As filed with the Securities and Exchange Commission on February 24, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
==========================
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: August 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to _____________
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: _______________
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SODEXHO ALLIANCE, SA
(Exact name of Registrant as specified in its charter)
Republic of France
(Jurisdiction of incorporation or organization)
3, avenue Newton
78180 Montigny - le - Bretonneux
France
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
American Depositary Shares,
Representing Common Shares New York Stock Exchange
Common Shares,
par value (euro)4 per share New York Stock Exchange*
------------------
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g)
of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
The number of outstanding shares of each class of stock of Sodexho Alliance, SA
at August 31, 2005 was:
Common Shares, par value (euro)4 per share..........................159,026,413
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes No X
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
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-b of the Exchange Act. (Check
one).
Large accelerated filer Accelerated filer Non-accelerated Filer X
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 X Item 18
------------------- --------------------
If this is an annual report, indicate by check mark whether the registrant is a
Shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes No X
TABLE OF CONTENTS
Page
Forward-Looking Statements...................................................ii
PART I
Item 1. Identity of Directors, Senior Management and Advisers.............1
Item 2. Offer Statistics And Expected Timetable...........................1
Item 3. Key Information...................................................1
Item 4. Information on the Company........................................7
Item 5. Operating and Financial Review and Prospects.....................20
Item 6. Directors, Senior Management and Employees.......................41
Item 7. Major Shareholders and Related Party Transactions................57
Item 8. Financial Information............................................60
Item 9. The Offer and Listing............................................61
Item 10. Additional Information...........................................63
Item 11. Quantitative and Qualitative Disclosures about Market Risk.......76
Item 12. Description of Securities Other than Equity Securities...........76
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies..................76
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds..............................................76
Item 15. Controls and Procedures..........................................77
Item 16A. Audit Committee Financial Expert.................................77
Item 16B. Code of Ethics...................................................77
Item 16C. Principal Auditor Fees and Services..............................78
Item 16D. Comparison of French and U.S. Corporate Governance
Practices........................................................78
Item 16E. Purchases of Equity Securities by Sodexho Alliance and
Affiliated Purchasers............................................78
PART III
Item 17. Financial Statements.............................................79
Item 18. Financial Statements.............................................79
Item 19. Exhibits.........................................................79
i
As used in this Annual Report, the terms "we," "our," "us," "Sodexho,"
"Sodexho Alliance" and "the Group" refer to Sodexho Alliance, SA and its
subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report may include statements
which may constitute "forward-looking statements." These statements are not
historical facts but instead represent our belief regarding future events, many
of which, by their nature, are inherently uncertain and outside of our control.
Such statements include information regarding our beliefs, estimates, forecast,
projections and current expectations concerning our future financial condition
and results of operations, including trends affecting our businesses.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those in the forward-looking
statements as a result of various factors. It should be recognized that factors
other than those expressly set forth in this Annual Report, such as general
economic factors and business strategies, may be significant, and that the
factors discussed herein may affect us to a greater extent than indicated.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. All forward-looking
statements attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements appearing in this
Annual Report. Forward-looking statements in this Annual Report are identified
by use of the following words and other similar expressions, among others:
"anticipate," "believe," "outlook," "probably," "project," "risks," "seek,"
"should," "target," "would," "objectives," "could," "estimate," "expect,"
"goals," "intend," "may," "shall." You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as at the
date of the particular statement. We undertake no obligation (and expressly
disclaim any such obligation to) update publicly or revise any forward-looking
statement as a result of new information, future events or otherwise. In light
of these risks, our results could differ materially from the forward-looking
statements contained in this Annual Report.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
Please see the section entitled "Item 5. Operating and Financial Review and
Prospects" for a presentation of selected financial data.
Exchange Rates
The following tables set forth, for the periods and dates indicated,
certain information concerning the exchange rate for the euro into U.S. dollars
based on the 2 p.m. ECB time rates quoted by the European Central Bank. Unless
otherwise indicated herein, exchange rates have been translated throughout this
Annual Report on Form 20-F at the end-of-period rate corresponding to the period
for which the translation has been made.
At end of period(1) Average rate(2) High Low
------------------- --------------- ---------------- -----------------
Euro per U.S. dollar:
2001...................... 1.0919 1.1316 1.2118 1.0477
2002...................... 1.0170 1.0978 1.1658 0.9856
2003...................... 0.9152 0.9357 1.0364 0.8403
2004...................... 0.8257 0.8296 0.9274 0.7777
2005...................... 0.8198 0.7856 0.8415 0.7335
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(1) All periods end August 31 of the stated year.
(2) The average of the rates on the last day of each month during the relevant
period.
Month ended High Low
------------------------------------------------------ ------ ------
Euro per U.S. dollar:
May 31, 2005.......................................... 0.8110 0.7720
June 30, 2005......................................... 0.8296 0.8114
July 31, 2005......................................... 0.8415 0.8205
August 31, 2005....................................... 0.8210 0.8028
September 30, 2005.................................... 0.8299 0.7974
October 31, 2005...................................... 0.8380 0.8235
November 30, 2005..................................... 0.8571 0.8305
December 31, 2005..................................... 0.8549 0.8319
January 31, 2006...................................... 0.8456 0.8134
On February 23, 2006, the 2 p.m. ECB time rate quoted by the European
Central Bank was (euro)0.8363 = U.S. $1.0000, or U.S. $1.1957 = (euro)1.0000.
This rate may differ from certain of the actual rates used in the preparation of
our consolidated financial statements, which are prepared in euro, and therefore
dollar amounts appearing herein may differ slightly from the actual dollar
amounts which were translated into euro in the preparation of such consolidated
financial statements in accordance with accounting principles generally accepted
in France.
A substantial proportion of our assets, liabilities, revenues and expenses
are denominated in currencies other than euro, in particular, the U.S. dollar
and the British pound sterling. Accordingly, fluctuations in the value of the
euro relative to other currencies can have a significant effect on the
translation into euro of non-euro assets, liabilities,
revenues and expenses. For information with respect to the impact of
fluctuations in exchange rates on our operations, see "Item 3D - Key Information
- Risk Factors," "Item 5 - Operating and Financial Review and Prospects" and
"Item 11 - Quantitative and Qualitative Disclosures About Market Risk."
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the offer and use of proceeds
Not Applicable.
D. Risk Factors
You should consider the following risks with respect to an investment in us
and investments in our American Depositary Shares ("ADSs").
We depend on the retention and renewal of our existing client contracts and
our ability to attract new customers
Our success depends on our ability to retain and renew existing client
contracts and to obtain and successfully negotiate new client contracts. Our
ability to do so generally depends on a variety of factors, including the
quality, price and responsiveness of our services, as well as our ability to
market these services effectively and to differentiate ourselves from our
competitors. Additionally, our growth in the Service Vouchers and Cards business
depends upon our geographic expansion, new product development, superior
branding and affiliate networks. We cannot assure you that we will be able to
renew existing client contracts or that our current customers will not turn to
competitors, cease operations, elect to self-operate or terminate contracts with
us as a result of merger or acquisition. We also cannot be certain that we will
obtain new contracts in any of our market segments, or that any new contracts
will be profitable. If we cannot continue to grow our operations through the
renewal of existing contracts or the negotiation of new contracts, our business,
financial condition, results of operations and cash flows will be materially and
adversely affected.
We may be adversely affected if customers reduce their outsourcing or use
of preferred vendors
Our business and growth strategies depend in large part on the continuation
of a trend in business, education, healthcare and government markets toward
outsourcing services. The decision to outsource depends upon customer
perceptions that outsourcing may provide higher quality services at a lower
overall cost and permit customers to focus on core business activities. We
cannot be certain that this trend will continue or not be reversed or that
customers that have outsourced functions will not decide to perform these
functions themselves. In addition, labor unions representing employees of some
of our current and prospective customers have occasionally opposed the
outsourcing trend and sought to direct to union employees the performance of the
types of services we offer. Management has also identified a trend among some of
our customers toward the retention of a limited number of preferred vendors to
provide all or a large part of their required services. We cannot be certain
that this trend will continue or not be reversed or, if it does continue, that
we will be selected and retained as a preferred vendor to provide these
services. Adverse developments with respect to either of these trends would have
a material adverse effect on our business, results of operations, cash flows and
financial condition.
Our business may suffer if we are unable to hire, train and retain
sufficient qualified personnel or if labor costs continue to increase
Certain trends in the global labor market, or in certain specific areas,
could adversely impact our business. The global economy has experienced reduced
levels of unemployment in recent years, which have created a shortage of
qualified workers at all levels. Given that our workforce requires large numbers
of entry level, skilled and hourly workers, especially in the delivery of
services other than food services to our clients, low levels of unemployment
could compromise our ability in certain businesses to provide quality service or
compete for new business. A failure to hire, train and retain qualified
management personnel, particularly at the entry management level could also
jeopardize our continued success. Furthermore, increases in wages or employee
benefits whether regulatory or otherwise, could have an impact on profitability.
Moreover, labor laws in certain countries require us to retain employees of
businesses we acquire, which in turn may cause us to incur additional training
costs and increase headcount beyond optimal levels.
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Adverse developments regarding the foregoing trends, individually or in the
aggregate, could have a material adverse effect on our results of operations.
We may be adversely affected if claims by employees in connection with
their employment are resolved against us
Due to the nature of our business and the large number of individuals we
employ around the world, and the risk of employment-related litigation, the
resolution of such claims against us could have an adverse effect on our
business.
Food shortages, and increases in food or other indirect operating costs
could adversely affect our results of operations and financial condition
We face fluctuating food prices and limited availability of certain food
items during the year. Food price and availability and transport costs,
including the cost of oil and gas, also vary by geographic location. In
addition, broader trends in food consumption, such as concern about health and
safety, may from time to time disrupt our business. Our typical contract allows
for certain adjustments due to rising prices or changed menus over time, but
often we must accept a reduced margin for a period of time to ensure the
availability of certain required food groups and to maintain customer
satisfaction. Our experience has been that changes in food preferences or
shortages, when they occur, may adversely affect our profitability at a given
location. Although most of our contracts provide for minimum annual price
increases for products and services provided by us, we could be adversely
impacted during inflationary periods if the rates of contractual increases are
lower than the relevant inflation rate.
Our profitability could be adversely affected if we were faced with other
indirect cost increases, to the extent we were unable to recover such increased
indirect costs through increases in our prices for our products and services.
For example, in recent years there has been, in general, a rise in insurance and
related premiums. To the extent that food or other operating costs increase, and
to the extent we are unable to pass these costs on to our clients for
competitive or economic reasons, our profit margins will decrease.
The pricing terms of our services contracts may constrain our ability to
recover costs and to make a profit on our contracts
Most of our contracts have a fixed price element. For example, the terms of
these contracts could require us to guarantee the price of the services we
provide and assume the risk that our costs to perform the services and provide
the materials will be greater than anticipated. This type of contract term could
expose us to losses if our estimates of contract operating costs are too low.
Our profitability on these contracts is therefore dependent on our ability to
accurately predict the costs associated with our services. These costs may be
affected by a variety of factors, some of which may be beyond our control. If we
are unable to accurately predict the costs of fixed price contracts, certain
projects could have lower margins than anticipated, which could have a material
adverse effect on our business.
Competition in our industry could adversely affect our results of operations
There is significant competition in the food and support services business
from local, regional, national and international companies of varying sizes, a
number of which have substantial financial resources. Our ability to
successfully compete depends on our ability to satisfy our clients by providing
quality services at a reasonable price. Certain of our competitors may be
willing to underbid us, accept a lower profit margin or expend more capital in
order to obtain or retain business. Existing or potential clients may also elect
to self-operate their food service, or to utilize other purchasing arrangements,
thereby reducing or eliminating the opportunity for us to serve them or compete
for the account.
Moreover, because our business is highly decentralized, it is imperative
that we keep pace with advances in technology and information services,
especially with respect to inventory, labor and cost management and the
communication of our best practices among our operations worldwide. If we do not
or cannot make necessary expenditures in these areas, we may be less competitive
and, consequently, less profitable.
Unfavorable economic conditions could adversely affect our results of
operations and financial condition
Economic conditions in the United States and worldwide have resulted in
lower demand for our services from non-government sector business clients,
particularly private corporate clients in our Food and Management Services
3
business, with a negative impact on our revenues. Economic conditions may also
exert budgetary pressures on public sector clients. Further economic downturns
may reduce demand for our services as well as decrease occupancy rates in
certain segments of the facilities that we manage. These factors may cause us to
lose business, lose economies of scale, or contract for business on less
favorable terms than our current prevailing terms. Additionally, our Remote
Sites activity is heavily dependent on the oil industry, and therefore can be
cyclical and dependent upon oil prices.
Our semi-annual results may vary significantly as a result of factors
beyond our control
Our semi-annual results of operations may fluctuate significantly as a
result of a number of factors over which we have no control, including our
customers' budgetary constraints, school vacations, the timing and duration of
our customers' planned maintenance activities and shutdowns, changes in our
competitors' pricing policies and general economic conditions. Furthermore, some
operating and fixed costs, which remain relatively constant throughout the
fiscal year, may lead to fluctuations in semi-annual results when offset by
differing levels of revenues. For these reasons, a half-year to half-year
comparison is not a good indication of our current performance or how we will
perform in the future.
We are subject to extensive regulation
Due to the nature of our industry, our listings on the French and the New
York stock exchanges, and the global nature of our operations, we are subject to
a international, federal, state, county and municipal laws, regulations and
licensing requirements, as well as a large number of regulatory and enforcement
authorities. The laws and regulations governing our industry have become
increasingly complex governing a wide variety of areas, including, among others,
labor, employment, immigration, health and safety, corporate governance,
consumer protection and the environment. The cost of compliance with these
sometimes overlapping and rapidly evolving regulatory regimes and the failure or
apparent failure to address any regulatory changes or enforcement initiatives
could have a significant impact on our results of operations, and violations of
certain regulations could result in penalties, fines, disciplinary actions,
increase our litigation risk or harm our reputation. There can be no assurance
that additional regulation or enforcement initiatives in any of the
jurisdictions in which we operate would not limit our activities in the future
or significantly increase the cost of regulatory compliance.
In addition, the growth and success of our Service Vouchers and Cards
business depends to an extent upon the continued availability of domestic tax
and labor law incentives encouraging the use of service vouchers by employers
and employees. A reduction or elimination of these benefits in our more
significant markets, or across many of our markets, could have an adverse result
on our business and results of operations.
Claims of illness or injury associated with the service of food and
beverages to the public could adversely affect us
Claims of illness or injury relating to food quality or food handling are
common in the food service industry, and a number of these claims may exist at
any given time. As a result, we could be adversely affected by negative
publicity resulting from food quality or handling claims at one or more of the
facilities that we serve. In addition to decreasing our revenues and
profitability at our facilities, adverse publicity could negatively impact our
service reputation, hindering our ability to renew contracts on favorable terms
or to obtain new business.
Our international business results are influenced by currency fluctuations
and other factors that may be different from factors affecting the United
States market
A significant portion of our revenues is derived from international
markets. During fiscal 2005, approximately 69% and 54% of our revenues and
EBITA, respectively, were generated outside the euro zone. The operating results
of our international subsidiaries are translated into euro and such results are
affected by movements in foreign currencies relative to the euro, especially
movements in the value of the U.S. dollar.
Our business is also subject to risks whose effects may be more pronounced
in our international operations, including national and local regulatory
requirements; potential difficulties in staffing and labor disputes; failures to
obtain and manage support and distribution for local operations; significant
natural disasters such as electrical black-outs, floods or droughts;
fluctuations in local interest rates; inflation; credit risk or poor financial
condition of local customers; the potential imposition of restrictions on
investments; potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other payments by
subsidiaries; foreign
4
exchange restrictions; and geo-political or social conditions in certain sectors
of our international markets. There can be no assurance that the foregoing
factors will not have a material adverse effect on our international operations
or on our consolidated financial condition, results of operations or cash flows.
Moreover, we expect that revenues from such emerging markets as Latin
America, Central Europe and Asia will continue to develop over the long term.
Emerging market operations present several risks, including volatility in gross
domestic production; credit risk; civil disturbances; economic and governmental
instability; changes in regulatory requirements; nationalization and
expropriation of private assets; significant fluctuations in interest rates,
currency exchange rates and inflation; the imposition of additional taxes or
other payments by foreign governments or agencies; and exchange controls and
other adverse actions or restrictions imposed by foreign governments.
We are subject to risks associated with our acquisitions of other businesses
We have acquired and may in the future acquire a substantial number of
businesses. Our acquisitions may not improve our financial performance in the
short or long term as we expect. Acquisitions enhance our earnings only if we
can successfully integrate the acquired businesses into our management
organization, purchasing operations, distribution network and information
systems. Our ability to integrate acquired businesses may be adversely affected
by factors that include customer resistance to our product brands and
distribution system, our failure to retain management and sales personnel,
difficulties in converting different information systems to our systems, the
size of the acquired business and the allocation of limited management resources
among various integration efforts. In addition, the benefits of synergy which we
expect at the time we select our acquisition candidates may not be as
significant as we originally anticipated. One or more of our acquisition
candidates may also have liabilities or adverse operating issues that we fail to
discover prior to the acquisition. Difficulties in integrating acquired
businesses, as well as liabilities or adverse operating issues relating to
acquired businesses, could have a material adverse effect on our business,
operating results and financial condition.
Even if acquired companies eventually contribute to an increase in our
profitability, the acquisitions may adversely affect our earnings in the short
term. Our earnings may decrease as a result of transaction-related expenses we
record for the quarter in which we complete an acquisition. Our earnings may be
further reduced by the higher operating and administrative expenses we typically
incur in the quarters immediately following an acquisition as we seek to
integrate the acquired business into our operations.
Natural disasters, acts of war and terrorist-related events may have a
continuing negative impact on our business
We cannot assess with any degree of certainty the future effects on our
business of natural disasters and terrorist attacks that have occurred and may
occur in the future throughout the world and other responsive actions, including
war.
In recent years, natural disasters and terrorist attacks and acts of war
have significantly adversely affected general economic and political conditions,
increasing many of the risks highlighted in these risk factors. This may have a
negative effect on our business and results of operations.
Our transition to international accounting standards may affect our
operating results
Due to the adoption by the European Union's Council of a regulation,
effective on January 1, 2005, requiring listed European companies to prepare
consolidated financial statements in accordance with International Financial
Reporting Standards ("IFRS"), we are currently converting our accounting
standards from French GAAP into IFRS. While we do not believe that this
transition to IFRS will have a material adverse effect on our reported financial
condition or results of operations, there are differences between French GAAP
and IFRS.
We currently have significant indebtedness and may incur additional
indebtedness in the future
At August 31, 2005, our percentage of total debt to total capitalization
was approximately 48%. Our total capitalization is the sum of our shareholders'
equity, minority interests and borrowings. Some lenders may consider this ratio
negatively in their credit decisions. Also, financial and other covenants in our
lending agreements may occasionally restrict our ability to operate our business
in certain ways. Specifically, our agreements limit our ability to dispose of
our assets, our subsidiaries' abilities to guarantee and borrow money, our
ability to incur certain types of
5
debt, our ability to merge or consolidate with other companies (subject to
certain exceptions) and our ability to alter the fundamental nature of our
business (subject to certain exceptions).
We may incur additional indebtedness in the future, subject to limitations
contained in the instruments governing our indebtedness, to finance capital
expenditures or for other general corporate purposes, including acquisitions. We
cannot assure you that our business will continue to generate cash flow at or
above the levels required to service our indebtedness and meet our other cash
needs, or that we will be able to obtain credit on terms as favorable as those
we enjoy currently if our debt to total capitalization ratio increases. If our
business fails to generate sufficient operating cash flow in the future, or if
we fail to obtain cash from other sources such as asset sales or additional
financings, we will be restricted in our ability to continue to make
acquisitions for cash and to invest in expansion or replacement of our
facilities, information systems and equipment. Such a failure could have a
material adverse effect on our business, operating results and financial
condition.
Our profitability or reputation may be affected by various operational risks
Operational risk is inherent in our business and can manifest itself in
various ways including business interruption, poor supplier performance,
information systems malfunctions or failures, regulatory breaches, human errors,
employee misconduct, and/or external fraud. These events can potentially result
in financial loss, harm to our reputation and/or hinder our operational
effectiveness. Our management attempts to control these risks and keep
operational risk at appropriate levels by maintaining a sound and
well-controlled environment in light of the characteristics of our business, the
markets and regulatory environment in which we operate. Notwithstanding these
control measures, operational risk is part of the business environment in which
we operate and we may incur losses from time to time due to these types of
risks.
Risks Related to an Investment in our American Depositary Shares ("ADSs")
The price of our ADSs and the U.S. dollar value of any dividends will be
affected by fluctuations in the U.S. dollar/euro exchange rate
The ADSs trade in U.S. dollars. Fluctuations in the exchange rate between
the euro and the U.S. dollar are likely to affect the market price of the ADSs.
For example, because our financial statements are reported in euro, a decline in
the value of the euro against the U.S. dollar would reduce our earnings as
reported in U.S. dollars. This could adversely affect the price at which the
ADSs trade on the U.S. securities markets. Any dividend we might pay in the
future would be denominated in euro. A decline in the value of the euro against
the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.
You may not be able to exercise preemptive rights for shares underlying
your ADSs
Under French law, shareholders have preemptive rights ("droits
preferentiels de souscription") to subscribe for cash for issuances of new
shares or other securities giving rights, directly or indirectly, to acquire
additional shares on a pro rata basis. Shareholders may waive their preemptive
rights specifically in respect of any offering, either individually or
collectively, at an extraordinary general meeting. Preemptive rights, if not
previously waived, are transferable during the subscription period relating to a
particular offering of shares and may be quoted on the exchange for such
securities in Paris. United States holders of ADSs may not be able to exercise
preemptive rights for the shares underlying their ADSs unless a registration
statement under the United States Securities Act of 1933, as amended, is
effective with respect to such rights or an exemption from the registration
requirements thereunder is available. At the time of any rights offering, we
intend to evaluate the costs and potential liabilities associated with any such
registration statement, as well as the indirect benefits of enabling the
exercise by the holders of ADSs of the preemptive rights associated with the
shares underlying their ADS, and any other factors we consider appropriate at
the time, and then to make a decision as to whether to file such a registration
statement. We cannot guarantee that any registration statement would be filed,
or, if filed, that it would be declared effective. If preemptive rights cannot
be exercised by an ADS holder, The Bank of New York, as depositary, will, if
possible, sell such holder's preemptive rights and distribute the net proceeds
of the sale to the holder. If the depositary determines, in its discretion, that
such rights cannot be sold, the depositary may allow such rights to lapse. In
either case, ADS holders' interest in us will be diluted, and, if the depositary
allows rights to lapse, holders of ADSs will not realize any value from the
granting of preemptive rights.
6
Holders of ADSs may be subject to additional risks related to holding ADSs
rather than shares
Because holders of ADSs do not hold their shares directly, they will be
subject to certain additional risks, including those listed below.
In the event of a dividend or other distribution, if exchange rates
fluctuate during any period of time when the depositary cannot convert euro into
U.S. dollars, the ADS holder may lose some or all of the value of the
distribution. There can be no assurance that the depositary will be able to
convert any currency at a specified exchange rate or sell any property, rights,
shares or other securities at a specified price, or that any of such
transactions can be completed within a specified time period.
ADS holders will generally have the right to instruct the depositary to
exercise the voting rights for the shares represented by the ADSs if we ask the
depositary to ask the holders for instructions. There can be no guarantee,
however, that ADS holders will receive voting materials in time to instruct the
depositary to vote. It is possible that ADS holders, or persons who hold their
ADSs through brokers, dealers or other third parties, will not have the
opportunity to exercise a right to vote at all.
ADS holders may not receive copies of all reports from the depositary or
us; these holders may have to go to the depositary's offices to inspect any
reports issued.
You may not be able to effect claims or enforce judgments brought against
us for alleged violations of the U.S. securities laws
We are a societe anonyme organized under the laws of France. A majority of
our directors and officers are non- U.S. residents, and a substantial portion of
our assets and the assets of our directors and officers are and we expect will
continue to be located outside the United States. As a result, it may not be
possible for you to effect service of process within the United States upon us
or most of these persons or to enforce judgments against us or them in United
States courts. Furthermore, there is doubt as to the enforceability in France,
in original actions or in actions for the enforcement of judgments of United
States courts, of civil liabilities predicated solely upon the federal
securities laws of the United States. French courts may not have the requisite
jurisdiction to grant the remedies sought in an original action brought in
France based solely upon the U.S. federal securities laws.
In order to effectively enforce judgments of U.S. courts rendered against
our French officers and directors in France, these persons would have to waive
their rights under Article 15 of the French Civil Code, which provides that
citizens of France may be sued only in France unless they otherwise consent. We
believe that none of these persons has waived this right with respect to actions
predicated solely upon U.S. federal securities laws. Furthermore, actions in the
United States could be adversely affected under certain circumstances by the
French law of July 26, 1968, as modified by a law of July 16, 1980, which may
preclude or restrict the gathering of evidence in France or from French persons
in connection with such actions.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a leading global provider of services in two primary business areas:
Food and Management Services and Service Vouchers and Cards. The Food and
Management Services business is segmented into four geographic regions.
In the Food and Management Services business, which accounted for
approximately 98% of our total revenues in fiscal 2005, we are a leading global
provider of outsourced food and multiservices to businesses, public agencies and
institutions, long-term and short-term healthcare facilities, universities and
primary and secondary schools. Within our Food and Management Services business,
we also provide many of the foregoing services to temporary and remote sites of
our clients' operations, specifically those affiliated with oil and gas
recovery, major construction projects and mining. Our river and harbor cruises
activity operates in various markets and provides tourist excursions and upscale
dinner cruises for individuals and corporate consumers alike. In the fiscal year
ended August 31, 2005, we had revenues of approximately (euro)11.4 billion from
our Food and Management Services business, operating through approximately
26,700 individual outlets in more than 76 countries. Food services include food
and beverage procurement and preparation, as well as the operation and
maintenance of food service and catering facilities, generally on a client's
7
premises. Multiservices include physical plant operations and maintenance,
energy management, groundskeeping, housekeeping, custodial and janitorial,
on-site laundry and an evolving suite of other services for which our clients
have identified a need. Our Service Vouchers and Cards business, which had
revenues of (euro)280 million in fiscal 2005, primarily issues and manages the
provision of paper and debit-card vouchers to our clients' employees for food,
products and services and the provision of various welfare benefits from
government clients to their constituents.
Our chairman, Pierre Bellon, launched the company in 1966 in Marseille,
France, by providing food service to employee restaurants. Since our founding,
we have been focused on growth, especially organic growth. By 1968, we began
operating in the Paris area, and we expanded our operations internationally in
1971 with a food services contract in Belgium. Between 1971 and 1993, we
continued our international growth with the development of our Remote Sites
business in Africa and the Middle East, the extension of our Service Vouchers
and Cards business into Belgium and Germany, and the expansion of our food
services business into other parts of Europe and Asia and overseas into North
America, Latin America and South Africa.
Since 1995, we have rapidly expanded our worldwide presence through organic
growth and acquisitions. Our acquisition of Gardner Merchant in 1995 made us the
world's largest contract food services company, based on annual revenues, gave
us a significant presence in the United Kingdom and the Netherlands and
strengthened our operations in North America. In January 1996, we acquired a
minority interest in Partena (now known as Sodexho Scandinavia), strengthening
our position in the Nordic countries. Currently, we hold 100% of the outstanding
capital stock.
In Latin America, the acquisitions of Cardapio in Brazil in 1996, a stake
in Luncheon Tickets in Argentina in 1998 and Refeicheque in Brazil in 1999
increased our share of the worldwide service vouchers and cards market.
Globally, our annual revenues in this activity are second only to Accor.
In March 1997, we acquired 49% of Universal Services in the United States,
and in January 2000 we acquired the remaining stake, forming Universal Sodexho,
the world market leader in Remote Sites operations.
In 1998, our North American subsidiaries and Marriott Management Services
combined, with Sodexho Alliance holding just under half of the resulting
company's share capital. In connection with this transaction, Sodexho Alliance
contributed an additional U.S. $304 million. The transaction created the largest
North American food and management services company based on annual revenues,
known as Sodexho Marriott Services, Inc., and almost doubled the size of our
operations by adding annual revenues of $3.2 billion (based on 1997 stand-alone
revenues) and over 3,000 clients in North America.
In June 2001, we completed a transaction by which we acquired the remaining
interest in Sodexho Marriott Services, Inc. ("SMS", now known as Sodexho, Inc.)
for approximately (euro)1.3 billion. In the fourth quarter of fiscal 2001, we
acquired 100% of the capital stock of the Wood Company ("Wood Dining Services"),
a company doing business as Wood Dining Services, and 60% of the capital stock
of Sogeres. We exercised our option to purchase the additional 40% of the
capital stock of Sogeres in November 2001. The total cost for all of the capital
stock of both companies was (euro)521 million, a portion of which was paid in
the fourth quarter of fiscal 2001 and the balance of which was paid at the time
the remaining shares of Sogeres were acquired in the first quarter of fiscal
2002. Prior to the acquisition, Sogeres had been our fourth-largest competitor,
based on revenues, in the French outsourced catering market, operating primarily
in Paris, the French Riviera and the Rhone-Alpes region. The acquisition of Wood
Dining Services brought a significant regional food service provider into our
network, adding over 500 clients and the management of over 10,000 employees
across 21 states in the United States.
Since 1983, our shares have been listed on Euronext Paris (formerly the
Paris Bourse) and on April 3, 2002, our ADSs were listed on the New York Stock
Exchange. In February 1997, our shareholders voted to change our name to Sodexho
Alliance, SA, and we were duly re-incorporated as such on February 25, 1997, for
a duration of 99 years from this date, the maximum allowed under French law. We
are subject to Book II of the French Code du Commerce and to Act No. 67-236 of
March 23, 1967 concerning "les societes commerciales et des groupements
d'interet economique" (French company law). Except as mentioned above, we and
our subsidiaries have not been a party to any material reorganizations, mergers
or consolidations and there have been no material changes in our mode of
conducting business or in the types of products produced or services we offer.
As of the date of this Annual Report on Form 20-F, there has been no indication
of any public takeover offer by any third party respecting our shares or by us
respecting another company's shares, except as described above.
8
We are headquartered in Paris, France and our registered office in France
is 3, avenue Newton, 78180 Montigny-le-Bretonneux. Our general telephone number
is 011-33-1-30-85-75-00. Our authorized U.S. representative is Richard
Macedonia, and our agent for service of process in the U.S. is Robert A. Stern,
Sodexho, Inc., 9801 Washingtonian Boulevard, Suite 1234, Gaithersburg, MD 20878.
Acquisition and Capital Expenditures
The following table sets forth our acquisition and capital expenditures for
fiscal 2003, 2004 and 2005.
Fiscal year ended August 31,
------------------------------
2005 2004 2003
---- ---- ----
(millions of euro)
Property, plant and equipment and
intangibles............................ 201 176 239
Acquisitions................................ 5 79 37
---- ---- ----
Total....................................... 206 255 276
==== ==== =====
We estimate that our consolidated capital expenditures for fiscal 2006 will
be approximately 2% of our revenues. This estimate is set yearly and is based on
commercial, technical and economic factors such as client demand and the
availability of equipment and building space. Capital expenditure estimates
remain subject to the finalization of services and other client contractual
terms relating to these expenditures.
Property, Plant and Equipment
Approximately two-thirds of our property, plant and equipment capital
expenditures involve the purchase of catering equipment used on client premises
and certain boats used in our river and harbor cruises activity. The remaining
portion of our capital expenditures relates to internal items such as
information technology and vehicles used to support our operations. We generally
use our clients' premises for food services, and therefore our property, plant
and equipment capital expenditures are limited. We do, however, use trucks owned
or leased by us to deliver food to the premises of our clients in certain
markets.
Acquisitions and Divestitures
Our material acquisition expenditures and divestitures since August 31,
2002 are highlighted below.
In March 2004, the Group, through its subsidiary Sodexho Pass do Brazil
sold a subsidiary, Medcheque. The company was created in 1997 and its core
business was the sale of medical-cards in Brazil. A loss on the disposal of
(euro)6 million ((euro)3.7 million net of tax) was recorded as an exceptional
expense in fiscal 2004.
During fiscal 2004 we acquired several subsidiaries, including the
remaining minority interests in Astilbe and Luncheon Tickets, for a total
expenditure of (euro)82 million.
Ongoing capital expenditures for property, plant and equipment are expected
to be funded from operating cash flows. Acquisition expenditures may be financed
through a combination of subsidiary operating cash flows, investment cash flows,
borrowings from financial institutions and other sources, including debt and
equity issuances.
B. Business Overview
General
Our operations can be divided into two broad businesses: Food and
Management Services and Service Vouchers and Cards. Food and Management Services
is our most significant business and accounted for 98% of our revenues for the
fiscal year ended August 31, 2005. Approximately 44% of our revenues in this
business were generated from our North American subsidiaries. The Service
Vouchers and Cards business accounted for 2% of our revenues in fiscal
9
2005. Within the Food and Management Services business, we separate our
operations into four geographic regions: North America, Continental Europe, the
United Kingdom and Ireland, and the rest of the world.
The tables set forth below summarize certain financial information for
these activities for the fiscal years ended August 31, 2005, 2004 and 2003.
Fiscal year ended August 31,
----------------------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
Revenues by Activity (in millions of euro)
Food and Management Services
North America ................................ 5,006 5,031 5,427
Continental Europe............................ 3,919 3,760 3,585
United Kingdom and Ireland ................... 1,303 1,351 1,453
Rest of the World ............................ 1,164 1,106 974
------ ------ ------
Total...................................... 11,392 11,248 11,439
Service Vouchers and Cards
Continental Europe.......................... 147 129 128
United Kingdom and Ireland.................. 5 6 12
Rest of the World........................... 128 111 108
------ ------ ------
Total Services Vouchers and Cards........... 280 246 248
------ ------ ------
Total revenues.............................. 11,672 11,494 11,687
====== ====== ======
EBITA by Activity(1)
Food and Management Services
North America ................................ 222 239 268
Continental Europe............................ 203 171 167
United Kingdom and Ireland.................... 27 28 21
Rest of the World............................. 37 37 18
------ ------ ------
Total...................................... 489 475 474
Service Vouchers and Cards....................... 82 68 68
------ ------ ------
EBITA, excluding corporate expenses.............. 571 543 542
Corporate expenses............................... (41) (28) (28)
------ ------ ------
Total...................................... 530 515 514
====== ====== ======
----------
(1) EBITA represents net income before interest expense, exceptional items,
income taxes, income from equity method investees, goodwill amortization
and minority interests.
Strategy
Since our founding in 1966, our ambition has been to satisfy the
expectations of clients, employees and shareholders alike. Accordingly, we have
focused on a growth strategy to meet and match each of these expectations.
Further, our vision is to improve the quality of daily life. In pursuing this
vision, we have focused on the following key priorities:
Accelerate profitable organic growth. Organic growth represents our
preferred and most profitable growth alternative as the outsourced food and
management services market in which we operate continues to expand. This
expansion stems from the worldwide trend towards outsourcing of non-core
functions, including food and management services, as enterprises increasingly
make strategic decisions to focus on their core businesses and seek service
delivery
10
and cost efficiencies. We seek to be in close proximity to our clients,
thereby allowing us to anticipate and satisfy their needs promptly with service
solutions tailored to their specific situation.
We expect to find opportunities for organic growth by:
o segmenting and sub-segmenting our client base,
o improving client retention through the reinforcement of client
relationships and the implementation in our segments and
countries of related initiatives,
o targeting the segments and sub-segments with the lowest
outsourcing rates; in particular, continuing our expansion into
the public sector and improving our ability to manage large
multinational accounts as we strengthen our organization
throughout the world,
o expanding our food services offering beyond traditional food
service sales points into vending, trolley and take-out sales
points, directors' tables and executive dining, branded concepts,
merchandising and other programs, and
o expanding our offering beyond food services to "multiservice"
solutions such as facility management, building management and
maintenance, business support services and ancillary services to
individuals.
To supplement organic growth, we may also from time to time, across our
business segments, acquire and integrate low-capital intensive, cash-generative
businesses.
Improve our operations and our operating margin. We are able to provide and
continue to develop more cost-effective services than local, regional and
national participants as a result of our economies of scale, our broader range
of services and our national and international coverage of large clients. These
factors help us at all levels in the management of processes and of our
purchasing and delivery logistics.
By leveraging our size across many markets we also:
o increase the exchange and transfer within our organization of
"best practices" pertaining to service offerings, client
retention, sales and technology processes, as well as leverage
experience gained across the various client segments and markets
throughout our operations,
o leverage our experience and brand through cross-segment teamwork
between our Food and Management Services and our Service Vouchers
and Cards businesses,
o are able to better coordinate labor scheduling practices and
share training costs across markets,
o streamline the use of ingredients we use and coordinate menu
planning across closely-situated sites,
o leverage our procurement efficiencies and use of common
information technology platforms, and
o enhance synergies within the Group.
Improve our human resource planning. We are strongly committed to the
development and promotion of our staff and invest in our human capital. The
human resources department prepares plans and programs to detect, prepare, train
and globalize tomorrow's executive teams. It is supported in this role by the
Sodexho Management Institute, our internal management training program.
Diversity is a business imperative and responsibility grounded in our
values of service, progress and teamwork. By valuing and managing workforce and
supplier diversity, we endeavor to leverage the skills and abilities of all
employees and suppliers in order to increase employee, client and customer
satisfaction.
Improve cash flow. We seek to minimize working capital requirements and
maximize free cash flow. To this end, we implement measures to control internal
capital spending, set targets for lower client credit, manage inventories and
11
link bonuses for executives and management teams to the achievement of clearly
stated targets at all levels of our organization.
Reinforce control. At the beginning of fiscal 2004, a groupwide initiative
known internally as the CLEAR Project (Controls for Legal Requirements and to
Enhance Accountability and Reporting) was undertaken, in order to ensure that
the Group's internal controls are documented and effective. The CLEAR Project is
sponsored by the CEO and the CFO of Sodexho Alliance, and has the support of the
Board of Directors, the Executive Committee and the Operational Committee of the
Group, all of whom are regularly updated on the project's progress. In addition,
the project is coordinated with the Group's external auditors to ensure the
propriety of the methodology adopted by the project teams as well as compliance
with the auditor's reporting requirements. Descriptive information on the
Group's internal controls can be found in the Chairman's Report included in the
Document de Reference filed with the AMF on December 12, 2005, which is
available on the Group's website, www.sodexho.com. Also see "Item 15" below.
Group management continues to reinforce our internal controls, including
increasing the intensity and frequency of internal audits and by reporting on
controls and risk management to the Audit Committee of our Board of Directors.
Our Group Senior Vice President, Internal Audit, who reports to our Chairman,
has reinforced our central audit function through his oversight in the following
areas: the enhancement of the department's staffing and the development of a
risk-based approach to audit planning. Our internal procedures, delegation and
contract review policies are regularly reviewed and updated. A summary of risks
and financial commitments is presented regularly to the Audit Committee by Group
management.
Our disclosure committee regularly evaluates our disclosure controls and
reviews annual and semi-annual reports, financial press releases, our Annual
Report on Form 20-F, and other information presented to shareholders. As a
consequence, existing disclosure procedures and controls are evaluated and
updated regularly as appropriate.
Encourage transparency and communication. We are continuing to develop a
global intranet aimed at facilitating the exchange of best practices, ideas and
procedures throughout our entire network. We have made, and will continue to
make, significant investments in our information technology systems because we
believe that the use of such systems for menu planning, the accurate measurement
and reporting of client and consumer activity, as well as inventory, labor and
performance reporting, are central to our continued success. Through our
technology infrastructure, we intend to continue to provide our unit managers
with tools that help them manage operations efficiently, thereby enhancing the
value for our clients of the services we provide.
Food and Management Services
Overview
We are a global food and management services contractor. In the fiscal year
ended August 31, 2005, our revenues in this activity were approximately
(euro)11.4 billion. In fiscal 2005, we operated through approximately 26,700
individual outlets in 76 countries. None of our clients is responsible for more
than 2% of our total revenues.
To serve our clients and increase revenues, we pursue a market segmentation
strategy based on client needs. The industry markets in which we operate are
Business and Industry (which includes both corporate clients and government
entities), Healthcare, Education and Remote Sites. Within each of these industry
markets, we have identified sub-segments which permit us to target and address
client requirements promptly and efficiently.
Business and Industry. The Business and Industry market accounted for
(euro)5.1 billion of our Food and Management Services business revenues in
fiscal 2005, delivered at over 14,900 sites, representing 45% of our total Food
and Management Services business revenues. Traditionally, this market has been
comprised of corporate customers, whom we provide with food services as well as
vending, reception, mailroom, cleaning and facilities maintenance. Over the last
40 years, we have expanded the range and depth of our services and clients to
include the following:
o providing food and management services to government agencies and other
public clients, such as the defense sectors including those in the
United States, the United Kingdom and Australia;
12
o providing food service at prestige occasions, which include some of the
world's most prominent tourist, sports and recreational events like the
Royal Ascot horse races, the Paris-Bercy and Roland-Garros Tennis
Tournaments and the upcoming 2007 Rugby World Cup to be held in France;
o providing a full range of executive dining services and the management
of conference centers and private clubs for our corporate clients; and
o providing food service and custodial services, maintenance,
transportation, professional training, and rehabilitation services to
correctional facilities in many locations outside of North America.
In our River and Harbor Cruises activity, we have selectively built an
international presence as a premier boat operator in France, the United States
and the United Kingdom, rendering us the largest operator of river and harbor
cruises in the world, based on annual revenues. This activity is more capital
intensive than the remainder of our businesses.
Healthcare. For fiscal 2005, revenues in the Healthcare market totaled
(euro)2.8 billion at approximately 5,700 sites, representing 25% of our total
Food and Management Services business revenues. In this market, we provide
catering services, vending, meal delivery, patient transport, room upkeep,
cleaning, groundskeeping, laundry and maintenance services, to hospitals,
clinics, nursing homes, retirement and care centers around the world. In order
to better address our clients' needs, we have sub-segmented the Healthcare
market into long-term care facilities, primarily for seniors, and acute care
facilities, providing services primarily to hospitals and outpatient clinics.
Historically, a larger proportion of our business has come from the acute care
facilities, but restructuring in the healthcare industry in recent years has
resulted in fewer hospital beds as well as in shorter patient stays, leading the
total short-stay market to expand by only two to three percent each year, but
the outsourced market remains dynamic and is expanding by 3.5 to 4.5 percent
annually. Similarly, long-term trends in caring for the elderly have led the
long-stay market to expand by approximately 2% each year. The Healthcare market
has traditionally been more insulated from economic downturns than the Business
and Industry market, lending stability to our revenue base.
Education. In fiscal 2005, revenues in the Education market totaled
(euro)2.8 billion at about 4,400 sites, representing 25% of our total Food and
Management Services business revenues. This portion of our business provides
food and management services to educational institutions ranging from nursery
schools to universities. Clients choose us to design, manage and equip their
food service facilities and to provide a wide range of incidental services.
Besides food, we offer vending, laundry, maintenance, groundskeeping,
environmental services, day care, mealtime supervision and hospitality services.
Like the Healthcare market, the Education market is relatively unresponsive to
changing economic conditions and thus contributes to reducing volatility in our
revenues.
Remote sites. As of the end of fiscal 2005, we operated the Remote Sites
activity on about 1,600 sites around the world and generated revenues of
(euro)0.655 billion. Our primary clients in this activity are oil and gas,
construction and mining businesses, to which we offer a wide range of food,
hotel, cleaning, technical maintenance, security, groundskeeping, medical
surveillance and leisure services, as well as the management of on-site clubs
and retail outlets. Clients in the oil and gas industry currently represent
approximately two-thirds of our business in this activity. This business tends
to be cyclical, depending upon the price of oil and gas, which drives
exploration efforts, and the extent of economic growth, which drives the
construction market. We estimate the worldwide remote sites services market,
which spans five continents, to be approximately (euro)10 billion per year, and
our only global competitor currently is Compass; the remainder of the market is
served by many local providers. We believe that new opportunities will develop
for service providers as trends in prices for raw materials stabilize and the
depletion of natural reserves in some countries leads to prospecting in new
onshore and offshore areas.
Services Mix
Most of our revenues are generated from food services, but our revenues in
the Food and Management Services business increasingly arise from providing
ancillary support and facility management services to our clients, which,
together with food service, we refer to as "multiservices". The multiservices
market is underpenetrated; we estimate the not-yet-outsourced portion to be
(euro)380 billion annually worldwide. We expect that the proportion of non-food
services we provide will increase relative to our food services in the future.
13
Food Services. The food services industry is broadly divided among the
areas of contract catering, concessions, vending and restaurants. The food
services we provide can generally be described as contract catering - that is,
the preparation and provision of meals to third parties on behalf of a client,
usually on the premises of the client in cafeterias or other on-site facilities.
The third parties to whom we supply our food services tend to be either
employees of our clients or consumers of other services provided by our clients.
Corporate clients request food services for their staff employees and
executives, hospitals do so for their patients and visitors, retirement
communities for their residents, and schools for their students.
Capital requirements in this business are minimal because of:
o low capital expenditures, as operations are generally conducted at
client sites;
o low fixed costs; and
o predictable cash flow from client and customer payments, which reduces
working capital needs.
For certain clients, such as primary and secondary schools in France, we
use central kitchen areas financed or owned by our clients where we prepare
foods for delivery to client sites. We then arrange for delivery of these
prepared foods to locations where either our employees or, depending on the
contract arrangement, workers hired by the client serve the food to its ultimate
consumers. In the majority of cases, however, we prepare and serve the food
on-site.
Within this core business, we also provide advice and technical support
with respect to the design and installation of food service facilities and the
training of catering and other service personnel. Innovation in this activity is
crucial to meeting demand and enhancing our client base. We have, for instance,
expanded our core food service business from basic on-site food preparation and
service to event catering, take-out, office delivery, off-site meal delivery,
and vending. New vending concepts allow teams working during non-business hours
to get hot meals at any time during the day or night at a reasonable cost. Small
companies without cafeteria facilities can have meals delivered to them on-site
or have vending machines installed.
Our ability to attract and retain clients depends not only on the cost,
quality and efficiency of our service but also on our ability to gauge and
address the preferences of the consumers for the food we serve. Consequently, we
see the design, tailoring and innovation of our menu options including the
branding of innovative concepts as a key aspect of the services we provide. In
the Education market, we have profiled and analyzed different age groups through
parent and child interviews, independent market studies and other methods in
order to develop optimal food service packages for students. In the Healthcare
market, in connection with the long-term healthcare business, we have designed a
broader range of purpose-designed services to meet the needs of an ever-growing
number of seniors based on an international profile of seniors and their
lifestyles we developed, the first of its kind in our industry. In the Business
and Industry market, we have adapted the practices of food stations and theme
menus to the particular needs of our clients and their employees using our
customer profiling system, Personix(R).
