<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
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(State of Incorporation) (I.R.S. Employer Identification Number)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
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(Address of principal executive offices) (Zip Code)
(301) 987-4431
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of October 26, 1999, the number of shares of common stock outstanding was
62,339,533. The aggregate market value of shares of common stock held by
non-affiliates at October 26, 1999 was $430,400,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended September 3, 1999 are
incorporated by reference into Part III of this report.
Index to Exhibits is located on pages 63 through 67 of this report.
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SODEXHO MARRIOTT SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1999
TABLE OF CONTENTS
PAGE
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INTRODUCTION
Overview and Glossary of Terms 2
Forward-Looking Statements 4
Pro Forma Unaudited Financial Information 5
PART I
Item 1. Business 13
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for the Company's Common Stock and Related
Shareholder Matters 20
Item 6. Selected Historical Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial
Owners and Management 60
Item 13. Certain Relationships and Related Transactions 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 63
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INTRODUCTION
OVERVIEW AND GLOSSARY OF TERMS
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping, and
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. Upon the
consummation of the distribution of its lodging, senior living and distribution
services businesses to existing shareholders (see "Distributed Operations"
below), which occurred on March 27, 1998 (the last day of the first quarter of
1998), the Company then acquired the North American operations of Sodexho
Alliance, S.A., and the combined operations were renamed Sodexho Marriott
Services, Inc. The subsidiaries listed below represent the current direct
subsidiaries of the Company. Each of these direct subsidiaries, in turn, has one
or more subsidiaries.
o Sodexho Marriott Operations, Inc., with two main operating
subsidiaries: Sodexho Marriott Management, Inc. (formerly Marriott
Management Services Corp.) and its subsidiaries, and International
Catering Corporation and its subsidiaries;
o Sodexho Financiere du Canada, Inc. (acquired in the Transactions
described in Note 1 to the Consolidated Financial Statements); and
o Sodexho MS Canada, Ltd. (formerly Marriott Corporation of Canada,
Ltd.).
Sodexho Financiere du Canada, Inc. and subsidiaries and International Catering
Corporation and subsidiaries are collectively referred to as "Sodexho North
America." Similarly, the former Marriott Corporation of Canada, Ltd. and
subsidiaries and the former Marriott Management Services Corp. and subsidiaries
are collectively referred to as "MMS."
THE TRANSACTIONS
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Distribution to shareholders, the
Acquisition of Sodexho North America and the Refinancing of debt (the
"Transactions"). Below is an overview of the Transactions.
DISTRIBUTED OPERATIONS. On March 27, 1998, the Company distributed to its
shareholders the lodging segment and two of the three lines of business in the
contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS businesses are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, MMS, has become the principal
business of the Company. The lodging segment distributed to shareholders is
presented as Discontinued Operations in the historical financial statements of
the Company.
ACQUISITION. Immediately after the Distribution, on March 27, 1998, Sodexho
transferred to the Company the operations of Sodexho North America having a fair
market value of approximately $278 million, combined with a cash payment of $304
million in exchange for 29.9 million shares of the Company's common stock, after
giving effect to a one-for-four reverse stock split. The purchase price included
approximately $3 million in transaction costs. As a result of the issuance of
new shares of the Company's common stock to Sodexho in connection with the
Acquisition, the shareholders who owned 100 percent of the Company immediately
prior to the Distribution owned approximately 51% immediately thereafter.
THE REFINANCING. On March 27, 1998, the Company borrowed $615 million and $620
million under the Secured SMS Facility and Guaranteed SMS Facility, respectively
(see Note 8 to the Consolidated Financial Statements). The proceeds were used to
reduce the Company's previously existing debt outstanding. Also, the Company
repaid debt of $73 million assumed in the Acquisition.
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Due to the extensive changes in the Company's business that resulted from the
Transactions, the Company is providing the following glossary of significant
terms used in this report for informational purposes. In certain places in this
document, where deemed meaningful for the reader's understanding, these
definitions may be repeated.
THE ACQUISITION. On March 27, 1998, the Company acquired Sodexho North America,
and Sodexho paid the Company $304 million, in exchange for approximately 48% of
the shares of the Company's common stock that were issued and outstanding
immediately after the Transactions.
ADJUSTED NET TANGIBLE ASSETS. The amount by which stockholders' equity exceeds
intangible assets with certain adjustments.
THE COMPANY. Sodexho Marriott Services, Inc. (together with its consolidated
subsidiaries), formerly Marriott International, Inc.
DISCONTINUED OPERATIONS. The Company's lodging business segment.
DISTRIBUTED OPERATIONS. The lodging, senior living services, and distribution
services businesses taken collectively.
THE DISTRIBUTION. On March 27, 1998, the Company distributed the stock of New
Marriott MI, Inc., which contained all of the assets and liabilities of the
Company's lodging, senior living services, and distribution services businesses,
to its shareholders in a tax-free transaction.
FISCAL YEAR 1999. The 53-week period ended September 3, 1999.
FISCAL YEAR 1997. The 52-week period ended January 2, 1998.
FISCAL YEAR 1996. The 53-week period ended January 3, 1997.
ICC. International Catering Corporation, and subsidiaries, combined with Sodexho
Financiere du Canada, Inc. and subsidiaries, collectively referred to as Sodexho
North America.
I&R COSTS. Integration and Restructuring costs related to the Transactions.
MI. New Marriott MI, Inc. (together with its subsidiaries) was subsequently
renamed Marriott International, Inc.
MDS. Marriott Distribution Services, the Company's distribution services
business.
MMS. Marriott Management Services Corp., the remaining line of business in the
contract services segment, consisting of food service and facilities management,
which has become the principal business of the Company.
MMS- UK OPERATION. Marriott Management Services Corp.'s United Kingdom
operations sold in October 1997 to a subsidiary of Sodexho Alliance, S.A. in
anticipation of the Transactions.
MSLS. Marriott Senior Living Services, the Company's senior living services
business.
NEW MARRIOTT MI, INC. Subsequently renamed Marriott International, Inc. ("MI"),
conducts business in the lodging segment, MDS and MSLS.
OTHER CONTRACT SERVICES. MDS and MSLS, which for the first quarter of the 1998
Transition Period and prior fiscal years were part of the Company's continuing
operations.
PRO FORMA FISCAL YEAR 1999. The pro forma 53-week period ending September 3,
1999.
PRO FORMA FISCAL YEAR 1998. The pro forma 52-week period ended August 28, 1998.
PRO FORMA FISCAL YEAR 1997. The pro forma 52-week period ended August 29, 1997.
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THE REFINANCING. On March 27, 1998, the Company and its indirect subsidiary, RHG
Finance Corporation, tendered for a total of $720 million principal amount of
their respective outstanding publicly held debt. In addition, the Company
refinanced its commercial paper and indebtedness outstanding under its revolving
credit facility, which totaled $950 million on March 27, 1998.
RETAINED BUSINESS. All operations not distributed.
REVERSE STOCK SPLIT. On March 27, 1998, the Company's common stock underwent a
one-for-four reverse stock split.
SODEXHO. Sodexho Alliance, S.A., a worldwide food and management services
organization headquartered in France and a 48% shareholder of the Company.
SODEXHO NORTH AMERICA. Sodexho Financiere du Canada and subsidiaries, and
International Catering Corporation and subsidiaries (also known as Sodexho USA)
taken collectively.
STUB PERIOD. The 22-week period beginning March 27, 1998, the date of the
Transactions, and ending on August 28, 1998.
THE TRANSACTIONS. The Distribution, Acquisition, and Refinancing taken
collectively.
TRANSITION PERIOD. On April 15, 1998, the Board of Directors of the Company
approved the change of the fiscal year of the Company to the Friday nearest to
August 31 of each year. Prior to this change in fiscal year, the Company's
fiscal year ended on the Friday nearest to December 31 of each year. Thus, the
1998 fiscal year, which began on January 3, 1998, ended on August 28, 1998, and
is considered the Transition Period. The 1999 fiscal year, which began on August
29, 1998 and ended on September 3, 1999, was a 53-week period.
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 Financial Condition and
Results of Operations and other parts of this report, include: (i) the ability
of the Company to adapt to various changes, including changes in its structure,
senior management and in its relationship with its largest shareholder--Sodexho
Alliance, (ii) the potential adverse impact of the Company's substantial
indebtedness, (iii) the ability of the Company to attract, hire, train and
retain competent management personnel, (iv) competition in the food services and
facilities management industries, (v) the effects of general economic
conditions, (vi) the ability of the Company to retain clients and obtain new
clients on satisfactory terms, (vii) the ability of the Company to remedy any
computer-related issues that may result from the advent of the Year 2000, and
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission including those set forth in Exhibit 99 filed
herein.
As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on the forward-looking statements included in this report or that
may be made elsewhere from time to time by, or on behalf of, the Company. The
Company assumes no obligation to update any forward-looking statements.
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<PAGE>
PRO FORMA UNAUDITED FINANCIAL INFORMATION
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Transactions described fully in Notes 1
through 5 to the Consolidated Financial Statements. As a result of these
changes, there are substantial differences in the comparability of the Company's
historical operating results prior to March 27, 1998, presented in Parts I and
II of this document and the Company's ensuing and 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
results for the fiscal year ended September 3, 1999 compared with the historical
results of operations for the thirty-four weeks ended August 28, 1998 and the
historical fiscal years 1997 and 1996 (presented in Item 8 of this report), but
also the pro forma operating results and pro forma cash flow for the full fiscal
years ended September 3, 1999, August 28, 1998 and August 29, 1997, as well as
the condensed balance sheet as of September 3, 1999 and August 28, 1998. The pro
forma operating results and cash flow information were prepared as if the
Transactions occurred at the beginning of each period and only include the
Company's Retained Business and the acquired operations of Sodexho North
America.
Prior to March 27, 1998, pro forma sales and managed volume include the combined
actual activity of the food and facilities management services business of MMS
and Sodexho North America. Managed Volume represents the Company's measurement
of gross revenues associated with all services the Company manages on behalf of
its clients. Similarly, pro forma corporate expenses include the combined
corporate overhead of both businesses. No synergies are assumed for periods
presented prior to March 27, 1998. Management estimates that approximately $25
million in synergies were realized in pro forma fiscal year 1999. Integration
and restructuring charges of $15.6 million and $31.1 million were excluded for
pro forma fiscal years 1999 and 1998, respectively. However, an estimate of $6.4
million in annual costs were included on a pro rata basis in all periods
presented prior to March 27, 1998, representing incremental costs to operate the
Company as a separate public entity. Pro forma net income reflects approximately
$15.9 million of amortization expense for each year for the intangible assets
related to the Acquisition.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of all periods presented. Effective income tax rates of 44.8%, 48% and 54% were
used for pro forma fiscal years 1999, 1998 and 1997, respectively. Pro forma
results do not include any extraordinary charges related to the Refinancing, the
loss in 1997 from the sale of MMS- UK operations to Sodexho or any operating
results from the MMS- UK operations prior to its sale.
Pro forma basic earnings per share was calculated with total weighted-average
shares outstanding of 62.1 million for pro forma fiscal 1999. For pro forma
fiscal years 1998 and 1997, a base of 61.9 million shares was included in pro
forma basic earning per share, which represents the number of shares outstanding
at August 28, 1998. Pro forma diluted earnings per share were calculated on a
base of 63.9 million shares for pro forma fiscal 1999 and 62.5 million shares
for fiscal 1998 and 1997. The dilutive shares are the result of the Company's
convertible debt, stock option plans and deferred stock incentive plans.
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PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR FISCAL YEARS ENDED SEPTEMBER 3, 1999, AUGUST 28, 1998 AND AUGUST 29, 1997
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
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(53 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C>
SALES
Corporate Services $1,380 $1,336 $1,243
Health Care 1,323 1,277 1,249
Education 1,221 1,150 1,083
Schools 358 333 302
Canada 143 145 153
Laundries/Other 77 65 59
------------------ ------------------- ------------------
TOTAL SALES 4,502 4,306 4,089
OPERATING COSTS AND EXPENSES
Corporate Services 1,289 1,253 1,169
Health Care 1,214 1,182 1,156
Education 1,148 1,093 1,034
Schools 337 317 288
Canada 136 140 149
Laundries/Other 72 61 56
------------------ ------------------- ------------------
TOTAL OPERATING COSTS AND EXPENSES 4,196 4,046 3,852
------------------ ------------------- ------------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 91 83 74
Health Care 109 95 93
Education 73 57 49
Schools 21 16 14
Canada 7 5 4
Laundries/Other 5 4 3
------------------ ------------------- ------------------
TOTAL OPERATING PROFIT 306 260 237
------------------ ------------------- ------------------
CORPORATE ITEMS:
Amortization of Intangible Assets (38) (37) (38)
Corporate Expenses (81) (73) (74)
Interest Expense, Net (87) (87) (87)
Gain on Sale of Investment 8 -- --
------------------ ------------------- ------------------
INCOME BEFORE INCOME TAXES 108 63 38
Provision for Income Taxes (48) (30) (20)
------------------ ------------------- ------------------
PRO FORMA NET INCOME $ 60 $ 33 $ 18
================== =================== ==================
PRO FORMA BASIC EARNINGS PER SHARE $ 0.96 $ 0.53 $ 0.28
================== =================== ==================
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.94 $ 0.52 $ 0.28
================== =================== ==================
</TABLE>
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PRO FORMA UNAUDITED SUPPLEMENTAL INFORMATION ON MANAGED VOLUME*
FOR FISCAL YEARS ENDED SEPTEMBER 3, 1999 AND AUGUST 28, 1998
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED % INC./
SEGMENT NOV-98 FEB-99 MAY-99 SEP-99 SEP-99 (DEC.)
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(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
<S> <C> <C> <C> <C> <C> <C>
Corporate Services $ 335 $ 323 $ 350 $ 372 $1,380 3 %
Health Care 699 705 708 758 2,870 9
Education 421 320 343 239 1,323 6
Schools 194 174 195 84 647 8
Canada 63 56 59 57 235 (1)
Laundries/Other 33 33 35 38 139 20
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Total $1,745 $1,611 $1,690 $1,548 $6,594 7 %
==========================================================================
FISCAL
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED
SEGMENT NOV-97 FEB-98 MAY-98 AUG-98 AUG-98
--------------------------------------------------------------------------
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Corporate Services $ 329 $ 320 $ 344 $ 346 $1,339
Health Care 650 650 657 671 2,628
Education 399 307 337 203 1,246
Schools 180 165 182 75 602
Canada 67 59 60 51 237
Laundries/Other N/A N/A N/A N/A 116
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Total $1,625 $1,501 $1,580 $1,346 $6,168
==========================================================================
<FN>
* Managed Volume represents the Company's measurement of gross revenues
associated with all services the Company manages on behalf of its clients.
</FN>
</TABLE>
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DISCUSSION OF PRO FORMA FISCAL YEAR 1999 COMPARED WITH PRO FORMA
FISCAL YEAR 1998 RESULTS OF OPERATIONS
Total sales for pro forma fiscal year 1999 ("1999") were $4.5 billion, an
increase of $196 million, or 4.6%, over $4.3 billion for pro forma fiscal year
1998 ("1998"). Excluding the estimated $76 million impact of the extra week in
fiscal year 1999, sales increased $120 million, or 2.8%. This growth was mostly
attributable to solid performance in the Education and Schools divisions that
was the result of sales growth at existing clients partially offset by an
overall lower retention rate for the Company in 1998. The Corporate Services
division had lower growth in sales for 1999, resulting from strong competition
in this mature market, the overall impact of corporate restructurings and a
lower retention rate going into 1999 from 1998. Growth in the Health Care
division was impacted by the challenging environment for the health care
industry in 1999, including decreased government reimbursements, consolidation
in the industry and several bankruptcies of health care institutions. Despite
these challenges, the Health Care division has grown sales at existing clients
and sold new business to largely offset a lower retention rate going into 1999
from 1998. As with other divisions, retention in Health Care improved in 1999,
which will favorably impact next year's sales growth. Management believes that
these challenges present an opportunity to gain new business, as the Company
works with new and existing clients to seek cost-effective outsourcing
solutions.
The Company believes managed volume is the more complete measure of its overall
level of business activity. Managed volume is the Company's measurement of gross
revenues associated with all services the Company manages on behalf of its
clients. Pro forma managed volume for fiscal year 1999 was $6.6 billion, up 7%
over pro forma fiscal 1998. Pro forma sales were up 5% to $4.5 billion, from
$4.3 billion a year ago. Excluding the estimated effect of the 53rd week in
fiscal 1999, pro forma managed volume and sales increased 5% and 3%,
respectively, over fiscal 1998.
Pro forma operating profit before corporate items (corporate administrative
expenses, interest expense, fees to Marriott International and Sodexho Alliance,
and amortization of intangible assets) totaled $306 million for 1999, an
increase of $46 million, or 17.7%, over $260 million in operating profit for
1998. This increase was driven by improved operating margins, particularly in
the Education and Schools divisions, the result of efficiencies achieved in the
procurement of food-related products and administrative synergies gained during
the year. Operating profit for the Health Care division was unfavorably impacted
by several bankruptcies at hospital clients in 1999, as this industry continues
to experience consolidation and restructuring issues. Excluding $3 million in
charges related to bankruptcies in 1999, Health Care's operating profit would
have totaled $112 million, or a 16.7% increase over a comparably adjusted 1998
operating profit of $96 million. Operating profit in the Canada and
Laundries/Other divisions collectively totaled $12 million in 1999, an increase
of $3 million or 33% over 1998. This double-digit increase was driven by
improved margins in the both divisions. The 53rd week did not have a material
impact of the Company's operating profit for the current year.
Corporate expenses and amortization of intangible assets in pro forma fiscal
1999 totaled $119 million, an increase of $9 million, or 8%, compared with pro
forma fiscal 1998. Included in corporate expenses are a one-time, $3.4 million
charge ($1.9 million after-tax, or $0.03 per diluted share) related to the
resignation of the former Chief Executive Officer and $5 million of Year 2000
related costs (see "Year 2000"). Excluding the one-time resignation charge and
the Year 2000 costs, total corporate expenses were level with Pro Forma Fiscal
1998. Administrative synergies were achieved as planned during 1999, but were
partially offset by consulting expenses and other reinvestments in the Company's
corporate infrastructure.
Pro Forma Fiscal 1999 included the favorable impact from the sale of the
Company's Bright Horizons Family Solutions ("BFAM") investment, resulting in a
gain of $8.3 million ($4.6 million after-tax, or $0.07 per diluted share).
Excluding the Year 2000 costs and the one-time resignation charge, total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 95.7% of total sales for Pro Forma Fiscal Year
1999 compared with Pro Forma Fiscal Year 1998's comparable period ratio of
96.5%. The Company anticipates this margin will continue to improve in the
periods ahead, as the Company continues to realize purchasing synergies.
Together with the synergies from administrative actions, these savings are
anticipated to reach $60 million annually by fiscal year 2001. Synergies from
both purchasing and administrative actions are estimated to be $25 million in
the current year. Anticipated incremental synergies generated in fiscal year
2000 are expected to be reinvested during fiscal year 2000. The reinvestments,
which are targeted primarily for additional sales and management personnel, have
already begun.
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DISCUSSION OF PRO FORMA FISCAL YEAR 1999 COMPARED WITH PRO FORMA
FISCAL YEAR 1998 RESULTS OF OPERATIONS, CONTINUED
In addition, the Company has undertaken an information systems strategy study to
evaluate the current state of its information systems, and consider information
technology options. Among the options under consideration is the adoption of
certain elements of the technology platform adopted by Sodexho Alliance. This
evaluation will require additional time to study and review alternatives and
their impact on capital investments, earnings, shareholder value and the
provisions of the Company's debt agreements. Strategic developments in this area
are expected to be finalized during fiscal year 2000. See Item 7.--Liquidity and
Capital Resources.
The growth in operating profit increased pretax income to $108 million, a 71% or
$45 million increase when compared with $63 million for 1998. The effective tax
rate for 1999 was 44.8%, a decrease from 48% for 1998, mostly due to the
proportion of nondeductible intangible amortization expense in relation to total
operating profit between the years. Net income almost doubled in 1999 to $60
million, or $0.94 per diluted share, compared with $33 million, or $0.52 per
diluted share for 1998. Excluding the one-time resignation charge and the BFAM
gain, pro forma earnings per diluted share would have been approximately $0.90.
DISCUSSION OF PRO FORMA 1998 COMPARED WITH PRO FORMA 1997 RESULTS OF OPERATIONS
Total sales for Pro Forma Fiscal 1998 were $4.3 billion, an increase of $217
million, or 5.3%, over $4.1 billion for 1997. This growth was mostly
attributable to solid performance in the Corporate Services and Education
divisions. Increases in the Corporate Services and Education divisions were the
result of high retention of existing clients (approximately 95% for 1998), and
strong new sales growth. Corporate Services division's sales were also favorably
impacted by the continued implementation of the Crossroads Cuisines retail
strategy. Lower growth in the Health Care division in 1998 was mostly the result
of the challenging environment for the health care industry in 1998, including
decreased government reimbursements, consolidation in the industry and several
bankruptcies of health care institutions. Despite these challenges, the Health
Care division increased sales by $28 million, or 2.2%, over the prior year.
Management believes that these challenges present an opportunity for the Company
to gain new business, as client organizations are likely to seek cost-effective
outsourcing solutions. The Schools, Canada and Laundries/Other divisions' sales
collectively totaled $543 million for 1998, an increase of $29 million, or 5.6%,
over the $514 million in aggregate sales for 1997.
Operating profit before corporate items (corporate expenses, interest expense,
and amortization of intangible assets) totaled $260 million for 1998, an
increase of $23 million, or 9.7%, over the $237 million in operating profit for
1997. This increase was driven by solid sales growth in the Corporate Services
and Education divisions in 1998. Operating margins, particularly in the
Education division, improved as the result of efficiencies in labor costs and
increased efficiencies in the procurement of food-related products gained during
the year. Operating profit in the Schools, Canada and Laundries/Other divisions
collectively totaled $25 million in 1998, an increase of $4 million or 19% over
1997. This double-digit increase was driven by strong growth in new business in
the Schools division.
Corporate expenses in 1998 were about even with the prior year, reflecting the
elimination of certain positions after the Transactions and the timing of
filling certain employee positions. Had the Company fully completed the
consolidation of the MMS and Sodexho North America processing systems and
related hiring of certain personnel, additional costs of approximately $5
million pretax would have been incurred during the 22 week Stub Period. Total
operating costs, corporate expenses and amortization of intangible assets
represent, in the aggregate, 96.5% of total sales for the year, compared with
1997's ratio of 96.9%. The Company anticipates this margin will continue to
improve in the periods ahead, as the Company continues the integration of the
MMS and Sodexho North America operations resulting in savings realized from
purchasing and administrative actions. These savings are anticipated to reach
$60 million annually by fiscal year 2001.
The growth in operating profit combined with relatively flat corporate items
contributed to an increase in pretax income of $25 million, or 66%, to $63
million for 1998. The effective tax rate for 1998 was 48%, a decrease from 54%
for 1997, mostly due to the proportion of nondeductible intangible amortization
expense in relation to total operating profit between the years. Net income
almost doubled in 1998 to $33 million, or $0.52 per diluted share, compared with
$18 million, or $0.28 per diluted share for 1997.
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<PAGE>
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
The Company continues to capitalize on its combined market presence as well as
focusing on attracting new accounts and enhancing services to sustain growth.
The Company is highly leveraged and 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.
Capital requirements are funded from a combination of existing cash balances and
operating cash flow. Additionally, the Company anticipates achieving annual cost
savings of approximately $60 million pretax by the end of fiscal year 2001,
resulting from purchasing and administrative synergies. The anticipated cost
savings, which the Company estimates were approximately $25 million in Fiscal
Year 1999, will be available to pay down debt and reinvest in the Company to
fund activities to enhance its competitive position. Anticipated incremental
synergies generated in fiscal year 2000 are expected to be reinvested during
fiscal year 2000. These reinvestments, which are targeted primarily for
additional sales and management personnel, have already begun. In addition, the
Company has undertaken an information systems strategy study to evaluate the
current state of its information systems, and consider information technology
options. Among the options under consideration is the adoption of certain
elements of the technology platform adopted by Sodexho Alliance. This evaluation
will require additional time to study and review alternatives and their impact
on capital investments, earnings, shareholder value and the provisions of the
Company's debt agreements. Strategic developments in this area are expected to
be finalized during Fiscal Year 2000. See Item 1.--Integration and Restructuring
and Item 7.--Liquidity and Capital Resources. Subject to the foregoing, the
Company believes that current cash flow generated from operations and cash
balances will be adequate to finance ongoing capital needs, meet debt service
requirements and fund the Company's planned growth initiatives.
As of September 3, 1999, the Company had a $235 million revolving credit
facility available at an interest rate of 7.55% to provide funds for liquidity,
seasonal borrowing needs and other general corporate purposes. At September 3,
1999, $52 million of this facility was outstanding, while an additional $33
million of this revolving credit facility was utilized by letters of credit
outstanding, principally related to insurance programs.
Prior to the Transactions, the Company paid regular quarterly dividends. On
October 13, 1999, the Board of Directors declared an $0.08 per common share
dividend for Fiscal Year 1999, payable on December 10, 1999 to shareholders of
record on November 22, 1999. The Company may pay dividends in the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to 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 continue to
closely monitor the results of the Company's operations, capital requirements,
and other considerations to determine the extent to which a dividend may be
declared in future periods.
The Company is required to make quarterly cash interest payments on its term and
guaranteed facilities, as well as scheduled principal repayments on its Senior
Secured Credit Facility (as detailed in Note 8 to Consolidated Financial
Statements). Annual interest expense was $88 million for the 53-week period
ended September 3, 1999 ($87 million on an annualized basis). Principal
repayments totaled $70 million in fiscal year 1999; with scheduled repayments of
approximately $80 million in 2000; $80 million in 2001; $90 million in 2002;
$115 million in 2003 and $65 million in 2004.
On October 7, 1999, Marriott International notified all holders of the Liquid
Yield Option(TM) Notes ("LYONs"), that Marriott International had elected to
redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount
at maturity of the LYONs, with a redemption date of November 8, 1999. Conversion
is available at any time until the close of business on the redemption date. The
maximum amount of funds that the Company would be obligated to pay to Marriott
International if all the LYONs were redeemed for cash is approximately $30
million. This amount would be paid to Marriott International in the first
quarter of fiscal year 2000--See Note 8 to Consolidated Financial Statements.
