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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended March 2, 2001
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
--------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 Washingtonian Boulevard, Gaithersburg, Maryland 20878
---------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(301) 987-4500
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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 April 10, 2001
------------------- ------------------
Common Stock $1.00
par value per share 63,610,236
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SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
Page No.
-------
Overview 1
Forward-Looking Statements 1
Part I.
Financial Information (Unaudited)
Condensed Consolidated Statements of Income -
Thirteen and Twenty-Six Weeks Ended March 2, 2001
and March 3, 2000 2
Condensed Consolidated Balance Sheets -
as of March 2, 2001 and September 1, 2000 3
Condensed Consolidated Statements of Cash Flows -
Twenty-Six Weeks Ended March 2, 2001
and March 3, 2000 4
Condensed Consolidated Statement of Stockholders' Deficit-
as of March 2, 2001 5
Notes to the Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 14
Quantitative and Qualitative Disclosures about Market Risk 17
Part II.
Other Information and Signatures
Legal Proceedings 18
Changes in Securities 18
Defaults Upon Senior Securities 18
Submission of Matters to a Vote of Security Holders 18
Other Information 19
Exhibits and Reports on Form 8-K 19
Signatures 20
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.
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 Results of Operations and
Financial Condition 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, S.A., (ii) the potential adverse impact of the Company's substantial
indebtedness, including restrictions and remedies available within the related
debt covenants, (iii) the ability of the Company to attract, hire, train and
retain competent management personnel, (iv) competition in the food services and
facilities management industries, (v) the effects of general economic
conditions, including the record low level of unemployment, (vi) the ability of
the Company to retain clients and obtain new clients on satisfactory terms, and
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission including those set forth in Exhibit 99 filed
herein.
As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on the forward-looking statements included in this report or that
may be made elsewhere from time to time by, or on behalf of, the Company. The
Company assumes no obligation to update any forward-looking statements.
-1-
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
Sodexho Marriott Services, Inc.
Condensed Consolidated Statements of Income
($ in millions, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------------- -------------------------------------
March 2, March 3, March 2, March 3,
2001 2000 2001 2000
----------------- ---------------- ----------------- ----------------
Sales $1,237 $1,179 $2,596 $2,467
Operating Costs and Expenses 1,157 1,101 2,398 2,286
----------------- ---------------- ----------------- ----------------
Operating Profit 80 78 198 181
Corporate expenses, including
amortization of intangible assets (32) (31) (67) (63)
Interest expense, net (19) (21) (39) (43)
----------------- ---------------- ----------------- ----------------
Income Before Income Taxes 29 26 92 75
Provision for income taxes (12) (12) (39) (33)
----------------- ---------------- ----------------- ----------------
Net Income $ 17 $ 14 $ 53 $ 42
================= ================ ================= ================
Basic Earnings Per Share $ 0.27 $ 0.23 $ 0.84 $ 0.67
================= ================ ================= ================
Diluted Earnings Per Share $ 0.27 $ 0.23 $ 0.83 $ 0.67
================= ================ ================= ================
See notes to the condensed consolidated financial statements.
-2-
Sodexho Marriott Services, Inc.
Condensed Consolidated Balance Sheets
($ in millions)
(Unaudited)
March 2, September 1,
2001 2000
-------------- ---------------
Assets
Current Assets
Cash and equivalents $ 70 $ 54
Accounts and notes receivable, net 515 463
Other current assets 159 165
-------------- ---------------
Total current assets 744 682
Property and equipment, net 95 96
Intangible assets, net 478 497
Other long-term assets 104 89
-------------- ---------------
Total assets $ 1,421 $ 1,364
============== ===============
Liabilities and Stockholders' Deficit
Current Liabilities
Current portion of long-term debt $ 81 $ 81
Accounts payable 322 305
Other current liabilities 406 379
-------------- ---------------
Total current liabilities 809 765
Long-term debt 859 900
Other long-term liabilities 110 112
-------------- ---------------
Total liabilities 1,778 1,777
Stockholders' Deficit
Preferred stock, no par value, 1 million shares authorized; no shares issued - -
Common stock, $1 par value, 300 million shares authorized;
64 million and 63 million shares issued and outstanding
at March 2, 2001, and September 1, 2000, respectively 64 63
Additional paid-in capital 1,352 1,348
Accumulated deficit (1,773) (1,826)
Employee restricted stock units 5 -
Accumulated other comprehensive (loss) income (5) 2
-------------- ---------------
Total stockholders' deficit (357) (413)
-------------- ---------------
Total liabilities and stockholders' deficit $ 1,421 $ 1,364
============== ===============
See notes to the condensed consolidated financial statements.
