<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEKS ENDED JUNE 2, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 987-4431
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Shares outstanding
Class at July 12, 2000
------------------------------- ------------------
Common Stock $1.00
par value per share 63,215,340
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Introduction
Overview 1
Forward-Looking Statements 1
Pro Forma Financial Information (Unaudited) 2
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Thirteen and Thirty-Nine Weeks Ended June 2, 2000
and May 28, 1999 6
Condensed Consolidated Balance Sheet -
as of June 2, 2000 and September 3, 1999 7
Condensed Consolidated Statement of Cash Flow - Thirty-Nine Weeks Ended
June 2, 2000 and May 28, 1999 8
Condensed Consolidated Statement of Stockholders' Deficit-
as of June 2, 2000 9
Notes to Condensed Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of Operations
and Financial Condition 19
Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information and Signatures:
Legal Proceedings 24
Changes in Securities 24
Defaults Upon Senior Securities 24
Submission of Matters to a Vote of Security Holders 24
Other Information 24
Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
<PAGE>
INTRODUCTION
OVERVIEW
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping,
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. Upon the
consummation of the distribution of its lodging, senior living and distribution
services businesses to existing shareholders, which occurred on March 27, 1998,
the Company then acquired (the "Acquisition") the North American operations of
Sodexho Alliance, S.A. ("Sodexho"), and the combined operations were renamed
Sodexho Marriott Services, Inc.
THE TRANSACTIONS
In general, in March 1998, the Company distributed to its shareholders (the
"Distribution") the lodging segment and two of the three lines of business in
the contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, formerly known as Marriott Management
Services ("MMS"), combined with Sodexho North America (Sodexho Financiere du
Canada and subsidiaries, and International Catering Corporation and subsidiaries
taken collectively are known as "Sodexho North America" or "Sodexho USA") and
became the principal business of the Company. Immediately after the
Distribution, Sodexho transferred to the Company the operations of Sodexho North
America combined with a cash payment of $304 million in exchange for 29.9
million shares of the Company's common stock. Lastly, on March 27, 1998, the
Company borrowed $615 million and $620 million under the Secured SMS Facility
and Guaranteed SMS Facility, respectively (see Note 3). These proceeds were used
to repurchase $713 million of the Company's $720 million publicly held debt and
to repay its $950 million outstanding obligations under the Company's existing
credit facility (the "Refinancing"). Collectively, the Distribution, Acquisition
and Refinancing are called the "Transactions."
FORWARD-LOOKING STATEMENTS
This report by the Company contains forward-looking statements within the
meaning of the federal securities laws. These statements are based on the
Company's current expectations and relate to anticipated future events that are
not historical facts, such as the Company's business strategies and their
intended results.
The forward-looking statements included in this report are subject to numerous
risks and uncertainties that could cause the Company's future activities and
results of operations to differ materially from those expressed or implied in
the forward-looking statements. These risks and uncertainties, which are further
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report, include: (i) the ability
of the Company to adapt to various changes, including changes in its structure,
senior management and in its relationship with its largest shareholder--Sodexho
Alliance, (ii) the potential adverse impact of the Company's substantial
indebtedness, including restrictions and remedies available within the related
debt covenants, (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, including the record low level of unemployment, (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.
1
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Transactions described in Notes 1 and 2
to the Condensed Consolidated Financial Statements. As a result of these
changes, there are certain differences in the comparability of the Company's
historical operating results presented in Part I of this document and the
Company's ongoing operations. To assist readers in understanding the present
operations of the Company, management believes it is meaningful and relevant to
set forth in this report not only the actual results of operations for the 13
and 39 weeks ended June 2, 2000 ("Third Quarter Fiscal Year 2000" and "First
Nine Months of Fiscal Year 2000," respectively) compared with the historical 13
and 39 weeks ended May 28, 1999 (presented in Part I of this report), but also
the pro forma results for the 13 and 39 weeks ended May 28, 1999 ("Pro Forma
Third Quarter Fiscal Year 1999" and "Pro Forma First Nine Months of Fiscal Year
1999," respectively) presented in this section. In addition, certain
reclassifications have been made to the Pro Forma Third Quarter and First Nine
Months of Fiscal Year 1999 to conform to the current year's presentation.
No pro forma adjustments were made for the Third Quarter or First Nine Months of
Fiscal Year 2000 results. For the comparable periods in fiscal year 1999, the
historical results have been adjusted to exclude integration charges of $2.6
million and $15.6 million pretax, respectively. Total integration charges
included, among other items, training and relocating of former MMS employees,
systems modifications, and other one-time costs associated with combining the
predecessor companies.
