<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEKS ENDED FEBRUARY 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
-------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 987-4431
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Shares outstanding
CLASS AT APRIL 5, 1999
-------------------- ----------------
Common Stock $1.00
par value per share 62,180,822
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
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PAGE NO.
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<S> <C>
Introduction
Overview 1
Glossary of Terms 2
Forward-Looking Statements 3
Pro Forma Financial Information (Unaudited) 4
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Thirteen and Twenty-Six Weeks Ended February 26, 1999 and
Twelve and Twenty-Eight Weeks Ended March 27, 1998 8
Condensed Consolidated Balance Sheet -
as of February 26, 1999 and August 28, 1998 9
Condensed Consolidated Statement of Cash Flow -
Twenty-Six Weeks Ended February 26, 1999 and
Twenty-Eight Weeks Ended March 27, 1998 10
Condensed Consolidated Statement of Stockholders' Deficit-
as of February 26, 1999 11
Notes to Condensed Consolidated Financial Statements 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition 25
Quantitative and Qualitative Disclosures about Market Risk 30
Part II. Other Information and Signatures:
Legal Proceedings 30
Changes in Securities 30
Defaults Upon Senior Securities 30
Submission of Matters to a Vote of Security Holders 30
Other Information 31
Exhibits and Reports on Form 8-K 31
Signatures 31
</TABLE>
<PAGE>
INTRODUCTION
OVERVIEW
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,
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 Company then acquired the North
American operations of Sodexho Alliance, S.A. ("Sodexho"), and the combined
operations were renamed Sodexho Marriott Services, Inc.
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, which were followed
on April 15, 1998, by a change in the Company's fiscal year-end from the Friday
nearest to December 31 to the Friday nearest to August 31 of each year.
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, formerly known as Marriott Management
Services ("MMS"), combined with Sodexho North America and became 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 (see Note 1 and Note 3).
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 that owned 100% of the Company
immediately prior to the Transactions 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 5). 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.
-1-
<PAGE>
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.
GLOSSARY OF TERMS
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.
I&R COSTS. Integration and Restructuring costs related to the Transactions.
MI. New Marriott MI, Inc. (together with its subsidiaries), renamed Marriott
International, Inc.
MDS. Marriott Distribution Services, the Company's distribution services
business.
MMS. The former Marriott Management Services Corp. and the former Marriott
Corporation of Canada, Ltd., collectively.
MMS- UK OPERATIONS. Marriott Management Services' 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, and is also referred to herein as "New Marriott."
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.
PRO FORMA SECOND QUARTER FISCAL 1999. The 13-week period ended
February 26, 1999.
PRO FORMA SECOND QUARTER FISCAL 1998. The 13-week period ended
February 27, 1998.
PRO FORMA FIRST HALF FISCAL 1999. The 26-week period ended February 26, 1999.
PRO FORMA FIRST HALF FISCAL 1998. The 26-week period ended February 27, 1998.
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.
-2-
<PAGE>
GLOSSARY OF TERMS, CONTINUED
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.
SODEXHO. Sodexho Alliance, S.A., a worldwide food and management services
organization headquartered in France and an approximate 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.
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 end 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, and ended on August 28, 1998,
was considered the Transition Period. The 1999 fiscal year, which began 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 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 existing 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 resulting 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 and the Company's Transition Report on Form 10-K filed with the
Securities and Exchange Commission on November 23, 1998.
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
elsewhere from time to time by or on behalf of the Company. The Company assumes
no obligation to update any forward-looking statements.
-3-
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Transactions described fully in Notes
1, 2 and 3 to the Condensed 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 Part I 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 13
and 26 weeks ended February 26, 1999 compared with the historical 12 and 28
weeks ended March 27, 1998 (presented in Part I of this report), but also the
Pro Forma Second Quarter and First Half Fiscal 1999 and 1998 presented in this
section. The pro forma operating results were prepared as if the Transactions
occurred at the beginning of the periods presented. Therefore, the pro forma
operating results only include the Company's Retained Business and the acquired
operations of Sodexho North America.
Pro forma sales and operating profit 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 were assumed for either the Pro Forma Second
Quarter Fiscal 1998 nor the Pro Forma First Half Fiscal 1998, and losses from
the sale of the MMS-UK operations in October 1997 and related operating results
prior to the sale were also excluded from these periods. Integration and
restructuring charges of $5.4 million and $13.0 million pretax were excluded
from Pro Forma Second Quarter and First Half Fiscal 1999, respectively.
Estimated expenses of $1.6 million and $3.2 million were included in Pro Forma
Second Quarter and First Half Fiscal 1998, respectively, representing
incremental costs to operate the Company as a separate public entity. Pro forma
net income reflects approximately $4.0 million and $8.0 million of amortization
expense for the intangible assets related to the Acquisition for both Pro Forma
Second Quarter and First Half Fiscal 1999 and 1998, respectively.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of all periods presented. Effective income tax rates of 44% and 48% were used
for Pro Forma First Half Fiscal 1999 and 1998, respectively. Pro forma results
do not include any extraordinary charges related to the Refinancing.
Pro forma basic earnings per share were calculated on a base of 62.1 million and
61.9 million shares for Pro Forma Second Quarter Fiscal 1999 and 1998,
respectively, which was the average number of shares outstanding during the 13
weeks ended February 26, 1999 and the number of shares outstanding on August 28,
1998. Pro forma diluted earnings per share were calculated on a base of 64.0
million and 62.5 million for Pro Forma Second Quarter Fiscal 1999 and 1998,
respectively. The dilutive shares were the result of the Company's convertible
debt, stock option plans and deferred stock incentive plans outstanding.
Pro forma basic earnings per share were calculated on a base of 62.0 million and
61.9 million shares for Pro Forma First Half Fiscal 1999 and 1998, respectively,
which was the average number of shares outstanding during the 26 weeks ended
February 26, 1999 and the number of shares outstanding on August 28, 1998. Pro
forma diluted earnings per share were calculated on a base of 64.1 million and
62.5 million for Pro Forma First Half Fiscal 1999 and 1998, respectively. The
dilutive shares were the result of the Company's convertible debt, stock option
plans and deferred stock incentive plans outstanding.
