As filed with the Securities and Exchange Commission on November 26, 2004
===============================================================================
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: ________________
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:
Title of each class Name of each exchange 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]
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
The number of outstanding shares of each class of stock of Sodexho
Alliance, SA at August 31, 2004 was:
Number of Shares
Title of Class Outstanding
Common Shares, par value (euro)4 per share.......... 159,026,413
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.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has
elected to follow.
[X] Item 17 [ ] Item 18
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16 Novembre 2004 - 16h
TABLE OF CONTENTS
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Page
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Forward-Looking Statements...................................................ii
PART I........................................................................1
ITEM 1. Identity of Directors, Senior Management and Advisors.............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.......................40
ITEM 7. Major Shareholders and Related Party Transactions................52
ITEM 8. Financial Information............................................55
ITEM 9. The Offer and Listing............................................56
ITEM 10. Additional Information...........................................57
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk.......73
ITEM 12. Description of Securities Other Than Equity Securities...........74
PART II......................................................................74
ITEM 13. Defaults, Dividend Arrearages and Delinquencies..................74
ITEM 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds..................................................74
ITEM 15. Controls and Procedures..........................................74
ITEM 16A. Audit Committee Financial Expert.................................74
ITEM 16B. Code of Ethics...................................................75
ITEM 16C. Principal Auditor Fees and Services..............................75
ITEM 16D. Comparison of French and US Corporate Governance Practices.......75
PART III.....................................................................75
ITEM 17. Financial Statements.............................................75
ITEM 18. Financial Statements.............................................75
ITEM 19. Exhibits.........................................................76
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 contain information that
is forward-looking. Such statements include information regarding our beliefs,
estimates 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. The information contained in this
Annual Report including, without limitation, the information under the heading
"Item 3.D Key Information--Risk Factors" identifies important factors that
could cause such differences. 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.
We do not undertake any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ii
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:
2000............................ 1.1228 1.0263 1.1268 0.9201
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
------------------
(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, 2004.............................................................. 0.8473 0.8166
June 30, 2004............................................................. 0.8333 0.8118
July 31, 2004............................................................. 0.8315 0.8057
August 31, 2004........................................................... 0.8345 0.8091
September 30, 2004........................................................ 0.8306 0.8059
October 31, 2004.......................................................... 0.8152 0.7817
On November 23, 2004, the 2 p.m. ECB time rate quoted by the European
Central Bank was (euro)0.7640 = U.S. $1.0000, or U.S. $1.3089 = (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 11. Quantitative and Qualitative Disclosures About
Market Risk."
1
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 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. Adverse
developments regarding the foregoing trends, individually or in the aggregate,
could have a material adverse effect on our results of operations.
2
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 a material 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 also varies by geographic
location. In addition, broader trends in food consumption, such as the recent
concern about beef consumption in Europe, 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
Fixed price contracts with our customers could expose us to losses if our
estimates of project costs are too low. A substantial portion of our services
contracts is fixed price contracts. The terms of these contracts 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. 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 governmental regulation
Due to the nature of our industry and our listings on the French and the
New York stock exchanges, our operations are subject to a variety of
international, federal, state, county and municipal laws, regulations and
licensing requirements, including regulations governing such areas as labor,
employment, immigration, health and safety, consumer protection and the
environment. The cost of compliance with these various regulatory regimes has a
significant impact on our results of operations, and violations of certain
regulations could result in the loss of a client contract or fines. There can be
no assurance that additional regulation 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 2004, approximately 70% and 66% 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 exchange restrictions; and geo-political or social
conditions in certain sectors of our international markets. There
4
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.
We currently have significant indebtedness and may incur additional
indebtedness in the future
At August 31, 2004, our percentage of total debt to total capitalization
was approximately 49%. 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 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). In addition, we are obligated under these agreements to maintain
certain ratios of net debt to EBITDA and interest to EBITA, which may also
impair our ability to enter into certain types of transactions.
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.
5
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.
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.
6
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 2004, 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, 2004, we had revenues of approximately
(euro)11.2 billion from our Food and Management Services business, operating
through approximately 24,900 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 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)249 million in fiscal 2004, 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. We were incorporated on December
31, 1974 as Sodexho, SA (societe anonyme), a French limited liability company,
for a duration of 99 years from this date, the maximum allowed under French
law. 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
7
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), since 1998 we have been part of the benchmark index for that
exchange, the CAC 40 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. 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
reclassifications, 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.
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 Michel Landel,
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 2002, 2003 and 2004.
8
Fiscal year ended August 31,
2004 2003 2002
(millions of euro)
Property, plant and equipment and intangibles....... 176 239 297
Acquisitions........................................ 79 37 107
--- --- ---
Total............................................... 255 276 404
=== === ===
We estimate that our consolidated capital expenditures for fiscal 2005
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,
2001 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.
In May 2004, the Group arranged a revolving credit facility of (euro)360
million in order to meet its cash commitments including the repayment of the
(euro)305 million bond issue in June 2004. As of August 31, 2004, (euro)100
million and $100 million were drawn (totaling (euro)183 million). This credit
facility expires in April 2005, but the Group may extend its term for an
additional year, to April 2006, at its option. The banks may extend the term to
April 2007.
In May 2002, we divested our entire interest in Lockhart Catering
Equipment Ltd for (euro)61 million in cash. Based in the United Kingdom, this
subsidiary was primarily engaged in the distribution of catering equipment, a
non-core activity for the Group.
In November 2001, we acquired 100% of the capital stock of Minesite
Catering Pty Ltd in Australia for (euro)10 million in cash.
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.
Since 1996, we have made three bond issuances, two equity offerings and
two syndicated bank borrowings to aid in financing our acquisition
expenditures. In 1996, we issued 400,000 bonds for a total of (euro)305
million, each of which bore an annual interest rate of 6%. These bonds were
redeemed in 2004. Each of these bonds carried a warrant entitling the bearer to
purchase 16.66 of our shares on or before June 7, 2004 for (euro)411.61. In
2004, 291 warrants were exercised, and 4,848 shares were issued. In 1997, we
raised (euro)306 million by issuing 835,770 new shares for cash. In March 1998,
Sodexho, Inc. (formerly SMS) raised U.S. $1.3 billion
9
of which (euro)580 million was guaranteed by us. Outstanding balances on these
facilities were refinanced in the third quarter of fiscal 2001 (see further
discussion below). In 1999, we issued a total of (euro)300 million in bonds
which bear an annual interest rate of 4.625% and mature in 2009. In July 2001,
we raised additional capital of (euro)1.0 billion by issuing 22,498,729 new
shares for cash.
In the fourth quarter of 2001, in connection with the acquisitions of
Sodexho, Inc., Sogeres and Wood Dining Services and to refinance Sodexho,
Inc.'s existing debt, we entered into a credit agreement for total amounts of
(euro)1.9 billion and U.S. $1.1 billion, divided among four facilities. The
first and second facilities, in the amount of (euro)1.9 billion, financed the
acquisitions. On July 5, 2001, (euro)0.9 billion of these facilities were
repaid out of the proceeds of our July 2001 share issuance. The balance was
repaid with the proceeds of the debt securities issued in March 2002, as
described below. The third and fourth facilities, in the amount of U.S. $1.1
billion, were used to refinance Sodexho, Inc.'s existing debt and are repayable
in quarterly installments with a final maturity date of April 5, 2006. Our
interest margin for these facilities is 0.55% over LIBOR or EURIBOR, as
appropriate, adjusted over time to reflect fluctuations in our credit rating
(these margins may range from 0.45% to 1.50%). The facilities are subject to
customary terms, financial covenants and events of default. The Group has
entered into various agreements to convert variable interest rates to fixed
rates.
In addition, on March 6, 2002, we finalized the terms of an issuance of
(euro)1 billion of debt securities in the European markets, which closed on
March 25, 2002. We used the net proceeds from the sale of these debt
securities, approximately (euro)1 billion, to refinance the credit facility
referred to above. The debt is issued in 5.875% notes due March 25, 2009.
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, 2004. Approximately 45% 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 2004.
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, 2004, 2003 and 2002.
2004 2003 2002(2)
--------------------------------------------------------------------------------------------------
Revenues by Activity (in millions of euro)
Food and Management Services
North America......................................... 5,031 5,427 6,039
Continental Europe.................................... 3,760 3,585 3,491
United Kingdom and Ireland............................ 1,351 1,453 1,681
Rest of the World..................................... 1,103 974 1,119
-------- -------- --------
Total............................................. 11,245 11,439 12,330
Service Vouchers and Cards
Continental Europe.................................... 129 128 124
United Kingdom and Ireland............................ 6 12 10
Rest of the World..................................... 114 108 145
-------- -------- --------
Total Services Vouchers and Cards..................... 249 248 279
-------- -------- --------
Total revenues.................................... 11,494 11,687 12,609
======== ======== ========
EBITA by Activity(1)
Food and Management Services
North America......................................... 239 268 293
10
2004 2003 2002(2)
--------------------------------------------------------------------------------------------------
(in millions of euro)
Continental Europe.................................... 171 167 150
United Kingdom and Ireland............................ 28 21 9
Rest of the World..................................... 37 18 31
-------- -------- --------
Total............................................. 475 474 483
Service Vouchers and Cards................................. 68 68 77
-------- -------- --------
EBITA, excluding corporate expenses........................ 543 542 560
Corporate expenses......................................... (28) (28) (35)
-------- -------- --------
Total............................................. 515 514 525
======== ======== ========
------------------
(1) EBITA represents net income before interest expense, exceptional items,
income taxes, income from equity method investees, goodwill amortization
and minority interests and represents an internal measure used to assess
performance.
(2) Certain amounts for the year ended August 31, 2002 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 Autorite des Marches Financiers). See note 1 to the
Consolidated Financial Statements for further information.
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 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 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 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,
o expanding our offering beyond food services to "multiservice"
solutions such as building management and maintenance, business
support services and ancillary services to individuals,
o continuing our expansion into the public sector,
o reinforcing our client relationships through client retention,
and
o strengthening our large multinational account capabilities as we
build our organization throughout the world.
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 operational management. 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 our purchasing and delivery
logistics.
11
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, and
o streamline the use of ingredients we use and coordinate menu
planning across closely-situated sites.
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 has prepared 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
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 Chairman and 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. Further
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 November 25,
2004, which is available on the Group's website, www.Sodexho.com. In addition to
the CLEAR Project, 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. We recently reinforced our central audit function by hiring
a Group Internal Audit Director who reports to our Chairman and Chief Executive
Officer. 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.
In October 2002, a disclosure committee was formed to evaluate our
disclosure controls and to review 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 developing 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 menu planning and 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.
12
Food and Management Services
Overview
We are a global food and management services contractor. In the fiscal
year ended August 31, 2004, our revenues in this activity were approximately
(euro)11.2 billion. In fiscal 2004, we operated through approximately 24,900
individual outlets in more than 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 2004, delivered at over 13,500 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 35 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;
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 2003 Rugby World Cup in Sydney, Australia;
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 2004, revenues in the Healthcare market totaled
(euro)2.7 billion at 5,100 sites, representing 24% 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 hospitals as well as in shorter patient stays, leading the short-stay
market to expand by only two to three percent each year. By contrast, shifting
trends in caring for the elderly have led the long-stay market to expand by
approximately 4% 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 2004, revenues in the Education market totaled
(euro)2.8 billion at over 4,900 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,
13
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 2004, we operated this activity on
about 1,300 sites around the world and generated revenues of (euro)0.6 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 services market, which spans five
continents, to be approximately (euro)10 billion per year, and our only global
competitor currently is Compass. We believe that new opportunities will develop
for service providers as 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 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.
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
14
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, Conviv'styles(R), now known as
Personix.
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. The ancillary services we provide are complementary to
our food services and 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 activities. Reception, mailroom,
switchboard, groundskeeping, housekeeping, custodial and janitorial
services, security and surveillance and transportation are among the
tasks which we perform to ensure the smooth operation of our clients'
businesses.
o Building management and maintenance services, which comprise 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.
