<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 MARCH 3, 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 APRIL 5, 2000
------------------- ------------------
Common Stock $1.00
par value per share 63,171,484
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
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<CAPTION>
PAGE NO.
--------
Introduction
<S> <C>
Overview 1
Forward-Looking Statements 1
Pro Forma Financial Information (Unaudited) 2
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Thirteen and Twenty-Six Weeks Ended March 3, 2000
and February 26, 1999 7
Condensed Consolidated Balance Sheet -
as of March 3, 2000 and September 3, 1999 8
Condensed Consolidated Statement of Cash Flow - Twenty-Six Weeks Ended
March 3, 2000 and February 26, 1999 9
Condensed Consolidated Statement of Stockholders' Deficit-
as of March 3, 2000 10
Notes to Condensed Consolidated Financial Statements 11
Management's Discussion and Analysis of Results of Operations
and Financial Condition 20
Quantitative and Qualitative Disclosures about Market Risk 24
Part II. Other Information and Signatures:
Legal Proceedings 25
Changes in Securities 25
Defaults Upon Senior Securities 25
Submission of Matters to a Vote of Security Holders 25
Other Information 26
Exhibits and Reports on Form 8-K 26
Signatures 27
</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 26 weeks ended March 3, 2000 ("Second Quarter Fiscal Year 2000" and "First
Half Fiscal Year 2000," respectively) compared with the historical 13 and 26
weeks ended February 26, 1999 (presented in Part I of this report), but also the
pro forma results for the 13 and 26 weeks ended February 26, 1999 ("Pro Forma
Second Quarter Fiscal Year 1999" and "Pro Forma First Half Fiscal Year 1999,"
respectively) presented in this section. In addition, certain reclassifications
have been made to the Pro Forma Second Quarter and First Half Fiscal Year 1999
to conform to the current year's presentation.
No pro forma adjustments were made for the Second Quarter or First Half Fiscal
Year 2000 results. For the comparable periods in fiscal year 1999, the
historical results have been adjusted to exclude integration charges of $5.4
million and $13.0 million pretax, respectively. Total integration charges
included, among other items, training and relocating of former MMS employees,
systems modifications, and other one-time costs associated with combining the
predecessor companies.
-2-
<PAGE>
UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN AND TWENTY-SIX WEEKS ENDED MARCH 3, 2000 AND
THE PRO FORMA THIRTEEN AND TWENTY-SIX WEEKS ENDED FEBRUARY 26, 1999
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------------- -------------------------------------
(PRO FORMA) (PRO FORMA)
MARCH 3, FEBRUARY 26, MARCH 3, FEBRUARY 26,
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
SALES
Corporate Services $ 349 $ 324 $ 700 $ 659
Health Care 348 324 683 639
Education 317 294 739 690
Schools 107 96 225 204
Canada 39 35 83 72
Laundries/Other 19 17 37 35
----------------- ----------------- ---------------- -----------------
TOTAL SALES 1,179 1,090 2,467 2,299
OPERATING COSTS AND EXPENSES
Corporate Services 327 303 657 616
Health Care 320 296 628 585
Education 299 279 677 631
Schools 101 90 212 191
Canada 37 33 78 68
Laundries/Other 17 16 34 34
----------------- ----------------- ---------------- -----------------
TOTAL OPERATING COSTS AND EXPENSES 1,101 1,017 2,286 2,125
----------------- ----------------- ---------------- -----------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 22 21 43 43
Health Care 28 28 55 54
Education 18 15 62 59
Schools 6 6 13 13
Canada 2 2 5 4
Laundries/Other 2 1 3 1
----------------- ----------------- ---------------- -----------------
TOTAL OPERATING PROFIT 78 73 181 174
CORPORATE ITEMS:
Amortization of Intangible Assets (10) (10) (19) (19)
Corporate Expenses (21) (17) (43) (35)
Interest Expense, Net (21) (21) (43) (44)
Gain on Sale of Investment - - - 8
----------------- ----------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 26 25 76 84
Provision for Income Taxes (12) (11) (34) (37)
----------------- ----------------- ---------------- -----------------
NET INCOME $ 14 $ 14 $ 42 $ 47
================= ================= ================ =================
BASIC EARNINGS PER SHARE $ 0.23 $ 0.23 $ 0.67 $ 0.76
================= ================= ================ =================
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.22 $ 0.67 $ 0.74
================= ================= ================ =================
</TABLE>
-3-
<PAGE>
DISCUSSION OF SECOND QUARTER FISCAL YEAR 2000 AND PRO FORMA SECOND QUARTER
FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total sales for Second Quarter Fiscal Year 2000 were $1.18 billion, an increase
of $89 million, or 8.2%, over $1.09 billion for Pro Forma Second 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 and Canada divisions had double-digit sales growth in the
current quarter, with strong growth in the remaining divisions, when compared
with the prior year's same period. Items that impacted sales growth in the
Second Quarter Fiscal Year 2000 included $9 million for catering sales during
the Year 2000 rollover operations in the Corporate Services division, and
approximately $8 million for a calendar week shift in the Education division.
The Health Care division experienced an $8 million increase in sales for the
current quarter due to changes at several clients where employees were moved to
the Company's payroll, thus increasing the costs billed to those clients.
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 $709 million for Second Quarter Fiscal Year 2000,
up $4 million or 1% over the $705 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 $194 million for
Second Quarter Fiscal Year 2000, an increase of $19 million, or 11% over the
$175 million for Pro Forma Second Quarter Fiscal Year 1999. The growth in the
Schools division was due to the impact of strong new sales that added
proportionately as much managed volume as sales.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $78 million for Second Quarter
Fiscal Year 2000, a 6.8%, or $5 million increase when compared with $73 million
in operating profit for the Pro Forma Second Quarter Fiscal Year 1999. Operating
profit increased mostly due to increases in the Education division, as it
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, inflationary-based operating profit growth was
partially offset by cost containment and reduction programs at the Company's
clients, as this industry continues to consolidate, restructure and close health
care facilities. Operating profit was flat in the remaining divisions as similar
trends in new sales and comparable growth in existing client accounts were
partially offset by first year operational inefficiencies in several of the
Company's divisions.