-4-
<PAGE>
PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN AND TWENTY-SIX WEEKS ENDED FEBRUARY 26, 1999 AND FEBRUARY 27, 1998
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------------- -------------------------------------
FEBRUARY 26, FEBRUARY 27, FEBRUARY 26, FEBRUARY 27,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
SALES
Corporate Services $ 324 $ 319 $ 659 $ 646
Health Care 324 316 639 634
Education 294 283 690 659
Schools 96 93 204 196
Canada 35 36 72 77
Laundries/Other 17 16 35 32
----------------- ----------------- ----------------- -----------------
TOTAL SALES 1,090 1,063 2,299 2,244
OPERATING COSTS AND EXPENSES
Corporate Services 303 299 616 607
Health Care 297 290 585 583
Education 278 269 630 606
Schools 89 88 190 185
Canada 33 35 68 74
Laundries/Other 16 15 34 30
----------------- ----------------- ----------------- -----------------
TOTAL OPERATING COSTS AND EXPENSES 1,016 996 2,123 2,085
----------------- ----------------- ----------------- -----------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 21 20 43 39
Health Care 27 26 54 51
Education 16 14 60 53
Schools 7 5 14 11
Canada 2 1 4 3
Laundries/Other 1 1 1 2
----------------- ----------------- ----------------- -----------------
TOTAL OPERATING PROFIT 74 67 176 159
CORPORATE ITEMS:
Amortization of Intangible Assets (10) (10) (19) (19)
Corporate Expenses (18) (21) (37) (42)
Interest Expense, Net (21) (22) (44) (44)
Gain on Sale of Investment -- -- 8 --
----------------- ----------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 25 14 84 54
Provision for Income Taxes (11) (7) (37) (26)
----------------- ----------------- ----------------- -----------------
PRO FORMA NET INCOME $ 14 $ 7 $ 47 $ 28
================= ================= ================= =================
PRO FORMA BASIC EARNINGS PER SHARE $ 0.23 $ 0.12 $ 0.76 $ 0.46
================= ================= ================= =================
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.22 $ 0.12 $ 0.74 $ 0.45
================= ================= ================= =================
</TABLE>
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<PAGE>
DISCUSSION OF PRO FORMA SECOND QUARTER FISCAL 1999 AND 1998
RESULTS OF OPERATIONS
Total sales for Pro Forma Second Quarter Fiscal 1999 were $1.09 billion, an
increase of $27 million, or 2.5%, over $1.06 billion for Pro Forma Second
Quarter Fiscal 1998. This growth was mostly attributable to the performance of
the Education and Schools (K-12) divisions. Sales growth in Corporate Services
was hampered by the absence of sales to clients lost during and after Pro Forma
Second Quarter Fiscal 1998 that largely offset the favorable impact of the
Crossroads Cuisines retail strategy. New sales in the Health Care division were
offset by the absence of sales to clients lost during and after Pro Forma Second
Quarter Fiscal 1998. The absence of sales to clients lost last year was greater
than historical experience, principally due to the disruption of the
Transactions. Management believes that the retention of clients during Fiscal
1999 will return to the more favorable historical levels. The Canada division's
sales would have been flat compared with last year's quarter without the
fluctuations in the Canadian dollar.
Operating profit before corporate items (corporate expenses, interest expense,
amortization of intangible assets and gain on sale of investment) totaled $74
million for the Pro Forma Second Quarter Fiscal 1999, an increase of $7 million,
or 10%, over the $67 million in operating profit for the Pro Forma Second
Quarter Fiscal 1998. Pro Forma Second Quarter Fiscal 1998 included a $3.5
million charge for potential sales and use tax exposure. Excluding this charge,
operating profit grew 4%, reflecting increases across all divisions,
particularly in Education.
Corporate expenses and amortization of intangible assets in the Pro Forma Second
Quarter Fiscal 1999 totaled $28 million, a 10% reduction from the $31 million
for the Pro Forma Second Quarter Fiscal 1998, reflecting the elimination of
certain positions after the Transactions along with other administrative
synergies. The Pro Forma Second Quarter Fiscal 1999 included the favorable
impact from the sale of the Company's remaining interest in the Bright Horizons
Family Solutions ("BFAM") investment. The sale of the remaining investment in
BFAM resulted in a pretax gain of $0.5 million, or $0.3 million after-tax (no
impact to diluted earnings per share) during the Second Quarter Fiscal 1999.
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 95.8% of total sales for the Pro Forma Second
Quarter Fiscal 1999 compared with Fiscal 1998's comparable period ratio of
96.6%. The Company anticipates this margin will continue to improve in the
periods ahead, as the Company continues its 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 reduced corporate expenses
contributed to an increase in pretax income of $11 million, or 79%, to $25
million for the Pro Forma Second Quarter Fiscal 1999. The effective tax rate for
the current pro forma period was 44%, a decrease from 48% for 1998, due to the
implementation of effective tax planning strategies and the lower proportion of
nondeductible intangible amortization expense in relation to total operating
profit between the years. Net income doubled to $14 million, or $0.22 per
diluted share, compared with $7 million, or $0.12 per diluted share for Pro
Forma Second Quarter Fiscal 1998.
-6-
<PAGE>
DISCUSSION OF PRO FORMA FIRST HALF FISCAL 1999 AND 1998 RESULTS OF OPERATIONS
Total sales for Pro Forma First Half Fiscal 1999 were $2.30 billion, an increase
of $55 million, or 2.5%, over $2.24 billion for Pro Forma First Half Fiscal
1998. This growth was mostly attributable to the performance of the Education,
Schools (K-12) and Laundry divisions. Sales growth in Corporate Services was
hampered by the absence of sales to clients lost during and after Pro Forma
First Half Fiscal 1998 that largely offset the favorable impact of the
Crossroads Cuisines retail strategy. New sales in the Health Care division in
Pro Forma First Half Fiscal 1999 were offset by the absence of sales to clients
lost during and after Pro Forma First Half Fiscal 1998 and by the impact of
several large clients switching their contract types from profit and loss to
certain types of management fee contracts, which reduced the amount of revenue
recognized. The absence of sales to clients lost last year was greater than
historical experience, principally due to the disruption of the Transactions.
Management believes that the retention of clients during Fiscal 1999 will return
to the more favorable historical levels. The Canada division's sales would have
been flat compared with last year without the fluctuations in the Canadian
dollar.
Operating profit before corporate items (corporate expenses, interest expense,
amortization of intangible assets and gain on sale of investment) totaled $176
million for the Pro Forma First Half Fiscal 1999, an increase of $17 million, or
11%, over the $159 million in operating profit for the Pro Forma First Half
Fiscal 1998. Pro Forma First Half Fiscal 1998 included charges totaling $5
million for potential sales and use tax exposure. Excluding these charges,
operating profit grew by 7%, driven by growth in profits at existing clients in
the Education and Schools divisions, combined with the favorable impact of
administrative synergies realized in the current period.
