the Company's net income,
or 45 percent when the ratio of the Company's consolidated debt to Earnings
Before Interest, Taxes, Depreciation and Amortization ratio ("EBITDA", as
defined in the documentation for the credit facility agreements) is less than 4
but not less than 3. This restriction will no longer apply when such ratio is
less than 3. The payment and amount of cash dividends on the Company's common
stock will be subject to the sole discretion of the Company's Board, which will
review the Company's dividend policy at such times as may be deemed appropriate.
The Board will closely monitor the results of the Company's operations, capital
requirements, and other considerations to determine the dividend to be declared
in future periods.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for the
Company derived from its financial statements as of the 34-week period ending
August 28, 1998, and for the five fiscal years ended January 2, 1998. As the
result of the Transactions, 1998's results are not comparable to the other years
presented. Specifically, the results of Sodexho North America are only included
in the Stub Period ended August 28, 1998. Conversely, the results of MDS and
MSLS are included in the historical financial continuing operations prior to the
Transaction. In addition, operating results in 1997 include a loss before income
taxes of $22 million ($14 million after-tax, or $0.40 per share) on the sale of
MMS- UK to Sodexho.
Prior to the Transactions, the Company was previously a wholly owned subsidiary
of Marriott Corporation (now named Host Marriott Corporation) prior to October
8, 1993, on which date its common stock was distributed to Marriott Corporation
shareholders. In addition, the historical income statement of the Company for
1993 includes 40 weeks of operating results as a subsidiary of Marriott
Corporation and 12 weeks of operating results as an independent entity. Thus,
the 1993 operating results are not directly comparable to other years.
The historical information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto, each
contained herein.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
34 WEEKS 36 WEEKS
AUGUST SEPT. FISCAL YEAR
----------------------------------------------------
1998(1) 1997(1) 1997(2) 1996(3) 1995 1994 1993
----------- ---------- ---------- ---------- --------- ---------- ---------
($ in millions, except per share data) (Unaudited)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $2,828 $3,390 $5,026 $4,318 $3,634 $3,466 $3,216
Operating Profit Before
Corporate Expenses and Interest 119 103 157 177 130 111 101
Total Corporate Expenses and Interest(4) (151) (122) (172) (127) (78) (71) (81)
----------- ---------- ---------- ---------- --------- ---------- ---------
(Loss) Income From Continuing Operations,
Before Taxes and Extraordinary Item (32) (19) (15) 50 52 40 20
Benefit (Provision) for Income Taxes from
Continuing Operations 13 19 15 (17) (20) (17) (8)
----------- ---------- ---------- ---------- --------- ---------- ---------
(Loss) Income From Continuing Operations, Before
Discontinued Operations, Cumulative Effect
of a Change in Accounting Principle and
Extraordinary Item(5) (19) -- -- 33 32 23 12
Discontinued Operations, Net of Income Taxes(6) 77 227 335 273 215 177 147
----------- ---------- ---------- ---------- --------- ---------- ---------
Income Before Cumulative Effect of
a Change in Accounting Principle and
Extraordinary Item(5) 58 227 335 306 247 200 159
Cumulative Effect of a Change in
Accounting Principle(5) -- -- -- -- -- -- (33)
Loss from Extraordinary Item, Net of Income Taxes(7) (44) -- -- -- -- -- --
----------- ---------- ---------- ---------- --------- ---------- ---------
Net Income $ 14 $ 227 $ 335 $ 306 $ 247 $ 200 $ 126
=========== ========== ========== ========== ========= ========== =========
PER SHARE DATA(8):
Diluted Earnings Per Share:
Continuing Operations $(0.36) $ 0.16 $ -- $ 0.97 $ 0.97 $ 0.69 $ 0.41
Discontinued Operations(6) 1.48 6.52 10.53 8.08 6.51 5.35 4.67
----------- ---------- ---------- ---------- --------- ---------- ---------
Before Cumulative Effect of a Change in
Accounting Principle(5) 1.12 6.68 10.53 9.05 7.48 6.04 5.08
Cumulative Effect of a Change in
Accounting Principle(5) -- -- -- -- -- -- (1.04)
Extraordinary Item(7) (0.85) -- -- -- -- -- --
----------- ---------- ---------- ---------- --------- ---------- ---------
Diluted Earnings Per Share $ 0.27 $ 6.68 $10.53 $ 9.05 $ 7.48 $ 6.04 $ 4.04
=========== ========== ========== ========== ========= ========== =========
Cash Dividends Declared $ 0.36 $ 1.04 $ 1.40 $ 1.28 $ 1.12 $ 1.12 $ 0.56
Diluted Weighted - Average Shares 52.0 34.9 31.8 33.8 33.0 33.1 31.5
BALANCE SHEET DATA (AT END OF YEAR):
Total Assets $1,341 $5,208 $5,009 $4,180 $3,221 $2,529 $1,743
Long-Term and Convertible Subordinated Debt 1,091 1,731 1,829 1,300 795 488 564
Stockholders' (Deficit)/Equity (555) 1,486 1,463 1,260 1,054 767 696
- -----------
<FN>
1 - On April 15, 1998, the Company's Board of Directors changed the fiscal year from the Friday closest to the end of December to
the Friday closest to the end of August, thereby creating a 34-week Transition Period. On March 27, 1998, the Company acquired
Sodexho North America. The historical data for fiscal year 1997 and prior years does not include the revenue and expenses of the
acquired business, see Notes 1 and 3 to the Consolidated Financial Statements. Amounts for the unaudited 36 weeks ended September
12, 1997 have been presented for comparative purposes only, and exclude the revenues or expenses of the acquired business.
2 - Operating results in fiscal year 1997 include a loss before income taxes of $22 million ($14 million after tax, or $0.40 per
share) on the sale of the MMS- UK operations to Sodexho in connection with the Transactions.
3 - Fiscal year 1996 includes 53 weeks, all other fiscal years include 52 weeks.
4 - Total corporate expenses include the amortization of intangible assets. For the 34 weeks ended August 28, 1998, $31.1 million
pretax of integration and restructuring charges was recognized, see Note 4 to the Consolidated Financial Statements.
5 - Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was adopted in the first quarter of fiscal
1993.
6 - On March 27, 1998, the Company distributed to its shareholders the Lodging, MSLS and MDS divisions as part of the
Transactions. For reporting purposes, the Lodging segment is considered Discontinued Operations prior to March 27, 1998. MSLS and
MDS are considered part of continuing operations for the same periods (see Note 1 to the Consolidated Financial Statements).
7 - On March 27, 1998, the Company refinanced its debt as part of the Transactions (see Note 1 and Note 8 to the Consolidated
Financial Statements), resulting in a $71 million pretax charge from the early extinguishment of debt ($44 million after-tax).
8 - Earnings per share data have been restated to reflect the adoption in 1997 of Statement of Financial Accounting Standards No.
128, "Earnings Per Share." All per share data has been adjusted to reflect a one-for-four reverse stock split effective March 27,
1998.
</FN>
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
As described in Part I, Items 1 & 2, "Business and Properties," on March 27,
1998, the Company completed the Distribution, Acquisition, and Refinancing. As a
result, the assets, liabilities, and business operations of the Company as of
August 28, 1998 and for the Transition Period then ended have changed
substantially compared to prior periods presented.
In particular, the most significant differences relate to the following:
- - The 1997, 1996 and 1995 Consolidated Statement of Income included
revenues, as well as operating costs and expenses, related to the
Distributed Operations. In the Consolidated Statement of Income, the
operations of the Lodging segment have been combined and included as
"Discontinued Operations, Net of Income Taxes." The MDS and MSLS segments
of Contract Services were also part of the Distribution to shareholders,
but remained part of continuing operations in the historical financial
statements. See Note 1 to the Consolidated Financial Statements.
- - As described in Notes 1 and 3 to the Consolidated Financial Statements,
the Company acquired the North American operations of Sodexho Alliance,
S.A. on March 27, 1998. The historical data in 1997 and prior years does
not include the revenue and expenses of the acquired business.
- - On March 27, 1998, the Company obtained over $1.3 billion in new debt
through secured and guaranteed credit facilities, with the proceeds used to
repay of over $1.6 billion of existing debt. See Note 8 to the Consolidated
Financial Statements.
- - On April 15, 1998, the Company's Board of Directors changed the fiscal
year from the Friday closest to the end of December to the Friday closest
to the end of August, thereby creating a 34-week Transition Period. See
Note 1 to the Consolidated Financial Statements.
Due to these substantial differences in the comparability of the Company's
historical operating results for the Transition Period and prior fiscal years,
management believes that it is meaningful and relevant in understanding the
present and ongoing Company operations to compare the Company's pro forma
operating results for fiscal years 1998, 1997 and 1996, presented in the
"Introduction" section of this report. These pro forma statements were prepared
as if the Distribution, Acquisition, Refinancing and the implementation of the
various related agreements entered into with Marriott International, Inc. and
Sodexho occurred at the beginning of each period. The pro formas exclude, among
other items, certain non-recurring costs such as (i) costs of the Distribution
of $17 million (net-of-tax) in 1998, (ii) an extraordinary loss related to the
early extinguishment of debt of $44 million, after-tax, and (iii) integration
and restructuring charges totaling $31 million for 1998. See Notes 2, 3, and 4
to the Consolidated Financial Statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, which analyzes the major elements of the Company's
consolidated statements of operations and financial condition, should be read in
conjunction with the detailed information and consolidated financial statements,
and related Notes to Consolidated Financial Statements, included in this report.
SEASONAL NATURE OF THE COMPANY'S BUSINESS
The food service and facilities management business has been characterized
historically by seasonal fluctuations in overall demand for services,
particularly in the Education and Schools divisions where sales are stronger
during the fall and spring.
LIMITED GEOGRAPHIC FOCUS
The Company is not currently expected to expand its international presence
beyond Canada. The Trademark License Agreement entered into by the Company and
Marriott International, Inc. gives the Company the right to use the Marriott
name in the U.S. and Canada (and elsewhere only in extremely limited
circumstances). Likewise, the Company entered into a Royalty Agreement with
Sodexho pursuant to which Sodexho licenses the right to use the "Sodexho" name
in the U.S. and Canada. As a practical matter, since the Company will only be
allowed to use its corporate name in the U.S. and Canada, and since Sodexho
controls or has a significant interest in companies operating in other countries
in the food and facilities management industries, it is unlikely that the
Company will engage in significant operations outside the U.S. and Canada. As a
result, the Company will be more susceptible to a downturn in the U.S. and
Canadian economies than a company that is actively engaged in various other
markets.
21
<PAGE>
BUSINESS STRATEGY
The Company's key financial objective is to generate higher revenues and
increase cash flow from operations through new contract sales, the retention of
existing contracts, and improved efficiencies in the Company's operations. This
financial objective is designed to build on the performance strengths of the
Company, which include expanding relationships with existing clients, attracting
new business, identifying under-penetrated and rapidly growing segments of the
food and facilities management industry, and seeking selective strategic
acquisition candidates compatible with this objective.
The Company has spent the past year focused on the consummation of the
Transactions. This involved the integration of the number one and number four
market leaders in the U.S. food and facilities management services industry,
including the merging of best practices and business strategies. The priorities
since the Transactions have been to align the Company's management team,
consolidate the systems and processes for improved operations, and develop
integrated business strategies.
The alignment of the management team has progressed beyond the matching of
personnel to an enhanced organization chart. Management has designed and
implemented a new Company-wide incentive program that is predominately based on
the achievement of predetermined financial targets and operational performance
objectives. In addition, the Board of Directors has granted 1.8 million shares
in the form of incentive stock options to the managing employees of the Company.
This grant has extended farther down in the management structure than any
previous plan utilized in either the MMS or the Sodexho North America
organizations.
The Company's consolidation and integration of its systems and processes has
been challenging due to the volume and geographic diversity of the systems and
processes that existed prior to the Transactions. As of August 29, 1998, the
Company had merged five accounting centers into one. The Company also plans to
transition from three payroll systems to one by January 1999. Another milestone
was the signing of a long term lease in June 1998 to combine the two corporate
headquarters into one redesigned facility in Gaithersburg, Maryland by December
31, 1998.
Improved efficiencies are also expected to be achieved as the former companies'
procurement and distribution processes and systems are combined. The Company
expects that these efficiences will account for approximately two-thirds of the
estimated $60 million in annual synergies which the Company expects to realize
by the year 2001. While no assurance can be given that this objective will be
met, management believes it is attainable and that its clients and others in the
marketplace will continue the trend of increased outsourcing of foodservice and
facilities management services.
22
<PAGE>
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the 34-week period ended August 28, 1998 (the Transition Period) as
compared with the historical unaudited 36 week period ended September 12, 1997
presented in the Selected Consolidated Financial Highlights above. While the
comparison of the Transition Period to the previously reported 36-week period in
1997 differs by two weeks, management believes that this comparison is the most
relevant. The discussion below also presents an analysis of fiscal years ended
January 2, 1998 (52 weeks), January 3, 1997 (53 weeks) and December 29, 1995 (52
weeks). As detailed above, due to the substantial differences in the
comparability of the Company's historical operating results for the Transition
Period versus prior fiscal years, management believes that it is more meaningful
and relevant, in understanding the present and ongoing operations of the
Company, to review the Company's pro forma operating results for fiscal years
1998, 1997 and 1996, presented in the "Introduction" section of this report.
HISTORICAL 34 WEEKS ENDED AUGUST 28, 1998 VS. 36 WEEKS ENDED SEPTEMBER 12, 1997.
Total sales for 34 weeks ended August 28, 1998 (the "Transition Period") were
$2.8 billion, a decrease of $562 million, or 16.6%, compared with $3.4 billion
for 1997. The decline in sales between the years was mostly attributable to the
distribution of the Marriott Distribution Services ("MDS") and Marriott Senior
Living Services ("MSLS") divisions to shareholders on March 27, 1998. The
results of these divisions were included in total sales for the entire 1997
period, but were only included in the first twelve weeks of the 1998 period.
Excluding the MDS and MSLS divisions, total sales increased $352 million, or
16.3%. Corporate Services sales in the 1998 period totaled $803 million, an
increase of $162 million, or 25.3%, versus $641 million for the prior year,
driven by the Acquisition. Education total sales increased $93 million to $598
million for the 1998 period, an increase of 18.2% over 1997, driven by the
Acquisition. Health Care sales for the 1998 period totaled $784 million, an
increase of $70 million, or 9.8% compared with 1997. The Schools, Canada and
Laundries/Other divisions collectively totaled $322 million for the 1998 period,
an increase of $28 million, or 9.5%, over the $294 million in aggregate sales
for 1997. Also contributing to higher sales was the high retention rate for
existing clients, which was in the 95% range for the 1998 period.
Operating profit before corporate items totaled $119 million for the 1998
period, an increase of $16 million, or 15.5%, over the $103 million in operating
profit for the 1997 period. Excluding $10 million in integration and
restructuring costs, operating profit increased $26 million, or 25.2%. This
increase was the result of the solid sales growth in the Corporate Services and
Education divisions in 1998. Total operating profit for Corporate Services was
$49 million, a 44.1% increase over 1997's total operating profit of $34 million.
Education's total operating profit increased $259 thousand to $5 million for the
1998 period, for an increase of over 5% compared to the prior year's period. In
addition to increased sales, operating margins improved as the result of the
Acquisition of Sodexho North America in March 1998. Challenges in the health
care industry resulted in a $4.3 million decrease in operating profit for this
division for the 1998 period. Health Care's total operating profit stood at $49
million for 1998, as compared with $53 million for the 1997 period. The Company
anticipates its leadership in this division and the continuing change in this
industry will result in an improved growth outlook in 1999 for this division.
Operating profit in the Schools, Canada and Laundries/Other divisions totaled
$11 million in the 1998 period, level with 1997's profit.
Corporate items remained flat during 1998, after excluding $21 million in
integration and restructuring charges in the 1998 period. Total corporate
expenses and interest were $151 million, or $130 million excluding the
integration and restructuring charges, for the 1998 period, compared with $122
million for the 1997 period. The Company anticipates increased efficiencies in
its operating costs and corporate expenses in the periods ahead, as the Company
continues the integration of the MMS and Sodexho North America operations. These
savings are anticipated to reach $60 million annually by fiscal year 2001.
Decreased operating profit in the Health Care division, as well as level
corporate expenses between the periods, contributed to the $1 million loss from
continuing operations before taxes and extraordinary item in the 1998 period,
excluding the integration and restructuring charges. This compares to a $19
million loss from continuing operations for the 1997 period, which included $12
million pretax of corporate expenses from non-cash items associated with
investments generating significant income tax benefits, resulting in an adjusted
operating loss of $7 million for the 1997. Discontinued Operations, net of
income taxes, totaled $77 million for the 1998 period, compared with $227
million for the 1997 period. This significant decrease was mostly due to the
Distribution to shareholders on March 27, 1998, which resulted in the 1998
period reflecting only 12 weeks of income from the Discontinued Operations.
23
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
HISTORICAL 52 WEEKS ENDED JANUARY 2, 1998 COMPARED WITH 53 WEEKS ENDED
JANUARY 3, 1997.
The Company reported a 1% increase in operating profit from continuing
operations on 16% higher sales in fiscal 1997, before the $22 million loss on
the sale of the MMS- UK operations to Sodexho. Profit comparisons between years
were affected by sales to investors during 1996 and 1997 of 43 senior living
communities, which were part of the Company's MSLS division that was distributed
to shareholders on March 27, 1998. Before the impact of the Distribution and
sale of the MMS- UK operations, operating profits from continuing operations
increased 11% over fiscal 1996. Operating profit was also adversely affected by
start-up losses for new distribution centers and distribution accounts from the
MDS division.
Before the loss on the sale of the MMS- UK operations, operating profits,
excluding MDS and MSLS, were 14% higher on a sales increase of 3% percent in
fiscal 1997. Sales and profits increased due to new contracts, expanded service
to ongoing accounts and continued cost reductions in several areas. The
Corporate Services, Health Care, Education and Schools divisions were the main
contributors to the profit growth.
MSLS, which was part of the Distribution on March 27, 1998, reported a sales
increase of 28% in fiscal 1997 over 1996, primarily due to the opening of 17
communities during 1997 and a two percentage point increase in occupancy, to
95%, for comparable properties. The Company sold 43 senior living properties to
investors since the beginning of 1996, retaining long-term operating agreements.
