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 MAY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 987-4431
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
SHARES OUTSTANDING
CLASS AT JUNE 29, 1999
------------------- ----------------
Common Stock $1.00
par value per share 62,247,425
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 and Thirty-Nine Weeks Ended May 28, 1999 and
Twelve and Twenty-Eight Weeks Ended March 27, 1998 8
Condensed Consolidated Balance Sheet -
as of May 28, 1999 and August 28, 1998 9
Condensed Consolidated Statement of Cash Flow -
Thirty-Nine Weeks Ended May 28, 1999 and
Twenty-Eight Weeks Ended March 27, 1998 10
Condensed Consolidated Statement of Stockholders' Deficit-
as of May 28, 1999 11
Notes to Condensed Consolidated Financial Statements 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition 25
Quantitative and Qualitative Disclosures about Market Risk 30
Part II. Other Information and Signatures:
Legal Proceedings 30
Changes in Securities 30
Defaults Upon Senior Securities 30
Submission of Matters to a Vote of Security Holders 30
Other Information 30
Exhibits and Reports on Form 8-K 30
Signatures 31
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. ("Sodexho"), 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 ("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 (see Note 1 and Note 3).
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% of the Company
immediately prior to the Transactions 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
(see Note 5). 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. 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.
-1-
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.
I&R COSTS. Integration and Restructuring costs related to the Transactions.
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.
PRO FORMA THIRD QUARTER FISCAL 1999. The 13-week period ended May 28, 1999.
PRO FORMA THIRD QUARTER FISCAL 1998. The 13-week period ended May 29, 1998.
PRO FORMA FIRST NINE MONTHS OF FISCAL 1999. The 39-week period ended May 28,
1999.
PRO FORMA FIRST NINE MONTHS OF FISCAL 1998. The 39-week period ended May 29,
1998.
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.
-2-
GLOSSARY OF TERMS, CONTINUED
RETAINED BUSINESS. All operations not distributed.
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.
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 end 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 existing clients and obtain new clients on satisfactory
terms in light of the Transactions, (vi) the ability of the Company, its
suppliers, customers and other third parties to remedy any computer-related
issues resulting 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 and the
Company's Transition Report on Form 10-K filed with the Securities and Exchange
Commission on November 23, 1998.
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
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, 2 and 3 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 13
and 39 weeks ended May 28, 1999 compared with the historical 12 and 28 weeks
ended March 27, 1998 (presented in Part I of this report), but also the Pro
Forma Third Quarter and First Nine Months of Fiscal 1999 and 1998 presented in
this section. The pro forma operating results were prepared as if the
Transactions occurred at the beginning of the periods presented. 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 either the Pro Forma Third
Quarter Fiscal 1998 nor the Pro Forma First Nine Months of Fiscal 1998, and
losses from the sale of the MMS-UK Operations in October 1997 and related
operating results prior to the sale were also excluded from these periods.
Integration and restructuring charges of $2.6 million and $15.6 million pretax
were excluded from Pro Forma Third Quarter and First Nine Months of Fiscal 1999,
respectively. Pro Forma Third Quarter and First Nine Months of Fiscal 1998 also
exclude $17.1 million in integration and restructuring charges. Estimated
expenses of $0.5 million and $3.7 million were included in Pro Forma Third
Quarter and First Nine Months of Fiscal 1998, respectively, representing
incremental costs to operate the Company as a separate public entity. Pro forma
net income reflects approximately $4.0 million and $12.0 million of amortization
expense for the intangible assets related to the Acquisition for both Pro Forma
Third Quarter and First Nine Months of Fiscal 1999 and 1998, respectively.
Pro forma interest expense, net, represents the estimated costs as if the
Refinancing and the interest rate agreements had been in place on the first day
of all periods presented. Effective income tax rates of 44% and 48% were used
for Pro Forma First Nine Months of Fiscal 1999 and 1998, respectively. Pro forma
results do not include any extraordinary charges related to the Refinancing.
Pro forma basic earnings per share were calculated on a base of 62.2 million and
61.9 million shares for Pro Forma Third Quarter Fiscal 1999 and 1998,
respectively, which was the average number of shares outstanding during the 13
weeks ended May 28, 1999 and the number of shares outstanding on August 28,
1998. Pro forma diluted earnings per share were calculated on a base of 63.9
million and 62.5 million for Pro Forma Third Quarter Fiscal 1999 and 1998,
respectively. The dilutive shares were the result of the Company's convertible
debt, stock option plans and deferred stock incentive plans outstanding.
Pro forma basic earnings per share were calculated on a base of 62.1 million and
61.9 million shares for Pro Forma First Nine Months of Fiscal 1999 and 1998,
respectively, which was the average number of shares outstanding during the 39
weeks ended May 28, 1999 and the number of shares outstanding on August 28,
1998. Pro forma diluted earnings per share were calculated on a base of 64.0
million and 62.5 million for Pro Forma First Nine Months of Fiscal 1999 and
1998, respectively. The dilutive shares were the result of the Company's
convertible debt, stock option plans and deferred stock incentive plans
outstanding.