Corporate expenses and amortization of intangible assets in the Pro Forma First
Half Fiscal 1999 totaled $56 million, an 8% reduction from the $61 million for
the Pro Forma First Half Fiscal 1998, reflecting the elimination of certain
positions after the Transactions along with other administrative synergies. The
Pro Forma First Half Fiscal 1999 included the favorable impact from the sale of
the Company's Bright Horizons Family Solutions ("BFAM") investment. The Company
made the investment in and formed a marketing affiliation with Corporate Child
Care Inc., a predecessor of BFAM, in 1989. The Company sold the majority of its
interest in this investment in the Pro Forma First Quarter Fiscal 1999 for a
pretax gain of $7.8 million, or $4.3 million after-tax ($0.07 per diluted common
share). The Company sold the remainder of its investment in the Pro Forma Second
Quarter Fiscal 1999, resulting in a cumulative pretax gain of $8.3 million, or
$4.6 million after-tax ($0.07 per diluted common share) recognized in the Pro
Forma First Half Fiscal 1999.
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 94.8% of total sales for the Pro Forma First Half
Fiscal 1999 compared with Fiscal 1998's comparable period ratio of 95.6%. The
Company anticipates this margin will continue to improve in the periods ahead,
as the Company continues its 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 the gain on sale of investment and
reduced corporate expenses contributed to an increase in pretax income of $30
million, or 56%, to $84 million for the Pro Forma First Half Fiscal 1999. The
effective tax rate for the current pro forma period was 44%, a decrease from 48%
for 1998, due to the implementation of effective tax planning strategies and the
lower proportion of nondeductible intangible amortization expense in relation to
total operating profit between the years. Net income increased 68% to $47
million, or $0.74 per diluted share, compared with $28 million, or $0.45 per
diluted share for Pro Forma First Half Fiscal 1998.
-7-
<PAGE>
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN TWELVE TWENTY-SIX TWENTY-EIGHT
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 26, MARCH 27, FEBRUARY 26, MARCH 27,
1999 1998 1999 1998
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
SALES $1,090 $1,111 $2,299 $2,747
Operating Costs and Expenses 1,016 1,072 2,124 2,632
Loss on Sale of MMS-UK Operations -- -- -- 22
---------------- ----------------- ---------------- -----------------
1,016 1,072 2,124 2,654
---------------- ----------------- ---------------- -----------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 74 39 175 93
CORPORATE ITEMS:
Corporate expenses,
including amortization of intangible assets (33) (43) (67) (73)
Interest expense, net (21) (16) (44) (36)
Gain on sale on investment -- -- 8 --
---------------- ----------------- ---------------- -----------------
Income (Loss) From Continuing Operations,
Before Income Taxes and
Extraordinary Item 20 (20) 72 (16)
(Provision) benefit for income taxes (9) 9 (32) 5
---------------- ----------------- ---------------- -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS, BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM 11 (11) 40 (11)
Discontinued operations, net of income taxes -- 77 -- 185
---------------- ----------------- ---------------- -----------------
Income Before Extraordinary Item 11 66 40 174
Loss from extraordinary item, net of
income taxes -- (43) -- (43)
---------------- ----------------- ---------------- -----------------
NET INCOME $ 11 $ 23 $ 40 $ 131
================ ================= ================ =================
BASIC EARNINGS PER SHARE:
Continuing Operations $ 0.18 $(0.34) $ 0.64 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
---------------- ----------------- ---------------- -----------------
0.18 2.09 0.64 5.38
Extraordinary Item -- (1.36) -- (1.36)
---------------- ----------------- ---------------- -----------------
BASIC EARNINGS PER SHARE $ 0.18 $ 0.73 $ 0.64 $ 4.02
================ ================= ================ =================
DILUTED EARNINGS PER SHARE:
Continuing Operations $ 0.18 $(0.34) $ 0.63 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
---------------- ----------------- ---------------- -----------------
0.18 2.09 0.63 5.38
Extraordinary Item -- (1.36) -- (1.36)
---------------- ----------------- ---------------- -----------------
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.73 $ 0.63 $ 4.02
================ ================= ================ =================
</TABLE>
See notes to condensed consolidated financial statements.
-8-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
FEBRUARY 26, AUGUST 28,
1999 1998
(UNAUDITED)
------------------ -------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and equivalents $ 66 $ 79
Accounts and notes receivable, net 513 374
Other 152 152
------------------ -------------------
Total current assets 731 605
Property and equipment, net 78 82
Intangible assets, net 558 573
Other assets 79 81
------------------ -------------------
$ 1,446 $ 1,341
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 121 $ 96
Accounts payable 272 222
Other current liabilities 386 328
Payable to affiliates for excess net tangible assets 15 49
------------------ -------------------
Total current liabilities 794 695
Long-term debt 1,021 1,062
Other long-term liabilities 108 110
Convertible subordinated debt 29 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 62
Additional paid-in capital 1,325 1,322
Accumulated deficit (1,895) (1,946)
Accumulated other comprehensive income 2 7
------------------ -------------------
Total stockholders' deficit (506) (555)
------------------ -------------------
Total liabilities and stockholders' deficit $ 1,446 $ 1,341
================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
-9-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
FEBRUARY 26, 1999 MARCH 27, 1998
--------------------- ---------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income $ 40 $ 131
Adjustments to reconcile to cash provided by continuing operations:
Income from discontinued operations -- (185)
Loss on retirement of debt, net of tax -- 43
Depreciation and amortization expense 42 52
Gain on sale of investment (8) --
Deferred income taxes -- 5
Changes in working capital (39) (9)
Changes in discontinued operations -- 144
Other 3 --
--------------------- ---------------------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES 38 181
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (33) (175)
Net cash - Acquisitions -- 24
Dispositions 22 130
Payments for excess net tangible assets (22) --
Cash - distributed operations -- (305)
Net investment in discontinued operations -- (217)
Other (5) (30)
--------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (38) (573)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuances of long-term debt -- 1,923
Proceeds from borrowings from short-term credit facility 20 --
Repayments of long-term debt (35) (1,816)
Proceeds received from Sodexho -- 304
Issuance of common stock 2 84
Purchases of treasury stock -- (159)
Dividends paid - common stock -- (22)
--------------------- ---------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13) 314
--------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13) (78)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 79 160
--------------------- ---------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 66 $ 82
===================== =====================
</TABLE>
See notes to condensed consolidated financial statements.