Operating profits declined as "ownership profits" from these properties were
replaced with "managed operating profits." This reduction in operating profit
was offset by a corresponding reduction in interest expense.
MDS, which was also part of the Distribution on March 27, 1998, had sales move
up sharply in fiscal 1997 as a result of the addition of several major
restaurant customers and the net addition of two new distribution centers.
Profits, however, were lower in fiscal 1997 due to start-up costs associated
with the new centers, as well as costs involved in integrating the new business
into existing distribution centers.
Corporate expenses rose 19% in 1997, due to noncash items associated with
investments generating significant income tax benefits, as well as modest staff
increases to accommodate growth and new business development. Interest expense
increased 29% over fiscal 1996 despite lower effective interest rates. The
average debt balance increased due to the acquisition of RHG, partially offset
by proceeds from sales of hotels and senior living communities.
Discontinued Operations, comprising the lodging division, had an operating
profit increase of 26% on 20% higher sales, benefiting from favorable conditions
in the U.S. lodging market, and contributions from new properties. The revenue
increase resulted from average growth across all brands of eight percent. This
revenue growth resulted in higher base management and franchise fees. Revenue
growth also contributed to higher house profits, which resulted in higher
incentive management fees.
The Company's net effective income tax rate for continuing and discontinued
operations increased to 39.5% in 1997, compared to 39% in 1996, reflecting
approximately a one percentage point increase due to the RHG acquisition and the
Company's ongoing participation in jobs and affordable housing tax credit
programs.
Net income increased nine percent to $335 million in fiscal 1997, on a sales
increase of 18% to $12 billion when including the sales from discontinued
operations, driven by contributions from new unit expansion and strong profit
growth for the Discontinued segment, partially offset by the loss on the sale of
the MMS- UK operations to Sodexho and the impact of the Renaissance Hotel Group
(RHG) acquisition. Diluted earnings per share increased 16% to $10.53,
reflecting higher net income. Before the loss on sale of the MMS- UK operations
and the impact of the RHG acquisition, net income and diluted earnings per share
increased 20%.
24
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
HISTORICAL 53 WEEKS ENDED JANUARY 3, 1997 COMPARED WITH 52 WEEKS ENDED
DECEMBER 29, 1995.
The Company reported a 36% increase in operating profit from continuing
operations on 19% higher sales in fiscal 1996. Excluding the impact of the March
1996 acquisition of Forum Group by the MSLS division, operating profits were up
11% for the year on 14% sales growth.
Profits rose 12% in 1996 while sales were up 9%, excluding the MSLS and MDS
divisions, which were distributed to shareholders on March 27, 1998 as part of
the Transactions. Performance was paced by the Health Care, Education and
Schools divisions, all of which benefited from the impact of new accounts, and
expansion of services to ongoing clients. International profits were also
higher, reflecting improved results in Canada.
Sales for MSLS increased 117% in 1996, while profits were up more than five-fold
from 1995 levels. Excluding the impact of the Forum acquisition, sales increased
23% and profits increased 18%. Overall growth was generated by a gain in
occupancy to 96%, and a 2% increase in average per diem rates for comparable
Marriott senior living communities, strong move-in rates at 11 communities
opened since the beginning of 1995, and contributions from the acquired Forum
Group communities.
Sales for MDS grew 35% in 1996, as the division opened five new distribution
centers and added several major external restaurant accounts. Profits were flat
in 1996, as sales gains were offset by start-up costs associated with the new
centers and new business.
Corporate expenses rose 23% in 1996, reflecting higher outlays associated with
new business development and staff additions to facilitate the Company's growth.
Additionally, costs increased due to tax-related investments, which generated
significant after-tax savings. Interest expense was up 60% as a result of
incremental borrowings to support business growth, partially offset by lower
interest rates. Interest income declined 5%, primarily due to collections and
sales of affiliate and other notes receivable.
Discontinued Operations, comprising the lodging division, had operating profit
up 26% on 10% higher sales, benefiting from favorable conditions in the U.S.
lodging market, and contributions from new properties. This division added a net
of 146 hotels and opened four new vacation club resorts during the year. Profits
for Marriott Hotels, Resorts and Suites rose 24 percent in 1996 on sales growth
of nine percent reflecting the addition of 1,006 rooms in the U.S. and a net of
3,768 rooms internationally. Comparable Company-operated U.S. hotels posted 8%
higher sales due to room rate growth of 7% and a one-percentage point increase
in occupancy to 78%. These sales gains, coupled with profit margin improvements,
generated substantially higher incentive management fees at many properties.
Profits for international hotels also were higher, primarily because of
contributions from new properties. Also contributing to the increase in 1996
from Discontinued Operations was higher income from the investment in The
Ritz-Carlton Hotel Company LLC. For comparable U.S. hotels, the luxury chain
posted a 10% increase in sales as average room rates increased four percent to
$181 and occupancy increased to 75%. In addition, house profit margins improved,
benefiting from integration with Marriott Lodging systems and programs.
The Company's net effective income tax rate for continuing and discontinued
operations declined to 39% in 1996, compared to 40% in 1995. This favorable
trend reflects the Company's ongoing participation in jobs and affordable
housing tax credit programs.
Net income increased 24% to $306 million in 1996, driven by the Discontinued
Operations net unit expansion and strong profit growth from Discontinued
Operations, MMS, MSLS and MDS, partially offset by higher interest and corporate
expenses. Diluted earnings per share advanced 21% to $9.05, reflecting higher
net income partially offset by higher average shares outstanding.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
After the Distribution, the Company has been focused on the integration of the
former MMS and Sodexho North America operations, capitalizing on its combined
market presence as well as focusing on attracting new accounts and enhancing
services to sustain growth. The Company is substantially more leveraged on a
relative basis than the Company was prior to the Distribution. The Company
anticipates that it would have long-term unsecured debt ratings, if obtained,
below investment grade based on its pro forma financial statements. The debt
resulting from the Refinancing contains restrictive covenants and requires
grants of security and guarantees by subsidiaries of the Company, which limit
the Company's ability to incur additional debt and engage in certain other
activities. Additionally, these debt covenants limit the Company's ability to
pay dividends.
The Company funds its capital requirements with a combination of existing cash
balances and operating cash flow. As of August 28, 1998, the Company had a $235
million revolving credit facility available at an interest rate of 6.82% to
provide funds for liquidity, seasonal borrowing needs and other general
corporate purposes. At August 28, 1998, $25 million of this facility was
outstanding, and an additional $26 million of the revolving credit facility had
been utilized by letters of credit outstanding, principally related to insurance
programs. The Company believes that cash flow generated from operations and
current cash balances will be adequate to finance ongoing capital needs, as well
as meet debt service requirements. The Company's debt agreements do not restrict
the Company's ability to fund its planned growth initiatives from operating cash
flow and existing credit facilities.
Prior to the Transactions, the Company had paid regular quarterly dividends. The
Company may pay quarterly dividends in the future, subject to the restrictive
covenants contained in the Company's credit facility agreements related to the
Refinancing and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to Earnings Before Interest, Taxes,
Depreciation and Amortization ratio ("EBITDA", as defined in the documentation
for the credit facility agreements) is less than 4 but not less than 3. This
restriction will no longer apply when such ratio is less than 3. The payment and
amount of cash dividends on the Company's common stock will be subject to the
sole discretion of the Company's Board, which will review the Company's dividend
policy at such times as may be deemed appropriate. The Board will closely
monitor the results of the Company's operations, capital requirements, and other
considerations to determine the dividend to be declared in future periods.
The Company is required to make quarterly cash interest payments on its term
facilities, as well as scheduled principal repayments on its Senior Secured
Credit Facility (as detailed in Note 8 to Consolidated Financial Statements).
Annual interest expense is estimated to be approximately $90 million based on
August 28, 1998 debt balances, with scheduled principal repayments amounting to
approximately: $70 million in 1999; $80 million in 2000; $80 million in 2001;
$90 million in 2002; $115 million in 2003 and $65 million in 2004.
The Company, prior to the Transactions, declared dividends of 28 cents per share
in each quarter of 1995, 32 cents per share in each quarter of 1996 and the
first quarter of 1997, and 36 cents per share in each of the last three quarters
of 1997 and the first quarter of 1998. The Company expects to reinvest most of
its earnings in its businesses. The Company may pay quarterly dividends in
future periods, subject to the judgment of its Board of Directors and
restrictive covenants in its debt agreements limiting the payment of dividends.
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. SFAS No. 133 will be
effective for the Company on September 4, 1999, the beginning of fiscal year
2000. The impact to the Company's financial position of implementing SFAS No.
133 has yet to be determined.
26
<PAGE>
YEAR 2000
GENERAL. The Company is actively addressing potential issues associated with the
computer programming practice historically used to signify dates by using two
digits rather than four digits (e.g. "00" instead of "2000"). Accordingly, the
Company's owned and operated computer-based technology may incorrectly process
dates and may not distinguish properly between 1900 and 2000, which could result
in computer systems failures or miscalculations. These potential issues are
collectively referred to as the Year 2000 issue.
The Year 2000 issue could arise at any point in the Company's purchasing,
supply, processing, distribution and financial chains. Incomplete or untimely
resolution of the Year 2000 issue by the Company, its key suppliers, clients and
other parties could have a material adverse effect on the Company's results of
operations, financial condition and cash flow.
The Company has established a Year 2000 project (the "Project") to address the
Year 2000 issue. The Project's Steering Committee consists of members of the
Company's senior management, including representatives from each of the
Company's divisions and most corporate functions. This Steering Committee
oversees and regularly reviews the status of the Company's efforts on the seven
phases of the Project: (1) awareness, (2) inventory, (3) assessment, (4)
remediation, (5) testing and validation, (6) implementation and (7) contingency
planning. The Steering Committee is also tasked with estimating and controlling
the associated costs of the Project. Additionally, the Company has established a
Year 2000 Project team, led by an experienced project manager, that is
responsible for the day-to-day oversight and coordination of the Company's Year
2000 efforts.
YEAR 2000 READINESS DISCLOSURE. The Company began the process of understanding
the Year 2000 issue in 1996. The Company's Board of Directors and senior
management are committed to minimizing the impact of the Year 2000 issue on the
Company's operations. Senior management has grouped the Company's exposure in
five general categories:
- Internally developed software
- Third party software
- Infrastructure (mainframe, personal computers, etc.)
- Facilities systems
- Other external systems (supply chain and other outside relationships)
Internally developed software, third party software and infrastructure hardware
are all information technology ("IT") systems. Facilities and other external
systems are non-IT systems.
The inventory and assessment phases both began in 1996. An inventory of
internally developed software and the assessment of the necessary remediation
are complete. Similarly, an inventory of third party software and mainframe
systems is complete. The Company is in the process of finalizing the inventory
and assessment of personal computers, which are used at most of the Company's
operating locations to support unit level financial and operating systems. This
process is substantially complete. The Company is also surveying and assessing
facilities systems, which include food service refrigeration and food
preparation systems that the Company manages for its clients. The Company also
manages elevators, heating, ventilation and air conditioning systems for its
clients pursuant to plant operations and maintenance agreements. Because these
facilities systems reside at client sites, they are generally not under the
Company's control, and responsibility for these systems generally rests with the
client. The assessment of these systems requires close cooperation between the
Company and its clients. With respect to plant operations and maintenance
clients, the Company is offering certain services to assist these clients in
achieving their Year 2000 objectives relative to their facilities systems.
Finally, the Company has identified other external systems that support the
different facets of its business, such as vendors, suppliers, utilities,
clients, customers, government entities and other service providers. These
systems are not under the Company's control.
The remediation phase is substantially complete for internally developed
software and mainframe systems. With respect to third party software and
personal computers, the Company has formulated a plan establishing the
priorities for remediation or contingency planning. Both internal and external
resources are involved in executing the plan, which is expected to be
substantially complete by March 31, 1999. Systems considered most critical to
ongoing operations and those that could have a material adverse effect on the
Company's business results of operations, financial condition and cash flow are
being given the highest priority. Remediation of facilities systems at its
clients' facilities and other external systems is not under the Company's
control.
27
<PAGE>
YEAR 2000, CONTINUED
The testing phase is well underway for the Company's internally developed
software and mainframe systems. The testing and, through third parties,
validation that these systems are Year 2000 compliant are expected to be
completed by December 31, 1998. Third party software and personal computer
specifications are being validated where they are considered critical to the
Company's business operations. The Company is working with clients and other
external entities to validate the compliance status of their systems.
The implementation and rollout of compliant systems are expected to be
substantially complete by June 30, 1999. Given the large number and geographic
diversity of the Company's operating locations, the installation of compliant
systems and removal of non-compliant systems, as necessary, at these locations
may pose certain difficulties.
To manage potential points of failure, the Company is developing contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Contingency plans and associated cost estimates are expected to be
completed by June 30, 1999, and will be continually refined as additional
information becomes available.
RISKS. There are many risks associated with the Year 2000 issue. Because the
Company's Year 2000 compliance depends upon numerous third parties also being
Year 2000 compliant on a timely basis, there can be no guarantee that the
Company's efforts will prevent a material adverse impact on its business,
results of operations, financial condition and cash flow. The possible
consequences to the Company of its business partners or the general
infrastructure (including transportation, utilities, and communications) not
being fully Year 2000 compliant include temporary facilities closings, delays in
the delivery of products, delays in the receipt of key food products, equipment
and packaging supplies, invoice and collection errors, and inventory and supply
shortages. These consequences could have a material adverse impact on the
Company's business, results of operations, financial condition and cash flow if
the Company is unable to conduct its business in the ordinary course. The
Company believes that its readiness plan should significantly reduce the adverse
effects any such disruptions may have.
COSTS. The Company has estimated that the pretax costs to be borne by it to
address the Year 2000 issue will be approximately $5-8 million, principally for
modification, testing, validation, project management and contingency planning.
These are expected to be expensed as incurred and funded from operating cash
flow. Through August 28, 1998, approximately $0.5 million had been incurred and
expensed. The Company does not separately identify internal costs incurred for
the Project, and such costs are mostly related to the Company's IT personnel
costs.
The actual costs to be incurred by the Company will depend on a number of
factors which cannot be accurately predicted, including the extent and
difficulty of the remediation and other work to be done, the clients'
expectations of the Company's responsibility to remediate the clients'
facilities systems, the availability and cost of consultants, the extent of
testing required to demonstrate Year 2000 compliance, the portion of such costs
that may be borne by the Company's clients pursuant to existing contractual
agreements and the Company's ability to timely collect all payments due to it
under existing contracts.
28
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest (see Note 8 to
the Consolidated Financial Statements). However, changes in interest rates also
impact the fair value of the Company's debt, totaling $1.1 billion at August 28,
1998. If interest rates increased by 100 basis points, the fair value of the
Company's debt would have decreased by approximately $26 million, while a 100
basis point decrease in rates would have increased the fair value of the
Company's debt by approximately $27 million, based on balances at August 28,
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
PAGE(S)
-------
Management's Report 30
Reports of Independent Public Accountants 31-32
Consolidated Statement of Income 33
Consolidated Balance Sheet 34
Consolidated Statement of Cash Flow 35
Consolidated Statement of Stockholders' Equity 36
Notes to Consolidated Financial Statements 37-58
Supplementary Data 59
29
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other financial information presented in this report.
In meeting this responsibility, the Company maintains a highly developed system
of internal controls, policies and procedures, including an internal auditing
function that continually evaluates the adequacy and effectiveness of its
control system. Management believes this system provides reasonable assurance
that transactions are properly authorized and recorded to adequately safeguard
the Company's assets and to permit preparation of the financial statements in
accordance with generally accepted accounting principles.
The financial statements presented herein were prepared on a historical basis
for the Transition Period January 3, 1998 to August 28, 1998 and for the
calendar years 1997, 1996, and 1995, as described in Note 1 to the Consolidated
Financial Statements. In addition, pro forma fiscal years 1996 through 1998 are
presented in the Introduction section of this report. Management believes that
this presentation is the most meaningful to shareholders and other users of
these financial statements. The pro forma results were prepared by applying
certain pro forma adjustments to the audited historical results of Marriott
International, Inc. and the acquired North American operations of Sodexho
Alliance, S.A.
The historical consolidated financial statements for the Transition Period in
1998 have been audited by PricewaterhouseCoopers LLP, independent public
accountants. The historical consolidated financial statements for 1997, 1996 and
1995 have been audited by Arthur Andersen LLP, independent public accountants.
Their reports, included in this report, express an informed judgment as to
whether management's historical consolidated financial statements present fairly
the Company's financial position and results of operation in conformity with
generally accepted accounting principles. The pro forma financial statements
included herein do not represent actual historical results of the Company and as
such are not audited.
The Board of Directors fulfills its responsibility for the financial statements
through its Audit Committee, composed of three directors not otherwise employed
by the Company. The committee meets a minimum of two times during the year with
the independent public accountants, representatives of management and the
internal auditors to review the scope and results of the internal and external
audits, the accounting principles applied in financial reporting, and financial
and operational controls. The independent public accountants and internal
auditors have unrestricted access to the Audit Committee with and without the
presence of management.
