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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 1, 2000
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) 987-4500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of October 23, 2000, the number of shares of common stock outstanding was
63,254,642. The aggregate market value of shares of common stock held by
non-affiliates at October 23, 2000 was $548,037,467.
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 1, 2000 are
incorporated by reference into Part III of this report.
Index to Exhibits is located on pages 54 through 58 of this report.
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SODEXHO MARRIOTT SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 2000
<TABLE>
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TABLE OF CONTENTS
PAGE
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<S> <C>
INTRODUCTION
Overview 2
Forward-Looking Statements 2
Pro Forma Unaudited Financial Information 3
PART I
Item 1. Business 9
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder Matters 13
Item 6. Selected Historical Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 51
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management 51
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54
</TABLE>
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INTRODUCTION
OVERVIEW
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping, and
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. ("MI"). Upon the
consummation of the distribution (see Note 1 to the Consolidated Financial
Statements) of its lodging, senior living (Marriott Senior Living Services, or
"MSLS") and distribution services (Marriott Distribution Services, or "MDS")
businesses to existing shareholders (the "Distribution"), 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. (the
"Acquisition"), and the combined operations were renamed Sodexho Marriott
Services, Inc. In connection with the distribution and acquisition, the Company
refinanced its debt ("Refinancing"). Collectively, the distribution, acquisition
and refinancing are known as the "Transactions" (see Notes 1 through 5 to the
Consolidated Financial Statements). The subsidiaries below represent the direct
subsidiaries of the Company. Each of these direct subsidiaries, in turn, has one
or more subsidiaries.
o Sodexho Operations, LLC., with one main operating subsidiary-- Sodexho
Marriott Management, Inc. (formerly Marriott Management Services Corp.) and
its subsidiaries;
o Sodexho Financiere du Canada, Inc. (acquired in the Transactions discussed
in Note 1 to the Consolidated Financial Statements) and subsidiaries,
including its main operating subsidiary-- Sodexho Canada, Inc.;
o Sodexho MS Canada, Ltd.; and
o Universal Remote Site Holdings, Ltd.
Prior to the Transactions, Sodexho Financiere du Canada, Inc. and subsidiaries
and International Catering Corporation and subsidiaries ("ICC") were
collectively referred to as "Sodexho North America." Subsequent to the
Transactions, ICC was merged into Sodexho Operations, LLC. Also, the former
Marriott Corporation of Canada, Ltd. and subsidiaries and the former Marriott
Management Services Corp. and subsidiaries were collectively referred to as
"MMS."
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 ("Sodexho"), (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, 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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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 1, 2000, compared with the fiscal
year ended September 3, 1999, the thirty-four weeks ended August 28, 1998 and
the historical fiscal year 1997 (presented in Item 8 of this report), but also
the results for the fiscal year ended September 1, 2000, compared with the pro
forma operating results and pro forma cash flow for the full fiscal years ended
September 3, 1999 and August 28, 1998, as well as the condensed balance sheet as
of September 1, 2000 and September 3, 1999.
Prior to March 27, 1998, pro forma sales include the combined actual activity of
the food and facilities management services business of MMS and Sodexho North
America. Similarly, pro forma corporate expenses include the combined corporate
overhead of both businesses. No synergies were assumed for periods presented
prior to March 27, 1998. In the aggregate, the Company achieved its $40 million
cumulative annual synergy target for fiscal year 2000, of which approximately
$20 million was incremental to fiscal year 2000. 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 end of year 2001.
Integration and restructuring charges of approximately $16 million and $31
million were excluded for pro forma fiscal years 1999 and 1998, respectively.
However, an estimate of $6 million in annual costs were included on a pro rata
basis in the period presented prior to March 27, 1998, representing incremental
costs to operate the Company as a separate public entity. Pro forma net income
reflects approximately $16 million of amortization expense for each year for the
intangible assets related to the Acquisition.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of the period prior to March 27, 1998. Effective income tax rates of 44.8% and
48% were used for pro forma fiscal years 1999 and 1998, respectively. Pro forma
results do not include any extraordinary charges related to the Refinancing, the
loss in 1997 from the sale of Marriott Management Services Corp.'s United
Kingdom operations ("MMS- UK") to Sodexho or any operating results from the MMS-
UK operations prior to its sale.
Pro forma basic earnings per share were calculated with total weighted-average
shares outstanding of 62.1 million for pro forma fiscal 1999. For pro forma
fiscal year 1998, a base of 61.9 million shares was included in pro forma basic
earning per share, which represents the number of shares outstanding at August
28, 1998. Pro forma diluted earnings per share were calculated on a base of 63.9
million shares for pro forma fiscal 1999 and 62.5 million shares for fiscal
1998. The dilutive shares were the result of the Company's convertible debt,
stock option plans and deferred stock incentive plans.
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PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME BY SEGMENT
FOR FISCAL YEARS ENDED SEPTEMBER 1, 2000, SEPTEMBER 3,1999 AND AUGUST 28, 1998
($IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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2000 1999 1998
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(52 WEEKS) (53 WEEKS) (52 WEEKS)
<S> <C> <C> <C>
SALES
Corporate Services $1,429 $1,380 $1,336
Health Care 1,399 1,323 1,277
Education 1,280 1,221 1,150
Schools 392 358 333
Canada 158 143 145
Laundries/Other 76 77 65
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TOTAL SALES 4,734 4,502 4,306
OPERATING COSTS AND EXPENSES
Corporate Services 1,336 1,290 1,253
Health Care 1,282 1,215 1,182
Education 1,204 1,150 1,093
Schools 372 338 317
Canada 151 136 140
Laundries/Other 70 72 61
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TOTAL OPERATING COSTS AND EXPENSES 4,415 4,201 4,046
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OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 93 90 83
Health Care 117 108 95
Education 76 71 57
Schools 20 20 16
Canada 7 7 5
Laundries/Other 6 5 4
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TOTAL OPERATING PROFIT 319 301 260
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CORPORATE ITEMS:
Amortization of Intangible Assets (37) (38) (37)
Corporate Expenses (86) (76) (73)
Interest Expense, Net (84) (87) (87)
Gain on Sale of Investment -- 8 --
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INCOME BEFORE INCOME TAXES 112 108 63
Provision for Income Taxes (49) (48) (30)
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PRO FORMA NET INCOME $ 63 $ 60 $ 33
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PRO FORMA BASIC EARNINGS PER SHARE $ 1.01 $ 0.96 $ 0.53
================== =================== ==================
PRO FORMA DILUTED EARNINGS PER SHARE $ 1.00 $ 0.94 $ 0.52
================== =================== ==================
</TABLE>
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DISCUSSION OF FISCAL YEAR 2000 COMPARED WITH PRO FORMA FISCAL YEAR 1999
RESULTS OF OPERATIONS
Total sales for fiscal year 2000 (52 week period ended September 1, 2000, or
"2000") were $4.7 billion, an increase of $232 million, or 5%, over $4.5 billion
for pro forma fiscal year 1999 (53 week period ended September 3, 1999, or
"1999"). Adjusting for the estimated $76 million impact of the extra week in
fiscal year 1999, sales increased $308 million, or 7%. Overall, this growth was
attributed to favorable new sales trends and solid comparable growth in existing
accounts in most of the Company's divisions. The School Services and Canada
divisions had double-digit sales growth during the year, with strong growth in
the remaining divisions, excluding the Laundries/Other division.
Managed volume, which represents the Company's measurement of gross revenues
associated with all services the Company manages on behalf of its clients, is
most relevant in the Health Care and Schools divisions. On a 52-week basis, the
Health Care division's managed volume was $2.9 billion for fiscal year 2000, up
$29 million or 1% over the $2.8 billion in managed volume for same period last
year. The Health Care division's relatively flat managed volume growth was
mostly due to the health care industry being under significant financial
pressure, impacting a large number of the Company's clients in certain
geographic markets. Managed volume for the Schools division was $698 million for
fiscal year 2000, an increase of $54 million, or 8% over the $644 million for
fiscal year 1999. The growth in the Schools division was due to the impact of
strong sales to new clients that added almost proportionately as much managed
volume as total sales for the period.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $319 million for fiscal year
2000, an increase of $18 million, or 6% when compared with $301 million in
operating profit for pro forma fiscal year 1999. Operating profit increased
mostly due to increases in the Health Care and Education divisions, as the
Education division experienced improving margins from the strong new sales in
the latter half of fiscal year 1999. In the Health Care division, operating
margins improved from strong new sales and solid comparable growth rates at
existing accounts, and the impact in fiscal year 1999 of approximately $3
million in bankruptcy related losses. Schools Services and Canada had flat
operating profits when compared with last year the result of several
under-performing client accounts that were mostly first year, larger based,
accounts. The Company anticipates that the inefficiencies in these
under-performing accounts will be resolved during the next two quarters as the
Company makes the necessary adjustments at these accounts to reach expected
operating performance.
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 96% of total sales for fiscal year 2000,
unchanged from pro forma fiscal year 1999's ratio. The Company anticipates this
margin will improve in the year ahead, as the Company achieves additional
purchasing synergies, partially offset by the continued investment of a portion
of the synergies in its businesses. In the aggregate, the Company achieved its
$40 million cumulative annual synergy target for fiscal year 2000, of which
approximately $20 million was incremental to fiscal year 2000. 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 end of year 2001. Incremental synergies
generated in fiscal year 2000 were reinvested during fiscal year 2000. The
reinvestments were primarily in additional sales and management personnel.
Corporate expenses and amortization of intangible assets in fiscal year 2000
totaled $123 million, an 11% increase from the adjusted pro forma fiscal year
1999, which excludes the $3 million pretax charge related to the resignation of
the former CEO. This was primarily due to an increase of approximately $7
million for the impact of open positions filled in the latter half of fiscal
year 1999, in addition to new positions added in the current year, along with a
$5 million increase in assistance fees paid to Sodexho Alliance for services
received, as agreed upon in the merger agreements. Pro forma fiscal year 1999
also included the favorable impact from the sale of the Company's Bright
Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million,
or $5 million after-tax ($0.07 per diluted common share).