2
<PAGE>
UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN AND THIRTY-NINE WEEKS ENDED JUNE 2, 2000 AND
THE PRO FORMA THIRTEEN AND THIRTY-NINE WEEKS ENDED MAY 28, 1999
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- -------------------------------------
(PRO FORMA) (PRO FORMA)
JUNE 2, MAY 28, JUNE 2, MAY 28,
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
SALES
Corporate Services $ 365 $ 350 $1,065 $1,009
Health Care 358 333 1,041 972
Education 326 317 1,065 1,007
Schools 118 108 343 312
Canada 39 36 122 108
Laundries/Other 19 19 56 54
----------------- ----------------- ---------------- -----------------
TOTAL SALES 1,225 1,163 3,692 3,462
OPERATING COSTS AND EXPENSES
Corporate Services 338 327 995 943
Health Care 330 310 958 895
Education 304 293 981 924
Schools 112 100 324 291
Canada 37 34 115 102
Laundries/Other 18 17 52 51
----------------- ----------------- ---------------- -----------------
TOTAL OPERATING COSTS AND EXPENSES 1,139 1,081 3,425 3,206
----------------- ----------------- ---------------- -----------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 27 23 70 66
Health Care 28 23 83 77
Education 22 24 84 83
Schools 6 8 19 21
Canada 2 2 7 6
Laundries/Other 1 2 4 3
----------------- ----------------- ---------------- -----------------
TOTAL OPERATING PROFIT 86 82 267 256
CORPORATE ITEMS:
Amortization of Intangible Assets (9) (9) (28) (28)
Corporate Expenses (21) (21) (64) (56)
Interest Expense, Net (20) (21) (63) (65)
Gain on Sale of Investment - - - 8
----------------- ----------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 36 31 112 115
Provision for Income Taxes (15) (14) (49) (51)
----------------- ----------------- ---------------- -----------------
NET INCOME $ 21 $ 17 $ 63 $ 64
================= ================= ================ =================
BASIC EARNINGS PER SHARE $0.33 $0.27 $1.00 $1.03
================= ================= ================ =================
DILUTED EARNINGS PER SHARE $0.32 $0.27 $0.99 $1.01
================= ================= ================ =================
</TABLE>
3
<PAGE>
DISCUSSION OF THIRD QUARTER FISCAL YEAR 2000 AND PRO FORMA THIRD QUARTER
FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total sales for Third Quarter Fiscal Year 2000 were $1.22 billion, an increase
of $62 million, or 5%, over $1.16 billion for Pro Forma Third Quarter Fiscal
Year 1999. This growth was mostly attributable to favorable new sales trends and
solid comparable growth in existing accounts in most of the Company's divisions.
The School Services, Health Care and Canada divisions had 8% to 10% sales growth
in the current quarter. The Corporate Services and Education divisions had
strong growth when compared with the prior year's same period, after adjusting
the Education division for a calendar shift resulting in approximately 5 to 7
fewer board days in the current quarter when compared with last year's quarter.
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. The Health Care
division's managed volume was approximately $716 million for Third Quarter
Fiscal Year 2000, up $2 million compared with $714 million in managed volume for
same quarter 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, which impacts a large number of the Company's clients in
certain geographic markets. Managed volume for the Schools division was
approximately $213 million for the Third Quarter Fiscal Year 2000, an increase
of $17 million, or 9% over the $196 million for Pro Forma Third Quarter 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 $86 million for the Third Quarter
Fiscal Year 2000, a 4%, or $4 million increase when compared with $82 million in
operating profit for the Pro Forma Third Quarter Fiscal Year 1999. Operating
profit increased mostly due to increases in the Health Care and Corporate
Services divisions, as Corporate Services experienced strong comparable growth
in existing client sales, in addition to the favorable impact of strong sales to
new clients in the latter half of Fiscal Year 1999. In the Health Care division,
the third quarter in the prior year was impacted by approximately $2 million in
bankruptcy related losses. Partially offsetting the increases in Corporate
Services and Health Care were the decreases in the Education and Schools
divisions totaling $4 million in the aggregate between the quarters. These
decreases were the result of several under-performing client accounts that were
mostly first year, larger based, accounts. The inefficiencies in these
under-performing accounts are anticipated to be resolved during the next two
quarters as the Company makes the necessary adjustments at these accounts to
reach expected operating performance. Also, the Education division had
approximately 5 to 7 fewer student board plan days in the current quarter versus
last year's quarter.
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 95% of total sales for the Third Quarter Fiscal
Year 2000, unchanged from Pro Forma Third Quarter Fiscal Year 1999's ratio. The
Company anticipates this margin will continue to be flat for the remainder of
the current fiscal year when compared with the prior year, as the Company
continues to reinvest the savings from its incremental purchasing synergies in
the businesses. Overall, the Company achieved about $5 million in additional
purchasing synergies for the Third Quarter Fiscal Year 2000, and as planned,
reinvested most of these synergies in sales staff and management support teams.
The Company anticipates that it will obtain approximately $5 million in
additional synergies in Fiscal Year 2000, most of which will be reinvested in
the businesses. The Company continues to anticipate synergies to reach $60
million in cost savings annually by fiscal year 2001.
Corporate expenses and amortization of intangible assets in the Third Quarter
Fiscal Year 2000 totaled $30 million, level with the prior year, which included
a $3.4 million charge related to the resignation of the former CEO. Excluding
this charge, the increase in corporate expenses was primarily due to an
approximate $2 million increase for the impact of open positions filled in the
latter half of Fiscal Year 1999, and a $1 million increase in assistance fees
paid to Sodexho Alliance for services received, as agreed upon in the merger
agreements.
Pretax income increased $5 million, or 16%, to $36 million for the Third Quarter
Fiscal Year 2000, or an increase of $2 million (or 6%), after adjusting for the
resignation charge taken in the prior year's quarter. The effective tax rate for
the current quarter was 42.4%, a decrease from 44.4% for 1999, due to the
continuing implementation of effective tax planning strategies. Net income of
$21 million, or $0.32 per diluted share, was an increase of 11% when compared
with the prior year's quarter, after adjusting for the $1.9 million after tax
impact of the resignation charge in the prior year's period. Diluted weighted
average shares outstanding for the Third Quarter Fiscal Year 2000 were 63.4
million, compared with 63.9 million for the prior year's same period. This
reduction was mostly due to the redemption of the convertible subordinated debt
in November 1999 (see Notes 3 and 4 to the Condensed Consolidated Financial
Statements).
4
<PAGE>
DISCUSSION OF FIRST NINE MONTHS OF FISCAL YEAR 2000 AND PRO FORMA
FIRST NINE MONTHS OF FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total sales for First Nine Months of Fiscal Year 2000 were $3.69 billion, an
increase of $230 million, or 6.6%, over $3.46 billion for Pro Forma First Nine
Months of Fiscal Year 1999. 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 in the current period, with strong growth in the remaining
divisions, when compared with the prior year's same period.