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 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.
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
15
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 half of private sector institutions and about one-third 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.
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.
16
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 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 focused on their
domestic or continental markets, with less than 45% of their revenues coming
from overseas operations.
The following table shows the ranking of the three leading contract
caterers, in terms of revenues, in different market segments, as of August
2004.
Business &
Industry Education Healthcare
---------- --------- ----------
No. 1.................. Compass Sodexho Sodexho
No. 2.................. Sodexho Aramark Compass
No. 3.................. Aramark Compass 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 70% 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
17
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 26
countries, mainly in Europe and Latin America, and our vouchers are used by
nearly 12.9 million people. As of the end of fiscal 2004, this activity issued
over 1.5 billion vouchers on behalf of more than 293,000 clients and generated
revenues of (euro)249 million. Our vouchers were accepted at over 825,000
locations and the total nominal value, which is not included in our revenues,
of vouchers issued in fiscal 2004 was (euro)4.8 billion. This business
generates negative working capital and requires only a modest level of capital
investment.
Our Service Vouchers and Cards business, which focused originally on
managing employee fringe benefits for companies, has expanded into controlling
and managing welfare benefits allocated by federal authorities and local
communities. The business currently comprises three product families: daily
life, incentive and assistance, which are used to pay for a wide range of
social and fringe benefits, including healthcare and household bills, and to
purchase everything from gas and groceries to clothing and medications. 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 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 nearly one 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 current captured market for service vouchers and
cards is more than (euro)15 billion worldwide. We also estimate that the
potential additional market for existing products in countries where we are
already present totals more than (euro)30 billion. Between 2003 and 2004,
organic growth was 7%. 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
objectives in this activity are to (i) consolidate our number two position by
offering the best perceived quality services in the market; (ii) enhance our
capabilities in new technologies, with a focus on smart card technology; and
(iii) innovate and develop new products and services to capture a greater share
of the market.
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
18
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 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, and changes in the interpretation of applicable regulations. 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
19
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, 2004, 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 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,
2004 of (euro)198 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)110 million as of August 31,
2004. 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, 2002, 2003 and 2004 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, 2000 and
2001 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, 2002, 2003 and 2004 were
audited by PricewaterhouseCoopers Audit.
Except as described in note 1 to the consolidated financial statements,
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, 2002, 2003 and 2004, and our
shareholders' equity to U.S. GAAP as of August 31, 2003 and 2004.
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
20
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.
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, 2004, 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.
21
As of August 31, 2004, 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 did not result in an impairment charge for the year ended August 31, 2004.
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 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.
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
22
"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 located in France, the projected unit credit valuation method
is used to evaluate the pension and post-retirement liabilities under French
GAAP. In the United Kingdom, our pension plans are administered by a third-party
insurance company. Under French GAAP, premiums paid to the insurance company are
recorded as an expense in the period in which they are made. 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.
23
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, 2004, 2003 and 2002 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,
2004 and 2003, and for each of the three fiscal years in the period ended August
31, 2004, 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 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 January 2003, the FASB issued FASB Interpretation, FIN No. 46,
Consolidation of Variable Interest Entities, which is an interpretation of
Accounting Research Bulletin, ARB No. 51 Consolidation of Financial Statements.
FIN No. 46 provides additional guidance regarding how to identify variable
interest entities and how an enterprise assesses its interest in the variable
interest entity to determine whether an entity is required to be consolidated.
The interpretation establishes that an enterprise consolidate a variable
interest entity if the enterprise is the primary beneficiary of the variable
interest entity. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. For
interests in variable interest entities existing as of January 31, 2003, the
guidance of FIN No. 46 applied in the first fiscal year or interim period
beginning after June 15, 2003. The adoption of FIN No. 46 did not have a
significant impact on the Group's consolidated results of operations, financial
position, or cash flows.
In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The principal difference between SFAS 146 and EITF
94-3 relates to the requirements of SFAS 146 related to the recognition of a
liability for a cost associated with an exit or disposal activity. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for exit costs was recognized at the date of an entity's commitment to
an exit plan. In accordance with SFAS 146, an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the definition
of a liability. In addition, SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. SFAS 146 was effective for
exit or disposal activities initiated after December 31, 2002. The Company has
applied the provisions of SFAS 146 to all costs associated with exit or disposal
activities initiated after December 31, 2002.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 affects the issuer's accounting for
three types of freestanding financial instruments: and equity. It requires that
an issuer classify a financial instrument that is (1) mandatorily redeemable
shares, which embodies an unconditional obligation requiring the issuer to
redeem the instrument in exchange for cash or other assets at a specified or
determinable date(s) or upon an event that is certain to occur; (2) instruments
that require or may require the issuer to repurchase some of its shares in
exchange for cash or other assets, including written put options and forward
purchase contracts; and (3) obligations that must or may be settled by issuing
a variable number of equity shares, the monetary value of which is fixed, tied
solely or predominantly to a variable such as a market index or varies
inversely with the value of the issuers' shares. SFAS 150 does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. For instruments entered into prior to May 31,
2003, the provisions of SFAS 150 are effective at the beginning of the first
interim period beginning after June 15, 2003 (for the Group, as of September 1,
2003). The adoption of SFAS 150 did not have a material impact on the results
of operations, financial position or cash flows of the Group.
In November 2000, the EITF reached a consensus on EITF 00-21, Revenue
Arrangements with Multiple Deliverables. EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF 00-21
apply to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003 (for the Group, September 1, 2003). The adoption of EITF 00-21
did not have a material impact on the results of operations, financial position
or cash flows of the Group.
International Financial Reporting Standards
Like all European listed companies, we will be required to apply
International Financial Reporting Standards (IFRS). This application will be
effective for us in the preparation of our consolidated financial statements as
of August 31, 2006 and for the fiscal year then ended. Comparative information
for the prior fiscal year will also be presented.
During fiscal 2003, we initiated a comprehensive IFRS conversion project
for our consolidated financial statements. At that time we identified the main
differences between our current accounting policies and IFRS. A summary of this
analysis was presented to the Audit Committee.
During fiscal 2004, we established a timetable for the project and updated
the analysis performed in fiscal 2004 to reflect new IFRS standards and
modifications to existing standards. We also held training sessions in order to
provide an overview of the impact of IFRS standards to financial managers in the
principal Group subsidiaries.
We are currently reviewing the U.S. GAAP reconciliation in order to
identify, anticipate and use accounting options available under existing French
accounting standards to achieve convergence with IFRS.
Based upon the work performed to date, we have identified the following
differences:
Financial statement presentation
Income statement
As permitted by IAS 1, the Group will present its income statement by
function, separately identifying direct and indirect (in particular, commercial
and administrative) costs within cost of sales. As required by IAS 1, the
captions "exceptional" and "extraordinary" results will no longer be used, which
will result in the reclassification of certain items currently reported as
exceptional to EBITA or to net financial expense.
Balance sheet
Our balance sheet will reflect the classification between current and
non-current elements which differs slightly from the current presentation.
Cash flow statement
Our current cash flow statement does not differ significantly from IAS 7.
Business combinations and intangible assets
The initial application of IFRS standards will not result in any changes to
prior years' accounting for business combinations and goodwill. As permitted by
IFRS 1, the Group will not restate the business combinations that occurred prior
to September 1, 2004.
However, the amounts recorded as market share in connection with these
business combinations will be reclassified to goodwill, because IFRS does not
permit their current presentation on the balance sheet.
In accordance with IAS 36, goodwill will no longer be amortized, but will
be subjected to annual impairment tests. IAS 36 retains the concept of
Generating Units of Treasury (UGT). These tests may differ from the impairment
tests currently performed.
Employee benefits
Employee benefits are being evaluated in accordance with IAS 19. As
permitted by the standard, the Group intends to record the accumulated actuarial
gains/losses as of September 1, 2004 in the opening shareholders' equity.
Share-based payments
IFRS 2, issued in February 2004, will modify the Group's accounting for
stock options granted to employees. The standard will affect the accounting for
all stock option grants made subsequent to November 7, 2002 for which the
exercise rights have not been earned prior to January 2, 2005. IFRS 2 requires
that the fair value of the options as of the grant date be expensed over the
vesting period. The January 2003, June 2003 and January 2004 plans will be
affected by this adjustment.
In addition, the IFRS standards require that treasury shares be reflected
as a reduction to consolidated shareholders' equity. As a result, the treasury
stock held by the Group in connection with its stock option plans, which is
currently classified as marketable securities, will be recorded as a reduction
to shareholders' equity.
Capital leases
Fixed assets that have been financed under lease agreements meeting the
criteria for treatment as capital leases are already recorded in accordance with
IAS 17. However, lease agreements pertaining to certain customer contracts are
still being reviewed for compliance with the standard.
Derivative financial instruments
Derivative financial instruments are recorded in the balance sheet at their
fair value, and variations between balance sheet dates are recorded in the
income statement, with the exception of certain derivatives meeting the
requirements for hedge accounting, for which the variations are recorded in
shareholders' equity.
Client investments
The IFRS accounting treatment for client investments, which are similar to
concession contracts, has not yet been finalized by the International Financial
Reporting Interpretations Committee (IFRIC). These client investments are
currently classified in deferred charges in our consolidated financial
statements.
Private Finance Initiatives
The IFRS accounting treatment in our consolidated financial statements for
certain of our contracts in the framework of private finance initiatives in the
United Kingdom has not yet been finalized by the appropriate professional
bodies.
The progress of the IFRS project is regularly communicated to the Audit
Committee and to our external auditors.
Timely completion of this project should allow the Group to be able to
quantify and communicate the impact of the conversion to IFRS prior to August
31, 2006.
The U.S. Securities and Exchange Commission (SEC) recently proposed
amending Form 20-F to allow first time application of IFRS to file two years
rather than three of income statements and cash flows. A final rule, which may
differ from the proposed rule, has not yet been issued and could require a third
year of comparative financial statements.
BALANCE SHEET AND INCOME STATEMENT DATA
Our consolidated financial statements and the selected financial data
presented below are reported in euro.
24
As of and for the year ended August 31,
---------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- --------
U.S. $(3) (euro) (euro) (euro)(5) (euro)(5) (euro)
(in millions, except per-share amounts)
Income Statement Data
French GAAP amounts
Revenues................................ 13,922 11,494 11,687 12,609 11,928 10,496
Earnings before interest, exceptional
items, income taxes, income from
equity method investees, goodwill
amortization and minority interests
(EBITA).............................. 624 515 514 525 571 530
Financial expense, net.................. (143) (118) (152) (166) (122) (118)
Minority interests in net income of
consolidated subsidiaries............ (18) (14) (9) (13) (67) (69)
Net income.............................. 222 183 162 202 128 79
Earnings per share (basic).............. 1.39 1.15 1.02 1.27 0.93 0.59
Earnings per share (diluted)............ 1.39 1.15 1.00 1.22 0.89 0.56
Dividends per share..................... 0.80 0.70 0.61 0.61 0.56 0.56
U.S. GAAP amounts
Revenues................................ 13,930 11,502 11,690 12,618 7,557 5,648
Operating income........................ 470 388 400 404 153 195
Net income (loss)....................... 205 169 147 136 (34) 24
Earnings (loss) per share (basic)....... 1.30 1.08 0.94 0.86 (0.25) 0.18
Earnings (loss) per share (diluted)..... 1.30 1.08 0.94 0.85 (0.25) 0.17
Balance Sheet Data
French GAAP amounts
Intangible assets, including acquisition
goodwill............................. 4,740 3,913 4,178 4,556 4,731 3,527
Tangible fixed assets, including
non-working capital, financial
investments and other assets......... 691 570 614 584 519 538
Working capital (1)..................... (1,625) (1,341) (1,260) (1,275) (1,208) (1,016)
Cash and cash equivalents (2)........... 1,465 1,209 1,278 1,307 1,213 897
Total assets............................ 9,261 7,647 8,108 8,544 8,638 6,951
Total borrowings........................ 2,577 2,128 2,488 2,693 2,781 2,009
Provisions for contingencies and losses. 112 93 89 99 93 115
Minority interests...................... 31 25 67 73 131 525
Total shareholders' equity.............. 2,654 2,192 2,249 2,398 2,386 1,402
U.S. GAAP amounts
Total assets............................ 9,049 7,472 8,089 8,503 8,820 4,397
Total shareholders' equity.............. 2,000 1,651 1,736 1,880 2,029 1,095
------------------
(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, 2004 2 p.m.
