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 November 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0936594
------------------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 Washingtonian Boulevard, Gaithersburg, Maryland 20878
---------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(301) 987-4431
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Shares outstanding
Class at January 4, 1999
- ------------------------------- ------------------
Common Stock $1.00
par value per share 62,117,346
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
Page No.
--------
Introduction
Overview 1
Glossary of Terms 2
Forward-Looking Statements 3
Pro Forma Financial Information (Unaudited) 4
Part I. Financial Information (Unaudited):
Condensed Consolidated Statement of Income -
Thirteen Weeks Ended November 27, 1998 and
Sixteen Weeks Ended January 2, 1998 7
Condensed Consolidated Balance Sheet -
as of November 27, 1998 and August 28, 1998 8
Condensed Consolidated Statement of Cash Flow -
Thirteen Weeks Ended November 27, 1998 and
Sixteen Weeks Ended January 2, 1998 9
Condensed Consolidated Statement of Stockholders' Deficit-
as of November 27, 1998 10
Notes to Condensed Consolidated Financial Statements 11
Management's Discussion and Analysis of Results of Operations
and Financial Condition 22
Quantitative and Qualitative Disclosures about Market Risk 26
Part II. Other Information and Signatures:
Legal Proceedings 26
Changes in Securities 26
Defaults Upon Senior Securities 26
Submission of Matters to a Vote of Security Holders 26
Other Information 26
Exhibits and Reports on Form 8-K 26
Signatures 27
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 (see "Distributed Operations"
below), which occurred on March 27, 1998, the Company then acquired the North
American operations of Sodexho Alliance, S.A., and the combined operations were
renamed Sodexho Marriott Services, Inc.
THE TRANSACTIONS
As of March 27, 1998, the assets, liabilities and business operations of the
Company changed substantially due to the Distribution to shareholders, the
Acquisition of Sodexho North America and the Refinancing of debt (the
"Transactions"). Below is an overview of the Transactions, which were followed
on April 15, 1998, by a change in the Company's fiscal year-end from the Friday
nearest to December 31 to the Friday nearest to August 31 of each year.
DISTRIBUTED OPERATIONS. On March 27, 1998, the Company distributed to its
shareholders 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 Corp. ("MMS"), combined with Sodexho North America and became the
principal business of the Company. The lodging segment distributed to
shareholders is presented as Discontinued Operations in the historical financial
statements of the Company.
ACQUISITION. Immediately after the Distribution, on March 27, 1998, Sodexho
transferred to the Company the operations of Sodexho North America having a fair
market value of approximately $278 million, combined with a cash payment of $304
million in exchange for 29.9 million shares of the Company's common stock, after
giving effect to the one-for-four reverse stock split. The purchase price
included approximately $3 million in transaction costs. As a result of the
issuance of new shares of the Company's common stock to Sodexho in connection
with the Acquisition, the shareholders that owned 100 percent of the Company
immediately prior to the Distribution owned approximately 51% immediately
thereafter.
THE REFINANCING. On March 27, 1998, the Company borrowed $615 million and $620
million under the Secured SMS Facility and Guaranteed SMS Facility,
respectively. The 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 $1.5 billion credit facility, which was
cancelled immediately after such repayment. Also, the Company repaid debt of $73
million assumed in the Acquisition. The $304 million received from Sodexho was
used in conjunction with the debt proceeds to fund the debt repayments.
-1-
The Company also received letters of credit for $13 million under the Secured
SMS Facility on March 27, 1998. The Company's borrowing agreements contain
various covenants, which, among other things, require the Company to meet
certain financial ratios and tests. Due to the extensive changes in the
Company's business that resulted from the Transactions, the Company is providing
the following glossary of significant terms used in this report for
informational purposes. In certain places in this document, where deemed
meaningful for the reader's understanding, these definitions may be repeated.
GLOSSARY OF TERMS
The Acquisition. On March 27, 1998, the Company acquired Sodexho North America,
and Sodexho paid the Company $304 million, in exchange for approximately 48% of
the shares of the Company's common stock that were issued and outstanding
immediately after the Transactions.
ADJUSTED NET TANGIBLE ASSETS. The amount by which stockholders' equity exceeds
intangible assets with certain adjustments.
THE COMPANY. Sodexho Marriott Services, Inc. (together with its consolidated
subsidiaries), formerly Marriott International, Inc.
DISCONTINUED OPERATIONS. The Company's lodging business segment.
DISTRIBUTED OPERATIONS. The lodging, senior living services, and distribution
services businesses taken collectively.
THE DISTRIBUTION. On March 27, 1998, the Company distributed the stock of New
Marriott MI, Inc., which contained all of the assets and liabilities of the
Company's lodging, senior living services, and distribution services businesses,
to its shareholders in a tax-free transaction.
ICC. International Catering Corporation and subsidiaries.
MI. New Marriott MI, Inc. (together with its subsidiaries), renamed Marriott
International, Inc.
MDS. Marriott Distribution Services, the Company's distribution services
business.
MMS. The former Marriott Management Services Corp. and the former Marriott
Corporation of Canada, Ltd., collectively.
MMS- UK OPERATIONS. Marriott Management Services' United Kingdom operations sold
in October 1997 to a subsidiary of Sodexho Alliance, S.A. in anticipation of the
Transactions.
MSLS. Marriott Senior Living Services, the Company's senior living services
business.
NEW MARRIOTT MI, INC. Subsequently renamed Marriott International, Inc. ("MI"),
conducts business in the lodging segment, MDS and MSLS, and is also referred to
herein as "New Marriott."
OTHER CONTRACT SERVICES. MDS and MSLS, which for the first quarter of the 1998
Transition Period and prior fiscal years were part of the Company's continuing
operations.
I&R COSTS. Integration and Restructuring costs related to the Transactions.
THE REFINANCING. On March 27, 1998, the Company and its indirect subsidiary, RHG
Finance Corporation, tendered for a total of $720 million principal amount of
their respective outstanding publicly held debt. In addition, the Company
refinanced its commercial paper and indebtedness outstanding under its revolving
credit facility, which totaled $950 million on March 27, 1998.
RETAINED BUSINESS. All operations not distributed.
-2-
GLOSSARY OF TERMS, CONTINUED
REVERSE STOCK SPLIT. On March 27, 1998, the Company's common stock underwent a
one-for-four reverse stock split.
SODEXHO. Sodexho Alliance, S.A., a worldwide food and management services
organization headquartered in France and an approximate 48% shareholder of the
Company.
SODEXHO NORTH AMERICA. Sodexho Financiere du Canada and subsidiaries, and
International Catering Corporation and subsidiaries (also known as Sodexho USA)
taken collectively.
STUB PERIOD. Following the Distribution and Transactions, the 22-week period
beginning March 28, 1998 and ending on August 28, 1998.
