-----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, Hh4U/Y/xq5xJMyzN/lufUycq0cVomSYr4nIlcvJNY3dbrqeD1ks+yMwXwgw9q+3g +buqNnrY2LUCAPiwJosL6g== /in/edgar/work/0000905036-00-000014/0000905036-00-000014.txt : 20001114 0000905036-00-000014.hdr.sgml : 20001114 ACCESSION NUMBER: 0000905036-00-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000901 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SODEXHO MARRIOTT SERVICES INC CENTRAL INDEX KEY: 0000905036 STANDARD INDUSTRIAL CLASSIFICATION: [5812 ] IRS NUMBER: 520936594 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12188 FILM NUMBER: 759872 BUSINESS ADDRESS: STREET 1: 9801 WASHINGTONIAN BOULEVARD CITY: GAITHERSBURG STATE: MD ZIP: 20878 BUSINESS PHONE: 3019474431 MAIL ADDRESS: STREET 1: 9801 WASHINGTONIAN BOULEVARD CITY: GAITHERSBURG STATE: MD ZIP: 20878 FORMER COMPANY: FORMER CONFORMED NAME: MARRIOTT INTERNATIONAL INC DATE OF NAME CHANGE: 19930517 10-K 1 0001.txt ANNUAL REPORT FOR FISCAL YEAR 2000 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-12188 SODEXHO MARRIOTT SERVICES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 52-0936594 ------------------------ --------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878 ---------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (301) 987-4500 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------------------------- ----------------------------------------- Common Stock, $1.00 par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Philadelphia Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure by delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of October 23, 2000, the number of shares of common stock outstanding was 63,254,642. The aggregate market value of shares of common stock held by non-affiliates at October 23, 2000 was $548,037,467. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive annual proxy statement to be filed within 120 days of the Registrant's fiscal year ended September 1, 2000 are incorporated by reference into Part III of this report. Index to Exhibits is located on pages 54 through 58 of this report. ================================================================================ SODEXHO MARRIOTT SERVICES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 2000
TABLE OF CONTENTS PAGE ---- INTRODUCTION Overview 2 Forward-Looking Statements 2 Pro Forma Unaudited Financial Information 3 PART I Item 1. Business 9 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters 13 Item 6. Selected Historical Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 51 PART III Item 10. Directors and Executive Officers of the Registrant 51 Item 11. Executive Compensation 51 Item 12. Security Ownership of Certain Beneficial Owners and Management 51 Item 13. Certain Relationships and Related Transactions 51 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54
-1- INTRODUCTION OVERVIEW Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North America of outsourced food and facilities management services to businesses, health care facilities, colleges and universities, and primary and secondary schools. Food services include food and beverage procurement, preparation and menu planning, as well as the operation and maintenance of food service and catering facilities, generally on a client's premises. Facilities management services include plant maintenance, energy management, grounds keeping, and housekeeping and custodial services. The Company was formerly named Marriott International, Inc. ("MI"). Upon the consummation of the distribution (see Note 1 to the Consolidated Financial Statements) of its lodging, senior living (Marriott Senior Living Services, or "MSLS") and distribution services (Marriott Distribution Services, or "MDS") businesses to existing shareholders (the "Distribution"), which occurred on March 27, 1998 (the last day of the first quarter of 1998), the Company then acquired the North American operations of Sodexho Alliance, S.A. (the "Acquisition"), and the combined operations were renamed Sodexho Marriott Services, Inc. In connection with the distribution and acquisition, the Company refinanced its debt ("Refinancing"). Collectively, the distribution, acquisition and refinancing are known as the "Transactions" (see Notes 1 through 5 to the Consolidated Financial Statements). The subsidiaries below represent the direct subsidiaries of the Company. Each of these direct subsidiaries, in turn, has one or more subsidiaries. o Sodexho Operations, LLC., with one main operating subsidiary-- Sodexho Marriott Management, Inc. (formerly Marriott Management Services Corp.) and its subsidiaries; o Sodexho Financiere du Canada, Inc. (acquired in the Transactions discussed in Note 1 to the Consolidated Financial Statements) and subsidiaries, including its main operating subsidiary-- Sodexho Canada, Inc.; o Sodexho MS Canada, Ltd.; and o Universal Remote Site Holdings, Ltd. Prior to the Transactions, Sodexho Financiere du Canada, Inc. and subsidiaries and International Catering Corporation and subsidiaries ("ICC") were collectively referred to as "Sodexho North America." Subsequent to the Transactions, ICC was merged into Sodexho Operations, LLC. Also, the former Marriott Corporation of Canada, Ltd. and subsidiaries and the former Marriott Management Services Corp. and subsidiaries were collectively referred to as "MMS." FORWARD-LOOKING STATEMENTS This report by the Company contains forward-looking statements within the meaning of the federal securities laws. These statements are based on the Company's current expectations and relate to anticipated future events that are not historical facts, such as the Company's business strategies and their intended results. The forward-looking statements included in this report are subject to numerous risks and uncertainties that could cause the Company's future activities and results of operations to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties, which are further discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report, include: (i) the ability of the Company to adapt to various changes, including changes in its structure, senior management and in its relationship with its largest shareholder--Sodexho Alliance ("Sodexho"), (ii) the potential adverse impact of the Company's substantial indebtedness, (iii) the ability of the Company to attract, hire, train and retain competent management personnel, (iv) competition in the food services and facilities management industries, (v) the effects of general economic conditions, (vi) the ability of the Company to retain clients and obtain new clients on satisfactory terms, and other factors described from time to time in the Company's filings with the Securities and Exchange Commission including those set forth in Exhibit 99 filed herein. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this report or that may be made elsewhere from time to time by, or on behalf of, the Company. The Company assumes no obligation to update any forward-looking statements. -2- PRO FORMA UNAUDITED FINANCIAL INFORMATION As of March 27, 1998, the assets, liabilities and business operations of the Company changed substantially due to the Transactions described fully in Notes 1 through 5 to the Consolidated Financial Statements. As a result of these changes, there are substantial differences in the comparability of the Company's historical operating results prior to March 27, 1998, presented in Parts I and II of this document and the Company's ensuing and ongoing operations. To assist readers in understanding the present operations of the Company, management believes it is meaningful and relevant to set forth in this report not only the results for the fiscal year ended September 1, 2000, compared with the fiscal year ended September 3, 1999, the thirty-four weeks ended August 28, 1998 and the historical fiscal year 1997 (presented in Item 8 of this report), but also the results for the fiscal year ended September 1, 2000, compared with the pro forma operating results and pro forma cash flow for the full fiscal years ended September 3, 1999 and August 28, 1998, as well as the condensed balance sheet as of September 1, 2000 and September 3, 1999. Prior to March 27, 1998, pro forma sales include the combined actual activity of the food and facilities management services business of MMS and Sodexho North America. Similarly, pro forma corporate expenses include the combined corporate overhead of both businesses. No synergies were assumed for periods presented prior to March 27, 1998. In the aggregate, the Company achieved its $40 million cumulative annual synergy target for fiscal year 2000, of which approximately $20 million was incremental to fiscal year 2000. The Company expects that the procurement and distribution process savings will account for approximately two-thirds of the estimated $60 million in annual synergies which the Company expects to realize by the end of year 2001. Integration and restructuring charges of approximately $16 million and $31 million were excluded for pro forma fiscal years 1999 and 1998, respectively. However, an estimate of $6 million in annual costs were included on a pro rata basis in the period presented prior to March 27, 1998, representing incremental costs to operate the Company as a separate public entity. Pro forma net income reflects approximately $16 million of amortization expense for each year for the intangible assets related to the Acquisition. Pro forma interest expense, net, represents the estimated costs as if the Refinancing and the interest rate agreements had been in place on the first day of the period prior to March 27, 1998. Effective income tax rates of 44.8% and 48% were used for pro forma fiscal years 1999 and 1998, respectively. Pro forma results do not include any extraordinary charges related to the Refinancing, the loss in 1997 from the sale of Marriott Management Services Corp.'s United Kingdom operations ("MMS- UK") to Sodexho or any operating results from the MMS- UK operations prior to its sale. Pro forma basic earnings per share were calculated with total weighted-average shares outstanding of 62.1 million for pro forma fiscal 1999. For pro forma fiscal year 1998, a base of 61.9 million shares was included in pro forma basic earning per share, which represents the number of shares outstanding at August 28, 1998. Pro forma diluted earnings per share were calculated on a base of 63.9 million shares for pro forma fiscal 1999 and 62.5 million shares for fiscal 1998. The dilutive shares were the result of the Company's convertible debt, stock option plans and deferred stock incentive plans. -3- PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME BY SEGMENT FOR FISCAL YEARS ENDED SEPTEMBER 1, 2000, SEPTEMBER 3,1999 AND AUGUST 28, 1998 ($IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 ------------------ ------------------- ------------------ (52 WEEKS) (53 WEEKS) (52 WEEKS) SALES Corporate Services $1,429 $1,380 $1,336 Health Care 1,399 1,323 1,277 Education 1,280 1,221 1,150 Schools 392 358 333 Canada 158 143 145 Laundries/Other 76 77 65 ------------------ ------------------- ------------------ TOTAL SALES 4,734 4,502 4,306 OPERATING COSTS AND EXPENSES Corporate Services 1,336 1,290 1,253 Health Care 1,282 1,215 1,182 Education 1,204 1,150 1,093 Schools 372 338 317 Canada 151 136 140 Laundries/Other 70 72 61 ------------------- ------------------ ------------------ TOTAL OPERATING COSTS AND EXPENSES 4,415 4,201 4,046 ------------------ ------------------- ------------------ OPERATING PROFIT BEFORE CORPORATE ITEMS Corporate Services 93 90 83 Health Care 117 108 95 Education 76 71 57 Schools 20 20 16 Canada 7 7 5 Laundries/Other 6 5 4 ------------------ ------------------- ------------------ TOTAL OPERATING PROFIT 319 301 260 ------------------ ------------------- ------------------ CORPORATE ITEMS: Amortization of Intangible Assets (37) (38) (37) Corporate Expenses (86) (76) (73) Interest Expense, Net (84) (87) (87) Gain on Sale of Investment -- 8 -- ------------------ ------------------- ------------------ INCOME BEFORE INCOME TAXES 112 108 63 Provision for Income Taxes (49) (48) (30) ------------------ ------------------- ------------------ PRO FORMA NET INCOME $ 63 $ 60 $ 33 ================== =================== ================== PRO FORMA BASIC EARNINGS PER SHARE $ 1.01 $ 0.96 $ 0.53 ================== =================== ================== PRO FORMA DILUTED EARNINGS PER SHARE $ 1.00 $ 0.94 $ 0.52 ================== =================== ==================
-4- DISCUSSION OF FISCAL YEAR 2000 COMPARED WITH PRO FORMA FISCAL YEAR 1999 RESULTS OF OPERATIONS Total sales for fiscal year 2000 (52 week period ended September 1, 2000, or "2000") were $4.7 billion, an increase of $232 million, or 5%, over $4.5 billion for pro forma fiscal year 1999 (53 week period ended September 3, 1999, or "1999"). Adjusting for the estimated $76 million impact of the extra week in fiscal year 1999, sales increased $308 million, or 7%. Overall, this growth was attributed to favorable new sales trends and solid comparable growth in existing accounts in most of the Company's divisions. The School Services and Canada divisions had double-digit sales growth during the year, with strong growth in the remaining divisions, excluding the Laundries/Other division. Managed volume, which represents the Company's measurement of gross revenues associated with all services the Company manages on behalf of its clients, is most relevant in the Health Care and Schools divisions. On a 52-week basis, the Health Care division's managed volume was $2.9 billion for fiscal year 2000, up $29 million or 1% over the $2.8 billion in managed volume for same period last year. The Health Care division's relatively flat managed volume growth was mostly due to the health care industry being under significant financial pressure, impacting a large number of the Company's clients in certain geographic markets. Managed volume for the Schools division was $698 million for fiscal year 2000, an increase of $54 million, or 8% over the $644 million for fiscal year 1999. The growth in the Schools division was due to the impact of strong sales to new clients that added almost proportionately as much managed volume as total sales for the period. Operating profit before corporate items (corporate expenses, interest expense and amortization of intangible assets) totaled $319 million for fiscal year 2000, an increase of $18 million, or 6% when compared with $301 million in operating profit for pro forma fiscal year 1999. Operating profit increased mostly due to increases in the Health Care and Education divisions, as the Education division experienced improving margins from the strong new sales in the latter half of fiscal year 1999. In the Health Care division, operating margins improved from strong new sales and solid comparable growth rates at existing accounts, and the impact in fiscal year 1999 of approximately $3 million in bankruptcy related losses. Schools Services and Canada had flat operating profits when compared with last year the result of several under-performing client accounts that were mostly first year, larger based, accounts. The Company anticipates that the inefficiencies in these under-performing accounts will be resolved during the next two quarters as the Company makes the necessary adjustments at these accounts to reach expected operating performance. Total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 96% of total sales for fiscal year 2000, unchanged from pro forma fiscal year 1999's ratio. The Company anticipates this margin will improve in the year ahead, as the Company achieves additional purchasing synergies, partially offset by the continued investment of a portion of the synergies in its businesses. In the aggregate, the Company achieved its $40 million cumulative annual synergy target for fiscal year 2000, of which approximately $20 million was incremental to fiscal year 2000. The Company expects that the procurement and distribution process savings will account for approximately two-thirds of the estimated $60 million in annual synergies which the Company expects to realize by the end of year 2001. Incremental synergies generated in fiscal year 2000 were reinvested during fiscal year 2000. The reinvestments were primarily in additional sales and management personnel. Corporate expenses and amortization of intangible assets in fiscal year 2000 totaled $123 million, an 11% increase from the adjusted pro forma fiscal year 1999, which excludes the $3 million pretax charge related to the resignation of the former CEO. This was primarily due to an increase of approximately $7 million for the impact of open positions filled in the latter half of fiscal year 1999, in addition to new positions added in the current year, along with a $5 million increase in assistance fees paid to Sodexho Alliance for services received, as agreed upon in the merger agreements. Pro forma fiscal year 1999 also included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million, or $5 million after-tax ($0.07 per diluted common share). The increase in operating profit, partially offset by the increase in corporate expenses and the sale of BFAM in the prior year, contributed to an increase in pretax income of $4 million, or 4%, to $112 million for fiscal year 2000. The effective tax rate for the current period was 43.5%, a decrease from 44.8% for 1999. Net income increased to $63 million, or $1.00 per diluted share, compared with $60 million, or $0.94 per diluted share for pro forma fiscal 1999. Excluding the one-time resignation charge and the BFAM gain, pro forma earnings per diluted share would have been approximately $0.90 in 1999. Diluted weighted average shares outstanding for fiscal year 2000 were 63.5 million, compared with 63.9 million for the prior year. This reduction was mostly due to the redemption of the convertible subordinated debt in November 1999 (see Notes 8 and 9 to the Consolidated Financial Statements). -5- DISCUSSION OF PRO FORMA FISCAL YEAR 1999 COMPARED WITH PRO FORMA FISCAL YEAR 1998 RESULTS OF OPERATIONS Total sales for pro forma fiscal year 1999 were $4.5 billion, an increase of $196 million, or 5%, over $4.3 billion for pro forma fiscal year 1998 (52 weeks ended August 28, 1998, or "1998"). Excluding the estimated $76 million impact of the extra week in 1999, sales increased $120 million, or 3%. This growth was mostly attributable to solid performance in the Education and Schools divisions that was the result of sales growth at existing clients partially offset by an overall lower retention rate for the Company in 1998. The Corporate Services division had lower growth in sales for 1999, resulting from strong competition in this mature market, the overall impact of corporate restructurings and a lower retention rate going into 1999 from 1998. Growth in the Health Care division was impacted by the challenging environment for the health care industry in 1999, including decreased government reimbursements, consolidation in the industry and several bankruptcies of health care institutions. Despite these challenges, the Health Care division has grown sales at existing clients and sold new business to largely offset a lower retention rate going into 1999 from 1998. As with other divisions, retention in Health Care improved in 1999. Pro forma operating profit before corporate items totaled $301 million for 1999, an increase of $41 million, or 16%, over $260 million in operating profit for 1998. This increase was driven by improved operating margins, particularly in the Education and Schools divisions, the result of efficiencies achieved in the procurement of food-related products and administrative synergies gained during the year. Operating profit for the Health Care division was unfavorably impacted by several bankruptcies at hospital clients in 1999, as this industry continues to experience consolidation and restructuring issues. Excluding $3 million in charges related to bankruptcies in 1999, Health Care's operating profit would have totaled $111 million, or a 16% increase over a comparably adjusted 1998 operating profit of $96 million. Operating profit in the Canada and Laundries/Other divisions collectively totaled $12 million in 1999, an increase of $3 million or 33% over 1998. This double-digit increase was driven by improved margins in both divisions. The 53rd week did not have a material impact on the Company's operating profit in pro forma fiscal year 1999. Corporate expenses and amortization of intangible assets in pro forma fiscal year 1999 totaled $114 million, an increase of $4 million, or 4%, compared with pro forma fiscal year 1998. Included in corporate expenses was a one-time, $3 million charge ($2 million after-tax, or $0.03 per diluted share) related to the resignation of the former Chief Executive Officer. Excluding the one-time resignation charge, total corporate expenses were level with pro forma fiscal year 1998. Administrative synergies were achieved as planned during 1999, but were partially offset by consulting expenses and other reinvestments in the Company's corporate infrastructure. Pro forma fiscal year 1999 included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment, resulting in a gain of $8 million ($5 million after-tax, or $0.07 per diluted share). Excluding the one-time resignation charge, total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 96% of total sales for pro forma fiscal year 1999 compared with pro forma fiscal year 1998's comparable period ratio of 97%. The growth in operating profit increased pretax income to $108 million, a 71% or $45 million increase when compared with $63 million for 1998. The effective tax rate for 1999 was 44.8%, a decrease from 48% for 1998, mostly due to the proportion of nondeductible intangible amortization expense in relation to total operating profit between the years. Net income almost doubled in 1999 to $60 million, or $0.94 per diluted share, compared with $33 million, or $0.52 per diluted share for 1998. Excluding the one-time resignation charge and the BFAM gain, pro forma earnings per diluted share would have been approximately $0.90 in 1999. -6- CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999 ($ IN MILLIONS)
SEPTEMBER 1, SEPTEMBER 3, 2000 1999 ------------------ ------------------ ASSETS Current assets Cash and equivalents $ 54 $ 48 Accounts and notes receivable 463 445 Inventories 67 60 Other 98 89 ------------------ ------------------ Total current assets 682 642 ------------------ ------------------ Property and equipment, net 96 85 Intangible assets 497 535 Other 89 85 ------------------ ------------------ $ 1,364 $ 1,347 ================== ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Current portion of long-term debt $ 81 $ 133 Accounts payable 305 238 Other current liabilities 379 347 ------------------ ------------------ Total current liabilities 765 718 Long-term debt 900 980 Other long-term liabilities 112 113 Convertible subordinated debt - 30 Stockholders' deficit Preferred stock, no par value, 1 million shares authorized; no shares issued - - Common stock, $1 par value; 300 million shares authorized, 63 million and 62 million shares issued and outstanding in 2000 and 1999, respectively 63 62 Additional paid-in capital 1,348 1,326 Accumulated deficit (1,826) (1,884) Accumulated other comprehensive income 2 2 ------------------ ------------------ Total stockholders' deficit (413) (494) ------------------ ------------------ Total liabilities and stockholders' deficit $ 1,364 $ 1,347 ================== ==================