-10-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER ADDITIONAL COMPREHENSIVE
OF COMMON PAID-IN ACCUMULATED INCOME
SHARES STOCK CAPITAL DEFICIT (EXPENSE) TOTAL
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
61.9 Balance, August 28, 1998 $62 $1,322 $(1,946) $7 $(555)
-- Net income -- -- 40 -- 40
Reclassification of gain
realized in net income,
-- net of taxes -- -- -- (5) (5)
-- Foreign exchange translation -- -- -- 1 1
-- Other -- -- -- (1) (1)
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME -- -- 40 (5) 35
Adjustment of distribution
-- to shareholders -- -- 11 -- 11
Employee stock plan
0.3 issuance and other -- 3 -- -- 3
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
62.2 Balance, February 26, 1999 $62 $1,325 $(1,895) $2 $(506)
============ =============================== =============== ============== =============== ================= ===============
</TABLE>
See notes to condensed consolidated financial statements.
-11-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sodexho Marriott Services, Inc. (together with its consolidated subsidiaries,
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, 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
restructured and refinanced its debt. The Transactions are explained in detail
below and in Notes 2 and 3.
The accompanying Condensed Consolidated Financial Statements of the Company have
been prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented not
misleading. However, the Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Transition Report on Form 10-K for the period ended
August 28, 1998.
In the opinion of the Company, the accompanying Condensed Consolidated Financial
Statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of February 26, 1999 and August 28, 1998, and the results of operations for
the 13 weeks and 26 weeks ended February 26, 1999 and the 12 weeks and 28 weeks
ended March 27, 1998. Interim results are not necessarily indicative of fiscal
year performance. 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 and cash
flow items of the lodging segment as "Discontinued Operations" for all periods
presented prior to the Distribution (see "Distribution" below and Note 2).
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
continues 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 that 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.
-12-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DISTRIBUTION, CONTINUED
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).
As part of the Transactions, the Company entered into separate agreements with
MI and Sodexho that established reasonable amounts of adjusted net tangible
assets (as defined in the agreements) for the respective operations that were
not part of the Distribution immediately prior to the consummation of the
Transactions. These agreements provided that the Company would pay MI and
Sodexho an amount by which the adjusted net tangible assets total is greater or
less than certain predetermined amounts, which resulted in an estimated $29
million and $20 million, payable to MI and Sodexho, respectively, as of August
28, 1998. Subsequent to the close of the current quarter, the Company completed
arbitration with MI and Sodexho resulting in payments totaling $36 million, of
which $22 million was paid prior to February 26, 1999 and the remaining $14
million was paid thereafter. The $10 million reduction in the payable to MI was
mostly due to adjustments related to deferred taxes, with an offsetting
adjustment to stockholders' deficit related to the Transaction's distribution to
shareholders.
REVERSE STOCK SPLIT
The Company 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 end 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.
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 $18 million
and $17 million at February 26, 1999 and August 28, 1998, 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.
-13-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, and
do not represent an exposure to credit loss. The notional amount and interest
payments 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.
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.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in fiscal 1997. 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, adjusted for interest expense related to convertible securities
(after-tax), by the diluted weighted-average number of outstanding common
shares, including the "if-converted" shares relating to convertible securities.
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.
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 February 26, 1999 and August 28, 1998,
the Company had $77 million and $34 million of outstanding drafts included in
accounts payable, 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.
-14-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 primarily 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.
Amortization expense for continuing operations totaled $10 million and $19
million for the 13 weeks and 26 weeks ended February 26, 1999, respectively,
compared with $5 million and $12 million for the 12 weeks and 28 weeks ended
March 27, 1998, respectively. Amortization expense for discontinued operations
totaled $10 million and $24 million for the 12 weeks and 28 weeks ended March
27, 1998.
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.
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, under separate captions, in the Condensed Consolidated Balance Sheet
and the Condensed Consolidated Statement of Stockholders' Deficit.
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 the
resulting translation adjustments are reflected in stockholders' deficit as
accumulated other comprehensive income.
Total accumulated other comprehensive income included $2.6 million of gross
foreign exchange translations gains, net of taxes totaling $1.1 million, at
February 26, 1999. Total accumulated other comprehensive income included $10.1
million of gross unrealized securities gain adjustments under SFAS No. 115, net
of taxes totaling $4.0 million and gross foreign exchange translation gains
totaling $1.1 million, net of taxes totaling $0.4 million at August 28, 1998.
During the first half of fiscal 1999, Total Comprehensive Income was comprised
of $40 million in net income, partially offset by the reclassification of the
realized gain on the sale of investment totaling $8.3 million pretax, net of
taxes totaling $3.7 million, for a cumulative $4.6 million net realized gain on
sale of investment recorded to the year-to-date Condensed Consolidated Statement
of Income.
-15-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. For fiscal year reporting, the Company disclosed
profit/loss, revenues and assets for each segment identified, including
reconciliations of these items to consolidated totals. For interim reporting
periods, the Company disclosed profit/loss and revenues for each segment. The
Company also disclosed the basis for identifying the segments and the types of
products and services within each segment. SFAS No. 131 was effective for the
Company for the Transition Period ended August 28, 1998 and quarterly beginning
in fiscal 1999 (see Note 8), including the restatement of prior periods reported
consistent with this pronouncement, if practicable.
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 is not anticipated to be material.
(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 Condensed 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.
-16-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS, CONTINUED
Discontinued Operations, Net of Income Taxes, is comprised of the following:
<TABLE>
<CAPTION>
28 WEEKS ENDED
MARCH 27, 1998
--------------------
($ in millions,
except per share
amounts)
<S> <C>
Sales $4,014
Income Before Income Taxes $ 332
Income Taxes (130)
--------------------
Discontinued Operations, Net of Income Taxes 202
Cost Associated with Effecting the Distribution (28)
Income Taxes 11
--------------------
Net Costs Associated with Effecting the Distribution (17)
--------------------
Discontinued Operations, Net of Income Taxes $ 185
====================
Basic Earnings Per Share $ 5.72
====================
Diluted Earnings Per Share $ 5.72
====================
</TABLE>
No identifiable assets or liabilities of the Lodging segment were included in
the Condensed Consolidated Balance Sheet as of March 27, 1998.
(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 6). The purchase price included approximately $3 million in
transaction costs. As a result of the issuance of new shares to the Company's
common stock to Sodexho in connection with the Acquisition, the shareholders who
owned 100% of the Company immediately prior to the Distribution owned
approximately 51% immediately thereafter.