-4-
PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME BY SEGMENT
FOR THIRTEEN AND THIRTY-NINE WEEKS ENDED MAY 28, 1999 AND MAY 29, 1998
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- -------------------------------------
MAY 28, MAY 29, MAY 28, MAY 29,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
SALES
Corporate Services $ 350 $ 344 $1,009 $ 990
Health Care 333 319 972 953
Education 317 313 1,007 972
Schools 108 98 312 294
Canada 36 37 108 114
Laundries/Other 19 16 54 48
----------------- ----------------- ----------------- -----------------
TOTAL SALES 1,163 1,127 3,462 3,371
OPERATING COSTS AND EXPENSES
Corporate Services 325 322 942 929
Health Care 310 297 895 880
Education 293 295 923 901
Schools 100 92 290 277
Canada 34 35 102 109
Laundries/Other 17 15 51 45
----------------- ----------------- ----------------- -----------------
TOTAL OPERATING COSTS AND EXPENSES 1,079 1,056 3,203 3,141
----------------- ----------------- ----------------- -----------------
OPERATING PROFIT BEFORE
CORPORATE ITEMS
Corporate Services 25 22 67 61
Health Care 23 22 77 73
Education 24 18 84 71
Schools 8 6 22 17
Canada 2 2 6 5
Laundries/Other 2 1 3 3
----------------- ----------------- ----------------- -----------------
TOTAL OPERATING PROFIT 84 71 259 230
CORPORATE ITEMS:
Amortization of Intangible Assets (9) (9) (28) (28)
Corporate Expenses (23) (17) (59) (59)
Interest Expense, Net (21) (22) (65) (66)
Gain on Sale of Investment -- -- 8 --
----------------- ----------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 31 23 115 77
Provision for Income Taxes (14) (11) (51) (37)
----------------- ----------------- ----------------- -----------------
PRO FORMA NET INCOME $ 17 $ 12 $ 64 $ 40
================= ================= ================= =================
PRO FORMA BASIC EARNINGS PER SHARE $ 0.27 $ 0.19 $ 1.03 $ 0.65
================= ================= ================= =================
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.27 $ 0.19 $ 1.01 $ 0.64
================= ================= ================= =================
-5-
DISCUSSION OF PRO FORMA THIRD QUARTER FISCAL 1999 AND 1998 RESULTS OF OPERATIONS
Total sales for Pro Forma Third Quarter Fiscal 1999 were $1.16 billion, an
increase of $36 million, or 3.1%, over $1.13 billion for Pro Forma Third Quarter
Fiscal 1998. This growth was mostly attributable to the performance of the
Health Care and Schools (K-12) divisions, as new sales in the Corporate Services
and Education divisions were largely offset by the absence of sales to clients
lost during and after Pro Forma Third Quarter Fiscal 1998. The absence of sales
to clients lost last year was greater than historical experience, principally
due to the disruption of the Transactions. Management believes that the
retention of clients during Fiscal 1999 will return to the more favorable
historical levels. 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
and amortization of intangible assets) totaled $84 million for the Pro Forma
Third Quarter Fiscal 1999, an increase of $13 million, or 18.7%, over the $71
million in operating profit for the Pro Forma Third Quarter Fiscal 1998.
Operating profit increased in all four of the larger divisions, as the Company
benefited from sales growth as well as administrative and purchasing synergies.
During the Pro Forma Third Quarter Fiscal 1999, the Health Care division's
operating profit growth was reduced as a $2 million pretax charge was taken to
reflect the impact of a hospital bankruptcy and the deteriorating financial
condition of certain other hospital clients. The Health Care industry as a whole
continues to be under fiscal pressures. The Company will continue to monitor its
existing client accounts closely, provide reserves based on current information
and trends, and perform comprehensive analysis of the credit worthiness of
potential clients prior to entering new contracts, especially in the Health Care
industry.
Corporate expenses and amortization of intangible assets in the Pro Forma Third
Quarter Fiscal 1999 totaled $32 million, a 26.3% increase from the $26 million
for the Pro Forma Third Quarter Fiscal 1998. The elimination of certain
positions after the Transactions along with other administrative synergies were
more than offset during the current quarter by a $3.4 million, one-time pretax
charge related to the former Chief Executive Officer's resignation and
approximately $2 million (pretax) in Year 2000 related costs (see "Year 2000").
Excluding the Year 2000 costs and the one-time resignation charge, total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 95.1% of total sales for the Pro Forma Third
Quarter Fiscal 1999 compared with Fiscal 1998's comparable period ratio of
96.0%. The Company anticipates this margin will continue to improve in the
periods ahead, as the Company continues to realize savings from purchasing
synergies. Together with the synergies from administrative actions, these
savings, a portion of which may be reinvested in the business, are anticipated
to reach $60 million annually by fiscal year 2001, and have exceeded $20 million
in the current year.
The growth in operating profit contributed to an increase in pretax income of $8
million, or 33%, to $31 million for the Pro Forma Third 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 significantly to
$17 million, or $0.27 per diluted share, compared with $12 million, or $0.19 per
diluted share for Pro Forma Third Quarter Fiscal 1998.
-6-
DISCUSSION OF PRO FORMA FIRST NINE MONTHS OF FISCAL 1999 AND 1998 RESULTS
OF OPERATIONS
Total sales for Pro Forma First Nine Months of Fiscal 1999 were $3.46 billion,
an increase of $91 million, or 2.7%, over $3.37 billion for Pro Forma First Nine
Months of Fiscal 1998. This growth was attributable to the performance of all of
the Company's divisions, except Canada. New sales in the Health Care and
Corporate Services divisions in the Pro Forma First Nine Months of Fiscal 1999
were hampered by the absence of sales to clients lost during and after Pro Forma
First Nine Months of Fiscal 1998. The absence of sales to clients lost last year
was greater than historical experience, principally due to the disruption of the
Transactions. Management believes that the retention of clients during Fiscal
1999 will return to the more favorable historical levels. The Canada division's
sales would have been flat compared with last year 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 $259
million for the Pro Forma First Nine Months of Fiscal 1999, an increase of $29
million, or 13.1%, over the $230 million in operating profit for the Pro Forma
First Nine Months of Fiscal 1998. During the Pro Forma First Nine Months of
Fiscal 1999, the Health Care division's operating profit growth was reduced as a
$3 million pretax charge was taken to reflect the impact of hospital
bankruptcies and the deteriorating financial condition of certain other hospital
clients. Pro Forma First Nine Months of Fiscal 1998 included charges totaling $5
million for potential sales and use tax exposure.
Corporate expenses and amortization of intangible assets in the Pro Forma First
Nine Months of Fiscal 1999 totaled $87 million, level with Pro Forma First Nine
Months of Fiscal 1998. The benefits from the elimination of certain positions
after the Transactions along with other administrative synergies were offset by
a one-time, $3.4 million pretax charge related to the resignation of the former
Chief Executive Officer and $3 million pretax of Year 2000 related costs (see
"Year 2000"). The Pro Forma First Nine Months of Fiscal 1999 included the
favorable impact from the sale of the Company's Bright Horizons Family Solutions
("BFAM") investment, resulting in a cumulative pretax gain of $8.3 million, or
$4.6 million after-tax ($0.07 per diluted common share) recognized in the Pro
Forma First Nine Months of Fiscal 1999.
Excluding the Year 2000 costs and the one-time resignation charge, total
operating costs, corporate expenses and amortization of intangible assets
represented, in the aggregate, 94.9% of total sales for the Pro Forma First Nine
Months of Fiscal 1999 compared with Fiscal 1998's comparable period ratio of
95.8%. The Company anticipates this margin will continue to improve in the
periods ahead, as the Company continues to realize purchasing synergies.