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. The Health Care
division's managed volume was $2.16 billion for the First Nine Months of Fiscal
Year 2000, up $28 million or 1% over the $2.13 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 $618 million for
the First Nine Months of Fiscal Year 2000, an increase of $53 million, or 9%
over the $565 million for Pro Forma First Nine Months of 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 $267 million for the First Nine
Months of Fiscal Year 2000, an increase of $11 million, or 4% when compared with
$256 million in operating profit for the Pro Forma First Nine Months of Fiscal
Year 1999. Operating profit increased mostly due to increases in the Health Care
and Corporate Services divisions, as Corporate Services experienced strong
comparable growth in existing client sales, in addition to the favorable impact
of strong new sales in the latter half of Fiscal Year 1999. In the Health Care
division, the prior year's period was impacted by approximately $3 million in
bankruptcy related losses. Partially offsetting the increases in Corporate
Services and Health Care were the flat results in the Education division and the
9% decrease in the Schools division compared to the prior year's period. This
weak performance was 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, 95% of total sales for First Nine Months of
Fiscal Year 2000, unchanged from Pro Forma First Nine Months of Fiscal Year
1999's ratio. The Company anticipates this margin will continue to be flat for
the remainder of the current fiscal year when compared with the prior year, as
the Company continues to reinvest the savings from its incremental purchasing
synergies in the businesses. Overall, the Company achieved about $15 million in
additional purchasing synergies for the First Nine Months of Fiscal Year 2000,
and as planned, reinvested most of these synergies in sales staff and management
support teams. The Company anticipates that it will obtain approximately $5
million in additional synergies in Fiscal Year 2000, most of which will be
reinvested in the businesses. The Company continues to anticipate synergies to
reach $60 million in cost savings annually by fiscal year 2001.
Excluding a $3.4 million pretax charge related to the resignation of the former
CEO taken in the prior year's period, corporate expenses and amortization of
intangible assets in the First Nine Months of Fiscal Year 2000 totaled $92
million, a 13% increase from the adjusted Pro Forma First Nine Months of Fiscal
Year 1999. This was primarily due to an increase of approximately $5 million for
the impact of open positions filled in the latter half of Fiscal Year 1999 and a
$4 million increase in assistance fees paid to Sodexho Alliance for services
received, as agreed upon in the merger agreements. The Pro Forma First Nine
Months of 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 $4 million after-tax ($0.07 per diluted common share).
The increase in corporate expenses along with the sale of BFAM in the prior
year's period contributed to a decrease in pretax income of $3 million, or 3%,
to $112 million for the First Nine Months of Fiscal Year 2000. The effective tax
rate for the current period was 43.5%, a decrease from 44.4% for 1999, due to
the continuing implementation of effective tax planning strategies. Net income
decreased to $63 million, or $0.99 per diluted share, compared with $64 million,
or $1.01 per diluted share for Pro Forma First Nine Months of Fiscal 1999.
Diluted weighted average shares outstanding for the First Nine Months of Fiscal
Year 2000 were 63.5 million, compared to 64.0 million for the prior year's same
period. This reduction was mostly due to the redemption of the convertible
subordinated debt in November 1999 (see Notes 3 and 4 to the Condensed
Consolidated Financial Statements).
5
<PAGE>
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- -------------------------------------
JUNE 2, MAY 28, JUNE 2, MAY 28,
2000 1999 2000 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
SALES $1,225 $1,163 $3,692 $3,462
Operating Costs and Expenses 1,139 1,082 3,425 3,208
----------------- ---------------- ----------------- ----------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 86 81 267 254
CORPORATE ITEMS:
Corporate expenses,
including amortization of intangible assets (30) (33) (92) (98)
Interest expense, net (20) (21) (63) (65)
Gain on sale of investment - - - 8
----------------- ---------------- ----------------- ----------------
Income Before Income Taxes 36 27 112 99
Provision for income taxes (15) (12) (49) (44)
----------------- ---------------- ----------------- ----------------
NET INCOME $ 21 $ 15 $ 63 $ 55
================= ================ ================= ================
BASIC EARNINGS PER SHARE $ 0.33 $ 0.25 $ 1.00 $ 0.89
================= ================ ================= ================
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.24 $ 0.99 $ 0.87
================= ================ ================= ================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
JUNE 2, SEPTEMBER 3,
2000 1999
(UNAUDITED)
------------------ -------------------
ASSETS
Current Assets
<S> <C> <C>
Cash and equivalents $ 45 $ 48
Accounts and notes receivable, net 477 445
Other 142 149
------------------ -------------------
Total current assets 664 642
Property and equipment, net 93 85
Intangible assets, net 506 535
Other assets 85 85
------------------ -------------------
$ 1,348 $ 1,347
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 111 $ 133
Accounts payable 289 238
Other current liabilities 333 347
------------------ -------------------
Total current liabilities 733 718
Long-term debt 920 980
Other long-term liabilities 111 113
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
at June 2, 2000, and September 3, 1999, respectively 63 62
Additional paid-in capital 1,346 1,326
Accumulated deficit (1,826) (1,884)
Accumulated other comprehensive income 1 2
------------------ -------------------
Total stockholders' deficit (416) (494)
------------------ -------------------
Total liabilities and stockholders' deficit $ 1,348 $ 1,347
================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------------------
JUNE 2, 2000 MAY 28, 1999
----------------------- -----------------------
CASH PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 63 $ 55
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization expense 62 63
Gain on sale of investment - (8)
Deferred income taxes - -
Changes in working capital 10 (37)
Other 4 10
----------------------- -----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 139 83
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (45) (44)
Dispositions 4 23
Payments for excess net tangible assets - (36)
Other (4) (10)
----------------------- -----------------------
NET CASH USED IN INVESTING ACTIVITIES (45) (67)
CASH FLOW FROM FINANCING ACTIVITIES
(Repayments of)/Proceeds from borrowings
from short-term credit facility (22) 17
Repayments of long-term debt (60) (53)
Payments for redemption of convertible subordinated debt (11) -
Issuance of common stock 1 3
Dividends paid - common (5) -
----------------------- -----------------------
NET CASH USED IN FINANCING ACTIVITIES (97) (33)
----------------------- -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3) (17)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 48 79
----------------------- -----------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 45 $ 62
======================= =======================
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF COMMON PAID-IN ACCUMULATED COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT INCOME TOTAL
------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
62.3 Balance, September 3, 1999 $62 $1,326 $(1,884) $2 $(494)
-- Net income - - 63 - 63
-- Foreign exchange translation - - - (1) (1)
------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME - - 63 (1) 62
Conversion of convertible
0.8 subordinated debt 1 19 - - 20
Dividends ($0.08 per
-- common share) - - (5) - (5)
Employee stock plan
0.1 issuance and other - 1 - - 1
------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
63.2 Balance, June 2, 2000 $63 $1,346 $(1,826) $1 $(416)
============ =============================== =============== ============== =============== ================= ===============
</TABLE>
See notes to condensed consolidated financial statements.
