-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGmbNVKPi57gel1waoU/o+V8ArHWr4utBvLyMjVRKPa6FE8XwUrb6x12V+3vpMsC sV2cb0pRnidLsAZRow8jzg== 0000905036-00-000001.txt : 20000202 0000905036-00-000001.hdr.sgml : 20000202 ACCESSION NUMBER: 0000905036-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991203 FILED AS OF DATE: 20000118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SODEXHO MARRIOTT SERVICES INC CENTRAL INDEX KEY: 0000905036 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 520936594 STATE OF INCORPORATION: DE FISCAL YEAR END: 0828 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12188 FILM NUMBER: 508688 BUSINESS ADDRESS: STREET 1: 9801 WASHINGTONIAN BOULEVARD CITY: GAITHERSBURG STATE: MD ZIP: 20878 BUSINESS PHONE: 3019874431 MAIL ADDRESS: STREET 1: 9801 WASHINGTONIAN BOULEVARD CITY: GAITHERBURG STATE: MD ZIP: 20878 FORMER COMPANY: FORMER CONFORMED NAME: MARRIOTT INTERNATIONAL INC DATE OF NAME CHANGE: 19930517 10-Q 1 FIRST QUARTER 10-Q FISCAL YEAR 2000 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 DECEMBER 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-12188 SODEXHO MARRIOTT SERVICES, INC. ------------------------------------------------------ (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 JANUARY 13, 2000 ------------------- ------------------- Common Stock $1.00 par value per share 63,162,949 SODEXHO MARRIOTT SERVICES, INC. FORM 10-Q INDEX
PAGE NO. -------- Introduction Overview 1 Forward-Looking Statements 1 Pro Forma Financial Information (Unaudited) 2 Part I. Financial Information (Unaudited): Condensed Consolidated Statement of Income - Thirteen Weeks Ended December 3, 1999 and November 27, 1998 6 Condensed Consolidated Balance Sheet - as of December 3, 1999 and September 3, 1999 7 Condensed Consolidated Statement of Cash Flow - Thirteen Weeks Ended December 3, 1999 and November 27, 1998 8 Condensed Consolidated Statement of Stockholders' Deficit- as of December 3, 1999 9 Notes to Condensed Consolidated Financial Statements 10 Management's Discussion and Analysis of Results of Operations and Financial Condition 19 Quantitative and Qualitative Disclosures about Market Risk 22 Part II. Other Information and Signatures: Legal Proceedings 23 Changes in Securities 23 Defaults Upon Senior Securities 23 Submission of Matters to a Vote of Security Holders 23 Other Information 23 Exhibits and Reports on Form 8-K 23 Signatures 24
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, (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- 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 weeks ended December 3, 1999 ("First Quarter Fiscal Year 2000") compared with the historical 13 weeks ended November 27, 1998 (presented in Part I of this report), but also the pro forma results for the 13 weeks ended November 27, 1998 ("Pro Forma First Quarter Fiscal Year 1999") presented in this section. In addition, certain reclassifications have been made to the Pro Forma First Quarter Fiscal Year 1999 to conform to the current year's presentation. No pro forma adjustments were made for the First Quarter Fiscal Year 2000 results. For the comparable period in fiscal year 1999, the historical results have been adjusted to exclude integration charges of $7.6 million pretax. Total integration charges included, among other items, training and relocating of former MMS employees, systems modifications, and other one-time costs associated with combining the predecessor companies. -2- UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT FOR THIRTEEN WEEKS ENDED DECEMBER 3, 1999 AND THE PRO FORMA THIRTEEN WEEKS ENDED NOVEMBER 27, 1998 ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED ---------------------------------------------- (PRO FORMA) DECEMBER 3, NOVEMBER 27, 1999 1998 ------------------ ------------------ SALES Corporate Services $ 351 $ 335 Health Care 335 315 Education 422 396 Schools 118 108 Canada 44 37 Laundries/Other 18 18 ------------------ ------------------ TOTAL SALES 1,288 1,209 OPERATING COSTS AND EXPENSES Corporate Services 330 313 Health Care 308 289 Education 378 352 Schools 111 101 Canada 41 35 Laundries/Other 17 18 ------------------ ------------------ TOTAL OPERATING COSTS AND EXPENSES 1,185 1,108 ------------------ ------------------ OPERATING PROFIT BEFORE CORPORATE ITEMS Corporate Services 21 22 Health Care 27 26 Education 44 44 Schools 7 7 Canada 3 2 Laundries/Other 1 -- ------------------ ------------------ TOTAL OPERATING PROFIT 103 101 CORPORATE ITEMS: Amortization of Intangible Assets (9) (9) Corporate Expenses (22) (18) Interest Expense, Net (22) (23) Gain on Sale of Investment -- 8 ------------------ ------------------ INCOME BEFORE INCOME TAXES 50 59 Provision for Income Taxes (22) (26) ------------------ ------------------ NET INCOME $ 28 $ 33 ================== ================== BASIC EARNINGS PER SHARE $ 0.44 $ 0.53 ================== ================== DILUTED EARNINGS PER SHARE $ 0.44 $ 0.52 ================== ==================