Together with the synergies from administrative actions, these savings, a
portion of which may be reinvested in the business, are anticipated to reach $60
million annually by fiscal year 2001, and have exceeded $20 million in the
current year.
The growth in operating profit combined with the gain on sale of investment,
increased pretax income by $38 million, or 49.4%, to $115 million for the Pro
Forma First Nine Months of 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 60% to $64 million, or $1.01 per
diluted share, compared with $40 million, or $0.64 per diluted share for the Pro
Forma First Nine Months of Fiscal 1998.
-7-
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
($ in millions, except per share amounts)
(Unaudited)
THIRTEEN TWELVE THIRTY-NINE TWENTY-EIGHT
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
MAY 28, MARCH 27, MAY 28, MARCH 27,
1999 1998 1999 1998
---------------- ----------------- ---------------- -----------------
SALES $1,163 $1,111 $3,462 $2,747
Operating Costs and Expenses 1,080 1,072 3,204 2,632
Loss on Sale of MMS-UK Operations -- -- -- 22
---------------- ----------------- ---------------- -----------------
1,080 1,072 3,204 2,654
---------------- ----------------- ---------------- -----------------
OPERATING PROFIT BEFORE CORPORATE ITEMS 83 39 258 93
CORPORATE ITEMS:
Corporate expenses,
including amortization of intangible assets (35) (43) (102) (73)
Interest expense, net (21) (16) (65) (36)
Gain on sale on investment -- -- 8 --
---------------- ----------------- ---------------- -----------------
Income (Loss) From Continuing Operations,
Before Income Taxes and
Extraordinary Item 27 (20) 99 (16)
(Provision) benefit for income taxes (12) 9 (44) 5
---------------- ----------------- ---------------- -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS, BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY ITEM 15 (11) 55 (11)
Discontinued operations, net of income taxes -- 77 -- 185
---------------- ----------------- ---------------- -----------------
Income Before Extraordinary Item 15 66 55 174
Loss from extraordinary item, net of
income taxes -- (43) -- (43)
---------------- ----------------- ---------------- -----------------
NET INCOME $ 15 $ 23 $ 55 $ 131
================ ================= ================ =================
BASIC EARNINGS PER SHARE:
Continuing Operations $ 0.25 $(0.34) $ 0.89 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
---------------- ----------------- ---------------- -----------------
0.25 2.09 0.89 5.38
Extraordinary Item -- (1.36) -- (1.36)
---------------- ----------------- ---------------- -----------------
BASIC EARNINGS PER SHARE $ 0.25 $ 0.73 $ 0.89 $ 4.02
================ ================= ================ =================
DILUTED EARNINGS PER SHARE:
Continuing Operations $ 0.24 $(0.34) $ 0.87 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
---------------- ----------------- ---------------- -----------------
0.24 2.09 0.87 5.38
Extraordinary Item -- (1.36) -- (1.36)
---------------- ----------------- ---------------- -----------------
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.73 $ 0.87 $ 4.02
================ ================= ================ =================
See notes to condensed consolidated financial statements.
-8-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
MAY 28, AUGUST 28,
1999 1998
(UNAUDITED)
------------------ -------------------
ASSETS
Current Assets
Cash and equivalents $ 62 $ 79
Accounts and notes receivable, net 470 374
Other 140 152
------------------ -------------------
Total current assets 672 605
Property and equipment, net 78 82
Intangible assets, net 550 573
Other assets 76 81
------------------ -------------------
$ 1,376 $ 1,341
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 120 $ 96
Accounts payable 257 222
Other current liabilities 343 328
Payable to affiliates for excess net tangible assets -- 49
------------------ -------------------
Total current liabilities 720 695
Long-term debt 1,001 1,062
Other long-term liabilities 115 110
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 1,326 1,322
Accumulated deficit (1,879) (1,946)
Accumulated other comprehensive income 2 7
------------------ -------------------
Total stockholders' deficit (489) (555)
------------------ -------------------
Total liabilities and stockholders' deficit $ 1,376 $ 1,341
================== ===================
See notes to condensed consolidated financial statements.
-9-
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
($ in millions)
(Unaudited)
THIRTY-NINE TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
MAY 28, 1999 MARCH 27, 1998
--------------------- ---------------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income $ 55 $ 131
Adjustments to reconcile to cash provided by continuing operations:
Income from discontinued operations -- (185)
Loss on retirement of debt, net of tax -- 43
Depreciation and amortization expense 63 52
Gain on sale of investment (8) --
Deferred income taxes -- 5
Changes in working capital (37) (9)
Changes in discontinued operations -- 144
Other 10 --
--------------------- ---------------------
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES 83 181
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (44) (175)
Net cash - Acquisitions -- 24
Dispositions 23 130
Payments for excess net tangible assets (36) --
Cash - distributed operations -- (305)
Net investment in discontinued operations -- (217)
Other (10) (30)
--------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (67) (573)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuances of long-term debt -- 1,923
Proceeds from borrowings from short-term credit facility 17 --
Repayments of long-term debt (53) (1,816)
Proceeds received from Sodexho -- 304
Issuance of common stock 3 84
Purchases of treasury stock -- (159)
Dividends paid - common stock -- (22)
--------------------- ---------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (33) 314
--------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (17) (78)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 79 160
--------------------- ---------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 62 $ 82
===================== =====================
See notes to condensed consolidated financial statements.
-10-
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 -- -- 55 -- 55
Reclassification of gain
realized in net income,
-- net of taxes -- -- -- (5) (5)
-- Foreign exchange translation -- -- -- 1 1
-- Other -- -- -- (1) (1)
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
-- TOTAL COMPREHENSIVE INCOME -- -- 55 (5) 50
Adjustment of distribution
-- to shareholders -- -- 12 -- 12
Employee stock plan
0.3 issuance and other -- 4 -- -- 4
- ------------ ------------------------------- --------------- -------------- --------------- ----------------- ---------------
62.2 Balance, May 28, 1999 $62 $1,326 $(1,879) $2 $(489)
============ =============================== =============== ============== =============== ================= ===============
See notes to condensed consolidated financial statements.
-11-
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 Notes 2 and 3.
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 10-K for the period ended
August 28, 1998.