-3-
Sodexho Marriott Services, Inc.
Condensed Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Twenty-Six Weeks Ended
----------------------------------------
March 2, March 3,
2001 2000
------------------ -------------------
Cash Flows From Operating Activities
Net Income $ 53 $ 42
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization expense 44 41
Changes in working capital (5) (4)
Other (5) 3
------------------ -------------------
Net Cash Provided by Operating Activities 87 82
Cash Flows from Investing Activities
Capital expenditures (34) (34)
Dispositions 1 4
Other (2) (3)
------------------ -------------------
Net Cash Used In Investing Activities (35) (33)
Cash Flows from Financing Activities
Proceeds from borrowings from short-term credit facility -- 6
Repayments of long-term debt (40) (40)
Payments for redemption of convertible subordinated debt -- (11)
Issuance of common stock 4 1
Dividends paid -- common -- (5)
------------------ -------------------
Net Cash Used In Financing Activities (36) (49)
------------------ -------------------
Net Increase in Cash and Cash Equivalents 16 --
Cash and Cash Equivalents Beginning of Period 54 48
------------------ -------------------
Cash and Cash Equivalents End of Period $ 70 $ 48
================== ===================
See notes to the condensed consolidated financial statements.
-4-
Sodexho Marriott Services, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
(amounts in millions)
(Unaudited)
Employee Accumulated
Number Additional Restricted Other
of Common Paid-In Accum. Stock Comprehensive
Shares Stock Capital Deficit Units (Loss) Income Total
- ------------- -------------------------------- ------------- ------------- ----------- ------------ ------------------ ----------
63.2 Balance, September 1, 2000 $63 $1,348 $(1,826) $- $ 2 $(413)
-- Net income - - 53 - - 53
Cumulative-effect
of change in accounting
-- method, net - - - - 8 8
Change in fair value
-- of derivatives, net - - - - (14) (14)
Foreign exchange
-- translation, net - - - - (1) (1)
- ------------- -------------------------------- ------------- ------------- ----------- ------------ ------------------ ----------
-- Total Comprehensive Income - - 53 - (7) 46
Employee incentive plan
0.3 issuance and other 1 4 - 5 - 10
- ------------- -------------------------------- ------------- ------------- ----------- ------------ ------------------ ----------
63.5 Balance, March 2, 2001 $64 $1,352 $(1,773) $5 $(5) $(357)
============= ================================ ============= ============= =========== ============ ================== ==========
See notes to the condensed consolidated financial statements.
-5-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of the Company are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These 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 1, 2000.
In the opinion of management, the accompanying Condensed Consolidated Financial
Statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 2, 2001 and September 1, 2000, and the results of operations for the
13 and 26 weeks ended March 2, 2001 and March 3, 2000.
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.
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 at March 2, 2001, unchanged
from September 1, 2000. 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.
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 effect of the Company's employee
incentive plans (including deferred and restricted stock) and the convertible
subordinated debt securities.
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 5).
-6-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Adoption of Statement of Financial Accounting Standards No. 133 ("SFAS No. 133")
On September 2, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. In accordance with the provisions in SFAS No. 133, the
Company has designated all of its interest-rate agreements as cash flow hedges.
The Company has determined that these agreements are highly effective in
offsetting the variable interest cash flows of the Company's debt portfolio. The
agreements were recorded on the balance sheet at fair value in other long-term
assets with the offsetting entry to accumulated other comprehensive income, a
component of stockholders' deficit, net of tax. The transition adjustment from
the adoption of SFAS No. 133, resulted in a cumulative-effect adjustment to
accumulated other comprehensive income of $15 million, net of taxes totaling $7
million. The Company does not anticipate any reclassifications to earnings from
accumulated other comprehensive income over the next 12 months, with adjustments
during the year related mostly to changes in the fair value of the related
agreements. There were no net gains or losses recognized on derivatives that had
previously been deferred, or 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.
Cash Flow Hedges
The Company's derivative and hedging strategy is aimed at managing interest-rate
risk and prohibits the use of derivative instruments for trading purposes.