The increase in operating profit, partially offset by the increase in corporate
expenses and the sale of BFAM in the prior year, contributed to an increase in
pretax income of $4 million, or 4%, to $112 million for fiscal year 2000. The
effective tax rate for the current period was 43.5%, a decrease from 44.8% for
1999. Net income increased to $63 million, or $1.00 per diluted share, compared
with $60 million, or $0.94 per diluted share for pro forma fiscal 1999.
Excluding the one-time resignation charge and the BFAM gain, pro forma earnings
per diluted share would have been approximately $0.90 in 1999. Diluted weighted
average shares outstanding for fiscal year 2000 were 63.5 million, compared with
63.9 million for the prior year. This reduction was mostly due to the redemption
of the convertible subordinated debt in November 1999 (see Notes 8 and 9 to the
Consolidated Financial Statements).
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<PAGE>
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 were $4.5 billion, an increase of
$196 million, or 5%, over $4.3 billion for pro forma fiscal year 1998 (52 weeks
ended August 28, 1998, or "1998"). Excluding the estimated $76 million impact of
the extra week in 1999, sales increased $120 million, or 3%. 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.
Pro forma operating profit before corporate items totaled $301 million for 1999,
an increase of $41 million, or 16%, 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 $111 million, or a 16% 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 both divisions. The 53rd week did not have a material impact
on the Company's operating profit in pro forma fiscal year 1999.
Corporate expenses and amortization of intangible assets in pro forma fiscal
year 1999 totaled $114 million, an increase of $4 million, or 4%, compared with
pro forma fiscal year 1998. Included in corporate expenses was a one-time, $3
million charge ($2 million after-tax, or $0.03 per diluted share) related to the
resignation of the former Chief Executive Officer. Excluding the one-time
resignation charge, total corporate expenses were level with pro forma fiscal
year 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 year 1999 included the favorable impact from the sale of the
Company's Bright Horizons Family Solutions ("BFAM") investment, resulting in a
gain of $8 million ($5 million after-tax, or $0.07 per diluted share).
Excluding the one-time resignation charge, total operating costs, corporate
expenses and amortization of intangible assets represented, in the aggregate,
96% of total sales for pro forma fiscal year 1999 compared with pro forma fiscal
year 1998's comparable period ratio of 97%.
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 $0.90
in 1999.
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CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999
($ IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 1, SEPTEMBER 3,
2000 1999
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ASSETS
<S> <C> <C>
Current assets
Cash and equivalents $ 54 $ 48
Accounts and notes receivable 463 445
Inventories 67 60
Other 98 89
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Total current assets 682 642
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Property and equipment, net 96 85
Intangible assets 497 535
Other 89 85
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$ 1,364 $ 1,347
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 81 $ 133
Accounts payable 305 238
Other current liabilities 379 347
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Total current liabilities 765 718
Long-term debt 900 980
Other long-term liabilities 112 113
Convertible subordinated debt - 30
Stockholders' deficit
Preferred stock, no par value, 1 million shares
authorized; no shares issued - -
Common stock, $1 par value; 300 million shares
authorized, 63 million and 62 million shares
issued and outstanding in 2000 and 1999, respectively 63 62
Additional paid-in capital 1,348 1,326
Accumulated deficit (1,826) (1,884)
Accumulated other comprehensive income 2 2
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Total stockholders' deficit (413) (494)
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Total liabilities and stockholders' deficit $ 1,364 $ 1,347
================== ==================
</TABLE>
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<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 $147
million in 2000, $145 million in 1999, and $115 million in 1998. The increase in
the adjusted operating cash flow in fiscal years 2000 and 1999 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. In fiscal year 2000, increases in cash provided
by changes in working capital were mostly due to increases in accounts payable
and other current liabilities exceeding the increase in accounts receivable by
approximately $81 million, the result of increased collection efforts in
accounts receivables and more favorable vendor payment terms and the extension
of payment cycles in accounts payables. For 1999, higher accounts and notes
receivable reflected the impact of the 53rd week and a lengthening of the
average billing cycle compared to 1998. The Company anticipates it will maintain
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 $66 million, $72
million, and $60 million for 2000, 1999, and 1998, respectively. The Company
anticipates expending approximately $70 to $75 million for capital investments
for fiscal year 2001. 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 reflect the Company's management of its debt
and other long-term liabilities. For fiscal year 2000, net cash used in
financing activities was mostly due to the $80 million scheduled repayments of
long-term debt, in addition to approximately $11 million for the cash portion of
the Liquid Yield Option(TM) Notes ("LYONs") settlement in November 1999 (see
Note 8 to the Consolidated Financial Statements). 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 $57 million in 1998.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED CASH FLOW
FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000, SEPTEMBER 3, 1999
AND AUGUST 28, 1998
($ IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999 1998
(52 WEEKS) (53 WEEKS) (52 WEEKS)
------------------- ------------------ ------------------
<S> <C> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
==========================================
Net income $ 63 $ 60 $ 33
Adjust to reconcile net income to net cash:
Depreciation expense 47 47 45
Amortization of intangible assets 37 38 37
Net changes in certain working capital and other items 74 (40) (39)
------------------- ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 221 105 76
------------------- ------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES
===================================
Capital expenditures (66) (72) (60)
Other (2) (24) (27)
------------------- ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (68) (96) (87)
------------------- ------------------ ------------------
CASH FLOW FROM FINANCING ACTIVITIES
===================================
Repayments of long-term debt (92) (70) (57)
Other (55) 30 106
------------------ ------------------- ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (147) (40) 49
------------------- ------------------ ------------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 6 $(31) $ 38
=================== ================== ==================
</TABLE>
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<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 to 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,
increasing cost pressures and low levels of unemployment.
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 additional food and facilities management
services to existing clients. Management of the Company believes that the
facilities management industry remains even more underpenetrated by large
contractors than the contract food services industry.
-9-
<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 30% 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 30% 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, recent 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/Other. These two segments collectively represent approximately 5% of
the Company's current revenues.
COMPETITION
The food and facilities management services business in North America comprises
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) 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.
-10-
<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 111,000 employees on its payroll in the U.S. and
Canada, and manages approximately 61,000 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 year 1997 to August 28,
1998. Fiscal year 2000 had 52 weeks ending on September 1, 2000. Fiscal Year
1999 had 53 weeks ending on September 3, 1999. Prior to the change in fiscal
year, the Company's 1997 historical fiscal year had 52 weeks and ended on the
Friday nearest the end of December, which was January 2, 1998.
-11-
<PAGE>
ITEM 2. PROPERTIES
The Company is headquartered in Maryland, where it has a 10-year lease ending in
December 2008 (with 2 renewable periods of 5 years each) for approximately
115,000 square feet of space at 9801 Washingtonian Boulevard, Gaithersburg,
Maryland. 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); Lexington, Massachusetts
(Corporate Services); West Lake, Texas (Schools); Burlington, Canada; and
Atlanta, Georgia (Laundries/Other). 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 20,000
square feet of office and warehouse space in Trumbull, Connecticut;
approximately 15,000 square feet of office space in Mobile, Alabama;
approximately 34,000 square feet of building space in Sunnyvale, California;
approximately 15,000 square feet of building space in Allston, Massachusetts,
and also owned 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. Also, during fiscal year 2000, the Company sub-leased
the 15,000 square feet of office space in Mobile, Alabama to a non-affiliate
entity and sold the 30,000 square foot office building in Montreal, Canada. In
addition, in June 2000, the Company terminated the Trumbull, Connecticut and
Sunnyvale, California leases prior to their expiration. These transactions did
not have an adverse impact on the Company's financial condition or results of
operations.
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 2000.
-12-
<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 was 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 years
2000 and 1999, the Transition Period, and fiscal year 1997 are as follows
(restated to reflect the one-for-four reverse stock split on March 27, 1998):
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED PER
HIGH LOW SHARE
---------------- --------------- ----------------
<S> <C> <C> <C> <C>
FISCAL YEAR 2000 First Quarter $ 19 5/16 $ 13 13/16 $.08
Second Quarter 15 3/4 10 1/8 -
Third Quarter 15 1/4 10 7/16 -
Fourth Quarter 18 15/16 14 -
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
</TABLE>
At September 1, 2000, there were 63.2 million shares of common stock outstanding
held by approximately 36,000 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, paid 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 years ended
September 1, 2000 and September 3, 1999, the 34-week period ending August 28,
1998, and fiscal years 1997, 1996 and 1995 (see below). 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
22-week 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 $0.40 per share) on the sale of
MMS- UK to Sodexho.
The historical information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto, each
contained herein.
-13-
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA, CONTINUED
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
34
FISCAL FISCAL WEEKS
YEAR YEAR AUGUST FISCAL YEAR
-------------------------------
2000(1) 1999(1) 1998(1) 1997(2) 1996(3) 1995(3)
----------- ---------- ----------- ---------- --------- ----------
($ in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $4,734 $4,502 $2,828 $5,026 $4,318 $3,634
Operating Profit Before
Corporate Expenses and Interest 319 299 119 157 177 130
Total Corporate Expenses and Interest(4) (207) (207) (151) (172) (127) (78)
----------- ---------- ----------- ---------- --------- ----------
Income (Loss) From Continuing Operations,
Before Taxes and Extraordinary Item 112 92 (32) (15) 50 52
(Provision) Benefit for Income Taxes from
Continuing Operations (49) (41) 13 15 (17) (20)
----------- ---------- ----------- ---------- --------- ----------
Income (Loss) From Continuing Operations, Before
Discontinued Operations and Extraordinary Item 63 51 (19) -- 33 32
Discontinued Operations, Net of Income Taxes(5) -- -- 77 335 273 215
----------- ---------- ----------- ---------- --------- ----------
Income Before Extraordinary Item 63 51 58 335 306 247
Loss from Extraordinary Item, Net of Income Taxes(6) -- -- (44) -- -- --
----------- ---------- ----------- ---------- --------- ----------
Net Income $ 63 $ 51 $ 14 $ 335 $ 306 $ 247
=========== ========== =========== ========== ========= ==========
PER SHARE DATA(7):
Diluted Earnings Per Share:
Continuing Operations $ 1.00 $ 0.81 $(0.36) $ -- $ 0.97 $ 0.97
Discontinued Operations(5) -- -- 1.48 10.53 8.08 6.51
----------- ---------- ----------- ---------- --------- ----------
Diluted Earnings Per Share before Extraordinary Item 1.00 0.81 1.12 10.53 9.05 7.48
Extraordinary Item(6) -- -- (0.85) -- -- --
----------- ---------- ----------- ---------- --------- ----------
Diluted Earnings Per Share $ 1.00 $ 0.81 $ 0.27 $10.53 $ 9.05 $ 7.48
=========== ========== =========== ========== ========= ==========
Cash Dividends Declared(8) $ 0.08 $ -- $ 0.36 $ 1.40 $ 1.28 $ 1.12
Diluted Weighted - Average Shares 63.5 63.9 52.0 31.8 33.8 33.0
BALANCE SHEET DATA (AT END OF YEAR):
Total Assets $1,364 $1,347 $1,341 $5,009 $4,180 $3,221
Long-Term and Convertible Subordinated Debt 900 1,010 1,091 1,829 1,300 795
Stockholders' (Deficit)/Equity (413) (494) (555) 1,463 1,260 1,054
-----------
<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 2000 had 52 weeks ended on September 1, 2000, 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 (52 weeks ended January 2, 1998)
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 ending on January 3, 1997, with fiscal
year 1995 including 52 weeks ending on December 29, 1995.