9
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sodexho Marriott Services, Inc. (together with its consolidated subsidiaries,
the "Company") is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, and primary and secondary schools. Food services include food
and beverage procurement, preparation and menu planning, as well as the
operation and maintenance of food service and catering facilities, generally on
a client's premises. Facilities management services include plant maintenance,
energy management, grounds keeping, housekeeping and custodial services.
The accompanying Condensed Consolidated Financial Statements of the Company have
been prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented not
misleading. However, the Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the period ended
September 3, 1999.
In the opinion of management, the accompanying Condensed Consolidated Financial
Statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of June 2, 2000 and September 3, 1999, and the results of operations for the
13 and 39 weeks ended June 2, 2000 and May 28, 1999.
Interim results are not necessarily indicative of fiscal year performance. All
material intercompany transactions and balances between Sodexho Marriott
Services, Inc., and its consolidated subsidiaries have been eliminated. Certain
amounts previously presented have been reclassified to conform to the current
presentation.
TRANSACTIONS
In general, in March 1998, the Company distributed to its shareholders (the
"Distribution") the lodging segment and two of the three lines of business in
the contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, formerly known as Marriott Management
Services ("MMS"), combined with Sodexho North America (Sodexho Financiere du
Canada and subsidiaries, and International Catering Corporation and subsidiaries
taken collectively are known as "Sodexho North America" or "Sodexho USA") and
became the principal business of the Company. Immediately after the
Distribution, Sodexho transferred to the Company the operations of Sodexho North
America combined with a cash payment of $304 million in exchange for 29.9
million shares of the Company's common stock. Lastly, on March 27, 1998, the
Company borrowed $615 million and $620 million under the Secured SMS Facility
and Guaranteed SMS Facility, respectively (see Note 3). These proceeds were used
to repurchase $713 million of the Company's $720 million publicly held debt and
to repay its $950 million outstanding obligations under the Company's existing
credit facility (the "Refinancing"). Collectively, the Distribution, Acquisition
and Refinancing are called the "Transactions."
10
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 at June 2,
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.
INTEREST-RATE AGREEMENTS
The Company's policies prohibit the use of derivative instruments for trading
purposes and procedures are in place to monitor and control their use. The use
of derivative instruments is limited to interest-rate agreements for the purpose
of reducing the variability of the Company's debt costs. These agreements are
entered into in conjunction with the issuance of the debt they are intended to
modify.
The notional balances of these agreements represent a balance used to calculate
the exchange of cash flows and are not assets or liabilities of the Company, and
do not represent an exposure to credit loss. The notional amount and interest
payments of these agreements match the cash flows of the related debt.
Accordingly, any market risk or opportunity associated with these agreements is
offset by the opposite market impact on the related debt. The Company's credit
risk related to interest-rate agreements is considered low because they are
entered into only with strong creditworthy counterparties and are generally
settled on a net basis. The difference paid or received on interest-rate
agreements is recognized as an adjustment to interest expense.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of outstanding common shares. Diluted earnings per share
is computed by dividing net income, adjusted for interest expense related to
convertible securities (after-tax), by the diluted weighted-average number of
outstanding common shares, including the "if-converted" shares relating to
convertible securities.
On October 7, 1999, Marriott International, Inc. ("MI") notified all holders of
the LYONs (see "Convertible Subordinated Debt" in Note 3), that MI had elected
to redeem all of the LYONs at a price of $619.65 for each $1,000 principal
amount at maturity of the LYONs, with a redemption date of November 8, 1999.
Conversion of the LYONs resulted in the issuance of 0.8 million shares of the
Company's common stock.
11
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 June 2, 2000 and September 3, 1999, the
Company had $131 million and $83 million of outstanding drafts included in
accounts payable, respectively.
INVENTORIES
Inventories consist of food items and supplies, which are stated at the lower of
average cost or market, generally using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from 3 to 40 years. Replacements and improvements are capitalized.
Leasehold improvements, net of estimated residual value, are amortized over the
shorter of the useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and customer relationships.
Intangible assets are amortized on a straight-line basis over periods generally
ranging from 30 to 40 years for goodwill and 10 to 20 years for customer
relationships. Amortization expense totaled $9 million and $28 million for the
13 and 39 weeks ended June 2, 2000, respectively, equal to the amortization
expense for the same periods of the prior fiscal year.
OTHER ASSETS
Included in other assets are client investments, which represent amounts
provided by the Company to clients at contract inception for the purchase of
property and equipment pertaining to the contract. These amounts are amortized
over the life of the related contract. When a contract terminates prior to its
scheduled termination date, the client generally must repay any unamortized
client investment balance to the Company.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income for the Company includes activity in foreign exchange
translation adjustments and securities available for sale under SFAS No. 115.
Items identified as comprehensive income are reported, under separate captions,
in the Condensed Consolidated Balance Sheet and the Condensed Consolidated
Statement of Stockholders' Deficit.