Currently, the Company uses interest-rate agreements (the "agreements") to carry
out its interest-rate risk management strategy. These agreements generally
involve the exchange of fixed and variable rate interest payments between two
parties, based on a common notional principal amount and maturity date. The
notional amount and interest payments in these agreements match the cash flows
of assets and/or liabilities. 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. 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 with only 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 2 for the notional amounts, related
rates, maturities, and fair values of these agreements. All derivatives are
recognized on the balance sheet at their fair value. Reflective of the Company's
current derivative and hedging strategy, derivative contracts entered into are
designated as a cash flow hedges; a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset
or liability. Accordingly, changes in the fair value of these highly effective
agreements are recorded in other accumulated comprehensive income, until
earnings are affected by the variability of their cash flows (e.g., when
periodic settlements on a variable-rate asset or liability are recorded in
earnings).
Accumulated Other Comprehensive (Loss) Income
Comprehensive income for the Company includes activity in foreign exchange
translation adjustments and cash flow hedges under the adoption of SFAS No. 133.
Items identified as comprehensive income are reported, under separate captions,
in the Condensed Consolidated Balance Sheets 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.
-7-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Accumulated Other Comprehensive (Loss) Income, Continued
Total accumulated other comprehensive loss included $10 million of gross
unrealized losses on the fair value of derivatives, net of taxes totaling $4
million, partially offset by $2 million of gross foreign exchange translation
gains, net of taxes totaling $1 million, at March 2, 2001. Total accumulated
other comprehensive income included gross foreign exchange translation gains
totaling $3 million, net of taxes totaling $1 million, at September 1, 2000.
During the first half fiscal year 2001, total comprehensive income was comprised
of $53 million in net income, $15 million for the gross cumulative effect of
change in accounting method, net of taxes totaling $7 million, a $25 million
decrease in fair value of derivatives, net of taxes totaling $11 million, and $1
million of foreign exchange translation losses, net of taxes.
(2) DEBT
March 2, September 1,
2001 2000
---------------------------------------
($ in millions)
Short-Term Debt:
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility -- --
Other 1 1
----------------- -----------------
Total $ 81 $ 81
================= =================
Long-Term Debt:
Senior Secured Credit Facility, maturing 2004
Averaging 6.66% in fiscal year 2001 $ 310 $ 350
Senior Guaranteed Credit Facility, due 2005
Averaging 7.12% in fiscal year 2001 620 620
Unsecured debt:
Senior Debt, maturing through 2009
Averaging 7.07% in fiscal year 2001 6 6
Other -- 1
Capital lease obligations 3 3
----------------- -----------------
Total $ 939 $ 980
Amount Reclassified to Short-Term Debt (80) (80)
----------------- -----------------
$ 859 $ 900
================= =================
Senior Secured Credit Facility - the senior secured credit facility consists of
$235 million of revolving credit and an additional $500 million, six-year term
loan facility. Interest is based on a bank prime rate, an amount over the
Federal funds rate, or an amount over the London interbank offered rate for
Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At March 2, 2001,
the Company is paying a rate of 6.68% 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 $21 million
at March 2, 2001, and September 1, 2000. At March 2, 2001, $214 million of this
facility was not used and was available to the Company, the same as at September
1, 2000.
-8-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(2) DEBT, CONTINUED
Senior Guaranteed Credit Facility - the senior guaranteed credit facility
consists of a $620 million seven-year term loan. Interest is based on a bank
prime rate, an amount over the Federal funds rate, or an amount over LIBOR,
payable in arrears quarterly. At March 2, 2001, 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 Alliance, S.A. ("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 flows.
The Company met the financial covenants of the debt agreements as of March 2,
2001 and for the 26 weeks then ended.
Cash Flow Hedges
In accordance with the provisions in SFAS No. 133, the Company has designated
all of its interest-rate agreements as cash flow hedges. The Company entered
into these agreements to convert its floating-rate debt to fixed rates. At March
2, 2001, the majority of the Company's debt was payable at variable rates of
interest. In May 1998, the Company entered into several interest-rate agreements
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 aggregate fair value of the interest-rate agreements at
March 2, 2001 was an unrealized pretax loss of $9 million, compared with an
unrealized pretax gain of $15 million at the end of fiscal year 2000 (see Note
1). At March 2, 2001 and for the 26-week period ended, the Company did not have
any ineffective or deferred gain/loss adjustments related to its cash flow
hedges.
The weighted-average rate for the total debt portfolio, including the effect of
the interest-rate agreements, was 6.87% at March 2, 2001. These agreements
expire between May 2001 and February 2005. At March 2, 2001, the Company did not
have any accrued interest receivable or payable to its counterparties and did
not have any unamortized fees or premiums. All of the Company's interest-rate
agreements are for purposes other than trading. In January and February 2001,
the Company entered into several forward agreements totaling $300 million in
notional principal balance for the replacement of certain swap agreements that
mature between May and August 2001. These forward agreements mature in May and
August 2001, and had a negative fair value of approximately $1 million (pretax)
at March 2, 2001.
