UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEKS ENDED DECEMBER 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
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(Address of principal executive offices) (Zip Code)
(301) 987-4431
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
SHARES OUTSTANDING
CLASS AT JANUARY 13, 2000
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Common Stock $1.00
par value per share 63,162,949
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
PAGE NO.
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Introduction
Overview 1
Forward-Looking Statements 1
Pro Forma Financial Information (Unaudited) 2
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income - Thirteen Weeks Ended
December 3, 1999 and November 27, 1998 6
Condensed Consolidated Balance Sheet -
as of December 3, 1999 and September 3, 1999 7
Condensed Consolidated Statement of Cash Flow - Thirteen Weeks Ended
December 3, 1999 and November 27, 1998 8
Condensed Consolidated Statement of Stockholders' Deficit-
as of December 3, 1999 9
Notes to Condensed Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of Operations
and Financial Condition 19
Quantitative and Qualitative Disclosures about Market Risk 22
Part II. Other Information and Signatures:
Legal Proceedings 23
Changes in Securities 23
Defaults Upon Senior Securities 23
Submission of Matters to a Vote of Security Holders 23
Other Information 23
Exhibits and Reports on Form 8-K 23
Signatures 24
INTRODUCTION
OVERVIEW
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping,
housekeeping and custodial services.
The Company was formerly named Marriott International, Inc. Upon the
consummation of the distribution of its lodging, senior living and distribution
services businesses to existing shareholders, which occurred on March 27, 1998,
the Company then acquired (the "Acquisition") the North American operations of
Sodexho Alliance, S.A. ("Sodexho"), and the combined operations were renamed
Sodexho Marriott Services, Inc.
The Transactions
In general, in March 1998, the Company distributed to its shareholders (the
"Distribution") the lodging segment and two of the three lines of business in
the contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, formerly known as Marriott Management
Services ("MMS"), combined with Sodexho North America (Sodexho Financiere du
Canada and subsidiaries, and International Catering Corporation and subsidiaries
taken collectively are known as "Sodexho North America" or "Sodexho USA") and
became the principal business of the Company. Immediately after the
Distribution, Sodexho transferred to the Company the operations of Sodexho North
America combined with a cash payment of $304 million in exchange for 29.9
million shares of the Company's common stock. Lastly, on March 27, 1998, the
Company borrowed $615 million and $620 million under the Secured SMS Facility
and Guaranteed SMS Facility, respectively (see Note 3). These proceeds were used
to repurchase $713 million of the Company's $720 million publicly held debt and
to repay its $950 million outstanding obligations under the Company's existing
credit facility (the "Refinancing"). Collectively, the Distribution, Acquisition
and Refinancing are called the "Transactions."
FORWARD-LOOKING STATEMENTS
This report by the Company contains forward-looking statements within the
meaning of the federal securities laws. These statements are based on the
Company's current expectations and relate to anticipated future events that are
not historical facts, such as the Company's business strategies and their
intended results.
The forward-looking statements included in this report are subject to numerous
risks and uncertainties that could cause the Company's future activities and
results of operations to differ materially from those expressed or implied in
the forward-looking statements. These risks and uncertainties, which are further
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report, include: (i) the ability
of the Company to adapt to various changes, including changes in its structure,
senior management and in its relationship with its largest shareholder--Sodexho
Alliance, (ii) the potential adverse impact of the Company's substantial
indebtedness, (iii) the ability of the Company to attract, hire, train and
retain competent management personnel, (iv) competition in the food services and
facilities management industries, (v) the effects of general economic
conditions, including the record low level of unemployment, (vi) the ability of
the Company to retain clients and obtain new clients on satisfactory terms, and
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission including those set forth in Exhibit 99 filed
herein.
As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on the forward-looking statements included in this report or that
may be made elsewhere from time to time by, or on behalf of, the Company. The
Company assumes no obligation to update any forward-looking statements.
-1-
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Transactions described in Notes 1 and 2
to the Condensed Consolidated Financial Statements. As a result of these
changes, there are certain differences in the comparability of the Company's
historical operating results presented in Part I of this document and the
Company's ongoing operations. To assist readers in understanding the present
operations of the Company, management believes it is meaningful and relevant to
set forth in this report not only the actual results of operations for the 13
weeks ended December 3, 1999 ("First Quarter Fiscal Year 2000") compared with
the historical 13 weeks ended November 27, 1998 (presented in Part I of this
report), but also the pro forma results for the 13 weeks ended November 27, 1998
("Pro Forma First Quarter Fiscal Year 1999") presented in this section. In
addition, certain reclassifications have been made to the Pro Forma First
Quarter Fiscal Year 1999 to conform to the current year's presentation.
No pro forma adjustments were made for the First Quarter Fiscal Year 2000
results. For the comparable period in fiscal year 1999, the historical results
have been adjusted to exclude integration charges of $7.6 million pretax. Total
integration charges included, among other items, training and relocating of
former MMS employees, systems modifications, and other one-time costs associated
with combining the predecessor companies.