Multiservices. Recognizing significant value added to our clients in
service areas that are not directly related to food is a focus area of our
growth strategy. We believe that providing these additional services is key to
our expansion. As consumers' needs become more sophisticated, clients will
continue to seek service contractors who are able to provide solutions for all
of their non-core food and management services on a quality, efficient,
cost-effective basis. With years of experience, we have become specialists in
the industry sectors of our client segments, and are able to provide ancillary
services complementary to our food services, which fall into three main
categories:
o People services, which are tailored to end-users and provided on the
client's premises. These include our retail food services as well as
dry cleaning, newsstands, leisure services and the on-site management
of health club facilities and day care centers.
o Business support services, which add value to our clients through the
management of peripheral business activities. Reception, mailroom,
switchboard, security and surveillance and transportation are among the
tasks which we perform to ensure the smooth operation of our clients'
businesses.
14
o Building management and maintenance services, which comprise
groundskeeping, housekeeping, custodial and janitorial services, as
well as the technical maintenance operations required to deliver
electricity, water, other utilities, heating and ventilation to the
various areas on a particular site. In Europe, for example, our
subsidiary Altys provides building services to large client accounts
such as Cisco in France, Belgium and Germany. In North America, we have
developed construction management services for healthcare and/or
educational institutions.
The Market for Outsourced Food and Management Services
We estimate that approximately one-half of food management services
worldwide currently remain self-operated, and an even greater proportion of
other ancillary services is not yet outsourced. We believe that over the past
ten years, the portion of outsourced Food and Management services has increased
steadily and we further believe that this trend will be reinforced by the
growing advantages of outsourcing peripheral activities in favor of large,
experienced contractors capable of providing higher quality services at a lower
cost. Specifically, outsourcing support functions allows potential clients to:
o improve the quality and consistency of support services through
professional management;
o benefit from current, innovative trends in procurement and delivery of
these services; and
o improve cost effectiveness through the economies of scale and
operational synergies that a specialized provider can achieve.
Outsourcing recently has grown particularly in the Education and Healthcare
markets, where a large number of the services we provide had historically been
undertaken by the government or other public institutions. Future growth in this
public sector area remains subject to government policies; however, governments
have found outsourcing to be a useful tool in attempting to reduce central
expenses and budget deficits.
Healthcare represents the largest potential market for food and management
services with outsourcing rates still comparatively low. We estimate that more
than half of this market is in short-stay care centers (public and private
hospitals) and the remainder in long-term care facilities for the elderly and
dependent. On average, we estimate that about one quarter of this market is
currently outsourced, with short-stay facilities generally more likely to
outsource than long-stay facilities by a ratio of almost two-to-one. A
multiservice approach is especially important in the Healthcare market, where
pressure on cost structures combined with greater life expectancy and
increasingly sophisticated medical technologies has led clients to seek to
reduce the cost of services that are not an integral part of their business.
We estimate that the Education market is about one-third outsourced, with
about one quarter of private sector institutions and about three quarters of
public institutions outsourcing food service. Much of the opportunity for
outsourcing in the Education market is concentrated in ten countries. The campus
dining marketplace, principally colleges and universities, continues to shift
from residential board plans to more retail-oriented operations driven by the
growing proportion of non-resident day and evening students on campuses, the
changing taste and service preferences of young consumers, and colleges' and
universities' desire to provide their students with greater flexibility.
Traditional cafeterias are being replaced by food courts and similar retail
operations providing greater variety of food selection. We believe that these
trends, coupled with cost pressures, lead public and private institutions to
consider outsourcing. Over the past three years, outsourcing in the Education
market has increased steadily.
There are significant growth opportunities also in the Business and
Industry market, especially in public sectors such as defense in developed
countries and across all sectors in emerging markets.
The market for multi-service national providers (food and facilities) is
growing as large corporations are moving toward outsourcing all of their
non-core services on a multisite and multiservice basis. We estimate that only
about half of such services are outsourced on average, but substantial
differences exist from one country to another.
15
We estimate the outsourcing potential for multiservices as a whole to be
two and one-half times greater than that for food services alone. We believe
this potential reflects not only low independent contractor penetration but also
an increasing trend of clients seeking a single-source solution for their
facilities and on-site needs.
Contracts
We use two broad contract types in our Food and Management Services
business: profit and loss contracts and management fee contracts. However, many
of our contracts contain characteristics of both types of contract. The primary
distinguishing feature of each contract type is the amount of financial risk we
bear and, conversely, our profit or loss potential. Our revenues under each type
of contract may vary substantially depending upon such factors as the type of
client facility involved, whether hourly workers are employed by us or by our
client, the services requested and the amount of capital, if any, invested by
us.
In profit and loss contracts, we generally receive all revenue derived from
and bear all expenses incurred in providing our services. Expenses under profit
and loss contracts generally include labor and food costs, but they can also
include commissions paid to the client, typically calculated as a percentage of
revenues made on the client's premises. In some cases, we may agree to pay
minimum guaranteed commissions to our clients. We may also receive client
subsidies to cover our fixed operating costs. Profit and loss contracts are
generally indexed for inflation, although our ability to change prices in
response to significant variations in cost may be limited. We believe, however,
that the existence of a captive on-site customer group, the relative ease of
determining sales volumes and operating margins, standard termination provisions
and our broad institutional client base limits and diversifies our risk with
respect to these contracts.
In management fee contracts, we receive a fee, which is generally fixed,
and we are reimbursed for the operational and administrative expenses we incur.
These contracts have varying terms and may in some instances provide for the
client to purchase food and labor directly or for us to make such purchases and
re-invoice the costs to the client. In either case, our profit potential and
risk of loss are generally fixed.
In the Business and Industry market, a reduction in client subsidies
combined with pressure on costs has resulted in a move from management fee to
profit and loss contracts. In the Healthcare market, industry trends, especially
in the United States, away from fee-for-service payments and towards a managed
care environment has shifted the risk and burden of cost control from insurance
providers to the health care institutions themselves, forcing them to focus not
only on the cost component of clinical care but also on the cost of all
services, including food and facilities management. Many contracts with
healthcare clients condition a portion of our compensation on financial
performance objectives as well as other measurements by third parties, such as
patient satisfaction.
The length of contracts that we enter into with clients varies. The
majority of our services are provided under contracts of indefinite term, which
are generally subject to termination on three months' notice by either party
without cause. Certain client contracts, such as those with universities,
hospitals and event catering, which require capital investments on our part,
tend to have fixed terms, generally between three and ten years. When we enter
into these contracts, we may negotiate a capital investment to help finance
facility construction or renovation. Contractually required investments
typically take the form of an investment in leasehold improvements and food
service equipment. At the end of the contract term or its earlier termination,
assets such as equipment and leasehold improvements typically become the
property of the client, but generally the client must reimburse us for any
undepreciated or unamortized capital expenditures.
Food and Management Services contracts are generally obtained and renewed
either through a competitive process or on a negotiated basis. We selectively
bid on contracts to provide services at facilities within the private and public
sectors with contracts in the public sector frequently being awarded on a
competitive bid basis under the requirements of applicable law. Contracts for
food services with school districts and other public clients are typically
awarded through a formal bid process.
Competition
We face significant competition in the Food and Management Services
business from local, regional, national and international outsourced service
providers, as well as from businesses, healthcare and educational institutions,
and
16
government agencies and institutions that choose to operate their own services
following the expiration or termination of contracts with us or with our
competitors. We compete on the basis of both price and quality of service and
product, although in some cases, generally involving large multinational
companies or the government sector, clients put a greater emphasis on price. Our
mission is to improve the quality of daily life, and hence create value for our
clients, and our strategy is to avoid the commoditization of our service
offering. Accordingly, we may lose some business to competitors on the basis of
price.
Within the outsourced portion of the global market there is a high level of
fragmentation. Only the top two companies, we and Compass (headquartered in the
United Kingdom), can be considered truly global enterprises. The next two
largest contract caterers, Aramark (headquartered in the United States) and
Elior (headquartered in France), are pursuing expansion outside of their home
countries through acquisitions, but they still remain largely dependent on their
domestic or continental markets. Approximately 21% of Aramark's food and
management services revenues come from overseas operations and although 41% of
Elior's revenues are earned outside of France, it generally does not operate
outside of Europe.
The following table shows the ranking of the three leading contract
caterers, in terms of revenues, in different market segments, as of August 2005.
Business &
Industry Education Healthcare
---------- --------- ----------
No. 1...................... Compass Sodexho Sodexho
No. 2...................... Sodexho Compass Compass
No. 3...................... Aramark Aramark Aramark
----------
Source: Broker reports, GIRA
On a national scale, competition levels vary significantly, though
concentration is generally higher than on the global stage. High concentration
levels are found in some countries such as France and the Netherlands, where we,
together with two other companies have over 75% of the outsourced food service
market. By contrast, more fragmented environments tend to exist in some of the
other countries in which we operate.
While the markets in which we operate continue to be highly fragmented, in
recent years the contract food service industry has experienced consolidation
and multinational expansion. Drivers for consolidation come from both the client
and supplier side. A larger entity with international coverage is able to tender
for the larger contracts and can negotiate better terms from its suppliers. In
addition, larger companies can obtain economies of scale and implement best
practices across sites. As a result of these benefits of scale, consolidation in
the industry has been accelerating, both in terms of the number and size of
deals.
Service Vouchers and Cards
In our Service Vouchers and Cards business, we have operations in 27
countries, mainly in Europe and Latin America, and our vouchers are used by
nearly 14 million people. For fiscal 2005, this activity issued approximately
1.6 billion vouchers and 2 million cards on behalf of more than 320,000 clients
and generated revenues of (euro)280 million. Our vouchers were accepted at over
821,000 locations and the total nominal value, which is not included in our
revenues, of vouchers issued in fiscal 2005 was (euro)5.3 billion. This business
generates negative working capital and requires only a modest level of capital
investment.
Our Service Vouchers and Cards business currently comprises three
categories of services: Daily Life, Motivation and Assistance, where our
vouchers and cards are used to purchase items such as groceries, clothing and
school books. This business, which focused originally on managing employee
fringe benefits for companies, has indeed expanded from reward solutions for
employees to controlling and managing welfare benefits allocated by federal
authorities. Our clients are generally commercial enterprises and community and
governmental entities. Revenues from service vouchers and cards activities
include the commissions paid by our customers who buy the service vouchers and
cards from us and commissions from our affiliated retail outlets where the
service vouchers and cards are redeemed. Customer commission revenues are
recorded at the time of issuance of the service voucher or card. Affiliate
17
commission revenues are recorded at the time of redemption. Revenues also
include interest income from the investment of proceeds from the time of sale of
the vouchers to our customers until the time of their redemption, when we must
repay our affiliates, generally a one-to-three-month period. Service vouchers
are used by businesses of all sizes, primarily in large urban centers, and they
frequently carry tax or labor law benefits.
To meet new needs and enhance quality, we are constantly expanding our
range of services through research and development in card technology, data
processing, security and control systems. Express voucher delivery and
personalized voucher pick-up from restaurants both significantly contributed to
the efficient handling of approximately 1.6 billion issued vouchers. We are also
developing card technology in Europe and Latin America to offer an advanced
solution to client businesses and government agencies which require a more
secure, comprehensive alternative to vouchers.
We estimate that the market for service vouchers and cards is more than
(euro)30 billion in issue volume worldwide. We are the second-largest service
vouchers and cards business in the world, based on annual revenues. We have only
one significant global competitor, Accor. Significant drivers in the industry
include product development, geographical expansion, name recognition (branding)
and the synergy effects of building large networks of affiliates. Our current
objective in this activity is to consolidate our number two position by offering
the best perceived quality services in the market. To maintain and improve
quality services, we focus on the development of new services by fostering
innovation, developing new services and enhancing our know-how in new
technologies.
Raw Materials
Raw materials essential to the operation of our business are obtained
principally through local and national food distributors in each of the
jurisdictions in which we operate. As such, we are subject to fluctuating food
prices and availability, both of which can vary by location. Furthermore,
because of the relatively short storage life of inventories, especially produce,
limited storage facilities at customer locations and our client requirements for
freshness, a minimum amount of inventory is maintained at customer locations at
any given time. All materials and services that we purchase are available from
more than one supplier, and we believe that the loss of any supplier would not
have a material impact on our business.
Since our inception in 1966, we have been highly proactive in addressing
food safety and health concerns. For example, in November 1999, we formed a Food
Safety Committee in France to anticipate and manage food safety risk. Comprising
four prominent professors and medical doctors specialized in nutrition and food
safety, this committee is supported by the technical resources of the Institut
Pasteur de Lille, a Sodexho partner for more than 20 years, and the French Food
Safety Agency. Similar food safety programs are continuously being developed and
extended across Europe and in other countries. End-to-end traceability has been
introduced in all of the procurement channels, whether for meat or other
products.
Seasonality
Although revenues of our business as a whole do not tend to fluctuate
significantly by season, certain market segments have been characterized
historically by seasonal fluctuations in overall demand for services, notably
the Education market of our Food and Management Services business and our River
and Harbor Cruises operations. In the Education market, revenues and operating
performance depends on the school, college and university calendar in each
country, with low activity levels during the long vacation periods, principally
in our fiscal fourth quarter. Our River and Harbor Cruises operations generally
benefit from increased tourism levels in the fourth quarter and may be reduced
to restricted operating levels in our fiscal second and third quarters as a
result of inclement weather.
Regulation
The following description of the regulations to which we are subject does
not purport to be complete and is qualified by reference to the relevant
provisions of applicable law in the jurisdictions in which we operate.
We are subject to various governmental regulations throughout the world in
the course of our operations. These regulations govern such matters as
employment, including wages; environmental protection; human health and safety;
and the bidding for and performance of contracts with governmental entities. To
ensure compliance with these
18
regulations, our facilities and products are subject to periodic inspection by
authorities at a local and national level in many jurisdictions in which we
operate.
The most significant of the regulations which apply to our business relate
to the handling, preparation and serving of food, and impose standards for food
temperature, kitchen cleanliness and employee hygiene, among other things. In
addition, certain of our operations are subject to licensing requirements with
respect to serving alcoholic beverages, including restrictions on individuals to
whom alcoholic beverages may be served. Various state agencies and governmental
entities have also imposed nutritional guidelines and other requirements on us
at some of the education and corrections facilities we serve.
Many of our subsidiaries, especially those in countries which are members
of the European Union, must comply with employment regulations designed to
protect hourly, part-time and full-time employees. These regulations govern
working hours, wages, unfair dismissal and discrimination. Furthermore, pursuant
to European Union regulation and subject to certain limitations and exceptions,
in the event we are assigned a contract for food service at a site within the
European Union from another contractor or from a client, we are required to hire
all workers who were employed at that site and were on the previous employer's
payroll to provide food services.
We have installed various internal controls and procedures designed to
maintain a high level of compliance with these regulations, but we cannot assure
you that we are in full compliance at all times with all applicable laws and
regulations. The cost of our compliance programs is not material, but it is
subject to additions to or changes in legislation, changes in regulatory
implementation, changes in the interpretation of applicable regulations and
sometimes subject to changes in the facilities of our clients. If we fail to
comply with applicable laws in any jurisdiction in which we operate, we could be
subject to civil remedies, including fines and injunctions, as well as potential
criminal sanctions.
Marketing
In those countries in which we have significant operations, our sales teams
are focused on developing particular client sectors by identifying and pursuing
potential new business opportunities, analyzing and evaluating such
opportunities together with our operational and financial management and
developing specific contract proposals. In addition to our professionals
dedicated exclusively to sales efforts, our food and support field management
shares responsibility for identifying and pursuing new sales opportunities, both
with the clients for which they are directly responsible and for potential
clients in their geographic area of responsibility. In addition, in several of
our major operating territories we also have dedicated sales retention teams.
Our sales retention teams participate directly with our operational management
teams in client retention, including conducting client satisfaction surveys and
the review and implementation of account management procedures. We estimate that
approximately 760 people are involved in sales, sales support and marketing, of
which approximately 40% are located in North America.
Our marketing efforts are directed both toward increasing our business with
existing clients as well as obtaining business from new clients. We regularly
develop and offer innovations in products and services for our clients that
allow us to grow revenues at existing locations while enhancing value provided
to those clients and improving service quality to their customers or employees
by tailoring new offerings to their needs. We have a specific process in each
country to promote and subsequently implement innovations on a broad scale.
C. Organizational Structure
As of August 31, 2005, we had over 250 subsidiaries in 76 countries. Our
operations are managed locally through these subsidiaries, although our central
management is at the level of Sodexho Alliance, SA. For a list of our
subsidiaries and a description of our interests in them, please see note 4 to
our Consolidated Financial Statements.
D. Property, Plant and Equipment
Our principal property and equipment consists of our service equipment and
fixtures, computer and office equipment, delivery vehicles and cruise vessels.
Our service equipment and fixtures include vending, commissary, janitorial,
maintenance and laundry equipment used primarily in the Food and Management
Services business. The vehicles comprise automobiles and delivery trucks
19
used in the Food and Management Services business and cruise vessels used in the
operation of the river and harbor cruises activity. The service equipment and
fixtures, computer and office equipment, delivery and other vehicles and cruise
vessels had an aggregate net book value as of August 31, 2005 of (euro)203
million.
Our real estate is comprised primarily of office space in several
countries, notably France, the United Kingdom and the United States, and had an
aggregate net book value of approximately (euro)102 million as of August 31,
2005. No individual parcel of real estate we own is of material significance to
our total assets.
In certain circumstances, we lease office space, computer software and
other equipment (primarily kitchen equipment). A discussion of our capital lease
policy can be found in note 1 to our Consolidated Financial Statements.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The selected consolidated financial data as of and for the years ended
August 31, 2003, 2004 and 2005 have been derived from and should be read in
conjunction with the consolidated financial statements of Sodexho Alliance
included elsewhere in this Annual Report on Form 20-F. The selected consolidated
financial data as of and for the years ended August 31, 2001 and 2002 have been
derived from consolidated financial statements that are not included in this
Annual Report on Form 20-F. Our consolidated financial statements for each of
the years ended August 31, 2003, 2004 and 2005 were audited by
PricewaterhouseCoopers Audit.
Our consolidated financial statements have been prepared in accordance with
French generally accepted accounting principles ("GAAP"), which differ in
certain significant respects from U.S. GAAP. Note 5 to our consolidated
financial statements describes the principal differences between French GAAP and
U.S. GAAP, as they relate to us, and reconciles our net income to U.S. GAAP for
each of the years ended August 31, 2003, 2004 and 2005, and our shareholders'
equity to U.S. GAAP as of August 31, 2004 and 2005.
Restatement
In connection with the implementation of International Financial Reporting
Standards (IFRS), which will become the Group's primary reporting GAAP effective
for fiscal 2006, the Group determined that certain of the adjustments to
reconcile shareholders' equity and net income from French GAAP to U.S. GAAP as
previously reported as of and for the years ended August 31, 2004, 2003, 2002
and 2001, were not properly accounted for. As a result, the Group has decided to
restate its previously issued reconciliations to U.S. GAAP of net income and
shareholders' equity.
The errors principally pertain to (i) foreign currency translation
adjustments related to goodwill and intangible assets denominated in euro in
French GAAP but required to be reported in the currency of the acquired entity
in U.S. GAAP; (ii) adjustments pertaining to pension and post-employment benefit
plans which were determined to be incomplete and contained errors in the
application of SFAS 87; and (iii) other adjustments which mainly related to the
use of the effective interest method in accounting for debt issuance costs in
connection with one of the Group's borrowing arrangements which resulted in a
difference as compared to the straight-line method, due to the timing of the
repayments. A summary of the effects of the restatement, which only affected the
U.S. GAAP reconciliation, is included in note 5 to the consolidated financial
statements. The most significant impacts of the restatement were a net reduction
in net income of (euro)5 million for the year ended August 31, 2002 (out of
previously reported net income of (euro)136 million) and a net reduction in
shareholders' equity of (euro)109 million as of August 31, 2004 (out of
previously reported shareholders' equity of (euro)1,652 million).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in compliance with relevant French
law and in conformity with accounting principles generally accepted in the
United States of America, requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities, including judgments
related to the selection of appropriate accounting policies as well as the
appropriate application of those policies. Actual results could differ from
those estimates. Our significant accounting policies are described in the notes
to the consolidated financial statements included in this Annual Report on Form
20-F. However, we have identified a number of those accounting policies and
estimates which we believe are the most significant to our business operations
and to an understanding of our financial statements and related footnotes.
20
Revenue Recognition
Our revenue recognition policies are substantially the same for both French
and U.S. GAAP.
In the Food and Management Services business, revenue is recognized in the
period in which services are provided pursuant to the terms of the contractual
relationships with clients.
Revenues for service voucher activities include commissions received from
customers, which are recorded upon issuance of the vouchers to the customers;
commissions received from affiliates, which are recorded upon redemption of the
vouchers by the affiliates; and interest income realized on the nominal value of
the vouchers during the period from their issuance through redemption
(generally, one to three months).
Business Combinations and Impairment of Intangible Assets and Goodwill
Accounting policies for business combinations and impairment of intangible
assets and goodwill differ between French and U.S. GAAP.
Under French GAAP, all of our business combinations are accounted for as
purchases. The cost of an acquired company is assigned to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
values at the date of acquisition. Any excess of purchase price over the fair
value of the tangible and intangible assets assumed, including market share, is
allocated to goodwill, which is amortized over its estimated useful life. Due to
the long-term nature of the Group's business, goodwill is generally amortized
over thirty years (on a pro rata basis in the year of acquisition). This
valuation of goodwill on a historical basis is also supported by a calculation
of the current value of these assets as of August 31, 2005, as described in
further detail below.
In the allocation of purchase price with respect to the acquisitions of
Sodexho, Inc. (formerly, Sodexho Marriott Services, Inc.), Wood Dining Services,
Sogeres, Sodexho Services Group Ltd (formerly, Gardner Merchant), Sodexho
Scandinavia (formerly, Partena), and Universal Services, a portion of the
difference between the cost of the shares acquired and the Group's equity in the
underlying net assets of the entities acquired has been recognized as market
share. This intangible asset represents the value attributed to the significant
market shares held by the Group in the geographic regions specific to the
acquisitions (the United Kingdom and Ireland, the United States, the
Netherlands, France, Australia and Sweden).
Market share is principally determined based on an average of multiples of
revenues and EBITA achieved by the acquired companies in the applicable
countries as compared to unrelated recent transactions in the marketplace and is
reviewed annually for impairment. Market shares are not amortized in the
consolidated financial statements, and no deferred taxes are recorded on market
shares. Initial allocations to market share require management to exercise
judgment in the choice of unrelated transactions in the marketplace. If there is
a significant diminution in the market share value for more than two consecutive
years, as recomputed based on actual results of the applicable subsidiary as
compared to the original calculation, an impairment loss is recorded.
As of August 31, 2005, the Group also performed the impairment tests on
market shares and goodwill required by the Reglement du CRC no. 2002-10, issued
on December 12, 2003, which defines the recoverable value of an asset as the
higher of its market value or "value in use." Market value is calculated based
on criteria determined at the date of the acquisition corresponding mainly to
revenues and EBITA and using multiples of recent transactions. Value in use is
determined using the value of future cash flows after taxes based on three year
operating plans prepared by management. These plans are extrapolated to a longer
period by applying a growth rate specific to the sector of activity and
geographical region concerned. Cash flows are discounted using an average cost
of capital. The recoverable value determined is then compared to the sum of
intangible assets, other fixed assets and working capital. These impairment
tests resulted in an impairment charge totaling (euro)3.5 million for the year
ended August 31, 2005.
Under U.S. GAAP, all of our business combinations are accounted for as
purchases. In accordance with SFAS No. 141, Business Combinations (APB 16,
Business Combinations, for transactions consummated prior to June 30, 2001), the
cost of an acquired company was assigned to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values at the date of acquisition. In accordance with U.S. GAAP, customer
relationships, trademarks, assembled workforce (for transactions consummated
prior to June 30, 2001 only), and
21
software intangible assets have been identified with respect to our
acquisitions. As such, for U.S. GAAP purposes, a portion of the amount allocated
to market share and goodwill under French GAAP is allocated to these identified
intangible assets. The remaining excess of the cost of the acquired company over
the fair value of the net assets acquired is recorded as goodwill. The
allocation of purchase price to intangible assets other than goodwill requires
management to make estimates with respect to the fair value of those intangible
assets, which fair value is largely dependent on assumptions utilized in the
valuation methodology, including estimates of future cash flows and appropriate
discount rates. A deferred tax liability is recorded with respect to all
intangible assets except goodwill, and the amount assigned to goodwill is
increased by an amount equal to the deferred tax liability recorded, if any.
For U.S. GAAP purposes, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which required us to reclassify (into goodwill) the carrying
value of assembled workforce intangibles and those customer relationship
intangibles which did not meet the criteria of SFAS 141 for recognition apart
from goodwill. None of the identifiable intangible assets recognized apart from
goodwill are considered to have indefinite lives. In accordance with SFAS 142,
we do not amortize goodwill. All other intangible assets, including customer
contracts, trademarks and software, are amortized over their estimated useful
lives.
SFAS 142 also requires us to evaluate our goodwill (and identifiable
intangible assets with indefinite lives, if any) for impairment at least
annually and more frequently if specific events indicate that an impairment in
value may have occurred. This evaluation requires management to make assumptions
with respect to the identification of its reporting units as well as the
estimates of future cash flows and appropriate discount rates, in order to
determine the fair value of the reporting units so identified. Under U.S. GAAP,
there was no impairment charge as of August 31, 2005.
SFAS 144 (SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of through fiscal 2003) requires that we
review our identifiable intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable (a "triggering event"). The review for recoverability requires us
to estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the undiscounted future cash flows
is less than the carrying amount of the asset, an impairment loss may be
recognized, which is measured based on the fair value of the asset. Management
is required to exercise judgment in the determination of whether a triggering
event has occurred as well as in the development of the assumptions used to
estimate future cash flows and determine fair value, as needed.
Provisions for contingencies and losses
Under French GAAP, provisions for contingencies and losses may be
recognized when there is a possibility of loss and prudence is an important,
although not the only, consideration. In general, provisions for risks and
charges represents liabilities which have not been settled, or for which the
settlement amount or other pertinent information is unknown, as of the balance
sheet date. Such amounts are reflected as charges in the income statement in the
period in which they are provisioned.
Under U.S. GAAP, provisions for contingencies and losses (contingent
liabilities) are recognized for specific existing risks when the related loss is
both probable and estimable and, in certain specific situations such as business
combinations and restructurings, when certain additional criteria are met. If a
loss is determined to have been incurred and management is able to reasonably
estimate the amount of the loss, an amount must be accrued for the loss. Where
the amount of the probable loss is determined within a range of possible
outcomes and no single amount within the range is considered to be a better
estimate than any other amount within the range, that amount is accrued.
However, when no amount within the range is considered to be a better estimate
than any other amount, the minimum amount in the range is required to be
accrued.
Under both French and U.S. GAAP, the recording of provisions requires
management to exercise significant judgment in determining the timing of
recognition and amount of recorded provisions.
Actuarially-Determined Liabilities
Included in other liabilities are liabilities established using actuarial
methods, notably for pensions and postretirement benefits in some of our
subsidiaries located in Europe. In French GAAP, there are no specific
requirements pertaining to accounting for pension and post-retirement benefits.
For subsidiaries principally located in the United Kingdom and the Netherlands
(effective September 1, 2004) and in France, the projected unit credit
22
valuation method is used to evaluate the pension and post-retirement liabilities
under French GAAP. Under U.S. GAAP, pension and post-retirement benefits are
accounted for using the methodologies prescribed by SFAS 87 and SFAS 106,
respectively. Both the projected unit credit valuation method and the
methodologies prescribed by SFAS 87 and SFAS 106, which are substantially
similar, require the use of actuarial assumptions, including the discount rate,
the rate of compensation increase and expected long-term rate of return on plan
assets. These assumptions are determined by management and require management to
exercise considerable judgment.
Also included in other liabilities are liabilities for workers'
compensation, principally in the United States. These liabilities are estimated
using actuarial methods for both French and U.S. GAAP based on assumptions made
by management with respect to the expected development of known and incurred but
not reported claims.
Derivative Financial Instruments
Under French GAAP, our derivative financial instruments, which consist
primarily of interest rate and cross-currency swap agreements on debt
instruments, are considered to hedge the underlying debt. Any interest rate
differential is recognized as an adjustment to interest expense over the term of
the related underlying debt. For swaps negotiated on inter-company debt, the
difference between the amount of the debt at the period end rates and the
swapped rates is recorded as debt. Where the hedge is of a net investment in a
foreign subsidiary, the resulting foreign currency translation difference is
recorded in the currency translation adjustment account in shareholders equity.
Under U.S. GAAP, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires all derivative instruments to be recorded on the
balance sheet at their fair value. Changes in fair value are recorded currently
in earnings unless the item is designated, qualifies, and is effective as a
hedge. Fair value is defined as the amount that would be paid or received to
terminate the derivative instrument at the balance sheet date. Changes in the
fair value of derivatives designated as part of a hedge transaction are recorded
each period in current earnings or other comprehensive income, depending on the
type of hedge transaction. For cash flow hedge transactions in which we are
hedging the variability of cash flows related to a variable rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument is reported in other comprehensive income. The gains and
losses on the derivative instrument that are reported in other comprehensive
income are reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges is recognized in current period earnings. For
certain derivative financial instruments, as permitted by SFAS 133 and as
described below, we have elected not to prepare the documentation required by
SFAS 133 in order to meet hedge accounting criteria. Had we met and
appropriately documented the hedge accounting criteria required by the standard,
reported earnings under U.S. GAAP might have been different in each of the
periods presented.
Under U.S. GAAP, we have accounted for all of our derivative financial
instruments (other than those of Sodexho, Inc., as described below), which
consist primarily of interest rate and cross-currency swap agreements, both
prior and subsequent to the adoption of SFAS No. 133 at fair value with changes
in fair value of instruments recognized currently in earnings. The aggregate
adjustment reflected in the reconciliation of consolidated shareholders' equity
and consolidated net income (loss) to U.S. GAAP as of and for the years ended
August 31, 2005, 2004 and 2003 for "Derivative financial instruments" is
attributable entirely to derivative financial instruments accounted for at fair
value. The fair value of our derivative financial instruments is generally
obtained from third party financial institutions.
Under U.S. GAAP, Sodexho, Inc.'s interest rate agreements have been
designated as cash flow hedges in accordance with SFAS No. 133. As of August 31,
2005 and 2004, and for each of the three fiscal years in the period ended August
31, 2005, these cash flow hedges were determined to be effective hedges and,
accordingly, changes in their fair value are reflected in the statement of
comprehensive income (recorded directly in shareholders' equity).
Currency Translation
For subsidiaries located in foreign countries, assets and liabilities are
translated using the end of period exchange rate. Income statement and cash flow
statement line items are translated using the average exchange rate for the
year, calculated using monthly averages. Exchange rates used are obtained from
the Bourse de Paris and other international financial markets. The difference
between the translation of the income statement at average and period end rates,
as well as the difference between the opening balance sheet accounts as
translated at beginning and end of period rates is
23
recorded in shareholders' equity, except with respect to countries considered
highly inflationary, where this difference is included in net financial expense.
Foreign exchange gains and losses resulting from intragroup transactions in
foreign currencies during the year are recorded in the income statement.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs--An
Amendment of ARB No. 43, Chapter 4." The provisions of SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005, and are not expected to have a material effect on the Group's
financial statements.
In December 2004, the FASB issued SFAS No. 123R, which is a revision of
SFAS No. 123, "Accounting for Stock-Based Compensation," which also supersedes
APB Opinion No. 25, "Accounting for Stock Issued to its Employees," and its
related implementation guidance. This Statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, and
recognize the cost over the period during which an employee is required to
provide service in exchange for the award--the requisite service period. This
Statement is effective for annual reporting periods beginning after June 15,
2005, and applies to all awards granted after the required effective date and to
awards modified, repurchased, or cancelled after that date. The Group is
currently evaluating the provisions of this Statement. Adoption of the Statement
as of the beginning of fiscal 2006 using the modified prospective transition
method will result in a reduction of reported earnings.
On March 30, 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations," which clarifies the term
"conditional asset retirement obligation" as used in FASB Statement No. 143. The
Interpretation is effective for Sodexho no later than the end of fiscal 2006.
The Group is currently evaluating the Interpretation, but has not yet determined
what effect adoption will have on the consolidated financial statements.
International Financial Reporting Standards
To comply with European regulations, the Group will prepare its
consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) effective for the 2006 fiscal year, which commenced
on September 1, 2005. These financial statements will include comparatives as of
and for the year ended August 31, 2005.
Further information regarding the principal impacts of IFRS is disclosed on
page 137 of our Reference Document (Annual Report) available at www.sodexho.com.
BALANCE SHEET AND INCOME STATEMENT DATA
--------------------------------------------------------------------------------
Our consolidated financial statements and the selected financial data
presented below are reported in euro.
As of and for the year ended August 31,
-----------------------------------------------------------------------
2005 2005 2004 2003 2002 2001
---- ---- ---- ---- ---- ----
U.S.$(3) (euro)(4) (euro) (euro)(4)(5) (euro)(5) (euro)
(in millions, except per-share amounts)
Income Statement Data
French GAAP amounts
Revenues................................ 14,238 11,672 11,494 11,687 12,609 11,928
Earnings before interest, exceptional
items, income taxes, income from
equity method investees, goodwill
amortization and minority interests
(EBITA).............................. 646 530 515 514 525 571
Financial expense, net.................. (126) (103) (118) (152) (166) (122)
Minority interests in net income of
consolidated subsidiaries............ (12) (10) (14) (9) (13) (67)
Net income.............................. 194 159 183 162 202 128
Earnings per share (basic).............. 1.22 1.00 1.15 1.02 1.27 0.93
Earnings per share (diluted)............ 1.22 1.00 1.15 1.00 1.22 0.89
Dividends per share..................... 0.91 0.75 0.70 0.61 0.61 0.56
24
As of and for the year ended August 31,
-----------------------------------------------------------------------
2005 2005 2004 2003 2002 2001
---- ---- ---- ---- ---- ----
U.S.$(3) (euro)(4) (euro) (euro)(4)(5) (euro)(5) (euro)
Balance Sheet Data
French GAAP amounts
Intangible assets, including acquisition
goodwill............................. 4,652 3,814 3,913 4,178 4,556 4,731
Tangible fixed assets, including
non-working capital, financial
investments and other assets......... 737 604 570 614 584 519
Working capital (1)..................... (2,074) (1,700) (1,341) (1,260) (1,275) (1,208)
Cash and cash equivalents (2)........... 1,666 1,366 1,209 1,278 1,307 1,213
Total assets............................ 9,708 7,959 7,647 8,108 8,544 8,638
Total borrowings........................ 2,366 1,940 2,128 2,488 2,693 2,781
Provisions for contingencies and losses. 210 172 93 89 99 93
Minority interests...................... 24 20 25 67 73 131
Total shareholders' equity.............. 2,606 2,136 2,192 2,249 2,398 2,386
U.S. GAAP amounts Restated(6) Restated(6) Restated(6) Restated(6)
Revenues................................ 14,249 11,681 11,502 11,690 12,618 7,557
Operating income........................ 444 364 386 404 403 155
Net income (loss)....................... 188 154 169 148 131 (36)
Earnings (loss) per share (basic)....... 1.21 0.99 1.08 0.95 0.83 (0.26)
Earnings (loss) per share (diluted)..... 1.21 0.99 1.08 0.95 0.82 (0.26)
Total assets............................ 9,310 7,632 7,393 8,028 8,435 8,780
Total shareholders' equity.............. 1,935 1,586 1,542 1,645 1,782 1,971
----------
(1) Working capital is calculated as the net of an asset component (current
assets, loans receivable and deposits and other and prepaid expenses less
cash, cash equivalents and restricted cash) and a liability component
(accounts payable, vouchers payable and other liabilities).
(2) Cash and cash equivalents includes restricted cash. See note 1 to our
consolidated financial statements for an explanation of restricted cash.
(3) The consolidated financial statements are prepared and presented in euro.
The U.S. dollar amounts presented in the table above have been translated
solely for the convenience of the reader using the August 31, 2005 2 p.m.
ECB time rate quoted by the European Central Bank of $1 = (euro)0.8198.
(4) See Note 1 to the consolidated financial statements for a discussion of the
impact of changes in accounting principles relating to accounting for
retirement and other employee benefit plans under French GAAP.
(5) Certain amounts for the years ended August 31, 2002 and 2001 differ from
the corresponding amounts for the same periods reported in the Company's
Document de Reference filed with the Commission des Operations en Bourse
(now known as the AMF).
(6) In connection with the implementation of International Financial Reporting
Standards (IFRS), which will become the Group's primary reporting GAAP
effective for fiscal 2006, the Group determined that certain of the
adjustments to reconcile shareholders' equity and net income from French
GAAP to U.S. GAAP as previously reported as of and for the years ended
August 31, 2004, 2003, 2002 and 2001, were not properly accounted for. As a
result, the Group has decided to restate its previously issued U.S. GAAP
information. The errors principally pertained to the foreign currency
translation adjustments related to goodwill and intangible assets
denominated in euro in French GAAP but required to be reported in the
currency of the acquired entity in U.S. GAAP. For the years ended August
31, 2004, 2003, 2002 and 2001, the effect of the errors on operating income
was (euro)(2) million, (euro)4 million, (euro)(1) million and (euro)2
million, respectively, and on net income the effect was (euro)0 million,
(euro)1 million, (euro)(5) million and (euro)(2) million, respectively. As
of August 31, 2004, 2003, 2002 and 2001, the effect on total assets was
(euro)(79) million, (euro)(61) million, (euro)(68) million and (euro)(40)
million, respectively, and the effect on shareholders' equity was
(euro)(109) million, (euro)(91) million, (euro)(98) million and (euro)(58)
million, respectively. Refer to note 5 to our consolidated financial
statements for additional information.
A. Operating Results
The balance sheets of subsidiaries located outside of the euro zone that
operate in a non-hyperinflationary currency environment are translated into euro
using exchange rates in effect at the balance sheet dates. The income statements
of these subsidiaries are translated at average exchange rates for the period.
The difference between the translation of the income statement at average and
period end rates, as well as the difference between the opening balance sheet
account as translated at beginning and end of period rates, are recorded in
shareholders' equity. Transactions in foreign currencies are translated using
the exchange rate in effect at the time of the transaction and the related
impact is reflected in the income statement.
We have no significant operations in countries with highly inflationary
economies.
Subject to certain de minimis exceptions discussed below, entities managed
by us, including entities in which we own at least 40% equity interest and are
the single largest shareholder, are fully consolidated. Fully consolidated
subsidiaries that have a year-end that is different from our year-end prepare
balance sheets as of August 31 for consolidation purposes. The foregoing
conditions notwithstanding, subsidiaries with (i) annual revenues of less than
(euro)2 million, (ii) annual profits or losses of less than (euro)0.1 million
and (iii) net assets of less than (euro)2 million, are excluded from the
consolidation. Entities not meeting any of the foregoing conditions, but over
which we are able to exercise significant influence, are consolidated using the
equity method of accounting.
25
The Group reports two principal operating segments, which are Food and
Management Services and Services Vouchers and Cards. The Food and Management
Services business is further segmented into four geographic regions. The Group
reports the following principal and secondary segments:
Food and Management Services
o North America
o United Kingdom and Ireland
o Continental Europe
o Rest of the World
Service Vouchers and Cards
Overview
Food and Management Services is our most significant activity, and
accounted for approximately 98% of our revenues and 86% of EBITA (before
corporate expenses) for the fiscal year ended August 31, 2005. Approximately 44%
of our fiscal 2005 revenues in the Food and Management Services business were
generated in North America. The Service Vouchers and Cards business comprised 2%
of our revenues and 14% of EBITA (before corporate expenses) in fiscal 2005.
Fiscal Year Ended August 31, 2005 Compared with Fiscal Year Ended August 31,
2004
Consolidated Overview of Revenues and EBITA
Revenues for fiscal 2005 totaled (euro)11.7 billion, a 1.5% increase from
fiscal 2004. Organic growth of 4.3% was offset by the unfavorable impact of
foreign currency translation of 2.4%, principally arising on revenues
denominated in U.S. dollars or reliant on the U.S. dollar exchange rate. The
currency effect resulted principally from the 5.3% increase in the average rates
for the euro as compared to the U.S. dollar. The impact of acquisitions (net of
divestitures) was a negative 0.4%. Organic growth continued to be hampered by
the worldwide economic situation, which weighed on the Business and Industry
segment of our Food and Management Services business. We expect our organic
growth rate in fiscal 2006 to be comparable to that in fiscal 2005 on a
consolidated basis.
EBITA was (euro)530 million in fiscal 2005 as compared to (euro)515 million
in fiscal 2004, an increase of 2.9%. However, at constant exchange rates, EBITA
increased by 5%. The operating margin improved moderately to 4.54%. The
improvement in EBITA was achieved after substantial investment in sales and in
the Clients for Life(R) client retention program. The main growth drivers were
solid performance in Continental Europe and in the Service Vouchers and Cards
activity. By contrast, performance in North America was disappointing, largely
related to the U.S. Marine Corps contract as discussed in more detail below.
Analysis of Revenues and EBITA
The following table presents, for the periods stated, the variation in
revenues and EBITA by activity. Certain amounts have been reclassified in order
to conform the prior year presentation to the current year.
26
Fiscal Year Ended August 31, Change in Revenues
-----------------------------------------------------------
Revenues by Activity 2005 2004 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America................................. 5,006 5,031 (25) -
Continental Europe............................ 3,919 3,760 159 4.2%
United Kingdom and Ireland.................... 1,303 1,351 (48) (3.6%)
Rest of the World............................. 1,164 1,106 58 5.2%
-------- ------- ----
Total...................................... 11,392 11,248 144 1.3%
Service Vouchers and Cards....................... 280 246 34 13.8%
-------- ------- ----
Total revenues.............................. 11,672 11,494 178 1.5%
======== ======= ====
Fiscal Year Ended August 31, Change in EBITA
-----------------------------------------------------------
EBITA by Activity 2005 2004 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America................................. 222 239 (17) (7.1%)
Continental Europe............................ 203 171 32 18.7%
United Kingdom and Ireland.................... 27 28 (1) (3.6%)
Rest of the World............................. 37 37 - -
-------- ------- ---- -----
Total......................................... 489 475 14 2.9%
Service Vouchers and Cards....................... 82 68 14 20.6%
-------- ------- ----
EBITA, excluding corporate expenses.............. 571 543 28 5.2
Corporate expenses............................... (41) (28) (13) (46.4%)
-------- ------- ----
Total EBITA................................... 530 515 15 2.9%
======== ======= ====
Food and Management Services
The Food and Management Services business accounted for 98% of consolidated
revenues and 86% of consolidated EBITA before corporate expenses. Revenues
reached (euro)11,392 million. Organic revenue growth in Food and Management
Services was driven by a strong performance in Healthcare (up 6.2%), especially
in North America. Revenues in the Education segment rose by 4.5% as a result of
favorable conditions in the North American university market, while in Europe,
Sodexho took a more selective approach to growth. The Business and Industry
segment posted a 2.8% increase in revenues. In the rest of the world, growth was
strong in Asia and Latin America, and in Remote Sites.
North America
North American revenues reached (euro)5 billion, with organic growth of
4.4%.
Business and Industry revenues were slightly lower in fiscal 2005 than in
the prior year, despite the development of new food service offerings at
existing sites and new contracts. Lower patronage at military bases in the
United States and protracted negotiations with the US Marine Corps also affected
the fiscal 2005 performance. The robust organic growth of 7.3% achieved in the
Healthcare segment reflected expanded service offerings to clients and end
customers at our existing sites, and a highly effective sales effort. The
Education segment, driven largely by the university market, also performed well,
lifting revenues by 5.8%. New clients during fiscal 2005 included the New York
City Health and Hospital Corporation, the Memorial Hermann System (Texas),
Verizon Wireless, General Electric in a number of states, St. John's University
in New York, and the Philadelphia municipal school system.
27
EBITA was (euro)222 million, while EBITA margin slipped to 4.4% from the
prior-year figure of 4.8%. The first positive effects of the rollout of new
tools for managing menu and staff costs were seen in the Education segment, and
retail food service offerings helped margins in the Business and Industry
segment. However, two items weighed on performance: first, doubtful debt
provisions recorded in the last months of the year against receivables in the
Healthcare segment and second, poor profit performance with the U.S. Marine
Corps contract; as is common in federal contracts of this nature, certain
modifications to the level and scope of services are taking time to review and
discuss.
Continental Europe
In Continental Europe, revenues reached (euro)3.9 billion, with organic
growth of 4%. In the Business and Industry segment, revenue growth was driven by
rapid advances in central Europe, Germany and Spain. Most of this improvement
was due to new business, such as a multiservice contract for 63 Citibank sites
in Hungary and contracts with Russian Aluminum in Russia and Torre Agbar in
Spain. At the end of fiscal 2005, Sodexho provided catering for the World Youth
Days in Germany. In other European countries, revenue growth was checked by a
decline in the number of customers as some of our clients carried out headcount
reductions. The Group accelerated its penetration of the Healthcare and Seniors
segments, while retaining a targeted approach. Successful tenders included the
Public Assistance hospitals in Paris, the Sagessa Group in Spain and the Ebel
clinics in Germany. In Education, the growth rate reflected a selective approach
to the public sector. New clients included public schools in Milan (Italy),
Linkoping (Sweden) and Kecskemet (Hungary), as well as the universities of Liege
and Turin.
EBITA increased by 19% at (euro)203 million, notably following productivity
gains in most countries, especially France, both at site level and in overhead.
Approximately half of the increase in EBITA resulted from the costly
reorganization of our Meals Delivery service in the French Education segment,
which negatively affected EBITA in fiscal 2004. EBITA margin increased sharply
to 5.2%, compared with 4.5% in the prior year.
United Kingdom and Ireland
Revenues in the U.K. and Ireland amounted to (euro)1.3 billion. At constant
consolidation scope and exchange rates, revenues decreased by only 2.6%, much
less than the decline recorded in fiscal 2004 and better than anticipated at the
beginning of the year. There were three main reasons for this performance:
o Sodexho was able to expand its range of outsourced services in
the Defense, Correctional Services and Healthcare segments, all
of which have a high multiservice component.
o The client retention rate improved following the rollout of the
Clients for Life(R) program.
o The latter part of fiscal 2005 saw a high level of major
hospitality events, especially the successful relocation of the
Ascot race meeting to York.