Details of these interest-rate agreements as of March 2, 2001 are as follows:
($ in millions)
Year-to-Date
Realized
Notional Weighted-Average Comprehensive
Principal Fair Interest Rate Income
Terms Balance Value* Paid Received (pretax)
- ------------------------------------------------------ ----------- ---------- ------------ ----------- ------------------
Received Variable-Pay Fixed, Maturing 5/01--8/01 $400 $(1) 5.73% 5.19% $2
Received Variable-Pay Fixed, Maturing 8/02 300 (4) 5.84 5.19 1
Received Variable-Pay Fixed, Maturing 2/05 200 (4) 5.90 5.19 1
- ------------------------------------------------------ ----------- ---------- ------------ ----------- ------------------
$900 $(9) 5.80% 5.19% $4
====================================================== =========== ========== ============ =========== ==================
<FN>
*-- based on the termination cost for these agreements obtained by third party market quotes.
</FN>
-9-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(3) STOCKHOLDERS' DEFICIT
Stockholders' Deficit
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. At March 2, 2001, the Company
had 63,536,538 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 Weeks Ended Twenty-Six Weeks Ended
------------------------------------- -------------------------------------
March 2, March 3, March 2, March 3,
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
(in millions, except per share (in millions, except per share
amounts) amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income $ 17.1 $ 14.6 $ 52.9 $ 42.4
================ ================= ================ =================
Weighted Average Shares Outstanding 63.3 63.2 63.3 62.9
================ ================= ================ =================
Basic Earnings Per Share $ 0.27 $ 0.23 $ 0.84 $ 0.67
================ ================= ================ =================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $ 17.1 $ 14.6 $ 52.9 $ 42.4
After-tax Interest Expense on
Convertible Subordinated Debt -- -- -- 0.1
---------------- ----------------- --------------- -----------------
Diluted Net Income $ 17.1 $ 14.6 $ 52.9 $ 42.5
================ ================= ================ =================
Weighted Average Shares Outstanding 63.3 63.2 63.3 62.9
Effect of Dilutive Securities*:
Employee Stock Options 0.9 -- 0.7 0.1
Employee Restricted Stock Units 0.2 -- -- --
Employee Deferred Stock 0.1 0.1 0.1 0.1
Convertible Subordinated Debt -- -- -- 0.4
---------------- ----------------- ---------------- -----------------
Diluted Weighted Average
Shares Outstanding 64.5 63.3 64.1 63.5
================ ================= ================ =================
Diluted Earnings Per Share $ 0.27 $ 0.23 $ 0.83 $ 0.67
================ ================= ================ =================
<FN>
* -- Certain employee stock options to purchase shares of common stock were
outstanding but were not included in the computation of diluted earnings per
share because the exercise prices of the options were greater than the average
market price of the common shares and thus were anti-dilutive. The
weighted-average total of excluded shares was approximately 1.5 million and 2.4
million for the 13 and 26 weeks ended March 2, 2001, respectively, compared to
approximately 6.0 million and 5.0 million for the 13 and 26 weeks ended March 3,
2000, respectively.
</FN>
-10-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(4) EMPLOYEE BENEFIT AND INCENTIVE PLANS
Benefit Plans
Employees meeting certain eligibility requirements can participate in the
Company's savings and deferred compensation plans. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 13-week and
26-week periods ended March 2, 2001, expenses that related to these plans
totaled approximately $4 million and $8 million, respectively, compared to $3
million and $7 million for the same periods last year.
Incentive 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 merger in March 1998, 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 amendment of these plans, 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. In addition, on January
10, 2001, the shareholders approved the Board of Directors' recommendation to
increase the number of shares approved under the 1998 Plan from 10 million to
11.5 million. This increase ensures the Company's ability to continue to promote
and enhance the long-term growth of the Company through rewarding and
recognizing outstanding employee performance.
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 become vested in installments
of one-fourth at the end of each of the first four years following the date of
grant. In December 2000, the Company issued approximately 1 million stock option
awards (within the Company's 1998 Plan and vesting terms detailed above) and
also issued approximately 360,000 employee restricted stock units. Generally,
the restricted stock units become issued shares (unrestricted) annually, on a
pro rata basis, over a four-year period. The Company believes these restricted
stock units will serve as an additional means to retain, reward and recognize
outstanding employees.