-10-
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 3, 1999 AND AUGUST 28, 1998
($ IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 3, AUGUST 28,
1999 1998
------------------ ------------------
ASSETS
<S> <C> <C>
Current assets
Cash and equivalents $ 48 $ 79
Accounts and notes receivable 445 374
Inventories 60 54
Other 89 98
------------------ ------------------
Total current assets 642 605
------------------ ------------------
Property and equipment, net 85 82
Intangible assets 535 569
Other 85 85
------------------ ------------------
$ 1,347 $ 1,341
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 133 $ 96
Accounts payable 238 222
Other current liabilities 347 377
------------------ ------------------
Total current liabilities 718 695
Long-term debt 980 1,062
Other long-term liabilities 113 110
Convertible subordinated debt 30 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 1,326 1,322
Accumulated deficit (1,884) (1,946)
Accumulated other comprehensive income 2 7
------------------ ------------------
Total stockholders' deficit (494) (555)
------------------ ------------------
Total liabilities and stockholders' deficit $ 1,347 $ 1,341
================== ==================
</TABLE>
-11-
<PAGE>
DISCUSSION OF PRO FORMA CASH FLOW
CASH FLOW FROM OPERATING ACTIVITIES
The Company's cash flow from operations is affected by a predictable seasonal
pattern. Cash flow from operations is strongest during the fall and spring, as
the demand for services fluctuates in the Education and Schools divisions.
Cash flow from operations, before the impact of changes in working capital, was
$145 million in 1999, $115 million in 1998, and $102 million in 1997. The
increase in the adjusted operating cash flow in pro forma fiscal years 1999 and
1998 was mostly the result of higher net income in both years. Working capital,
defined as the net of current assets and current liabilities, is favorable to
the Company when current liabilities exceed current assets. This negative
working capital position is primarily the result of the timing of cash payments
in relationship to the timing of cash received. Higher accounts and notes
receivable in 1999 reflect the impact of the 53rd week and a lengthening of the
average billing cycle compared to last year. The Company anticipates it will
improve its negative working capital position in future periods.
CASH FLOW FROM INVESTING ACTIVITIES
The Company invests cash primarily for capital expenditures related to new or
existing client relationships. Total capital expenditures were $72 million, $60
million and $57 million for 1999, 1998 and 1997, respectively. The Company
anticipates expending approximately $70 to $75 million for capital investments
for fiscal year 2000. In addition, the Company intends to make, from time to
time, investments for business acquisitions.
CASH FLOW FROM FINANCING ACTIVITIES
The Company's financing activities reflects the Company's management of its debt
and other long-term liabilities, in addition to the Company's receipt of funds
from stock sales, as part of the Company's overall management of its cost of
capital. Pro forma cash flow from financing activities represents cash flow as
if the Refinancing had been in place on the first day of all periods presented.
In 1999, net cash used in financing activities totaled $40 million, mostly due
to the $70 million repayment of long-term debt, partially offset by increases in
short-term debt and other liabilities. Net cash provided by financing activities
in 1998 totaled $49 million. Other cash provided by financing activities totaled
$106 million, reflecting the transfer of insurance-related liabilities from MI,
and was partially offset by repayments of long-term debt totaling $57 million in
1998. Net cash provided by financing activity was unchanged for 1997.
PRO FORMA UNAUDITED CONDENSED CASH FLOW
FOR THE FISCAL YEARS ENDED 1999, 1998 AND 1997
($ IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 29,
1999 1998 1997
------------------- ------------------ ------------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
CASH PROVIDED BY OPERATING ACTIVITIES
- -------------------------------------
<S> <C> <C> <C>
Net income $ 60 $ 33 $ 18
Adjust to reconcile net income to net cash:
Depreciation expense 47 45 46
Amortization of intangible assets 38 37 38
Net changes in certain working capital items (40) (39) (12)
------------------- ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 105 76 90
------------------- ------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES
- -----------------------------------
Capital expenditures (72) (60) (57)
Other (24) (27) (30)
------------------- ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (96) (87) (87)
------------------- ------------------ ------------------
CASH FLOW FROM FINANCING ACTIVITIES
- -----------------------------------
Repayments of long-term debt (70) (57) -
Other 30 106 -
------------------- ------------------ ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (40) 49 -
------------------- ------------------ ------------------
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS $(31) $ 38 $ 3
=================== ================== ==================
</TABLE>
-12-
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. Food services
include food and beverage procurement, preparation and menu planning, as well as
the operation and maintenance of food service and catering facilities, generally
on a client's premises. Facilities management services include plant operations
and maintenance, energy management, grounds keeping, and housekeeping and
custodial services.
The Company was formerly named Marriott International, Inc. Upon consummation of
the Distribution, Acquisition, and Refinancing (the "Transactions"), which
occurred on March 27, 1998 (the last day of the first quarter of 1998), Marriott
International, Inc. was renamed Sodexho Marriott Services, Inc. As of March 27,
1998, the principal business of the Company changed from lodging and contract
services to food and facilities management services. This change was the result
of the Distribution and the Acquisition. In connection with the Distribution and
Acquisition, the Company refinanced its debt. The Transactions are explained in
more detail below and in the Company's Notes 1 through 5 of the Consolidated
Financial Statements included in this report. Due to the extensive changes in
the Company's business that resulted from the Transactions, the Company is
providing for informational purposes the following description of its business.
INDUSTRY AND MARKETPLACE
The food and facilities management services industry is rapidly changing. Major
industry dynamics are:
o Continued growth in the outsourcing of food service and facilities
management as a result of: focus by customers on core competencies and
outsourcing of their non-core services, general economic growth, and
increasing cost pressures.
o Increasing market penetration by large, well-capitalized participants due
to their ability to provide more cost-effective services as a result of
economies of scale, a broader range of services than local and regional
participants, and national and international coverage to large clients.
o An increase in the retail orientation of contract catering due to the
proliferation of alternative retail outlets, including quick serve
restaurants.
o Strong industry dynamics towards a "one-stop shopping" alternative for all
outsourcing needs, including food service and facilities management.
o Minimal capital requirements due to several factors, including low capital
expenditures because operations are generally conducted at client sites
using client equipment; low fixed costs, permitting rapid response to
market conditions; and predictable cash flow from client payments, reducing
or eliminating working capital needs.
o Stable industry revenues from an existing client base.
MARKET POSITION
The Company has its origins in two well-established food service providers, MMS
and Sodexho North America. The Company is the market leader in the North
American contract food services industry, which the Company's management
believes is generally underpenetrated by large contractors. Market leadership
makes the Company well positioned to grow faster than the overall market. The
Company has a unique opportunity to leverage its position as the market leader
in food service by cross-selling its facilities management services to existing
food-service-only clients. Management of the Company believes that the
facilities management industry remains even more underpenetrated by large
contractors than the contract food services industry.
-13-
<PAGE>
ITEM 1. BUSINESS, CONTINUED
The Company operates primarily in four business segments as discussed below
(also see Note 14 to the Consolidated Financial Statements):
CORPORATE SERVICES. Although the market for food service in business
and industry is relatively highly penetrated, customers are responding favorably
to the growth in retail orientation by food service contractors. The market for
multi-service national providers (food and facilities) is growing as large
corporations are moving toward outsourcing all of their non-core services on a
multi-site and multi-service basis. This represents an opportunity to leverage
from food contracting to the less developed facilities management market. The
government market is expected to increase as federal departments and agencies
implement large-scale outsourcing of non-core functions. The Corporate Services
segment represents approximately 31% of the Company's current revenues.
HEALTH CARE. The health care industry continues its transformation from
a fee-for-service to a managed care and capitated rate environment. This market
dynamic has shifted the risk and burden of cost control from insurance providers
to the health care institutions themselves, forcing them to focus not only on
the cost component of clinical care, but also on the cost of all services
including food and facilities management. These cost pressures are driving the
trend toward consolidation of health care institutions and guaranteed cost
contracts for hospital services, and have contributed to several institutional
bankruptcies. While management of the Company recognizes the challenges of these
trends, it also believes that there are opportunities for growth, as the health
care market remains significantly underpenetrated. The Health Care segment
represents approximately 29% of the Company's current revenues.
EDUCATION. The campus dining marketplace, principally in colleges and
universities, continues to shift from residential board plans to more
retail-oriented operations driven by (i) the growing proportion of non-resident
day and evening students on campuses, (ii) the taste and service preferences of
today's young consumers and (iii) colleges' and universities' desire to provide
their students with greater flexibility. Traditional straight-line cafeterias
are being replaced by scatter systems and food courts. These trends, coupled
with cost pressures, are causing public and private institutions to consider
outsourcing as a viable choice. The Education segment represents approximately
27% of the Company's current revenues.
SCHOOLS. The current fiscal climate is forcing school districts
(kindergarten through Grade 12) to minimize costs while improving the
performance of non-instructional areas. Over the last several years, 150-200
school systems per year have decided to begin outsourcing their food services.
Also, new federal regulations require that school meals meet more stringent food
specifications and production techniques to comply with "Nutrient Standards"
guidelines. Some school districts may turn to contractors to help comply with
these guidelines. The Schools segment represents approximately 8% of the
Company's current revenues.
The Company also operates two additional segments-- Canada and Laundry Services.
These two segments collectively represent approximately 5% of the Company's
current revenues.
COMPETITION
The food and facilities management services business in North America is
comprised of a large number of local, regional and national service providers.
The Company's strongest competition comes from larger, well-capitalized
participants due to their ability to provide (i) cost-effective services as a
result of economies of scale, (ii) a broader range of services than local and
regional participants and (iii) national coverage to large clients.
Many educational institutions, health care providers and businesses consider
cost to be an important factor when selecting companies to provide food and
facilities management services. The Company expects to continue being a
successful low-cost services provider due to its (i) significant purchasing
economies of scale for food service and facilities management supplies, (ii)
sophisticated site labor management controls, (iii) low administrative overhead,
and (iv) strong information and accounting systems which allow clients to
monitor costs more closely in tandem with the Company's management team.
Clients also consider the quality of food and facilities management services to
be an important factor in addition to price. Accordingly, the Company's ability
to maintain a level of quality in keeping with client expectations will continue
to be an important competitive factor.
-14-
<PAGE>
ITEM 1. BUSINESS, CONTINUED
THE TRANSACTIONS
DISTRIBUTED OPERATIONS. On March 27, 1998, the Company distributed to its
shareholders, on a pro rata basis, all outstanding shares of New Marriott MI,
Inc., a wholly owned subsidiary of the Company, in a tax-free distribution (the
"Distribution"). New Marriott MI, Inc., subsequently renamed Marriott
International, Inc. (together with subsidiaries, "MI") conducts business in the
lodging segment and in two of the three lines of business previously in the
Company's contract services segment - MSLS and MDS. The lodging, MSLS and MDS
business are collectively referred to as the Distributed Operations. The third
line of business in the contract services segment, MMS, is now the principal
business of the Company.
ACQUISITION. Immediately after the Distribution, on March 27, 1998, Sodexho
transferred to the Company the operations of Sodexho North America having a fair
market value of approximately $278 million, and simultaneously made a cash
payment of $304 million in exchange for 29.9 million shares of the Company's
common stock, after giving effect to the one-for-four reverse stock split, as
detailed in Note 9 to the Consolidated Financial Statements. The purchase price
included approximately $3 million in transaction costs. As a result of the
issuance of new shares of the Company's common stock to Sodexho in connection
with the Acquisition, the shareholders who owned 100 percent of the Company
immediately prior to the Distribution owned approximately 51% immediately
thereafter.
The Acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated to the fair market value of assets acquired and
liabilities assumed as follows:
<TABLE>
<CAPTION>
($ in millions)
-----------------
<S> <C>
Current assets $ 142
Other assets 56
Customer relationships 122
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (17)
Other liabilities (46)
Debt (73)
Deferred taxes, net (8)
Goodwill 239
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
</TABLE>
Immediately after the Acquisition, the Company refinanced the $73 million of
debt assumed, as detailed in Note 3 to the Consolidated Financial Statements.
REFINANCING. On March 27, 1998, the Company borrowed $615 million and $620
million under the Secured Facility and Guaranteed Facility, respectively, both
of which are described below. The proceeds were used to repurchase $713 million
of the Company's publicly held debt, as discussed in the following paragraph,
and to repay its $950 million outstanding obligations under the Company's
existing $1.5 billion credit facility, which was cancelled immediately after
such repayment. Also, the Company repaid debt of $73 million assumed in the
Acquisition. The $304 million received from Sodexho (see Note 3 to the
Consolidated Financial Statements) was used together with the proceeds of the
new debt to fund the debt repayments. The Company also received letters of
credit for $13 million under the Secured Facility on March 27, 1998.
-15-
<PAGE>
ITEM 1. BUSINESS, CONTINUED
The Secured Facility consists of a $235 million revolving credit facility and a
$500 million six year term loan facility. It bears interest at rates based on a
bank prime rate, the Federal funds rate, or the London interbank offered rate
for Eurodollar deposits ("LIBOR"), payable in arrears quarterly. The Company is
currently paying interest at an aggregate 6.88%. Of the revolving credit
facility, up to $100 million may be used to cover letters of credit. As of
September 3, 1999, the Company had letters of credit outstanding of $33 million.
The facility is collateralized by liens on the inventory, accounts receivable,
and stock of the principal subsidiaries of Sodexho Marriott Operations, Inc. As
of September 3, 1999, $150 million of borrowing capacity was available under
this facility.
The Guaranteed Facility is a $620 million seven-year term loan. It bears
interest at rates based on a bank prime rate, the Federal funds rate, or LIBOR,
payable in arrears quarterly. The Company is currently paying interest at 6.85%,
after adjusting for the impact of hedging activities and miscellaneous fees
associated with this facility, which includes a 0.5% annual fee ($3 million)
based on the Guaranteed Facility balance that the Company pays Sodexho to serve
as guarantor of the loan.
In connection with the Distribution, the Company tendered for $720 million
principal amount of its outstanding publicly held debt, $600 million related to
the Series A through D Senior Notes and $120 million related to the Renaissance
Hotel Group (RHG) Financing. Approximately $593 million of the Series A through
D Senior Notes were tendered at a premium of $45 million (pretax). The
untendered Series A through D Senior Notes remain a liability of the Company.
<TABLE>
<CAPTION>
Face Amount Prior to Untendered Debt at Untendered Debt at
Tender March 27, 1998 March 27, 1998 September 3, 1999
------------------------- ------------------------- ------------------------
($ in millions)
<S> <C> <C> <C>
Series A $ 150 $ 2 $ 2
Series B 200 1 1
Series C 150 3 2
Series D 100 1 1
------------------------- ------------------------- ------------------------
$ 600 $ 7 $ 6
========================= ========================= ========================
</TABLE>
Approximately $117 million of the $120 million in RHG Finance outstanding
Guaranteed Notes were tendered at a premium of $20 million (pretax). The Company
paid an additional $3.5 million in cash to MI representing the untendered RHG
debt that became a liability of MI. The debt extinguishment was financed through
the Secured Facility and the Guaranteed Facility discussed above, as well as the
$304 million received from Sodexho in connection with the Acquisition.
As part of the Distribution, the Company and MI agreed that total indebtedness
retained by the Company after the Distribution would equal $1.444 billion.
Because the Company's indebtedness totaled $1.698 billion after effecting the
Distribution, MI paid the Company the difference of $254 million, which the
Company used to repay debt as detailed above.
As a result of the foregoing, the Company incurred an extraordinary charge for
costs associated with the early extinguishment of debt of $71 million, $44
million after-tax, or $0.85 per diluted share for the 34-week period ended
August 28, 1998.
The Company's borrowing agreements contain various covenants, which, among other
things, require the Company to meet certain financial ratios and tests. Each of
the borrowing agreements is described generally in pages 121 through 123 of the
Proxy Statement for the Special Meeting of Stockholders of Marriott
International, Inc. dated March 17, 1998, which is incorporated by reference
into this report and is included as an exhibit to this report.
-16-
<PAGE>
ITEM 1. BUSINESS, CONTINUED
INTEGRATION AND RESTRUCTURING
Integration and restructuring actions, such as those taken in the past two years
and which may be taken in future years, reflect the Company's efforts to change
in anticipation of marketplace trends. These actions are intended to integrate
and realign resources for more effective and efficient execution of operating
strategies. The integration costs recorded in the Transition Period and in
Fiscal Year 1999 include, among other items, training and relocating employees,
incremental overhead during the integration phase, systems modifications, and
other one-time costs related to the integration of MMS and Sodexho North
America. Integration costs totaling $16 million pretax were included in the
results of operations for Fiscal Year 1999 and $24 million pretax were reflected
in the results of operations for the Transition Period.
Restructuring actions totaling approximately $37 million were recorded in the
first quarter of the 1998 Transition Period, $7 million of which was recorded as
a charge to operations related to termination benefits for approximately 50
employees and office closure costs related to MMS. Restructuring costs represent
costs, such as employee termination benefits and office closure costs, that are
incurred to terminate certain duplicate activities. This reserve totaled $5
million at August 28, 1998 and $2 million at September 3, 1999. The gross
acquisition reserve detailed in Note 3 to the Consolidated Financial Statements
principally represents costs associated with termination benefits for
approximately 350 employees and office closure costs related to the former
Sodexho North America operations. This reserve totaled $24 million at March 27,
1998, and was reduced to $17 million and $8 million at August 28, 1998 and
September 3, 1999, respectively, due to net payments made during these periods.
These actions have generated approximately one-third of the anticipated annual
cost savings of approximately $60 million pretax. The remaining two-thirds of
these anticipated savings relate to greater purchasing economies. Management
believes it will achieve these synergies by the end of fiscal year 2001. The
synergies from both purchasing and administrative actions are estimated to be
$25 million in the current year. Anticipated incremental synergies generated in
fiscal year 2000 are expected to be reinvested during fiscal year 2000. The
reinvestments, which are targeted primarily for additional sales and management
personnel, have already begun. See Item 7.--Liquidity and Capital Resources.
ARRANGEMENTS BETWEEN THE COMPANY AND MI
Pursuant to the Distribution agreement, the Company and New Marriott MI, Inc.
("New Marriott", subsequently renamed Marriott International, Inc.) agreed upon
the allocation of assets and liabilities related to the MMS business and the New
Marriott business. In this regard, the Company agreed generally to indemnify New
Marriott against liabilities that relate to the MMS business, and New Marriott
agreed generally to indemnify the Company against liabilities that relate to the
New Marriott business. The Company and New Marriott also entered into a number
of agreements governing their relationship after March 27, 1998. These
agreements include (i) a tax-sharing agreement, (ii) an employee benefits
allocation agreement, (iii) a trademark license agreement, (iv) a noncompetition
agreement, (v) a LYONs allocation agreement, as well as other additional
agreements between the companies. Each of these agreements is described
generally in pages 43 through 48 of the Proxy Statement for the Special Meeting
of Stockholders of Marriott International, Inc. dated March 17, 1998, which is
incorporated by reference into this report, and is included as an exhibit to
this report.
ARRANGEMENTS BETWEEN THE COMPANY AND SODEXHO
The Company has entered into various agreements with Sodexho that govern its
relationship with that entity. These agreements include (i) a royalty agreement,
(ii) an assistance agreement, (iii) a stockholder agreement, as well as other
additional agreements between the companies including guarantees of certain
liabilities of the Company by Sodexho. Each of these agreements is described
generally in pages 48 through 50 of the Proxy Statement for the Special Meeting
of Stockholders of Marriott International, Inc. dated March 17, 1998, which is
incorporated by reference into this report, and is included as an exhibit to
this report.
-17-
<PAGE>
ITEM 1. BUSINESS, CONTINUED
GOVERNMENT REGULATION
The Company is subject to various governmental regulations relating to its
operations, including, but not limited to, employment, health, safety and
environmental regulations as well as regulations applicable to bidding for and
performing federal, state and local government contracts. The Company has
installed various controls and procedures designed to ensure compliance with
these regulations.
EMPLOYEES
The Company has approximately 103,000 employees on its payroll in the U.S. and
Canada, and manages approximately 60,000 people on its clients' payrolls. An
estimated 12,000 non-management employees are represented by organized labor
unions for collective bargaining purposes. The Company believes its relations
with its employees are positive.
INFLATION
The Company's expenses are impacted by inflation. While price increases
generally can be instituted as inflation occurs, many contracts require certain
approvals before prices can be increased, which may temporarily have an adverse
impact on profit margins. Management believes that over time, however, the
Company will be able to raise prices, as appropriate, and sustain profit
margins.
ACCOUNTING PERIOD
On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to the end of August, effective immediately. This change resulted
in a 34-week Transition Period from the end of fiscal 1997 to August 28, 1998.
In addition, Fiscal Year 1999 had 53 weeks and ended on September 3, 1999. The
Company's 1997 historical fiscal year ended on the Friday nearest the end of
December and contained 52 weeks, while the 1996 historical fiscal year contained
53 weeks.
-18-
<PAGE>
ITEM 2. PROPERTIES
In June 1998, the Company entered into a 10 year lease, ending in December 2008,
with 2 renewable periods of 5 years each, for approximately 80,000 square feet
of space at 9801 Washingtonian Boulevard, Gaithersburg, Maryland. Also in June
1998, the Company entered an amended agreement with MI to vacate the Bethesda
headquarters office space no later than December 31, 1998. By December 1998, the
Company had moved all of its 250 headquarters employees to the Gaithersburg
Headquarters. Since that time, an additional 100 employees have been hired or
moved from other locations to the Gaithersburg Headquarters.
In addition, all of the Company's operating divisions lease their respective
headquarters office space as follows: Avon, Connecticut (Health Care); Altamonte
Springs, Florida (Education); and Downers Grove, Illinois (Schools). The
headquarters for the Corporate Services division is located with the Company's
headquarters in Gaithersburg, Maryland. These operating division leases
generally run for initial terms of three to five years with renewal options. The
Company also has a long-term lease for its office facility in Buffalo, New York,
where all of the centralized accounting and processing activities for North
America take place. The Company owns three laundry facilities (Walla Walla,
Washington; Tucson, Arizona; and Phoenix, Arizona) and leases three additional
laundry facilities (Birmingham, Alabama; Gilroy, California; and Compton,
California).
As a result of the Acquisition, the Company also occupied approximately 25,000
square feet of office and warehouse space in Trumbull, Connecticut;
approximately 15,000 square feet of office space in Mobile, Alabama;
approximately 20,000 square feet of building space in Sunnyvale, California; and
approximately 15,000 square feet of building space in Allston, Massachusetts.
The Company also owns a 30,000 square foot office building in Montreal, Canada.
In October 1998, the Company sold an 80,000 square foot office facility in
Waltham, Massachusetts, obtained in the Acquisition. The sale of the Waltham
office facility did not have any adverse impact on the Company's financial
condition or results of operations. To provide space for the operations that
formerly occupied one-half of the Waltham office facility, the Company entered
into an agreement in December 1998 to lease approximately 25,000 square feet of
office space in Lexington, Massachusetts, for a seven year period, with a five
year renewal option.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of Fiscal Year 1999.
-19-
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
COMMON STOCK. The comparability of stock prices in the table below is affected
by the Transactions which occurred on March 27, 1998. The range of the Company's
common stock prices and dividends declared per share for Fiscal Year 1999, the
Transition Period and the past two fiscal years are as follows (restated to
reflect the one-for-four reverse stock split):
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED PER
HIGH LOW SHARE
---------------- --------------- ----------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999 First Quarter $ 33 3/8 $ 24 5/8 $ -
Second Quarter 29 1/4 22 -
Third Quarter 25 1/8 18 7/8 -
Fourth Quarter 23 1/4 13 3/4 -
TRANSITION PERIOD 1998 Quarter ended March 27, 1998 330 1/2 243 3/4 .36
Nine weeks ended May 29, 1998 31 3/8 24 5/16 -
Quarter ended August 28, 1998 33 1/16 25 3/4 -
FISCAL YEAR 1997 First Quarter 229 198 1/2 .32
Second Quarter 256 1/2 198 1/2 .36
Third Quarter 287 240 .36
Fourth Quarter 307 260 1/2 .36
FISCAL YEAR 1996 First Quarter 210 1/2 149 .32
Second Quarter 200 177 .32
Third Quarter 229 1/2 193 1/2 .32
Fourth Quarter 239 1/2 205 1/2 .32
</TABLE>
At September 3, 1999, there were 62.3 million shares of common stock outstanding
held by approximately 42,000 shareholders of record. The Company's common stock
is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange.
DIVIDEND POLICY. Prior to the Transactions, the Company had paid regular
quarterly dividends. On October 13, 1999, the Board of Directors declared an
$0.08 per common share dividend for Fiscal Year 1999, payable on December 10,
1999 to shareholders of record on November 22, 1999--see Item 7.--Liquidity and
Capital Resources. The Company may pay dividends in the future, subject to the
restrictive covenants contained in the Company's credit facility agreements
related to the Refinancing and other relevant considerations. In general, the
restrictive covenants do not permit the Company to pay dividends to shareholders
in an amount greater than 40 percent of the Company's net income, or 45 percent
when the ratio of the Company's consolidated debt to Earnings Before Interest,
Taxes, Depreciation and Amortization ratio ("EBITDA", as defined in the
documentation for the credit facility agreements) is less than 4 but not less
than 3. This restriction will no longer apply when such ratio is less than 3.
The payment and amount of cash dividends on the Company's common stock will be
subject to the sole discretion of the Company's Board, which will review the
Company's dividend policy at such times as may be deemed appropriate. The Board
will closely monitor the results of the Company's operations, capital
requirements, and other considerations to determine the extent to which a
dividend may be declared in future periods.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for the
Company derived from its financial statements as of the fiscal year ended
September 3, 1999, the 34-week period ending August 28, 1998, and for the four
fiscal years ended January 2, 1998. As the result of the Transactions, 1998's
results are not comparable to the other years presented. Specifically, the
results of Sodexho North America are only included in the Stub Period ended
August 28, 1998. Conversely, the results of MDS and MSLS are included in the
historical financial continuing operations prior to the Transaction. In
addition, operating results in 1997 include a loss before income taxes of $22
million ($14 million after-tax, or $0.40 per share) on the sale of MMS- UK to
Sodexho.
The historical information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto, each
contained herein.