ECB time rate quoted by the European Central Bank of $1 = (euro).0.8257.
(4) See Note 1 to the consolidated financial statements for a discussion of the
impact of changes in accounting principles.
(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). See note 1 to the Consolidated Financial Statements
for further 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
25
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.
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 87.5% of EBITA (before
corporate expenses) for the fiscal year ended August 31, 2004. It consists of
the supply of food and management services to companies, public agencies and
institutions, hospitals, clinics, retirement homes, schools, colleges and
universities, as well as remote site services to oil and gas operations, both on
land and on offshore oil rigs, major construction projects and mining
facilities, as well as river and harbor cruise activities. Approximately 45% of
our fiscal 2004 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 12.5 % of EBITA (before corporate expenses) in fiscal 2004.
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
26
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.
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......................... 1,103 974 129 13.2
-------------------------------------------------------------------
Total................................. 11,245 11,439 (194) (1.7)
Service Vouchers and Cards..................... 249 248 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.
27
The Defense sub-segment benefited from an additional month of activity as
compared to the prior fiscal year on the 55 US 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 ever changing 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 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.
o 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 education, 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.
o 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
28
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 UK 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 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 UK 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 the UK 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.
o 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
29
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 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.
30
Fiscal Year Ended August 31, 2003 Compared with Fiscal Year Ended August 31,
2002
Consolidated Overview of Revenues and EBITA
Revenues for fiscal 2003 totaled (euro)11.7 billion, a 7.3% decrease from
fiscal 2002. Organic growth of 3.1% was offset by the unfavorable impact of
foreign currency translation of 10%, principally arising on revenues denominated
in U.S. dollars or reliant on the U.S. dollar exchange rate. The impact of
acquisitions (net of divestitures) of negative 0.4% principally reflected the
sale of the Lockhart subsidiary in the United Kingdom in May 2002. Organic
growth reflected the impact of three significant new defense contracts in the
United States and Sweden. Nonetheless, 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.
EBITA decreased by 2.6% to (euro)514 million in fiscal 2003. However, at
constant exchange rates EBITA increased by 9.8%. The operating margin improved
moderately to 4.4% as a result of the initial favorable effects of our action
plans in the United Kingdom and an improved performance in both North America
and Continental Europe.
Analysis of Revenues and EBITA
The following table presents, for the periods stated, the variation in
revenues and EBITA by activity.
Fiscal Year Ended August 31, Change in Revenues
--------------------------------------------------------------
Revenues by Activity 2003 2002 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America............................. 5,427 6,039 (612) (10)
Continental Europe........................ 3,585 3,491 94 3
United Kingdom and Ireland................ 1,453 1,681 (228) (14)
Rest of the World, including Remote Sites. 974 1,119 (145) (13)
----------------------------------------------
Total................................. 11,439 12,330 (891) (7)
Service Vouchers and Cards..................... 248 279 (31) (11)
----------------------------------------------
Total revenues........................ 11,687 12,609 (922) (7)
==============================================
Fiscal Year Ended August 31, Change in EBITA
--------------------------------------------------------------
EBITA by Activity 2003 2002 (euro) %
---------------------------------------------------------------------------------------------------------------
(in millions of euro, except percentages)
Food and Management Services
North America............................ 268 293 (25) (9)
Continental Europe....................... 167 150 17 11
United Kingdom and Ireland............... 21 9 12 133
Rest of the World, including Remote Sites 18 31 (13) (42)
----------------------------------------------
Total................................ 474 483 (9) (2)
Service Vouchers and Cards.................... 68 77 (9) (12)
----------------------------------------------
EBITA, excluding corporate expenses........... 542 560 (18) (3)
Corporate expenses............................ (28) (35) 7 20
----------------------------------------------
Total EBITA.......................... 514 525 (11) (2)
==============================================
31
Food and Management Services
Food and Management Services represented 98% of our consolidated revenues
and 87% of our consolidated EBITA before corporate expenses. Our revenues from
this segment totaled (euro)11.4 billion in fiscal 2003, reflecting organic
growth of 2.9%, which was a net improvement over prior year organic growth of
1.6%. The strengthening of the euro during the year resulted in a negative
foreign currency exchange impact of 9.7% while net dispositions decreased
revenues by 0.3%.
North America
Food and Management Services revenues in North America for fiscal 2003 were
(euro)5.4 billion with organic growth of 4.3%.
Organic growth in the Business and Industry segment was 5.8%. The year was
highlighted by the creation of the Defense sub-segment, which contributed
revenues of (euro)133 million. Excluding Defense, Business and Industry segment
declined by 0.6%. The progressive opening during the year of contracts with
clients such as Sony, General Electric Medical Systems, General Mills and a
national contract with Hewlett Packard, offset the negative effects of
delocalizations and staff reductions in the industrial sector.
Organic growth in the Healthcare and Seniors segment was 3.5%. This
progression reflected continued good performance on existing sites as well as
the signing of some new multiservice contracts toward the end of the year. Other
commercial successes such as Spring Valley Hospital Center, North Colorado
Medical Center and the Medical Center of Louisiana would begin to have a
favorable impact in fiscal 2003-2004.
The Education segment's revenues reflected organic growth of 3.7% for
fiscal 2003. Significant contracts were signed at the end of the year, such as
the Atlanta Public School District, Rowan University in New Jersey, the
University of Connecticut and Morehouse College in Georgia.
EBITA in North America reached (euro)268 million. Operating margins
increased from 4.8% in the prior year to 4.9% for fiscal 2003. This improvement
resulted from revenue growth on existing sites in Healthcare and Education and
the continued optimization of purchasing and employee costs in all segments. The
margin improvement was partially offset by start-up costs in the Defense
sub-segment and costs related to the implementation of new information systems.
Continental Europe
In Continental Europe, revenues rose to (euro)3.6 billion in fiscal 2003,
with organic growth of 3.6%, as follows: 4.0% in Business and Industry, 3.7% in
Healthcare, and 2.1% in Education.
In France, the Healthcare segment continued its steady development, notably
with the signing of "Global Hospitality" contracts such as the Chenieux clinics
in Limoges and Clinique St. Louis in Poissy. In Business and Industry, growth
was maintained, despite a depressed economic environment. Labor strikes during
May and June weighed on growth, particularly in the Education segment.
In Northern Europe, the opening of contracts with the Swedish army and the
city of Stockholm in the Healthcare segment, as well as contracts with Nokia in
Finland and Vattenfall in Sweden in Business and Industry contributed to our
organic growth.
In other countries in Continental Europe, significant contracts were signed
during the year, both in food service as well as multiservice. Examples include
Banco Santander in Spain, Euroform in the Netherlands, and Wal-Mart in Germany.
Sodexho Prestige continued its development, particularly in France, with
the operation of renowned restaurants such as Roland Garros. In Sweden, Sodexho
Prestige operated the Parliament Restaurant.
EBITA increased by 11.3% and the operating margin grew from 4.3% to 4.7%.
This increase resulted from a strong improvement in gross operating profit due
to the pursuit of our Five Step process, which is intended to
32
optimize purchasing and to a lesser extent to implement a selectivity strategy
which in certain cases led us not to renew certain insufficiently profitable
contracts. In addition, overheads were contained and increased in line with
revenues.
United Kingdom and Ireland
In the United Kingdom and Ireland, revenues totaled (euro)1.5 billion in
fiscal 2003, a decline of 13.7% from the prior year, including a negative
currency exchange impact of 6.8%. The remaining difference was attributable to
the sale of the Lockhart subsidiary in the third quarter of fiscal 2002. On a
constant consolidation basis and excluding the currency effect, revenues
declined by 3.9%, in part due to the new management team's decision to exit
unprofitable contracts, notably in the Hotels sub-segment. In addition,
retention rates declined, for example, in the Healthcare segment, where certain
clients returned to self-operation. Finally, revenues were affected by site
closings and cost reductions made by Business and Industry clients. New
contracts signed included a multiservice contract with Glaxo Smithkline, two
detention centers and the Deep Cut garrison.
EBITA of (euro)21 million in fiscal 2003 reflected an EBITA margin increase
to 1.4% as compared with 0.5% for the prior year. The action plan to improve
profitability in the United Kingdom subsidiary was underway. This plan included
rigorous control over food and employee costs at each site, and the
renegotiation or exit from certain contracts. In spite of Land Technology's
disappointing operating performance, the EBITA margin improved by 0.9%. The
action plan also relied on training and motivation of the teams as well as
strict containment of overheads. Important training initiatives were undertaken
during the year such as "Sodexho Way," to reinforce the rigor of operations
management, and to improve contracting policies. In addition, noteworthy
investments were made in human resources including external recruitment of
executives to reinforce the sales and marketing departments as well as the
management of the Healthcare segment. The return to a margin similar to the
Group's overall food and management services margin was the strong priority for
the next two or three years.
Rest of the World
In the Rest of the World, which included the worldwide remote sites
activity, revenues of (euro)974 million reflected organic growth of 3.9%.
In spite of an unfavorable economic environment in the industrial sector,
we continued our development in Latin America and won several new contracts in
multiservice including Coca Cola, Codelco Norte and Carrefour in Chile, Pepsi
Cola and Clariant in Venezuela, Techint in Peru, and Exito in Colombia.
In China we continued to experience strong growth as a result of new
contracts in all segments such as with Motorola, Shanghai Container Limited, and
Richina in Business and Industry, and Yewcchung Shanghai Internal School and
CAFA in Education. Healthcare development continued with the signing of
contracts with the Jin Shan and Dacang hospitals.
In Australia, we experienced strong growth, as our Minesite subsidiary
obtained a contract with the Golden Valley camp.
The remote sites activity had good performances in the North Sea and in
Alaska. The slowdown of foraging activity in the Gulf of Mexico was confirmed.
The reinforcement of our sales teams and our strategy of following our
clients on large projects had begun to show results, such as the three-year
contract recently signed with Chiyoda on Sakhalin Island (Russia).
Total EBITA for these regions was (euro)18 million as compared to (euro)31
million for the prior year. The operating margin declined from 2.9% for fiscal
2002 to 1.9% in the current year. A difficult environment and strong competition
in Latin America weighed on EBITA. Finally, in remote sites, expenses related to
the opening of certain contracts and to the reinforcement of our sales
structures, as well as the allocation of certain overhead costs previously
supported by Group management, also weighed on the operating margin.
33
Service Vouchers and Cards
Sodexho Pass had revenues of (euro)248 million and organic growth of 11.3%
in fiscal 2003, representing business activities in 26 countries. This increase
was mainly attributable to new contracts in our traditional services (meal and
food), such as Telecom and Technit in Argentina, SNCB in Belgium, the Ministry
of Health in Venezuela, and General Motors in Mexico. Growth also resulted from
new services offered to existing clients such as, for example, a culture card
provided to 199,000 students in the Centre and Burgundy regions of France, and
the creation of the Education voucher for 15,000 beneficiaries of the Postal
Service in Hungary, and the consultant voucher "Adviescheque" in Belgium.
EBITA was (euro)68 million for fiscal 2003, compared to (euro)77 million
for the prior year. 74% of the EBITA for this activity was earned in foreign
currencies, and therefore, as a result, currency fluctuations had a more
significant impact in this activity than in the other activities. The operating
margin of 27.5% was comparable to that of the prior year.
Corporate Expenses
Corporate expenses, which are included in EBITA, of (euro)28 million in
fiscal 2003 declined significantly from the prior year. This was the result of
the allocation of corporate expenses to each operating entity.