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 May 28, 1999 and August 28, 1998, and the results of operations for the 13
weeks and 39 weeks ended May 28, 1999 and the 12 weeks and 28 weeks ended March
27, 1998. The prior year's 12-week and 28-week periods ended March 27, 1998 have
been presented because financial information within the Transition Period was
not available, the result of the timing of the Transactions, the change in the
Company's fiscal year (see "Fiscal Year"), and the integration of multiple
financial systems.
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.
-12-
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).
As part of the Transactions, the Company entered into separate agreements with
MI and Sodexho that established reasonable amounts of adjusted net tangible
assets (as defined in the agreements) for the respective operations that were
not part of the Distribution immediately prior to the consummation of the
Transactions. These agreements provided that the Company would pay MI and
Sodexho an amount by which the adjusted net tangible assets total is greater or
less than certain predetermined amounts, which resulted in an estimated $29
million and $20 million, payable to MI and Sodexho, respectively, as of August
28, 1998. The Company completed arbitration with MI and Sodexho resulting in
cumulative payments totaling $36 million in Fiscal 1999. The majority of the
decrease related to the $10 million reduction in the payable to MI, which was
mostly due to adjustments related to deferred taxes. The reduction in the
payable to MI had an offsetting adjustment to stockholders' deficit related to
the Transaction's distribution to shareholders in the Company's Condensed
Consolidated Balance Sheet.
REVERSE STOCK SPLIT
The Company 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 end 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 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 $21 million
and $17 million at May 28, 1999 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.
-13-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of undiscounted expected future cash flow is less than
the carrying amount of long-lived assets, the Company recognizes an impairment
loss based on the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
INTEREST-RATE AGREEMENTS
The Company's policies prohibit the use of derivative instruments for trading
purposes and procedures are in place to monitor and control their use. The use
of derivative instruments is limited to interest-rate agreements for the purpose
of reducing the variability of the Company's debt costs. These agreements are
entered into in conjunction with the issuance of the debt they are intended to
modify.
The notional balances of these agreements represent a balance used to calculate
the exchange of cash flows and are not assets or liabilities of the Company, and
do not represent an exposure to credit loss. The notional amount and interest
payments of these agreements match the cash flows of the related debt.
Accordingly, any market risk or opportunity associated with these agreements is
offset by the opposite market impact on the related debt. The Company's credit
risk related to interest-rate agreements is considered low because they are
entered into only with strong creditworthy counterparties and are generally
settled on a net basis. The difference paid or received on interest-rate
agreements is recognized as an adjustment to interest expense.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
EARNINGS PER SHARE
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 May 28, 1999 and August 28, 1998, the
Company had $80 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.
-14-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
ranging from 3 to 40 years. Replacements and improvements are capitalized.
Leasehold improvements, net of estimated residual value, are amortized over the
shorter of the useful life of the asset or the lease term.
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill and customer relationships.
Intangible assets are amortized on a straight-line basis over periods generally
ranging from 30 to 40 years for goodwill and 10 to 20 years for customer
relationships.
Amortization expense for continuing operations totaled $9 million and $28
million for the 13 weeks and 39 weeks ended May 28, 1999, respectively, compared
with $5 million and $12 million for the 12 weeks and 28 weeks ended March 27,
1998, respectively. Amortization expense for discontinued operations totaled $5
million and $19 million for the 12 weeks and 28 weeks ended March 27, 1998,
respectively.
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 the
resulting translation adjustments are reflected in stockholders' deficit as
accumulated other comprehensive income.
Total accumulated other comprehensive income included $3.6 million of gross
foreign exchange translations gains, net of taxes totaling $1.6 million, at May
28, 1999. 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. During the First
Nine Months of Fiscal 1999, total Comprehensive Income was comprised of $55
million in net income, partially offset by the reclassification of the realized
gain on the sale of investment totaling $8.3 million pretax, net of taxes
totaling $3.7 million, for a cumulative $4.6 million net realized gain on sale
of investment recorded to the year-to-date Condensed Consolidated Statement of
Income.
-15-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 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. The
Company also disclosed 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 8), including the restatement of prior periods reported
consistent with this pronouncement, if practicable.
NEW ACCOUNTING STANDARDS
SFAS No. 133-- "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and will require the Company to record derivative
instruments, such as interest-rate agreements on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company treats
such instruments as off-balance-sheet items. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
(2) 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.
-16-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) THE DISTRIBUTION AND DISCONTINUED OPERATIONS, CONTINUED
Discontinued Operations, Net of Income Taxes, is comprised of the following:
28 WEEKS ENDED
MARCH 27, 1998
--------------------
($ in millions,
except per share
amounts)
Sales $4,014
Income Before Income Taxes $ 332
Income Taxes (130)
--------------------
Discontinued Operations, Net of Income Taxes 202
Cost Associated with Effecting the Distribution (28)
Income Taxes 11
--------------------
Net Costs Associated with Effecting the Distribution (17)
--------------------
Discontinued Operations, Net of Income Taxes $ 185
====================
Basic Earnings Per Share $ 5.72
====================
Diluted Earnings Per Share $ 5.72
====================
No identifiable assets or liabilities of the Lodging segment were included in
the Condensed Consolidated Balance Sheet as of March 27, 1998.
(3) ACQUISITION
On March 27, 1998, Sodexho transferred to the Company the operations of Sodexho
North America having a fair market value of $278 million, combined with a cash
payment of $304 million, in exchange for 29.9 million shares of the Company's
common stock, after giving effect to the one-for-four reverse stock split (see
Note 1 and Note 6). The purchase price included approximately $3 million in
transaction costs. As a result of the issuance of new shares to the Company's
common stock to Sodexho in connection with the Acquisition, the shareholders
that owned 100% of the Company immediately prior to the Distribution owned
approximately 51% immediately thereafter.
Certain adjustments have been made to the preliminary allocation of the purchase
price to the fair market value of assets acquired, as shown in the table below:
($ in millions)
-----------------
Current assets $ 142
Other assets 56
Customer relationships 122
Current liabilities (137)
Payable to Sodexho for excess net tangible assets (18)
Other liabilities (47)
Debt (73)
Deferred taxes, net (7)
Goodwill 240
-----------------
Subtotal 278
Cash contributed to the Company 304
-----------------
Total purchase price $ 582
=================
-17-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) INTEGRATION AND RESTRUCTURING
Integration and restructuring actions taken in the 39 weeks ended May 28, 1999,
reflect the undertaking by the Company to integrate and realign resources for
more effective and efficient execution of operating strategies. Integration
costs totaled $16 million during the First Nine Months 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 $8 million at May 28, 1999,
generally represents the estimated cost of termination benefits for
approximately 350 former Sodexho North America employees as well as the
estimated cost for the closure of certain Sodexho North America offices.