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 - The Board of Directors declared on October 13, 1999, an $0.08 per common
share dividend for fiscal year 1999, paid on December 10, 1999 to
shareholders of record on November 22, 1999--see Note 9 to the Consolidated
Financial Statements.
</FN>
</TABLE>
-14-
<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 for
fiscal years 2000 and 1999 have changed substantially compared to prior periods
presented.
In particular, the most significant differences relate to the following:
o The 1997 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 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 did 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 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 differences in the comparability of the Company's historical
operating results for fiscal years 2000 and 1999, the Transition Period, and
prior fiscal year, management believes that it is meaningful and relevant in
understanding the present and ongoing Company operations to compare fiscal year
2000 with the Company's pro forma operating results for fiscal years 1999 and
1998, 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 pro forma fiscal
year 1998. The pro formas exclude, among other items, certain non-recurring
costs such as (i) costs of the Distribution of $17 million (after-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 (pretax) in 1999 and $31 million (pretax) for 1998. See Notes 1 through
5 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. Although the Company supports certain U.S. clients in Guam,
Antarctica and the Marshall Islands, among others. 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.
-15-
<PAGE>
BUSINESS STRATEGY
The Company's key financial objective is to generate higher revenues and
increase cash flow from operations through new contract sales, the retention of
existing contracts, and improved efficiencies in the Company's operations. This
financial objective is designed to build on the performance strengths of the
Company, which include expanding relationships with existing clients, attracting
new business, identifying under-penetrated and rapidly growing segments of the
food and facilities management industry, and seeking selective strategic
acquisition candidates compatible with this objective.
The Company is positioned well 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 $130 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.
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 fiscal year 1999 was setting common goals
and the merging of best practices and business strategies. Fiscal year 1999 also
saw the successful alignment of its management team, consolidation of its
systems and processes for improved operations, and development of integrated
business strategies. This foundation carried over into fiscal year 2000, where
significant investments were made to bring additional resources to the client
level, including recruiting and training of client level operators and
increasing the Company's sales force.
A key element of the Company's strategy is obtaining additional synergies and
cost savings within its operations, particularly in the food procurement
process. In the aggregate, the Company achieved its $40 million cumulative
annual synergy target for fiscal year 2000, of which approximately $20 million
was incremental to fiscal year 2000. 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 end of year 2001. Incremental synergies generated in fiscal year
2000 were reinvested during fiscal year 2000. The reinvestments were primarily
in additional sales and management personnel.
Beginning in fiscal year 1999 and continuing in fiscal year 2000, the Company
has also invested in new systems to improve the tracking and analysis of food
procurement activities. These enhancements will result in additional procurement
efficiencies and improved operating margins in the Company's businesses. Within
these initiatives, a new procurement information system was implemented in the
latter half of fiscal year 2000. A key benefit of this new system is the
improved capturing of data regarding the Company's procurement activity. This
capability also improves the Company's ability to better match the procurement
process to the period in which it occurred, which resulted in the recording of
an increase in pretax earnings of $8 million ($5 million after-tax, or $0.07 per
diluted share) in the Company's fourth quarter of fiscal year 2000, accounted
for as a change in estimate under APB Opinion No. 20-- "Accounting Changes." The
Company estimates that approximately $5 million (pretax), or $0.04 per diluted
share, of this change in estimate relates to procurement activity prior to
fiscal year 2000, with the remainder of this impact being related to
enhancements and improved procurement-related efficiencies attributable to
fiscal year 2000.
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
were originally expected to be finalized during fiscal year 2000, however,
management has determined that the complexity of the systems review would
require additional analysis that would carry the project well into fiscal year
2001. See Item 7.--Liquidity and Capital Resources.
-16-
<PAGE>
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the 52-week period ended September 1, 2000 ("fiscal year 2000", or
"2000") as compared with the 53-week period ended September 3, 1999 ("fiscal
year 1999", or "1999") presented in the Selected Consolidated Financial
Highlights above. The discussion below also presents an analysis of fiscal year
1999 compared with the 34-week period ended August 28, 1998 (the "Transition
Period") and the Transition Period compared with the fiscal year ended January
2, 1998 (52 weeks). As detailed above, due to the differences in the
comparability of the Company's historical operating results for fiscal year
2000, compared with fiscal year 1999, the Transition Period and fiscal year
1997, management believes that it is meaningful and relevant to review the
Company's operating results for fiscal year 2000, compared with pro forma fiscal
years 1999 and 1998, presented in the "Introduction" section of this report.
HISTORICAL 52 WEEKS ENDED SEPTEMBER 1, 2000 COMPARED WITH THE 53 WEEKS ENDED
SEPTEMBER 3, 1999.
Total sales for fiscal year 2000 were $4.7 billion, an increase of $232 million,
or 5%, over $4.5 billion for fiscal year 1999. Adjusting for the estimated $76
million impact of the extra week in fiscal year 1999, sales increased $308
million, or 7%. Overall, this growth was attributed to favorable new sales
trends and solid comparable growth in existing accounts in most of the Company's
divisions. The School Services and Canada divisions had double-digit sales
growth during the year, with strong growth in the remaining divisions, excluding
Laundries/Other. Managed volume, which represents the Company's measurement of
gross revenues associated with all services the Company manages on behalf of its
clients, is most relevant in the Health Care and Schools divisions. On a 52-week
basis, the Health Care division's managed volume was $2.9 billion for fiscal
year 2000, up $29 million or 1% over the $2.8 billion in managed volume for same
period last year. The Health Care division's relatively flat managed volume
growth was mostly due to the health care industry being under significant
financial pressure, impacting a large number of the Company's clients in certain
geographic markets. Managed volume for the Schools division was $698 million for
fiscal year 2000, an increase of $54 million, or 8% over the $644 million for
fiscal year 1999. The growth in the Schools division was due to the impact of
solid new sales that added almost proportionately as much managed volume as
total sales for the period.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $319 million for fiscal year
2000, an increase of $20 million, or 7% when compared with $299 million in
operating profit for fiscal year 1999. Operating profit increased mostly due to
increases in the Health Care and Education divisions, as the Education division
experienced improving margins from the strong new sales in the latter half of
fiscal year 1999. In the Health Care division, operating margins improved from
strong new sales and solid comparable growth rates at existing accounts, and the
impact in fiscal year 1999 of approximately $3 million in bankruptcy related
losses. Schools Services and Canada had flat operating profits when compared
with last year, the result of several under-performing client accounts that were
mostly first year, larger based, accounts. The Company anticipates that the
inefficiencies in these under-performing accounts will be resolved during the
next two quarters as the Company makes the necessary adjustments at these
accounts to reach expected operating performance.
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 96% of total sales for fiscal year 2000,
unchanged from fiscal year 1999's ratio. The Company anticipates this margin
will improve in the year ahead, as the Company achieves additional purchasing
synergies, partially offset by the continued investment of a portion of the
synergies in its businesses. Overall, the Company achieved about $20 million in
additional purchasing synergies in 2000, resulting in an aggregate of over $40
million in cumulative annual synergies by the end of 2000, and as planned,
reinvested most of 2000's synergies in sales staff and management support teams.
The Company continues to anticipate cumulative synergies to reach $60 million in
cost savings annually in 2001.
Corporate expenses and amortization of intangible assets in fiscal year 2000
totaled $123 million, an 11% increase from the adjusted fiscal year 1999, which
excludes the $3 million pretax charge related to the resignation of the former
CEO and the $14 million in integration charges. This was primarily due to an
increase of approximately $7 million for the impact of open positions filled in
the latter half of fiscal year 1999 and new positions added in the current year,
along with a $5 million increase in assistance fees paid to Sodexho Alliance for
services received, as agreed upon in the merger agreements. Fiscal year 1999
also included the favorable impact from the sale of the Company's Bright
Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million,
or $5 million after-tax ($0.07 per diluted common share). The increase in
operating profits contributed to the increase in pretax income of $20 million,
or 22%, to $112 million for fiscal year 2000, as the integration and resignation
charges in 1999 were offset by the BFAM gain in 1999 and increases in corporate
expenses between the years. The effective tax rate for the current period was
43.5%, a decrease from 44.8% for 1999. Net income increased to $63 million, or
$1.00 per diluted share, compared with $51 million, or $0.81 per diluted share
for fiscal year 1999. Diluted weighted average shares outstanding for fiscal
year 2000 were 63.5 million, compared to 63.9 million for the prior year.
-17-
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
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% 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 the
Consolidated Financial Statements). Excluding the MDS and MSLS divisions, total
sales increased $2 billion, or 80%. 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 compared with the Transition Period.
Operating profit before corporate items totaled $299 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 $301 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 $207 million, an increase of $56 million, or 37%, 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 $193 million and $130 million, an increase of $63
million, or 48%. 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 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 million, or $5 million after-tax ($0.07 per
diluted common share).