-20-
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA, CONTINUED
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
34
FISCAL WEEKS
YEAR AUGUST FISCAL YEAR
-----------------------------------------
1999(1) 1998(1) 1997(2) 1996(3) 1995 1994
----------- ---------- --------- ---------- --------- ----------
($ in millions, except per share data)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Sales $4,502 $2,828 $5,026 $4,318 $3,634 $3,466
Operating Profit Before
Corporate Expenses and Interest 304 119 157 177 130 111
Total Corporate Expenses and Interest(4) (212) (151) (172) (127) (78) (71)
----------- ---------- --------- ---------- --------- ----------
Income (Loss) From Continuing Operations,
Before Taxes and Extraordinary Item 92 (32) (15) 50 52 40
(Provision) Benefit for Income Taxes from
Continuing Operations (41) 13 15 (17) (20) (17)
----------- ---------- --------- ---------- --------- ----------
Income (Loss) From Continuing Operations, Before
Discontinued Operations and Extraordinary Item 51 (19) -- 33 32 23
Discontinued Operations, Net of Income Taxes(5) -- 77 335 273 215 177
----------- ---------- --------- ---------- --------- ----------
Income Before Extraordinary Item 51 58 335 306 247 200
Loss from Extraordinary Item, Net of Income Taxes(6) -- (44) -- -- -- --
----------- ---------- --------- ---------- --------- ----------
Net Income $ 51 $ 14 $ 335 $ 306 $ 247 $ 200
=========== ========== ========= ========== ========= ==========
PER SHARE DATA(7):
Diluted Earnings Per Share:
Continuing Operations $ 0.81 $(0.36) $ -- $ 0.97 $ 0.97 $ 0.69
Discontinued Operations(5) -- 1.48 10.53 8.08 6.51 5.35
----------- ---------- --------- ---------- --------- ----------
Diluted Earnings Per Share before Extraordinary Item 0.81 1.12 10.53 9.05 7.48 6.04
Extraordinary Item(6) -- (0.85) -- -- -- --
----------- ---------- --------- ---------- --------- ----------
Diluted Earnings Per Share $ 0.81 $ 0.27 $10.53 $ 9.05 $ 7.48 $ 6.04
=========== ========== ========= ========== ========= ==========
Cash Dividends Declared(8) $ -- $ 0.36 $ 1.40 $ 1.28 $ 1.12 $ 1.12
Diluted Weighted - Average Shares 63.9 52.0 31.8 33.8 33.0 33.1
BALANCE SHEET DATA (AT END OF YEAR):
Total Assets $1,347 $1,341 $5,009 $4,180 $3,221 $2,529
Long-Term and Convertible Subordinated Debt 1,010 1,091 1,829 1,300 795 488
Stockholders' (Deficit)/Equity (494) (555) 1,463 1,260 1,054 767
- -----------
<FN>
1 - On April 15, 1998, the Company's Board of Directors changed the fiscal year
from the Friday closest to the end of December to the Friday closest to the end
of August, thereby creating a 34-week Transition Period. On March 27, 1998, the
Company acquired Sodexho North America. In addition, fiscal year 1999 had 53
weeks and ended on September 3, 1999. The historical data for fiscal year 1997
and prior years does not include the revenue and expenses of the acquired
business, see Notes 1 through 3 to the Consolidated Financial Statements.
2 - Operating results in fiscal year 1997 include a loss before income taxes of
$22 million ($14 million after tax, or $0.40 per share) on the sale of the MMS-
UK operations to Sodexho in connection with the Transactions.
3 - Fiscal year 1996 includes 53 weeks, all fiscal years prior to the
Transactions include 52 weeks.
4 - Total corporate expenses include the amortization of intangible assets. For
fiscal year 1999 and the 34 weeks ended August 28, 1998, $16 million and $31
million pretax, respectively, of integration and restructuring charges were
recognized, see Note 4 to the Consolidated Financial Statements.
5 - On March 27, 1998, the Company distributed to its shareholders the Lodging,
MSLS and MDS divisions as part of the Transactions. For reporting purposes, the
Lodging segment is considered Discontinued Operations prior to March 27, 1998.
MSLS and MDS are considered part of continuing operations for the same periods
(see Note 1 to the Consolidated Financial Statements).
6 - On March 27, 1998, the Company refinanced its debt as part of the
Transactions (see Note 1 and Note 8 to the Consolidated Financial Statements),
resulting in a $71 million pretax charge from the early extinguishment of debt
($44 million after-tax).
7 - Earnings per share data have been restated to reflect the adoption in 1997
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
All per share data has been adjusted to reflect a one-for-four reverse stock
split effective March 27, 1998.
8 - Subsequent to the end of fiscal year 1999, the Board of Directors declared
on October 13, 1999, an $0.08 per common share dividend for Fiscal Year 1999,
payable on December 10, 1999 to shareholders of record on November 22, 1999--see
Note 9 to the Consolidated Financial Statements.
</FN>
</TABLE>
-21-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
As described in Part I, Items 1 & 2, "Business and Properties," on March 27,
1998, the Company completed the Distribution, Acquisition, and Refinancing. As a
result, the assets, liabilities, and business operations of the Company as of
September 3, 1999 and for the year then ended have changed substantially
compared to prior periods presented.
In particular, the most significant differences relate to the following:
o The 1997 and 1996 Consolidated Statement of Income included revenues, as
well as operating costs and expenses, related to the Distributed
Operations. In the Consolidated Statement of Income, the operations of the
Lodging segment have been combined and included as "Discontinued
Operations, Net of Income Taxes." The MDS and MSLS segments of Contract
Services were also part of the Distribution to shareholders, but remained
part of continuing operations in the historical financial statements. See
Note 1 to the Consolidated Financial Statements.
o As described in Notes 1 through 5 to the Consolidated Financial Statements,
the Company acquired the North American operations of Sodexho Alliance,
S.A. on March 27, 1998. The historical data in 1997 and prior years does
not include the revenue and expenses of the acquired business.
o On March 27, 1998, the Company obtained over $1.3 billion in new debt
through secured and guaranteed credit facilities, with the proceeds used to
repay of over $1.6 billion of existing debt.
o On April 15, 1998, the Company's Board of Directors changed the fiscal year
from the Friday closest to the end of December to the Friday closest to the
end of August, thereby creating a 34-week Transition Period. See Note 1 to
the Consolidated Financial Statements.
Due to these substantial differences in the comparability of the Company's
historical operating results for fiscal year 1999, the Transition Period and
prior fiscal years, management believes that it is meaningful and relevant in
understanding the present and ongoing Company operations to compare the
Company's pro forma operating results for fiscal years 1999, 1998 and 1997,
presented in the "Introduction" section of this report. These pro forma
statements were prepared as if the Distribution, Acquisition, Refinancing and
the implementation of the various related agreements entered into with Marriott
International, Inc. and Sodexho occurred at the beginning of each period. The
pro formas exclude, among other items, certain non-recurring costs such as (i)
costs of the Distribution of $17 million (net-of-tax) in 1998, (ii) an
extraordinary loss related to the early extinguishment of debt of $44 million,
after-tax, and (iii) integration and restructuring charges totaling $16 million
in 1999 and $31 million for 1998. See Notes 1 through 4 to the Consolidated
Financial Statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company, which analyzes the major elements of the Company's
consolidated statements of operations and financial condition, should be read in
conjunction with the detailed information and consolidated financial statements,
and related Notes to Consolidated Financial Statements, included in this report.
SEASONAL NATURE OF THE COMPANY'S BUSINESS
The food service and facilities management business has been characterized
historically by seasonal fluctuations in overall demand for services,
particularly in the Education and Schools divisions where sales are stronger
during the fall and spring.
LIMITED GEOGRAPHIC FOCUS
The Company is not currently expected to expand its international presence
beyond Canada. The Trademark License Agreement entered into by the Company and
Marriott International, Inc. gives the Company the right to use the Marriott
name in the U.S. and Canada (and elsewhere only in extremely limited
circumstances). Likewise, the Company entered into a Royalty Agreement with
Sodexho pursuant to which Sodexho licenses the right to use the "Sodexho" name
in the U.S. and Canada. As a practical matter, since the Company will only be
allowed to use its corporate name in the U.S. and Canada, and since Sodexho
controls or has a significant interest in companies operating in other countries
in the food and facilities management industries, it is unlikely that the
Company will engage in significant operations outside the U.S. and Canada. As a
result, the Company will be more susceptible to a downturn in the U.S.
and Canadian economies than a company that is actively engaged in various other
markets.
-22-
<PAGE>
BUSINESS STRATEGY
The Company's key financial objective is to generate higher revenues and
increase cash flow from operations through new contract sales, the retention of
existing contracts, and improved efficiencies in the Company's operations. This
financial objective is designed to build on the performance strengths of the
Company, which include expanding relationships with existing clients, attracting
new business, identifying under-penetrated and rapidly growing segments of the
food and facilities management industry, and seeking selective strategic
acquisition candidates compatible with this objective.
In 1999, the Company substantially completed the integration of the number one
and number four market leaders in the U.S. food and facilities management
services industry. The focus during the year has been setting common goals and
the merging of best practices and business strategies. The Company successfully
aligned its management team, consolidated its systems and processes for improved
operations, and developed integrated business strategies.
The Company is positioned to capitalize on the current trend for outsourcing
services. As increasing cost pressures force organizations to focus on their
core business, the demand for outsourcing services is growing. The total market
is estimated at $113 billion in North America, with 75% of potential food and
facilities management outsourcing business still self-operated. The Company is
focusing on building the organization where resources are closest to the units,
facilitating the local managers ability to adapt to the clients needs.
Additionally, the Company wants to focus on the markets and sub-markets that
have the most growth potential and that match up well with the Company's core
services. During the past year, the Company made significant progress in
segmenting all of its markets in terms of size, penetration, needs, growth and
profitability. The results of this process provide the basis for choosing the
steps the Company will take to strengthen its leadership position and to target
specific high potential markets.
An integral part of the Company's business strategy has been the design and
implementation of the Company-wide incentive program, which is predominately
based on the achievement of predetermined financial targets and operational
performance objectives. During the Transition Period, the Board of Directors
granted 1.8 million shares in the form of incentive stock options to the
managing employees of the Company. These grants have extended further down in
the management structure than previous grants issued prior to the
Transactions--see Note 9 to Consolidated Financial Statements. In addition, the
Company expects to issue approximately 2.5 million new stock option awards in
the first half of fiscal year 2000, which are anticipated to include one-time
grants for eligible unit general managers of the Company.
In fiscal year 1999, efficiencies in the procurement and distribution processes,
when combined with the administrative savings, resulted in an estimated $25
million in aggregate savings for the year. The Company expects that the
procurement and distribution process savings will account for approximately
two-thirds of the estimated $60 million in annual synergies which the Company
expects to realize by the year 2001. While no assurance can be given that this
objective will be met, management believes it is attainable as seen in the
results for fiscal year 1999. Anticipated incremental synergies generated in
fiscal year 2000 are expected to be reinvested during fiscal year 2000. The
reinvestments, which are targeted primarily for additional sales and management
personnel, have already begun. In addition, the Company has undertaken an
information systems strategy study to evaluate the current state of its
information systems, and consider information technology options. Among the
options under consideration is the adoption of certain elements of the
technology platform adopted by Sodexho Alliance. This evaluation will require
additional time to study and review alternatives and their impact on capital
investments, earnings, shareholder value and the provisions of the Company's
debt agreements. Strategic developments in this area are expected to be
finalized during Fiscal Year 2000. See Item 7.--Liquidity and Capital Resources.
-23-
<PAGE>
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the 53-week period ended September 3, 1999 ("Fiscal Year 1999") as
compared with the 34-week period ended August 28, 1998 (the "Transition Period")
presented in the Selected Consolidated Financial Highlights above. The
discussion below also presents an analysis of fiscal years ended January 2, 1998
(52 weeks) and January 3, 1997 (53 weeks). As detailed above, due to the
substantial differences in the comparability of the Company's historical
operating results for Fiscal Year 1999, the Transition Period and prior fiscal
years, management believes that it is more meaningful and relevant, in
understanding the present and ongoing operations of the Company, to review the
Company's pro forma operating results for fiscal years 1999, 1998, and 1997,
presented in the "Introduction" section of this report.
HISTORICAL 53 WEEKS ENDED SEPTEMBER 3, 1999 COMPARED WITH THE 34 WEEKS ENDED
AUGUST 28, 1998.
Total sales for Fiscal Year 1999 were $4.5 billion, an increase of $1.7 billion,
or 59.2% compared with $2.8 billion for the Transition Period. The significant
increase between the periods was due to the 19 additional weeks reported in
Fiscal Year 1999, partially offset by the first 12 weeks of the Transition
Period including sales from the Marriott Distribution Services ("MDS") and
Marriott Senior Living Services ("MSLS") divisions that were distributed to
shareholders on March 27, 1998 (as detailed in Notes 1 through 4 to Consolidated
Financial Statements). Excluding the MDS and MSLS divisions, total sales
increased $2 billion, or 79.6%. Solid sales growth in comparable accounts was
partially offset by a lower retention rate for the Transition Period. Retention
rates, particularly in the Health Care and Education divisions, improved in
Fiscal Year 1999, which will favorably impact fiscal year 2000's sales growth.
Operating profit before corporate items totaled $304 million for Fiscal Year
1999, more than double the $119 million for the 1998 Transition Period.
Excluding $2 million and $10 million in integration and restructuring costs in
Fiscal Year 1999 and the Transition Period, respectively, operating profit would
have totaled $306 million for Fiscal Year 1999 and $129 million for the
Transition Period. This increase was the result of the 19 week difference
between the periods as well as increased margins, largely due to purchasing and
administrative synergies between the periods. These increases were partially
offset by challenges in the health care industry, which resulted in charges
totaling $3 million to operating profit for Fiscal Year 1999 to record
additional bad debt reserves due to three client bankruptcies during the year.
Corporate items totaled $212 million, an increase of $61 million, or 40%, when
compared to $151 million for the Transition Period. Excluding integration
expenses totaling $14 million for Fiscal Year 1999 and integration and
restructuring expenses of $21 million for the Transition Period, adjusted
corporate items totaled $198 million and $130 million, an increase of $68
million, or 52%. This increase reflects the over 50% increase in the number of
operating weeks between the periods. In addition, the benefits from the
elimination of certain positions after the Transactions along with other
administrative synergies were more than offset in the current fiscal year by a
one-time, $3.4 million pretax charge related to the resignation of the former
Chief Executive Officer and $5 million pretax of Year 2000 related costs (see
"Year 2000"). Fiscal Year 1999 also included the favorable impact from the sale
of the Company's Bright Horizons Family Solutions ("BFAM") investment, resulting
in a cumulative pretax gain of $8.3 million, or $4.6 million after-tax ($0.07
per diluted common share).
Excluding the Year 2000 costs, integration expenses and the one-time resignation
charge, total operating costs, corporate expenses and amortization of intangible
assets represented, in the aggregate, 95.7% of total sales for Fiscal Year 1999
compared with the Transition Period's comparable period ratio of 98.1%. The
Company anticipates this margin will continue to improve in the periods ahead,
as the Company continues to realize purchasing synergies. Together with the
synergies from administrative actions, these savings are anticipated to reach
$60 million annually by fiscal year 2001. Synergies from both purchasing and
administrative actions are estimated to be $25 million in the current year.
Anticipated incremental synergies generated in fiscal year 2000 are expected to
be reinvested during fiscal year 2000. The reinvestments, which are targeted
primarily for additional sales and management personnel, have already begun. In
addition, the Company has undertaken an information systems strategy study to
evaluate the current state of its information systems, and consider information
technology options. Among the options under consideration is the adoption of
certain elements of the technology platform adopted by Sodexho Alliance. This
evaluation will require additional time to study and review alternatives and
their impact on capital investments, earnings, shareholder value and the
provisions of the Company's debt agreements. See "Liquidity and Capital
Resources."
-24-
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
HISTORICAL 53 WEEKS ENDED SEPTEMBER 3, 1999 COMPARED WITH THE 34 WEEKS ENDED
AUGUST 28, 1998, CONTINUED.
Total income from continuing operations before taxes was $108 million, excluding
$16 million of integration charges, versus a comparable $1 million loss from
continuing operations for the Transition Period. This significant increase was
due to the 19 additional weeks of operations in the current year, in addition to
increased operating margins as well as administrative and purchasing synergies.
The Transition period included Discontinued Operations, net of income taxes,
totaling $77 million, reflecting the results of the lodging segment prior to the
Transactions. The Transition Period also included a loss from an extraordinary
item totaling $44 million, or $0.85 per share, from the redemption and
defeasance of debt (see Note 1 to Consolidated Financial Statements).
HISTORICAL 34 WEEKS ENDED AUGUST 28, 1998 COMPARED WITH THE 52 WEEKS ENDED
JANUARY 2, 1998.
Total sales for the Transition Period were $2.8 billion, a decrease of $2.2
billion, or 43.7% compared with $5.0 billion for Fiscal Year 1997. The
significant decrease between the periods was due to the 35% decrease in the
number of weeks reported, in addition to the $1.45 billion decrease from the
Marriott Distribution Services ("MDS") and Marriott Senior Living Services
("MSLS") divisions that were distributed to shareholders on March 27, 1998 (as
detailed in Notes 1 through 3 to Consolidated Financial Statements). Excluding
the MDS and MSLS divisions, and with no adjustment for the difference in the
number of weeks reported, total sales decreased $750 million, or 23.0%.
Operating profit before corporate items totaled $119 million for the Transition
Period, a decrease of $38 million, or 24.2%, compared with the $157 million for
Fiscal Year 1997. Excluding $10 million in integration costs in the Transition
Period and a $22 million pretax loss from the sale of MMS- UK in Fiscal Year
1997 operating profit would have totaled $129 million for the Transition Period
and $179 million for Fiscal Year 1997, a decrease of $50 million, or 27.9%. This
decrease was the result of the 18 week difference between the periods and the
$14 million decrease in operating profit from the MDS and MSLS divisions, which
were partially offset by increased margins between the periods, especially in
the Corporate Services division from the continued success of the Crossroads
Cuisines marketing strategy.
Corporate items totaled $151 million, a decrease of $21 million, or 12%, when
compared to $172 million for Fiscal Year 1997. Excluding integration and
restructuring expenses of $21 million for the Transition Period, adjusted
corporate items totaled $130 million for the Transition Period, an adjusted
decrease of $42 million, or 24%. This decrease reflects the 35% decrease in the
number of operating weeks between the periods, though the Transition Period
includes the Stub Period expenses of Sodexho North America's operations.
Excluding integration and restructuring expenses, total operating costs,
corporate expenses and amortization of intangible assets represented, in the
aggregate, 98.1% of total sales for the Transition Period compared with Fiscal
Year 1997's comparable period ratio of 98.7%. The Company anticipates this
margin will continue to improve in the periods ahead, as the Company continues
to realize purchasing synergies. Together with the synergies from administrative
actions, these savings are anticipated to reach $60 million annually by fiscal
year 2001. Synergies from both purchasing and administrative actions are
estimated to be $25 million in the current year. Anticipated incremental
synergies generated in fiscal year 2000 are expected to be reinvested during
fiscal year 2000. The reinvestments, which are targeted primarily for additional
sales and management personnel, have already begun. In addition, the Company is
evaluating participation in the development of Sodexho Alliance's information
technology platform. This evaluation will require additional time to study and
review alternatives and their impact to earnings, shareholder value and the
provisions of the Company's debt agreements. See "Liquidity and Capital
Resources."
Total loss from continuing operations before taxes was $1 million, excluding $31
million of integration and restructuring charges, for the Transition Period.
This compares with income from continuing operations before taxes of $7 million
for Fiscal Year 1997, excluding the $22 million pretax loss from the sale of
MMS- UK operations. This decrease is the result of the decrease of 18 weeks of
operations in the current period, most of which include strong operational weeks
for the Education and Schools divisions. The Transition period included
Discontinued Operations, net of income taxes, totaling $77 million, reflecting
the results of the lodging segment prior to the Transactions. Fiscal Year 1997
included Discontinued Operations, net of income taxes, totaling $335 million,
reflecting a full year of the lodging segment. The Transition Period also
included a loss from an extraordinary item totaling $44 million, or $0.85 per
share, from the redemption and defeasance of debt (see Note 1 to Consolidated
Financial Statements).
-25-
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
HISTORICAL 52 WEEKS ENDED JANUARY 2, 1998 COMPARED WITH 53 WEEKS ENDED
JANUARY 3, 1997.
The Company reported a 1% increase in operating profit from continuing
operations on 16% higher sales in fiscal 1997, before the $22 million loss on
the sale of the MMS- UK operations to Sodexho. Profit comparisons between years
were affected by sales to investors during 1996 and 1997 of 43 senior living
communities, which were part of the Company's MSLS division that was distributed
to shareholders on March 27, 1998. Before the impact of the Distribution and
sale of the MMS- UK operations, operating profits from continuing operations
increased 11% over fiscal 1996. Operating profit was also adversely affected by
start-up losses for new distribution centers and distribution accounts from the
MDS division.
Before the loss on the sale of the MMS- UK operations, operating profits,
excluding MDS and MSLS, were 14% higher on a sales increase of 3% percent in
fiscal 1997. Sales and profits increased due to new contracts, expanded service
to ongoing accounts and continued cost reductions in several areas. The
Corporate Services, Health Care, Education and Schools divisions were the main
contributors to the profit growth.
MSLS, which was part of the Distribution on March 27, 1998, reported a sales
increase of 28% in fiscal 1997 over 1996, primarily due to the opening of 17
communities during 1997 and a two percentage point increase in occupancy, to
95%, for comparable properties. The Company sold 43 senior living properties to
investors since the beginning of 1996, retaining long-term operating agreements.
Operating profits declined as "ownership profits" from these properties were
replaced with "managed operating profits." This reduction in operating profit
was offset by a corresponding reduction in interest expense.
MDS, which was also part of the Distribution on March 27, 1998, had sales move
up sharply in fiscal 1997 as a result of the addition of several major
restaurant customers and the net addition of two new distribution centers.
Profits, however, were lower in fiscal 1997 due to start-up costs associated
with the new centers, as well as costs involved in integrating the new business
into existing distribution centers.
Corporate expenses rose 19% in 1997, due to noncash items associated with
investments generating significant income tax benefits, as well as modest staff
increases to accommodate growth and new business development. Interest expense
increased 29% over fiscal 1996 despite lower effective interest rates. The
average debt balance increased due to the acquisition of RHG, partially offset
by proceeds from sales of hotels and senior living communities.
Discontinued Operations, comprising the lodging division, had an operating
profit increase of 26% on 20% higher sales, benefiting from favorable conditions
in the U.S. lodging market, and contributions from new properties. The revenue
increase resulted from average growth across all brands of eight percent. This
revenue growth resulted in higher base management and franchise fees. Revenue
growth also contributed to higher house profits, which resulted in higher
incentive management fees.
The Company's net effective income tax rate for continuing and discontinued
operations increased to 39.5% in 1997, compared to 39% in 1996, reflecting
approximately a one percentage point increase due to the RHG acquisition and the
Company's ongoing participation in jobs and affordable housing tax credit
programs.
Net income increased nine percent to $335 million in fiscal 1997, on a sales
increase of 18% to $12 billion when including the sales from discontinued
operations, driven by contributions from new unit expansion and strong profit
growth for the Discontinued segment, partially offset by the loss on the sale of
the MMS- UK operations to Sodexho and the impact of the Renaissance Hotel Group
(RHG) acquisition. Diluted earnings per share increased 16% to $10.53,
reflecting higher net income. Before the loss on sale of the MMS- UK operations
and the impact of the RHG acquisition, net income and diluted earnings per share
increased 20%.
-26-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to capitalize on its combined market presence as well as
focusing on attracting new accounts and enhancing services to sustain growth.
The Company is highly leveraged and 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.
Capital requirements are funded from a combination of existing cash balances and
operating cash flow. Additionally, the Company anticipates achieving annual cost
savings of approximately $60 million pretax by the end of fiscal year 2001,
resulting from purchasing actions and administrative synergies. The anticipated
cost savings, which the Company estimates were approximately $25 million in
Fiscal Year 1999, will be available to pay down debt and reinvest in the Company
to fund activities to enhance its competitive position. Anticipated incremental
synergies generated in fiscal year 2000 are expected to be reinvested during
fiscal year 2000. These reinvestments, which are targeted primarily for
additional sales and management personnel, have already begun. In addition, the
Company has undertaken an information systems strategy study to evaluate the
current state of its information systems, and consider information technology
options. Among the options under consideration is the adoption of certain
elements of the technology platform adopted by Sodexho Alliance. This evaluation
will require additional time to study and review alternatives and their impact
on capital investments, earnings, shareholder value and the provisions of the
Company's debt agreements. Strategic developments in this area are expected to
be finalized during Fiscal Year 2000. See Item 1.--Integration and Restructuring
and Item 7.--Liquidity and Capital Resources. Subject to the foregoing, the
Company believes that current cash flow generated from operations and cash
balances will be adequate to finance ongoing capital needs, meet debt service
requirements and fund the Company's planned growth initiatives.
As of September 3, 1999, the Company had a $235 million revolving credit
facility available at an interest rate of 7.55% to provide funds for liquidity,
seasonal borrowing needs and other general corporate purposes. At September 3,
1999, $52 million of this facility was outstanding, while an additional $33
million of this revolving credit facility was utilized by letters of credit
outstanding, principally related to insurance programs.
Prior to the Transactions, the Company paid regular quarterly dividends. On
October 13, 1999, the Board of Directors declared an $0.08 per common share
dividend for Fiscal Year 1999, payable on December 10, 1999 to shareholders of
record on November 22, 1999. The Company may pay dividends in the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to 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 continue to
closely monitor the results of the Company's operations, capital requirements,
and other considerations to determine the extent to which a dividend may be
declared in future periods.
The Company is required to make quarterly cash interest payments on its term and
guaranteed facilities, as well as scheduled principal repayments on its Senior
Secured Credit Facility (as detailed in Note 8 to Consolidated Financial
Statements). Annual interest expense was $88 million for the 53-week period
ended September 3, 1999 ($87 million on an annualized basis). Principal
repayments totaled $70 million in fiscal year 1999; with scheduled repayments of
approximately $80 million in 2000; $80 million in 2001; $90 million in 2002;
$115 million in 2003 and $65 million in 2004.
On October 7, 1999, Marriott International notified all holders of the LYONs,
that Marriott International had elected to redeem all of the LYONs at a price of
$619.65 for each $1,000 principal amount at maturity of the LYONs, with a
redemption date of November 8, 1999. Conversion is available at any time until
the close of business on the redemption date. The maximum amount of funds that
the Company would be obligated to pay to Marriott International if all the LYONs
were redeemed for cash is approximately $30 million. This amount would be paid
to Marriott International in the first quarter of fiscal year 2000--See Note 8
to Consolidated Financial Statements.
-27-
<PAGE>
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. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. 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 arising from the
historical computer programming practice of using two digits rather than four
digits to signify dates (e.g. "00" instead of "2000"). This practice could cause
the Company's owned and operated computer-based technology to process dates
incorrectly because of an inability to distinguish properly between 1900 and
2000, and 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.
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.
The Company 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 each of the following areas of
concentration for the Project:
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 Steering Committee is also tasked with estimating and controlling the
associated costs of the Project. Additionally, the Company 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. The Company's methodology involves eight phases for the Project: (1)
awareness, (2) inventory, (3) assessment, (4) remediation, (5) testing and
validation, (6) implementation, (7) contingency planning and (8) crisis
management/business continuity.