Acquisition reserve activity, reflecting certain adjustments made to the
preliminary allocation of the purchase price to the fair market value of assets
acquired (see Note 3), is detailed below:
BALANCE AS OF BALANCE AS OF
AUGUST 28, 1998 ADJUSTMENTS PAYMENTS MAY 28, 1999
-------------------- -- ----------------- - ------------- -- ----------------------
($ in millions)
Employee Terminations $10.0 $(0.2) $ (6.3) $3.5
Relocation of Sodexho Facilities 2.6 -- (1.9) 0.7
Closures 3.1 1.2 (1.3) 3.0
Other Restructuring 1.6 1.3 (2.3) 0.6
-------------------- ----------------- ------------- ----------------------
Total $17.3 $ 2.3 $(11.8) $7.8
==================== ================= ============= ======================
In addition, integration expenses recorded in the Condensed Consolidated
Statement of Income during the Third Quarter and the First Nine Months of Fiscal
1999 are detailed below. No restructuring expenses were recorded in the
Condensed Consolidated Statement of Income during the First Nine Months of
Fiscal 1999.
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
MAY 28, 1999 MAY 28, 1999
---------------------- ---------------------
($ in millions)
Integration:
Duplicate Overhead $1.1 $ 7.6
MMS Relocation 0.2 0.3
Training Systems 0.1 1.0
Other 1.2 6.7
---------------------- ---------------------
Total $2.6 $15.6
====================== =====================
-18-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT
MAY 28, AUGUST 28,
1999 1998
----------------- -----------------
($ in millions)
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 77 $ 70
Senior Secured Revolving Credit Facility 42 25
Other 1 1
----------------- -----------------
Total $ 120 $ 96
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 7.18% in fiscal 1999 $ 447 $ 500
Senior Guaranteed Credit Facility, due 2005
averaging 6.93% in fiscal 1999 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal 1999 6 6
Other 1 2
Capital Lease Obligations 4 4
----------------- -----------------
Total $1,078 $1,132
Amount Reclassified to Short-Term Debt (77) (70)
----------------- -----------------
$1,001 $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 May 28, 1999,
the Company is paying a rate of 6.93% 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 $26 million
at May 28, 1999. At May 28, 1999, $167 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 May 28, 1999, the Company is paying a rate of
6.80% 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 May 28,
1999 and for the 39-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.
-19-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) 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 were
issued at a discount representing a yield to maturity of 4.25%. The Company
recorded the LYONs at the discounted amount at issuance. Accretion 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 for the 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 May 28, 1999.
INTEREST-RATE AGREEMENTS
At May 28, 1999, the majority of the Company's debt was payable at variable
rates of interest. As part of the Refinancing of the Company's debt, the Company
entered into several interest-rate agreements on May 29, 1998 totaling $900
million in notional principal balances to hedge a portion of its variable rate
debt. These agreements guarantee a fixed rate of interest over the life of the
agreements. The Company is paying a fixed rate ranging between 5.71% and 5.90%,
plus a residual margin that is not hedged relating to the underlying
variable-rate debt.
In March 1999, the Company entered two new interest-rate agreements to guarantee
a fixed rate of interest payments for a portion of its floating interest rate
debt. These agreements were effective on March 30, 1999 and April 1, 1999, with
notional principal amounts of $80 million and $70 million, respectively, and
will pay a fixed rate of 5.02% and 5.05% while receiving interest based on
three-month LIBOR. Both agreements mature in September 1999 and will reduce the
Company's exposure to the uncertainty of changes in interest rates during their
term. The weighted-average rate for the total debt portfolio, including the
affect of the interest-rate agreements, was 6.90% at May 28, 1999. These
agreements expire between August 2001 and February 2005.
-20-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT, CONTINUED
Details of these interest rate agreements as of May 28, 1999 are as follows:
YEAR-TO-DATE
NOTIONAL WEIGHTED-AVERAGE NET IMPACT
PRINCIPAL FAIR INTEREST RATE TO EARNINGS--
TERMS BALANCE VALUE* PAID RECEIVED 39 WEEKS
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
($ in millions)
Received Variable
Pay Fixed, Maturing 9/99 $ 150 $ -- 5.03% 5.01% $ --
Received Variable
Pay Fixed, Maturing 5/--8/01 400 1 5.71 5.01 1
Received Variable
Pay Fixed, Maturing 8/02 300 1 5.84 5.01 1
Received Variable
Pay Fixed, Maturing 8/05 200 2 5.90 5.01 1
- ----------------------------------- --------------- -------------- --------------- --------------- ---------------
$1,050 $ 4 5.69% 5.01% $ 3
=================================== =============== ============== =============== =============== ===============
<FN>
*-- based on the termination cost for these agreements obtained by third party
market quotes.
</FN>
At May 28, 1999, the Company did not have any accrued interest receivable or
payable to its counterparties and did not have any unamortized fees or premiums
under these agreements. All of the Company's interest-rate agreements are for
purposes other than trading.
(6) 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 two shares of New Marriott MI, Inc. stock (renamed
Marriott International, Inc.) for each share of the Company's stock. 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 May 28, 1999,
the Company had 62,231,555 shares outstanding.