THE TRANSACTIONS. The Distribution, Acquisition, and Refinancing taken
collectively.
TRANSITION PERIOD. On April 15, 1998, the Board of Directors of the Company
approved the change of the fiscal year of the Company to the Friday nearest to
August 31 of each year. Prior to this change in fiscal year, the Company's
fiscal year ended on the Friday nearest to December 31 of each year. Thus, the
1998 fiscal year, which began on January 3, 1998, and ended on August 28, 1998,
was considered the Transition Period. The 1999 fiscal year, which began on
August 29, 1998, will end on September 3, 1999, and will include 53 weeks.
TRANSITION REPORT. The Company's Transition Report on Form 10-K for the 34-week
period ended August 28, 1998.
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 changes in its corporate structure related to the
Transactions, (ii) the potential adverse impact of the Company's substantial
indebtedness, (iii) competition in the food services and facilities management
industries, (iv) the effects of general economic conditions, (v) the ability of
the Company to retain clients and obtain new clients on satisfactory terms in
light of the Transactions, (vi) the ability of the Company to remedy any
computer-related issues that may result from the advent of the Year 2000, 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.
-3-
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 fully in Notes 1
and 2 to the Condensed Consolidated Financial Statements. As a result of these
changes, there are substantial 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
thirteen weeks ended November 27, 1998 ("First Quarter Fiscal 1999") and the
historical sixteen weeks ended January 2, 1998 presented in Part I of this
report, but also the pro forma operating results for the First Quarter of Fiscal
1999 ("Pro Forma First Quarter Fiscal 1999") and the thirteen weeks ended
November 28, 1997 ("Pro Forma First Quarter Fiscal 1998"). The pro forma
operating results were prepared as if the Transactions occurred at the beginning
of Pro Forma First Quarter Fiscal 1998. Therefore, the pro forma operating
results only include the Company's Retained Business and the acquired operations
of Sodexho North America.
Pro forma sales and operating profit presented include the combined actual sales
of the food and facilities management services business of MMS and Sodexho North
America. Pro forma corporate expenses include the combined corporate overhead of
both businesses. No synergies were assumed for the Pro Forma First Quarter
Fiscal 1998, and losses from the sale of MMS-UK operations and related operating
results prior to the sale were also excluded from that time period. Integration
and restructuring charges of $7.6 million pretax were excluded from Pro Forma
First Quarter Fiscal 1999. An estimate of $1.6 million was included in Pro Forma
First Quarter Fiscal 1998, representing incremental costs to operate the Company
as a separate public entity. Pro forma net income reflects approximately $4.0
million of amortization expense for the intangible assets related to the
Acquisition for both pro forma quarters presented.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of all periods presented. Effective income tax rates of 44% and 48% were used
for Pro Forma First Quarter Fiscal 1999 and 1998, respectively.
Pro forma basic earnings per share were calculated on a base of 62.0 million and
61.9 million shares for Pro Forma First Quarter Fiscal 1999 and 1998,
respectively, which was the number of shares outstanding on November 27, 1998
and August 28, 1998. Pro forma diluted earnings per share were calculated on a
base of 64.1 million and 62.5 million for Pro Forma First Quarter Fiscal 1999
and 1998, respectively. The dilutive shares were the result of the Company's
convertible debt, stock option plans and deferred stock incentive plans
outstanding.
-4-
PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN WEEKS ENDED NOVEMBER 27, 1998, AND NOVEMBER 28, 1997
($ in millions, except per share amounts)
THIRTEEN WEEKS ENDED
-----------------------------------------
NOVEMBER 27, NOVEMBER 28,
1998 1997
------------------ ------------------
SALES
Corporate Services $ 335 $ 327
Health Care 315 318
Education 396 376
Schools 108 103
Canada 37 41
Laundries/Other 18 16
------------------ ------------------
TOTAL SALES 1,209 1,181
OPERATING COSTS AND EXPENSES
Corporate Services 313 308
Health Care 288 293
Education 352 337
Schools 101 97
Canada 35 39
Laundries/Other 18 15
------------------ ------------------
TOTAL OPERATING COSTS AND EXPENSES 1,107 1,089
------------------ ------------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 22 19
Health Care 27 25
Education 44 39
Schools 7 6
Canada 2 2
Laundries/Other -- 1
------------------ ------------------
TOTAL OPERATING PROFIT 102 92
CORPORATE ITEMS:
Amortization of Intangible Assets (9) (9)
Corporate Expenses (19) (21)
Interest Expense, Net (23) (22)
Gain on Sale of Investment 8 --
------------------ ------------------
INCOME BEFORE INCOME TAXES 59 40
Provision for Income Taxes (26) (19)
------------------ ------------------
PRO FORMA NET INCOME $ 33 $ 21
================== ==================
PRO FORMA BASIC EARNINGS PER SHARE $ 0.53 $ 0.34
================== ==================
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.52 $ 0.33
================== ==================
-5-
DISCUSSION OF PRO FORMA FIRST QUARTER 1999 AND 1998 RESULTS OF OPERATIONS
Total sales for Pro Forma First Quarter Fiscal 1999 were $1.21 billion, an
increase of $28 million, or 2%, over $1.18 billion for Pro Forma First Quarter
Fiscal 1998. This growth was mostly attributable to strong performance in the
Education and Schools (K-12) divisions. Growth in the Corporate Services
division's sales was hampered by the absence of sales to clients lost after Pro
Forma First Quarter Fiscal 1998 that largely offset the favorable impact of the
Crossroads Cuisines retail strategy. A decline in sales in the Health Care and
Canada divisions in the current quarter partially offset the performance of the
Education, Schools and Corporate Services divisions. The decrease in the Health
Care division's sales was mostly the result of several large clients switching
their contracts from profit and loss type contracts to management fee contracts,
which reduced the amount of revenue recognized. The Canada division's sales
would have been flat compared with last year's quarter without the fluctuations
in the Canadian dollar.
Operating profit before corporate items (corporate expenses, interest expense,
amortization of intangible assets and gain on sale of investment) totaled $102
million for the Pro Forma First Quarter Fiscal 1999, an increase of $10 million,
or 11%, over the $92 million in operating profit for the Pro Forma First Quarter
Fiscal 1998. This increase was driven by solid growth in profits at existing
clients across all divisions, in addition to administrative synergies. Despite
the challenges in its market, the Health Care division's operating profit
increased over 8 percent in the current quarter when compared with last year's
quarter. Partially offsetting these strong performances was the lower profits in
the Laundries division, which resulted from increased expenses associated with
the expansion of two client relationships.