-7- DISCUSSION OF PRO FORMA CASH FLOW CASH FLOW FROM OPERATING ACTIVITIES The Company's cash flow from operations is affected by a predictable seasonal pattern. Cash flow from operations is strongest during the fall and spring, as the demand for services fluctuates in the Education and Schools divisions. Cash flow from operations, before the impact of changes in working capital, was $147 million in 2000, $145 million in 1999, and $115 million in 1998. The increase in the adjusted operating cash flow in fiscal years 2000 and 1999 was mostly the result of higher net income in both years. Working capital, defined as the net of current assets and current liabilities, is favorable to the Company when current liabilities exceed current assets. This negative working capital position is primarily the result of the timing of cash payments in relationship to the timing of cash received. In fiscal year 2000, increases in cash provided by changes in working capital were mostly due to increases in accounts payable and other current liabilities exceeding the increase in accounts receivable by approximately $81 million, the result of increased collection efforts in accounts receivables and more favorable vendor payment terms and the extension of payment cycles in accounts payables. For 1999, higher accounts and notes receivable reflected the impact of the 53rd week and a lengthening of the average billing cycle compared to 1998. The Company anticipates it will maintain its negative working capital position in future periods. CASH FLOW FROM INVESTING ACTIVITIES The Company invests cash primarily for capital expenditures related to new or existing client relationships. Total capital expenditures were $66 million, $72 million, and $60 million for 2000, 1999, and 1998, respectively. The Company anticipates expending approximately $70 to $75 million for capital investments for fiscal year 2001. In addition, the Company intends to make, from time to time, investments for business acquisitions. CASH FLOW FROM FINANCING ACTIVITIES The Company's financing activities reflect the Company's management of its debt and other long-term liabilities. For fiscal year 2000, net cash used in financing activities was mostly due to the $80 million scheduled repayments of long-term debt, in addition to approximately $11 million for the cash portion of the Liquid Yield Option(TM) Notes ("LYONs") settlement in November 1999 (see Note 8 to the Consolidated Financial Statements). In 1999, net cash used in financing activities totaled $40 million, mostly due to the $70 million repayment of long-term debt, partially offset by increases in short-term debt and other liabilities. Net cash provided by financing activities in 1998 totaled $49 million. Other cash provided by financing activities totaled $106 million, reflecting the transfer of insurance-related liabilities from MI, and was partially offset by repayments of long-term debt totaling $57 million in 1998. PRO FORMA UNAUDITED CONDENSED CONSOLIDATED CASH FLOW FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000, SEPTEMBER 3, 1999 AND AUGUST 28, 1998 ($ IN MILLIONS)
2000 1999 1998 (52 WEEKS) (53 WEEKS) (52 WEEKS) ------------------- ------------------ ------------------ CASH FLOW PROVIDED BY OPERATING ACTIVITIES ========================================== Net income $ 63 $ 60 $ 33 Adjust to reconcile net income to net cash: Depreciation expense 47 47 45 Amortization of intangible assets 37 38 37 Net changes in certain working capital and other items 74 (40) (39) ------------------- ------------------ ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 221 105 76 ------------------- ------------------ ------------------ CASH FLOW FROM INVESTING ACTIVITIES =================================== Capital expenditures (66) (72) (60) Other (2) (24) (27) ------------------- ------------------ ------------------ NET CASH USED IN INVESTING ACTIVITIES (68) (96) (87) ------------------- ------------------ ------------------ CASH FLOW FROM FINANCING ACTIVITIES =================================== Repayments of long-term debt (92) (70) (57) Other (55) 30 106 ------------------ ------------------- ------------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (147) (40) 49 ------------------- ------------------ ------------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 6 $(31) $ 38 =================== ================== ==================
-8- PART I ITEM 1. BUSINESS GENERAL The Company is the leading provider in North America of outsourced food and facilities management services to businesses, health care facilities, colleges and universities, primary and secondary schools and other clients. Food services include food and beverage procurement, preparation and menu planning, as well as the operation and maintenance of food service and catering facilities, generally on a client's premises. Facilities management services include plant operations and maintenance, energy management, grounds keeping, and housekeeping and custodial services. The Company was formerly named Marriott International, Inc. Upon consummation of the Distribution, Acquisition, and Refinancing (the "Transactions"), which occurred on March 27, 1998 (the last day of the first quarter of 1998), Marriott International, Inc. was renamed Sodexho Marriott Services, Inc. As of March 27, 1998, the principal business of the Company changed from lodging and contract services to food and facilities management services. This change was the result of the Distribution and the Acquisition. In connection with the Distribution and Acquisition, the Company refinanced its debt. The Transactions are explained in more detail below and in the Company's Notes 1 through 5 to the Consolidated Financial Statements included in this report. Due to the extensive changes in the Company's business that resulted from the Transactions, the Company is providing for informational purposes the following description of its business. INDUSTRY AND MARKETPLACE The food and facilities management services industry is rapidly changing. Major industry dynamics are: o Continued growth in the outsourcing of food service and facilities management as a result of: focus by customers on core competencies and outsourcing of their non-core services, general economic growth, increasing cost pressures and low levels of unemployment. o Increasing market penetration by large, well-capitalized participants due to their ability to provide more cost-effective services as a result of economies of scale, a broader range of services than local and regional participants, and national and international coverage to large clients. o An increase in the retail orientation of contract catering due to the proliferation of alternative retail outlets, including quick serve restaurants. o Strong industry dynamics towards a "one-stop shopping" alternative for all outsourcing needs, including food service and facilities management. o Minimal capital requirements due to several factors, including low capital expenditures because operations are generally conducted at client sites using client equipment; low fixed costs, permitting rapid response to market conditions; and predictable cash flow from client payments, reducing or eliminating working capital needs. o Stable industry revenues from an existing client base. MARKET POSITION The Company has its origins in two well-established food service providers, MMS and Sodexho North America. The Company is the market leader in the North American contract food services industry, which the Company's management believes is generally underpenetrated by large contractors. Market leadership makes the Company well positioned to grow faster than the overall market. The Company has a unique opportunity to leverage its position as the market leader in food service by cross-selling additional food and facilities management services to existing clients. Management of the Company believes that the facilities management industry remains even more underpenetrated by large contractors than the contract food services industry. -9- ITEM 1. BUSINESS, CONTINUED The Company operates primarily in four business segments as discussed below (also see Note 14 to the Consolidated Financial Statements): CORPORATE SERVICES. Although the market for food service in business and industry is relatively highly penetrated, customers are responding favorably to the growth in retail orientation by food service contractors. The market for multi-service national providers (food and facilities) is growing as large corporations are moving toward outsourcing all of their non-core services on a multi-site and multi-service basis. This represents an opportunity to leverage from food contracting to the less developed facilities management market. The government market is expected to increase as federal departments and agencies implement large-scale outsourcing of non-core functions. The Corporate Services segment represents approximately 30% of the Company's current revenues. HEALTH CARE. The health care industry continues its transformation from a fee-for-service to a managed care and capitated rate environment. This market dynamic has shifted the risk and burden of cost control from insurance providers to the health care institutions themselves, forcing them to focus not only on the cost component of clinical care, but also on the cost of all services including food and facilities management. These cost pressures are driving the trend toward consolidation of health care institutions and guaranteed cost contracts for hospital services, and have contributed to several institutional bankruptcies. While management of the Company recognizes the challenges of these trends, it also believes that there are opportunities for growth, as the health care market remains significantly underpenetrated. The Health Care segment represents approximately 30% of the Company's current revenues. EDUCATION. The campus dining marketplace, principally in colleges and universities, continues to shift from residential board plans to more retail-oriented operations driven by (i) the growing proportion of non-resident day and evening students on campuses, (ii) the taste and service preferences of today's young consumers and (iii) colleges' and universities' desire to provide their students with greater flexibility. Traditional straight-line cafeterias are being replaced by scatter systems and food courts. These trends, coupled with cost pressures, are causing public and private institutions to consider outsourcing as a viable choice. The Education segment represents approximately 27% of the Company's current revenues. SCHOOLS. The current fiscal climate is forcing school districts (kindergarten through Grade 12) to minimize costs while improving the performance of non-instructional areas. Over the last several years, 150-200 school systems per year have decided to begin outsourcing their food services. Also, recent federal regulations require that school meals meet more stringent food specifications and production techniques to comply with "Nutrient Standards" guidelines. Some school districts may turn to contractors to help comply with these guidelines. The Schools segment represents approximately 8% of the Company's current revenues. The Company also operates two additional segments-- Canada and Laundry Services/Other. These two segments collectively represent approximately 5% of the Company's current revenues. COMPETITION The food and facilities management services business in North America comprises a large number of local, regional and national service providers. The Company's strongest competition comes from larger, well-capitalized participants due to their ability to provide (i) cost-effective services as a result of economies of scale, (ii) a broader range of services than local and regional participants and (iii) national coverage to large clients. Many educational institutions, health care providers and businesses consider cost to be an important factor when selecting companies to provide food and facilities management services. The Company expects to continue being a successful low-cost services provider due to its (i) significant purchasing economies of scale for food service and facilities management supplies, (ii) sophisticated site labor management controls, (iii) low administrative overhead and (iv) information and accounting systems which allow clients to monitor costs more closely in tandem with the Company's management team. Clients also consider the quality of food and facilities management services to be an important factor in addition to price. Accordingly, the Company's ability to maintain a level of quality in keeping with client expectations will continue to be an important competitive factor. -10- ITEM 1. BUSINESS, CONTINUED GOVERNMENT REGULATION The Company is subject to various governmental regulations relating to its operations, including, but not limited to, employment, health, safety and environmental regulations as well as regulations applicable to bidding for and performing federal, state and local government contracts. The Company has installed various controls and procedures designed to ensure compliance with these regulations. EMPLOYEES The Company has approximately 111,000 employees on its payroll in the U.S. and Canada, and manages approximately 61,000 people on its clients' payrolls. An estimated 12,000 non-management employees are represented by organized labor unions for collective bargaining purposes. The Company believes its relations with its employees are positive. INFLATION The Company's expenses are impacted by inflation. While price increases generally can be instituted as inflation occurs, many contracts require certain approvals before prices can be increased, which may temporarily have an adverse impact on profit margins. Management believes that over time, however, the Company will be able to raise prices, as appropriate, and sustain profit margins. ACCOUNTING PERIOD On April 15, 1998, the Company's Board of Directors approved a change in the Company's fiscal year from the Friday closest to the end of December to the Friday closest to the end of August, effective immediately. This change resulted in a 34-week Transition Period from the end of fiscal year 1997 to August 28, 1998. Fiscal year 2000 had 52 weeks ending on September 1, 2000. Fiscal Year 1999 had 53 weeks ending on September 3, 1999. Prior to the change in fiscal year, the Company's 1997 historical fiscal year had 52 weeks and ended on the Friday nearest the end of December, which was January 2, 1998. -11- ITEM 2. PROPERTIES The Company is headquartered in Maryland, where it has a 10-year lease ending in December 2008 (with 2 renewable periods of 5 years each) for approximately 115,000 square feet of space at 9801 Washingtonian Boulevard, Gaithersburg, Maryland. In addition, all of the Company's operating divisions lease their respective headquarters office space as follows: Avon, Connecticut (Health Care); Altamonte Springs, Florida (Education); Lexington, Massachusetts (Corporate Services); West Lake, Texas (Schools); Burlington, Canada; and Atlanta, Georgia (Laundries/Other). These operating division leases generally run for initial terms of three to five years with renewal options. The Company also has a long-term lease for its office facility in Buffalo, New York, where all of the centralized accounting and processing activities for North America take place. The Company owns three laundry facilities (Walla Walla, Washington; Tucson, Arizona; and Phoenix, Arizona) and leases three additional laundry facilities (Birmingham, Alabama; Gilroy, California; and Compton, California). As a result of the Acquisition, the Company also occupied approximately 20,000 square feet of office and warehouse space in Trumbull, Connecticut; approximately 15,000 square feet of office space in Mobile, Alabama; approximately 34,000 square feet of building space in Sunnyvale, California; approximately 15,000 square feet of building space in Allston, Massachusetts, and also owned a 30,000 square foot office building in Montreal, Canada. In October 1998, the Company sold an 80,000 square foot office facility in Waltham, Massachusetts, obtained in the Acquisition. The sale of the Waltham office facility did not have any adverse impact on the Company's financial condition or results of operations. To provide space for the operations that formerly occupied one-half of the Waltham office facility, the Company entered into an agreement in December 1998 to lease approximately 25,000 square feet of office space in Lexington, Massachusetts, for a seven-year period, with a five-year renewal option. Also, during fiscal year 2000, the Company sub-leased the 15,000 square feet of office space in Mobile, Alabama to a non-affiliate entity and sold the 30,000 square foot office building in Montreal, Canada. In addition, in June 2000, the Company terminated the Trumbull, Connecticut and Sunnyvale, California leases prior to their expiration. These transactions did not have an adverse impact on the Company's financial condition or results of operations. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Company during the fourth quarter of fiscal year 2000. -12- PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS COMMON STOCK. The comparability of stock prices in the table below was affected by the Transactions, which occurred on March 27, 1998. The range of the Company's common stock prices and dividends declared per share for fiscal years 2000 and 1999, the Transition Period, and fiscal year 1997 are as follows (restated to reflect the one-for-four reverse stock split on March 27, 1998):
DIVIDENDS DECLARED PER HIGH LOW SHARE ---------------- --------------- ---------------- FISCAL YEAR 2000 First Quarter $ 19 5/16 $ 13 13/16 $.08 Second Quarter 15 3/4 10 1/8 - Third Quarter 15 1/4 10 7/16 - Fourth Quarter 18 15/16 14 - FISCAL YEAR 1999 First Quarter 33 3/8 24 5/8 - Second Quarter 29 1/4 22 - Third Quarter 25 1/8 18 7/8 - Fourth Quarter 23 1/4 13 3/4 - TRANSITION PERIOD 1998 Quarter ended March 27, 1998 330 1/2 243 3/4 .36 Nine weeks ended May 29, 1998 31 3/8 24 5/16 - Quarter ended August 28, 1998 33 1/16 25 3/4 - FISCAL YEAR 1997 First Quarter 229 198 1/2 .32 Second Quarter 256 1/2 198 1/2 .36 Third Quarter 287 240 .36 Fourth Quarter 307 260 1/2 .36
At September 1, 2000, there were 63.2 million shares of common stock outstanding held by approximately 36,000 shareholders of record. The Company's common stock is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and Philadelphia Stock Exchange. DIVIDEND POLICY. Prior to the Transactions, the Company had paid regular quarterly dividends. On October 13, 1999, the Board of Directors declared an $0.08 per common share dividend for fiscal year 1999, paid on December 10, 1999 to shareholders of record on November 22, 1999--see Item 7. Liquidity and Capital Resources. The Company may pay dividends in the future, subject to the restrictive covenants contained in the Company's credit facility agreements related to the Refinancing and other relevant considerations. In general, the restrictive covenants do not permit the Company to pay dividends to shareholders in an amount greater than 40 percent of the Company's net income, or 45 percent when the ratio of the Company's consolidated debt to Earnings Before Interest, Taxes, Depreciation and Amortization ratio ("EBITDA", as defined in the documentation for the credit facility agreements) is less than 4 but not less than 3. This restriction will no longer apply when such ratio is less than 3. The payment and amount of cash dividends on the Company's common stock will be subject to the sole discretion of the Company's Board, which will review the Company's dividend policy at such times as may be deemed appropriate. The Board will closely monitor the results of the Company's operations, capital requirements, and other considerations to determine the extent to which a dividend may be declared in future periods. ITEM 6. SELECTED HISTORICAL FINANCIAL DATA The following table presents summary selected historical financial data for the Company derived from its financial statements as of the fiscal years ended September 1, 2000 and September 3, 1999, the 34-week period ending August 28, 1998, and fiscal years 1997, 1996 and 1995 (see below). As the result of the Transactions, 1998's results are not comparable to the other years presented. Specifically, the results of Sodexho North America are only included in the 22-week period ended August 28, 1998. Conversely, the results of MDS and MSLS are included in the historical financial continuing operations prior to the Transaction. In addition, operating results in 1997 include a loss before income taxes of $22 million ($14 million after-tax, or $0.40 per share) on the sale of MMS- UK to Sodexho. The historical information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto, each contained herein. -13- ITEM 6. SELECTED HISTORICAL FINANCIAL DATA, CONTINUED SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
34 FISCAL FISCAL WEEKS YEAR YEAR AUGUST FISCAL YEAR ------------------------------- 2000(1) 1999(1) 1998(1) 1997(2) 1996(3) 1995(3) ----------- ---------- ----------- ---------- --------- ---------- ($ in millions, except per share data) INCOME STATEMENT DATA: Sales $4,734 $4,502 $2,828 $5,026 $4,318 $3,634 Operating Profit Before Corporate Expenses and Interest 319 299 119 157 177 130 Total Corporate Expenses and Interest(4) (207) (207) (151) (172) (127) (78) ----------- ---------- ----------- ---------- --------- ---------- Income (Loss) From Continuing Operations, Before Taxes and Extraordinary Item 112 92 (32) (15) 50 52 (Provision) Benefit for Income Taxes from Continuing Operations (49) (41) 13 15 (17) (20) ----------- ---------- ----------- ---------- --------- ---------- Income (Loss) From Continuing Operations, Before Discontinued Operations and Extraordinary Item 63 51 (19) -- 33 32 Discontinued Operations, Net of Income Taxes(5) -- -- 77 335 273 215 ----------- ---------- ----------- ---------- --------- ---------- Income Before Extraordinary Item 63 51 58 335 306 247 Loss from Extraordinary Item, Net of Income Taxes(6) -- -- (44) -- -- -- ----------- ---------- ----------- ---------- --------- ---------- Net Income $ 63 $ 51 $ 14 $ 335 $ 306 $ 247 =========== ========== =========== ========== ========= ========== PER SHARE DATA(7): Diluted Earnings Per Share: Continuing Operations $ 1.00 $ 0.81 $(0.36) $ -- $ 0.97 $ 0.97 Discontinued Operations(5) -- -- 1.48 10.53 8.08 6.51 ----------- ---------- ----------- ---------- --------- ---------- Diluted Earnings Per Share before Extraordinary Item 1.00 0.81 1.12 10.53 9.05 7.48 Extraordinary Item(6) -- -- (0.85) -- -- -- ----------- ---------- ----------- ---------- --------- ---------- Diluted Earnings Per Share $ 1.00 $ 0.81 $ 0.27 $10.53 $ 9.05 $ 7.48 =========== ========== =========== ========== ========= ========== Cash Dividends Declared(8) $ 0.08 $ -- $ 0.36 $ 1.40 $ 1.28 $ 1.12 Diluted Weighted - Average Shares 63.5 63.9 52.0 31.8 33.8 33.0 BALANCE SHEET DATA (AT END OF YEAR): Total Assets $1,364 $1,347 $1,341 $5,009 $4,180 $3,221 Long-Term and Convertible Subordinated Debt 900 1,010 1,091 1,829 1,300 795 Stockholders' (Deficit)/Equity (413) (494) (555) 1,463 1,260 1,054 - ----------- 1 - On April 15, 1998, the Company's Board of Directors changed the fiscal year from the Friday closest to the end of December to the Friday closest to the end of August, thereby creating a 34-week Transition Period. On March 27, 1998, the Company acquired Sodexho North America. In addition, fiscal year 2000 had 52 weeks ended on September 1, 2000, fiscal year 1999 had 53 weeks and ended on September 3, 1999. The historical data for fiscal year 1997 and prior years does not include the revenue and expenses of the acquired business, see Notes 1 through 3 to the Consolidated Financial Statements. 2 - Operating results in fiscal year 1997 (52 weeks ended January 2, 1998) include a loss before income taxes of $22 million ($14 million after tax, or $0.40 per share) on the sale of the MMS- UK operations to Sodexho in connection with the Transactions. 3 - Fiscal year 1996 includes 53 weeks ending on January 3, 1997, with fiscal year 1995 including 52 weeks ending on December 29, 1995. 4 - Total corporate expenses include the amortization of intangible assets. For fiscal year 1999 and the 34 weeks ended August 28, 1998, $16 million and $31 million pretax, respectively, of integration and restructuring charges were recognized, see Note 4 to the Consolidated Financial Statements. 5 - On March 27, 1998, the Company distributed to its shareholders the Lodging, MSLS and MDS divisions as part of the Transactions. For reporting purposes, the Lodging segment is considered Discontinued Operations prior to March 27, 1998. MSLS and MDS are considered part of continuing operations for the same periods (see Note 1 to the Consolidated Financial Statements). 6 - On March 27, 1998, the Company refinanced its debt as part of the Transactions (see Note 1 and Note 8 to the Consolidated Financial Statements), resulting in a $71 million pretax charge from the early extinguishment of debt ($44 million after-tax). 7 - Earnings per share data have been restated to reflect the adoption in 1997 of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." All per share data has been adjusted to reflect a one-for-four reverse stock split effective March 27, 1998. 8 - The Board of Directors declared on October 13, 1999, an $0.08 per common share dividend for fiscal year 1999, paid on December 10, 1999 to shareholders of record on November 22, 1999--see Note 9 to the Consolidated Financial Statements.