-3- DISCUSSION OF FIRST QUARTER FISCAL YEAR 2000 AND PRO FORMA FIRST QUARTER FISCAL YEAR 1999 RESULTS OF OPERATIONS Total sales for First Quarter Fiscal Year 2000 were $1.29 billion, an increase of $79 million, or 6.5%, over $1.21 billion for Pro Forma First Quarter Fiscal Year 1999. This growth was mostly attributable to strong new sales and solid comparable growth in existing accounts in most of the Company's divisions. Overall, the Company also experienced gradually improving retention of its existing clients in the current quarter over the prior year's quarter. Over half of the sales growth was attributed to the Education and Health Care divisions. The Education division experienced a change in the academic calendar versus last year, resulting in approximately two to three additional board days over the prior year's quarter. The Company expects this calendar shift to impact both the second and third quarters of the current fiscal year. The Health Care division sales growth benefited from several clients with contract changes where the employees were moved onto the Company's payroll, thus increasing the costs billed to those clients. Absent these two items, the Company estimates sales growth would have been about 5% for First Quarter Fiscal Year 2000 versus the prior year. 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 $712 million for First Quarter Fiscal Year 2000, up $13 million or 2% over the $699 million in managed volume for same quarter last year. Managed volume for the Schools division was $210 million for First Quarter Fiscal Year 2000, an increase of $16 million, or 8% over the $194 million for Pro Forma First Quarter Fiscal Year 1999. The growth in the Schools division was due to the impact of strong new sales in the later half of Fiscal Year 1999. Health Care's growth reflected inflationary increases in existing accounts. Operating profit before corporate items (corporate expenses, interest expense and amortization of intangible assets) totaled $103 million for First Quarter Fiscal Year 2000, a slight increase when compared with $101 million in operating profit for the Pro Forma First Quarter Fiscal Year 1999. Operating profit increased mostly due to increases in the Canadian and Laundries divisions, as they experienced improving retention and strong comparable growth in existing client sales, with Canada also having an improving exchange rate between the U.S. and Canadian dollars. The Corporate Services division experienced a 5% decline in operating profit for the current 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 have a comparable impact on the Corporate Services division's operating profit for the next quarter, with improvement anticipated in the second half of Fiscal Year 2000. Operating profit was flat in the remaining divisions as similar trends in new sales, gradually improving retention, and comparable growth in existing client accounts were offset by start-up costs in these divisions, the result of the strong new sales, which included several larger new sales accounts with higher start-up costs compared with the prior year. Excluding Year 2000-related costs (see "Year 2000"), total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 94% of total sales for First Quarter Fiscal Year 2000, flat compared with Pro Forma First 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 purchasing synergies, and as planned, reinvested these synergies in sales staff and management support teams. The Company anticipates that it will obtain approximately $15 to $20 million in additional synergies in Fiscal Year 2000, most of which will be reinvested in the businesses. Additionally, the Company anticipates synergies to reach $60 million in cost savings annually by fiscal year 2001. -4- DISCUSSION OF FIRST QUARTER FISCAL YEAR 2000 AND PRO FORMA FIRST QUARTER FISCAL YEAR 1999 RESULTS OF OPERATIONS, CONTINUED Corporate expenses and amortization of intangible assets in the First Quarter Fiscal Year 2000 totaled $31 million, a 16% increase from the $27 million for the Pro Forma First Quarter Fiscal Year 1999. This increase was primarily due to an increase of approximately $2 million in Year 2000-related costs (see "Year 2000") and a $1 million increase in assistance fees paid to Sodexho Alliance for services received, as agreed upon in the merger agreements, as well as the annualized impact of open positions filled during Fiscal Year 1999. The Pro Forma First Quarter Fiscal Year 1999 included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million, or $4 million after-tax ($0.07 per diluted common share). The increase in corporate expenses along with the sale of BFAM in the prior year's first quarter contributed to a decrease in pretax income of $9 million, or 16%, to $50 million for the First 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 decreased to $28 million, or $0.44 per diluted share, compared with $33 million, or $0.52 per diluted share for Pro Forma First Quarter Fiscal 1999. -5- PART I FINANCIAL INFORMATION (UNAUDITED) ITEM 1. FINANCIAL STATEMENTS SODEXHO MARRIOTT SERVICES, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME ($ in millions, except per share amounts) (Unaudited)
THIRTEEN THIRTEEN WEEKS WEEKS ENDED ENDED DECEMBER 3, NOVEMBER 27, 1999 1998 ---------------- ----------------- SALES $1,288 $1,209 Operating Costs and Expenses 1,185 1,109 ---------------- ----------------- OPERATING PROFIT BEFORE CORPORATE ITEMS 103 100 CORPORATE ITEMS: Corporate expenses, including amortization of intangible assets (31) (33) Interest expense, net (22) (23) Gain on sale on investment -- 8 ---------------- ----------------- Income Before Income Taxes 50 52 Provision for income taxes (22) (23) ---------------- ----------------- NET INCOME $ 28 $ 29 ================ ================= BASIC EARNINGS PER SHARE $ 0.44 $ 0.46 ================ ================= DILUTED EARNINGS PER SHARE $ 0.44 $ 0.45 ================ =================
See notes to condensed consolidated financial statements. -6- SODEXHO MARRIOTT SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEET ($ in millions)