<TABLE>
<S> <C> <C>
/s/ CHARLES D. O'DELL /s/ LAWRENCE E. HYATT /s/ LOTA S. ZOTH
Charles D. O'Dell Lawrence E. Hyatt Lota S. Zoth
President and Senior Vice President and Vice President,
Chief Executive Officer Chief Financial Officer Corporate Controller and
Chief Accounting Officer
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Sodexho Marriott Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and stockholders' equity and of cash flow
present fairly, in all material respects, the financial position of Sodexho
Marriott Services, Inc. and its subsidiaries at August 28, 1998 and the results
of their operations and their cash flow for the thirty-four weeks then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 7, 1998
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sodexho Marriott Services, Inc.:
We have audited the accompanying consolidated balance sheet of Sodexho Marriott
Services, Inc. (formerly "Marriott International, Inc.") as of January 2, 1998
and January 3, 1997, and the related consolidated statements of income, cash
flow, and stockholders' equity for each of the three fiscal years in the period
ended January 2, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sodexho Marriott
Services, Inc. as of January 2, 1998 and January 3, 1997, and the results of its
operations and its cash flow for each of the three fiscal years in the period
ended January 2, 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
February 3, 1998 (except with respect to the matters discussed in Notes
2 and 14, as to which the date is October 7, 1998)
32
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND FOR
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 3, 1998
TO
AUGUST 28, 1998 1997 1996 1995
-------------------- ----------------- ----------------- ------------------
(34 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C>
SALES $2,828 $5,026 $4,318 $3,634
OPERATING COSTS AND EXPENSES
Operating expenses 2,709 4,847 4,141 3,504
Loss on sale of MMS- UK operations - 22 - -
-------------------- ----------------- ----------------- ------------------
2,709 4,869 4,141 3,504
-------------------- ----------------- ----------------- ------------------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST 119 157 177 130
Corporate expenses, including
amortization of intangible assets (97) (94) (79) (64)
Interest expense (65) (110) (85) (53)
Interest income 11 32 37 39
-------------------- ----------------- ----------------- ------------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS, BEFORE TAXES AND
EXTRAORDINARY ITEM (32) (15) 50 52
Benefit (Provision) for Income Taxes from
Continuing Operations 13 15 (17) (20)
-------------------- ----------------- ----------------- ------------------
(Loss) Income From Continuing Operations, Before
Discontinued Operations and Extraordinary Item (19) - 33 32
Discontinued Operations, Net of Income Taxes 77 335 273 215
-------------------- ----------------- ----------------- ------------------
Income Before Extraordinary Item 58 335 306 247
Loss from Extraordinary Item, Net of Income Taxes (44) - - -
-------------------- ----------------- ----------------- ------------------
NET INCOME $ 14 $ 335 $ 306 $ 247
==================== ================= ================= ==================
BASIC (LOSS) EARNINGS PER SHARE:
Continuing Operations $(0.36) $ - $1.03 $1.03
Discontinued Operations 1.48 10.53 8.56 6.89
-------------------- ----------------- ----------------- ------------------
1.12 10.53 9.59 7.92
Extraordinary Item (0.85) - - -
-------------------- ----------------- ----------------- ------------------
BASIC EARNINGS PER SHARE $0.27 $10.53 $9.59 $7.92
==================== ================= ================= ==================
DILUTED (LOSS) EARNINGS PER SHARE:
Continuing Operations $(0.36) $ - $0.97 $0.97
Discontinued Operations 1.48 10.53 8.08 6.51
-------------------- ----------------- ----------------- ------------------
1.12 10.53 9.05 7.48
Extraordinary Item (0.85) - - -
-------------------- ----------------- ----------------- ------------------
DILUTED EARNINGS PER SHARE $0.27 $10.53 $9.05 $7.48
==================== ================= ================= ==================
</TABLE>
See Notes To Consolidated Financial Statements.
33
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 28, 1998, JANUARY 2, 1998 AND JANUARY 3, 1997
($ IN MILLIONS)
<TABLE>
<CAPTION>
AUGUST 28, JANUARY 2, JANUARY 3,
1998 1998 1997
----------------- ------------------ ------------------
ASSETS
Current Assets
<S> <C> <C> <C>
Cash and equivalents $ 79 $ 139 $ 128
Accounts and notes receivable, net 374 487 419
Inventories 54 116 115
Other 98 77 71
Net current assets from discontinued operations - 95 31
----------------- ------------------ ------------------
Total current assets 605 914 764
----------------- ------------------ ------------------
Property and equipment, net 82 505 918
Intangible assets, net 573 388 506
Investments in affiliates 5 197 154
Other 76 198 245
Net noncurrent assets of discontinued operations - 2,807 1,593
----------------- ------------------ ------------------
$1,341 $5,009 $4,180
================= ================== ==================
LIABILITIES AND STOCKHOLDERS' (DEFICIT)/EQUITY
Current Liabilities
Current portion of long-term debt $ 96 $ 23 $ 23
Accounts payable 222 548 479
Accrued payroll and benefits 301 358 325
Other current liabilities 27 220 265
Payable to affiliates for excess net tangible assets 49 - -
----------------- ------------------ ------------------
Total current liabilities 695 1,149 1,092
----------------- ------------------ ------------------
Long-term debt 1,062 1,519 1,003
Other long-term liabilities 110 568 528
Convertible subordinated debt 29 310 297
Commitments and Contingencies (Note 11)
Stockholders' (deficit)/equity
Preferred stock, no par value, 1 million shares
authorized; no shares issued - - -
Common stock, $1 par value; 300 million,
75 million and 75 million authorized; 61.9 million,
31.5 million and 31.5 million shares issued
and outstanding 62 32 32
Additional paid-in capital 1,322 805 751
(Accumulated deficit)/retained earnings (1,946) 822 628
Accumulated other comprehensive income (expense) 7 (12) (1)
Treasury stock, at cost - (184) (150)
----------------- ------------------ ------------------
Total stockholders' (deficit)/equity (555) 1,463 1,260
----------------- ------------------ ------------------
Total liabilities and stockholders' (deficit)/equity $1,341 $5,009 $4,180
================= ================== ==================
</TABLE>
See Notes To Consolidated Financial Statements.
34
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
($ IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 3, 1998
TO
AUGUST 28, 1998 1997 1996 1995
--------------------- --------------- ----------------- ----------------
(34 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
CASH PROVIDED BY OPERATING ACTIVITIES
- -------------------------------------
<S> <C> <C> <C> <C>
Net income $ 14 $ 335 $ 306 $ 247
Adjust to reconcile net income to cash and equivalents:
Income from discontinued operations (77) (335) (273) (215)
Extraordinary item - extinguishment of debt 44 - - -
Depreciation and amortization expense 57 99 101 84
Provision (benefit) for deferred taxes 6 (2) (2) (18)
Changes in working capital 128 67 57 61
Changes in discontinued operations 131 271 397 180
Other (2) 142 6 40
--------------------- --------------- ----------------- ----------------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 301 577 592 379
--------------------- --------------- ----------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES
- -----------------------------------
Capital expenditures (86) (282) (170) (78)
Net cash-Acquisitions 24 - (331) (44)
Dispositions 29 441 60 33
Net (increase) decrease in loans to affiliates - 4 44 (18)
Cash from distributed operations (305) - - -
Net investment in discontinued operations (113) (1,118) (99) (436)
Other (160) (86) (53) (14)
--------------------- --------------- ----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (611) (1,041) (549) (557)
--------------------- --------------- ----------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES
- -----------------------------------
Proceeds from the issuance of long-term debt 1,820 687 - 556
Repayments of long-term debt (1,900) (18) (137) (341)
Proceeds from issuance of convertible subordinated debt - - 288 -
Proceeds from issuance of common stock for Acquisition 304 - - -
Common stock issued-ESOP & other 72 40 43 40
Purchases of treasury stock (35) (191) (158) (17)
Dividends paid - common (11) (43) (40) (35)
--------------------- --------------- ----------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 250 475 (4) 203
--------------------- --------------- ----------------- ----------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS $ (60) $ 11 $ 39 $ 25
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 139 128 89 64
--------------------- --------------- ----------------- ----------------
CASH & CASH EQUIVALENTS END OF PERIOD $ 79 $ 139 $ 128 $ 89
===================== =============== ================= ================
SUPPLEMENTAL:
Interest paid-continuing operations $ 64 $ 96 $ 57 $ 32
Income tax payments-continuing operations 23 19 35 42
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for Acquisition $ 275 $ - $ - $ -
</TABLE>
See Notes To Consolidated Financial Statements.
35
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998
AND FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(ACCUMULATED ACCUMULATED
COMMON ADDITIONAL DEFICIT)/ OTHER TREASURY
SHARES COMMON PAID-IN RETAINED COMPREHENSIVE STOCK,
OUTSTANDING STOCK CAPITAL EARNINGS INCOME (EXPENSE) AT COST TOTAL
- --------------- -------------------------------- ---------- ------------- ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30.6 Balance, December 30, 1994 $32 $ 723 $ 183 $ (3) $(168) $ 767
- Net income - - 247 - - 247
- Foreign exchange translation - - - 1 - 1
---------- ------------- ------------- ---------------- ------------- -------------
- TOTAL COMPREHENSIVE INCOME - - 247 1 - 248
---------- ------------- ------------- ---------------- ------------- -------------
Employee stock plan
0.9 issuance and other - (7) - - 97 90
- Dividends ($1.12 per share) - - (35) - - (35)
(0.1) Purchases of treasury stock - - - - (16) (16)
- --------------- -------------------------------- ---------- ------------- ------------- ---------------- ------------- -------------
31.4 Balance, December 29, 1995 32 716 395 (2) (87) 1,054
- Net income - - 306 - - 306
- Foreign exchange translation - - - 1 - 1
---------- ------------- ------------- ---------------- ------------- -------------
- TOTAL COMPREHENSIVE INCOME - - 306 1 - 307
---------- ------------- ------------- ---------------- ------------- -------------
Employee stock plan
0.9 issuance and other - 35 (32) - 100 103
- Dividends ($1.28 per share) - - (41) - - (41)
(0.8) Purchases of treasury stock - - - - (163) (163)
- --------------- -------------------------------- ---------- ------------- ------------- ---------------- ------------- -------------
31.5 Balance, January 3, 1997 32 751 628 (1) (150) 1,260
- Net income - - 335 - - 335
- Unrealized Gain on Securities - - - 5 - 5
- Foreign exchange translation - - - (16) - (16)
---------- ------------- ------------- ---------------- ------------- -------------
- TOTAL COMPREHENSIVE INCOME - - 335 (11) - 324
---------- ------------- ------------- ---------------- ------------- -------------
Employee stock plan
0.8 issuance and other - 54 (97) - 173 130
- Dividends ($1.40 per share) - - (44) - - (44)
(0.8) Purchases of treasury stock - - - - (207) (207)
- --------------- -------------------------------- ---------- ------------- ------------- ---------------- ------------- -------------
31.5 Balance, January 2, 1998 32 805 822 (12) (184) 1,463
- - - - - -
- Net income - - 14 - - 14
- Unrealized Gain on Securities - - - 1 - 1
- Foreign exchange translation - - - (6) - (6)
---------- ------------- ------------- ---------------- ------------- -------------
- TOTAL COMPREHENSIVE INCOME - - 14 (5) - 9
---------- ------------- ------------- ---------------- ------------- -------------
- Distribution to Shareholders - - (2,715) 24 - (2,691)
Shares issued to Sodexho--
29.9 related to the Acquisition 30 549 - - - 579
Employee stock plan
0.6 issuance and other - (32) (56) - 160 72
- Dividends ($0.36 per share) - - (11) - - (11)
(0.1) Purchases of treasury stock - - - - (35) (35)
- Cancellation of treasury stock - - - - 59 59
- --------------- -------------------------------- ---------- ------------- ------------- ---------------- ------------- -------------
61.9 Balance, August 28, 1998 $62 $1,322 $(1,946) $ 7 $ - $ (555)
=============== ================================ ========== ============= ============= ================ ============= =============
</TABLE>
See Notes To Consolidated Financial Statements.
36
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping, and
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. ("MI"). Upon
consummation of the Distribution, Acquisition and Refinancing (collectively, the
"Transactions"), which occurred on March 27, 1998, the last day of the first
quarter of 1998, Marriott International, Inc. was renamed Sodexho Marriott
Services, Inc. As of March 27, 1998, the principal business of the Company
changed from lodging and contract services to food and facilities management
services. In connection with the Distribution and Acquisition, the Company began
a restructuring and refinanced its debt. The Transactions are explained in
detail in Notes 2, 3, and 4.
All material intercompany transactions and balances between Sodexho Marriott
Services, Inc., and its consolidated subsidiaries have been eliminated. Certain
amounts previously presented have been reclassified to conform to the current
presentation. Additionally, related to the Distribution on March 27, 1998, the
Company has combined the results of operations, cash flow and balance sheet
items of the lodging segment as "Discontinued Operations" for all periods
presented (see "Distribution" below and Note 2).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements, and the reported amounts of sales and expenses during the
reporting period. Accordingly, ultimate results could differ from those
estimates.
DISTRIBUTION
On March 27, 1998, the Company completed the Distribution to its shareholders,
on a pro rata basis, of all outstanding shares of New Marriott MI, Inc. ("New
Marriott"), a wholly owned subsidiary of the Company, in a tax-free distribution
(the "Distribution"). New Marriott conducts the lodging (including timeshare
resort development and operation), senior living services and distribution
service businesses previously conducted by the Company and changed its name to
Marriott International, Inc. The food service and facilities management business
will continue to be conducted by the Company. Immediately after the
Distribution, the Company acquired the North American food service and
facilities management operations of Sodexho Alliance, S.A. (Sodexho) in exchange
for stock of the Company, with the Company operating the combined food service
and facilities management businesses under the name - Sodexho Marriott Services,
Inc. As a result of the issuance of new shares of the Company's common stock to
Sodexho in connection with the Acquisition, the shareholders who owned 100% of
the Company immediately prior to the Distribution owned approximately 51% of the
Company thereafter. At the same time, the Company obtained financing arranged by
Sodexho, to refinance certain existing indebtedness of the Company.
For the purposes of governing certain of the ongoing relationships between MI
and the Company after the Distribution and to provide for an orderly transition,
MI and the Company entered into various agreements including the Employee
Benefits and Other Employment Matters Allocation Agreement, Liquid Yield Option
Notes (LYONs) Allocation Agreement, Tax Sharing Agreement, Trademark and Trade
Name License Agreement, Noncompetition Agreement, Employee Benefit Services
Agreement, Procurement Services Agreement, Distribution Services Agreement and
other transitional services agreements. Effective March 27, 1998, these
agreements provided, among other things, that MI assumed administration of
certain of the Company's employee benefit plans and insurance programs as well
as succeed to the Company's liability to LYONs holders under the LYONs
Indenture, a portion of which was assumed by the Company. In connection with the
Distribution, on October 31, 1997, the Company sold the MMS- UK operations to
Sodexho for $50 million in cash. The sale resulted in a pretax loss of $22
million ($14 million after tax, or $0.40 per share).
37
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVERSE STOCK SPLIT
The Company also combined every four shares of its common stock into one share
of the Company's common stock pursuant to a reverse stock split on March 27,
1998. All share and per share data has been adjusted to reflect a one-for-four
reverse stock split effective March 27, 1998.
FISCAL YEAR
On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to the end of August, effective immediately. This change resulted
in a 34-week transition period (the "Transition Period") from the end of fiscal
1997 to the end of the new fiscal year on August 28, 1998. The new fiscal 1999
year will have 53 weeks, ending on September 3, 1999.
Prior to the 1998 Transition Period, the Company's fiscal year ended on the
Friday nearest to December 31. The 1997 fiscal year included 52 weeks and ended
on January 2, 1998 ("Fiscal 1997" or "1997"). The 1996 fiscal year included 53
weeks and ended on January 3, 1997 ("Fiscal 1996" or "1996"), while the 1995
fiscal year included 52 weeks and ended on December 29, 1995 ("Fiscal 1995" or
"1995").
REVENUE RECOGNITION AND ACCOUNTS AND NOTES RECEIVABLE
Revenues are recognized at the time services are rendered or products are
delivered. Revenues include reimbursements for food and payroll costs incurred
on behalf of customers under contracts in which the Company manages food service
programs for a fee. Losses, if any, are provided for at the time management
determines the cost will ultimately exceed contract revenue for the duration of
the contract.
The allowance for doubtful accounts for continuing operations was $17 million,
$12 million, and $11 million as of August 28, 1998, January 2, 1998 and January
3, 1997, respectively. Concentration of credit risk within accounts receivable
is limited because a large number of customers make up the Company's customer
base, thus spreading risk associated with trade credit. In addition, the Company
closely monitors its accounts receivable. The Company generally does not require
collateral and maintains reserves for potential uncollectible amounts, which, in
the aggregate, have not exceeded management's expectations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of undiscounted expected future cash flow is less than
the carrying amount of long-lived assets, the Company recognizes an impairment
loss based on the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
INTEREST-RATE AGREEMENTS
The Company's policies prohibit the use of derivative instruments for trading
purposes and procedures are in place to monitor and control their use. The use
of derivative instruments is limited to interest-rate agreements for the purpose
of reducing the variability of the Company's debt costs. These agreements are
entered into in conjunction with the issuance of the debt they are intended to
modify.
The notional balances of these agreements represent a balance used to calculate
the exchange of cash flows and are not assets or liabilities of the Company, in
addition to not representing an exposure to credit loss. The notional amount and
interest payment of these agreements match the cash flows of the related debt.
Accordingly, any market risk or opportunity associated with these agreements is
offset by the opposite market impact on the related debt. The Company's credit
risk related to interest-rate agreements is considered low because they are
entered into only with strong creditworthy counterparties and are generally
settled on a net basis. The difference paid or received on interest-rate
agreements is recognized as an adjustment to interest expense. See Note 8 for
the notional amounts, related interest rates, maturities, and fair values of
these interest-rate agreements.
38
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
EXTRAORDINARY ITEM
On March 27, 1998, the Company recognized an extraordinary charge of $71 million
($44 million after the related income tax benefit of $27 million) in connection
with the redemption and defeasance of the Secured Debt (see Note 8). This loss
primarily represented premiums of $67 million paid on the redemptions and $4
million of financing costs.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in fiscal 1997. Fiscal years prior to 1997 have been
restated to conform with this pronouncement. Under SFAS No. 128, basic earnings
per share is computed by dividing net income by the weighted-average number of
outstanding common shares. Diluted earnings per share is computed by dividing
net income by the diluted weighted-average number of outstanding common shares.
In addition, on March 27, 1998, the Company's common stock underwent a
one-for-four reverse stock split. Earnings per share computations have been
restated to reflect this reverse stock split.
A comparison of earnings per share as previously calculated to new computation
under SFAS No. 128, for the years affected follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Primary Earnings Per Share as previously calculated $9.96 $9.04 $7.48
================== ================== ===================
Fully Diluted Earnings Per Share as previously calculated $9.84 $8.96 $7.48
================== ================== ===================
Basic Earnings Per Share $10.53 $9.59 $7.92
================== ================== ===================
Diluted Earnings Per Share $10.53 $9.05 $7.48
================== ================== ===================
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents. The Company uses
drafts in its cash management system. At August 28, 1998, the Company had $34
million of outstanding drafts included in accounts payable, compared with
outstanding draft totals of $193 million and $180 million at January 2, 1998 and
January 3, 1997, respectively.