INFORMATION TECHNOLOGY SYSTEMS
The inventory and assessment phases for the IT systems began in 1996. For
internally developed mainframe software, the Company not only has completed
these two phases, but also has completed testing, third party validation, and
implementation of compliant versions of the software.
With respect to other internally developed software, third party software and
personal computers, which are used at most of the Company's operating locations
to support unit level financial and operating systems, the Company has completed
the inventory and assessment of these items. The Company also completed testing
and third party validation of its internally developed software and has acquired
compliant versions of all of its third party software. The Company is working
with clients and other external entities to validate the compliance status of
their systems.
-28-
<PAGE>
YEAR 2000, CONTINUED
The rollout of compliant versions of all software and of personal computers to
replace those the Company owns and the removal of non compliant systems are on
schedule to be substantially complete by October 31, 1999. Considering the large
number and geographic diversity of the Company's operating locations, 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.
NON-INFORMATION TECHNOLOGY SYSTEMS
The Company has also surveyed and assessed 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. In some Health Care division accounts the
Company provides, either directly or through subcontractors, certain maintenance
services related to biomedical equipment. Because these facilities systems
reside at client sites, they are generally not under the Company's control, and
responsibility for these systems generally rests with the client. The assessment
of these systems 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 continues to obtain up-to-date 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. At this time, the Company anticipates sporadic
outages of limited duration, however the Company believes its contingency plans
in place are sufficient to address this degree of potential disruption.
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.
To manage potential points of failure, the Company has developed contingency
plans designed to mitigate the potential disruptions that may result from the
Year 2000 issue. In general, because the Company has had much experience with
power outages, equipment failures, etc., in its normal course of business, the
Company believes it is prepared for potential Year 2000 disruptions. Contingency
plans and associated cost estimates are generally complete, and will be
continually refined as additional information becomes available. The Company
believes that its business continuity planning should significantly reduce the
adverse effects any disruptions may have.
COSTS. The Company had originally estimated that the pretax costs to be borne by
it to address the Year 2000 issue would be approximately $5-8 million
principally for modification, testing, validation, project management and
contingency and business continuity planning. These costs are being expensed as
incurred and funded from operating cash flow. Through Fiscal Year 1999,
approximately $5.5 million had been incurred and expensed, and the Company now
anticipates spending a total of approximately $8 million for this Project. Thus,
approximately $2.5 million will be incurred and expensed for this Project in
Fiscal Year 2000. The Company does not separately identify certain internal
costs incurred for the Project, most of which are related to the Company's
internal 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 remaining 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 and the severity and duration of the impact of Year
2000 on the Company's business.
-29-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates
(after adjusting for hedge positions outstanding) as well as notes receivable
which earn a variable rate of interest (see Note 8 to the Consolidated Financial
Statements). However, changes in interest rates also impact the fair value of
the Company's debt, totaling $1.1 billion at September 3, 1999. If interest
rates increased by 100 basis points, the fair value of the Company's debt would
have decreased by approximately $21 million, while a 100 basis point decrease in
rates would have increased the fair value of the Company's debt by approximately
$22 million, based on balances at September 3, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
PAGE(S)
-------
Management's Report 31
Reports of Independent Public Accountants 32-33
Consolidated Statement of Income 34
Consolidated Balance Sheet 35
Consolidated Statement of Cash Flow 36
Consolidated Statement of Stockholders' Equity 37
Notes to Consolidated Financial Statements 38-58
Supplementary Data 59
-30-
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other financial information presented in this report.
In meeting this responsibility, the Company maintains a highly developed system
of internal controls, policies and procedures, including an internal auditing
function that continually evaluates the adequacy and effectiveness of its
control system. Management believes this system provides reasonable assurance
that transactions are properly authorized and recorded to adequately safeguard
the Company's assets and to permit preparation of the financial statements in
accordance with generally accepted accounting principles.
The financial statements presented herein were prepared on a historical basis
for Fiscal Year 1999, the Transition Period of January 3, 1998 to August 28,
1998, and for the calendar years 1997 and 1996, as described in Note 1 to the
Consolidated Financial Statements. In addition, pro forma fiscal years 1997
through 1999 are presented in the Introduction section of this report.
Management believes that this presentation is the most meaningful to
shareholders and other users of these financial statements. The pro forma
results were prepared by applying certain pro forma adjustments to the audited
historical results of Marriott International, Inc. and the acquired North
American operations of Sodexho Alliance, S.A.
The historical consolidated financial statements for Fiscal Year 1999 and for
the Transition Period in 1998 have been audited by PricewaterhouseCoopers LLP,
independent public accountants. The historical consolidated financial statements
for 1997 and 1996 have been audited by Arthur Andersen LLP, independent public
accountants. Their reports, included in this report, express an informed
judgment as to whether management's historical consolidated financial statements
present fairly the Company's financial position and results of operation in
conformity with generally accepted accounting principles. The pro forma
financial statements included herein do not represent actual historical results
of the Company and as such are not audited.
The Board of Directors fulfills its responsibility for the financial statements
through its Audit Committee, composed of three directors not otherwise employed
by the Company. The committee meets a minimum of two times during the year with
the independent public accountants, representatives of management and the
internal auditors to review the scope and results of the internal and external
audits, the accounting principles applied in financial reporting, and financial
and operational controls. The independent public accountants and internal
auditors have unrestricted access to the Audit Committee with and without the
presence of management.
/s/ MICHEL LANDEL /s/ LAWRENCE E. HYATT /s/ LOTA S. ZOTH
Michel Landel Lawrence E. Hyatt Lota S. Zoth
President and Senior Vice President and Vice President,
Chief Executive Officer Chief Financial Officer Corporate Controller and
Chief Accounting Officer
-31-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Sodexho Marriott Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and stockholders' equity and of cash flow
present fairly, in all material respects, the financial position of Sodexho
Marriott Services, Inc. and its subsidiaries at September 3, 1999 and August 28,
1998 and the results of their operations and their cash flow for the fifty-three
weeks and thirty-four weeks then ended, respectively, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
October 8, 1999
-32-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sodexho Marriott Services, Inc.:
We have audited the accompanying consolidated balance sheet of Sodexho Marriott
Services, Inc. (formerly "Marriott International, Inc.") as of January 2, 1998,
and the related consolidated statements of income, cash flow, and stockholders'
equity for each of the two fiscal years in the period ended January 2, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sodexho Marriott
Services, Inc. as of January 2, 1998, and the results of its operations and its
cash flow for each of the two fiscal years in the period ended January 2, 1998,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Vienna, VA
February 3, 1998 (except with respect to the matters discussed in Notes
2 and 14, as to which the date is October 7, 1998)
-33-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1999, THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND
FOR FISCAL YEARS ENDED JANUARY 2, 1998 AND JANUARY 3, 1997
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JANUARY 3 TO
AUGUST 28,
1999 1998 1997 1996
-------------------- ------------------- -------------------- ------------------
(53 WEEKS) (34 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C>
SALES $4,502 $2,828 $5,026 $4,318
OPERATING COSTS AND EXPENSES
Operating expenses 4,198 2,709 4,847 4,141
Loss on sale of MMS- UK operations - - 22 -
-------------------- ------------------- -------------------- ------------------
4,198 2,709 4,869 4,141
-------------------- ------------------- -------------------- ------------------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST 304 119 157 177
Corporate expenses, including
amortization of intangible assets (133) (97) (94) (79)
Interest expense (88) (65) (110) (85)
Interest income 1 11 32 37
Gain on sale of investment 8 - - -
-------------------- ------------------- -------------------- ------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS, BEFORE TAXES AND
EXTRAORDINARY ITEM 92 (32) (15) 50
(Provision) Benefit for Income Taxes from
Continuing Operations (41) 13 15 (17)
-------------------- ------------------- -------------------- ------------------
Income (Loss) From Continuing Operations, Before
Discontinued Operations and Extraordinary Item 51 (19) - 33
Discontinued Operations, Net of Income Taxes - 77 335 273
-------------------- ------------------- -------------------- ------------------
Income Before Extraordinary Item 51 58 335 306
Loss from Extraordinary Item, Net of Income Taxes - (44) - -
-------------------- ------------------- -------------------- ------------------
NET INCOME $ 51 $ 14 $ 335 $ 306
==================== =================== ==================== ==================
BASIC EARNINGS (LOSS) PER SHARE:
Continuing Operations $ 0.82 $(0.36) $ - $ 1.03
Discontinued Operations - 1.48 10.53 8.56
-------------------- ------------------- -------------------- ------------------
0.82 1.12 10.53 9.59
Extraordinary Item - (0.85) - -
-------------------- ------------------- -------------------- ------------------
BASIC EARNINGS PER SHARE $ 0.82 $ 0.27 $10.53 $ 9.59
==================== =================== ==================== ==================
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing Operations $ 0.81 $(0.36) $ - $ 0.97
Discontinued Operations - 1.48 10.53 8.08
-------------------- ------------------- -------------------- ------------------
0.81 1.12 10.53 9.05
Extraordinary Item - (0.85) - -
-------------------- ------------------- -------------------- ------------------
DILUTED EARNINGS PER SHARE $ 0.81 $ 0.27 $10.53 $ 9.05
==================== =================== ==================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
-34-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 3, 1999, AUGUST 28, 1998 AND JANUARY 2, 1998
($ IN MILLIONS)
SEPTEMBER 3, AUGUST 28, JANUARY 2,
1999 1998 1998
----------------- ----------------- -------------------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and equivalents $ 48 $ 79 $ 139
Accounts and notes receivable, net 445 374 487
Inventories 60 54 116
Other 89 98 77
Net current assets from discontinued operations - - 95
----------------- ----------------- -------------------
Total current assets 642 605 914
----------------- ----------------- -------------------
Property and equipment, net 85 82 505
Intangible assets, net 535 569 388
Investments in affiliates 7 5 197
Other 78 80 198
Net noncurrent assets of discontinued operations - - 2,807
----------------- ----------------- -------------------
$1,347 $1,341 $5,009
================= ================= ===================
LIABILITIES AND STOCKHOLDERS' (DEFICIT)/EQUITY
Current Liabilities
Current portion of long-term debt $ 133 $ 96 $ 23
Accounts payable 238 222 548
Accrued payroll and benefits 327 301 358
Other current liabilities 20 27 220
Payable to affiliates for excess net tangible assets - 49 -
----------------- ----------------- -------------------
Total current liabilities 718 695 1,149
----------------- ----------------- -------------------
Long-term debt 980 1,062 1,519
Other long-term liabilities 113 110 568
Convertible subordinated debt 30 29 310
Commitments and Contingencies (Note 11)
Stockholders' (deficit)/equity
Preferred stock, no par value, 1 million shares
Authorized; no shares issued - - -
Common stock, $1 par value; 300 million,
75 million and 75 million authorized; 62.3 million,
61.9 million and 31.5 million shares issued
and outstanding 62 62 32
Additional paid-in capital 1,326 1,322 805
(Accumulated deficit)/Retained earnings (1,884) (1,946) 822
Accumulated other comprehensive income (expense) 2 7 (12)
Treasury stock, at cost - - (184)
----------------- ----------------- -------------------
Total stockholders' (deficit)/equity (494) (555) 1,463
----------------- ----------------- -------------------
Total liabilities and stockholders' (deficit)/equity $1,347 $1,341 $5,009
================= ================= ===================
</TABLE>
See Notes to Consolidated Financial Statements.
-35-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR FISCAL YEAR 1999, THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND
FISCAL YEARS ENDED JANUARY 2, 1998 AND JANUARY 3, 1997
($ IN MILLIONS)
JANUARY 3 TO
AUGUST 28,
1999 1998 1997 1996
------------------ ------------------ ------------------- -----------------
(53 WEEKS) (34 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
- -------------------------------------
Net income $ 51 $ 14 $ 335 $ 306
Adjust to reconcile net income to cash and equivalents:
Income from discontinued operations - (77) (335) (273)
Extraordinary item - extinguishment of debt - 44 - -
Gain on sale of investment (8) - - -
Depreciation and amortization expense 85 57 99 101
(Benefit) provision for deferred taxes (5) 6 (2) (2)
Changes in working capital (18) 128 67 57
Changes in discontinued operations - 131 271 397
Other - (2) 142 6
------------------ ------------------ ------------------- -----------------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 105 301 577 592
------------------ ------------------ ------------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES
- -----------------------------------
Capital expenditures (72) (86) (282) (170)
Net cash - acquisitions - 24 - (331)
Dispositions 26 29 441 60
Net decrease in loans to affiliates - - 4 44
Cash from distributed operations - (305) - -
Net investment in discontinued operations - (113) (1,118) (99)
Other (50) (160) (86) (53)
------------------ ------------------ ------------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (96) (611) (1,041) (549)
------------------ ------------------ ------------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES
- -----------------------------------
Proceeds from the issuance of long-term debt - 1,820 687 -
Repayments of long-term debt (70) (1,900) (18) (137)
Proceeds from issuance of convertible subordinated debt - - - 288
Proceeds from issuance of common stock for Acquisition - 304 - -
Common stock issued - ESOP & other 4 72 40 43
Purchases of treasury stock - (35) (191) (158)
Dividends paid - common - (11) (43) (40)
Other 26 - - -
------------------ ------------------ ------------------- -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (40) 250 475 (4)
------------------ ------------------ ------------------- -----------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS $ (31) $ (60) $ 11 $ 39
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 79 139 128 89
------------------ ------------------ ------------------- -----------------
CASH & CASH EQUIVALENTS END OF PERIOD $ 48 $ 79 $ 139 $ 128
================== ================== =================== =================
SUPPLEMENTAL:
Interest paid - continuing operations $ 87 $ 64 $ 96 $ 57
Income tax payments - continuing operations 37 23 19 35
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for Acquisition $ - $ 275 $ - $ -
</TABLE>
See Notes to Consolidated Financial Statements.
-36-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 3, 1999, THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND
FISCAL YEARS ENDED JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED
(ACCUMULATED OTHER
COMMON ADDITIONAL DEFICIT)/ COMPREHENSIVE TREASURY
SHARES COMMON PAID-IN RETAINED INCOME STOCK,
OUTSTANDING STOCK CAPITAL EARNINGS (EXPENSE) AT COST TOTAL
- ---------------- ------------------------------- ----------- ------------- ----------------- ---------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
31.4 Balance, December 29, 1995 $32 $ 716 $ 395 $(2) $ (87) $ 1,054
- Net income - - 306 - - 306
- Foreign exchange translation - - - 1 - 1
----------- ------------- ----------------- ---------------- ------------ ---------
- TOTAL COMPREHENSIVE INCOME - - 306 1 - 307
----------- ------------- ----------------- ---------------- ------------ ---------
Employee stock plan
0.9 issuance and other - 35 (32) - 100 103
- Dividends ($1.28 per share) - - (41) - - (41)
(0.8) Purchases of treasury stock - - - - (163) (163)
- ---------------- ------------------------------- ----------- ------------- ----------------- ---------------- ------------ ---------
31.5 Balance, January 3, 1997 32 751 628 (1) (150) 1,260
- Net income - - 335 - - 335
- Unrealized gain on securities - - - 5 - 5
- Foreign exchange translation - - - (16) - (16)
----------- ------------- ----------------- ---------------- ------------ ---------
- TOTAL COMPREHENSIVE INCOME - - 335 (11) - 324
----------- ------------- ----------------- ---------------- ------------ ---------
Employee stock plan
0.8 issuance and other - 54 (97) - 173 130
- Dividends ($1.40 per share) - - (44) - - (44)
(0.8) Purchases of treasury stock - - - - (207) (207)
- ---------------- ------------------------------- ----------- ------------- ----------------- ---------------- ------------ ---------
31.5 Balance, January 2, 1998 32 805 822 (12) (184) 1,463
- Net income - - 14 - - 14
- Unrealized gain on securities - - - 1 - 1
- Foreign exchange translation - - - (6) - (6)
----------- ------------- ----------------- ---------------- ------------ ---------
- TOTAL COMPREHENSIVE INCOME - - 14 (5) - 9
----------- ------------- ----------------- ---------------- ------------ ---------
- Distribution to shareholders - - (2,715) 24 - (2,691)
Shares issued to Sodexho--
29.9 related to the Acquisition 30 549 - - - 579
Employee stock plan
0.6 issuance and other - (32) (56) - 160 72
- Dividends ($0.36 per share) - - (11) - - (11)
(0.1) Purchases of treasury stock - - - - (35) (35)
- Cancellation of treasury stock - - - - 59 59
- ---------------- ------------------------------- ----------- ------------- ----------------- ---------------- ------------ ---------
61.9 Balance, August 28, 1998 62 1,322 (1,946) 7 - (555)
- Net income - - 51 - - 51
Reclassification of gain
- realized in net income, net - - - (5) - (5)
- Foreign exchange translation - - - 1 - 1
- Other - - - (1) - (1)
----------- ------------- ----------------- ---------------- ------------ ---------
- TOTAL COMPREHENSIVE INCOME - - 51 (5) - 46
----------- ------------- ----------------- ---------------- ------------ ---------
Adjustment of distribution to
- shareholders - - 11 - - 11
Employee stock plan
0.4 issuance and other - 4 - - - 4
- ---------------- ------------------------------- ----------- ------------- ----------------- ---------------- ------------ ---------
62.3 Balance, September 3, 1999 $62 $1,326 $(1,884) $ 2 $ - $ (494)
================ =============================== =========== ============= ================= ================ ============ =========
</TABLE>
See Notes to Consolidated Financial Statements.
-37-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping, and
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. ("MI"). Upon
consummation of the Distribution, Acquisition and Refinancing (collectively, the
"Transactions"), which occurred on March 27, 1998, the last day of the first
quarter of 1998, Marriott International, Inc. was renamed Sodexho Marriott
Services, Inc. As of March 27, 1998, the principal business of the Company
changed from lodging and contract services to food and facilities management
services. In connection with the Distribution and Acquisition, the Company began
a restructuring and refinanced its debt. The Transactions are explained in
detail in Notes 2, 3, and 4.
All material intercompany transactions and balances between Sodexho Marriott
Services, Inc., and its consolidated subsidiaries have been eliminated. Certain
amounts previously presented have been reclassified to conform to the current
presentation. Additionally, related to the Distribution on March 27, 1998, the
Company has combined the results of operations, cash flow and balance sheet
items of the lodging segment as "Discontinued Operations" for all periods
presented (see "Distribution" below and Note 2).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements, and the reported amounts of sales and expenses during the
reporting period. Accordingly, ultimate results could differ from those
estimates.
DISTRIBUTION
On March 27, 1998, the Company completed the Distribution to its shareholders,
on a pro rata basis, of all outstanding shares of New Marriott MI, Inc. ("New
Marriott"), a wholly owned subsidiary of the Company, in a tax-free distribution
(the "Distribution"). New Marriott conducts the lodging (including timeshare
resort development and operation), senior living services and distribution
service businesses previously conducted by the Company and changed its name to
Marriott International, Inc. The food service and facilities management business
will continue to be conducted by the Company. Immediately after the
Distribution, the Company acquired the North American food service and
facilities management operations of Sodexho Alliance, S.A. (Sodexho) in exchange
for stock of the Company, with the Company operating the combined food service
and facilities management businesses under the name - Sodexho Marriott Services,
Inc. As a result of the issuance of new shares of the Company's common stock to
Sodexho in connection with the Acquisition, the shareholders who owned 100% of
the Company immediately prior to the Distribution owned approximately 51% of the
Company thereafter. At the same time, the Company obtained financing arranged by
Sodexho, to refinance certain existing indebtedness of the Company.
For the purposes of governing certain of the ongoing relationships between MI
and the Company after the Distribution and to provide for an orderly transition,
MI and the Company entered into various agreements including the Employee
Benefits and Other Employment Matters Allocation Agreement, Liquid Yield
Option(TM) Notes (LYONs) Allocation Agreement (see Note 8), 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) for the year ended January 2, 1998.
-38-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVERSE STOCK SPLIT
The Company also combined every four shares of its common stock into one share
of the Company's common stock pursuant to a reverse stock split on March 27,
1998. All share and per share data has been adjusted to reflect a one-for-four
reverse stock split effective March 27, 1998.
FISCAL YEAR
On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to the end of August, effective immediately. This change resulted
in a 34-week transition period (the "Transition Period") from the end of fiscal
1997 to the end of the new fiscal year on August 28, 1998. The new fiscal 1999
year had 53 weeks and ended on September 3, 1999.
Prior to the 1998 Transition Period, the Company's fiscal year ended on the
Friday nearest to December 31. The 1997 fiscal year included 52 weeks and ended
on January 2, 1998 ("Fiscal 1997" or "1997"). The 1996 fiscal year included 53
weeks and ended on January 3, 1997 ("Fiscal 1996" or "1996").
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 $21 million,
$17 million, and $12 million as of September 3, 1999, August 28, 1998, and
January 2, 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.
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. The majority of these
agreements were entered into in conjunction with the issuance of the debt they
were intended to modify.
The notional balances of these agreements represent a balance used to calculate
the exchange of cash flows and are not assets or liabilities of the Company, in
addition to not representing an exposure to credit loss. The notional amount and
interest payment of these agreements match the cash flows of the related debt.
Accordingly, any market risk or opportunity associated with these agreements is
offset by the opposite market impact on the related debt. The Company's credit
risk related to interest-rate agreements is considered low because they are
entered into only with strong creditworthy counterparties and are generally
settled on a net basis. The difference paid or received on interest-rate
agreements is recognized as an adjustment to interest expense. See Note 8 for
the notional amounts, related interest rates, maturities, and fair values of
these interest-rate agreements.
-39-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
EXTRAORDINARY ITEM
On March 27, 1998, the Company recognized an extraordinary charge of $71 million
($44 million after the related income tax benefit of $27 million) in connection
with the redemption and defeasance of the Secured Debt. This loss was comprised
of premiums totaling $67 million paid for the redemptions and $4 million of
financing costs.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in fiscal 1997. Under SFAS No. 128, basic earnings
per share is computed by dividing net income by the weighted-average number of
outstanding common shares. Diluted earnings per share is computed by dividing
net income by the diluted weighted-average number of outstanding common shares.
In addition, on March 27, 1998, the Company's common stock underwent a
one-for-four reverse stock split. Earnings per share computations have been
restated to reflect this reverse stock split.
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 September 3, 1999, the Company had $83
million of outstanding drafts included in accounts payable, compared with
outstanding draft totals of $34 million and $193 million at August 28, 1998 and
January 2, 1998, respectively.
INVENTORIES
Inventories consist of food items and supplies, which are stated at the lower of
average cost or market, generally using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from 3 to 40 years. Replacements and improvements are capitalized.
Leasehold improvements, net of estimated residual value, are amortized over the
shorter of the useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and customer relationships. Intangible
assets are amortized on a straight-line basis over periods generally ranging
from 30 to 40 years for goodwill and 10 to 20 years for customer relationships.
Amortization expense for continuing operations totaled $38 million in fiscal
year 1999, $26 million for the Transition Period ended August 28, 1998, $25
million in fiscal year 1997, and $26 million in fiscal year 1996. Amortization
expense for discontinued operations totaled $8 million for the Transition Period
ended August 28, 1998, $42 million in fiscal year 1997 and $8 million in fiscal
year 1996.
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.
-40-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INSURANCE
Except for the period of October 1, 1997 to March 27, 1998, the Company is
partially self-insured for certain levels of workers' compensation, general
liability, employment practices and employee medical coverage. Self-insurance
levels are the result of the Company using certain insurance programs that
include higher deductibles for the Company, resulting in the Company being
"self-insured" for claims below the deductible levels. Estimated costs for these
self-insurance programs are accrued at the present value (discounted at a rate
of 5% at fiscal year end 1999) of projected settlements for known and
anticipated claims. Self-insurance liabilities of the Company amounted to $89
million at September 3, 1999 and $87 million at August 28, 1998. The Company was
fully insured for most claims occurring during the period of October 1, 1997 to
March 27, 1998, as the Company placed certain insurance programs with
third-party providers during the period.
ACCUMULATED OTHER COMPREHENSIVE INCOME
In June 1997, SFAS No. 130--"Reporting Comprehensive Income" was issued,
requiring that certain financial activity typically disclosed in stockholders'
equity be reported in the financial statements as an adjustment to net income in
determining comprehensive income. Items applicable to the Company include
activity in foreign exchange translation adjustments and securities available
for sale under SFAS No. 115. Items identified as comprehensive income are
reported in the Consolidated Balance Sheet and the Consolidated Statement of
Stockholders' Equity, under separate captions.
Results for the Canada division are translated to U.S. dollars using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the applicable balance sheet date, and resulting
translation adjustments are reflected in stockholders' (deficit)/equity as
accumulated other comprehensive income.
Total accumulated other comprehensive income included $3.1 million of gross
foreign exchange translations gains, net of taxes totaling $1.4 million, at
September 3, 1999. At August 28, 1998, total accumulated other comprehensive
income was comprised of $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 January 2, 1998, total accumulated other comprehensive income
was comprised of $28.2 million of gross unrealized securities loss adjustments,
net of taxes totaling $11.0 million, partially offset by gross foreign exchange
translation gains totaling $8.9 million, net of taxes totaling $3.5 million.
During fiscal year 1999, total comprehensive income was comprised of $51 million
in net income and $1.9 million of gross foreign exchange translation gains, net
of taxes totaling $0.9 million, 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. Total comprehensive income for the 34 weeks ended
August 28, 1998, included $14 million in net income and $1.2 million in gross
securities gain adjustments, net of taxes totaling $0.5 million, partially
offset by $10.7 million of gross foreign exchange translation losses, net of
taxes totaling $4.3 million. For fiscal 1997, total comprehensive income was
comprised of $335 million in net income and $8.9 million of gross securities
gain adjustments, net of taxes totaling $3.5 million, partially offset by $26.6
million of gross foreign exchange translation losses, net of taxes totaling
$10.4 million.
SEGMENT REPORTING
In June 1997, SFAS No. 131--"Disclosures about Segments of an Enterprise and
Related Information" was issued requiring the reporting of selected segmented
information in quarterly and annual reports. Information from operating segments
is derived from methods used by the Company's management to allocate resources
and measure performance. The Company is required to disclose profit/loss,
revenues and assets for each segment identified, including reconciliations of
these items to consolidated totals. The Company is also required to disclose the
basis for identifying the segments and the types of products and services within
each segment. SFAS No. 131 was effective for the Company for the Transition
Period ended August 28, 1998 (see Note 14), and quarterly in fiscal 1999,
including the restatement of prior periods reported consistent with this
pronouncement, if practicable.