Results for the Canada division are translated to U.S. dollars using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the applicable balance sheet date, and the
resulting translation adjustments are reflected in stockholders' deficit as
accumulated other comprehensive income.
Total accumulated other comprehensive income included $2.1 million of gross
foreign exchange translations gains, net of taxes totaling $0.9 million, at June
2, 2000. Total accumulated other comprehensive income included gross foreign
exchange translation gains totaling $3.1 million, net of taxes totaling $1.4
million at September 3, 1999. During the First Nine Months of Fiscal Year 2000,
total comprehensive income was comprised of $63 million in net income and $1.0
million of gross foreign translation losses, net of taxes totaling $0.5 million.
12
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SEGMENT REPORTING
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. For fiscal
year reporting, the Company disclosed profit/loss, revenues and assets for each
segment identified, including reconciliations of these items to consolidated
totals. For interim reporting periods, the Company disclosed profit/loss and
revenues for each segment (see Note 6). The Company also disclosed the basis for
identifying the segments and the types of products and services within each
segment.
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
(2) INTEGRATION AND RESTRUCTURING
Integration costs, reflecting the undertaking by the Company to integrate and
realign resources for more effective and efficient execution of operating
strategies, totaled $16 million during the First Nine Months of Fiscal Year
1999. The operating profit before corporate items for the First Nine Months of
Fiscal Year 1999 included $2 million for integration charges while corporate
expenses included $14 million of these charges. The integration costs included,
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 $3 million at June 2, 2000,
generally represents the aggregate remaining estimated cost of termination
benefits for approximately 350 former Sodexho North America employees and the
estimated cost for the closure and excess capacity in certain Sodexho North
America offices.
Acquisition reserve activity is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
SEPTEMBER 3, 1999 PAYMENTS JUNE 2, 2000
---------------------- -- ---------------------- -- ----------------------
($ in millions)
<S> <C> <C> <C>
Employee Terminations $2.4 $(2.2) $0.2
Relocation of Sodexho Facilities 0.7 (0.4) 0.3
Closures 1.9 (0.9) 1.0
Other Restructuring 2.6 (1.1) 1.5
---------------------- ---------------------- ----------------------
Total $7.6 $(4.6) $3.0
====================== ====================== ======================
</TABLE>
13
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) DEBT
<TABLE>
<CAPTION>
JUNE 2, SEPTEMBER 3,
2000 1999
----------------- --- -----------------
($ in millions)
SHORT-TERM DEBT:
<S> <C> <C>
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility 30 52
Other 1 1
----------------- -----------------
Total $ 111 $ 133
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 7.30% in fiscal year 2000 $ 370 $ 430
Senior Guaranteed Credit Facility, due 2005
averaging 6.98% in fiscal year 2000 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal year 2000 6 6
Other 1 1
Capital lease obligations 3 3
----------------- -----------------
Total $1,000 $1,060
Amount Reclassified to Short-Term Debt (80) (80)
----------------- -----------------
$ 920 $ 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 June 2, 2000,
the Company is paying a rate of 6.92% on the term loan facility, adjusted for
fee amortization and hedging costs. The senior secured credit facility is
secured predominately by inventory, accounts receivable and the stock of certain
subsidiaries of the Company. Up to $100 million of the $235 million revolving
credit may be used to collateralize letters of credit, which totaled $33 million
at June 2, 2000, and September 3, 1999. At June 2, 2000, $172 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 June 2, 2000, the Company is paying a rate of
6.95% on this facility, adjusted for fee amortization and hedging costs. This
facility is guaranteed by Sodexho, for which the Company pays Sodexho an annual
fee of 0.5% of the outstanding balance of the Senior Guaranteed Credit Facility,
or $3 million pretax.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flow.
The Company met the financial covenants of the debt agreements as of June 2,
2000 and for the 39 weeks then ended.
14
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) 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 prior to the Transactions and the Distribution (see below). The LYONs were
issued at a discount representing a yield to maturity of 4.25%. The Company
recorded the LYONs at the discounted amount at issuance. Accretion 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 for the 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 remained liable to the holders of the LYONs for any payments that
the Company may have failed to make on its allocable portion.
On October 7, 1999, MI notified all holders of the LYONs, that MI had elected to
redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount
at maturity of the LYONs, with a redemption date of November 8, 1999. The
Company's allocated portion of the LYONs totaled $30 million just prior to
conversion, and at September 3, 1999. The results of the redemption for the
Company were the issuance of approximately 760,000 common shares and a payment
of $10.8 million to MI for the Company's share of bondholders choosing to redeem
in cash.
INTEREST-RATE AGREEMENTS
At June 2, 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 $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The weighted-average rate for the total debt portfolio,
including the effect of the interest-rate agreements, was 7.00% at June 2, 2000.
These agreements expire between May 2001 and February 2005.
Details of these interest rate agreements as of June 2, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS--
TERMS BALANCE VALUE* PAID RECEIVED 39 WEEKS
----------------------------------- --------------- -------------- --------------- --------------- ---------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Received Variable
Pay Fixed, Maturing 5/--8/01 $400 $ 6 5.73% 6.83% $0.5
Received Variable
Pay Fixed, Maturing 8/02 300 8 5.84 6.83 0.2
Received Variable
Pay Fixed, Maturing 2/05 200 11 5.90 6.83 -
----------------------------------- --------------- -------------- --------------- --------------- ---------------
$900 $25 5.80% 6.83% $0.7
=================================== =============== ============== =============== =============== ===============
<FN>
*-- based on the termination cost for these agreements obtained by third party market quotes.
</FN>
</TABLE>
At June 2, 2000, the Company did not have any accrued interest receivable or
payable to its counterparties and did not have any unamortized fees or premiums
under these agreements. All of the Company's interest-rate agreements are for
purposes other than trading.
15
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(4) 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. At June 2, 2000, the Company had
63,184,313 shares outstanding. One million shares of preferred stock, without
par value, are authorized, with none issued.