INVENTORIES
Inventories consist of food items and supplies, which are stated at the lower of
average cost or market, generally using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from 3 to 40 years. Replacements and improvements are capitalized.
Leasehold improvements, net of estimated residual value, are amortized over the
shorter of the useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and customer relationships. Intangible
assets are amortized on a straight-line basis over periods generally ranging
from 30 to 40 years for goodwill and 10 to 20 years for customer relationships.
39
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Amortization expense for continuing operations totaled $26 million for the
Transition Period ended August 28, 1998, $25 million in fiscal year 1997, $26
million in fiscal 1996, and $24 million in fiscal 1995. Amortization expense for
discontinued operations totaled $8 million for the Transition Period ended
August 28, 1998, $42 million in fiscal year 1997, $8 million in fiscal 1996, and
$5 million in fiscal 1995.
OTHER ASSETS
Included in other assets are client investments, which represent amounts
provided by the Company to clients at contract inception for the purchase of
property and equipment pertaining to the contract. These amounts are amortized
over the life of the related contract. When a contract terminates prior to its
scheduled termination date, the client generally must repay any unamortized
client investment balance to the Company.
SELF-INSURANCE
Except for the period of October 1, 1997 to March 27, 1998, the Company is
partially self-insured for certain levels of workers' compensation, general
liability, employment practices and employee medical coverage. Estimated costs
for these self-insurance programs are accrued at the present value (discounted
at a rate of 5% at fiscal year end 1998) of projected settlements for known and
anticipated claims. Self-insurance liabilities of the Company amounted to $87
million at August 28, 1998. The Company was fully insured for most claims
occurring during the period of October 1, 1997 to March 27, 1998, as the Company
placed certain insurance programs with third-party providers during the period.
ACCUMULATED OTHER COMPREHENSIVE INCOME
In June 1997, SFAS No. 130--"Reporting Comprehensive Income" was issued,
requiring that certain financial activity typically disclosed in stockholders'
equity be reported in the financial statements as an adjustment to net income in
determining comprehensive income. Items applicable to the Company include
activity in foreign exchange translation adjustments and securities available
for sale under SFAS No. 115. Items identified as comprehensive income are
reported in the Consolidated Balance Sheet and the Consolidated Statement of
Stockholders' Equity, under separate captions.
Results for the Canada division are translated to U.S. dollars using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the applicable balance sheet date, and resulting
translation adjustments are reflected in stockholders' (deficit)/equity as
accumulated other comprehensive income.
Accumulated other comprehensive income was comprised of $10.7 million of gross
foreign exchange translations losses, net of taxes totaling $4.3 million, and
$1.3 million of gross securities gain adjustments under SFAS No. 115, net of
taxes totaling $0.5 million at August 28, 1998. For Fiscal 1997, accumulated
other comprehensive income was comprised of $26.6 million of gross foreign
exchange translations losses, net of taxes totaling $10.4 million, and $8.9
million of gross securities gain adjustments under SFAS No. 115, net of taxes
totaling $3.5 million. For Fiscal 1996, accumulated other comprehensive income
was comprised solely of $2.4 million of gross foreign exchange translations
losses, net of taxes totaling $1.0 million.
SEGMENT REPORTING
In June 1997, SFAS No. 131--"Disclosures about Segments of an Enterprise and
Related Information" was issued requiring the reporting of selected segmented
information in quarterly and annual reports. Information from operating segments
is derived from methods used by the Company's management to allocate resources
and measure performance. The Company is required to disclose profit/loss,
revenues and assets for each segment identified, including reconciliations of
these items to consolidated totals. The Company is also required to disclose the
basis for identifying the segments and the types of products and services within
each segment. SFAS No. 131 is effective for the Company for the Transition
Period ended August 28, 1998 (see Note 14), and quarterly beginning in fiscal
1999, including the restatement of prior periods reported consistent with this
pronouncement, if practicable. The Company did not have any material impact from
the implementation of SFAS No. 131.
40
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. SFAS No. 133 will be
effective for the Company on September 4, 1999, the beginning of fiscal year
2000. The impact to the Company's financial position of implementing SFAS No.
133 has yet to be determined.
(2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS
THE DISTRIBUTION
On March 27, 1998, the Company distributed to its shareholders, on a pro rata
basis, all outstanding shares of New Marriott MI, Inc., a wholly owned
subsidiary of the Company, in a tax-free distribution (the "Distribution"). New
Marriott MI, Inc., subsequently renamed Marriott International, Inc. (together
with subsidiaries, "MI") conducts business in the lodging segment and two of the
three lines of business in the contract services segment - Marriott Senior
Living Services ("MSLS") and Marriott Distribution Services ("MDS"). The
lodging, MSLS and MDS businesses are collectively referred to as Distributed
Operations. The third line of business in the contract services segment,
Marriott Management Services ("MMS"), has become the principal business of the
Company.
DISCONTINUED OPERATIONS
As a result of the Distribution, the Consolidated Financial Statements and Notes
thereto have been restated to present the lodging segment distributed to
shareholders as Discontinued Operations. The MDS, MSLS and MMS business make up
the Contract Services segment in the historical financial statements of the
Company. Thus, the distributed operations of MSLS and MDS are presented as
continuing operations prior to the date of distribution, March 27, 1998.
Discontinued Operations, Net of Income Taxes, is comprised of the following:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997 1996 1995
------------------- ------------------- ------------------ ------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales $1,774 $7,008 $5,854 $5,327
Income Before Income Taxes $ 158 $ 569 $ 452 $ 360
Income Taxes (64) (234) (179) (145)
------------------- ------------------- ------------------ ------------------
Income -Discontinued Operations $ 94 $ 335 $ 273 $ 215
Costs Associated with Effecting
the Distribution $ (28) $ - $ - $ -
Income Taxes 11 - - -
------------------- ------------------- ------------------ ------------------
Net Costs Associated with
Effecting the Distribution $ (17) $ - $ - $ -
------------------- ------------------- ------------------ ------------------
Discontinued Operations,
Net of Income Taxes $ 77 $ 335 $ 273 $ 215
=================== =================== ================== ==================
Basic Earnings Per Share $1.48 $10.53 $8.56 $6.89
Diluted Earnings Per Share $1.48 $10.53 $8.08 $6.51
</TABLE>
Results of discontinued operations in 1998 include a pretax charge of $28
million relating to the Distribution detailed above, and was comprised of legal,
administrative and accounting costs to consummate the Distribution. Net
identifiable assets of the Lodging segment totaled $2.90 billion, $1.62 billion
and $1.53 billion as of the end of fiscal years ended 1997, 1996 and 1995,
respectively (see Note 14).
41
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) ACQUISITION
On March 27, 1998, Sodexho transferred to the Company the operations of Sodexho
North America having a fair market value of $278 million, combined with a cash
payment of $304 million, in exchange for 29.9 million shares of the Company's
common stock, after giving effect to the one-for-four reverse stock split (see
Note 1 and Note 9). The purchase price included approximately $3 million in
transaction costs. As a result of the issuance of new shares to the Company's
common stock to Sodexho in connection with the Acquisition, the shareholders who
owned 100% of the Company immediately prior to the Distribution owned
approximately 51% immediately thereafter.
The Acquisition has been accounted for using the purchase method of accounting.
The purchase price has been allocated to the fair market value of assets
acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
($ in millions)
-----------------
<S> <C>
Current assets $ 142
Other assets 52
Customer relationships 120
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (18)
Other liabilities (37)
Debt (73)
Deferred taxes, net (9)
Goodwill 238
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
</TABLE>
Pro forma results of the Company, assuming the Acquisition had been made at the
beginning of the periods presented are shown below:
PRO FORMA UNAUDITED RESULTS OF OPERATIONS
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
34 WEEKS ENDED 52 WEEKS ENDED
AUGUST 28, 1998 JANUARY 2, 1998
-------------------- --------------------
($ in millions, except per share amounts)
<S> <C> <C>
SALES $ 2,716 $ 4,163
OPERATING COSTS AND EXPENSES 2,574 3,908
-------------------- --------------------
OPERATING PROFIT BEFORE CORPORATE
ITEMS 142 255
Corporate expenses and amortization of intangible assets (68) (116)
Interest expense, net (57) (87)
-------------------- --------------------
INCOME BEFORE INCOME TAXES 17 52
Provision for income taxes (8) (25)
-------------------- --------------------
PRO FORMA NET INCOME $ 9 $ 27
==================== ====================
PRO FORMA EARNINGS PER SHARE:
BASIC $ 0.14 $ 0.43
-------------------- --------------------
DILUTED $ 0.14 $ 0.43
==================== ====================
</TABLE>
42
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) ACQUISITION, CONTINUED
Pro forma sales include the combined actual sales of the food and facilities
management services business of MMS and Sodexho North America. Pro forma
operating profit before corporate expenses and interest reflects the pro rata
amount of approximately $15.9 million of annual amortization expense for the
intangible assets related to the Acquisition. Pro forma corporate expenses
include the combined corporate overhead of both businesses. No synergies are
assumed and integration and restructuring costs totaling $31 million have been
excluded from the 34 weeks ended August 28, 1998 results. However, an estimate
of $6.4 million in annual costs were included on a pro rata basis in all periods
presented until the date of the Transactions, representing the incremental costs
to operate as a separate public entity. Additionally, had the Company fully
completed the consolidation of the MMS and Sodexho North America processing
systems, and related hiring of certain personnel after the Acquisition,
additional costs of approximately $5 million pretax would have been incurred
during the 22-week Stub Period in 1998. For the 52 weeks ended January 2, 1998,
the loss from the sale and operations of the MMS- UK operations sold to Sodexho
in October 1997 have been excluded from the results presented.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing (see Note 8) and the interest-rate agreements had been in place on
the first day of both periods presented. An effective income tax rate of 48% and
49% were used for current and prior period, respectively. Pro forma results do
not include the extraordinary item related to the Refinancing.
Pro forma basic earnings per share were calculated on a share base of 61.9
million for both periods presented, which represents the number of shares
outstanding on August 28, 1998. Pro forma diluted earnings per share were
calculated on a share base of 62.6 million for both periods presented. The
dilutive shares are due to stock option plans, deferred stock incentive plans,
and convertible debt outstanding.
(4) INTEGRATION AND RESTRUCTURING
Integration and restructuring actions taken in the Transition Period, reflect
the undertaking by the Company to integrate and realign resources for more
effective and efficient execution of operating strategies. Integration costs
totaled $24 million during the Transition Period. The integration costs include,
among other items, training and relocating of former MMS employees, incremental
overhead during the integration phase, systems modifications, and other one-time
costs.
Restructuring costs represent employee termination benefits, office closure
expenditures, and other costs related to a restructuring plan initiated from the
Transactions. The acquisition reserve, which totaled $24 million at August 28,
1998, generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North American employees as well as the
estimated cost for the closure of certain Sodexho North American offices. In
addition, restructuring charges totaling $7 million were recorded in the
Consolidated Statement of Income for the Transition Period, related to the
estimated cost of termination benefits for approximately 50 employees of MMS.
Acquisition Reserve activity related to the Transactions for the 22-week Stub
Period is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
MARCH 27, 1998 PAYMENTS AUGUST 28, 1998
-------------------- -------------------- ---------------------
($ in millions)
<S> <C> <C> <C>
Employee Terminations $12.8 $(2.5) $10.3
Relocation of Sodexho Facilities 2.7 (0.1) 2.6
Closures 3.1 -- 3.1
Other 11.8 (3.9) 7.9
-------------------- -------------------- ---------------------
Total $30.4 $(6.5) $23.9
==================== ==================== =====================
</TABLE>
43
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) INTEGRATION AND RESTRUCTURING, CONTINUED
In addition, combined Integration and Restructuring expenses recorded in the
Consolidated Statement of Income during the Transition Period are as follows:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998
-------------------------
($ in millions)
<S> <C>
Integration:
Duplicate Overhead $ 9.4
MMS Relocation 1.7
Training Systems 1.3
Other 12.0
Restructuring:
Employee Terminations 2.2
Closures 2.1
Other 2.4
-------------------------
Total $31.1
=========================
</TABLE>
(5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND SODEXHO ALLIANCE, S.A.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL ("MI")
Pursuant to the Distribution agreement (see Note 2), the Company and MI agreed
upon the allocation of assets and liabilities related to the MMS business and MI
business. In this regard, the Company agreed generally to indemnify MI against
liabilities that relate to the MMS business, and MI agreed generally to
indemnify the Company against liabilities that relate to the MI Business. The
Company and MI also agreed to enter into a number of agreements governing their
relationship after March 27, 1998, as described below.
TAX SHARING AGREEMENT. The Tax Sharing Agreement by and among the Company, MI
and Sodexho Alliance, S.A. ("Sodexho") provides that MI is liable for all taxes
of the Company (other than sales, use and property taxes, which are borne by the
entities filing such returns) for all periods up to and including March 27,
1998. In addition, the parties have agreed for certain specified periods after
the Distribution not to take specific actions that could cause the Distribution
not to have Tax-Free Status.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT. On September 30, 1997, the Company and
MI entered into an Employee Benefits and Other Employment Matters Allocation
Agreement providing for the allocation of employees of the Company and
obligations and responsibilities regarding compensation, benefits and labor
matters. The Company and MI may amend and/or terminate any of the benefit plans
covering their employees at any time. Specific provisions of this agreement also
include allocations of the Company's profit sharing, deferred compensation and
stock option plans with MI.
MEDICAL AND OTHER WELFARE BENEFITS PLANS. MI assumed the administration of the
Company's medical, dental, short-term disability, vacation and group term life
insurance plans incurred before March 27, 1998 by MI employees, the Company's
employees and former employees. The Company established and maintains a separate
medical, dental, short-term disability, vacation and group term life insurance
plans for its employees after the Distribution.
TRADEMARK LICENSE AGREEMENT. As part of the contribution of assets to MI, the
Company transferred and assigned to MI all of the Company's right, title and
interest in certain trademarks, including the trademarks "Marriott,"
"Courtyard," "Residence Inns by Marriott" and "Fairfield Inns by Marriott."
Pursuant to the terms of the agreement MI generally granted to the Company a
limited nonexclusive right to use the "Marriott" name solely in connection with
MMS as defined in the agreement. For four years after March 27, 1998, the
Company is permitted to use the "Marriott" name as part of its corporate name
and the names of its principal business divisions. During the term of the
license, the Company pays MI a license fee of $1 million per year, payable
quarterly in advance. MI may terminate the Trademark License Agreement prior to
the expiration of its term under certain conditions. In addition, the Company
may terminate this agreement upon 180 days' prior written notice to MI.
44
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND
SODEXHO ALLIANCE, S.A., CONTINUED
NONCOMPETITION AGREEMENT. The Company and MI entered into a Noncompetition
Agreement generally prohibiting MI from competing in the core business of MMS
(as defined) in the United States, Canada and the United Kingdom for a period of
four years. However, per the agreement, MI may enter into certain negligible
investments (as defined) in businesses that compete with the Company through
direct investment or acquisitions.
LYONS ALLOCATION AGREEMENT AND SUPPLEMENTAL INDENTURE. The Company had issued
$540 million face amount of Liquid Yield Option Notes ("LYONs"), with an
accreted value as of January 2, 1998 of approximately $310 million. Pursuant to
the LYONs Allocation Agreement and a supplemental indenture to the LYONs
Indenture, MI assumed responsibility for all of the debt obligations evidenced
by the LYONs by becoming a successor to the Company in accordance with the terms
of the LYONs Indenture. The Company assumed responsibility for a portion of the
LYONs equal to its pro rata share based on the relative equity values of the
Company and MI, although MI will remain liable for any payments that the Company
fails to make on its allocable portion. Accordingly, MI and the Company will
share, in accordance with the foregoing allocations, responsibility for all
increases in the accreted value of LYONs following the Distribution and all
payment obligations at maturity or pursuant to an exercise of issuer call rights
or holder put rights, and MI and the Company will each issue shares of its own
stock in satisfaction of any exercise by the LYONs holders of their conversion
rights.
ADDITIONAL AGREEMENTS BETWEEN THE COMPANY AND MI. In connection with the
Distribution agreement, the Company and MI (or a subsidiary of MI) have entered
into a number of additional agreements providing for the delivery of certain
transitional and other services between the companies. The terms and conditions
of these agreements were negotiated by the parties bargaining at arm's length.
Such additional agreements include agreements regarding payroll processing,
benefits administration, procurement, distribution, information technology, and
office space and related facilities management in the MI corporate headquarters
(see Note 2).
The anticipated payments from MI to the Company and from the Company to MI
associated with the performance of these agreements (excluding pass-through
product costs) are approximately $4 to 5 million and approximately $60 to $65
million, respectively, for the full 1999 fiscal year. Payments made to MI for
the 1998 22-week Stub Period totaled approximately $25 million, with total
receipts from MI of $2 million during the same period.
As part of the Transactions, the Company entered into an agreement with MI that
established a reasonable amount of adjusted net tangible assets (as defined in
the agreement) for the operations that were not part of the Distribution
immediately prior to the consummation of the Transactions. This agreement
provided that the Company would pay MI the amount by which the adjusted net
tangible assets total is greater than $103 million, estimated at March 27, 1998
to be $29 million payable to MI. Subject to final review by the Company, Sodexho
and MI, the amount plus accrued interest is expected to be finalized and paid
during the second quarter of fiscal 1999.
RELATIONSHIP WITH SODEXHO ALLIANCE, S.A. ("SODEXHO")
ROYALTY AGREEMENT AND ASSISTANCE AGREEMENT. The Company and Sodexho entered into
a Royalty Agreement and an Assistance Agreement effective March 27, 1998.
Pursuant to these agreements, the Company has the right to use the name
"Sodexho" in connection with its operations in the United States and Canada for
a period of 10 years, for a royalty payment equal to 0.05% of the annual
gross revenues of the Company during the first three years of the Royalty
Agreement. Thereafter, Sodexho and the Company will negotiate in good faith to
determine the royalty fee, based on fair market value. The Royalty Agreement may
be terminated by the Company at any time after Sodexho owns less than 10%
of the outstanding Common Stock of the Company. Sodexho may terminate the
Royalty Agreement prior to the expiration of its term under certain
circumstances.