Certain adjustments have been made to the preliminary allocation of the purchase
price to the fair market value of assets acquired, as shown in the table below:
<TABLE>
<CAPTION>
($ in millions)
-----------------
<S> <C>
Current assets $ 142
Other assets 54
Customer relationships 120
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (18)
Other liabilities (46)
Debt (73)
Deferred taxes, net (6)
Goodwill 242
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
</TABLE>
-17-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) INTEGRATION AND RESTRUCTURING
Integration and restructuring actions taken in the 26 weeks ended February 26,
1999, reflect the undertaking by the Company to integrate and realign resources
for more effective and efficient execution of operating strategies. Integration
costs totaled $13 million during the first half of fiscal 1999. 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 $11 million at February 26,
1999, generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North America employees as well as the
estimated cost for the closure of certain Sodexho North America offices.
Acquisition reserve activity, reflecting certain adjustments made to the
preliminary allocation of the purchase price to the fair market value of assets
acquired (see Note 3), is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
AUGUST 28, 1998 ADJUSTMENTS PAYMENTS FEBRUARY 26, 1999
-------------------- ----------------- ------------- ----------------------
($ in millions)
<S> <C> <C> <C> <C>
Employee Terminations $10.0 $(0.2) $(4.6) $ 5.2
Relocation of Sodexho Facilities 2.6 -- (0.9) 1.7
Closures 3.1 1.2 (1.1) 3.2
Other Restructuring 1.6 1.3 (1.8) 1.1
-------------------- ----------------- ------------- ----------------------
Total $17.3 $ 2.3 $(8.4) $11.2
==================== ================= ============= ======================
</TABLE>
In addition, integration expenses recorded in the Condensed Consolidated
Statement of Income during the second quarter and first half of fiscal 1999 are
detailed below. No restructuring expenses were recorded in the Condensed
Consolidated Statement of Income during the first half of fiscal 1999.
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
FEBRUARY 26, 1999 FEBRUARY 26, 1999
---------------------- ---------------------
($ in millions)
<S> <C> <C>
Integration:
Duplicate Overhead $2.8 $ 6.5
MMS Relocation -- 0.1
Training Systems 0.4 0.9
Other 2.2 5.5
---------------------- ---------------------
Total $5.4 $13.0
====================== =====================
</TABLE>
-18-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT
<TABLE>
<CAPTION>
FEBRUARY 26, AUGUST 28,
1999 1998
----------------- -----------------
($ in millions)
<S> <C> <C>
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 75 $ 70
Senior Secured Revolving Credit Facility 45 25
Other 1 1
----------------- -----------------
Total $ 121 $ 96
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 7.20% in fiscal 1999 $ 465 $ 500
Senior Guaranteed Credit Facility, due 2005
averaging 6.92% in fiscal 1999 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal 1999 6 6
Other 1 2
Capital Lease Obligations 4 4
----------------- -----------------
Total $1,096 $1,132
Amount Reclassified to Short-Term Debt (75) (70)
----------------- -----------------
$1,021 $1,062
================= =================
</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 February 26,
1999, the Company is paying a rate of 6.96% on the term loan facility, adjusted
for fee amortization and hedging costs. The senior secured credit facility is
secured predominately by inventory, accounts receivable and the stock of certain
subsidiaries of the Company. Up to $100 million of the $235 million revolving
credit may be used to collateralize letters of credit, which totaled $26 million
at February 26, 1999. At February 26, 1999, $164 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 February 26, 1999, the Company is paying a rate
of 6.82% on this facility, adjusted for fee amortization and hedging costs. This
facility is guaranteed by Sodexho, for which the Company pays Sodexho an annual
fee of 0.5% of the outstanding balance of the Senior Guaranteed Credit Facility,
or $3 million pretax.
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 February
26, 1999 and for the 26-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 January 2, 1998.
-19-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT, CONTINUED
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 prior to the Transactions and the Distribution (see below). The LYONs were
issued at a discount representing a yield to maturity of 4.25%. 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 for the 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 February 26, 1999.
INTEREST-RATE AGREEMENTS
At February 26, 1999, 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 $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.71% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The weighted-average rate for the total debt portfolio,
including the affect of the interest-rate agreements, was 6.91% at February 26,
1999. These agreements expire between August 2001 and February 2005.
Details of these interest rate agreements as of February 26, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS--
TERMS BALANCE VALUE* PAID RECEIVED 26 WEEKS
- ---------------------------------------------------------------------------------------------------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Received Variable
Pay Fixed $400 $(1) 5.71% 5.25% $(0.7)
Received Variable
Pay Fixed 300 (4) 5.84 5.25 (0.4)
Received Variable
Pay Fixed 200 (2) 5.90 5.25 (0.4)
- ---------------------------------------------------------------------------------------------------------
$900 $(7) 5.80% 5.25% $(1.5)
=========================================================================================================
<FN>
*-- based on the termination cost for these agreements obtained by third party
market quotes.
</FN>
</TABLE>
At February 26, 1999, 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.
-20-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT, CONTINUED
Subsequent to February 26, 1999, the Company entered two new interest-rate
agreements to guarantee a fixed rate of interest payments for a portion of its
floating interest rate debt. These agreements were entered into on March 30,
1999 and April 1, 1999, with notional principal amounts of $80 million and $70
million, respectively, and will pay a fixed rate of 5.02% and 5.05% while
receiving interest based on three-month LIBOR. Both agreements mature in
September 1999 and will reduce the Company's exposure to the uncertainty of
changes in interest rates during their term.
(6) STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT
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 two shares of New Marriott MI, Inc. stock (renamed
Marriott International, Inc.) for each share of the Company's stock. 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. At February 26,
1999, the Company had 62,169,270 shares outstanding.