-2-
UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN WEEKS ENDED DECEMBER 3, 1999 AND
THE PRO FORMA THIRTEEN WEEKS ENDED NOVEMBER 27, 1998
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED
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(PRO FORMA)
DECEMBER 3, NOVEMBER 27,
1999 1998
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SALES
Corporate Services $ 351 $ 335
Health Care 335 315
Education 422 396
Schools 118 108
Canada 44 37
Laundries/Other 18 18
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TOTAL SALES 1,288 1,209
OPERATING COSTS AND EXPENSES
Corporate Services 330 313
Health Care 308 289
Education 378 352
Schools 111 101
Canada 41 35
Laundries/Other 17 18
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TOTAL OPERATING COSTS AND EXPENSES 1,185 1,108
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OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 21 22
Health Care 27 26
Education 44 44
Schools 7 7
Canada 3 2
Laundries/Other 1 --
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TOTAL OPERATING PROFIT 103 101
CORPORATE ITEMS:
Amortization of Intangible Assets (9) (9)
Corporate Expenses (22) (18)
Interest Expense, Net (22) (23)
Gain on Sale of Investment -- 8
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INCOME BEFORE INCOME TAXES 50 59
Provision for Income Taxes (22) (26)
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NET INCOME $ 28 $ 33
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BASIC EARNINGS PER SHARE $ 0.44 $ 0.53
================== ==================
DILUTED EARNINGS PER SHARE $ 0.44 $ 0.52
================== ==================
-3-
DISCUSSION OF FIRST QUARTER FISCAL YEAR 2000 AND PRO FORMA FIRST QUARTER
FISCAL YEAR 1999 RESULTS OF OPERATIONS
Total sales for First Quarter Fiscal Year 2000 were $1.29 billion, an increase
of $79 million, or 6.5%, over $1.21 billion for Pro Forma First Quarter Fiscal
Year 1999. This growth was mostly attributable to strong new sales and solid
comparable growth in existing accounts in most of the Company's divisions.
Overall, the Company also experienced gradually improving retention of its
existing clients in the current quarter over the prior year's quarter.
Over half of the sales growth was attributed to the Education and Health Care
divisions. The Education division experienced a change in the academic calendar
versus last year, resulting in approximately two to three additional board days
over the prior year's quarter. The Company expects this calendar shift to impact
both the second and third quarters of the current fiscal year. The Health Care
division sales growth benefited from several clients with contract changes where
the employees were moved onto the Company's payroll, thus increasing the costs
billed to those clients. Absent these two items, the Company estimates sales
growth would have been about 5% for First Quarter Fiscal Year 2000 versus the
prior year.
Managed volume, which represents the Company's measurement of gross revenues
associated with all services the Company manages on behalf of its clients, is
most relevant in the Health Care and Schools divisions. The Health Care
division's managed volume was $712 million for First Quarter Fiscal Year 2000,
up $13 million or 2% over the $699 million in managed volume for same quarter
last year. Managed volume for the Schools division was $210 million for First
Quarter Fiscal Year 2000, an increase of $16 million, or 8% over the $194
million for Pro Forma First Quarter Fiscal Year 1999. The growth in the Schools
division was due to the impact of strong new sales in the later half of Fiscal
Year 1999. Health Care's growth reflected inflationary increases in existing
accounts.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $103 million for First Quarter
Fiscal Year 2000, a slight increase when compared with $101 million in operating
profit for the Pro Forma First Quarter Fiscal Year 1999. Operating profit
increased mostly due to increases in the Canadian and Laundries divisions, as
they experienced improving retention and strong comparable growth in existing
client sales, with Canada also having an improving exchange rate between the
U.S. and Canadian dollars. The Corporate Services division experienced a 5%
decline in operating profit for the current quarter compared with the prior
year's quarter, the result of increased labor rates in the highly competitive
markets that the Corporate Services division serves. Due to the national trend
of record low unemployment, the Company had in place several strategic
initiatives regarding labor costs; however, the up-tick in labor rates occurred
faster than the Company's initiatives could mitigate the increase. The Company
anticipates this trend will have a comparable impact on the Corporate Services
division's operating profit for the next quarter, with improvement anticipated
in the second half of Fiscal Year 2000. Operating profit was flat in the
remaining divisions as similar trends in new sales, gradually improving
retention, and comparable growth in existing client accounts were offset by
start-up costs in these divisions, the result of the strong new sales, which
included several larger new sales accounts with higher start-up costs compared
with the prior year.
Excluding Year 2000-related costs (see "Year 2000"), total operating costs,
corporate expenses and amortization of intangible assets represented, in the
aggregate, 94% of total sales for First Quarter Fiscal Year 2000, flat compared
with Pro Forma First Quarter Fiscal Year 1999's ratio. The Company anticipates
this margin will continue to be flat for the remainder of the current fiscal
year when compared with the prior year, as the Company continues to reinvest the
savings from its incremental purchasing synergies in the businesses. Overall,
the Company achieved about $5 million in purchasing synergies, and as planned,
reinvested these synergies in sales staff and management support teams. The
Company anticipates that it will obtain approximately $15 to $20 million in
additional synergies in Fiscal Year 2000, most of which will be reinvested in
the businesses. Additionally, the Company anticipates synergies to reach $60
million in cost savings annually by fiscal year 2001.
-4-
DISCUSSION OF FIRST QUARTER FISCAL YEAR 2000 AND PRO FORMA FIRST QUARTER
FISCAL YEAR 1999 RESULTS OF OPERATIONS, CONTINUED
Corporate expenses and amortization of intangible assets in the First Quarter
Fiscal Year 2000 totaled $31 million, a 16% increase from the $27 million for
the Pro Forma First Quarter Fiscal Year 1999. This increase was primarily due to
an increase of approximately $2 million in Year 2000-related costs (see "Year
2000") and a $1 million increase in assistance fees paid to Sodexho Alliance for
services received, as agreed upon in the merger agreements, as well as the
annualized impact of open positions filled during Fiscal Year 1999. The Pro
Forma First Quarter Fiscal Year 1999 included the favorable impact from the sale
of the Company's Bright Horizons Family Solutions ("BFAM") investment for a
pretax gain of $8 million, or $4 million after-tax ($0.07 per diluted common
share).
The increase in corporate expenses along with the sale of BFAM in the prior
year's first quarter contributed to a decrease in pretax income of $9 million,
or 16%, to $50 million for the First Quarter Fiscal Year 2000. The effective tax
rate for the current quarter was 44.0%, a decrease from 44.4% for 1999, due to
the continuing implementation of effective tax planning strategies. Net income
decreased to $28 million, or $0.44 per diluted share, compared with $33 million,
or $0.52 per diluted share for Pro Forma First Quarter Fiscal 1999.