Excluding Year 2000-related costs (see "Year 2000"), total operating costs,
corporate expenses and amortization of intangible assets represented, in the
aggregate, 96% of total sales for Second Quarter Fiscal Year 2000, which did not
change from Pro Forma Second 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 Second 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 $10 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 Second Quarter
Fiscal Year 2000 totaled $31 million, a 15% increase from the $27 million for
the Pro Forma Second Quarter Fiscal Year 1999. This increase 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.
Despite an increase in corporate expenses pretax income increased $1 million, or
4%, to $26 million for the Second Quarter Fiscal Year 2000. The effective tax
rate for the current quarter was 44.0%, a decrease from 44.4% for 1999, due to
the continuing implementation of effective tax planning strategies. Net income
of $14 million, or $0.23 per diluted share, was level with $14 million, or $0.22
per diluted share for Pro Forma Second Quarter Fiscal 1999. Diluted weighted
average shares outstanding for the Second Quarter Fiscal Year 2000 were 63.3
million, compared to 64.0 million for the prior year's same period. This
reduction was mostly due to the conversion of the convertible subordinated debt
in November 1999 (see Notes 3 and 4 to the Condensed Consolidated Financial
Statements).
-4-
<PAGE>
DISCUSSION OF FIRST HALF FISCAL YEAR 2000 AND PRO FORMA FIRST HALF
FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total sales for First Half Fiscal Year 2000 were $2.47 billion, an increase of
$168 million, or 7.3%, over $2.30 billion for Pro Forma First Half 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 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. Items that impacted sales growth in the First
Half Fiscal Year 2000 included $9 million for catering sales during the Year
2000 rollover operations in the Corporate Services division, and approximately
$18 million for a calendar week shift in the Education division. The Health Care
division experienced a $15 million increase in sales for the First Half Fiscal
Year 2000 due to changes at several clients where employees were moved to the
Company's payroll, thus increasing the costs billed to those clients.
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 $1.42 billion for First Half Fiscal Year 2000, up
$18 million or 1% over the $1.40 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 $404 million for
First Half Fiscal Year 2000, an increase of $35 million, or 10% over the $369
million for Pro Forma First Half Fiscal Year 1999. The growth in the Schools
division was due to the impact of strong new sales that added proportionately as
much managed volume as sales.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $181 million for First Half
Fiscal Year 2000, an increase of $7 million, or 4.0% when compared with $174
million in operating profit for the Pro Forma First Half Fiscal Year 1999.
Operating profit increased mostly due to increases in the Education division,
the result of strong comparable growth in existing clients sales, in addition to
the favorable impact of strong new sales in the latter half of Fiscal Year 1999.
The Corporate Services division's operating profit was flat as it began the
recovery from a 5% decline in operating profit in the first quarter compared
with the prior year's quarter, the result of increased labor rates in the highly
competitive markets that the Corporate Services division serves. Due to the
national trend of record low unemployment, the Company had in place several
strategic initiatives regarding labor costs; however, the up-tick in labor rates
occurred faster than the Company's initiatives could mitigate the increase. The
Company anticipates this trend will be mitigated in the second half of Fiscal
Year 2000. In the Health Care division, inflationary-based operating profit
growth was partially offset by cost containment and reduction programs at the
Company's clients, as this industry continues to consolidate, restructure and
close healthcare facilities. Operating profit was flat in the remaining
divisions as similar trends in new sales and comparable growth in existing
client accounts were partially offset by first year operational inefficiencies
in several of the Company's divisions.
Excluding Year 2000-related costs (see "Year 2000"), total operating costs,
corporate expenses and amortization of intangible assets represented, in the
aggregate, 95% of total sales for First Half Fiscal Year 2000, which did not
change from Pro Forma First Half 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 $10 million in additional
purchasing synergies for the First Half 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 $10 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 Half
Fiscal Year 2000 totaled $62 million, a 15% increase from the $54 million for
the Pro Forma First Half Fiscal Year 1999. This was primarily due to an increase
of approximately $3 million for the impact of open positions filled in the
latter half of Fiscal Year 1999, an increase of approximately $2 million in Year
2000-related costs (see "Year 2000") and a $3 million increase in assistance
fees paid to Sodexho Alliance for services received, as agreed upon in the
merger agreements. The Pro Forma First Half 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).
-5-
<PAGE>
DISCUSSION OF FIRST HALF FISCAL YEAR 2000 AND PRO FORMA FIRST HALF
FISCAL YEAR 1999 RESULTS OF OPERATIONS, CONTINUED
The increase in corporate expenses along with the sale of BFAM in the prior
year's first half contributed to a decrease in pretax income of $8 million, or
10%, to $76 million for the First Half Fiscal Year 2000. The effective tax rate
for the current period was 44.0%, a decrease from 44.4% for 1999, due to the
continuing implementation of effective tax planning strategies. Net income
decreased to $42 million, or $0.67 per diluted share, compared with $47 million,
or $0.74 per diluted share for Pro Forma First Half Fiscal 1999. Diluted
weighted average shares outstanding for the First Half Fiscal Year 2000 were
63.5 million, compared to 64.1 million for the prior year's same period. This
reduction was mostly due to the conversion of the convertible subordinated debt
in November 1999 (see Notes 3 and 4 to the Condensed Consolidated Financial
Statements).