Excluding the Year 2000 costs, the integration expenses and the one-time
resignation charge, total operating costs, corporate expenses and amortization
of intangible assets represented, in the aggregate, 96% of total sales for
fiscal year 1999 compared with the Transition Period's comparable period ratio
of 98%.
Total income from continuing operations before taxes was $108 million, excluding
$16 million of integration charges, versus a comparably adjusted $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 the Consolidated Financial Statements).
-18-
<PAGE>
RESULTS OF OPERATIONS, CONTINUED
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 44% 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 $1.4 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 the 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%.
Operating profit before corporate items totaled $119 million for the Transition
Period, a decrease of $38 million, or 24%, 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 28%. 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 expenses from Sodexho North America's operations for the 22-week period
ended August 28, 1998.
Excluding integration and restructuring expenses, total operating costs,
corporate expenses and amortization of intangible assets represented, in the
aggregate, 98% of total sales for the Transition Period compared with fiscal
year 1997's comparable period ratio of 99%.
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 was the result of the decrease of 18 weeks of
operations in the Transition 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 the
Consolidated Financial Statements).
-19-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged as a result of the Transactions in March 1998.
The debt resulting from the refinancing contains restrictive covenants and
requires grants of security and guarantees by subsidiaries of the Company, and
therefore limits 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. In fiscal year 2000, net cash flows from operations more
than doubled from the prior year, to $221 million. This increase was mostly due
to improved net income and increases in working capital of $82 million, the
result of increased collection efforts in accounts receivables and more
favorable vendor payment terms and the extension of payment cycles in accounts
payables. Additionally, the Company achieved its $40 million cumulative annual
synergy target for fiscal year 2000, of which approximately $20 million was
incremental to fiscal year 2000. 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 end of year 2001. These anticipated cost savings will be available to pay
down debt and reinvest in the Company to fund activities to enhance its
competitive position. Incremental synergies generated in fiscal year 2000 were
reinvested during fiscal year 2000. The reinvestments were primarily in
additional sales and management personnel.
On October 13, 1999, the Board of Directors declared an $0.08 per common share
dividend for fiscal year 1999, paid 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% of the Company's net income, or 45% when the ratio of
the Company's consolidated debt to Earnings Before Interest, Taxes, Depreciation
and Amortization ratio ("EBITDA", as defined in the documentation for the credit
facility agreements) is less than 4 but not less than 3. This restriction will
no longer apply when such ratio is less than 3. The payment and amount of cash
dividends on the Company's common stock will be subject to the sole discretion
of the Company's Board, which will review the Company's dividend policy at such
times as may be deemed appropriate. The Board will closely monitor the results
of the Company's operations, capital requirements, and other considerations to
determine the extent to which a dividend may be declared in future periods.
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 in fiscal year 2001. Most recently, the Company
began a study of a solution set for payroll, benefits and human resources
information systems, as the Company migrates from the current Marriott
International payroll-related systems. Under the current agreement, the Company
is required to migrate off the Marriott International payroll infrastructure no
later than the Company's fiscal year 2002 (see Note 5 to the Consolidated
Financial Statements).
Overall, the size of the Company's indebtedness, its restrictive covenants 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. 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 1, 2000, the Company had a $235 million revolving credit
facility available to provide funds for liquidity, seasonal borrowing needs and
other general corporate purposes. At September 1, 2000, the Company had $21
million of this revolving credit facility utilized by letters of credit
outstanding, principally related to insurance programs, with the remaining $214
million available for operations. The Company is required to make quarterly cash
interest payments on its term facilities, as well as scheduled principal
repayments on its Senior Secured Credit Facility (see Note 8 to the Consolidated
Financial Statements) amounting to approximately: $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. The results of the redemption for the
Company were the issuance of approximately 760,000 common shares and a payment
of $11 million to MI for the Company's share of bondholders choosing to redeem
in cash.
-20-
<PAGE>
NEW ACCOUNTING STANDARDS
On September 2, 2000, the Company adopted Statement of Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS No. 133"). In accordance with the provisions in SFAS No. 133, the Company
has designated all of its interest rate swap agreements as cash flow hedges. The
Company has determined that these interest rate swap agreements are highly
effective in offsetting the variable interest cash flows of the Company's debt
portfolio. The interest rate swap agreements will be recorded on the balance
sheet at fair value in other assets (or other liabilities) with the offsetting
entry to accumulated other comprehensive income, a component of stockholders'
deficit for the effective portion of the hedge. The ineffective portion of the
hedge will be recorded directly to the statement of income. The fair value of
the interest rate swap contracts were approximately $15 million (pretax) in the
aggregate as of September 1, 2000 (see Note 8 to the Consolidated Financial
Statements). There were no net gains or losses on derivatives that had
previously been deferred or gains and losses on derivatives that were previously
deferred as adjustments to the carrying amount of the hedged items. Currently,
the Company does not have any other financial contracts which contain embedded
derivatives or fair value hedge relationships which would fall within the scope
of SFAS No. 133.
YEAR 2000
The Company has actively addressed potential Year 2000 issues. These issues
could have arisen at any point in the Company's purchasing, supply, processing,
distribution and financial chains. The results to date indicate that Year 2000
issues have had no material adverse impact on the Company.
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, see Note 8 to the Consolidated
Financial Statements) as well as notes receivable which earn a variable rate of
interest. However, changes in interest rates also impact the fair value of the
Company's debt, totaling $981 million at September 1, 2000. If interest rates
increased by 100 basis points, the fair value of the Company's debt would have
decreased by approximately $17 million, while a 100 basis point decrease in
rates would have increased the fair value of the Company's debt by approximately
$17 million, based on balances at September 1, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
PAGE(S)
-------
Management's Report 22
Reports of Independent Public Accountants 23-24
Consolidated Statement of Income 25
Consolidated Balance Sheet 26
Consolidated Statement of Cash Flow 27
Consolidated Statement of Stockholders' Deficit 28
Notes to Consolidated Financial Statements 29-49
Supplementary Data 50
-21-
<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 years 2000 and 1999, the Transition Period of January 3, 1998 to
August 28, 1998, and for calendar year 1997 as described in Note 1 to the
Consolidated Financial Statements. In addition, fiscal year 2000 and pro forma
fiscal years 1999 and 1998 are presented in the Introduction section of this
report. Management believes that this presentation is meaningful and relevant 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 years 2000 and 1999
and for the Transition Period in 1998 have been audited by
PricewaterhouseCoopers LLP, independent public accountants. The historical
consolidated financial statements for 1997 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 three 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/ JOHN M. BUSH
Michel Landel John M. Bush
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
-22-
<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 statement of income and stockholders' deficit and of cash flow
present fairly, in all material respects, the financial position of Sodexho
Marriott Services, Inc. and its subsidiaries at September 1, 2000 and September
3, 1999, and the results of their operations and their cash flow for the
fifty-two weeks ended September 1, 2000, the fifty-three weeks ended September
3, 1999 and the thirty-four weeks ended August 28, 1998, in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America 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 11, 2000
-23-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sodexho Marriott Services, Inc.:
We have audited the accompanying consolidated statements of income, cash flow,
and stockholders' deficit of Sodexho Marriott Services, Inc. (formerly "Marriott
International, Inc.") for the fiscal year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated statements of income, cash flow, and
stockholders' deficit referred to above present fairly, in all material
respects, the results of Sodexho Marriott Services, Inc.'s operations and its
cash flow for the fiscal year ended January 2, 1998, in conformity with
accounting principles generally accepted in the United States.