The Assistance Agreement sets forth certain services provided by Sodexho to the
Company, including services related to purchasing activities, catering and site
support services, marketing, management and administration, legal and financial
matters, humans relations, communications and cash management. In exchange for
these services, the Company pays to Sodexho a fee equal to a percentage of the
annual gross revenues of the Company and its subsidiaries. Pursuant to the terms
of the Assistance Agreement, no fee was owed during the 22 week Stub Period
ended August 31, 1998. The anticipated payments from the Company to Sodexho
associated with the performance of services is approximately $4 million for the
full 1999 fiscal year. Payments made to Sodexho for the 1998 22-week Stub Period
totaled approximately $1 million.
45
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND
SODEXHO ALLIANCE, S.A., CONTINUED
OTHER ARRANGEMENTS. Sodexho has agreed to guarantee the following: (i) the
payment when due of certain deferred compensation amounts payable by the Company
to the Company's employees, (ii) the obligations of the Company under the LYONs
allocation agreement and the LYONs indenture, (iii) obligations with respect to
certain insurance costs that are set forth in the Distribution agreement, and
(iv) Senior Credit Guarantee Facility (see Note 8) where Sodexho has guaranteed
the Company for a credit facility in exchange for a guarantee fee equal to 0.50%
per annum of the outstanding principal amount of indebtedness. In addition, the
Company and Sodexho entered into a stockholder agreement covering certain
corporate governance matters and that grants Sodexho certain registration rights
with respect to stock of the Company held by Sodexho as well as certain rights
to nominate members of the Company's Board of Directors.
As part of the Acquisition, the Company entered into an agreement with Sodexho
that established a reasonable amount of adjusted net tangible assets (as defined
in the agreement) from the Acquisition immediately prior to the consummation of
the Acquisition. This agreement provided that the Company would pay Sodexho the
amount by which the adjusted net tangible assets total is less than a negative
$35 million, estimated on March 27, 1998 to be $20 million payable to Sodexho.
Subject to final review by the Company, MI and Sodexho, the amount plus accrued
interest is expected to be finalized and paid in the second quarter of fiscal
1999.
(6) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AUGUST 28, 1998 1997 1996
------------------ ------------------ -------------------
($ IN MILLIONS)
<S> <C> <C> <C>
Land $ 9 $ 89 $ 129
Buildings and leasehold improvements 20 242 637
Furniture and equipment 217 303 307
Construction in progress 3 129 83
------------------ ------------------ -------------------
249 763 1,156
Accumulated depreciation and amortization (167) (258) (238)
------------------ ------------------ -------------------
$ 82 $ 505 $ 918
================== ================== ===================
</TABLE>
Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Interest capitalized
for continuing operations was not material for all periods presented. Interest
capitalized for discontinued operations totaled $16 million in 1997, $9 million
in 1996 and $8 million in 1995. Replacements and improvements that extend the
useful life of property and equipment are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the asset life or lease
term. As a result of the Distribution, approximately $1.09 billion and $976
million of the Company's property and equipment was restated as Discontinued
Operations as of fiscal years ended 1997 and 1996, respectively (see Notes 1 and
2).
(7) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
AUGUST 28, 1998 1997 1996
------------------ ------------------ -------------------
($ IN MILLIONS)
<S> <C> <C> <C>
Customer relationships $477 $389 $417
Goodwill 413 269 337
Other 24 10 8
------------------ ------------------ -------------------
914 668 762
Accumulated amortization (341) (280) (256)
------------------ ------------------ -------------------
$573 $388 $506
================== ================== ===================
</TABLE>
Amortization expense for continuing operations totaled $26 million for the 34
weeks ended August 28, 1998, $25 million in 1997, $26 million in 1996 and $24
million in 1995. As a result of the Distribution, approximately $1.29 billion
and $142 million of the Company's intangible assets was restated as Discontinued
Operations as of fiscal years ended 1997 and 1996, respectively (see Notes 1 and
2). Amortization expense for discontinued operations totaled $8 million for the
34 weeks ended August 28, 1998, $42 million in 1997, $8 million in 1996 and $5
million in 1995.
46
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT
<TABLE>
<CAPTION>
AUGUST 28, 1998 JANUARY 2, 1998 JANUARY 3, 1997
------------------- ------------------- -------------------
($ IN MILLIONS)
SHORT-TERM DEBT:
<S> <C> <C> <C>
Current Portion of Long-Term Debt $ 70 $ 23 $ 23
Senior Secured Revolving Credit Facility 25 - -
Other 1 - -
------------------- ------------------- -------------------
Total $ 96 $ 23 $ 23
=================== =================== ===================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
Averaging 6.815% in 1998 $ 500 $ - $ -
Senior Guaranteed Credit Facility, due 2005
Averaging 6.14% in 1998 620 - -
Secured Debt, maturing through 2020,
Averaging 7.34% in 1997 - - 286
Unsecured debt:
Senior Debt, maturing through 2009
Averaging 7.43% in 1998 6 725 597
Commercial Paper, 5.82% in 1997 - 692 20
Endowment Deposits (non-interest bearing) - 91 100
Other 2 24 1
Capital Lease Obligations 4 10 22
------------------- ------------------- -------------------
Total $1,132 $1,542 $1,026
Amount Reclassified to Short-Term Debt (70) (23) (23)
------------------- ------------------- -------------------
$1,062 $1,519 $1,003
=================== =================== ===================
</TABLE>
Senior Secured Credit Facility-- the senior secured credit facility consists of
$235 million of revolving credit and an additional $500 million, six-year term
loan facility. Interest is based on a bank prime rate, an amount over the
Federal funds rate, or an amount over the London interbank offered rate for
Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At August 28, 1998,
the Company is paying a rate of 6.786% on this facility. Up to $100 million of
the $235 million revolving credit may be used to collateralize letters of
credit, which totaled $26 million at August 28, 1998. The senior secured credit
facility is secured predominately by inventory and accounts receivable of the
Company. At August 28, 1998, $184 million of this facility was not used and was
available to the Company.
Senior Guaranteed Credit Facility-- the senior guaranteed credit facility
consists of a $620 million seven-year term loan. Interest is based on a bank
prime rate, an amount over the Federal funds rate, or an amount over LIBOR,
payable in arrears quarterly. At August 28, 1998, the Company is paying a rate
of 6.14% on this facility. This facility is guaranteed by Sodexho, for which the
Company pays Sodexho an annual fee of 0.5%, or $3 million pretax.
Debt totaling $17 million and $7 million was presented as Discontinued
Operations at January 2, 1998 and January 3, 1997, respectively (see Notes 1 and
2).
Aggregate debt maturities, excluding capital lease obligations, are: 1999 - $70
million; 2000 - $80 million; 2001 - $80 million; 2002 - $90 million; 2003 - $115
million and $693 million thereafter.
On March 27, 1998, the Company used the proceeds from the Senior Secured and
Senior Guaranteed Credit Facilities to tender for $720 million of the Senior
Debt outstanding at that time, of which $713 million was repaid. Cumulative
premium and tender costs from the repayment totaled $71 million pretax ($44
million after related taxes totaling $27 million) which was recognized as an
extraordinary item in the Consolidated Statement of Income. In addition, the
Company repaid its outstanding obligations under its then existing $1.5 billion
credit facility (see below) totaling $950 million, which was cancelled after the
repayment.
47
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT, CONTINUED
Remaining proceeds from the Senior Secured and Senior Guaranteed Credit
Facilities were used to repay the $950 million, combined with $304 million
received from Sodexho and $254 million received from MI. The $254 million
received from MI was part of the Distribution agreement between the Company and
MI in which total indebtedness retained by the Company at the Distribution would
equal $1.44 billion. Thus, the $720 million Senior Debt prior to tender, the
$950 million credit facility outstanding, as well as other miscellaneous debt,
totaled approximately $1.7 billion in debt, compared with the $1.44 billion
balance, resulting in the payment from MI to the Company.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flow.
The Company met the financial covenants of the debt agreements as of August 28,
1998 and for the 22 weeks then ended.
Prior to the Distribution, the Company entered into a $1.5 billion bank credit
facility in March 1997. This facility had a term of five years at an interest
rate of LIBOR plus a spread, 21.5 basis points, based on the Company's senior
debt rating as of fiscal year end 1997. Commercial paper is classified as
long-term debt based on the Company's ability and intent to refinance it on a
long-term basis.
CONVERTIBLE SUBORDINATED DEBT
On March 25, 1996, the Company issued $540 million (principal amount at
maturity) of zero coupon convertible subordinated debt in the form of Liquid
Yield Option Notes ("LYONs") due 2011. Each $1,000 LYON is convertible at any
time, at the option of the holder, into 8.76 shares of the Company's Common
Stock. The LYONs were issued at a discount representing a yield to maturity of
4.25 percent. The Company recorded the LYONs at the discounted amount at
issuance. Accretion is recorded as interest expense and an increase to the
carrying value. Gross proceeds from the LYONs issuance were $288 million.
Upon consummation of the Distribution, each LYON was convertible into 2.19
shares of the Company's common stock (after giving effect to a one-for-four
reverse stock split), as well as a certain amount of shares of MI's Common
Stock. The LYONs were assumed by MI, and the Company assumed responsibility for
a portion of the LYONs equal to its pro rata share of the relative equity values
of the Company and MI as determined in good faith by the Company prior to the
Distribution, although MI remains liable to the holders of the LYONs for any
payments that the Company fails to make on its allocable portion. The Company's
allocated portion of the LYONS totaled $29 million at August 28, 1998.
INTEREST-RATE AGREEMENTS
At August 28, 1998, the majority of the Company's debt was payable at variable
rates of interest. As part of the Refinancing of the Company's debt, the Company
entered into several interest-rate agreements on May 29, 1998 totaling $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.73% and 5.90%,
plus a residual premium that is not hedged relating to the underlying
variable-rate debt, resulting in a weighted-average fixed rate for the Company
of 6.92% at August 28, 1998. These agreements expire between August 2001 and
February 2005. Since the inception of these agreements, the Company paid a net
$0.3 million to its counterparties under these agreements, recorded as
additional interest expense. At August 28, 1998, the aggregate net unrealized
loss under these agreements was $9.6 million, based on the termination cost for
these agreements obtained by third party market quotes. At August 28, 1998, the
Company did not have any accrued interest receivable or payable to its
counterparties and did not have any unamortized fees or premiums under these
agreements. All of the Company's interest rate agreements are for purposes other
than trading.
48
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' (DEFICIT)/EQUITY
STOCKHOLDERS' (DEFICIT)/EQUITY
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. One million shares of preferred
stock, without par value, are authorized, with none issued. At the Distribution,
each shareholder received one share of the Company's stock and one share of New
Marriott, Inc. stock (renamed Marriott International, Inc.). In addition, the
Company's stock underwent a one-for-four reverse stock split on March 27, 1998.
Prior to the Distribution, the Company's charter authorized the issuance of
seventy-five million shares of the Company's common stock, with a par value of
$1 per share, with one million shares of preferred stock, without par value,
authorized, with none issued.
In addition, on March 27, 1998, the Company issued to Sodexho Alliance, S.A.,
approximately 48% of its shares of common stock, representing 29.9 million
shares (after the effect of the reverse stock split), in exchange for $304
million in cash and the operations of Sodexho North America (see Note 3). At
August 28, 1998, the Company had 61,866,447 shares outstanding.
On July 23, 1993, the Company's Board of Directors adopted a shareholder rights
plan under which one preferred stock purchase right was distributed for each
share of Company common stock. Each right entitles the holder to buy 1/1000th of
a share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of $150. The rights will be exercisable ten days
after a person or group acquires beneficial ownership of 20 percent or more of
the Company's common stock, or begins a tender or exchange offer for 30 percent
or more of the Company's common stock. Shares owned by a person or group on
September 30, 1993 and held continuously thereafter are exempt for purposes of
determining beneficial ownership under the rights plan. The rights are nonvoting
and will expire on the tenth anniversary of the adoption of the Company's
shareholder rights plan, unless exercised or previously redeemed by the Company
for $.01 each. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
either the Company or the acquirer having a value of twice the exercise price of
the right. The shareholder rights plan continued in effect after the
Distribution and was amended to exempt shares acquired by Sodexho and its
affiliates.
The Company has been authorized by its Board of Directors to purchase up to an
additional 5.1 million shares of the Company's common stock including 5.0
million shares authorized in January 1998. This program has been terminated with
the consummation of the Transactions.
49
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' (DEFICIT)/EQUITY, CONTINUED
EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128 (see Note 1), thus 1996 and 1995
earning per share computations have been restated in conformity with SFAS No.
128. The following table details earnings and number of shares used in the basic
and diluted earnings per share calculations.
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1998 1997 1996 1995
-------------- --------------- --------------- ---------------
(in millions, except per share amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Net (Loss) Income from Continuing Operations $ (19) $ -- $ 33 $ 32
Net Income from Discontinued Operations 77 335 273 215
Net Loss from Extraordinary Item (44) -- -- --
-------------- --------------- --------------- ---------------
Net Income $ 14 $ 335 $ 306 $ 247
============== =============== =============== ===============
Weighted Average Shares Outstanding 52.0 31.8 31.9 31.2
============== =============== =============== ===============
Basic Earnings Per Share:
Continuing Operations $(0.36) $ -- $1.03 $1.03
Discontinued Operations 1.48 10.53 8.56 6.89
Extraordinary Item (0.85) -- -- --
-------------- --------------- --------------- ---------------
BASIC EARNINGS PER SHARE $ 0.27 $ 10.53 $9.59 $7.92
============== =============== =============== ===============
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Diluted Net (Loss) Income from Continuing Operations $ (19) $ -- $ 33 $ 32
Diluted Net Income from Discontinued Operations 77 335 273 215
Diluted Net Loss from Extraordinary Item (44) -- -- --
-------------- --------------- --------------- ---------------
Diluted Net Income $ 14 $ 335 $ 306 $ 247
============== =============== =============== ===============
Weighted Average Shares Outstanding 52.0 31.8 31.9 31.2
-------------- --------------- --------------- ---------------
Effect of Dilutive Securities:
Employee Stock Option Plan * * 1.1 0.9
Deferred Stock Incentive Plan * * 0.8 0.9
Convertible Subordinated Debt * * * --
-------------- --------------- --------------- ---------------
Diluted Weighted Average Shares Outstanding 52.0 31.8 33.8 33.0
============== =============== =============== ===============
Diluted Earnings Per Share:
Continuing Operations $(0.36) $ -- $0.97 $0.97
Discontinued Operations 1.48 10.53 8.08 6.51
Extraordinary Item (0.85) -- -- --
-------------- --------------- --------------- ---------------
DILUTED EARNINGS PER SHARE $ 0.27 $ 10.53 $9.05 $7.48
============== =============== =============== ===============
<FN>
*--The effect of dilutive securities is computed using the treasury stock method and average market prices during the periods. The
if-converted method is used for convertible subordinated debt ("debt securities"). For the 34 weeks ended August 28, 1998 and for
fiscal 1997, dilutive securities under the employee stock option plan (of 0.6 million and 1.1 million, respectively), the deferred
stock incentive plan (of 0.1 million and 0.7 million, respectively) and the debt securities (of 1.2 million for both periods) was
excluded due to the loss from continuing operations. Also, debt securities were excluded in fiscal 1996 (of 0.9 million) as they
were antidilutive.
</FN>
</TABLE>
Certain employee and deferred stock options to purchase shares of common stock
were outstanding but were not included in the computation of diluted earnings
per share because the exercise prices of the options were greater than the
average market price of the common shares as follows:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1998 1997 1996 1995
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Weighted average number of shares (in millions) 0.6 0.6 0.5 0.5
Weighted average exercise price $ 29 $272 $220 $148
Weighted average remaining life (in years) 10 15 15 15
</TABLE>
50
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INCOME TAXES
The (provision) benefit for income taxes on continuing operations was comprised
of the following:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1998 1997 1996 1995
---------------- ----------------- ---------------- -----------------
($ in millions)
<S> <C> <C> <C> <C>
Current:
- Federal $ 19 $ 12 $(13) $(34)
- Other -- 1 (6) (4)
---------------- ----------------- ---------------- -----------------
19 13 (19) (38)
---------------- ----------------- ---------------- -----------------
Deferred:
- Federal (6) 2 2 16
- Other -- -- -- 2
---------------- ----------------- ---------------- -----------------
(6) 2 2 18
---------------- ----------------- ---------------- -----------------
$ 13 $ 15 $(17) $(20)
================ ================= ================ =================
</TABLE>
A reconciliation of the Federal statutory tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1998 1997 1996 1995
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Federal statutory tax rate 35.0 % 35.0 % (35.0)% (35.0)%
State income taxes, net of Federal tax benefit (1.3) 6.8 (2.8) (4.2)
Tax credits 13.7 90.5 8.1 3.9
Goodwill amortization (6.9) (24.7) (7.6) (3.1)
Other, net 0.1 (8.7) 4.1 0.6
---------------- ----------------- ---------------- -----------------
Effective income tax rate 40.6 % 98.9 % (33.2)% (37.8)%
================ ================= ================ =================
</TABLE>
The tax effect of significant temporary differences is as follows:
<TABLE>
<CAPTION>
AUGUST 28,
1998 1997 1996
---------------- ---------------- ----------------
($ IN MILLIONS)
<S> <C> <C> <C>
Self-insurance $ 38 $ 37 $ 36
Employee benefits 25 30 20
Other liabilities 26 14 15
Property and equipment 2 3 7
Intangible assets (63) (29) (28)
Other, net 4 (7) (4)
---------------- ---------------- ----------------
Net deferred tax assets $ 32 $ 48 $ 46
================ ================ ================
</TABLE>
51
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INCOME TAXES, CONTINUED
Total deferred tax assets and liabilities as of August 28, 1998, January 2,
1998, and January 3, 1997, were as follows:
<TABLE>
<CAPTION>
AUGUST 28, 1998 1997 1996
------------------- ----- ---------------- ----- ----------------
($ IN MILLIONS)
<S> <C> <C> <C>
Deferred tax assets $ 104 $ 81 $ 82
Deferred tax liabilities (72) (33) (36)
------------------- ---------------- ----------------
Net deferred taxes $ 32 $ 48 $ 46
=================== ================ ================
</TABLE>
The Company has not established a valuation allowance for deferred tax assets.