Financial Expense, Net
Net financial expense totaled (euro)152 million as compared to (euro)166
million in the prior year. The improvement resulted in part from a reduction in
interest expense due to the reduction in debt and exchange rate variances and
also from the impact of items which affected the prior year, principally the
provision of (euro)19 million on Sodexho Alliance shares held and the
non-repetition of foreign currency exchange gains realized in the prior year in
the Service Vouchers and Cards business, when funds were converted into strong
currencies.
Net Exceptional Income/Expense
Net exceptional income totaled (euro)1 million in fiscal 2003 and was
principally explained by a (euro)28.6 million purchase price complement received
in fiscal 2003 in connection with the sale of our shares in CCA in fiscal 2001,
offset by provisions recorded on Sodexho Alliance stock options and losses on
Sodexho Alliance shares totaling (euro)13.6 million, restructuring costs in the
United Kingdom and the U.S. totaling (euro)7.6 million, and exceptional costs
related to litigation of (euro)5 million.
Income Taxes
Income taxes declined to (euro)134 million in fiscal 2003 for an effective
rate of 36.9%, which was comparable to the prior year when computed in the same
manner.
Net Income from Equity Method Investees
Net income from equity method investees was (euro)4 million, which was
comparable to the prior year.
Minority Interests
Minority interests decreased from (euro)13 million in fiscal 2002 to
(euro)9 million in fiscal 2003 mainly as a result of currency effects.
Goodwill Amortization
Goodwill amortization decreased from (euro)67 million in fiscal 2002 to
(euro)62 million in fiscal 2003, 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 2002
through fiscal 2004:
Year ended August 31,
--------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Net cash provided by operating activities.............. 614 490 619
Net cash used in investing activities.................. (245) (278) (315)
Net cash used in financing activities.................. (401) (202) (70)
Net effect of exchange rate variations on cash......... (33) (54) (118)
------ ------ ------
Net increase (decrease) in cash and cash equivalents... (65) (44) 116
====== ====== ======
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 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. 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 2003, net cash provided by operating activities amounted to
(euro)490 million. Cash provided by operating activities totaled (euro)387
million, a level close to that for fiscal 2002, despite unfavorable currency
effects of 13%, thus confirming the Group's ability to generate cash. Net cash
generated by changes in operating working capital amounted to (euro)100 million
in fiscal 2003, of which 40% was from the Service Vouchers and Cards business.
The remaining amount resulted from organic growth in revenues and the efforts of
the operating teams in the Food and Management Services business to improve
receivables collection, a strategic priority for the group.
Capital expenditures, net of disposals of property, plant and equipment,
amounted to (euro)226 million in fiscal 2003, representing 1.9% of revenues.
Significant investments in information systems were made during the year in the
main countries where the Group operates.
35
Net acquisition expenditures of (euro)33 million in fiscal 2003 mainly
included the acquisitions of the remaining 23.16% of Sodexho Pass do Brazil from
its minority shareholders and 91.4% of the outstanding shares of Patriot Medical
Technologies, Inc., a U.S. company based in Tennessee which specializes in
providing engineering services to the medical sector.
Net cash used in financing activities of (euro)202 million in fiscal 2003
is explained in part by the repayment of debt of (euro)97 million and the
remainder by the payment of (euro)105 million in dividends.
Net debt was reduced by (euro)162 million of which (euro)82 million
resulted from the exchange rate effect on August 31, 2003. As such, net debt in
our consolidated balance sheet totaled (euro)1,201 million as of August 31,
2003, and represents 52% of our shareholders' equity including minority
shareholders.
Total financial debt of (euro)2,488 million as of August 31, 2003
principally comprised three bond issues in euro totaling (euro)1,605 million and
U.S. dollar credit facilities totaling U.S. $718 million. The balance of
outstanding debt represents leasing, term and various revolving credit
facilities. As of August 31, 2003, 91% of our debt was at fixed interest rates,
and our weighted average interest cost was 5.5%.
As of August 31, 2003, and in addition to available cash and cash
equivalents and marketable securities (excluding restricted cash) of (euro)1,142
million, we had revolving credit facilities available of (euro)119 million to
provide funds for liquidity, seasonal borrowing needs and other corporate
purposes.
C. 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.
D. Off-balance sheet arrangements.
Commitments made as of August 31, 2004 (millions of euro) were as follows:
August 31, 2004 August 31, 2003
1-3 >5
< 1 year years >3-5 years years Total Total
Financial guarantees to third parties ....... 46 2 17 9 74 59
Performance bonds on operating leases ....... 17 10 7 4 38 33
Client performance bonds .................... 6 10 -- -- 16 48
Other commitments ........................... 4 3 -- -- 7 10
--------- --------- --------- --------- --------- ---------
Total ....................................... 73 25 24 13 135 150
========= ========= ========= ========= ========= =========
36
With respect to the above table, there are no other significant off balance
sheet commitments.
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)10 million as of August 31, 2004. Other
surety arrangements (security granted over equipment or buildings used for
collateral) agreed to by Sodexho Alliance and its subsidiaries in fiscal 2004
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 8% 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)1.9 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.
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 Sodexho MM Catering
The Group has entered into a put agreement to acquire the remaining 9.5% of
the shares of Sodexho MM Catering from the minority shareholders at any time for
a purchase price based on a multiple of the average economic profits as defined
contractually, for a minimum amount of (euro)0.2 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.
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
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
37
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 have securitized
without recourse a portion of their client receivables for an amount of (euro)48
million and (euro)82 million as of August 31, 2004 and 2003, respectively.
Commitments for stock options in Sodexho Alliance shares
The Group has the following stock option commitments:
o 2,168,641 shares with an average exercise price of U.S. $27.30 to
certain employees of Sodexho, Inc., in connection with the Group's
acquisition of 53% of Sodexho Marriott Services, Inc. in June 2001.
These options are exercisable in the following periods:
o From August 31, 2004 through various expiration dates, the latest
being April 31, 2011: 1,898,259 shares
o From August 31, 2005 through various expiration dates, the latest
being April 31, 2011: 270,382 shares
o 5,669,293 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
Exercise Number of shares
Issuance date From To Price on August 31, 2004
January, 2000 March, 2004 January, 2005 39.86 euros 69,026
April, 2000 March, 2004 January, 2005 39.86 euros 2,251
January, 2001 March, 2005 January, 2006 48.42 euros 298,761
January, 2002 January, 2006 January, 2007 47.00 euros 394,340
January, 2002 January, 2006 January, 2008 47.00 euros 1,068,242
September, 2002 April, 2006 March, 2008 47.00 euros 12,000
October, 2002 October, 2006 October, 2007 21.87 euros 2,730
January, 2003 January, 2004 January, 2009 24.00 euros 2,739,100
June, 2003 January, 2004 January, 2009 24.00 euros 84,660
January, 2004 January, 2005 January, 2010 24.50 euros 998,183
----------
TOTAL 5,669,293
==========
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 benefit
of the optionees and to buy their shares no later than February 20, 2008. In
connection with this agreement, a provision of (euro)3.5 million was recorded in
the consolidated financial statements as of August 31, 2004.
Operating lease commitments
Operating lease commitments are as follows:
Less than one year (euro)100 million
38
From one to three years (euro)121 million
From three to five years (euro)53 million
More than five years (euro)24 million
Operating lease commitments primarily relate to central kitchens under
tri-partite agreements with municipalities for (euro)52 million and rent of
(euro)132 million for office space and (euro)114 million for various equipment.
Retirement plan obligations
As of August 31, 2004, retirement plan obligations which were not recorded
as a liability in the balance sheet because of the existence of an external fund
totaled (euro)442 million. Partially offsetting this amount are external funds
totaling (euro)298 million.
F. Tabular Disclosure of Contractual Obligations
Future payments on borrowings and other debt balances as of August 31, 2004
were due as follows:
Total Total
Less than One to Three to five More than August 31, August 31,
one year three years years five years 2004 2003
--------- ----------- ------------- ---------- ---------- ----------
(millions of euro)
Bonds
Euro................................ 32 1,300 1,332 1,641
--------- ----------- ------------- ---------- ---------- ----------
Total bonds..................... 32 1,300 1,332 1,641
Bank borrowings (1)
U.S. Dollars........................ 218 441 42 701 953
Euro................................ (41) (78) (38) 20 (137) (388)
Pounds Sterling..................... 132 (1) 131 85
Other currencies.................... 18 5 23 45
--------- ----------- ------------- ---------- ---------- ----------
Total bank borrowings........... 327 367 4 20 718 695
Capital lease obligations
U.S. Dollars........................ 3 2 5 7
Euro................................ 11 15 7 5 38 38
Other currencies.................... 3 3 3
--------- ----------- ------------- ---------- ---------- ----------
Total capital lease
obligations....................... 14 17 10 5 46 48
Other borrowings
Euro................................ 6 2 1 9 4
Other currencies.................... 1
--------- ----------- ------------- ---------- ---------- ----------
Total other borrowings.......... 6 2 1 9 5
Bank overdraft balances
Euro................................ 16 16 25
U.S. dollars ....................... 1 1
Pounds Sterling..................... 70
Other currencies.................... 6 6 4
--------- ----------- ------------- ---------- ---------- ----------
Total bank overdrafts........... 23 23 99
--------- ----------- ------------- ---------- ---------- ----------
Total............................... 402 386 1,314 26 2,128 2,488
========= =========== ============= ========== ========== ==========
------------------
(1) Includes impact of swaps; see note 3.17 to the consolidated
financial statements for further information.
39
ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The table below sets forth, as of October 31, 2004, 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
Remi Baudin(2)(3) 10/19/1930 Vice Chairman 2/25/1983 2007
Astrid Bellon 4/16/1969 Director 7/26/1989 2007
Bernard Bellon (4) 8/11/1935 Director 2/26/1975 2006
Francois-Xavier 9/10/1965 Director 7/26/1989 2007
Bellon
Sophie Clamens 8/19/1961 Director 7/26/1989 2007
Paul Jeanbart(6)* 8/23/1939 Director 2/13/1996 2005
Charles Milhaud 2/20/1943 Director 2/4/2003 2006
Francois Perigot(1) 5/12/1926 Director 2/13/1996 2005
(4)*
Edouard de Royere(2) 6/26/1932 Director 2/13/1996 2005
(4)(5)*
Nathalie Szabo(2) 1/26/1964 Director 7/26/1989 2007
H.J. Mark 11/02/1940 Director 2/05/2002 2005
Tompkins(6)*
------------------
(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 currently
serves as its Chairman and Chief Executive Officer. 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 since 1981, 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 Pinault Printemps La Redoute. 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 38.53% economic interest in Sodexho Alliance as of October 31, 2004.
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
40
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.
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. He is a member of the
Executive Board of Bellon SA. In 1999 he became the Chief Operating Officer of
Sodexho Mexico. In January 2004, he was nominated as the Chief Executive of
Sodexho UK, before having to resign his position several months later, for
health reasons. 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 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. 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, Managing Director of Rolaco Holding SA and is a member
of the Semiramis Hotel Co., Delta International Bank, NASCO Insurance Group, and
XL Capital Limited 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 Vice President of the Board of Directors of Eulia Compagnie
Financiere, President of the Supervisory Councils of Credit Foncier de France
and Financiere Oceor, Member of the Supervisory Board of CNP Assurance, member
of the Executive Committee of the Federation Bancaire Francaise, President of
the European Sector of Caisse d'Epargne, Chairman of the Supervisory Committee
of Ixis and member of the Boards of Directors of Sopassure and the Banque
Internationale des Mascareignes. He is a permanent representative of the CNCE to
the Boards of the Banque de Tahiti, Holassure, the Banque des Iles
Saint-Pierre-et-Miquelon, the Banque des Antilles Francaises, Credit
Saint-Pierrais, the Banque de la Reunion, the and the Banque de
Nouvelle-Caledonie.
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
41
Economic and Social Council (1989-1999). He has been President of the
Franco-Dutch Chamber of Commerce since 1996, President of MEDEF International
since 1997 and President of the International Employers Organisation since June
2001. He currently serves as a director of Unilever Bestfoods France, Lever and
OENEO.