-6-
<PAGE>
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------------- -------------------------------------
MARCH 3, FEBRUARY 26, MARCH 3, FEBRUARY 26,
2000 1999 2000 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
SALES $1,179 $1,090 $2,467 $2,299
Operating Costs and Expenses 1,101 1,017 2,286 2,126
----------------- ---------------- ----------------- ----------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 78 73 181 173
CORPORATE ITEMS:
Corporate expenses,
including amortization of intangible assets (31) (32) (62) (65)
Interest expense, net (21) (21) (43) (44)
Gain on sale on investment - - - 8
----------------- ---------------- ----------------- ----------------
Income Before Income Taxes 26 20 76 72
Provision for income taxes (12) (9) (34) (32)
----------------- ---------------- ----------------- ----------------
NET INCOME $ 14 $ 11 $ 42 $ 40
================= ================ ================= ================
BASIC EARNINGS PER SHARE $ 0.23 $ 0.18 $ 0.67 $ 0.64
================= ================ ================= ================
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.18 $ 0.67 $ 0.63
================= ================ ================= ================
</TABLE>
See notes to condensed consolidated financial statements.
-7-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
<TABLE>
<CAPTION>
MARCH 3, SEPTEMBER 3,
2000 1999
(UNAUDITED)
------------------ -------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and equivalents $ 48 $ 48
Accounts and notes receivable, net 509 445
Other 150 149
------------------ -------------------
Total current assets 707 642
Property and equipment, net 92 85
Intangible assets, net 517 535
Other assets 87 85
------------------ -------------------
$ 1,403 $ 1,347
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 139 $ 133
Accounts payable 261 238
Other current liabilities 388 347
------------------ -------------------
Total current liabilities 788 718
Long-term debt 940 980
Other long-term liabilities 110 113
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 March 3, 2000, and September 3, 1999, respectively 63 62
Additional paid-in capital 1,346 1,326
Accumulated deficit (1,847) (1,884)
Accumulated other comprehensive income 3 2
------------------ -------------------
Total stockholders' deficit (435) (494)
------------------ -------------------
Total liabilities and stockholders' deficit $ 1,403 $ 1,347
================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
-8-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
--------------------------------------------------
MARCH 3, 2000 FEBRUARY 26, 1999
----------------------- -----------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income $ 42 $ 40
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization expense 41 42
Gain on sale of investment - (8)
Deferred income taxes - -
Changes in working capital (4) (39)
Other 3 3
----------------------- -----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 82 38
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (34) (33)
Dispositions 4 22
Payments for excess net tangible assets - (22)
Other (3) (5)
----------------------- -----------------------
NET CASH USED IN INVESTING ACTIVITIES (33) (38)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from borrowings from short-term credit facility 6 20
Repayments of long-term debt (40) (35)
Payments for redemption of convertible subordinated debt (11) -
Issuance of common stock 1 2
Dividends paid - common (5) -
----------------------- -----------------------
NET CASH USED IN FINANCING ACTIVITIES (49) (13)
----------------------- -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS - (13)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 48 79
----------------------- -----------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 48 $ 66
======================= =======================
</TABLE>
See notes to condensed consolidated financial statements.
-9-
<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 - - 42 - 42
-- Foreign exchange translation - - - 1 1
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME - - 42 1 43
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, March 3, 2000 $63 $1,346 $(1,847) $3 $(435)
============ =============================== =============== ============== =============== ================= ===============
</TABLE>
See notes to condensed consolidated financial statements.
-10-
<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 March 3, 2000 and September 3, 1999, and the results of operations for the
13 and 26 weeks ended March 3, 2000 and February 26, 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."
-11-
<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 $24 million and $21 million at March 3,
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.
-12-
<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 March 3, 2000 and September 3, 1999,
the Company had $80 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 $10 million and $19 million for the
13 and 26 weeks ended March 3, 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 $4.4 million of gross
foreign exchange translations gains, net of taxes totaling $1.9 million, at
March 3, 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 Half Fiscal Year 2000, total
comprehensive income was comprised of $42 million in net income and $1.3 million
of gross foreign translation gains, net of taxes totaling $0.5 million.
-13-
<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 $13 million during the First Half Fiscal Year 1999. The
operating profit before corporate items for the First Half Fiscal Year 1999
included $1.1 million for integration charges while corporate expenses included
$11.9 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 $5 million at March 3,
2000, generally represents the aggregate remaining estimated cost of termination
benefits for approximately 350 former Sodexho North America employees and the
estimated cost for the closure and excess capacity in certain Sodexho North
America offices.
Acquisition reserve activity is detailed below:
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
SEPTEMBER 3, 1999 PAYMENTS MARCH 3, 2000
---------------------- -- ---------------------- -- ----------------------
($ in millions)
<S> <C> <C> <C>
Employee Terminations $2.4 $(1.7) $0.7
Relocation of Sodexho Facilities 0.7 (0.1) 0.6
Closures 1.9 (0.4) 1.5
Other Restructuring 2.6 (0.1) 2.5
---------------------- ---------------------- ----------------------
Total $7.6 $(2.3) $5.3
====================== ====================== ======================
</TABLE>
-14-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) DEBT
<TABLE>
<CAPTION>
MARCH 3, SEPTEMBER 3,
2000 1999
----------------- --- -----------------
($ in millions)
<S> <C> <C>
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility 58 52
Other 1 1
----------------- -----------------
Total $ 139 $ 133
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 7.10% in fiscal year 2000 $ 390 $ 430
Senior Guaranteed Credit Facility, due 2005
averaging 6.96% 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 $1,020 $1,060
Amount Reclassified to Short-Term Debt (80) (80)
----------------- -----------------
$ 940 $ 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 March 3, 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 $32 million
at March 3, 2000, versus $33 million at September 3, 1999. At March 3, 2000,
$145 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 March 3, 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 March 3,
2000 and for the 26 weeks then ended.