New business won in fiscal 2005 included a Private Finance Initiative
multiservice contract with the Royal Manchester Infirmary, a food service
contract for the Foreign & Commonwealth Office and another for the Capio Group
in Healthcare.
EBITA was (euro)27 million, and the EBITA margin was 2.1%. The measures
initiated more than two years ago are continuing to bear fruit, with a
turnaround in subsidiary profitability, as illustrated by a 0.6% improvement in
gross margins during the fiscal year. This improvement in gross margins
permitted a reinvestment in client retention initiatives, offer development and
in more rigorous site management.
Philip Jansen took over as Chief Executive in October 2004, and is
implementing an action plan with the following objectives:
o building the momentum of growth by generating extra revenues from
existing sites and winning new clients, in both food and other
services;
o reinforcing site management procedures;
28
o exercising effective cost control at all levels.
Philip Jansen and his team are all focused on their number one priority:
bringing the EBITA margin back to levels achieved in the rest of the Group.
Rest of the World
In the rest of the world, revenues reached (euro)1.2 billion, with organic
growth of 10.4%. Excluding the effect of the Rugby World Cup in fiscal 2004,
organic growth reached 15.6%. Sodexho posted double-digit growth in Latin
America and Asia, and in Remote Sites.
In Latin America, economic conditions were more favorable, and our
motivated and highly-skilled team was able to expand the business significantly,
with organic growth accelerating in both food and other services. Many of our
successes were in the mining industry, including the Las Bambas copper mine for
Xstrata in Peru and five mines for Companhia Vale do Rio Doce in Brazil.
In mainland China, we continued to record strong growth across all
segments. New contracts included Hitachi, Guangzhou Mak Diesel Engine, UPM
Kymmene, Bridgestone and Lee Shau Kee Middle School. The Australian subsidiary
reported significant advances both in multiservice, with clients such as Kagara
Zinc, Masterfoods, Barrick Gold and Aker Kverner, and in the Seniors segment, as
demonstrated by the recently-signed contract with Uniting Care.
The Remote Sites activity achieved impressive growth, signing contracts
with clients such as Noble (Gulf of Mexico), Shell (Sakhalin Islands), and
Trinity International (North Sea), and also securing all of the contracts for
seismic exploration activities in Saudi Arabia.
EBITA was (euro)37 million, or an EBITA margin of 3.2%. An upturn in
drilling activities favored the Remote Sites activity, which posted improved
profits from the start-up of new multiservice contracts, a reorganization of
North African operations and tight control of overheads. In Latin America, good
growth and rigorous control over contractual terms led to an improvement in
EBITA. However, the profitability of other activities in the Asia/Australasia
region suffered from a lower level of major events at the Sydney stadium, and
was also affected by ongoing investment in development and human resources in
China and India.
Service Vouchers and Cards
Sodexho Pass, which now has operations in 27 countries, posted revenues of
(euro)280 million. Organic growth was sharply higher at 13.2%, boosted by issue
volume (face value of vouchers and cards multiplied by the number of vouchers
and cards issued) of (euro)5.3 billion, a rise of 8.9% at constant exchange
rates and consolidation scope. This performance reflects commercial successes in
Sodexho's established services: Meal Pass, Food Pass and Gift Pass. In Latin
America, Central Europe and Asia, Sodexho Pass demonstrated the benefits of its
solutions as a staff motivation and retention tool to a number of new corporate
clients, in industries such as pharmaceuticals (Bristol-Myers Squibb, Abbot),
beauty (Avon, L'Oreal), consumer goods (Procter & Gamble, Stanhome, Coca Cola)
and mining (Mining Holding Kompania Waglowa).
Growth was also enhanced by the rollout of new assistance services such as
the Vacation Pass, Creche Pass and Culture Pass. Tetra Pak, the city of
Shanghai, AGF, the Metropolitan Police Authority and Kraft Foods have all chosen
Sodexho Pass as their partner.
EBITA advanced by 20.9% to (euro)82 million, reflecting not only revenue
growth but also favorable trends in interest rates. EBITA margin was 29.4%, or
approximately 1.5% of issue volume.
Corporate Expenses
Corporate expenses amounted to (euro)41 million. During fiscal 2005, in
addition to making organizational changes, Sodexho invested in training
initiatives, the Sodexho School of Management, client retention, and
strengthening the procurement function. Also included in corporate expenses are
the cost of the IFRS transition project and the "CLEAR" Project to refine risk
assessment and management.
29
Financial Expense, Net
The Group reported net financial expense of (euro)103 million, compared
with (euro)118 million for fiscal 2004, mainly due to lower interest charges as
a result of debt reduction. Interest cover (the ratio of EBITA to net interest
expense) improved sharply to 5.5 times.
Net Exceptional Income/Expense
Net exceptional expense totaled (euro)95 million in fiscal 2005 and is
principally comprised of the following elements: (euro)62 million for the
resolution of the class action litigation in the U.S.; (euro)10 million for
restructuring of our U.K. operations, including rationalization of
administrative headquarters and headcount reductions; (euro)7 million of
provisions related to stock option plans; and (euro)5 million of provisions for
various legal disputes.
Income Taxes
Income tax expense was (euro)103 million, representing an effective tax
rate of 31%. The reduced level of income tax expense was mainly due to favorable
outcomes to a number of tax exposures and to the utilization of prior period tax
losses to previous periods.
Net Income from Equity Method Investees
Net income from equity method investees was (euro)0 million, as compared to
(euro)1 million in the prior year.
Minority Interests
Minority interests decreased from (euro)14 million in fiscal 2004 to
(euro)10 million in fiscal 2005.
Goodwill Amortization
Goodwill amortization was stable at (euro)60 million and (euro)59 million
in fiscal 2004 and 2005, respectively.
Fiscal Year Ended August 31, 2004 Compared with Fiscal Year Ended August 31,
2003
Consolidated Overview of Revenues and EBITA
Revenues for fiscal 2004 totaled (euro)11.494 billion, a 1.6% decrease from
fiscal 2003. Organic growth of 4.1% was offset by the unfavorable impact of
foreign currency translation of 5.8 %, principally arising on revenues
denominated in U.S. dollars or reliant on the U.S. dollar exchange rate. The
currency effect resulted principally from the 11.3% increase in the euro against
the U.S. dollar. The impact of acquisitions (net of divestitures) was 0.1%.
Organic growth continued to be hampered by the worldwide economic situation,
which weighed on the Business and Industry segment of our Food and Management
Services business. We expect our organic growth rate in fiscal 2005 to be
comparable to that in fiscal 2004 on a consolidated basis.
EBITA was (euro)515 million in fiscal 2004 consistent with (euro) 514
million in fiscal 2003. However, at constant exchange rates, EBITA increased by
7.2%. The operating margin improved moderately to 4.5% as a result of the
initial favorable effects of our action plans in the United Kingdom and an
improved performance in Latin America, Asia Australia, remote sites and Service
Vouchers and Cards.
Analysis of Revenues and EBITA
The following table presents, for the periods stated, the variation in
revenues and EBITA by activity.
30
Fiscal Year Ended August 31, Change in Revenues
-----------------------------------------------------------
Revenues by Activity 2004 2003 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America................................. 5,031 5,427 (396) (7.3)
Continental Europe............................ 3,760 3,585 175 4.9
United Kingdom and Ireland.................... 1,351 1,453 (102) (7.0)
Rest of the World............................. 1,106 974 129 13.2
------- ------- -----
Total...................................... 11,248 11,439 (194) (1.7)
Service Vouchers and Cards....................... 246 248 1
------- ------- -----
Total revenues.............................. 11,494 11,687 (193) (1.6)
======= ======= =====
Fiscal Year Ended August 31, Change in EBITA
-----------------------------------------------------------
EBITA by Activity 2004 2003 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America................................. 239 268 (29) (10.7)
Continental Europe............................ 171 167 4 2.3
United Kingdom and Ireland.................... 28 21 7 34.7
Rest of the World............................. 37 18 19 104.7
------- ------- -----
Total......................................... 475 474 1 0.4
Service Vouchers and Cards....................... 68 68 -
------- ------- -----
EBITA, excluding corporate expenses.............. 543 542 1 0.2
Corporate expenses............................... (28) (28) - (0.5)
------- ------- -----
Total EBITA................................... 515 514 1 0.4
======= ======= =====
Food and Management Services
Food and Management Services represented 98% of our consolidated revenues
and 87.5 % of our consolidated EBITA before corporate expenses. Our revenues
from this segment totaled (euro)11.2 billion in fiscal 2004, reflecting organic
growth of 4.0%, which was an improvement over prior year organic growth of 2.9%.
The strengthening of the euro during the year resulted in a negative foreign
currency exchange impact of 5.9%.
North America
In North America, revenues totaled (euro)5.0 billion, with organic growth
of 3.7%.
In the Business and Industry segment, the economic recovery has not been
accompanied by an increase in hiring by the large companies which are our
clients. The Business and Industry segment reported a decline in revenues of
0.6% from those of the prior fiscal year. In this segment, some of the growth in
sales on existing sites which resulted from the innovative service offerings
developed by our teams, was offset by site closings.We estimate this had a
negative impact on growth of approximately 3%. New clients included Conoco
Philips, Honda, Novartis Research Center, Harley Davidson, Defence Supply
Center, World Bank Conference Center, Equiserve, Office Depot and America
Online, Inc.
The Defense sub-segment benefited from an additional month of activity as
compared to the prior fiscal year on the 55 U.S. Marine Corps sites, with an
increase of 6.6%. From the beginning, this contract has required our teams to be
flexible and to adapt to the everchanging needs of our clients.
In the Education segment, client retention as well as strong sales growth
on existing sites translated into strong organic growth in revenues of 6%. The
dynamism of our teams in the public school sub-segment and their ability to
cross-sell, resulted in the start-up of new contracts and services such as the
Public School Systems of Atlanta, St. Louis and Lincoln, Oregon. In the higher
education sub-segment, new sales with an annual value of (euro)80 million
included such
31
colleges and universities as the University of Concordia, the University of
Tulsa, Emory University, Arizona State University and South Carolina State
University.
In Healthcare, the rate of organic growth increased year over year to 4.3%
notably due to strong performances on existing sites. Among our new foodservice
clients are Delray Medical Center and Morris View Nursing Home. New
multi-service clients include St. Anthony Medical Center, Sequoia Portola
Valley, University of Virginia Health System and St. Vincent Hospital and Health
Center and Hemet Valley. In Canada, Sodexho signed the country's two largest
public healthcare contracts with Vancouver Coastal Health and Providence Health
Care and Fraser Health Authority.
In North America, EBITA totaled (euro)239 million, a level comparable to
that of the prior fiscal year, excluding currency effects. In all segments,
significant gains in productivity were made as a result of procurement
improvements and containment of labor and overhead costs which more than
compensated for the inflationary pressures on costs associated with workers
compensation and unemployment taxes. Timing delays in contract variation
discussions with the U.S. Marines resulted in a disappointing contribution of
the Defense sub-segment to North American performance. This explains the slight
decline in the EBITA margin in North America, which was 4.8% as compared to 4.9%
for fiscal 2003.
Continental Europe
Revenues totaled (euro)3.8 billion. Organic growth showed a net
improvement, 4.7% as compared with 3.6% in fiscal 2003.
In the Business and Industry segment, organic growth totaled 4.3%. There
was accelerated growth with the opening of contracts such as Alcatel Space, La
Redoute and Generali in France, the start up of Wal-Mart in Germany, and in
Spain with new clients such as the Cultural Forum in Barcelona and the Endesa
Group. On the other hand, a difficult economic environment hindered our growth
in Sweden and the Netherlands.
In the Education segment, our offer, which is based on an expertise in
balanced diets and nutritional eduction, and the strong sales drive of our
teams, contributed to growth which totaled 7.5%. Among our new clients are the
schools of the cities of Budapest, Versailles, Cannes and Frankfurt, as well as
the University of Liege and the University of Utrecht.
A selective approach in Healthcare contributed to our growth rate in
revenues of only 3.5%. The start-up of a multiservice contract for all senior
residences and schools for the city of Gavle in Sweden at the end of fiscal 2004
as well as the recent signature of contracts with the Public Hospitals in Paris,
the University Hospital of Rennes, and the Military Hospital of Warsaw are
expected to contribute to the growth of this segment in fiscal 2005.
EBITA totaled (euro)171 million and the EBITA margin was 4.5% as compared
to 4.7% for fiscal 2003. Most countries realized productivity gains, at both the
site and overhead levels. However, two factors weighed on performance: a bad
debt provision for a significant client in Italy; and difficulties encountered
in the meal delivery activity in the Education segment in the Paris region and
expenses relating to the resulting reorganization.
United Kingdom and Ireland
Revenues totaled (euro)1.4 billion, a decrease of 5.6% from fiscal 2003,
excluding currency effects.
It was principally the Business and Industry segment that affected the
change in revenues, explained for the most part by our exit from the hotels
sub-segment and by a retention rate that remains too weak. In the Healthcare and
Education segments, we began to see a slight improvement in revenues on existing
sites at the end of fiscal 2004.
Our focus on restoring the profitability of this subsidiary was nonetheless
accompanied by commercial successes such as Dell in Ireland, British Aerospace,
HBOS, and in multiservices, the Havering, Roehampton and Stoke Mandeville
Hospitals and the Colchester Garrison in the United Kingdom.
EBITA totaled (euro)28 million with an EBITA margin of 2.1%, compared with
1.4% in fiscal 2003. This improvement does not include (euro)6 million in EBITA
achieved by our U.K.teams in connection with a hospitality contract for the
Rugby World Cup in Australia, which is included in the Rest of the World
activity. Including this amount, EBITA
32
margin totaled 2.4%, in line with our objectives. During the fiscal year,
operational performance improved in a majority of the segments, but was
partially offset by an increase in pension costs and the non-recurrence of
certain prior year short-term contracts in the Defense sub-segment. As a result
of improved controls over food and labor costs at each site, and the decision to
exit non-profitable contracts, gross profit (an indicator of operational
performance at the site level) improved by nearly 1%. Simultaneously, overhead
costs were reduced. Costs pertaining to the consolidation of certain properties,
the reorganization of certain support functions and staff reductions are
included in exceptional expenses.
The team in the U.K.and Ireland has been reinforced by the hiring of new
managing directors for the Healthcare and Prestige Divisions, a new Chief
Financial Officer and a General Counsel. These external hires were complemented
by internal promotions within theU.K.and from other countries in the Group.
Philip Jansen, the new Chief Executive arrived in October 2004. He and his team
are focused on their absolute priority - returning the subsidiary to an EBITA
margin similar to that of other Group companies within three years.
Rest of the World
In the Rest of the World, revenues totaled (euro)1.1 billion, with organic
growth of 17.7%. The entire zone experienced strong sales growth, and excluding
the revenues generated by the hospitality contract for the Rugby World Cup,
organic growth was 12.7%.
In Latin America, in a less troubled environment, motivated and competent
teams experienced good sales development and organic growth increased, as much
in food as in other services. In addition, there were a number of sales
successes in the mining segment such as Codelco in Chile, Barrick Alto in Peru
and SNC Lavalin in Venezuela. Adapting our offer allowed us to boost growth in
Brazil with the addition of new clients such as Cosan, Siemens and
Anglo-American. Elsewhere, multiservices activity developed in Colombia and
Chile.
In China, we continue to experience strong growth across all segments with
contracts such as Jiangsu Fujitsu, Saint Gobain Abrasive, Shanghai Research
Petrochemical Institute, Shanghai Matsushita and Bridgestone in the Business and
Industry segment, the International School of Shanghai and in Healthcare, the
Public Hospital Nan Xiang. During the fiscal year, in connection with our food
service activity we began a partnership with the Shanghai Automotive Industry
Corporation. In Australia, growth continues, notably within our Universal
Sodexho subsidiary. A highlight of the fiscal year was the Rugby World Cup which
was a great success, based equally on the strength of our sales and our
operating teams. Finally, a contract with the Samitiveg Hospital of Bangkok
marked the opening of our business in Thailand.
The Remote Site activity recorded strong growth. New contracts include
Chyoda and Chayvo in Eurasia, Shell Rabi in Gabon, the residential complex Al
Khor of Qatargas, a copper mine in Laos for Bateman Ausenco, and a three year
contract signed with the Maersk Group in the North Sea. In addition our teams
experienced good development in revenues on existing sites particularly in North
America and the Middle East.
Overall, EBITA in the Rest of the World doubled from the previous year and
totaled (euro)37 million. The EBITA margin increased from 1.9% for fiscal 2003
to 3.4% in fiscal 2004. This improvement reflects the strong dynamism of these
regions and the teams' efforts to control costs, notwithstanding additional
investment in development.
Service Vouchers and Cards
Located in 26 countries, Sodexho Pass reported (euro)249 million in
revenues and issue volume (face value of service vouchers and cards multiplied
by the number of service vouchers and cards) of (euro)4.8 billion. Organic
growth in revenues, excluding currency effects and at a constant consolidation
scope was 6.6% and issue volume increased by 11.2% over fiscal 2003. There are
three main factors that explain the modest growth in revenues: the general
decline in interest rates; the reduction in headcount in companies, particularly
in Germany; and the effect of a one-time billing during fiscal 2003 in
connection with the transfer from paper vouchers to electronic cards for one of
our clients in Great Britain.
New clients include Adecco, La Poste and RTL in France, Philip Morris and
Unilever in Hungary, the Aldi Group in Belgium, Carlsberg in Bulgaria, Thomson
in Mexico and British Telecom in India. New services offered to our clients have
contributed to our growth, as evidenced by our recent joint venture with
Belgacom to launch the internet
33
voucher Surf@Home by Sodexho by Sodexho in Belgium, designed to facilitate
at-home high speed internet access for our clients' employees.
EBITA totaled (euro)68 million, equivalent to the prior fiscal year, but
was an increase of 6.6% at constant exchange rates. During fiscal 2004, our
teams successfully converted from paper to electronic cards notably in Turkey
and in Brazil, while at the same time maintaining our economic model. The
decrease in EBITA margin from 27.5% to 27.3% since fiscal 2003 is principally
related to the decrease in interest rates on the funds generated by our
operations.
Corporate Expenses
Corporate expenses, which are included in EBITA, were (euro) 28 million in
fiscal 2004, a decrease of 0.5% from the prior year.
Financial Expense, Net
Net financial expense totaled (euro)118 million as compared to (euro)152
million in the prior year. The improvement resulted in part from lower interest
expense due to the reduction in debt, exchange rate variances, and the impact of
refinancing certain lines of credit at variable interest rates.
Net Exceptional Income/Expense
Net exceptional expense totaled (euro)33 million in fiscal 2004 and is
principally comprised of the following, (euro)6 million loss on the sale of the
Medcheque subsidiary in Brazil in March 2004, (euro)6 million for obsolete
assets in various countries; (euro)6 million for costs of litigation (including
(euro)3 million for ongoing defense costs in connection with the U.S. litigation
more fully described in Item 8A); (euro)4 million associated with the relocation
of offices and staff reductions in the United Kingdom, and (euro)3 million for
provisions for stock options and loses on shares held as treasury shares.
Income Taxes
Income taxes totaled to (euro)109 million in fiscal 2004 for an effective
rate of 30 %, as a result of the favorable resolution of certain tax
contingencies and the utilization of loss carrybacks in the United Kingdom, as
well as the benefits from certain changes in tax laws in several jurisdictions
including Italy, and some non-taxable income.
Net Income from Equity Method Investees
Net income from equity method investees was (euro)1 million, which
decreased from (euro)4 million in the prior year.
Minority Interests
Minority interests increased from (euro)9 million in fiscal 2003 to
(euro)14 million in fiscal 2004.
Goodwill Amortization
Goodwill amortization decreased from (euro)62 million in fiscal 2003 to
(euro)59 million in fiscal 2004, mainly as a result of currency exchange
impacts.
34
B. Liquidity and Capital Resources
The following table sets forth certain cash flow items for fiscal 2003
through fiscal 2005:
Year ended August 31,
-----------------------
2005 2004 2003
---- ---- ----
(millions of euro)
Net cash provided by operating activities.............. 655 614 490
Net cash used in investing activities.................. (203) (245) (278)
Net cash used in financing activities.................. (332) (401) (202)
Net effect of exchange rate variations on cash......... 27 (33) (54)
---- ---- ----
Net increase (decrease) in cash and cash equivalents... 147 (65) (44)
==== ==== ====
Cash provided by operating activities (including dividends received from
equity method investees) was down 5% at (euro)426 million. Changes in working
capital from operating activities generated cash of (euro)229 million. In
addition to the effect of revenue growth, this reflected a one-day improvement
in average credit taken by clients in Food and Management Services and a sharp
increase in issue volumes for Service Vouchers and Cards during the final months
of fiscal 2005. As a result, net cash flow from operations was up 7% at
(euro)655 million, confirming the excellent cash-generating ability of the
Sodexho financial model. However, payment of the settlements in the U.S. class
action are expected to impact cash flow in the second half of fiscal 2006.
At (euro)186 million, acquisitions of fixed assets (net of disposals)
represented 1.6% of revenues.
Net cash used in financing activities amounted to (euro)332 million,
comprising a dividend payout of (euro)116 million and debt reduction of
(euro)216 million.
After an increase of (euro)120 million in the net cash position at August
31, 2005, net debt showed an overall reduction of (euro)335 million, including
(euro)36 million from the effect of closing exchange rates). This took net debt
at August 31, 2005 to (euro)575 million, with gearing down to just 26%.
At August 31, 2005, total borrowings stood at (euro)1,940 million, mainly
in the form of two bond issues ((euro)1,332 million) and a US dollar bank credit
facility of $541 million. The balance was made up of various bank credit
facilities and finance leases.
On April 29, 2005, the group arranged a multi-currency variable rate
syndicated credit facility of (euro)460 million and $700 million. This facility
was utilized for making accelerated prepayments on the April 2001 credit
facility and the May 2004 line of credit, both of which were repaid in full.
This credit facility expires in April 2010, but the group may extend its term
for two additional periods of one year each, at the discretion of the banks.
As of the end of fiscal 2005, 71% of borrowings were at fixed rate, and the
average interest rate was 5.3%. Unused credit facilities amounted to (euro)475
million. Off balance sheet commitments at August 31, 2005 (see note 4.23 to the
consolidated financial statements) stood at (euro)210 million, equivalent to
9.7% of shareholders' equity. We believe our working capital is sufficient for
our present requirements. We expect that cash on hand, internally generated cash
flows and available credit will be sufficient to cover our additional cash flow
requirements in the foreseeable future.
For fiscal 2004, net cash provided by operating activities amounted to
(euro)614 million. Cash provided by operating activities totaled (euro)447
million, a 15.5% increase from fiscal 2003, despite unfavorable currency effects
of 7%. Net cash generated by changes in operating working capital amounted to
(euro)163 million in fiscal 2004, of which 25% was from the Service Vouchers and
Cards business. The cash flow from changes in working capital in food and
management services was driven by organic growth in revenues, improvements in
receivables collection, and the impact of the timing of the fiscal year closing
date on the payment of employee costs.
Capital expenditures, net of disposals of property, plant and equipment,
amounted to (euro)163 million in fiscal 2004, representing 1.4 % of revenues.
Net acquisition expenditures of (euro)82 million in fiscal 2004 mainly included
the
35
acquisitions of the remaining interests in Astilbe and Luncheon Tickets. Net
cash used in financing activities of (euro)401 million in fiscal 2004 is
explained in part by the net repayment of debt of (euro)270 million and by the
payment of (euro)103 million in dividends.
Net debt was reduced by (euro)294 million of which (euro)57 million
resulted from the exchange rate effect on August 31, 2004. As such, net debt in
our consolidated balance sheet totaled (euro)919 million as of August 31, 2004,
and represents 41% of our shareholders' equity including minority shareholders.
Total financial debt of (euro)2,128 million as of August 31, 2004
principally comprised two bond issues in euro totaling (euro)1,332 million and
two credit facilities totaling U.S. $735 million. The balance of outstanding
debt represents leasing, term and various revolving credit facilities. As of
August 31, 2004, 79% of our debt was at fixed interest rates, and our weighted
average interest cost was 5.2%.
As of August 31, 2004, and in addition to available cash and cash
equivalents and marketable securities (excluding restricted cash) of (euro)1,041
million, we had revolving credit facilities available of (euro)331 million to
provide funds for liquidity, seasonal borrowing needs and other corporate
purposes.
C. U.S. GAAP
General
Our financial statements are prepared in accordance with French GAAP, which
differs in certain significant respects from U.S. GAAP, as discussed in note 5
to the consolidated financial statements. The effects of U.S. GAAP adjustments
are included in note 5 to the consolidated financial statements.
D. Research and Development, Patents and Licenses, etc.
We have the patents, trademarks, trade names and licenses that are
necessary for the operation of our business as we currently conduct it. Other
than the Sodexho name, we do not consider our patents, trademarks, trade names
and licenses to be material to the operation of our business.
E. Off Balance Sheet Arrangements.
The Group has entered into agreements to purchase or sell shares in various
group companies that are not wholly-owned. None of the estimated obligations in
connection with these arrangements is considered to either have, or be
reasonably likely to have, a current or future material effect on the Group's
financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Commitments made as of August 31, 2005 (millions of euro) were as follows:
August 31, 2005 August 31, 2004
-------------------------------------------- ----------------
1-3 > 3-5 > 5
< 1 year years years years Total Total
-------- ----- ----- ----- ----- -----
Financial guarantees to third parties ....... 100 39 11 10 160 74
Performance bonds on operating leases ....... 8 5 5 9 27 38
Client performance bonds .................... 8 8 - - 16 16
Other commitments ........................... 1 5 - 1 7 7
-------- ----- ----- ----- ----- -----
Total ....................................... 117 57 16 20 210 135
======== ===== ===== ===== ===== =====
36
The increase of (euro)86 million in financial guarantees to third parties
primarily relates to new letters of credit written in the United States in favor
of third party workers' compensation insurance carriers.
Sureties
In connection with its Service Vouchers and Cards business, Sodexho
Alliance and its subsidiaries have secured cash amounts with different financial
institutions, totaling (euro)9 million as of August 31, 2005. Other surety
arrangements (security granted over equipment or buildings used for collateral)
agreed to by Sodexho Alliance and its subsidiaries in fiscal 2005 were not
significant.
Commitments to purchase or sell shares in companies
Commitments made:
o Abra (subsidiary of Sodexho Scandinavian Holding AB)
The Group, through its Sodexho Scandinavian Holding AB subsidiary, has
entered into a put agreement with the minority shareholders of Abra (located in
Norway) to acquire the remaining 4% of the shares outstanding by November 2005,
at the latest, for a price based upon a profit multiple. The minimum purchase
price amount is (euro)0.5 million and based on current projections, is estimated
at (euro)1.1 million.
o Altys Multiservices
The Group has entered into a put agreement to acquire 18.5% of the shares
of Altys Multiservice from the minority shareholders between October 1 and
November 30, 2005, and 1.5% between October 1 and November 30, 2007, for a
purchase price based on a multiple of the average economic profits, as defined
contractually in the year of exercise with an adjustment based on the following
year's results. In the fourth quarter of calendar 2005, the Group acquired the
20% held by the minority shareholders for consideration of (euro)10.6 million.
o Sodexho Italia
The Group has entered into a put agreement to acquire the remaining 2% of
the shares of Sodexho Italia from the minority shareholders on July 1, 2010, at
the latest, for a purchase price based on a multiple of the average economic
profits, as defined contractually.
o Smiling Faces
The Group, via its subsidiary Sodexho Scandinavian Holding AB, entered into
a put agreement to acquire between 2006 and 2012 the remaining 30% of the shares
of Smiling Faces (Finland). The purchase price is based on earnings multiples,
subject to a minimum of (euro)0.5 million. Based on current projections, the
purchase price is estimated at (euro)2.1 million.
Commitments received:
o Patriot Medical Technologies, Inc.
The minority shareholders of Patriot have entered into a call agreement
with the Group, which allows the Group, during the period from September 3, 2003
and September 3, 2005, to acquire the remaining outstanding shares of Patriot,
if any, for the greater of U.S. $2 million and five times Patriot's EBITDA,
reduced by adjustments defined contractually. At the start of September 2005,
Sodexho, Inc. bought out these minority interests.
o Abra (subsidiary of Sodexho Scandinavian Holding AB)
The minority shareholders of Abra have entered into a call agreement to
sell the remaining shares to the Group in accordance with the terms described
above, in November 2005 at the latest.
o Sodexho Italia
37
The minority shareholder of Sodexho Italia has entered into a call agreement to
sell the remaining shares to the Group in accordance with the terms described
above, on July 1, 2010 at the latest.
o Altys Multiservices
The minority shareholders of Altys Multiservice have entered into a call
agreement to sell 18.5% of the shares to the Group between October 1 and
November 30, 2005 for a purchase price based on a multiple of the average
economic profits as defined contractually in the year of exercise with an
adjustment based on the following year's results.
Other commitments
Securitization
Our food service subsidiaries in the United Kingdom had securitized without
recourse a portion of their client receivables for an amount of (euro)48 million
as of August 31, 2004. The securitization program was terminated in June 2005.
The reduction of (euro)47 million in securitized receivables (excluding
translation adjustments) related to August 31, 2004 is included in the line
"Change in working capital from financing activities" in the Statement of Cash
Flows.
Commitments for stock options in Sodexho Alliance shares
The Group has the following stock option commitments:
o 1,565,122 Sodexho Alliance shares with an average exercise price of
U.S. $28.95 to certain employees of Sodexho, Inc., in connection with
the Group's acquisition of 53% of Sodexho Marriott Services, Inc. in
June 2001. As of August 31, 2005, all of these options were
exercisable, through various expiration dates, the latest being April
31, 2011.
o 6,983,920 Sodexho Alliance shares granted by the Board of Directors to
Group employees in connection with various stock option plans.
Following is information with respect to these plans.
Exercisable period
------------------------------------- Number of options
outstanding
Issuance date From To Exercise price on January 31, 2006
----------------------- ----------------- ---------------- -------------- ----------------------
January, 2001 March, 2005 January, 2006 (euro)48.42 135,530
January, 2002 January, 2006 January, 2007 (euro)47.00 356,521
January, 2002 January, 2006 January, 2008 (euro)47.00 970,521
September, 2002 April, 2006 March, 2008 (euro)47.00 12,000
October, 2002 October, 2006 October, 2007 (euro)21.87 2,335
January, 2003 January, 2004 January, 2009 (euro)24.00 2,216,264
June, 2003 January, 2004 January, 2009 (euro)24.00 58,160
January, 2004 January, 2005 January, 2010 (euro)24.50 906,191
January, 2005 January, 2006 January, 2011 (euro)23.10 979,350
June, 2005 June, 2006 June, 2011 (euro)26.04 20,000
September, 2005 September, 2006 September, 2011 (euro)28.07 10,000
January, 2006 January, 2007 January, 2012 (euro)34.85 967,452
-----------
TOTAL 6,634,324
===========
In connection with its acquisition of Sogeres, the Group committed to
maintain Sogeres' stock option plan dated August 1, 1997. The Group committed to
acquire the Sogeres shares from the optionees through September 2004 and has
recorded a related liability in its accounts. As of August 31, 2004, the Group
had acquired all of the shares. A second stock option plan was established for
which the Group has committed to increase the capital of Sogeres for the
38
benefit of the optionees and to buy their shares no later than February 20,
2008. In connection with this agreement, a provision of (euro)4.9 million was
recorded in the consolidated financial statements as of August 31, 2005.
Operating lease commitments
Operating lease commitments are as follows:
Less than one year (euro)99 million
From one to three years (euro)121 million
From three to five years (euro)45 million
More than five years (euro)25 million
Operating lease commitments primarily relate to central kitchens under
tri-partite agreements with municipalities for (euro)50 million and rent of
(euro)135 million for office space and (euro)105 million for various equipment.
F. Tabular Disclosure of Contractual Obligations
Future payments on borrowings and other debt balances as of August 31, 2005
were due as follows:
Total Total
Less than One to Three to More than August 31, August 31,
one year three years five years five years 2005 2004
--------- ----------- ---------- ---------- ---------- ----------
(millions of euro)
Bonds
Euro.......................... 32 - 1,300 - 1,332 1,332
--------- ----------- ---------- ---------- ---------- ----------
Total bonds............... 32 - 1,300 - 1,332 1,332
Bank borrowings (1)
U.S. Dollars.................. 11 135 444 - 590 701
Euro.......................... (157) (95) 6 17 (229) (137)
Pounds Sterling............... 125 - - 125 131
Other currencies.............. 35 9 - - 44 23
--------- ----------- ---------- ---------- ---------- ----------
Total bank borrowings............ 14 49 450 17 530 718
Capital lease obligations
U.S. Dollars.................. 1 2 2 5 10 5
Euro.......................... 10 14 6 4 34 38
Other currencies.............. 1 - 1 - 2 3
--------- ----------- ---------- ---------- ---------- ----------
Total capital lease
obligations...................... 12 16 9 9 46 46
Other borrowings
Euro.......................... 7 1 1 - 9 9
Other currencies.............. 2 - - - 2
--------- ----------- ---------- ---------- ---------- ----------
Total other borrowings........... 9 1 1 - 11 9
Bank overdraft balances
Euro.......................... 14 - - - 14 16
U.S. Dollars.................. 3 - - - 3 1
Pounds Sterling............... 1 - - - 1
Other currencies.............. 3 - - - 3 6
--------- ----------- ---------- ---------- ---------- ----------
Total bank overdrafts............ 21 - - - 21 23
--------- ----------- ---------- ---------- ---------- ----------
Total............................ 88 66 1,760 26 1,940 2,128
========= =========== ========== ========== ========== ==========
39
(1) Includes impact of swaps; see note 3.17 to the consolidated financial
statements for further information.
40
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The table below sets forth, as of January 31, 2006, the names of our
directors, their dates of birth, their current positions with us, the dates of
their initial appointment as directors and the expiration dates of their current
terms.
Initially
Name Date of Birth Position Appointed Expiration of Term
------------------------- ------------------ ------------------ ------------------ -------------------------
Pierre Bellon(2)(4) 1/24/1930 Chairman 11/14/1974 2007
Robert Baconnier(5)* 4/15/40 Director 2/8/2005 2008
Remi Baudin(2)(3) 10/19/1930 Vice Chairman 2/25/1983 2007
Patricia Bellinger(2)(4)* 3/24/1960 Director 2/8/2005 2008
Astrid Bellon 4/16/1969 Director 7/26/1989 2007
Bernard Bellon(4) 8/11/1935 Director 2/26/1975 2009
Francois-Xavier Bellon 9/10/1965 Director 7/26/1989 2007
Sophie Clamens 8/19/1961 Director 7/26/1989 2007
Paul Jeanbart* 8/23/1939 Director 2/13/1996 2008
Charles Milhaud 2/20/1943 Director 2/4/2003 2009
Francois Perigot(1)(6)* 5/12/1926 Director 2/13/1996 2008
Nathalie Szabo(2) 1/26/1964 Director 7/26/1989 2007
Peter Thompson* 8/15/1946 Director 2/8/2005 2008
H.J. Mark Tompkins(6)* 11/02/1940 Director 2/05/2002 2008
----------
(1) Chairman of the Nominating Committee.
(2) Member of the Nominating Committee.
(3) Chairman of the Compensation Committee.
(4) Member of the Compensation Committee.
(5) Chairman of the Audit Committee and financial expert.
(6) Member of the Audit Committee.
* Independent director.
Pierre Bellon. Mr. Bellon founded Sodexho Alliance in 1966 and served as
its Chairman and Chief Executive Officer until August 31, 2005. Currently, he is
Chairman of the Board of Directors. Since 1988, he has served as Chairman and
Chief Executive Officer of Bellon SA, the family holding company that controls
us, and as Chairman of its Executive Board (Board of Directors) from 1996 until
February 2002. At that time, he was appointed Chairman of the Bellon SA
Supervisory Board. Mr. Bellon has also served as National President of the
Center for Young Company Managers (formerly the Center for Young Employers) from
1968 to 1970 and President of the National Federation of Hotel and Restaurant
Chains from 1972 to 1975. He was a member of the Economic and Social Council
from 1969 to 1979 and has been a member of the Executive Council of the National
Council of French Employers (CNPF (now known as the Medef)) since 1976 and from
1980 until 2005, its Vice-President. He has also served as President of the
Management Improvement Association, which he founded in 1987, and as a member of
the Board of the National Association of Joint-Stock Companies. Mr. Bellon is
currently a director of PPR. Mr. Bellon and his children, Astrid Bellon, Sophie
Clamens, Nathalie Szabo and Francois-Xavier Bellon and their children, hold 68.5
of the shares in Bellon SA, which holds a 36.83% economic interest in Sodexho
Alliance as of January 31, 2006.
41
Robert Baconnier. Mr. Baconnier began his career in 1967 as a civil servant
at the French Ministry of Economy and Finance, and was assigned to the Internal
Revenue Service (Direction Generale des Impots). From 1977 to 1979, he was the
Technical Advisor to the office of the Minister of Economy and Finance, then
Deputy Director in the office of the Minister for the Budget. From 1979 to 1983,
he was Deputy Director in charge of the International Division of the Tax
Legislation Department; in 1983 he was appointed head of the Litigation
Department of the Internal Revenue Service. In 1986, he became the head of the
Internal Revenue Service. From 1990 to 1991, he was the Paymaster General at the
French Treasury, and then in 1991 he joined the law firm Bureau Francis
Lefebvre, where he served as Chairman of the Management Board until 2004.
Currently, he is the Chairman and CEO of ANSA, the French National Association
of Joint Stock Companies. In addition, he serves as an advisor to the French
Foreign Trade Commission and he is the Chairman of the Tax Committee of MEDEF,
the French employer's federation.
Remi Baudin. Before helping Pierre Bellon to create Sodexho Alliance, Mr.
Baudin took part in a number of foreign projects for the management consultant
company SEMA from 1957 to 1965. He reorganized and managed its ship supply
business (1965-1969), then created a joint venture with Sonatrach in the Remote
Sites business and headed the two companies' joint subsidiary in Algeria
(1969-1970). He successively managed the Food and Management Services France
division and started up operations in Belgium (1971-1976); the France and Africa
division, overseeing start-ups in Cameroon, Nigeria, Ivory Coast, Angola, Benin,
Guinea, Algeria and Libya (1977-1982); and the Food and Management Services
France and Europe division (1982-1992). Mr. Baudin is also President of FERCO,
the European food services confederation, which he founded in 1988 and is the
President of the Supervisory Board of Octofinances SA. He was Chairman of the
Bellon SA Supervisory Board from 1996 until February 2002 and currently serves
as its Vice Chairman.
Patricia Bellinger. Ms. Bellinger began her career in Madrid, Spain in 1986
by founding a casting agency, and she continued working in media and
communications in Spain until 1995. In 1995, she returned to the United States
and joined Bristol Myers Squibb, the pharmaceutical company, where she was
successively Associate Director for Communications, Associate Director for
Public Affairs, and in 1998, the Corporate Director of Culture and Human
Resources Diversity. In 2002, she joined British Petroleum in London to become
the head of diversity and inclusion. Recently Ms. Bellinger became the head of
the newly created Leadership Education function. Ms. Bellinger currently serves
as a member of the Executive Leadership Council in Washington, D.C; she is a
member of the Advisory Board of the Leadership Center at Morehouse College in
Atlanta, Ga. and she is also a member of the Breakthrough Breast Cancer
Generations Appeal Board. Ms. Bellinger is an American citizen.
Astrid Bellon. Astrid Bellon is a member of the Executive Board of Bellon
SA, is President of Sofrane SAS, and is a Manager and Permanent Representative
of Sofrane for S.C.A Sobelnat. Since 1999, Ms. Bellon has worked in the field of
audio-visual production, and in 2001, she created the company "Les Films d'a
Cote," in which she is also a shareholder. Astrid Bellon is the daughter of
Pierre Bellon.
Bernard Bellon. Mr. Bellon was Director of Compagnie Hoteliere du Midi (a
member of the Compagnie de Navigation Mixte Group) from 1962 to 1970 and then
held various managerial positions in banking at CIC-Banque de Union Europeenne
Group from 1970 to 1988. In 1988, he founded Finadvance SA, a venture capital
company, and has since served as its Chairman. He also serves as a member of the
Bellon SA Supervisory Board and a director of CIC France and Copelia. Bernard
Bellon is the brother of Pierre Bellon.
Francois-Xavier Bellon. Francois-Xavier Bellon began his career in the
temporary employment business as an agency manager for Adia France (1990-1991)
and then for Ecco in Barcelona, Spain, where he was promoted to Sales and
Marketing Director and Regional Director for Catalonia (1993-1995). He joined
the Group in September 1995, initially as segment manager and later as
development manager for the Healthcare segment in France. In 1999, he became the
Managing Director of Sodexho Mexico. In January 2004, he was appointed Chief
Executive of Sodexho in the U.K., before resigning a few months later. He is a
member of the Executive Board of Bellon SA. Since 2005, he has been the Sales
and Marketing Director of the Temporary Work division of the Adecco Group.
Francois-Xavier Bellon is the son of Pierre Bellon.
Sophie Clamens. From 1985 to 1987, Ms. Clamens was employed by Credit
Lyonnais in New York as a mergers and acquisitions advisor for the bank's French
clientele. She later worked as a sales agent for a number of leading European
fashion houses, including Chanel, Valentino, Ungaro and Armani. Ms. Clamens
joined the Group's finance
42
department in 1994, initially as a development analyst and later responsible for
strategic financial planning. Since 2002, she has been Manager of Strategic
Planning for the Group. Since September 2005 she has been Group Vice President
Client Retention, responsible for worldwide implementation of the Group's client
retention strategy. Ms. Clamens became Chairman of the Executive Board of Bellon
SA in 2002, and, currently serves as a director of Holding Altys SA. Ms. Clamens
is the daughter of Pierre Bellon.
Paul Jeanbart. Mr. Jeanbart is a co-founder, partner and, since 1967, the
Chief Executive Officer of the Rolaco Group. He also serves as Chairman of Oryx
Merchant Bank Limited, Chairman of the Board of Directors of Hotels
Intercontinental Geneve, Executive Director of Rolaco Holding SA and is a member
of the Semiramis Hotel Co., Delta International Bank, NASCO Insurance Group, and
Luxury Brand Development Boards of Directors and the Club Mediterranee SA
Supervisory Board. Mr. Jeanbart is a citizen of Canada.
Charles Milhaud. Mr. Milhaud joined the Caisse d'Epargne in 1964. In 1983,
he became Directeur General of the Caisse d'Epargne des Bouches du Rhone et de
la Corse as well as a Member of the Supervisory Board of the Centre National des
Caisses d'Epargne (CENCEP). In 1995, he was named Vice President of the Board of
Directors of the Caisse Centrale des Caisses d'Epargne. When the two entities
merged in 1999 to form the Caisse Nationale des Caisses d'Epargne (CNCE), Mr.
Milhaud was named President of the Directoire, a position he currently holds.
Mr. Milhaud is also Chairman of the Supervisory Boards of Credit Foncier de
France, Ixis, Issoria and Financiere Oceor, Member of the Supervisory Boards of
CDC Enterprise, Ixis Asset Management, Ixis Asset Management Group, Ixis Private
Capital Management and CNP Assurances SA. He is a member of the Executive
Committee of the Federation Bancaire Francaise.
Francois Perigot. After serving as Chairman and Chief Executive Officer of
Thibaud Gibbs et Compagnie from 1968 to 1970, Mr. Perigot successively held the
positions of Chairman and Chief Executive Officer Unilever Spain and Chairman
and Chief Executive Officer Unilever France (1971-1986). From 1986 to 1998, he
was Chairman of Compagnie du Platre, and from 1988 to 1998 he served as Vice
Chairman and later Chairman of UNICE, the European union of employer and
industry confederations. Mr. Perigot has also served as a president of the
Enterprise Institute (1983-1986), a president of the National Council of French
Employers (1986-1994), a member of the Executive Committee of the International
Chamber of Commerce (1987-1989) and a member of the Economic and Social Council
(1989-1999). He has also been President of the Franco-Dutch Chamber of Commerce,
President of MEDEF International (1997-2005) and President of the International
Employers Organisation since June 2001. He currently serves as Honorary
President of MEDEF and MEDEF International since 2005.
Nathalie Szabo. Ms. Szabo began her career in 1987 in the restaurant
industry. She served as an account manager for Scott Traiteur from 1989 and
later became sales director of Pavillon Royal. She joined the Group in March
1996 as sales director of Sodexho Prestige in France. She became sector manager
in 1999 and subsequently became the Managing Director of Sodexho Prestige. Ms.
Szabo is a member of the Executive Board of Bellon SA. Ms. Szabo is the daughter
of Pierre Bellon.
Peter Thompson. Mr. Thompson began his career in marketing in 1970, and in
1974 he became a Product Manager for General Foods Corp. He then joined GrandMet
plc in 1984, where he held management positions in several subsidiaries,
including Green Giant, Haagen-Dazs and Pillsbury. In 1992, he became Chairman
and CEO of GrandMet Foods Europe, based in Paris. Mr. Thompson then joined
PepsiCo Group in 1994 where he successively held the positions of: Chairman of
Walkers Crisps in the U.K.; CEO Europe, Middle East, Africa of Frito-Lay
International, and finally CEO of Pepsi-Cola International (1996-2004).
Currently, he is the Chairman of the Board of Trustees of the Stanwich School
and a Director of Syngenta AG. Mr. Thompson is an American citizen.
H.J. Mark Tompkins. Mr. Tompkins began his career in investment banking in
1964 with Samuel Montagu & Company (now HSBC). From 1965 to 1971, he was a
management consultant with Booz Allen & Hamilton working on assignments in the
U.K., continental Europe and the U.S. He joined the Slater Walker Securities
group in 1972 and was named Chairman and Chief Executive Officer of Compagnie
Financiere Haussmann, a publicly traded company in France. From 1975 through
1987, he became active in property development, investment and management in
both residential and commercial sectors. In 1987 and subsequent years, his focus
moved to private equity and capital development in publicly traded entities,
notably in the healthcare, pharmaceutical, retail and distribution, leisure,
tourism and manufacturing sectors. He has significant experience in mergers and
acquisitions, start-ups, initial public offerings, and private and public debt
offerings. He currently serves as director of Allied Healthcare International,
Inc.,
43
Healthcare Enterprise Group Plc, Samara Private Game Reserve (Pty) Ltd and
Kingkaroo (Pty) Ltd. Mr. Tompkins is a British citizen.
Executive Officers
The table below sets forth, as of January 31, 2006, the names and dates of
birth of our executive officers.