Corporate expenses and amortization of intangible assets in the Pro Forma First
Quarter Fiscal 1999 totaled $28 million, a 5% reduction from the $30 million for
the Pro Forma First Quarter Fiscal 1998, reflecting the elimination of certain
positions after the Transactions along with other administrative synergies. The
Pro Forma First Quarter Fiscal 1999 included the favorable impact from the sale
of the Company's Bright Horizons Family Solutions ("BFAM") investment. The
Company made the investment in and formed a marketing affiliation with Corporate
Childcare, a predecessor of BFAM, in 1989. As a result of a series of mergers
and an Initial Public Offering involving Corporate Childcare, the Company owned
less than 5% of the new entity BFAM. The Company decided to sell the majority of
this investment in the Pro Forma First Quarter Fiscal 1999 for a pretax gain of
$7.8 million, or $4.3 million after-tax ($0.07 per diluted common share).
Total operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 93.9% of total sales for the Pro Forma First
Quarter Fiscal 1999 compared with Fiscal 1998's comparable period ratio of
94.8%. The Company anticipates this margin will continue to improve in the
periods ahead, as the Company continues its integration of the MMS and Sodexho
North America operations resulting in savings realized from purchasing and
administrative actions. These savings are anticipated to reach $60 million
annually by fiscal year 2001.
The growth in operating profit combined with the gain on sale of investment and
reduced corporate expenses contributed to an increase in pretax income of $19
million, or 47%, to $59 million for the Pro Forma First Quarter Fiscal 1999. The
effective tax rate for the current pro forma period was 44%, a decrease from 48%
for 1998, due to the implementation of effective tax planning strategies and the
lower proportion of nondeductible intangible amortization expense in relation to
total operating profit between the years. Net income increased 57% to $33
million, or $0.52 per diluted share, compared with $21 million, or $0.33 per
diluted share for Pro Forma First Quarter Fiscal 1998.
-6-
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
THIRTEEN WEEKS SIXTEEN WEEKS
ENDED ENDED
NOVEMBER 27, JANUARY 2,
1998 1998
------------------ ------------------
SALES $1,209 $1,636
Operating Costs and Expenses 1,108 1,560
Loss on sale of MMS-UK Operations -- 22
------------------ ------------------
1,108 1,582
------------------ ------------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 101 54
CORPORATE ITEMS:
Corporate expenses, including amortization of intangible assets (34) (30)
Interest expense, net (23) (20)
Gain on sale on investment 8 --
------------------ ------------------
Income From Continuing Operations Before Income Taxes 52 4
Provision for income taxes (23) (4)
------------------ ------------------
INCOME FROM CONTINUING OPERATIONS 29 -
Discontinued operations, net of income taxes - 108
------------------ ------------------
NET INCOME $ 29 $ 108
================== ==================
Basic Earnings Per Share:
Continuing Operations $0.46 $ -
Discontinued Operations - 3.29
------------------ ------------------
BASIC EARNINGS PER SHARE $0.46 $3.29
================== ==================
Diluted Earnings Per Share:
Continuing Operations $0.45 $ -
Discontinued Operations - 3.29
------------------ ------------------
DILUTED EARNINGS PER SHARE $0.45 $3.29
================== ==================
See notes to condensed consolidated financial statements.
-7-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
NOVEMBER 27, AUGUST 28,
1998 1998
(Unaudited)
------------------ -------------------
ASSETS
Current Assets
Cash and equivalents $ 76 $ 79
Accounts and notes receivable, net 553 374
Other 154 152
------------------ -------------------
Total current assets 783 605
Property and equipment, net 72 82
Intangible assets, net 563 573
Other assets 78 81
------------------ -------------------
$1,496 $1,341
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 126 $ 96
Accounts payable 287 222
Other current liabilities 378 328
Payable to affiliates for excess net tangible assets 28 49
------------------ -------------------
Total current liabilities 819 695
Long-term debt 1,061 1,062
Other long-term liabilities 116 110
Convertible subordinated debt 29 29
Stockholders' Deficit
Preferred stock, no par value, 1 million shares authorized; no shares issued - -
Common stock, $1 par value, 300 million shares authorized;
62 million shares issued and outstanding 62 62
Additional paid-in capital 1,325 1,322
Accumulated deficit (1,917) (1,946)
Accumulated other comprehensive income 1 7
------------------ -------------------
Total stockholders' deficit (529) (555)
------------------ -------------------
Total liabilities and stockholders' deficit $1,496 $1,341
================== ===================
See notes to condensed consolidated financial statements.
-8-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
THIRTEEN WEEKS SIXTEEN WEEKS
ENDED ENDED
NOVEMBER 27, 1998 JANUARY 2, 1998
------------------ ------------------
CASH USED IN OPERATING ACTIVITIES
Net Income $ 29 $108
Adjustments to reconcile to cash provided by continuing operations:
Income from discontinued operations -- (108)
Depreciation and amortization expense 21 30
Gain on sale of investment (8) --
Deferred income taxes 1 --
Changes in working capital (67) (51)
Changes in discontinued operations -- 13
Other 7 --
------------------ ------------------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES (17) (8)
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (12) (112)
Dispositions 21 102
Payments for excess net tangible assets (22) --
Net investment in discontinued operations -- (104)
Other (4) 128
------------------ ------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17) 14
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuances of long-term debt -- 103
Proceeds from borrowings from short-term credit facility 30 --
Repayments of long-term debt -- (7)
Issuances of common stock 1 12
Purchases of treasury stock -- (124)
Dividends paid - common stock -- (11)
------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31 (27)
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3) (21)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 79 160
------------------ ------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 76 $ 139
================== ==================
See notes to condensed consolidated financial statements.
-9-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(amounts in millions)
(Unaudited)
ACCUMULATED
OTHER
NUMBER ADDITIONAL COMPREHENSIVE
OF COMMON PAID-IN ACCUMULATED INCOME
SHARES STOCK CAPITAL DEFICIT (EXPENSE) TOTAL
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
61.9 Balance, August 28, 1998 $62 $1,322 $(1,946) $7 $(555)
-- Net income -- -- 29 -- 29
Reclassification of gain
realized in net income,
-- net of taxes -- -- -- (4) (4)
-- Foreign exchange translation -- -- -- -- --
-- Other -- -- -- (2) (2)
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME -- -- 29 (6) 23
Employee stock plan
0.2 issuance and other -- 3 -- -- 3
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
62.1 Balance, November 27, 1998 $62 $1,325 $(1,917) $1 $(529)
============ =============================== =============== ============== =============== ================= ===============
See notes to condensed consolidated financial statements.
-10-
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 Company was formerly named Marriott International, Inc. ("MI"). Upon
consummation of the Distribution, Acquisition and Refinancing (collectively, the
"Transactions"), which occurred on March 27, 1998, the last day of the first
quarter of 1998, Marriott International, Inc. was renamed Sodexho Marriott
Services, Inc. As of March 27, 1998, the principal business of the Company
changed from lodging and contract services to food and facilities management
services. In connection with the Distribution and Acquisition, the Company
restructured and refinanced its debt. The Transactions are explained in detail
below and in Note 2.