-41-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements, on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. 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 Consolidated Financial Statements and Notes
thereto have been restated to present the lodging segment distributed to
shareholders as Discontinued Operations. The MDS, MSLS and MMS business make up
the Contract Services segment in the historical financial statements of the
Company. Thus, the distributed operations of MSLS and MDS are presented as
continuing operations prior to the date of distribution, March 27, 1998.
Discontinued Operations, Net of Income Taxes, is comprised of the following:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997 1996
------------------- ------------------ -------------------
($ in millions, except per share amounts)
<S> <C> <C> <C>
Sales $1,774 $7,008 $5,854
Income Before Income Taxes $ 158 $ 569 $ 452
Income Taxes (64) (234) (179)
------------------- ------------------ -------------------
Income -Discontinued Operations $ 94 $ 335 $ 273
Costs Associated with Effecting the Distribution $ (28) $ - $ -
Income Taxes 11 - -
------------------- ------------------ -------------------
Net Costs Associated with Effecting the Distribution $ (17) $ - $ -
------------------- ------------------ -------------------
Discontinued Operations, Net of Income Taxes $ 77 $ 335 $ 273
=================== ================== ===================
Basic Earnings Per Share $ 1.48 $10.53 $ 8.56
Diluted Earnings Per Share $ 1.48 $10.53 $ 8.08
</TABLE>
Results of discontinued operations in 1998 include a pretax charge of $28
million relating to the Distribution detailed above, and was comprised of legal,
administrative and accounting costs to consummate the Distribution. Net
identifiable assets of the Lodging segment totaled $2.90 billion and $1.62
billion as of the end of fiscal years ended 1997 and 1996, respectively (see
Note 14).
-42-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) ACQUISITION
On March 27, 1998, Sodexho transferred to the Company the operations of Sodexho
North America having a fair market value of $278 million, combined with a cash
payment of $304 million, in exchange for 29.9 million shares of the Company's
common stock, after giving effect to the one-for-four reverse stock split (see
Notes 1 through 4). The purchase price included approximately $3 million in
transaction costs. As a result of the issuance of new shares to the Company's
common stock to Sodexho in connection with the Acquisition, the shareholders who
owned 100% of the Company immediately prior to the Distribution owned
approximately 51% immediately thereafter.
The Acquisition has been accounted for using the purchase method of accounting.
The purchase price has been allocated to the fair market value of assets
acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
($ in millions)
-----------------
<S> <C>
Current assets $ 142
Other assets 56
Customer relationships 122
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (17)
Other liabilities (46)
Debt (73)
Deferred taxes, net (8)
Goodwill 239
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
</TABLE>
Pro forma results of the Company, assuming the Acquisition had been made at the
beginning of the periods presented are shown below:
PRO FORMA UNAUDITED RESULTS OF OPERATIONS
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
34 WEEKS ENDED 52 WEEKS ENDED
AUGUST 28, 1998 JANUARY 2, 1998
-------------------- --------------------
($ in millions, except per share amounts)
<S> <C> <C>
SALES $2,716 $4,163
OPERATING COSTS AND EXPENSES 2,574 3,908
-------------------- --------------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 142 255
Corporate expenses and amortization of intangible assets (68) (116)
Interest expense, net (57) (87)
-------------------- --------------------
INCOME BEFORE INCOME TAXES 17 52
Provision for income taxes (8) (25)
-------------------- --------------------
PRO FORMA NET INCOME $ 9 $ 27
==================== ====================
PRO FORMA EARNINGS PER SHARE:
BASIC $ 0.14 $ 0.43
==================== ====================
DILUTED $ 0.14 $ 0.43
==================== ====================
</TABLE>
Pro forma sales include the combined actual sales of the food and facilities
management services business of MMS and Sodexho North America. Pro forma
operating profit before corporate expenses and interest reflects the pro rata
amount of approximately $15.9 million of annual amortization expense for the
intangible assets related to the Acquisition. Pro forma corporate expenses
include the combined corporate overhead of both businesses. No synergies are
assumed and integration and restructuring costs totaling $31 million have been
excluded from the 34 weeks ended August 28, 1998 results. However, an estimate
of $6.4 million in annual costs were included on a pro rata basis in all periods
presented until the date of the Transactions, representing the incremental costs
to operate as a separate public entity.
-43-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) ACQUISITION, CONTINUED
For the 52 weeks ended January 2, 1998, the loss from the sale and operations of
the MMS- UK operations sold to Sodexho in October 1997 have been excluded from
the results presented. Pro forma interest expense, net, represents the estimated
costs as if the Refinancing and the interest-rate agreements had been in place
on the first day of both periods presented. An effective income tax rate of 48%
and 49% were used for current and prior period, respectively. Pro forma results
do not include the extraordinary item related to the Refinancing. Pro forma
basic earnings per share were calculated on a share base of 61.9 million for
both periods presented, which represents the number of shares outstanding on
August 28, 1998. Pro forma diluted earnings per share were calculated on a share
base of 62.6 million for both periods presented. The dilutive shares are due to
stock option plans, deferred stock incentive plans, and convertible debt
outstanding.
(4) INTEGRATION AND RESTRUCTURING
Integration and restructuring actions taken in fiscal year 1999 and the
Transition Period ended August 28, 1998 reflect the undertaking by the Company
to integrate and realign resources for more effective and efficient execution of
operating strategies. Integration costs totaled $16 million during fiscal year
1999 and $24 million during the Transition Period. The integration costs
include, among other items, training and relocating of former MMS employees,
incremental overhead during the integration phase, systems modifications, and
other one-time costs.
Restructuring costs represent employee termination benefits, office closure
expenditures, and other costs related to a restructuring plan initiated from the
Transactions. The acquisition reserve, which totaled $8 million at September 3,
1999, generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North America employees as well as the
estimated cost for the closure of certain Sodexho North America offices.
Acquisition reserve activity, reflecting certain adjustments made to the
preliminary allocation of the purchase price to the fair market value of assets
acquired (see Note 3), is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
AUGUST 28, 1998 ADJUSTMENTS PAYMENTS SEPTEMBER 3, 1999
-------------------- -- ----------------- - ------------- -- ----------------------
($ in millions)
<S> <C> <C> <C> <C>
Employee Terminations $10.3 $ 0.3 $ (8.2) $2.4
Relocation of Sodexho Facilities 2.6 (0.8) (1.1) 0.7
Closures 3.1 1.2 (2.4) 1.9
Other Restructuring 1.3 1.3 -- 2.6
-------------------- ----------------- ------------- ----------------------
Total $17.3 $ 2.0 $(11.7) $7.6
==================== ================= ============= ======================
</TABLE>
In addition, integration expenses recorded in the Consolidated Statement of
Income during fiscal year 1999 and the Transition Period are detailed below. No
restructuring expenses were recorded in the Consolidated Statement of Income
during fiscal year 1999.
<TABLE>
<CAPTION>
FISCAL YEAR 34 WEEKS ENDED
1999 AUGUST 28, 1998
---------------------- ---------------------
($ in millions)
<S> <C> <C>
Integration:
Duplicate Overhead $ 7.2 $ 9.4
MMS Relocation 0.3 1.7
Training Systems 1.1 1.3
Other 7.0 12.0
Restructuring:
Employee Terminations -- 2.2
Closures -- 2.1
Other -- 2.4
---------------------- ---------------------
Total $15.6 $31.1
====================== =====================
</TABLE>
-44-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND SODEXHO ALLIANCE, S.A.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL ("MI")
Pursuant to the Distribution agreement (see Note 2), the Company and MI agreed
upon the allocation of assets and liabilities related to the MMS business and MI
business. The Company and MI also agreed to enter into a number of agreements
governing their relationship after March 27, 1998, as described below.
TAX SHARING AGREEMENT. The Tax Sharing Agreement by and among the Company, MI
and Sodexho Alliance, S.A. ("Sodexho") provides that MI is liable for all taxes
of the Company (other than sales, use and property taxes, which are borne by the
entities filing such returns) for all periods up to and including March 27,
1998. In addition, the parties have agreed for certain specified periods after
the Distribution not to take specific actions that could cause the Distribution
not to have Tax-Free Status.
EMPLOYEE BENEFITS ALLOCATION AGREEMENT. On September 30, 1997, the Company and
MI entered into an Employee Benefits and Other Employment Matters Allocation
Agreement providing for the allocation of employees of the Company and
obligations and responsibilities regarding compensation, benefits and labor
matters.
MEDICAL AND OTHER WELFARE BENEFITS PLANS. MI assumed the administration of the
Company's medical, dental, short-term disability, vacation and group term life
insurance plans incurred before March 27, 1998 by MI employees, the Company's
employees and former employees. The Company established and maintains a separate
medical, dental, short-term disability, vacation and group term life insurance
plans for its employees after the Distribution.
TRADEMARK LICENSE AGREEMENT. As part of the contribution of assets to MI, the
Company transferred and assigned to MI all of the Company's right, title and
interest in certain trademarks, including the trademarks "Marriott,"
"Courtyard," "Residence Inns by Marriott" and "Fairfield Inns by Marriott."
Pursuant to the terms of the agreement MI generally granted to the Company a
limited nonexclusive right to use the "Marriott" name solely in connection with
the Company's business as defined in the agreement. For four years after March
27, 1998, the Company is permitted to use the "Marriott" name as part of its
corporate name and the names of its principal business divisions. During the
term of the license, the Company pays MI a license fee of $1 million per year,
payable quarterly in advance. MI may terminate the Trademark License Agreement
prior to the expiration of its term under certain conditions. In addition, the
Company may terminate this agreement upon 180 days' prior written notice to MI.
NONCOMPETITION AGREEMENT. The Company and MI entered into a Noncompetition
Agreement generally prohibiting MI from competing in the core business of MMS
(as defined) in the United States, Canada and the United Kingdom for a period of
four years. However, per the agreement, MI may enter into certain negligible
investments (as defined) in businesses that compete with the Company through
direct investment or acquisitions.
LYONS ALLOCATION AGREEMENT AND SUPPLEMENTAL INDENTURE. The Company had issued
$540 million face amount of Liquid Yield Option(TM) Notes ("LYONs"), with an
accreted value as of January 2, 1998 of approximately $310 million. Pursuant to
the LYONs Allocation Agreement and a supplemental indenture to the LYONs
Indenture, MI assumed responsibility for all of the debt obligations evidenced
by the LYONs by becoming a successor to the Company in accordance with the terms
of the LYONs Indenture. The Company assumed responsibility for a portion of the
LYONs equal to its pro rata share based on the relative equity values of the
Company and MI, although MI will remain liable for any payments that the Company
fails to make on its allocable portion. Subsequent to the end of fiscal year
1999, on October 7, 1999, Marriott International notified all holders of the
LYONs, that Marriott International had elected to redeem all of the LYONs at a
price of $619.65 for each $1,000 principal amount at maturity of the LYONs, with
a redemption date of November 8, 1999--See Note 8.
ADDITIONAL AGREEMENTS BETWEEN THE COMPANY AND MI. In connection with the
Distribution agreement, the Company and MI (or a subsidiary of MI) have entered
into a number of additional agreements providing for the delivery of certain
transitional and other services between the companies. The terms and conditions
of these agreements were negotiated by the parties bargaining at arm's length.
Absent the Transactions, the Company believes that it may have been able to
negotiate more favorable terms with outside parties on certain of these
agreements. However, the Company further believes the terms of these agreements
are within the range of the prevailing markets for such services.
-45-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND
SODEXHO ALLIANCE, S.A., CONTINUED
Such additional agreements include agreements regarding payroll processing,
benefits administration, procurement, distribution, information technology, and
office space and related facilities management in the MI corporate headquarters
(see Note 2).
Billings from MI to the Company and from the Company to MI associated with the
performance of these agreements (excluding pass-through product costs) were
approximately $65 million and approximately $4 million, respectively, for fiscal
year 1999. Billings from MI for the 1998 22-week Stub Period totaled
approximately $25 million, with total billings to MI of $2 million during the
same period.
As part of the Transactions, the Company entered into an agreement with MI that
established a reasonable amount of adjusted net tangible assets (as defined in
the agreement) for the operations that were not part of the Distribution
immediately prior to the consummation of the Transactions. This agreement
provided that the Company would pay MI the amount by which the adjusted net
tangible assets total is greater than $103 million, estimated at March 27, 1998
to be $29 million payable to MI. This amount was arbitrated and paid in fiscal
year 1999 for a reduced amount totaling $19 million, mostly the result of
adjustments related to deferred taxes.
RELATIONSHIP WITH SODEXHO ALLIANCE, S.A. ("SODEXHO")
ROYALTY AGREEMENT AND ASSISTANCE AGREEMENT. The Company and Sodexho entered into
a Royalty Agreement and an Assistance Agreement effective March 27, 1998.
Pursuant to these agreements, the Company has the right to use the name
"Sodexho" in connection with its operations in the United States and Canada for
a period of 10 years, for a royalty payment equal to 0.05% of the annual gross
revenues of the Company during the first three years of the Royalty Agreement.
Thereafter, Sodexho and the Company will negotiate in good faith to determine
the royalty fee, based on fair market value. The Royalty Agreement may be
terminated by the Company at any time after Sodexho owns less than 10% of the
outstanding Common Stock of the Company. Sodexho may terminate the Royalty
Agreement prior to the expiration of its term under certain circumstances.
Payments made to Sodexho under this agreement in Fiscal Year 1999 totaled $2.25
million.
The Assistance Agreement sets forth certain services provided by Sodexho to the
Company, including services related to purchasing activities, catering and site
support services, marketing, management and administration, legal and financial
matters, human relations, communications and cash management. In exchange for
these services, the Company pays to Sodexho a fee equal to a percentage of the
annual gross revenues of the Company and its subsidiaries. Pursuant to the terms
of the Assistance Agreement, no fee was owed during the 22-week Stub Period
ended August 31, 1998. Payments from the Company to Sodexho associated with the
performance of services was approximately $2.25 million for fiscal year 1999.
Payments made to Sodexho for the 1998 22-week Stub Period totaled approximately
$1 million. Payments in fiscal year 2000 are expected to increase to
approximately $5 million under this agreement.
OTHER ARRANGEMENTS. Sodexho has agreed to guarantee the following: (i) the
payment when due of certain deferred compensation amounts payable by the Company
to the Company's employees, (ii) the obligations of the Company under the LYONs
allocation agreement and the LYONs indenture, (iii) obligations with respect to
certain insurance costs that are set forth in the Distribution agreement, and
(iv) Senior Credit Guarantee Facility (see Note 8) where Sodexho has guaranteed
the Company's obligation under a $620 million credit facility in exchange for a
guarantee fee equal to 0.50% per annum of the outstanding principal amount of
indebtedness. In addition, the Company and Sodexho entered into a stockholder
agreement covering certain corporate governance matters and that grants Sodexho
certain registration rights with respect to stock of the Company held by Sodexho
as well as certain rights to nominate members of the Company's Board of
Directors.
As part of the Acquisition, the Company entered into an agreement with Sodexho
that established a reasonable amount of adjusted net tangible assets (as defined
in the agreement) of the acquired operations immediately prior to the
consummation of the Acquisition. This agreement provided that the Company would
pay Sodexho the amount by which the adjusted net tangible assets total is less
than a negative $35 million, estimated on March 27, 1998 to be $20 million
payable to Sodexho. As a result of negotiations between Sodexho and the Company,
this amount was paid in fiscal year 1999 for a reduced amount totaling $17
million.
-46-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1999 AUGUST 28, 1998 1997
------------------ ------------------ ------------------
($ in millions)
<S> <C> <C> <C>
Land $ 1 $ 9 $ 89
Buildings and leasehold improvements 14 20 242
Furniture and equipment 233 217 303
Construction in progress 9 3 129
------------------ ------------------ ------------------
257 249 763
Accumulated depreciation and amortization (172) (167) (258)
------------------ ------------------ ------------------
$ 85 $ 82 $505
================== ================== ==================
</TABLE>
Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Interest capitalized
for continuing operations was not material for all periods presented. Interest
capitalized for discontinued operations totaled $16 million in 1997 and $9
million in 1996. Replacements and improvements that extend the useful life of
property and equipment are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the asset life or lease term. As
a result of the Distribution, approximately $1.09 billion of the Company's
property and equipment was restated as Discontinued Operations as of the fiscal
year ended 1997 (see Notes 1 and 2).
(7) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1999 AUGUST 28, 1998 1997
------------------ ------------------ ------------------
($ in millions)
<S> <C> <C> <C>
Customer relationships $461 $477 $389
Goodwill 375 413 269
Other 23 24 10
------------------ ------------------ ------------------
859 914 668
Accumulated amortization (324) (345) (280)
------------------ ------------------ ------------------
$535 $569 $388
================== ================== ==================
</TABLE>
Amortization expense for continuing operations totaled $38 million for fiscal
year 1999, $26 million for the 34 weeks ended August 28, 1998, $25 million in
1997 and $26 million in 1996. As a result of the Distribution, approximately
$1.29 billion of the Company's intangible assets were restated as Discontinued
Operations as of the fiscal year ended 1997 (see Notes 1 and 2). Amortization
expense for discontinued operations totaled $8 million for the 34 weeks ended
August 28, 1998, $42 million in 1997 and $8 million in 1996.
-47-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT
<TABLE>
<CAPTION>
SEPTEMBER 3, 1999 AUGUST 28, 1998 JANUARY 2, 1998
--------------------- --------------------- ---------------------
($ in millions)
SHORT-TERM DEBT:
<S> <C> <C> <C>
Current Portion of Long-Term Debt $ 80 $ 70 $ 23
Senior Secured Revolving Credit Facility 52 25 -
Other 1 1 -
--------------------- --------------------- ---------------------
Total $ 133 $ 96 $ 23
===================== ===================== =====================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 7.13% in 1999 $ 430 $ 500 $ -
Senior Guaranteed Credit Facility, due 2005
averaging 6.92% in 1999 620 620 -
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in 1999 6 6 725
Commercial Paper, 5.82% in 1997 - - 692
Endowment Deposits (non-interest bearing) - - 91
Other 1 2 24
Capital Lease Obligations 3 4 10
--------------------- --------------------- ---------------------
Total $1,060 $1,132 $1,542
Amount Reclassified to Short-Term Debt (80) (70) (23)
--------------------- --------------------- ---------------------
$ 980 $1,062 $1,519
===================== ===================== =====================
</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 September 3,
1999, the Company is paying a rate of 6.80% on the term loan facility, adjusted
for fee amortization and hedging costs. The senior secured credit facility is
secured predominantly by inventory and accounts receivable of the Company. Up to
$100 million of the $235 million revolving credit may be used to collateralize
letters of credit, which totaled $33 million at September 3, 1999 and $26
million at August 28, 1998. At September 3, 1999, $150 million of this facility
was not used and was available to the Company, compared with $184 million at
August 28, 1998.
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 September 3, 1999, the Company is paying a rate
of 6.85% on this facility, adjusted for fee amortization and hedging costs and
including an annual guarantee fee of 0.5% ($3 million pretax) paid to Sodexho
for this facility (see Note 5).
Debt totaling $17 million was presented as Discontinued Operations at January 2,
1998 (see Notes 1 and 2).
Aggregate debt maturities, excluding capital lease obligations, are: 2000 - $80
million; 2001 - $80 million; 2002 - $90 million; 2003 - $115 million and $692
million thereafter.
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 September
3, 1999 and the year then ended, as well as August 28, 1998 and for the 22 weeks
then ended.
-48-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) 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(TM) Notes ("LYONs") due 2011. Each $1,000 LYON is convertible at
any time, at the option of the holder, into 8.76 shares of the Company's Common
Stock. The LYONs were issued at a discount representing a yield to maturity of
4.25 percent. The Company recorded the LYONs at the discounted amount at
issuance. Accretion is recorded as interest expense and an increase to the
carrying value. Gross proceeds from the LYONs issuance were $288 million.
Upon consummation of the Distribution, each LYON was convertible into 2.19
shares of the Company's common stock (after giving effect to a one-for-four
reverse stock split), as well as 17.52 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 $30 million at September 3, 1999 and $29 million at August
28, 1998.
On October 7, 1999, MI notified all holders of the LYONs, that MI had elected to
redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount
at maturity of the LYONs, with a redemption date of November 8, 1999. Conversion
is available at any time until the close of business on the redemption date. The
maximum amount of funds that the Company would be obligated to pay to MI if all
the LYONs were redeemed for cash is approximately $30 million. This amount would
be paid to MI in the first quarter of fiscal year 2000.
INTEREST-RATE AGREEMENTS
At September 3, 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 5.70% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt.
In March 1999, the Company entered two new interest-rate agreements to guarantee
a fixed rate of interest payments for a portion of its unhedged floating
interest rate debt. These agreements were effective on March 30, 1999 and April
1, 1999, with notional principal amounts of $80 million and $70 million,
respectively, and paid a fixed rate of 5.02% and 5.05%, respectively, while
receiving interest based on three-month LIBOR. These agreements matured in
fiscal year 1999. The weighted-average rate for the total debt portfolio,
including the effect of the interest-rate agreements, was 6.87% at September 3,
1999. These agreements expire between August 2001 and February 2005.
Details of these interest rate agreements as of September 3, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS-
TERMS BALANCE VALUE* PAID RECEIVED FY 1999
- ------------------------------------------------- ------------- ------------- ------------- ------------- -----------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Receive Variable, Pay Fixed, Maturing 5/--8/01 $400 $ 3 5.71% 5.49% $(2)
Receive Variable, Pay Fixed, Maturing 8/02 300 4 5.84% 5.49% (2)
Receive Variable, Pay Fixed, Maturing 8/05 200 6 5.90% 5.49% (1)
------------- ------------- ------------- ------------- -----------------
$900 $13 5.80% 5.49% $(5)
============= ============= ============= ============= =================
<FN>
*-- based on the termination cost for these agreements obtained from third party market quotes.
</FN>
</TABLE>
At September 3, 1999, the Company did not have any material 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.
-49-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' (DEFICIT)/EQUITY
STOCKHOLDERS' (DEFICIT)/EQUITY
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. One million shares of preferred
stock, without par value, are authorized, with none issued. At the Distribution,
each shareholder received one share of the Company's stock and one share of New
Marriott, Inc. stock (renamed Marriott International, Inc.). In addition, the
Company's stock underwent a one-for-four reverse stock split on March 27, 1998.
Prior to the Distribution, the Company's charter authorized the issuance of
seventy-five million shares of the Company's common stock, with a par value of
$1 per share, with one million shares of preferred stock, without par value,
authorized, with none issued.
In addition, on March 27, 1998, the Company issued to Sodexho Alliance, S.A.,
approximately 48% of its shares of common stock, representing 29.9 million
shares (after the effect of the reverse stock split), in exchange for $304
million in cash and the operations of Sodexho North America (see Note 3). At
September 3, 1999, the Company had 62,251,459 shares outstanding.
On July 23, 1993, the Company's Board of Directors adopted a shareholder rights
plan under which one preferred stock purchase right was distributed for each
share of Company common stock. Each right entitles the holder to buy 1/1000th of
a share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of $150. The rights will be exercisable ten days
after a person or group acquires beneficial ownership of 20 percent or more of
the Company's common stock, or begins a tender or exchange offer for 30 percent
or more of the Company's common stock. Shares owned by a person or group on
September 30, 1993 and held continuously thereafter are exempt for purposes of
determining beneficial ownership under the rights plan. The rights are nonvoting
and will expire on the tenth anniversary of the adoption of the Company's
shareholder rights plan, unless exercised or previously redeemed by the Company
for $.01 each. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
either the Company or the acquirer having a value of twice the exercise price of
the right. The shareholder rights plan continued in effect after the
Distribution and was amended to exempt shares acquired by Sodexho and its
affiliates.
A program to repurchase the Company's common stock, up to 5.1 million shares,
was terminated with the consummation of the Transactions.
On October 13, 1999, the Board of Directors declared an $0.08 per common share
dividend for Fiscal Year 1999, payable on December 10, 1999, to shareholders of
record on November 22, 1999. The payment and amount of cash dividends on the
Company's common stock will continue to 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 continue to closely monitor the
results of the Company's operations, capital requirements, and other
considerations to determine the extent to which a dividend may be declared in
future periods.
-50-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' (DEFICIT)/EQUITY, CONTINUED
EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128 (see Note 1), thus 1996 earnings per
share computations have been restated in conformity with SFAS No. 128. The
following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28,
1999 1998 1997 1996
--------------- -------------- --------------- ---------------
(in millions, except per share amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Net Income (Loss) from Continuing Operations $ 51 $ (19) $ -- $ 33
Net Income from Discontinued Operations -- 77 335 273
Net Loss from Extraordinary Item -- (44) -- --
--------------- -------------- --------------- ---------------
Net Income $ 51 $ 14 $ 335 $ 306
=============== ============== =============== ===============
Weighted Average Shares Outstanding 62.1 52.0 31.8 31.9
=============== ============== =============== ===============
Basic Earnings Per Share:
Continuing Operations $0.82 $(0.36) $ -- $1.03
Discontinued Operations -- 1.48 10.53 8.56
Extraordinary Item -- (0.85) -- --
--------------- -------------- --------------- ---------------
BASIC EARNINGS PER SHARE $0.82 $ 0.27 $10.53 $9.59
=============== ============== =============== ===============
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Diluted Net Income (Loss) from Continuing Operations $ 51 $ (19) $ -- $ 33
Diluted Net Income from Discontinued Operations -- 77 335 273
Diluted Net Loss from Extraordinary Item -- (44) -- --
After-tax Interest Expense on Convertible Subordinated Debt 1 * * *
--------------- -------------- --------------- ---------------
Diluted Net Income $ 52 $ 14 $ 335 $ 306
=============== ============== =============== ===============
Weighted Average Shares Outstanding 62.1 52.0 31.8 31.9
Effect of Dilutive Securities:
Employee Stock Option Plan 0.5 * * 1.1
Deferred Stock Incentive Plan 0.1 * * 0.8
Convertible Subordinated Debt 1.2 * * *
--------------- -------------- --------------- ---------------
Diluted Weighted Average Shares Outstanding 63.9 52.0 31.8 33.8
=============== ============== =============== ===============
Diluted Earnings Per Share:
Continuing Operations $0.81 $(0.36) $ -- $0.97
Discontinued Operations -- 1.48 10.53 8.08
Extraordinary Item -- (0.85) -- --
--------------- -------------- --------------- ---------------
DILUTED EARNINGS PER SHARE $0.81 $ 0.27 $10.53 $9.05
=============== ============== =============== ===============
<FN>
*--The effect of dilutive securities is computed using the treasury stock method
and average market prices during the periods. The if-converted method is used
for convertible subordinated debt ("debt securities"). For the 34 weeks ended
August 28, 1998 and for fiscal 1997, dilutive securities under the employee
stock option plan (of 0.6 million and 1.1 million, respectively), the deferred
stock incentive plan (of 0.1 million and 0.7 million, respectively) and the debt
securities (of 1.2 million for both periods) was excluded due to the loss from
continuing operations. Also, debt securities were excluded in fiscal 1996 (of
0.9 million) as they were antidilutive.