Name Date of Birth Position
-------------------------------------------------------------------------------------------------------------------
Elisabeth Carpentier 5/08/1954 Group Executive Vice President, Human Resources
Pierre Henry 1/22/1952 Group Chief Operating Officer
Chief Executive Officer Service Vouchers & Cards
Sian Herbert-Jones 9/13/1960 Group Chief Financial Officer
Vincent Hillenmeyer 7/16/1966 Group Executive Vice President, Strategic Planning
Philip Jansen 1/28/1967 Group Chief Operating Officer
Chief Executive United Kingdom and Ireland, Food and Management Services
Nicolas Japy 5/30/1956 Group Chief Operating Officer
Chief Executive Officer Universal Sodexho Remote Sites, Chief Executive
Officer, Asia and Australia, Food and Management Services
Michel Landel 11/07/1951 Chief Executive Officer Sodexho Alliance
President, Executive Committee
President, Sodexho Stop Hunger Association
Richard Macedonia 08/21/1943 Group Chief Operating Officer
Chief Executive Officer, North America Food and Management Services
Jacques Petry 10/16/1954 Group Chief Operating Officer
Chief Executive Officer Continental Europe and South America, Food and
Management Services
Clodine Pincemin 7/20/1952 Group Executive Vice President, Communications and Sustainable
Development
Damien Verdier 02/09/1957 Group Executive Vice President, Marketing
Elisabeth Carpentier. Ms. Carpentier joined us in 1981 as Director of
Hiring and Placement. From 1994 to 1998, she served as Human Resources Director
for our Food and Management Services subsidiary in France. In January 1998, she
was appointed Group Chief Human Resources Officer. Ms. Carpentier has both a law
diploma and a post-graduate degree in human resources management.
Pierre Henry. After acquiring sales experience in the Belgian subsidiary of
a U.S. company, Mr. Henry joined Sodexho in 1980 as Regional Director of
Belgium's Cheque Repas. He then served successively as Sales Director and
Managing Director of Cheque Repas Belgium. The scope of his responsibility has
gradually extended to include other European countries, and in 2001, he was
appointed Managing Director, Service Vouchers and Cards of a region which
included Western Europe, Morocco, Tunisia, Turkey, China and the Philippines. He
was promoted to the position of Chief Operating Officer and then Chief Executive
Officer of our Service Vouchers and Cards activity in February 2004 and
September 2005, respectively. Since September 2005, he is also one of the
Group's Chief Operating Officers. He holds a degree in psychology which he
obtained from the Catholic University of Louvain, Belgium.
44
Sian Herbert-Jones. Ms. Herbert-Jones began her career in Corporate Finance
with Price Waterhouse in London and Paris from 1982 to 1995, where she served,
notably, as Director in the Mergers and Acquisitions department. While at Price
Waterhouse, she played an active role in our acquisition of Gardner Merchant in
1995. Ms. Herbert-Jones joined us in 1995 and was appointed Treasurer in 1998,
Deputy Chief Financial Officer in October 2000 and Group Chief Financial Officer
in November 2001. She holds an M.A. in History from Oxford University and is a
Chartered Accountant in England and Wales.
Vincent Hillenmeyer. Mr. Hillenmeyer began his career in 1988 with Arthur
Andersen. After joining Sodexho in 1991, he served as Remote Sites Finance
Manager in Cameroon, then in 1993 as District Manager for Sodexho France,
Business and Industry, in 1995 as Financial Analyst for Sodexho France, Business
and Industry, and in 1998 as Paris-Ile de France Regional Director, Large
Accounts. In 2000, he was appointed Vice President, Special Projects,
Information Systems, for Sodexho, Inc. In October 2001, he was promoted to Group
Executive Vice President, Strategic Planning. He earned a degree from HEC, one
of France's leading business schools.
Philip Jansen. Mr. Jansen started his career in 1988 at Procter & Gamble in
various commercial roles, has been Sales, Marketing and Commercial Director with
Dunlop Slazenger, before serving as Managing Director for the Consumer Division
at Telewest Communication PLC, followed by a position as Group Chief Operating
Officer at MyTravel Group PLC. Philip Jansen joined Sodexho U.K.& Ireland in
October 2004 as Chief Executive and since September 2005, he is also one of the
Group's Chief Operating Officers. He holds a Bachelor of Science Degree in
Economics from the University of Cardiff.
Nicolas Japy. Mr. Japy began his career in 1982 as an oil consultant for
BEICIP. After joining the TAT airline as Programs and Development Director, he
served as Managing Director of Air Vendee. He joined Sodexho in 1991 as Managing
Director for Congo, and then served as Managing Director for Saudi Arabia and
later for Africa. In 1998, he left Sodexho to serve as Director of North
American Operations for Club Mediterranee. In October 2001, he returned as
President and Chief Executive of the remote sites activity. Since September
2005, he is one of the Group's Chief Operating Officers and Chief Executive
Officer of the Remote Sites activity and Food and Management Services in Asia
and Australia. He holds engineering degrees from ENSEE in Grenoble and ENSPM in
Paris.
Michel Landel. Mr. Landel began his career in banking with Chase Manhattan
and building products with Poliet. He joined Sodexho in 1984 to manage
operations in Eastern Africa, Libya and Algeria. In 1986, he was appointed to
head the Remote Sites business in Africa. He was again promoted in 1989, this
time to head North America operations. In particular, he helped bring about the
1998 alliance with Marriott Management Services and the creation of a joint
company, Sodexho Marriott Services (SMS). In May 1999, he was named President
and Chief Executive Officer, and a member of the Board of SMS, which became
fully owned by Sodexho in 2001. In June 2003, he became Co-President and Chief
Operating Officer of Sodexho Alliance responsible for the Food and Management
Services activities in North America, the United Kingdom and Ireland, as well as
for the remote site activity. In September 2005, he was appointed Chief
Executive Officer of the Group. He has a degree in business and management from
the European Business School.
Richard "Dick" Macedonia. Mr. Macedonia began his career with the company
in 1968 in operations in the Campus Services, and joined Health Care Services in
1975. He has held positions throughout the company including District Manager,
Vice President of Marketing and Sales, Vice President of Business Development
and later President for Sodexho's Health Care Services Division. He was
appointed to different positions within Sodexho Inc.: Chief Operating Officer in
June 2003, President & Chief Operating Officer at the beginning of 2004 and a
year later President and Chief Executive Officer. Since September 2005 he is
also one of the Group's Chief Operating Officers and Worldwide Market Champion
for Business and Industry, replacing Michel Landel. Mr. Macedonia is a graduate
of Indiana University of Pennsylvania, Indiana, PA. He is a corporate member of
both the Health Insights Foundation and the Hospital Research and Development
Institute.
Jacques Petry. Prior to joining Sodexho, Mr. Petry spent his entire
previous career with the group Lyonnaise des Eaux / Suez serving successively as
Project Manager of United Water in the United States, Chief Executive of various
international subsidiaries, Chairman & CEO of SITA and finally Chairman & CEO of
Suez Environnement. He joined Sodexho in March 2005 as Chief Executive Officer,
Continental Europe and South America. Since September 2005, he is one of the
Group's Chief Operating Officers and Chief Executive Officer of Continental
Europe and Latin America. He also has Group-wide responsibility for Global
Business & Industry global account. He holds engineering degrees
45
from Ecole Polytechnique and Ecole Nationale des Ponts et Chaussees as well as
an MBA from Villanova University In Pennsylvannia.
Clodine Pincemin. Ms. Pincemin joined us in 1974. She was later appointed
to head public relations and then communications for France. Since 1991, she has
held the position of Group Executive Vice President, Communications and
Sustainable Development. Ms. Pincemin has a degree in French literature.
Damien Verdier. Mr. Verdier joined Sodexho in 1979 working as District
Manager, then as Development Manager. He was promoted to Regional Director in
1985, Operations Director for Business & Industry France in 1991, Managing
Director for Business & Industry segment in 1993 and Managing Director for
France in 1998. In 2003, he became Director of Strategic Planning for
Continental Europe and was appointed in September 2005 Group Executive Vice
President, Marketing responsible for procurement, food offer marketing and
client retention. He holds a business degree which he obtained from the Ecole
Superieure de Commerce de Nantes, France.
B. Compensation
During fiscal 2005, members of our Board of Directors received total fees,
compensation and benefits from Sodexho Alliance and related companies as
follows.
Sodexho
Total Total Alliance Bellon SA(2)
--------------------------------------------------------------------------------------------------
Directors'
in euro Fiscal 2004(1) Fiscal 2005(1) fees
--------------------------------------------------------------------------------------------------
Pierre Bellon 289,692 485,867 35,800 450,067
Robert Baconnier (3) - 13,600 13,600 -
Remi Baudin 30,900 38,800 37,300 1,500
Patricia Bellinger (3) - 16,700 16,700 -
Astrid Bellon 70,400 88,664 24,000 64,664
Bernard Bellon 22,800 32,300 30,800 1,500
Francois-Xavier Bellon 414,935 273,869 24,000 169,165
Sophie Clamens 159,499 190,162 26,400 84,892
Paul Jeanbart 21,300 26,500 26,500 -
Charles Milhaud 14,000 19,500 19,500 -
Francois Perigot 25,200 32,100 32,100 -
Edouard de Royere (4) 31,900 24,000 24,000 -
Nathalie Szabo 136,074 161,709 29,000 70,980
Peter Thompson(3) - 10,500 10,500 -
Mark Tompkins 23,700 30,800 30,800 -
--------------------------------------------------------------------------------------------------
(1) Total including directors' fees paid by Sodexho Alliance and all forms of
compensation paid for positions held in Bellon SA, Sodexho Alliance, and/or
Sodexho Group companies.
(2) All forms of compensation paid for positions held in Bellon SA.
(3) Appointed as Directors at the general shareholders' meeting of February 8,
2005.
(4) Term of office as Director expired at the general shareholders' meeting of
February 8, 2005.
46
As a matter of French law, non-employee members of our Board of Directors
may not be granted stock options.
Compensation for our executives is comprised of a fixed salary, a
performance bonus tied to the achievement of annual objectives, and benefits.
For fiscal 2005, the aggregate compensation received by members of the Executive
Committee was (euro)5,713,284 which included base pay totaling (euro)3,544,273
and variable pay totaling (euro)2,169,011. The members of the Executive
Committee who were members during fiscal 2005 also received options to purchase
a total of 252,000 Sodexho Alliance shares. During fiscal 2005, the total
compensation paid to the Group Chief Executive Officer and Chief Operating
Officers was as follows:
Fixed Variable
compensation compensation Total
--------------------------------------------------------------------------------------------
(amounts in euro)
Pierre Bellon 315,867 170,000 485,867
Jean-Michel Dhenain 568,766 253,335 822,101
Michel Landel 801,889 920,112 1,722,001
The table below provides certain information regarding the options to
purchase our common shares granted to executive officers.
Date of Plan Amount(1) Exercise Price per Share Expiration Date
------------ --------- ------------------------ ---------------
January 24, 2001 25,767 (euro)48.42 January 23, 2006
January 11, 2002 46,500 (euro)47.00 January 10, 2007
January 11, 2002 60,000 (euro)47.00 January 10, 2008
January 27, 2003 214,000 (euro)24.00 January 26, 2009
January 27, 2003 40,000 (euro)24.00 Janaury 26, 2009
June 12, 2003 15,000 (euro)24.00 January 26, 2009
January 20, 2004 237,000 (euro)24.50 January 19, 2010
January 18, 2005 292,000 (euro)23.10 January 17, 2011
January 10, 2006 329,500 (euro)34.85 January 9, 2012
----------
(1) These amounts have been adjusted retroactively, where appropriate, to
reflect the four-for-one stock split effective March 7, 2001 and the rights
offering on July 4, 2001.
During fiscal 2005, we and our subsidiaries recorded total charges of
(euro)33 million for pension, retirement and similar benefits and, as of August
31, 2005, we and our subsidiaries had accrued a total of (euro)246 million for
these items.
C. Board Practices
Our Board of Directors has 14 members. Directors are chosen for their
ability to take the interests of all shareholders into account and for their
recognized expertise in areas that are strategic to the company, such as
international expansion, innovation, finances or services. The Board of
Directors periodically reviews operations, on-going business and special
transactions, defines corporate strategy, closes our interim and annual
accounts, prepares shareholders' meetings, designates corporate officers to
implement strategy and monitors the quality of information provided to
shareholders and financial markets.
Senior executives of the company regularly inform the Board of the
resources used in their respective businesses to implement the strategy defined
by the Executive Committee and approved by the Board. The Board is assisted in
its strategic thinking by three ad hoc committees:
o the Audit Committee, which prepares and monitors internal accounting
procedures, supervises the application of Group financial, legal and
accounting rules, proposes changes to accounting procedures,
recommends the appointment and fees of our external auditors and
approves their audit and non-audit services, communicates with our
internal and external auditors and reports on such matters to the rest
of our Board.
47
o the Nominating Committee for Board members and corporate officers,
which examines the Chairman's proposals, prepares recommendations to
present to the Board and keeps an up-to-date, confidential list of
potential replacements in case a position becomes vacant; and
o the Compensation Committee, which proposes compensation packages for
corporate officers and senior executives, including stock option
plans.
The Audit Committee is chaired by Robert Baconnier, a financial expert,
with the assistance of Francois Perigot and Mark Thompkins. Ms. Clamens and Mr.
Baudin are invited to attend the Audit Committee meetings but are not members.
In addition, Mr. Pierre Bellon, Mr. Landel, Ms. Herbert-Jones and the Group
Senior Vice President, Internal Audit are regularly invited to present their
activities and to respond to committee members questions. Our external auditors
report to the Audit Committee periodically on their activity and planned
actions. The Chairman of the Audit Committee reports to the Board after each
Audit Committee meeting. The Audit Committee met four times during fiscal 2005 .
The committee discussed a variety of pertinent issues including the approval of
the Internal Audit Plan for fiscal 2005, an examination of the principal
accounting rules applied by the Group, the impact of International Financial
Reporting Standards (IFRS) on the consolidated financial statements, the
organization of the Group's finance function, the reports presented by the Group
Senior Vice President of Internal Audit department, including its
recommendations and management's action plans, the status of the CLEAR project,
which is management's initiative to evaluate internal control procedures to
comply with applicable French and US laws, and the renewal of Directors' and
Officers' liability insurance coverages. The Audit Committee also reviewed the
consolidated financial statements for fiscal 2004 as well as the half-year
consolidated financial statements for fiscal 2005. The committee approved the
audit and non-audit engagements and fees of the Group's external audit firms and
their affiliates.
The Nominating Committee is chaired by Francois Perigot with the assistance
of Pierre Bellon, Patricia Bellinger, Remi Baudin and Nathalie Szabo. During the
fiscal year, Ms. Bellinger replaced Mr. De Royere as a member of this committee.
The Nominating Committee met several times during fiscal 2005 including one
formal meeting to review matters including the succession of Pierre Bellon and
the independence of the Company's directors.
The Compensation Committee is chaired by Remi Baudin, who is also Vice
Chairman of the Board of Directors, with the assistance of Pierre Bellon,
Patricia Bellinger and Bernard Bellon. The Compensation Committee met three
times during fiscal 2005 and reviewed matters including the feasibility of a new
international Employee Savings plan, new stock option plans and revised rules,
and compensation packages for the Chairman and Chief Executive Officer and the
Chief Operating Officers.
The Board of Directors met eight times during fiscal 2005.
There are no service contract termination benefits for Directors as such
benefits are forbidden by French law.
D. Employees and Labor Relations
As of August 31, 2005, we had 324,446 employees worldwide. The table below
shows the number of employees of our company and our subsidiaries by geographic
zone as of August 31, 2005, 2004 and 2003.
August 31,
-----------------------------------
2005 2004 2003
---- ---- ----
North America................................... 120,157 116,772 119,009
United Kingdom and Ireland...................... 47,515 49,053 51,843
France.......................................... 31,306 30,359 30,465
Rest of Europe.................................. 55,964 53,132 49,897
Rest of the World............................... 69,504 63,659 57,171
------- ------- -------
Total Number of Employees................... 324,446 312,975 308,385
======= ======= =======
Following is a breakdown of our employees by category as of August 31,
2005, 2004 and 2003.
48
August 31,
-----------------------------------
2005 2004 2003
---- ---- ----
Executives and middle management ............... 6,130 6,408 6,137
Establishment managers and supervisory staff.... 33,020 32,368 33,173
Front line service staff and other.............. 285,296 274,199 269,075
------- ------- -------
Total Number of Employees................... 324,446 312,975 308,385
======= ======= =======
Some of our employees are members of local or national trade unions, and,
consequently, we have entered into various collective bargaining agreements.
Pursuant to regulations in certain countries across Europe, especially in France
and Belgium, various committees which represent employees meet on a regular
basis. These committees are informed about and consulted on pertinent employee
matters. Salaries, working conditions and other employment matters are
negotiated with trade unions every year. It is our practice to renew or replace
our various employee and collective bargaining agreements as and when they
expire, and we are not aware of any material agreements which are not expected
to be satisfactorily renewed or replaced in a timely manner. A relatively small
number of our employees worldwide are subject to collective bargaining
agreements, and we do not believe that a failure to renew our collective
bargaining agreements on terms similar to those we have now would have a
material adverse effect on our financial condition or results of operations.
Because we are a service company, though, we are highly dependent upon the
availability of hourly or part-time wage and skilled employees. Thus, severe
shortages in the supply of these employees at times of high demand for their
services could materially impact our operating performance.
In France, legislation reducing the working week to 35 hours led to
wide-ranging discussions with employee representatives on issues such as
workplace organization, time management, flexibility and customer service.
We have not experienced any significant work disruptions or conflicts in
the last few years, and we consider our relationship with our employees to be
satisfactory.
E. Share Ownership
Collectively, members of the Board of Directors and the Executive Committee
directly own less than 0.5% of our outstanding capital stock. Pierre Bellon and
his children, Astrid Bellon, Francois-Xavier Bellon, Sophie Clamens and Nathalie
Szabo, collectively own an economic interest of approximately 68.50%
(representing a voting interest of approximately 82.6%) in Bellon SA, which, as
of January 31, 2006, owns an economic interest of approximately 36.83%
(representing a voting interest of approximately 41.74%) in us. This difference
between voting and economic interests in Sodexho is attributable to the fact
that a double voting right is granted to all holders of fully-paid registered
shares when those shares have been registered for more than four years in the
name of the same shareholder, as described in "Item 10.B. Additional
Information--Memorandum and Articles of Association." As of January 31, 2006,
14,942,940 of the shares owned by Bellon SA had double voting rights. Bernard
Bellon, who is Pierre Bellon's brother, and members of the Bellon family own, as
of January 31, 2006, an economic interest of approximately 13% in Bellon SA. The
table below sets forth share ownership information, exclusive of these indirect
interests, for these individuals and for Bellon SA as of January 31, 2006.
Number of
Name Shares Owned
---- ------------
Board of Directors
Bellon SA...................................................58,572,917(1)
Pierre Bellon............................................... *(2)
Robert Baconnier............................................ *(2)
Remi Baudin................................................. *(2)
Patricia Bellinger.......................................... *(2)
Astrid Bellon............................................... *(2)
Bernard Bellon.............................................. *(2)
49
Number of
Name Shares Owned
---- ------------
Francois-Xavier Bellon...................................... *(2)
Sophie Clamens.............................................. *(2)
Paul Jeanbart............................................... *(2)
Charles Milhaud............................................. *(2)
Francois Perigot............................................ *(2)
Nathalie Szabo.............................................. *(2)
Peter Thompson.............................................. *(2)
H.J. Mark Tompkins.......................................... *(2)
Executive Committee
Elisabeth Carpentier........................................ *(2)
Pierre Henry................................................ *(2)
Sian Herbert-Jones.......................................... *(2)
Vincent Hillenmeyer......................................... *(2)
Philip Jansen............................................... *(2)
Nicolas Japy................................................ *(2)
Michel Landel............................................... *(2)
Dick Macedonia.............................................. *(2)
Clodine Pincemin............................................ *(2)
Jacques Petry............................................... *(2)
Damien Verdier.............................................. *(2)
----------
(1) Pierre Bellon owns 0.01% of the outstanding shares of Bellon SA; Astrid
Bellon, Francois-Xavier Bellon, Sophie Clamens and Nathalie Szabo and their
children each own an economic interest of 17.1% in Bellon SA. At any
ordinary shareholders' meeting of Bellon SA, Pierre Bellon has a voting
interest of 65.13% and each of Astrid Bellon, Francois-Xavier Bellon,
Sophie Clamens and Nathalie Szabo and their children has a voting interest
of 2.09%. At any extraordinary meeting, Pierre Bellon has a voting interest
of 0.01% and each of Astrid Bellon, Francois-Xavier Bellon, Sophie Clamens
and Nathalie Szabo and their children has a voting interest of 18.37%.
Bernard Bellon and other members of the Bellon family own an economic
interest of 13% in Bellon SA. At any ordinary shareholders' meeting,
Bernard Bellon has a voting interest of 17.1%. At any extraordinary
meeting, Bernard Bellon has a voting interest of 2.86%. Bellon SA is the
beneficial owner of approximately 36.83% of our outstanding shares.
(2) Indicates beneficial ownership of less than 1% of the shares outstanding.
As of January 31, 2006, members of our Board of Directors and Executive
Committee held, in the aggregate, options to acquire 1,154,400 shares of our
common stock. The following table lists the amounts, exercises prices and
expiration dates of options held by these individuals at that time.
Exercise Price
Name Amount(1) per Share Expiration Date
---- --------- --------- ---------------
Board of Directors
Pierre Bellon -- -- --
Robert Baconnier -- -- --
Remi Baudin(2) -- -- --
Patricia Bellinger -- -- --
Astrid Bellon(2) -- -- --
50
Exercise Price
Name Amount(1) per Share Expiration Date
---- --------- --------- ---------------
Board of Directors
Bernard Bellon(2) -- -- --
Francois-Xavier Bellon(2) -- -- --
Sophie Clamens(2) -- -- --
Paul Jeanbart(2) -- -- --
Charles Milhaud -- -- --
Francois Perigot(2) -- -- --
Nathalie Szabo(2) -- -- --
Peter Thompson -- -- --
H.J. Mark Tompkins -- -- --
Executive Committee
Elisabeth Carpentier 5,317 (euro)48.42 January 23, 2006
10,000 (euro)47.00 January 10, 2007
35,000 (euro)24.00 January 26, 2009
35,000 (euro)24.50 January 19, 2010
35,000 (euro)23.10 January 17, 2011
35,000 (euro)34.85 January 9, 2012
Pierre Henry 3,068 (euro)48.42 January 23, 2006
3,400 (euro)47.00 January 10, 2007
7,300 (euro)24.00 January 26, 2009
5,000 (euro)24.50 January 19, 2010
10,000 (euro)23.10 January 17, 2011
35,000 (euro)34.85 January 9, 2012
Sian Herbert-Jones 6,135 (euro)48.42 January 23, 2006
15,000 (euro)47.00 January 10, 2007
40,000 (euro)24.00 January 26, 2009
40,000 (euro)24.50 January 19, 2010
40,000 (euro)23.10 January 17, 2011
40,000 (euro)34.85 January 9, 2012
Vincent Hillenmeyer 4,000 (euro)47.00 January 10, 2007
17,000 (euro)24.00 January 26, 2009
17,000 (euro)24.50 January 19, 2010
17,000 (euro)23.10 January 17, 2011
17,000 (euro)34.85 January 9, 2012
51
Exercise Price
Name Amount(1) per Share Expiration Date
---- --------- --------- ---------------
Board of Directors
Philip Jansen 8,000 (euro)23.10 January 17, 2011
20,000 (euro)34.85 January 9, 2012
Nicolas Japy 2,500 (euro)47.00 January 10, 2007
15,000 (euro)24.00 January 26, 2009
10,000 (euro)24.50 January 19, 2010
15,000 (euro)23.10 January 17, 2011
30,000 (euro)34.85 January 9, 2012
Michel Landel 30,000 (euro)47.00 January 10, 2007
60,000 (euro)24.00 January 26, 2009
45,000 (euro)24.50 January 19, 2010
60,000 (euro)23.10 January 17, 2011
63,000 (euro)34.85 January 9, 2012
Dick Macedonia 26,000 (euro)47.00 January 10, 2007
40,000 (euro)24.00 January 26, 2009
15,000 (euro)24.00 January 26, 2009
35,000 (euro)24.50 January 19, 2010
35,000 (euro)23.10 January 17, 2011
27,500 (euro)34.85 January 9, 2012
Jacques Petry 30,000 (euro)34.85 January 9, 2012
Clodine Pincemin 4,090 (euro)48.42 January 23, 2006
6,500 (euro)47.00 January 10, 2007
19,000 (euro)24.00 January 26, 2009
10,000 (euro)24.50 January 19, 2010
35,000 (euro)23.10 January 17, 2011
12,000 (euro)34.85 January 9, 2012
Damien Verdier 4,090 (euro)48.42 January 23, 2006
2,500 (euro)47.00 January 10, 2007
12,000 (euro)24.00 January 26, 2009
8,000 (euro)24.50 January 19, 2010
7,000 (euro)23.10 January 17, 2011
20,000 (euro)34.85 January 9, 2012
---------
52
Exercise Price
Name Amount(1) per Share Expiration Date
---- --------- --------- ---------------
Board of Directors
Total 1,154,400
=========
----------
(1) These numbers have been adjusted retroactively, where appropriate, to
reflect the four-for-one stock split effective March 7, 2001 and the rights
offering on July 4, 2001.
(2) We do not grant options to members of the Board of Directors (other than
the Chairman of the Board) who are not employees.
Our Board of Directors approved four Sodexho Alliance Stock Option Plans on
January 10, 2006. The granting of stock options to our employees under these
plans had been previously approved by our shareholders at our Extraordinary
Shareholders Meeting of February 3, 2004. The exercise price of these plans is
(euro)34.85. Options under these plans will be valid from the grant date through
January 9, 2012. Under the plans, 25% of the options granted vest and become
exercisable on each anniversary of the grant date, such that the entire option
is vested after four years on January 10, 2010. Options under these plans,
totaling 967,452, were granted to 373 employees. No options granted under these
plans may be transferred by the optionholder other than by will or the laws of
intestacy. Stock options under these four plans are governed by the laws of
France (specifically, articles L225.117 through L225.185 of the French Code de
Commerce). Sodexho Alliance shares underlying any American Depositary Shares to
be delivered to Sodexho, Inc. optionholders will be purchased by Sodexho
Alliance on the open market.
Our Board of Directors approved one Sodexho Alliance Stock Option Plan on
September 13, 2005. The granting of stock options to our employees under this
plan had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 3, 2004. The exercise price for this plan is
(euro)28.07. Options under this plan will be valid from the grant date through
September 12, 2011. Under this plan, 25% of the options granted vest and become
exercisable on each anniversary of the grant date, such that the entire option
is vested after four years on September 12, 2009. Options under this plan,
totaling 10,000 were granted to 1 employee. No options granted under this plan
may be transferred by the optionholder other than by will or the laws of
intestacy. Stock options under this plan are governed by the laws of France
(specifically, articles L225.117 through L225.185 of the French Code de
Commerce). Sodexho Alliance shares underlying any American Depositary Shares to
be delivered to Sodexho, Inc. optionholders will be purchased by Sodexho
Alliance on the open market.
Our Board of Directors approved one Sodexho Alliance Stock Option Plan on
June 16, 2005. The granting of stock options to our employees under this plan
had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 3, 2004. The exercise price for this plan is
(euro)26.04. Options under this plan will be valid from the grant date through
June 15, 2011. Under this plan, 25% of the options granted vest and become
exercisable on each anniversary of the grant date, such that the entire option
is vested after four years on June 15, 2009. Options under this plan, totaling
20,000 were granted to 2 employees. No options granted under this plan may be
transferred by the optionholder other than by will or the laws of intestacy.
Stock options under this plan are governed by the laws of France (specifically,
articles L225.117 through L225.185 of the French Code de Commerce). Sodexho
Alliance shares underlying any American Depositary Shares to be delivered to
Sodexho, Inc. optionholders will be purchased by Sodexho Alliance on the open
market.
Our Board of Directors approved three Sodexho Alliance Stock Option Plans
on January 18, 2005. The granting of stock options to our employees under these
plans had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 3, 2004. The exercise price for these plans is
(euro)23.10. Options under these plans will be valid from the grant date through
January 17, 2011. Under the plans, 25% of the options granted vest and become
exercisable on each anniversary of the grant date, such that the entire option
is vested after four years on January 17, 2009. Options under these plans,
totaling 1,000,050 were granted to 454 employees. No options granted under these
plans may be transferred by the optionholder other than by will or the laws of
intestacy. Stock options under these three plans are governed by the laws of
France (specifically, articles L225.117 through L225.185 of the
53
French Code de Commerce). Sodexho Alliance shares underlying any American
Depositary Shares to be delivered to Sodexho, Inc. optionholders will be
purchased by Sodexho Alliance on the open market.
Our Board of Directors approved three Sodexho Alliance Stock Option Plans
on January 20, 2004. The granting of stock options to our employees under these
plans had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 21, 2000. The exercise price for these plans
is (euro)24.50. Options under these plans will be valid from the grant date
through January 19, 2010. Under the plans, 25% of the options granted vest and
become exercisable on each anniversary of the grant date, such that the entire
option is vested after four years on January 19, 2008. Options under these
plans, totaling 1,009,683 were granted to 494 employees. No options granted
under these plans may be transferred by the optionholder other than by will or
the laws of intestacy. Stock options under these three plans are governed by the
laws of France (specifically, articles L225.117 through L225.185 of the French
Code de Commerce). Sodexho Alliance shares underlying any American Depositary
Shares to be delivered to Sodexho, Inc. optionholders will be purchased by
Sodexho Alliance on the open market.
Our Board of Directors approved four Sodexho Alliance Stock Option Plans in
2003. The granting of stock options to our employees under these plans had been
previously approved by our shareholders at our Extraordinary Shareholders'
Meeting of February 21, 2000. The first three plans were approved on January 27,
2003 and the fourth plan on June 12, 2003. The exercise price for these plans is
(euro)24.00. Options under these plans will be valid from the grant date through
January 26, 2009. Under the January 27, 2003 plans, 25% of the options granted
vest and become exercisable on each anniversary of the grant date, such that the
entire option is vested after four years on January 27, 2007. Options under
these plans, totaling 2,917,800, were granted to 1,344 employees. Under the June
12, 2003 plan, 25% of the options granted vest and become exercisable on January
27 of each year such that the entire option is vested on January 27, 2007.
Options under this plan, totaling 84,660, were granted to nine employees. No
options granted under these plans may be transferred by the optionholder other
than by will or the laws of intestacy. Stock options under these four plans are
governed by the laws of France (specifically, articles L225.177 through L225.185
of the French Code de Commerce). Sodexho Alliance shares underlying any American
Depositary Shares to be delivered to Sodexho, Inc. optionholders will be
purchased by Sodexho Alliance on the open market.
Our Board of Directors approved two Sodexho Alliance Stock Option Plans
prior to December 31, 2002. The granting of stock options to our employees under
these plans had been previously approved by our shareholders at our
Extraordinary Shareholders' Meeting of February 21, 2000. The first plan was
approved on September 17, 2002. Options under this plan, totaling 12,000, were
granted to a single newly hired employee and will be valid from September 17,
2002 to March 31, 2008. The options vest in full on April 1, 2006 and may be
exercised between April 1, 2006 and March 31, 2008 with an exercise price of
(euro)47.00. The second plan was approved on October 10, 2002. Options under
this plan, totaling 3,220, were granted to 46 employees and will be valid from
October 10, 2002 to October 10, 2007. The options vest in full on October 10,
2006 and may be exercised between October 10, 2006 and October 10, 2007 with an
exercise price of (euro)21.87. For both plans, if an optionholder terminates his
or her employment due to disability, retires or dies, his or her options will
vest in proportion to the time he or she has been continuously employed by us.
For both plans, no options granted under this plan may be transferred by the
optionholder other than by will or the laws of intestacy. Stock options granted
under both plans are governed by the laws of France (specifically, articles
L225.177 through L225.185 of the French Code de Commerce). Any Sodexho Alliance
shares or Sodexho Alliance shares underlying any American Depositary Shares to
be delivered to Sodexho, Inc. optionholders will be purchased by Sodexho
Alliance on the open market.
Our Board of Directors approved the Sodexho Alliance Stock Option Plan A on
January 11, 2002. The granting of stock options to our employees under this plan
had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 21, 2000. Options under this plan will be
valid from January 11, 2002 to January 10, 2007 and will be granted to our
employees primarily located outside of the United States. The options granted
under Plan A vest in full four years from the date of grant and may be exercised
between January 11, 2006 and January 10, 2007. If an optionholder terminates his
or her employment due to disability, retires or dies, his or her options will
vest in proportion to the time he or she has been continuously employed by us.
No options granted under this plan may be transferred by the optionholder other
than by will or the laws of intestacy. Approximately 475 of our employees were
granted options pursuant to this plan. Plan A stock options are governed by the
laws of France (specifically, articles L225.177 through L225.185 of the French
Code de Commerce).
54
On January 11, 2002, our Board of Directors approved the Sodexho Alliance
Stock Option Plan B, under which options will be granted to employees of
Sodexho, Inc. and its affiliates. The issuance of shares to our employees under
this plan had been previously approved by our shareholders at our Extraordinary
Shareholders' Meeting of February 21, 2000. Options in Sodexho Alliance shares
granted under this plan vest in full four years from the date of grant, and
optionholders may exercise the options they receive during the two-year period
between January 11, 2006 and January 10, 2008. If an optionholder terminates his
or her employment due to disability, retires or dies, his or her options will
vest in proportion to the time he or she has been continuously employed by us.
No options granted under this plan may be transferred by the option holder other
than by will or the laws of intestacy. Approximately 772 of our employees were
granted options pursuant to this plan. Any Sodexho Alliance shares or Sodexho
Alliance shares underlying any American Depositary Shares to be delivered to
Sodexho, Inc. optionholders will be purchased by Sodexho Alliance on the open
market.
At the Extraordinary Shareholders' Meeting of February 13, 1996, our
shareholders renewed the authorization given to our Board at the February 23,
1993 Extraordinary Shareholders' Meeting to issue shares to our employees
through an employee stock ownership plan, the InterEnterprise Mutual Fund.
Pursuant to this authorization, our Board of Directors has approved a separate
stock ownership plan in each of the years between 1996 and 1999, inclusive,
funded through market repurchases of our shares on the Paris Bourse. In December
2000, the Board authorized new issuances of shares to employees participating in
our international employee stock ownership plan.
In addition, in 2001 we created the Sodexho Alliance International Employee
Stock Ownership Plan in which approximately 150,000 employees of Sodexho
Alliance and Sodexho Alliance's majority-owned subsidiaries were eligible to
participate. This plan was open for cash contributions from April 23, 2001 until
September 19, 2001, and it offered two options to subscribe for shares. The
first, called Alliance Plus, allowed employees to invest up to 2.5% of their
gross annual pay. Each cash contribution was matched on a non-recourse basis by
an unaffiliated bank with an additional contribution equal to nine times the
employee's investment to be used towards the purchase of additional shares. If
the stock appreciates in value during the term of the plan, the employees repay
the matching funds to the bank and a portion of the stock's appreciation from
the proceeds of the sale of the stock. If the stock depreciates in value, the
employee is not responsible for reimbursing the bank for its loss. Under the
second plan, called Alliance Classic, employees were given the option of
investing up to 25% of their gross annual compensation towards the purchase of
shares at a discount to fair market value. The two plans were not mutually
exclusive, and employees could select a combination of the two for investment.
Under both plans, employee investments cannot be withdrawn without penalty for a
period of five years from the time of investment. The employee in both cases
benefited from a discount of up to 20% of the fair market price of our shares at
the time the shares were issued. On October 18, 2001, the Board of Directors
issued 1,385,848 shares with a par value of (euro)4 each and an issue price of
(euro)44.10 per share for United States employees and (euro)41.51 for other
employees.
As of August 31, 2005, 28,270 employees held 2,390,964 Sodexho Alliance
shares, representing 1.5% of the outstanding shares of Sodexho Alliance.
Prior to our acquisition of the portion of SMS we did not already own in
June 2001, approximately 6.4 million SMS stock options had been granted under
the SMS 1998 Stock Incentive Plan, 2.7 million of which were vested and 3.7
million of which were unvested at the time of the acquisition. Under the terms
of this plan, SMS stock options were granted to officers and key employees at an
exercise price not less than the market price of SMS stock on the date of grant.
Most of the SMS options vest 25% each year during the four years following the
date of grant and expire ten years following the date of grant. If an SMS
optionholder dies during his or her employment, all such person's SMS stock
options become fully vested and may be exercised up to one year after his or her
death to the extent vested at the time of his or her death. In the event an SMS
employee is terminated, such employee's SMS stock options may be exercised up to
three months after the date of his or her termination to the extent vested at
the time of his or her termination. No SMS stock option may be transferred by
the optionee other than by will or the laws of intestacy.
Certain members of SMS's management received restricted stock units in
connection with their employment. These units have vested 25% each year during
the four years following the date of the grant. During fiscal 2005 all units
vested. Pursuant to their vesting, restricted stock units were converted into
the right to indirectly receive our ordinary shares or our ADSs.
55
Pursuant to the terms of our agreement to acquire the 53% of Sodexho, Inc.
we did not already own, vested SMS stock options were cancelled in exchange for
a cash payment equal to the option spread (i.e., the difference between the
exercise price and the tender price offered by us for SMS shares), and unvested
SMS stock options were converted into the right to indirectly purchase our
ordinary shares or our ADSs. The unvested restricted stock units were converted
into the right to indirectly receive, pursuant to their vesting, our ordinary
shares or our ADSs. Any Sodexho Alliance shares or Sodexho Alliance shares
underlying any American Depositary Shares to be delivered to SMS optionholders
will be purchased by Sodexho Alliance on the open market.
As of August 31, 2005, 3,189 members of management held 7,128,825 options
to purchase Sodexho Alliance shares, representing 4.5% of the shares of Sodexho
Alliance on a fully-diluted basis.
56
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Below is a diagram illustrating our ownership as of January 31, 2006.
[GRAPHIC OMITTED]
* Includes 3.57% held by Caisse des Depots et Consignations and 10.09% held
by Arnhold and S. Bleichroeder.
57
The following shareholders known to management to beneficially own 5% or
more of our shares: Bellon SA, a French company controlled by our chairman,
Pierre Bellon, and members of his family, the Caisse des Depots et
Consignations, a French bank and Arnhold and S. Bleichroder, on behalf of
several funds it manages, including First Eagle Fund, Inc. As of January 31,
2006, Bellon SA beneficially owned 58,572,917 shares of the company
(representing approximately 36.83% of our outstanding share capital and 41.74%
of the voting power relating to our outstanding share capital), and Pierre
Bellon and his children beneficially owned approximately 68.5% of the
outstanding capital stock of Bellon SA. As of the same date, Bernard Bellon and
other members of the Bellon family owned 13% of the outstanding capital stock of
Bellon SA. As of the same date, Sofinsod, one of our wholly-owned subsidiaries,
held an indirect interest of approximately 6.8% in Sodexho Alliance, SA through
its direct interest of approximately 18.5% in Bellon SA, pursuant to the merger
with Societe Financiere de la Porte Verte. Excluding the Bellon SA shares owned
by our subsidiaries, as of January 31, 2006, Pierre Bellon and his children
owned 84.10% of the outstanding capital stock of Bellon SA, and Bernard Bellon
and other members of the Bellon family owned 15.90% of such stock.
As of January 31, 2006, the Caisse des Depots et Consignations owned 3.57%
of outstanding shares and 4.90% of voting rights. As of January 31, 2006,
Arnhold and S. Bleichroeder owned 10.09% of outstanding shares and 9.08% of
voting rights.
To management's knowledge, there have not been any significant changes in
Bellon SA's ownership interest in Sodexho Alliance during the past three years,
and there are no agreements granting Bellon SA or any other shareholder
different voting rights from our other shareholders. As disclosed in "Item 10.B.
Additional Information -- Memorandum and Articles of Association Relating to
Shares," a double voting right is granted to all holders of fully-paid
registered shares when those shares have been registered for more than four
years in the name of the same shareholder.
As of August 31, 2005, our shares were owned by approximately 56,935
shareholders, including approximately 28,270 people acquiring their shares
through our various employee stock ownership plans (together, our employees own
approximately 1.50% of our outstanding capital stock). French citizens hold
approximately 27.24% of our shares, while French institutional investors hold
approximately 19.64% of our shares. To the best of our knowledge and after
having made reasonable inquiries, as of August 31, 2005, foreign shareholders
held approximately 32.27% of our shares. This figure may not be entirely
accurate because we can obtain only limited information regarding the beneficial
owners of our shares.
We are not directly or indirectly owned or controlled by another
corporation, other than Bellon SA, or by any government or other natural or
legal person.
B. Related Party Transactions
To management's knowledge, since September 1, 2002 no loans have been made
by Sodexho Alliance, Bellon SA or any of their subsidiaries to or for the
benefit of key Sodexho Alliance management personnel or close members of their
families, Bellon SA, any of its affiliates or any other enterprise in which a
substantial interest in the voting power is owned, directly or indirectly, by
any of the foregoing persons or entities.
In the course of our business, we have occasionally entered into contracts
with certain of our affiliates. The material terms of those material affiliate
contracts which are currently in force or have been in force during some portion
of the last three fiscal years are described below.
On December 30, 1991, we entered into an agreement with Felix Bellon SA,
the predecessor of Bellon SA, for consulting and advisory management services.
The contract renews automatically every year, but it can be terminated on three
months' notice by either party. Amounts invoiced under this contract totaled
(euro)4 million in fiscal 2005.
In fiscal 2003, Mr. Douce, a former Director of Sodexho Alliance, invoiced
Sodexho Alliance (euro)32,260 for services rendered as a speaker at Sodexho
Management Institute.
In fiscal 2003, Sodexho Alliance acquired the remaining 23.16% of the
shares of Sodexho Pass do Brazil from its minority shareholders, including
Bellon S.A., for (euro)27.6 million. In fiscal 2004, the Group acquired the
remaining shares of Sodexho do Brazil from Bellon S.A., for (euro)3 million.
58
A list of Sodexho Alliance, SA's intercompany loans, advances, deposits and
guarantees outstanding, other than those with wholly-owned subsidiaries, as of
August 31, 2005 is provided below.
Loans and Amount of Largest amount
advances given deposits and outstanding as
and guarantees given of each of Total Amount
outstanding as and outstanding August 31, outstanding
of August 31, as of August 31, 2005, 2004 and as of August
2005 2005 2003 31, 2005
------------------------------------------------------------------
(thousands of euro)
French subsidiaries
Societe Marseillaise de restauration et de services 383
Sogeres Holding 7,595
Sodexho Pass International 85 1,464 13,771 1,549
Universal Sodexho SAS 53 53 53
STNB 590 708 590
Sodexho France SAS 76 1,500 1,576 1,576
Universal Sodexho Afrique 2,246 2,246 2,246
Other 6 176 6
Foreign subsidiaries
Sodexho Hellas 69 69 69
Sodexho Tanzanie 3 16 3
Sodexho Pass Chili 396 -
Spirit Cruises 4,464 -
Sodexho Chili 27 5,573 5,600 5,600
Sodexho Healthcare Services Ltd 30,447 -
Sodexho Ltd 61,619 -
Siges Chili 8,198 8,257 8,198
Sodexho Education Services Ltd 15,000 -
Sodexho Defence Services Ltd 28,290 -
Sodexho Holdings Ltd 14,954 14,954 14,954
Sodexho Malaysia 174 175 174
Sodexho Gabon 332 -
Primary Management Aldershot 22,715 -
Universal Sodexho Partnership 16,954 -
Harmondsworth 26,358 26,647 26,348
Sodexho Argentina 10 845 1,131 855
Universal Sodexho Scotland 13,262 -
Sodexho Luxembourg 274 278 274
Sakhalin Support Services 5,498 -
Rugby Hospitality 2003 2,057 -
Kelvin Catering Ltd 1,587 -
Universal Services Europe Ltd 1,893 -
Universal Sodexho Norway 1,916 -
Sodexho Maroc 16 182 365 198
PT Universal Ogden Indonesia 458 -
Other 24 223 24
Foreign affiliates
Serco Sodexho Defense Services 5,584 -
---- ------- -------- -------
TOTAL 369 62,358 296,695 62,727
==== ======= ======== =======
59
C. Interests of Experts and Counsel
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information.
See Item 17.
Legal Proceedings
On March 8, 2001, ten current and former employees of Sodexho, Inc., the
majority of whom had worked for Marriott Management Services, Inc. (later known
as Sodexho Marriott Services, Inc., and now known as Sodexho, Inc.) filed a
lawsuit against Sodexho, Inc. in the U.S. District Court for the District of
Columbia, alleging that they and other African-American salaried employees were
discriminated against in promotions on the basis of their race. On June 25,
2002, the district court certified the case as a class action for purposes of
determining liability. On April 27, 2005, Sodexho, Inc. agreed to settle the
lawsuit in order to avoid protracted legal proceedings, but without admitting
liability. The judge subsequently approved the settlement on August 10, 2005.
Under the terms of the settlement, Sodexho, Inc. committed to make monetary
payments to eligible class members and to the class' attorneys for a total
amount of up to $80 million, as well as to continue to promote its diversity
programs. The Group anticipates that these payments will be made during the
second half of fiscal 2006. A supplementary exceptional provision of $78 million
((euro)61 million) has been recognized in the financial statements for fiscal
2005, to cover settlement payments and defense costs net of insurance. This
settlement had a net negative impact of (euro)38 million on the consolidated
income statement for the year ended August 31, 2005.
Following an investigation into the financial condition of Banco Santos by
the intervenor representing the Central Bank of Brazil, Sodexho Pass do Brazil
is involved in disputes with Banco Santos and a mutual fund concerning the
existence of balances outstanding for the principal amount of (euro)18 million.
Sodexho Pass do Brazil and Banco Santos have each commenced legal proceedings
against the other in this matter. Sodexho Pass do Brazil vigorously denies that
it owes any amounts in connection with these balances.
We are involved in a number of other legal proceedings incidental to the
normal conduct of our business. We do not believe that liabilities relating to
these proceedings are likely to be, in the aggregate, material to our business
or our consolidated financial position.
Dividends
We have paid dividends in each year since 1976. The payment and amount of
dividends depend on our earnings and financial condition and other factors that
our Board of Directors deem relevant. Dividends are recommended by our Board and
are then voted on by the shareholders at the shareholders' ordinary general
meeting. We have paid dividends in euro since 2000.