DECEMBER 3, SEPTEMBER 3, 1999 1999 (UNAUDITED) ------------------ ------------------- ASSETS Current Assets Cash and equivalents $ 47 $ 48 Accounts and notes receivable, net 555 445 Other 147 149 ------------------ ------------------- Total current assets 749 642 Property and equipment, net 86 85 Intangible assets, net 526 535 Other assets 84 85 ------------------ ------------------- $ 1,445 $ 1,347 ================== =================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Current portion of long-term debt $ 194 $ 133 Accounts payable 261 238 Other current liabilities 366 347 ------------------ ------------------- Total current liabilities 821 718 Long-term debt 960 980 Other long-term liabilities 114 113 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 December 3, 1999, and September 3, 1999, respectively 63 62 Additional paid-in capital 1,346 1,326 Accumulated deficit (1,861) (1,884) Accumulated other comprehensive income 2 2 ------------------ ------------------- Total stockholders' deficit (450) (494) ------------------ ------------------- Total liabilities and stockholders' deficit $ 1,445 $ 1,347 ================== ===================
See notes to condensed consolidated financial statements. -7- SODEXHO MARRIOTT SERVICES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW ($ in millions) (Unaudited)
THIRTEEN THIRTEEN WEEKS ENDED WEEKS ENDED DECEMBER 3, 1999 NOVEMBER 27, 1998 ----------------------- ----------------------- CASH USED IN OPERATING ACTIVITIES Net Income $ 28 $ 29 Adjustments to reconcile to cash used in operating activities: Depreciation and amortization expense 21 21 Gain on sale of investment - (8) Deferred income taxes - 1 Changes in working capital (71) (67) Other 3 7 ----------------------- ----------------------- NET CASH USED IN OPERATING ACTIVITIES (19) (17) CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (15) (12) Dispositions 3 21 Payments for excess net tangible assets - (22) Other (1) (4) ----------------------- ----------------------- NET CASH USED IN INVESTING ACTIVITIES (13) (17) CASH FLOW FROM FINANCING ACTIVITIES Proceeds from borrowings from short-term credit facility 61 30 Repayments of long-term debt (20) - Payments for redemption of convertible subordinated debt (11) - Issuance of common stock 1 1 ----------------------- ----------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 31 31 ----------------------- ----------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1) (3) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 48 79 ----------------------- ----------------------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 47 $ 76 ======================= =======================
See notes to condensed consolidated financial statements. -8- SODEXHO MARRIOTT SERVICES, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (amounts in millions) (Unaudited)
ACCUMULATED NUMBER ADDITIONAL OTHER OF COMMON PAID-IN ACCUMULATED COMPREHENSIVE SHARES STOCK CAPITAL DEFICIT INCOME TOTAL - ------------ ------------------------------- --------------- -------------- --------------- ----------------- --------------- 62.3 Balance, September 3, 1999 $62 $1,326 $(1,884) $2 $(494) -- Net income - - 28 - 28 -- Foreign exchange translation - - - - - - ------------ ------------------------------- --------------- -------------- --------------- ----------------- --------------- -- TOTAL COMPREHENSIVE INCOME - - 28 - 28 Conversion of convertible 0.8 subordinated debt 1 19 - - 20 Dividends ($0.08 per -- common share) - - (5) - (5) Employee stock plan -- issuance and other - 1 - - 1 - ------------ ------------------------------- --------------- -------------- --------------- ----------------- --------------- 63.1 Balance, December 3, 1999 $63 $1,346 $(1,861) $2 $(450) ============ =============================== =============== ============== =============== ================= ===============
See notes to condensed consolidated financial statements. -9- 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 December 3, 1999 and September 3, 1999, and the results of operations for the 13 weeks ended December 3, 1999 and November 27, 1998. Interim results are not necessarily indicative of fiscal year performance. All material intercompany transactions and balances between Sodexho Marriott Services, Inc., and its consolidated subsidiaries have been eliminated. Certain amounts previously presented have been reclassified to conform to the current presentation. TRANSACTIONS In general, in March 1998, the Company distributed to its shareholders (the "Distribution") the lodging segment and two of the three lines of business in the contract services segment - Marriott Senior Living Services ("MSLS") and Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are collectively referred to as the Distributed Operations. The third line of business in the contract services segment, formerly known as Marriott Management Services ("MMS"), combined with Sodexho North America (Sodexho Financiere du Canada and subsidiaries, and International Catering Corporation and subsidiaries taken collectively are known as "Sodexho North America" or "Sodexho USA") and became the principal business of the Company. Immediately after the Distribution, Sodexho transferred to the Company the operations of Sodexho North America combined with a cash payment of $304 million in exchange for 29.9 million shares of the Company's common stock. Lastly, on March 27, 1998, the Company borrowed $615 million and $620 million under the Secured SMS Facility and Guaranteed SMS Facility, respectively (see Note 3). These proceeds were used to repurchase $713 million of the Company's $720 million publicly held debt and to repay its $950 million outstanding obligations under the Company's existing credit facility (the "Refinancing"). Collectively, the Distribution, Acquisition and Refinancing are called the "Transactions." -10- 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 $21 million at December 3, 1999 and September 3, 1999. Concentration of credit risk within accounts receivable is limited because a large number of customers make up the Company's customer base, thus spreading risk associated with trade credit. In addition, the Company closely monitors its accounts receivable. The Company generally does not require collateral and maintains reserves for potential uncollectible amounts, which, in the aggregate, have not exceeded management's expectations. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of undiscounted expected future cash flow is less than the carrying amount of long-lived assets, the Company recognizes an impairment loss based on the amount by which the carrying amount of the asset exceeds the fair value of the asset. INTEREST-RATE AGREEMENTS The Company's policies prohibit the use of derivative instruments for trading purposes and procedures are in place to monitor and control their use. The use of derivative instruments is limited to interest-rate agreements for the purpose of reducing the variability of the Company's debt costs. These agreements are entered into in conjunction with the issuance of the debt they are intended to modify. The notional balances of these agreements represent a balance used to calculate the exchange of cash flows and are not assets or liabilities of the Company, and do not represent an exposure to credit loss. The notional amount and interest payments of these agreements match the cash flows of the related debt. Accordingly, any market risk or opportunity associated with these agreements is offset by the opposite market impact on the related debt. The Company's credit risk related to interest-rate agreements is considered low because they are entered into only with strong creditworthy counterparties and are generally settled on a net basis. The difference paid or received on interest-rate agreements is recognized as an adjustment to interest expense. INCOME TAXES The Company recognizes deferred tax assets and liabilities based upon the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities and operating loss and tax credit carryforwards. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted-average number of outstanding common shares. Diluted earnings per share is computed by dividing net income, adjusted for interest expense related to convertible securities (after-tax), by the diluted weighted-average number of outstanding common shares, including the "if-converted" shares relating to convertible securities. On October 7, 1999, Marriott International, Inc. ("MI") notified all holders of the LYONs (see "Convertible Subordinated Debt" in Note 3), that MI had elected to redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount at maturity of the LYONs, with a redemption date of November 8, 1999. Conversion of the LYONs resulted in the issuance of 0.8 million shares of the Company's common stock. -11- 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 December 3, 1999 and September 3, 1999, the Company had $89 million and $83 million of outstanding drafts included in accounts payable, respectively. INVENTORIES Inventories consist of food items and supplies, which are stated at the lower of average cost or market, generally using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 40 years. Replacements and improvements are capitalized. Leasehold improvements, net of estimated residual value, are amortized over the shorter of the useful life of the asset or the lease term. INTANGIBLE ASSETS Intangible assets primarily consist of goodwill and customer relationships. Intangible assets are amortized on a straight-line basis over periods generally ranging from 30 to 40 years for goodwill and 10 to 20 years for customer relationships. Amortization expense totaled $9 million for each of the 13 weeks ended December 3, 1999 and November 27, 1998. OTHER ASSETS Included in other assets are client investments, which represent amounts provided by the Company to clients at contract inception for the purchase of property and equipment pertaining to the contract. These amounts are amortized over the life of the related contract. When a contract terminates prior to its scheduled termination date, the client generally must repay any unamortized client investment balance to the Company. ACCUMULATED OTHER COMPREHENSIVE INCOME 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 $3.7 million of gross foreign exchange translations gains, net of taxes totaling $1.6 million, at December 3, 1999. 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 Quarter Fiscal Year 2000, total comprehensive income was comprised of $28 million in net income and $0.6 million of gross foreign translation gains, net of taxes totaling $0.2 million. -12- 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 $8 million during the First Quarter of Fiscal Year 1999. The operating profit before corporate items for First Quarter of Fiscal Year 1999 included $1.2 million of integration charges while corporate expenses included $6.4 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 $7 million at December 3, 1999, generally represents the remaining estimated cost of termination benefits, which are generally paid out over a period of time, for approximately 350 former Sodexho North America employees, as well as the estimated cost for the closure and excess capacity in certain Sodexho North America offices. Acquisition reserve activity is detailed below:
BALANCE AS OF BALANCE AS OF SEPTEMBER 3, 1999 PAYMENTS DECEMBER 3, 1999 ---------------------- -- ---------------------- -- ---------------------- ($ in millions) Employee Terminations $2.4 $(0.9) $1.5 Relocation of Sodexho Facilities 0.7 -- 0.7 Closures 1.9 (0.2) 1.7 Other Restructuring 2.6 -- 2.6 ---------------------- ---------------------- ---------------------- Total $7.6 $(1.1) $6.5 ====================== ====================== ======================
-13- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (3) DEBT
DECEMBER 3, SEPTEMBER 3, 1999 1999 ----------------- ----------------- ($ in millions) SHORT-TERM DEBT: Current Portion of Long-Term Debt $ 80 $ 80 Senior Secured Revolving Credit Facility 113 52 Other 1 1 ----------------- ----------------- Total $ 194 $ 133 ================= ================= LONG-TERM DEBT: Senior Secured Credit Facility, maturing 2004 averaging 6.88% in fiscal year 2000 $ 410 $ 430 Senior Guaranteed Credit Facility, due 2005 averaging 6.93% 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 $1,040 $1,060 Amount Reclassified to Short-Term Debt (80) (80) ----------------- ----------------- $ 960 $ 980 ================= =================
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 December 3, 1999, the Company is paying a rate of 6.84% on the term loan facility, adjusted for fee amortization and hedging costs. The senior secured credit facility is secured predominately by inventory, accounts receivable and the stock of certain subsidiaries of the Company. Up to $100 million of the $235 million revolving credit may be used to collateralize letters of credit, which totaled $33 million at December 3, 1999, and September 3, 1999. At December 3, 1999, $89 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 December 3, 1999, the Company is paying a rate of 6.87% 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 December 3, 1999 and for the 13-weeks then ended. -14- 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 remains liable to the holders of the LYONs for any payments that the Company fails 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 December 3, 1999, the majority of the Company's debt was payable at variable rates of interest. As part of the Refinancing of the Company's debt, the Company entered into several interest-rate agreements on May 29, 1998 totaling $900 million in notional principal balances to hedge a portion of its variable rate debt. These agreements guarantee a fixed rate of interest over the life of the agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%, plus a residual margin that is not hedged relating to the underlying variable-rate debt. The weighted-average rate for the total debt portfolio, including the affect of the interest-rate agreements, was 6.94% at December 3, 1999. These agreements expire between May 2001 and February 2005. Details of these interest rate agreements as of December 3, 1999 are as follows:
YEAR-TO-DATE NOTIONAL WEIGHTED-AVERAGE NET IMPACT PRINCIPAL FAIR INTEREST RATE TO EARNINGS-- TERMS BALANCE VALUE* PAID RECEIVED 13 WEEKS - ----------------------------------- --------------- -------------- --------------- --------------- --------------- ($ in millions) Received Variable Pay Fixed, Maturing 5/--8/01 $400 $ 4 5.71% 6.11% $(0.2) Received Variable Pay Fixed, Maturing 8/02 300 5 5.84 6.11 (0.3) Received Variable Pay Fixed, Maturing 8/05 200 6 5.90 6.11 (0.2) - ----------------------------------- --------------- -------------- --------------- --------------- --------------- $900 $15 5.80% 6.11% $(0.7) =================================== =============== ============== =============== =============== =============== *-- based on the termination cost for these agreements obtained by third party market quotes.
At December 3, 1999, the Company did not have any accrued interest receivable or payable to its counterparties and did not have any unamortized fees or premiums under these agreements. All of the Company's interest-rate agreements are for purposes other than trading. -15- 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 December 3, 1999, the Company had 63,138,862 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.
THIRTEEN THIRTEEN WEEKS WEEKS ENDED ENDED DECEMBER 3, NOVEMBER 27, 1999 1998 ------------------- ------------------ (in millions, except per share amounts) COMPUTATION OF BASIC EARNINGS PER SHARE: Net Income $ 28 $ 29 =================== ================== Weighted Average Shares Outstanding 62.5 62.0 =================== ================== BASIC EARNINGS PER SHARE $ 0.44 $ 0.46 =================== ================== COMPUTATION OF DILUTED EARNINGS PER SHARE: Net Income $ 27.8 $ 28.7 After-tax Interest Expense on Convertible Subordinated Debt 0.1 0.2 ------------------- ------------------ Diluted Net Income $ 27.9 $ 28.9 =================== ================== Weighted Average Shares Outstanding 62.5 62.0 Effect of Dilutive Securities*: Employee Stock Option Plan 0.2 0.8 Deferred Stock Incentive Plan 0.1 0.1 Convertible Subordinated Debt 0.9 1.2 ------------------- ------------------ Diluted Weighted Average Shares Outstanding 63.7 64.1 =================== ================== DILUTED EARNINGS PER SHARE $ 0.44 $ 0.45 =================== ================== * -- Certain employee and deferred stock options to purchase shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares and thus were anti-dilutive. The weighted-average total of excluded shares was approximately 3.9 million and 4 thousand at December 3, 1999 and November 27, 1998, respectively.