-5-
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
THIRTEEN THIRTEEN
WEEKS WEEKS
ENDED ENDED
DECEMBER 3, NOVEMBER 27,
1999 1998
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SALES $1,288 $1,209
Operating Costs and Expenses 1,185 1,109
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OPERATING PROFIT BEFORE CORPORATE ITEMS 103 100
CORPORATE ITEMS:
Corporate expenses, including amortization of intangible assets (31) (33)
Interest expense, net (22) (23)
Gain on sale on investment -- 8
---------------- -----------------
Income Before Income Taxes 50 52
Provision for income taxes (22) (23)
---------------- -----------------
NET INCOME $ 28 $ 29
================ =================
BASIC EARNINGS PER SHARE $ 0.44 $ 0.46
================ =================
DILUTED EARNINGS PER SHARE $ 0.44 $ 0.45
================ =================
See notes to condensed consolidated financial statements.
-6-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
DECEMBER 3, SEPTEMBER 3,
1999 1999
(UNAUDITED)
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ASSETS
Current Assets
Cash and equivalents $ 47 $ 48
Accounts and notes receivable, net 555 445
Other 147 149
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Total current assets 749 642
Property and equipment, net 86 85
Intangible assets, net 526 535
Other assets 84 85
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$ 1,445 $ 1,347
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 194 $ 133
Accounts payable 261 238
Other current liabilities 366 347
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Total current liabilities 821 718
Long-term debt 960 980
Other long-term liabilities 114 113
Convertible subordinated debt - 30
Stockholders' Deficit
Preferred stock, no par value, 1 million shares authorized; no shares issued - -
Common stock, $1 par value, 300 million shares authorized;
63 million and 62 million shares issued and outstanding
at December 3, 1999, and September 3, 1999, respectively 63 62
Additional paid-in capital 1,346 1,326
Accumulated deficit (1,861) (1,884)
Accumulated other comprehensive income 2 2
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Total stockholders' deficit (450) (494)
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Total liabilities and stockholders' deficit $ 1,445 $ 1,347
================== ===================
See notes to condensed consolidated financial statements.
-7-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
DECEMBER 3, 1999 NOVEMBER 27, 1998
----------------------- -----------------------
CASH USED IN OPERATING ACTIVITIES
Net Income $ 28 $ 29
Adjustments to reconcile to cash used in operating activities:
Depreciation and amortization expense 21 21
Gain on sale of investment - (8)
Deferred income taxes - 1
Changes in working capital (71) (67)
Other 3 7
----------------------- -----------------------
NET CASH USED IN OPERATING ACTIVITIES (19) (17)
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (15) (12)
Dispositions 3 21
Payments for excess net tangible assets - (22)
Other (1) (4)
----------------------- -----------------------
NET CASH USED IN INVESTING ACTIVITIES (13) (17)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from borrowings from short-term credit facility 61 30
Repayments of long-term debt (20) -
Payments for redemption of convertible subordinated debt (11) -
Issuance of common stock 1 1
----------------------- -----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31 31
----------------------- -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1) (3)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 48 79
----------------------- -----------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 47 $ 76
======================= =======================
See notes to condensed consolidated financial statements.
-8-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(amounts in millions)
(Unaudited)
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF COMMON PAID-IN ACCUMULATED COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT INCOME TOTAL
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
62.3 Balance, September 3, 1999 $62 $1,326 $(1,884) $2 $(494)
-- Net income - - 28 - 28
-- Foreign exchange translation - - - - -
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME - - 28 - 28
Conversion of convertible
0.8 subordinated debt 1 19 - - 20
Dividends ($0.08 per
-- common share) - - (5) - (5)
Employee stock plan
-- issuance and other - 1 - - 1
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
63.1 Balance, December 3, 1999 $63 $1,346 $(1,861) $2 $(450)
============ =============================== =============== ============== =============== ================= ===============
See notes to condensed consolidated financial statements.
-9-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Sodexho Marriott Services, Inc. (together with its consolidated subsidiaries,
the "Company") is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, and primary and secondary schools. Food services include food
and beverage procurement, preparation and menu planning, as well as the
operation and maintenance of food service and catering facilities, generally on
a client's premises. Facilities management services include plant maintenance,
energy management, grounds keeping, housekeeping and custodial services.
The accompanying Condensed Consolidated Financial Statements of the Company have
been prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented not
misleading. However, the Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the period ended
September 3, 1999.
In the opinion of management, the accompanying Condensed Consolidated Financial
Statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of December 3, 1999 and September 3, 1999, and the results of operations for
the 13 weeks ended December 3, 1999 and November 27, 1998.
Interim results are not necessarily indicative of fiscal year performance. All
material intercompany transactions and balances between Sodexho Marriott
Services, Inc., and its consolidated subsidiaries have been eliminated. Certain
amounts previously presented have been reclassified to conform to the current
presentation.
TRANSACTIONS
In general, in March 1998, the Company distributed to its shareholders (the
"Distribution") the lodging segment and two of the three lines of business in
the contract services segment - Marriott Senior Living Services ("MSLS") and
Marriott Distribution Services ("MDS"). The lodging, MSLS and MDS business are
collectively referred to as the Distributed Operations. The third line of
business in the contract services segment, formerly known as Marriott Management
Services ("MMS"), combined with Sodexho North America (Sodexho Financiere du
Canada and subsidiaries, and International Catering Corporation and subsidiaries
taken collectively are known as "Sodexho North America" or "Sodexho USA") and
became the principal business of the Company. Immediately after the
Distribution, Sodexho transferred to the Company the operations of Sodexho North
America combined with a cash payment of $304 million in exchange for 29.9
million shares of the Company's common stock. Lastly, on March 27, 1998, the
Company borrowed $615 million and $620 million under the Secured SMS Facility
and Guaranteed SMS Facility, respectively (see Note 3). These proceeds were used
to repurchase $713 million of the Company's $720 million publicly held debt and
to repay its $950 million outstanding obligations under the Company's existing
credit facility (the "Refinancing"). Collectively, the Distribution, Acquisition
and Refinancing are called the "Transactions."