/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)
-24-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999, THE THIRTY-FOUR WEEKS ENDED
AUGUST 28, 1998 AND THE FISCAL YEAR ENDED JANUARY 2, 1998
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JANUARY 3 TO
AUGUST 28,
2000 1999 1998 1997
----------------- ---------------- ----------------- ----------------
(52 WEEKS) (53 WEEKS) (34 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C>
SALES $4,734 $4,502 $2,828 $5,026
OPERATING COSTS AND EXPENSES
Operating expenses 4,415 4,203 2,709 4,847
Loss on sale of MMS- UK operations - - - 22
----------------- ---------------- ----------------- ----------------
4,415 4,203 2,709 4,869
----------------- ---------------- ----------------- ----------------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST 319 299 119 157
Corporate expenses, including
amortization of intangible assets (123) (128) (97) (94)
Interest expense (85) (88) (65) (110)
Interest income 1 1 11 32
Gain on sale of investment - 8 - -
----------------- ---------------- ----------------- ----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS, BEFORE TAXES AND
EXTRAORDINARY ITEM 112 92 (32) (15)
(Provision) benefit for income taxes from
continuing operations (49) (41) 13 15
----------------- ---------------- ----------------- ----------------
Income (Loss) From Continuing Operations, Before
Discontinued Operations and Extraordinary Item 63 51 (19) -
Discontinued Operations, Net of Income Taxes - - 77 335
----------------- ---------------- ----------------- ----------------
Income Before Extraordinary Item 63 51 58 335
Loss from Extraordinary Item, Net of Income Taxes - - (44) -
----------------- ---------------- ----------------- ----------------
NET INCOME $ 63 $ 51 $ 14 $ 335
================= ================ ================= ================
BASIC EARNINGS (LOSS) PER SHARE:
Continuing Operations $ 1.01 $ 0.82 $(0.36) $ -
Discontinued Operations - - 1.48 10.53
----------------- ---------------- ----------------- ----------------
1.01 0.82 1.12 10.53
Extraordinary Item - - (0.85) -
----------------- ---------------- ----------------- ----------------
BASIC EARNINGS PER SHARE $ 1.01 $ 0.82 $ 0.27 $10.53
================= ================ ================= ================
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing Operations $ 1.00 $ 0.81 $(0.36) $ -
Discontinued Operations - - 1.48 10.53
----------------- ---------------- ----------------- ----------------
1.00 0.81 1.12 10.53
Extraordinary Item - - (0.85) -
----------------- ---------------- ----------------- ----------------
DILUTED EARNINGS PER SHARE $ 1.00 $ 0.81 $ 0.27 $10.53
================= ================ ================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
-25-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999
($ IN MILLIONS)
SEPTEMBER 1, SEPTEMBER 3,
2000 1999
----------------- ------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 54 $ 48
Accounts and notes receivable, net 463 445
Inventories 67 60
Other 98 89
----------------- ------------------
Total current assets 682 642
----------------- ------------------
Property and equipment, net 96 85
Intangible assets, net 497 535
Investments in affiliates 8 7
Other 81 78
----------------- ------------------
$ 1,364 $ 1,347
================= ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 81 $ 133
Accounts payable 305 238
Accrued payroll, benefits and
other current liabilities 379 347
----------------- ------------------
Total current liabilities 765 718
----------------- ------------------
Long-term debt 900 980
Other long-term liabilities 112 113
Convertible subordinated debt - 30
Commitments and Contingencies (Note 11)
Stockholders' Deficit
Preferred stock, no par value, 1 million shares
authorized; no shares issued - -
Common stock, $1 par value; 300 million authorized,
63.2 million and 62.3 million shares
issued and outstanding in 2000 and 1999, respectively 63 62
Additional paid-in capital 1,348 1,326
Accumulated deficit (1,826) (1,884)
Accumulated other comprehensive income 2 2
----------------- ------------------
Total stockholders' deficit (413) (494)
----------------- ------------------
Total liabilities and stockholders' deficit $ 1,364 $ 1,347
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR FISCAL YEARS 2000 AND 1999, THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND
THE FISCAL YEAR ENDED JANUARY 2, 1998
($ IN MILLIONS)
JANUARY 3 TO
AUGUST 28,
2000 1999 1998 1997
------------------ ----------------- ------------------ -----------------
(52 WEEKS) (53 WEEKS) (34 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
==========================================
Net income $ 63 $ 51 $ 14 $ 335
Adjustments to net cash provided by operating activities:
Income from discontinued operations - - (77) (335)
Extraordinary item - extinguishment of debt - - 44 -
Gain on sale of investment - (8) - -
Depreciation and amortization expense 84 85 57 99
Provision (benefit) for deferred taxes 10 (5) 6 (2)
Changes in working capital 64 (18) 128 67
Changes in discontinued operations - - 131 271
Other - - (2) 142
------------------ ----------------- ------------------ -----------------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 221 105 301 577
------------------ ----------------- ------------------ -----------------
CASH FLOW FROM INVESTING ACTIVITIES
===================================
Capital expenditures (66) (72) (86) (282)
Net cash - acquisitions - - 24 -
Dispositions 5 26 29 441
Net decrease in loans to affiliates - - - 4
Cash from distributed operations - - (305) -
Net investment in discontinued operations - - (113) (1,118)
Other (7) (50) (160) (86)
------------------ ----------------- ------------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES (68) (96) (611) (1,041)
------------------ ----------------- ------------------ -----------------
CASH FLOW FROM FINANCING ACTIVITIES
===================================
Proceeds from the issuance of long-term debt - - 1,820 687
Repayments of long-term debt (92) (70) (1,900) (18)
(Decrease) increase in short-term debt (52) 26 - -
Proceeds from issuance of common stock for Acquisition - - 304 -
Common stock issued - ESOP & other 2 4 72 40
Purchases of treasury stock - - (35) (191)
Dividends paid - common (5) - (11) (43)
------------------ ----------------- ------------------ -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (147) (40) 250 475
------------------ ----------------- ------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 6 $ (31) $ (60) $ 11
CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 48 79 139 128
------------------ ----------------- ------------------ -----------------
CASH & CASH EQUIVALENTS END OF PERIOD $ 54 $ 48 $ 79 $ 139
================== ================= ================== =================
SUPPLEMENTAL:
Interest paid - continuing operations $ 77 $ 83 $ 64 $ 96
Income tax payments - continuing operations 40 37 23 19
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for Acquisition $ - $ - $ 275 $ -
</TABLE>
See Notes to Consolidated Financial Statements.
-27-
<PAGE>
<TABLE>
<CAPTION>
SODEXHO MARRIOTT SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999, THIRTY-FOUR WEEKS ENDED
AUGUST 28, 1998 AND THE FISCAL YEAR ENDED JANUARY 2, 1998
(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> <C>
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)
- Net income - - 63 - - 63
----------- ------------ ---------------- ---------------- ------------ -----------
- TOTAL COMPREHENSIVE INCOME - - 63 - - 63
----------- ------------ ---------------- ---------------- ------------ -----------
Conversion of convertible
0.8 subordinated debt 1 19 - - - 20
- Dividends ($0.08 per share) - - (5) - - (5)
Employee stock plan
0.1 issuance and other - 3 - - - 3
---------------- ------------------------------- ----------- ------------ ---------------- ---------------- ------------ -----------
63.2 Balance, September 1, 2000 $63 $1,348 $(1,826) $ 2 $ - $ (413)
================ =============================== =========== ============ ================ ================ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-28-
<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 conducted 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 remaining line of business was the food service
and facilities management business-- Marriott Management Services ("MMS"), which
became the principal business of 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 Notes 5 and 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.
-29-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
In the latter half of fiscal year 2000, a new procurement system was implemented
to improve the tracking and analysis of food procurement activities. A key
benefit of this new system is the improved capturing of data regarding the
Company's procurement activity. This capability also improves the Company's
ability to better match the procurement process to the period in which it
occurred, which resulted in the recording of an increase in pretax earnings of
$8 million ($5 million after-tax, or $0.07 per diluted share) in the Company's
fourth quarter of fiscal year 2000, accounted for as a change in estimate under
APB Opinion No. 20-- "Accounting Changes." The Company estimates that
approximately $5 million (pretax), or $0.04 per diluted share, of this change in
estimate relates to procurement activity prior to fiscal year 2000, with the
remainder of this impact being related to enhancements and improved
procurement-related efficiencies attributable to fiscal year 2000.
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
year 1997 to the end of the new fiscal year on August 28, 1998. Fiscal year 2000
had 52 weeks and ended on September 1, 2000, and fiscal year 1999 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 year 1997" or "1997").
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 was $23 million and $21 million as of
September 1, 2000 and September 3, 1999, 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.
-30-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 comprised
premiums totaling $67 million paid for the redemptions and $4 million of
financing costs.
EARNINGS PER SHARE
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, and includes the affect of the Company's employee
stock option plan, the deferred stock incentive plan and the convertible
subordinated debt securities. 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 1, 2000, the Company had $134
million of outstanding drafts included in accounts payable, compared with
outstanding draft totals of $83 million at September 3, 1999.
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.
-31-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and customer relationships.
Intangible assets are amortized on a straight-line basis over periods generally
ranging from 30 to 40 years for goodwill and 10 to 20 years for customer
relationships. Amortization expense for continuing operations totaled $37
million in fiscal year 2000, $38 million in fiscal year 1999, $26 million for
the Transition Period ended August 28, 1998, and $25 million in fiscal year
1997. Amortization expense for discontinued operations totaled $8 million for
the Transition Period ended August 28, 1998 and $42 million in fiscal year 1997.
OTHER ASSETS
Included in other assets are client investments, which generally 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.
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 6% at fiscal year end 2000) of projected settlements for known and
anticipated claims. Self-insurance liabilities of the Company amounted to $75
million at September 1, 2000 and $89 million at September 3, 1999. 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
Comprehensive income entails reporting certain financial activity typically
disclosed in stockholders' deficit as an adjustment to net income in determining
total 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'
Deficit, 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 as accumulated other comprehensive income. Total
accumulated other comprehensive income for fiscal year 2000 included $3 million
of gross foreign exchange translation gains, net of taxes totaling $1 million,
unchanged from fiscal year 1999. For fiscal year 2000, total comprehensive
income was comprised of $63 million in net income. During fiscal year 1999,
total comprehensive income was comprised of $51 million in net income and $2
million of gross foreign exchange translation gains, net of taxes totaling $1
million, partially offset by the reclassification of the realized gain on the
sale of investment totaling $8 million pretax, net of taxes totaling $3 million.
Total comprehensive income for the 34 weeks ended August 28, 1998, included $14
million in net income, partially offset by $10 million of gross foreign exchange
translation losses, net of taxes totaling $4 million. For fiscal year 1997,
total comprehensive income was comprised of $335 million in net income and $9
million of gross securities gain adjustments, net of taxes totaling $4 million,
partially offset by $26 million of gross foreign exchange translation losses,
net of taxes totaling $10 million.
SEGMENT REPORTING
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. 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.
-32-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW ACCOUNTING STANDARDS
On September 2, 2000, the Company adopted Statement of Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS No. 133"). In accordance with the provisions in SFAS No. 133, the Company
has designated all of its interest rate swap agreements as cash flow hedges. The
Company has determined that these interest rate swap agreements are highly
effective in offsetting the variable interest cash flows of the Company's debt
portfolio. The interest rate swap agreements will be recorded on the balance
sheet at fair value in other assets (or other liabilities) with the offsetting
entry to accumulated other comprehensive income, a component of stockholders'
deficit for the effective portion of the hedge. The ineffective portion of the
hedge will be recorded directly to the statement of income. The fair value of
the interest rate swap contracts were approximately $15 million (pretax) in the
aggregate as of September 1, 2000 (see Note 8). There were no net gains or
losses on derivatives that had previously been deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of the hedged items. Currently, the Company does not have any other financial
contracts which contain embedded derivatives or fair value hedge relationships
which would fall within the scope of SFAS No. 133.
(2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS
THE DISTRIBUTION
On March 27, 1998, the Company distributed to its shareholders, on a pro rata
basis, all outstanding shares of New Marriott MI, Inc., a wholly owned
subsidiary of the Company, in a tax-free distribution (the "Distribution"). New
Marriott MI, Inc., subsequently renamed Marriott International, Inc. (together
with subsidiaries, "MI") conducts business in the lodging segment and two of the
three lines of business in the contract services segment - Marriott Senior
Living Services ("MSLS") and Marriott Distribution Services ("MDS"). The
lodging, MSLS and MDS businesses are collectively referred to as Distributed
Operations. The third line of business in the contract services segment,
Marriott Management Services ("MMS"), has become the principal business of the
Company.
DISCONTINUED OPERATIONS
As a result of the Distribution, the Consolidated Financial Statements and Notes
thereto have been restated to present the lodging segment distributed to
shareholders as Discontinued Operations. The MDS, MSLS and MMS business make up
the "Contract Services" segment in the historical financial statements of the
Company. Thus, the distributed operations of MSLS and MDS are presented as
continuing operations prior to the date of distribution, March 27, 1998.