</FN>
</TABLE>
Certain employee and deferred stock options to purchase shares of common stock
were outstanding but were not included in the computation of diluted earnings
per share because the exercise prices of the options were greater than the
average market price of the common shares as follows:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1999 1998 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of shares (in millions) 1.8 0.6 0.6 0.5
Weighted average exercise price $29 $29 $272 $220
Weighted average remaining life (in years) 9 10 15 15
</TABLE>
-51-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INCOME TAXES
The (provision) benefit for income taxes on continuing operations was comprised
of the following:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1999 1998 1997 1996
---------------- ----------------- ----------------- ----------------
($ in millions)
Current:
<S> <C> <C> <C> <C>
- Federal $(36) $19 $12 $(13)
- Other (10) -- 1 (6)
---------------- ----------------- ----------------- ----------------
(46) 19 13 (19)
================ ================= ================= ================
Deferred:
- Federal 5 (6) 2 2
- Other -- -- -- --
---------------- ----------------- ----------------- ----------------
5 (6) 2 2
---------------- ----------------- ----------------- ----------------
$(41) $13 $15 $(17)
================ ================= ================= ================
</TABLE>
A reconciliation of the Federal statutory tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1999 1998 1997 1996
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Federal statutory tax rate (35.0)% 35.0 % 35.0 % (35.0)%
State income taxes, net of Federal tax benefit (6.3) (1.3) 6.8 (2.8)
Tax credits 1.5 13.7 90.5 8.1
Goodwill amortization (3.9) (6.9) (24.7) (7.6)
Other, net (1.1) 0.1 (8.7) 4.1
---------------- ----------------- ----------------- ----------------
Effective income tax rate (44.8)% 40.6 % 98.9 % (33.2)%
================ ================= ================= ================
</TABLE>
The tax effect of significant temporary differences is as follows:
<TABLE>
<CAPTION>
AUGUST 28,
1999 1998 1997
--------------------- --------------------- ---------------------
($ in millions)
<S> <C> <C> <C>
Self-insurance $ 38 $ 38 $ 37
Employee benefits 28 25 30
Other liabilities 15 26 14
Property and equipment 6 2 3
Intangible assets (54) (63) (29)
Other, net 8 4 (7)
--------------------- --------------------- ---------------------
Net deferred tax assets $ 41 $ 32 $ 48
===================== ===================== =====================
</TABLE>
Total deferred tax assets and liabilities as of September 3, 1999, August 28,
1998 and January 2, 1998, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 3, 1999 AUGUST 28, 1998 1997
--------------------- --------------------- ---------------------
($ in millions)
<S> <C> <C> <C>
Deferred tax assets $ 110 $ 104 $ 81
Deferred tax liabilities (69) (72) (33)
--------------------- --------------------- ---------------------
Net deferred taxes $ 41 $ 32 $ 48
===================== ===================== =====================
</TABLE>
-52-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INCOME TAXES, CONTINUED
The Company has not established a valuation allowance for deferred tax assets.
In assessing the realizability of deferred tax assets, management considers the
Company's ability to generate sufficient future taxable income during periods in
which temporary differences reverse. The amount of net deferred tax assets
considered realizable could be reduced if estimated future taxable income cannot
be achieved. Management believes it is more likely than not the Company will
realize the benefits of its net deferred tax assets.
As part of the Distribution and Acquisition, the Company, MI and Sodexho entered
into tax sharing agreements which reflect each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state or other
taxes relating to the business of the Company, MI and Sodexho prior to the
Transactions (see Note 5).
While the Company has changed its accounting period from a fiscal year ended on
the Friday closest to the end of December to the Friday closest to the end of
August, its tax year has not changed. The Company has applied to the Internal
Revenue Service for a change in its tax year in 1999 to the Friday closest to
the end of August.
(11) COMMITMENTS AND CONTINGENCIES
The Company issues bid and performance bonds for its client-related contracts in
the normal course of business. These guarantees are limited, in the aggregate,
to $56 million at September 3, 1999 and August 28, 1998, with expected funding
of zero. Letters of credit outstanding on the Company's behalf at September 3,
1999 and August 28, 1998 totaled $33 million and $26 million, respectively,
related to the Company's insurance programs. Upon consummation of the
Distribution, MI replaced the Company as guarantor or obligor under previous
guarantees and commitments related primarily to the lodging segment distributed
on March 27, 1998.
Summarized below are the Company's future obligations under leases at
September 3, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------------- --------------------------
($ in millions)
FISCAL YEAR
<S> <C> <C>
2000 $0.7 $12.0
2001 0.7 10.2
2002 0.8 8.0
2003 0.8 5.5
2004 0.8 4.5
Thereafter 0.9 10.5
------------------------- --------------------------
Total minimum lease payments 4.7 $50.7
==========================
Less amount representing interest (1.1)
-------------------------
Present value of minimum lease payments $3.6
=========================
</TABLE>
The Company generally leases office space and equipment under noncancellable
agreements, primarily to support its administrative operations. Most leases have
initial terms of one to 20 years, and contain one or more renewal options,
generally for five or 10-year periods. The leases provide for minimum rentals,
and additional rentals, which are based on the operations of the leased
property. Total rent expense for continuing operations for fiscal year 1999
totaled $26 million, the 34 weeks ended August 28, 1998 totaled $13.8 million,
fiscal year 1997 totaled $90 million, and fiscal year 1996 totaled $81 million.
Total rent expense for discontinued operations for the 34 weeks ended August 28,
1998 totaled $41 million, and $177 million and $179 million for the fiscal years
ended 1997 and 1996, respectively.
The nature of the business of the Company causes it to be involved in routine
legal proceedings from time to time. Management of the Company believes that
there are no pending or threatened legal proceedings that upon resolution would
have a material adverse impact to the Company.
-53-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) EMPLOYEE BENEFIT AND INCENTIVE PLANS
DEFERRED COMPENSATION PLANS
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. As part of the Distribution,
the Company elected to continue the deferred compensation plan and has
established a new savings plan for the Company separate from the MI profit
sharing plan. The Company assumed the obligations and liabilities of the
undistributed portion of the deferred compensation plan in relationship to the
employees retained by the Company after the Distribution. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the fiscal year
ended September 3, 1999, the Company contributed approximately $10.2 million for
these plans, with contributions totaling $9.5 million for the 34-week period
ended August 28, 1998.
STOCK OPTION PLANS
The Company has two stock-based incentive plans-- the Sodexho Marriott Services,
Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (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 administers converted
stock options prior to the Distribution, with no new awards made under this
plan. The 1998 Plan governs the issuance and administration of conversion awards
and is also available for the issuance of new awards. These stock plans are
administered by the Compensation Policy Committee as authorized by the Board of
Directors. As part of the Distribution and the amendment of these plans, and in
relationship to the changes in the capital structure of the Company after the
Distribution, the Board of Directors has approved up to 10 million shares of
common stock to be available under the 1998 Plan for converted options as well
as new awards. At the Distribution date, approximately 3.3 million options were
exchanged as conversion options of prior grants under both the 1993 and 1998
Plans, with an additional 0.4 million options issued to employees of Sodexho
North America as part of the conversion of stock options held by those employees
prior to the Acquisition. Also, 3.3 million shares were terminated related to
the options of former MI employees from the Distribution.
Employee stock options may be granted to officers and key employees at exercise
prices not less than the market price of the Company's stock on the date of
grant. Most options under the stock option plans are exercisable in cumulative
installments of one-fourth at the end of each of the first four years following
the date of grant. In June 1998, the Company issued 1.8 million new stock option
awards. The Company expects to issue approximately 2.5 million new stock option
awards in the first half of fiscal year 2000.
A summary of the Company's stock option activity during fiscal 1999, the 34
weeks ended August 28, 1998 and fiscal 1997 is presented below (adjusting for
the one-for-four reverse stock split on March 27, 1998):
<TABLE>
<CAPTION>
34 WEEKS ENDED
1999 AUGUST 28, 1998 1997
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE (IN EXERCISE
(IN MILLIONS) PRICE (IN MILLIONS) PRICE MILLIONS) PRICE
-------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5.0 $ 20 3.6 $140 3.5 $112
Granted during the year 0.1 26 1.9 28 0.6 268
Conversion options-Distribution -- -- 3.3 * -- --
Conversion options-Acquisition -- -- 0.4 6 -- --
Terminations-Distribution -- -- (3.3) * -- --
Exercised during the year (0.4) 8 -- -- (0.5) 84
Forfeited during the year (0.1) 24 (0.9) 17 -- --
-------------- ------------- -------------- ------------- ------------- --------------
Outstanding at end of year 4.6 $ 21 5.0 $ 20 3.6 $140
============== ============= ============== ============= ============= ==============
Options exercisable at end of year 1.4 $ 14 0.5 $ 11 2.3 $ 96
============== ============= ============== ============= ============= ==============
<FN>
*-- exercise price for shares outstanding prior to the Transactions were
repriced to reflect the change in the Company's capital structure (including the
one-for-four reverse stock split) as well as preserve the financial value of the
options to the option holders as of March 27, 1998.
</FN>
</TABLE>
-54-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) EMPLOYEE BENEFIT AND INCENTIVE PLANS, CONTINUED
Stock options under the 1993 and 1998 Plans that were outstanding at September
3, 1999 are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- --------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS REMAINING LIFE EXERCISE OPTIONS EXERCISE
PRICES (IN MILLIONS) (IN YEARS) PRICE (IN MILLIONS) PRICE
- ------------------------ ------------------- ------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C>
$ 2.3 to 10.0 0.5 5 $ 8 0.5 $ 8
10.1 to 15.0 0.5 6 12 0.3 12
15.1 to 20.0 0.9 7 18 0.3 18
20.1 to 25.0 1.0 8 22 0.3 22
25.1 to 31.4 1.7 9 29 -- --
- ------------------------ ------------------- ------------------ ------------------ ------------------ -------------------
$ 2.3 to 31.4 4.6 7 $21 1.4 $14
======================== =================== ================== ================== ================== ===================
</TABLE>
Pro forma compensation cost for the Stock Option Plans, the Deferred
Compensation Plan, the Supplemental Executive Stock Option awards and employee
purchases, recognized in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," would reduce the Company's net income as follows:
<TABLE>
<CAPTION>
34 WEEKS ENDED
SEPTEMBER 3, 1999 AUGUST 28, 1998 1997 1996
--------------------- --------------------- ------------------ ------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income as reported $51 $14 $335 $306
Pro forma net income $46 $13 $317 $295
Diluted earnings per share as reported $0.81 $0.27 $10.53 $9.05
Pro forma diluted earnings per share $0.72 $0.25 $9.97 $8.73
</TABLE>
The aggregate weighted-average fair value for each option granted during fiscal
year 1999, the 34 weeks ended August 28, 1998, fiscal 1997 and fiscal 1996 was
$11, $12, $88 and $76, respectively. Since the pro forma compensation cost is
recognized over the vesting period, the foregoing pro forma reductions in the
Company's net income are not representative of anticipated amounts in future
years.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using the
Black-Scholes option-pricing model, with the following assumptions:
<TABLE>
<CAPTION>
34 WEEKS ENDED
1999 AUGUST 28, 1998 1997 1996
--------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Annual dividends $-- $-- $1.40 $1.28
Expected volatility 44% 40% 24% 25%
Estimated forfeitures 35% 35% 13% 13%
Risk-free interest rate 6.2% 5.5% 6.2% 6.1%
Expected life (in years) 10 10 7 7
</TABLE>
-55-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
For current assets, current liabilities and notes and other receivables,
management believes the carrying amounts are reasonable estimates of their fair
values. The fair values of noncurrent financial liabilities are shown below.
<TABLE>
<CAPTION>
1999 AUGUST 28, 1998 1997
--------------------------- --------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- ------------- ------------- -------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt, convertible
subordinated debt and other
long-term liabilities $1,010 $981 $1,091 $1,073 $1,908 $1,944
</TABLE>
The difference between carrying amounts and fair values for notes and other
receivables for continuing operations are not material as of September 3, 1999,
August 28, 1998 and January 2, 1998. However, net noncurrent assets of
discontinued operations include notes and other receivables with a carrying
amount of $647 million at fiscal year end 1997, with a market value based on the
expected future cash flows discounted at risk adjusted rates of $660 million.
Valuations for long-term debt, convertible subordinated debt and other long-term
liabilities are determined based on quoted market prices or expected future
payments discounted at risk adjusted rates. The fair value of commercial paper
borrowings is equal to the carrying value.
-56-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has identified six new business segments within these markets: Corporate
Services, Health Care, Education, Schools, Canada, and Laundries/Other. Prior to
the Distribution, the Company was a diversified hospitality company with
operations in two business segments: Lodging, which includes development,
ownership, operation and franchising of lodging properties under 10 brand names
and development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
In June 1997, SFAS No. 131 was issued--"Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the reporting of
selected-segmented information in quarterly and annual reports. As required in
SFAS No. 131, information from operating segments presented has been derived
consistent with the Company's methodology in allocating resources and measuring
performance after the Distribution (see Note 1).
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
1999 1998 1997 1996
----------------- ----------------- ---------------- -----------------
($ in millions)
<S> <C> <C> <C> <C>
GROSS SALES
Corporate Services $1,380 $ 803 $ 930 $ 901
Health Care 1,323 784 1,039 1,027
Education 1,221 598 824 805
Schools 358 199 303 275
Canada 143 80 106 111
Laundries/Other 77 43 55 56
Other Contract Services -- 321 1,769 1,143
----------------- ----------------- ---------------- -----------------
Contract Services 4,502 2,828 5,026 4,318
Discontinued Operations -- 1,774 7,008 5,854
----------------- ----------------- ---------------- -----------------
Total Gross Sales $4,502 $4,602 $12,034 $10,172
----------------- ----------------- ---------------- -----------------
GROSS OPERATING PROFIT
Corporate Services $ 91 $ 49 $ 35 $ 30
Health Care 109 49 60 54
Education 73 5 27 24
Schools 20 8 11 8
Canada 6 1 3 2
Laundries/Other 5 2 2 3
Other Contract Services -- 5 19 56
----------------- ----------------- ---------------- -----------------
Contract Services 304 119 157 177
Discontinued Operations -- 158 569 452
----------------- ----------------- ---------------- -----------------
Total Gross Operating Profit $ 304 $ 277 $ 726 $ 629
----------------- ----------------- ---------------- -----------------
Total Net Operating Profit from
Continuing Operations (Contract Services) $ 304 $ 119 $ 157 $ 177
Corporate Items, Gain on Investment and
Net Interest Expense 212 151 172 127
----------------- ----------------- ---------------- -----------------
Income (Loss) From Continuing Operations,
Before Taxes and Extraordinary Item $ 92 $ (32) $ (15) $ 50
================= ================= ================ =================
</TABLE>
-57-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) BUSINESS SEGMENTS, CONTINUED
The Company does not have any material activity outside of the United States and
does not presently analyze it operations by geographic regions. In addition, the
Company offers a wide array of food and facilities products within its
operations, customized to individual client's requirements, and thus the
Company's management has not found it practical to track results by individual
products or services in relationship to the financial statements presented in
this report. At September 3, 1999, the Company had a diverse client base and
does not have any individual clients that are material to its overall
operations.
IDENTIFIABLE ASSETS, CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION BY
BUSINESS SEGMENT:
<TABLE>
<CAPTION>
AUGUST 28,
1999 1998 1997 1996
----------------- ---------------- ----------------- ----------------
($ in millions)
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS
Corporate Services $ 160 $ * $ * $ *
Health Care 193 * * *
Education 169 * * *
Schools 44 * * *
Canada 37 * * *
Laundries/Other 23 * * *
Corporate 721 * * *
----------------- ---------------- ----------------- ----------------
Contract Services 1,347 1,341 1,669 2,108
Discontinued Operations, Net -- -- 2,902 1,624
Other -- -- 438 448
----------------- ---------------- ----------------- ----------------
$1,347 $1,341 $5,009 $4,180
================= ================ ================= ================
CAPITAL EXPENDITURES
Corporate Services $ 15 $ * $ * $ *
Health Care 11 * * *
Education 26 * * *
Schools 3 * * *
Canada 2 * * *
Laundries/Other 2 * * *
Corporate 13 * * *
----------------- ---------------- ----------------- ----------------
Contract Services 72 86 264 154
Discontinued Operations -- 58 271 158
Other -- -- 18 14
----------------- ---------------- ----------------- ----------------
$ 72 $ 144 $ 553 $ 326
================= ================ ================= ================
DEPRECIATION AND AMORTIZATION
Corporate Services $ 11 $ * $ * $ *
Health Care 9 * * *
Education 18 * * *
Schools 2 * * *
Canada 2 * * *
Laundries/Other 1 * * *
Corporate 42 * * *
----------------- ---------------- ----------------- ----------------
Contract Services 85 57 87 91
Discontinued Operations -- 21 89 55
Other -- -- 12 10
----------------- ---------------- ----------------- ----------------
$ 85 $ 78 $ 188 $ 156
================= ================ ================= ================
<FN>
* -- Management has determined that available financial information related to
periods prior to March 27, 1998 does not allow for a practical or meaningful
presentation of identifiable assets, capital expenditures or depreciation and
amortization for its current business segments for the Transition Period and
Fiscal Years 1997 and 1996.
</FN>
</TABLE>
-58-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
SUPPLEMENTARY DATA
HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
1999(1)
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------- ------------- ------------- -------------
(13 WEEKS) (13 WEEKS) (13 WEEKS) (14 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C> <C>
Sales $1,209 $1,090 $1,163 $1,040 $4,502
Operating profit before corporate items 101 74 83 46 304
Income (Loss) from continuing operations 29 11 15 (4) 51
Net income $ 29 $ 11 $ 15 $ (4) $ 51
Diluted earnings per share(6) $ 0.45 $ 0.18 $ 0.24 $(0.07) $ 0.81
1998(1)
------------- ------------- ------------- -------------
FIRST 9 WEEKS 13 WEEKS 34 WEEKS
QUARTER 5/29/98(2) 8/28/98(2) 8/28/98
------------- ------------- ------------- -------------
Sales $1,111 $ 752 $ 965 $2,828
Operating profit before corporate items 39 50 30 119
(Loss) Income from continuing operations(3) (11) 9 (17) (19)
Discontinued operations, net of income taxes(3) 77 -- -- 77
Extraordinary item, net of income taxes(4) (43) (1) -- (44)
Net income $ 23 $ 8 $ (17) $ 14
Diluted earnings per share(6) $ 0.73 $ 0.12 $(0.27) $ 0.27
1997(1)
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER(3) YEAR
------------- ------------- ------------- ------------- -------------
(12 WEEKS) (12 WEEKS) (12 WEEKS) (16 WEEKS) (52 WEEKS)
Sales $1,154 $1,164 $1,072 $1,636 $5,026
Operating profit before corporate items 41 44 18 54 157
Income (Loss) from continuing operations(3) -- -- -- -- --
Discontinued operations, net of income taxes(3) 77 83 67 108 335
Net income(5) $ 77 $ 83 $ 67 $ 108 $ 335
Diluted earnings per share(6) $ 2.50 $ 2.62 $ 2.12 $ 3.29 $10.53
<FN>
1 - On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to August 31, thereby creating a 34-week Transition Period. On
March 27, 1998, the Company acquired Sodexho North America. The historical data
for fiscal year 1997 and prior years does not include the revenue and expenses
of the acquired business, see Notes 1 and 3 to the Consolidated Financial
Statements.
2 - Combined actual results of MMS and the acquired Sodexho North America after
March 27, 1998.
3 - On March 27, 1998, the Company distributed to its shareholders the Lodging,
MSLS and MDS divisions as part of the Transactions. For reporting purposes, the
Lodging segment is considered Discontinued Operations prior to March 27, 1998.
MSLS and MDS are considered part of continuing operations (see Note 1 to the
Consolidated Financial Statements).
4 - On March 27, 1998, the Company refinanced its debt as part of the
Transactions (see Notes 1 and 8 to the Consolidated Financial Statements),
resulting in a $71 million pretax charge from the early extinguishment of debt
($44 million after-tax).
5 - Operating results in the fourth quarter of 1997 include a loss before tax of
$22 million ($14 million after tax, or $0.40 per share) on the sale of MMS- UK
to Sodexho in connection with the Transactions.
6 - Earnings per share data have been restated to reflect the adoption in 1997
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
All per share data has been adjusted to reflect a one-for-four reverse stock
split effective March 27, 1998.
</FN>
</TABLE>
-59-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
As described below, certain information appearing in the Company's Proxy
Statement to be furnished to shareholders in connection with the 2000 Annual
Meeting, is incorporated by reference in this Form 10-K Annual Report.
ITEM 10. This information is incorporated by reference to
the "Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the
Company's Proxy Statement to be furnished to
shareholders in connection with the 2000 Annual
Meeting. Information regarding executive officers is
included below.
ITEM 11. This information is incorporated by reference to
the "Executive Compensation" section of the Company's
Proxy Statement to be furnished to shareholders in
connection with the 2000 Annual Meeting.
ITEM 12. This information is incorporated by reference to
the "Security Ownership of Certain Beneficial Owners
and Management" section of the Company's Proxy
Statement to be furnished to shareholders in
connection with the 2000 Annual Meeting.
ITEM 13. This information is incorporated by reference to
the "Certain Transactions" section of the Company's
Proxy Statement to be furnished to shareholders in
connection with the 2000 Annual Meeting.
EXECUTIVE OFFICERS
The 12 persons identified below are the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Michel Landel 48 Michel Landel was named President and Chief Executive Officer of
President and the Company on May 3, 1999. Upon consummation of the
Chief Executive Officer Transactions, Mr. Landel was appointed as the Company's Executive
Vice President on June 16, 1998 and was named President,
Corporate Services division. Prior to the Transactions, Mr.
Landel was appointed President and Chief Executive Officer of
Sodexho North America in 1994. Mr. Landel joined Sodexho in 1984
as a Regional Manager of Sodexho Africa. In 1986, he was named
President of Sodexho Africa, a position he held until 1989, when
he became President and Chief Executive Officer of Sodexho's
United States operations. Prior to joining Sodexho, Mr. Landel
held positions with Groupe Poliet (Plan General Manager,
1980-1984) and The Chase Manhattan Bank (Financial Analyst and
Assistant Treasurer, 1976-1980).
</TABLE>
-60-
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Anthony F. Alibrio 55 Anthony F. Alibrio was appointed President, Health Care Services
Executive Vice President effective with the Transactions and was also appointed an
President, Health Care Services Executive Vice President as of May 3, 1999. Prior to the
Transactions, Mr. Alibrio served as President of Health Care
Services for the Marriott Management Services division of
Marriott International, Inc. since 1990. His career has been
focused on serving the health care industry for the past 28 years
of his 33-year tenure with Marriott. In the past he has held
various operations, sales, and marketing responsibilities
including Division Vice President and National Vice President of
Sales and Marketing at Marriott. A member of the Healthcare
Research and Development Institute and the American Academy of
Medical Administrators, Mr. Alibrio also serves as a member of
the Board of Directors for the National Committee for Quality
Health Care and Health Insights Foundation.
William W. Hamman 57 William W. Hamman was appointed President, Education Services
Executive Vice President effective with the Transactions and was also appointed an
President, Education Services Executive Vice President as of May 3, 1999. Prior to the
Transactions, Mr. Hamman served as President of the Marriott
Education Services division of Marriott International, Inc. since
1990. He has supported the higher education community for 36
years, holding positions in Marriott Education Services that
included Regional Vice President, Area Vice President and
Division Vice President. Mr. Hamman is active in the National
Association of College and University Business Officers (NACUBO)
and Council of Independent Colleges (CIC). He also serves on the
Western Illinois University Foundation Board of Trustees.
Thomas M. Mulligan 48 Thomas M. Mulligan was appointed to his current position
President, Corporate Services effective May 28, 1999. Mr. Mulligan joined Sodexho Services,
Inc., a subsidiary of Sodexho Alliance, in 1974 and has served in
the Sodexho Education, Corporate Services and Healthcare
divisions. Prior to his current appointment, Mr. Mulligan served
as head of the New England Corporate Services operations of the
Company. Mr. Mulligan supports hunger relief efforts through the
Pine Street Inn in Boston and has worked with the Toys for Tots
program.
James A. Seaton 50 James A. Seaton was appointed to his current position effective
President, School Services September 3, 1998. Prior to his current position, Mr. Seaton
served as Senior Vice President in the Corporate Services
division of the Company. Mr. Seaton joined Marriott
International, Inc. in 1972 as a management trainee and advanced
through several positions in the Education Services division,
serving as a manager of district operations, Regional Vice
President and Vice President of Operations. Mr. Seaton also
served as Vice President of Grandy's and as Senior Vice President
for the Corporate Services division of Marriott Management
Services prior to the Transactions.
</TABLE>
-61-
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Stephen J. Brady 55 Stephen J. Brady was appointed to his current position effective
Senior Vice President, Corporate with the Transactions. Mr. Brady joined Sodexho USA, a division
Communications of Sodexho Alliance, in 1989 after a 15-year career in the retail
industry. His positions with Sodexho USA were Vice President of
Strategic Developments, Vice President of Health Care Operations
and Regional Vice President of Education Operations. Most
recently he has served as Vice President of Marketing and
Communications for Sodexho USA. Mr. Brady serves on the board of
FoodChain, the national food rescue network.
Randall C. Harris 48 Randall C. Harris was appointed to his current position effective
Senior Vice President and Chief Human with the Transactions. Mr. Harris joined Marriott International,
Resources Officer Inc. in 1997. Before joining Marriott, Mr. Harris was with
Cognizant Corporation, which was formed as a result of the
restructuring of Dunn & Bradstreet Corporation. His previous
experience includes senior human resources and general
management positions with American Express (and the subsequent
initial public offering of First Data Corporation) and Sprint
Corporation.
Lawrence E. Hyatt 45 Lawrence E. Hyatt was appointed to his current position effective
Senior Vice President and Chief with the Transactions. Mr. Hyatt served as Senior Vice President
Financial Officer of Finance and Planning for the Marriott Management Services
division of Marriott International, Inc. since 1988. He joined
Marriott Corporation in 1981 and has been Staff Auditor for
Corporate Internal Audit, Manager of Financial Analysis for Roy
Rogers Restaurants, Director of Finance for Marriott Services
Group and Vice President, Operations Planning and Control for the
Company. Previously, Mr. Hyatt was an associate in ICF
Incorporated and a financial analyst for the US Department of
Energy.