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- --- -------------------------------------
JUNE 2, MAY 28, JUNE 2, MAY 28,
2000 1999 2000 1999
----------------- ---------------- --- ---------------- -----------------
(in millions, except per share amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Net Income $ 21 $ 15 $ 63 $ 55
================= ================ ================ =================
Weighted Average Shares Outstanding 63.2 62.2 63.0 62.1
================= ================ ================ =================
BASIC EARNINGS PER SHARE $ 0.33 $ 0.25 $ 1.00 $ 0.89
================= ================ ================ =================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $ 20.6 $ 15.4 $ 63.0 $ 55.2
After-tax Interest Expense on
Convertible Subordinated Debt - 0.2 0.1 0.5
----------------- ---------------- ---------------- -----------------
Diluted Net Income $ 20.6 $ 15.6 $ 63.1 $ 55.7
================= ================ ================ =================
Weighted Average Shares Outstanding 63.2 62.2 63.0 62.1
Effect of Dilutive Securities*:
Employee Stock Option Plan 0.1 0.4 0.1 0.6
Deferred Stock Incentive Plan 0.1 0.1 0.1 0.1
Convertible Subordinated Debt - 1.2 0.3 1.2
----------------- ---------------- ---------------- -----------------
Diluted Weighted Average
Shares Outstanding 63.4 63.9 63.5 64.0
================= ================ ================ =================
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.24 $ 0.99 $ 0.87
================= ================ ================ =================
<FN>
* -- Certain employee 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 and thus were anti-dilutive. The weighted-average total of excluded shares was approximately 5.9 million and 5.3 million for
the 13 and 39 weeks ended June 2, 2000, respectively, compared to approximately 1.8 million for both the 13 and 39 weeks ended May
28, 1999.
</FN>
</TABLE>
16
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(5) EMPLOYEE BENEFIT AND INCENTIVE PLANS
DEFERRED COMPENSATION PLANS
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. As part of the Distribution,
the Company elected to continue the deferred compensation plan and has
established a new savings plan for the Company separate from the MI profit
sharing plan. The Company assumed the obligations and liabilities of the
undistributed portion of the deferred compensation plan in relationship to the
employees retained by the Company after the Distribution. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 13-week and
39-week periods ended June 2, 2000, expenses that related to these plans totaled
$2.8 million and $8.5 million, respectively, compared to $2.4 million and $9.2
million for the 13-week and 39-week periods ended May 28, 1999, 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.
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. The Company issued 2.6 million in stock option awards during
the first 39 weeks of fiscal year 2000, which included approximately 500,000 of
one-time grants for eligible unit general managers.
A summary of the Company's stock option activity during the 39 weeks ended June
2, 2000, is presented below:
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
JUNE 2, 2000
--------------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
----------------- -----------------
<S> <C> <C>
Outstanding at September 3, 1999 4.6 $21
Granted during the thirty-nine weeks 2.6 16
Exercised during the thirty-nine weeks (0.2) 8
Forfeited during the thirty-nine weeks (0.4) 22
----------------- -----------------
Outstanding at June 2, 2000 6.6 $20
================= =================
Options exercisable at June 2, 2000 2.3 $18
================= =================
</TABLE>
17
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(6) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- -- -------------------------------------
JUNE 2, MAY 28, JUNE 2, MAY 28,
2000 1999 2000 1999
---------------- -- ----------------- -- ----------------- -- ----------------
($ in millions)
GROSS SALES
<S> <C> <C> <C> <C>
Corporate Services $ 365 $ 350 $1,065 $1,009
Health Care 358 333 1,041 972
Education 326 317 1,065 1,007
Schools 118 108 343 312
Canada 39 36 122 108
Laundries/Other 19 19 56 54
---------------- ----------------- ----------------- ----------------
Total Gross Sales $1,225 $1,163 $3,692 $3,462
================ ================= ================= ================
GROSS OPERATING PROFIT
Corporate Services $ 27 $ 23 $ 70 $ 66
Health Care 28 23 83 77
Education 22 24 84 83
Schools 6 8 19 20
Canada 2 1 7 5
Laundries/Other 1 2 4 3
---------------- ----------------- ----------------- ----------------
Total Gross Operating Profit $ 86 $ 81 $ 267 $ 254
================ ================= ================= ================
Corporate Items (50) (54) (155) (155)
---------------- ----------------- ----------------- ----------------
Income Before Income Taxes $ 36 $ 27 $ 112 $ 99
================ ================= ================= ================
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
The nature of the business of the Company causes it to be involved in routine
legal proceedings from time to time. Management of the Company believes that
there are no pending or threatened legal proceedings that upon resolution would
have a material adverse impact to the Company.
18
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the unaudited 13-week and 39-week periods ended June 2, 2000 ("Third
Quarter Fiscal Year 2000" and "First Nine Months of Fiscal Year 2000,"
respectively) as compared with the historical unaudited 13-week and 39-week
periods ended May 28, 1999 ("Third Quarter Fiscal Year 1999" and "First Nine
Months of Fiscal Year 1999," respectively).
DUE TO THE DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S HISTORICAL
OPERATING RESULTS FOR THE THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL YEAR
2000 VERSUS THE PRIOR FISCAL YEAR'S PERIODS, MANAGEMENT BELIEVES THAT IT IS MOST
MEANINGFUL AND RELEVANT, IN UNDERSTANDING THE PRESENT AND ONGOING OPERATIONS OF
THE COMPANY, TO REVIEW THE COMPANY'S PRO FORMA OPERATING RESULTS PRESENTED IN
THE "INTRODUCTION" SECTION OF THIS REPORT.
THIRD QUARTER FISCAL YEAR 2000 VS. THIRD QUARTER FISCAL YEAR 1999
Total sales for Third Quarter Fiscal Year 2000 were $1.22 billion, an increase
of $62 million, or 5%, over $1.16 billion for Third Quarter Fiscal Year 1999.