Discontinued Operations, Net of Income Taxes, is comprised of the following:
<TABLE>
<CAPTION>
34 WEEKS ENDED
AUGUST 28, 1998 1997
------------------- -------------------
($ in millions, except per share amounts)
<S> <C> <C>
Sales $ 1,774 $7,008
Income Before Income Taxes $ 158 $ 569
Income Taxes (64) (234)
------------------- -------------------
Income -Discontinued Operations $ 94 $ 335
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
=================== ===================
Basic Earnings Per Share $ 1.48 $10.53
Diluted Earnings Per Share $ 1.48 $10.53
</TABLE>
Results of discontinued operations in 1998 included 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 as of the end
of fiscal year 1997 (see Note 14).
-33-
<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 $3 million in
transaction costs. As a result of the issuance of new shares of the Company's
common stock to Sodexho in connection with the Acquisition, the shareholders who
owned 100% of the Company immediately prior to the Distribution owned
approximately 51% immediately thereafter.
The Acquisition has been accounted for using the purchase method of accounting.
The purchase price has been allocated to the fair market value of assets
acquired and liabilities assumed as follows:
($ in millions)
-----------------
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
=================
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
<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 $16 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 were
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 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.
-34-
<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 the Transition Period and the 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 $2 million at September 1,
2000, generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North America employees as well as the
estimated cost for the closure of certain Sodexho North America offices.
Acquisition reserve activity is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
SEPTEMBER 3, 1999 PAYMENTS SEPTEMBER 1, 2000
--------------------- -- ------------- -- ---------------------
($ in millions)
<S> <C> <C> <C>
Employee Terminations $2.4 $(2.4) $ --
Relocation of Sodexho Facilities 0.7 (0.5) 0.2
Closures 1.9 (1.4) 0.5
Other Restructuring 2.6 (1.8) 0.8
--------------------- ------------- ---------------------
Total $7.6 $(6.1) $1.5
===================== ============= =====================
</TABLE>
In addition, integration and restructuring expenses recorded in the Consolidated
Statement of Income during fiscal year 1999 and the Transition Period are
detailed below. No integration and restructuring costs were recorded in the
Consolidated Statement of Income during fiscal year 2000. Also, no restructuring
expenses were recorded in fiscal year 1999.
<TABLE>
<CAPTION>
FISCAL YEAR 34 WEEKS ENDED
1999 AUGUST 28, 1998
---------------------- ---------------------
($ 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>
-35-
<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 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. 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, redeemed on 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.
-36-
<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).
Under these agreements, services provided by MI to be paid by the Company as
well as services provided by the Company to be paid by MI (excluding
pass-through product costs) were approximately $64 million and $4 million,
respectively, for fiscal year 2000, with $65 million and $4 million,
respectively, for fiscal year 1999. Services performed by MI for the 1998
22-week period ended August 28, 1998 totaled approximately $25 million, with
services provided by the Company totaling $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 was 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 were $2 million in both fiscal year 2000 and fiscal
year 1999. Payments made to Sodexho for the 1998 22-week period ended August 28,
1998 totaled approximately $1 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 period ended
August 28, 1998. Payments from the Company to Sodexho associated with the
performance of services were approximately $7 million in fiscal year 2000 and $2
million in fiscal year 1999.
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 (see Note 8), (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 ($3 million pretax) 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 was 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 $17
million.
-37-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
($ in millions)
<S> <C> <C>
Land $ 1 $ 1
Buildings and leasehold improvements 14 14
Furniture and equipment 247 233
Construction in progress 10 9
------------------ ------------------
272 257
Accumulated depreciation and amortization (176) (172)
------------------ ------------------
$ 96 $ 85
================== ==================
</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 $16 million in 1997.
Replacements and improvements that extend the useful life of property and
equipment are capitalized. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the asset life or lease term.
(7) INTANGIBLE ASSETS
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
($ in millions)
<S> <C> <C>
Customer relationships $ 461 $ 461
Goodwill 374 375
Other 23 23
------------------ ------------------
858 859
Accumulated amortization (361) (324)
------------------ ------------------
$ 497 $ 535
================== ==================
</TABLE>
Amortization expense for continuing operations totaled $37 million for fiscal
year 2000, $38 million for fiscal year 1999, $26 million for the 34 weeks ended
August 28, 1998, and $25 million in 1997. Amortization expense for discontinued
operations totaled $8 million for the 34 weeks ended August 28, 1998, and $42
million in 1997.
-38-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT
<TABLE>
<CAPTION>
SEPTEMBER 1, 2000 SEPTEMBER 3, 1999
--------------------- --------- ---------------------
($ in millions)
<S> <C> <C>
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility - 52
Other 1 1
--------------------- --------- ---------------------
Total $ 81 $ 133
===================== ========= =====================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 6.94% in 2000 $ 350 $ 430
Senior Guaranteed Credit Facility, due 2005
averaging 6.99% in 2000 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in 2000 6 6
Other 1 1
Capital Lease Obligations 3 3
--------------------- --------- ---------------------
Total $ 980 $1,060
Amount Reclassified to Short-Term Debt (80) (80)
--------------------- --------- ---------------------
$ 900 $ 980
===================== ========= =====================
</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 1,
2000, the Company was paying a rate of 6.90% 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 $21 million at September 1, 2000 and $33
million at September 3, 1999. At September 1, 2000, $214 million of this
facility was not used and was available to the Company, compared with $150
million at September 3, 1999.
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 1, 2000, the Company was paying a
rate of 6.99% 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).
Aggregate debt maturities, excluding capital lease obligations, are: 2001 - $80
million; 2002 - $90 million; 2003 - $115 million; 2004 - $65 million and $627
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
1, 2000 and the year then ended, September 3, 1999 and the year then ended, as
well as August 28, 1998 and for the 22 weeks then ended.
-39-
<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 was 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%. The Company recorded the LYONs at the discounted amount at issuance.
Accretion was 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 had remained liable to the holders of the LYONs if the Company had
failed to make any payments on its allocable portion. The Company's allocated
portion of the LYONs totaled $30 million at the end of fiscal year 1999.
On October 7, 1999, MI notified all holders of the LYONs, that MI would redeem
on November 8, 1999 all of the LYONs at a price of $619.65 for each $1,000
principal amount at maturity of the LYONs. The result of the redemption for the
Company was the issuance of approximately 760,000 common shares and a payment of
$11 million to MI for the Company's share of bondholders choosing to redeem in
cash.
INTEREST-RATE AGREEMENTS
At September 1, 2000, 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 $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The weighted-average rate for the total debt portfolio,
including the effect of the interest-rate agreements, was 7.01% at September 1,
2000. These agreements expire between May 2001 and February 2005.
Details of these interest rate agreements as of September 1, 2000 are as
follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
NET IMPACT
NOTIONAL WEIGHTED-AVERAGE TO EARNINGS-
PRINCIPAL FAIR INTEREST RATE FY 2000
TERMS BALANCE VALUE* PAID RECEIVED (PRETAX)
--------------------------------------------------- ------------- ----------- ------------- ------------- -----------------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Receive Variable, Pay Fixed, Maturing 5/01--8/01 $400 $ 3 5.73% 6.83% $ 2
Receive Variable, Pay Fixed, Maturing 8/02 300 5 5.84% 6.83% 1
Receive Variable, Pay Fixed, Maturing 2/05 200 7 5.90% 6.83% --
------------- ----------- ------------- ------------- -----------------
$900 $15 5.80% 6.83% $ 3
============= =========== ============= ============= =================
<FN>
*-- based on the termination cost for these agreements obtained from third party
market quotes.
</FN>
</TABLE>
At September 1, 2000, 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.
-40-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. One million shares of preferred
stock, without par value, are authorized, with none issued. At the Distribution,
each shareholder received 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 1, 2000, the Company had 63,244,970 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, paid 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.
-41-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) STOCKHOLDERS' DEFICIT, CONTINUED
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
2000 1999 1998 1997
--------------- -------------- --------------- ---------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income (Loss) from Continuing Operations $ 63 $ 51 $ (19) $ --
Net Income from Discontinued Operations -- -- 77 335
Net Loss from Extraordinary Item -- -- (44) --
--------------- -------------- --------------- ---------------
Net Income $ 63 $ 51 $ 14 $ 335
=============== ============== =============== ===============
Weighted Average Shares Outstanding 63.0 62.1 52.0 31.8
=============== ============== =============== ===============
Basic Earnings Per Share:
Continuing Operations $1.01 $0.82 $(0.36) $ --
Discontinued Operations -- -- 1.48 10.53
Extraordinary Item -- -- (0.85) --
--------------- -------------- --------------- ---------------
BASIC EARNINGS PER SHARE $1.01 $0.82 $ 0.27 $10.53
=============== ============== =============== ===============
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Diluted Net Income (Loss) from Continuing Operations $63.4 $51.0 $(19.0) $ --
Diluted Net Income from Discontinued Operations -- -- 77.0 335.0
Diluted Net Loss from Extraordinary Item -- -- (44.0) --
After-tax Interest Expense on Convertible Subordinated Debt 0.1 0.7 * *
--------------- -------------- --------------- ---------------
Diluted Net Income $63.5 $51.7 $ 14.0 $335.0
=============== ============== =============== ===============
Weighted Average Shares Outstanding 63.0 62.1 52.0 31.8
Effect of Dilutive Securities:
Employee Stock Option Plan 0.2 0.5 * *
Deferred Stock Incentive Plan 0.1 0.1 * *
Convertible Subordinated Debt 0.2 1.2 * *
--------------- -------------- --------------- ---------------
Diluted Weighted Average Shares Outstanding 63.5 63.9 52.0 31.8
=============== ============== =============== ===============
Diluted Earnings Per Share:
Continuing Operations $1.00 $0.81 $(0.36) $ --
Discontinued Operations -- -- 1.48 10.53
Extraordinary Item -- -- (0.85) --
--------------- -------------- --------------- ---------------
DILUTED EARNINGS PER SHARE $1.00 $0.81 $ 0.27 $10.53
=============== ============== =============== ===============
<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 year 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 in both periods) were excluded due to the loss from
continuing operations.