-16- 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 weeks ended December 3, 1999, expenses that related to these plans totaled $2.8 million, compared to $3.6 million for the 13 weeks ended November 27, 1998. STOCK OPTION PLANS The Company has two stock-based incentive plans-- the Sodexho Marriott Services, Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (the "1993 Plan" or the "1998 Plan"). The purpose of these plans is to promote and enhance the long-term growth of the Company by aligning the interests of the employees with the interests of the Company's shareholders. The 1993 Plan administers converted stock options prior to the Distribution, with no new awards made under this plan. The 1998 Plan governs the issuance and administration of conversion awards and is also available for the issuance of new awards. These stock plans are administered by the Compensation Policy Committee as authorized by the Board of Directors. As part of the Distribution and the amendment of these plans, and in relationship to the changes in the capital structure of the Company after the Distribution, the Board of Directors has approved up to 10 million shares of common stock to be available under the 1998 Plan for converted options as well as new awards. 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 13 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 13 weeks ended December 3, 1999, is presented below:
THIRTEEN WEEKS ENDED DECEMBER 3, 1999 -------------------------------------- WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE (IN MILLIONS) PRICE ----------------- ----------------- Outstanding at September 3, 1999 4.6 $21 Granted during the thirteen weeks 2.4 17 Exercised during the thirteen weeks (0.1) 7 Forfeited during the thirteen weeks - - ----------------- ----------------- Outstanding at December 3, 1999 6.9 $20 ================= ================= Options exercisable at December 3, 1999 2.2 $18 ================= =================
-17- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Unaudited) (6) BUSINESS SEGMENTS The Company is the leading provider in North America of outsourced food and facilities management services to businesses, health care facilities, colleges and universities, primary and secondary schools and other clients. The Company has six business segments within these markets: Corporate Services, Health Care, Education, Schools, Canada, and Laundries/Other. SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
13 WEEKS ENDED 13 WEEKS ENDED DECEMBER 3, NOVEMBER 27, 1999 1998 ---------------- --- ---------------- ($ in millions) GROSS SALES Corporate Services $ 351 $ 335 Health Care 335 315 Education 422 396 Schools 118 108 Canada 44 37 Laundries/Other 18 18 ---------------- ---------------- Total Gross Sales $1,288 $1,209 ================ ================ GROSS OPERATING PROFIT Corporate Services $ 21 $ 22 Health Care 27 26 Education 44 44 Schools 7 6 Canada 3 2 Laundries/Other 1 - ---------------- ---------------- Total Gross Operating Profit $ 103 $ 100 ================ ================ Corporate Items (53) (48) ---------------- ---------------- Income Before Income Taxes $ 50 $ 52 ================ ================
(7) COMMITMENTS AND CONTINGENCIES The nature of the business of the Company causes it to be involved in routine legal proceedings from time to time. Management of the Company believes that there are no pending or threatened legal proceedings that upon resolution would have a material adverse impact to the Company. -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following discussion presents an analysis of results of operations of the Company for the unaudited 13-week period ended December 3, 1999 ("First Quarter Fiscal Year 2000") as compared with the historical unaudited 13-week period ended November 27, 1998 ("First Quarter Fiscal Year 1999"). DUE TO THE DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S HISTORICAL OPERATING RESULTS FOR THE FIRST QUARTER FISCAL YEAR 2000 VERSUS FIRST QUARTER FISCAL YEAR 1999, 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. FIRST QUARTER FISCAL YEAR 2000 VS. FIRST QUARTER FISCAL YEAR 1999 Total sales for First Quarter Fiscal Year 2000 were $1.29 billion, an increase of $79 million, or 6.5%, over $1.21 billion for First Quarter Fiscal Year 1999. This growth was mostly attributable to strong new sales and solid comparable growth in existing accounts in most of the Company's divisions. Overall, the Company also experienced gradually improving retention of its existing clients in the current quarter over the prior year's quarter. Over half of the sales growth was attributed to the Education and Health Care divisions. The Education division experienced a change in the academic calendar versus last year, resulting in approximately two to three additional board days over the prior year's quarter. The Company expects this calendar shift to impact both the second and third quarter of the current fiscal year. The Health Care division's sales growth benefited from several clients with contract changes where the employees were moved onto the Company's payroll, which increased the costs billed to those clients. Thus, adjusting for these items, the Company estimates sales growth would have been about 5% for First Quarter Fiscal Year 2000 versus the prior year. 