-15-
<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 March 3, 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 $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The weighted-average rate for the total debt portfolio,
including the effect of the interest-rate agreements, was 6.98% at March 3,
2000. These agreements expire between May 2001 and February 2005.
Details of these interest rate agreements as of March 3, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS--
TERMS BALANCE VALUE* PAID RECEIVED 26 WEEKS
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Received Variable
Pay Fixed, Maturing 5/--8/01 $400 $ 5 5.71% 6.10% $(0.2)
Received Variable
Pay Fixed, Maturing 8/02 300 8 5.84 6.10 0.1
Received Variable
Pay Fixed, Maturing 2/05 200 10 5.90 6.10 0.1
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
$900 $23 5.80% 6.10% $ -
=================================== =============== ============== =============== =============== ===============
<FN>
*-- based on the termination cost for these agreements obtained by third party market quotes.
</FN>
</TABLE>
At March 3, 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.
-16-
<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 March 3, 2000, the Company
had 63,170,265 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 TWENTY-SIX WEEKS ENDED
------------------------------------- --- -------------------------------------
MARCH 3, FEBRUARY 26, MARCH 3, FEBRUARY 26,
2000 1999 2000 1999
----------------- ---------------- --- ---------------- -----------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income $ 14 $ 11 $ 42 $ 40
================= ================= ================ ================
Weighted Average Shares Outstanding 63.2 62.1 62.9 62.0
================= ================ ================ =================
BASIC EARNINGS PER SHARE $ 0.23 $ 0.18 $ 0.67 $ 0.64
================= ================ ================ =================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $ 14.6 $ 11.1 $ 42.4 $ 39.8
After-tax Interest Expense on
Convertible Subordinated Debt - 0.1 0.1 0.3
----------------- ---------------- ---------------- -----------------
Diluted Net Income $ 14.6 $ 11.2 $ 42.5 $ 40.1
================= ================ ================ =================
Weighted Average Shares Outstanding 63.2 62.1 62.9 62.0
Effect of Dilutive Securities*:
Employee Stock Option Plan - 0.6 0.1 0.8
Deferred Stock Incentive Plan 0.1 0.1 0.1 0.1
Convertible Subordinated Debt - 1.2 0.4 1.2
----------------- ---------------- ---------------- -----------------
Diluted Weighted Average
Shares Outstanding 63.3 64.0 63.5 64.1
================= ================ ================ =================
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.18 $ 0.67 $ 0.63
================= ================ ================ =================
<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 6.0 million and 5.0
million for the 13 and 26 weeks ended March 3, 2000, respectively, compared to
approximately 1.8 million for both the 13 and 26 weeks ended February 26, 1999.
</FN>
</TABLE>
-17-
<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
26-week periods ended March 3, 2000, expenses that related to these plans
totaled $2.9 million and $5.7 million, respectively, compared to $3.2 million
and $6.8 million for the 13-week and 26-week periods ended February 26, 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 2.4 million in stock option awards during
the first 26 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 26 weeks ended March
3, 2000, is presented below:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
MARCH 3, 2000
--------------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
----------------- -----------------
<S> <C> <C>
Outstanding at September 3, 1999 4.6 $21
Granted during the twenty-six weeks 2.4 16
Exercised during the twenty-six weeks (0.1) 8
Forfeited during the twenty-six weeks (0.1) 23
----------------- -----------------
Outstanding at March 3, 2000 6.8 $20
================= =================
Options exercisable at March 3, 2000 2.3 $18
================= =================
</TABLE>
-18-
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(6) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------------- -- -------------------------------------
MARCH 3, FEBRUARY 26, MARCH 3, FEBRUARY 26,
2000 1999 2000 1999
---------------- -- ----------------- -- ----------------- -- ----------------
($ in millions)
<S> <C> <C> <C> <C>
GROSS SALES
Corporate Services $ 349 $ 324 $ 700 $ 659
Health Care 348 324 683 639
Education 317 294 739 690
Schools 107 96 225 204
Canada 39 35 83 72
Laundries/Other 19 17 37 35
---------------- ----------------- ----------------- ----------------
Total Gross Sales $1,179 $1,090 $2,467 $2,299
================ ================= ================= ================
GROSS OPERATING PROFIT
Corporate Services $ 22 $ 21 $ 43 $ 43
Health Care 28 28 55 54
Education 18 15 62 59
Schools 6 6 13 12
Canada 2 2 5 4
Laundries/Other 2 1 3 1
---------------- ----------------- ----------------- ----------------
Total Gross Operating Profit $ 78 $ 73 $ 181 $ 173
================ ================= ================= ================
Corporate Items (52) (53) (105) (101)
---------------- ----------------- ----------------- ----------------
Income Before Income Taxes $ 26 $ 20 $ 76 $ 72
================ ================= ================= ================
</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.
-19-
<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 26-week periods ended March 3, 2000
("Second Quarter Fiscal Year 2000" and "First Half Fiscal Year 2000,"
respectively) as compared with the historical unaudited 13-week and 26-week
periods ended February 26, 1999 ("Second Quarter Fiscal Year 1999" and "First
Half Fiscal Year 1999," respectively).
DUE TO THE DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S HISTORICAL
OPERATING RESULTS FOR THE SECOND QUARTER AND FIRST HALF 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.
SECOND QUARTER FISCAL YEAR 2000 VS. SECOND QUARTER FISCAL YEAR 1999
Total sales for Second Quarter Fiscal Year 2000 were $1.18 billion, an increase
of $89 million, or 8.2%, over $1.09 billion for Second 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 and Canada divisions had double-digit sales growth in the
current quarter, with strong growth in the remaining divisions, when compared
with the prior year's same period. Items that impacted sales growth in the
Second Quarter Fiscal Year 2000 included $9 million for catering sales during
the Year 2000 rollover operations in the Corporate Services division and
approximately $8 million for a calendar week shift in the Education division.