-21-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) 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 TWELVE THIRTY-NINE TWENTY-EIGHT
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
MAY 28, MARCH 27, MAY 28, MARCH 27,
1999 1998 1999 1998
----------------- ----------------- ---------------- ----------------
(in millions, except per share amounts) (in millions, except per share amounts)
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income (Loss) from
Continuing Operations $ 15 $ (11) $ 55 $ (11)
Net Income from Discontinued Operations -- 77 -- 185
Net Loss from Extraordinary Item -- (43) -- (43)
----------------- ----------------- ---------------- ----------------
Net Income $ 15 $ 23 $ 55 $ 131
================= ================= ================ ================
Weighted Average Shares Outstanding 62.2 31.7 62.1 32.3
================= ================= ================ ================
Basic Earnings (Loss) Per Share:
Continuing Operations $0.25 $(0.34) $0.89 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
Extraordinary Item -- (1.36) -- (1.36)
----------------- ----------------- ---------------- ----------------
BASIC EARNINGS PER SHARE $0.25 $ 0.73 $0.89 $ 4.02
================= ================= ================ ================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Diluted Net Income (Loss) from
Continuing Operations $ 16 $ (11) $ 56 $ (11)
Diluted Net Income from
Discontinued Operations -- 77 -- 185
Diluted Net Loss from Extraordinary Item -- (43) -- (43)
----------------- ----------------- ---------------- ----------------
Diluted Net Income $ 16 $ 23 $ 56 $ 131
================= ================= ================ ================
Weighted Average Shares Outstanding 62.2 31.7 62.1 32.3
Effect of Dilutive Securities:
Employee Stock Option Plan 0.4 * 0.6 *
Deferred Stock Incentive Plan 0.1 * 0.1 *
Convertible Subordinated Debt 1.2 * 1.2 *
----------------- -- ----------------- --- ---------------- --- ----------------
Diluted Weighted Average
Shares Outstanding 63.9 31.7 64.0 32.3
================= ================= ================ ================
Diluted Earnings Per Share:
Continuing Operations $0.24 $(0.34) $0.87 $(0.34)
Discontinued Operations -- 2.43 -- 5.72
Extraordinary Item -- (1.36) -- (1.36)
----------------- ----------------- ---------------- ----------------
DILUTED EARNINGS PER SHARE $0.24 $ 0.73 $0.87 $ 4.02
================= ================= ================ ================
<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 12 weeks and 28
weeks ended March 27, 1998, dilutive securities under the employee stock option
plan (of 3.5 million and 2.1 million, respectively), the deferred stock
incentive plan (of 0.9 million and 0.8 million, respectively), and the debt
securities (1.2 million for both periods) were excluded due to the loss from
continuing operations.
</FN>
-22-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) 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 and
39-week periods ended May 28, 1999, expenses that related to these plans totaled
$2.4 million and $9.2 million, respectively.
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. During the first 39 weeks of fiscal 1999, the Company issued
120,075 new stock option awards.
A summary of the Company's stock option activity during the 39 weeks ended May
28, 1999, is presented below:
THIRTY-NINE WEEKS ENDED
MAY 28, 1999
--------------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
----------------- -----------------
Outstanding at August 28, 1998 5.0 $20
Granted during the thirty-nine weeks 0.1 26
Exercised during the thirty-nine weeks (0.3) 8
Forfeited during the thirty-nine weeks (0.1) 16
----------------- -----------------
Outstanding at May 28, 1999 4.7 $21
================= =================
Options exercisable at May 28, 1999 1.4 $14
================= =================
-23-
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
Prior to the Distribution, the Company was a diversified hospitality company
with operations in two business segments: Lodging, which includes development,
ownership, operation and franchising of lodging properties under 10 brand names
and development and operation of vacation timesharing resorts; and Contract
Services, consisting of the Company's principal business operations after the
Distribution, in addition to the senior living communities business and the
wholesale food distribution business ("Other Contract Services").
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
13 WEEKS ENDED 12 WEEKS ENDED 39 WEEKS ENDED 28 WEEKS ENDED
MAY 28, MARCH 27, MAY 28, MARCH 27,
1999 1998 1999 1998
---------------- --- ---------------- ---------------- --- ----------------
($ in millions) ($ in millions)
GROSS SALES
Corporate Services $ 350 $ 222 $1,009 $ 512
Health Care 333 238 972 563
Education 317 204 1,007 522
Schools 108 87 312 203
Canada 36 24 108 60
Laundries/Other 19 15 54 72
Other Contract Services -- 321 -- 815
---------------- ---------------- ---------------- ----------------
Contract Services 1,163 1,111 3,462 2,747
Discontinued Operations -- 1,774 -- 4,014
---------------- ---------------- ---------------- ----------------
Total Gross Sales $1,163 $2,885 $3,462 $6,761
================ ================ ================ ================
GROSS OPERATING PROFIT
Corporate Services $ 24 $ 11 $ 67 $ 23
Health Care 23 12 77 36
Education 24 6 84 33
Schools 8 5 21 10
Canada 2 -- 6 2
Laundries/Other 2 -- 3 --
Other Contract Services -- 5 -- 11
Loss on Sale of MMS-UK Operations -- -- -- (22)
---------------- ---------------- ---------------- ----------------
Contract Services 83 39 258 93
Discontinued Operations -- 158 -- 332
---------------- ---------------- ---------------- ----------------
Total Gross Operating Profit $ 83 $ 197 $ 258 $ 425
================ ================ ================ ================
Total Net Operating Profit from
Continuing Operations (Contract $ 83 $ 39 $ 258 $ 93
Services)
Corporate Items (56) (59) (159) (109)
---------------- ---------------- ---------------- ----------------
Income From Continuing Operations,
Before Taxes and Extraordinary Item $ 27 $ (20) $ 99 $ (16)
================ ================ ================ ================
(9) 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.
-24-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion presents an analysis of results of operations of the
Company for the unaudited 13-week period ended May 28, 1999 ("Third Quarter
Fiscal 1999") as compared with the historical unaudited 12-week period ended
March 27, 1998. Also included is an analysis for the unaudited 39-week period
ended May 28, 1999 ("First Nine Months of Fiscal 1999") as compared with the
historical unaudited 28-week period ended March 27,1998.
WHILE THE COMPARISON OF THE THIRD QUARTER FISCAL 1999 TO THE PREVIOUSLY REPORTED
12-WEEK PERIOD IN 1998 DIFFERS BY ONE WEEK, AND IS NOT A SEASONALLY ALIGNED
COMPARISON, AS WELL AS THE FIRST NINE MONTHS OF FISCAL 1999 COMPARED WITH THE
PREVIOUSLY REPORTED 28-WEEK PERIOD DIFFERS BY 11 WEEKS, MANAGEMENT BELIEVES THAT
THESE COMPARISONS ARE THE MOST PRACTICABLE AS FINANCIAL INFORMATION WITHIN THE
TRANSITION PERIOD WAS NOT AVAILABLE DUE TO THE TIMING OF THE TRANSACTIONS, THE
CHANGE IN THE COMPANY'S FISCAL YEAR, AND THE INTEGRATION OF MULTIPLE ACCOUNTING
SYSTEMS (SEE NOTE 1).