-10-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION AND ACCOUNTS AND NOTES RECEIVABLE
Revenues are recognized at the time services are rendered or products are
delivered. Revenues include reimbursements for food and payroll costs incurred
on behalf of customers under contracts in which the Company manages food service
programs for a fee. Losses, if any, are provided for at the time management
determines the cost will ultimately exceed contract revenue for the duration of
the contract.
The allowance for doubtful accounts was $21 million at December 3, 1999 and
September 3, 1999. Concentration of credit risk within accounts receivable is
limited because a large number of customers make up the Company's customer base,
thus spreading risk associated with trade credit. In addition, the Company
closely monitors its accounts receivable. The Company generally does not require
collateral and maintains reserves for potential uncollectible amounts, which, in
the aggregate, have not exceeded management's expectations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of undiscounted expected future cash flow is less than
the carrying amount of long-lived assets, the Company recognizes an impairment
loss based on the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
INTEREST-RATE AGREEMENTS
The Company's policies prohibit the use of derivative instruments for trading
purposes and procedures are in place to monitor and control their use. The use
of derivative instruments is limited to interest-rate agreements for the purpose
of reducing the variability of the Company's debt costs. These agreements are
entered into in conjunction with the issuance of the debt they are intended to
modify.
The notional balances of these agreements represent a balance used to calculate
the exchange of cash flows and are not assets or liabilities of the Company, and
do not represent an exposure to credit loss. The notional amount and interest
payments of these agreements match the cash flows of the related debt.
Accordingly, any market risk or opportunity associated with these agreements is
offset by the opposite market impact on the related debt. The Company's credit
risk related to interest-rate agreements is considered low because they are
entered into only with strong creditworthy counterparties and are generally
settled on a net basis. The difference paid or received on interest-rate
agreements is recognized as an adjustment to interest expense.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of outstanding common shares. Diluted earnings per share
is computed by dividing net income, adjusted for interest expense related to
convertible securities (after-tax), by the diluted weighted-average number of
outstanding common shares, including the "if-converted" shares relating to
convertible securities.
On October 7, 1999, Marriott International, Inc. ("MI") notified all holders of
the LYONs (see "Convertible Subordinated Debt" in Note 3), that MI had elected
to redeem all of the LYONs at a price of $619.65 for each $1,000 principal
amount at maturity of the LYONs, with a redemption date of November 8, 1999.
Conversion of the LYONs resulted in the issuance of 0.8 million shares of the
Company's common stock.
-11-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents. The Company uses
drafts in its cash management system. At December 3, 1999 and September 3, 1999,
the Company had $89 million and $83 million of outstanding drafts included in
accounts payable, respectively.
INVENTORIES
Inventories consist of food items and supplies, which are stated at the lower of
average cost or market, generally using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from 3 to 40 years. Replacements and improvements are capitalized.
Leasehold improvements, net of estimated residual value, are amortized over the
shorter of the useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and customer relationships.
Intangible assets are amortized on a straight-line basis over periods generally
ranging from 30 to 40 years for goodwill and 10 to 20 years for customer
relationships. Amortization expense totaled $9 million for each of the 13 weeks
ended December 3, 1999 and November 27, 1998.
OTHER ASSETS
Included in other assets are client investments, which represent amounts
provided by the Company to clients at contract inception for the purchase of
property and equipment pertaining to the contract. These amounts are amortized
over the life of the related contract. When a contract terminates prior to its
scheduled termination date, the client generally must repay any unamortized
client investment balance to the Company.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income for the Company includes activity in foreign exchange
translation adjustments and securities available for sale under SFAS No. 115.
Items identified as comprehensive income are reported, under separate captions,
in the Condensed Consolidated Balance Sheet and the Condensed Consolidated
Statement of Stockholders' Deficit.
Results for the Canada division are translated to U.S. dollars using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the applicable balance sheet date, and the
resulting translation adjustments are reflected in stockholders' deficit as
accumulated other comprehensive income.
Total accumulated other comprehensive income included $3.7 million of gross
foreign exchange translations gains, net of taxes totaling $1.6 million, at
December 3, 1999. Total accumulated other comprehensive income included gross
foreign exchange translation gains totaling $3.1 million, net of taxes totaling
$1.4 million at September 3, 1999. During the First Quarter Fiscal Year 2000,
total comprehensive income was comprised of $28 million in net income and $0.6
million of gross foreign translation gains, net of taxes totaling $0.2 million.
-12-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SEGMENT REPORTING
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. For fiscal
year reporting, the Company disclosed profit/loss, revenues and assets for each
segment identified, including reconciliations of these items to consolidated
totals. For interim reporting periods, the Company disclosed profit/loss and
revenues for each segment (see Note 6). The Company also disclosed the basis for
identifying the segments and the types of products and services within each
segment.
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
(2) INTEGRATION AND RESTRUCTURING
Integration costs, reflecting the undertaking by the Company to integrate and
realign resources for more effective and efficient execution of operating
strategies, totaled $8 million during the First Quarter of Fiscal Year 1999. The
operating profit before corporate items for First Quarter of Fiscal Year 1999
included $1.2 million of integration charges while corporate expenses included
$6.4 million of these charges. The integration costs included, among other
items, training and relocating of former MMS employees, incremental overhead
during the integration phase, systems modifications, and other one-time costs.
Restructuring costs represent employee termination benefits, office closure
expenditures, and other costs related to a restructuring plan initiated from the
Transactions. The acquisition reserve, which totaled $7 million at December 3,
1999, generally represents the remaining estimated cost of termination benefits,
which are generally paid out over a period of time, for approximately 350 former
Sodexho North America employees, as well as the estimated cost for the closure
and excess capacity in certain Sodexho North America offices.