Edouard de Royere. After working as an authorized representative with power
of attorney for Credit Lyonnais and as Director of Union Immobiliere et
Financiere, Mr. de Royere joined L'Air Liquide in 1966. He successively held the
positions of General Secretary to senior management and Investor Relations
Manager, and in 1967 he was appointed Company Secretary. Mr. de Royere joined
the L'Air Liquide Board of Directors in 1971. He became Assistant Managing
Director in 1979, then Vice Chairman and Assistant Managing Director, and
finally Vice Chairman in 1982. From 1985 to 1995, he served as Chairman and
Chief Executive Officer of L'Air Liquide. In 1997, he was named Honorary
Chairman of L'Air Liquide and since 2001 he has served as a member of its
Supervisory Board. He is also Honorary Chairman of the National Association of
Joint-Stock Companies. Mr. de Royere currently serves as a member of the
Supervisory Board of Michelin.
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 effective September 2003 she is the General Manager of Sodexho
Prestige. Ms. Szabo is a member of the Executive Board of Bellon SA. Ms. Szabo
is the daughter of Pierre Bellon.
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 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 Calcitech Ltd, Healthcare
Enterprise Group Plc, and Kingkaroo(Pty) Ltd. Mr. Tompkins is a British citizen.
Executive Officers
The table below sets forth, as of October 31, 2004, the names and dates of
birth of our executive officers, which include Pierre Bellon as Chairman and
Chief Executive Officer and the members of our Executive Committee.
Name Date of Birth Position
Pierre Bellon 1/24/1930 Chairman and Chief Executive Officer
Elisabeth Carpentier 5/08/1954 Group Senior Vice President and Chief Human Resources Officer
Jean-Michel Dhenain 12/10/1944 Group President and Chief Operating Officer
Sian Herbert-Jones 9/13/1960 Group Senior Vice President and Chief Financial Officer
Vincent Hillenmeyer 7/16/1966 Group Senior Vice President, Strategic Planning
Michel Landel 11/07/1951 Group President and Chief Operating Officer
Philippe Lauthier 22/09/1957 Group Senior Vice President, Procurement
Richard Macedonia 9/21/1943 President and Chief Executive Officer, North America
Clodine Pincemin 7/20/1952 Group Senior Vice President, Corporate Communications and
Sustainable Development
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 Senior Vice President and Chief Human Resources Officer. Ms.
Carpentier has both a law diploma and a post-graduate degree in human resources
management.
42
Jean-Michel Dhenain. Mr. Dhenain joined us in 1972, where he served as
Regional Director, Departmental Director and then Sales Director. He then headed
the Hospitals-Clinics division before moving to our French healthcare subsidiary
in 1987 and our French schools-universities subsidiary in 1991. Mr. Dhenain is
currently our Co-President and Chief Operating Officer responsible for Food and
Management Services activities in Continental Europe, South America and
Asia/Australia. He has supervised operations in Continental Europe since April
30, 1998 and is the Market Champion for Healthcare. Mr. Dhenain has a degree in
law and economics from the University of Dijon, France.
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 Senior Vice President
and 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 is the Senior Vice President for
Strategic Planning and Control. He 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
Senior Vice President Strategic Planning. He earned a degree in 1988 from HEC,
one of France's leading business schools.
Michel Landel. Mr. Landel has served as President, Chief Executive Officer,
and a member of the Board of Directors of Sodexho, Inc. (formerly SMS) since May
1999. Mr. Landel joined us in 1984 as Chief Operating Manager for Eastern
Africa, Libya and Algeria. Mr. Landel served as President and Chief Executive
Officer of Sodexho North America (known now as Sodexho, Inc.) from 1989 to 1998.
He was appointed an Executive Vice President of Sodexho, Inc. in 1998 and was
also appointed President, Corporate Services, in June 1998. Mr. Landel currently
serves as Co-President and Chief Operating Officer responsible for Food and
Management Services activities in North America, the United Kingdom and Ireland,
as well as for remote sites activities. He is the Market Champion for Business
and Industry (and prior to April 22, 2002, for Education). He has a degree in
business and management from the European Business School.
Philippe Lauthier. Mr. Lauthier has served as Group Senior Vice President,
Procurement since January 2004. Mr. Lauthier acquired expertise in international
purchasing management at companies such as Auchan, where he had been employed
from 1981 to 1985, Promodes (1985-1999) and Carrefour (1999 to 2003). Prior to
joining Sodexho, Mr. Lauthier had successfully developed the synergies resulting
from the merger between Carrefour, Promodes, and Comptoirs Modernes. He has a
bachelor's degree in economic sciences, a master's degree in economic sciences
and applied mathematics from the University of Aix-Marseille II and a DESS
(Diplome d'Etudes Superieures Specialisees) in marketing and was an auditor at
the Law Faculty.
Richard "Dick" Macedonia. Mr. Macedonia is the President and Chief
Executive Officer of Sodexho, Inc. Before being named COO in 2003, Mr. Macedonia
most recently was the president for Sodexho's Health Care Services Division. Mr.
Macedonia began his career with the company in 1968 as a unit manager in the
Campus Services Division, and joined Health Care Services in 1975. He has held
positions throughout the divisions including district manager, vice president of
marketing and sales, and vice president of business development. 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.
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 Senior Vice President, Corporate Communications and
Sustainable Development. Ms. Pincemin has a degree in French literature.
43
B. Compensation
During fiscal 2004, members of our Board of Directors received total fees,
compensation and benefits from Sodexho Alliance and related companies as
follows.
Sodexho
Alliance
Board meeting
Name fees Bellon S.A.(2) Total(1)
-----------------------------------------------------------------------------
(in euro)
Pierre Bellon 26,600 263,092 289,692
Remi Baudin 29,400 1,500 30,900
Astrid Bellon 17,000 53,400 70,400
Bernard Bellon 21,300 1,500 22,800
Francois-Xavier Bellon 17,000 163,561 414,935
Sophie Clamens 20,800 95,003 159,499
Paul Jeanbart 21,300 21,300
Charles Milhaud 14,000 14,000
Francois Perigot 25,200 25,200
Edouard de Royere 31,900 31,900
Nathalie Szabo 22,100 67,900 136,074
H.J. Mark Tompkins 23,700 23,700
------------------
(1) Amount includes Board meeting attendance fees paid by Sodexho Alliance as
well as all compensation and benefits of any kind paid with respect to
responsibilities with Bellon SA and Sodexho Alliance.
(2) Compensation with respect to responsibilities with Bellon SA, including
Directors' fees.
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 2004, the aggregate compensation received by members of the Executive
Committee was (euro)3,678,129 which included base pay totaling (euro)2,683,400
and variable pay totaling (euro)994,729. The nine members of the Executive
Committee also received options to purchase a total of 237,000 Sodexho Alliance
shares. During fiscal 2004, 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 289,692 - 289,692
Jean-Michel Dhenain 331,494 152,668 484,162
Michel Landel 638,814 344,727 983,541
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 25, 2000 22,578 (euro)39.86 January 24, 2005
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 January 26,2009
June 12, 2003 15,000 (euro)24.00 January 26,2009
January 20, 2004 237,000 (euro)24.50 January 19, 2010
---------------------------------------
(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.
44
During fiscal 2004, we and our subsidiaries recorded total charges of
(euro)54.9 million for pension, retirement and similar benefits and, as of
August 31, 2004, we and our subsidiaries had accrued a total of (euro)155.4
million for these items.
C. Board Practices
Our Board of Directors has 12 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.
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 Edouard de Royere, a financial expert,
with the assistance of Paul Jeanbart 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, Ms. Herbert-Jones and the Group 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 seven times during fiscal 2004 . The committee discussed a
variety of pertinent issues including the approval of the Internal Audit Plan
for fiscal 2004, 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 reinforcement of the internal Audit department, 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 2003 as well as the
half-year consolidated financial statements for fiscal 2004. 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, Edouard de Royere, Remi Baudin and Nathalie Szabo. The
Nominating Committee met 3 times during fiscal 2004 and reviewed matters
including succession planning for Mr. Bellon, the assessment of directors'
independence, and the nomination of new directors.
45
The Compensation Committee is chaired by Remi Baudin, who is also Vice
Chairman of the Board of Directors, with the assistance of Pierre Bellon,
Francois Perigot, Edouard de Royere and Bernard Bellon. The Compensation
Committee met twice during fiscal 2004 and reviewed matters including the
feasibility of a new Employee Savings plan, new stock option plans and revised
rules, and compensation packages for the Chairman and Chief Executive Officer
and the two Presidents and Chief Operating Officers.
The Board of Directors met eight times during fiscal 2004.
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, 2004, we had 312,975 employees worldwide. The table below
shows the number of employees of our company and our subsidiaries by geographic
zone as of August 31, 2004, 2003 and 2002.
August 31,
----------------------------------
2004 2003 2002
-------- -------- --------
North America.................. 116,772 119,009 117,689
United Kingdom and Ireland..... 49,053 51,843 61,835
France......................... 30,359 30,465 30,477
Rest of Europe................. 53,132 49,897 49,438
Rest of the World.............. 63,659 57,171 55,702
-------- -------- --------
Total Number of Employees 312,975 308,385 315,141
======== ======== ========
Following is a breakdown of our employees by category as of August 31
2004, 2003 and 2002.
August 31,
----------------------------------
2004 2003 2002
-------- -------- --------
Executives and middle management 6,408 6,137 5,759
Establishment managers and supervisory staff 32,368 33,173 25,614
Front line service staff and other 274,199 269,075 283,768
-------- -------- --------
Total Number of Employees 312,975 308,385 315,141
======== ======== ========
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, recent legislation on working week reduction 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.
46
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 68.5 %
(representing a voting interest of approximately 82.6 %) in Bellon SA, which, as
of October 31,2004, owns an economic interest of approximately 38.5%
(representing a voting interest of approximately 39.9%) 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 October 31, 2004,
5,269,400 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 October 31, 2004, 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 October 31, 2004.
Number of
Name Shares Owned
Bellon SA................................................... 61,257,490 (1)
Pierre Bellon............................................... *(2)
Remi Baudin................................................. *(2)
Astrid Bellon............................................... *(2)
Bernard Bellon.............................................. *(2)
Francois-Xavier Bellon...................................... *(2)
Sophie Clamens.............................................. *(2)
Patrice Douce............................................... *(2)
Paul Jeanbart............................................... *(2)
Francois Perigot............................................ *(2)
Edouard de Royere........................................... *(2)
Nathalie Szabo.............................................. *(2)
H.J. Mark Tompkins.......................................... *(2)
Elisabeth Carpentier........................................ *(2)
Jean-Michael Dhenain........................................ *(2)
Sian Herbert-Jones.......................................... *(2)
Michel Landel............................................... *(2)
Clodine Pincemin............................................ *(2)
Philippe Lauthier *(2)
Vincent Hillenmeyer *(2)
------------------
(1) Pierre Bellon owns .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 17.12% in Bellon SA. At any
ordinary shareholders' meeting of Bellon SA, Pierre Bellon has a voting
interest of 65.1% and each of Astrid Bellon, Francois-Xavier Bellon, Sophie
Clamens and Nathalie Szabo and their children has a voting interest of
4.4%. At any extraordinary meeting, Pierre Bellon has a voting interest of
.01% and each of Astrid Bellon, Francois-Xavier Bellon, Sophie Clamens and
Nathalie Szabo has a voting interest of 20.7%. Bernard Bellon and other
members of the Bellon family own an economic interest of 12.8% 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 2.9%. Bellon SA is the beneficial owner of approximately
38.53% of our outstanding shares.
(2) Indicates beneficial ownership of less than 1% of the shares outstanding.