The Health Care division experienced an $8 million increase in sales for the
current quarter due to changes at several clients where employees were moved to
the Company's payroll, thus increasing the costs billed to those clients.
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 $709 million for Second Quarter Fiscal Year 2000,
up $4 million or 1% over the $705 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 $194 million for
Second Quarter Fiscal Year 2000, an increase of $19 million, or 11% over the
$175 million for Second Quarter Fiscal Year 1999. The growth in the Schools
division was due to the impact of strong new sales that added proportionately as
much managed volume as sales.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $78 million for Second Quarter
Fiscal Year 2000, a 7% increase when compared with $73 million in operating
profit for the Second Quarter Fiscal Year 1999. Operating profit increased
mostly due to increases in the Education division, as it 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, inflationary-based operating profit growth was partially offset by
cost containment and reduction programs at the Company's clients, as this
industry continues to consolidate, restructure and close health care facilities.
Operating profit was flat in the remaining divisions as similar trends in new
sales and comparable growth in existing client accounts were partially offset by
first year operational inefficiencies in several of the Company's divisions.
Excluding integration and Year 2000-related costs (see "Year 2000"), total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 96% of total sales for Second Quarter Fiscal Year
2000, which did not change from Second 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 Second 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 $10 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.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
SECOND QUARTER FISCAL YEAR 2000 VS. SECOND QUARTER FISCAL YEAR 1999, CONTINUED
Corporate expenses and amortization of intangible assets in the Second Quarter
Fiscal Year 2000 totaled $31 million, a 15% increase from the $27 million for
the Second Quarter Fiscal Year 1999, after adjusting for approximately $5
million in integration costs included in the prior year's quarter (see Note 2).
This increase 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.
The increase in operating profit contributed to an increase in pretax income of
$6 million, or 30%, to $26 million for the Second Quarter Fiscal Year 2000. The
effective tax rate for the current quarter was 44.0%, a decrease from 44.4% for
1999, due to the continuing implementation of effective tax planning strategies.
Net income increased to $14 million, or $0.23 per diluted share, compared with
$11 million, or $0.18 per diluted share for Second Quarter Fiscal Year 1999.
Diluted weighted average shares outstanding for the Second Quarter Fiscal Year
2000 were 63.3 million, compared to 64.0 million for the prior year's same
period. This reduction was mostly due to the conversion of the convertible
subordinated debt in November 1999 (see Notes 3 and 4 to the Condensed
Consolidated Financial Statements).
FIRST HALF FISCAL YEAR 2000 VS. FIRST HALF FISCAL YEAR 1999
Total sales for First Half Fiscal Year 2000 were $2.47 billion, an increase of
$168 million, or 7.3%, over $2.30 billion for First Half 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 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. Items that impacted sales growth in the First
Half Fiscal Year 2000 included $9 million for catering sales during the Year
2000 rollover operations in the Corporate Services division and approximately
$18 million for a calendar week shift in the Education division. The Health Care
division experienced a $15 million increase in sales for the current period due
to changes at several clients where employees were moved to the Company's
payroll, thus increasing the costs billed to those clients.
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 $1.42 billion for First Half Fiscal Year 2000, up
$18 million or 1% over the $1.40 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, which impacts a large number of the Company's clients in certain
geographic markets. Managed volume for the Schools division was $404 million for
First Half Fiscal Year 2000, an increase of $35 million, or 10% over the $369
million for First Half Fiscal Year 1999. The growth in the Schools division was
due to the impact of strong new sales that added proportionately as much managed
volume as sales.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $181 million for First Half
Fiscal Year 2000, a 5% increase when compared with $173 million in operating
profit for the First Half Fiscal Year 1999. Operating profit increased mostly
due to increases in the Education division, the result of strong comparable
growth in existing clients sales, in addition to the favorable impact of strong
new sales in the latter half of Fiscal Year 1999. The Corporate Services
division's operating profit was flat as it began the recovery from a 5% decline
in operating profit in the first quarter compared with the prior year's quarter,
the result of increased labor rates in the highly competitive markets that the
Corporate Services division serves. Due to the national trend of record low
unemployment, the Company had in place several strategic initiatives regarding
labor costs; however, the up-tick in labor rates occurred faster than the
Company's initiatives could mitigate the increase. The Company anticipates this
trend will be mitigated in the second half of Fiscal Year 2000. In the Health
Care division, inflationary-based operating profit growth was partially offset
by cost containment and reduction programs at the Company's clients, as this
industry continues to consolidate, restructure and close health care facilities.
Operating profit was flat in the remaining divisions as similar trends in new
sales and comparable growth in existing client accounts were partially offset by
first year operational inefficiencies in several of the Company's divisions.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FIRST HALF FISCAL YEAR 2000 VS. FIRST HALF FISCAL YEAR 1999, CONTINUED
Excluding integration and Year 2000-related costs (see "Year 2000"), total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 95% of total sales for First Half Fiscal Year
2000, which did not change from First Half 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 $10 million in additional
purchasing synergies in the First Half 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 $10 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 Half
Fiscal Year 2000 totaled $62 million, a 17% increase from the $53 million for
the First Half Fiscal Year 1999, after adjusting for approximately $12 million
in integration costs included in the prior year's period (see Note 2). This was
primarily due to an increase of approximately $3 million for the impact of open
positions filled in the latter half of Fiscal Year 1999, an increase of
approximately $2 million in Year 2000-related costs (see "Year 2000") and a $3
million increase in assistance fees paid to Sodexho Alliance for services
received, as agreed upon in the merger agreements. The First Half 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 operating profit partially offset by the sale of BFAM in the
prior year's first half contributed to an increase in pretax income of $4
million, or 6%, to $76 million for the First Half Fiscal Year 2000. The
effective tax rate for the current period was 44.0%, a decrease from 44.4% for
1999, due to the continuing implementation of effective tax planning strategies.