-21-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) STOCKHOLDERS' DEFICIT, CONTINUED
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
<TABLE>
<CAPTION>
THIRTEEN TWELVE TWENTY-SIX TWENTY-EIGHT
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 26, MARCH 27, FEBRUARY 26, MARCH 27,
1999 1998 1999 1998
----------------- ----------------- ---------------- ----------------
(in millions, except per share amounts) (in millions, except per share amounts)
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income (Loss) from
Continuing Operations $ 11 $ (11) $ 40 $ (11)
Net Income from Discontinued Operations -- 77 -- 185
Net Loss from Extraordinary Item -- (43) -- (43)
----------------- ----------------- ---------------- ----------------
Net Income $ 11 $ 23 $ 40 $ 131
================= ================= ================ ================
Weighted Average Shares Outstanding 62.1 31.7 62.0 32.3
================= ================= ================ ================
Basic Earnings (Loss) Per Share:
Continuing Operations $0.18 $(0.34) $0.64 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
Extraordinary Item -- (1.36) -- (1.36)
----------------- ----------------- ---------------- ----------------
BASIC EARNINGS PER SHARE $0.18 $ 0.73 $0.64 $ 4.02
================= ================= ================ ================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Diluted Net Income (Loss) from
Continuing Operations $ 11 $ (11) $ 40 $ (11)
Diluted Net Income from
Discontinued Operations -- 77 -- 185
Diluted Net Loss from Extraordinary Item -- (43) -- (43)
----------------- ----------------- ---------------- ----------------
Diluted Net Income $ 11 $ 23 $ 40 $ 131
================= ================= ================ ================
Weighted Average Shares Outstanding 62.1 31.7 62.0 32.3
Effect of Dilutive Securities:
Employee Stock Option Plan 0.6 * 0.8 *
Deferred Stock Incentive Plan 0.1 * 0.1 *
Convertible Subordinated Debt 1.2 * 1.2 *
----------------- ----------------- ---------------- ----------------
Diluted Weighted Average
Shares Outstanding 64.0 31.7 64.1 32.3
================= ================= ================ ================
Diluted Earnings Per Share:
Continuing Operations $0.18 $(0.34) $0.63 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
Extraordinary Item -- (1.36) -- (1.36)
----------------- ----------------- ---------------- ----------------
DILUTED EARNINGS PER SHARE $0.18 $ 0.73 $0.63 $ 4.02
================= ================= ================ ================
<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 12 weeks and 28
weeks ended March 27, 1998, dilutive securities under the employee stock option
plan (of 3.5 million and 2.1 million, respectively), the deferred stock
incentive plan (of 0.9 million and 0.8 million, respectively), and the debt
securities (1.2 million for both periods) were excluded due to the loss from
continuing operations.
</FN>
</TABLE>
-22-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) 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 13-week and
26-week periods ended February 26, 1999, expenses that related to these plans
totaled $3.2 million and $6.8 million, respectively.
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 had approved up to 10 million shares of common stock to be
available under the 1998 Plan for converted options as well as new awards.
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. During the first 26 weeks of fiscal 1999, the Company issued
112,575 new stock option awards.
A summary of the Company's stock option activity during the 26 weeks ended
February 26, 1999, is presented below:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
FEBRUARY 26, 1999
--------------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
----------------- -----------------
<S> <C> <C>
Outstanding at August 28, 1998 5.0 $20
Granted during the twenty-six weeks 0.1 26
Exercised during the twenty-six weeks (0.3) 7
Forfeited during the twenty-six weeks (0.1) 9
----------------- -----------------
Outstanding at February 26, 1999 4.7 $21
================= =================
Options exercisable at February 26, 1999 1.4 $14
================= =================
</TABLE>
-23-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
Prior to the Distribution, the Company was a diversified hospitality company
with operations in two business segments: Lodging, which includes development,
ownership, operation and franchising of lodging properties under 10 brand names
and development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
<TABLE>
<CAPTION>
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
13 WEEKS 12 WEEKS 26 WEEKS 28 WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 26, MARCH 27, FEBRUARY 26, MARCH 27,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
GROSS SALES
Corporate Services $ 324 $ 222 $ 659 $ 512
Health Care 324 238 639 563
Education 294 204 690 522
Schools 96 87 204 203
Canada 35 24 72 60
Laundries/Other 17 15 35 72
Other Contract Services -- 321 -- 815
---------------- ---------------- ---------------- ----------------
Contract Services 1,090 1,111 2,299 2,747
Discontinued Operations -- 1,774 -- 4,014
---------------- ---------------- ---------------- ----------------
Total Gross Sales $1,090 $2,885 $2,299 $6,761
================ ================ ================ ================
GROSS OPERATING PROFIT
Corporate Services $ 21 $ 11 $ 43 $ 23
Health Care 27 12 54 36
Education 16 6 60 33
Schools 7 5 13 10
Canada 2 -- 4 2
Laundries/Other 1 -- 1 --
Other Contract Services -- 5 -- 11
Loss on Sale of MMS-UK Operations -- -- -- (22)
---------------- ---------------- ---------------- ----------------
Contract Services 74 39 175 93
Discontinued Operations -- 158 -- 332
---------------- ---------------- ---------------- ----------------
Total Gross Operating Profit $ 74 $ 197 $ 175 $ 425
================ ================ ================ ================
Total Net Operating Profit from
Continuing Operations (Contract Services) $ 74 $ 39 $ 175 $ 93
Corporate Items (54) (59) (103) (109)
---------------- ---------------- ---------------- ----------------
Income From Continuing Operations,
Before Taxes $ 20 $ (20) $ 72 $ (16)
================ ================ ================ ================
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
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.
-24-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the unaudited 13-week period ended February 26, 1999 ("Second
Quarter Fiscal 1999") as compared with the historical unaudited 12-week period
ended March 27, 1998. Also included is an analysis for the unaudited 26-week
period ended February 26, 1999 ("First Half Fiscal 1999") as compared with the
historical unaudited 28-week period ended March 27,1998.
While the comparison of the Second Quarter Fiscal 1999 to the previously
reported 12-week period in 1998 differs by one week, and the First Half Fiscal
1999 to the previously reported 28-week period differs by two weeks, management
believes that these comparisons are reasonable.
DUE TO THE SUBSTANTIAL DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S
HISTORICAL OPERATING RESULTS FOR THE FIRST QUARTER AND FIRST HALF FISCAL 1999
VERSUS THE PRIOR FISCAL YEAR'S PERIODS, MANAGEMENT BELIEVES THAT IT IS MOST
MEANINGFUL AND RELEVANT, IN UNDERSTANDING THE PRESENT AND ONGOING OPERATIONS OF
THE COMPANY, TO REVIEW THE COMPANY'S PRO FORMA OPERATING RESULTS PRESENTED IN
THE "INTRODUCTION" SECTION OF THIS REPORT.
THIRTEEN WEEKS ENDED FEBRUARY 26, 1999 VS. TWELVE WEEKS ENDED MARCH 27, 1998.
Total sales for Second Quarter Fiscal 1999 were $1.09 billion, a decrease of $21
million, or 2%, when compared with $1.11 billion for the 12 weeks ended March
27, 1998. The decline in sales between the periods 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 in the 12-week period
ended March 27, 1998, but were not included in the Second Quarter Fiscal 1999.
Excluding the MDS and MSLS divisions, total sales increased $300 million, or
38%. This growth was a result of the Acquisition, which had a significant impact
on the current period's sales, with Corporate Services' sales increasing $102
million, or 46%, Health Care's increasing $86 million, or 36%, and Education's
increasing $90 million, or 44%.