David R. Smail 60 David R. Smail was appointed to his current position effective
Senior Vice President and Chief with the Transactions. Previously, Mr. Smail served as Senior
Information Officer Vice President and Chief Information Officer for the Marriott
Management Services division of Marriott International, Inc.
since 1993. He joined Marriott Corporation in 1981 as Vice
President in the Marriott Information Systems Department. From
1985 to 1992, he served as Vice President, Corporate Systems
Services, Marriott Corporation. Prior to joining Marriott
Corporation, Mr. Smail worked as an Assistant Vice President in
the Operations Group, AMTRAK, and spent 14 years at Andersen
Consulting.
Robert A. Stern 41 Robert A. Stern was appointed to his current position effective
Senior Vice President and General Counsel with the Transactions. Previously, Mr. Stern served as Associate
General Counsel for Marriott International, Inc. providing legal
support to Marriott Management Services. Prior to his
appointment to Associate General Counsel, Mr. Stern provided
legal support to Marriott Corporation's Restaurant and Travel
Plaza businesses. Mr. Stern joined Marriott Corporation in 1985
from the Washington D.C., office of Skadden Arps Slate Meagher &
Flom.
</TABLE>
-62-
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Philippe Taillet 40 Philippe Taillet was appointed to his current position effective
Senior Vice President, August 10, 1999. Prior to his appointment, Mr. Taillet served as
Facilities Management Senior Vice President, Strategic Planning for the Company. Prior
to the Transactions, Mr. Taillet served as Vice President,
Corporate Strategy for Sodexho Alliance since 1995. From 1991 to
1995, he was Director of Facilities Management at Disneyland
Paris and from 1986 to 1991 he was a consultant for Bain &
Company in Paris and Boston. Mr. Taillet began his career as a
software engineer for Schlumberger Oil Field Services in Paris.
Anthony J. Wilson 47 Anthony J. Wilson was appointed to his current position effective
Senior Vice President, with the Transactions. Previously, Mr. Wilson served as Senior
Marketing and Procurement Vice President, Marketing and Product Development for the
Marriott Management Services division of Marriott International,
Inc. since November 1996. Prior to joining Marriott, Mr. Wilson
was Vice President and General Manager in the Global Food Service
division of Campbell Soup Company. He also spent 13 years at
ARAMARK, where he served as Senior Vice President ARASERVE and
President of ARAMARK's Marketing Services Group.
</TABLE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
The response to this portion of Item 14. is submitted under Item 8. of
this Report on Form 10-K.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
Any shareholder who desires a copy of the following Exhibits may obtain
a copy upon request from the Company at a charge that reflects the
reproduction cost of such Exhibits. Requests should be made to the
Secretary, Sodexho Marriott Services, Inc., 9801 Washingtonian
Boulevard, Gaithersburg, Maryland, 20878.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Exhibit No. 3 (a) to Form 8-K dated April 3, 1998.
Incorporation.
3.2 Amended and Restated Bylaws. Exhibit No. 3 (b) to Form 8-K dated April 3, 1998.
</TABLE>
-63-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
4.1 Certificate of Designation, Preferences and Exhibit No. 4.1 to Form 8-K dated October 25, 1993.
Rights of Series A Junior Participating
Preferred Stock.
4.2 Rights Agreement with The Bank of New York, as (a) Exhibit No. 4.2 to Form 8-K dated October 25,
Rights Agent, as amended. 1993, (b) Exhibit 1 to Form 8--A/A filed on October
15, 1997 (Amendment No. 1) and (c) Amendment No. 2
to Rights Agreement dated as of March 27, 1998
filed by amendment to Form 8-A.
4.3 Indenture with Chemical Bank, as Trustee, as (a) Exhibit Nos. 4(i) and 4(ii) to Form 8-K dated
supplemented. December 9, 1993 (original Indenture and First
Supplemental Indenture); (b) Exhibit No. 4 (ii) to
Form 8-K dated April 19, 1995 (Second Supplemental
Indenture); (c) Exhibit No. 4.2 to From 8-K dated
June 7, 1995 (Third Supplemental Indenture); (d)
Exhibit No. 4.2 to Form 8-K dated December 11, 1995
(Fourth Supplemental Indenture); (e) Exhibit No.
4(a) to Form 8-K/A dated April 27, 1998 (Fifth
Supplemental Indenture); (f) Exhibit No. 4(b) to
Form 8-K/A dated April 27, 1998 (Sixth Supplemental
Indenture); Exhibit No. 4(c) to Form 8-K/A dated
April 27, 1998 (Seventh Supplemental Indenture);
and Exhibit No. 4(d) to Form 8-K/A dated April 27,
1998 (Eighth Supplemental Indenture).
4.4 Indenture with The Bank of New York, as Trustee, (a) Exhibit No. 4.1 Form 8-K dated March 25, 1996;
relating to Liquid Yield Option(TM) Notes, as and (b) Exhibit No. 4.2 to Form 8-K dated March 25,
supplemented. 1996 (First Supplemental Indenture).
4.5 Indenture among RHG Finance Corporation, as (a) Exhibit No. 2.02 to Renaissance Hotel Group
issuer, Renaissance Hotel Group N.V. and the N.V. Annual Report on Form 20-F for the fiscal year
Company, as guarantors, and The First National ended June 30, 1996; and (b) Exhibit No. 4 to Form
Bank of Chicago as Trustee, as supplemented. 10-Q for the fiscal quarter ended June 20, 1997
(First and Second Supplemental Indenture).
4.6 Sodexho Marriott Services, Inc. 1993 Exhibit 4(a) to Form 8-K dated April 15, 1998.
Comprehensive Stock Incentive Plan.
4.7 Sodexho Marriott Services, Inc. 1998 Exhibit 4(a) to Form 8-K dated April 15, 1998.
Comprehensive Stock Incentive Plan.
4.8 Sodexho Savings Plus Plan. Exhibit 4.3 to Form S-8 dated September 17, 1998.
4.9 Sodexho Marriott Services, Inc. 401(k) Employee Exhibit 4.3 to Form S-8 dated September 17, 1998.
Retirement Savings Plan.
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
4.10 Trust Agreement with Bankers Trust Company, Exhibit 99.1 to Form S-8 dated September 17, 1998.
Trustee for the Sodexho Marriott Services, Inc.
401(k) Employee Retirement Savings Plan.
10.1 $1.5 billion Credit Agreement with Citibank, (a) Exhibit No. 10 to Form 10-Q for the fiscal
N.A., as Administrative Agent, and certain banks, quarter ended March 28, 1997 (original agreement);
as Banks, as amended. (b) Exhibit No. 10.2 to Form 10-K for the fiscal
year ended December 29, 1995 (first Amendment);
and (c) Exhibit No. 10-1 to Form 10-Q for the fiscal
quarter ended September 12, 1997 (Second
Amendment).
10.2 Distribution Agreement with Host Marriott, as (a) Exhibit No. 10.3 to Form 8-K dated October 25,
amended. 1993; (b) Exhibit No. 10.2 to Form 10-K for the
fiscal year ended December 29, 1995 (First
Amendment); and (c) Exhibit No. 10.1 to Form 10-
Q for the fiscal quarter ended September 12, 1997
(Second Amendment).
10.3 Non Competition Agreement with Host Marriott and (a) Exhibit No. 10.7 to Form 8-K dated October 25,
Host Marriott Services Corporation, as amended. 1993; and (b) Exhibit No. 10.4 to Form 10-K for the
fiscal year ended December 29, 1995 (Amendment No.
1).
10.4 Employee Benefits and Other Employment Matters Exhibit No. 10.6 to Form 8-K dated October 25, 1993.
Allocation Agreement with Host Marriott.
10.5 Agreement and Plan of Merger by and among Exhibit No. (c) (1) to Schedule 14d-1 dated
Marriott International, Inc., FGI Acquisition February 23, 1996.
Corp. and Forum Group, Inc.
10.6 Acquisition Agreement, dated as of February 17, Exhibit No. 10.1 to Form 8-K dated February 19,
1997, by and between the Company and Renaissance 1997.
Hotel Group N.V.
10.7 Shareholder Agreement, dated as of February 17, Exhibit No. 10.2 to Form 8-K dated February 19,
1997, by and between Marriott International, Inc. 1997.
and Diamant Hotel Investments N.V.
10.8 Stock Purchase Agreement, dated as of June 21, Exhibit No. 10.2 to Form 10-Q for the fiscal quarter
1997, by and between Host Marriott Corporation ended September 12, 1997.
and Marriott Senior Living Services, Inc.
10.9 Distribution Agreement dated as of September 30, Appendix A to Definitive Proxy Statement for a
1997 between the Company and New Marriott MI, Special Meeting of Shareholders commenced on March
Inc. 17, 1998 and adjourned on March 20, 1998.
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
10.10 Agreement and Plan of Merger dated as of Appendix B to Definitive Proxy Statement for a
September 30, 1997 by and among the Company, Special Meeting of Shareholders commenced on March
Marriott - ICC Merger Corp., New Marriott MI, 17, 1998 and adjourned on March 20, 1998.
Inc., Sodexho Alliance, S.A., and International
Catering Corporation.
10.11 Omnibus Restructuring Agreement dated as of Appendix C to Definitive Proxy Statement for a
September 30, 1997 by and among the Company, Special Meeting of Shareholders commenced on
Marriott - ICC Merger Corp., New Marriott MI, March 17, 1998 and adjourned on March 20, 1998.
Inc., Sodexho Alliance, S.A., and International
Catering Corporation.
10.12 Amendment Agreement, dated as of January 28, Appendix D to Definitive Proxy Statement for a
1998, by and among the Company, Marriott-ICC Special Meeting of Shareholders commenced on
Merger Corp., New Marriott MI, Inc., Sodexho March 17, 1998 and adjourned on March 20, 1998.
Alliance, S.A., and International Catering
Corporation.
10.13 Employee Benefits and Other Employment Exhibit No. 10.1 to Form 10 of New Marriott MI,
Matters Allocation Agreement, dated as of Inc. filed on February 1, 1998.
September 30, 1997, by and between the Company
and New Marriott MI, Inc. Computation of Ratio
of Earnings to Fixed Charges. Subsidiaries of
Marriott International, Inc. Consent of Arthur
Andersen LLP. Forward-Looking Statements.
10.14 Trademark and Trade Name License Agreement Exhibit No. 10.18 to Form 10-K/A filed on April 15,
dated as of March 27, 1998 among the Company, 1998.
New Marriott and Marriott Worldwide Corporation.
10.15 Royalty Agreement dated as of March 27, 1998 Exhibit No. 10.19 to Form 10-K/A filed on April
between Sodexho Alliance, S.A. and the Company. 15, 1998.
10.16 $620 million Credit Agreement dated as of (a) Exhibit No. 10(a) to Form 8-K/A dated April 27,
January 30, 1998 with the Company, as Borrower, 1998; and (b) Exhibit No. 10(c) to Form 8-K/A
certain initial lenders, as Initial Lenders, dated April 27, 1998 (Amendment No. 1).
Societe Generale and J.P. Morgan Securities Inc.
("J.P. Morgan"), as Arrangers, Societe Generale,
as Administrative Agent, and Morgan Guaranty
Trust Company of New York ("Morgan"), as
Documentation Agent, as amended.
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED
(3) Exhibits, Continued
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
--- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C>
10.17 $735 million Credit Agreement dated as of (a) Exhibit No. 10(b) to Form 8-K/A dated April 27,
January 30, 1998 with Sodexho Marriott 1998 and (b) Exhibit No. 10(d) to Form 8-K/A dated
Operations, Inc., as Borrower, the Company, as April 27, 1998 (Amendment No. 1).
Parent Guarantor, certain initial lenders, as
Initial Lenders, Societe Generale and Morgan, as
Initial Issuing Banks, Morgan, as Documentation
Agent and Administrative Agent, and Societe
Generale and J.P. Morgan, as Arrangers, as
amended.
10.18 Stockholder Agreement dated as of March 27, 1998 Exhibit No. 10.22 to Form 10-K/A filed on April 15,
with Sodexho Alliance, S.A. 1998.
10.19 Severance agreement with Charles D. O'Dell, Filed herewith.
dated as of May 3, 1999.
12 Schedule of Ratio of Earnings to Fixed Charges. Filed herewith.
21 Subsidiaries of Sodexho Marriott Services, Inc. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, Filed herewith.
Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Filed herewith.
Independent Public Accountants.
24 Power of Attorney. Filed herewith.
99 Forward-Looking Statements. Filed herewith.
</TABLE>
(B) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE ITEM REPORTED
---- -------------
<S> <C>
September 17, 1998 Announcement of the 1999 Annual
Meeting of Stockholders.
May 3, 1999 Announcement of the Company's Board
of Directors had named Michel Landel
as President and Chief Executive
Officer and a member of the Board of
Directors of the Company.
July 29, 1999 Announcement relating to the
Company's investor conference held in
New York, New York.
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 29th day of
October, 1999.
SODEXHO MARRIOTT SERVICES, INC.
By: /S/ ROBERT A. STERN
-------------------------
Robert A. Stern
Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* President and Chief Executive Officer October 29, 1999
- --------------------------- and Director (Principal
Michel Landel Executive Officer)
/S/ LAWRENCE E. HYATT Senior Vice President and Chief Financial October 29, 1999
- --------------------------- Officer (Principal Financial Officer)
Lawrence E. Hyatt
/S/ LOTA S. ZOTH Vice President, Corporate Controller and October 29, 1999
- --------------------------- Chief Accounting Officer (Principal
Lota S. Zoth Accounting Officer)
* Chairman and Director October 29, 1999
- ---------------------------
William J. Shaw
* Director October 29, 1999
- ---------------------------
Daniel J. Altobello
* Director October 29, 1999
- ---------------------------
Pierre Bellon
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* Director October 29, 1999
- ---------------------------
Bernard Carton
* Director October 29, 1999
- ---------------------------
Doctor R. Crants
* Director October 29, 1999
- ---------------------------
John W. Marriott III
* Director October 29, 1999
- ---------------------------
Edouard de Royere
</TABLE>
*By: /S/ ROBERT A. STERN
-----------------------
Robert A. Stern
Attorney- in- fact
-69-
<PAGE>
EXHIBIT 10.19
SODEXHO MARRIOTT SERVICES, INC.
SEVERANCE AGREEMENT WITH CHARLES D. O'DELL
SEVERANCE AGREEMENT
This SEVERANCE AGREEMENT (this "Agreement"), dated as of May
3, 1999, is between SODEXHO MARRIOTT SERVICES, INC., a Delaware corporation (the
"Company") and CHARLES D. O'DELL ("O'Dell").
WHEREAS, the Company was formed on March 27, 1998 as a result
of a series of transactions (the "Transaction") in which the company that was
previously known as Marriott International, Inc. ("Old Marriott") completed a
distribution of its lodging and other related businesses to its shareholders and
the remaining food and facilities management businesses of Old Marriott were
combined with the North American operations of Sodexho Alliance, S.A. to form
the Company.
WHEREAS, in connection with the Transaction, the Company and
O'Dell entered into an Employment Agreement dated March 30, 1998 (the
"Employment Agreement") under which O'Dell became the President and Chief
Executive Officer of the Company.
WHEREAS, O'Dell holds 60,922 shares of the Company's common
stock, par value $1.00 per share (the "Common Stock") that are subject to
Deferred Stock Agreements between O'Dell and the Company (which were initially
entered into by Old Marriott or its predecessor, Marriott Corporation), dated as
of April 26, 1985, February 6, 1986 and November 2, 1995 (the "Deferred Stock
Agreements").
WHEREAS, O'Dell holds 15,231 shares of Common Stock pursuant
to the Restricted Stock Agreement between O'Dell and the Company dated October
14, 1993 (the "Restricted Stock Agreement").
WHEREAS, O'Dell holds options to purchase up to an aggregate
of 217,778 shares of Common Stock pursuant to the stock option agreements
identified on Schedule A hereto (the "Stock Option Agreements").
WHEREAS, O'Dell holds an option to purchase up to 152,266
shares of Common Stock granted pursuant to the "Supplemental Long-Term Incentive
Plan" referenced in the March 20, 1997 memorandum from J.W. Marriott, Jr. to
O'Dell (the "Supplemental Option").
WHEREAS, in his capacity as President and Chief Executive
Officer of the Company, O'Dell is entitled to participate in certain other
employee benefit plans and receives certain perquisites and benefits provided by
the Company.
WHEREAS, O'Dell and the Company jointly and amicably agree
that O'Dell shall resign as President and Chief Executive Officer and therefore
terminate his employment and service with the Company and its subsidiaries.
WHEREAS, O'Dell and the Company desire to set forth the terms
and conditions of their joint and amicable agreements regarding the resignation
of O'Dell, the termination of O'Dell's employment and service with the Company
and its subsidiaries, the terms of their relationship after O'Dell's resignation
and the effect of such resignation and termination on the Employment Agreement,
the Deferred Stock Agreements, the Restricted Stock Agreement, the Options and
the Supplemental Option.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. Resignation From and Termination of Employment.
(a) The Company and O'Dell agree that O'Dell's last day of employment with
the Company under the Employment Agreement shall be June 3, 1999 (the
"Termination Date"), however, the Company shall retain O'Dell on its payroll for
the sole purpose of implementing this Severance Agreement in accordance with the
terms hereof. O'Dell resigns immediately from all of his offices and positions
with the Company and its subsidiaries including, without limitation, his
position as a member of the Board of Directors, President and Chief Executive
Officer of the Company. O'Dell shall take no official action in the name and on
behalf of the Company or any of its subsidiaries nor have any authority to bind
the Company or any of its subsidiaries after the date hereof. O'Dell agrees to
execute and deliver to the Company and its subsidiaries such documents
concerning such resignation and termination as may be reasonably requested by
the Company or any of its subsidiaries from time to time.
(b) O'Dell and the Company agree that, notwithstanding anything in the
Employment Agreement or any other agreement, oral or written, express or
implied, to the contrary, the payments and provisions set forth in this
Agreement accurately reflect all of the compensation, benefits and perquisites
payable or otherwise to be provided to, or for services of, O'Dell by the
Company before, at or after the Termination Date and that O'Dell is not entitled
to any compensation, benefits, payments or perquisites from the Company except
as set forth in this Agreement.
-1-
<PAGE>
2. Further Assistance. O'Dell agrees to make himself reasonably available
to the Company relating to his prior services as an employee of the Company
under the Employment Agreement including, but not limited to, assisting the
Company and acting as a witness in connection with any pending or threatened
litigation or other legal proceeding with respect to which the Company
reasonably determines his participation to be necessary and responding to
questions and inquiries with respect to such prior services. Such assistance
will be without compensation to O'Dell except for compensation provided herein.
However, O'Dell will be reimbursed for any out-of-pocket expenses he incurs in
providing such assistance.
3. Payments on Termination. The Company shall continue to retain O'Dell on
its payroll for a period of twenty-four (24) months after the Termination Date
(the "Benefits Period") for purposes of making certain of the payments and
providing certain of the benefits required to be made or provided pursuant to
this Agreement.
(a) Accrued Salary and Expenses. The Company shall pay to O'Dell his base
salary, and shall reimburse his business expenses incurred on behalf of the
Company, through the date hereof, in the same manner as the Company has
previously made such payments.
(b) Base Salary. The Company shall continue to pay to O'Dell his current
base salary, less ordinary payroll deductions, from the date hereof through the
Benefits Period.
(c) Bonus Compensation. Promptly after the Termination Date, the Company
shall pay to O'Dell a pro-rata portion his target bonus for 1999, which amount
shall be equal to $365,750 multiplied by a fraction, the numerator of which
shall be the number of calendar days constituting the period from the first day
of the Company's fiscal year 1999 through the day prior to the Termination Date,
inclusive, and the denominator of which shall be 371 (representing the number of
calendar days in such fiscal year).
(d) Vacation and Sick Days. Promptly after the Termination Date, the
Company shall pay to O'Dell (1) a pro rata portion of his current base salary
for any accrued and unused, and vested vacation days through the Termination
Date and (2) in lieu of payment for sick and personal days, O'Dell's current
base salary for ten work days.
(e) Severance Payments. The Company shall
pay to O'Dell an aggregate cash amount of $1,000,000, less any applicable
payroll deductions, in two installments of $500,000 each on the first and second
anniversaries of the Termination Date.
4. Effect on Employment Agreement. Except as otherwise provided in this
paragraph, the Employment Agreement shall be terminated as of the date hereof
and shall be of no further force or effect.
(a) The Company and O'Dell each hereby waive the provisions of Section 3(d)
of the Employment Agreement.
(b) Sections 5(a), 5(d), 5(g), 5(h), 5(i), 5(j), 5(k) and 5(l) of the
Employment Agreement shall remain in full force and effect until the expiration
of the Benefits Period and are incorporated herein by reference.
(c) Section 5(e) of the Employment Agreement shall remain in full force and
effect until the expiration of the Benefits Period and is incorporated herein by
reference, except that the second sentence thereof is hereby amended to read in
its entirety as follows:
"Competition with the business of SMS shall include (i) any
business which provides competitive products or services or (ii) which provides
internal services within their organization which substitute for, replace or
otherwise compete with the services or products supplied by SMS, provided that
O'Dell is involved in the provision of such internal services, but shall not
include (a) any retail restaurant business or any business involving the sale of
food and/or food supplies which retail restaurant or food and/or food supply
business does not have as a significant portion of its business the provision of
products or services to health care, educational, governmental, corporate, or
other similar facilities or institutional accounts; (b) financial services
businesses, benefits administration businesses, or employment services
businesses (such as Manpower); or (c) food or supply manufacturers or
wholesalers (without regard to who their customers are), provided that the
amount of business that such manufacturer or wholesaler does with health care,
educational, governmental, corporate or other similar institutional food service
accounts is not significant."
(d) Section 5(f) of the Employment Agreement shall remain in full force and
effect until the expiration of the Benefits Period and is incorporated herein by
reference, except that the second sentence thereof is hereby amended to read in
its entirety as follows:
"Therefore, prior to the expiration of the Benefits Period (as
such term is defined in the Severance Agreement between the
Executive and SMS dated as of May 3, 1999), Executive agrees
not to directly or indirectly, either for himself or for any
other person, firm or corporation, knowingly call on or
solicit, or attempt to call on or solicit, any of SMS's
customers for the purpose of offering or providing any product
or service that would be deemed to compete with or to be
similar to SMS's products or services under the standards set
forth in Section 5(e) of this Agreement."
-2-
<PAGE>
5. Effect on Options.
(a) The Supplemental Option and all rights and benefits of O'Dell
thereunder shall be terminated and canceled as of the Termination Date and
thereafter shall be of no further force or effect.
(b) The Stock Option Agreements and all rights and benefits of O'Dell
thereunder shall remain in full force and effect, and the options granted
thereby (the "Options") shall continue to vest in accordance with the terms of
the Stock Option Agreements, until the expiration of the Benefits Period as if
O'Dell's employment by the Company had not terminated. All Options that are
vested as of the last day of the Benefits Period shall continue to be
exercisable through the original term of the applicable Stock Option Agreement,
as if O'Dell's employment by the Company had not terminated. Options that are
not vested as of the last day of the Benefits Period shall be canceled and shall
be of no further force or effect as of such date.
(c) Upon O'Dell's request from time to time, the Company will make all
reasonable efforts to permit O'Dell to exercise his Options through
broker-assisted cashless exercises. To effect a cashless exercise, the written
notice of exercise shall direct that the Common Stock certificate or
certificates for the shares for which the Option is exercised be delivered to a
specified licensed broker acceptable to the Company, as O'Dell's agent, and, at
the time the Common Stock certificate or certificates are delivered, the broker
tenders to the Company cash (or cash equivalents acceptable to the Company)
equal to the exercise price of the Option plus the amounts, if any, of federal
and/or other taxes which the Company may be required to withhold with respect to
the exercise of the Option, which may be satisfied as provided in Section 9 of
this Agreement.
6. Effect on Deferred Stock Agreements. The parties hereby agree as
follows, and the Deferred Stock Agreements shall be deemed amended to the extent
necessary to reflect such agreement:
(a) The Deferred Stock Agreements and all rights and benefits of O'Dell
thereunder shall remain in full force and effect, and the stock awards granted
thereunder shall continue to vest in accordance with the terms of the Deferred
Stock Agreements as if O'Dell's employment had not been terminated, until the
expiration of the Benefits Period.
(b) All shares of Common Stock that are vested under the Deferred Stock
Agreements on the last day of the Benefits Period shall be distributed to O'Dell
on such date. All shares of Common Stock that have not vested as of the last day
of the Benefits Period shall be forfeited. Upon the expiration of the Benefits
Period and distribution of the Common Stock as provided in the first sentence of
this section, the Deferred Stock Agreements shall be of no further force or
effect.
7. Effect on Restricted Stock Agreement. The parties hereby agree as
follows, and the Restricted Stock Agreement shall be deemed amended to the
extent necessary to reflect such agreement:
(a) The Restricted Stock Agreement and all rights and benefits of O'Dell
thereunder shall remain in full force and effect, and installments of shares
shall continue to be released thereunder in accordance with the terms of the
Restricted Stock Agreement as if O'Dell's employment had not been terminated and
as if all performance objectives had been satisfied, until the expiration of the
Benefits Period.
(b) All Shares of Common Stock that are vested under the Restricted Stock
Agreement on the last day of the Benefits Period shall be delivered to O'Dell on
such date. All shares of Common Stock that have not vested as of the last day of
the Benefits Period shall be forfeited, and thereafter the Restricted Stock
Agreement shall be of no further force or effect.
8. Host Marriott Corporation Deferred Stock Agreement(s) and Deferred Stock
Bonus Plan. The parties agree to request in good faith that Host Marriott
Corporation ("HMC") distribute to O'Dell immediately upon expiration of the
Benefits Period (a) all securities that are vested under the Deferred Stock
Agreement(s) between HMC and O'Dell as of the last day of the Benefits Period
and (b) all securities to which O'Dell is then entitled under the HMC Deferred
Stock Bonus Plan, as, for both (a) and (b) above, a retiree with twenty (20)
years of service.
9. Tax Withholding. The Company may deduct or withhold, or require O'Dell
to remit to the Company, the amount necessary to satisfy the Company's
obligation to withhold federal, state or other taxes incurred upon O'Dell's
exercise of an Option or upon the distribution or delivery to O'Dell of shares
of Common Stock under the Deferred Stock Agreements or the Restricted Stock
Agreement. The Company shall be entitled to withhold such amounts from any
compensation or other payments then or thereafter payable to O'Dell. In
addition, O'Dell may elect to satisfy the tax withholding requirement, in whole
or in part, by having the Company withhold shares of Common Stock otherwise
issuable to him having a fair market value on the date the tax is to be
determined equal to the minimum statutory total tax which could be imposed in
connection with the transaction. For this purpose, the Common Stock shall be
deemed to have a fair market value per share equal to the closing price of the
Common Stock on the New York Stock Exchange or such other primary market in
which the Common Stock is then traded, as of the date on which the tax is to be
determined.