DUE TO THE SUBSTANTIAL DIFFERENCES IN THE COMPARABILITY OF THE COMPANY'S
HISTORICAL OPERATING RESULTS FOR THE THIRD QUARTER AND FIRST NINE MONTHS OF
FISCAL 1999 VERSUS THE PRIOR FISCAL YEAR'S PERIODS, 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 MAY 28, 1999 VS. TWELVE WEEKS ENDED MARCH 27, 1998.
Total sales for Third Quarter Fiscal 1999 were $1.16 billion, an increase of $52
million, or 5%, when compared with $1.11 billion for the 12 weeks ended March
27, 1998. The increase in sales between the periods was mostly due to the
additional week in the current period, partially offset by 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 12-week period ended March 27,
1998, but were not included in the Third Quarter Fiscal 1999. Excluding the MDS
and MSLS divisions, total sales increased $373 million, or 47%. This growth was
a result of the Acquisition, which had a significant impact on the current
period's sales, with Corporate Services' sales increasing $128 million, or 58%,
Health Care's increasing $95 million, or 40%, and Education's increasing $113
million, or 55%.
Operating profit before corporate items totaled $83 million for the Third
Quarter Fiscal 1999 period, more than doubling from the $39 million in operating
profit for the 12-week period ended March 27, 1998. This increase was the result
of the significant sales growth in the Corporate Services, Health Care and
Education divisions as detailed above. In addition to increased sales, operating
margins improved as the result of the Acquisition, with Corporate Services'
operating profit increasing $13 million, or 118%, Health Care's increasing $11
million, or 92%, and Education's increasing $18 million, or 300%. During the
Third Quarter Fiscal 1999, the Health Care division's operating profit growth
was reduced as a $2 million pretax charge was taken to reflect the impact of a
hospital bankruptcy and the deteriorating financial condition of certain other
hospital clients. The Health Care industry as a whole continues to be under
fiscal pressures. The Company will continue to monitor its existing client
accounts closely, provide reserves based on current information and trends, and
perform comprehensive analysis of the credit worthiness of potential clients
prior to entering new contracts, especially in the Health Care industry.
Corporate expenses, after excluding $3 million in integration charges, totaled
$32 million in the Third Quarter Fiscal 1999 period, down $11 million, or 26%
from the 12-week prior period. Increases in interest expense of $5 million were
the result of the Refinancing on March 27, 1998. In the periods ahead, the
Company anticipates it will continue efficiencies in corporate expenses and
improved operating profit as the Company realizes further savings from
purchasing synergies. Together with the synergies from administrative actions,
these savings, a portion of which may be reinvested in the business, are
anticipated to reach $60 million annually by fiscal year 2001, and have exceeded
$20 million in the current year.
Income from continuing operations before income taxes increased to $15 million,
the result of growth in operating profit between the periods. Discontinued
operations, net of income taxes, totaled $77 million for the 12-week period
ended March 27, 1998, reflecting net income from the distributed lodging
segment. The extraordinary charge for costs associated with the early
extinguishment of debt, which was part of the Refinancing on March 27, 1998, was
$43 million, net of $28 million in taxes, or $1.36 per basic and diluted share.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
The Company's effective income tax rate was 44% for the Third Quarter Fiscal
1999, compared with 41% for continuing and discontinued operations in 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 for the
Third Quarter Fiscal 1999 was $15 million, or $0.24 per diluted share, compared
with a net loss from continuing operations of $11 million, or $0.34 net loss per
diluted share, in the prior year's period. Discontinued Operations, net of
income taxes, totaled $77 million, or $2.43 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.
THIRTY-NINE WEEKS ENDED MAY 28, 1999 VS. TWENTY-EIGHT WEEKS ENDED MARCH 27,
1998.
Total sales for the thirty-nine weeks ended May 28, 1999 ("First Nine Months of
Fiscal 1999") were $3.46 billion, an increase of $715 million, or 26%, when
compared with $2.75 billion for the 28 weeks ended March 27, 1998. The increase
in sales between the periods was mostly due to the additional 11 weeks in the
current period, partially offset by 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 28-week period ended March 27, 1998, but were not
included in the First Nine Months of Fiscal 1999. Excluding the MDS and MSLS
divisions, total sales increased $1.53 billion, or 79%. This growth was a result
of the Acquisition, which had a significant impact on the current period's
sales, with Corporate Services' sales increasing $497 million, or 97%, Health
Care's increasing $409 million, or 73%, and Education's increasing $485 million,
or 93%.
Excluding the loss on the sale of MMS-UK Operations, operating profit before
corporate items totaled $258 million for the First Nine Months of Fiscal 1999
period, an increase of $143 million, more than double the adjusted $115 million
in operating profit for the 28-week period ended March 27, 1998. This increase
was the result of the strong sales growth in the Corporate Services, Health Care
and Education divisions as detailed above. In addition to increased sales,
operating margins improved as the result of the Acquisition, with Corporate
Services' operating profit increasing $44 million, or 191%, Health Care's
increasing $41 million, or 114%, and Education's increasing $51 million, or
155%. During the First Nine Months of Fiscal 1999, the Health Care division's
operating profit growth was reduced as a $3 million pretax charge was taken to
reflect the impact of hospital bankruptcies and the deteriorating financial
condition of certain other hospital clients.
Corporate expenses, after excluding $15 million in integration charges, totaled
$87 million in the First Nine Months of Fiscal 1999 period, an increase of $14
million, or 19% from the 28-week prior period, the result of the additional 11
weeks in the current period. Increases in interest expense of $29 million were
the result of the Refinancing on March 27, 1998 and the additional 11 weeks in
the current period. Also, the Company sold its investment in Bright Horizons
Family Solutions ("BFAM"), resulting an aggregate pretax gain of $8.3 million,
or $4.6 million after-tax ($0.07 per diluted common share). In the periods
ahead, the Company anticipates it will continue efficiencies in corporate
expenses and improved operating profit as the Company realizes further savings
from purchasing synergies. Together with the synergies from administrative
actions, these savings, a portion of which may be reinvested in the business,
are anticipated to reach $60 million annually by fiscal year 2001, and have
exceeded $20 million in the current year.