In assessing the realizability of deferred tax assets, management considers the
Company's ability to generate sufficient future taxable income during periods in
which temporary differences reverse. The amount of net deferred tax assets
considered realizable could be reduced if estimated future taxable income cannot
be achieved. Management believes it is more likely than not the Company will
realize the benefits of its net deferred tax assets.
As part of the Distribution and Acquisition, the Company, MI and Sodexho entered
into tax sharing agreements which reflect each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state or other
taxes relating to the business of the Company, MI and Sodexho prior to the
Transactions (see Note 5).
While the Company has changed its accounting period from a fiscal year ended on
the Friday closest to the end of December to the Friday closest to the end of
August, its tax year has not changed. The Company expects to apply to the
Internal Revenue Service for a change in its tax year in 1999.
52
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES
The Company issues bid and performance bonds for its client-related contracts in
the normal course of business. These guarantees are limited, in the aggregate,
to $56 million at August 28, 1998, with expected funding of zero. Letters of
credit outstanding on the Company's behalf at August 28, 1998 totaled $26
million, related to the Company's self-insurance program. Upon consummation of
the Distribution, MI replaced the Company as guarantor or obligor under previous
guarantees and commitments related primarily to the lodging segment distributed
on March 27, 1998.
Summarized below are the Company's future obligations under leases at August
28, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------------- -------------------------
($ IN MILLIONS)
FISCAL YEAR
<S> <C> <C>
1999 $0.6 $11.2
2000 0.7 9.7
2001 0.7 8.1
2002 0.8 6.1
2003 0.8 4.2
Thereafter 1.7 13.0
------------------------- -------------------------
Total minimum lease payments 5.3 $52.3
------------------------- =========================
Less amount representing interest (1.4)
-------------------------
Present value of minimum lease payments $3.9
=========================
</TABLE>
The Company generally leases office space and equipment under noncancellable
agreements, primarily to support its administrative operations. Most leases have
initial terms of one to 20 years, and contain one or more renewal options,
generally for five or 10-year periods. The leases provide for minimum rentals,
and additional rentals, which are based on the operations of the leased
property. Total rent expense for continuing operations for the 34 weeks ended
August 28, 1998 totaled $12.3 million, and $90 million, $81 million and $75
million for the fiscal years ended 1997, 1996 and 1995, respectively. Total rent
expense for discontinued operations for the 34 weeks ended August 28, 1998
totaled $41 million, and $177 million, $179 million and $146 million for the
fiscal years ended 1997, 1996 and 1995, respectively.
The nature of the business of the Company causes it to be involved in routine
legal proceedings from time to time. Management of the Company believes that
there are no pending or threatened legal proceedings that upon resolution would
have a material adverse impact to the Company.
53
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) EMPLOYEE BENEFIT AND INCENTIVE PLANS
DEFERRED COMPENSATION PLANS
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. As part of the Distribution,
the Company elected to continue the deferred compensation plan and has
established a new savings plan for the Company separate from the MI profit
sharing plan. The Company assumed the obligations and liabilities of the
undistributed portion of the deferred compensation plan in relationship to the
employees retained by the Company after the Distribution. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 34-week period
ended August 28, 1998, Company contributions totaled $9.5 million.
STOCK OPTION PLANS
Prior to the Distribution, the Company amended and restated the 1993 Stock Plan
and the 1996 Stock Plan, presently known as the Sodexho Marriott Services, Inc.
1993 and 1998 Comprehensive Stock Incentive Plans, respectively (the "1993 Plan"
or the "1998 Plan"). The purpose of these plans is to promote and enhance the
long-term growth of the Company by aligning the interests of the employees with
the interests of the Company's shareholders. The 1993 Plan will administer the
converted stock options prior to the Distribution, with no new awards made under
this plan. The 1998 Plan will govern the issuance and administration of
conversion awards under the previous 1996 stock plan and will also be available
for the issuance of new awards. These stock plans are administered by the
Compensation Policy Committee as authorized by the Board of Directors. As part
of the Distribution and the amendment of these plans, and in relationship to the
changes in the capital structure of the Company after the Distribution, the
Board of Directors has approved up to 10 million shares of common stock to be
available under the 1998 Plan for converted options as well as new awards. At
the Distribution date, approximately 3.3 million options were exchanged as
conversion options of prior grants under both the 1993 and 1998 Plans, with an
additional 0.4 million options issued to employees of Sodexho North America as
part of the conversion of stock options held by those employees prior to the
Acquisition. Also, 3.3 million shares were terminated related to the options of
former MI employees from the Distribution.
Employee stock options may be granted to officers and key employees at exercise
prices not less than the market price of the Company's stock on the date of
grant. Most options under the stock option plans are exercisable in cumulative
installments of one-fourth at the end of each of the first four years following
the date of grant. In June 1998, the Company issued 1.8 million new stock option
awards.
A summary of the Company's stock option activity during the 34 weeks ended
August 28, 1998, fiscal 1997 and fiscal 1996 is presented below (adjusting for
the one-for-four reverse stock split on March 27, 1998):
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997 1996
---------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(IN MILLIONS) PRICE (IN MILLIONS) PRICE (IN MILLIONS) PRICE
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3.6 $140 3.5 $112 3.6 $ 92
Granted during the year 1.9 28 0.6 268 0.4 220
Conversion options-Distribution 3.3 * -- -- -- --
Conversion options-Acquisition 0.4 6 -- -- -- --
Terminations-Distribution (3.3) * -- -- -- --
Exercised during the year -- -- (0.5) 84 (0.5) 80
Forfeited during the year (0.9) 17 -- -- -- --
-------------- ------------- ------------- ------------- ------------- -------------
Outstanding at end of year 5.0 $ 20 3.6 $140 3.5 $112
============== ============= ============= ============= ============= =============
Options exercisable at end of year 0.5 $ 11 2.3 $ 96 2.3 $ 80
============== ============= ============= ============= ============= =============
<FN>
*-- exercise price for shares outstanding prior to the Transactions were repriced to reflect the change in the Company's capital
structure (including the one-for-four reverse stock split) as well as preserve the financial value of the options to the option
holders as of March 27, 1998.
</FN>
</TABLE>
54
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) EMPLOYEE BENEFIT AND INCENTIVE PLANS, CONTINUED
Stock options under the 1993 and 1998 Plans that were outstanding at August 28,
1998 are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- -------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS REMAINING LIFE EXERCISE OPTIONS EXERCISE
PRICES (IN MILLIONS) (IN YEARS) PRICE (IN MILLIONS) PRICE
- ----------------------- ------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 2.3 to 10.0 0.9 6 $ 7 0.3 $ 8
10.1 to 15.0 0.5 7 12 0.1 12
15.1 to 20.0 0.9 8 18 0.1 18
20.1 to 25.0 1.0 9 22 -- --
25.1 to 31.4 1.7 10 29 -- --
- ----------------------- ------------------ ------------------ ------------------- ------------------ ------------------
$ 2.3 to 31.4 5.0 8 $20 0.5 $11
======================= ================== ================== =================== ================== ==================
</TABLE>
Pro forma compensation cost for the Stock Option Plans, the Deferred
Compensation Plan, the Supplemental Executive Stock Option awards and employee
purchases, recognized in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," would reduce the Company's net income as follows:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997 1996 1995
-------------------- ------------------- ------------------ ------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income as reported $14 $335 $306 $247
Pro forma net income $13 $317 $295 $243
Diluted earnings per share as reported $0.27 $10.53 $9.05 $7.48
Pro forma diluted earnings per share $0.25 $9.97 $8.73 $7.36
</TABLE>
The aggregate weighted-average fair value for each option granted during the 34
weeks ended August 28, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $12,
$88, $76 and $48, respectively. Since the pro forma compensation cost is
recognized over the vesting period, the foregoing pro forma reductions in the
Company's net income are not representative of anticipated amounts in future
years.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using the
Black-Scholes option-pricing model, with the following assumptions:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Annual dividends $ -- $1.40 $1.28 $1.12
Expected volatility 40% 24% 25% 26%
Estimated forfeitures 35% 13% 13% 13%
Risk-free interest rate 5.5% 6.2% 6.1% 5.9%
Expected life (in years) 10 7 7 7
</TABLE>
55
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
For current assets, current liabilities and notes and other receivables,
management believes the carrying amounts are reasonable estimates of their fair
values. The fair values of noncurrent financial liabilities are shown below.
<TABLE>
<CAPTION>
AUGUST 28, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- ------------- ------------- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt, convertible
subordinated debt and other
long-term liabilities $1,091 $1,073 $1,908 $1,944 $1,359 $1,316
</TABLE>
The difference between carrying amounts and fair values for notes and other
receivables for continuing operations are not material as of August 28, 1998,
January 2, 1998, and January 3, 1997. However, net noncurrent assets of
discontinued operations includes notes and other receivables with a carrying
amount of $647 million and $479 million at year end 1997 and 1996, respectively.
The market values for notes and other receivables were valued based on the
expected future cash flows discounted at risk adjusted rates, and totaled $660
million and $479 million, respectively. Valuations for long-term debt,
convertible subordinated debt and other long-term liabilities are determined
based on quoted market prices or expected future payments discounted at risk
adjusted rates. The fair value of commercial paper borrowings is equal to the
carrying value.
56
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. For 1998, the
Company has identified six new business segments within these markets: Corporate
Services, Health Care, Education, Schools, Canada, and Laundries/Other. Prior to
the Distribution, the Company was a diversified hospitality company with
operations in two business segments: Lodging, which includes development,
ownership, operation and franchising of lodging properties under 10 brand names
and development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
In June 1997, SFAS No. 131 was issued--"Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the reporting of
selected-segmented information in quarterly and annual reports. As required in
SFAS No. 131, information from operating segments presented for 1998 has been
derived consistent with the Company's methodology in allocating resources and
measuring performance after the Distribution (see Note 1).
<TABLE>
<CAPTION>
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
34 WEEKS
ENDED
AUGUST 28,
1998 1997 1996 1995
----------------- ---------------- ----------------- ----------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
GROSS SALES
Corporate Services $ 803 $ 930 $ 901 $ 879
Health Care 784 1,039 1,027 960
Education 598 824 805 787
Schools 199 303 275 238
Canada 80 106 111 111
Laundries/Other 43 55 56 56
Other Contract Services 321 1,769 1,143 603
----------------- ---------------- ----------------- ----------------
Contract Services 2,828 5,026 4,318 3,634
Discontinued Operations 1,774 7,008 5,854 5,327
----------------- ---------------- ----------------- ----------------
Total Gross Sales $4,602 $12,034 $10,172 $8,961
----------------- ---------------- ----------------- ----------------
GROSS OPERATING PROFIT
Corporate Services $ 49 $ 35 $ 30 $ 31
Health Care 49 60 54 47
Education 5 27 24 23
Schools 8 11 8 6
Canada 1 3 2 1
Laundries/Other 2 2 3 --
Other Contract Services 5 19 56 22
----------------- ---------------- ----------------- ----------------
Contract Services 119 157 177 130
Discontinued Operations 158 569 452 360
----------------- ---------------- ----------------- ----------------
Total Gross Operating Profit $ 277 $ 726 $ 629 $ 490
----------------- ---------------- ----------------- ----------------
Total Net Operating Profit from
Continuing Operations (Contract Services) $ 119 $ 157 $ 177 $ 130
Corporate and Net Interest Expense 151 172 127 78
----------------- ---------------- ----------------- ----------------
(Loss) Income From Continuing Operations,
Before Taxes and Extraordinary Item $ (32) $ (15) $ 50 $ 52
================= ================ ================= ================
</TABLE>
57
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) BUSINESS SEGMENTS, CONTINUED
The Company does not have any material activity outside of the United States and
does not presently analyze it operations by geographic regions. In addition, the
Company offers a wide array of food and facilities products within its
operations, customized to individual client's requirements, and thus the
Company's management has not found it practical to track results by individual
products or services in relationship to the financial statements presented in
this report. At August 28, 1998, the Company had a diverse client base and does
not have any individual clients that are material to its overall operations.
IDENTIFIABLE ASSETS, CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION BY
BUSINESS SEGMENT:
<TABLE>
<CAPTION>
AUGUST 28,
1998 1997 1996 1995
---------------- ----------------- ----------------- ----------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS
Contract Services $1,341 $1,669 $2,108 $1,169
Discontinued Operations, Net -- 2,902 1,624 1,533
Other -- 438 448 519
---------------- ----------------- ----------------- ----------------
$1,341 $5,009 $4,180 $3,221
================ ================= ================= ================
CAPITAL EXPENDITURES
Contract Services $ 86 $ 264 $ 154 $ 70
Discontinued Operations 58 271 158 76
Other -- 18 14 7
---------------- ----------------- ----------------- ----------------
$ 144 $ 553 $ 326 $ 153
================ ================= ================= ================
DEPRECIATION AND AMORTIZATION
Contract Services $ 57 $ 87 $ 91 $ 73
Discontinued Operations 21 89 55 45
Other -- 12 10 11
---------------- ----------------- ----------------- ----------------
$ 78 $ 188 $ 156 $ 129
================ ================= ================= ================
</TABLE>
Management has determined that available financial information for its current
business segments related to periods prior to March 27, 1998 does not allow for
a practical or meaningful presentation of identifiable assets, capital
expenditures or depreciation and amortization for the periods presented.
58
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
SUPPLEMENTARY DATA
HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
1998(1)
------------- ------------- -------------- -------------
FIRST 9 WEEKS 13 WEEKS 34 WEEKS
QUARTER 5/29/98(2) 8/28/98(2) 8/28/98
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales $1,111 $ 752 $ 965 $2,828
Operating profit before corporate
expenses and interest 39 50 30 119
(Loss) Income from continuing operations(3) (11) 9 (17) (19)
Discontinued operations, net of income taxes(3) 77 -- -- 77
Extraordinary item, net of income taxes(4) (43) (1) -- (44)
Net income $ 23 $ 8 $ (17) $ 14
Diluted earnings per share(6) $ 0.73 $ 0.12 $(0.27) $ 0.27
</TABLE>
<TABLE>
<CAPTION>
1997(1)
------------- ------------- -------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER(3) YEAR
------------- ------------- -------------- ------------- -------------
(12 WEEKS) (12 WEEKS) (12 WEEKS) (16 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C> <C>
Sales $1,154 $1,164 $1,072 $1,636 $5,026
Operating profit before corporate
expenses and interest 41 44 18 54 157
Income (Loss) from continuing operations(3) -- -- -- -- --
Discontinued operations, net of income taxes(3) 77 83 67 108 335
Net income(5) $ 77 $ 83 $ 67 $ 108 $ 335
Diluted earnings per share(6) $ 2.50 $ 2.62 $ 2.12 $ 3.29 $10.53
</TABLE>
<TABLE>
<CAPTION>
1996(1)
------------- ------------- -------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------- -------------- ------------- -------------
(12 WEEKS) (12 WEEKS) (12 WEEKS) (17 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C>
Sales $ 890 $ 964 $ 909 $1,555 $4,318
Operating profit before corporate
expenses and interest 29 38 27 83 177
Income (Loss) from continuing operations(3) 6 5 (4) 26 33
Discontinued operations, net of income taxes(3) 57 70 62 84 273
Net income $ 63 $ 75 $ 58 $ 110 $ 306
Diluted earnings per share(6) $1.86 $2.22 $1.72 $ 3.25 $ 9.05
<FN>
1 - On April 15, 1998, the Company's Board of Directors approved a change in the Company's fiscal year from the Friday closest to
the end of December to the Friday closest to the end of August, thereby creating a 34-week Transition Period. On March 27, 1998,
the Company acquired Sodexho North America. The historical data for fiscal year 1997 and prior years does not include the revenue
and expenses of the acquired business, see Notes 1 and 3 to the Consolidated Financial Statements.
2 - Combined actual results of MMS and the acquired Sodexho North America after March 27, 1998.
3 - On March 27, 1998, the Company distributed to its shareholders the Lodging, MSLS and MDS divisions as part of the
Transactions. For reporting purposes, the Lodging segment is considered Discontinued Operations prior to March 27, 1998. MSLS and
MDS are considered part of continuing operations (see Note 1 to the Consolidated Financial Statements).
4 - On March 27, 1998, the Company refinanced its debt as part of the Transactions (see Notes 1 and 8 to the Consolidated Financial
Statements), resulting in a $71 million pretax charge from the early extinguishment of debt ($44 million after-tax).
5 - Operating results in the fourth quarter of 1997 include a loss before tax of $22 million ($14 million after tax, or $0.40 per
share) on the sale of MMS- UK to Sodexho in connection with the Transactions.
6 - Earnings per share data have been restated to reflect the adoption in 1997 of Statement of Financial Accounting Standards No.
128, "Earnings Per Share." All per share data has been adjusted to reflect a one-for-four reverse stock split effective March 27,
1998.
</FN>
</TABLE>
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
As described below, certain information appearing in the Company's Proxy
Statement to be furnished to shareholders in connection with the 1999 Annual
Meeting, is incorporated by reference in this Form 10-K Transition Report.
ITEM 10 This information is incorporated by reference to the
"Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" sections of the Company's Proxy
Statement to be furnished to shareholders in connection
with the 1999 Annual Meeting. Information regarding
executive officers is included below.
ITEM 11 This information is incorporated by reference to the
"Executive Compensation" section of the Company's Proxy
Statement to be furnished to shareholders in connection with
the 1999 Annual Meeting.
ITEM 12 This information is incorporated by reference to the
"Security Ownership of Certain Beneficial Owners and
Management" section of the Company's Proxy Statement to be
furnished to shareholders in connection with the 1999 Annual
Meeting.
ITEM 13 This information is incorporated by reference to the "Certain
Transactions" section of the Company's Proxy Statement to be
furnished to shareholders in connection with the 1999
Annual Meeting.
EXECUTIVE OFFICERS
The 10 persons identified below are the executive officers of the Company. Each
of the executive officers with the exception of Mr. Landel, assumed their
current positions with the Company effective with the date of the Transactions.
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Charles D. O'Dell 47 Charles D. O'Dell joined Marriott Corporation in 1979 and became
President and a Regional Manager in Marriott Corporation's Roy Rogers Division
Chief Executive Officer in 1981. Mr. O'Dell held several management positions in that
Division until 1985, when he was named Division Vice President -
Education in the Food and Services Management Division. In 1986,
Mr. O'Dell became Senior Vice President of Business Food and
Auxiliary Services, and in November 1990 he was appointed
President of Marriott Management Services.