-3-
<PAGE>
10. Termination-Related Expenses.
(a) The Company will pay for or reimburse O'Dell for the following
termination-related expenses to the extent that such expenses are (i) incurred
prior to the earlier of 18 months following execution of this Agreement and the
commencement of O'Dell's employment as an executive by another employer and (ii)
evidenced by appropriate invoices or receipts:
(i) fees and expenses of an outplacement service;
(ii) reasonable costs of travel to job interviews, or
travel otherwise reasonably related to pursuit of
employment; and
(iii) cost of reasonable and customary office supplies.
(b) During the period referred to in Section 10(a) hereof, the Company will
provide O'Dell with a reasonably furnished office in a shared executive suite or
similar arrangement, with commensurate secretarial and switchboard support, or
pay for the cost of O'Dell's use of such office space and support.
(c) Four months after the date of this Agreement, O'Dell and the Company
will discuss in good faith fixing a monthly amount to be paid in lieu of actual
cost reimbursements for the items in Sections 10(a)(i), 10(a)(iii) and 10(b).
(d) The Company will pay the reasonable attorneys' fees and expenses
incurred by O'Dell in connection with the negotiation and execution of this
Agreement upon receipt of an invoice therefor.
11. Certain Employee Benefit Plans and Agreements.
(a) Until the expiration of the Benefits Period (or, if earlier, until
O'Dell becomes employed by another employer), O'Dell shall be entitled to
participate fully in the Company's 401(k) Plan in accordance with its terms and
shall be eligible for matching contributions by the Company in accordance with
the provisions of the Plan, to the same extent as other executives of the
Company.
(b) Vested amounts accrued to O'Dell's account under deferred compensation
plans of the Company shall be distributed to O'Dell following the expiration of
the Benefits Period, in accordance with O'Dell's elections and in accordance
with the terms of such plans.
(c) Until the expiration of the Benefits Period, the Company shall continue
to make available to O'Dell coverage under the Company's health and dental
insurance plans on the same terms as such benefits are made available to other
executives of the Company.
(d) After the expiration of the Benefits Period, O'Dell shall have the
option to convert and continue his health and dental insurance coverage, at his
sole expense and at then current rates for a period not to exceed 24 months
after the expiration of the Benefits Period in accordance with the rules and
procedures of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA").
(e) Any coverage under disability or accidental death and dismemberment
insurance plans currently provided to O'Dell by the Company shall discontinue on
the Termination Date.
12. Certain Perquisites.
(a) The Company shall pay O'Dell $7,500 on the Termination Date and $7,500
on the first anniversary of the Termination Date in lieu of the current $7,500
executive allowance program.
(b) Any coverage under business travel life insurance plans currently
provided to O'Dell by the Company shall discontinue on the Termination Date.
(c) The Company shall reimburse O'Dell for costs incurred by O'Dell in
connection with travel to one board meeting of the National Restaurant
Association and one board meeting of Second Harvest, provided in each case that
such meeting occurs in May 1999. The Company shall reimburse O'Dell for costs
incurred by O'Dell or his spouse in connection with his spouse's travel to one
of these meetings.
(d) O'Dell's car allowance shall continue until the expiration of the
Benefits Period on the same terms that are in effect at the time of this
Agreement.
(e) The Company shall, prior to, on or promptly after the Termination Date,
transfer to O'Dell ownership and possession of O'Dell's office computer.
(f) O'Dell shall remain eligible to participate in the Marriott/Sodexho
Marriott umbrella plan for cellular phones to the same extent and on the same
terms as other executives of the Company.
-4-
<PAGE>
13. Releases.
(a) O'Dell, on behalf of himself and his heirs, executors, administrators,
successors and assigns, forever releases and discharges the Company, Marriott
International, Inc., Host Marriott Corporation and Sodexho Alliance, S.A., and
their respective agents, officers, employees, directors, stockholders and
affiliates, and the respective successors and assigns of each of the foregoing
persons and entities, from and against any and all claims, damages, lawsuits,
actions, causes of action, and liabilities whatsoever, whether known or unknown,
absolute or contingent, accrued or unaccrued, including but not limited to, all
claims arising from or in any way connected with O'Dell's employment by the
Company and the termination of O'Dell's employment with the Company, but
excluding any claims, damages or liabilities associated with any breach by any
of the foregoing parties after the date hereof of the terms of this Agreement or
any agreement referred to herein to the extent that such agreement remains in
effect after the date hereof. This release includes, but is not limited to,
rights or claims arising under Title VII of the Civil Rights Act of 1964, as
amended, the Employee Retirement Income Security Act of 1974, as amended, the
Americans with Disabilities Act and any other federal, state or local statutes
or common-law rights of action prohibiting employment discrimination based on
sex, race, color, national origin, religion, handicap or veteran status or
otherwise concerning O'Dell's employment. O'Dell also agrees not to sue or
otherwise institute or cause to be instituted or in any way voluntarily
participate in the prosecution of any complaints or charges against any person
or entity released herein in any federal, state, District of Columbia or other
court, administrative agency or other forum concerning any claims released
herein. Notwithstanding anything to the contrary contained in this Agreement, if
O'Dell is a party or is added or joined as a party to any suit or proceeding,
whether civil, criminal, administrative or investigative by reason of any acts
or omission prior to the date of this Agreement, or by reason of the fact that
he was a director, officer, employee, or agent of the Company at any time prior
to the date of this Agreement, the indemnification and insurance provisions
contained in the Company's By-Laws (as such By-Laws consist as of the
Termination Date) shall continue to apply to O'Dell, and O'Dell does not release
any claims with respect to such indemnification. If O'Dell is sued or made a
party to a suit or proceeding by a bona fide third party by reason of any acts
or omission related to the Company prior to the date of this Agreement, or by
reason of the fact that he was a director, officer, employee, or agent of the
Company at any time prior to the date of this Agreement, then notwithstanding
the provisions of this paragraph, O'Dell will not be prevented from taking any
action in connection with such suit or proceeding with respect to any person
otherwise released. O'Dell's release contained in this Section as to Sodexho
Alliance, S.A., Marriott International, Inc., and Host Marriott Corporation
shall be conditional upon O'Dell's receipt of a release, respectively, from each
of those companies in a form consistent with Section 13(c) of this Agreement.
(b) O'Dell acknowledges that he has carefully read this Agreement which
includes the release set forth in Section 13(a) (the "Release of Claims") and
fully understands all of its terms. O'Dell is signing this Agreement voluntarily
and with full knowledge of its significance and acknowledges that he has not
relied upon any representation or statement, written or oral, not set forth in
this Agreement.
(c) The Company, on behalf itself and its subsidiaries and their respective
successors and assigns, forever releases and discharges O'Dell from and against
any and all claims, damages, lawsuits, actions, causes of action, and
liabilities whatsoever, whether known or unknown, absolute or contingent,
accrued or unaccrued, including but not limited to all claims arising from or in
any way connected with O'Dell's employment by the Company and any subsidiary of
the Company and the termination of O'Dell's employment with the Company, but
excluding any claims, damages or liabilities associated with any breach by
O'Dell after the date hereof of the terms of this Agreement or any agreement
referred to herein to the extent that such agreement remains in effect after the
date hereof. The Company also agrees not to sue or otherwise institute or cause
to be instituted or in any way voluntarily participate in the prosecution of any
complaints or charges against O'Dell in any federal, state, District of Columbia
or other court, administrative agency or other forum concerning any claims
released herein.
14. Injunctive Relief. O'Dell acknowledges and agrees that the
compensation, benefits and other entitlements provided to him under this
Agreement are adequate consideration for Section 4. O'Dell acknowledges and
warrants that he will be fully able to earn an adequate livelihood for himself
and his dependents if Section 4 should be specifically enforced against him.
O'Dell also acknowledges that the restrictions contained in Section 4 are
reasonable and necessary to protect the business and interests of the Company,
the Company has relied and is relying upon the enforceability of such
restrictions in entering into this Agreement, and any violation of these
restrictions will cause substantial irreparable injury to the Company.
Therefore, O'Dell agrees that the Company is entitled, in addition to other
remedies, to preliminary and permanent injunctive relief to secure specific
performance, and to prevent a breach or contemplated breach, of Section 4. The
restrictions set forth in Section 4 shall be construed as independent covenants,
and the existence of any claim or cause of action against the Company, whether
predicated upon this Agreement or otherwise, shall not constitute a defense to
the enforcement by the Company of the restrictions contained in Section 4.
O'Dell hereby consents to the jurisdiction over his person of any courts within
the State of Maryland with respect to any proceedings in law or in equity
arising out of this Agreement. If any court of competent jurisdiction shall hold
that the restrictions contained in Section 4 are unreasonable as to time or
geographical area, said restrictions shall be deemed to be reduced to the extent
necessary in the opinion of such court to make them reasonable.
-5-
<PAGE>
15. No Disparagement. O'Dell agrees not to disparage the reputation of the
Company or Sodexho Alliance, S.A., any subsidiary or affiliate of either entity,
or any and all of the officers, directors, employees, agents or affiliates of
any of the foregoing, and will take no steps and make no statements detrimental
to the reputation or interests of any such person or entity, or those associated
with any such person or entity; provided, however, that O'Dell may make any
statements about the foregoing that he is required to make by law. The Company
agrees not to disparage the reputation of O'Dell, and not to take any steps or
make any statements detrimental to the reputation or interests of O'Dell;
provided, however, that the Company may make any statements about O'Dell that it
may be required to make by law.
16. Nondisclosure of this Agreement. The parties hereto agree that they
will keep the terms, amounts and facts of this Agreement completely
confidential, and will not hereafter disclose any information concerning this
Agreement to anyone except their respective attorneys or accountants, including,
but not limited to, any past, present, or prospective employees of the Company
or any of its parent, subsidiary or related companies or entities, except, in
each case, as may be required by law or as permitted in writing by the Company
and O'Dell or as may be necessary in furtherance of the agreements hereunder.
O'Dell will not, directly or indirectly, discuss the circumstances of his
termination with any client or customer of the Company, any securities analyst,
securities broker, or any agent or representative of any of the foregoing, and
will direct all inquiries to the investor relations staff of the Company.
17. Cooperation With Legal Process. O'Dell agrees that if he receives a
subpoena or is otherwise required by law to provide information to a
governmental entity or other person concerning the activities of the Company or
his activities in connection with the Company's business, he will immediately
notify the General Counsel of the Company of such subpoena or requirement and
deliver to the General Counsel of the Company a copy of such subpoena or other
notice, unless such disclosure would in the opinion of a recognized legal expert
on such matters, be prohibited by law.
18. Payments and Stock Distributions in the Event of Death. In the event of
O'Dell's death, any payments or stock distributions otherwise payable to him
under this Agreement shall be paid to the legal representative(s) of his estate.
19. No Assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any rights or obligations hereunder
(other than by operation of law) without first obtaining the written consent of
the other party hereto. However, in the event of the death of O'Dell all rights
to receive payments hereunder shall become rights of O'Dell's estate.
20. Amendment; Modification; Waiver. No amendments or additions to this
Agreement shall be binding unless in writing and signed by both of the parties
hereto. No delay or failure at any time on the part of the Company or O'Dell in
exercising any right, power or privilege under this Agreement, or in enforcing
any provision of this Agreement, shall impair any such right, power, or
privilege, or be construed as a waiver of any default or as any acquiescence
therein, or shall affect the right of such party thereafter to enforce each and
every provision of this Agreement in accordance with its terms.
21. Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
22. Severability. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
23. Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when hand delivered, sent by overnight courier,
or mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by telegram, telecopy or telex,
addressed as follows:
If to the Company:
Sodexho Marriott Services, Inc.
9801 Washingtonian Boulevard
Gaithersburg, Maryland 20878
Telecopy No.: (301) 987-4499
Attention: General Counsel
If to O'Dell:
Charles D. O'Dell
10803 Cripplegate Road
Potomac, Maryland 20854
Telecopy No.: (301) 983-1296
-6-
<PAGE>
with a copy (which shall not constitute notice) to:
Bruce S. Mendelsohn, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W., Suite 400
Washington, District of Columbia 20036
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
24. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto, and supersedes all prior oral or written agreements,
commitments or understandings, including the Employment Agreement, with respect
to the matters provided for herein, except as otherwise specifically provided
herein.
25. Further Assurance. Each party hereto agrees that, at any time, and from
time to time, such party shall execute and deliver such further documents as the
other party hereto may reasonably request to effect fully the purposes of this
Agreement.
26. Consent to Jurisdiction. All judicial proceedings brought against the
Company arising out of or relating to this Agreement must be brought in a state
or federal court of competent jurisdiction in the State of Maryland. By
execution and delivery of this Agreement the parties accept for themselves,
respectively, and in connection with their properties, generally and
unconditionally, the exclusive jurisdiction of the aforesaid courts and waive
any defense of forum non conveniens and irrevocably agree to be bound by any
judgment rendered thereby in connection with this Agreement, in each respect to
the maximum extent permitted by law.
27. Enforceability Representation. Each party to this Agreement represents
that this Agreement constitutes the legally valid and binding obligation of such
party, enforceable against such party in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights generally (including, without
limitation, fraudulent conveyance laws) and by general principles of equity,
including without limitation, concepts of materiality, reasonableness, good
faith and fair dealing and the possible unavailability of specific performance
or injunctive relief, regardless of whether considered in a proceeding in equity
or at law.
28. Consents. Each of the parties further represents that it is not
required to submit any notice, report or other filing to or obtain any consent
or approval from any governmental authority or third party under any agreement
to which the party is a party or under any law to which it is subject in order
to execute, deliver and perform this Agreement as contemplated hereby.
29. Attorney's Fees. In the event of any action by any party arising under
or out of, in connection with or in respect of this Agreement, including any
participation in bankruptcy proceedings to enforce against a party a right or
claim in such proceedings, the prevailing party shall be entitled to reasonable
costs, expenses and attorneys' fees incurred in such action. Attorneys' fees
incurred in enforcing any judgment in respect of this Agreement are recoverable
as a separate item. The parties intend that the preceding sentence be severable
from the other provisions of this Agreement, survive any judgment and, to the
maximum extent permitted by law, not be deemed merged into such judgment.
30. Interpretation. Each party hereto hereby acknowledges that:
(a) it or he was represented by counsel and had an opportunity to
participate equally in the drafting and negotiations of this Agreement;
(b) such negotiations were extensive and have been conducted on an arm's
length basis;
(c) O'Dell is sophisticated and has substantial experience in business,
financial and legal matters; and
(d) there are no circumstances surrounding the drafting or negotiations of
this Agreement and no other reason that would or should require a court
construing this Agreement to construe it more strictly or stringently against
one party than against the other party.
31. Governing Law. This Agreement shall be governed by the laws of the
State of Maryland, excluding the choice of law rules thereof.
32. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but each of which taken together shall
constitute one and the same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in their names and on their behalf as of the date
first above written.
SODEXHO MARRIOTT SERVICES, INC.
By: /S/ ROBERT A. STERN
-------------------------------------------
Name: ROBERT A. STERN
-------------------------------------------
Title: SENIOR VICE PRESIDENT--GEN. COUNSEl
-------------------------------------------
Date of Execution: May 3, 1999
/S/ CHARLES D. O'DELL
-------------------------------------------------
CHARLES D. O'DELL
Date of Execution: May 3, 1999
-8-
<PAGE>
SCHEDULE A
DATE OF OPTION AGREEMENT NUMBER OF SHARES SUBJECT TO OPTION AT MAY 3, 1999
- ------------------------ -------------------------------------------------
June 8, 1998 85,000
November 6,1997 46,583
November 7, 1996 34,265
November 2, 1995 31,066
November 3, 1994 20,864
-9-
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions)
FISCAL YEAR 34 WEEKS FISCAL YEAR ENDED
-----------------------------------------
1999 AUGUST 28, 1998 1997 1996 1995 1994
-------------- ------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income Before Extraordinary Item $ 51 $ 58 $335 $306 $247 $200
Add / (Deduct):
Tax and Extraordinary Item 41 42 219 196 165 142
Fixed Charges 88 65 179 142 107 84
Interest Capitalized as Property and Equipment -- -- (16) (9) (8) (4)
(Income) / Loss Related to certain 50%-or-Less-
Owned-Affiliates -- -- -- 1 -- (2)
-------------- ------------------- --------- ---------- --------- ----------
Earnings Available For Fixed Charges $180 $165 $717 $636 $511 $420
============== =================== ========= ========== ========= ==========
Fixed Charges:
Interest Including Amounts Capitalized as
Property and Equipment $ 88 $ 65 $126 $ 94 $ 61 $ 36
Portion of Rental Expense Representative of
Interest -- -- 53 48 45 45
Share of Interest Expense of certain 50%-or-Less-
Owned-Affiliates -- -- -- -- 1 3
-------------- ------------------- --------- ---------- --------- ----------
Total Fixed Charges $ 88 $ 65 $179 $142 $107 $ 84
============== =================== ========= ========== ========= ==========
Ratio of Earnings to Fixed Charges 2.0 2.5 4.0 4.5 4.8 5.0
============== =================== ========= ========== ========= ==========
<FN>
For the purpose of computing the ratio of earnings to fixed charges as prescribed by the rules and regulations of the Commission,
earnings represent income before cumulative effect of a change in accounting principle and extraordinary item, plus, when
applicable, (a) taxes on such income, (b) fixed charges, and (c) the Company's equity interest in losses of certain
50%-or-less-owned-affiliates; less (x) undistributed earnings of 50%-or-less-owned-affiliates, and (y) interest capitalized. Fixed
charges represent interest (including amounts capitalized), representative of interest, and when applicable, the Company's share of
the interest expense of certain 50%-or-less-owned-affiliates.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21
9/3/1999 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 1
DOMESTIC SUBSIDIARIES
STATE INCORPORATION 10-K REPORT
State: Alabama
Marcorp, Inc.
State: California
Sodexho Management Corp.
Saga Health Care Dietary Management Services, Inc.
Saga Education Food Services, Inc.
LunchStop, Inc.
Servo Foods, Inc.
State: Connecticut
Sodexho Services, Inc.
State: Delaware
Sodexho Marriott Services, Inc.
Sodexho Marriott Operations, Inc.
Sodexho Marriott Laundry Services, Inc.
Sodexho Marriott Education Services, Inc.
SMS Services of California, Inc.
SMO Finance Corp.
International Catering Corporation
Gardner Merchant Holdings, Inc.
Corporate Food Services, Inc.
Sodexho Marriott Services of Indiana Limited Partnership
SDH I, Inc.
SDH II, Inc.
SDH III, Inc.
SDH IV, Inc.
State: Massachusetts
Sodexho USA, Inc.
International Catering Corp. of Massachusetts
State: New Jersey
SMS Electrical, Inc. dba SMS Electrical and Plumbing
State: New York
Sodexho Marriott Management, Inc.
Service Systems Corporation
State: Texas
Premier Hospitality, Inc.
Premier Hospitality Club, Inc.
Sodexho Marriott Services of Texas Limited Partnership
State: Vermont
Sodexho Vermont, Inc.
<PAGE>
9/3/1999 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 2
FOREIGN SUBSIDIARIES
CORPS. WITHIN COUNTRY 10-K LIST
Country: Canada, Ontario
Sodexho MS Canada, Ltd. dba Sodexho Marriott Services Canada
Ontrak Services, Inc.
Country: Canada, Quebec
Sodexho Marriott Quebec Ltee
Sodexho Financiere du Canada, Inc.
Sodexho Canada, Inc. dba Sodexho Services Canada
Luc, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-63863, No. 333-63861, No. 33-66624, No. 33-85420
and No. 333-00404) of Sodexho Marriott Services, Inc. of our report dated
October 8, 1999 relating to the financial statements, which appears on page 32
of this Annual Report on Form 10-K.
/s/PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
October 27, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated February 3, 1998 (except with respect to the matters discussed in
Notes 2 and 14 of the Company's financial statements, as to which the date is
October 7, 1998), included in this Form 10-K, into the Company's previously
filed Registration Statements Files No. 33-66624, No. 33-85420, No. 333-00404,
No. 333-63863,and No. 333-63861.
/s/ARTHUR ANDERSEN LLP
Vienna, VA
October 27, 1999
Exhibit 24
POWER OF ATTORNEY
We the undersigned directors of Sodexho Marriott Services, Inc.
(the "Corporation"), do hereby constitute and appoint Robert A. Stern and Joan
Rector McGlockton, or either or both of them, with full power of substitution,
our true and lawful attorneys-in-fact and agents, to do any and all acts and
things in our names and our behalf in our capacities as directors for the
purpose of executing and filing on behalf of the Corporation, a Form 10-K for
the fiscal year ended September 3, 1999, including any exhibits thereto and any
and all amendments thereto; and we hereby ratify and confirm all that said
attorneys and agents shall do or cause to be one by virtue thereof.
IN WITNESS WHEREOF, each of the undersigned has executed and
delivered this Power of Attorney on and as of October 13, 1999.
<TABLE>
<S> <C>
/s/ WILLIAM J. SHAW /s/ PIERRE BELLON
- ------------------------------------------------ -----------------------------------------------
William J. Shaw, Director Pierre Bellon, Director
/s/ BERNARD CARTON /s/ EDOUARD DE ROYERE
- ------------------------------------------------ -----------------------------------------------
Bernard Carton, Director Edouard de Royere, Director
/s/ JOHN W. MARRIOTT, III /s/ DOCTOR R. CRANTS
- ------------------------------------------------ -----------------------------------------------
John W. Marriott, III, Director Doctor R. Crants, Director
/s/ DANIEL J. ALTOBELLO /s/ MICHEL LANDEL
- ------------------------------------------------ -----------------------------------------------
Daniel J. Altobello, Director Michel Landel, Director
</TABLE>
<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 FISCAL YEAR ENDED SEPTEMBER 3, 1999 CONSOLIDATED STATEMENT
OF INCOME AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 3, 1999 FROM
THE COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR OTHER YEAR
<FISCAL-YEAR-END> SEP-03-1999 AUG-28-1998 JAN-02-1998
<PERIOD-START> AUG-29-1999 JAN-03-1998 JAN-04-1997
<PERIOD-END> SEP-03-1999 AUG-28-1998 JAN-02-1998
<CASH> 48 79 139
<SECURITIES> 0 10 9
<RECEIVABLES> 445 374 487
<ALLOWANCES> 21 17 12
<INVENTORY> 60 54 116
<CURRENT-ASSETS> 642 605 914
<PP&E> 257 249 763
<DEPRECIATION> 172 167 258
<TOTAL-ASSETS> 1,347 1,341 5,009
<CURRENT-LIABILITIES> 718 695 1,149
<BONDS> 1,010 1,091 1,829
0 0 0
0 0 0
<COMMON> 62 62 32
<OTHER-SE> (556) (617) 1,431
<TOTAL-LIABILITY-AND-EQUITY> 1,347 1,341 5,009
<SALES> 4,502 2,828 5,026
<TOTAL-REVENUES> 4,502 2,828 5,026
<CGS> 4,198 2,709 4,847
<TOTAL-COSTS> 4,198 2,709 4,869
<OTHER-EXPENSES> 133 97 94
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 88 65 110
<INCOME-PRETAX> 92 (32) (15)
<INCOME-TAX> 41 13 15
<INCOME-CONTINUING> 51 (19) 0
<DISCONTINUED> 0 77 335
<EXTRAORDINARY> 0 (44) 0
<CHANGES> 0 0 0
<NET-INCOME> 51 14 335
<EPS-BASIC> 0.82 0.27 10.53
<EPS-DILUTED> 0.81 0.27 10.53
<FN>
On April 15, 1998, the Board of Directors of the Company approved the change of
the fiscal year of the Company to the Friday nearest to August 31 of each year.
Prior to this change in fiscal year, the Company's fiscal year ended on the
Friday nearest to December 31 of each year. Thus, the 1998 fiscal year, which
began on January 3, 1998, ended on August 28, 1998, and the 1999 fiscal year
began on August 29, 1998 and ended on September 3, 1999 and was a 53-week
period.
</FN>
</TABLE>
EXHIBIT 99
SODEXHO MARRIOTT SERVICES, INC.
FORWARD-LOOKING STATEMENTS
SUMMARY OF IMPORTANT FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As indicated previously, this report contains forward-looking statements 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
expand its business, and reduce its debt over a reasonable period of time, and
be able to attract, hire, train and retain competent employees. There can no
assurance, however, that the Company's efforts to execute all elements of 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 less than two years as an independent,
publicly owned, food service and facilities management company. The Company's
management has limited experience in operating and managing a public company
with indebtedness that exceeds its assets, or in integrating an acquisition the
size of Sodexho North America. The Company also 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,
invest in information technology infrastructure 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, a failure by the Company 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 substantial 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. This relationship may also require the Company's management
to focus on issues arising from cultural and geographic differences, rather than
on the strategic initiatives specifically designated for the North American
marketplace. Effects might also 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 September 3, 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 or through March 27, 2001. 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
before March 27, 2001. 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, or through March 27, 2002. 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 four
years prior to the Transactions, is not as well known in that market as the
"Marriott" name. The Company may have to make additional expenditures to
position its new name in the marketplace and cannot predict with certainty the
extent to which the substitution of a new name may adversely affect its
retention and acquisition of clients. Further, to the extent that the Company
fails to perform its obligations under its license agreements with New Marriott
or Sodexho, each of New Marriott and Sodexho could successfully prevent the
Company from using their respective names, which could adversely affect the
Company's retention and acquisition of clients and its financial performance.
DIVIDEND POLICY. Prior to the Transactions, the Company paid regular
quarterly dividends. On October 13, 1999, the Company's Board of Directors
declared a dividend for fiscal year 1999 of $0.08 per common share for Fiscal
Year 1999, payable on December 10, 1999 to shareholders of record on November
22, 1999. In the future, the Company may pay 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
percent of the Company's net income, or 45 percent when the ratio of the
Company's consolidated debt to EBITDA (as defined in the documentation for the
credit facility agreements) is less than 4 but not less than 3. This restriction
will no longer apply when such ratio is less than 3. The payment and amount of
cash dividends on the Company's common stock will be subject to the sole
discretion of the Company's Board, which will review the Company's dividend
policy at such times as may be deemed appropriate. 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.
YEAR 2000 READINESS. The Company is actively addressing potential issues
arising from the historical computer programming practice of using two digits
rather than four digits to signify dates (e.g. "00" instead of "2000"). This
practice could cause the Company's owned and operated computer-based technology
to process dates incorrectly because of an inability to distinguish properly
between 1900 and 2000, and 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. 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.
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.