Net income increased to $42 million, or $0.67 per diluted share, compared with
$40 million, or $0.63 per diluted share for First Half Fiscal Year 1999. Diluted
weighted average shares outstanding for the First Half Fiscal Year 2000 were
63.5 million, compared to 64.1 million for the prior year's same period. This
reduction was mostly due to the conversion 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.
-22-
<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 during the second half of fiscal year 2000. 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 March 3, 2000, the Company had a $235 million revolving credit facility
available at an interest rate of 7.68% to provide funds for liquidity, seasonal
borrowing needs and other general corporate purposes. At March 3, 2000, $58
million of this facility was outstanding, while an additional $32 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 Half 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.
-23-
<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
GENERAL. 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.
SYSTEMS. The Company has completed the implementation and rollout of compliant
versions of software and personal computers to replace those the Company owns.
In addition, the Company has completed the necessary removal of its
non-compliant systems. While the Company has experienced a few minor software
failures, primarily in third party software, they have had no impact on the
Company. In addition, the Company has not received any reports indicating a need
to implement its contingency plan.
RISKS. We believe that no risks associated with the Year 2000 issue remain. If
any issue should surface, the Company believes that its experience in handling
business disruptions resulting from non-Year 2000 events would significantly
reduce any adverse effects of any such Year 2000 disruptions.
COSTS. The Company had previously estimated that the pretax costs to be borne by
it to address the Year 2000 issue would be approximately $5-8 million,
principally for modification, testing, validation, project management and
contingency and business continuity planning. From the inception of this project
through First Half Fiscal Year 2000, approximately $8 million has been incurred
and expensed. These costs have been expensed as incurred and funded from
operating cash flow. The Company does not anticipate any additional material
costs for this project during the remainder of fiscal year 2000. The Company has
not separately identified certain internal costs incurred for this project, most
of which were related to the Company's internal personnel costs.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $1.1 billion at March 3, 2000. If interest rates increased by 100 basis
points, the fair value of the Company's debt would have decreased by
approximately $18 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $19 million,
based on balances at March 3, 2000.
-24-
<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
- ------------------------------------------------------------
The Annual Meeting of the shareholders of the Company was held on January 12,
2000, in Gaithersburg, Maryland. Chairman of the Board William J. Shaw presided
and 54,463,218 of the 63,138,862 shares outstanding as of the record date of
November 22, 1999, were represented at the meeting in person or by proxy.
1-Elections of Directors
Nominees for membership on the Board of Directors of the Corporation, listed
below, were elected by the shareholders. The following schedule lists the number
of shares cast for each nominee:
Total Total
Votes For Votes Withheld
------------------ ------------------
Daniel J. Altobello 54,227,535 235,683
Pierre Bellon 54,221,561 241,657
Bernard Carton 54,215,866 247,352
Doctor R. Crants 54,240,939 222,279
Edouard de Royere 54,214,200 249,018
Michel Landel 54,234,343 228,875
John W. Marriott III 54,232,046 231,172
William J. Shaw 54,234,153 229,065
2-Ratification of the appointment of PricewaterhouseCoopers, LLP as independent
auditors of the Company for fiscal year 2000:
By a vote of 54,345,921 For, to 71,830 Against, with 45,467 Abstaining, the
Company's shareholders approved the appointment of PricewaterhouseCoopers, LLP
as independent auditors of the Company for fiscal year 2000.
3-Approval of the adoption of the Sodexho Marriott Services Employee Stock
Purchase Plan:
By a vote of 53,936,234 For, to 452,514 Against, with 74,470 Abstaining, the
Company's shareholders approved the adoption of the Sodexho Marriott Services
Employee Stock Purchase Plan.
-25-
<PAGE>
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
EXHIBIT
NO. DESCRIPTIONS
------- ------------
27 Financial Data Schedule of the Registrant
99 Forward-Looking Statements
(b) Reports on Form 8-K
December 29, 1999 Press Release, dated December 28, 1999,
relating to Sodexho Marriott Services, Inc.
comments on outlook for first quarter fiscal
year 2000.
February 16, 2000 Press Release, dated February 15, 2000,
announcing the appointment of John Bush
as Senior Vice President and Chief Financial
Officer of the Company.
-26-
<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.
April 7, 2000 /s/ JOHN M. BUSH
------------------------------------------
John M. Bush
Senior Vice President and
Chief Financial Officer
/s/ LOTA S. ZOTH
------------------------------------------
Lota S. Zoth
Vice President, Corporate Controller and
Chief Accounting Officer
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR SODEXHO MARRIOTT SERVICES, INC.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S TWENTY-SIX WEEKS ENDED MARCH 3, 2000 CONDENSED CONSOLIDATED STATEMENT
OF INCOME AND THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 3, 2000 FROM
THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> OTHER OTHER
<FISCAL-YEAR-END> SEP-01-2000 SEP-03-1999
<PERIOD-START> SEP-04-1999 AUG-29-1998
<PERIOD-END> MAR-03-2000 FEB-26-1999
<CASH> 48 66
<SECURITIES> 0 0
<RECEIVABLES> 509 513
<ALLOWANCES> 24 18
<INVENTORY> 68 59
<CURRENT-ASSETS> 707 731
<PP&E> 266 247
<DEPRECIATION> 174 169
<TOTAL-ASSETS> 1,403 1,446
<CURRENT-LIABILITIES> 788 794
<BONDS> 940 1,050
0 0
0 0
<COMMON> 63 62
<OTHER-SE> (498) (568)
<TOTAL-LIABILITY-AND-EQUITY> 1,403 1,446
<SALES> 2,467 2,299
<TOTAL-REVENUES> 2,467 2,299
<CGS> 2,286 2,126
<TOTAL-COSTS> 2,286 2,126
<OTHER-EXPENSES> 62 57
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43 44
<INCOME-PRETAX> 76 72
<INCOME-TAX> 34 32
<INCOME-CONTINUING> 42 40
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 42 40
<EPS-BASIC> 0.67 0.64
<EPS-DILUTED> 0.67 0.63
</TABLE>
EXHIBIT 99
SODEXHO MARRIOTT SERVICES, INC.