As of October 31, 2004, members of our Board of Directors and Executive
Committee held, in the aggregate, options to acquire 660,845 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
Pierre Bellon -- -- --
Remi Baudin(2) -- -- --
Astrid Bellon(2) -- -- --
47
Exercise Price
Name Amount(1) per Share Expiration Date
Bernard Bellon(2) -- -- --
Francois-Xavier Bellon(2) -- -- --
Sophie Clamens(2) -- -- --
Patrice Douce(2) -- -- --
Paul Jeanbart(2) -- -- --
Francois Perigot(2) -- -- --
Edouard de Royere(2) -- -- --
Nathalie Szabo(2) -- -- --
H.J. Mark Tompkins -- -- --
Elisabeth Carpentier 4,172 (euro)39.86 January 24, 2005
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
Jean-Michel Dhenain 8,221 (euro)39.86 January 24, 2005
10,225 (euro)48.42 January 23, 2006
15,000 (euro)47.00 January 10, 2007
43,000 (euro)24.00 January 26, 2009
45,000 (euro)24.50 January 19, 2010
Sian Herbert-Jones 6,135 (euro)39.86 January 24, 2005
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
Vincent Hillenmeyer 982 (euro)39.86 January 24, 2005
4,000 (euro)47.00 January 10, 2007
17,000 (euro)24.00 January 26, 2009
17,000 (euro)24.50 January 19, 2010
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
Philippe Lauthier 10,000 (euro)24.50 January 19, 2010
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
Clodine Pincemin 3,068 (euro)39.86 January 24, 2005
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
---------------
Total 660,845
===============
------------------
(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.
48
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).
49
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, 2004, 33,701 employees held 2,703,578 Sodexho Alliance
shares, representing 1.7% 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 have received restricted stock units in
connection with their employment. These units vest 25% each year during the four
years following the date of grant. If a holder of restricted stock units dies
during his or her employment, all such person's restricted stock units become
fully vested. If an employee is terminated, such employee's unvested restricted
stock units will be forfeited. No restricted stock units may be transferred by
their holder prior to conversion, as described in the following paragraph.
50
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 October 31, 2004, 3,354 members of management held 7,859,482 options
to purchase Sodexho Alliance shares and 57,698 restricted stock units,
representing 4.9% of the shares of Sodexho Alliance on a fully-diluted basis.
51
ITEM 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Below is a diagram illustrating our ownership as of October 31, 2004.
( Bernard Bellon )
(and other members of) ( Pierre Bellon )
( the Bellon family ) ( and his children )
------------------- ----------------
\ |
13.00% 68.5%
\ /
\-->( Bellon SA )<-/
( family holding company )<---------\
| \
Employees | Public* \
\ | / \
1.70% 38.53% 57.86% \
----- ------ ------ \
Treasury shares \ | / \
\ \ | / \
\ v v / \
1.91% ------>( Sodexho Alliance )<-/ 18.5%
----- ------------------ -----
| | | /
|<--------------| | /
| /
100% /
---- /
| /
v /
( Sonfinsod )------------------/
-----------
* Includes 4.69% held by Caisse des Depots et Consignations and 5.2% held by
Arnhold and S. Bleichroder.
52
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 October 31,
2004, Bellon SA beneficially owned 61,257,490 shares of the company
(representing approximately 38.53% of our outstanding share capital and 39.9% 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 5% 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. Pursuant to French law, these shares
owned by our subsidiaries are not entitled to any vote. Excluding the Bellon SA
shares owned by our subsidiaries, as of October 31, 2004, and Pierre Bellon and
other members of the Bellon family owned 68.5% of the outstanding capital stock
of Bellon SA, Bernard Bellon and other members of the Bellon family owned 13% of
such stock.
As of August 31, 2004 the Caisse des Depots et Consignations owned 4.69% of
outstanding shares and 6.26% of voting rights. As of October 27, 2004 Arnhold
and S. Bleichroder owned 5.25% of outstanding shares and 5.01% 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, 2004, our shares were owned by approximately 73,644
shareholders, including approximately 33,701 people acquiring their shares
through our various employee stock ownership plans (together, our employees own
approximately 1.70% of our outstanding capital stock). French citizens hold
approximately 8.5% of our shares, while French institutional investors hold
approximately 27.2% of our shares. To the best of our knowledge and after having
made reasonable inquiries, as of August 31, 2004, foreign shareholders held
approximately 22.16% 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, 2001 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)3 million in fiscal 2004.
In 2001, we sold our entire holding in Corrections Corporation of America
("CCA"), which resulted in an exceptional loss of (euro)3 million, net of tax
benefits. We sold our CCA shares to Latonia, an entity that is indirectly
controlled by Paul Jeanbart, one of our directors. We sold the CCA shares for
(euro)8,718,339. Pursuant to the terms of
53
the purchase and sale agreement, Latonia paid us an additional amount totaling
(euro)28.6 million upon resale of some of the shares in May 2003.
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.
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, 2004 is provided below.
Loans and Amount of deposits Largest amount
advances given and guarantees outstanding as of
and outstanding given and each of August Total Amount
as of August 31, outstanding as of 31, 2004, 2003 and outstanding as of
2004 August 31, 2004 2002 August 31, 2004
--------------------------------------------------------------------------
(thousands of euro)
--------------------------------------------------------------------------
French subsidiaries
Societe Francaise de restauration 338
Societe Marseillaise de restauration et de services 383 395 383
SPI 12,700 81 15,024 12,781
Universal Sodexho Afrique 799 2,237 799
STNB 708 826 708
Other 176 176 176
Foreign subsidiaries
Sodexho Hellas 46 1,700 46
Sodexho Tanzanie 16 293 16
Sodexho Pass Chili 396 396 396
Spirit Cruises 4,464 4,464 4,464
Sodexho Chili 5,179 74 5,253 5,253
Sodexho Healthcare Services Ltd 30,447 30,447 30,447
Sodexho Ltd 61,619 61,619 61,619
Siges Chili 8,257 8,257 8,257
Sodexho Education Services Ltd 15,000 15,000 15,000
Sodexho Defence Services Ltd 28,290 28,290 28,290
Sodexho Holdings Ltd 4,737 666 13,530 5,403
Sodexho Malaysia 175 175 175
Sodexho Investment Services Ltd 21,531 21,531 21,531
Primary Management Aldershot 22,715 22,715 22,715
Universal Sodexho Partnership 15,285 1 16,954 15,286
Harmondsworth 26,647 28,664 26,647
Sodexho Argentina 827 305 1,131 1,131
Universal Sodexho Scotland 8,860 6 13,262 8,866
Sodexho Luxembourg 274 278 274
Sakhalin Support Services 5,498 5,498 5,498
Kelvin Catering Ltd 881 1 1,587 883
Universal Services Europe Ltd 1,893 1,893 1,893
Universal Sodexho Norway 1,881 1,916 1,881
Sodexho Maroc 365 365 365
PT Universal Ogden Indonesia 413 458 413
Other 134 134 134
Foreign affiliates
Serco Sodexho Defense Services 5,492 5,492 5,492
--------------------------------------------------------------------------
TOTAL 285,320 1,902 310,298 287,222
==========================================================================
54
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 on the basis of their race. The plaintiffs' complaint
alleges unspecified damages on behalf of a class relating to the period
commencing March 27, 1998 and ending on July 1, 2001, as well as reimbursement
of plaintiffs' costs and attorneys' fees. After substantially completing
discovery, Sodexho estimates the size of the class to be approximately 2,400
current and former employees of Sodexho, Inc. Sodexho, Inc. has denied the
plaintiffs' allegations and is vigorously defending the lawsuit. On June 25,
2002, the district court certified the case as a class action for purposes of
determining liability. Sodexho, Inc.'s requests for permission to appeal this
decision have been denied by both the U.S. Court of Appeals for the District of
Columbia and the U.S. Supreme Court. In December 2003, the court directed the
parties to engage in mediation, but no settlement has been reached. In October,
2004, the Judge scheduled a hearing on two Sodexho pre-trial motions, including
a motion for summary judgment for early December, 2004 and in the event that the
matter proceeds to trial, the Judge has indicated a trial date of April 2005. A
resolution of plaintiffs' claims in their favor could have a material effect on
our net income. As from fiscal 2002, a provision of U.S. $10 million ((euro)8.3
million as of August 31, 2004) has been maintained for defense costs anticipated
in connection with this lawsuit.
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%. Prior to January 1, 2005, holders who
qualify for benefits under an applicable tax treaty and who comply with the
procedures for claiming treaty benefits may be entitled to a reduced rate of
withholding tax and, in certain circumstances, an additional payment (net of
withholding tax) representing all or part of the French avoir fiscal, or tax
credit, under conditions provided for in the relevant treaty and under French
law. Effective January 1, 2005, the French Finance Law of 2004 has abolished the
avoir fiscal. Investors in our ADSs or shares are strongly recommended to read
the Section of this prospectus entitled "Item 10.E. 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.
55
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 excluding Dividend per share including outstanding at the Total dividend
Year (1)(2) avoir fiscal avoir fiscal date of payment paid
------------------------------------------------------------------------------------------------------------------------------------
(euro) $ (euro) $ (euro)(in millions)
2000....................... 0.56 0.50 0.84 0.75 134,350,116 75.2
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
------------------------------------------------------------------------------------------------------------------------------------
(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. Since 1998, our shares have been 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, 2003 through
October 31, 2004 were less than 2,000 shares per day.
Average daily
trading volume
Fiscal Year High Low (in shares)
------------------------------------ ----------- ----------- ---------------
(euro) (euro)
2000................................ 47.74 31.38 317,693
2001................................ 60.10 41.13 397,875
2002................................ 55.75 25.10 574,261
2003................................ 30.83 17.95 683,519
2004................................ 28.15 20.16 812,089
56
Average daily
trading volume
Fiscal Year High Low (in shares)
------------------------------------ ----------- ----------- ---------------
2003 (euro) (euro)
First Quarter.................. 30.83 18.11 744,885
Second Quarter................. 26.85 20.20 579,734
Third Quarter.................. 22.56 17.95 761,906
Fourth Quarter................. 27.36 20.88 646,377
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
May............................ 23.63 20.54 873,358
June........................... 21.76 20.16 782,153
July........................... 24.00 21.03 760,549
August......................... 22.78 20.57 481,564
September...................... 22.48 20.70 829,581
October........................ 22.50 19.37 767,374
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.
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, 2004 found 38,835 identified holders of bearer
shares and 1,108 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.
57
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 and October 31, 2004, 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, 2004 and October 31, 2004 we
issued no shares for these purposes.
As of August 31, 2004 and October 31, 2004, we directly owned 3,033,771
shares, roughly 1.91% 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 5% 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 20,2004, the Board of Directors issued 1,108,683 options.
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, 2001, 2002, 2003 and 2004 and in the period commencing
August 31, 2004 and ending October 31, 2004, 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.
58
Shares
outstanding
Date before new issue Type of transaction Shares created
----------------------------------------------------------------------------------------------
October 13, 2000 33,587,529 Exercise of stock options (1) 1,552
December 5, 2000 33,589,081 Exercise of stock options (1) 18,020
December 11, 2000 33,607,109 Exercise of warrants and stock options (1) 36,524
December 15, 2000 33,643,625 Exercise of stock options (1) 36,108
January 22, 2001 33,679,733 Exercise of warrants (1) 82
March 7, 2001 33,679,815 Four-for-one stock split -
April 9, 2001 134,719,260 Exercise of warrants (1) 16
April 10, 2001 134,719,276 Exercise of warrants (1) 261,838
May 3, 2001 134,981,114 Exercise of stock options (1) 6,256
May 14, 2001 134,987,370 Exercise of warrants (1) 278
May 15, 2001 134,987,648 International Employee Stock Ownership Plan(2) 4,728
July 4, 2001 134,992,376 Share issue(3) 22,498,729
August 24, 2001 157,491,105 Exercise of stock options (1) 23,034
August 27, 2001 157,514,139 Exercise of warrants (1) 50
August 31, 2001 157,514,189 Exercise of warrants (1) 45,465
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)(4) 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) We raised (euro)1.0 billion by issuing 22,498,729 new shares to our
existing shareholders for cash. Pursuant to the terms of the offering, each
of our shareholders was entitled to purchase one share for every six shares
held by such shareholder at the time of the offering, at a price of
(euro)45 per share.