-14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW As described in Part I, Items 1 & 2, "Business" and "Properties," on March 27, 1998, the Company completed the Distribution, Acquisition, and Refinancing. As a result, the assets, liabilities, and business operations of the Company for fiscal years 2000 and 1999 have changed substantially compared to prior periods presented. In particular, the most significant differences relate to the following: o The 1997 Consolidated Statement of Income included revenues, as well as operating costs and expenses, related to the distributed operations. In the Consolidated Statement of Income, the operations of the lodging segment have been combined and included as "Discontinued Operations, Net of Income Taxes." The MDS and MSLS segments were also part of the Distribution to shareholders, but remained part of continuing operations in the historical financial statements. See Note 1 to the Consolidated Financial Statements. o As described in Notes 1 through 5 to the Consolidated Financial Statements, the Company acquired the North American operations of Sodexho Alliance, S.A. on March 27, 1998. The historical data in 1997 did not include the revenue and expenses of the acquired business. o On March 27, 1998, the Company obtained over $1.3 billion in new debt through secured and guaranteed credit facilities, with the proceeds used to repay over $1.6 billion of existing debt. o On April 15, 1998, the Company's Board of Directors changed the fiscal year from the Friday closest to the end of December to the Friday closest to the end of August, thereby creating a 34-week Transition Period. See Note 1 to the Consolidated Financial Statements. Due to these differences in the comparability of the Company's historical operating results for fiscal years 2000 and 1999, the Transition Period, and prior fiscal year, management believes that it is meaningful and relevant in understanding the present and ongoing Company operations to compare fiscal year 2000 with the Company's pro forma operating results for fiscal years 1999 and 1998, presented in the "Introduction" section of this report. These pro forma statements were prepared as if the Distribution, Acquisition, Refinancing and the implementation of the various related agreements entered into with Marriott International, Inc. and Sodexho occurred at the beginning of pro forma fiscal year 1998. The pro formas exclude, among other items, certain non-recurring costs such as (i) costs of the Distribution of $17 million (after-tax) in 1998, (ii) an extraordinary loss related to the early extinguishment of debt of $44 million, after-tax, and (iii) integration and restructuring charges totaling $16 million (pretax) in 1999 and $31 million (pretax) for 1998. See Notes 1 through 5 to the Consolidated Financial Statements. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company, which analyzes the major elements of the Company's consolidated statements of operations and financial condition, should be read in conjunction with the detailed information and consolidated financial statements, and related Notes to Consolidated Financial Statements, included in this report. SEASONAL NATURE OF THE COMPANY'S BUSINESS The food service and facilities management business has been characterized historically by seasonal fluctuations in overall demand for services, particularly in the Education and Schools divisions where sales are stronger during the fall and spring. LIMITED GEOGRAPHIC FOCUS The Company is not currently expected to expand its international presence beyond Canada. Although the Company supports certain U.S. clients in Guam, Antarctica and the Marshall Islands, among others. The Trademark License Agreement entered into by the Company and Marriott International, Inc. gives the Company the right to use the "Marriott" name in the U.S. and Canada (and elsewhere only in extremely limited circumstances). Likewise, the Company entered into a Royalty Agreement with Sodexho pursuant to which Sodexho licenses the right to use the "Sodexho" name in the U.S. and Canada. As a practical matter, since the Company will only be allowed to use its corporate name in the U.S. and Canada, and since Sodexho controls or has a significant interest in companies operating in other countries in the food and facilities management industries, it is unlikely that the Company will engage in significant operations outside the U.S. and Canada. As a result, the Company will be more susceptible to a downturn in the U.S. and Canadian economies than a company that is actively engaged in various other markets. -15- BUSINESS STRATEGY The Company's key financial objective is to generate higher revenues and increase cash flow from operations through new contract sales, the retention of existing contracts, and improved efficiencies in the Company's operations. This financial objective is designed to build on the performance strengths of the Company, which include expanding relationships with existing clients, attracting new business, identifying under-penetrated and rapidly growing segments of the food and facilities management industry, and seeking selective strategic acquisition candidates compatible with this objective. The Company is positioned well to capitalize on the current trend for outsourcing services. As increasing cost pressures force organizations to focus on their core business, the demand for outsourcing services is growing. The total market is estimated at $130 billion in North America, with 75% of potential food and facilities management outsourcing business still self-operated. The Company is focusing on building the organization where resources are closest to the units, facilitating the local managers' ability to adapt to the clients' needs. Additionally, the Company wants to focus on the markets and sub-markets that have the most growth potential and that match up well with the Company's core services. During the past year, the Company made significant progress in segmenting all of its markets in terms of size, penetration, needs, growth and profitability. The results of this process provide the basis for choosing the steps the Company will take to strengthen its leadership position and to target specific high potential markets. In 1999, the Company substantially completed the integration of the number one and number four market leaders in the U.S. food and facilities management services industry. The focus during fiscal year 1999 was setting common goals and the merging of best practices and business strategies. Fiscal year 1999 also saw the successful alignment of its management team, consolidation of its systems and processes for improved operations, and development of integrated business strategies. This foundation carried over into fiscal year 2000, where significant investments were made to bring additional resources to the client level, including recruiting and training of client level operators and increasing the Company's sales force. A key element of the Company's strategy is obtaining additional synergies and cost savings within its operations, particularly in the food procurement process. In the aggregate, the Company achieved its $40 million cumulative annual synergy target for fiscal year 2000, of which approximately $20 million was incremental to fiscal year 2000. The Company expects that the procurement and distribution process savings will account for approximately two-thirds of the estimated $60 million in annual synergies which the Company expects to realize by the end of year 2001. Incremental synergies generated in fiscal year 2000 were reinvested during fiscal year 2000. The reinvestments were primarily in additional sales and management personnel. Beginning in fiscal year 1999 and continuing in fiscal year 2000, the Company has also invested in new systems to improve the tracking and analysis of food procurement activities. These enhancements will result in additional procurement efficiencies and improved operating margins in the Company's businesses. Within these initiatives, a new procurement information system was implemented in the latter half of fiscal year 2000. A key benefit of this new system is the improved capturing of data regarding the Company's procurement activity. This capability also improves the Company's ability to better match the procurement process to the period in which it occurred, which resulted in the recording of an increase in pretax earnings of $8 million ($5 million after-tax, or $0.07 per diluted share) in the Company's fourth quarter of fiscal year 2000, accounted for as a change in estimate under APB Opinion No. 20-- "Accounting Changes." The Company estimates that approximately $5 million (pretax), or $0.04 per diluted share, of this change in estimate relates to procurement activity prior to fiscal year 2000, with the remainder of this impact being related to enhancements and improved procurement-related efficiencies attributable to fiscal year 2000. In addition, the Company has undertaken an information systems strategy study to evaluate the current state of its information systems, and consider information technology options. Among the options under consideration is the adoption of certain elements of the technology platform adopted by Sodexho Alliance. This evaluation will require additional time to study and review alternatives and their impact on capital investments, earnings, shareholder value and the provisions of the Company's debt agreements. Strategic developments in this area were originally expected to be finalized during fiscal year 2000, however, management has determined that the complexity of the systems review would require additional analysis that would carry the project well into fiscal year 2001. See Item 7.--Liquidity and Capital Resources. -16- RESULTS OF OPERATIONS The following discussion presents an analysis of results of operations of the Company for the 52-week period ended September 1, 2000 ("fiscal year 2000", or "2000") as compared with the 53-week period ended September 3, 1999 ("fiscal year 1999", or "1999") presented in the Selected Consolidated Financial Highlights above. The discussion below also presents an analysis of fiscal year 1999 compared with the 34-week period ended August 28, 1998 (the "Transition Period") and the Transition Period compared with the fiscal year ended January 2, 1998 (52 weeks). As detailed above, due to the differences in the comparability of the Company's historical operating results for fiscal year 2000, compared with fiscal year 1999, the Transition Period and fiscal year 1997, management believes that it is meaningful and relevant to review the Company's operating results for fiscal year 2000, compared with pro forma fiscal years 1999 and 1998, presented in the "Introduction" section of this report. HISTORICAL 52 WEEKS ENDED SEPTEMBER 1, 2000 COMPARED WITH THE 53 WEEKS ENDED SEPTEMBER 3, 1999. Total sales for fiscal year 2000 were $4.7 billion, an increase of $232 million, or 5%, over $4.5 billion for fiscal year 1999. Adjusting for the estimated $76 million impact of the extra week in fiscal year 1999, sales increased $308 million, or 7%. Overall, this growth was attributed to favorable new sales trends and solid comparable growth in existing accounts in most of the Company's divisions. The School Services and Canada divisions had double-digit sales growth during the year, with strong growth in the remaining divisions, excluding Laundries/Other. Managed volume, which represents the Company's measurement of gross revenues associated with all services the Company manages on behalf of its clients, is most relevant in the Health Care and Schools divisions. On a 52-week basis, the Health Care division's managed volume was $2.9 billion for fiscal year 2000, up $29 million or 1% over the $2.8 billion in managed volume for same period last year. The Health Care division's relatively flat managed volume growth was mostly due to the health care industry being under significant financial pressure, impacting a large number of the Company's clients in certain geographic markets. Managed volume for the Schools division was $698 million for fiscal year 2000, an increase of $54 million, or 8% over the $644 million for fiscal year 1999. The growth in the Schools division was due to the impact of solid new sales that added almost proportionately as much managed volume as total sales for the period. Operating profit before corporate items (corporate expenses, interest expense and amortization of intangible assets) totaled $319 million for fiscal year 2000, an increase of $20 million, or 7% when compared with $299 million in operating profit for fiscal year 1999. Operating profit increased mostly due to increases in the Health Care and Education divisions, as the Education division experienced improving margins from the strong new sales in the latter half of fiscal year 1999. In the Health Care division, operating margins improved from strong new sales and solid comparable growth rates at existing accounts, and the impact in fiscal year 1999 of approximately $3 million in bankruptcy related losses. Schools Services and Canada had flat operating profits when compared with last year, the result of several under-performing client accounts that were mostly first year, larger based, accounts. The Company anticipates that the inefficiencies in these under-performing accounts will be resolved during the next two quarters as the Company makes the necessary adjustments at these accounts to reach expected operating performance. Total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 96% of total sales for fiscal year 2000, unchanged from fiscal year 1999's ratio. The Company anticipates this margin will improve in the year ahead, as the Company achieves additional purchasing synergies, partially offset by the continued investment of a portion of the synergies in its businesses. Overall, the Company achieved about $20 million in additional purchasing synergies in 2000, resulting in an aggregate of over $40 million in cumulative annual synergies by the end of 2000, and as planned, reinvested most of 2000's synergies in sales staff and management support teams. The Company continues to anticipate cumulative synergies to reach $60 million in cost savings annually in 2001. Corporate expenses and amortization of intangible assets in fiscal year 2000 totaled $123 million, an 11% increase from the adjusted fiscal year 1999, which excludes the $3 million pretax charge related to the resignation of the former CEO and the $14 million in integration charges. This was primarily due to an increase of approximately $7 million for the impact of open positions filled in the latter half of fiscal year 1999 and new positions added in the current year, along with a $5 million increase in assistance fees paid to Sodexho Alliance for services received, as agreed upon in the merger agreements. Fiscal year 1999 also included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment for a pretax gain of $8 million, or $5 million after-tax ($0.07 per diluted common share). The increase in operating profits contributed to the increase in pretax income of $20 million, or 22%, to $112 million for fiscal year 2000, as the integration and resignation charges in 1999 were offset by the BFAM gain in 1999 and increases in corporate expenses between the years. The effective tax rate for the current period was 43.5%, a decrease from 44.8% for 1999. Net income increased to $63 million, or $1.00 per diluted share, compared with $51 million, or $0.81 per diluted share for fiscal year 1999. Diluted weighted average shares outstanding for fiscal year 2000 were 63.5 million, compared to 63.9 million for the prior year. -17- RESULTS OF OPERATIONS, CONTINUED HISTORICAL 53 WEEKS ENDED SEPTEMBER 3, 1999 COMPARED WITH THE 34 WEEKS ENDED AUGUST 28, 1998. Total sales for fiscal year 1999 were $4.5 billion, an increase of $1.7 billion, or 59% compared with $2.8 billion for the Transition Period. The significant increase between the periods was due to the 19 additional weeks reported in fiscal year 1999, partially offset by the first 12 weeks of the Transition Period including sales from the Marriott Distribution Services ("MDS") and Marriott Senior Living Services ("MSLS") divisions that were distributed to shareholders on March 27, 1998 (as detailed in Notes 1 through 4 to the Consolidated Financial Statements). Excluding the MDS and MSLS divisions, total sales increased $2 billion, or 80%. Solid sales growth in comparable accounts was partially offset by a lower retention rate for the Transition Period. Retention rates, particularly in the Health Care and Education divisions, improved in fiscal year 1999 compared with the Transition Period. Operating profit before corporate items totaled $299 million for fiscal year 1999, more than double the $119 million for the 1998 Transition Period. Excluding $2 million and $10 million in integration and restructuring costs in fiscal year 1999 and the Transition Period, respectively, operating profit would have totaled $301 million for fiscal year 1999 and $129 million for the Transition Period. This increase was the result of the 19 week difference between the periods as well as increased margins, largely due to purchasing and administrative synergies between the periods. These increases were partially offset by challenges in the health care industry, which resulted in charges totaling $3 million to operating profit for fiscal year 1999 to record additional bad debt reserves due to three client bankruptcies during the year. Corporate items totaled $207 million, an increase of $56 million, or 37%, when compared to $151 million for the Transition Period. Excluding integration expenses totaling $14 million for fiscal year 1999 and integration and restructuring expenses of $21 million for the Transition Period, adjusted corporate items totaled $193 million and $130 million, an increase of $63 million, or 48%. This increase reflects the over 50% increase in the number of operating weeks between the periods. In addition, the benefits from the elimination of certain positions after the Transactions along with other administrative synergies were more than offset in the current fiscal year by a one-time, $3 million pretax charge related to the resignation of the former Chief Executive Officer and $5 million pretax of Year 2000 related costs (see "Year 2000"). Fiscal year 1999 also included the favorable impact from the sale of the Company's Bright Horizons Family Solutions ("BFAM") investment, resulting in a cumulative pretax gain of $8 million, or $5 million after-tax ($0.07 per diluted common share). Excluding the Year 2000 costs, the integration expenses and the one-time resignation charge, total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 96% of total sales for fiscal year 1999 compared with the Transition Period's comparable period ratio of 98%. Total income from continuing operations before taxes was $108 million, excluding $16 million of integration charges, versus a comparably adjusted $1 million loss from continuing operations for the Transition Period. This significant increase was due to the 19 additional weeks of operations in the current year, in addition to increased operating margins as well as administrative and purchasing synergies. The Transition period included Discontinued Operations, net of income taxes, totaling $77 million, reflecting the results of the lodging segment prior to the Transactions. The Transition Period also included a loss from an extraordinary item totaling $44 million, or $0.85 per share, from the redemption and defeasance of debt (see Note 1 to the Consolidated Financial Statements). -18- RESULTS OF OPERATIONS, CONTINUED HISTORICAL 34 WEEKS ENDED AUGUST 28, 1998 COMPARED WITH THE 52 WEEKS ENDED JANUARY 2, 1998. Total sales for the Transition Period were $2.8 billion, a decrease of $2.2 billion, or 44% compared with $5.0 billion for fiscal year 1997. The significant decrease between the periods was due to the 35% decrease in the number of weeks reported, in addition to the $1.4 billion decrease from the Marriott Distribution Services ("MDS") and Marriott Senior Living Services ("MSLS") divisions that were distributed to shareholders on March 27, 1998 (as detailed in Notes 1 through 3 to the Consolidated Financial Statements). Excluding the MDS and MSLS divisions, and with no adjustment for the difference in the number of weeks reported, total sales decreased $750 million, or 23%. Operating profit before corporate items totaled $119 million for the Transition Period, a decrease of $38 million, or 24%, compared with the $157 million for fiscal year 1997. Excluding $10 million in integration costs in the Transition Period and a $22 million pretax loss from the sale of MMS- UK in fiscal year 1997, operating profit would have totaled $129 million for the Transition Period and $179 million for fiscal year 1997, a decrease of $50 million, or 28%. This decrease was the result of the 18 week difference between the periods and the $14 million decrease in operating profit from the MDS and MSLS divisions, which were partially offset by increased margins between the periods, especially in the Corporate Services division from the continued success of the Crossroads Cuisines marketing strategy. Corporate items totaled $151 million, a decrease of $21 million, or 12%, when compared to $172 million for fiscal year 1997. Excluding integration and restructuring expenses of $21 million for the Transition Period, adjusted corporate items totaled $130 million for the Transition Period, an adjusted decrease of $42 million, or 24%. This decrease reflects the 35% decrease in the number of operating weeks between the periods, though the Transition Period includes expenses from Sodexho North America's operations for the 22-week period ended August 28, 1998. Excluding integration and restructuring expenses, total operating costs, corporate expenses and amortization of intangible assets represented, in the aggregate, 98% of total sales for the Transition Period compared with fiscal year 1997's comparable period ratio of 99%. Total loss from continuing operations before taxes was $1 million, excluding $31 million of integration and restructuring charges, for the Transition Period. This compares with income from continuing operations before taxes of $7 million for fiscal year 1997, excluding the $22 million pretax loss from the sale of MMS- UK operations. This decrease was the result of the decrease of 18 weeks of operations in the Transition period, most of which include strong operational weeks for the Education and Schools divisions. The Transition period included Discontinued Operations, net of income taxes, totaling $77 million, reflecting the results of the lodging segment prior to the Transactions. Fiscal year 1997 included Discontinued Operations, net of income taxes, totaling $335 million, reflecting a full year of the lodging segment. The Transition Period also included a loss from an extraordinary item totaling $44 million, or $0.85 per share, from the redemption and defeasance of debt (see Note 1 to the Consolidated Financial Statements). -19- LIQUIDITY AND CAPITAL RESOURCES The Company is highly leveraged as a result of the Transactions in March 1998. The debt resulting from the refinancing contains restrictive covenants and requires grants of security and guarantees by subsidiaries of the Company, and therefore limits the Company's ability to incur additional debt and engage in certain other activities. Additionally, these debt covenants limit the Company's ability to pay dividends. Capital requirements are funded from a combination of existing cash balances and operating cash flow. In fiscal year 2000, net cash flows from operations more than doubled from the prior year, to $221 million. This increase was mostly due to improved net income and increases in working capital of $82 million, the result of increased collection efforts in accounts receivables and more favorable vendor payment terms and the extension of payment cycles in accounts payables. Additionally, the Company achieved its $40 million cumulative annual synergy target for fiscal year 2000, of which approximately $20 million was incremental to fiscal year 2000. The Company expects that the procurement and distribution process savings will account for approximately two-thirds of the estimated $60 million in annual synergies which the Company expects to realize by the end of year 2001. These anticipated cost savings will be available to pay down debt and reinvest in the Company to fund activities to enhance its competitive position. Incremental synergies generated in fiscal year 2000 were reinvested during fiscal year 2000. The reinvestments were primarily in additional sales and management personnel. On October 13, 1999, the Board of Directors declared an $0.08 per common share dividend for fiscal year 1999, paid on December 10, 1999 to shareholders of record on November 22, 1999. The Company may pay dividends in the future, subject to the restrictive covenants contained in the Company's credit facility agreements and other relevant considerations. In general, the restrictive covenants do not permit the Company to pay dividends to shareholders in an amount greater than 40% of the Company's net income, or 45% when the ratio of the Company's consolidated debt to Earnings Before Interest, Taxes, Depreciation and Amortization ratio ("EBITDA", as defined in the documentation for the credit facility agreements) is less than 4 but not less than 3. This restriction will no longer apply when such ratio is less than 3. The payment and amount of cash dividends on the Company's common stock will be subject to the sole discretion of the Company's Board, which will review the Company's dividend policy at such times as may be deemed appropriate. The Board will closely monitor the results of the Company's operations, capital requirements, and other considerations to determine the extent to which a dividend may be declared in future periods. In addition, the Company has undertaken an information systems strategy study to evaluate the current state of its information systems, and consider information technology options. Among the options under consideration is the adoption of certain elements of the technology platform adopted by Sodexho Alliance. This evaluation will require additional time to study and review alternatives and their impact on capital investments, earnings, shareholder value and the provisions of the Company's debt agreements. Strategic developments in this area are expected to be finalized in fiscal year 2001. Most recently, the Company began a study of a solution set for payroll, benefits and human resources information systems, as the Company migrates from the current Marriott International payroll-related systems. Under the current agreement, the Company is required to migrate off the Marriott International