A summary of the Company's stock option activity during the 26 weeks ended March
2, 2001, is presented below:
Twenty-Six Weeks Ended
March 2, 2001
-----------------------------------
Weighted
Number of Average
Options Exercise
(in millions) Price
---------------- ---------------
Outstanding at September 1, 2000 6.5 $20
Granted during the twenty-six weeks 1.0 $21
Exercised during the twenty-six weeks (0.3) $16
Forfeited during the twenty-six weeks (0.3) $23
---------------- ---------------
Outstanding at March 2, 2001 6.9 $20
================ ===============
Options exercisable at March 2, 2001 3.2 $19
================ ===============
-11-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(5) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
Sales and operating profit by business segment:
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------------- -------------------------------------
March 2, March 3, March 2, March 3,
2001 2000 2001 2000
------------------------------------- -------------------------------------
($ in millions) ($ in millions)
Gross Sales
Corporate Services $ 352 $ 349 $ 713 $ 700
Health Care 370 348 725 683
Education 340 317 788 739
Schools 112 107 241 225
Canada 43 39 89 83
Laundries/Other 20 19 40 37
----------------- ---------------- ----------------- ----------------
Total Gross Sales $1,237 $1,179 $2,596 $2,467
================= ================ ================= ================
Gross Operating Profit
Corporate Services $ 21 $ 22 $ 45 $ 43
Health Care 30 28 58 55
Education 20 18 73 62
Schools 5 6 14 13
Canada 3 2 6 5
Laundries/Other 1 2 2 3
----------------- ---------------- ----------------- ----------------
Total Gross Operating Profit $ 80 $ 78 $ 198 $ 181
================= ================ ================= ================
Amortization; Interest, Net;
and Corporate Expenses (51) (52) (106) (106)
----------------- ---------------- ----------------- ----------------
Income Before Income Taxes $ 29 $ 26 $ 92 $ 75
================= ================ ================= ================
-12-
Sodexho Marriott Services, Inc.
Notes To The Condensed Consolidated Financial Statements, Continued
(Unaudited)
(6) COMMITMENTS AND CONTINGENCIES
On January 24, 2001, Sodexho Alliance, S.A. submitted a proposal to the Board of
Directors of the Company to acquire all of the common stock of the Company it
does not already own for $27 per share in cash. On January 25, 2001, Barry
Feldman v. William Shaw et. al. was filed in the Court of Chancery, New Castle
County, Delaware. A total of nine cases have now been filed, on a similar basis,
in which plaintiffs have sued the 8 individual members of the Board of Directors
of the Company, Sodexho Alliance, S.A., and the Company, alleging that
shareholders of the Company, as a class, have been harmed by the defendants'
claimed breaches of fiduciary duties related to the Sodexho Alliance, S.A.
proposal. These nine lawsuits are likely to be consolidated. The Company intends
to defend the lawsuits vigorously, and believes the lawsuits to be without
merit.
The nature of the Company's business 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.
(7) OTHER MATTERS
On January 29, 2001, the Company announced that its Board of Directors had
appointed a special committee to evaluate the proposal by Sodexho Alliance, S.A.
("Sodexho") to acquire all of the outstanding common shares of the Company that
are not already held by Sodexho, for $27 per share in cash. Also, Sodexho and
the Company have agreed that the royalty agreement, set to change on March 27,
2001, will continue under its present terms and conditions (0.05% of annual
gross revenues) until August 31, 2001. Sodexho and the Company will negotiate
the royalty fee to commence September 1, 2001, based on the fair market value of
the Company's use of the Sodexho name, consistent with the terms of the existing
royalty agreement. It is not yet known if, or to what extent, the royalty fee
might change; however, an increase in the royalty fee could have a material
adverse effect on the Company's results of operations.
-13-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THE SECOND QUARTER FISCAL YEAR 2001 COMPARED WITH THE SECOND QUARTER
FISCAL YEAR 2000
The Company had net income for the second quarter of fiscal year 2001 (13 weeks
ended March 2, 2001) of $17 million, or $0.27 per diluted common share, compared
with $14 million, or $0.23 per diluted common share for the second quarter of
fiscal year 2000 (13 weeks ended March 3, 2000). Diluted average shares totaled
64.5 million for the current quarter compared with 63.3 million for the prior
year's quarter.
Total sales for the second quarter of fiscal year 2001 were $1.24 billion,
an increase of $58 million, or 5% over the $1.18 billion in total sales for the
second quarter of fiscal year 2000. The divisions had solid growth performance
in the current quarter versus last year's quarter, with all divisions having
growth of 5% or more, excluding the Corporate Services division. This growth was
the result of solid increases in sales at existing accounts and good retention.