</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,
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of shares (in millions) 5.4 1.8 0.6 0.6
Weighted average exercise price $22 $29 $29 $272
Weighted average remaining life (in years) 8 9 10 15
</TABLE>
-42-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INCOME TAXES
The (provision) benefit for income taxes from continuing operations was
comprised of the following:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
2000 1999 1998 1997
---------------- ----------------- ----------------- ----------------
($ in millions)
<S> <C> <C> <C> <C>
Current:
- Federal $(33) $(36) $19 $12
- Other (6) (10) -- 1
---------------- ----------------- ----------------- ----------------
(39) (46) 19 13
---------------- ----------------- ----------------- ----------------
Deferred:
- Federal (9) 5 (6) 2
- Other (1) -- -- --
---------------- ----------------- ----------------- ----------------
(10) 5 (6) 2
---------------- ----------------- ----------------- ----------------
$(49) $(41) $13 $15
================ ================= ================= ================
</TABLE>
A reconciliation of the Federal statutory tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
34 WEEKS
ENDED
AUGUST 28,
2000 1999 1998 1997
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Federal statutory tax rate (35.0)% (35.0)% 35.0 % 35.0 %
State income taxes, net of Federal tax benefit (4.8) (6.3) (1.3) 6.8
Tax credits 0.9 1.5 13.7 90.5
Goodwill amortization (3.1) (3.9) (6.9) (24.7)
Other, net (1.5) (1.1) 0.1 (8.7)
---------------- ----------------- ----------------- ----------------
Effective income tax rate (43.5)% (44.8)% 40.6 % 98.9 %
================ ================= ================= ================
</TABLE>
The tax effect of significant temporary differences is as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------- ---------------------
($ in millions)
<S> <C> <C>
Self-insurance $ 29 $ 38
Employee benefits 28 28
Other liabilities 16 15
Property and equipment 2 6
Intangible assets (54) (54)
Other, net 10 8
--------------------- ---------- ---------------------
Net deferred tax assets $ 31 $ 41
===================== ========== =====================
</TABLE>
Total deferred tax assets and liabilities as of September 1, 2000 and September
3, 1999, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1, 2000 SEPTEMBER 3, 1999
--------------------- ---------- ---------------------
($ in millions)
<S> <C> <C>
Deferred tax assets $ 95 $ 110
Deferred tax liabilities (64) (69)
--------------------- ---------- ---------------------
Net deferred taxes $ 31 $ 41
===================== ========== =====================
</TABLE>
-43-
<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). Under these agreements, the Company received
approximately $9 million during fiscal year 2000 from Sodexho related to the
closing of a tax audit during fiscal year 2000 related to tax returns filed
prior to the merger and payments made by the Company in fiscal year 2000 or to
be made in subsequent tax years.
During fiscal year 2000, the Internal Revenue Service granted the Company
permission to change its tax year to correspond to its financial reporting year
end, the Friday closest to the end of August, effective for the year ended
September 3, 1999.
(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 $70 million at September 1, 2000, and $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 1, 2000 were $21 million, with September 3,
1999 and August 28, 1998 totaling $33 million and $26 million, respectively,
related to the Company's insurance programs. Upon consummation of the
Distribution, MI replaced the Company as guarantor or obligor under previous
guarantees and commitments related primarily to the lodging segment distributed
on March 27, 1998.
Summarized below are the Company's future obligations under leases at September
1, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------------- --------------------------
($ in millions)
FISCAL YEAR
<S> <C> <C>
2001 $0.7 $10.9
2002 0.8 9.4
2003 0.8 7.9
2004 0.8 6.6
2005 0.7 3.9
Thereafter 0.2 9.9
------------------------- --------------------------
Total minimum lease payments 4.0 $48.6
==========================
Less amount representing interest (0.8)
-------------------------
Present value of minimum lease payments $3.2
=========================
</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 2000
totaled $27 million, fiscal year 1999 totaled $26 million, the 34 weeks ended
August 28, 1998 totaled $14 million, and fiscal year 1997 totaled $90 million.
Total rent expense for discontinued operations for the 34 weeks ended August 28,
1998 totaled $41 million, and $177 million for the fiscal year 1997.
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.
-44-
<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. Within these plans, the
Company contributed approximately $13 million, $12 million and $10 million per
year for the fiscal years ended September 1, 2000 and September 3, 1999, and for
the 34-week period ended August 28, 1998, respectively.
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, with an additional 2.6 million new stock option awards in fiscal year
2000.
A summary of the Company's stock option activity during fiscal 2000, fiscal
1999, and the 34 weeks ended August 28, 1998 is presented below (adjusting for
the one-for-four reverse stock split on March 27, 1998):
<TABLE>
<CAPTION>
34 WEEKS ENDED
2000 1999 AUGUST 28, 1998
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(IN MILLIONS) PRICE (IN MILLIONS) PRICE (IN MILLIONS) PRICE
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4.6 $ 21 5.0 $ 20 3.6 $140
Granted during the year 2.6 16 0.1 26 1.9 28
Conversion options-Distribution -- -- -- -- 3.3 *
Conversion options-Acquisition -- -- -- -- 0.4 6
Terminations-Distribution -- -- -- -- (3.3) *
Exercised during the year (0.2) 9 (0.4) 8 -- --
Forfeited during the year (0.5) 22 (0.1) 24 (0.9) 17
-------------- ------------- -------------- ------------- -------------- -------------
Outstanding at end of year 6.5 $ 20 4.6 $ 21 5.0 $ 20
============== ============= ============== ============= ============== =============
Options exercisable at end of year 2.6 $ 20 1.4 $ 14 0.5 $ 11
============== ============= ============== ============= ============== =============
<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>
-45-
<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
1, 2000 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 0.4 3 $ 8 0.3 $ 8
10.1 to 15.0 0.5 6 13 0.4 12
15.1 to 20.0 3.1 8 17 0.6 18
20.1 to 25.0 0.9 7 22 0.5 22
25.1 to 31.4 1.6 8 29 0.8 29
------------------------ ------------------- ------------------ ------------------ ------------------ -------------------
$ 2.3 to 31.4 6.5 8 $20 2.6 $20
======================== =================== ================== ================== ================== ===================
</TABLE>
Pro forma compensation cost for the Stock Option Plans, the Deferred
Compensation Plan, the Supplemental Executive Stock Option awards and employee
purchases would reduce the Company's net income as follows:
<TABLE>
<CAPTION>
34 WEEKS ENDED
2000 1999 AUGUST 28, 1998 1997
------------------ ------------------- -------------------- -------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income as reported $63 $51 $14 $335
Pro forma net income $57 $46 $13 $317
Diluted earnings per share as reported $1.00 $0.81 $0.27 $10.53
Pro forma diluted earnings per share $0.89 $0.72 $0.25 $9.97
</TABLE>
The aggregate weighted-average fair value for each option granted during fiscal
years 2000 and 1999, the 34 weeks ended August 28, 1998, and fiscal year 1997
was $7, $11, $12, and $88, 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.
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
2000 1999 AUGUST 28, 1998 1997
--------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Annual dividends $0.08 $ -- $ -- $1.40
Expected volatility 46% 44% 40% 24%
Estimated forfeitures 35% 35% 35% 13%
Risk-free interest rate 6.2% 6.2% 5.5% 6.2%
Expected life (in years) 10 10 10 7
</TABLE>
-46-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
For current assets, current liabilities and notes and other receivables,
management believes the carrying amounts are reasonable estimates of their fair
values. The fair values of noncurrent financial liabilities are shown below.
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
Long-term debt, convertible
subordinated debt and other
long-term liabilities $900 $882 $1,010 $981
</TABLE>
The difference between carrying amounts and fair values for notes and other
receivables for continuing operations were not material as of September 1, 2000
and September 3, 1999. Valuations for long-term debt, convertible subordinated
debt and other long-term liabilities were determined based on quoted market
prices or expected future payments discounted at risk adjusted rates.
-47-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has identified six business segments within these markets: Corporate Services,
Health Care, Education, Schools, Canada, and Laundries/Other. Prior to the
Distribution, the Company was a diversified hospitality company with operations
in two business segments: Lodging, which includes development, ownership,
operation and franchising of lodging properties under 10 brand names and
development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
Information from operating segments presented has been derived consistent with
the Company's methodology in allocating resources and measuring performance
after the Distribution (see Note 1).