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 Transition Report on Form-10K for the period ended
August 28, 1998.
In the opinion of the Company, 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 November 27, 1998 and August 28, 1998, and the results of operations for
the 13-weeks ended November 27, 1998 and the 16-weeks ended January 2, 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. Additionally, related to the Distribution on March 27, 1998, the
Company has combined the results of operations and cash flow items of the
lodging segment as "Discontinued Operations" for all periods presented prior to
the Distribution (see "Distribution" below and Note 2).
DISTRIBUTION
On March 27, 1998, the Company completed the Distribution to its shareholders,
on a pro rata basis, of all outstanding shares of New Marriott MI, Inc. ("New
Marriott"), a wholly owned subsidiary of the Company, in a tax-free distribution
(the "Distribution"). New Marriott conducts the lodging (including timeshare
resort development and operation), senior living services and distribution
service businesses previously conducted by the Company and changed its name to
Marriott International, Inc. The food service and facilities management business
continues to be conducted by the Company. Immediately after the Distribution,
the Company acquired the North American food service and facilities management
operations of Sodexho Alliance, S.A. (Sodexho) in exchange for stock of the
Company, with the Company operating the combined food service and facilities
management businesses under the name - Sodexho Marriott Services, Inc. As a
result of the issuance of new shares of the Company's common stock to Sodexho in
connection with the Acquisition, the shareholders that owned 100% of the Company
immediately prior to the Distribution owned approximately 51% of the Company
thereafter. At the same time, the Company obtained financing arranged by
Sodexho, to refinance certain existing indebtedness of the Company.
-11-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DISTRIBUTION, CONTINUED
For the purposes of governing certain of the ongoing relationships between MI
and the Company after the Distribution and to provide for an orderly transition,
MI and the Company entered into various agreements including the Employee
Benefits and Other Employment Matters Allocation Agreement, Liquid Yield Option
Notes (LYONs) Allocation Agreement, Tax Sharing Agreement, Trademark and Trade
Name License Agreement, Noncompetition Agreement, Employee Benefit Services
Agreement, Procurement Services Agreement, Distribution Services Agreement and
other transitional services agreements. Effective March 27, 1998, these
agreements provided, among other things, that MI assumed administration of
certain of the Company's employee benefit plans and insurance programs as well
as succeed to the Company's liability to LYONs holders under the LYONs
Indenture, a portion of which was assumed by the Company. In connection with the
Distribution, on October 31, 1997, the Company sold the MMS- UK operations to
Sodexho for $50 million in cash. The sale resulted in a pretax loss of $22
million ($14 million after-tax, or $0.40 per share).
REVERSE STOCK SPLIT
The Company also combined every four shares of its common stock into one share
of the Company's common stock pursuant to a reverse stock split on March 27,
1998. All share and per share data has been adjusted to reflect a one-for-four
reverse stock split effective March 27, 1998.
FISCAL YEAR
On April 15, 1998, the Company's Board of Directors approved a change in the
Company's fiscal year from the Friday closest to the end of December to the
Friday closest to the end of August, effective immediately. This change resulted
in a 34-week transition period (the "Transition Period") from the end of fiscal
1997 to the end of the new fiscal year on August 28, 1998. The new fiscal 1999
year will have 53 weeks, ending on September 3, 1999.
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 for continuing operations was $18 million
and $17 million at November 27, 1998 and August 28, 1998, respectively.
Concentration of credit risk within accounts receivable is limited because a
large number of customers make up the Company's customer base, thus spreading
risk associated with trade credit. In addition, the Company closely monitors its
accounts receivable. The Company generally does not require collateral and
maintains reserves for potential uncollectible amounts, which, in the aggregate,
have not exceeded management's expectations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of undiscounted expected future cash flow is less than
the carrying amount of long-lived assets, the Company recognizes an impairment
loss based on the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
-12-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTEREST-RATE AGREEMENTS
The Company's policies prohibit the use of derivative instruments for trading
purposes and procedures are in place to monitor and control their use. The use
of derivative instruments is limited to interest-rate agreements for the purpose
of reducing the variability of the Company's debt costs. 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
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," in fiscal 1997. Under SFAS No. 128, 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 March 27, 1998, the Company's common stock underwent a one-for-four reverse
stock split. Earnings per share computations have been restated to reflect this
reverse stock split.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents. The Company uses
drafts in its cash management system. At November 27, 1998 and August 28, 1998,
the Company had $57 million and $34 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.
-13-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and customer relationships.
Intangible assets are amortized on a straight-line basis over periods generally
ranging from 30 to 40 years for goodwill and 10 to 20 years for customer
relationships.
Amortization expense for continuing operations totaled $9 million for the
thirteen weeks ended November 27, 1998, compared with $8 million for the sixteen
weeks ended January 2, 1998. Amortization expense for discontinued operations
totaled $13 million for the sixteen weeks ended January 2, 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
In June 1997, SFAS No. 130--"Reporting Comprehensive Income" was issued,
requiring that certain financial activity typically disclosed in stockholders'
equity be reported in the financial statements as an adjustment to net income in
determining comprehensive income. Items applicable to the Company include
activity in foreign exchange translation adjustments and securities available
for sale under SFAS No. 115. Items identified as comprehensive income are
reported, 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 resulting
translation adjustments are reflected in stockholders' deficit as accumulated
other comprehensive income.
Total accumulated other comprehensive income included $1.8 million of gross
foreign exchange translations gains, net of taxes totaling $0.8 million, at
November 27, 1998. Total accumulated other comprehensive income included $10.1
million of gross unrealized securities gain adjustments under SFAS No. 115, net
of taxes totaling $4.0 million and gross foreign exchange translation gains
totaling $1.1 million, net of taxes totaling $0.4 million at August 28, 1998.
Total Comprehensive Income for the first quarter of fiscal 1999 was mostly
comprised of $29 million in net income, partially offset by the reclassification
of the realized gain on the sale of investment totaling $7.8 million pretax, net
of taxes totaling $3.5 million, for a cumulative $4.3 million net realized gain
on sale of investment recorded to the current quarter's Condensed Consolidated
Statement of Income.
SEGMENT REPORTING
In June 1997, SFAS No. 131--"Disclosures about Segments of an Enterprise and
Related Information" was issued requiring the reporting of selected segmented
information in quarterly and annual reports. 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 is required to
disclose profit/loss, revenues and assets for each segment identified, including
reconciliations of these items to consolidated totals. For interim reporting
periods, the Company is required to disclose profit/loss and revenues for each
segment. The Company is also required to disclose the basis for identifying the
segments and the types of products and services within each segment. SFAS No.