Dividends paid to holders of American Depositary Shares (ADSs) or Sodexho
Alliance shares who are not residents of France will generally be subject to
French withholding tax at a rate of 25%. Investors in our ADSs or shares are
strongly recommended to read the section of this prospectus entitled "Item 10E -
Additional Information - Taxation" for information on the consequences of such
abolition and to consult their own advisors with respect to the tax consequences
of an investment in ADSs or shares.
60
The table below sets forth, for the fiscal years indicated, the amount of
dividends declared per share excluding the French avoir fiscal and the amount of
dividends declared per share including the French avoir fiscal (before deduction
of applicable French withholding tax). Dividends declared for a given fiscal
year are paid in the following fiscal year.
Shares
Dividend per share outstanding at
excluding Dividend per share the date of Total dividend
Year(1)(2) avoir fiscal including avoir fiscal payment paid
--------------------------------------------------------------------------------------------------------------------------
(euro) $ (euro) $ (euro)(in millions)
2001......................... 0.56 0.51 0.84 0.77 158,945,502 89.0
2002......................... 0.61 0.60 0.915 0.90 159,021,416 97.0
2003......................... 0.61 0.67 0.915 1.00 159,021,565 97.0
2004(3)...................... 0.70 0.84 - - 159,026,413 111.3
2005(3)...................... 0.75 0.91 - - 159,026,413 119.3
----------
(1) Pursuant to French law, payment of dividends must be made within nine
months following the end of the fiscal year to which they relate.
(2) The amounts listed in this table have been adjusted retroactively, where
appropriate, to reflect the four-for-one stock split effective March 7,
2001.
(3) Effective for dividends paid after January 1, 2005, there is no longer a
right to a tax credit (avoir fiscal).
B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
A. Listing Details
The principal trading market for our common shares, which have a par value
of (euro)4 each, is Euronext Paris (formerly the Paris Bourse), where they
have been listed since 1983. From 1998 until 2005, our shares were included in
the CAC 40 benchmark index of Euronext Paris. The table below sets forth, for
the periods indicated, the reported high and low prices and average daily
trading volume (in shares) for our outstanding shares on Euronext Paris and its
predecessor, the Paris Bourse (all amounts have been restated to reflect stock
splits).
Our Articles of Association (statuts) provide that fully-paid common shares
may be held in either registered or bearer form at the option of the
shareholders.
Prior to the listing of our shares on the New York Stock Exchange,
effective April 3, 2002, there was no public trading market in the United States
for our shares or the ADSs. ADS trading volumes from September 1, 2004 through
January 31, 2006 averaged 6,300 shares per day.
Average daily
trading volume
Fiscal Year High Low (in shares)
--------------------------------------------------------------------------------
2001 ....................................... 60.10 41.13 397,875
2002 ....................................... 55.75 25.10 574,261
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Average daily
trading volume
Fiscal Year High Low (in shares)
--------------------------------------------------------------------------------
2003 ....................................... 30.83 17.95 683,519
2004 ....................................... 28.15 20.16 812,089
2005 ....................................... 29.78 19.40 698,542
Average daily
trading volume
Fiscal Year High Low (in shares)
--------------------------------------------------------------------------------
2004 (euro) (euro)
First Quarter............................ 28.15 21.68 832,502
Second Quarter........................... 26.72 23.10 764,039
Third Quarter............................ 27.16 20.54 984,526
Fourth Quarter........................... 24.00 20.16 674,755
2005 (euro) (euro)
First Quarter............................ 23.61 19.40 773,291
Second Quarter........................... 24.82 21.81 797,456
Third Quarter............................ 26.70 23.51 795,647
Fourth Quarter........................... 29.78 25.23 427,774
May ..................................... 26.57 24.92 525,828
June .................................... 26.55 25.23 409,403
July .................................... 29.78 25.37 590,801
August................................... 29.65 27.15 283,117
September................................ 31.89 28.00 462,633
October.................................. 32.91 30.51 410,809
November................................. 34.85 32.30 591,179
December................................. 35.77 33.55 482,168
January.................................. 38.58 34.74 506,745
B. Plan of Distribution
Not Applicable.
C. Markets
See Item 9.A.
D. Selling Shareholders
Not Applicable.
E. Dilution
Not Applicable.
F. Expenses of the Issue
Not Applicable.
62
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
We have only one class of share capital, consisting of common shares with a
nominal value of (euro)4 per share. All of our outstanding shares are
fully-paid. Our Articles of Association (statuts) provide that fully-paid shares
may be held in registered or bearer form at the option of the shareholder. The
most recent survey on August 31, 2005 found 28,109 identified holders of bearer
shares and 1,109 holders of registered shares.
In accordance with French law concerning dematerialization of securities,
the ownership rights of shareholders are represented not by share certificates
but rather by book entries. We maintain a share account with Societe Generale
for all shares in registered form, which is administered by Societe Generale. In
addition, we maintain separate accounts in the name of each shareholder either
directly or, at a shareholder's request, through the shareholder's accredited
intermediary. Each shareholder account shows the name of the holder, the number
of shares held and, in the case of shares held through an accredited
intermediary, the fact that the shares are held through such intermediary.
Societe Generale, as a matter of course, issues confirmation to each registered
shareholder as to shares registered in the shareholder's account, but these
confirmations are not documents of title.
Shares held in bearer form are held on the shareholder's behalf in an
account maintained by an accredited intermediary and are registered in an
account which the accredited intermediary maintains with Societe Generale. That
account is separate from our share account with Societe Generale. Each
accredited intermediary maintains a record of shares held through it and will
issue certificates of registration for the shares it holds. Shares held in
bearer form may only be transferred through accredited intermediaries and
Societe Generale. Our statuts permit us to request that Societe Generale provide
us at any time with the identity of the holders of our shares or other
securities granting immediate or future voting rights held in bearer form and
with the number of shares or other securities so held.
Our statuts do not contain any restrictions relating to the transfer of
shares. Under French law, registered shares must be converted into bearer form
before being traded on Euronext Paris and, accordingly, must be registered in an
account maintained by an accredited intermediary. A shareholder may initiate a
transfer by giving instructions to the relevant accredited intermediary. A fee
or commission is payable to the broker involved in the transaction, regardless
of whether the transaction occurs within or outside of France. No registration
tariff is normally payable in France unless a transfer instrument has been
executed in France.
As of August 31, 2005 and January 31, 2006, our share capital, as
authorized in our statuts, was (euro)636,105,652, represented by 159,026,413
shares. Our Board updates our statuts regularly to take into account increases
in share capital due to the issuance of shares in connection with employee stock
ownership plans, the exercise of stock options, warrants and subscription rights
and any conversion of convertible bonds. Between August 31, 2005 and January 31,
2006, we issued no shares for these purposes.
As of August 31, 2005 and January 31, 2006, we directly owned 3,436,300 and
2,633,620 shares, roughly 2.2% and 1.66% of total share capital, with face value
(euro)4 per share and book value of (euro)4 per share. Sofinsod, one of our
wholly-owned subsidiaries, holds an indirect interest of approximately 6.8% in
Sodexho Alliance, SA through its interest of approximately 18.5% in the capital
of Bellon SA pursuant to the merger with La Societe Financiere de la Porte Verte
on September 1, 2003.
Equity-Linked Securities
On January 10, 2006, the Board of Directors issued 967,452 options.
On September 13, 2005, the Board of Directors issued 10,000 options.
On June 16, 2005, the Board of Directors issued 20,000 options.
On January 18, 2005, the Board of Directors issued 1,000,050 options.
On January 20, 2004, the Board of Directors issued 1,108,683 options.
63
On June 12, 2003, the Board of Directors issued 84,660 options.
On January 27, 2003, the Board of Directors issued 2,917,800 options. On
September 17, 2002, the Board of Directors issued 12,000 options. On October 10,
2002, the Board of Directors issued 3,220 options.
At the Extraordinary Shareholders' Meeting of February 13, 1996, our
shareholders authorized the Board to issue bonds with equity warrants in an
aggregate face amount not to exceed (euro)304,898,000. On May 21, 1996, the
Board approved the issue of (euro)304,898,000 in debt pursuant to this
authorization at a face value of (euro)762 per bond. These bonds were redeemed
in 2004. Each of the 400,000 issued bonds carried a warrant giving the right to
subscribe one share of our common stock, without preemptive subscription rights,
at a price of (euro)411.61 until June 7, 2004. Following our increase in share
capital which took effect in December 1997, each warrant entitled the holder to
subscribe for 1.02 shares of common stock for (euro)411.61. After the April 1998
bonus share issue, each warrant entitled the holder to subscribe for 4.08 shares
per warrant. Following our four-for-one stock split effective March 7, 2001 and
the capital increase in June 2001, each warrant currently entitles the holder to
16.66 shares per warrant. The exercise price remained unchanged at (euro)411.61
through June 7, 2004. In 2004, a total of 291 warrants were exercised and 4,848
shares were issued. The warrants expired on June 7, 2004 and were withdrawn from
the market.
Changes in Share Capital
The table below indicates the changes in our share capital in the fiscal
years ending August 31, 2002, 2003, 2004 and 2005 and in the period commencing
August 31, 2005 and ending January 31, 2006, retroactively adjusted, where
appropriate, to reflect our four-for-one stock split effective March 7, 2001.
The warrants expired on June 7, 2004 and were withdrawn from the market.
Shares
outstanding
Date before new issue Type of transaction Shares created
----------------- ---------------- ----------------------------------------------- --------------
October 18, 2001 157,559,654 International Employee Stock Ownership Plan (2) 1,385,848
December 10, 2001 158,945,502 Exercise of stock options (1) 4,173
December 18, 2001 159,949,675 Exercise of warrants (1) 2,499
January 11, 2002 158,952,174 Exercise of stock options (1) 8,180
January 31, 2002 158,960,354 Exercise of warrants (1) 16
February 25, 2002 158,960,370 Exercise of stock options (1) 5,726
February 28, 2002 158,966,096 Exercise of warrants (1) 51,230
April 17, 2002 159,017,326 Exercise of stock options (1) 4,090
October 1, 2002 159,021,416 Exercise of warrants (1) 149
February 28, 2004 159,021,565 Exercise of warrants (1) 366
June 7, 2004 159,021,931 Exercise of warrants (1) (3) 4,482
----------
(1) Please see our disclosure in this Annual Report on Form 20-F regarding our
options and warrants.
(2) Please see our description of the Sodexho Alliance International Employee
Stock Ownership Plan described in "Item 6.E. Directors, Senior Management
and Employees--Share Ownership" for the terms of this plan. These shares
were issued to employees at a discount of 15% to 20%, depending upon the
jurisdiction in which the shares were issued to our employees, from the
fair market value of the shares at the time of issuance.
(3) Pursuant to the notice issued on May 21,1996 by Sodexho Alliance and
approved by the French "Autorite des Marches Financieres" the warrants
expired on June 7, 2004 and have been withdrawn from the market.
64
Authorizations
At the Extraordinary Shareholders' Meeting of January 31, 2006, our
shareholders authorized the Board to increase our issued capital on one or more
occasions, at any time over the 26 month period from such date, by issuing
common shares, warrants and share equivalents with or without preemptive
subscription rights. The shareholders authorized these issuances to be funded in
cash or by capitalizing reserves. The issuances of capital are subject to the
following restrictions: share issues funded with cash may not exceed an
aggregate par value of (euro)63,000,000 at any one time; issues of debt
securities may not have the effect of increasing our indebtedness by more than
(euro)540,000,000 and the aggregate par value of share issues funded by
capitalizing reserves may not exceed the amount of treasury reserves. This
authorization canceled the Extraordinary Shareholders' Meeting authorization of
February 3, 2004 pertaining to the same subject matter.
At the Annual Shareholders' Meeting of January 31, 2006, our shareholders
authorized the Board of Directors to repurchase shares of our stock for a period
of 18 months from the date of the meeting. The maximum purchase price authorized
for each share was (euro)45.00, and the maximum number of shares to be
repurchased is an amount equal to 10% of the issued shares or the limits
specified by law. The Board of Directors has not yet decided to implement this
program.
At the Annual Shareholders' Meeting of February 8, 2005, our shareholders
authorized the Board of Directors to repurchase shares of our stock for a period
of 18 months from the date of the meeting. The terms of this repurchase program
have been approved by the French Autorite des Marches Financiers. The maximum
purchase price authorized for each share was (euro)40.00, and the maximum number
of shares to be repurchased is an amount equal to 10% of the issued shares or
the limits specified by law. Pursuant to this authorization, we purchased
977,349 shares on the open market during fiscal 2005.
B. Memorandum and Articles of Association
The following summary contains a description of the material provisions of
our Articles of Association (statuts), which does not purport to be complete and
is qualified in its entirety by reference to our statuts, an English translation
of which is attached hereto as an exhibit, and French company law.
Registration and Corporate Purpose
Sodexho is a societe anonyme a Conseil d'Administration, a form of limited
liability company established under French law. Our bylaws were registered in
Versailles, France on December 31, 1974 under the number 301,940,219, Code APE
741 J.
Our objects and purposes are set out in Article 2 of our statuts. These
include
o studying and providing all services in connection with the
organization of catering;
o operating restaurants, bars, hotels and any business related to
catering, the hotel industry, hotel services, tourism, leisure;
o providing, in whole or in part, the services required for the
operation, maintenance and management of office, commercial,
industrial, leisure, health and educational establishments and
buildings, and providing services connected with the operation
and maintenance, in whole or in part, of facilities associated
with the foregoing;
o providing installation, maintenance, repair and replacement
services related to any type of facility;
o providing consultancy services and studying the economic,
financial and technical aspects of all projects and services
connected with the operation or organization of the
above-mentioned businesses and, specifically, all transactions
involving advice relating to the operation or organization of the
above-mentioned businesses;
o creating, purchasing and holding companies, irrespective of their
corporate purpose; and
65
o engaging in any business transactions directly or indirectly
related to the foregoing or to any similar or related objects.
Directors
We are managed by a Board of Directors. The Board of Directors is invested
with all permissible powers relating to third parties within the scope of our
objects, subject to limitations prescribed by our shareholders and French law.
Under French law, the Board of Directors prepares and presents the year-end
accounts to the shareholders and convenes shareholders' meetings. In addition,
the Board of Directors reviews and monitors our economic, financial and
technical strategies.
The Board of Directors is composed of a minimum of three members and a
maximum of 18 members appointed at the ordinary general meeting of the
shareholders. The Board of Directors is authorized to act in all circumstances
in the name of Sodexho Alliance, subject to our corporate purpose and to those
powers granted by law or at shareholder meetings. Under French law, Directors
are liable for violations of French legal or regulatory requirements applicable
to societes anonymes, violation of our statuts or mismanagement. A Director may
be held liable for such actions both individually and jointly with the other
directors. The Executive Committee directs our general strategy and guides our
international development.
The Directors' term of office was six years until February 5, 2002. This
term was changed to three years at the Extraordinary Shareholders' meeting of
February 5, 2002. Any Director may stand for reelection. A Director appointed to
replace another Director whose term of office has expired can only remain in
office for the remaining period of the term of office of his or her predecessor.
Except in the event of termination of employment if the Director is a salaried
employee, or in the event of resignation, removal or death, the term of office
of a Director expires at the end of the ordinary general meeting held during the
year in which the Director's term of office expires. Our statuts allow for the
election of directors at staggered times. At the annual Meeting of Shareholders
in February 2005, the Board of Directors membership increased by two, to a total
of 14 Directors as follows: one director whose term expires in February 2005 has
asked that his term not be renewed as he wished to retire from the Board; three
of our directors' terms were renewed and three new directors were elected.
The Board of Directors elects a Chairman from among its members and may
elect one or more Vice Chairmen. The Chairman must retire no later than the end
of the ordinary general meeting of shareholders held in the year in which he or
she reaches 85 years of age. The shareholders may, during the following ordinary
general meeting, extend this age limit.
Meetings of the Board of Directors, which are held as often as necessary,
are normally convened and presided over by the Chairman or Vice Chairman. A
quorum consists of one-half of the members of the Board of Directors, and
decisions are taken by a vote of the majority of the members present or
represented by other members of the Board of Directors. A Director may give a
proxy to another Director but a Director cannot represent more than one other
member at any particular meeting. Members of the Board of Directors represented
by another member at meetings do not count for purposes of determining the
existence of a quorum.
Transactions between Us and Our Directors
Any agreement between us and any one of the members of the Board of
Directors that is not in the ordinary course of our business is subject to the
prior authorization of the disinterested members of Board of Directors. The same
applies to agreements between us and another company if one of the members of
the Board of Directors is the owner, general partner, manager, director, general
manager or member of the executive or supervisory board of the other company.
66
Directors' Compensation
The aggregate compensation of the Board of Directors is determined at the
ordinary general meeting of the shareholders. The Board of Directors then
divides up this compensation among its members. It may allocate exceptional
compensation to some of its members for assignments undertaken by them. In
addition, compensation may be granted to directors on a case-by-case basis for
special assignments. The Board may also authorize the reimbursement of travel
and accommodation expenses as well as other expenses incurred by Directors in
the corporate interest.
Directors' Borrowing Powers
All loans or borrowings may be decided by the Board of Directors within the
limits duly authorized by the ordinary general meeting of the shareholders.
Directors' Age Limits
The number of Directors having reached age 70 may not at any time exceed
one-third of the total number of Directors in office. Any such Directors may
remain in office only until the end of the next ordinary general meeting of
shareholders. In the event that the number of Directors reaching the age of 70
during one year exceeds one-third of the total number of Directors in office,
the order of retirement is decided by drawing lots during a meeting of the Board
of Directors.
Directors' Share-Ownership Requirements
Each member of the Board of Directors must own at least four hundred of our
shares.
Rights, Preferences and Restrictions Relating to Shares
We currently have one class of shares, consisting of common shares with a
nominal value of (euro)4 per share. Our statuts provide that fully-paid shares
may be held in registered or bearer form. Shares not fully-paid may be held in
registered form only. The rights, preferences and restrictions attaching to the
shares are set forth below.
Dividend Rights
We may distribute dividends to our shareholders from net income in each
fiscal year (after deductions for depreciation and provisions), as increased or
reduced by any profit or loss carried forward from prior years and as reduced by
the legal reserve fund described below, after payment of the initial dividend
described below. These distributions are subject to applicable provisions of
French law.
Under French law, we are required to contribute a minimum of 5% of our
annual net income in each fiscal year, after a reduction for any losses carried
forward from previous years, to a legal reserve fund. The obligation to make
this minimum contribution ceases if and so long as we maintain a legal reserve
equal to 10% of the aggregate nominal value of our issued share capital. The
legal reserve is distributable only upon our liquidation. The remaining net
income, increased by any profits carried forward, constitutes the distributable
profits.
On the recommendation of the Board of Directors, shareholders may decide to
carry forward all or part of any distributable profits remaining after payment
of the initial dividend to the next fiscal year as retained earnings or to
allocate them to (i) the creation of reserves; (ii) contingency funds for the
purpose of total or partial redemption of our shares; or (iii) the shareholders
as additional dividends. The Board of Directors may propose a dividend for
approval by the shareholders at the ordinary general meeting.
Right of Inspection
Any shareholder has a right of access to all of our corporate documents
(e.g., shareholder lists, corporate minutes, financial records) required to
assess the management of the Company.
67
We must distribute dividends to our shareholders pro rata according to
their shareholdings. Dividends are payable to holders of shares outstanding on
the date of the shareholders' meeting approving the distribution of dividends,
or, in case of interim dividend, on the date the Board of Directors meets and
approves the distribution of interim dividends. The actual dividend payment date
is decided by the shareholders at an ordinary general meeting or by the Board of
Directors, if no decision is taken by the shareholders. We must pay any
dividends within nine months of the end of the fiscal year unless otherwise
authorized by court order. Under French law, dividends not claimed within five
years of the date of payment are forfeited.
If proposed by the Board of Directors and decided at the ordinary general
meeting, each shareholder may be granted at the ordinary general meeting a
choice between payment of the dividend in cash or in shares, for all or for part
of the dividend, according to the procedures set out under French law.
Voting Rights
Subject to the limitations on voting rights described below under
"--Shareholders' Meetings" and "--Disclosure of Shareholdings," each shareholder
is entitled to one vote per share at any general meeting of our shareholders. A
double voting right is granted to holders of fully-paid registered shares when
those shares have been registered for more than four years in the name of the
same shareholder. Any share whose ownership is transferred (certain intra-family
transactions excepted) or which is converted into a bearer share loses the right
to the double vote. Double voting rights also attach to any shares issued by
right to shareholders in proportion to the number of shares with double voting
rights which such shareholders held prior to the issuance. Votes can be cast by
proxy or by mail. Proxies can only be exercised by the shareholder's spouse or
by another shareholder. Our statuts do not grant our shareholders the right to
cumulate their votes when electing directors and French law does not
automatically grant this right to shareholders.
Rights in the Event of Liquidation
In the event that we are liquidated, our assets remaining after payment of
our debts, liquidation expenses and all of our remaining obligations will be
distributed to repay the nominal value of our shares in full. Any surplus will
then be distributed pro rata among our shareholders.
Preferential Right of Subscription
Under French law, shareholders have preemptive rights to subscribe for cash
issuances of new shares or other securities giving rights, directly or
indirectly, to acquire additional shares on a pro rata basis. A two-thirds
majority of the shares entitled to vote at an extraordinary general meeting may
vote to waive preemptive subscription rights with respect to any particular
offering. French law requires that the Board of Directors and our independent
auditors present reports that specifically address any proposal to waive
preemptive subscription rights. In the event of a waiver, the issue of
securities must be completed within the period prescribed by law. The
shareholders may also decide at an extraordinary general meeting to give the
existing shareholders a non-transferable preferential right to subscribe to the
new securities, for a limited period of time. A two-thirds majority of the
shares entitled to vote at an extraordinary general meeting may also grant to
existing shareholders a non-transferable form of preemptive right to subscribe
to any new securities that may affect our share capital. Shareholders may also
notify us that they wish to waive their own preemptive subscription rights with
respect to any particular offering if they so choose.
Preemptive subscription rights, if not previously waived, are transferable
during the subscription period relating to a particular offering of shares and
may be listed on Euronext Paris.
Redemption of Shares
Under French law, our Board of Directors is entitled to redeem a set number
of shares as authorized by our shareholders at an extraordinary shareholders'
meeting, provided that the capital reduction has not been undertaken in an
attempt to mask the effect of losses. In the case of such an authorization, the
shares redeemed must be cancelled within one month after the end of the offer to
purchase such shares from shareholders. One notable exception to this rule,
however, is that shares redeemed on the open market need not be cancelled if the
company redeeming the shares grants options on or awards those shares to its
employees within one year of the redemption.
68
Liability to Further Capital Calls
Shareholders are liable for corporate liabilities only up to the nominal
amount of the shares they hold.
Changes to Shareholders' Rights
A two-thirds majority vote at the extraordinary shareholders' meeting is
required to change our statuts, which set out the rights attaching to our
shares. The extraordinary shareholders' meeting may not increase shareholders'
obligations, except in the event that different classes of shares are merged.
However, in such case, any decision involving a change in the rights attaching
to a class of shares shall be final only following its ratification by a
two-thirds majority of a special meeting of the shareholders of the class
concerned.
Shareholders' Meetings
In accordance with French law, there are two types of shareholders' general
meetings: ordinary and extraordinary. Ordinary general meetings are required for
matters such as the election of directors, the appointment of statutory
auditors, the approval of annual accounts, the declaration of dividends and the
issuance of debt. Extraordinary general meetings are required for the approval
of matters such as amendments to our statuts, approval of mergers, increases or
decreases in share capital, the creation of a new class of equity securities and
the authorization of the issuance of investment certificates or securities
convertible or exchangeable into equity securities.
Convocation of Meetings
The Board of Directors is required to convene an annual ordinary general
meeting of shareholders, which must be held within six months of the end of our
fiscal year, to approve the annual financial statements for the fiscal year.
Other ordinary or extraordinary general meetings may be convened at any time
during the year. Meetings of shareholders may be convened by the Board of
Directors or, if the Board of Directors fails to call such a meeting, by our
statutory auditors or by a court-appointed agent. The court may be requested to
appoint an agent by (i) one or several shareholders holding at least 10% of our
share capital; (ii) any interested party in emergency cases; or (iii) certain
duly qualified associations of shareholders. The notice calling a meeting must
state the matters to be considered at the meeting.
At least 30 days prior to the date set for any general meeting of
shareholders, a preliminary notice must be sent to the Autorite des Marches
Financiers ("AMF"), the administrative agency responsible for overseeing the
French securities markets, and published in France in the Bulletin des Annonces
Legales Obligatoires (bulletin of obligatory legal announcements) (the "BALO").
This preliminary notice must contain the agenda of the meeting and a draft of
the resolutions to be considered. Within 10 days of the notice, one or several
shareholders holding a specified percentage of shares (determined on the basis
of a formula relating to capitalization) or a duly qualified association of
shareholders holding a specified percentage of voting rights may propose
additional resolutions to be voted on at the meeting. At least 15 days prior to
the date set for a general meeting on its first call, and at least six days
before any meeting's second call, notice must be sent by mail to all holders of
registered shares who have held such shares for more than one month prior to the
notice. Notice of the meeting shall also be given in a journal authorized to
publish legal announcements in the administrative region (departement) in which
we are registered, as well as in the BALO, with prior notice to the AMF. The
notice must state the type, agenda, place, date and time of the meeting. No
action may be taken at a meeting on any matter not listed on the agenda for that
meeting, subject to exceptions relating to the dismissal of directors under
certain circumstances and to certain miscellaneous matters.
Attendance of and Voting at Meetings
Attendance and the exercise of voting rights at general meetings of
shareholders are subject to certain conditions. A holder of registered shares
must have his shares registered in his own name in a shareholder account
maintained by us or on our behalf at least five days prior to the meeting. A
holder of shares in bearer form must obtain from the financial intermediary with
whom the shares have been deposited a certificate indicating the number of
bearer shares owned and attesting to the fact that the shares are not
transferable until the time fixed for the meeting.
All shareholders who have properly registered their shares have the right
to participate in general meetings, either in person or by proxy, and to vote
either by proxy or by mail according to the number of shares they hold. Proxies
will be sent to any shareholder on request, but they can only appoint the
shareholder's spouse or another shareholder as proxy.
69
Any vote made by mail shall be deemed valid if received by us at least three
days prior to the date of the meeting, but the attendance of the shareholder
automatically cancels any proxy previously executed by that shareholder or any
previous vote made by mail.
Under French law, shares of a company held by entities controlled directly
or indirectly by that company are not entitled to voting rights, are not counted
for quorum or majority purposes, and do not receive dividends.
Under French law, the presence in person or by proxy of shareholders
holding an aggregate of not less than 20% (in the case of an ordinary general
meeting or an extraordinary general meeting deciding upon any capital increase
affecting reserves, such as a stock dividend) or 25% (in the case of any other
extraordinary general meeting) of voting shares is necessary for a quorum. If a
quorum is not reached at any meeting, that meeting is adjourned. There is no
quorum requirement upon recommencement of an adjourned ordinary general meeting.
Upon the reconvening of an extraordinary general meeting, the presence in person
or by proxy of shareholders having not less than 20% of the eligible voting
rights is necessary for a quorum, except when an increase in our share capital
is proposed through the incorporation of reserves, profits or a share premium,
in which case the quorum requirements are those applicable to ordinary general
meetings.
At an ordinary general meeting or at an extraordinary general meeting
deciding upon any capital increase by incorporation of reserves, a simple
majority of the votes cast is required to pass a resolution. At any other
extraordinary general meeting, a two-thirds majority of the votes cast is
required to pass a resolution. However, a unanimous vote is required to increase
the liabilities of shareholders. Abstention from voting by those present or
represented by proxy is deemed to be a vote against the resolution submitted to
a vote.
Limitation on Security Ownership
There is no limitation, under French law or in our statuts on the right of
non-French residents or non-French security holders to own or, where applicable,
to vote our securities.
Change in Control/Anti-Takeover
There are no provisions in the statuts that would have the effect of
delaying, deferring or preventing a change in our control and that would operate
only with respect to a merger, acquisition or corporate restructuring involving
us or any of our subsidiaries. There also are not any provisions in our statuts
that allow for the issuance of preferred stock upon the occurrence of takeover
attempts or the addition of other "anti-takeover" measures without a shareholder
vote.
Disclosure of Shareholdings
French law provides that any individual or entity, acting alone or in
concert with others, that acquires, directly or indirectly, more than 5%, 10%,
15%, 20%, 25%, 33%, 50%, 66%, 90% or 95% of our shares or voting rights attached
to our shares, or whose holdings fall below any of these thresholds, must notify
us of the number of shares or voting rights that person or entity holds within
five calendar days of the date the threshold has been crossed. The individual or
entity must also notify the Autorite des Marches Financiers (financial markets
authority) (the "AMF") within five Euronext Paris trading days of the date on
which the threshold is crossed. If the shareholder fails to comply with this
notification requirement, the shares or voting rights in excess of the relevant
threshold will be deprived of voting rights or the voting rights will not be
exercisable, as the case may be, for two years from the date on which the owner
of the shares or voting rights complies with the notification requirement. In
addition, any shareholder who fails to comply with the above requirements may
have all or part of his voting rights suspended for up to five years by the
Commercial Court at the request of our Chairman, any shareholder or the AMF, and
may be subject to other penalties.
In addition to the requirements set out in French law, our statuts provide
that every person or corporate body who acquires or ceases to hold, directly or
indirectly, 2.5% or more of our shares must notify us within a period of 15 days
from the date when the threshold is exceeded. If the shareholder fails to comply
with the notification requirement, any shareholder holding at least 5% of the
authorized capital can cause the shares in excess of this threshold to be
deprived of voting rights for two years following the date of the notification.
In order to permit shareholders to give the notice required by law or by
our statuts, we are obligated to publish information disclosing the total number
of votes eligible to be cast at our annual ordinary general meeting in the BALO
within 15 calendar days of the general meeting. In addition, if the number of
eligible votes changes by at least 5% between two ordinary general meetings, we
are required to publish the number of votes then available in the BALO
70
within 15 calendar days of the change and to provide the AMF with a written
notice. In order to facilitate compliance with the notification requirements, a
holder of ADSs may notify the Depositary, and the Depositary shall immediately
forward the notification to us and the AMF.
Under the regulations of the AMF, and subject to limited exemptions, anyone
acquiring 33 1/3% or more of the share capital or voting rights of a French
listed company must initiate a public tender offer for the balance of our share
capital (including, for these purposes, all securities convertible into or
exchangeable for equity securities).
Changes in Capital
As of January 31, 2006 our share capital was (euro)636,105,652 million,
divided into 159,026,413 shares at a par value of (euro)4 each, all fully-paid
and of the same class. Pursuant to authorizations granted by the shareholders at
previous meetings, see "Authorizations," we are entitled to increase this share
capital under certain circumstances.
Pursuant to French law, our share capital may be increased only with the
approval of the shareholders at an extraordinary general meeting upon the
recommendation of the Board of Directors. Our share capital may be increased by
the issuance of additional shares, by the issuance of a new class of equity
securities or by an increase in the nominal value of the shares. The
shareholders may delegate to the Board of Directors the powers required to
effect in one or more stages (subject to the limitations provided by French law)
any increase in share capital previously authorized by the shareholders. A
reduction in our share capital can be accomplished either by decreasing the
nominal value of the shares or by reducing the number of outstanding shares. The
number of outstanding shares may be reduced either by an exchange of shares or
by our repurchase and cancellation of shares.
C. Material Contracts
We are not currently party to any contract, nor have we been party to any
contract within the last two years, which we believe to be individually material
to our business or operations.
D. Exchange Controls
The French commercial code currently does not limit the right of
non-residents of France or non-French persons to own and vote shares. However,
non-residents of France must file an administrative notice with French
authorities in connection with the acquisition of a controlling interest in our
company. Under existing administrative rulings, ownership of 20% or more of our
share capital or voting rights is regarded as a controlling interest, but a
lower percentage might be held to be a controlling interest in some
circumstances depending on factors such as the acquiring party's intentions and
the acquiring party's ability to elect directors, and financial reliance on us
by the relying party.
Under current French exchange control regulations, there are no limitations
on the import or export of capital or on the amount of payments that may be
remitted by us to non-residents. Laws and regulations concerning foreign
exchange control do require, however, that all payments or transfers of funds
(including payments of dividends to foreign shareholders) made by a French
resident to a non-resident be handled by an accredited intermediary. In France,
all registered banks and substantially all credit establishments are accredited
intermediaries.
E. Taxation
The following discussion describes the material French and United States
federal income tax consequences of the acquisition, ownership and disposition of
ADSs or shares by a U.S. Holder (as defined below). The following summary is for
general information only. It is not intended, and should not be construed, as
legal or professional tax advice. This discussion is not exhaustive of all
possible tax considerations. It does not purport to be a comprehensive
description of all the tax considerations that may be relevant. This discussion
does not address U.S. state, local and non-U.S. tax consequences (other than
French tax consequences). The discussion applies only to U.S. Holders who hold
ADSs or shares as capital assets for United States federal income tax purposes
and it does not address special classes of holders, such as:
o certain financial institutions;
71
o insurance companies;
o dealers and certain traders in securities or foreign currencies;
o persons holding ADSs or shares as part of a hedge, straddle,
conversion or other integrated transaction;
o persons whose functional currency for United States federal
income tax purposes is not the U.S. dollar;
o partnerships or other entities classified as partnerships for
United States federal income tax purposes;
o persons liable for the alternative minimum tax;
o tax-exempt organizations or retirements plans, except to a
limited extent under "French Taxation of US Holders of Our
Ordinary Shares or ADSs - Taxation of Dividends";
o persons that own or are deemed to own 10% or more of our voting
stock;
o persons who acquired ADSs or shares pursuant to the exercise of
any employee stock option or otherwise as compensation; o persons
that are not entitled to the benefits of the Convention between
the US and France for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and
Capital of August 31, 1994 (the "Treaty"); or
o persons whose ownership of our ordinary shares or ADSs is
connected with the conduct of business through a permanent
establishment or fixed base in France.
This discussion is based on the French Code General des Impots and the
regulations enacted thereunder, the U.S. Internal Revenue Code of 1986, as
amended, administrative pronouncements, judicial decision, final, temporary and
proposed U.S. Treasury regulations, and the Treaty, all as currently in effect
and subject to change, possibly with retroactive effect. This discussion is also
based in part on representations by the depositary and assumes that each
obligation provided for in, or otherwise contemplated by, the deposit agreement
or any other related document will be performed in accordance with its terms.
In addition, this discussion below does not address any aspects of tax laws
other than French tax laws or US federal income tax laws, the possible
application of US federal gift or estate taxation, or the potential application
of the alternative minimum tax.
Accordingly, holders and prospective holders of our ordinary shares or ADSs
are strongly urged to consult their own tax advisers as to the specific
consequences to them under French tax law, US federal income tax law, and other
tax laws of the purchase, ownership, and disposition of our ordinary shares or
ADSs, including, in particular, the effect of any state or local taxes or taxes
other than French taxes and US federal income taxes.
As used herein, the term "U.S. Holder" means a beneficial owner of ADSs or
shares that is, for United States federal income tax purposes:
o a citizen or resident of the United States;
o a corporation, or other entity taxable as a corporation, created
or organized in or under the laws of the United States or any
political subdivision thereof; or
o an estate or trust the income of which is subject to United
States federal income taxation regardless of its source.
In general, a U.S. Holder of ADSs will be treated as the holder of the
underlying shares represented by those ADSs for United States federal income tax
purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder
exchanges ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
pre-released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. Holders of ADSs. Such actions would also be
inconsistent with the claiming of the reduced rates of tax applicable to
dividends received by certain non-corporate U.S. Holders. Accordingly, the
analysis of the creditability of French taxes and the availability of the
reduced tax rates for dividends received by certain non-corporate U.S. Holders
of ADSs, each described below, could be affected by actions taken by parties to
whom ADSs are pre-released.
72
The following discussion assumes that Sodexho is not, and will not become,
a passive foreign investment company, as discussed below under "-Passive Foreign
Investment Company Considerations."
Taxation of Dividends
In France, dividends are paid out of after-tax income.
The French Finance Law of 2004 has abolished the avoir fiscal and the
precompte with respect to dividends paid to French individual shareholders as
from January 1, 2005. French non-individual shareholders are no longer entitled
to use the avoir fiscal attached to dividends paid on or before December 31,
2004 as from January 1, 2005. To compensate for the abolition of the avoir
fiscal, the French Finance Law of 2004 provides that, for dividends paid as from
January 1, 2005, French individual residents will be taxed only on 50% of the
dividends received by them and will be entitled to a tax allowance equal to
(euro)1,220 or (euro)2,440, depending on the marital status of the holder. In
addition, such shareholders will be entitled to a new tax credit equal to 50% of
the dividend received by them, capped at (euro)115 or (euro)230 depending on the
marital status of the holder. The French Finance Law of 2005 provides that, for
dividends paid as from January 1, 2006, French individual residents will be
taxed only on 40% of the dividends received by them and will be entitled to a
tax allowance equal to (euro)1,525 or (euro)3,050, depending on the marital
status of the holder. In addition, such shareholders will be entitled to a new
tax credit equal to 50% of the dividend received by them, capped at (euro)115 or
(euro)230 depending on the marital status of the holder.
Under French domestic law, dividends paid to non-residents are normally
subject to a 25% withholding tax.
Under the Treaty, the rate of French withholding tax on dividends paid to a
U.S. Holder whose ownership of ADSs or shares is not effectively connected with
a permanent establishment or a fixed base in France is reduced to 15%. Dividends
paid to an Eligible U.S. Holder and an Eligible Tax Exempt Holder, each as
defined below, will be subject to the reduced rate of 15% at the time of
payment, provided that such holder establishes before the date of payment that
such holder is a resident of the United States under the Treaty in accordance
with the procedures described below. As a consequence of the enactment of the
provisions of the French Finance Law of 2004 mentioned above, non-individual
Eligible U.S. Holders are no longer entitled to claim a refund of the avoir
fiscal for dividends paid as from January 1, 2004 and individual Eligible U.S.
Holders are no longer entitled to claim a refund of the avoir fiscal for
dividends paid as from January 1, 2005. However, according to the French
Guidelines 5-I-2-05 released on August 11, 2005, an individual Eligible U.S.
Holder will be entitled to a tax credit equal to 50% of the received
distribution, capped at (euro) 115 or (euro) 230 according to the taxpayer's
family status. This tax credit is charged to the tax due or is reimbursed less a
15% withholding tax. Procedures for claiming the payment in respect of the new
tax credit mentioned above for dividends paid as from January 1, 2005 have yet
to be published.
An Eligible U.S. Holder is a U.S. Holder whose ownership of ADSs or shares
is not effectively connected with a permanent establishment or fixed base in
France and who is (1) an individual or other non-corporate holder that is a
resident of the United States as defined pursuant to the provisions of the
Treaty, (2) a United States corporation, other than a regulated investment
company, (3) a United States corporation, which is a regulated investment
company, provided that less than 20% of its shares are beneficially owned by
persons who are neither citizens nor residents of the United States or (4) a
partnership, or trust that is treated as a resident of the United States as
defined pursuant to the provisions of the Treaty, but only to the extent that
its partners, beneficiaries or grantors would qualify under clause (1) or (2)
above.
An Eligible Tax-Exempt Holder is a tax-exempt United States pension fund or
other tax-exempt entity (including certain state-owned institutions,
not-for-profit organizations and individuals with respect to dividends
beneficially-owned by such individuals and derived from an investment in a
tax-favoured retirement account) who is nonetheless eligible for the reduced
withholding tax rate of 15% provided for by the Treaty subject to certain
formalities.
Dividends paid to an Eligible U.S. Holder will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if (i) such holder
duly completes and provides the paying agent with the relevant Treasury Form RF1
A EU-No. 5052 (the "Form") before the date of payment of the relevant dividend,
or (ii) if such holder duly completes and provides the institution in charge of
the management of the stock account (etablissement gestionnaire du
compte-titres) with a simplified certificate (the "Certificate") in accordance
with the French Guidelines 4 J-1-05 released on February
73
25, 2005. Dividends paid to any U.S. Holder that has not filed the relevant
completed form or Certificate before the dividend payment date will be subject
to French withholding tax at the rate of 25%. Such holder may claim a refund of
the excess withholding by completing and providing the French tax authorities
with the relevant form before December 31st of the year following the year
during which the dividend is paid.
The forms or the Certificate, together with their respective instructions,
are available from the United States Internal Revenue Service and at the Centre
des Impots des Non-Residents (9, rue d'Uzes, 75094 Paris Cedex 2, France). The
depositary will provide to all U.S. Holders of ADRs the forms or Certificate,
together with the respective instructions, and will arrange for the filing with
the French tax authorities of all forms and Certificates completed by U.S.
Holders of ADRs and returned to the depositary within sufficient time.
Procedures for claiming the payment in respect of the new tax credit mentioned
above for dividends paid as from January 1, 2005 have yet to be published.
Distributions received by a U.S. Holder on ADSs or shares, other than
certain pro rata distributions of shares, will constitute foreign-source
dividend income to the extent paid out of Sodexho's current or accumulated
earnings and profits as determined for United States federal income tax
purposes. The amount of this dividend will include any amounts withheld in
respect of French taxes. Subject to applicable limitations that may vary
depending upon a U.S. Holder's individual circumstances and the discussion above
regarding concerns expressed by the U.S. Treasury, dividends paid to certain
non-corporate U.S. Holders in taxable years beginning before January 1, 2009
will be taxable at a maximum rate of 15%. Non-corporate U.S. Holders should
consult their own tax advisers to determine whether they are subject to any
special rules that limit the availability of these rates. The dividend will not
be eligible for the dividends-received deduction generally allowed to corporate
U.S. Holders. Such dividends will constitute passive income or, in certain
cases, financial services income for foreign tax credit purposes.
Dividends paid in euro will be included in a U.S. Holder's income in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the date
of the U.S. Holder's (or in the case of ADSs, the depositary's) receipt of the
dividend, regardless of whether the payment is in fact converted into U.S.
dollars. If the dividend is converted into U.S. dollars on the date of receipt,
the U.S. Holder generally should not be required to recognize foreign currency
gain or loss in respect of the dividend income. A U.S. Holder may have foreign
currency gain or loss if the amount of such dividend is not converted into U.S.
dollars on the date of its receipt.
French taxes withheld from dividends on ADSs or shares at a rate not
exceeding the rate provided in the Treaty will generally be creditable against a
U.S. Holder's United States federal income tax liability, subject to applicable
restrictions and limitations that may vary depending upon the U.S. Holder's
circumstances and the discussion above regarding concerns expressed by the U.S.
Treasury. Instead of claiming a credit, a U.S. Holder may elect to deduct French
withholding taxes in computing its taxable income, subject to generally
applicable limitations. U.S. Holders should consult their own tax advisers to
determine whether they are subject to any special rules that limit their ability
to make effective use of foreign tax credits.
Taxation of Capital Gains
Under the Treaty, French tax generally will not be levied on any capital
gain derived from the sale of ADSs or shares by a U.S. Holder eligible for the
benefits of the Treaty.
A U.S. Holder will generally recognize capital gain or loss on the sale or
other disposition of ADSs or shares, which will be long-term capital gain or
loss if the holder has held such ADSs or shares for more than one year. The
amount of the U.S. Holder's gain or loss will be equal to the difference between
the amount realized on the sale or other disposition and such holder's tax basis
in the ADSs or shares, as determined in U.S. dollars. Any gain or loss will
generally be U.S.-source for foreign tax credit purposes.
French Estate and Gift Taxes
Under "The Convention Between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to taxes on Estates, Inheritance and Gifts of November 24,
1978," a transfer of ADSs or shares by gift or by reason of the death of a U.S.
Holder that would otherwise be subject to French gift or inheritance tax,
respectively, will generally not be subject to French tax unless (1) the donor
or the transferor is domiciled in France at the time of making the gift, or at
the time of his or her death, or (2) the ADSs or shares were used in, or held
for use in, the conduct of a business through or pertaining to a permanent
establishment fixed base in France. Prospective investors in shares or ADSs
should consult their own advisors as to the
74
applicability of the November 24, 1978 Convention mentioned above, and in
particular as to the interpretation of article 8 of said Convention.
French Wealth Tax
The French wealth tax does not apply to any U.S. Holder that is not an
individual or, in the case of natural persons, who owns alone or with their
parents, directly or indirectly, ADSs or shares representing the right to less
than 25% of our profits. Prospective investors in shares or ADSs should consult
their own advisors as to the applicability of the Treaty and in particular to
the interpretation of its article 23.
Passive Foreign Investment Company Considerations
Sodexho believes that it was not a passive foreign investment company
("PFIC") for United States federal income tax purposes for the taxable year
ended August 31, 2005. However, because PFIC status depends upon the composition
of a company's income and assets and the market value of its assets from time to
time, there can be no assurance that Sodexho will not be considered a PFIC for
any taxable year. If Sodexho were treated as a PFIC for any taxable year during
which a U.S. Holder held ADSs or shares, certain adverse United States federal
income tax consequences could apply.
U.S. Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries may be subject
to information reporting and to backup withholding unless the U.S. Holder is a
corporation or other exempt recipient or, in the case of backup withholding, the
holder provides a correct taxpayer identification number and certifies that no
loss of exemption from backup withholding has occurred. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit against
the holder's United States federal income tax liability and may entitle the
holder to a refund, provided that the required information is furnished to the
United States Internal Revenue Service.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
We are subject to the information requirements of the Securities Exchange
Act of 1934 (the "Exchange Act") except that, as a foreign issuer, we are not
subject to the proxy rules under Section 14 of the Exchange Act and our
officers, directors and principal shareholders are not subject to the insider
short-swing profit disclosure and recovery provisions under Section 16 of the
Exchange Act. In accordance with the Exchange Act reporting requirements
applicable to us, we file annual reports on Form 20-F with and submit certain
information on Form 6-K, including our quarterly revenue announcements and our
semi-annual profit and loss information (both of which will be prepared in
accordance with French GAAP and generally will not include a reconciliation to
U.S. GAAP), to the United States Securities and Exchange Commission (the "SEC").
The information that will be filed on Form 6-K will be substantially less
detailed than interim financial statements required of a domestic registrant
pursuant to Article 10 of Regulation S-X. You may read and copy any document
that we file at the Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 and view them on line at www.sec.gov. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You may also inspect our filings at the regional offices of the
SEC located at Citicorp, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and at 233 Broadway, New York, New York 10279 and view them on-line at
www.sec.gov. To provide shareholders with regular information about our
businesses, financial results and share price, we also offer our annual report
in French and English, including the "Reference Document" filed with the AMF.