Acquisition reserve activity is detailed below:
BALANCE AS OF BALANCE AS OF
SEPTEMBER 3, 1999 PAYMENTS DECEMBER 3, 1999
---------------------- -- ---------------------- -- ----------------------
($ in millions)
Employee Terminations $2.4 $(0.9) $1.5
Relocation of Sodexho Facilities 0.7 -- 0.7
Closures 1.9 (0.2) 1.7
Other Restructuring 2.6 -- 2.6
---------------------- ---------------------- ----------------------
Total $7.6 $(1.1) $6.5
====================== ====================== ======================
-13-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) DEBT
DECEMBER 3, SEPTEMBER 3,
1999 1999
----------------- -----------------
($ in millions)
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility 113 52
Other 1 1
----------------- -----------------
Total $ 194 $ 133
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 6.88% in fiscal year 2000 $ 410 $ 430
Senior Guaranteed Credit Facility, due 2005
averaging 6.93% in fiscal year 2000 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal year 2000 6 6
Other 1 1
Capital Lease Obligations 3 3
----------------- -----------------
Total $1,040 $1,060
Amount Reclassified to Short-Term Debt (80) (80)
----------------- -----------------
$ 960 $ 980
================= =================
Senior Secured Credit Facility - the senior secured credit facility consists of
$235 million of revolving credit and an additional $500 million, six-year term
loan facility. Interest is based on a bank prime rate, an amount over the
Federal funds rate, or an amount over the London interbank offered rate for
Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At December 3,
1999, the Company is paying a rate of 6.84% on the term loan facility, adjusted
for fee amortization and hedging costs. The senior secured credit facility is
secured predominately by inventory, accounts receivable and the stock of certain
subsidiaries of the Company. Up to $100 million of the $235 million revolving
credit may be used to collateralize letters of credit, which totaled $33 million
at December 3, 1999, and September 3, 1999. At December 3, 1999, $89 million of
this facility was not used and was available to the Company, compared with $150
million at September 3, 1999.
Senior Guaranteed Credit Facility - the senior guaranteed credit facility
consists of a $620 million seven-year term loan. Interest is based on a bank
prime rate, an amount over the Federal funds rate, or an amount over LIBOR,
payable in arrears quarterly. At December 3, 1999, the Company is paying a rate
of 6.87% on this facility, adjusted for fee amortization and hedging costs. This
facility is guaranteed by Sodexho, for which the Company pays Sodexho an annual
fee of 0.5% of the outstanding balance of the Senior Guaranteed Credit Facility,
or $3 million pretax.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flow.
The Company met the financial covenants of the debt agreements as of December 3,
1999 and for the 13-weeks then ended.
-14-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) DEBT, CONTINUED
CONVERTIBLE SUBORDINATED DEBT
On March 25, 1996, the Company issued $540 million (principal amount at
maturity) of zero coupon convertible subordinated debt in the form of Liquid
Yield Option(TM) Notes ("LYONs") due 2011. Each $1,000 LYON was convertible at
any time, at the option of the holder, into 8.76 shares of the Company's Common
Stock prior to the Transactions and the Distribution (see below). The LYONs were
issued at a discount representing a yield to maturity of 4.25%. The Company
recorded the LYONs at the discounted amount at issuance. Accretion was recorded
as interest expense and an increase to the carrying value. Gross proceeds from
the LYONs issuance were $288 million.
Upon consummation of the Distribution, each LYON was convertible into 2.19
shares of the Company's common stock (after giving effect for the one-for-four
reverse stock split), as well as 17.52 shares of MI's Common Stock. The LYONs
were assumed by MI, and the Company assumed responsibility for a portion of the
LYONs equal to its pro rata share of the relative equity values of the Company
and MI as determined in good faith by the Company prior to the Distribution,
although MI remains liable to the holders of the LYONs for any payments that the
Company fails to make on its allocable portion.
On October 7, 1999, MI notified all holders of the LYONs, that MI had elected to
redeem all of the LYONs at a price of $619.65 for each $1,000 principal amount
at maturity of the LYONs, with a redemption date of November 8, 1999. The
Company's allocated portion of the LYONs totaled $30 million just prior to
conversion, and at September 3, 1999. The results of the redemption for the
Company were the issuance of approximately 760,000 common shares and a payment
of $10.8 million to MI for the Company's share of bondholders choosing to redeem
in cash.
INTEREST-RATE AGREEMENTS
At December 3, 1999, the majority of the Company's debt was payable at variable
rates of interest. As part of the Refinancing of the Company's debt, the Company
entered into several interest-rate agreements on May 29, 1998 totaling $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.70% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The weighted-average rate for the total debt portfolio,
including the affect of the interest-rate agreements, was 6.94% at December 3,
1999. These agreements expire between May 2001 and February 2005.
Details of these interest rate agreements as of December 3, 1999 are as follows:
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS--
TERMS BALANCE VALUE* PAID RECEIVED 13 WEEKS
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
($ in millions)
Received Variable
Pay Fixed, Maturing 5/--8/01 $400 $ 4 5.71% 6.11% $(0.2)
Received Variable
Pay Fixed, Maturing 8/02 300 5 5.84 6.11 (0.3)
Received Variable
Pay Fixed, Maturing 8/05 200 6 5.90 6.11 (0.2)
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
$900 $15 5.80% 6.11% $(0.7)
=================================== =============== ============== =============== =============== ===============
<FN>
*-- based on the termination cost for these agreements obtained by third party
market quotes.
</FN>
At December 3, 1999, the Company did not have any accrued interest receivable or
payable to its counterparties and did not have any unamortized fees or premiums
under these agreements. All of the Company's interest-rate agreements are for
purposes other than trading.