Operating profit before corporate items totaled $74 million for the Second
Quarter Fiscal 1999 period, an increase of $35 million, or 90%, over the $39
million in operating profit for the 12-week period ended March 27, 1998. This
increase was the result of the significant sales growth in the Corporate
Services, Health Care and Education divisions as detailed above. In addition to
increased sales, operating margins improved as the result of the Acquisition,
with Corporate Services' operating profit increasing $10 million, or 91%, Health
Care's increasing $15 million, or 125%, and Education's increasing $10 million,
or 167%.
Corporate expenses, after excluding $5 million in integration charges, totaled
$28 million in the Second Quarter Fiscal 1999 period, down $15 million, or 35%
from the 12-week prior period. The Company anticipates increased efficiencies in
its operating costs and corporate expenses in the periods ahead, from the
integration of the MMS and Sodexho North America operations. These savings are
anticipated to reach $60 million annually by fiscal year 2001. Increases in
interest expense of $5 million were the result of the Refinancing on March 27,
1998.
Income from continuing operations before income taxes increased to $20 million,
the result of growth in operating profit between the periods. Discontinued
operations, net of income taxes, totaled $77 million for the 12-week period
ended March 27, 1998, reflecting net income from the distributed lodging
segment.
The extraordinary charge for costs associated with the early extinguishment of
debt, which was part of the Refinancing on March 27, 1998, was $43 million, net
of $28 million in taxes, or $1.36 per basic and diluted share.
The Company's effective income tax rate was 44% for the Second Quarter Fiscal
1999, compared with 41% for continuing and discontinued operations in the prior
year's period. This increase was due to the higher proportion of nondeductible
intangible amortization expense largely from the Acquisition, partially offset
by the implementation of effective tax planning strategies. Net income for the
Second Quarter Fiscal 1999 was $11 million, or $0.18 per diluted share, compared
with a net loss from continuing operations of $11 million, or $0.34 net loss per
diluted share, in the prior year's period. Discontinued Operations, net of
income taxes, totaled $77 million, or $2.43 per diluted share, reflecting the
performance of the Distributed lodging segment in the prior year's period before
the Distribution to shareholders on March 27, 1998.
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
TWENTY-SIX WEEKS ENDED FEBRUARY 26, 1999 VS. TWENTY-EIGHT WEEKS ENDED
MARCH 27, 1998.
Total sales for First Half Fiscal 1999 were $2.30 billion, a decrease of $448
million, or 16%, when compared with $2.75 billion for the 28 weeks ended March
27, 1998. The decline in sales between the periods 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 in the 28-week period
ended March 27, 1998, but were not included in the First Half Fiscal 1999.
Excluding the MDS and MSLS divisions, total sales increased $367 million, or
19%. This growth was a result of the Acquisition, which had a significant impact
on the current period's sales, with Corporate Services' sales increasing $147
million, or 29%, Health Care's increasing $76 million, or 13%, and Education's
increasing $168 million, or 32%.
Excluding the loss on the sale of MMS-UK operations, operating profit before
corporate items totaled $175 million for the First Half Fiscal 1999 period, an
increase of $60 million, or 52%, over the adjusted $115 million in operating
profit for the 28-week period ended March 27, 1998. This increase was the result
of the strong sales growth in the Corporate Services, Health Care and Education
divisions as detailed above. In addition to increased sales, operating margins
improved as the result of the Acquisition, with Corporate Services' operating
profit increasing $20 million, or 87%, Health Care's increasing $18 million, or
50%, and Education's increasing $27 million, or 82%.
Corporate expenses, after excluding $13 million in integration charges, totaled
$54 million in the First Half Fiscal 1999 period, down $19 million, or 26% from
the 28-week prior period. The Company anticipates increased efficiencies in its
operating costs and corporate expenses in the periods ahead, from the
integration of the MMS and Sodexho North America operations. These savings are
anticipated to reach $60 million annually by fiscal year 2001. Increases in
interest expense of $8 million were the result of the Refinancing on March 27,
1998. Also, the Company recognized an $8 million gain on the sale of the
Company's investment in Bright Horizons Family Solutions ("BFAM"). The Company
decided to sell the majority of this investment in BFAM in the First Quarter
Fiscal 1999, and the remainder in the Second Quarter Fiscal 1999, for an
aggregate pretax gain of $8.3 million, or $4.6 million after-tax ($0.07 per
diluted common share).
Excluding the $22 million pretax loss from the sale of MMS-UK to Sodexho
Alliance in the prior period, income from continuing operations before income
taxes increased significantly to $40 million, the result of strong increases in
operating profit between the periods. Discontinued operations, net of income
taxes, totaled $185 million for the 28-week period ended March 27, 1998,
reflecting net income from the distributed lodging segment.
The extraordinary charge for costs associated with the early extinguishment of
debt, which was part of the Refinancing at March 27, 1998, was $43 million, net
of $28 million in taxes, or $1.36 per basic and diluted share.
The Company's effective income tax rate was 44% for the First Half Fiscal 1999,
compared with 40% for continuing and discontinued operations in the prior year's
period. This increase was due to the higher proportion of nondeductible
intangible amortization expense largely from the Acquisition, partially offset
by the implementation of effective tax planning strategies. Net income for the
First Half Fiscal 1999 was $40 million, or $0.63 per diluted share, compared
with a net loss from continuing operations of $11 million, or $0.34 loss per
diluted share, for the prior year's period. Discontinued Operations, net of
income taxes, totaled $185 million, or $5.72 per diluted share, reflecting the
performance of the Distributed lodging segment in the prior year's period before
the Distribution to shareholders on March 27, 1998.
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
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 February 26, 1999, the Company had a
$235 million revolving credit facility available at an interest rate of 7.47% to
provide funds for liquidity, seasonal borrowing needs and other general
corporate purposes. At February 26, 1999, $45 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 paid regular quarterly dividends,
including 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 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. In general, the restrictive covenants do not permit the
Company to pay dividends to shareholders in an amount greater than 40% of the
Company's net income, or 45% 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 5 to Condensed Consolidated Financial
Statements). Annual interest expense is estimated to be approximately $90
million based on current 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.