payroll infrastructure no later than the Company's fiscal year 2002 (see Note 5 to the Consolidated Financial Statements). Overall, the size of the Company's indebtedness, its restrictive covenants and other restrictions on the Company's activities contained in its credit facility agreements may limit the Company's ability to respond to market conditions, satisfy capital expenditure requirements, meet contractual or financial obligations, incur additional debt, invest in information technology infrastructure or engage in other activities. Subject to the foregoing, the Company believes that current cash flow generated from operations and cash balances will be adequate to finance ongoing capital needs, meet debt service requirements and fund the Company's planned growth initiatives. As of September 1, 2000, the Company had a $235 million revolving credit facility available to provide funds for liquidity, seasonal borrowing needs and other general corporate purposes. At September 1, 2000, the Company had $21 million of this revolving credit facility utilized by letters of credit outstanding, principally related to insurance programs, with the remaining $214 million available for operations. The Company is required to make quarterly cash interest payments on its term facilities, as well as scheduled principal repayments on its Senior Secured Credit Facility (see Note 8 to the Consolidated Financial Statements) amounting to approximately: $80 million in 2001; $90 million in 2002; $115 million in 2003 and $65 million in 2004. On October 7, 1999, Marriott International notified all holders of the LYONs, that Marriott International had elected to redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount at maturity of the LYONs, with a redemption date of November 8, 1999. The results of the redemption for the Company were the issuance of approximately 760,000 common shares and a payment of $11 million to MI for the Company's share of bondholders choosing to redeem in cash. -20- NEW ACCOUNTING STANDARDS On September 2, 2000, the Company adopted Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS No. 133"). In accordance with the provisions in SFAS No. 133, the Company has designated all of its interest rate swap agreements as cash flow hedges. The Company has determined that these interest rate swap agreements are highly effective in offsetting the variable interest cash flows of the Company's debt portfolio. The interest rate swap agreements will be recorded on the balance sheet at fair value in other assets (or other liabilities) with the offsetting entry to accumulated other comprehensive income, a component of stockholders' deficit for the effective portion of the hedge. The ineffective portion of the hedge will be recorded directly to the statement of income. The fair value of the interest rate swap contracts were approximately $15 million (pretax) in the aggregate as of September 1, 2000 (see Note 8 to the Consolidated Financial Statements). There were no net gains or losses on derivatives that had previously been deferred or gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of the hedged items. Currently, the Company does not have any other financial contracts which contain embedded derivatives or fair value hedge relationships which would fall within the scope of SFAS No. 133. YEAR 2000 The Company has actively addressed potential Year 2000 issues. These issues could have arisen at any point in the Company's purchasing, supply, processing, distribution and financial chains. The results to date indicate that Year 2000 issues have had no material adverse impact on the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings are not materially affected by changes in interest rates, due to the relatively low balances of borrowings at floating interest rates (after adjusting for hedge positions outstanding, see Note 8 to the Consolidated Financial Statements) as well as notes receivable which earn a variable rate of interest. However, changes in interest rates also impact the fair value of the Company's debt, totaling $981 million at September 1, 2000. If interest rates increased by 100 basis points, the fair value of the Company's debt would have decreased by approximately $17 million, while a 100 basis point decrease in rates would have increased the fair value of the Company's debt by approximately $17 million, based on balances at September 1, 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial information is included on the pages indicated: PAGE(S) ------- Management's Report 22 Reports of Independent Public Accountants 23-24 Consolidated Statement of Income 25 Consolidated Balance Sheet 26 Consolidated Statement of Cash Flow 27 Consolidated Statement of Stockholders' Deficit 28 Notes to Consolidated Financial Statements 29-49 Supplementary Data 50 -21- MANAGEMENT'S REPORT Management is responsible for the integrity and objectivity of the consolidated financial statements and other financial information presented in this report. In meeting this responsibility, the Company maintains a highly developed system of internal controls, policies and procedures, including an internal auditing function that continually evaluates the adequacy and effectiveness of its control system. Management believes this system provides reasonable assurance that transactions are properly authorized and recorded to adequately safeguard the Company's assets and to permit preparation of the financial statements in accordance with generally accepted accounting principles. The financial statements presented herein were prepared on a historical basis for fiscal years 2000 and 1999, the Transition Period of January 3, 1998 to August 28, 1998, and for calendar year 1997 as described in Note 1 to the Consolidated Financial Statements. In addition, fiscal year 2000 and pro forma fiscal years 1999 and 1998 are presented in the Introduction section of this report. Management believes that this presentation is meaningful and relevant to shareholders and other users of these financial statements. The pro forma results were prepared by applying certain pro forma adjustments to the audited historical results of Marriott International, Inc. and the acquired North American operations of Sodexho Alliance, S.A. The historical consolidated financial statements for fiscal years 2000 and 1999 and for the Transition Period in 1998 have been audited by PricewaterhouseCoopers LLP, independent public accountants. The historical consolidated financial statements for 1997 have been audited by Arthur Andersen LLP, independent public accountants. Their reports, included in this report, express an informed judgment as to whether management's historical consolidated financial statements present fairly the Company's financial position and results of operation in conformity with generally accepted accounting principles. The pro forma financial statements included herein do not represent actual historical results of the Company and as such are not audited. The Board of Directors fulfills its responsibility for the financial statements through its Audit Committee, composed of three directors not otherwise employed by the Company. The committee meets a minimum of three times during the year with the independent public accountants, representatives of management and the internal auditors to review the scope and results of the internal and external audits, the accounting principles applied in financial reporting, and financial and operational controls. The independent public accountants and internal auditors have unrestricted access to the Audit Committee with and without the presence of management. /s/ MICHEL LANDEL /s/ JOHN M. BUSH Michel Landel John M. Bush President and Senior Vice President and Chief Executive Officer Chief Financial Officer -22- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Sodexho Marriott Services, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of income and stockholders' deficit and of cash flow present fairly, in all material respects, the financial position of Sodexho Marriott Services, Inc. and its subsidiaries at September 1, 2000 and September 3, 1999, and the results of their operations and their cash flow for the fifty-two weeks ended September 1, 2000, the fifty-three weeks ended September 3, 1999 and the thirty-four weeks ended August 28, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Washington, D.C. October 11, 2000 -23- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Sodexho Marriott Services, Inc.: We have audited the accompanying consolidated statements of income, cash flow, and stockholders' deficit of Sodexho Marriott Services, Inc. (formerly "Marriott International, Inc.") for the fiscal year ended January 2, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of income, cash flow, and stockholders' deficit referred to above present fairly, in all material respects, the results of Sodexho Marriott Services, Inc.'s operations and its cash flow for the fiscal year ended January 2, 1998, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Vienna, VA February 3, 1998 (except with respect to the matters discussed in Notes 2 and 14, as to which the date is October 7, 1998) -24-
SODEXHO MARRIOTT SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999, THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND THE FISCAL YEAR ENDED JANUARY 2, 1998 ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) JANUARY 3 TO AUGUST 28, 2000 1999 1998 1997 ----------------- ---------------- ----------------- ---------------- (52 WEEKS) (53 WEEKS) (34 WEEKS) (52 WEEKS) SALES $4,734 $4,502 $2,828 $5,026 OPERATING COSTS AND EXPENSES Operating expenses 4,415 4,203 2,709 4,847 Loss on sale of MMS- UK operations - - - 22 ----------------- ---------------- ----------------- ---------------- 4,415 4,203 2,709 4,869 ----------------- ---------------- ----------------- ---------------- OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST 319 299 119 157 Corporate expenses, including amortization of intangible assets (123) (128) (97) (94) Interest expense (85) (88) (65) (110) Interest income 1 1 11 32 Gain on sale of investment - 8 - - ----------------- ---------------- ----------------- ---------------- INCOME (LOSS) FROM CONTINUING OPERATIONS, BEFORE TAXES AND EXTRAORDINARY ITEM 112 92 (32) (15) (Provision) benefit for income taxes from continuing operations (49) (41) 13 15 ----------------- ---------------- ----------------- ---------------- Income (Loss) From Continuing Operations, Before Discontinued Operations and Extraordinary Item 63 51 (19) - Discontinued Operations, Net of Income Taxes - - 77 335 ----------------- ---------------- ----------------- ---------------- Income Before Extraordinary Item 63 51 58 335 Loss from Extraordinary Item, Net of Income Taxes - - (44) - ----------------- ---------------- ----------------- ---------------- NET INCOME $ 63 $ 51 $ 14 $ 335 ================= ================ ================= ================ BASIC EARNINGS (LOSS) PER SHARE: Continuing Operations $ 1.01 $ 0.82 $(0.36) $ - Discontinued Operations - - 1.48 10.53 ----------------- ---------------- ----------------- ---------------- 1.01 0.82 1.12 10.53 Extraordinary Item - - (0.85) - ----------------- ---------------- ----------------- ---------------- BASIC EARNINGS PER SHARE $ 1.01 $ 0.82 $ 0.27 $10.53 ================= ================ ================= ================ DILUTED EARNINGS (LOSS) PER SHARE: Continuing Operations $ 1.00 $ 0.81 $(0.36) $ - Discontinued Operations - - 1.48 10.53 ----------------- ---------------- ----------------- ---------------- 1.00 0.81 1.12 10.53 Extraordinary Item - - (0.85) - ----------------- ---------------- ----------------- ---------------- DILUTED EARNINGS PER SHARE $ 1.00 $ 0.81 $ 0.27 $10.53 ================= ================ ================= ================
See Notes to Consolidated Financial Statements. -25-
SODEXHO MARRIOTT SERVICES, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999 ($ IN MILLIONS) SEPTEMBER 1, SEPTEMBER 3, 2000 1999 ----------------- ------------------ ASSETS Current Assets Cash and equivalents $ 54 $ 48 Accounts and notes receivable, net 463 445 Inventories 67 60 Other 98 89 ----------------- ------------------ Total current assets 682 642 ----------------- ------------------ Property and equipment, net 96 85 Intangible assets, net 497 535 Investments in affiliates 8 7 Other 81 78 ----------------- ------------------ $ 1,364 $ 1,347 ================= ================== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Current portion of long-term debt $ 81 $ 133 Accounts payable 305 238 Accrued payroll, benefits and other current liabilities 379 347 ----------------- ------------------ Total current liabilities 765 718 ----------------- ------------------ Long-term debt 900 980 Other long-term liabilities 112 113 Convertible subordinated debt - 30 Commitments and Contingencies (Note 11) Stockholders' Deficit Preferred stock, no par value, 1 million shares authorized; no shares issued - - Common stock, $1 par value; 300 million authorized, 63.2 million and 62.3 million shares issued and outstanding in 2000 and 1999, respectively 63 62 Additional paid-in capital 1,348 1,326 Accumulated deficit (1,826) (1,884) Accumulated other comprehensive income 2 2 ----------------- ------------------ Total stockholders' deficit (413) (494) ----------------- ------------------ Total liabilities and stockholders' deficit $ 1,364 $ 1,347 ================= ==================
See Notes to Consolidated Financial Statements. -26-
SODEXHO MARRIOTT SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOW FOR FISCAL YEARS 2000 AND 1999, THE THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND THE FISCAL YEAR ENDED JANUARY 2, 1998 ($ IN MILLIONS) JANUARY 3 TO AUGUST 28, 2000 1999 1998 1997 ------------------ ----------------- ------------------ ----------------- (52 WEEKS) (53 WEEKS) (34 WEEKS) (52 WEEKS) CASH FLOW PROVIDED BY OPERATING ACTIVITIES ========================================== Net income $ 63 $ 51 $ 14 $ 335 Adjustments to net cash provided by operating activities: Income from discontinued operations - - (77) (335) Extraordinary item - extinguishment of debt - - 44 - Gain on sale of investment - (8) - - Depreciation and amortization expense 84 85 57 99 Provision (benefit) for deferred taxes 10 (5) 6 (2) Changes in working capital 64 (18) 128 67 Changes in discontinued operations - - 131 271 Other - - (2) 142 ------------------ ----------------- ------------------ ----------------- NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES 221 105 301 577 ------------------ ----------------- ------------------ ----------------- CASH FLOW FROM INVESTING ACTIVITIES =================================== Capital expenditures (66) (72) (86) (282) Net cash - acquisitions - - 24 - Dispositions 5 26 29 441 Net decrease in loans to affiliates - - - 4 Cash from distributed operations - - (305) - Net investment in discontinued operations - - (113) (1,118) Other (7) (50) (160) (86) ------------------ ----------------- ------------------ ----------------- NET CASH USED IN INVESTING ACTIVITIES (68) (96) (611) (1,041) ------------------ ----------------- ------------------ ----------------- CASH FLOW FROM FINANCING ACTIVITIES =================================== Proceeds from the issuance of long-term debt - - 1,820 687 Repayments of long-term debt (92) (70) (1,900) (18) (Decrease) increase in short-term debt (52) 26 - - Proceeds from issuance of common stock for Acquisition - - 304 - Common stock issued - ESOP & other 2 4 72 40 Purchases of treasury stock - - (35) (191) Dividends paid - common (5) - (11) (43) ------------------ ----------------- ------------------ ----------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (147) (40) 250 475 ------------------ ----------------- ------------------ ----------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 6 $ (31) $ (60) $ 11 CASH & CASH EQUIVALENTS BEGINNING OF PERIOD 48 79 139 128 ------------------ ----------------- ------------------ ----------------- CASH & CASH EQUIVALENTS END OF PERIOD $ 54 $ 48 $ 79 $ 139 ================== ================= ================== ================= SUPPLEMENTAL: Interest paid - continuing operations $ 77 $ 83 $ 64 $ 96 Income tax payments - continuing operations 40 37 23 19 NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for Acquisition $ - $ - $ 275 $ -
See Notes to Consolidated Financial Statements. -27-
SODEXHO MARRIOTT SERVICES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE FISCAL YEARS ENDED SEPTEMBER 1, 2000 AND SEPTEMBER 3, 1999, THIRTY-FOUR WEEKS ENDED AUGUST 28, 1998 AND THE FISCAL YEAR ENDED JANUARY 2, 1998 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ACCUMULATED (ACCUMULATED OTHER COMMON ADDITIONAL DEFICIT)/ COMPREHENSIVE TREASURY SHARES COMMON PAID-IN RETAINED INCOME STOCK, OUTSTANDING STOCK CAPITAL EARNINGS (EXPENSE) AT COST TOTAL - ---------------- ------------------------------- ----------- ------------ ---------------- ---------------- ------------ ----------- 31.5 Balance, January 3, 1997 $32 $751 $ 628 $ (1) $(150) $ 1,260 - Net income - - 335 - - 335 - Unrealized gain on securities - - - 5 - 5 - Foreign exchange translation - - - (16) - (16) ----------- ------------ ---------------- ---------------- ------------ ----------- - TOTAL COMPREHENSIVE INCOME - - 335 (11) - 324 ----------- ------------ ---------------- ---------------- ------------ ----------- Employee stock plan 0.8 issuance and other - 54 (97) - 173 130 - Dividends ($1.40 per share) - - (44) - - (44) (0.8) Purchases of treasury stock - - - - (207) (207) ================ =============================== =========== ============ ================ ================ ============ =========== 31.5 Balance, January 2, 1998 32 805 822 (12) (184) 1,463 - Net income - - 14 - - 14 - Unrealized gain on securities - - - 1 - 1 - Foreign exchange translation - - - (6) - (6) ----------- ------------ ---------------- ---------------- ------------ ----------- - TOTAL COMPREHENSIVE INCOME - - 14 (5) - 9 ----------- ------------ ---------------- ---------------- ------------ ----------- - Distribution to shareholders - - (2,715) 24 - (2,691) Shares issued to Sodexho-- 29.9 related to the Acquisition 30 549 - - - 579 Employee stock plan 0.6 issuance and other - (32) (56) - 160 72 - Dividends ($0.36 per share) - - (11) - - (11) (0.1) Purchases of treasury stock - - - - (35) (35) - Cancellation of treasury stock - - - - 59 59 ================ =============================== =========== ============ ================ ================ ============ =========== 61.9 Balance, August 28, 1998 62 1,322 (1,946) 7 - (555) - Net income - - 51 - - 51 Reclassification of gain - realized in net income, net - - - (5) - (5) - Foreign exchange translation - - - 1 - 1 - Other - - - (1) - (1) ----------- ------------ ---------------- ---------------- ------------ ----------- - TOTAL COMPREHENSIVE INCOME - - 51 (5) - 46 ----------- ------------ ---------------- ---------------- ------------ ----------- Adjustment of distribution to - shareholders - - 11 - - 11 Employee stock plan 0.4 issuance and other - 4 - - - 4 ================ =============================== =========== ============ ================ ================ ============ =========== 62.3 Balance, September 3, 1999 62 1,326 (1,884) 2 - (494) - Net income - - 63 - - 63 ----------- ------------ ---------------- ---------------- ------------ ----------- - TOTAL COMPREHENSIVE INCOME - - 63 - - 63 ----------- ------------ ---------------- ---------------- ------------ ----------- Conversion of convertible 0.8 subordinated debt 1 19 - - - 20 - Dividends ($0.08 per share) - - (5) - - (5) Employee stock plan 0.1 issuance and other - 3 - - - 3 - ---------------- ------------------------------- ----------- ------------ ---------------- ---------------- ------------ ----------- 63.2 Balance, September 1, 2000 $63 $1,348 $(1,826) $ 2 $ - $ (413) ================ =============================== =========== ============ ================ ================ ============ ===========
See Notes to Consolidated Financial Statements. -28- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North America of outsourced food and facilities management services to businesses, health care facilities, colleges and universities, and primary and secondary schools. Food services include food and beverage procurement, preparation and menu planning, as well as the operation and maintenance of food service and catering facilities, generally on a client's premises. Facilities management services include plant maintenance, energy management, grounds keeping, and housekeeping and custodial services. The Company was formerly named Marriott International, Inc. ("MI"). Upon consummation of the Distribution, Acquisition and Refinancing (collectively, the "Transactions"), which occurred on March 27, 1998, the last day of the first quarter of 1998, Marriott International, Inc. was renamed Sodexho Marriott Services, Inc. As of March 27, 1998, the principal business of the Company changed from lodging and contract services to food and facilities management services. In connection with the Distribution and Acquisition, the Company began a restructuring and refinanced its debt. The Transactions are explained in detail in Notes 2, 3, and 4. All material intercompany transactions and balances between Sodexho Marriott Services, Inc., and its consolidated subsidiaries have been eliminated. Certain amounts previously presented have been reclassified to conform to the current presentation. Additionally, related to the Distribution on March 27, 1998, the Company has combined the results of operations, cash flow and balance sheet items of the lodging segment as "Discontinued Operations" for all periods presented (see "Distribution" below and Note 2). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Accordingly, ultimate results could differ from those estimates. DISTRIBUTION On March 27, 1998, the Company completed the Distribution to its shareholders, on a pro rata basis, of all outstanding shares of New Marriott MI, Inc. ("New Marriott"), a wholly owned subsidiary of the Company, in a tax-free distribution (the "Distribution"). New Marriott conducted the lodging (including timeshare resort development and operation), senior living services and distribution service businesses previously conducted by the Company and changed its name to Marriott International, Inc. The remaining line of business was the food service and facilities management business-- Marriott Management Services ("MMS"), which became the principal business of the Company. Immediately after the Distribution, the Company acquired the North American food service and facilities management operations of Sodexho Alliance, S.A. ("Sodexho") in exchange for stock of the Company, with the Company operating the combined food service and facilities management businesses under the name - Sodexho Marriott Services, Inc. As a result of the issuance of new shares of the Company's common stock to Sodexho in connection with the Acquisition, the shareholders who owned 100% of the Company immediately prior to the Distribution owned approximately 51% of the Company thereafter. At the same time, the Company obtained financing arranged by Sodexho, to refinance certain existing indebtedness of the Company. For the purposes of governing certain of the ongoing relationships between MI and the Company after the Distribution and to provide for an orderly transition, MI and the Company entered into various agreements including the Employee Benefits and Other Employment Matters Allocation Agreement, Liquid Yield Option(TM) Notes (LYONs) Allocation Agreement (see Notes 5 and 8), Tax Sharing Agreement, Trademark and Trade Name License Agreement, Noncompetition Agreement, Employee Benefit Services Agreement, Procurement Services Agreement, Distribution Services Agreement and other transitional services agreements. Effective March 27, 1998, these agreements provided, among other things, that MI assumed administration of certain of the Company's employee benefit plans and insurance programs as well as succeed to the Company's liability to LYONs holders under the LYONs Indenture, a portion of which was assumed by the Company. In connection with the Distribution, on October 31, 1997, the Company sold the MMS- UK operations to Sodexho for $50 million in cash. The sale resulted in a pretax loss of $22 million ($14 million after tax, or $0.40 per share) for the year ended January 2, 1998. -29- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. In the latter half of fiscal year 2000, a new procurement system was implemented to improve the tracking and analysis of food procurement activities. A key benefit of this new system is the improved capturing of data regarding the Company's procurement activity. This capability also improves the Company's ability to better match the procurement process to the period in which it occurred, which resulted in the recording of an increase in pretax earnings of $8 million ($5 million after-tax, or $0.07 per diluted share) in the Company's fourth quarter of fiscal year 2000, accounted for as a change in estimate under APB Opinion No. 20-- "Accounting Changes." The Company estimates that approximately $5 million (pretax), or $0.04 per diluted share, of this change in estimate relates to procurement activity prior to fiscal year 2000, with the remainder of this impact being related to enhancements and improved procurement-related efficiencies attributable to fiscal year 2000. REVERSE STOCK SPLIT The Company also combined every four shares of its common stock into one share of the Company's common stock pursuant to a reverse stock split on March 27, 1998. All share and per share data has been adjusted to reflect a one-for-four reverse stock split effective March 27, 1998. FISCAL YEAR On April 15, 1998, the Company's Board of Directors approved a change in the Company's fiscal year from the Friday closest to the end of December to the Friday closest to the end of August, effective immediately. This change resulted in a 34-week transition period (the "Transition Period") from the end of fiscal year 1997 to the end of the new fiscal year on August 28, 1998. Fiscal year 2000 had 52 weeks and ended on September 1, 2000, and fiscal year 1999 had 53 weeks and ended on September 3, 1999. Prior to the 1998 Transition Period, the Company's fiscal year ended on the Friday nearest to December 31. The 1997 fiscal year included 52 weeks and ended on January 2, 1998 ("fiscal year 1997" or "1997"). REVENUE RECOGNITION AND ACCOUNTS AND NOTES RECEIVABLE Revenues are recognized at the time services are rendered or products are delivered. Revenues include reimbursements for food and payroll costs incurred on behalf of customers under contracts in which the Company manages food service programs for a fee. Losses, if any, are provided for at the time management determines the cost will ultimately exceed contract revenue for the duration of the contract. The allowance for doubtful accounts was $23 million and $21 million as of September 1, 2000 and September 3, 1999, respectively. Concentration of credit risk within accounts receivable is limited because a large number of customers make up the Company's customer base, thus spreading risk associated with trade credit. In addition, the Company closely monitors its accounts receivable. The Company generally does not require collateral and maintains reserves for potential uncollectible amounts, which, in the aggregate, have not exceeded management's expectations. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of undiscounted expected future cash flow is less than the carrying amount of long-lived assets, the Company recognizes an impairment loss based on the amount by which the carrying amount of the asset exceeds the fair value of the asset. -30- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED INTEREST-RATE AGREEMENTS The Company's policies prohibit the use of derivative instruments for trading purposes and procedures are in place to monitor and control their use. The use of derivative instruments is limited to interest-rate agreements for the purpose of reducing the variability of the Company's debt costs. The majority of these agreements were entered into in conjunction with the issuance of the debt they were intended to modify. The notional balances of these agreements represent a balance used to calculate the exchange of cash flows and are not assets or liabilities of the Company, in addition to not representing an exposure to credit loss. The notional amount and interest payment of these agreements match the cash flows of the related debt. Accordingly, any market risk or opportunity associated with these agreements is offset by the opposite market impact on the related debt. The Company's credit risk related to interest-rate agreements is considered low because they are entered into only with strong creditworthy counterparties and are generally settled on a net basis. The difference paid or received on interest-rate agreements is recognized as an adjustment to interest expense. See Note 8 for the notional amounts, related interest rates, maturities, and fair values of these interest-rate agreements. INCOME TAXES The Company recognizes deferred tax assets and liabilities based upon the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities and operating loss and tax credit carryforwards. EXTRAORDINARY ITEM On March 27, 1998, the Company recognized an extraordinary charge of $71 million ($44 million after the related income tax benefit of $27 million) in connection with the redemption and defeasance of the Secured Debt. This loss comprised premiums totaling $67 million paid for the redemptions and $4 million of financing costs. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted-average number of outstanding common shares. Diluted earnings per share is computed by dividing net income by the diluted weighted-average number of outstanding common shares, and includes the affect of the Company's employee stock option plan, the deferred stock incentive plan and the convertible subordinated debt securities. In addition, on March 27, 1998, the Company's common stock underwent a one-for-four reverse stock split. Earnings per share computations have been restated to reflect this reverse stock split. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. The Company uses drafts in its cash management system. At September 1, 2000, the Company had $134 million of outstanding drafts included in accounts payable, compared with outstanding draft totals of $83 million at September 3, 1999. INVENTORIES Inventories consist of food items and supplies, which are stated at the lower of average cost or market, generally using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 40 years. Replacements and improvements are capitalized. Leasehold improvements, net of estimated residual value, are amortized over the shorter of the useful life of the asset or the lease term. -31- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED INTANGIBLE ASSETS Intangible assets primarily consist of goodwill and customer relationships. Intangible assets are amortized on a straight-line basis over periods generally ranging from 30 to 40 years for goodwill and 10 to 20 years for customer relationships. Amortization expense for continuing operations totaled $37 million in fiscal year 2000, $38 million in fiscal year 1999, $26 million for the Transition Period ended August 28, 1998, and $25 million in fiscal year 1997. Amortization expense for discontinued operations totaled $8 million for the Transition Period ended August 28, 1998 and $42 million in fiscal year 1997. OTHER ASSETS Included in other assets are client investments, which generally represent amounts provided by the Company to clients at contract inception for the purchase of property and equipment pertaining to the contract. These amounts are amortized over the life of the related contract. When a contract terminates prior to its scheduled termination date, the client generally must repay any unamortized client investment balance to the Company. INSURANCE Except for the period of October 1, 1997 to March 27, 1998, the Company is partially self-insured for certain levels of workers' compensation, general liability, employment practices and employee medical coverage. Self-insurance levels are the result of the Company using certain insurance programs that include higher deductibles for the Company, resulting in the Company being "self-insured" for claims below the deductible levels. Estimated costs for these self-insurance programs are accrued at the present value (discounted at a rate of 6% at fiscal year end 2000) of projected settlements for known and anticipated claims. Self-insurance liabilities of the Company amounted to $75 million at September 1, 2000 and $89 million at September 3, 1999. The Company was fully insured for most claims occurring during the period of October 1, 1997 to March 27, 1998, as the Company placed certain insurance programs with third-party providers during the period. ACCUMULATED OTHER COMPREHENSIVE INCOME Comprehensive income entails reporting certain financial activity typically disclosed in stockholders' deficit as an adjustment to net income in determining total comprehensive income. Items applicable to the Company include activity in foreign exchange translation adjustments and securities available for sale under SFAS No. 115. Items identified as comprehensive income are reported in the Consolidated Balance Sheet and the Consolidated Statement of Stockholders' Deficit, under separate captions. Results for the Canada division are translated to U.S. dollars using the average exchange rates during the period. Assets and liabilities are translated using the exchange rate in effect at the applicable balance sheet date, and resulting translation adjustments are reflected in stockholders' deficit as accumulated other comprehensive income. Total accumulated other comprehensive income for fiscal year 2000 included $3 million of gross foreign exchange translation gains, net of taxes totaling $1 million, unchanged from fiscal year 1999. For fiscal year 2000, total comprehensive income was comprised of $63 million in net income. During fiscal year 1999, total comprehensive income was comprised of $51 million in net income and $2 million of gross foreign exchange translation gains, net of taxes totaling $1 million, partially offset by the reclassification of the realized gain on the sale of investment totaling $8 million pretax, net of taxes totaling $3 million. Total comprehensive income for the 34 weeks ended August 28, 1998, included $14 million in net income, partially offset by $10 million of gross foreign exchange translation losses, net of taxes totaling $4 million. For fiscal year 1997, total comprehensive income was comprised of $335 million in net income and $9 million of gross securities gain adjustments, net of taxes totaling $4 million, partially offset by $26 million of gross foreign exchange translation losses, net of taxes totaling $10 million. SEGMENT REPORTING Information from operating segments is derived from methods used by the Company's management to allocate resources and measure performance. The Company does not have any material activity outside of the United States and does not presently analyze it operations by geographic regions. In addition, the Company offers a wide array of food and facilities products within its operations, customized to individual client's requirements, and thus the Company's management has not found it practical to track results by individual products or services in relationship to the financial statements presented in this report. -32- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED NEW ACCOUNTING STANDARDS On September 2, 2000, the Company adopted Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS No. 133"). In accordance with the provisions in SFAS No. 133, the Company has designated all of its interest rate swap agreements as cash flow hedges. The Company has determined that these interest rate swap agreements are highly effective in offsetting the variable interest cash flows of the Company's debt portfolio. The interest rate swap agreements will be recorded on the balance sheet at fair value in other assets (or other liabilities) with the offsetting entry to accumulated other comprehensive income, a component of stockholders' deficit for the effective portion of the hedge. The ineffective portion of the hedge will be recorded directly to the statement of income. The fair value of the interest rate swap contracts were approximately $15 million (pretax) in the aggregate as of September 1, 2000 (see Note 8). There were no net gains or losses on derivatives that had previously been deferred or gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of the hedged items. Currently, the Company does not have any other financial contracts which contain embedded derivatives or fair value hedge relationships which would fall within the scope of SFAS No. 133. (2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS THE DISTRIBUTION On March 27, 1998, the Company distributed to its shareholders, on a pro rata basis, all outstanding shares of New Marriott MI, Inc., a wholly owned subsidiary of the Company, in a tax-free distribution (the "Distribution"). New Marriott MI, Inc., subsequently renamed Marriott International, Inc. (together with subsidiaries, "MI") conducts business in the lodging segment and two of the three lines of business in the contract services segment - Marriott Senior Living Services ("MSLS") and Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS businesses are collectively referred to as Distributed Operations. The third line of business in the contract services segment, Marriott Management Services ("MMS"), has become the principal business of the Company. DISCONTINUED OPERATIONS As a result of the Distribution, the Consolidated Financial Statements and Notes thereto have been restated to present the lodging segment distributed to shareholders as Discontinued Operations. The MDS, MSLS and MMS business make up the "Contract Services" segment in the historical financial statements of the Company. Thus, the distributed operations of MSLS and MDS are presented as continuing operations prior to the date of distribution, March 27, 1998. Discontinued Operations, Net of Income Taxes, is comprised of the following:
34 WEEKS ENDED AUGUST 28, 1998 1997 ------------------- ------------------- ($ in millions, except per share amounts) Sales $ 1,774 $7,008 Income Before Income Taxes $ 158 $ 569 Income Taxes (64) (234) ------------------- ------------------- Income -Discontinued Operations $ 94 $ 335 Costs Associated with Effecting the Distribution $ (28) - Income Taxes 11 - ------------------- ------------------- Net Costs Associated with Effecting the Distribution $ (17) $ - ------------------- ------------------- Discontinued Operations, Net of Income Taxes $ 77 $ 335 =================== =================== Basic Earnings Per Share $ 1.48 $10.53 Diluted Earnings Per Share $ 1.48 $10.53
Results of discontinued operations in 1998 included a pretax charge of $28 million relating to the Distribution detailed above, and was comprised of legal, administrative and accounting costs to consummate the Distribution. Net identifiable assets of the Lodging segment totaled $2.90 billion as of the end of fiscal year 1997 (see Note 14). -33- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (3) ACQUISITION On March 27, 1998, Sodexho transferred to the Company the operations of Sodexho North America having a fair market value of $278 million, combined with a cash payment of $304 million, in exchange for 29.9 million shares of the Company's common stock, after giving effect to the one-for-four reverse stock split (see Notes 1 through 4). The purchase price included approximately $3 million in transaction costs. As a result of the issuance of new shares of the Company's common stock to Sodexho in connection with the Acquisition, the shareholders who owned 100% of the Company immediately prior to the Distribution owned approximately 51% immediately thereafter. The Acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated to the fair market value of assets acquired and liabilities assumed as follows: ($ in millions) ----------------- Current assets $ 142 Other assets 56 Customer relationships 122 Current liabilities (137) Payable to Sodexho for excess net tangible assets (17) Other liabilities (46) Debt (73) Deferred taxes, net (8) Goodwill 239 ----------------- Subtotal 278 Cash contributed to the Company 304 ----------------- Total purchase price $ 582 ================= Pro forma results of the Company, assuming the Acquisition had been made at the beginning of the periods presented are shown below: PRO FORMA UNAUDITED RESULTS OF OPERATIONS
34 WEEKS ENDED 52 WEEKS ENDED AUGUST 28, 1998 JANUARY 2, 1998 -------------------- -------------------- ($ in millions, except per share amounts) SALES $2,716 $4,163 OPERATING COSTS AND EXPENSES 2,574 3,908 -------------------- -------------------- OPERATING PROFIT BEFORE CORPORATE ITEMS 142 255 Corporate expenses and amortization of intangible assets (68) (116) Interest expense, net (57) (87) -------------------- -------------------- INCOME BEFORE INCOME TAXES 17 52 Provision for income taxes (8) (25) -------------------- -------------------- PRO FORMA NET INCOME $ 9 $ 27 ==================== ==================== PRO FORMA EARNINGS PER SHARE: BASIC $0.14 $0.43 ==================== ==================== DILUTED $0.14 $0.43 ==================== ====================
Pro forma sales include the combined actual sales of the food and facilities management services business of MMS and Sodexho North America. Pro forma operating profit before corporate expenses and interest reflects the pro rata amount of approximately $16 million of annual amortization expense for the intangible assets related to the Acquisition. Pro forma corporate expenses include the combined corporate overhead of both businesses. No synergies were assumed and integration and restructuring costs totaling $31 million have been excluded from the 34 weeks ended August 28, 1998 results. However, an estimate of $6 million in annual costs were included on a pro rata basis in all periods presented until the date of the Transactions, representing the incremental costs to operate as a separate public entity. -34- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (3) ACQUISITION, CONTINUED For the 52 weeks ended January 2, 1998, the loss from the sale and operations of the MMS- UK operations sold to Sodexho in October 1997 have been excluded from the results presented. Pro forma interest expense, net, represents the estimated costs as if the Refinancing and the interest-rate agreements had been in place on the first day of both periods presented. An effective income tax rate of 48% and 49% were used for the Transition Period and the prior period, respectively. Pro forma results do not include the extraordinary item related to the Refinancing. Pro forma basic earnings per share were calculated on a share base of 61.9 million for both periods presented, which represents the number of shares outstanding on August 28, 1998. Pro forma diluted earnings per share were calculated on a share base of 62.6 million for both periods presented. The dilutive shares are due to stock option plans, deferred stock incentive plans, and convertible debt outstanding. (4) INTEGRATION AND RESTRUCTURING Integration and restructuring actions taken in fiscal year 1999 and the Transition Period ended August 28, 1998 reflect the undertaking by the Company to integrate and realign resources for more effective and efficient execution of operating strategies. Integration costs totaled $16 million during fiscal year 1999 and $24 million during the Transition Period. The integration costs include, among other items, training and relocating of former MMS employees, incremental overhead during the integration phase, systems modifications, and other one-time costs. Restructuring costs represent employee termination benefits, office closure expenditures, and other costs related to a restructuring plan initiated from the Transactions. The acquisition reserve, which totaled $2 million at September 1, 2000, generally represents the estimated cost of termination benefits for approximately 350 former Sodexho North America employees as well as the estimated cost for the closure of certain Sodexho North America offices. Acquisition reserve activity is detailed below:
BALANCE AS OF BALANCE AS OF SEPTEMBER 3, 1999 PAYMENTS SEPTEMBER 1, 2000 --------------------- -- ------------- -- --------------------- ($ in millions) Employee Terminations $2.4 $(2.4) $ -- Relocation of Sodexho Facilities 0.7 (0.5) 0.2 Closures 1.9 (1.4) 0.5 Other Restructuring 2.6 (1.8) 0.8 --------------------- ------------- --------------------- Total $7.6 $(6.1) $1.5 ===================== ============= =====================
In addition, integration and restructuring expenses recorded in the Consolidated Statement of Income during fiscal year 1999 and the Transition Period are detailed below. No integration and restructuring costs were recorded in the Consolidated Statement of Income during fiscal year 2000. Also, no restructuring expenses were recorded in fiscal year 1999.
FISCAL YEAR 34 WEEKS ENDED 1999 AUGUST 28, 1998 ---------------------- --------------------- ($ in millions) Integration: Duplicate Overhead $ 7.2 $ 9.4 MMS Relocation 0.3 1.7 Training Systems 1.1 1.3 Other 7.0 12.0 Restructuring: Employee Terminations -- 2.2 Closures -- 2.1 Other -- 2.4 ---------------------- --------------------- Total $15.6 $31.1 ====================== =====================
-35- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND SODEXHO ALLIANCE, S.A. RELATIONSHIP WITH MARRIOTT INTERNATIONAL ("MI") Pursuant to the Distribution agreement (see Note 2), the Company and MI agreed upon the allocation of assets and liabilities related to the MMS business and MI business. The Company and MI also agreed to enter into a number of agreements governing their relationship after March 27, 1998, as described below. TAX SHARING AGREEMENT. The Tax Sharing Agreement by and among the Company, MI and Sodexho Alliance, S.A. ("Sodexho") provides that MI is liable for all taxes of the Company (other than sales, use and property taxes, which are borne by the entities filing such returns) for all periods up to and including March 27, 1998. In addition, the parties have agreed for certain specified periods after the Distribution not to take specific actions that could cause the Distribution not to have Tax-Free Status. EMPLOYEE BENEFITS ALLOCATION AGREEMENT. On September 30, 1997, the Company and MI entered into an Employee Benefits and Other Employment Matters Allocation Agreement providing for the allocation of employees of the Company and obligations and responsibilities regarding compensation, benefits and labor matters. MEDICAL AND OTHER WELFARE BENEFITS PLANS. MI assumed the administration of the Company's medical, dental, short-term disability, vacation and group term life insurance plans incurred before March 27, 1998 by MI employees, the Company's employees and former employees. The Company established and maintains separate medical, dental, short-term disability, vacation and group term life insurance plans for its employees after the Distribution. TRADEMARK LICENSE AGREEMENT. As part of the contribution of assets to MI, the Company transferred and assigned to MI all of the Company's right, title and interest in certain trademarks, including the trademarks "Marriott," "Courtyard," "Residence Inns by Marriott" and "Fairfield Inns by Marriott." Pursuant to the terms of the agreement MI generally granted to the Company a limited nonexclusive right to use the "Marriott" name solely in connection with the Company's business as defined in the agreement. For four years after March 27, 1998, the Company is permitted to use the "Marriott" name as part of its corporate name and the names of its principal business divisions. During the term of the license, the Company pays MI a license fee of $1 million per year, payable quarterly in advance. MI may terminate the Trademark License Agreement prior to the expiration of its term under certain conditions. In addition, the Company may terminate this agreement upon 180 days' prior written notice to MI. NONCOMPETITION AGREEMENT. The Company and MI entered into a Noncompetition Agreement generally prohibiting MI from competing in the core business of MMS (as defined) in the United States, Canada and the United Kingdom for a period of four years. However, per the agreement, MI may enter into certain negligible investments (as defined) in businesses that compete with the Company through direct investment or acquisitions. LYONS ALLOCATION AGREEMENT AND SUPPLEMENTAL INDENTURE. The Company had issued $540 million face amount of Liquid Yield Option(TM) Notes ("LYONs"), with an accreted value as of January 2, 1998 of approximately $310 million. Pursuant to the LYONs Allocation Agreement and a supplemental indenture to the LYONs Indenture, MI assumed responsibility for all of the debt obligations evidenced by the LYONs by becoming a successor to the Company in accordance with the terms of the LYONs Indenture. The Company assumed responsibility for a portion of the LYONs equal to its pro rata share based on the relative equity values of the Company and MI, although MI will remain liable for any payments that the Company fails to make on its allocable portion. On October 7, 1999, Marriott International notified all holders of the LYONs, that Marriott International had elected to redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount at maturity of the LYONs, redeemed on November 8, 1999--See Note 8. ADDITIONAL AGREEMENTS BETWEEN THE COMPANY AND MI. In connection with the Distribution agreement, the Company and MI (or a subsidiary of MI) have entered into a number of additional agreements providing for the delivery of certain transitional and other services between the companies. The terms and conditions of these agreements were negotiated by the parties bargaining at arm's length. Absent the Transactions, the Company believes that it may have been able to negotiate more favorable terms with outside parties on certain of these agreements. However, the Company further believes the terms of these agreements are within the range of the prevailing markets for such services. -36- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (5) RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND SODEXHO ALLIANCE, S.A., CONTINUED Such additional agreements include agreements regarding payroll processing, benefits administration, procurement, distribution, information technology, and office space and related facilities management in the MI corporate headquarters (see Note 2). Under these agreements, services provided by MI to be paid by the Company as well as services provided by the Company to be paid by MI (excluding pass-through product costs) were approximately $64 million and $4 million, respectively, for fiscal year 2000, with $65 million and $4 million, respectively, for fiscal year 1999. Services performed by MI for the 1998 22-week period ended August 28, 1998 totaled approximately $25 million, with services provided by the Company totaling $2 million during the same period. As part of the Transactions, the Company entered into an agreement with MI that established a reasonable amount of adjusted net tangible assets (as defined in the agreement) for the operations that were not part of the Distribution immediately prior to the consummation of the Transactions. This agreement provided that the Company would pay MI the amount by which the adjusted net tangible assets total was greater than $103 million, estimated at March 27, 1998 to be $29 million payable to MI. This amount was arbitrated and paid in fiscal year 1999 for a reduced amount totaling $19 million, mostly the result of adjustments related to deferred taxes. RELATIONSHIP WITH SODEXHO ALLIANCE, S.A. ("SODEXHO") ROYALTY AGREEMENT AND ASSISTANCE AGREEMENT. The Company and Sodexho entered into a Royalty Agreement and an Assistance Agreement effective March 27, 1998. Pursuant to these agreements, the Company has the right to use the name "Sodexho" in connection with its operations in the United States and Canada for a period of 10 years, for a royalty payment equal to 0.05% of the annual gross revenues of the Company during the first three years of the Royalty Agreement. Thereafter, Sodexho and the Company will negotiate in good faith to determine the royalty fee, based on fair market value. The Royalty Agreement may be terminated by the Company at any time after Sodexho owns less than 10% of the outstanding Common Stock of the Company. Sodexho may terminate the Royalty Agreement prior to the expiration of its term under certain circumstances. Payments made to Sodexho were $2 million in both fiscal year 2000 and fiscal year 1999. Payments made to Sodexho for the 1998 22-week period ended August 28, 1998 totaled approximately $1 million. The Assistance Agreement sets forth certain services provided by Sodexho to the Company, including services related to purchasing activities, catering and site support services, marketing, management and administration, legal and financial matters, human relations, communications and cash management. In exchange for these services, the Company pays to Sodexho a fee equal to a percentage of the annual gross revenues of the Company and its subsidiaries. Pursuant to the terms of the Assistance Agreement, no fee was owed during the 22-week period ended August 28, 1998. Payments from the Company to Sodexho associated with the performance of services were approximately $7 million in fiscal year 2000 and $2 million in fiscal year 1999. OTHER ARRANGEMENTS. Sodexho has agreed to guarantee the following: (i) the payment when due of certain deferred compensation amounts payable by the Company to the Company's employees, (ii) the obligations of the Company under the LYONs allocation agreement and the LYONs indenture (see Note 8), (iii) obligations with respect to certain insurance costs that are set forth in the Distribution agreement, and (iv) Senior Credit Guarantee Facility (see Note 8) where Sodexho has guaranteed the Company's obligation under a $620 million credit facility in exchange for a guarantee fee equal to 0.50% per annum ($3 million pretax) of the outstanding principal amount of indebtedness. In addition, the Company and Sodexho entered into a stockholder agreement covering certain corporate governance matters and that grants Sodexho certain registration rights with respect to stock of the Company held by Sodexho as well as certain rights to nominate members of the Company's Board of Directors. As part of the Acquisition, the Company entered into an agreement with Sodexho that established a reasonable amount of adjusted net tangible assets (as defined in the agreement) of the acquired operations immediately prior to the consummation of the Acquisition. This agreement provided that the Company would pay Sodexho the amount by which the adjusted net tangible assets total was less than a negative $35 million, estimated on March 27, 1998 to be $20 million payable to Sodexho. As a result of negotiations between Sodexho and the Company, this amount was paid in fiscal year 1999 for a reduced amount totaling $17 million. -37- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (6) PROPERTY AND EQUIPMENT