-15-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(4) STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. At December 3, 1999, the Company
had 63,138,862 shares outstanding. One million shares of preferred stock,
without par value, are authorized, with none issued.
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
THIRTEEN THIRTEEN
WEEKS WEEKS
ENDED ENDED
DECEMBER 3, NOVEMBER 27,
1999 1998
------------------- ------------------
(in millions, except per share amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income $ 28 $ 29
=================== ==================
Weighted Average Shares Outstanding 62.5 62.0
=================== ==================
BASIC EARNINGS PER SHARE $ 0.44 $ 0.46
=================== ==================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $ 27.8 $ 28.7
After-tax Interest Expense on Convertible Subordinated Debt 0.1 0.2
------------------- ------------------
Diluted Net Income $ 27.9 $ 28.9
=================== ==================
Weighted Average Shares Outstanding 62.5 62.0
Effect of Dilutive Securities*:
Employee Stock Option Plan 0.2 0.8
Deferred Stock Incentive Plan 0.1 0.1
Convertible Subordinated Debt 0.9 1.2
------------------- ------------------
Diluted Weighted Average Shares Outstanding 63.7 64.1
=================== ==================
DILUTED EARNINGS PER SHARE $ 0.44 $ 0.45
=================== ==================
<FN>
* -- Certain employee and deferred stock options to purchase shares of common
stock were outstanding but were not included in the computation of diluted
earnings per share because the exercise prices of the options were greater than
the average market price of the common shares and thus were anti-dilutive. The
weighted-average total of excluded shares was approximately 3.9 million and 4
thousand at December 3, 1999 and November 27, 1998, respectively.
</FN>
-16-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(5) EMPLOYEE BENEFIT AND INCENTIVE PLANS
DEFERRED COMPENSATION PLANS
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. As part of the Distribution,
the Company elected to continue the deferred compensation plan and has
established a new savings plan for the Company separate from the MI profit
sharing plan. The Company assumed the obligations and liabilities of the
undistributed portion of the deferred compensation plan in relationship to the
employees retained by the Company after the Distribution. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 13 weeks ended
December 3, 1999, expenses that related to these plans totaled $2.8 million,
compared to $3.6 million for the 13 weeks ended November 27, 1998.
STOCK OPTION PLANS
The Company has two stock-based incentive plans-- the Sodexho Marriott Services,
Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (the "1993 Plan" or the
"1998 Plan"). The purpose of these plans is to promote and enhance the long-term
growth of the Company by aligning the interests of the employees with the
interests of the Company's shareholders. The 1993 Plan administers converted
stock options prior to the Distribution, with no new awards made under this
plan. The 1998 Plan governs the issuance and administration of conversion awards
and is also available for the issuance of new awards. These stock plans are
administered by the Compensation Policy Committee as authorized by the Board of
Directors. As part of the Distribution and the amendment of these plans, and in
relationship to the changes in the capital structure of the Company after the
Distribution, the Board of Directors has approved up to 10 million shares of
common stock to be available under the 1998 Plan for converted options as well
as new awards.
Employee stock options may be granted to officers and key employees at exercise
prices not less than the market price of the Company's stock on the date of
grant. Most options under the stock option plans are exercisable in cumulative
installments of one-fourth at the end of each of the first four years following
the date of grant. The Company issued 2.4 million in stock option awards during
the first 13 weeks of fiscal year 2000, which included approximately 500,000 of
one-time grants for eligible unit general managers.
A summary of the Company's stock option activity during the 13 weeks ended
December 3, 1999, is presented below:
THIRTEEN WEEKS ENDED
DECEMBER 3, 1999
--------------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
----------------- -----------------
Outstanding at September 3, 1999 4.6 $21
Granted during the thirteen weeks 2.4 17
Exercised during the thirteen weeks (0.1) 7
Forfeited during the thirteen weeks - -
----------------- -----------------
Outstanding at December 3, 1999 6.9 $20
================= =================
Options exercisable at December 3, 1999 2.2 $18
================= =================
-17-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(6) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
13 WEEKS ENDED 13 WEEKS ENDED
DECEMBER 3, NOVEMBER 27,
1999 1998
---------------- --- ----------------
($ in millions)
GROSS SALES
Corporate Services $ 351 $ 335
Health Care 335 315
Education 422 396
Schools 118 108
Canada 44 37
Laundries/Other 18 18
---------------- ----------------
Total Gross Sales $1,288 $1,209
================ ================
GROSS OPERATING PROFIT
Corporate Services $ 21 $ 22
Health Care 27 26
Education 44 44
Schools 7 6
Canada 3 2
Laundries/Other 1 -
---------------- ----------------
Total Gross Operating Profit $ 103 $ 100
================ ================
Corporate Items (53) (48)
---------------- ----------------
Income Before Income Taxes $ 50 $ 52
================ ================
(7) COMMITMENTS AND CONTINGENCIES
The nature of the business of the Company causes it to be involved in routine
legal proceedings from time to time. Management of the Company believes that
there are no pending or threatened legal proceedings that upon resolution would
have a material adverse impact to the Company.
-18-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the unaudited 13-week period ended December 3, 1999 ("First Quarter
Fiscal Year 2000") as compared with the historical unaudited 13-week period
ended November 27, 1998 ("First Quarter Fiscal Year 1999").
DUE TO THE DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S HISTORICAL
OPERATING RESULTS FOR THE FIRST QUARTER FISCAL YEAR 2000 VERSUS FIRST QUARTER
FISCAL YEAR 1999, MANAGEMENT BELIEVES THAT IT IS MOST MEANINGFUL AND RELEVANT,
IN UNDERSTANDING THE PRESENT AND ONGOING OPERATIONS OF THE COMPANY, TO REVIEW
THE COMPANY'S PRO FORMA OPERATING RESULTS PRESENTED IN THE "INTRODUCTION"
SECTION OF THIS REPORT.