The Corporate Services division had sales growth of 1% in the current quarter
versus the prior year's quarter, due to lower account retention in the prior
year, and slower new sales in the later half of fiscal year 2000 and carrying
over into fiscal year 2001. This division's overall sales growth will continue
to be challenged by the very competitive nature of this segment.
Operating profit for the current quarter totaled $80 million, an increase
of $2 million, or 4% compared with operating profit of $78 million for the
second quarter of last year. Strong increases in the Education, Health Care and
Canada divisions, the result of growth in sales at existing accounts, was
partially offset by under-performance in the Corporate Services, Schools and
Laundries/Other divisions. Corporate Services had several under-performing
accounts and increases in bad debt expense. Schools also had a bad debt charge
at one large account and the unfavorable impact of a softer new sales season in
fiscal year 2000. The Laundries/Other division was impacted by the
under-performance of one larger facility and start up related costs for a new
facility in Chicago.
Partially offsetting the operating profit growth for the second quarter of
fiscal year 2001 was a $2 million increase in corporate expenses (excluding
amortization of intangible assets) when compared to the last year's second
quarter. Most of this increase was the result of positions unfilled in last
year's second quarter which were filled in the latter half of fiscal year 2000
and into the first half of fiscal year 2001, predominately in the Human
Resources and Information Technology areas.
Interest expense decreased $2 million or 8%, impacted by reduced levels of
debt and improved working capital results that helped keep down the use of the
Company's short-term credit facility (see "Liquidity and Capital Resources"
below). The effective tax rate for the current quarter was 40.3%, down from
44.0% in last year's second quarter, mostly due to the reduced impact of
nondeductible expenses and a lower effective state tax rate.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
THE FIRST HALF FISCAL YEAR 2001 COMPARED WITH THE FIRST HALF FISCAL YEAR 2000
The Company had net income for the first half of fiscal year 2001 (26 weeks
ended March 2, 2001) of $53 million, or $0.83 per diluted common share, compared
with $42 million, or $0.67 per diluted common share for the first half of fiscal
year 2000 (26 weeks ended March 3, 2000). Diluted average shares totaled 64.1
million for the first half of fiscal year 2001 compared with 63.5 million for
the prior year's period.
Total sales for the first half of fiscal year 2001 were $2.60 billion, an
increase of $129 million, or 5% over the $2.47 billion in total sales for the
first half of fiscal year 2000. All the divisions had solid growth performance
of 6% or more, excluding the Corporate Services division, due to solid increases
in sales at existing accounts and good retention. The Corporate Services
division had sales growth of 2% in the first half of fiscal 2001 versus the
prior year's first half, due to lower account retention in the prior year, and
slower new sales in the later half of fiscal year 2000 and carrying over into
fiscal year 2001. This division's overall sales growth will continue to be
challenged by the very competitive nature of this segment, with modest sales
growth anticipated for the remainder of fiscal year 2001.
Operating profit for the first half of fiscal year 2001 totaled $198
million, an increase of $17 million, or 10% compared with operating profit of
$181 million for the first half of last year. Strong increases in the Education,
Health Care, Schools and Canada divisions, the result of growth in sales at
existing accounts, was partially offset by under-performance in the Corporate
Services and Laundries/Other divisions. Corporate Services had unfavorable
trends in several under-performing accounts and increases in bad debt expense.
The Laundries/Other division was impacted by under-performance of one larger
facility and start up related costs for a new facility in Chicago.
Last fiscal year, the Company experienced inefficiencies in several first
year accounts in the Education division, negatively impacting operating profits
for this division in fiscal year 2000. Beginning in fiscal year 2001, the
Company implemented several initiatives to reduce start-up costs associated with
opening new business in this division as well as changes in the under-performing
accounts to improve their operating results. The results in this division for
the first half of fiscal year 2001 have been strong; but, as fiscal year 2001
progresses, the Education division is expected to compare less favorably to the
stronger operating profit results in the latter part of fiscal year 2000.
In the Corporate Services division, the challenges with retention in this
highly competitive segment and the slower new sales in the first half of fiscal
year 2001 are anticipated to continue to place pressure on this division's
operating profit. However, continued focus on labor costs, procurement
initiatives, and the improvement of several under-performing accounts are
anticipated to maintain or slightly improve the growth in operating profits for
Corporate Services in the second half of fiscal year 2001.