You may request a copy of the aforementioned filings and annual report at no
cost by writing or telephoning the offices of Sodexho Alliance, SA, attention
Jean-Jacques Vironda, Investor Relations, 3, avenue Newton, 78180
Montigny-le-Bretonneux, France. Our telephone
75
number for these requests is 011-33-0-1-30-85-72-03, our fax number is
011-33-0-1-30-85-51-81 and our e-mail address is
jean-jacques.vironda@sodexhoalliance.com.
I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate and foreign exchange rate risks associated
with underlying assets and liabilities. We manage this exposure as it pertains
to our borrowings through the use of interest rate, currency and cross-currency
derivative contracts. These swap contracts are entered into with major high
credit quality institutions, in accordance with procedures and within limits
approved by our Board of Directors. Our policy is not to use derivative
contracts for any other purpose than hedging our financial exposures.
Foreign Exchange Risk Exposure
Foreign exchange risk exposure arises from the possibility that changes in
foreign currency exchange rates will impact the value of revenues, expenses,
assets and liabilities denominated in foreign currencies. Our results of
operations, financial position, and cash flows are directly dependent on the
periodic monitoring and adjustment of the balance of assets and liabilities in
each of our main operating currencies, which are the euro, the U.S. dollar and
the British pound sterling. The impact of fluctuations in exchange rates is
mitigated to a large extent by the fact that within each of our subsidiaries,
revenues and the related expenses are generally denominated in the same
currency. In order to match the cash flows pertaining to borrowing instruments
held by our subsidiaries with the revenues to which they relate, we occasionally
enter into currency or cross-currency swap contracts.
Interest Rate Exposure
In accordance with our policy, we may borrow at variable rates and use
interest rate swaps in order to fix future interest payments, effectively
converting borrowings from floating to fixed rates. As of August 31, 2005,
including the effect of interest and cross-currency swap agreements,
approximately 71% of our borrowings were at fixed rates, with an average
interest rate of 5.3%.
Sensitivity Analysis
A hypothetical strengthening or weakening by 10% in the value of the dollar
relative to the euro would have resulted in an increase or decrease,
respectively, of our fiscal 2005 net income by approximately (euro)3 million. A
hypothetical strengthening or weakening by 10% in the value of the British pound
sterling relative to the euro would have resulted in an increase or decrease,
respectively, of our fiscal 2005 net income by approximately (euro)1 million.
A hypothetical increase of 1% in average interest rates would have resulted
in an increase in fiscal 2005 interest expense of approximately (euro)5.2
million on our variable rate borrowings.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
76
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)). As discussed in Note 5,
the Group restated its French GAAP to U.S. GAAP reconciliation of shareholders'
equity and net income as of and for the years ended August 31, 2004, 2003, 2002
and 2001. The restatement principally related to the Group's determination that
incremental goodwill and intangible assets recognized under U.S. GAAP as from
fiscal 2001 and continuing in subsequent years for certain acquisitions should
have been recorded in the functional currency of the related entity and errors
in the accounting for pension and other post-retirement benefit plans and other
adjustments which mainly related to the accounting for debt issuance costs as
from the year ended August 31, 2001 and also carrying through to subsequent
years. These errors were identified as a result of the implementation of IFRS
which will become the Group's primary reporting GAAP effective for fiscal 2006.
The Group has identified the need to reinforce documentation and the skills
and competencies of its financial teams both within its subsidiaries and
centrally, including the number of personnel with technical expertise in the
area of financial reporting. During fiscal 2005 the Group successfully recruited
a number of additional finance and accounting personnel. The Group intends to
continue during fiscal 2006 to reinforce these skills and competencies.
As a result, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, the
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized and reported as
and when required. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives.
French Descriptive Report on Internal Controls
Under French law, we are required to publish descriptions of the material
elements of our internal controls on financial and accounting information. The
French report, which is included in our Document de Reference for the year
ending August 31, 2005, is not the equivalent of the report we will be required
to file under the Sarbanes-Oxley Act of 2002 beginning with the annual report to
be filed for the year ending August 31, 2006. An English translation of our
French report is available on the Group's website, www.sodexho.com.
ITEM 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Robert Baconnier, who serves
on the audit committee, has the background and qualifications necessary to be
considered an audit committee financial expert.
ITEM 16B. Code of Ethics
In 2003, the Board of Directors adopted a written Code of Conduct for
Senior Managers. Each of Sodexho Alliance's senior financial managers, including
the Group's Chief Executive Officer, Chief Financial Officer, Chief Accountant,
and others performing similar functions, signed a statement acknowledging his or
her compliance with the Code. The full text of the Code of Conduct is available
on Sodexho Alliance's internet website at www.sodexho.com/sodexhocorp/en/
permanent_elements/library.
77
ITEM 16C. Principal Auditor Fees and Services
PricewaterhouseCoopers KPMG
Amount Percentage Amount Percentage
------------------------------------------------------------------------------------------------------
(millions of euros) Fiscal 2005 Fiscal 2004 Fiscal 2005 Fiscal 2004 Fiscal 2005 Fiscal 2004 Fiscal 2005 Fiscal 2004
------------------------------------------------------------------------------------------------------
Audit and audit-related:
Audit fees 5.9 4.1 89% 78% 3.8 2.0 95% 95%
Audit-related fees 0.4 0.1 6% 2% 0.1 - 3% -%
------- ------- ------- ------- ------- ------- ------- -------
Total audit and audit-related
fees 6.3 4.2 95% 80% 3.9 2.0 98% 95%
Other non-audit services:
Tax, legal and human
resources consulting 0.3 1.0 5% 19% 0.1 0.1 2% 5%
Other - 0.1 0% 1% - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total other services 0.3 1.1 5% 20% 0.1 0.1 2% 5%
------- ------- ------- ------- ------- ------- ------- -------
Total 6.6 5.3 100% 100% 4.0 2.1 100% 100%
======= ======= ======= ======= ======= ======= ======= =======
The fees paid by Group subsidiaries to accounting firms other than
PricewaterhouseCoopers and KPMG in connection with the audit of their financial
statements totaled (euro)0.5 million for the year ended August 31, 2005.
Included in audit fees are amounts of (euro)1.6 million and (euro)1.5
million for PricewaterhouseCoopers and KPMG, respectively, relating to the
audits of financial statements prepared in accordance with International
Financial Reporting Standards.
ITEM 16D. Comparison of French and U.S. Corporate Governance Practices
As a result of the Group's activity on two different stock exchanges, the
Group's corporate governance structure includes the mandatory provisions of
French corporate governance law and the securities laws and regulations of both
France and the U.S., as well as the rules that are promulgated by both public
markets. As a result, the Group believes that its corporate governance structure
is robust and reflects the evolving best practices of corporate governance in
the U.S. and France. Disclosure of significant differences between our corporate
governance practices and those required of domestic companies by the New York
Stock Exchange listing standards is available on Sodexho Alliance's internet
website at www.sodexho.com.
ITEM 16.E Purchases of Equity Securities by Sodexho Alliance and
Affiliated Purchasers
Total Number of Shares Maximum Number of
Average Price Paid Purchased as Part of Shares that May Yet Be
Total Number of per Share Publicly Announced Plans Purchased Under the
Period Shares Purchased (in euro) or Programs Plans or Programs(3)
---------------- ---------------- ------------------ ------------------------ ----------------------
September 2004 12,883,551
October 2004 106,522 20.47 106,522(1) 12,779,194
November 2004 12,824,470
December 2004 12,824,470
January 2005 12,944,056
February 2005 13,006,849
March 2005 341,121 24.38 341,121(2) 12,759,852
April 2005 136,228 24.36 136,228(2) 12,665,650
May 2005 300,000 25.79 300,000(2) 12,441,014
June 2005 200,000 26.07 200,000(2) 12,262,567
78
Total Number of Shares Maximum Number of
Average Price Paid Purchased as Part of Shares that May Yet Be
Total Number of per Share Publicly Announced Plans Purchased Under the
Period Shares Purchased (in euro) or Programs Plans or Programs(3)
---------------- ---------------- ------------------ ------------------------ ----------------------
July 2005 12,405,104
August 2005 12,466,341
---------------- ---------------- ------------------ ------------------------
TOTAL 1,083,871 24.69 1,083,871
----------
(1) The Annual Shareholders' Meeting of February 3, 2004 authorized the Board
of Directors to buy and sell the company's own shares on the market for a
period of 18 months in compliance with the objectives and procedures of the
stock purchase program approved by the Autorites des Marches Financiers
(AMF) under visa n(degree) 04-025 of January 14, 2004 (pursuant to COB
Regulation n(degree) 98-02 modified by COB Regulation n(degree) 2000-06).
The number of shares held or acquired may not exceed 10% of the authorized
share capital. Under this authorization, 812,272 shares have been
repurchased from May 6, 2004 to October 13, 2004.
(2) The Annual Shareholders' Meeting of February 8, 2005 authorized the Board
of Directors to buy and sell the company's own shares on the market for a
period of 18 months in compliance with the objectives and procedures of the
stock purchase program approved by the Autorites des Marches Financiers
(AMF) under visa n(degree) 05-109 of February 22, 2005. The maximum number
of shares that may be purchased by virtue of this authorization may not
exceed 10% of the total number of shares constituting the share capital,
this number being eventually adjusted to take into account operations
modifying the share capital. Under no circumstances may the total number of
share the Company holds, either directly or indirectly through its indirect
subsidiaries, exceed 10% of the share capital. Under this authorization,
977,349 shares have been repurchased from March 2, 2005 to June 20, 2005.
(3) Based on 10% of the Company's shares capital, and after deducting the
shares held by the Company to cover the share purchase option plans for
Company employees, as well as after deducting the shares held by the
subsidiaries.
PART III
ITEM 17. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-57 of this Annual Report.
ITEM 18. FINANCIAL STATEMENTS
We have responded to Item 17 in lieu of responding to this Item.
ITEM 19. EXHIBITS
(a) The following exhibits are filed as part of this Form 20-F
Exhibit
Number Description
------ -----------
1 Sodexho Alliance Restated Corporate Statuts (English
translation)(incorporated by reference to Exhibit 1 to the
Registration Statement on Form 20-F filed by Sodexho Alliance
SA on March 19, 2002, Commission File No. 1-31274)
2.1 Composite Conformed Term and Revolving Facilities Agreement,
dated April 6, 2001, for Sodexho Alliance, SA, arranged by
Citibank International plc, Goldman Sachs International and SG
Investment Banking with Societe Generale acting as Agent and
Societe Generale acting as Issuing Bank (as amended by a letter
dated 27 April 2001, an Amendment and Restatement Agreement
dated 8 June 2001 and as amended by letters dated March 14,
2003 and May 15, 2003)(incorporated by reference to Exhibit 2.1
to the Registration Statement on Form 20-F filed by Sodexho
Alliance SA on December 18, 2003, Commission File No.
001-31274)
2.2 Form of Deposit Agreement among Sodexho Alliance, SA, The Bank
of New York as Depositary, and all Owners and Beneficial Owners
from time to time of American Depositary Receipts issued
thereunder (incorporated by reference to Exhibit A of the
Registration Statement on Form F-6 filed by The Bank of New
York and the
79
Exhibit
Number Description
------ -----------
Company on March 21, 2002, Commission File No. 333-84970)
2.3 Terms and Conditions of Offering of Euro 1,000,000,000 5.875
percent Bonds due 2009 (incorporated by reference to Exhibit
2.3 to the Registration Statement on Form 20-F filed by Sodexho
Alliance SA on March 19, 2002, Commission File No. 1-31274)
2.4 Agreement by Registrant to Furnish Certain Information to the
Securities and Exchange Commission (incorporated by reference
to Exhibit 2.4 to the Registration Statement on Form 20-F filed
by Sodexho Alliance SA on March 19, 2002, Commission File No.
1-31274)
4.1 Agreement and Plan of Merger, dated as of May 1, 2001, among
Sodexho Marriott Services, Inc., Sodexho Alliance, SA and SMS
Acquisition Corp. (incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed by Sodexho Marriott
Services, Inc. on May 4, 2001, Commission File No. 1-12188)
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form 20-F filed by Sodexho Alliance SA on March
19, 2002, Commission File No. 1-31274)
4.2 Agreement dated December 30, 1991 between Felix Bellon SA and
Sodexho S.A. as amended (English translation) (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form
20-F filed by Sodexho Alliance SA on December 18, 2003,
Commission File No. 001-31274)
8.1 List of Significant Subsidiaries (incorporated by reference to note
4.4 of the Consolidated Financial Statements of Sodexho Alliance,
SA)
12.1 Certification by Michel Landel, Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
12.2 Certification by Sian Herbert-Jones, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13 Certifications by Michel Landel, Chief Executive Officer and
Sian Herbert-Jones, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
14 Employment contract of Michel Landel
80
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing this Annual Report on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SODEXHO ALLIANCE, SA
By: /s/ Sian Herbert-Jones
-------------------------------
Name: Sian Herbert-Jones
Title: Chief Financial Officer
Dated: February 24, 2006
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Sodexho Alliance, SA
Report of Independent Registered Public Accounting Firm................. F-1
Consolidated Income Statements for each of the fiscal years ended
August 31, 2005, 2004 and 2003....................................... F-2
Consolidated Balance Sheets as of August 31, 2005 and 2004.............. F-3
Consolidated Statements of Cash Flows for each of the fiscal years ended
August 31, 2005, 2004 and 2003..................................... F-4
Notes to the Consolidated Financial Statements.......................... F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Sodexho Alliance, SA
We have audited the accompanying consolidated balance sheets of Sodexho
Alliance, SA and its subsidiaries (together, the "Group") as of August 31, 2005
and 2004 and the related consolidated statements of income and of cash flows
for each of the three fiscal years in the period ended August 31, 2005, all
expressed in millions of euro. These financial statements are the
responsibility of the Group's management, and they have been approved by the
Board of Directors. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us
present fairly, in all material respects, the financial position of the Group
as of August 31, 2005 and 2004, and the results of its operations and its cash
flows for each of the three fiscal years in the period ended August 31, 2005,
in conformity with accounting principles generally accepted in France.
As discussed in note 1, the Group changed its method of accounting for
retirement and other long-term employee benefits effective September 1, 2004.
Accounting principles generally accepted in France vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences, is presented in note 5, as restated, to the consolidated financial
statements.
Paris, France
February 21, 2006
PRICEWATERHOUSECOOPERS AUDIT
Hubert Toth
F-1
SODEXHO ALLIANCE, SA
CONSOLIDATED INCOME STATEMENTS
Years ended August 31,
----------------------------------
2005 2004 2003
------ ------ ------
(millions of euro)
Revenues............................................................. 11,672 11,494 11,687
Other income......................................................... 48 40 37
Purchases............................................................ (3,983) (3,942) (3,955)
Employee costs....................................................... (5,395) (5,277) (5,519)
Other external charges............................................... (1,535) (1,505) (1,482)
Taxes, other than income taxes...................................... (93) (82) (79)
Depreciation and increase in provisions.............................. (184) (213) (175)
------ ------ ------
Earnings Before Interest, Exceptional Items, Income Taxes, Income
from Equity Method Investees, Goodwill Amortization and Minority
Interests (EBITA)................................................ 530 515 514
Financial expense, net............................................... (103) (118) (152)
------ ------ ------
Income Before Exceptional Items, Income Taxes, Income from Equity
Method Investees, Goodwill Amortization and Minority Interests.... 427 397 362
Exceptional (expense) income, net.................................... (95) (33) 1
Income taxes......................................................... (103) (109) (134)
------ ------ ------
Income Before Income from Equity Method Investees, Goodwill
Amortization and Minority Interests............................... 229 255 229
Net income from equity method investees.............................. - 1 4
Goodwill amortization................................................ (60) (59) (62)
------ ------ ------
Group Net Income Before Minority Interests........................... 169 197 171
Minority interests in net income of consolidated subsidiaries........ (10) (14) (9)
------ ------ ------
Group Net Income..................................................... 159 183 162
====== ====== ======
Earnings per share (in euro)......................................... 1.00 1.15 1.02
====== ====== ======
Diluted earnings per share (in euro)................................. 1.00 1.15 1.00
====== ====== ======
See accompanying notes to the consolidated financial statements.
F-2
SODEXHO ALLIANCE, SA
CONSOLIDATED BALANCE SHEET
August 31,
------------------
2005 2004
----- -----
ASSETS (millions of euro)
Fixed and Intangible Assets, Net
Goodwill.......................................................... 1,338 1,394
Intangible assets................................................. 2,476 2,519
Property, plant and equipment..................................... 365 362
Financial investments............................................. 77 66
Equity method investees........................................... 25 14
------ ------
Total Fixed and Intangible Assets, Net............................... 4,281 4,355
Current and Other Assets
Inventories ...................................................... 177 163
Accounts receivable, net.......................................... 1,508 1,368
Prepaid expenses, other receivables and other assets.............. 627 552
Marketable securities............................................. 647 536
Restricted cash................................................... 206 168
Cash.............................................................. 513 505
------ ------
Total Current and Other Assets....................................... 3,678 3,292
------ ------
TOTAL ASSETS......................................................... 7,959 7,647
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common stock...................................................... 636 636
Additional paid in capital........................................ 1,186 1,186
Consolidated reserves............................................. 314 370
------ ------
Total Shareholders' Equity........................................... 2,136 2,192
Minority Interests................................................... 20 25
Provisions for Contingencies and Losses.............................. 172 93
Liabilities
Borrowings........................................................ 1,940 2,128
Accounts payable.................................................. 1,120 1,035
Vouchers payable.................................................. 1,000 843
Other liabilities................................................. 1,571 1,331
------ ------
Total Liabilities.................................................... 5,631 5,337
------ ------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES........................... 7,959 7,647
====== ======
See accompanying notes to the consolidated financial statements.
F-3
SODEXHO ALLIANCE, SA
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended August 31,
----------------------------------
2005 2004 2003
------ ------ ------
(millions of euro)
Operating Activities
Consolidated net income before income (loss) from equity
method investees and minority interests................. 169 197 167
Noncash items:
Depreciation and provisions......................... 307 263 215
Deferred taxes...................................... (52) (14) (9)
Losses (gains) on disposals and other, net of tax... 2 1 14
------ ------ -----
Cash provided by operating activities................... 426 447 387
Dividends received from equity method investees..... - 4 3
Change in working capital from operating activities. 229 163 100
------ ------ ------
Net cash from operating activities.......................... 655 614 490
Investing Activities
Tangible and intangible fixed assets........................ (205) (181) (241)
Fixed asset disposals....................................... 15 19 15
Acquisitions, net of dispositions, of consolidated
subsidiaries............................................ (7) (74) (33)
Change in working capital from investing activities......... (6) (9) (19)
------ ------ ------
Net cash used in investing activities....................... (203) (245) (278)
Financing Activities
Dividends paid to parent company shareholders............... (108) (95) (94)
Dividends paid to minority shareholders of consolidated
subsidiaries............................................ (8) (8) (11)
Increase in shareholders' equity............................ - 1 0
Proceeds from borrowings.................................... 477 271 104
Repayment of borrowings..................................... (656) (541) (178)
Change in working capital from financing activities......... (37) (29) (23)
------ ------ ------
Net cash used in financing activities....................... (332) (401) (202)
------ ------ ------
Increase (decrease) in net cash, cash equivalents and
marketable securities................................... 120 (32) 10
====== ====== ======
Cash, cash equivalents and marketable securities, as of
beginning of period..................................... 1,209 1,278 1,307
Add: provisions as of beginning of period 12 8 23
Cash, cash equivalents and marketable securities, as of end
of period .............................................. 1,365 1,209 1,278
Add: provisions as of end of period 3 12 8
Net effect of exchange rates on cash........................ (27) 33 54
------ ------ ------
Increase (decrease) in net cash, cash equivalents and
marketable securities....................................... 120 (32) 10
====== ====== ======
See accompanying notes to the consolidated financial statements.
F-4
SODEXHO ALLIANCE, SA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND RELATED FINANCIAL INFORMATION
Sodexho Alliance, SA and its subsidiaries (together, the "Group") applies
accounting principles that comply with French law, including the consolidation
accounting principles established by the Comite de la Reglementation Comptable
No 99-02 ("Regulation CRC 99-02") in France (collectively, "French GAAP") in
its consolidated financial statements. Regulation CRC 99-02 was adopted as of
September 1, 2000, and its impact on the financial statements is described
below. The financial statements of Group companies, which have been prepared in
accordance with the accounting principles applicable in their respective
countries, conform to the accounting principles described above in
consolidation.
The differences between French GAAP and accounting principles generally
accepted in the United States ("US GAAP") that have an impact on the Group's
consolidated financial statements are described in note 5.
The financial statements have been prepared on a basis consistent with the
prior year, except for the change in the method of accounting for retirement
and other long-term employee benefits (see Retirement and other long-term
employee benefits, below). Consistent with recommendation no. 2003-R01 issued
by the Conseil National de la Comptabilite (CNC), the Group has elected to
apply the preferred method of accounting for such benefits.
Amounts in tables are expressed in millions of euro, unless indicated
otherwise.
Significant Events During the Year
McReynolds vs. Sodexho, Inc. litigation
On March 8, 2001, ten current and former employees Marriott Management
Services, Inc., later known as Sodexho Marriott Services, Inc. and now known as
Sodexho, Inc., filed a lawsuit alleging that they and other African-Americans
were discriminated against in promotions on the basis of their race. On June
25, 2002, the district court certified the case as a class action for purposes
of determining liability. On April 27, 2005, Sodexho, Inc. agreed to settle the
lawsuit in order to avoid protracted legal proceedings, but without admitting
liability. The Judge subsequently approved the settlement on August 10, 2005.
Under the terms of the settlement, Sodexho, Inc. committed to make monetary
payments to eligible class members and to the class' attorneys for a total
amount of up to $80 million, as well as to continue to promote its diversity
programs. The Group anticipates that these payments will be made during the
second half of fiscal 2006. A supplementary provision of $78 million ((euro)61
million) has been recognized in the financial statements for fiscal 2005, to
cover settlement payments and defense costs net of insurance. This settlement
had a net negative impact of (euro)38 million on the consolidated income
statement for the year ended August 31, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of Sodexho
Alliance, SA and its principal subsidiaries. Subsidiaries which are effectively
controlled by Sodexho Alliance are fully consolidated. Companies which are not
fully consolidated but over which Sodexho Alliance is able to exercise
significant influence, are accounted for using the equity method. All fully
consolidated companies that do not have an August 31 year-end are consolidated
on the basis of financial statements prepared on or around August 31 and for
the twelve-month period then ended.
A number of companies having a minimal impact on the Group's consolidated
financial statements have been excluded from consolidation, notably those
having sales of less than (euro)2 million, net income (loss) of less than
(euro) 0.1 million, and total assets of less than (euro)2 million.
F-5
The term "Change in consolidation scope" in certain footnote schedules
refers to activity related solely to acquisitions and disposals of subsidiaries
and/or increases or decreases in ownership percentages that result from a
change in the method of consolidation (for example, from the equity method to
full consolidation).
A list of subsidiaries and the Group's percentage interest and percentage
of voting rights held is provided in note 4.6.
Revenue Recognition
Revenues are recognized when all of the following criteria have been met:
(i) persuasive evidence of an arrangement exists, (ii) services have been
rendered, (iii) the sales price is fixed or determinable and (iv)
collectibility is reasonably assured.
Revenues for the service voucher segment include commissions received from
customers, which are recorded upon issuance of the vouchers to the customers;
commissions received from affiliates, which are recorded upon redemption of the
vouchers; and investment income realized on the nominal value of the vouchers
during the period from their issuance through redemption (generally one to
three months).
Retirement and Other Long-Term Employee Benefits
Effective September 1, 2004, all retirement and other long-term employee
benefits are recognized in the consolidated financial statements. The
first-time adoption of CNC recommendation 2003-R01 reduced consolidated
shareholders' equity by (euro)104 million. Tax and employee-related liabilities
were increased by (euro)147 million, and deferred tax assets by (euro)43
million.
The Group has adopted the projected unit credit method as the actuarial
method for measuring its retirement benefit obligations. Factors used in
calculating the obligation include length of service, life expectancy, salary
inflation and staff turnover, as well as economic assumptions such as general
inflation, the rate of return on assets, and the discount rate. Cumulative
actuarial gains and losses representing more than 10% of the greater of (i) the
gross amount of the obligation or (ii) the fair value of plan assets are
amortized over the average residual working life of active employees (the
"corridor" method).
The expense recognized in the income statement mainly comprises:
- rights vesting during the period;
- movements arising from the discounting of vested rights;
- the actual return on externally-held plan assets;
- the impact of plan amendments in prior periods or new plans;
- the amortization of actuarial gains and losses.
The liability recognized in the balance sheet represents the obligation
net of externally-held plan assets and of items (primarily actuarial gains and
losses) that are amortizable and consequently are not recognized.
The Group's principal retirement and other employee benefit plans are
described below:
- In France, the obligation represents lump-sum benefits that are
payable on retirement if the employee is still with the company at
retirement age, and long-service awards. This obligation is primarily
covered by specific provisions recognized in the balance sheet.
- The Sodexho Group also contributes to multi-employer plans, in
particular in Sweden and the United States. These plans are accounted
for as defined-contribution plans, because the information provided
by the plan managers is insufficient for them to be classified as
defined-benefit plans.
- In the United Kingdom, Sodexho's obligation relates to a
complementary retirement plan, partially funded by externally-held
assets, and calculated on the basis of 1) final salary, in the case
of managerial grade staff allocated to the private sector; and 2)
benefits comparable to those offered in the public sector, in the
case of managerial grade staff allocated to the public sector.
F-6
It was decided to close the United Kingdom plan to new employees
effective July 1, 2003, and increase contributions to the fund so
that the obligation will be fully funded by the end of an 8-year
period.
- In continental Europe other than France, the main defined-benefits
plans are as follows:
- In Italy, there is a legal obligation to pay a lump-sum
retirement benefit ("TFR"). At each fiscal year-end, rights
fully vested in employees are valued and discounted as specified
by law, and recognized in full as a liability.
- In the Netherlands, certain employees are entitled to
complementary retirement or early retirement benefits.
Stock Options
Sodexho Alliance has acquired treasury shares in connection with its stock
option plans, which are included in marketable securities. A provision (and
corresponding expense) is recorded if at the closing date of the period, the
acquisition cost of the shares acquired exceeds the exercise price of the
options awarded. If the number of treasury shares acquired is less than the
number of options awarded, a liability (and corresponding expense) is recorded
for the difference between the market price at the end of the period and the
exercise price, multiplied by the number of remaining shares to be acquired for
the applicable tranche of stock options. This liability is subject to
adjustment in future periods based on movements in the market price of the
Group's common shares.
Vendor Discounts and Allowances
Discounts and allowances obtained from vendors are recorded as a reduction
to the related costs in the income statement.
Exceptional income and expenses
Exceptional income and expenses are recorded for significant items which
by nature, or due to their unusual or non-recurring character, are not
considered to be inherent to the operating activities of the Group. In general,
such costs relate to gains or losses on asset dispositions, restructuring
costs, exceptional depreciation or amortization of fixed and intangible assets,
or provisions or expenses recorded in connection with employee stock option
plans.
Earnings per Share
Earnings per share and diluted earnings per share are calculated in
accordance with Position Statement No. 27 of the Ordre des Experts Comptables.
Earnings per share is calculated by dividing group net income by the average
number of shares outstanding during the year, including treasury shares. In the
calculation of diluted earnings per share, the denominator is increased by the
number of potential shares outstanding, and the numerator is increased by the
net-of-tax interest income (calculated at the taux moyen mensuel du marche
monetaire euro) on the proceeds which would have been obtained from the
issuance of these shares. For fiscal 2003, the potential shares included in
diluted earnings per share relate to stock options awarded but not yet
exercised and warrants outstanding from the 1996 bond issuance, which were
exercisable prior to June 2004.
As of August 31, 2004 and 2005, there were no commitments to create new
shares. Therefore, earnings per share and diluted earnings per share are the
same.
Foreign Currency Transactions and Translation
Countries with stable currencies
For subsidiaries located in countries with stable, non-hyperinflationary
currencies, assets and liabilities are translated using the end of period
exchange rate. Income statement and cash flow statement line items are
translated using the average exchange rate for the year, calculated using
monthly averages. Exchange rates used are obtained from the Euronext Paris and
other international financial markets. The difference between the translation
of the income statement at average and period end rates, as well as the
difference between the opening balance sheet accounts as
F-7
translated at beginning and end of period rates is recorded in shareholders'
equity. Foreign exchange gains and losses resulting from intragroup
transactions in foreign currencies during the year are recorded in the income
statement.
The financial statements of subsidiaries located in the following
countries reflect monetary corrections as required by local regulations:
Argentina, Chile, Columbia, Mexico, Turkey and Venezuela.
Other countries
The inclusion of monetary corrections imposed by local regulators on
subsidiaries located in hyperinflationary countries in the consolidated
financial statements had no impact on the income statement. Foreign currency
translation differences for these subsidiaries are recorded in the currency
translation adjustment account in shareholders' equity in the same manner as
for the subsidiaries in countries with stable currencies.
For these subsidiaries, differences between net income translated at
average and period-end rates are included in net financial expense. The impact
of these differences on the consolidated income statement was not significant
in any of the periods presented. As of August 31, 2005, none of the countries
in which the Group operates was considered to be hyperinflationary.
Translation differences on monetary assets and liabilities denominated in
foreign currencies are recorded in the income statement. Translation
differences related to a monetary component of a net investment in a company
within a consolidated foreign subsidiary are recorded in consolidated
shareholders' equity until the sale or liquidation of the net investment.
Business Combinations
All of the Group's acquisitions have been accounted for as purchases.
Effective September 1, 2000, assets and liabilities of acquired companies have
been recorded as of the acquisition date at their respective fair values.
Intangible Assets and Goodwill
The first-time consolidation at fair value of Sodexho, Inc., Wood Dining
Services, Sogeres, Sodexho Services Group Ltd, Sodexho Scandinavian Holding AB
and Universal Services led to the recognition as intangible assets of the
significant market shares represented by the contract portfolios of each
company in its main geographical markets (United States, France, United
Kingdom, Ireland, Netherlands, Australia and Sweden). No deferred tax was
recognized on the fair value attributed to these assets.
Goodwill represents the excess of the acquisition cost of an acquired
entity over the Group's interest in the fair value of the assets and
liabilities acquired, as of the date of first-time consolidation. Because of
the long-term sustainability of the markets in which Group companies operate,
goodwill is in almost all cases amortized over a period of thirty years
(calculated on a pro rata basis in the year of acquisition).
The fair value of market shares was measured by applying multiples to
revenues and EBITA as generated by the acquired companies in their principal
markets, and is reviewed for impairment at each balance sheet date.
Market shares are not amortized in the consolidated financial statements.
A provision for impairment is recognized in the event of material loss in value
over more than two successive fiscal years, calculated by comparing actual data
with the amounts used in the original valuation.
As in the case of goodwill, the carrying amount of market shares is
compared with their value in use, calculated on the basis of discounted future
cash flows using the method described below.
As of August 31, 2005, Sodexho carried out the impairment tests stipulated
in CRC regulation no. 2002-10 of December 12, 2002, which defines the
recoverable amount of an asset as the higher of market value or value in use.
o Market value was recomputed on the basis of the same criteria as were
used at the time of the original acquisition, primarily revenues and
EBITA, to which were applied multiples derived from recent
transactions.
F-8
o Value in use was determined on the basis of after-tax cash flows
derived from extrapolations of 3-year business plans prepared by
management. The growth rate applied after the initial 3 year period
was the growth rate specific to the sector of activity and geographic
region. The resulting cash flows were discounted using the average
cost of capital.
o The recoverable amount determined using this method is then compared
with the aggregate of all intangible assets and other fixed assets
used in operations, plus working capital.
Further information pertaining to goodwill and intangible assets is
provided in notes 3.5 and 3.6
Property, Plant and Equipment
Leased assets are recorded on the balance sheet as capital leases in
instances where a Group company is deemed to bear substantially all of the
risks and rewards of the leased asset. A corresponding obligation is recorded
as a liability, and the related rental expense is allocated between
depreciation and interest expense in the income statement.
Depreciation of property, plant and equipment is calculated on a
straight-line basis over the estimated useful lives of the respective assets
giving consideration to the local economic conditions and climate.
The following useful lives are generally used by Group companies:
o Software....................................... 25%
o Enterprise resource planning system............ 20%
o Buildings...................................... 3.33 - 5%
o Facilities and fixtures........................ 10%
o Plant and machinery............................ 10 - 50%
o Vehicles....................................... 25%
o Office and computer equipment.................. 20 - 25%
o Other fixed assets............................. 10%
Investment Securities of Non-Consolidated Companies
Investment securities are recorded at acquisition cost. If the utility
value is determined to be less than the net book value, investment securities
are written down. Utility value is determined based on various criteria such as
market value or market price, profitability outlook or revalued net assets.
Dividends received from non-consolidated companies are recorded as income in
the period in which they are received.
Deferred Income Taxes
Deferred income taxes are recorded on temporary differences between the
tax basis of assets and liabilities and their carrying values for financial
reporting purposes (other than market shares and goodwill) as well as on
consolidation adjustments.
As the pattern of temporary difference reversals is not fixed, deferred
taxes recorded on the balance sheet have not been discounted to their present
value. In addition, deferred tax assets pertaining to net operating loss
carry-forwards (net of deferred tax liabilities) are only recorded in cases
where recovery is deemed probable.
A reconciliation of income taxes computed at Sodexho Alliance's statutory
rate to the actual income tax provision is provided in note 3.4.
F-9
Deferred Charges
Deferred charges primarily include investments made in client facilities
in the U.S. and are amortized over the life of the related contract as well as
deferred financing costs, which are amortized over the maturity period of the
related debt.
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. As of August 31, 2005, the gross value of inventories was (euro)179
million.
Accounts Receivable
Accounts receivable from clients are recorded at face value. The allowance
for doubtful accounts is estimated based upon the risk of non-recoverability of
client receivables.
Concentration of credit risk within accounts receivable is limited because
a large number of customers make up the Group's customer base, thus spreading
risk associated with trade credit. The Group generally does not require
collateral or specific guarantees.
Further information pertaining to accounts receivable is provided in note
3.10.
Marketable Securities and Deposits
Marketable securities and deposits include short-term investments akin to
cash equivalents and are generally recorded at the lower of cost or market
value. Also included in marketable securities and deposits are 3,439,900
Sodexho Alliance shares purchased for a total amount of (euro)99 million. These
shares are to be used to fulfill our obligation with respect to several stock
option plans within the Group. As a result of the sale of some of the shares
during fiscal 2003, the shares were provisioned by (euro)7 million as of August
31, 2003. For the year ended August 31, 2004, the shares were provisioned by
(euro)4 million. For the year ended August 31, 2005, the (euro)11 million
provision was reversed in full, based on the average listed price of Sodexho
Alliance shares during the last 20 trading days of fiscal 2005.
The fair value of marketable securities is presented in note 3.17.
Restricted Cash
Restricted cash represents funds set aside in order to comply with
regulations governing the issuance of restaurant vouchers in France ((euro)168
million as of August 31, 2005) and Romania ((euro)29 million as of August 31,
2005)and as a guarantee for commitments entered into by Mexican affiliates
((euro)9 million as of August 31, 2005).
Vouchers Payable
Vouchers payable represents the face value of vouchers in circulation or
presented to Sodexho but not yet reimbursed to the affiliate.
Financial Instruments
Group policy is to finance acquisitions through borrowings in the acquired
company's currency generally at fixed rates of interest. In most cases where
variable rate debt has been negotiated, the variable rate interest is swapped
into fixed rates through the use of cross-currency or interest-rate swap
agreements. Similarly, in most cases where acquisition financing has been
negotiated in a currency other than that of the acquired company, a
cross-currency or currency swap agreement is negotiated.
The cross-currency and interest rate swap agreements are used by the Group
to manage its currency and interest rate exposures on its borrowings. All such
agreements are designated as hedges at contract inception. Any interest rate
differential is recognized as an adjustment to interest expense over the term
of the related underlying debt. For swaps negotiated on inter-company debt, the
difference between the amount of the debt at the period end rate and at the
F-10
swapped rate is recorded as debt. As a policy, the Group does not engage in
speculative transactions, nor does the Group hold or issue financial
instruments for trading purposes.
The fair values of financial instruments are presented in note 3.17.
Provisions for Contingencies and Losses
The Group applies the recommendations of Regulation CRC 2000-6.
Provisions for contingencies and losses are recorded when it is probable that a
legal, equitable or constructive obligation to sacrifice economic benefits to a
third party in the future without an expectation of receiving proceeds of a
similar amount from the third party.
2. ANALYSIS OF OPERATING ACTIVITIES AND GEOGRAPHIC INFORMATION
Fiscal year ended August 31,
----------------------------------
2005 2004 2003
------ ------ ------
(millions of euro)
Revenues by Operating Activity:
Food and Management Services
North America........................................... ....... 5,006 5,031 5,427
Continental Europe.............................................. 3,919 3,760 3,585
United Kingdom and Ireland...................................... 1,303 1,351 1,453
Rest of the World............................................... 1,164 1,106 974
------ ------ ------
11,392 11,248 11,439
Service Vouchers and Cards........................................... 280 246 248
------ ------ ------
11,672 11,494 11,687
====== ====== ======
Fiscal year ended August 31,
----------------------------------
2005 2004 2003
------ ------ ------
(millions of euro)
Revenues by Geographic Region:
North America................................................... 5,006 5,031 5,427
United Kingdom and Ireland...................................... 1,308 1,357 1,465
France.......................................................... 1,872 1,814 1,734
Rest of Europe.................................................. 2,193 2,075 1,978
Rest of the World............................................... 1,293 1,217 1,083
------ ------ ------
11,672 11,494 11,687
====== ====== ======
August 31,
---------------------
2005 2004
------ ------
(millions of euro)
Net Fixed Assets by Operating Activity:
Food and Management Services
North America...................................................................... 2,388 2,433
Continental Europe................................................................. 709 715
United Kingdom and Ireland......................................................... 852 877
Rest of the World.................................................................. 156 151
Service Vouchers and Cards.............................................................. 143 147
Holding Companies....................................................................... 33 32
------ ------
4,281 4,355
====== ======
F-11
August 31,
---------------------
2005 2004
------ ------
(millions of euro)
Net Fixed Assets by Geographic Region:
North America...................................................................... 2,388 2,433
United Kingdom and Ireland......................................................... 852 877
France............................................................................. 365 355
Rest of Europe..................................................................... 408 423
Rest of the World.................................................................. 268 267
------ ------
4,281 4,355
====== ======
F-12
Fiscal year ended August 31,
----------------------------------
2005 2004 2003
------ ------ ------
(millions of euro)
EBITA by Operating Activity:
Food and Management Services
North America.......................................... ........ 222 239 268
Continental Europe.............................................. 203 171 167
United Kingdom and Ireland...................................... 27 28 21
Rest of the World............................................... 37 37 18
Service Vouchers and Cards........................................... 82 68 68
Corporate Expenses................................................... (41) (28) (28)
------ ------ ------
530 515 514
====== ====== ======
August 31,
----------------------
2005 2004
------- -------
(millions of euro)
Group Employees by Geographic Zone:
North America...................................................................... 120,157 116,772
United Kingdom and Ireland......................................................... 47,515 49,053
France............................................................................. 31,306 30,359
Rest of Europe..................................................................... 55,964 53,132
Rest of the World.................................................................. 69,504 63,659
------- -------
324,446 312,975
======= =======
3. ANALYSIS OF THE INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS
3.1 EBITA: Depreciation and Amortization and Changes in Provisions
Year ended August 31,
---------------------------------
2005 2004 2003
----- ----- -----
(millions of euro)
Depreciation and amortization and increases in
provisions
Depreciation of property, plant and equipment,
amortization of intangible assets, and deferred charges
expensed during the period.............................. 179 191 170
Increase in provisions on current assets.................. 27 31 21
Increases in provisions for contingencies and losses...... 17 16 14
----- ----- -----
223 238 205
===== ===== =====
Releases of provisions
Provisions on fixed assets................................ (1) (1) -
Provisions on current assets.............................. (23) (13) (9)
Provisions for contingencies and losses................... (15) (11) (21)
----- ----- -----
Total..................................................... (39) (25) (30)
----- ----- -----
Depreciation and changes in provsions, net 184 213 175
===== ===== =====
F-13
3.2 Financial Expense, Net
Year ended August 31,
---------------------------------
2005 2004 2003
----- ----- -----
(millions of euro)
Interest income........................................... 18 31 24
Net variation in financial provisions..................... (7) (6) (3)
Net exchange gains........................................ 1 (1) (8)
Interest expense.......................................... (115) (142) (165)
----- ----- -----
(103) (118) (152)
===== ===== =====
Interest expense in fiscal 2005 included interest of (euro)73 million on
the 1999 and 2002 bond issues, interest of (euro)12 million on the April 2001
credit facility drawn down by Sodexho, Inc., interest of (euro)5 million on the
revolving credit facility arranged in May 2004, and interest of (euro)4 million
on the new multi-currency revolving credit facility arranged in April 2005.
Interest expense for fiscal 2004 primarily included (euro)30 million of
interest expense on the credit facility arranged in April 2001 at the Sodexho,
Inc. subsidiary, and interest of (euro)87 million on the 1996, 1999 and 2002
bond issuances. Interest expense for fiscal 2003 primarily included (euro)38
million of interest expense on the credit facility arranged in April 2001, and
interest of (euro)91 million on the 1996, 1999 and 2002 bond issuances.
Reimbursements of borrowings of (euro)74 million and the decline of the U.S.
dollar against the euro reduced our interest expense by (euro)15 million.
3.3 Exceptional Items
The net exceptional loss of (euro)95 million in fiscal 2005 mainly
comprises the (euro)62 million cost of the settlement of the litigation in the
United Sates (see "Significant Events"). It also includes (euro)10 million for
restructuring in the United Kingdom, including relocation of administrative
headquarters and headcount reductions, (euro)7 million of provisions related to
stock option plans, and (euro)5 million of provisions for various ongoing
claims and litigation.
The net exceptional loss of (euro)33 million in fiscal 2004 included a
loss on disposal of (euro)6 million for the sale of the Medcheque subsidiary in
Brazil in March 2004; losses on disposal and exceptional depreciation of
(euro)6 million on assets that became obsolete in several countries; expenses
of (euro)6 million for current litigation; an expense of (euro)4 million
related to property rationalizations and staff reductions in the United
Kingdom; losses and provisions totaling (euro)3 million pertaining to Sodexho
Alliance shares held in connection with stock option plans.
Net exceptional income of (euro)1 million in fiscal 2003 included
(euro)28.6 million received in fiscal as a purchase price complement in
connection with the fiscal 2001 sale of the shares in Corrections Corporation
of America. This income was offset by (euro)13.6 million in losses and
provisions pertaining to Sodexho Alliance shares held and stock option plans,
(euro)7.6 million in restructuring costs in our U.S. and U.K. subsidiaries and
litigation expenses of (euro)5 million.
3.4 Income Tax Provision
Following is a reconciliation of income taxes computed at Sodexho
Alliance's statutory rate to the actual income tax provision (in millions of
euro).
F-14
Year ended August 31,
----------------------------------
2005 2004 2003
----- ----- -----
Income before exceptional items, income taxes, income from equity
investees, and goodwill amortization................................. 427 397 362
Exceptional items........................................................ (95) (33) 1
----- ----- -----
Income before taxes...................................................... 332 364 363
Sodexho Alliance tax rate................................................ 34.93% 35.43% 35.43%
----- ----- -----
Theoretical tax provision................................................ 116 129 129
Effect of differing jurisdictional tax rates............................. (10) (3) 2
Permanent differences.................................................... (10) (13) (7)
Other taxes.............................................................. 10 (3) 4
Net operating loss carryforwards utilized in the current year but
generated in prior years and not previously recognized............... (6) (3) (2)
Current year non-recognition of net operating loss carryforwards......... 1 1 5
----- ----- -----
Tax provision............................................................ 101 108 131
===== ===== =====
Current income taxes..................................................... 152 122 140
Deferred income taxes.................................................... (51) (14) (9)
----- ----- -----
Total.................................................................... 101 108 131
Withholding taxes........................................................ 2 1 3
----- ----- -----
Total income taxes....................................................... 103 109 134
===== ===== =====
F-15
3.5 Goodwill
Additions Decreases
during the during the Translation
August 31, 2004 year year adjustments August 31, 2005
--------------- ---------- ---------- ----------- ---------------
(millions of euro)
Sodexho, Inc...... Gross 898.5 3.8 (4.4) 897.9
Accumulated
Amortization (115.0) (28.9) (0.4) (144.3)
Sodexho United
Kingdom (1)...... Gross 348.4 (3.6) 344.8
Accumulated
Amortization (104.4) (11.4) 1.0 (114.8)
Sodexho Pass do
Brazil .......... Gross 86.4 3.0 89.4
Accumulated
Amortization (15.2) (2.9) (0.6) (18.7)
Sogeres........... Gross 53.9 53.9
Accumulated
Amortization (5.6) (1.8) (7.4)
Sodexho
Scandinavia...... Gross 56.9 0.8 (0.8) 57.0
Accumulated
Amortization (12.8) (1.9) 0.2 (14.5)
Sodexho
Spain........... Gross 28.5 28.5
Accumulated
Amortization (9.3) (1.0) (10.3)
Sodexho
Belgium......... Gross 24.1 0.1 24.2
Accumulated
Amortization (9.5) (0.8) (10.3)
Luncheon
Tickets......... Gross 32.8 32.8
Accumulated
Amortization (4.6) (1.1) (5.7)
Sodexho
Italy........... Gross 17.7 0.3 17.4
Accumulated
Amortization (3.8) (0.6) (0.3) (4.1)
Universal
Services........ Gross 17.2 17.2
Accumulated
Amortization (2.7) (0.6) (3.3)
Sodexho
Germany......... Gross 15.7 15.7
Accumulated
Amortization (5.2) (0.5) (5.7)
Other Gross
goodwill
(gross amount
less than 15
million)......... 142.8 1.6 0.9 4.2 147.7
Accumulated
Amortization (40.5) (8.7) (0.9) (0.8) (49.1)
------- ------ ------ ------ -------
F-16
3.5 Goodwill
Additions Decreases
during the during the Translation
August 31, 2004 year year adjustments August 31, 2005
--------------- ---------- ---------- ----------- ---------------
(millions of euro)
Total goodwill
Cost......... 1,722.9 6.4 1.2 (1.6) 1,726.5
Accumulated
amortization...... (328.6) (60.2) (1.2) (0.6) (388.2)
------- ------ ------ ------ -------
Net
book
value........ 1,394.3 (53.8) - (2.2) 1,338.3
======= ====== ====== ====== =======
(1) This line item includes the international subsidiaries existing as of
the date of acquisition of the Gardner Merchant Group, notably in the
United Kingdom, Ireland, the Netherlands, the United States, France
and Australia, as well as subsequent entities acquired by our
subsidiary in the United Kingdom and Ireland.