FORWARD-LOOKING STATEMENTS
SUMMARY OF IMPORTANT FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
As indicated previously, this report contains forward-looking statements that
are subject to a number of risks and uncertainties. Sodexho Marriott Services,
Inc. (the "Company") cautions readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results of operations. The factors set forth below do not
constitute all factors which investors should consider prior to making an
investment decision with respect to the Company's securities. Further, investors
should not assume that the information contained below is complete or accurate
in all respects following the date of this filing. The Company assumes no
obligation to update any forward-looking statements or any of the factors
discussed below.
CHANGES IN OPERATIONS. On March 27, 1998, the Company, formerly named
Marriott International, Inc. (as formerly named, "Old Marriott"), consummated a
series of transactions (the "Transactions") that, among other things, resulted
in: (i) a spin-off to Old Marriott's stockholders of all businesses of Old
Marriott other than its food service and facilities management business through
a special dividend of stock in a new company which now uses the name "Marriott
International, Inc." ("New Marriott"); (ii) the acquisition through a merger of
the North American operations of Sodexho Alliance, S.A. ("Sodexho"); and (iii)
the refinancing of certain outstanding indebtedness. Following the Transactions,
the Company was renamed Sodexho Marriott Services, Inc. As a result of the
Transactions, the Company's operations were significantly changed. The
distribution of the lodging business narrowed the Company's operations to its
food service and facilities management business (as expanded by the addition of
the North American operations of Sodexho), and caused the Company's debt
obligations, as a percentage of its assets, to increase significantly. The
Company's business strategy is based on the belief that it will be able to
expand its business, and reduce its debt over a reasonable period of time, and
be able to attract, hire, train and retain competent employees. There can no
assurance, however, that the Company's efforts to execute all elements of this
strategy will be successful, or that a failure to do so will not have a material
adverse effect on the Company's business, results of operations, and financial
condition. In addition, because the Company is less diversified than it was
prior to the Transactions, the results of operations of the Company will be more
susceptible to competitive and market factors specific to its core businesses.
LIMITED HISTORY AS AN INDEPENDENT FOOD SERVICE AND FACILITIES MANAGEMENT
COMPANY. The Company has been operating less than two years as an independent,
publicly owned, food service and facilities management company. The Company's
management has limited experience in operating and managing a public company
with indebtedness that exceeds its assets, or in integrating an acquisition the
size of Sodexho North America. The Company also must take steps to assure that
certain corporate services now being provided to the Company for limited periods
of time by New Marriott eventually will be adequately performed by the Company
or third-party contractors. Any or all of these factors could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
SUBSTANTIAL INDEBTEDNESS. The Company's indebtedness under its credit
facility agreements is currently over $1.0 billion and bears interest at rates
that float with certain indices. The size of the Company's indebtedness and the
restrictive covenants, events of default and other restrictions on the Company's
activities contained in its credit facility agreements may limit the Company's
ability to respond to market conditions, satisfy capital expenditure
requirements, meet contractual or financial obligations, incur additional debt,
invest in information technology infrastructure or engage in other activities.
As a result, significant losses or lower profits by the Company or certain
activities by it could cause the Company to violate the terms of its credit
facility agreements and thereby impair the Company's liquidity and limit its
ability to raise additional capital. Moreover, a failure by the Company to make
required debt payments could result in an acceleration of the Company's
indebtedness, in which case the lenders thereunder would be entitled to exercise
their remedies, including foreclosing on collateral. In view of the Company's
substantial leverage, any new financings and refinancings by the Company of the
Company's indebtedness, if available at all, may be at higher interest rates and
may contain terms significantly less advantageous than would have been available
to the Company absent the Transactions. In addition, a rise in interest rates
would cause the Company's payment obligations to increase, even though the
Company has hedged a significant portion of its interest rate risk. The
occurrence of any of these events could restrict the Company's ability to
finance its future operations, meet capital needs or engage in other business
activities that may be in the interest of the Company. There can be no assurance
that the Company will be able to obtain additional capital, if needed, on
acceptable terms, or that the occurrence of any of the foregoing events would
not have a material adverse effect on the Company's business, results of
operations and financial condition.
<PAGE>
CONTRACTUAL ARRANGEMENTS. The Company's ability to continue the growth of
its food service and facilities management business depends on whether it can
continue to obtain new contracts, or renewals of existing contracts, on
satisfactory terms. The majority of the food service and facilities management
contracts of the Company are either based on fixed-price terms or terminable by
clients on short notice (generally from 30 to 120 days), or both. Therefore, the
Company's results of operations are dependent to a significant extent on its
ability to estimate and control costs associated with the provision of services
under these contracts. The Company's costs are subject to increases as a result
of rising labor and supply costs, many of which are outside its control. In
addition, the terms of the Company's operating contracts, distribution
agreements, franchise agreements and leases are influenced by contract terms
offered by the Company's competitors, general economic conditions, and other
factors. There can be no assurance that some or all of these factors will not
adversely affect the Company's operating margins or its ability to enter into
satisfactory future contracts, or that these factors would not have a material
adverse effect on the Company's business, results of operations, and financial
condition.
COMPETITION. The food service and facilities management industries are
highly competitive. The Company competes in these industries with numerous other
vendors of varying sizes, many of which have significant financial resources.
The continued success of the Company will be dependent, in large part, upon its
ability to compete in such areas as the quality of food and facilities
management services, the nature and scope of specialized services, and upon the
Company's ability to contain costs.