This growth was mostly attributable to favorable new sales trends and solid
comparable growth in existing accounts in most of the Company's divisions. The
School Services, Health Care and Canada divisions had 8% to 10% sales growth in
the current quarter. The Corporate Services and Education divisions had strong
growth when compared with the prior year's same period, after adjusting the
Education division for a calendar shift related to approximately 5 to 7 fewer
board days in the current quarter when compared with last year's quarter.
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. The Health Care
division's managed volume was approximately $716 million for Third Quarter
Fiscal Year 2000, up $2 million compared with $714 million in managed volume for
same quarter 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, which impacts a large number of the Company's clients in
certain geographic markets. Managed volume for the Schools division was
approximately $213 million for the Third Quarter Fiscal Year 2000, an increase
of $17 million, or 9% over the $196 million for Third Quarter 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 $86 million for the Third Quarter
Fiscal Year 2000, a 6%, or $5 million increase when compared with $81 million in
operating profit for the Third Quarter Fiscal Year 1999. Operating profit
increased mostly due to increases in the Health Care and Corporate Services
divisions, as Corporate Services experienced strong comparable growth in
existing client sales, in addition to the favorable impact of strong sales to
new clients in the latter half of Fiscal Year 1999. In the Health Care division,
the third quarter in the prior year was impacted by approximately $2 million in
bankruptcy related losses. Partially offsetting the increases in Corporate
Services and Health Care were the decreases in the Education and Schools
divisions totaling $4 million in the aggregate between the quarters. These
decreases were the result of several under-performing client accounts that were
mostly first year, larger based, accounts. The inefficiencies in these
under-performing accounts are anticipated to be resolved during the next two
quarters as the Company makes the necessary adjustments at these accounts to
reach expected operating performance. Also, the Education division had
approximately 5 to 7 fewer student board plan days in the current quarter versus
last year's quarter.
Excluding integration costs, total operating costs, corporate expenses and
amortization of intangible assets represented, in the aggregate, 95% of total
sales for the Third Quarter Fiscal Year 2000, unchanged from the Third Quarter
Fiscal Year 1999's ratio. The Company anticipates this margin will continue to
be flat for the remainder of the current fiscal year when compared with the
prior year, as the Company continues to reinvest the savings from its
incremental purchasing synergies in the businesses. Overall, the Company
achieved about $5 million in additional purchasing synergies for the Third
Quarter Fiscal Year 2000, and as planned, reinvested most of these synergies in
sales staff and management support teams. The Company anticipates that it will
obtain approximately $5 million in additional synergies in Fiscal Year 2000,
most of which will be reinvested in the businesses. The Company continues to
anticipate synergies to reach $60 million in cost savings annually by fiscal
year 2001.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
THIRD QUARTER FISCAL YEAR 2000 VS. THIRD QUARTER FISCAL YEAR 1999, CONTINUED
Corporate expenses and amortization of intangible assets in the Third Quarter
Fiscal Year 2000 totaled $30 million, an increase of $3 million, or 11%, over
the prior year's total, after adjusting for approximately $3 million in
integration costs (see Note 2) and a $3.4 million pretax charge related to the
resignation of the former CEO included in the prior year's quarter. The increase
in corporate expenses was primarily due to a $2 million increase for the impact
of open positions filled in the latter half of Fiscal Year 1999, and a $1
million increase in assistance fees paid to Sodexho Alliance for services
received, as agreed upon in the merger agreements.
After adjusting for the integration costs and the resignation charge, pretax
income increased $2 million, or 6%, to $36 million for the Third Quarter Fiscal
Year 2000. The effective tax rate for the current quarter was 42.4%, a decrease
from 44.4% for 1999, due to the continuing implementation of effective tax
planning strategies. Net income of $21 million, or $0.32 per diluted share,
increased 11% when compared with the prior year's quarter, after adjusting for
the integration charges and the resignation charge in the prior year's period.
Diluted weighted average shares outstanding for the Third Quarter Fiscal Year
2000 were 63.4 million, compared with 63.9 million for the prior year's same
period. This reduction was mostly due to the redemption of the convertible
subordinated debt in November 1999 (see Notes 3 and 4 to the Condensed
Consolidated Financial Statements).
FIRST NINE MONTHS OF FISCAL YEAR 2000 VS. FIRST NINE MONTHS OF FISCAL YEAR 1999
Total sales for First Nine Months of Fiscal Year 2000 were $3.69 billion, an
increase of $230 million, or 6.6%, over $3.46 billion for First Nine Months of
Fiscal Year 1999. 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 in the current period, with strong growth in the remaining divisions,
when compared with the prior year's same period.
The Health Care division's managed volume was $2.16 billion for the First Nine
Months of Fiscal Year 2000, up $28 million or 1% over the $2.13 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 $618 million for the First Nine Months of Fiscal Year 2000, an increase of
$53 million, or 9% over the $565 million for First Nine Months of Fiscal Year
1999. The growth in the Schools division was due to the impact of strong 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 $267 million for the First Nine
Months of Fiscal Year 2000, an increase of $13 million, or 5% when compared with
$254 million in operating profit for the First Nine Months of Fiscal Year 1999.