An exceptional impairment charge of (euro)3.5 million was recorded
against goodwill (in French GAAP only) to reflect the
underperformance of three Group subsidiaries.
3.6 Intangible Assets
Additions Decreases Changes in
August 31, during the during the consolidation Translation August 31,
2003 year year scope (*) adjustments 2004
---------- ---------- ---------- ------------- ----------- ----------
(millions of euro)
Market Shares (1):
North America (food and management services).. 1,502.9 (10.7) 1,492.2
North America (remote sites).................. 36.1 9.9 (0.7) 25.5
United Kingdom and Ireland.................... 554.1 (6.0) 548.1
Netherlands................................... 86.1 86.1
Sweden........................................ 78.2 (1.8) 76.4
Australia..................................... 10.5 0.6 11.1
France........................................ 137.0 137.0
--------- ---------- ---------- ------------- ----------- ----------
Total Cost.................................... 2,404.9 9.9 (18.6) 2,376.4
Diminutions in value (Australia).............. 0.0
--------- ---------- ---------- ------------- ----------- ----------
Net book value................................ 2,404.9 9.9 (18.6) 2,376.4
Other Intangible Assets (2):
Cost.......................................... 196.7 19.9 4.5 0.1 (1.5) 210.7
Accumulated amortization and diminutions in
value.................................... (82.5) (34.5) (3.5) 2.6 (110.9)
--------- ---------- ---------- ------------- ----------- ----------
Net book value................................ 114.2 (14.6) 1.0 0.1 1.1 99.8
Totals:
Cost.......................................... 2,601.6 19.9 14.4 0.1 (20.1) 2,587.1
Accumulated amortization and diminutions in (82.5)
value.................................... (34.5) (3.5) 2.6 (110.9)
--------- ---------- ---------- ------------- ----------- ----------
Net book value................................ 2,519.1 (14.6) 10.9 0.1 (17.5) 2,476.2
========= ========== ========== ============= =========== ==========
The methodology used for valuing market shares and the valuation as of
August 31, 2005 are described in note 1.
F-17
(1) Refer to note 1 for a description of the methods used to value market
shares and evaluate them for impairment as of the balance sheet date.
(2) Other intangible assets mainly include software with a net value of
(euro)74 million as of August 31, 2005.
F-18
3.7 Property, Plant and Equipment
Additions Decreases Changes in
August during during the consolidation Translation August
31, 2004 the year year scope adjustments 31, 2005
----------- ---------- ---------- ------------- ----------- --------
(millions of euro)
Land
Cost................................... 8.2 0 2.6 1.2 6.8
Diminutions in value................... (0.6) (0.1) (0.6) (0.1)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 7.6 (0.1) 2.0 - 1.2 6.7
Buildings
Cost................................... 84.3 2.3 6.3 3.0 83.3
Accumulated depreciation............... (34.9) (4.1) (3.5) (1.5) (37.0)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 49.4 (1.8) 2.8 - 1.5 46.3
Facilities and fixtures
Cost................................... 132.9 11.8 12.6 0.3 132.4
Accumulated depreciation............... (80.1) (16.1) (9.9) 2.4 (83.9)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 52.8 (4.3) 2.7 - 2.7 48.5
Plant and machinery
Cost................................... 358.7 48.1 32.8 10.0 384.0
Accumulated depreciation............... (232.2) (50.9) (26.4) (1.0) (257.7)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 126.5 (2.8) 6.4 - 9.0 126.3
Vehicles
Cost................................... 71.6 10.8 7.0 (0.1) (6.2) 69.1
Accumulated depreciation............... (53.5) (6.7) (5.8) 0.1 8.9 (45.4)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 18.1 4.1 1.2 - 2.7 23.7
Office and computer equipment
Cost................................... 190.4 29.4 16.8 (0.5) 2.8 205.3
Accumulated depreciation............... (136.8) (28.2) (15.0) 0.5 (2.4) (151.9)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 53.6 1.2 1.8 - 0.4 53.4
Other fixed assets
Cost................................... 109.5 30.9 13.1 (13.0) 114.3
Accumulated depreciation............... (55.6) (12.3) (13.5) (0.1) (54.5)
----------- ---------- ---------- ------------- ----------- --------
Net book value...................... 53.9 18.6 (0.4) - (13.1) 59.8
Totals:
Cost................................... 955.6 133.3 91.2 (0.6) (1.9) 995.2
Accumulated amortization............... (593.7) (118.4) (74.7) 0.6 6.3 (630.5)
----------- ---------- ---------- ------------- ----------- --------
Net book value......................... 361.9 14.9 16.5 0.0 4.4 364.7
=========== ========== ========== ============= =========== ========
3.7.1 Capital Leases
Assets recorded under capital lease arrangements totaled (euro)42 million
as of August 31, 2005 ((euro)44 million as of August 31, 2004), which was net
of accumulated amortization of (euro)76 million.
F-19
3.8 Financial investments
Increases/
(decreases) Changes in
August 31, during consolidation Translation August 31,
2004 the year scope adjustments 2005
----------- ---------- ------------- ----------- ----------
(millions of euro)
Investment securities
Cost................................... 19.2 1.5 (0.5) (0.1) 20.1
Diminutions in value................... (10.3) (0.1) (10.4)
----------- ---------- ------------- ----------- ----------
Net book value..................... 8.9 1.5 (0.5) (0.2) 9.7
Other investments
Cost................................... 20.1 (0.9) 19.2
Diminutions in value................... (0.2) (0.2)
----------- ---------- ------------- ----------- ----------
Net book value..................... 19.9 (0.9) 19.0
Receivables from investees
Cost................................... 19.4 3.0 (0.1) 22.3
Diminutions in value................... (0.1) (0.1)
----------- ---------- ------------- ----------- ----------
Net book value..................... 19.3 3.0 (0.1) 22.2
Loans receivable *
Cost................................... 6.2 7.8 0.3 14.3
Diminutions in value................... (0.1) (0.1)
----------- ---------- ------------- ----------- ----------
Net book value..................... 6.1 7.8 0.3 14.2
Deposits and other *
Cost................................... 11.3 0.7 (0.2) 0.2 12.0
Diminutions in value................... (0.1) (0.1)
----------- ---------- ------------- ----------- ----------
Net book value..................... 11.3 0.6 (0.2) 0.2 11.9
Total financial investments
Cost................................... 76.2 12.1 (0.7) 0.3 87.9
Diminutions in value................... (10.7) (0.1) (0.1) (10.9)
----------- ---------- ------------- ----------- ----------
Net book value..................... 65.5 12.0 (0.7) 0.2 77.0
=========== ========== ============= =========== ==========
* These items are included in working capital in the statement of cash flows.
Principal investment securities in non-consolidated companies
As of August 31, 2005, investment securities principally include a
(euro)2.0 million investment in Stadium Australia Management, in which the
Group owns an equity interest of 15.8% of the shares, a (euro)3.3 million
investment in Leoc Japan Co (previously, Sodex Japan Company Ltd), of which it
owns an equity interest of 9.3%, a (euro)1 million investment in Societe Privee
de Gestion, in which the Group owns an equity interest of 10.8%, and a
(euro)1.3 million investment in 60% of Kanne catering-Service GmbH, which was
acquired on August 1, 2005 and will be consolidated effective September 1,
2005.
F-20
3.8.1 Investments in Equity Investees
Companies accounted for under the equity method are listed in note 4.5.
Current Current Gross
year net year Changes in Translation balance,
August 31, income dividends consolidation adjustments August 31,
2004 (loss) received scope and other 2005
---------- -------- --------- ------------- ----------- ----------
(millions of euro)
Equity method
investees................... 14.5 2.0 (0.4) 7.7 1.5 25.3
========== ======== ========= ============= =========== ==========
3.9 Prepaid Expenses, Other Receivables and Other Assets
Gross value, Provisions Net value, Net value,
August 31, as of August August 31, August 31,
2005 31, 2005 2005 2004
------------ ------------ ---------- ----------
(millions of euro)
Advances to suppliers........................... 5 5 5
Other operating receivables..................... 201 (3) 198 222
Investment receivables.......................... 3 3 3
Financing receivables........................... 1 1 1
------------ ------------ ---------- ----------
Total other receivables..................... 210 (3) 207 231
Prepaid expenses ............................... 55 55 53
Deferred financing charges...................... 6 6 16
Other deferred charges (1)...................... 163 163 146
Deferred tax asset.............................. 197 197 106
------------ ------------ ---------- ----------
Total....................................... 631 (3) 628 552
============ ============ ========== ==========
(1) These items are classified as fixed assets in the statement of cash flows.
3.10 Accounts and Other Receivables
Allowance
for
Gross Doubtful Net book Net book
value, Accounts, value, Due from value,
August 31, August 31, August 31, Due within one to five Due after August 31,
2005 2005 2005 one year years five years 2004
---------- ---------- ---------- ---------- ----------- ---------- ----------
(millions of euro)
Accounts
receivable......... 1,587 (79) 1,508 1,507 1 1,368
========== ========== ========== ========== =========== ========== ==========
Other
receivables........ 210 (3) 207 167 40 231
========== ========== ========== ========== =========== ========== ==========
Prepaid expenses... 55 - 55 52 1 2 53
========== ========== ========== ========== =========== ========== ==========
The allowance for doubtful accounts represents 4.9% of the accounts
receivable balance as of August 31, 2005 compared to 5.4% as of August 31,
2004.
F-21
3.11 Deferred Charges
Net book Net book
value, Due from value,
August 31, Due within one to Due after August 31,
2005 one year five years five years 2004
---------- ---------- ---------- ---------- ----------
Deferred financing costs 6 2 4 - 16
========== ========== ========== ========== ==========
Deferred charges.. 163 35 88 40 146
========== ========== ========== ========== ==========
Included in deferred charges are investments in client facilities,
principally in the North America, totaling (euro)139 million as of August 31,
2005, and (euro)10 million of bid costs and (euro)6 million of start-up costs
on long term contracts, which are amortized over the shorter of their estimated
useful life and 10 years.
3.12 Deferred taxes
August 31,
2005 2004
------------- ------------
(millions of euro)
Deferred tax assets................ 197 106
Deferred tax liabilities........... (13) (20)
------------- ------------
Net deferred tax assets............ 184 86
============= ============
As of August 31, 2005, deferred tax assets which were not recorded because
their realization was not considered probable totaled (euro)18 million,
including (euro)3 million of net operating loss carrybacks recorded by the
subsidiaries prior to their acquisition. As of August 31, 2004, deferred tax
assets which were not recorded because their realization was not considered
probable totaled (euro)21 million.
The principal items giving rise to deferred tax assets and liabilities
were as follows:
August 31,
2005 2004
------------- ------------
(millions of euro)
Employee benefits liabilities (*).... 168 75
Other temporary differences.......... 8 8
Net operating loss carryforwards..... 8 3
------------- ------------
Net deferred tax assets.............. 184 86
============= ============
(*) Includes (euro)43 million recognized as a result of the change in
accounting method for retirement and other employee benefits.
3.13 Cash
Cash balances comprise the following:
August 31, 2005
--------------------------------------------
Gross Provisions Net
------------ ---------- -------------
Marketable securities 650 3 647
Restricted cash 206 0 206
F-22
August 31, 2005
--------------------------------------------
Gross Provisions Net
------------ ---------- -------------
Cash 513 0 513
------------ ---------- -------------
Total 1,369 3 1,366
============ ========== =============
Excluding Sodexho Alliance shares valued at (euro)99 million, marketable
securities totaled (euro)548 million and comprised (euro)389 million in
short-term instruments with maturities less than three months and (euro)159
million with maturities greater than three months. Additional information is
provided in note 3.17.
Cash by type of currency as of August 31, 2005 was as follows:
Euro 675 49%
US Dollars 103 8%
Pounds Sterling 86 6%
Other currencies 505 37%
------- -------
Total 1,369 100%
======= =======
3.13 Shareholders' Equity
Changes in shareholders' equity are as follows:
Consolidated Reserves
-----------------------------------------
Additional Foreign Group
Shares Common paid in Retained currency Treasury net Shareholders'
outstanding stock capital earnings translation shares income equity
----------- ------ ---------- -------- ----------- -------- ------ -------------
(millions of euro)
Shareholders' equity,
August 31, 2003...... 159,021,565 636 1,186 591 (294) (32) 162 2,249
=========== ====== ========== ======== =========== ======== ====== =============
Share capital increase.. 4,848 0
Dividend payments by
the holding
company (net of
dividends on
treasury shares)..... 67 (162) (95)
Net income for the
period............... 183 183
Foreign currency
translation
adjustment and
other................ 6 (151) (145)
----------- ------ ---------- -------- ----------- -------- ------ -------------
Shareholders' equity,
August 31, 2004...... 159,026,413 636 1,186 664 (445) (32) 183 2,192
=========== ====== ========== ======== =========== ======== ====== =============
Share capital increase.. -
Dividend payments by
the holding
company (net of
dividends on
treasury shares)..... 75 (183) (108)
F-23
Consolidated Reserves
-----------------------------------------
Additional Foreign Group
Shares Common paid in Retained currency Treasury net Shareholders'
outstanding stock capital earnings translation shares income equity
----------- ------ ---------- -------- ----------- -------- ------ -------------
(millions of euro)
Net income for the
period............... 159 159
Change in accounting
method (*) (104) (104)
Foreign currency
translation
adjustment and (9) 6 (3)
----------- ------ ---------- -------- ----------- -------- ------ -------------
other................
Shareholders' equity,
August 31, 2005...... 159,026,413 636 1,186 626 (439) (32) 159 2,136
=========== ====== ========== ======== =========== ======== ====== =============
(*) Change in method of accounting for retirement and other employee benefits.
The pre-tax impact of the change in method of (euro)147 million relates
primarily to the United Kingdom ((euro)121 million) and the Netherlands
((euro)19 million). The change in method also had the effect of increasing
deferred tax assets by (euro)43 million.
3.13.1Indirectly Held Treasury shares
As of August 31, 2005, Sofinsod had a 6.81% indirect interest in Sodexho
Alliance, SA through its 18.5% interest in the capital of Bellon SA, which in
turn held 36.83% of Sodexho Alliance, SA. These shares, valued at (euro)32
million in the financial statements, are reflected as a reduction to
shareholders' equity in the consolidated financial statements. The Group is in
compliance with the regulations L.225-210 and L.225-214 insofar as its
reserves, other than the statutory reserves, are higher than the gross value of
the treasury shares held.
3.14 Minority Interests
Changes in minority interests are as follows:
August 31,
2005 2004
------------- ------------
(millions of euro)
Minority interests, beginning of year....... 25 66
Share capital increase.................... 1 1
Dividends paid............................ (8) (8)
Net income for the period................. 10 14
Change in consolidation scope............. (8) (47)
Currency translation and other............ - (1)
Minority interests, end of year............. 20 25
3.15 Provisions for Contingencies and Losses
Provisions for contingencies and losses include the following amounts:
F-24
Release
without
corres- Translation Change in
August 31, ponding Differences Consolidation August 31,
2004 Increase Release charge and Other Scope 2005
---------- -------- ------- -------- ----------- ------------- ----------
(millions of euro)
Payroll and other taxes 34 8 (3) 1 40
Employee litigation... 16 67 (1) (7) (1) 5 80
Contract termination costs
and loss-making contracts 9 9 (4) 14
Client and supplier
litigation 9 2 (4) (2) 5
Equity method investees 9 2 11
Stock options.............. 4 8 12
Sodexho Inc. acquisition
provisions. 3 (1) 2
Large repairs 3 1 (1) 3
Other 6 2 (3) (1) 1 5
---------- -------- ------- -------- ----------- ------------- ----------
93 97 (22) (4) 8 172
========== ======== ======= ======== =========== ============= ==========
(1) Includes a charge of (euro)61 million in fiscal 2005 for settlement of the
litigation in the United States (see note 1, "Significant events").
The following table summarizes the net impact to the income statement line
items of the increases and releases to provisions for contingencies and losses
as of August 31, 2005:
Increases Released/utilized
--------- -----------------
(millions of euro)
EBITA...................... 17 (15)
Financial expense, net..... 0 0
Exceptional items.......... 80 (11)
--------- -----------------
97 (26)
========= =================
3.16 Borrowings and Financial Debt
Future payments on borrowings and other debt balances as of August 31,
2005 were due as follows:
Total
------------- Total
Less than one One to five More than August 31, August 31,
year years five years 2005 2004
------------- ----------- ---------- ------------ -----------
(millions of euro)
Bonds
Euro.................................. 32 1,300 1,332 1,332
------------- ----------- ---------- ------------ -----------
Total bonds....................... 32 1,300 1,332 1,332
Bank borrowings (1)
U.S. Dollars.......................... 11 579 590 701
Euro.................................. (157) (89) 17 (229) (137)
Pounds Sterling....................... 125 125 131
Other currencies...................... 35 9 44 23
------------- ----------- ---------- ------------ -----------
Total bank borrowings............ 14 499 17 530 718
Capital lease obligations
U.S. Dollars.......................... 1 4 5 10 5
Euro.................................. 10 20 4 34 38
Other currencies...................... 1 1 2 3
------------- ----------- ---------- ------------ -----------
Total capital lease obligations.. 12 25 9 46 46
F-25
Total
------------- Total
Less than one One to five More than August 31, August 31,
year years five years 2005 2004
------------- ----------- ---------- ------------ -----------
(millions of euro)
Other borrowings
Euro.................................. 7 2 9 9
Other currencies...................... 2 2 0
------------- ----------- ---------- ------------ -----------
Total other borrowings............ 9 2 11 9
Bank overdraft balances
Euro.................................. 14 14 16
U.S. Dollars.......................... 3 3 1
Pounds Sterling....................... 1 1 0
Other currencies...................... 3 3 6
------------- ----------- ---------- ------------ -----------
Total bank overdrafts............ 21 - - 21 23
------------- ----------- ---------- ------------ -----------
Total.................................... 88 1,826 26 1,940 2,128
============= =========== ========== ============ ===========
(1) Includes impact of swaps; see note 3.17 for further information.
F-26
3.16.1. Bond Issues
August 31, Translation August 31,
2004 Increase Repayments Differences 2005
---------- ---------- ---------- ----------- ----------
(millions of euro, except for number of securities)
1999 bond issuance -
(euro)300,000,000
Principal 300 300
Accrued interest.. 6 6
---------- ---------- ---------- ----------- ----------
Total 306 - - - 306
2002 bond issuance -
(euro)1,000,000,000
Principal 1,000 1,000
Accrued interest.. 26 26
---------- ---------- ---------- ----------- ----------
Total 1,026 - - - 1,026
---------- ---------- ---------- ----------- ----------
Total.... 1,332 - - - 1,332
========== ========== ========== =========== ==========
(euro)300 million bond issue
On March 16, 1999, Sodexho Alliance issued 300,000 bonds of (euro)1,000
each for total proceeds of (euro)300 million. The bonds will be fully
redeemable at par on March 16, 2009 and bear interest at 4.625% per annum,
which is payable on March 16 annually. There were 300,000 bonds outstanding as
of August 31, 2005.
(euro)1 billion bond issue
On March 25, 2002, Sodexho Alliance issued bonds totaling (euro)1 billion,
maturing on March 25, 2009, and bearing interest of 5.875% payable on March 25
annually.
Neither of these bond issues is subject to financial covenants.
3.16.2 Other Borrowings
Syndicated credit facility - April 2001
On May 31, 2005, Sodexho Alliance and Sodexho, Inc. repaid in full
all amounts borrowed under the credit facility negotiated in April
2001. The total amount borrowed under this facility as of August 31,
2004 was (euro)476 million.
Revolving credit facility - May 2004
On May 18, 2005, Sodexho Alliance and Sodexho, Inc. repaid in full all
amounts borrowed under the revolving credit facility arranged in May 2004. The
total amont borrowed under this facility as of August 31, 2004 was (euro)183
million.
Revolving credit facility - April 2005
On April 29, 2005, Sodexho Alliance and Sodexho, Inc. entered into a new
multi-currency revolving credit facility agreement for maximum amounts of
(euro)460 million plus $700 million. This facility expires on April 29, 2010,
but may be extended at the request of Sodexho Alliance, subject to consent from
the lenders, initially to April 29, 2011 and subsequently to April 26, 2012.
F-27
As of August 31, 2005, this facility had been used to draw down (euro)474
million of borrowings and issue $104 million of bank guarantees. The amounts
borrowed were used primarily to repay in full the April 2001 syndicated credit
facility and the May 2004 revolving credit facility.
This new credit facility is not subject to financial covenants, but
requires the borrower to comply with the standard clauses contained in this
type of syndicated credit agreement. In the event of non-compliance with these
clauses, bankers representing at least two-thirds of the agreed facility are
entitled to demand early repayment of the balance outstanding under the
facility. Early repayment of the facility would also entitle the holders of the
March 2002 (euro)1 billion bond issue to demand early redemption of their
bonds.
As of August 31, 2005, the Group was in compliance with the standard
clauses.
3.16.3 Interest rate swap agreements
In accordance with Group policy, substantially all variable rate
borrowings are at fixed interest rates or are swapped to fixed rates. If
borrowings are arranged other than in local currency, a currency swap agreement
is negotiated. As of August 31, 2005, 71% percent of borrowings were at fixed
rates (including those swapped) and the average interest rate for fiscal 2005
was 5.3%.
F-28
3.17 Financial Instruments
The table below summarizes the impact on the financial statements of the
financial instruments described in note 3.16.
Borrowings
Borrowings Borrowings in Borrowings in other TOTAL
in euro USD in GBP currencies
-------------------------------------------------------------------------------------------------------------------------
(millions of euro)
-------------------------------------------------------------------------------------------------------------------------
a) Borrowings subject to cross currency agreements:
- UK borrowings 125 125
(GPB 86 million) (125) (125)
Due to the bank GBP 86 million
Due from the bank EUR 125 million
- Sodexho Scandinavia swaps 26 26
(SEK 242 million) (26) (26)
Due to the bank SEK 242 million
Due from the bank EU$ 26 million
- Sodexho Inc. swaps
(US dollar 111.7 million)
Due to the bank US $114.9 million 94 94
Due from the bank EUR 129.6 million (130) (130)
- other subsidiaries swaps (not detailed) (9) 6 3 -
b) Borrowings subject to interest rate swap -
agreements
c) Borrowings not subject to hedging 61 490 - 15 566
arrangements
----------- --------- ---------- ------- ------
Total borrowings (229) 590 125 44 530
=========== ========= ========== ======= ======
3.17.1 Currency and cross currency swaps
In August 2005, a cross currency swap was negotiated (GBP 86 million
against (euro)125 million) on an intercompany loan totaling GBP 86 million.
This swap will expire during fiscal 2006.
In August 2005, a cross currency swap (SEK 242 million for (euro)26
million) was contracted to hedge 100% of an intragroup loan of SEK 242 million
made to Sodexho Scandinavian Holding AB. This swap will expire during fiscal
2006.
In March 2002, a cross currency swap was negotiated on an inter-company
loan of U.S. $309 million to Sodexho, Inc. (6.325% against 6.5775% and in euro
against U.S. dollars), reimbursable on March 25, 2007. As of August 31, 2005,
the debt at the swapped rate totaled U.S. $115 million against (euro)130
million. The decrease in the dollar against the euro led to a decrease in the
debt as converted to euro of (euro)35 million.
F-29
Fair Values of Financial Instruments
Following are the fair values of the Group's financial instruments as of
August 31, 2005:
ASSETS Net book value Fair value Difference
-------------- ---------- ----------
(millions of euro)
Financial investments
Investments in non-consolidated companies........ 10 10 -
Receivables from investees....................... 22 22 -
Loans receivable................................. 14 14 -
Other long-term investments...................... 19 19 -
Other financial assets........................... 12 12 -
-------------- ---------- ----------
Total financial investments...................... 77 77 -
Equity method investees.......................... 25 25 -
Marketable securities and other
Short-term notes................................. 187 187
Term deposits.................................... 155 157 2
Debt securities.................................. 112 115 3
Mutual funds - SICAV............................. 65 65 -
Mutual funds - other............................. 29 29 -
Sodexho Alliance shares (1)...................... 99 96 (3)
-------------- ---------- ----------
Total marketable securities and other ........... 647 649 2
-------------- ---------- ----------
Restricted cash ................................ 206 207 1
-------------- ---------- ----------
Total............................................ 955 958 3
============== ========== ==========
LIABILITIES
Bonds
2002 (euro)1 billion bond issuance............... 1,026 1,125 99
1999 (euro)300 million bond issuance............. 306 323 17
-------------- ---------- ----------
Total bonds................................... 1,332 1,448 116
Bank debt
Sodexho, Inc. borrowings......................... 490 491 1
Swap on intercompany loan with Sodexho, Inc...... (35) (40) (5)
Sodexho Alliance borrowings 30 30 -
Other bank debt.................................. 45 45 -
-------------- ---------- ----------
Total bank debt............................... 530 526 (4)
Bank overdrafts. ................................ 21 21 -
Other borrowings................................. 57 57 -
-------------- ---------- ----------
Total borrowings................................. 1,940 2,052 112
============== ========== ==========
Other liabilities
SMS acquisition debt (1)......................... 22 8 (14)
-------------- ---------- ----------
Total............................................ 1,962 2,060 98
============== ========== ==========
(1) A portion of the acquisition cost for the shares of Sodexho Marriott
Services, Inc. (now Sodexho, Inc.) acquired in June 2001 related to the
rollover of employee stock options, was considered payable in Sodexho Alliance
shares, which have not yet been issued. A liability was recorded in other
liabilities as of the acquisition date. This liability has been revalued to
reflect the price paid by Sodexho Alliance for shares it acquired on the open
market to be used in connection with this stock option program. As of August
31, 2005, the fair value of the debt arising on the acquisition of 53% of
Sodexho, Inc. was (euro)14 million lower than its carrying amount.
F-30
3.18 Maturities of other liabilities
Less More
Net value at than 1 1 to 5 than 5 August 31,
August 31, 2005 year years years 2004
------------------------------------------------------------
Advances from clients................ 173 167 3 3 123
Tax and employee liabilities......... 1,252 845 5 402 1,048
Other operating
liabilities.......................... 73 73 - - 64
Investment related liabilities....... 23 - 23 - 28
Financing related liabilities ....... 1 1 - - 0
Deferred revenues.................... 36 31 3 2 48
------------------------------------------------------------
Other liabilities 1,558 1,117 34 407 1,311
================================
Deferred tax liabilities (1) 13 20
-------------- ------------
Total 1,571 1,331
============== ============
(1) Not analyzed by maturity.
F-31
3.19 Tax and employee-related liabilities
Retirement benefits
The total retirement benefit obligation as of August 31, 2005 was (euro)246
million and mainly comprised the following:
o (euro)113 million for plans in the United Kingdom;
o (euro)53 million for plans in Italy;
o (euro)25 million for plans in France;
o (euro)19 million for plans in the Netherlands.
The main assumptions used in measuring these obligations for the principal
plans were as follows:
France Netherlands United
Kingdom
Discount ratae 4.00% 4.00% 5.10%
Salary inflation rate 2.50% 2.00% 3.95%
General inflation rate 2.00% 2.00% 2.70%
Rate of return on plan assets N/A 5.90% 6.80%
3.20 Statement of Cash Flows - Additional Information
3.20.1 Changes in working capital
The table below provides additional information on the balance sheet line
items impacting the cash flow statement, excluding exchange rate variations,
changes in consolidation scope, or other variations not impacting cash flows.
Change in
August 31, Increase / Securiti- Translation consolidation August 31,
2004 (decrease) zation (2) adjustments scope 2005
---------- ---------- ---------- ----------- ------------- ----------
Loans receivable and other
financial investments (1) 18 8 26
Inventories...................... 163 13 1 177
Advances to suppliers............ 5 5
Accounts receivable.............. 1,368 57 47 40 (4) 1,508
Other operating receivables...... 222 (21) (3) 198
Prepaid expenses.. 53 (2) 4 55
---------- ---------- ---------- ----------- ------------- ----------
Operating receivables. 1,829 55 47 42 (4) 1,989
Investment related receivables... 3 3
Financing related receivables.... 17 37 (47) 7
---------- ---------- ---------- ----------- ------------- ----------
Changes in assets 1,849 92 - 42 (4) 1,979
========== ========== ========== =========== ============= ==========
Advances from customers 123 30 20 173
Accounts payable................. 1,035 81 5 (1) 1,120
Vouchers payable................. 843 123 33 1 1,000
Taxes and social charges
payable.......................... 1,048 53 153 (*) (2) 1,252
F-32
Change in
August 31, Increase / Securiti- Translation consolidation August 31,
2004 (decrease) zation (2) adjustments scope 2005
---------- ---------- ---------- ----------- ------------- ----------
Other operating payables......... 64 8 1 73
Deferred revenues..... 48 (11) (1) 36
---------- ---------- ---------- ----------- ------------- ----------
Operating liabilities 3,161 284 211 (2) 3,654
Investment related payables ..... 28 (6) 1 23
Financing related payables ...... 0 0 1 1
---------- ---------- ---------- ----------- ------------- ----------
Changes in liabilities 3,189 278 213 (2) 3,678
========== ========== ========== =========== ============= ==========
Net effect on working capital:
Change in working capital from
operating activities............. 229
Change in working capital from ==========
investment activities (6)
==========
Change in working capital from
financing activities (37)
==========
(1) This item is included in Financial Investments in the Balance Sheet.
(2) The securitization affects the changes in working capital from financing
activities.
(*) Includes the (euro)147 million impact of the change in method of accounting
for retirement and other employee benefits.
3.20.2 Changes in borrowings
Change in
August 31, Increase/ Translation consolidation August 31,
2004 (decrease) adjustments scope 2005
---------- ---------- ----------- ------------- -----------
Bonds............................ 1,332 1,332
Bank borrowings.................. 718 (179) (9) 530
Bank overdraft balances.......... 23 (2) 21
Capital lease obligations........ 46 46
Other borrowings................. 9 2 11
---------- ---------- ----------- ------------- -----------
2,128 (179) (9) 1,940
========== ========== =========== ============= ===========
F-33
3.20.3 Acquisitions and disposals of tangible and intangible assets and
subsidiaries
Acquisitions Disposals Net
------------ ---------- ---------
Tangible and intangible assets (*)....................... (201) 14 (187)
Variation in financial assets (4) (4)
Less: tax effects on disposals 1 1
------------ ---------- ---------
Total change in tangible and intangible assets (205) 15 (190)
Acquisitions (disposals) of subsidiaries................. (5) (5)
Less: cash in acquired and disposed of companies, net 1 (3) (2)
Less: tax effects on disposals
Net cash from changes in consolidation scope (4) (3) (7)
------------ ---------- ---------
TOTAL (209) 12 (197)
============ ========== =========
(*) includes other deferred charges relating to fixed assets.
3.21 Commitments
3.21.1 Off balance sheet commitments
The Group has entered into agreements to purchase or sell shares in
companies. None of the estimated obligations in connection with these
arrangements is considered to either have, or be reasonably likely to have, a
current or future material effect on the Group's financial condition, changes
in financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Commitments made as of August 31, 2005 (millions of euro) were as follows:
August 31, 2005 August 31, 2004
---------------------------------------- ---------------
1 - 5
< 1 year years >5 years Total Total
---------- ------ -------- ------ -----------
Financial guarantees to third parties........ 100 50 10 160 74
Performance bonds on operating leases........ 8 10 9 27 38
Client performance bonds .................... 8 8 - 16 16
Other commitments............................ 1 5 1 7 7
---------- ------ -------- ------ -----------
Total 117 73 20 210 135
========== ====== ======== ====== ===========
The increase of (euro)86 million in financial guarantees to third
parties primarily relates to new letters of credit written in the
United States in favor of third party workers' compensation insurance
carriers.
Sureties:
In connection with its Service Vouchers and Cards activity, Sodexho
Alliance and its subsidiaries have secured cash amounts with different
financial institutions, totaling (euro)9 million as of August 31, 2005. Other
surety arrangements (security granted over equipment or buildings used for
collateral) agreed to by Sodexho Alliance and its subsidiaries during fiscal
2005 were not material.
3.21.2 Commitments to purchase or sell shares in companies
Commitments made:
o Abra (subsidiary of Sodexho Scandinavian Holding AB)
The Group, through its Sodexho Scandinavian Holding AB subsidiary, has
entered into a put agreement with the minority shareholders of Abra (located in
Norway) to acquire the remaining 4% of the shares outstanding by November
F-34
2005, at the latest, for a price based upon a profit multiple. The minimum
purchase price amount is (euro)0.5 million and based on current projections, is
estimated at (euro)1.1 million.
o Altys Multiservices
The Group has entered into a put agreement to acquire 18.5% of the shares
of Altys Multiservice from the minority shareholders between October 1 and
November 30, 2005, and 1.5% between October 1 and November 30, 2007, for a
purchase price based on a multiple of the average economic profits, as defined
contractually in the year of exercise with an adjustment based on the following
year's results. In the fourth quarter of calendar 2005, the Group acquired the
20% held by the minority shareholders for consideration of (euro)10.6 million.
o Sodexho Italia
The Group has entered into a put agreement to acquire the remaining 2% of
the shares of Sodexho Italia from the minority shareholders on July 1, 2010, at
the latest, for a purchase price based on a multiple of the average economic
profits, as defined contractually.
o Smiling Faces
The Group, via its subsidiary Sodexho Scandinavian Holding AB, entered
into a put agreement to acquire between 2006 and 2012 the remaining 30% of the
shares of Smiling Faces (Finland). The purchase price is based on earnings
multiples, and based on current projections is estimated at (euro)2.1 million.
At the start of September 2005, Sodexho, Inc. bought out these minority
interests.
Commitments received:
Patriot Medical Technologies, Inc.
The minority shareholders of Patriot Medical Technologies, Inc have
entered into a call agreement with the Group, which allows the Group, during
the period from September 3, 2003 and September 3, 2005, to acquire the
remaining outstanding shares of Patriot Medical Technologies, Inc, if any, for
the greater of U.S. $2 million and five times Patriot Medical Technologies,
Inc.'s EBITDA, reduced by adjustments defined in the contract between the
parties. At the beginning of September 2005, Sodexho, Inc. acquired the
minority interests.
Abra
The minority shareholders of Abra have entered into a call agreement to
sell the remaining shares to the Group in accordance with the terms described
above, in November, 2005 at the latest.
Sodexho Italia:
The minority shareholder of Sodexho Italia has entered into a call
agreement to sell the remaining shares to the Group in accordance with the
terms described above, on July 1, 2010 at the latest.
Altys Multiservices
18.5% of the minority shareholders of Altys Multiservices have entered
into a call agreement to sell the remaining shares to the Group between October
1, 2005 and November 30, 2005 for a purchase price based on a multiple of the
average economic profits as defined contractually in the year of exercise with
an adjustment based on the following year's results.
The exercise of the put and call agreements described above would not have
a material impact on the consolidated financial statements.
3.21.3 Other commitments
Securitization
F-35
During fiscal 1999 our food management and services subsidiaries in the United
Kingdom entered into a long-term agreement to securitize without recourse a
portion of their accounts receivable. As of August 31, 2004, the amount
securitized totaled GBP 32.4 million ((euro)48 million). The securitization
program was terminated in June 2005.
The reduction in securitization of (euro)47 million (excluding currency
effects) compared to August 31, 2004 is included under the caption "Change in
working capital from financing activities" in the statement of cash flows.
3.21.4 Commitments for stock options in Sodexho Alliance shares
The group, through its stock option plans, is committed to deliver 1,565,122
Sodexho Alliance shares to employees of Sodexho, Inc. at an average price of
$28.95 in connection with the acquisition of 53% of the shares of Sodexho
Marriott Services in June 2001. As of August 31, 2005 all of these options were
exercisable.
To date, 5,996,468 Sodexho Alliance shares have been granted by the Board
of Directors to employees of the Group in connection with various stock option
plans.
Exercisable period
Number of options
Outstanding on
Issuance date From To Exercise price August 31, 2005
------------------ ------------- -------------- ---------------- ------------------
January 2001 March 2005 January 2006 (euro)48.42 140,829
January 2002 January 2006 January 2007 (euro)47.00 369,761
January 2002 January 2006 January 2008 (euro)47.00 994,371
September 2002 April 2006 March 2008 (euro)47.00 12,000
October 2002 October 2006 October 2007 (euro)21.87 2,335
January 2003 January 2004 January 2009 (euro)24.00 2,446,941
June 2003 January 2004 January 2009 (euro)24.00 60,160
January 2004 January 2005 January 2010 (euro)24.50 950,021
January 2005 January 2006 January 2011 (euro)23.10 1,000,050
June 2005 June 2006 June 2011 (euro)26.04 20,000
-----------------
TOTAL 5,996,468
=================
Number of options Fiscal 2005
----------------- -----------
Options outstanding as of September 1, 2004 5,669,293
Options granted 1,030,000
Options exercised (171,946)
Forfeitures due to employee departures (310,222)
Forfeitures due to unmet performance objectives (220,657)
------------
Options outstanding as of August 31, 2005 5,996,468
============
A stock option plan was established for which the Group has committed to
increase the capital of Sogeres for the benefit of the optionees and to buy
their shares no later than February 20, 2008. In connection with this
agreement, a liability of (euro)4.9 million was recorded in the consolidated
financial statements as of August 31, 2005.
F-36
3.21.5 Commitments for operating leases
As of August 31, 2005, over the residual life of operating leases, the
total future payments are as follows:
o Less than one year: (euro)99 million
Greater than one year and less than five years (euro)166 million
More than five years: (euro)25 million
Operating lease commitments relate to central kitchens under tri-partite
agreements and counter-guarantees from French local authorities for (euro)50
million; rent for office space for (euro)135 million; and various equipment
(site equipment, vehicles, and other equipment) for (euro)105 million.
4. Other information
4.1 Compensation, advances, loans and retirement plan commitments made to
members of the Sodexho Alliance Board of Directors and the Group presidents and
Chief Operating Officers are as follows:
Compensation (euro)0.38 million
Advances and loans None
Defined contribution retirement plan (euro)0.22 million
4.2 Related parties
As of August 31, 2005, Bellon SA held 36.83% of the capital of Sodexho
Alliance. Pursuant to an agreement between Bellon SA and Sodexho Alliance,
Bellon SA invoiced Sodexho Alliance (euro)4 million for consulting and advisory
services during fiscal 2005.
Sodexho Alliance paid dividends of (euro)41 million to Bellon SA during
fiscal 2005.
Transactions with other related companies comprise loans and off balance
sheet commitments related to equity method investees as well as investments
(see notes 3.8 and 3.8.1).
August 31,
2005 2004
------------- -----------
Loans:
Equity-method invetees 20 17
Other unconsolidated companies 2 2
Off-balance sheet commitments:
Equity-method investees 19 16
Other unconsolidated companies 13 12
Performance bonds to clients:
Equity-method investees 13 13
4.3. Litigation
On March 8, 2001, ten current and former employees Marriott Management
Services, Inc., later known as Sodexho Marriott Services, Inc. and now known as
Sodexho, Inc., filed a lawsuit alleging that they and other African-Americans
were discriminated against in promotions on the basis of their race. On June
25, 2002, the district court certified the
F-37
case as a class action for purposes of determining liability. On April 27,
2005, Sodexho, Inc. agreed to settle the lawsuit in order to avoid protracted
legal proceedings, but without admitting liability.This Judge subsequently
approved the settlement on August 10, 2005.
Under the terms of the settlement, Sodexho, Inc. committed to make
monetary payments to eligible class members and to the class' attorneys for a
total amount of up to $80 million, as well as to continue to promote its
diversity programs. The Group anticipates that these payments will be made
during the second half of fiscal 2006. A supplementary provision of $78 million
((euro)61 million) has been recognized in the financial statements for fiscal
2005, to cover settlement payments and defense costs net of insurance. This
settlement had a net negative impact of (euro)38 million on the consolidated
income statement for the year ended August 31, 2005.
Following an investigation into the financial condition of Banco Santos by
the intervenor representing the Central Bank of Brazil, Sodexho Pass do Brazil
is involved in disputes with Banco Santos and a mutual fund concerning the
existence of balances outstanding for the principal amount of (euro)18 million.
Sodexho Pass do Brazil and Banco Santos have each commenced legal proceedings
against the other in this matter. Sodexho Pass do Brazil vigorously denies that
it owes any amounts in connection with these balances.
We are involved in a number of other legal proceedings incidental to the
normal conduct of our business. We do not believe that liabilities relating to
the these proceedings are likely to be, in the aggregate, material to our
business or our consolidated financial position.
4.4 Subsequent Events
There have been no significant events arising subsequent to August 31,
2005.
4.5 Group Employees
As of August 31, 2005, the employees of the Group were as follows:
Executives and middle management 6,130
Site managers and supervisory staff 33,020
Front line service staff and other 285,296
-------------
Total 324,446
=============
4.6..List of Subsidiaries
A list of subsidiaries and the Group's percentage interest and the
percentage of voting rights held is provided below. Unless indicated otherwise
by a percentage, the Group owns 97% or more of the outstanding shares of the
subsidiary. The annotation "N" denotes the ten companies consolidated for the
first time in fiscal 2005. Two of these companies were acquired during the
year, and the remainder were newly created entities or previously
deconsolidated companies. The annotation "EM" denotes the eighteen companies
accounted for by the equity method. All other companies are fully consolidated.