During the First Half Fiscal 1999, the Company experienced its normal seasonal
impact on working capital as accounts receivable and accounts payable decreased
from the end of the First Quarter Fiscal 1999. This is consistent with the
reduction in overall demand for services in the Education and Schools divisions
as the holiday season occurred during the current quarter. However, accounts
receivable and accounts payable increased from August 28, 1998, as the Company
experienced its normal seasonal decreases in working capital as the overall
demand for services in these segments decreases during the summer season. Also,
subsequent to the close of the current quarter, the Company completed
arbitration with MI and Sodexho related to Adjusted Net Tangible Assets in
accordance with the respective Distribution and Acquisition agreements,
resulting in payments totaling $36 million (see Note 1-- Distribution), of which
$22 million was paid prior to February 26, 1999 and the remaining $14 million
was paid thereafter.
-27-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, 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 is not anticipated to be material.
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 business,
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:
o Internally developed software
o Third party software
o Infrastructure (mainframe, personal computers, etc.)
o Facilities systems
o 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 has substantially completed 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. 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, and other equipment 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.
-28-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
YEAR 2000, CONTINUED
The assessment of these systems has involved close cooperation between the
Company and its clients. With respect to plant operations and maintenance
clients, the Company is providing certain services to assist its clients in
achieving their Year 2000 objectives relative to their facilities systems.
Finally, the Company is in the process of obtaining compliance information
regarding its vendors and suppliers and is monitoring the compliance status of
other external systems that support the different facets of its business, such
as utilities, government entities and other service providers. These systems are
not under the Company's control.
The remediation phase is 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 substantially complete as of 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. However, as stated above, the
Company is providing certain services in support of its clients' remediation
efforts and is monitoring the progress of external entities.
The testing phase is complete for the Company's internally developed software
and mainframe systems. The third party validation that these systems are Year
2000 compliant is substantially complete. 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 have been or 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, primarily related to the coordination of efforts
and resources in relationship to the geographic constraints.
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, government, 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 delays and
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 February 26, 1999, approximately $1.8 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 help 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.
-29-
<PAGE>
ITEM 3.
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. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $1.1 billion at February 26, 1999. If interest rates increased by 100
basis points, the fair value of the Company's debt would have decreased by
approximately $24 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $25 million,
based on balances at February 26, 1999.
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings pending against the Company.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of the shareholders of the Company was held on January 13,
1999, in Chantilly, Virginia. Chairman of the Board William J. Shaw presided and
56,321,936 of the 62,110,491 shares outstanding as of the record date of
November 25, 1998, were represented at the meeting in person or by proxy.
1-Elections of Directors
Nominees for membership on the Board of Directors of the Corporation, listed
below, were elected by the shareholders. The following schedule lists the number
of shares cast for each nominee:
Total Total
Votes For Votes Withheld
------------------ ------------------
Pierre Bellon 55,616,066 705,870
Bernard Carton 55,616,066 705,870
Edouard de Royere 55,615,722 706,214
William J. Shaw 55,615,884 706,052
Charles D. O'Dell 55,616,066 705,870
John W. Marriott III 55,615,648 706,288
Doctor R. Crants 55,615,958 705,978
Daniel J. Altobello 55,615,884 706,052
2-Ratification of the appointment of PricewaterhouseCoopers, LLP as independent
auditors of the Company for fiscal year 1999:
By a vote of 56,261,365 For, to 22,356 Against, with 38,215 Abstaining, the
Company's shareholders approved the appointment of PricewaterhouseCoopers, LLP
as independent auditors of the Company for fiscal year 1999.
-30-
<PAGE>
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
NO. DESCRIPTIONS
---- ------------
27 Financial Data Schedule of the Registrant
99 Forward-Looking Statements
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SODEXHO MARRIOTT SERVICES, INC.
April 9, 1999 /s/ LAWRENCE E. HYATT
-----------------------------------------------
Lawrence E. Hyatt
Senior Vice President and
Chief Financial Officer
/s/ LOTA S. ZOTH
-----------------------------------------------
Lota S. Zoth
Vice President, Corporate Controller and
Chief Accounting Officer
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR SODEXHO MARRIOTT SERVICES, INC.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S TWENTY-SIX WEEKS ENDED FEBRUARY 26, 1999 CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF FEBRUARY
26, 1999 FROM THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> OTHER OTHER
<FISCAL-YEAR-END> SEP-03-1999 AUG-28-1998
<PERIOD-START> AUG-29-1998 SEP-13-1997
<PERIOD-END> FEB-26-1999 MAR-27-1998
<CASH> 66 82
<SECURITIES> 0 11
<RECEIVABLES> 513 388
<ALLOWANCES> 18 12
<INVENTORY> 59 62
<CURRENT-ASSETS> 731 604
<PP&E> 247 243
<DEPRECIATION> 169 159
<TOTAL-ASSETS> 1,446 1,374
<CURRENT-LIABILITIES> 794 584
<BONDS> 1,050 1,113
0 0
0 0
<COMMON> 62 62
<OTHER-SE> (568) (623)
<TOTAL-LIABILITY-AND-EQUITY> 1,446 1,374
<SALES> 2,299 2,747
<TOTAL-REVENUES> 2,299 2,747
<CGS> 2,124 2,632
<TOTAL-COSTS> 2,124 2,654
<OTHER-EXPENSES> 67 73
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 44 36
<INCOME-PRETAX> 72 (16)
<INCOME-TAX> 32 (5)
<INCOME-CONTINUING> 40 (11)
<DISCONTINUED> 0 185
<EXTRAORDINARY> 0 (43)
<CHANGES> 0 0
<NET-INCOME> 40 131
<EPS-PRIMARY> 0.64 4.02
<EPS-DILUTED> 0.63 4.02
<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.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
FORWARD-LOOKING STATEMENTS
SUMMARY OF IMPORTANT FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As indicated previously, this report contains forward-looking statements that
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 business, results of operations,
and financial condition. 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 or the integration into
the Company's operations of an acquisition the size of Sodexho North America.
Further, the Company must take steps to assure 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 business, results of operations, and financial condition.
SUBSTANTIAL INDEBTEDNESS. The Company's indebtedness under its credit
facility agreements is currently $1.1 billion and bears interest at rates that
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 business, results of operations and financial condition.
<PAGE>
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 business, results of operations, and financial
condition.
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 business, results of operations, and financial
condition.
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 business, results of operations, and
financial condition. 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 business,
results of operations, and financial condition.
CERTAIN ANTI-TAKEOVER EFFECTS. As of February 26, 1999, Sodexho, the
Company's largest stockholder, 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% 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% 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 stockholder 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>
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. Historically, the Company has paid regular quarterly
dividends. The Company may pay quarterly dividends, 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 stockholders in an amount greater than 40% of the
Company's net income, or 45% 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. Payment of dividends on the Company's common stock will
depend upon the Company's financial position, capital requirements,
profitability and such other factors as the Company's Board deems relevant.
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.