In the Health Care division, continued stable labor costs and improvements
from procurement initiatives were partially offset by some under-performance in
a few larger client accounts. The Health Care segment continues to be a
challenging and consolidating market segment as a result of pressure to assist
new and existing clients in meeting their demanding and changing fiscal
requirements. The Health Care division continues to focus on opportunities to
improve its under-performing accounts, as well as offering additional services,
which bring value to clients and improve the operating results of this segment.
Overall, management believes that this segment will continue to improve its
operating results compared with the prior year in the second half of fiscal year
2001.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
THE FIRST HALF FISCAL YEAR 2001 COMPARED WITH THE FIRST HALF
FISCAL YEAR 2000, CONTINUED
Partially offsetting the operating profit growth for the first half of
fiscal year 2001 was a $5 million (12%) increase in corporate expenses
(excluding the amortization of intangible assets) versus last year's period.
Most of this increase was the result of positions unfilled in last year's first
half which were filled in the latter half of fiscal year 2000 and into the first
half of fiscal year 2001, predominately in the Human Resources and Information
Technology areas.
Interest expense decreased $4 million or 9%, impacted by reduced levels of
debt and improved working capital results that helped keep down the use of the
Company's short-term credit facility (see "Liquidity and Capital Resources"
below). The effective tax rate for the first half of fiscal year 2001 was 42.5%,
down from 44.0% in last year's first half, mostly due to the reduced impact of
nondeductible expenses and a lower effective state tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital needs from a combination of existing cash balances
and cash from operations. The Company's large debt portfolio is a result of the
Company's spin-off and merger in March 1998. Net cash flows from operations for
the first half of fiscal year 2001 totaled $87 million, an improvement of $5
million when compared with the first half of fiscal year 2000. This favorable
result was mostly attributed to the increase in net income when comparing the
first half of fiscal year 2001 with the prior year's period. The Company
continues to focus on increasing collection efforts in its accounts receivable
portfolio and refining its vendor payment cycles.
The Company achieved its $40 million cumulative synergy target for fiscal
year 2000. In addition, the Company achieved its overall objective established
at the time of the March 1998 merger of $60 million in cumulative synergies
through the second quarter of fiscal year 2001.
The Company's Board of Directors did not declare a dividend during the
first half of fiscal year 2001. 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. 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. At a recent Board of Directors meeting, the Board approved an initial
phase of the Company's information technology strategy, which has now moved from
a strategic study to a phased-in implementation process. This phase includes the
approval of a new accounting system in the Company's Financial Services Center
located in Buffalo, New York, with an estimated cost of approximately $30
million over the next 24 months. Of this $30 million, approximately $26 million
would be capitalized and the remaining balance would be recognized within the
Company's operating expenses. The total operating expenses to be incurred in
fiscal year 2001 are not expected to be material. Approximately $8 million of
capital expenditures are anticipated to be disbursed within the current fiscal
year. Management anticipates that additional details regarding the system,
vendor selection and implementation strategy will be available later in the
fiscal year. Updates regarding additional steps of the Company's overall
information systems strategy will be made available as those stages are
approved.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Most recently, the Company began a study of a solution set for its
payroll, benefits and human resources information systems, as the Company
migrates from the current Marriott International payroll-related systems. Though
the current agreement requires the Company to migrate off the Marriott
International payroll infrastructure no later than fiscal year 2002, Marriott
International and the Company are finalizing terms to extend this agreement
beyond fiscal year 2002. This extension is anticipated to be finalized later in
fiscal year 2001. This extension will provide the Company additional time to
select the best payroll and benefit alternatives to meet the Company's and its
client's needs.
NEW ACCOUNTING STANDARDS
On September 2, 2000, the Company adopted Statement of Financial 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 agreements as
cash flow hedges. The Company has determined that these agreements are highly
effective in offsetting the variable interest cash flows of the Company's debt
portfolio. The agreements have been recorded on the balance sheet at fair value
in other long-term assets with the offsetting entry to accumulated other
comprehensive income, a component of stockholders' deficit, net of tax. The
transition adjustment resulting from the adoption of SFAS No. 133 at September
2, 2000, resulted in a cumulative-effect adjustment to accumulated other
comprehensive income of $15 million, net of taxes totaling $7 million (see Note
1). At March 2, 2001, all agreements were considered highly effective. The
Company does not anticipate any reclassifications to earnings from accumulated
other comprehensive income in fiscal year 2001, with adjustments during the year
related mostly to changes in the fair value of the related agreements. There
were no net gains or losses recognized on derivatives that had previously been
deferred, or 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.