(4) 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.
59
Authorizations
At the Extraordinary Shareholders' Meeting of February 3, 2004, 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)570,000,000 and the aggregate par value of share issues funded by
capitalizing reserves may not exceed the amount of treasury reserves. Our
shareholders also authorized the Board of Directors to repurchase shares of our
stock for a period of 18 months following the meeting. The terms of this
repurchase program have been approved by the French Autorite des Marches
Financiers. Pursuant to this authorization, we purchased 785,750 shares on the
open market in fiscal 2004. 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.
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
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
60
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 2004, six of our directors' terms were renewed. At the annual
Meeting of Shareholders in February 2005, it is expected that the Board of
Directors membership will increase 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 will be renewed and three new directors will be 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.
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.
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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.
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.
62
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.
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.
63
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. 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.
64
Under French law, the presence in person or by proxy of shareholders
holding an aggregate of not less than 25% (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 33 (0)f1/4% (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 25% 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%,
20%, 33%, 50% or 66% 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 15 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 within 15
calendar days of the change and to provide the AMF with a written notice. In
order to facilitate
65
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 (0)f1/4% 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 October 31, 2004 our share capital was (euro)636,105,652, 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
nonresidents of France or non-French persons to own and vote shares. However,
nonresidents 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
French Taxation
The following is a general summary of the material French tax consequences
of purchasing, owning and disposing of shares or ADSs. The statements relating
to French tax laws set out below are based on the laws in force as of the date
hereof, and are subject to any changes in applicable French tax laws or in any
applicable double taxation conventions or treaties with France occurring after
such date.
This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or list of all potential tax effects of the
purchase or ownership of the shares and of the ADSs or a comprehensive
description of all of the tax considerations that may be important for your
decision to purchase shares or ADSs.
66
There is currently no direct simplified procedure available for holders of
ADSs who are not United States residents to claim or receive from the French tax
authorities any tax treaty benefits in respect of dividends that the holder may
be entitled to receive pursuant to a treaty between France and the holder's
country of residence.
The following summary does not discuss the treatment of shares or ADSs that
are held in connection with a permanent establishment or fixed base through
which a holder carries on business or performs personal services in France.
As a general matter, we encourage you to consult your own tax advisors as
to the tax consequences of the purchase, ownership and disposition of shares or
ADSs arising from your particular circumstances and the specific laws applicable
to you, including the availability and terms of any applicable tax treaty.
In particular, holders should be aware that the French Finance Law of 2004
has abolished the avoir fiscal and the precompte with respect to dividends to
be paid to French individual shareholders as from January 1, 2005. French
non-individual shareholders will generally no longer be entitled to use the
avoir fiscal 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%
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.
Non resident individual shareholders that are entitled to the benefits of
and that comply with the procedures for claiming benefits under an applicable
tax treaty entered into with France (as described below) will be entitled to
the refund of the avoir fiscal with respect to dividends paid on or prior to
December 31, 2004. Although yet unclear, such shareholders could be entitled to
the new tax credit of (euro)115 or (euro)230 mentioned above with respect to
dividends paid as from January 1, 2005. Non resident non-individual
shareholders that would be entitled to the transfer of the avoir fiscal under
an applicable tax treaty entered into with France (as described below) are no
longer entitled to the refund of the avoir fiscal with respect to dividends
paid as from January 1, 2004. Non resident shareholders that are not entitled
to benefit from the refund of the avoir fiscal but are otherwise entitled to
benefit from the relevant provisions of a tax treaty entered into with France,
should be entitled to a refund of any precompte actually paid on dividends paid
by a French distributing company before January 1, 2005.
In addition, the French Finance Law of 2004 has implemented a temporary
equalization tax equal to 25% of dividends paid in 2005 out of profits which
have not been taxed at the ordinary corporate income tax rate or which have
been earned and taxed more than five years before the distribution. Unlike the
precompte, such temporary equalization tax will not be refundable to non
resident shareholders but will be deductible from the corporate income tax to
be paid by the French distributing company with respect to the three fiscal
years following the year of the distribution and refundable in case of excess.
Taxation on Sale or Disposal of Shares or ADSs
On the basis of the provisions of any relevant double tax treaty, persons
who are not French residents for the purpose of French taxation (as well as,
under certain conditions, foreign states, international organizations and
certain foreign public bodies) and who have held not more than 25%, directly or
indirectly, and for individuals, with or without family members of our dividend
rights (benefices sociaux) at any time during the preceding five years, are not
subject to any French income tax or capital gains tax on any sale or disposal
of shares.
If a share transfer is evidenced by a written agreement, such share
transfer agreement is, in principle, subject to registration formalities and
therefore to a 1% registration duty assessed on the higher of the purchase price
and the market value of the shares (subject to a maximum assessment of
(euro)3,049 per transfer) provided that no duty is due if such written share
transfer agreement is executed outside France.
An owner of shares resident outside France may trade shares on the Euronext
Paris. Should such owner, or the broker or other agent through whom a sale is
effected, require assistance in this connection, an accredited intermediary
should be contacted. For dealings on Euronext Paris, a tax assessed on the price
at which the securities were traded (impot sur les operations de bourse) is
payable at a rate of 0.3% on transactions up to (euro)153,000 and at a rate of
0.15% thereafter, subject to a rebate of (euro)23 per transaction and a maximum
assessment of (euro)610 per transaction. Transactions made by non-residents of
France are not subject to the payment of such tax. In addition, while not
strictly a tax, a fee or commission is payable to the financial intermediary
whether within or outside France.
Taxation of Dividends
In France, dividends are paid out of after-tax income.
Subject to the disclosure above regarding the abolition of the avoir
fiscal and the precompte, for dividends paid as from January 1, 2005 or, as
regards non-individual shareholders for the avoir fiscal to be used as from such
date, French residents are generally entitled to a tax credit, known as the
avoir fiscal, equal to:
o 50% of the dividend paid to (i) individuals and (ii) companies which
own at least 5% of the capital of the French distributing company and
meet the requirements to qualify for the French parent-subsidiary
regime; or
o 10% of the dividend paid to other shareholders.
Pursuant to regulations finalized on December 30, 2002 and applicable as
from January 1, 2003 through December 31, 2004, shareholders entitled to the
10%-rate avoir fiscal are generally entitled to an additional avoir fiscal
equal to 80% of the precompte actually paid by the distributing company.
Under French domestic law, dividends paid to nonresidents are normally
subject to a 25% withholding tax and nonresidents are generally not eligible
for the benefit of the avoir fiscal.
However, the following countries and territories (including Overseas
Territories) have entered into income tax treaties with France whereby tax
residents of such countries and territories may, as provided in the relevant
treaty, obtain from the French tax authorities a reduction (generally to 15%)
of all or part of such withholding tax and a refund of the avoir fiscal (net of
applicable withholding tax).
Australia Iceland Malta South Korea
Austria India Mauritius Spain
Belgium Israel Mexico Sweden
Bolivia Italy Namibia Switzerland
Brazil Ivory Coast Netherlands Togo
Burkina Faso Japan New Zealand Turkey
Canada Latvia Niger Ukraine
Estonia Lithuania Norway United Kingdom
Finland Luxembourg Pakistan United States of America
Gabon Malaysia Senegal Venezuela
Ghana Mali Singapore
67
Overseas Territories and Other
New Caledonia
Saint-Pierre et Miquelon
Mayotte
Treaties with some of the countries and territories listed above contain
specific limitations applicable to corporate entities entitled to benefit from
the avoir fiscal, or limit the rights to the avoir fiscal strictly to individual
residents (as opposed to corporate entities). The "Taxation of Dividends"
section below describes the provisions of the income tax treaty between the
United States and France.
Except for the United States, none of the countries or territories listed
above has a treaty granting benefits to holders of ADSs, as opposed to shares.
Accordingly, this discussion of treaty benefits does not apply to ADS holders.
Dividends paid to nonresidents of France benefiting from the avoir fiscal
in accordance with a tax treaty will be subject, on the date of payment, to the
withholding tax at the reduced rate provided for by such treaty rather than to
the French withholding tax at the rate of 25% to be later reduced to the treaty
rate, provided that they fulfill, before the date of payment of the dividend,
certain filing formalities.
Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have been
earned and taxed more than five years before the distribution are subject to a
precompte (equalization tax) by such companies equal to the avoir fiscal
attached to the corresponding dividends. The precompte is paid by the
distributing company to the French tax authorities and is equal to a maximum of
50% of the net dividend before withholding tax. When a tax treaty in force does
not provide for a refund of the avoir fiscal or when the nonresident investor is
not entitled to such refund but is otherwise entitled to the benefits of a tax
treaty, such investor may generally obtain from the French tax authorities a
refund of such precompte actually paid in cash by us, if any (net of applicable
withholding tax). As noted above, the precompte has been abolished for dividends
paid as from January 1, 2005.
Estate and Gift Tax
France imposes estate and gift tax on certain real and personal property
acquired by inheritance or gift from a nonresident of France if such property is
deemed to be situated in France. France has entered into estate and gift tax
treaties with a number of countries pursuant to which, assuming certain
conditions are met, residents of the treaty countries may be exempted from such
tax or obtain a tax credit. Prospective investors in shares or ADSs should
consult their own advisors concerning the applicability of French estate and
gift tax to their shareholding and the availability of, and the conditions for
claiming exemption or tax credit under, such a treaty.
Wealth Tax
In the absence of a more favorable tax treaty, the French wealth tax (impot
de solidarite sur la fortune) does not apply to non-French resident individual
investors owning directly or indirectly less than 10% of our capital stock.
68
Taxation of United States Investors
The following discussion describes the material United States federal
income tax and French tax consequences of the acquisition, ownership and
disposition of ADSs or shares by a U.S. Holder (as defined below).
This discussion is based in part on representations of 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. The United States Treasury has expressed concerns that parties
to whom American depositary shares such as the ADSs are released may be taking
actions that are inconsistent with the claiming of foreign tax credits by U.S.
Holders of ADSs. Accordingly, the analysis of the creditability of French taxes
described below could be affected by future actions that may be taken by the
United States Treasury.
This discussion is not a complete analysis or description of all potential
tax consequences to a U.S. Holder of owning ADSs or shares. It deals only with
ADSs or shares held as capital assets by persons who own less than 10% of our
capital and does not discuss the tax consequences applicable to all categories
of investors, some of which (such as dealers in securities and investors whose
functional currency is not the U.S. dollar) may be subject to special rules.
Holders of our shares or ADSs are advised to consult their tax advisors
concerning the application of the United States federal income tax laws to their
particular situations as well as any tax consequences arising under the laws of
any state, local or foreign taxing authority.
The statements of United States and French tax laws set forth herein are
based on the laws in force as of the date hereof, including the United States
Internal Revenue Code of 1986, the French Code General des Impots and the
regulations enacted thereunder, and the double tax convention between the United
States and France. In this regard, the Convention between the United States and
the French Republic for the Avoidance of Double Income Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of
August 31, 1994, referred to as the Treaty, entered into force on December 30,
1995, and the French tax authorities issued an Instruction dated May 13, 1994
and released on June 7, 1994 relating to the withholding tax on dividends in
favor of non-residents entitled to the avoir fiscal pursuant to a tax treaty,
referred to as the "June 1994 Regulations." The Treaty and the June 1994
Regulations change the French withholding tax rules applicable to dividends to
which an avoir fiscal is associated and may affect the timing of payments to
non-residents of France that are entitled to tax treaty benefits.
As used herein, the term "U.S. Holder" means a beneficial owner of ADSs or
shares who or that is entitled to Treaty benefits under the "limitation on
benefits" provisions contained in the Treaty and is, for United States federal
income tax purposes:
o a citizen or resident of the United States;
o a corporation created or organized 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.
Taxation of Dividends
In France, dividends are paid out of after-tax income.