FIRST QUARTER FISCAL YEAR 2000 VS. FIRST QUARTER FISCAL YEAR 1999
Total sales for First Quarter Fiscal Year 2000 were $1.29 billion, an increase
of $79 million, or 6.5%, over $1.21 billion for First Quarter Fiscal Year 1999.
This growth was mostly attributable to strong new sales and solid comparable
growth in existing accounts in most of the Company's divisions. Overall, the
Company also experienced gradually improving retention of its existing clients
in the current quarter over the prior year's quarter.
Over half of the sales growth was attributed to the Education and Health Care
divisions. The Education division experienced a change in the academic calendar
versus last year, resulting in approximately two to three additional board days
over the prior year's quarter. The Company expects this calendar shift to impact
both the second and third quarter of the current fiscal year. The Health Care
division's sales growth benefited from several clients with contract changes
where the employees were moved onto the Company's payroll, which increased the
costs billed to those clients. Thus, adjusting for these items, the Company
estimates sales growth would have been about 5% for First Quarter Fiscal Year
2000 versus the prior year.
Managed volume, which represents the Company's measurement of gross revenues
associated with all services the Company manages on behalf of its clients, is
most relevant in the Health Care and Schools divisions. The Health Care
division's managed volume was $712 million for First Quarter Fiscal Year 2000,
up $13 million or 2% over the $699 million in managed volume for same quarter
last year. Managed volume for the Schools division was $210 million for First
Quarter Fiscal Year 2000, an increase of $16 million, or 8% over the $194
million for First Quarter Fiscal Year 1999. The growth in the Schools division
was due to the impact of strong new sales in the later half of Fiscal Year 1999.
Health Care's growth reflected inflationary increases in existing accounts.
Operating profit before corporate items (corporate expenses, interest expense
and amortization of intangible assets) totaled $103 million for First Quarter
Fiscal Year 2000, a 3% increase when compared with $100 million in operating
profit for the First Quarter Fiscal Year 1999. Operating profit increased mostly
due to increases in the Canadian and Laundries divisions, as they experienced
improving retention and strong comparable growth in existing client sales, with
Canada also having an improving exchange rate between the U.S. and Canadian
dollars. The Corporate Services division experienced a 5% decline in operating
profit for the current quarter compared with the prior year's quarter, the
result of increased labor rates in the highly competitive markets that the
Corporate Services division serves. Due to the national trend of record low
unemployment, the Company had in place several strategic initiatives regarding
labor costs; however, the up-tick in labor rates occurred faster than the
Company's initiatives could mitigate the increase. The Company anticipates this
trend will have a comparable impact on the Corporate Services division's
operating profit for the next quarter, with improvement anticipated in the
second half of Fiscal Year 2000. Operating profit was flat in the remaining
divisions as similar trends in new sales, gradually improving retention, and
comparable growth in existing client accounts were offset by start-up costs in
these divisions, the result of the strong new sales, which included several
larger new sales accounts with higher start-up costs compared with the prior
year.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
FIRST QUARTER FISCAL YEAR 2000 VS. FIRST QUARTER FISCAL YEAR 1999, CONTINUED
Excluding integration and Year 2000-related costs (see "Year 2000"), total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 94% of total sales for First Quarter Fiscal Year
2000, flat compared with First Quarter Fiscal Year 1999's ratio. The Company
anticipates this margin will continue to be flat for the remainder of the
current fiscal year when compared with the prior year, as the Company continues
to reinvest the savings from its incremental purchasing synergies in the
businesses. Overall, the Company achieved about $5 million in purchasing
synergies, and as planned, reinvested these synergies in sales staff and
management support teams. The Company anticipates that it will obtain
approximately $15 to $20 million in additional synergies in Fiscal Year 2000,
most of which will be reinvested in the businesses. Additionally, the Company
anticipates to reach $60 million in cost savings annually by fiscal year 2001.
Corporate expenses and amortization of intangible assets in the First Quarter
Fiscal Year 2000 totaled $31 million, a 16% increase from the $27 million for
the First Quarter Fiscal Year 1999, after adjusting for approximately $6 million
in integration costs included in the prior year's quarter (see Note 2). This
increase was primarily due to an increase of approximately $2 million in Year
2000-related costs (see "Year 2000") and a $1 million increase in assistance
fees paid to Sodexho Alliance for services received, as agreed upon in the
merger agreements, as well as the annualized impact of open positions filled
during Fiscal Year 1999. The First Quarter Fiscal Year 1999 included the
favorable impact from the sale of the Company's Bright Horizons Family Solutions
("BFAM") investment for a pretax gain of $8 million, or $4 million after-tax
($0.07 per diluted common share).
The increase in corporate expenses along with the sale of BFAM in the prior
year's first quarter contributed to a decrease in pretax income of $2 million,
or 4%, to $50 million for the First Quarter Fiscal Year 2000. The effective tax
rate for the current quarter was 44.0%, a decrease from 44.4% for 1999, due to
the continuing implementation of effective tax planning strategies. Net income
decreased to $28 million, or $0.44 per diluted share, compared with $29 million,
or $0.45 per diluted share for First Quarter Fiscal Year 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged and anticipates that it would have long-term
unsecured debt ratings, if obtained, below investment grade based on its pro
forma financial statements. The debt resulting from the Refinancing contains
restrictive covenants and requires grants of security and guarantees by
subsidiaries of the Company, which limit the Company's ability to incur
additional debt and engage in certain other activities. Additionally, these debt
covenants limit the Company's ability to pay dividends.
Capital requirements are funded from a combination of existing cash balances and
operating cash flow. Additionally, the Company anticipates achieving annual cost
savings of approximately $60 million pretax by the end of fiscal year 2001,
resulting from purchasing actions and administrative synergies. The Company
estimates that it will achieve approximately $15 to $20 million in incremental
synergies in fiscal year 2000, compared with $25 million achieved in fiscal year
1999. These anticipated cost savings will be available to pay down debt and
reinvest in the Company to fund activities to enhance its competitive position.