2000 1999 ------------------ ------------------ ($ in millions) Land $ 1 $ 1 Buildings and leasehold improvements 14 14 Furniture and equipment 247 233 Construction in progress 10 9 ------------------ ------------------ 272 257 Accumulated depreciation and amortization (176) (172) ------------------ ------------------ $ 96 $ 85 ================== ==================
Property and equipment is recorded at cost, including interest, rent and real estate taxes incurred during development and construction. Interest capitalized for continuing operations was not material for all periods presented. Interest capitalized for discontinued operations totaled $16 million in 1997. Replacements and improvements that extend the useful life of property and equipment are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the asset life or lease term. (7) INTANGIBLE ASSETS
2000 1999 ------------------ ------------------ ($ in millions) Customer relationships $ 461 $ 461 Goodwill 374 375 Other 23 23 ------------------ ------------------ 858 859 Accumulated amortization (361) (324) ------------------ ------------------ $ 497 $ 535 ================== ==================
Amortization expense for continuing operations totaled $37 million for fiscal year 2000, $38 million for fiscal year 1999, $26 million for the 34 weeks ended August 28, 1998, and $25 million in 1997. Amortization expense for discontinued operations totaled $8 million for the 34 weeks ended August 28, 1998, and $42 million in 1997. -38- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (8) DEBT
SEPTEMBER 1, 2000 SEPTEMBER 3, 1999 --------------------- --------- --------------------- ($ in millions) SHORT-TERM DEBT: Current Portion of Long-Term Debt $ 80 $ 80 Senior Secured Revolving Credit Facility - 52 Other 1 1 --------------------- --------- --------------------- Total $ 81 $ 133 ===================== ========= ===================== LONG-TERM DEBT: Senior Secured Credit Facility, maturing 2004 averaging 6.94% in 2000 $ 350 $ 430 Senior Guaranteed Credit Facility, due 2005 averaging 6.99% in 2000 620 620 Unsecured debt: Senior Debt, maturing through 2009 averaging 7.07% in 2000 6 6 Other 1 1 Capital Lease Obligations 3 3 --------------------- --------- --------------------- Total $ 980 $1,060 Amount Reclassified to Short-Term Debt (80) (80) --------------------- --------- --------------------- $ 900 $ 980 ===================== ========= =====================
Senior Secured Credit Facility-- the senior secured credit facility consists of $235 million of revolving credit and an additional $500 million, six-year term loan facility. Interest is based on a bank prime rate, an amount over the Federal funds rate, or an amount over the London interbank offered rate for Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At September 1, 2000, the Company was paying a rate of 6.90% on the term loan facility, adjusted for fee amortization and hedging costs. The senior secured credit facility is secured predominantly by inventory and accounts receivable of the Company. Up to $100 million of the $235 million revolving credit may be used to collateralize letters of credit, which totaled $21 million at September 1, 2000 and $33 million at September 3, 1999. At September 1, 2000, $214 million of this facility was not used and was available to the Company, compared with $150 million at September 3, 1999. Senior Guaranteed Credit Facility-- the senior guaranteed credit facility consists of a $620 million seven-year term loan. Interest is based on a bank prime rate, an amount over the Federal funds rate, or an amount over LIBOR, payable in arrears quarterly. At September 1, 2000, the Company was paying a rate of 6.99% on this facility, adjusted for fee amortization and hedging costs and including an annual guarantee fee of 0.5% ($3 million pretax) paid to Sodexho for this facility (see Note 5). Aggregate debt maturities, excluding capital lease obligations, are: 2001 - $80 million; 2002 - $90 million; 2003 - $115 million; 2004 - $65 million and $627 million thereafter. The Company's debt agreements require the maintenance of certain financial ratios and stockholders' equity balances, and also include, among other things, limitations on additional indebtedness, certain acquisitions, dividend payments, pledging of assets, and other restrictions on operations related to cash flow. The Company met the financial covenants of the debt agreements as of September 1, 2000 and the year then ended, September 3, 1999 and the year then ended, as well as August 28, 1998 and for the 22 weeks then ended. -39- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (8) DEBT, CONTINUED CONVERTIBLE SUBORDINATED DEBT On March 25, 1996, the Company issued $540 million (principal amount at maturity) of zero coupon convertible subordinated debt in the form of Liquid Yield Option(TM) Notes ("LYONs") due 2011. Each $1,000 LYON was convertible at any time, at the option of the holder, into 8.76 shares of the Company's Common Stock. The LYONs were issued at a discount representing a yield to maturity of 4.25%. The Company recorded the LYONs at the discounted amount at issuance. Accretion was recorded as interest expense and an increase to the carrying value. Gross proceeds from the LYONs issuance were $288 million. Upon consummation of the Distribution, each LYON was convertible into 2.19 shares of the Company's common stock (after giving effect to a one-for-four reverse stock split), as well as 17.52 shares of MI's Common Stock. The LYONs were assumed by MI, and the Company assumed responsibility for a portion of the LYONs equal to its pro rata share of the relative equity values of the Company and MI as determined in good faith by the Company prior to the Distribution, although MI had remained liable to the holders of the LYONs if the Company had failed to make any payments on its allocable portion. The Company's allocated portion of the LYONs totaled $30 million at the end of fiscal year 1999. On October 7, 1999, MI notified all holders of the LYONs, that MI would redeem on November 8, 1999 all of the LYONs at a price of $619.65 for each $1,000 principal amount at maturity of the LYONs. The result of the redemption for the Company was the issuance of approximately 760,000 common shares and a payment of $11 million to MI for the Company's share of bondholders choosing to redeem in cash. INTEREST-RATE AGREEMENTS At September 1, 2000, the majority of the Company's debt was payable at variable rates of interest. As part of the Refinancing of the Company's debt, the Company entered into several interest-rate agreements on May 29, 1998 totaling $900 million in notional principal balances to hedge a portion of its variable rate debt. These agreements guarantee a fixed rate of interest over the life of the agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%, plus a residual margin that is not hedged relating to the underlying variable-rate debt. The weighted-average rate for the total debt portfolio, including the effect of the interest-rate agreements, was 7.01% at September 1, 2000. These agreements expire between May 2001 and February 2005. Details of these interest rate agreements as of September 1, 2000 are as follows:
YEAR-TO-DATE NET IMPACT NOTIONAL WEIGHTED-AVERAGE TO EARNINGS- PRINCIPAL FAIR INTEREST RATE FY 2000 TERMS BALANCE VALUE* PAID RECEIVED (PRETAX) - --------------------------------------------------- ------------- ----------- ------------- ------------- ----------------- ($ in millions) Receive Variable, Pay Fixed, Maturing 5/01--8/01 $400 $ 3 5.73% 6.83% $ 2 Receive Variable, Pay Fixed, Maturing 8/02 300 5 5.84% 6.83% 1 Receive Variable, Pay Fixed, Maturing 2/05 200 7 5.90% 6.83% -- ------------- ----------- ------------- ------------- ----------------- $900 $15 5.80% 6.83% $ 3 ============= =========== ============= ============= ================= *-- based on the termination cost for these agreements obtained from third party market quotes.
At September 1, 2000, the Company did not have any material accrued interest receivable or payable to its counterparties and did not have any unamortized fees or premiums under these agreements. All of the Company's interest-rate agreements are for purposes other than trading. -40- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (9) STOCKHOLDERS' DEFICIT STOCKHOLDERS' DEFICIT The Company is authorized to issue three hundred million shares of the Company's common stock, with a par value of $1 per share. One million shares of preferred stock, without par value, are authorized, with none issued. At the Distribution, each shareholder received one share of the Company's stock and one share of New Marriott, Inc. stock (renamed Marriott International, Inc.). In addition, the Company's stock underwent a one-for-four reverse stock split on March 27, 1998. Prior to the Distribution, the Company's charter authorized the issuance of seventy-five million shares of the Company's common stock, with a par value of $1 per share, with one million shares of preferred stock, without par value, authorized, with none issued. In addition, on March 27, 1998, the Company issued to Sodexho Alliance, S.A., approximately 48% of its shares of common stock, representing 29.9 million shares (after the effect of the reverse stock split), in exchange for $304 million in cash and the operations of Sodexho North America (see Note 3). At September 1, 2000, the Company had 63,244,970 shares outstanding. On July 23, 1993, the Company's Board of Directors adopted a shareholder rights plan under which one preferred stock purchase right was distributed for each share of Company common stock. Each right entitles the holder to buy 1/1000th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $150. The rights will be exercisable ten days after a person or group acquires beneficial ownership of 20 percent or more of the Company's common stock, or begins a tender or exchange offer for 30 percent or more of the Company's common stock. Shares owned by a person or group on September 30, 1993 and held continuously thereafter are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on the tenth anniversary of the adoption of the Company's shareholder rights plan, unless exercised or previously redeemed by the Company for $.01 each. If the Company is involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right. The shareholder rights plan continued in effect after the Distribution and was amended to exempt shares acquired by Sodexho and its affiliates. A program to repurchase the Company's common stock, up to 5.1 million shares, was terminated with the consummation of the Transactions. On October 13, 1999, the Board of Directors declared an $0.08 per common share dividend for fiscal year 1999, paid on December 10, 1999, to shareholders of record on November 22, 1999. The payment and amount of cash dividends on the Company's common stock will continue to be subject to the sole discretion of the Company's Board, which will review the Company's dividend policy at such times as may be deemed appropriate. The Board will continue to closely monitor the results of the Company's operations, capital requirements, and other considerations to determine the extent to which a dividend may be declared in future periods. -41- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (9) STOCKHOLDERS' DEFICIT, CONTINUED EARNINGS PER SHARE The following table details earnings and number of shares used in the basic and diluted earnings per share calculations.
34 WEEKS ENDED AUGUST 28, 2000 1999 1998 1997 --------------- -------------- --------------- --------------- (in millions, except per share amounts) COMPUTATION OF BASIC EARNINGS PER SHARE: Net Income (Loss) from Continuing Operations $ 63 $ 51 $ (19) $ -- Net Income from Discontinued Operations -- -- 77 335 Net Loss from Extraordinary Item -- -- (44) -- --------------- -------------- --------------- --------------- Net Income $ 63 $ 51 $ 14 $ 335 =============== ============== =============== =============== Weighted Average Shares Outstanding 63.0 62.1 52.0 31.8 =============== ============== =============== =============== Basic Earnings Per Share: Continuing Operations $1.01 $0.82 $(0.36) $ -- Discontinued Operations -- -- 1.48 10.53 Extraordinary Item -- -- (0.85) -- --------------- -------------- --------------- --------------- BASIC EARNINGS PER SHARE $1.01 $0.82 $ 0.27 $10.53 =============== ============== =============== =============== COMPUTATION OF DILUTED EARNINGS PER SHARE: Diluted Net Income (Loss) from Continuing Operations $63.4 $51.0 $(19.0) $ -- Diluted Net Income from Discontinued Operations -- -- 77.0 335.0 Diluted Net Loss from Extraordinary Item -- -- (44.0) -- After-tax Interest Expense on Convertible Subordinated Debt 0.1 0.7 * * --------------- -------------- --------------- --------------- Diluted Net Income $63.5 $51.7 $ 14.0 $335.0 =============== ============== =============== =============== Weighted Average Shares Outstanding 63.0 62.1 52.0 31.8 Effect of Dilutive Securities: Employee Stock Option Plan 0.2 0.5 * * Deferred Stock Incentive Plan 0.1 0.1 * * Convertible Subordinated Debt 0.2 1.2 * * --------------- -------------- --------------- --------------- Diluted Weighted Average Shares Outstanding 63.5 63.9 52.0 31.8 =============== ============== =============== =============== Diluted Earnings Per Share: Continuing Operations $1.00 $0.81 $(0.36) $ -- Discontinued Operations -- -- 1.48 10.53 Extraordinary Item -- -- (0.85) -- --------------- -------------- --------------- --------------- DILUTED EARNINGS PER SHARE $1.00 $0.81 $ 0.27 $10.53 =============== ============== =============== =============== *--The effect of dilutive securities is computed using the treasury stock method and average market prices during the periods. The if-converted method is used for convertible subordinated debt ("debt securities"). For the 34 weeks ended August 28, 1998 and for fiscal year 1997, dilutive securities under the employee stock option plan (of 0.6 million and 1.1 million, respectively), the deferred stock incentive plan (of 0.1 million and 0.7 million, respectively) and the debt securities (of 1.2 million in both periods) were excluded due to the loss from continuing operations.
Certain employee and deferred stock options to purchase shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares as follows:
34 WEEKS ENDED AUGUST 28, 2000 1999 1998 1997 ------------- ------------- ------------- ------------- Weighted average number of shares (in millions) 5.4 1.8 0.6 0.6 Weighted average exercise price $22 $29 $29 $272 Weighted average remaining life (in years) 8 9 10 15
-42- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (10) INCOME TAXES The (provision) benefit for income taxes from continuing operations was comprised of the following:
34 WEEKS ENDED AUGUST 28, 2000 1999 1998 1997 ---------------- ----------------- ----------------- ---------------- ($ in millions) Current: - Federal $(33) $(36) $19 $12 - Other (6) (10) -- 1 ---------------- ----------------- ----------------- ---------------- (39) (46) 19 13 ---------------- ----------------- ----------------- ---------------- Deferred: - Federal (9) 5 (6) 2 - Other (1) -- -- -- ---------------- ----------------- ----------------- ---------------- (10) 5 (6) 2 ---------------- ----------------- ----------------- ---------------- $(49) $(41) $13 $15 ================ ================= ================= ================
A reconciliation of the Federal statutory tax rate to the Company's effective income tax rate follows:
34 WEEKS ENDED AUGUST 28, 2000 1999 1998 1997 ---------------- ----------------- ----------------- ---------------- Federal statutory tax rate (35.0)% (35.0)% 35.0 % 35.0 % State income taxes, net of Federal tax benefit (4.8) (6.3) (1.3) 6.8 Tax credits 0.9 1.5 13.7 90.5 Goodwill amortization (3.1) (3.9) (6.9) (24.7) Other, net (1.5) (1.1) 0.1 (8.7) ---------------- ----------------- ----------------- ---------------- Effective income tax rate (43.5)% (44.8)% 40.6 % 98.9 % ================ ================= ================= ================
The tax effect of significant temporary differences is as follows:
2000 1999 --------------------- ---------- --------------------- ($ in millions) Self-insurance $ 29 $ 38 Employee benefits 28 28 Other liabilities 16 15 Property and equipment 2 6 Intangible assets (54) (54) Other, net 10 8 --------------------- ---------- --------------------- Net deferred tax assets $ 31 $ 41 ===================== ========== =====================
Total deferred tax assets and liabilities as of September 1, 2000 and September 3, 1999, were as follows:
SEPTEMBER 1, 2000 SEPTEMBER 3, 1999 --------------------- ---------- --------------------- ($ in millions) Deferred tax assets $ 95 $ 110 Deferred tax liabilities (64) (69) --------------------- ---------- --------------------- Net deferred taxes $ 31 $ 41 ===================== ========== =====================
-43- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (10) INCOME TAXES, CONTINUED The Company has not established a valuation allowance for deferred tax assets. In assessing the realizability of deferred tax assets, management considers the Company's ability to generate sufficient future taxable income during periods in which temporary differences reverse. The amount of net deferred tax assets considered realizable could be reduced if estimated future taxable income cannot be achieved. Management believes it is more likely than not the Company will realize the benefits of its net deferred tax assets. As part of the Distribution and Acquisition, the Company, MI and Sodexho entered into tax sharing agreements which reflect each party's rights and obligations with respect to deficiencies and refunds, if any, of federal, state or other taxes relating to the business of the Company, MI and Sodexho prior to the Transactions (see Note 5). Under these agreements, the Company received approximately $9 million during fiscal year 2000 from Sodexho related to the closing of a tax audit during fiscal year 2000 related to tax returns filed prior to the merger and payments made by the Company in fiscal year 2000 or to be made in subsequent tax years. During fiscal year 2000, the Internal Revenue Service granted the Company permission to change its tax year to correspond to its financial reporting year end, the Friday closest to the end of August, effective for the year ended September 3, 1999. (11) COMMITMENTS AND CONTINGENCIES The Company issues bid and performance bonds for its client-related contracts in the normal course of business. These guarantees are limited, in the aggregate, to $70 million at September 1, 2000, and $56 million at September 3, 1999 and August 28, 1998, with expected funding of zero. Letters of credit outstanding on the Company's behalf at September 1, 2000 were $21 million, with September 3, 1999 and August 28, 1998 totaling $33 million and $26 million, respectively, related to the Company's insurance programs. Upon consummation of the Distribution, MI replaced the Company as guarantor or obligor under previous guarantees and commitments related primarily to the lodging segment distributed on March 27, 1998. Summarized below are the Company's future obligations under leases at September 1, 2000:
CAPITAL OPERATING LEASES LEASES ------------------------- -------------------------- ($ in millions) FISCAL YEAR 2001 $0.7 $10.9 2002 0.8 9.4 2003 0.8 7.9 2004 0.8 6.6 2005 0.7 3.9 Thereafter 0.2 9.9 ------------------------- -------------------------- Total minimum lease payments 4.0 $48.6 ========================== Less amount representing interest (0.8) ------------------------- Present value of minimum lease payments $3.2 =========================
The Company generally leases office space and equipment under noncancellable agreements, primarily to support its administrative operations. Most leases have initial terms of one to 20 years, and contain one or more renewal options, generally for five or 10-year periods. The leases provide for minimum rentals, and additional rentals, which are based on the operations of the leased property. Total rent expense for continuing operations for fiscal year 2000 totaled $27 million, fiscal year 1999 totaled $26 million, the 34 weeks ended August 28, 1998 totaled $14 million, and fiscal year 1997 totaled $90 million. Total rent expense for discontinued operations for the 34 weeks ended August 28, 1998 totaled $41 million, and $177 million for the fiscal year 1997. The nature of the business of the Company causes it to be involved in routine legal proceedings from time to time. Management of the Company believes that there are no pending or threatened legal proceedings that upon resolution would have a material adverse impact to the Company. -44- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (12) EMPLOYEE BENEFIT AND INCENTIVE PLANS DEFERRED COMPENSATION PLANS Employees meeting certain eligibility requirements can participate in the Company's deferred compensation and savings plans. As part of the Distribution, the Company elected to continue the deferred compensation plan and has established a new savings plan for the Company separate from the MI profit sharing plan. The Company assumed the obligations and liabilities of the undistributed portion of the deferred compensation plan in relationship to the employees retained by the Company after the Distribution. The Company currently contributes generally 50% of the participants' contributions to these plans, limited to 6% of compensation, with certain exceptions. Within these plans, the Company contributed approximately $13 million, $12 million and $10 million per year for the fiscal years ended September 1, 2000 and September 3, 1999, and for the 34-week period ended August 28, 1998, respectively. STOCK OPTION PLANS The Company has two stock-based incentive plans-- the Sodexho Marriott Services, Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (the "1993 Plan" or the "1998 Plan"). The purpose of these plans is to promote and enhance the long-term growth of the Company by aligning the interests of the employees with the interests of the Company's shareholders. The 1993 Plan administers converted stock options prior to the Distribution, with no new awards made under this plan. The 1998 Plan governs the issuance and administration of conversion awards and is also available for the issuance of new awards. These stock plans are administered by the Compensation Policy Committee as authorized by the Board of Directors. As part of the Distribution and the amendment of these plans, and in relationship to the changes in the capital structure of the Company after the Distribution, the Board of Directors has approved up to 10 million shares of common stock to be available under the 1998 Plan for converted options as well as new awards. At the Distribution date, approximately 3.3 million options were exchanged as conversion options of prior grants under both the 1993 and 1998 Plans, with an additional 0.4 million options issued to employees of Sodexho North America as part of the conversion of stock options held by those employees prior to the Acquisition. Also, 3.3 million shares were terminated related to the options of former MI employees from the Distribution. Employee stock options may be granted to officers and key employees at exercise prices not less than the market price of the Company's stock on the date of grant. Most options under the stock option plans are exercisable in cumulative installments of one-fourth at the end of each of the first four years following the date of grant. In June 1998, the Company issued 1.8 million new stock option awards, with an additional 2.6 million new stock option awards in fiscal year 2000. A summary of the Company's stock option activity during fiscal 2000, fiscal 1999, and the 34 weeks ended August 28, 1998 is presented below (adjusting for the one-for-four reverse stock split on March 27, 1998):
34 WEEKS ENDED 2000 1999 AUGUST 28, 1998 ---------------------------- ---------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (IN MILLIONS) PRICE (IN MILLIONS) PRICE (IN MILLIONS) PRICE -------------- ------------- -------------- ------------- -------------- ------------- Outstanding at beginning of year 4.6 $ 21 5.0 $ 20 3.6 $140 Granted during the year 2.6 16 0.1 26 1.9 28 Conversion options-Distribution -- -- -- -- 3.3 * Conversion options-Acquisition -- -- -- -- 0.4 6 Terminations-Distribution -- -- -- -- (3.3) * Exercised during the year (0.2) 9 (0.4) 8 -- -- Forfeited during the year (0.5) 22 (0.1) 24 (0.9) 17 -------------- ------------- -------------- ------------- -------------- ------------- Outstanding at end of year 6.5 $ 20 4.6 $ 21 5.0 $ 20 ============== ============= ============== ============= ============== ============= Options exercisable at end of year 2.6 $ 20 1.4 $ 14 0.5 $ 11 ============== ============= ============== ============= ============== ============= *-- exercise price for shares outstanding prior to the Transactions were repriced to reflect the change in the Company's capital structure (including the one-for-four reverse stock split) as well as preserve the financial value of the options to the option holders as of March 27, 1998.