OTHER MATTERS
On January 29, 2001, the Company announced that its Board of Directors had
appointed a special committee to evaluate the proposal by Sodexho Alliance, S.A.
("Sodexho") to acquire all of the outstanding common shares of the Company that
are not already held by Sodexho, for $27 per share in cash (see Note 7). Also,
Sodexho and the Company have agreed that the royalty agreement, set to change on
March 27, 2001, will continue under its present terms and conditions (0.05% of
annual gross revenues) until August 31, 2001. Sodexho and the Company will
negotiate the royalty fee to commence September 1, 2001, based on the fair
market value of the Company's use of the Sodexho name, consistent with the terms
of the existing royalty agreement. It is not yet known if, or to what extent,
the royalty fee might change; however, an increase in the royalty fee could have
a material adverse effect on the Company's results of operations.
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 $940 million at March 2, 2001. If interest rates increased by 100 basis
points, the fair value of the Company's debt would have decreased by
approximately $15 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $15 million,
based on balances at March 2, 2001.
-17-
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On January 24, 2001, Sodexho Alliance, S.A. submitted a proposal to the Board of
Directors of the Company to acquire all of the common stock of the Company it
does not already own for $27 per share in cash. On January 25, 2001, Barry
Feldman v. William Shaw et. al. was filed in the Court of Chancery, New Castle
County, Delaware. A total of nine cases have now been filed, on a similar basis,
in which plaintiffs have sued the 8 individual members of the Board of Directors
of the Company, Sodexho Alliance, S.A., and the Company, alleging that
shareholders of the Company, as a class, have been harmed by the defendants'
claimed breaches of fiduciary duties related to the Sodexho Alliance, S.A.
proposal. These nine lawsuits are likely to be consolidated. The Company intends
to defend the lawsuits vigorously, and believes the lawsuits to be without
merit.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of the shareholders of the Company was held on January 10,
2001, in Gaithersburg, Maryland. Chairman of the Board William J. Shaw presided
and 56,364,619 of the 63,258,994 common shares outstanding as of the record date
of November 15, 2000, were represented at the meeting in person or by proxy.
1- Elections of Directors
Nominees for membership on the Board of Directors of the Corporation, listed
below, were elected by the shareholders. The following schedule lists the number
of shares cast for each nominee:
Total Total
Votes Votes
For Withheld
----------------- ----------------
Daniel J. Altobello 56,213,671 150,948
Pierre Bellon 56,216,904 147,715
Bernard Carton 56,215,673 148,946
Edouard de Royere 55,797,939 566,680
Michel Landel 56,213,965 150,654
John W. Marriott III 56,178,685 185,934
Mary S. Metz 56,195,230 169,389
William J. Shaw 56,188,494 176,125
-18-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONTINUED
- ------------------------------------------------------------------------
2- Ratification of the appointment of PricewaterhouseCoopers, LLP as independent
auditors of the Company for fiscal year 2001:
By a vote of 56,250,086 For, to 85,537 Against, with 28,996 Abstaining, the
Company's shareholders approved the appointment of PricewaterhouseCoopers, LLP
as independent auditors of the Company for fiscal year 2001.
3- Approval for the amendment of the 1998 Comprehensive Stock Incentive Plan to
increase the number of shares available under the Plan from 10 million to 11.5
million shares:
By a vote of 55,753,209 For, to 553,092 Against, with 58,318 Abstaining, the
Company's shareholders approved the amendment of the 1998 Comprehensive Stock
Incentive Plan to increase the number of shares available under the Plan from 10
million to 11.5 million shares.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
No. Descriptions
------- ------------
99 Forward-Looking Statements
(b) Reports on Form 8-K
January 29, 2001 Appointment of Special Committee by the Company's
Board of Directors in response to Sodexho Alliance's
proposal to acquire all the remaining shares of
the Company's Common Stock not already held by
Sodexho Alliance.
February 27, 2001 Announcement by the Special Committee of its
financial and legal advisors regarding the proposal
from Sodexho Alliance to acquire all the remaining
shares of the Company's Common Stock not already
held by Sodexho Alliance.
March 15, 2001 Announcement of the award of a multi-year service
agreement between the Company and the
U.S. Marine Corps.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SODEXHO MARRIOTT SERVICES, INC.
April 12, 2001 /s/ JOHN M. BUSH
-------------------------------
John M. Bush
Senior Vice President and
Chief Financial Officer
/s/ CHARLES B. RUSSELL
------------------------------
Charles B. Russell
Vice President, Corporate Controller and
Chief Accounting Officer
-20-