Excluding the $22 million pretax loss from the sale of MMS-UK Operations to
Sodexho Alliance in the prior period, income from continuing operations before
income taxes increased significantly to $99 million, the result of strong
increases in operating profit between the periods. Discontinued operations, net
of income taxes, totaled $185 million for the 28-week period ended March 27,
1998, reflecting net income from the distributed lodging segment.
The extraordinary charge for costs associated with the early extinguishment of
debt, which was part of the Refinancing at March 27, 1998, was $43 million, net
of $28 million in taxes, or $1.36 per basic and diluted share.
The Company's effective income tax rate was 44% for the First Nine Months of
Fiscal 1999, compared with 40% for continuing and discontinued operations in 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.
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Net income for the First Nine Months of Fiscal 1999 was $55 million, or $0.87
per diluted share, compared with a net loss from continuing operations of $11
million, or $0.34 loss per diluted share, for the prior year's period.
Discontinued Operations, net of income taxes, totaled $185 million, or $5.72 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.
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, 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 May 28, 1999, the Company had a $235
million revolving credit facility available at an interest rate of 7.94% to
provide funds for liquidity, seasonal borrowing needs and other general
corporate purposes. At May 28, 1999, $42 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 paid regular quarterly dividends,
including 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 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. In general, the restrictive covenants do not permit the
Company to pay dividends to shareholders in an amount greater than 40% of the
Company's net income, or 45% when the ratio of the Company's consolidated debt
to Earnings Before Interest, Taxes, Depreciation and Amortization ratio
("EBITDA", as defined in the documentation for the credit facility agreements)
is less than 4 but not less than 3. This restriction will no longer apply when
such ratio is less than 3. The payment and amount of cash dividends on the
Company's common stock will be subject to the sole discretion of the Company's
Board, which will review the Company's dividend policy at such times as may be
deemed appropriate. The Board will closely monitor the results of the Company's
operations, capital requirements, and other considerations to determine the
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 5 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.
During the First Nine Months of Fiscal 1999, the Company experienced its normal
seasonal impact on working capital as accounts receivable and accounts payable
decreased from the end of the Second Quarter of Fiscal 1999--February 26, 1999.
This is consistent with the reduction in overall demand for services in the
Education and Schools divisions in the current quarter as the academic season
approaches its end. However, accounts receivable and accounts payable increased
from August 28, 1998, as the Company experienced its normal seasonal decreases
in working capital at the end of fiscal 1998 as the overall demand for services
in these segments decreases further during the summer season. Also, the Company
completed arbitration with MI and Sodexho related to Adjusted Net Tangible
Assets in accordance with the respective Distribution and Acquisition
agreements, resulting in payments totaling $36 million (see Note 1--
Distribution).
-27-
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. In June 1999, the
Financial Accounting Standards Board approved the deferral of the effective date
for SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June
15, 2000. Therefore, SFAS No. 133 will be effective for the Company on September
2, 2000, the beginning of fiscal year 2001. The impact to the Company's
financial position of implementing SFAS No. 133 is not anticipated to be
material.
YEAR 2000
GENERAL. The Company is actively addressing potential issues from the computer
programming practice historically used to signify dates of 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.
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.
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 each of the following areas of
concentration for the Project:
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 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. The Company's methodology involves seven phases for the Project:
(1) awareness, (2) inventory, (3) assessment, (4) remediation, (5) testing and
validation, (6) implementation and (7) contingency planning.
INFORMATION TECHNOLOGY SYSTEMS
The inventory and assessment phases both began in 1996. The Company has
completed testing and third party validation of internally developed software
and mainframe systems and has implemented compliant versions of these systems.
Similarly, the inventory and assessment of third party software and personal
computers, which are used at most of the Company's operating locations to
support unit level financial and operating systems, are complete. The Company
has acquired compliant versions of most of its third party software and there
are remediation efforts in place for the few remaining third party software
applications. The Company is working with clients and other external entities to
validate the compliance status of their systems.
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
YEAR 2000, CONTINUED
The rollout of compliant versions of all software and of personal computers to
replace those the Company owns has begun. 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. Although the implementation and rollout of
compliant systems was expected to be substantially complete by June 30, 1999,
the large number and geographic diversity of the Company's operating locations
together with the Company's goal of minimizing the impact of this rollout on
client operations has extended this timeframe. The Company's goal is to
substantially complete the installation of compliant systems and removal of
non-compliant systems at these locations by October 31, 1999.
NON-INFORMATION TECHNOLOGY SYSTEMS
The Company has also surveyed and assessed 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, and other equipment for its clients pursuant to plant
operations and maintenance agreements. In some Health Care division accounts the
Company provides, either directly or through subcontractors, certain maintenance
services related to biomedical equipment. 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. The assessment
of these systems has involved close cooperation between the Company and its
clients. With respect to plant operations and maintenance clients, the Company
is providing certain services to assist its clients in achieving their Year 2000
objectives relative to their facilities systems.
Finally, the Company is in the process of obtaining compliance information
regarding its vendors and suppliers and is monitoring the compliance status of
other external systems that support the different facets of its business, such
as utilities, government entities and other service providers. These systems are
not under the Company's control.
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, government, 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 delays and
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.
To manage potential points of failure, the Company has developed contingency
plans to mitigate the potential disruptions that may result from the Year 2000
issue. Contingency plans and associated cost estimates are generally complete,
and will be continually refined as additional information becomes available.
COSTS. The Company had originally estimated that the pretax costs to be borne by
it to address the Year 2000 issue would be approximately $5-8 million,
principally for modification, testing, validation, project management and
contingency planning. These are expected to be expensed as incurred and funded
from operating cash flow. For the First Nine Months of Fiscal 1999 approximately
$3 million had been incurred and expensed, and the Company now anticipates
spending approximately $8 million for this Project. Thus, approximately $5
million will be expensed for this Project during the duration of Fiscal Year
1999 and into Fiscal Year 2000. The Company does not separately identify certain
internal costs incurred for the Project, mostly related to the Company's
internal 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.
-29-
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 May 28, 1999. If interest rates increased by 100 basis
points, the fair value of the Company's debt would have decreased by
approximately $22 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $23 million,
based on balances at May 28, 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
May 3, 1999 Press Release, dated May 3, 1999,
announcing Michel Landel as
President and Chief Operating
Officer of the Company.
-30-
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.
July 6, 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
-31-