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 $712 million for First Quarter Fiscal Year 2000, up $13 million or 2% over the $699 million in managed volume for same quarter last year. Managed volume for the Schools division was $210 million for First Quarter Fiscal Year 2000, an increase of $16 million, or 8% over the $194 million for First Quarter Fiscal Year 1999. The growth in the Schools division was due to the impact of strong new sales in the later half of Fiscal Year 1999. Health Care's growth reflected inflationary increases in existing accounts. Operating profit before corporate items (corporate expenses, interest expense and amortization of intangible assets) totaled $103 million for First Quarter Fiscal Year 2000, a 3% increase when compared with $100 million in operating profit for the First Quarter Fiscal Year 1999. Operating profit increased mostly due to increases in the Canadian and Laundries divisions, as they experienced improving retention and strong comparable growth in existing client sales, with Canada also having an improving exchange rate between the U.S. and Canadian dollars. The Corporate Services division experienced a 5% decline in operating profit for the current 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 have a comparable impact on the Corporate Services division's operating profit for the next quarter, with improvement anticipated in the second half of Fiscal Year 2000. Operating profit was flat in the remaining divisions as similar trends in new sales, gradually improving retention, and comparable growth in existing client accounts were offset by start-up costs in these divisions, the result of the strong new sales, which included several larger new sales accounts with higher start-up costs compared with the prior year. -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED FIRST QUARTER FISCAL YEAR 2000 VS. FIRST QUARTER 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, 94% of total sales for First Quarter Fiscal Year 2000, flat compared with First 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 purchasing synergies, and as planned, reinvested these synergies in sales staff and management support teams. The Company anticipates that it will obtain approximately $15 to $20 million in additional synergies in Fiscal Year 2000, most of which will be reinvested in the businesses. Additionally, the Company anticipates to reach $60 million in cost savings annually by fiscal year 2001. Corporate expenses and amortization of intangible assets in the First Quarter Fiscal Year 2000 totaled $31 million, a 16% increase from the $27 million for the First Quarter Fiscal Year 1999, after adjusting for approximately $6 million in integration costs included in the prior year's quarter (see Note 2). This increase was primarily due to an increase of approximately $2 million in Year 2000-related costs (see "Year 2000") and a $1 million increase in assistance fees paid to Sodexho Alliance for services received, as agreed upon in the merger agreements, as well as the annualized impact of open positions filled during Fiscal Year 1999. The First Quarter Fiscal Year 1999 included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million, or $4 million after-tax ($0.07 per diluted common share). The increase in corporate expenses along with the sale of BFAM in the prior year's first quarter contributed to a decrease in pretax income of $2 million, or 4%, to $50 million for the First 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 decreased to $28 million, or $0.44 per diluted share, compared with $29 million, or $0.45 per diluted share for First Quarter Fiscal Year 1999. 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 $15 to $20 million in incremental synergies in 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 reinvested during fiscal year 2000. These reinvestments, which are targeted primarily for additional sales and management personnel, have already begun. In addition, the Company has undertaken an information systems strategy study to evaluate the current state of its information systems, and consider information technology options. Among the options under consideration is the adoption of certain elements of the technology platform adopted by Sodexho Alliance. This evaluation will require additional time to study and review alternatives and their impact on capital investments, earnings, shareholder value and the provisions of the Company's debt agreements. Strategic developments in this area are expected to be finalized during Fiscal Year 2000. Most recently, the Company began a study of payroll and human resource related systems, as the Company migrates from the current Marriott International payroll-related systems by December 31, 2001. Previously, the Company had expected to migrate off the Marriott International payroll-related infrastructure no later than fiscal year 2002. 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. -20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED LIQUIDITY AND CAPITAL RESOURCES, CONTINUED As of December 3, 1999, the Company had a $235 million revolving credit facility available at an interest rate of 7.70% to provide funds for liquidity, seasonal borrowing needs and other general corporate purposes. At December 3, 1999, $113 million of this facility was outstanding, while an additional $33 million of this revolving credit facility was utilized by letters of credit outstanding, principally related to insurance programs. 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. 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 Quarter 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 quarter. 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. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED 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 removal of nearly all of the non-compliant systems and expects completion in the next quarter. While the Company has experienced a few minor software failures, primarily in third party software, they have had no impact on the Company. The Company's operations are reporting no Year 2000 compliance issues with respect to facilities systems and the supply chain. In addition, the Company has not received any reports indicating a need to implement a contingency plan. RISKS. Some risks associated with the Year 2000 issue may remain. While the Company is conducting business as usual, the Company will continue to watch for Year 2000 related events that could impact its business, results of operation, financial condition and cash flow. The Company believes that its experience in handling business disruptions resulting from non-Year 2000 events should significantly reduce any adverse effects of any potential 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. These costs have been expensed as incurred and funded from operating cash flow. Through First Quarter Fiscal Year 2000, approximately $7.6 million had been incurred and expensed, and the Company anticipates spending a total of approximately $8 million for this Project. The Company does not separately identify certain internal costs incurred for the Project, most of which are related to the Company's internal IT-personnel costs. 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 $1.2 billion at December 3, 1999. If interest rates increased by 100 basis points, the fair value of the Company's debt would have decreased by approximately $19 million, while a 100 basis point decrease in rates would have increased the fair value of the Company's debt by approximately $20 million, based on balances at December 3, 1999. -22- PART II OTHER INFORMATION AND SIGNATURES ITEM 1. LEGAL PROCEEDINGS - -------------------------- There are no material legal proceedings pending against the Company. ITEM 2. CHANGES IN SECURITIES - ------------------------------ None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. ITEM 5. OTHER INFORMATION - -------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits Exhibit NO. DESCRIPTIONS ---- ------------ 27 Financial Data Schedule of the Registrant 99 Forward-Looking Statements (b) Reports on Form 8-K November 3, 1999 Press Release, dated November 3, 1999, announcing the resignation of Lawrence E. Hyatt as Chief Financial Officer of the Company. -23- 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. January 18, 2000 /S/ LOTA S. ZOTH ----------------------------------------------- Lota S. Zoth Vice President, Corporate Controller and Chief Accounting Officer -24- EX-27 2 FINANCIAL DATA SCHEDULE
5 FINANCIAL DATA SCHEDULE FOR SODEXHO MARRIOTT SERVICES, INC. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S THIRTEEN WEEKS ENDED DECEMBER 3, 1999 CONDENSED CONSOLIDATED STATEMENT OF INCOME AND THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 3, 1999 FROM THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 OTHER OTHER SEP-01-2000 SEP-03-1999 SEP-04-1999 AUG-29-1998 DEC-03-1999 NOV-27-1998 47 76 0 1 555 553 21 18 67 59 749 783 260 241 174 169 1445 1,496 821 819 960 1,090 0 0 0 0 63 62 (513) (591) 1,445 1,496 1,288 1,209 1,288 1,209 1,185 1,109 1,185 1,109 31 33 0 0 22 23 50 52 22 23 28 29 0 0 0 0 0 0 28 29 0.44 0.46 0.44 0.45
EX-99 3 FORWARD-LOOKING STATEMENTS 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. 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. CERTAIN ANTI-TAKEOVER EFFECTS. As of December 3, 1999, Sodexho, the Company's largest stockholder, beneficially owned approximately 48% of the outstanding shares of the Company's common stock. Sodexho has agreed pursuant to a tax sharing and indemnification agreement entered into among the Company, New Marriott and Sodexho not to acquire 50% or more of the Company's common stock for three years after the Transactions or through March 27, 2001. The certificate of incorporation of the Company generally provides that no person may acquire 50% or more of the Company's common stock until the end of such period. Consequently, no change in control of the Company is expected to occur before March 27, 2001. In addition, because Sodexho owns a large percentage of the Company's common stock it may be able to exercise significant influence over many matters requiring stockholder approval. Pursuant to a stockholder agreement with the Company, Sodexho also has the right to nominate three members of the Company's Board. As a result, Sodexho's relationship with the Company may have the effect of, among other things, preventing a change in control of the Company at any time without the agreement of Sodexho. 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. YEAR 2000 READINESS. The Company has been actively addressing potential issues arising from the historical computer programming practice of using two digits rather than four digits to signify dates (e.g. "00" instead of "2000"). This practice could cause the Company's owned and operated computer-based technology to process dates incorrectly because of an inability to distinguish properly between 1900 and 2000, and could result in computer systems failures or miscalculations. These potential issues are collectively referred to as the Year 2000 issue. Based on experience to date, it does not appear that the Company will experience any significant adverse effects from the Year 2000 issue. The Company, however, is not yet in a position to state conclusively that the issue will not have a material adverse impact on the Company's business, results of operations, financial condition and cash flow if the Company is unable to conduct its business in the ordinary course. FLUCTUATING PRICES OF THE COMPANY'S COMMON STOCK. The Company's common stock is listed and traded on the New York Stock Exchange and certain other U.S. exchanges. Prices at which the Company's common stock trades fluctuate significantly and could be influenced by many factors, including, among others, the continuing depth and liquidity of the market for the Company's common stock, investor perception of the Company, the Company's dividend policy and general economic and market conditions. -----END PRIVACY-ENHANCED MESSAGE-----