Michel Landel 46 Michel Landel was appointed President and Chief Executive Officer
Executive Vice President and of Sodexho North America in 1994. Mr. Landel joined Sodexho in
President, Corporate Services 1984 as a Regional Manager of Sodexho Africa. In 1986, he was
named President of Sodexho Africa, a position he held until 1989,
when he became President and Chief Executive Officer of Sodexho's
United States operations. Prior to joining Sodexho, Mr. Landel
held positions with Groupe Poliet (Plan General Manager,
1980-1984) and The Chase Manhattan Bank (Financial Analyst and
Assistant Treasurer, 1976-1980). Mr. Landel assumed his current
position with the Company on June 16, 1998.
</TABLE>
60
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Anthony F. Alibrio 53 Anthony F. Alibrio's has served as President of Health Care
President, Health Care Services Services for Marriott Management Services since 1990. His career
has been focused on serving the health care industry for the past
27 years of his 32-year tenure with Marriott. In the past he has
held various operations, sales, and marketing responsibilities
including Division Vice President and National Vice President of
Sales and Marketing. A member of the Healthcare Research and
Development Institute and the American Academy of Medical
Administrators, Mr. Alibrio also serves as a member of the Board
of Directors for the National Committee for Quality Health Care
and Health Insights Foundation.
Stephen J. Brady 53 Stephen J. Brady joined Sodexho USA in 1989 after a 15-year
Senior Vice President, Corporate career in the retail industry. His positions with Sodexho USA
Communications were Vice President of Strategic Developments, Vice President of
Health Care Operations and Regional Vice President of Education
Operations. Most recently he has served as Vice President of
Marketing and Communications for Sodexho USA. Mr. Brady serves
on the board of FoodChain, the national food rescue network.
William W. Hamman 56 William W. Hamman has served as President of Marriott Education
President, Education Services Services since 1990. He has supported the higher education
community for 35 years, holding positions in Marriott Education
Services that include Regional Vice President, Area Vice
President and Division Vice President. Mr. Hamman is active in
the National Association of College and University Business
Officers (NACUBO) and Council of Independent Colleges (CIC). He
also serves on the Western Illinois University Foundation Board
of Trustees.
Randall C. Harris 46 Randall C. Harris joined Marriott Management Services in 1997.
Senior Vice President and Chief Human Before joining the Company, Mr. Harris was with Cognizant
Resources Officer Corporation, which was formed as a result of the restructuring of
Dunn & Bradstreet Corporation. His previous experience includes
senior human resources and general management positions with
American Express (and the subsequent initial public offering of
First Data Corporation.) and Sprint Corporation.
Lawrence E. Hyatt 44 Lawrence E. Hyatt has served as Senior Vice President of Finance
Senior Vice President and Chief and Planning for Marriott Management Services since 1988. He
Financial Officer joined Marriott Corporation in 1981 and has been Staff Auditor
for Corporate Internal Audit, Manager of Financial Analysis for
Roy Rogers Restaurants, Director of Finance for Marriott Services
Group and Vice President, Operations Planning and Control for the
Company. Previously, Mr. Hyatt was an associate in ICF
Incorporated and a financial analyst for the US Department of
Energy.
</TABLE>
61
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
David R. Smail 58 David R. Smail has most currently served as Senior Vice President
Senior Vice President and Chief and Chief Information Officer for Marriott Management Services
Information Officer since 1993. He joined Marriott Corporation in 1981 as Vice
President in the Marriott Information Systems Department. From
1985 to 1992, he served as Vice President, Corporate Systems
Services, Marriott Corporation. Prior to joining Marriott
Corporation, Mr. Smail worked as an Assistant Vice President in
the Operations Group, AMTRAK, and spent 14 years at Andersen
Consulting.
Robert A. Stern 40 Robert A. Stern has most recently served as Associate General
Senior Vice President and General Counsel for the Company providing legal support to Marriott
Counsel Management Services. Previously, he provided legal support to
Marriott Corporation's Restaurant and Travel Plaza businesses.
Mr. Stern joined Marriott Corporation in 1985 from the Washington
D.C., office of Skadden Arps Slate Meagher & Flom.
Anthony J. Wilson 45 Anthony J. Wilson has served as Senior Vice President, Marketing
Senior Vice President, and Product Development for MMS since joining the Company in
Marketing and Procurement November 1996. Previously, Mr. Wilson was Vice President and
General Manager in the Global Food Service division of Campbell
Soup Company. He also spent 13 years at ARAMARK, where he served
as Senior Vice President ARASERVE and President of ARAMARK's
Marketing Services Group.
</TABLE>
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
The response to this portion of Item 14 is submitted under Item 8 of
this Report on Form 10-K.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
Any shareholder who desires a copy of the following Exhibits may obtain
a copy upon request from the Company at a charge that reflects the
reproduction cost of such Exhibits. Requests should be made to the
Secretary, Sodexho Marriott Services, Inc., 9801 Washingtonian
Boulevard, Gaithersburg, Maryland, 20878.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
- ------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation. Exhibit No. 3 (a) to Form 8-K dated April 3, 1998.
3.2 Amended and Restated Bylaws. Exhibit No. 3 (b) to Form 8-K dated April 3, 1998.
4.1 Certificate of Designation, Preferences and Rights Exhibit No. 4.1 to Form 8-K dated October 25, 1993.
of Series A Junior Participating Preferred Stock.
4.2 Rights Agreement with The Bank of New York, as (a) Exhibit No. 4.2 to Form 8-K dated October 25,
Rights Agent, as amended. 1993, (b) Exhibit 1 to Form 8--A/A filed on October
15, 1997 (Amendment No. 1) and (c) Amendment No. 2
to Rights Agreement dated as of March 27, 1998
filed by amendment to Form 8-A.
4.3 Indenture with Chemical Bank, as Trustee, as (a) Exhibit Nos. 4(i) and 4(ii) to Form 8-K dated
supplemented. December 9, 1993 (original Indenture and First
Supplemental Indenture); (b) Exhibit No. 4 (ii) to
Form 8-K dated April 19, 1995 (Second Supplemental
Indenture); (c) Exhibit No. 4.2 to From 8-K dated
June 7, 1995 (Third Supplemental Indenture); (d)
Exhibit No. 4.2 to Form 8-K dated December 11, 1995
(Fourth Supplemental Indenture); (e) Exhibit No.
4(a) to Form 8-K/A dated April 27, 1998 (Fifth
Supplemental Indenture); (f) Exhibit No. 4(b) to
Form 8-K/A dated April 27, 1998 (Sixth Supplemental
Indenture); Exhibit No. 4(c) to Form 8-K/A dated
April 27, 1998 (Seventh Supplemental Indenture);
and Exhibit No. 4(d) to Form 8-K/A dated April 27,
1998 (Eighth Supplemental Indenture).
</TABLE>
63
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
- ------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
4.4 Indenture with The Bank of New York, as Trustee, (a) Exhibit No. 4.1 Form 8-K dated March 25, 1996;
relating to Liquid Yield Option Notes, as (b) Exhibit No. 4.2 to Form 8-K dated March 25,
supplemented. 1996 (First Supplemental Indenture).
4.5 Indenture among RHG Finance Corporation, as (a) Exhibit No. 2.02 to Renaissance Hotel Group
issuer, Renaissance Hotel Group N.V. and the N.V. Annual Report on Form 20-F for the fiscal year
Company, as guarantors, and The First National ended June 30, 1996; and (b) Exhibit No. 4 to Form
Bank of Chicago as Trustee, as supplemented. 10-Q for the fiscal quarter ended June 20, 1997
(First and Second Supplemental Indenture).
4.6 Sodexho Marriott Services, Inc. 1993 Comprehensive Exhibit 4(a) to Form 8-K dated April 15, 1998.
Stock Incentive Plan.
4.7 Sodexho Marriott Services, Inc. 1998 Comprehensive Exhibit 4(a) to Form 8-K dated April 15, 1998.
Stock Incentive Plan.
4.8 Sodexho Savings Plus Plan. Exhibit 4.3 to Form S-8 dated September 17, 1998.
4.9 Sodexho Marriott Services, Inc. 401(k) Employee Exhibit 4.3 to Form S-8 dated September 17, 1998.
Retirement Savings Plan.
4.10 Trust Agreement with Bankers Trust Company, Exhibit 99.1 to Form S-8 dated September 17, 1998.
Trustee for the Sodexho Marriott Services, Inc.
401(k) Employee Retirement Savings Plan.
10.1 $1.5 billion Credit Agreement with Citibank, N.A., (a) Exhibit No. 10 to Form 10-Q for the fiscal
as Administrative Agent, and certain banks, as quarter ended March 28, 1997 (original agreement),
Banks, as amended. and (b) Exhibit No. 10.2 to Form 10-K for the
fiscal year ended December 29, 1995 (first
Amendment); and (c) Exhibit No. 10-1 to Form
10-Q for the fiscal quarter ended September 12,
1997 (Second Amendment).
10.2 Distribution Agreement with Host Marriott, as (a) Exhibit No. 10.3 to Form 8-K dated October 25,
amended. 1993; (b) Exhibit No. 10.2 to Form 10-K for the
fiscal year ended December 29, 1995 (First
Amendment); and (c) Exhibit No. 10.1 to Form
10-Q for the fiscal quarter ended September 12,
1997 (Second Amendment).
10.3 Non Competition Agreement with Host Marriott and (a) Exhibit No. 10.7 to Form 8-K dated October 25,
Host Marriott Services Corporation, as amended. 1993; (b) Exhibit No. 10.4 to Form 10-K for the
fiscal year ended December 29, 1995 (Amendment No. 1).
10.4 Employee Benefits and Other Employment Matters Exhibit No. 10.6 to Form 8-K dated October 25, 1993.
Allocation Agreement with Host Marriott.
</TABLE>
64
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
- ------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
10.5 Agreement and Plan of Merger by and among Marriott Exhibit No. (c) (1) to Schedule 14d-1 dated
International, Inc., FGI Acquisition Corp. and February 23, 1996.
Forum Group, Inc.
10.6 Acquisition Agreement, dated as of February 17, Exhibit No. 10.1 to Form 8-K dated February 19,
1997, by and between the Company and Renaissance 1997.
Hotel Group N.V.
10.7 Shareholder Agreement, dated as of February 17, Exhibit No. 10.2 to Form 8-K dated February 19,
1997, by and between Marriott International, Inc. 1997.
and Diamant Hotel Investments N.V.
10.8 Stock Purchase Agreement, dated as of June 21, Exhibit No. 10.2 to Form 10-Q for the fiscal
1997, by and between Host Marriott Corporation and quarter ended September 12, 1997.
Marriott Senior Living Services, Inc.
10.9 Distribution Agreement dated as of September 30, Appendix A to Definitive Proxy Statement for a
1997 between the Company and New Marriott MI, Inc. Special Meeting of Shareholders commenced on March
17, 1998 and adjourned on March 20, 1998.
10.10 Agreement and Plan of Merger dated as of September Appendix B to Definitive Proxy Statement for a
30, 1997 by and among the Company, Marriott - ICC Special Meeting of Shareholders commenced on March
Merger Corp., New Marriott MI, Inc., Sodexho 17, 1998 and adjourned on March 20, 1998.
Alliance, S.A., and International Catering
Corporation.
10.11 Omnibus Restructuring Agreement dated as of Appendix C to Definitive Proxy Statement for a
September 30, 1997 by and among the Company, Special Meeting of Shareholders commenced on March
Marriott --ICC Merger Corp., New Marriott MI, 17, 1998 and adjourned on March 20, 1998.
Inc., Sodexho Alliance, S.A., and
International Catering Corporation.
10.12 Amendment Agreement, dated as of January 28, 1998, Appendix D to Definitive Proxy Statement for a
by and among the Company, Marriott-ICC Merger Special Meeting of Shareholders commenced on March
Corp., New Marriott MI, Inc., Sodexho Alliance, 17, 1998 and adjourned on March 20, 1998.
S.A., and International Catering Corporation.
10.13 Employee Benefits and Other Employment Matters Exhibit No. 10.1 to Form 10 of New Marriott MI,
Allocation Agreement, dated as of September 30, Inc. filed on February 1, 1998.
1997, by and between the Company and New Marriott
MI, Inc. Computation of Ratio of Earnings to
Fixed Charges. Subsidiaries of Marriott
International, Inc. Consent of Arthur Andersen
LLP. Forward-Looking Statements.
</TABLE>
65
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
- ------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
10.14 Trademark and Trade Name License Agreement dated Exhibit No. 10.18 to Form 10-K/A filed on April 15,
as of March 27, 1998 among the Company, New 1998.
Marriott and Marriott Worldwide Corporation.
10.15 Royalty Agreement dated as of March 27, 1998 Exhibit No. 10.19 to Form 10-K/A filed on April
between Sodexho Alliance, S.A. and the Company. 15, 1998.
10.16 $620 million Credit Agreement dated as of January (a) Exhibit No. 10(a) to Form 8-K/A dated April 27,
30, 1998 with the Company, as Borrower, certain 1998; and (b) Exhibit No. 10(c) to Form 8-K/A dated
initial lenders, as Initial Lenders, Societe April 27, 1998 (Amendment No. 1).
Generale and J.P. Morgan Securities Inc. ("J.P.
Morgan"), as Arrangers, Societe Generale, as
Administrative Agent, and Morgan Guaranty Trust
Company of New York ("Morgan"), as Documentation
Agent, as amended.
10.17 $735 million Credit Agreement dated as of January (a) Exhibit No. 10(b) to Form 8-K/A dated April 27,
30, 1998 with Sodexho Marriott Operations, Inc., 1998 and (b) Exhibit No. 10(d) to Form 8-K/A dated
as Borrower, the Company, as Parent Guarantor, April 27, 1998 (Amendment No. 1).
certain initial lenders, as Initial Lenders,
Societe Generale and Morgan, as Initial Issuing
Banks, Morgan, as Documentation Agent and
Administrative Agent, and Societe Generale and
J.P. Morgan, as Arrangers, as amended.
10.18 Stockholder Agreement dated as of March 27, 1998 Exhibit No. 10.22 to Form 10-K/A filed on April 15,
with Sodexho Alliance, S.A. 1998.
12 Schedule of Ratio of Earnings to Fixed Charges. Filed herewith.
21 Subsidiaries of Sodexho Marriott Services, Inc. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Filed herewith.
Public Accountants.
23.2 Consent of Arthur Andersen LLP, Filed herewith.
Independent Public Accountants.
24 Power of Attorney. Filed herewith.
99 Forward-Looking Statements. Filed herewith.
</TABLE>
66
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(B) REPORTS ON FORM 8-K
DATE ITEM REPORTED
---- -------------
April 3, 1998 Announcement of the consummation of
the Distribution to Shareholders and
Acquisition of Sodexho North America.
April 15, 1998 Announcement of change in fiscal year
of the Company to the Friday nearest
August 31 from the Friday nearest
December 31.
June 10, 1998 Announcement of stock option grants
under the 1998 Stock Option Plan (as
defined).
June 16, 1998 Announcement of Michel Landel named
President of the Company's Corporate
Services Division.
September 17, 1998 Announcement of the 1999 Annual
Meeting of Stockholders.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 23rd day of
November, 1998.
SODEXHO MARRIOTT SERVICES, INC.
By: /s/ ROBERT A. STERN
--------------------------
Robert A. Stern
Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
*
- -------------------------- President and Chief Executive Officer November 23, 1998
Charles D. O'Dell and Director (Principal
Executive Officer)
/s/ LAWRENCE E. HYATT
- -------------------------- Senior Vice President and Chief Financial November 23, 1998
Lawrence E. Hyatt Officer (Principal Financial Officer)
/s/ LOTA S. ZOTH
- -------------------------- Corporate Controller and Chief November 23, 1998
Lota S. Zoth Accounting Officer (Principal
Accounting Officer)
*
- -------------------------- Chairman and Director November 23, 1998
William J. Shaw
*
- -------------------------- Director November 23, 1998
Daniel J. Altobello
*
- -------------------------- Director November 23, 1998
Pierre Bellon
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
*
- -------------------------- Director November 23, 1998
Bernard Carton
*
- -------------------------- Director November 23, 1998
Doctor R. Crants
*
- -------------------------- Director November 23, 1998
John W. Marriott III
- -------------------------- Director November 23, 1998
Edouard de Royere
</TABLE>
* By: /s/ ROBERT A. STERN
--------------------
Robert A. Stern
Attorney-in-fact
69
<PAGE>
Exhibit 12
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions)
34 WEEKS FISCAL YEAR ENDED
----------------------------------------------------
AUGUST 28, 1998 1997 1996 1995 1994 1993
------------------ ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income Before Cumulative Effect of a Change in
Accounting Principle and Extraordinary Item $ 58 $335 $306 $247 $200 $159
Add / (Deduct):
Tax and Income Before Cumulative Effect of a
Change in Accounting Principle and
Extraordinary Item 42 219 196 165 142 116
Fixed Charges 65 179 142 107 64 73
Interest Capitalized as Property and Equipment - (16) (9) (6) (4) (3)
(Income) / Loss Related to certain
50%-or-Less-Owned-Affiliates - - 1 - (2) (1)
------------------ ---------- --------- ---------- --------- ----------
Earnings Available For Fixed Charges $165 $717 $636 $511 $420 $344
================== ========== ========= ========== ========= ==========
Fixed Charges:
Interest Including Amounts Capitalized as Property
and Equipment $ 65 $126 $ 94 $ 61 $ 36 $ 30
Portion of Rental Expense Representative
of Interest - 53 8 45 45 40
Share of Interest Expense of certain
50%-or-Less-Owned-Affiliates - - - 1 3 3
------------------ ---------- --------- ---------- --------- ----------
Total Fixed Charges $ 65 $179 $142 $107 $ 64 $ 73
================== ========== ========= ========== ========= ==========
Ratio of Earnings to Fixed Charges 2.5 4.0 4.5 4.8 5.0 4.7
================== ========== ========= ========== ========= ==========
<FN>
For the purpose of computing the ratio of earnings to fixed charges as prescribed by the rules and regulations of the Commission,
earnings represent income before cumulative effect of a change in accounting principle and extraordinary item, plus, when
applicable, (a) taxes on such income, (b) fixed charges, and (c) the Company's equity interest in losses of certain
50%-or-less-owned-affiliates; less (x) undistributed earnings of 50%-or-less-owned-affiliates, and (y) interest capitalized. Fixed
charges represent interest (including amounts capitalized), representative of interest, and when applicable, the Company's share
of the interest expense of certain 50%-or-less-owned-affiliates.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21
11/11/1998 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 1
DOMESTIC SUBSIDIARIES
STATE INCORPORATION 10-K REPORT
State: Alabama
Marcorp, Inc.