-45- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (12) EMPLOYEE BENEFIT AND INCENTIVE PLANS, CONTINUED Stock options under the 1993 and 1998 Plans that were outstanding at September 1, 2000 are summarized as follows:
OUTSTANDING EXERCISABLE --------------------------------------------------------- -------------------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE EXERCISE OPTIONS REMAINING LIFE EXERCISE OPTIONS EXERCISE PRICES (IN MILLIONS) (IN YEARS) PRICE (IN MILLIONS) PRICE - ------------------------ ------------------- ------------------ ------------------ ------------------ ------------------- $ 2.3 to 10.0 0.4 3 $ 8 0.3 $ 8 10.1 to 15.0 0.5 6 13 0.4 12 15.1 to 20.0 3.1 8 17 0.6 18 20.1 to 25.0 0.9 7 22 0.5 22 25.1 to 31.4 1.6 8 29 0.8 29 - ------------------------ ------------------- ------------------ ------------------ ------------------ ------------------- $ 2.3 to 31.4 6.5 8 $20 2.6 $20 ======================== =================== ================== ================== ================== ===================
Pro forma compensation cost for the Stock Option Plans, the Deferred Compensation Plan, the Supplemental Executive Stock Option awards and employee purchases would reduce the Company's net income as follows:
34 WEEKS ENDED 2000 1999 AUGUST 28, 1998 1997 ------------------ ------------------- -------------------- ------------------- ($ in millions, except per share amounts) Net income as reported $63 $51 $14 $335 Pro forma net income $57 $46 $13 $317 Diluted earnings per share as reported $1.00 $0.81 $0.27 $10.53 Pro forma diluted earnings per share $0.89 $0.72 $0.25 $9.97
The aggregate weighted-average fair value for each option granted during fiscal years 2000 and 1999, the 34 weeks ended August 28, 1998, and fiscal year 1997 was $7, $11, $12, and $88, respectively. Since the pro forma compensation cost is recognized over the vesting period, the foregoing pro forma reductions in the Company's net income are not representative of anticipated amounts in future years. The fair value of each option granted has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions:
34 WEEKS ENDED 2000 1999 AUGUST 28, 1998 1997 --------------------- --------------------- -------------------- --------------------- Annual dividends $0.08 $ -- $ -- $1.40 Expected volatility 46% 44% 40% 24% Estimated forfeitures 35% 35% 35% 13% Risk-free interest rate 6.2% 6.2% 5.5% 6.2% Expected life (in years) 10 10 10 7
-46- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (13) FAIR VALUE OF FINANCIAL INSTRUMENTS For current assets, current liabilities and notes and other receivables, management believes the carrying amounts are reasonable estimates of their fair values. The fair values of noncurrent financial liabilities are shown below.
2000 1999 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------- ------------- ------------- ------------- ($ in millions) ($ in millions) Long-term debt, convertible subordinated debt and other long-term liabilities $900 $882 $1,010 $981
The difference between carrying amounts and fair values for notes and other receivables for continuing operations were not material as of September 1, 2000 and September 3, 1999. Valuations for long-term debt, convertible subordinated debt and other long-term liabilities were determined based on quoted market prices or expected future payments discounted at risk adjusted rates. -47- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (14) BUSINESS SEGMENTS The Company is the leading provider in North America of outsourced food and facilities management services to businesses, health care facilities, colleges and universities, primary and secondary schools and other clients. The Company has identified six business segments within these markets: Corporate Services, Health Care, Education, Schools, Canada, and Laundries/Other. Prior to the Distribution, the Company was a diversified hospitality company with operations in two business segments: Lodging, which includes development, ownership, operation and franchising of lodging properties under 10 brand names and development and operation of vacation timesharing resorts; and Contract Services, consisting of the Company's principal business operations after the Distribution, in addition to the senior living communities business and the wholesale food distribution business ("Other Contract Services"). Information from operating segments presented has been derived consistent with the Company's methodology in allocating resources and measuring performance after the Distribution (see Note 1).
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT: 34 WEEKS ENDED AUGUST 28, 2000 1999 1998 1997 ----------------- ----------------- ---------------- ----------------- ($ in millions) GROSS SALES Corporate Services $1,429 $1,380 $ 803 $ 930 Health Care 1,399 1,323 784 1,039 Education 1,280 1,221 598 824 Schools 392 358 199 303 Canada 158 143 80 106 Laundries/Other 76 77 43 55 Other Contract Services -- -- 321 1,769 ----------------- ----------------- ---------------- ----------------- Contract Services 4,734 4,502 2,828 5,026 Discontinued Operations -- -- 1,774 7,008 ----------------- ----------------- ---------------- ----------------- Total Gross Sales $4,734 $4,502 $4,602 $12,034 ----------------- ----------------- ---------------- ----------------- GROSS OPERATING PROFIT Corporate Services $ 93 $ 90 $ 49 $ 35 Health Care 117 108 49 60 Education 76 71 5 27 Schools 20 19 8 11 Canada 7 6 1 3 Laundries/Other 6 5 2 2 Other Contract Services -- -- 5 19 ----------------- ----------------- ---------------- ----------------- Contract Services 319 299 119 157 Discontinued Operations -- -- 158 569 ----------------- ----------------- ---------------- ----------------- Total Gross Operating Profit $ 319 $ 299 $ 277 $ 726 ----------------- ----------------- ---------------- ----------------- Total Net Operating Profit from Continuing Operations (Contract Services) $ 319 $ 299 $ 119 $ 157 Corporate Items, Gain on Investment and Net Interest Expense 207 207 151 172 ----------------- ----------------- ---------------- ----------------- Income (Loss) From Continuing Operations, Before Taxes and Extraordinary Item $ 112 $ 92 $ (32) $ (15) ================= ================= ================ =================
-48- SODEXHO MARRIOTT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (14) BUSINESS SEGMENTS, CONTINUED The Company does not have any material activity outside of the United States and does not presently analyze its operations by geographic regions. In addition, the Company offers a wide array of food and facilities products within its operations, customized to individual client's requirements, and thus the Company's management has not found it practical to track results by individual products or services in relationship to the financial statements presented in this report. At September 1, 2000, the Company had a diverse client base and does not have any individual clients that are material to its overall operations.
IDENTIFIABLE ASSETS, CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION BY BUSINESS SEGMENT: AUGUST 28, 2000 1999 1998 1997 ----------------- ---------------- ---------------- ----------------- ($ in millions) IDENTIFIABLE ASSETS Corporate Services $ 176 $ 160 $ * $ * Health Care 190 193 * * Education 182 169 * * Schools 48 44 * * Canada 40 37 * * Laundries/Other 22 23 * * Corporate 706 721 * * ----------------- ---------------- ---------------- ----------------- Contract Services 1,364 1,347 1,341 1,669 Discontinued Operations, Net -- -- -- 2,902 Other -- -- -- 438 ----------------- ---------------- ---------------- ----------------- $1,364 $1,347 $1,341 $5,009 ================= ================ ================ ================= CAPITAL EXPENDITURES Corporate Services $ 14 $ 15 $ * $ * Health Care 11 11 * * Education 21 26 * * Schools 3 3 * * Canada 4 2 * * Laundries/Other 1 2 * * Corporate 12 13 * * ----------------- ---------------- ---------------- ----------------- Contract Services 66 72 86 264 Discontinued Operations -- -- 58 271 Other -- -- -- 18 ----------------- ---------------- ---------------- ----------------- $ 66 $ 72 $ 144 $ 553 ================= ================ ================ ================= DEPRECIATION AND AMORTIZATION Corporate Services $ 12 $ 11 $ * $ * Health Care 8 9 * * Education 18 18 * * Schools 2 2 * * Canada 3 2 * * Laundries/Other 1 1 * * Corporate 40 42 * * ----------------- ---------------- ---------------- ----------------- Contract Services 84 85 57 87 Discontinued Operations -- -- 21 89 Other -- -- -- 12 ----------------- ---------------- ---------------- ----------------- $ 84 $ 85 $ 78 $ 188 ================= ================ ================ ================= * -- Management has determined that available financial information related to periods prior to March 27, 1998 does not allow for a practical or meaningful presentation of identifiable assets, capital expenditures or depreciation and amortization for its current business segments for the Transition Period and fiscal year 1997.
-49- SODEXHO MARRIOTT SERVICES, INC. SUPPLEMENTARY DATA HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITED ($ in millions, except per share amounts)
2000(1) ------------- ------------- ------------- ------------- ------------- FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER(3) YEAR ------------- ------------- ------------- ------------- ------------- (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS) (52 WEEKS) Sales $1,288 $1,179 $1,225 $1,042 $4,734 Operating profit before corporate items 103 78 86 52 319 Income from continuing operations 28 14 21 -- 63 Net income $ 28 $ 14 $ 21 $ -- $ 63 Diluted earnings per share(5) $ 0.44 $ 0.23 $ 0.32 $ 0.01 $ 1.00 1999(1) ------------- ------------- ------------- ------------- ------------- FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR ------------- ------------- ------------- ------------- ------------- (13 WEEKS) (13 WEEKS) (13 WEEKS) (14 WEEKS) (53 WEEKS) Sales $1,209 $1,090 $1,163 $1,040 $4,502 Operating profit before corporate items 100 73 81 45 299 Income (Loss) from continuing operations 29 11 15 (4) 51 Net income $ 29 $ 11 $ 15 $ (4) $ 51 Diluted earnings per share(5) $ 0.45 $ 0.18 $ 0.24 $(0.07) $ 0.81 1998(1) ------------- ------------- ------------- ------------- FIRST QUARTER 9 WEEKS 13 WEEKS 34 WEEKS (12 WEEKS) 5/29/98(2) 8/28/98(2) 8/28/98 ------------- ------------- ------------- ------------- Sales $1,111 $ 752 $ 965 $2,828 Operating profit before corporate items 39 50 30 119 (Loss) Income from continuing operations(3) (11) 9 (17) (19) Discontinued operations, net of income taxes(3) 77 -- -- 77 Extraordinary item, net of income taxes(4) (43) (1) -- (44) Net income $ 23 $ 8 $ (17) $ 14 Diluted earnings per share(5) $ 0.73 $ 0.12 $(0.27) $ 0.27 1 - On April 15, 1998, the Company's Board of Directors approved a change in the Company's fiscal year from the Friday closest to the end of December to the Friday closest to August 31, thereby creating a 34-week Transition Period. On March 27, 1998, the Company acquired Sodexho North America. 2 - Combined actual results of MMS and the acquired Sodexho North America after March 27, 1998. 3 - On March 27, 1998, the Company distributed to its shareholders the Lodging, MSLS and MDS divisions as part of the Transactions. For reporting purposes, the Lodging segment is considered Discontinued Operations prior to March 27, 1998. MSLS and MDS are considered part of continuing operations (see Note 1 to the Consolidated Financial Statements). 4 - On March 27, 1998, the Company refinanced its debt as part of the Transactions (see Notes 1 and 8 to the Consolidated Financial Statements), resulting in a $71 million pretax charge from the early extinguishment of debt ($44 million after-tax). 5 - Earnings per share data have been restated to reflect the adoption in 1997 of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." All per share data has been adjusted to reflect a one-for-four reverse stock split effective March 27, 1998.
-50- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12 AND 13. As described below, certain information appearing in the Company's Proxy Statement to be furnished to shareholders in connection with the 2001 Annual Meeting, is incorporated by reference in this Form 10-K Annual Report. ITEM 10. This information is incorporated by reference to the "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" sections of the Company's Proxy Statement to be furnished to shareholders in connection with the 2001 Annual Meeting. Information regarding executive officers is included below. ITEM 11. This information is incorporated by reference to the "Executive Compensation" section of the Company's Proxy Statement to be furnished to shareholders in connection with the 2001 Annual Meeting. ITEM 12. This information is incorporated by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's Proxy Statement to be furnished to shareholders in connection with the 2001 Annual Meeting. ITEM 13. This information is incorporated by reference to the "Certain Transactions" section of the Company's Proxy Statement to be furnished to shareholders in connection with the 2001 Annual Meeting. EXECUTIVE OFFICERS The 11 persons identified below are the executive officers of the Company.
NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- Michel Landel 49 Michel Landel was named President and Chief Executive Officer of President and the Company on May 3, 1999. Upon consummation of the Chief Executive Officer Transactions, Mr. Landel was appointed as the Company's Executive Vice President on June 16, 1998 and was named President, Corporate Services division. Prior to the Transactions, Mr. Landel was appointed President and Chief Executive Officer of Sodexho North America in 1994. Mr. Landel joined Sodexho in 1984 as a Regional Manager of Sodexho Africa. In 1986, he was named President of Sodexho Africa, a position he held until 1989, when he became President and Chief Executive Officer of Sodexho's United States operations. Prior to joining Sodexho, Mr. Landel held positions with Groupe Poliet (Plan General Manager, 1980-1984) and The Chase Manhattan Bank (Financial Analyst and Assistant Treasurer, 1976-1980).
-51- EXECUTIVE OFFICERS, CONTINUED
NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- Anthony F. Alibrio 56 Anthony F. Alibrio was appointed President, Health Care Services Executive Vice President effective with the Transactions and was also appointed an President, Health Care Services Executive Vice President as of May 3, 1999. Prior to the Transactions, Mr. Alibrio served as President of Health Care Services for the Marriott Management Services division of Marriott International, Inc. since 1990. His career has been focused on serving the health care industry for the past 28 years of his 33-year tenure with Marriott. In the past he has held various operations, sales, and marketing responsibilities including Division Vice President and National Vice President of Sales and Marketing at Marriott. A member of the Healthcare Research and Development Institute and the American Academy of Medical Administrators, Mr. Alibrio is also past chair and currently serves as a member of the Board of Directors for the National Committee for Quality Health Care and is a current chair and member of the Board of Health Insights Foundation. William W. Hamman 59 William W. Hamman was appointed President, Education Services Executive Vice President effective with the Transactions and was also appointed an President, Education Services Executive Vice President as of May 3, 1999. Prior to the Transactions, Mr. Hamman served as President of the Marriott Education Services division of Marriott International, Inc. since 1990. He has supported the higher education community for 36 years, holding positions in Marriott Education Services that included Regional Vice President, Area Vice President and Division Vice President. Mr. Hamman is active in the National Association of College and University Business Officers (NACUBO) and the Council of Independent Colleges (CIC). He also serves on the Western Illinois University Foundation Board of Trustees. Thomas M. Mulligan 49 Thomas M. Mulligan was appointed to his current position President, Corporate Services effective May 28, 1999. Mr. Mulligan joined Sodexho Services, Inc., a subsidiary of Sodexho Alliance, in 1974 and has served in the Sodexho Education, Corporate Services and Healthcare divisions. Prior to his current appointment, Mr. Mulligan served as head of the New England Corporate Services operations of the Company. Mr. Mulligan supports hunger relief efforts through the Pine Street Inn in Boston and has worked with the Toys for Tots program. Stephen J. Brady 56 Stephen J. Brady was appointed to his current position effective Senior Vice President, Corporate with the Transactions. Mr. Brady joined Sodexho USA, a division Communications of Sodexho Alliance, in 1989 after a 15-year career in the retail industry. His positions with Sodexho USA were Vice President of Strategic Developments, Vice President of Health Care Operations and Regional Vice President of Education Operations. Most recently he has served as Vice President of Marketing and Communications for Sodexho USA. Mr. Brady serves on the board of America's Second Harvest and the national food rescue network.
-52- EXECUTIVE OFFICERS, CONTINUED
NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- John M. Bush 46 John Bush was named Senior Vice President and Chief Financial Senior Vice President and Chief Officer on February 15, 2000. Prior to his new appointment, Mr. Financial Officer Bush had served as Senior Vice President, Finance and Planning for the Higher Education division of the Company since 1995. Mr. Bush began his career with the Company in 1976 as a Food Service Manager in the Higher Education Division and became regional controller in 1989. Ollie Lawrence, Jr. 49 Ollie Lawrence, Jr. was named Senior Vice President, Human Senior Vice President and Chief Human Resources on April 3, 2000. Previously, Mr. Lawrence served as Resources Officer Vice President, Human Resources for U.S. Airways, Inc. From 1996 to 1998, Mr. Lawrence served as Senior Vice President for Sodexho USA, Inc. and also founded his own company, "b michael" of New York City were he served as President and CEO. Bernard Royer 47 Bernard Royer was named Senior Vice President, Purchasing and Senior Vice President, Distribution on April 6, 2000. Mr. Royer was Corporate Vice Procurement and Distribution President of International Purchasing for Sodexho International Management from 1999 to April 2000. From 1990 to 1998, Mr. Royer was Vice President of Purchasing for Sodexho USA, Inc. Robert A. Stern 42 Robert A. Stern was appointed to his current position effective Senior Vice President and General Counsel with the Transactions. Previously, Mr. Stern served as Associate General Counsel for Marriott International, Inc. providing legal support to Marriott Management Services. Prior to his appointment to Associate General Counsel, Mr. Stern provided legal support to Marriott Corporation's Restaurant and Travel Plaza businesses. Mr. Stern joined Marriott Corporation in 1985 from the Washington, D.C. office of Skadden Arps Slate Meagher & Flom. Philippe Taillet 41 Philippe Taillet was appointed to his current position effective Senior Vice President and Chief July 10, 2000. Prior to his appointment, Mr. Taillet served as Information Officer Senior Vice President, Facilities Management and Senior Vice President, Strategic Planning for the Company. Prior to the Transactions, Mr. Taillet served as Vice President, Corporate Strategy for Sodexho Alliance since 1995. From 1991 to 1995, he was Director of Facilities Management at Disneyland Paris and from 1986 to 1991 he was a consultant for Bain & Company in Paris and Boston. Mr. Taillet began his career as a software engineer for Schlumberger Oil Field Services in Paris. Susan H. Tatum 48 Susan Tatum was named Senior Vice President, Marketing, on Senior Vice President, September 26, 2000. From 1985 until her recent appointment, Ms. Marketing Tatum held positions of increasing responsibilities within the Education division of the Company including Senior Vice President and Vice President- Operations and Communications; Vice President and Director- Business Development and Communications; District Manager; and General Manager at Stanford University.
-53- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) Financial Statements The response to this portion of Item 14. is submitted under Item 8. of this Report on Form 10-K. (2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits Any shareholder who desires a copy of the following Exhibits may obtain a copy upon request from the Company at a charge that reflects the reproduction cost of such Exhibits. Requests should be made to the Secretary, Sodexho Marriott Services, Inc., 9801 Washingtonian Boulevard, Gaithersburg, Maryland, 20878.