131 was effective for the Company for the Transition Period ended August 28,
1998 and quarterly beginning in fiscal 1999 (see Note 7), including the
restatement of prior periods reported consistent with this pronouncement, if
practicable.
-14-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. SFAS No. 133 will be
effective for the Company on September 4, 1999, the beginning of fiscal year
2000. The impact to the Company's financial position of implementing SFAS No.
133 has yet to be determined.
(2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS
THE DISTRIBUTION
On March 27, 1998, the Company distributed to its shareholders, on a pro rata
basis, all outstanding shares of New Marriott MI, Inc., a wholly owned
subsidiary of the Company, in a tax-free distribution (the "Distribution"). New
Marriott MI, Inc., subsequently renamed Marriott International, Inc. (together
with subsidiaries, "MI") conducts business in the lodging segment and two of the
three lines of business in the contract services segment - Marriott Senior
Living Services ("MSLS") and Marriott Distribution Services ("MDS"). The
lodging, MSLS and MDS businesses are collectively referred to as Distributed
Operations. The third line of business in the contract services segment,
Marriott Management Services ("MMS"), has become the principal business of the
Company.
DISCONTINUED OPERATIONS
As a result of the Distribution, the Condensed Consolidated Financial Statements
and Notes thereto have been restated to present the lodging segment distributed
to shareholders as Discontinued Operations. The MDS, MSLS and MMS business make
up the Contract Services segment in the historical financial statements of the
Company. Thus, the distributed operations of MSLS and MDS are presented as
continuing operations prior to the date of distribution, March 27, 1998.
Discontinued Operations, Net of Income Taxes, is comprised of the following:
16 Weeks Ended
January 2, 1998
---------------------
($ in millions, except
per share amounts)
Sales $2,240
Income Before Income Taxes $ 174
Income Taxes (66)
---------------------
Discontinued Operations, Net of Income Taxes $ 108
=====================
Basic Earnings Per Share $3.29
---------------------
Diluted Earnings Per Share $3.29
=====================
Net identifiable assets of the Lodging segment totaled $2.9 billion as of
January 2, 1998.
-15-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) INTEGRATION AND RESTRUCTURING
Integration and restructuring actions taken in the 13-weeks ended November 27,
1998, reflect the undertaking by the Company to integrate and realign resources
for more effective and efficient execution of operating strategies. Integration
costs totaled $8 million during the first quarter of fiscal 1999. The
integration costs include, among other items, training and relocating of former
MMS employees, incremental overhead during the integration phase, systems
modifications, and other one-time costs.
Restructuring costs represent employee termination benefits, office closure
expenditures, and other costs related to a restructuring plan initiated from the
Transactions. The acquisition reserve, which totaled $20 million at November 27,
1998, generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North America employees as well as the
estimated cost for the closure of certain Sodexho North America offices.
Acquisition Reserve activity related to the Transactions for the 13-weeks ended
November 27, 1998 is detailed below:
Balance as of Balance as of
August 28, 1998 Payments November 27, 1998
-------------------- -- -------------------- --- -----------------------
($ in millions)
Employee Terminations $10.0 $(2.8) $7.2
Relocation of Sodexho Facilities 2.6 (0.6) 2.0
Closures 3.1 (0.1) 3.0
Other 8.2 (0.3) 7.9
-------------------- -------------------- -----------------------
Total $23.9 $(3.8) $20.1
==================== ==================== =======================
In addition, integration expenses recorded in the Condensed Consolidated
Statement of Income during the first quarter of fiscal 1999 are detailed below.
No restructuring expenses were recorded in the Condensed Consolidated Statement
of Income during the first quarter of fiscal 1999.
Thirteen Weeks Ended
November 27, 1998
---------------------------
($ in millions)
Integration:
Duplicate Overhead $3.7
MMS Relocation 0.1
Training Systems 0.5
Other 3.3
---------------------------
Total $7.6
===========================
-16-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) DEBT
November 27, August 28,
1998 1998
----------------- -----------------
($ in millions)
Short-Term Debt:
Current Portion of Long-Term Debt $ 70 $ 70
Senior Secured Revolving Credit Facility 55 25
Other 1 1
----------------- -----------------
Total $126 $ 96
================= =================
Long-Term Debt:
Senior Secured Credit Facility, maturing 2004
averaging 7.10% in fiscal 1999 $500 $500
Senior Guaranteed Credit Facility, due 2005
averaging 6.95% in fiscal 1999 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal 1999 6 6
Other 2 2
Capital Lease Obligations 3 4
----------------- -----------------
Total $1,131 $1,132
Amount Reclassified to Short-Term Debt (70) (70)
----------------- -----------------
$1,061 $1,062
================= =================
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 November 27,
1998, the Company is paying a rate of 7.10% on this 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 $26 million
at November 27, 1998. At November 27, 1998, $154 million of this facility was
not used and was available to the Company.
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 November 27, 1998, the Company is paying a rate
of 6.95% on this facility, adjusted for fee amortization and hedging costs. This
facility is guaranteed by Sodexho, for which the Company pays Sodexho an annual
fee of 0.5% of the outstanding balance of the Senior Guaranteed Credit Facility,
or $3 million pretax.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flow.
The Company met the financial covenants of the debt agreements as of November
27, 1998 and for the 13-weeks then ended.
Prior to the Distribution, the Company entered into a $1.5 billion bank credit
facility in March 1997. This facility had a term of five years at an interest
rate of LIBOR plus a spread, 21.5 basis points, based on the Company's senior
debt rating as of January 2, 1998. Commercial paper is classified as long-term
debt based on the Company's ability and intent to refinance it on a long-term
basis.
-17-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) 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 Notes ("LYONs") due 2011. Each $1,000 LYON is 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 was
issued at a discount representing a yield to maturity of 4.25 percent. The
Company recorded the LYONs at the discounted amount at issuance. Accretion is
recorded as interest expense and an increase to the carrying value. Gross
proceeds from the LYONs issuance were $288 million.
Upon consummation of the Distribution, each LYON was convertible into 2.19
shares of the Company's common stock (after giving effect to a one-for-four
reverse stock split), as well as a certain amount of 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. The Company's
allocated portion of the LYONS totaled $29 million at November 27, 1998.
INTEREST-RATE AGREEMENTS
At November 27, 1998, 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 5.73% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt, resulting in a weighted-average rate for the Company of
7.01% at November 27, 1998. These agreements expire between August 2001 and
February 2005. Since the inception of these agreements, the Company had paid a
net $0.3 million to its counterparties under these agreements, recorded as
additional interest expense. At November 27, 1998, the Company had $0.3 million
in accrued interest payable to its counterparties and did not have any
unamortized fees or premiums under these agreements. Also, at November 27, 1998,
the aggregate net unrealized loss under these agreements was approximately $21
million, based on the termination cost of these agreements obtained by third
party market quotes. All of the Company's interest rate agreements are for
purposes other than trading.