Operating profit increased mostly due to increases in the Health Care and
Corporate Services divisions, as Corporate Services experienced strong
comparable growth in existing client sales, in addition to the favorable impact
of strong sales to new clients in the latter half of Fiscal Year 1999. In the
Health Care division, the prior year's period was impacted by approximately $3
million in bankruptcy related losses. Partially offsetting the increases in
Corporate Services and Health Care were the flat results in the Education
division and the 5% decrease in the Schools division compared to the prior
year's period. This weak performance was 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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FIRST NINE MONTHS OF FISCAL YEAR 2000 VS. FIRST NINE MONTHS OF
FISCAL YEAR 1999, CONTINUED
Excluding integration costs (see Note 2), total operating costs, corporate
expenses and amortization of intangible assets represented, in the aggregate,
95% of total sales for First Nine Months of Fiscal Year 2000, unchanged from
First Nine Months of Fiscal Year 1999's ratio. The Company anticipates this
margin will continue to be flat for the remainder of the current fiscal year
when compared with the prior year, as the Company continues to reinvest the
savings from its incremental purchasing synergies in the businesses. Overall,
the Company achieved about $15 million in additional purchasing synergies for
the First Nine Months of Fiscal Year 2000, and as planned, reinvested most of
these synergies in sales staff and management support teams. The Company
anticipates that it will obtain approximately $5 million in additional synergies
in Fiscal Year 2000, most of which will be reinvested in the businesses. The
Company continues to anticipate synergies to reach $60 million in cost savings
annually by fiscal year 2001.
Corporate expenses and amortization of intangible assets in the First Nine
Months of Fiscal Year 2000 totaled $92 million, a 14% increase from the First
Nine Months of Fiscal Year 1999, after adjusting for approximately $14 million
in integration costs (see Note 2) and a $3.4 million pretax charge related to
the resignation of the former CEO included in the prior year's period. This was
primarily due to an increase of approximately $5 million for the impact of open
positions filled in the latter half of Fiscal Year 1999 and a $4 million
increase in assistance fees paid to Sodexho Alliance for services received, as
agreed upon in the merger agreements. The First Nine Months of 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 $4 million after-tax ($0.07 per diluted common share).
After adjusting for integration costs, the resignation charge and the sale of
BFAM in the prior year's period, pretax income increased $2 million, or 2%, to
$112 million for the First Nine Months of Fiscal Year 2000. The effective tax
rate for the current period was 43.5%, a decrease from 44.4% for 1999, due to
the continuing implementation of effective tax planning strategies. Net income
increased to $63 million, or $0.99 per diluted share, compared with $55 million,
or $0.87 per diluted share for First Nine Months of Fiscal 1999, reflecting the
integration costs and the resignation charge in the prior year's period,
partially offset by the gain on sale of BFAM. Diluted weighted average shares
outstanding for the First Nine Months of Fiscal Year 2000 were 63.5 million,
compared with 64.0 million for the prior year's same period. This reduction was
mostly due to the redemption of the convertible subordinated debt in November
1999 (see Notes 3 and 4 to the Condensed Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged and anticipates that it would have long-term
unsecured debt ratings, if obtained, below investment grade based on its pro
forma financial statements. The debt resulting from the Refinancing contains
restrictive covenants and requires grants of security and guarantees by
subsidiaries of the Company, which limit the Company's ability to incur
additional debt and engage in certain other activities. Additionally, these debt
covenants limit the Company's ability to pay dividends.
Capital requirements are funded from a combination of existing cash balances and
operating cash flow. Additionally, the Company anticipates achieving annual cost
savings of approximately $60 million pretax by the end of fiscal year 2001,
resulting from purchasing actions and administrative synergies. The Company
estimates that it will achieve approximately $20 million in incremental
synergies for the full fiscal year 2000, compared with $25 million achieved in
fiscal year 1999. These anticipated cost savings will be available to pay down
debt and reinvest in the Company to fund activities to enhance its competitive
position. Anticipated incremental synergies generated in fiscal year 2000 are
expected to be, for the most part, reinvested during fiscal year 2000. These
reinvestments have been targeted primarily for additional sales and management
personnel.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 resource
information systems, as the Company migrates from the current Marriott
International payroll-related systems. The Company expects to migrate off the
Marriott International payroll-related infrastructure no later than fiscal year
2002.
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 June 2, 2000, the Company had a $235 million revolving credit facility
available at an interest rate of 9.00% to provide funds for liquidity, seasonal
borrowing needs and other general corporate purposes. At June 2, 2000, $30
million of this facility was outstanding, while an additional $33 million of
this revolving credit facility was utilized by letters of credit outstanding,
principally related to insurance programs.
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 3) amounting to approximately: $80 million in 2000;
$80 million in 2001; $90 million in 2002; $115 million in 2003 and $65 million
in 2004.
On October 7, 1999, Marriott International notified all holders of the LYONs,
that Marriott International had elected to redeem all of the LYONs at a price of
$619.65 for each $1,000 principal amount at maturity of the LYONs, with a
redemption date of November 8, 1999. The results of the redemption for the
Company were the issuance of approximately 760,000 common shares and a payment
of $10.8 million to MI for the Company's share of bondholders choosing to redeem
in cash.
During the First Nine Months of Fiscal Year 2000, the Company experienced its
normal seasonal impact on working capital as accounts receivable and accounts
payable increased with the increase in overall demand for services in the
Education and Schools divisions during the period.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements, on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance- sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
YEAR 2000
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. Although incomplete or untimely resolution of
the Year 2000 issue by the Company, its key suppliers, clients and other parties
could have had a material adverse effect on the Company's business, results of
operations, financial condition and cash flow, the results to date indicate that
Year 2000 issues have had no material adverse impact on the Company.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $1.0 billion at June 2, 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 $18 million,
based on balances at June 2, 2000.
23
<PAGE>
PART II
OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
--------------------------
There are no material legal proceedings pending against the Company.
Item 2. Changes in Securities
------------------------------
None.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
Item 5. Other Information
--------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit
No. Descriptions
------- ------------
27 Financial Data Schedule of the Registrant
99 Forward-Looking Statements
(b) Reports on Form 8-K
April 6, 2000 Press Release, dated April 6, 2000,
announcing the appointment of Bernard Royer
as Senior Vice President of Purchasing
and Distribution for the Company.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SODEXHO MARRIOTT SERVICES, INC.
July 14, 2000 /s/ JOHN M. BUSH
----------------------------------
John M. Bush
Senior Vice President and
Chief Financial Officer and
Acting Chief Accounting Officer
(Principal Financial Officer)
25