% voting Principal
% interest rights activity Country
-------------------------------------------------------------------------------------------------------
France
-------- ----------------------------------------------------------------------------------------------
SOCIETE FRANCAISE DE RESTAURATION (sub-group) FMS France
----------------------------------------------------------------------------------------------
ALTYS MULTISERVICE 80% 80% FMS France
----------------------------------------------------------------------------------------------
ALTYS GESTION FMS France
----------------------------------------------------------------------------------------------
SOCIETE FRANCAISE DE SERVICES FMS France
----------------------------------------------------------------------------------------------
F-38
% voting Principal
% interest rights activity Country
-------------------------------------------------------------------------------------------------------------------
France
----------------------------------------------------------------------------------------------------------
SOCIETE FRANCAISE DE RESTAURATION ET SERVICES FMS France
(SUB-GROUP)
----------------------------------------------------------------------------------------------------------
SODEQUIP FMS France
----------------------------------------------------------------------------------------------------------
SODEXHO PRESTIGE FMS France
----------------------------------------------------------------------------------------------------------
SIR FMS France
----------------------------------------------------------------------------------------------------------
CIR FMS France
----------------------------------------------------------------------------------------------------------
SIGES FMS France
----------------------------------------------------------------------------------------------------------
LA NORMANDE SA FMS France
----------------------------------------------------------------------------------------------------------
HEDELREST FMS France
----------------------------------------------------------------------------------------------------------
RGC FMS France
----------------------------------------------------------------------------------------------------------
SAGERE FMS France
----------------------------------------------------------------------------------------------------------
SOGERES (sub-group) FMS France
----------------------------------------------------------------------------------------------------------
BATEAUX PARISIENS (sub-group) FMS France
----------------------------------------------------------------------------------------------------------
ARMEMENT LEBERT BUISSON FMS France
----------------------------------------------------------------------------------------------------------
SOCIETE DES THERMES DE NEYRAC-LES-BAINS FMS France
----------------------------------------------------------------------------------------------------------
EMIS FMS France
----------------------------------------------------------------------------------------------------------
CATESCO FMS France
----------------------------------------------------------------------------------------------------------
SODEXHO CHEQUES ET CARTES DE SERVICES SVC France
----------------------------------------------------------------------------------------------------------
SODEXHO PASS INTERNATIONAL HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO FRANCE HOL France
----------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO SAS HOL France
----------------------------------------------------------------------------------------------------------
SOFINSOD HOL France
----------------------------------------------------------------------------------------------------------
ETINBIS HOL France
----------------------------------------------------------------------------------------------------------
ETIN HOL France
----------------------------------------------------------------------------------------------------------
GARDNER MERCHANT GROUPE HOL France
----------------------------------------------------------------------------------------------------------
LOISIRS DEVELOPPEMENT HOL France
----------------------------------------------------------------------------------------------------------
HOLDING ALTYS HOL France
----------------------------------------------------------------------------------------------------------
ASTILBE HOL France
----------------------------------------------------------------------------------------------------------
HOLDING SOGERES HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO AMERIQUE DU SUD HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO MANAGEMENT HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO CONTINENTAL EUROPE HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO ASIE OCEANIE HOL France
----------------------------------------------------------------------------------------------------------
SODEXHO IS AND T HOL France
----------------------------------------------------------------------------------------------------------
SIGES GUYANE FMS France
----------------------------------------------------------------------------------------------------------
SOCIETE HOTELIERE DE TOURISME DE GUYANE FMS France
----------------------------------------------------------------------------------------------------------
SODEX'NET FMS France
----------------------------------------------------------------------------------------------------------
GUYANE PROPRETE FMS France
----------------------------------------------------------------------------------------------------------
SODEXHO GUYANE FMS France
----------------------------------------------------------------------------------------------------------
SOCIETE GUYANAISE DE PROTECTION ET GARDIENNAGE FMS France
----------------------------------------------------------------------------------------------------------
SODEXHO ANTILLES FMS France
----------------------------------------------------------------------------------------------------------
F-39
% interest % voting Principal Country
rights activity
-------------------------------------------------------------------------------------------------------------------
Americas
-------------------------------------------------------------------------------------------------------------------
SODEXHO, INC. (sub-group) FMS United States
----------------------------------------------------------------------------------------------------------
SODEXHO CANADA (sub-group) FMS Canada
----------------------------------------------------------------------------------------------------------
SPIRIT CRUISES FMS United States
----------------------------------------------------------------------------------------------------------
DELTA CATERING MANAGEMENT 49% 49% FMS United States
----------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO USA, INC. HOL United States
----------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO PARTNERSHIP FMS United States
----------------------------------------------------------------------------------------------------------
UNIVERSAL SERVICES ENTERPRISES LLC HOL United States
----------------------------------------------------------------------------------------------------------
SODEXHO PASS USA SVC United States
----------------------------------------------------------------------------------------------------------
ENERGY CATERING SERVICES LLC FMS United States
----------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO EMPRESA DE SERVICIOS Y CAMPAMENTOS FMS Venezuela
----------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO SERVICES DE VENEZUELA FMS Venezuela
----------------------------------------------------------------------------------------------------------
UNIVERSAL SERVICES DO BRAZIL LTDA FMS Brazil
----------------------------------------------------------------------------------------------------------
SODEXHO DO BRAZIL COMERCIAL LTDA FMS Brazil
----------------------------------------------------------------------------------------------------------
SODEXHO ARGENTINA FMS Argentine
----------------------------------------------------------------------------------------------------------
SODEXHO COLOMBIA 65% 65% FMS Colombia
----------------------------------------------------------------------------------------------------------
SODEXHO VENEZUELA ALIMENTACION Y SERVICIOS 70% 70% FMS Venezuela
----------------------------------------------------------------------------------------------------------
SODEXHO COSTA RICA FMS Costa Rica
----------------------------------------------------------------------------------------------------------
SODEXHO MEXICO FMS Mexico
----------------------------------------------------------------------------------------------------------
EM DOYON UNIVERSAL SERVICES JV 50% 50% FMS United States
----------------------------------------------------------------------------------------------------------
SODEXHO PERU FMS Peru
----------------------------------------------------------------------------------------------------------
EM BAS 33% 33% FMS Chile
----------------------------------------------------------------------------------------------------------
EM BAS II 33% 33% FMS Chile
----------------------------------------------------------------------------------------------------------
SIGES CHILE FMS Chile
----------------------------------------------------------------------------------------------------------
SODEXHO CHILE (sub-group) FMS Chile
----------------------------------------------------------------------------------------------------------
SODEXHO SERVICIOS DE PERSONAL FMS Mexico
----------------------------------------------------------------------------------------------------------
SODEXHO MANTENIMIENTO Y SERVICIOS FMS Mexico
----------------------------------------------------------------------------------------------------------
SODEXHO PASS DO BRAZIL SVC Brazil
----------------------------------------------------------------------------------------------------------
CARDAPIO INFORMATICA SVC Brazil
----------------------------------------------------------------------------------------------------------
NATIONAL ADMINISTRACAO DE RESTAURENTES SVC Brazil
----------------------------------------------------------------------------------------------------------
SODEXHO PASS CHILE SVC Chile
----------------------------------------------------------------------------------------------------------
SODEXHO PASS VENEZUELA 64% 64% SVC Venezuela
----------------------------------------------------------------------------------------------------------
SODEXHO PASS DE COLOMBIA 51% 51% SVC Colombia
----------------------------------------------------------------------------------------------------------
SODEXHO PASS PEROU SVC Peru
----------------------------------------------------------------------------------------------------------
SODEXHO PASS PANAMA 51% 51% SVC Panama
----------------------------------------------------------------------------------------------------------
LUNCHEON TICKETS SVC Argentina
----------------------------------------------------------------------------------------------------------
PRESTACIONES MEXICANAS SA DE CV SVC Mexico
----------------------------------------------------------------------------------------------------------
SODEXHO SERVICIOS OPERATIVOS SVC Mexico
----------------------------------------------------------------------------------------------------------
F-40
% interest % voting Principal Country
rights activity
----------------------------------------------------------------------------------------------------------------------
Africa
----------------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO AFRIQUE FMS France
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO NORTH AFRICA FMS France
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO NIGERIA FMS Nigeria
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO GABON 90% 90% FMS Gabon
-------------------------------------------------------------------------------------------------------------
SODEXHO ANGOLA FMS Angola
-------------------------------------------------------------------------------------------------------------
SODEXHO PASS TUNISIE 49% 49% SVC Tunisia
-------------------------------------------------------------------------------------------------------------
SODEXHO MAROC FMS Morocco
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO GUINEA ECUATORIAL 70% 70% FMS Eq. Guinea
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO CAMEROUN 70% 70% FMS Cameroon
-------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO CONGO FMS Congo
-------------------------------------------------------------------------------------------------------------
SODEXHO SOUTHERN AFRICA (sub-group) 55% 55% FMS S. Africa
-------------------------------------------------------------------------------------------------------------
SODEXHO INVESTMENTS LTD HOL S. Africa
-------------------------------------------------------------------------------------------------------------
SODEXHO TANZANIA FMS Tanzania
----------------------------------------------------------------------------------------------------------------------
% interest % voting Principal Country
rights activity
------------------------------------------------------------------------------------------------------------------------
Europe
------------------------------------------------------------------------------------------------------------------------
SODEXHO BELGIQUE FMS Belgium
---------------------------------------------------------------------------------------------------------------
ALTYS BELGIQUE FMS Belgium
---------------------------------------------------------------------------------------------------------------
N SODEXHO SUISSE FMS Switzerland
---------------------------------------------------------------------------------------------------------------
ALTYS SUISSE FMS Switzerland
---------------------------------------------------------------------------------------------------------------
ALTYS DEUTSCHLAND FMS Germany
---------------------------------------------------------------------------------------------------------------
ALTYS AUSTRIA GMBH FMS Austria
---------------------------------------------------------------------------------------------------------------
ALTYS REPUBLIQUE TCHEQUE FMS Czech Republic
---------------------------------------------------------------------------------------------------------------
SODEXHO LUXEMBOURG (SUB-GROUP) FMS Luxembourg
---------------------------------------------------------------------------------------------------------------
SODEXHO ITALIA (SUB-GROUP) FMS Italy
---------------------------------------------------------------------------------------------------------------
SODEXHO DOO FMS Slovenia
---------------------------------------------------------------------------------------------------------------
SODEXHO OY FMS Finland
---------------------------------------------------------------------------------------------------------------
ABRA NORDIC VENDING OY FMS Finland
---------------------------------------------------------------------------------------------------------------
SODEXHO SCANDINAVIAN HOLDING AB (sub-group) FMS Sweden
---------------------------------------------------------------------------------------------------------------
SODEXHO ESPANA (sub-group) FMS Spain
---------------------------------------------------------------------------------------------------------------
SODEXHO PORTUGAL II RESTAURACAO E SERVICIOS FMS Portugal
---------------------------------------------------------------------------------------------------------------
SODEXHO HELLAS 58% 58% FMS Greece
---------------------------------------------------------------------------------------------------------------
SODEXHO CATERING AND SERVICES GMBH FMS Germany
---------------------------------------------------------------------------------------------------------------
SODEXHO SERVICES GMBH FMS Germany
---------------------------------------------------------------------------------------------------------------
PLAUEN MENU 90% FMS Germany
---------------------------------------------------------------------------------------------------------------
BARENMENU GMBH FMS Germany
---------------------------------------------------------------------------------------------------------------
HDL CATERING FMS Germany
---------------------------------------------------------------------------------------------------------------
F-41
% interest % voting Principal Country
rights activity
------------------------------------------------------------------------------------------------------------------------
Europe
------------------------------------------------------------------------------------------------------------------------
N WJT CATERING FMS Germany
---------------------------------------------------------------------------------------------------------------
SODEXHO AO FMS Russia
---------------------------------------------------------------------------------------------------------------
SODEXHO EUROASIA FMS Russia
---------------------------------------------------------------------------------------------------------------
IMAGOR SERVICES HOL Belgium
---------------------------------------------------------------------------------------------------------------
SODEXHO SPOLECNE STRAVOVANI A SLUZBY FMS Czech Republic
---------------------------------------------------------------------------------------------------------------
SODEXHO SKOLNI JIDELNY SRO FMS Czech Republic
---------------------------------------------------------------------------------------------------------------
SODEXHO SPOLOCNE STRAVOVANIE A SLUZBY FMS Slovakia
---------------------------------------------------------------------------------------------------------------
SODEXHO MAGYARORSZAG KFT FMS Hungary
---------------------------------------------------------------------------------------------------------------
ZONA VENDEGLATO KFT FMS Hungary
---------------------------------------------------------------------------------------------------------------
SODEXHO TOPLU YEMEK FMS Turkey
---------------------------------------------------------------------------------------------------------------
SODEXHO POLSKA SP. ZOO FMS Poland
---------------------------------------------------------------------------------------------------------------
SODEXHO MM CATERING GMBH FMS Austria
---------------------------------------------------------------------------------------------------------------
EM AGECROFT PRISON MANAGEMENT 50% 50% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO SERVICES GROUP LTD HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
EM HPC LIMITED 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO INTERNATIONAL HOLDINGS LTD HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
KEYLINE TRAVEL MANAGEMENT FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO PRESTIGE LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO SCOTLAND FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
HARMONDSWORTH DETENTION SERVICES LTD 51% 51% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
UKDS FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM SODEXHO CATALYST ROMFORD HAVERING 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM SODEXHO CATALYST ROEHAMPTON 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
TILLERY VALLEY FOODS LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
RUGBY HOSPITALITY 2003 LTD 55% 55% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO DEFENCE SERVICES LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO LAND TECHNOLOGY LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO INVESTMENTS SERVICES LIMITED FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
N, EM MANCHESTER ROYAL INFIRMARY PFI 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM PETERBOROUGH PRISON MANAGEMENT LIMITED 33% 33% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM ASHFORD PRISON SERVICES LIMITED 33% 33% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO HOLDINGS LTD HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO EDUCATION SERVICES LTD FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO MANAGEMENT SERVICES LTD FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO HEALTHCARE SERVICES LTD FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO SUPPORT SERVICES HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO NORWAY FMS Norway
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO HOLDINGS LTD HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SERVICES EUROPE LTD HOL United Kingdom
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SODEXHO THE NETHERLANDS BV FMS Netherlands
---------------------------------------------------------------------------------------------------------------
UNIVERSAL SERVICES EUROPE-ISLANDE FMS Iceland
---------------------------------------------------------------------------------------------------------------
PRIMARY MANAGEMENT ALDERSHOT 60% 60% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM MERCIA HEALTHCARE HOLDINGS LTD 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
EM SOUTH MANCHESTER HEALTHCARE LTD 25% 25% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
N RUGBY TRAVEL AND HOSPITALITY'07 80% 80% FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
F-42
% interest % voting Principal Country
rights activity
------------------------------------------------------------------------------------------------------------------------
Europe
------------------------------------------------------------------------------------------------------------------------
SODEXHO HOLDINGS - IRELAND LTD HOL Ireland
---------------------------------------------------------------------------------------------------------------
SODEXHO IRELAND LIMITED FMS Ireland
---------------------------------------------------------------------------------------------------------------
SODEXHO BV (sub-group) FMS Netherlands
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS BELGIQUE SVC Belgium
---------------------------------------------------------------------------------------------------------------
SPECIAL EVENT SVC Belgium
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS LUXEMBOURG SVC Luxembourg
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS GMBH SVC Germany
---------------------------------------------------------------------------------------------------------------
SODEXHO CARD SERVICES GMBH SVC Germany
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS SRL SVC Italy
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS ESPANA SVC Spain
---------------------------------------------------------------------------------------------------------------
TICKET MENU SVC Spain
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS AUSTRIA GMBH SVC Austria
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS LIMITED SVC United Kingdom
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS HUNGARIA KFT SVC Hungary
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS BULGARIA SVC Bulgaria
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS CESKA REPUBLIKA SVC Czech Republic
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS SLOVAK REPUBLIC SVC Slovakia
---------------------------------------------------------------------------------------------------------------
N CHEQUE LIST 67% 67% SVC Belgium
---------------------------------------------------------------------------------------------------------------
N SODEXHO PASS CENTRAL EUROPE SVC Netherlands
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS POLSKA SVC Poland
---------------------------------------------------------------------------------------------------------------
SODEXHO RESTORAN SERVISLERI AS 80% 80% SVC Turkey
---------------------------------------------------------------------------------------------------------------
NETSER 40% 50% SVC Turkey
---------------------------------------------------------------------------------------------------------------
SODEXHO PASS ROMANIA SVC Romania
---------------------------------------------------------------------------------------------------------------
CATAMARAN CRUISERS FMS United Kingdom
---------------------------------------------------------------------------------------------------------------
COMPAGNIE FINANCIERE AURORE INTERNATIONAL HOL Belgium
---------------------------------------------------------------------------------------------------------------
PAKZON HOL Netherlands
------------------------------------------------------------------------------------------------------------------------
% interest % voting Principal Country
rights activity
-------------------------------------------------------------------------------------------------------------------------
Asia, Australasia, Middle East
-------------------------------------------------------------------------------------------------------------------------
KELVIN CATERING LTD 49% 49% FMS United Arab
Emirates
----------------------------------------------------------------------------------------------------------------
TEYSEER SERVICES COMPANY 49% 49% FMS Qatar
----------------------------------------------------------------------------------------------------------------
RESTAURATION FRANCAISE (NOUVELLE-CALEDONIE) 72% 72% FMS France
----------------------------------------------------------------------------------------------------------------
SODEXHO NOUVELLE-CALEDONIE 54% 54% FMS France
----------------------------------------------------------------------------------------------------------------
SRRS (LA REUNION) FMS France
----------------------------------------------------------------------------------------------------------------
SODEXHO SINGAPORE FMS Singapore
----------------------------------------------------------------------------------------------------------------
SODEXHO MALAYSIA FMS Malaysia
----------------------------------------------------------------------------------------------------------------
SODEXHO HONG KONG LTD FMS Hong Kong
----------------------------------------------------------------------------------------------------------------
EM SODEXHO HEALTHCARE SUPPORT SERVICES (THAILAND) 26% 26% FMS Thailand
----------------------------------------------------------------------------------------------------------------
SODEXHO KOREA CO LTD FMS Korea
----------------------------------------------------------------------------------------------------------------
F-43
% % voting Principal
interest rights activity Country
------------------------------------------------------------ ----------- ------------- --------------- ------------------
Asia, Australasia, Middle East
------------------------------------------------------------ ----------- ------------- --------------- ------------------
Universal Sodexho Eurasia FMS United Kingdom
--------------------------------------------------- ----------- ------------- --------------- ------------------
Aims Corporation FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
N, EM Mowlem Sodexho 50% 50% FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Universal Remote Sites Services FMS Singapore
--------------------------------------------------- ----------- ------------- --------------- ------------------
PT Universal Ogden Indonesia FMS Indonesia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Altys Multi-Services pty FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Australia FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Rugby Hospitality 2003 Pty 55% 100% FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
EM Serco Sodexho Defence Services pty Ltd 50% 50% FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Venues Australia Pty FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
EM Serco Sodexho Defence Services New Zealand 50% 50% FMS New Zealand
--------------------------------------------------- ----------- ------------- --------------- ------------------
N Sodexho New Zealand FMS New Zealand
--------------------------------------------------- ----------- ------------- --------------- ------------------
Universal Sodexho pty ltd FMS Australia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Tianjing Service Management Company ltd FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho (Shanghai) Management Services Company ltd FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Services Company ltd Shanghai FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
N, EM Shanghai SAIC Sodexho Services Co. Ltd 49% 49% FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho (Suzhou) Services Company Ltd FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Beijing Sodexho Service Company ltd FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho (Guangzhou) Management Services ltd FMS China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Pass Shanghai SVC China
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho India FMS India
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Pass Services India 74% 74% SVC India
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Pass, Inc. 60% 60% SVC Philippines
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sodexho Services Lebanon 60% 60% FMS Lebanon
--------------------------------------------------- ----------- ------------- --------------- ------------------
N Universal Sodexho laos Laos
--------------------------------------------------- ----------- ------------- --------------- ------------------
SISA.UAE FMS United Arab
Emirates
--------------------------------------------------- ----------- ------------- --------------- ------------------
EM Sodexho Kazmunaigas Services 49% 49% FMS Kazakhstan
--------------------------------------------------- ----------- ------------- --------------- ------------------
Sakhalin Support Services 95% 95% FMS Russia
--------------------------------------------------- ----------- ------------- --------------- ------------------
Allied Support FMS Russia
-------- --------------------------------------------------- ----------- ------------- --------------- ------------------
Business : FMS = Food and Management Services, SVC = Service Vouchers and Cards, HOL = Holding company
5. DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP
The Group's consolidated financial statements have been prepared in
accordance with French GAAP which, as applied by the Group, differs in certain
significant respects from accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The effects of the application of U.S.
GAAP to net income and shareholders' equity are set forth in the tables below:
F-44
Restatement
In connection with the implementation of International Financial Reporting
Standards (IFRS), which will become the Group's primary reporting GAAP
effective for fiscal 2006, the Group determined that certain of the adjustments
to reconcile shareholders' equity and net income from French GAAP to U.S. GAAP
as previously reported as of and for the years ended August 31, 2004, 2003,
2002 and 2001, were not properly accounted for. As a result, the Group has
decided to restate its previously issued reconciliations to U.S. GAAP of net
income and shareholders' equity.
The errors principally pertain to (i) foreign currency translation
adjustments related to goodwill and intangible assets denominated in euro in
French GAAP but required to be reported in the currency of the acquired entity
in U.S. GAAP; (ii) adjustments pertaining to retirement plans which were
determined to be incomplete and contained errors in the application of SFAS 87;
and (iii) other adjustments which mainly included the use of the effective
interest method in accounting for debt issuance costs in connection with one of
the Group's borrowing arrangements resulted in a difference as compared to the
straight-line method, due to the timing of the repayments. Following is a
summary of the effects of the restatement on the years presented.
Basic Diluted
Operating Net Earnings Earnings Total Total
Revenues Income Income per Share per Share Assets Equity
-------- ------ ------ --------- --------- ------ ------
Fiscal 2004
Previously reported 11,502 388 169 1.08 1.08 7,472 1,651
Adjustments:
Business combinations -
currency related - 2 2 .01 .01 (76) (73)
Business combinations and
intangible assets - other - (2) (2) (.01) (.01) (13) (12)
Pensions and postretirement
benefits - 2 1 .01 .01 6 (16)
Other - (4) (1) (.01) (.01) 4 (8)
-------- ------ ------ --------- --------- ------ ------
- (2) - - - (79) (109)
-------- ------ ------ --------- --------- ------ ------
As restated 11,502 386 169 1.08 1.08 7,393 1,542
======= ====== ====== ======== ========= ====== ======
Fiscal 2003
Previously reported 11,690 400 147 0.94 0.94
Adjustments:
Business combinations -
currency related - 1 1 - -
Business combinations and
intangible assets - other - (2) (1) - -
Pensions and postretirement
benefits - 1 1 .01 .01
Other - 4 - - -
-------- ------ ------ --------- ---------
Adjustment - 4 1 0.01 0.01
-------- ------ ------ --------- ---------
As restated 11,690 404 148 0.95 0.95
======= ====== ====== ======== =========
F-45
5.1 Reconciliation of consolidated net income (loss)
For the year ended August 31,
-----------------------------------------------
2005 2004 2003
-------------- --------------- ----------------
(millions of euro, except per-share amounts)
Restated Restated
Net income................................................. 159 183 162
---------- ---------- -----------
U.S. GAAP adjustments: (1)
(a) Business combinations................................ (15) (24) (40)
(b) Stock-based compensation.............................. (1) (4) 5
(c) Pensions and postretirement benefits.................. (19) (12) (26)
(d) Detachable stock purchase warrants.................... - (5) (6)
(e) Investments in marketable equity securities - (4) -
(f) Derivative financial instruments...................... 2 (4) 22
(g) Treasury shares...................................... 6 2 4
(h) Other, net............................................ 3 6 (1)
(i) Deferred income tax effect............................ 20 31 28
---------- ---------- -----------
Total U.S. GAAP adjustments................................ (4) (14) (14)
---------- ---------- -----------
Net income, as determined under U.S. GAAP.................. 155 169 148
========== ========= ===========
Earnings per share, as determined under U.S. GAAP
(j) Basic earnings per share............................ 0.99 1.08 0.95
(j) Diluted earnings per share.......................... 0.99 1.08 0.95
-------------------------------------------
(1) Refer to note 5.4 for explanations.
5.2 Reconciliation of consolidated shareholders' equity
August 31,
------------------------
2005 2004
----------- ------------
(millions of euro)
Restated
Shareholders' equity................................. 2,136 2,192
U.S. GAAP adjustments: (1)
(a) Business combinations............................ (490) (439)
(b) Stock-based compensation......................... - -
(c) Pensions and postretirement benefits............. 50 (88)
(e) Investments in marketable equity securities...... 5 (3)
(f) Derivative financial instruments................. 5 3
(g) Treasury shares.................................. (69) (111)
(h) Other, net....................................... 8 7
(i) Deferred income tax effects...................... (59) (19)
--------- ---------
Total U.S. GAAP adjustments........................... (550) (650)
--------- ---------
F-46
August 31,
------------------------
2005 2004
----------- ------------
(millions of euro)
Restated
Shareholders' equity, as determined under U.S. GAAP... 1,586 1,542
=========== ============
(1) Refer to note 5.3 for explanations.
F-47
5.3 Notes to reconciliation of consolidated net income and consolidated
shareholders' equity
(a) Business combinations
Under French GAAP, all of the Group's business combinations are accounted
for as purchases. The cost of an acquired company is assigned to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
fair values at the date of acquisition. Any excess of purchase price over the
fair value of the tangible and intangible assets acquired is allocated to
goodwill, which is amortized over its estimated useful life. Where the Group
has established a strong presence in a geographic market through an
acquisition, an additional intangible asset, market share, is recorded in the
allocation of purchase price. In accordance with French GAAP, this market share
intangible asset is not amortized. However, it is evaluated annually for
impairment as described in note 1. Deferred taxes are not recorded with respect
to goodwill or market share under French GAAP.
Under U.S. GAAP, all of the Group's business combinations are accounted
for as purchases. In accordance with SFAS 141, Business Combinations, and
related interpretations (APB 16 prior to July 1, 2001), the cost of an acquired
company is assigned to the tangible and identifiable intangible assets acquired
and liabilities assumed on the basis of their fair values at the date of
acquisition. In accordance with U.S. GAAP, customer relationships, trademarks,
workforce (prior to July 1, 2001 only) and software intangible assets were
identified with respect to the Group's acquisitions. As a result, part of what
was allocated to market share and goodwill under French GAAP is reallocated to
these identified intangible assets for U.S. GAAP. The remaining excess of cost
over fair value of the net assets acquired is recorded as goodwill. In
accordance with SFAS 142 (APB 17 prior to September 1, 2001) all intangible
assets acquired, including customer relationships, trademarks and software are
amortized over their estimated useful lives. In accordance with APB 17,
goodwill and assembled workforce were amortized through fiscal 2001; thereafter
assembled workforce has been reclassified to goodwill, which is no longer
amortized. A deferred tax liability is recorded with respect to all intangible
assets except goodwill. Generally, the amount assigned to goodwill is increased
by an amount equal to the deferred taxes recorded.
A summary of the composition of the aggregate adjustments included in the
reconciliations of consolidated net income (loss) related to the Group's
business combinations follows:
For the year ended August 31,
--------------------------------
2005 2004 2003
---------- ----------- ---------
Restated Restated
(millions of euro)
Sodexho, Inc............................. (17) (19) (30)
Gardner Merchant......................... (10) (10) (9)
Other.................................... 12 7 (1)
---------- ----------- ---------
(15) (24) (40)
========== =========== =========
The deferred income tax effect related to the adjustments for the
acquisition of Sodexho, Inc., Gardner Merchant and other business combinations
is included in the reconciliations of consolidated net income (loss) and
consolidated shareholders' equity within the caption "Deferred income tax
effects." There is no minority interest impact related to the adjustments for
the Gardner Merchant acquisition or other business combinations.
As of August 31, 2005, the principal effects on the Group's balance sheet
related to the accounting for business combinations were to increase goodwill
by (euro)1.3 billion, decrease intangible assets other than goodwill by
(euro)1.6 billion and increase deferred tax liabilities by (euro)0.2 billion.
As of August 31, 2004, the principal effects on the Group's balance sheet
related to the accounting for business combinations were to increase goodwill
by (euro)1.3 billion, decrease intangible assets other than goodwill by
(euro)1.5 billion and increase deferred tax liabilities by (euro)0.3 billion.
The following table presents the allocation of intangible assets and
goodwill, their estimated useful lives and the related amortization expense.
F-48
Amortization Expense
August 31, Year Ended August 31,
------------------- Estimated -------------------------------------
2005 2004 Useful Life 2005 2004 2003
-------- --------- --------------- ---------- ------------- ------------
Restated Restated Restated
(millions of euro) (years) (millions of euro)
Customer relationships..................... 1,458 1,480 10 - 19 64 70 84
Trademarks................................. 30 30 5 - - -
Software and other......................... 214 216 3 - 7 33 36 30
Goodwill................................... 2,957 2,969 - - -
-------- -------- ---------- ------------- -----------
4,659 4,695 97 106 113
====================================
Accumulated amortization................... (1,110) (1,010)
-------- ---------
Total intangible assets and goodwill, 3,549 3,685
net................................... ======== =========
Incremental U.S. GAAP amortization with respect to software and other
intangible assets totaled zero, (euro)3 million and (euro)7 million in fiscal
2005, fiscal 2004 and fiscal 2003, respectively, and principally related to
leased assets which are capitalized under U.S. GAAP but treated as operating
leases under French GAAP.
Additional information with respect to the differences between French GAAP
and U.S. GAAP for the Group's significant acquisitions is provided below.
Sodexho, Inc. (formerly Sodexho Marriott Services, Inc.)
In connection with the acquisition of the 53% of Sodexho, Inc. it did not
already own, Sodexho Alliance agreed to convert the unvested stock options into
unvested Sodexho Alliance stock options. Sodexho Alliance recorded a liability
amounting to (euro)79 million in connection with this agreement, computed as
the aggregate intrinsic value of the options (using the market value of the
underlying shares of (euro)53.47 based on the average Sodexho Alliance share
price over the 20 days preceding the transaction). The liability was recorded
as part of the cost of the acquisition. For the years ended August 31, 2005 and
2004, the liability was reduced (with a corresponding benefit recorded in the
income statement) by (euro)5.6 million and (euro)6.6 million, which was
computed as the lesser of a) the original provision and b) the difference
between (euro)53.47 per share and the acquisition cost of the related treasury
shares (see note 5.3(f)).
Under U.S. GAAP, the portion of the intrinsic value of the rolled over
unvested options related to future service was recorded as unearned
compensation in shareholders' equity. The fair value of these stock options was
recorded as shareholders' equity.
Gardner Merchant ("GM")
In accounting for the acquisition of the worldwide operations of GM in
1995, the Group allocated a significant portion of the excess of purchase price
over the fair value over the tangible assets acquired and liabilities assumed
to market share, which is not subject to amortization. Under U.S. GAAP, the
excess of purchase price over the fair value of the tangible assets acquired
and liabilities assumed was partially allocated to identifiable intangible
assets, including customer contracts, trademarks and assembled workforce
(reclassified to goodwill and no longer amortized as of July 1, 2001), and
amortized over their estimated useful lives of 14 years, five years and four
years, respectively. The remaining excess was allocated to goodwill which was
amortized over its estimated useful life of 30 years through June 30, 2001.
F-49
(b) Stock-based compensation
Stock options
The Group has historically granted certain employees options to purchase
common shares of Sodexho Alliance. The accounting treatment under French GAAP
is described below in note (f) Treasury shares. For U.S. GAAP, the Group has
elected to account for its stock-based compensation plans in accordance with
the intrinsic value method prescribed by APB Opinion No. 25 which requires that
companies recognize total compensation cost equal to the excess, if any, of the
market price of the share over the exercise price of the option on the
measurement date. The measurement date is defined as the first date on which
the number of shares the employee is entitled to receive and the exercise price
are known. Option grants for which both the number of shares an employee is
entitled to receive and the exercise price are known on the date of grant are
referred to as "fixed" stock option grants. All other grants are considered to
be "variable" stock option grants. For fixed stock option grants, total
compensation cost is measured only once, on the date of grant. For variable
stock option grants, this excess is estimated periodically at interim dates and
final measurement occurs on the measurement date. Compensation expense for both
fixed and variable option grants is recognized over the employee service
period, which is generally the vesting period of the option, in accordance with
the provisions of FIN 28. Total compensation expense recognized under U.S. GAAP
with respect to these stock options was (euro)0.2 million, (euro)0.3 million
and (euro)0.3 million and for each of the years ended August 31, 2005, 2004 and
2003, respectively.
Other stock-based compensation
In addition to traditional stock option plans, certain of the Group's
subsidiaries have stock-based compensation plans whereunder an employee is
granted a number of hypothetical shares in the subsidiary ("phantom shares").
The employee is entitled to any appreciation in the value, as determined by
application of a formula based on a multiple of adjusted EBITA, of those
phantom shares. The employee's interest in that appreciation vests 100% after
completion of a service period (generally, between four and five years). For
French GAAP, compensation expense is recognized currently for the amount of the
total appreciation in the value of the phantom shares (or change in value in
subsequent periods) as computed based on the contractual formula. For U.S.
GAAP, the total compensation expense is computed in the same manner; however,
the expense is recognized ratably over the service period. Total compensation
expense recognized under U.S. GAAP with respect to these plans was (euro)2.5
million, (euro)2.3 million and (euro)1.4 million for the years ended August 31,
2005, 2004 and 2003 compared to (euro)1.3 million, (euro)3.5 million and
(euro)3.4 million recognized under French GAAP for the same period.
(c) Pensions and postretirement benefits
Under French GAAP, effective September 1, 2004, pension and similar
obligations are accrued using the projected unit credit valuation method. Prior
to that date, pension and similar obligations were accrued using the projected
unit credit valuation method, except for funded plans to which the Group
subsidiary made a contribution, where the amount of the contribution was
recorded as the annual expense of the plan.
Under U.S. GAAP, the Group accounts for its pension and postretirement
benefit plans in accordance with SFAS 87, Employers' Accounting for Pensions
and SFAS 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. Transition obligations were calculated as of September 1, 1999 as
permitted for companies outside the United States and amortized over a period
of 15 years from the initial implementation date of SFAS 87 in 1989 for
pensions and of SFAS 106 in 1995 for other postretirement benefits. For the
funded plans where the accumulated benefit obligation exceeded the fair value
of the plan assets as of August 31, 2005, 2004 and 2003, an additional minimum
liability has been recorded, with a corresponding entry recorded net of tax as
accumulated other comprehensive income, a component of shareholders' equity.
(d) Derivative financial instruments
Under French GAAP, the Group's derivative financial instruments, which
primarily include interest rate and cross-currency swap agreements on debt
instruments, are considered to hedge the underlying debt. Any interest rate
differential is recognized as an adjustment to interest expense over the term
of the related underlying debt. For swaps negotiated on intercompany debt, the
difference between the amount of the debt at the period end rates and the
swapped rates
F-50
is recorded as debt. Where the hedge is of a net investment in a foreign
subsidiary, the resulting foreign currency translation difference is recorded
in the currency translation adjustment account in shareholders equity.
Under U.S. GAAP, all derivative instruments are required to be recorded on
the balance sheet at their fair value. Changes in fair value are recorded
currently in earnings unless the item is designated, qualifies, and is
effective as a hedge. Fair value is defined as the amount that would be paid or
received to terminate the derivative instrument at the balance sheet date.
Changes in the fair value of derivatives designated as part of a hedge
transaction are recorded each period in current earnings or other comprehensive
income, depending on the type of hedge transaction. For cash flow hedge
transactions in which the Group is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income are reclassified to earnings in
the periods in which earnings are impacted by the variability of the cash flows
of the hedged item. The ineffective portion of all hedges is recognized in
current period earnings.
Under U.S. GAAP, the Group has accounted for all of its derivative
financial instruments (other than those of Sodexho, Inc.) at fair value with
changes in the fair value of instruments recognized currently in earnings.
Under U.S. GAAP, Sodexho, Inc.'s interest rate agreements have been
designated as cash flow hedges in accordance with SFAS No. 133. These
agreements had terminated as of August 31, 2005. For the fiscal year ended
August 31, 2005 and through the termination date, these cash flow hedges were
determined to be effective hedges, and accordingly, changes in fair value are
reflected in the statement of comprehensive income. The aggregate adjustment
related to derivative financial instruments accounted for as cash flow hedges
in accordance with SFAS No. 133, which is included within the caption "Business
combinations" in the reconciliations of consolidated shareholders' equity and
consolidated net income (loss), amounted to an increase in consolidated
shareholders' equity of (euro)0, (euro)8 and (euro)4 million as of August 31,
2005, 2004 and 2003, respectively.
(e) Investments in marketable equity securities
Under French GAAP, investments in marketable securities are recorded at
cost, with unrealized losses recorded in the income statement. Under U.S. GAAP,
investments in marketable equity securities are classified as trading,
held-to-maturity and available-for-sale. Available-for-sale securities are
reported at market value, with unrealized gains and losses excluded from
earnings and recorded in equity as a separate component of other comprehensive
income. Unrealized gains and losses are transferred from equity to income when
realized. Unrealized losses which are considered other than temporary are
transferred to the statement of operations when such determination is made.
(f) Treasury shares
Under French GAAP, treasury shares are recorded, at cost, as an asset in a
company's balance sheet when repurchased for re-issuance in connection with
stock-based compensation plans. A provision is recorded for the difference
between the fair market value of the treasury shares and their cost. An
additional provision is also recorded for the difference, if any, between the
fair market value of treasury shares (held and/or to be acquired by Sodexho
Alliance) and the exercise price of stock options when such exercise price is
lower than the fair market value ("in the money options"). The difference
between the proceeds and the recorded cost, after giving consideration to
provisions, if any, is recognized in the profit and loss account as a gain or
loss. Under U.S. GAAP, treasury shares are recorded, at cost, as a reduction of
shareholders' equity. Any difference between the recorded cost and proceeds
received on a subsequent issuance of the shares is also reflected directly in
equity.
(g) Other, net
Other consists of the impacts on net income (loss) and shareholders'
equity for the differences between U.S. GAAP and French GAAP summarized in the
table below:
Net Income for the Year Ended Shareholders' Equity
August 31, as of August 31,
---------------------------------- --------------------------
2005 2004 2003 2005 2004
---------------------------------- --------------------------
Restated Restated Restated
Provisions for contingencies and losses 1 (2) (1) - (1)
Leases - 1 1 (7) (7)
F-51
Net Income for the Year Ended Shareholders' Equity
August 31, as of August 31,
---------------------------------- --------------------------
2005 2004 2003 2005 2004
---------------------------------- --------------------------
Restated Restated Restated
Scope of consolidation - - - (1) -
Debt issuance costs 4 1 1 1 (4)
Equity method investees (6) 1 (3) (8) (2)
Indirectly-held treasury shares 1 2 1 32 32
Deferred charges and other 3 3 0 (9) (11)
---------------------------------- -----------------------
Total - Other, net 3 6 (1) 8 7
================================== =======================
Provisions for contingencies and losses
Under French GAAP, provisions for contingencies and losses are recorded
when it is probable that there is a legal, equitable or constructive obligation
to sacrifice economic benefits to a third party in the future without an
expectation of receiving proceeds of a similar amount from the third party.
Under U.S. GAAP, provisions for contingencies and losses (liabilities) are
recognized for specific existing risks when the related loss is both estimable
and probable and subject to additional criteria in certain situations, such as
business combinations and restructurings. In accordance with SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, one-time
termination benefits are recognized over the period in which the services are
rendered.
Leases
Under French GAAP, leases that transfer substantially all of the risks and
rewards of ownership to the lessee are accounted for as capital leases. All
other leases are accounted for as operating leases.
Under U.S. GAAP, lease accounting is based on a series of established
quantitative criteria. These criteria are: (i) the lease automatically
transfers ownership of the asset to the lessee at the end of the lease, (ii)
the lease contains a bargain purchase option exercisable by the lessee, (iii)
the term of the lease is equal to or greater than 75% of the estimated useful
life of the leased asset at lease inception and (iv) the present value of the
future minimum lease payments to be made pursuant to the lease agreement
represents 90% or more of the fair value of the leased asset at inception of
the lease. A lease meeting any one of these criteria is required to be
accounted for as a capital lease by the lessee. All other leases are required
to be accounted for as operating leases.
The aggregate impact of the capitalization of leases for U.S. GAAP on
total assets is an increase of (euro)40 million and (euro)49 million as of
August 31, 2005 and 2004, respectively. The aggregate impact on total
liabilities (debt) is an increase of (euro)44 million and (euro)55 million as
of August 31, 2005 and 2004, respectively.
..........Consolidation
Under French GAAP, the Group does not consolidate certain insignificant
subsidiaries. Under U.S. GAAP, the Group consolidates all subsidiaries which it
has the ability to control regardless of significance. The net impact on the
Group financial statements of consolidating these subsidiaries in U.S. GAAP was
not material in any of the periods presented.
Debt issuance costs
Under French GAAP, debt issuance costs are capitalized and amortized
straight-line over the life of the related debt. Under U.S. GAAP, debt issuance
costs are capitalized and amortized over the life of the related debt using the
effective interest method.
Equity method investees
F-52
French GAAP does not require that the underlying accounts of equity method
investees be conformed to French GAAP. Under U.S. GAAP, the underlying
financial statements of the Group's equity method investees have been conformed
to U.S. GAAP. The principal adjustment related to derivative financial
instruments held by the equity method investees, which were accounted for in
accordance with SFAS 133.
Indirectly-held treasury shares
Under French GAAP, certain of the Group's outstanding common shares which
are indirectly owned by consolidated subsidiaries of the Group are considered
treasury shares (see note 3.13.1) and treated as a reduction of equity in the
consolidated French GAAP financial statements. Under U.S. GAAP, these
indirectly-held shares are not considered treasury shares because the
subsidiaries of the Group do not control the entity which actually owns the
shares in the Group. Therefore, no such reclassification between investments
and shareholders' equity is made under U.S. GAAP. Indirectly-held treasury
shares are considered outstanding for purposes of computing earnings-per-share
under French and U.S. GAAP.
Deferred charges and other
Under French GAAP, certain costs, such as costs incurred for strategic
consultancy studies and, in certain cases, contract start-up costs, can be
capitalized and amortized over their estimated useful lives of three to five
years, if the cost is expected to provide a future benefit. U.S. GAAP requires
that such costs be expensed as incurred.
(h) Deferred income tax effect of U.S. GAAP adjustments
This reconciliation item includes the tax effects of the U.S. GAAP
adjustments reflected in the reconciliations of shareholders' equity and net
income (loss).
(j) Earnings per share
Under French GAAP, earnings per share is computed as the Group's share of
consolidated net income divided by the weighted average number of shares
outstanding during the period, including treasury shares. In the calculation of
diluted earnings per share under French GAAP, the denominator is increased by
the number of potential shares outstanding, and the numerator is increased by
the net-of-tax interest income on the proceeds which would have resulted from
the issuance of these shares. The potential shares included in diluted earnings
per share relate to stock options awarded but not yet exercised and warrants
outstanding from the 1996 bond issuance.
Under U.S. GAAP, companies are required to present their earnings per
share on a basic and diluted basis. Basic earnings per share are computed as
net income available to common shareholders divided by the weighted average
shares outstanding for the period. For purposes of computing the weighted
average shares outstanding for the period, treasury shares are not considered
outstanding. Diluted earnings per share are computed after giving effect to all
dilutive potential common shares outstanding during the period. Net income
available to common shareholders is adjusted to add back items such as interest
expense on convertible debt. The number of weighted average shares outstanding
is adjusted to include the number of additional common shares that would have
been outstanding if dilutive potential common shares had been issued. Dilutive
potential common shares includes such items as stock purchase options, stock
purchase warrants and convertible securities.
The number of shares used to compute basic and diluted earnings per share
under U.S. GAAP is summarized below:
August 31,
----------------------------------------
2005 2004 2003
------------- ------------- ------------
Basic earnings per share............. 155,838,789 156,381,370 156,422,010
Diluted earnings per share........... 155,838,789 156,381,370 156,422,141
F-53
5.4 New U.S. GAAP accounting pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs--An Amendment of ARB No. 43, Chapter 4." The provisions of SFAS No. 151
will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and are not expected to have a material effect on the
Group's financial statements.
In December 2004, the FASB issued a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation," which also supersedes APB Opinion No. 25,
"Accounting for Stock Issued to its Employees," and its related implementation
guidance. This Statement requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award, and recognize the cost over the
period during which an employee is required to provide service in exchange for
the award--the requisite service period. This Statement is effective for annual
reporting periods beginning after June 15, 2005, and applies to all awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. The Group is currently evaluating the provisions
of this Statement. Adoption of the Statement as of the beginning of fiscal 2006
using the modified prospective transition method will result in a reduction of
reported earnings.
On March 30, 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations," which clarifies the
term "conditional asset retirement obligation" as used in FASB Statement No.
143. The Interpretation is effective for Sodexho no later than the end of
fiscal 2006. The Group is currently evaluating the Interpretation, but has not
yet determined what effect adoption will have on the consolidated financial
statements.
5.5 Other disclosures
The following are supplemental disclosures which pertain to the Group's
financial statements as prepared in accordance with French GAAP.
(a) Impairment of long-lived assets
Tangible fixed assets (property, plant and equipment) are written down to
estimated net realizable value when changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is determined
for each group of asset by considering management's expectations of future
economic and operating conditions of the respective assets to be held for use.
Should this determination indicate that an asset is impaired, a write-down is
recognized which is equal to the difference between carrying value and fair
value. Fair value is determined on the basis of market prices.
Intangible assets and goodwill are written down to estimated net
realizable value when negative conditions are identified. Impairment is
determined based on an estimation of value and future benefits of the
intangible assets. Should this determination indicate that an intangible asset
or goodwill is impaired, the related amortization period is revised or an
impairment loss is recognized. Impairment for market share intangible assets
are recognized as an impairment loss in accordance with the policy described in
note 1.
(b) Allowance for doubtful accounts
Set forth below is a table which provides information on the Group's
allowance for doubtful accounts.
August 31,
-----------------------------------
2005 2004 2003
---------- ------------ -----------
(millions of euro)
Balance at beginning of period 78 64 60
Additions 25 31 14
Deductions (24) (13) (3)
Scope of consolidation and currency
translation adjustment - (4) (7)
---------- ------------ -----------
F-54
August 31,
-----------------------------------
2005 2004 2003
---------- ------------ -----------
(millions of euro)
Balance at end of period 79 78 64
========== ============ ===========
F-55
(c) IAS 7 Consolidated Statements of Cash Flow
Following are consolidated statements of cash flows presented in
accordance with IAS 7:
Years ended August 31,
---------------------------------------
2005 2004 2003
----------- ------------ --------------
(millions of euro)
Cash flows from operating activities
Group net income....................................................... 159 183 162
Minority interests in net income....................................... 10 14 9
Net (income) loss from equity method investees, net of dividends
received.......................................................... - 3 (1)
Less:
Income taxes...................................................... 102 109 134
Accrued interest.................................................. 97 111 141
Adjustments for:
Depreciation and provisions....................................... 246 205 153
Goodwill amortization............................................. 60 59 62
Less: gains or losses on disposal net of tax...................... 2 1 14
----------- ------------ --------------
Operating profit before working capital changes........................ 676 685 674
Increase in inventories........................................... (13) 0 (9)
Increase in account receivables................................... (56) (5) 5
Increase in prepaid expenses, other receivables and other assets.. (20) 45 (12)
Increase in accounts payable...................................... 81 (46) 6
Increase in vouchers payable...................................... 123 80 43
Increase in other liabilities..................................... 67 55 30
----------- ------------ --------------
Change in working capital.............................................. 182 129 63
Income taxes paid................................................. (141) (92) (111)
Interest paid or received......................................... (97) (111) (141)
----------- ------------ --------------
Net cash flow from operating activities........................... 620 611 485
----------- ------------ --------------
Cash flows from investing activities
Purchases of tangible and intangible fixed assets................. (195) (166) (223)
Acquisitions of subsidiaries net of cash acquired................. (4) (76) (34)
Proceeds on disposal of fixed assets.............................. 15 13 14
Other investing activities........................................ 22 (59) (29)
----------- ------------ --------------
Net cash used in investing activities............................. (162) (288) (272)
----------- ------------ --------------
Cash flows from financing activities
Dividends paid.................................................... (108) (95) (94)
Dividends paid to minority shareholders........................... (8) (8) (11)
Proceeds from issuance of share capital, including minority
interests..................................................... - 1 -
Purchases of treasury shares...................................... 1 (4) 23
Proceeds from long-term borrowings................................ 467 257 39
Repayment of borrowings........................................... (653) (465) (178)
Increase (decrease) in bank overdrafts............................ (3) (78) 47
Other financing activities........................................ (37) (29) (21)
----------- ------------ --------------
Net cash provided by (used in) financing activities............... (341) (421) (195)
----------- ------------ --------------
Net increase (decrease) in cash and cash equivalents................... 117 (98) 18
----------- ------------ --------------
Cash and cash equivalents at beginning of period....................... 782 908 932
Net effect of exchange rates on cash................................... 19 (28) (42)
----------- ------------ --------------
Cash and cash equivalents at end of period............................. 918 782 908
----------- ------------ --------------
Cash and cash equivalents include marketable securities with maturities of
three months or less from their date of acquisition (excluding restricted cash
and treasury shares totaling (euro)99 million, (euro)100 million and (euro)96
million as of August 31, 2005, 2004 and 2003). Certain cash and cash equivalent
amounts in prior years have been reclassified to conform to the current year
presentation.
F-56
(d) Statement of comprehensive income
Total comprehensive income (loss) in French GAAP consists of the
following:
For the year ended August 31,
------------------------------------------
2005 2004 2003
----------- -------------- ---------------
(millions of euro)
Net income, as determined under French GAAP....................... 159 183 162
----------- -------------- ---------------
Cumulative effect of change in accounting method............... (104)
Foreign currency translation adjustments and other............. (3) (145) (216)
----------- -------------- ---------------
Comprehensive income (loss), as determined under French GAAP...... 52 38 (54)
=========== ============== ================
(e) Provisions for contingencies and losses
Following is supplemental information pertaining to the provisions for
contingencies and losses recorded by the Group in accordance with French GAAP
as listed in note 3.15:
Sodexho, Inc. acquisition provisions
The Sodexho, Inc. acquisition provisions were recorded in connection with
the 1998 transaction with Marriott Management Services, and primarily
represented an unfavorable contract for food and supply distribution and
restructuring costs, principally related to employee termination, relocation of
facilities and closures, related to Sodexho North America.
Payroll and other taxes
The payroll and other taxes provision relates to payroll and other tax
exposures, including sales and use taxes in the United States, in the various
countries in which the Group operates.
Contract termination costs
The provision for contract termination costs relates to anticipated costs
to exit certain client relationships, generally in acquisition situations.
Client, supplier and employee litigation
Client, supplier and employee litigation provisions relate to pending or
threatened litigation.
Large repairs
Large repairs provisions represent significant anticipated costs to
maintain certain facilities.
Other
Other provisions include re-engineering costs, exchange loss risks and flood
contingencies related to the River and Harbor Cruises activity.
F-57
Exhibit 12.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Michel Landel, the Chief Executive Officer of Sodexho Alliance, SA (the
"registrant"), certify that:
1. I have reviewed this annual report on Form 20-F of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this annual report based on such
evaluation; and;
d) Disclosed in this annual report any change in the company's
internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or
is reasonably likely to materially affect, the company's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: February 24, 2006
By: /s/ Michel Landel
-------------------------------------
Name: Michel Landel
Title: Chief Executive Officer