(5) STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. One million shares of preferred
stock, without par value, are authorized, with none issued. At the Distribution,
each shareholder received one share of the Company's stock and two shares of New
Marriott MI, Inc. stock (renamed Marriott International, Inc.). In addition, the
Company's stock underwent a one-for-four reverse stock split on March 27, 1998.
Prior to the Distribution, the Company's charter authorized the issuance of
seventy-five million shares of the Company's common stock, with a par value of
$1 per share, with one million shares of preferred stock, without par value,
authorized, with none issued.
In addition, on March 27, 1998, the Company issued to Sodexho Alliance, S.A.,
approximately 48% of its shares of common stock, representing 29.9 million
shares (after the effect of the reverse stock split), in exchange for $304
million in cash and the operations of Sodexho North America. At November 27,
1998, the Company had 62,110,491 shares outstanding.
-18-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) STOCKHOLDERS' DEFICIT, CONTINUED
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
Thirteen Weeks Sixteen Weeks
Ended November 27, Ended January 2,
1998 1998
----------------------- --- ------------------------
(in millions, except per share amounts)
Computation of Basic Earnings Per Share:
Net (Loss) Income from Continuing Operations $ 29 $ --
Net Income from Discontinued Operations -- 108
----------------------- ------------------------
Net Income $ 29 $ 108
======================= ========================
Weighted Average Shares Outstanding 62.0 32.8
======================= ========================
Basic Earnings Per Share:
Continuing Operations $0.46 $ --
Discontinued Operations -- 3.29
----------------------- ------------------------
Basic Earnings Per Share $0.46 $3.29
======================= ========================
Computation of Diluted Earnings Per Share:
Diluted Net (Loss) Income from Continuing Operations $29 $ --
Diluted Net Income from Discontinued Operations -- 108
----------------------- ------------------------
Diluted Net Income $29 $ 108
======================= ========================
Weighted Average Shares Outstanding 62.0 32.8
Effect of Dilutive Securities:
Employee Stock Option Plan 0.8 *
Deferred Stock Incentive Plan 0.1 *
Convertible Subordinated Debt 1.2 *
----------------------- ------------------------
Diluted Weighted Average Shares Outstanding 64.1 32.8
======================= ========================
Diluted Earnings Per Share:
Continuing Operations $0.45 $ --
Discontinued Operations -- 3.29
----------------------- ------------------------
Diluted Earnings Per Share $0.45 $3.29
======================= ========================
[FN]
*--The effect of dilutive securities is computed using the treasury stock method
and average market prices during the periods. The if-converted method is used
for convertible subordinated debt ("debt securities"). For the 16 weeks ended
January 2, 1998, dilutive securities under the employee stock option plan of 1.0
million, the deferred stock incentive plan of 0.7 million, and the debt
securities of 1.2 million were excluded due to the loss from continuing
operations.
</FN>
-19-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) EMPLOYEE BENEFIT AND INCENTIVE PLANS
DEFERRED COMPENSATION PLANS
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. As part of the Distribution,
the Company elected to continue the deferred compensation plan and has
established a new savings plan for the Company separate from the MI profit
sharing plan. The Company assumed the obligations and liabilities of the
undistributed portion of the deferred compensation plan in relationship to the
employees retained by the Company after the Distribution. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 13-week period
ended November 27, 1998, expenses that related to these plans totaled $3.6
million.
STOCK OPTION PLANS
Prior to the Distribution, the Company amended and restated the 1993 Stock Plan
and the 1996 Stock Plan, presently known as the Sodexho Marriott Services, Inc.
1993 and 1998 Comprehensive Stock Incentive Plans, respectively (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 will administer the
converted stock options prior to the Distribution, with no new awards made under
this plan. The 1998 Plan will govern the issuance and administration of
conversion awards under the previous 1996 stock plan and will also be 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 had 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. In the first quarter of fiscal 1999, the Company issued
57,000 new stock option awards.
A summary of the Company's stock option activity during the 13-weeks ended
November 27, 1998, is presented below:
Thirteen Weeks Ended
November 27, 1998
--------------------------------------
Weighted
Number of Average
Options Exercise
(in millions) Price
----------------- -----------------
Outstanding at August 28, 1998 5.0 $20
Granted during the thirteen weeks 0.1 28
Exercised during the thirteen weeks (0.3) 7
Forfeited during the thirteen weeks -- --
----------------- -----------------
Outstanding at November 27, 1998 4.8 $21
================= =================
Options exercisable at November 27, 1998 1.4 $13
================= =================
(7) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
-20-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) BUSINESS SEGMENTS, CONTINUED
Prior to the Distribution, the Company was a diversified hospitality company
with operations in two business segments: Lodging, which includes development,
ownership, operation and franchising of lodging properties under 10 brand names
and development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
Sales and operating profit by business segment:
13 Weeks Ended 16 Weeks Ended
November 27, January 2,
1998 1998
--------------------- --------------------
($ in millions)
Gross Sales
Corporate Services $ 335 $ 290
Health Care 315 325
Education 396 318
Schools 108 116
Canada 37 36
Laundries/Other 18 57
Other Contract Services -- 494
--------------------- --------------------
Contract Services 1,209 1,636
Discontinued Operations -- 2,240
--------------------- --------------------
Total Gross Sales $1,209 $3,876
===================== ====================
Gross Operating Profit
Corporate Services $ 22 $ 12
Health Care 27 24
Education 44 27
Schools 6 5
Canada 2 2
Laundries/Other -- --
Other Contract Services -- 6
Loss on Sale of MMS-UK Operations -- (22)
--------------------- --------------------
Contract Services 101 54
Discontinued Operations -- 174
--------------------- --------------------
Total Gross Operating Profit $ 101 $ 228
===================== ====================
Total Net Operating Profit from
Continuing Operations (Contract Services) $ 101 $ 54
Corporate Items (49) (50)
--------------------- --------------------
Income From Continuing Operations,
Before Taxes $ 52 $ 4
===================== ====================
(8) 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.
-21-
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 13-week period ended November 27, 1998 ("First Quarter Fiscal
1999") as compared with the historical unaudited 16-week period ended January 2,
1998. While the comparison of the First Quarter Fiscal 1999 to the previously
reported 16-week period in 1997 differs by three weeks, management believes that
this comparison is reasonable. Due to the substantial differences in the
comparability of the Company's historical operating results for the First
Quarter Fiscal 1999 versus the prior fiscal year's period, 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.
THIRTEEN WEEKS ENDED NOVEMBER 27, 1998 VS. SIXTEEN WEEKS ENDED JANUARY 2, 1998.