ECONOMIC CONDITIONS. A decline in international, national or regional
economic conditions could result in reduced demand for the outsourcing of food
and facilities management services and create pressure on the Company to enter
into contractual arrangements less favorable than those currently in effect or
under consideration. Accordingly, such a decline could have a material adverse
effect on the Company's business, results of operations, and financial
condition. Also, low levels of unemployment, or other factors, could cause labor
costs to increase and could cause the Company to have unfilled positions that
could impair its service levels. This could result in increased costs incurred
by the Company, some of which may not be recoverable from clients and could
impair the retention of existing clients.
LIMITED GEOGRAPHIC FOCUS. The Company is not currently expected to expand
its international presence beyond Canada. The Company's licensing arrangements
with New Marriott and Sodexho to use the names "Marriott" and "Sodexho" cover
only the U.S. and Canada. As a practical matter, since the Company will be
allowed to use its corporate name only in the U.S. and Canada, and since Sodexho
controls or has significant interests in companies competing in other countries
in the food service and facilities management sector, it is unlikely that the
Company will engage in significant operations outside the U.S. and Canada. As a
result, the Company will be more susceptible to a downturn in the U.S. and
Canadian economies than a company that is actively engaged in various other
markets.
RELATIONSHIP WITH SODEXHO. As part of the Transactions, the Company and
Sodexho entered into certain arrangements under which Sodexho provides the
Company with a variety of consulting and advisory services and other assistance
and has guaranteed a portion of the Company's indebtedness. Sodexho also has
licensed to the Company the use of the name "Sodexho." These arrangements may
have the effect of causing the Company to be reliant to a substantial degree on
its relationship with Sodexho. Each of these arrangements has a finite term, and
the failure to renew any such arrangements on comparable terms could have a
material adverse effect on the Company's business, results of operations, and
financial condition. This relationship may also require the Company's management
to focus on issues arising from cultural and geographic differences, rather than
on the strategic initiatives specifically designated for the North American
marketplace. Effects might also result in the event Sodexho were to encounter
financial or other difficulties that could prevent it from providing such
services or assistance to the Company.
SEASONAL NATURE OF THE COMPANY'S BUSINESS. The food service and facilities
management business has been characterized historically by seasonal fluctuations
in overall demand for services, particularly in the education sector where sales
are stronger during the academic year. There can be no assurance that these
fluctuations will not have a material adverse effect on the Company's business,
results of operations, and financial condition.
<PAGE>
CERTAIN ANTI-TAKEOVER EFFECTS. As of March 3, 2000, Sodexho, the Company's
largest stockholder, beneficially owned approximately 48% of the outstanding
shares of the Company's common stock. Sodexho has agreed pursuant to a tax
sharing and indemnification agreement entered into among the Company, New
Marriott and Sodexho not to acquire 50% or more of the Company's common stock
for three years after the Transactions or through March 27, 2001. The
certificate of incorporation of the Company generally provides that no person
may acquire 50% or more of the Company's common stock until the end of such
period. Consequently, no change in control of the Company is expected to occur
before March 27, 2001. In addition, because Sodexho owns a large percentage of
the Company's common stock it may be able to exercise significant influence over
many matters requiring stockholder approval. Pursuant to a stockholder agreement
with the Company, Sodexho also has the right to nominate three members of the
Company's Board. As a result, Sodexho's relationship with the Company may have
the effect of, among other things, preventing a change in control of the Company
at any time without the agreement of Sodexho.
USE OF TRADENAMES. New Marriott has licensed the "Marriott" name to the
Company in certain limited respects for a period of four years after the
Transactions, or through March 27, 2002. The Company will not have the right to
use the "Marriott" name after the expiration of the four-year period. In
addition, Sodexho has licensed the "Sodexho" name to the Company under a royalty
agreement having a ten-year term. The "Sodexho" name, which has been used in the
food service and facilities management business in North America for the four
years prior to the Transactions, is not as well known in that market as the
"Marriott" name. The Company may have to make additional expenditures to
position its new name in the marketplace and cannot predict with certainty the
extent to which the substitution of a new name may adversely affect its
retention and acquisition of clients. Further, to the extent that the Company
fails to perform its obligations under its license agreements with New Marriott
or Sodexho, each of New Marriott and Sodexho could successfully prevent the
Company from using their respective names, which could adversely affect the
Company's retention and acquisition of clients and its financial performance.
DIVIDEND POLICY. Prior to the Transactions, the Company paid regular
quarterly dividends. On October 13, 1999, the Company's Board of Directors
declared a dividend for fiscal year 1999 of $0.08 per common share, payable on
December 10, 1999 to shareholders of record on November 22, 1999. In the future,
the Company may pay dividends, subject to the restrictive covenants contained in
the Company's credit facility agreements and other relevant considerations. In
general, the restrictive covenants do not permit the Company to pay dividends to
stockholders in an amount greater than 40 percent of the Company's net income,
or 45 percent when the ratio of the Company's consolidated debt to EBITDA (as
defined in the documentation for the credit facility agreements) is less than 4
but not less than 3. This restriction will no longer apply when such ratio is
less than 3. The payment and amount of cash dividends on the Company's common
stock will be subject to the sole discretion of the Company's Board, which will
review the Company's dividend policy at such times as may be deemed appropriate.
Payment of dividends on the Company's common stock will depend upon the
Company's financial position, capital requirements, profitability and such other
factors as the Company's Board deems relevant.
FLUCTUATING PRICES OF THE COMPANY'S COMMON STOCK. The Company's common
stock is listed and traded on the New York Stock Exchange and certain other U.S.
exchanges. Prices at which the Company's common stock trades fluctuate
significantly and could be influenced by many factors, including, among others,
the continuing depth and liquidity of the market for the Company's common stock,
investor perception of the Company, the Company's dividend policy and general
economic and market conditions.