<TABLE>
<CAPTION>
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
34 WEEKS
ENDED
AUGUST 28,
2000 1999 1998 1997
----------------- ----------------- ---------------- -----------------
($ in millions)
<S> <C> <C> <C> <C>
GROSS SALES
Corporate Services $1,429 $1,380 $ 803 $ 930
Health Care 1,399 1,323 784 1,039
Education 1,280 1,221 598 824
Schools 392 358 199 303
Canada 158 143 80 106
Laundries/Other 76 77 43 55
Other Contract Services -- -- 321 1,769
----------------- ----------------- ---------------- -----------------
Contract Services 4,734 4,502 2,828 5,026
Discontinued Operations -- -- 1,774 7,008
----------------- ----------------- ---------------- -----------------
Total Gross Sales $4,734 $4,502 $4,602 $12,034
----------------- ----------------- ---------------- -----------------
GROSS OPERATING PROFIT
Corporate Services $ 93 $ 90 $ 49 $ 35
Health Care 117 108 49 60
Education 76 71 5 27
Schools 20 19 8 11
Canada 7 6 1 3
Laundries/Other 6 5 2 2
Other Contract Services -- -- 5 19
----------------- ----------------- ---------------- -----------------
Contract Services 319 299 119 157
Discontinued Operations -- -- 158 569
----------------- ----------------- ---------------- -----------------
Total Gross Operating Profit $ 319 $ 299 $ 277 $ 726
----------------- ----------------- ---------------- -----------------
Total Net Operating Profit from
Continuing Operations (Contract Services) $ 319 $ 299 $ 119 $ 157
Corporate Items, Gain on Investment and
Net Interest Expense 207 207 151 172
----------------- ----------------- ---------------- -----------------
Income (Loss) From Continuing Operations,
Before Taxes and Extraordinary Item $ 112 $ 92 $ (32) $ (15)
================= ================= ================ =================
</TABLE>
-48-
<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 its 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 1, 2000, the Company had a diverse client base and
does not have any individual clients that are material to its overall
operations.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS, CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION BY BUSINESS SEGMENT:
AUGUST 28,
2000 1999 1998 1997
----------------- ---------------- ---------------- -----------------
($ in millions)
IDENTIFIABLE ASSETS
<S> <C> <C> <C> <C>
Corporate Services $ 176 $ 160 $ * $ *
Health Care 190 193 * *
Education 182 169 * *
Schools 48 44 * *
Canada 40 37 * *
Laundries/Other 22 23 * *
Corporate 706 721 * *
----------------- ---------------- ---------------- -----------------
Contract Services 1,364 1,347 1,341 1,669
Discontinued Operations, Net -- -- -- 2,902
Other -- -- -- 438
----------------- ---------------- ---------------- -----------------
$1,364 $1,347 $1,341 $5,009
================= ================ ================ =================
CAPITAL EXPENDITURES
Corporate Services $ 14 $ 15 $ * $ *
Health Care 11 11 * *
Education 21 26 * *
Schools 3 3 * *
Canada 4 2 * *
Laundries/Other 1 2 * *
Corporate 12 13 * *
----------------- ---------------- ---------------- -----------------
Contract Services 66 72 86 264
Discontinued Operations -- -- 58 271
Other -- -- -- 18
----------------- ---------------- ---------------- -----------------
$ 66 $ 72 $ 144 $ 553
================= ================ ================ =================
DEPRECIATION AND AMORTIZATION
Corporate Services $ 12 $ 11 $ * $ *
Health Care 8 9 * *
Education 18 18 * *
Schools 2 2 * *
Canada 3 2 * *
Laundries/Other 1 1 * *
Corporate 40 42 * *
----------------- ---------------- ---------------- -----------------
Contract Services 84 85 57 87
Discontinued Operations -- -- 21 89
Other -- -- -- 12
----------------- ---------------- ---------------- -----------------
$ 84 $ 85 $ 78 $ 188
================= ================ ================ =================
<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 year 1997.
</FN>
</TABLE>
-49-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
SUPPLEMENTARY DATA
HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
2000(1)
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER(3) YEAR
------------- ------------- ------------- ------------- -------------
(13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS) (52 WEEKS)
<S> <C> <C> <C> <C> <C>
Sales $1,288 $1,179 $1,225 $1,042 $4,734
Operating profit before corporate items 103 78 86 52 319
Income from continuing operations 28 14 21 -- 63
Net income $ 28 $ 14 $ 21 $ -- $ 63
Diluted earnings per share(5) $ 0.44 $ 0.23 $ 0.32 $ 0.01 $ 1.00
1999(1)
------------- ------------- ------------- ------------- -------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------- ------------- ------------- -------------
(13 WEEKS) (13 WEEKS) (13 WEEKS) (14 WEEKS) (53 WEEKS)
Sales $1,209 $1,090 $1,163 $1,040 $4,502
Operating profit before corporate items 100 73 81 45 299
Income (Loss) from continuing operations 29 11 15 (4) 51
Net income $ 29 $ 11 $ 15 $ (4) $ 51
Diluted earnings per share(5) $ 0.45 $ 0.18 $ 0.24 $(0.07) $ 0.81
1998(1)
------------- ------------- ------------- -------------
FIRST
QUARTER 9 WEEKS 13 WEEKS 34 WEEKS
(12 WEEKS) 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(5) $ 0.73 $ 0.12 $(0.27) $ 0.27
<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.
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 - 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>
-50-
<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 2001 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 2001 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 2001 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 2001 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 2001 Annual Meeting.
EXECUTIVE OFFICERS
The 11 persons identified below are the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Michel Landel 49 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>
-51-
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Anthony F. Alibrio 56 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 is also past chair and
currently serves as a member of the Board of Directors for the
National Committee for Quality Health Care and is a current chair
and member of the Board of Health Insights Foundation.
William W. Hamman 59 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 the Council of Independent Colleges (CIC). He also serves on
the Western Illinois University Foundation Board of Trustees.
Thomas M. Mulligan 49 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.
Stephen J. Brady 56 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
America's Second Harvest and the national food rescue network.
</TABLE>
-52-
<PAGE>
EXECUTIVE OFFICERS, CONTINUED
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
John M. Bush 46 John Bush was named Senior Vice President and Chief Financial
Senior Vice President and Chief Officer on February 15, 2000. Prior to his new appointment, Mr.
Financial Officer Bush had served as Senior Vice President, Finance and Planning
for the Higher Education division of the Company since 1995. Mr.
Bush began his career with the Company in 1976 as a Food Service
Manager in the Higher Education Division and became regional
controller in 1989.
Ollie Lawrence, Jr. 49 Ollie Lawrence, Jr. was named Senior Vice President, Human
Senior Vice President and Chief Human Resources on April 3, 2000. Previously, Mr. Lawrence served as
Resources Officer Vice President, Human Resources for U.S. Airways, Inc. From 1996
to 1998, Mr. Lawrence served as Senior Vice President for Sodexho
USA, Inc. and also founded his own company, "b michael" of New
York City were he served as President and CEO.
Bernard Royer 47 Bernard Royer was named Senior Vice President, Purchasing and
Senior Vice President, Distribution on April 6, 2000. Mr. Royer was Corporate Vice
Procurement and Distribution President of International Purchasing for Sodexho International
Management from 1999 to April 2000. From 1990 to 1998, Mr. Royer
was Vice President of Purchasing for Sodexho USA, Inc.
Robert A. Stern 42 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.
Philippe Taillet 41 Philippe Taillet was appointed to his current position effective
Senior Vice President and Chief July 10, 2000. Prior to his appointment, Mr. Taillet served as
Information Officer Senior Vice President, Facilities Management and 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.
Susan H. Tatum 48 Susan Tatum was named Senior Vice President, Marketing, on
Senior Vice President, September 26, 2000. From 1985 until her recent appointment, Ms.
Marketing Tatum held positions of increasing responsibilities within the
Education division of the Company including Senior Vice President
and Vice President- Operations and Communications; Vice President
and Director- Business Development and Communications; District
Manager; and General Manager at Stanford University.
</TABLE>
-53-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
The response to this portion of Item 14. is submitted under Item 8. of
this Report on Form 10-K.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
Any shareholder who desires a copy of the following Exhibits may obtain
a copy upon request from the Company at a charge that reflects the
reproduction cost of such Exhibits. Requests should be made to the
Secretary, Sodexho Marriott Services, Inc., 9801 Washingtonian
Boulevard, Gaithersburg, Maryland, 20878.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR
------- ----------- ---------------------------------------------
NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT
---- -----------------------------------------------
DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE
-----------------------------------------
COMPANY AND THE APPLICABLE EXHIBIT IS
-------------------------------------
INCORPORATED BY REFERENCE THERETO)
----------------------------------
<S> <C> <C> <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.
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).
</TABLE>
-54-
<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> <C>
4.4 Indenture with The Bank of New York, as Trustee, (a) Exhibit No. 4.1 Form 8-K dated March 25, 1996;
relating to Liquid Yield Option(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.
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 (a) Exhibit No. 10.7 to Form 8-K dated October 25,
and Host Marriott Services Corporation, as 1993; and (b) Exhibit No. 10.4 to Form 10-K for the
amended. fiscal year ended December 29, 1995 (Amendment
No. 1).
</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> <C>
10.4 Employee Benefits and Other Employment Exhibit No. 10.6 to Form 8-K dated October 25, 1993.
Matters 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
Inc. March 17, 1998 and adjourned on March 20, 1998.
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
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.
10.11 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 March17, 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.
</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> <C>
10.14 Trademark and Trade Name License Agreement Exhibit No. 10.18 to Form 10-K/A filed on April
dated as of March 27, 1998 among the Company, 15, 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.
10.17 $735 million Credit Agreement dated as of January (a) Exhibit No. 10(b) to Form 8-K/A dated April 27,
30, 1998 with Sodexho Marriott Operations, Inc., 1998 and (b) Exhibit No. 10(d) to Form 8-K/A dated
as Borrower, the Company, as Parent Guarantor, April 27, 1998 (Amendment No. 1).
certain initial lenders, as Initial Lenders,
Societe Generale and Morgan, as Initial Issuing
Banks, Morgan, as Documentation Agent and
Administrative Agent, and Societe Generale and
J.P. Morgan, as Arrangers, as amended.
10.18 Stockholder Agreement dated as of March 27, 1998 Exhibit No. 10.22 to Form 10-K/A filed on April 15,
with Sodexho Alliance, S.A. 1998.
10.19 Severance agreement with Charles D. O'Dell, dated Exhibit No. 10.19 to Form 10-K filed on October 29,
as of May 3, 1999. 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>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K,
CONTINUED
(B) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE ITEM REPORTED
---- -------------
<S> <C>
November 3, 1999 Announcement of the Resignation of
Lawrence E. Hyatt as Chief Financial
Officer of the Company.
December 29, 1999 Company comments on outlook for first
quarter fiscal year 2000.
February 16, 2000 Announcement of the appointment of
John Bush as Senior Vice President
and Chief Financial Officer of the
Company.
April 6, 2000 Announcement of the appointment of
Bernard Royer as Senior Vice
President of Purchasing and
Distribution for the Company.
</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 13th day of
November, 2000.
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 and November 13, 2000
--------------------------- Director (Principal
Michel Landel Executive Officer)
/S/ JOHN M. BUSH Senior Vice President and Chief Financial November 13, 2000
------------------ Officer (Principal Financial Officer)
John M. Bush
* Chairman and Director November 13, 2000
---------------------------
William J. Shaw
* Director November 13, 2000
---------------------------
Daniel J. Altobello
* Director November 13, 2000
---------------------------
Pierre Bellon
* Director November 13, 2000
---------------------------
Bernard Carton
* Director November 13, 2000
---------------------------
John W. Marriott III
* Director November 13, 2000
---------------------------
Edouard de Royere
</TABLE>
*By: /S/ ROBERT A. STERN
----------------------
Robert A. Stern
Attorney- in- fact
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