Total sales for First Quarter Fiscal 1999 were $1.21 billion, a decrease of $427
million, or 26%, when compared with $1.64 billion for the 16 weeks ended January
2, 1998. The decline in sales between the periods was mostly attributable to the
distribution of the Marriott Distribution Services ("MDS") and Marriott Senior
Living Services ("MSLS") divisions to shareholders on March 27, 1998. The
results of these divisions were included in total sales in the 16-week period
ended January 2, 1998, but were not included in the First Quarter Fiscal 1999.
Excluding the MDS and MSLS divisions, total sales increased $67 million, or
5.9%. Corporate Services sales in the 1999 first quarter totaled $335 million,
an increase of $45 million, or 15.5%, versus $290 million for the prior year's
period, driven by the Acquisition. Education division sales increased $78
million to $396 million for the current period, an increase of 24.5%, again
driven by the Acquisition.
Excluding the loss on the sale of MMS-UK operations, operating profit before
corporate items totaled $101 million for the First Quarter Fiscal 1999 period,
an increase of $25 million, or 32.9%, over the $76 million in operating profit
for the 16-week period ended January 2, 1998. This increase was the result of
the solid sales growth in the Corporate Services and Education divisions as
detailed above. Total operating profit for Corporate Services division was $22
million for the First Quarter Fiscal 1999, a 83.3% increase over the 16-week
prior period's total operating profit of $12 million. Education's total
operating profit increased $17 million to $44 million, an increase of 63.0%
compared to the prior year's period. In addition to increased sales, operating
margins improved as the result of the Acquisition.
Corporate expenses, after excluding $6 million in integration charges, totaled
$28 million in the First Quarter Fiscal 1999 period, down $2 million, or 6.7%
from the 16-week prior period. The Company anticipates increased efficiencies in
its operating costs and corporate expenses in the periods ahead, as the Company
continues the integration of the MMS and Sodexho North America operations. These
savings are anticipated to reach $60 million annually by fiscal year 2001.
Increases in interest expense of $3 million, were more than offset by the $8
million gain on the sale of the Company's investment in Bright Horizons Family
Solutions ("BFAM"). The Company decided to sell the majority of this
investment in BFAM in the First Quarter Fiscal 1999 for a pretax gain of $7.8
million, or $4.3 million after-tax ($0.07 per diluted common share).
Excluding the $22 million pretax loss from the sale of MMS-UK to Sodexho
Alliance in the prior period, income from continuing operations before income
taxes doubled to $52 million, the result of strong increases in operating profit
between the periods. Discontinued operations, net of income taxes, totaled $108
million for the 16-week period ended January 2, 1998, reflecting net income from
the distributed lodging segment.
The Company's net effective income tax rate for continuing and discontinued
operations was 44% for the First Quarter Fiscal 1999, compared with 39.5% for
the prior year's period. This increase was due to the higher proportion of
nondeductible intangible amortization expense largely from the Acquisition,
partially offset by the implementation of effective tax planning strategies. Net
income from continuing operations for the First Quarter Fiscal 1999 was $29
million, or $0.45 per diluted share, compared with break-even for the prior
year's period. Discontinued Operations, net of income taxes, totaled $108
million, or $3.29 per diluted share, reflecting the performance of the
Distributed lodging segment in the prior year's period before the Distribution
to shareholders on March 27, 1998.
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
After the Distribution, the Company has been focused on the integration of the
former MMS and Sodexho North America operations, capitalizing on its combined
market presence as well as focusing on attracting new accounts and enhancing
services to sustain growth. The Company is substantially more leveraged on a
relative basis than the Company was prior to the Distribution. The Company
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.
The Company funds its capital requirements with a combination of existing cash
balances and operating cash flow. As of November 27, 1998, the Company had a
$235 million revolving credit facility available at an interest rate of 7.10% to
provide funds for liquidity, seasonal borrowing needs and other general
corporate purposes. At November 27, 1998, $55 million of this facility was
outstanding, and an additional $26 million of the revolving credit facility had
been utilized by letters of credit outstanding, principally related to insurance
programs. The Company believes that cash flow generated from operations and
current cash balances will be adequate to finance ongoing capital needs, as well
as meet debt service requirements. The Company's debt agreements do not restrict
the Company's ability to fund its planned growth initiatives from operating cash
flow and existing credit facilities.
Prior to the Transactions, the Company had paid regular quarterly dividends. The
Company may pay quarterly dividends in the future, subject to the restrictive
covenants contained in the Company's credit facility agreements related to the
Refinancing and other relevant considerations. In general, the restrictive
covenants do not permit the Company to pay dividends to shareholders in an
amount greater than 40 percent of the Company's net income, or 45 percent when
the ratio of the Company's consolidated debt to Earnings Before Interest, Taxes,
Depreciation and Amortization ratio ("EBITDA", as defined in the documentation
for the credit facility agreements) is less than 4 but not less than 3. This
restriction will no longer apply when such ratio is less than 3. The payment and
amount of cash dividends on the Company's common stock will be subject to the
sole discretion of the Company's Board, which will review the Company's dividend
policy at such times as may be deemed appropriate. The Board will closely
monitor the results of the Company's operations, capital requirements, and other
considerations to determine the dividend to 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 (as detailed in Note 4 to Condensed Consolidated Financial
Statements). Annual interest expense is estimated to be approximately $90
million based on current debt balances, with scheduled principal repayments
amounting to approximately: $70 million in 1999; $80 million in 2000; $80
million in 2001; $90 million in 2002; $115 million in 2003 and $65 million in
2004.
The Company, prior to the Transactions, declared dividends of 28 cents per share
in each quarter of 1995, 32 cents per share in each quarter of 1996 and the
first quarter of 1997, and 36 cents per share in each of the last three quarters
of 1997 and the first quarter of 1998. The Company expects to reinvest most of
its earnings in its businesses. The Company may pay quarterly dividends in
future periods, subject to the judgment of its Board of Directors and
restrictive covenants in its debt agreements limiting the payment of dividends.
During the First Quarter Fiscal 1999, 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 current quarter. Also, the Company made partial
payments to MI and Sodexho related to Adjusted Net Tangible Assets in accordance
with the respective Distribution and Acquisition agreements in the First Quarter
Fiscal 1999. These payments totaled $22 million. Subject to final review by the
Company, MI and Sodexho, any remaining payments plus accrued interest related to
Adjusted Net Tangible Assets are expected to be paid during the second quarter
of fiscal 1999.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION, CONTINUED
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance- sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. SFAS No. 133 will be
effective for the Company on September 4, 1999, the beginning of fiscal year
2000. The impact to the Company's financial position of implementing SFAS No.
133 has yet to be determined.