Anticipated incremental synergies generated in fiscal year 2000 are expected to
be reinvested during fiscal year 2000. These reinvestments, which are targeted
primarily for additional sales and management personnel, have already begun.
In addition, the Company has undertaken an information systems strategy study to
evaluate the current state of its information systems, and consider information
technology options. Among the options under consideration is the adoption of
certain elements of the technology platform adopted by Sodexho Alliance. This
evaluation will require additional time to study and review alternatives and
their impact on capital investments, earnings, shareholder value and the
provisions of the Company's debt agreements. Strategic developments in this area
are expected to be finalized during Fiscal Year 2000. Most recently, the Company
began a study of payroll and human resource related systems, as the Company
migrates from the current Marriott International payroll-related systems by
December 31, 2001. Previously, the Company had expected to migrate off the
Marriott International payroll-related infrastructure no later than fiscal year
2002. Subject to the foregoing, the Company believes that current cash flow
generated from operations and cash balances will be adequate to finance ongoing
capital needs, meet debt service requirements and fund the Company's planned
growth initiatives.
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
As of December 3, 1999, the Company had a $235 million revolving credit facility
available at an interest rate of 7.70% to provide funds for liquidity, seasonal
borrowing needs and other general corporate purposes. At December 3, 1999, $113
million of this facility was outstanding, while an additional $33 million of
this revolving credit facility was utilized by letters of credit outstanding,
principally related to insurance programs.
On October 13, 1999, the Board of Directors declared an $0.08 per common share
dividend for Fiscal Year 1999, paid on December 10, 1999 to shareholders of
record on November 22, 1999. The Company may pay dividends in the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40% of the Company's net income, or 45% when the ratio of
the Company's consolidated debt to Earnings Before Interest, Taxes, Depreciation
and Amortization ratio ("EBITDA", as defined in the documentation for the credit
facility agreements) is less than 4 but not less than 3. This restriction will
no longer apply when such ratio is less than 3. The payment and amount of cash
dividends on the Company's common stock will be subject to the sole discretion
of the Company's Board, which will review the Company's dividend policy at such
times as may be deemed appropriate. The Board will closely monitor the results
of the Company's operations, capital requirements, and other considerations to
determine the extent to which a dividend may be declared in future periods.
The Company is required to make quarterly cash interest payments on its term
facilities, as well as scheduled principal repayments on its Senior Secured
Credit Facility (see Note 3) amounting to approximately: $80 million in 2000;
$80 million in 2001; $90 million in 2002; $115 million in 2003 and $65 million
in 2004.
On October 7, 1999, Marriott International notified all holders of the LYONs,
that Marriott International had elected to redeem all of the LYONs at a price of
$619.65 for each $1,000 principal amount at maturity of the LYONs, with a
redemption date of November 8, 1999. The results of the redemption for the
Company were the issuance of approximately 760,000 common shares and a payment
of $10.8 million to MI for the Company's share of bondholders choosing to redeem
in cash.
During the First Quarter of Fiscal Year 2000, the Company experienced its normal
seasonal impact on working capital as accounts receivable and accounts payable
increased with the increase in overall demand for services in the Education and
Schools divisions during the quarter.
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements, on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance- sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
YEAR 2000
GENERAL. The Company has actively addressed potential Year 2000 issues. These
issues could have arisen at any point in the Company's purchasing, supply,
processing, distribution and financial chains. Although incomplete or untimely
resolution of the Year 2000 issue by the Company, its key suppliers, clients and
other parties could have had a material adverse effect on the Company's
business, results of operations, financial condition and cash flow, the results
to date indicate that Year 2000 issues have had no material adverse impact on
the Company.
SYSTEMS. The Company has completed the implementation and rollout of compliant
versions of software and personal computers to replace those the Company owns.
In addition, the Company has completed the removal of nearly all of the
non-compliant systems and expects completion in the next quarter. While the
Company has experienced a few minor software failures, primarily in third party
software, they have had no impact on the Company.
The Company's operations are reporting no Year 2000 compliance issues with
respect to facilities systems and the supply chain. In addition, the Company has
not received any reports indicating a need to implement a contingency plan.
RISKS. Some risks associated with the Year 2000 issue may remain. While the
Company is conducting business as usual, the Company will continue to watch for
Year 2000 related events that could impact its business, results of operation,
financial condition and cash flow. The Company believes that its experience in
handling business disruptions resulting from non-Year 2000 events should
significantly reduce any adverse effects of any potential Year 2000 disruptions.
COSTS. The Company had previously estimated that the pretax costs to be borne by
it to address the Year 2000 issue would be approximately $5-8 million,
principally for modification, testing, validation, project management and
contingency and business continuity planning. These costs have been expensed as
incurred and funded from operating cash flow. Through First Quarter Fiscal Year
2000, approximately $7.6 million had been incurred and expensed, and the Company
anticipates spending a total of approximately $8 million for this Project. The
Company does not separately identify certain internal costs incurred for the
Project, most of which are related to the Company's internal IT-personnel costs.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $1.2 billion at December 3, 1999. If interest rates increased by 100
basis points, the fair value of the Company's debt would have decreased by
approximately $19 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $20 million,
based on balances at December 3, 1999.
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PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings pending against the Company.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
NO. DESCRIPTIONS
---- ------------
27 Financial Data Schedule of the Registrant
99 Forward-Looking Statements
(b) Reports on Form 8-K
November 3, 1999 Press Release, dated November 3, 1999,
announcing the resignation of
Lawrence E. Hyatt as Chief Financial
Officer of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SODEXHO MARRIOTT SERVICES, INC.
January 18, 2000 /S/ LOTA S. ZOTH
-----------------------------------------------
Lota S. Zoth
Vice President, Corporate Controller and
Chief Accounting Officer
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