State: Alaska
Sodexho Alaska, Inc.
State: California
Sodexho Management Corp.
Saga Health Care Dietary Management Services, Inc.
Saga Education Food Services, Inc.
LunchStop, Inc.
State: Connecticut
Sodexho Services, Inc.
State: Delaware
Sofinsod Corp.
Sodexho Marriott Services, Inc.
Sodexho Marriott Operations, Inc.
Sodexho Marriott Laundry Services, Inc.
Sodexho Marriott Education Services, Inc.
SMS Services of California, Inc.
SMO Finance Corp.
Offshore Food Services, Inc.
International Catering Corporation
International Boatel Companies, Inc.
Garfield Food Services, Inc.
Garfield Catering Corp.
Gardner Merchant Holdings, Inc.
Corporate Food Services, Inc.
Boatel, Inc.
Boatel Services, Inc.
Boatel Catering, Inc.
Boatel Associates, Inc.
State: Idaho
MFS of Boise, Inc.
State: Massachusetts
Sodexho USA, Inc. dba Servo
Service Supply Corp.
International Catering Corp. of Massachusetts
Creative Gourmet, Inc.
State: New Jersey
SMS Electrical, Inc.
State: New York
Sodexho Marriott Management, Inc.
Service Systems Corporation
Servend Food Services, Inc.
<PAGE>
11/11/1998 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 2
DOMESTIC SUBSIDIARIES, CONTINUED
STATE INCORPORATION 10-K REPORT
State: Pennsylvania
Garlex Realty Corp
State: Texas
SMS Education Services of Texas, Inc.
Premier Hospitality, Inc.
Premier Hospitality Club, Inc.
GulfWide Services, Inc.
State: Vermont
Sodexho Vermont, Inc.
SMS Food Services of Vermont, Inc.
State: Wisconsin
SMS Education Services of Wisconsin, Inc.
FOREIGN SUBSIDIARIES
CORPS. WITHIN COUNTRY 10-K LIST
Country: Canada, Newfoundland
Bona Vista Foods, Ltd.
Country: Canada, Ontario
Sodexho Marriott Services Canada, Ltd.
Ontrak Services, Inc.
Dalmar Foods Limited
Country: Canada, Quebec
Sodexho Marriott Quebec Ltee
Sodexho Financiere du Canada, Inc.
Sodexho Canada, Inc.
Luc, Inc.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements (No. 333-63863, No. 333-63861, No. 33-66624, No. 33-85420 and No.
333-00404) of Sodexho Marriott Services, Inc. of our report dated October 7,
1998 appearing on page 31 of this Transition Report on Form 10-K.
/s/PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
November 19, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated February 3, 1998 (except with respect to the matters discussed in
Notes 2 and 14 of the Company's financial statements, as to which the date is
October 7, 1998), included in this Form 10-K, into the Company's previously
filed Registration Statements Files No. 33-66624, No. 33-85420, No. 333-00404,
No. 333-63863,and No. 333-63861.
/s/ARTHUR ANDERSEN LLP
Washington, D.C.
November 19, 1998
<PAGE>
Exhibit 24
POWER OF ATTORNEY
We the undersigned directors of Sodexho Marriott Services,
Inc. (the "Corporation"), do hereby constitute and appoint Robert A. Stern and
Joan Rector McGlockton, or either or both of them, with full power of
substitution, our true and lawful attorneys-in-fact and agents, to do any and
all acts and things in our names and our behalf in our capacities as directors
for the purpose of executing and filing on behalf of the Corporation, a
Transition Report on Form 10-K for the fiscal year ended August 28, 1998,
including any exhibits thereto and any and all amendments thereto; and we hereby
ratify and confirm all that said attorneys and agents shall do or cause to be
one by virtue thereof.
IN WITNESS WHEREOF, each of the undersigned has executed and
delivered this Power of Attorney on and as of October 15, 1998.
<TABLE>
<S> <C>
/s/ WILLIAM J. SHAW /s/ PIERRE BELLON
- ------------------------------------------------ -----------------------------------------------
William J. Shaw, Director Pierre Bellon, Director
/s/ BERNARD CARTON
- ------------------------------------------------ -----------------------------------------------
Bernard Carton, Director Edouard de Royere
/s/ JOHN W. MARRIOTT, III /s/ DOCTOR R. CRANTS
- ------------------------------------------------ -----------------------------------------------
John W. Marriott, III, Director Doctor R. Crants, Director
/s/ DANIEL J. ALTOBELLO /s/ CHARLES D. O'DELL
- ------------------------------------------------ -----------------------------------------------
Daniel J. Altobello, Director Charles D. O'Dell, Director
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
SODEXHO MARRIOTT SERVICES,INC.
FINANCIAL DATA SCHEDULE FOR AUGUST 28, 1998, JANUARY 2, 1998 AND JANUARY 3, 1997
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> AUG-28-1998 JAN-02-1998 JAN-03-1997
<PERIOD-START> JAN-03-1998 JAN-04-1997 DEC-30-1995
<PERIOD-END> AUG-28-1998 JAN-02-1998 JAN-03-1997
<CASH> 79 139 128
<SECURITIES> 10 9 0
<RECEIVABLES> 374 487 419
<ALLOWANCES> (17) (12) (11)
<INVENTORY> 54 116 115
<CURRENT-ASSETS> 605 914 764
<PP&E> 249 763 1156
<DEPRECIATION> 167 258 238
<TOTAL-ASSETS> 1341 5009 4180
<CURRENT-LIABILITIES> 695 1149 1092
<BONDS> 1091 1829 1300
0 0 0
0 0 0
<COMMON> 62 32 32
<OTHER-SE> (617) 1431 1228
<TOTAL-LIABILITY-AND-EQUITY> 1341 5009 4180
<SALES> 2828 5026 4318
<TOTAL-REVENUES> 2828 5026 4318
<CGS> 2709 4847 4141
<TOTAL-COSTS> 2709 4869 4141
<OTHER-EXPENSES> 97 94 79
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 65 110 85
<INCOME-PRETAX> (32) (15) 50
<INCOME-TAX> 13 15 (17)
<INCOME-CONTINUING> (19) 0 33
<DISCONTINUED> 77 335 273
<EXTRAORDINARY> (44) 0 0
<CHANGES> 0 0 0
<NET-INCOME> 14 335 306
<EPS-PRIMARY> 0.27 10.53 9.59
<EPS-DILUTED> 0.27 10.53 9.05
<FN>
On April 15, 1998, the Board of Directors of the Company approved the change of
the fiscal year of the Company to the Friday nearest to August 31 of each year.
Prior to this change in fiscal year, the Company's fiscal year ended on the
Friday nearest to December 31 of each year. Thus, the 1998 fiscal year, which
began on January 3, 1998, ended on August 28, 1998.
</FN>
</TABLE>
<PAGE>
Exhibit 99
SODEXHO MARRIOTT SERVICES, INC.
FORWARD-LOOKING STATEMENTS
SUMMARY OF IMPORTANT FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As indicated previously, this report contains forward-looking statements which
are subject to a number of risks and uncertainties. Sodexho Marriott Services,
Inc. (the "Company") cautions readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results of operations. The factors set forth below do not
constitute all factors which investors should consider prior to making an
investment decision with respect to the Company's securities. Further, investors
should not assume that the information contained below is complete or accurate
in all respects following the date of this filing. The Company assumes no
obligation to update any forward-looking statements or any of the factors
discussed below.
CHANGES IN OPERATIONS. On March 27, 1998, the Company, formerly named Marriott
International, Inc. (as formerly named, "Old Marriott"), consummated a series of
transactions (the "Transactions") that, among other things, resulted in: (i) a
spin-off to Old Marriott's stockholders of all businesses of Old Marriott other
than its food service and facilities management business through a special
dividend of stock in a new company which now uses the name "Marriott
International, Inc." ("New Marriott"); (ii) the acquisition through a merger of
the North American operations of Sodexho Alliance, S.A. ("Sodexho"); and (iii)
the refinancing of certain outstanding indebtedness. Following the Transactions,
the Company was renamed Sodexho Marriott Services, Inc. As a result of the
Transactions, the Company's operations were significantly changed. The
distribution of the lodging business narrowed the Company's operations to its
food service and facilities management business (as expanded by the addition of
the North American operations of Sodexho), and caused the Company's debt
obligations, as a percentage of its assets, to increase significantly. The
Company's business strategy is based on the belief that it will be able to
integrate successfully the North American operations of Sodexho into its
existing operations, expand its business, and reduce its debt over a reasonable
period of time. There can no assurance, however, that the Company's efforts to
execute this strategy will be successful, or that a failure to do so will not
have a material adverse effect on the Company's results of operations, financial
condition and business. In addition, because the Company is less diversified
than it was prior to the Transactions, the results of operations of the Company
will be more susceptible to competitive and market factors specific to its core
businesses.
LIMITED HISTORY AS AN INDEPENDENT FOOD SERVICE AND FACILITIES MANAGEMENT
COMPANY. The Company has been operating for only a limited period of time as an
independent, publicly owned, food service and facilities management company. In
addition, the Company's management does not have prior experience in operating
and managing a public company with significant leverage. Further, the Company
must take steps to ensure that certain corporate services now being provided to
the Company for limited periods of time by New Marriott eventually will be
adequately performed by the Company or third-party contractors. Any or all of
these factors could have a material adverse effect on the Company's results of
operations, financial condition and business.
SUBSTANTIAL INDEBTEDNESS. The Company's indebtedness under its credit facility
agreements is currently in excess of $1.3 billion and bears interest at rates
which float with certain indices. The size of the Company's indebtedness and the
restrictive covenants, events of default and other restrictions on the Company's
activities contained in its credit facility agreements may limit the Company's
ability to respond to market conditions, satisfy capital expenditure
requirements, meet contractual or financial obligations, incur additional debt
or engage in other activities. As a result, significant losses by the Company or
certain activities by it could cause the Company to violate the terms of its
credit facility agreements and thereby impair the Company's liquidity and limit
its ability to raise additional capital. Moreover, the failure to make required
debt payments could result in an acceleration of the Company's indebtedness, in
which case the lenders thereunder would be entitled to exercise their remedies,
including foreclosing on collateral. In view of the Company's leverage, any new
financings and refinancings by the Company of the Company's indebtedness, if
available at all, may be at higher interest rates and may contain terms
significantly less advantageous than would have been available to the Company
absent the Transactions. In addition, a rise in interest rates would cause the
Company's payment obligations to increase, even though the Company has hedged a
significant portion of its interest rate risk. The occurrence of any of these
events could restrict the Company's ability to finance its future operations,
meet capital needs or engage in other business activities that may be in the
interest of the Company. There can be no assurance that the Company will be able
to obtain additional capital, if needed, on acceptable terms, or that the
occurrence of any of the foregoing events would not have a material adverse
effect on the Company's results of operations, financial condition and business.
<PAGE>
Exhibit 99
SODEXHO MARRIOTT SERVICES, INC.
FORWARD-LOOKING STATEMENTS
CONTRACTUAL ARRANGEMENTS. The Company's ability to continue the growth of its
food service and facilities management business depends on whether it can
continue to obtain new contracts, or renewals of existing contracts, on
satisfactory terms. The majority of the food service and facilities management
contracts of the Company are either based on fixed-price terms or terminable by
clients on short notice (generally from 30 to 120 days), or both. Therefore, the
Company's results of operations are dependent to a significant extent on its
ability to estimate and control costs associated with the provision of services
under these contracts. The Company's costs are subject to increases as a result
of rising labor and supply costs, many of which are outside its control. In
addition, the terms of the Company's operating contracts, distribution
agreements, franchise agreements and leases are influenced by contract terms
offered by the Company's competitors, general economic conditions, and other
factors. There can be no assurance that some or all of these factors will not
adversely affect the Company's operating margins or its ability to enter into
satisfactory future contracts, or that these factors would not have a material
adverse effect on the Company's results of operations, financial condition and
business.
COMPETITION. The food service and facilities management industries are highly
competitive. The Company competes in these industries with numerous other
vendors of varying sizes, many of which have significant financial resources.
The continued success of the Company will be dependent, in large part, upon its
ability to compete in such areas as the quality of food and facilities
management services, the nature and scope of specialized services, and upon the
Company's ability to contain costs.
ECONOMIC CONDITIONS. A decline in international, national or regional economic
conditions could result in reduced demand for the outsourcing of food and
facilities management services and create pressure on the Company to enter into
contractual arrangements less favorable than those currently in effect or under
consideration. Accordingly, such a decline could have a material adverse effect
on the Company's results of operations, financial condition and business.
LIMITED GEOGRAPHIC FOCUS. The Company is not currently expected to expand its
international presence beyond Canada. The Company's licensing arrangements with
New Marriott and Sodexho to use the names "Marriott" and "Sodexho" cover only
the U.S. and Canada. As a practical matter, since the Company will be allowed to
use its corporate name only in the U.S. and Canada, and since Sodexho controls
or has significant interests in companies competing in other countries in the
food service and facilities management sector, it is unlikely that the Company
will engage in significant operations outside the U.S. and Canada. As a result,
the Company will be more susceptible to a downturn in the U.S. and Canadian
economies than a company that is actively engaged in various other markets.
RELATIONSHIP WITH SODEXHO. As part of the Transactions, the Company and Sodexho
entered into certain arrangements under which Sodexho provides the Company with
a variety of consulting and advisory services and other assistance and has
guaranteed a portion of the Company's indebtedness. Sodexho also has licensed to
the Company the use of the name "Sodexho." These arrangements may have the
effect of causing the Company to be reliant to a substantial degree on its
relationship with Sodexho. Each of these arrangements has a finite term, and the
failure to renew any such arrangements on comparable terms could have a material
adverse effect on the Company's results of operations, financial condition and
business. Similar effects also might result in the event Sodexho were to
encounter financial or other difficulties that could prevent it from providing
such services or assistance to the Company.
SEASONAL NATURE OF THE COMPANY'S BUSINESS. The food service and facilities
management business has been characterized historically by seasonal fluctuations
in overall demand for services, particularly in the education sector where sales
are stronger during the academic year. There can be no assurance that these
fluctuations will not have a material adverse effect on the Company's results of
operations, financial condition and business.
CERTAIN ANTI-TAKEOVER EFFECTS. As of March 27, 1998, Sodexho, the Company's
largest shareholder, beneficially owned approximately 48% of the outstanding
shares of the Company's common stock. Sodexho has agreed pursuant to a tax
sharing and indemnification agreement entered into among the Company, New
Marriott and Sodexho not to acquire 50 percent or more of the Company's common
stock for three years after the Transactions, and the certificate of
incorporation of the Company generally provides that no person may acquire 50
percent or more of the Company's common stock until the end of such period.
Consequently, no change in control of the Company is expected to occur during
the three years following the Transactions. In addition, because Sodexho owns a
large percentage of the Company's common stock it may be able to exercise
significant influence over many matters requiring shareholder approval. Pursuant
to a stockholder agreement with the Company, Sodexho also has the right to
nominate three members of the Company's Board. As a result, Sodexho's
relationship with the Company may have the effect of, among other things,
preventing a change in control of the Company at any time without the agreement
of Sodexho.
<PAGE>
Exhibit 99
SODEXHO MARRIOTT SERVICES, INC.
FORWARD-LOOKING STATEMENTS
USE OF TRADENAMES. New Marriott has licensed the "Marriott" name to the Company
in certain limited respects for a period of four years after the Transactions.
The Company will not have the right to use the "Marriott" name after the
expiration of the four-year period. In addition, Sodexho has licensed the
"Sodexho" name to the Company under a royalty agreement having a ten-year term.
The "Sodexho" name, which has been used in the food service and facilities
management business in North America for the past four years, is not as well
known in that market as the "Marriott" name. The Company may have to make
additional expenditures to position its new name in the marketplace and cannot
predict with certainty the extent to which the substitution of a new name may
adversely affect its retention and acquisition of clients. Further, to the
extent that the Company fails to perform its obligations under its license
agreements with New Marriott or Sodexho, each of New Marriott and Sodexho could
successfully prevent the Company from using their respective names, which could
adversely affect the Company's retention and acquisition of clients and its
financial performance.
DIVIDEND POLICY. Prior to the Transactions, the Company had paid regular
quarterly dividends. The Company may pay quarterly dividends in the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to EBITDA (as defined in the
documentation for the credit facility agreements) is less than 4 but not less
than 3. This restriction will no longer apply when such ratio is less than 3.
The payment and amount of cash dividends on the Company's common stock will be
subject to the sole discretion of the Company's Board, which will review the
Company's dividend policy at such times as may be deemed appropriate. The Board
will closely monitor the results of the Company's operations, capital
requirements, and other considerations to determine the dividend to be declared
in future periods.
YEAR 2000 COMPLIANCE. There are many risks associated with the Year 2000 issue.
Because the Company's Year 2000 compliance depends upon numerous third parties
also being Year 2000 compliant on a timely basis, there can be no guarantee that
the Company's efforts will prevent a material adverse impact on its business,
results of operations, financial condition and cash flow. The possible
consequences to the Company of its business partners or the general
infrastructure (including transportation, utilities, and communications) not
being fully Year 2000 compliant include temporary facilities closings, delays in
the delivery of products, delays in the receipt of key food products, equipment
and packaging supplies, invoice and collection errors, and inventory and supply
shortages. These consequences could have a material adverse impact on the
Company's business, results of operations, financial condition and cash flow if
the Company is unable to conduct its business in the ordinary course. The
Company believes that its readiness plan should significantly reduce the adverse
effects any such disruptions may have. FLUCTUATING PRICES OF THE COMPANY'S
COMMON STOCK. The Company's common stock is listed and traded on the New York
Stock Exchange and certain other U.S. exchanges. Prices at which the Company's
common stock trades fluctuate significantly and could be influenced by many
factors, including, among others, the continuing depth and liquidity of the
market for the Company's common stock, investor perception of the Company, the
Company's dividend policy and general economic and market conditions.