YEAR 2000
General. The Company is actively addressing potential issues associated with the
computer programming practice historically used to signify dates by using two
digits rather than four digits (e.g. "00" instead of "2000"). Accordingly, the
Company's owned and operated computer-based technology may incorrectly process
dates and may not distinguish properly between 1900 and 2000, which could result
in computer systems failures or miscalculations. These potential issues are
collectively referred to as the Year 2000 issue.
The Year 2000 issue could arise at any point in the Company's purchasing,
supply, processing, distribution and financial chains. Incomplete or untimely
resolution of the Year 2000 issue by the Company, its key suppliers, clients and
other parties could have a material adverse effect on the Company's business,
results of operations, financial condition and cash flow.
The Company has established a Year 2000 project (the "Project") to address the
Year 2000 issue. The Project's Steering Committee consists of members of the
Company's senior management, including representatives from each of the
Company's divisions and most corporate functions. This Steering Committee
oversees and regularly reviews the status of the Company's efforts on the seven
phases of the Project: (1) awareness, (2) inventory, (3) assessment, (4)
remediation, (5) testing and validation, (6) implementation and (7) contingency
planning. The Steering Committee is also tasked with estimating and controlling
the associated costs of the Project. Additionally, the Company has established a
Year 2000 Project team, led by an experienced project manager, that is
responsible for the day-to-day oversight and coordination of the Company's Year
2000 efforts.
Year 2000 Readiness Disclosure. The Company began the process of understanding
the Year 2000 issue in 1996. The Company's Board of Directors and senior
management are committed to minimizing the impact of the Year 2000 issue on the
Company's operations. Senior management has grouped the Company's exposure in
five general categories:
o Internally developed software
o Third party software
o Infrastructure (mainframe, personal computers, etc.)
o Facilities systems
o Other external systems (supply chain and other outside relationships)
Internally developed software, third party software and infrastructure hardware
are all information technology ("IT") systems. Facilities and other external
systems are non-IT systems.
The inventory and assessment phases both began in 1996. An inventory of
internally developed software and the assessment of the necessary remediation
are complete. Similarly, an inventory of third party software and mainframe
systems is complete. The Company has substantially completed the inventory and
assessment of personal computers, which are used at most of the Company's
operating locations to support unit level financial and operating systems. The
Company is also surveying and assessing facilities systems, which include food
service refrigeration and food preparation systems that the Company manages for
its clients. The Company also manages elevators, heating, ventilation and air
conditioning systems for its clients pursuant to plant operations and
maintenance agreements. Because these facilities systems reside at client sites,
they are generally not under the Company's control, and responsibility for these
systems generally rests with the client.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION, CONTINUED
YEAR 2000, CONTINUED
The assessment of these systems requires close cooperation between the Company
and its clients. With respect to plant operations and maintenance clients, the
Company is offering certain services to assist these clients in achieving their
Year 2000 objectives relative to their facilities systems. Finally, the Company
has identified other external systems that support the different facets of its
business, such as vendors, suppliers, utilities, clients, customers, government
entities and other service providers. These systems are not under the Company's
control.
The remediation phase is complete for internally developed software and
mainframe systems. With respect to third party software and personal computers,
the Company has formulated a plan establishing the priorities for remediation or
contingency planning. Both internal and external resources are involved in
executing the plan, which is expected to be substantially complete by March 31,
1999. Systems considered most critical to ongoing operations and those that
could have a material adverse effect on the Company's business results of
operations, financial condition and cash flow are being given the highest
priority. Remediation of facilities systems at its clients' facilities and other
external systems is not under the Company's control.
The testing phase is nearly complete for the Company's internally developed
software and mainframe systems. The testing and, through third parties,
validation that these systems are Year 2000 compliant are expected to be
completed by December 31, 1998. Third party software and personal computer
specifications are being validated where they are considered critical to the
Company's business operations. The Company is working with clients and other
external entities to validate the compliance status of their systems.
The implementation and rollout of compliant systems have been or are expected to
be substantially complete by June 30, 1999. Given the large number and
geographic diversity of the Company's operating locations, the installation of
compliant systems and removal of non-compliant systems, as necessary, at these
locations may pose certain difficulties.
To manage potential points of failure, the Company is developing contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Contingency plans and associated cost estimates are expected to be
completed by June 30, 1999, and will be continually refined as additional
information becomes available.
Risks. There are many risks associated with the Year 2000 issue. Because the
Company's Year 2000 compliance depends upon numerous third parties also being
Year 2000 compliant on a timely basis, there can be no guarantee that the
Company's efforts will prevent a material adverse impact on its business,
results of operations, financial condition and cash flow. The possible
consequences to the Company of its business partners or the general
infrastructure (including transportation, utilities, and communications) not
being fully Year 2000 compliant include temporary facilities closings, delays in
the delivery of products, delays in the receipt of key food products, equipment
and packaging supplies, invoice and collection errors, and inventory and supply
shortages. These consequences could have a material adverse impact on the
Company's business, results of operations, financial condition and cash flow if
the Company is unable to conduct its business in the ordinary course. The
Company believes that its readiness plan should significantly reduce the adverse
effects any such disruptions may have.
Costs. The Company has estimated that the pretax costs to be borne by it to
address the Year 2000 issue will be approximately $5-8 million, principally for
modification, testing, validation, project management and contingency planning.
These are expected to be expensed as incurred and funded from operating cash
flow. Through November 27, 1998, approximately $1.0 million had been incurred
and expensed. The Company does not separately identify internal costs incurred
for the Project, and such costs are mostly related to the Company's IT personnel
costs.
The actual costs to be incurred by the Company will depend on a number of
factors which cannot be accurately predicted, including the extent and
difficulty of the remediation and other work to be done, the clients'
expectations of the Company's responsibility to help remediate the clients'
facilities systems, the availability and cost of consultants, the extent of
testing required to demonstrate Year 2000 compliance, the portion of such costs
that may be borne by the Company's clients pursuant to existing contractual
agreements and the Company's ability to timely collect all payments due to it
under existing contracts.
-25-
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $1.1 billion at August 28, 1998. If interest rates increased by 100
basis points, the fair value of the Company's debt would have decreased by
approximately $26 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $27 million,
based on balances at August 28, 1998. Management believes the Company's exposure
to changes in interest rates has not changed materially during the first quarter
of fiscal 1999.
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
September 17, 1998 Announcement of the 1999 Annual
Meeting of Stockholders.
-26-
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 8, 1999 /s/ LAWRENCE E. HYATT
--------------------------------
Lawrence E. Hyatt
Senior Vice President and
Chief Financial Officer
/s/ LOTA S. ZOTH
--------------------------------
Lota S. Zoth
Vice President, Corporate Controller and
Chief Accounting Officer
-27-