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR ------- ----------- --------------------------------------------- NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT ---- ----------------------------------------------- DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE ----------------------------------------- COMPANY AND THE APPLICABLE EXHIBIT IS ------------------------------------- INCORPORATED BY REFERENCE THERETO) ---------------------------------- 3.1 Amended and Restated Certificate of Exhibit No. 3 (a) to Form 8-K dated April 3, 1998. Incorporation. 3.2 Amended and Restated Bylaws. Exhibit No. 3 (b) to Form 8-K dated April 3, 1998. 4.1 Certificate of Designation, Preferences and Exhibit No. 4.1 to Form 8-K dated October 25, 1993. Rights of Series A Junior Participating Preferred Stock. 4.2 Rights Agreement with The Bank of New York, as (a) Exhibit No. 4.2 to Form 8-K dated October 25, Rights Agent, as amended. 1993, (b) Exhibit 1 to Form 8--A/A filed on October 15, 1997 (Amendment No. 1) and (c) Amendment No. 2 to Rights Agreement dated as of March 27, 1998 filed by amendment to Form 8-A. 4.3 Indenture with Chemical Bank, as Trustee, as (a) Exhibit Nos. 4(i) and 4(ii) to Form 8-K dated supplemented. December 9, 1993 (original Indenture and First Supplemental Indenture); (b) Exhibit No. 4 (ii) to Form 8-K dated April 19, 1995 (Second Supplemental Indenture); (c) Exhibit No. 4.2 to From 8-K dated June 7, 1995 (Third Supplemental Indenture); (d) Exhibit No. 4.2 to Form 8-K dated December 11, 1995 (Fourth Supplemental Indenture); (e) Exhibit No. 4(a) to Form 8-K/A dated April 27, 1998 (Fifth Supplemental Indenture); (f) Exhibit No. 4(b) to Form 8-K/A dated April 27, 1998 (Sixth Supplemental Indenture); Exhibit No. 4(c) to Form 8-K/A dated April 27, 1998 (Seventh Supplemental Indenture); and Exhibit No. 4(d) to Form 8-K/A dated April 27, 1998 (Eighth Supplemental Indenture).
-54- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K, CONTINUED (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED (3) Exhibits, Continued
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR ------- ----------- --------------------------------------------- NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT ---- ----------------------------------------------- DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE ----------------------------------------- COMPANY AND THE APPLICABLE EXHIBIT IS ------------------------------------- INCORPORATED BY REFERENCE THERETO) ---------------------------------- 4.4 Indenture with The Bank of New York, as Trustee, (a) Exhibit No. 4.1 Form 8-K dated March 25, 1996; relating to Liquid Yield Option(TM)Notes, as and (b) Exhibit No. 4.2 to Form 8-K dated March 25, supplemented. 1996 (First Supplemental Indenture). 4.5 Indenture among RHG Finance Corporation, as (a) Exhibit No. 2.02 to Renaissance Hotel Group issuer, Renaissance Hotel Group N.V. and the N.V. Annual Report on Form 20-F for the fiscal year Company, as guarantors, and The First National ended June 30, 1996; and (b) Exhibit No. 4 to Form Bank of Chicago as Trustee, as supplemented. 10-Q for the fiscal quarter ended June 20, 1997 (First and Second Supplemental Indenture). 4.6 Sodexho Marriott Services, Inc. 1993 Exhibit 4(a) to Form 8-K dated April 15, 1998. Comprehensive Stock Incentive Plan. 4.7 Sodexho Marriott Services, Inc. 1998 Exhibit 4(a) to Form 8-K dated April 15, 1998. Comprehensive Stock Incentive Plan. 4.8 Sodexho Savings Plus Plan. Exhibit 4.3 to Form S-8 dated September 17, 1998. 4.9 Sodexho Marriott Services, Inc. 401(k) Employee Exhibit 4.3 to Form S-8 dated September 17, 1998. Retirement Savings Plan. 4.10 Trust Agreement with Bankers Trust Company, Exhibit 99.1 to Form S-8 dated September 17, 1998. Trustee for the Sodexho Marriott Services, Inc. 401(k) Employee Retirement Savings Plan. 10.1 $1.5 billion Credit Agreement with Citibank, (a) Exhibit No. 10 to Form 10-Q for the fiscal N.A., as Administrative Agent, and certain banks, quarter ended March 28, 1997 (original agreement); as Banks, as amended. (b) Exhibit No. 10.2 to Form 10-K for the fiscal year ended December 29, 1995 (first Amendment); and (c) Exhibit No. 10-1 to Form 10-Q for the fiscal quarter ended September 12, 1997 (Second Amendment). 10.2 Distribution Agreement with Host Marriott, as (a) Exhibit No. 10.3 to Form 8-K dated October 25, amended. 1993; (b) Exhibit No. 10.2 to Form 10-K for the fiscal year ended December 29, 1995 (First Amendment); and (c) Exhibit No. 10.1 to Form 10- Q for the fiscal quarter ended September 12, 1997 (Second Amendment). 10.3 Non Competition Agreement with Host Marriott (a) Exhibit No. 10.7 to Form 8-K dated October 25, and Host Marriott Services Corporation, as 1993; and (b) Exhibit No. 10.4 to Form 10-K for the amended. fiscal year ended December 29, 1995 (Amendment No. 1).
-55- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K, CONTINUED (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED (3) Exhibits, Continued
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR ------- ----------- --------------------------------------------- NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT ---- ----------------------------------------------- DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE ----------------------------------------- COMPANY AND THE APPLICABLE EXHIBIT IS ------------------------------------- INCORPORATED BY REFERENCE THERETO) ---------------------------------- 10.4 Employee Benefits and Other Employment Exhibit No. 10.6 to Form 8-K dated October 25, 1993. Matters Allocation Agreement with Host Marriott. 10.5 Agreement and Plan of Merger by and among Exhibit No. (c) (1) to Schedule 14d-1 dated Marriott International, Inc., FGI Acquisition February 23, 1996. Corp. and Forum Group, Inc. 10.6 Acquisition Agreement, dated as of February 17, Exhibit No. 10.1 to Form 8-K dated February 19, 1997, by and between the Company and Renaissance 1997. Hotel Group N.V. 10.7 Shareholder Agreement, dated as of February 17, Exhibit No. 10.2 to Form 8-K dated February 19, 1997, by and between Marriott International, Inc. 1997. and Diamant Hotel Investments N.V. 10.8 Stock Purchase Agreement, dated as of June 21, Exhibit No. 10.2 to Form 10-Q for the fiscal quarter 1997, by and between Host Marriott Corporation ended September 12, 1997. and Marriott Senior Living Services, Inc. 10.9 Distribution Agreement dated as of September 30, Appendix A to Definitive Proxy Statement for a 1997 between the Company and New Marriott MI, Special Meeting of Shareholders commenced on Inc. March 17, 1998 and adjourned on March 20, 1998. 10.10 Agreement and Plan of Merger dated as of Appendix B to Definitive Proxy Statement for a September 30, 1997 by and among the Company, Special Meeting of Shareholders commenced on Marriott - ICC Merger Corp., New Marriott MI, March 17, 1998 and adjourned on March 20, 1998. Inc., Sodexho Alliance, S.A., and International Catering Corporation. 10.11 Omnibus Restructuring Agreement dated as of Appendix C to Definitive Proxy Statement for a September 30, 1997 by and among the Company, Special Meeting of Shareholders commenced on Marriott - ICC Merger Corp., New Marriott MI, March 17, 1998 and adjourned on March 20, 1998. Inc., Sodexho Alliance, S.A., and International Catering Corporation. 10.12 Amendment Agreement, dated as of January 28, Appendix D to Definitive Proxy Statement for a 1998, by and among the Company, Marriott-ICC Special Meeting of Shareholders commenced on Merger Corp., New Marriott MI, Inc., Sodexho March17, 1998 and adjourned on March 20, 1998. Alliance, S.A., and International Catering Corporation. 10.13 Employee Benefits and Other Employment Exhibit No. 10.1 to Form 10 of New Marriott MI, Matters Allocation Agreement, dated as of Inc. filed on February 1, 1998. September 30, 1997, by and between the Company and New Marriott MI, Inc.
-56- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K, CONTINUED (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT, CONTINUED (3) Exhibits, Continued
EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (WHERE A REPORT OR ------- ----------- --------------------------------------------- NO. REGISTRATION STATEMENT IS INDICATED BELOW, THAT ---- ----------------------------------------------- DOCUMENT HAS BEEN PREVIOUSLY FILED BY THE ----------------------------------------- COMPANY AND THE APPLICABLE EXHIBIT IS ------------------------------------- INCORPORATED BY REFERENCE THERETO) ---------------------------------- 10.14 Trademark and Trade Name License Agreement Exhibit No. 10.18 to Form 10-K/A filed on April dated as of March 27, 1998 among the Company, 15, 1998. New Marriott and Marriott Worldwide Corporation. 10.15 Royalty Agreement dated as of March 27, 1998 Exhibit No. 10.19 to Form 10-K/A filed on April between Sodexho Alliance, S.A. and the Company. 15, 1998. 10.16 $620 million Credit Agreement dated as of (a) Exhibit No. 10(a) to Form 8-K/A dated April 27, January 30, 1998 with the Company, as Borrower, 1998; and (b) Exhibit No. 10(c) to Form 8-K/A certain initial lenders, as Initial Lenders, dated April 27, 1998 (Amendment No. 1). Societe Generale and J.P. Morgan Securities Inc. ("J.P. Morgan"), as Arrangers, Societe Generale, as Administrative Agent, and Morgan Guaranty Trust Company of New York ("Morgan"), as Documentation Agent, as amended. 10.17 $735 million Credit Agreement dated as of January (a) Exhibit No. 10(b) to Form 8-K/A dated April 27, 30, 1998 with Sodexho Marriott Operations, Inc., 1998 and (b) Exhibit No. 10(d) to Form 8-K/A dated as Borrower, the Company, as Parent Guarantor, April 27, 1998 (Amendment No. 1). certain initial lenders, as Initial Lenders, Societe Generale and Morgan, as Initial Issuing Banks, Morgan, as Documentation Agent and Administrative Agent, and Societe Generale and J.P. Morgan, as Arrangers, as amended. 10.18 Stockholder Agreement dated as of March 27, 1998 Exhibit No. 10.22 to Form 10-K/A filed on April 15, with Sodexho Alliance, S.A. 1998. 10.19 Severance agreement with Charles D. O'Dell, dated Exhibit No. 10.19 to Form 10-K filed on October 29, as of May 3, 1999. 1999. 12 Schedule of Ratio of Earnings to Fixed Charges. Filed herewith. 21 Subsidiaries of Sodexho Marriott Services, Inc. Filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, Filed herewith. Independent Public Accountants. 23.2 Consent of Arthur Andersen LLP, Filed herewith. Independent Public Accountants. 24 Power of Attorney. Filed herewith. 99 Forward-Looking Statements. Filed herewith.
-57- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K, CONTINUED (B) REPORTS ON FORM 8-K
DATE ITEM REPORTED ---- ------------- November 3, 1999 Announcement of the Resignation of Lawrence E. Hyatt as Chief Financial Officer of the Company. December 29, 1999 Company comments on outlook for first quarter fiscal year 2000. February 16, 2000 Announcement of the appointment of John Bush as Senior Vice President and Chief Financial Officer of the Company. April 6, 2000 Announcement of the appointment of Bernard Royer as Senior Vice President of Purchasing and Distribution for the Company.
-58- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 13th day of November, 2000. SODEXHO MARRIOTT SERVICES, INC. By: /S/ ROBERT A. STERN ------------------------------- Robert A. Stern Senior Vice President and General Counsel Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- * President and Chief Executive Officer and November 13, 2000 - --------------------------- Director (Principal Michel Landel Executive Officer) /S/ JOHN M. BUSH Senior Vice President and Chief Financial November 13, 2000 - ------------------ Officer (Principal Financial Officer) John M. Bush * Chairman and Director November 13, 2000 - --------------------------- William J. Shaw * Director November 13, 2000 - --------------------------- Daniel J. Altobello * Director November 13, 2000 - --------------------------- Pierre Bellon * Director November 13, 2000 - --------------------------- Bernard Carton * Director November 13, 2000 - --------------------------- John W. Marriott III * Director November 13, 2000 - --------------------------- Edouard de Royere
*By: /S/ ROBERT A. STERN ---------------------- Robert A. Stern Attorney- in- fact -59- EX-12 2 0002.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
SODEXHO MARRIOTT SERVICES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ in millions) FISCAL YEAR FISCAL YEAR 34 WEEKS FISCAL YEAR ENDED ------------------------------- 2000 1999 AUGUST 28, 1998 1997 1996 1995 -------------- -------------- ------------------ ---------- ---------- --------- Income Before Extraordinary Item $ 63 $ 51 $ 58 $335 $306 $247 Add / (Deduct): Tax and Extraordinary Item 49 41 42 219 196 165 Fixed Charges 85 88 65 179 142 107 Interest Capitalized as Property and Equipment -- -- -- (16) (9) (8) (Income) / Loss Related to certain 50%-or-Less- Owned-Affiliates -- -- -- -- 1 -- -------------- -------------- ------------------ ---------- ---------- --------- Earnings Available For Fixed Charges $197 $180 $165 $717 $636 $511 -------------- -------------- ------------------ ---------- ---------- --------- Fixed Charges: Interest Including Amounts Capitalized as Property and Equipment $ 85 $ 88 $ 65 $126 $94 $61 Portion of Rental Expense Representative of Interest -- -- -- 53 48 45 Share of Interest Expense of certain 50%-or-Less- Owned-Affiliates -- -- -- -- -- 1 -------------- -------------- ------------------ ---------- ---------- --------- Total Fixed Charges $ 85 $ 88 $ 65 $179 $142 $107 -------------- -------------- ------------------ ---------- ---------- --------- Ratio of Earnings to Fixed Charges 2.3 2.0 2.5 4.0 4.5 4.8 -------------- -------------- ------------------ ---------- ---------- --------- For the purpose of computing the ratio of earnings to fixed charges as prescribed by the rules and regulations of the Commission, earnings represent income before cumulative effect of a change in accounting principle and extraordinary item, plus, when applicable, (a) taxes on such income, (b) fixed charges, and (c) the Company's equity interest in losses of certain 50%-or-less-owned-affiliates; less (x) undistributed earnings of 50%-or-less-owned-affiliates, and (y) interest capitalized. Fixed charges represent interest (including amounts capitalized), representative of interest, and when applicable, the Company's share of the interest expense of certain 50%-or-less-owned-affiliates.
EX-21 3 0003.txt SUBSIDIARIES OF SODEXHO MARRIOTT SERVICES, INC. EXHIBIT 21 9/1/2000 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 1 DOMESTIC SUBSIDIARIES STATE INCORPORATION 10-K REPORT State: Alabama Marcorp, Inc. State: California Sodexho Management Corp. Saga Health Care Dietary Management Services, Inc. Saga Education Food Services, Inc. State: Delaware Sodexho Marriott Services, Inc. Sodexho Operations, LLC. Sodexho Marriott Laundry Services, Inc. Sodexho Marriott Education Services, Inc. SMS Services of California, Inc. SMO Finance Corp. Corporate Food Services, Inc. Sodexho Marriott Services of Indiana Limited Partnership SDH I, Inc. SDH II, Inc. SDH III, Inc. SDH IV, Inc. Sodexho America, LLC. State: Massachusetts International Catering Corp. of Massachusetts State: New Jersey SMS Electrical, Inc. dba SMS Electrical and Plumbing State: New York Sodexho Marriott Management, Inc. State: Texas Premier Hospitality, Inc. Premier Hospitality Club, Inc. Sodexho Marriott Services of Texas Limited Partnership State: Vermont Sodexho Vermont, Inc. Territory: Guam Sodexho Services Guam, Inc. 9/1/2000 SODEXHO MARRIOTT SERVICES, INC. PAGE NUMBER : 2 FOREIGN SUBSIDIARIES CORPS. WITHIN COUNTRY 10-K REPORT Country: Canada, Ontario Sodexho MS Canada, Ltd. dba Sodexho Marriott Services Canada Ontrak Services, Inc. Country: Canada, Quebec Sodexho Marriott Quebec Ltee Sodexho Financiere du Canada, Inc. Sodexho Canada, Inc. dba Sodexho Services Canada Luc, Inc. Country: Canada, B.C. Universal Remote Site Services, Ltd. Fortier Services, Ltd. Universal Remote Site Holdings, Ltd. EX-23.1 4 0004.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-63863, No. 333-38300, No. 33-66624, No. 33-85420, and No. 333-00404) of Sodexho Marriott Services, Inc. of our report dated October 11, 2000 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated October 11, 2000 relating to the financial statement schedules, which appears in this Form 10-K. /s/PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Washington, D.C. November 9, 2000 EX-23.2 5 0005.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report (and to all references to our Firm), dated February 3, 1998 (except with respect to the matters discussed in Notes 2 and 14 of the Company's financial statements, as to which the date is October 7, 1998), included in this Form 10-K, into the Company's previously filed Registration Statements Files No. 33-66624, No. 33-85420, No. 333-00404, No. 333-63863,and No. 333-38300. /s/ARTHUR ANDERSEN LLP Vienna, VA November 9, 2000 EX-24 6 0006.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY We, the undersigned directors of Sodexho Marriott Services, Inc. (the "Corporation"), do hereby constitute and appoint Robert A. Stern and Joan Rector McGlockton, or either or both of them, with full power of substitution, our true and lawful attorneys-in-fact and agents, to do any and all acts and things in our names and our behalf in our capacities as directors for the purpose of executing and filing, on behalf of the Corporation, a Form 10-K for the fiscal year ended September 1, 2000, including any exhibits thereto and any and all amendments thereto; and we hereby ratify and confirm all that said attorneys and agents shall do or cause to be done by virtue thereof. IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Power of Attorney or a counterpart, all of which together shall constitute one and the same instrument to be effective as of October 17, 2000. /s/ WILLIAM J. SHAW /s/ PIERRE BELLON - ------------------------------------------------ ----------------------------------------------- William J. Shaw, Director Pierre Bellon, Director /s/ BERNARD CARTON /s/ EDOUARD DE ROYERE - ------------------------------------------------ ----------------------------------------------- Bernard Carton, Director Edouard de Royere, Director /s/ JOHN W. MARRIOTT III /s/ MICHEL LANDEL - ------------------------------------------------ ----------------------------------------------- John W. Marriott III, Director Michel Landel, Director /s/ DANIEL J. ALTOBELLO - ------------------------------------------------ Daniel J. Altobello, Director
EX-27 7 0007.txt FINANCIAL DATA SCHEDULE
5 FINANCIAL DATA SCHEDULE FOR SODEXHO MARRIOTT SERVICES, INC. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FISCAL YEAR ENDED SEPTEMBER 1, 2000 CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 1, 2000 FROM THE COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR YEAR YEAR SEP-01-2000 SEP-03-1999 AUG-28-1998 SEP-04-1999 AUG-29-1998 JAN-03-1998 SEP-01-2000 SEP-03-1999 AUG-28-1998 54 48 79 0 0 10 463 445 374 23 21 17 67 60 54 682 642 605 272 257 249 176 172 167 1,364 1,347 1,341 765 718 695 900 1,010 1,091 0 0 0 0 0 0 63 62 62 (476) (556) (617) 1,364 1,347 1,341 4,734 4,502 2,828 4,734 4,502 2,828 4,415 4,203 2,709 4,415 4,203 2,709 123 128 97 0 0 0 85 88 65 112 92 (32) 49 41 (13) 63 51 (19) 0 0 77 0 0 (44) 0 0 0 63 51 14 1.01 0.82 0.27 1.00 0.81 0.27 On April 15, 1998, the Board of Directors of the Company approved the change of the fiscal year of the Company to the Friday nearest to August 31 of each year. Prior to this change in fiscal year, the Company's fiscal year ended on the Friday nearest to December 31 of each year. Thus, the 1998 fiscal year, which began on January 3, 1998, ended on August 28, 1998, and the 1999 fiscal year began on August 29, 1998 and ended on September 3, 1999 and was a 53-week period.
EX-99 8 0008.txt 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 be 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. The Company has been operating less than three 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 about $1 billion and bears interest at rates that float with certain indices. The size of the Company's indebtedness and the restrictive covenants, events of default and other restrictions on the Company's activities contained in its credit facility agreements may limit the Company's ability to respond to market conditions, satisfy capital expenditure requirements, meet contractual or financial obligations, incur additional debt, invest in information technology infrastructure or engage in other activities. As a result, significant losses 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. Thereto, any issues which may adversely impact Sodexho's image could negatively impact the Company as well. In addition, 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. Adverse effects might also result in the event Sodexho were to encounter financial or other difficulties that could prevent it from providing such services or assistance to the Company. SEASONAL NATURE OF THE COMPANY'S BUSINESS. The food service and facilities management business has been characterized historically by seasonal fluctuations in overall demand for services, particularly in the education sector where sales are stronger during the academic year. There can be no assurance that these fluctuations will not have a material adverse effect on the Company's business, results of operations, and financial condition. CERTAIN ANTI-TAKEOVER EFFECTS. As of September 1, 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, paid 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. -----END PRIVACY-ENHANCED MESSAGE-----