Subject to the disclosure below regarding the abolition of the avoir
fiscal and the precompte, for dividends paid as from January 1, 2005 or, as
regards non-individual shareholders, for avoir fiscal to be used as from such
date, French residents are generally entitled to a tax credit, known as the
avoir fiscal, equal to:
o 50% of the dividend paid to (i) individuals and (ii) companies which
own at least 5% of the capital of the French distributing company and
meet the requirements to qualify for the French parent-subsidiary
regime; or
o 10% of the dividend paid to other shareholders.
Pursuant to regulations finalized on December 30, 2002 and applicable as
from January 1, 2003 through December 31, 2004, shareholders entitled to the
10%-rate avoir fiscal are generally entitled to an additional avoir fiscal
equal to 80% of the precompte actually paid by the distributing company.
The French Finance Law of 2004 has abolished the avoir fiscal and the
precompte with respect to dividends to be paid to French individual
shareholders as from January 1, 2005. French non-individual shareholders will
generally no longer be entitled to use the avoir fiscal 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% 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.
Under French domestic law, dividends paid to nonresidents are normally
subject to a 25% withholding tax and nonresidents are generally not eligible
for the benefit of the avoir fiscal.
69
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. An Eligible U.S. Holder would also be
entitled to a payment equal to the avoir fiscal, less a 15% withholding tax. As
noted below, such payment will not be made to an Eligible U.S. Holder until
after the close of the calendar year in which the dividend was paid, and only
upon receipt by the French tax authorities of a claim made by the Eligible U.S.
Holder for such payment in accordance with the procedures set forth 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 will no longer be entitled
to claim a refund of the avoir fiscal for dividends paid as from January 1,
2005. Although yet unclear, Individual Eligible U.S. Holders could be entitled
to the new tax credit of (euro)115 or (euro)230 mentioned above with respect to
dividends paid as from January 1, 2005. In addition, although yet unclear,
Eligible U.S. Holders may not be entitled to the benefit of being taxed only on
50% of the dividends received by them, applicable to individual French
residents, for the application to those dividends of French withholding tax.
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 noncorporate 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.
Payment of the avoir fiscal is made by the French Treasury not earlier than
the January 15 following the close of the calendar year in which the related
dividend is paid, and only after receipt by the French tax administration of a
claim for such payment in accordance with the procedures described below.
However, there are certain limitations on the availability of the avoir fiscal
under the Treaty. First, the avoir fiscal is generally only granted if the
Eligible U.S. Holder is subject to United States federal income tax on both the
dividend and the avoir fiscal. Second, a partnership or a trust (other than a
pension trust, a real estate investment trust or a real estate mortgage
investment conduit) in its capacity as an Eligible U.S. Holder is entitled to
the avoir fiscal only to the extent that its partners, beneficiaries or
grantors, as applicable, are themselves Eligible U.S. Holders (other than a
regulated investment company) and are themselves subject to United States
federal income tax on their respective shares of both the dividend and the avoir
fiscal. Third, the Eligible U.S. Holder, where required by the French tax
administration, must show that he or she is the beneficial owner of the ADSs or
shares and that the holding of such ADSs or shares does not have as one of its
principal purposes to allow another person to take advantage of the grant of the
avoir fiscal under the Treaty.
Under the Treaty, special rules apply to (1) any "Eligible Pension Fund",
which is a tax-exempt entity established in, and sponsored or established by a
resident of, the United States, the exclusive purpose of which is to provide
retirement or employee benefits, (2) any "Eligible Not-For-Profit Organization",
which is a tax-exempt entity organized in the United States, the use of whose
assets is limited under United States federal or state laws, both currently and
upon liquidation, to the accomplishment of the purposes that serve as the basis
of its exemption from income taxation in the United States, and (3) any
"Individual Holding Shares in a Retirement Plan", meaning an individual who is a
resident of the United States under the Treaty and who owns Shares through an
individual retirement account, a Keogh plan or any similar arrangement.
("Eligible Pension Funds", "Eligible Not-For-Profit Organizations" and
"Individuals Holding Shares in a Retirement Plan" are referred to collectively
as "Eligible Tax-Exempt Holders.")
Provided they are entitled to Treaty benefits under the limitation on
benefits provisions in Article 30 of the Treaty, Eligible Tax-Exempt Holders are
entitled to receive from the French Treasury a payment equal to 30/85ths of the
avoir fiscal (the "partial avoir fiscal"), less a 15% dividend withholding tax
on such amount, notwithstanding the general requirement described above that the
Holder be subject to United States tax on both the dividend and the avoir
fiscal. Thus, for example, if a dividend of (euro)100 were payable by us to an
Eligible Tax-Exempt Holder that is an individual and the requirements of the
June 1994 Regulations are satisfied, such Holder would initially receive
(euro)85 (the (euro)100 dividend less a (euro)15 withholding tax). The Eligible
Tax-Exempt Holder would be further entitled to an additional payment from the
French Treasury of (euro)15, consisting of the partial avoir fiscal of 30/85ths
of (euro)50, less the 15% withholding tax on that amount. Thus, the total net
payment to the Eligible Tax-Exempt Holder would be (euro)100. The Eligible
Tax-Exempt Holder, where required by the French tax administration, must show
that it is the
70
beneficial owner of the shares and that the holding of such shares does not have
as one of its principal purposes to allow another person to take advantage of
the grant of the partial avoir fiscal under the Treaty. It should be noted that
non-individual Eligible Tax-Exempt Holders are no longer entitled to receive
payment of the partial avoir fiscal for dividends paid as from January 1, 2004.
Individual Eligible Tax-Exempt Holders will no longer be entitled to receive
payment of the partial avoir fiscal for dividends paid as from January 1, 2005.
Eligible Tax-Exempt Holders are also entitled to a refund of any precompte
paid by us with respect to the dividends they receive, but such refund is
reduced by the amount of the partial avoir fiscal to which they are entitled and
further reduced by the 15% dividend withholding tax.
Eligible Tax-Exempt Holders generally must follow the procedures set forth
hereafter. Nevertheless, the existing French forms do not take into account the
special tax treatment applicable to Eligible Tax-Exempt Holders with respect to
the payment of the partial avoir fiscal and the refund of the precompte. Certain
Eligible Tax-Exempt Holders may also be required to provide written evidence
certified by the IRS of their status under United States federal income tax law.
As a consequence, Eligible Tax-Exempt Holders are urged to contact their own tax
advisors with respect to the procedures to be followed to obtain Treaty
benefits.
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 Treasury Form RF1 A EU-No.
5052 (the "Form") before the date of payment of the relevant dividend, or (ii)
if completion of the Form is not possible prior to the payment of dividends,
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") stating that (a) such holder
is a United States resident as defined pursuant to the provisions of the Treaty,
(b) such holder's ownership of the ADSs or shares is not effectively connected
with a permanent establishment or fixed base in France, (c) such holder owns all
of the rights attached to the full ownership of the ADSs or shares, including
but not limited to dividend rights and (d) such holder meets all the
requirements of the Treaty for obtaining the benefit of the reduced rate of
withholding tax and the right to payment of the French avoir fiscal. Dividends
paid to a U.S. Holder that is entitled to the reduced withholding tax rate of
15% but that is not entitled to the avoir fiscal (i.e., one who is not an
Eligible U.S. Holder) will be subject to the reduced withholding tax rate of 15%
at the time the dividend is paid if such holder duly completes and provides the
paying agent with Treasury Form RF1 B EU-No. 5053 before the date of payment of
the relevant dividend. 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 tax and an Eligible U.S. Holder may claim the
avoir fiscal 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 avoir fiscal or partial avoir fiscal is generally expected to be paid
to Eligible U.S. Holders and Eligible Tax-Exempt Holders within 12 months of
filing the Form, but not before January 15th following the end of the calendar
year in which the related dividend is paid. Similarly, any French withholding
tax refund is generally expected to be paid to U.S. Holders within 12 months of
filing the Form, but not before January 15th following the end of the calendar
year in which the related 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.
The procedures described above apply so long as the avoir fiscal exists.
Procedures for claiming the benefit of the reduced rate of French withholding
tax and, as the case may be, the transfer of the new tax credit mentioned above
for dividends paid as from January 1, 2005, have yet to be published.
Precompte
The following discussion pertains to dividends issued prior to December 31,
2004. Effective January 1, 2005, pursuant to Article 93 of the law 2003-1311,
dividends no longer give rise to a right to a tax credit.
Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have been
earned and taxed more than five years before the distribution are subject to a
"precompte" (equalization tax) by such companies equal to the avoir fiscal
attached to the corresponding dividends. The precompte is paid by the
distributing company to the French tax authorities and is equal to a maximum of
50% of the dividend distributed before withholding tax.
71
A U.S. Holder not entitled to the full avoir fiscal may generally obtain a
refund from the French tax authorities of any precompte paid by us with respect
to the dividends paid to the holder. Pursuant to Treaty, the amount of the
precompte refunded to United States residents is reduced by the 15% withholding
tax applicable to dividends. A U.S. Holder is only entitled to a refund of
precompte actually paid in cash by us.
A U.S. Holder entitled to the refund of the precompte must apply for such
refund by filing a French Treasury Form RF1 B EU-No. 5053 (the "Treasury Form")
before the end of the year following the year in which the dividend was paid.
The form and its instructions are available from the United States Internal
Revenue Service or at the Centre des Impots des Non-Residents (9, rue d'Uzes,
75094 Paris Cedex 2, France). The depositary will, upon request, provide to U.S.
Holders of ADRs the Treasury Forms, together with the respective instructions,
and will arrange for the filing with the French tax authorities of all Treasury
Forms completed by U.S. Holders of ADRs and returned to the Depositary within
sufficient time.
As described above, the French Finance Law of 2004 has abolished the
precompte for dividends paid as from January 1, 2005. However, the French
Finance Law of 2004 has implemented a temporary equalization tax equal to 25%
of dividends paid in 2005 out of profits which have not been taxed at the
ordinary corporate income tax rate or which have been earned and taxed more
than five years before the distribution. Unlike the precompte, such temporary
equalization tax will not be refundable to U.S. Holders but will be deductible
from the corporate income tax to be paid by the French distributing company
with respect to the three fiscal years following the year of the distribution
and refundable in case of excess.
For United States federal income tax purposes, the gross amount of a
dividend and the amount of the avoir fiscal or precompte paid to a U.S. Holder,
including any French withholding tax thereon, will be included in gross income
as dividend income in the year each such payment is received to the extent paid
out of our current or accumulated earnings and profits as calculated for United
States federal income tax purposes. No dividends received deduction will be
allowed with respect to dividends paid. Under recently enacted legislation,
dividends received by non-corporate U.S. Holders of ADSs or shares may be
subject to U.S. Federal income tax at lower rates than other types of ordinary
income if certain conditions are met. U.S. Holders should consult their own tax
advisors regarding the implications of this new legislation on their particular
circumstances. The amount of any dividend paid in euro, including the amount of
any French taxes withheld there from, will be equal to the dollar value of such
euro amount on the date such dividend is included in income, regardless of
whether the payment is in fact converted into dollars. A U.S. Holder will
generally be required to recognize United States source ordinary income or loss
upon the sale or disposition of euro. Moreover, a U.S. Holder may be required to
recognize foreign currency gain or loss, which will generally be United States
source ordinary income or loss, upon the receipt of a refund of amounts, if any,
withheld from dividends in excess of the Treaty rate of 15%.
French withholding tax imposed at the Treaty rate of 15% on dividends paid
by us and on any related payment of the avoir fiscal or precompte is treated as
payment of a foreign income tax and, subject to certain conditions and
limitations, may be taken as a credit against such U.S. Holder's United States
federal income tax liability. For foreign tax credit purposes, dividends will
generally constitute foreign source "passive", or in the case of certain
holders, "financial services" income.
Taxation of Capital Gains
Under the Treaty, no French tax is levied on any capital gain derived from
the sale of ADSs or shares by a U.S. Holder who (1) is a resident of the United
States under the Treaty, and (2) does not have a permanent establishment in
France to which the ADSs or shares are effectively connected or, in the case of
an individual, who does not maintain a fixed base in France to which the ADSs or
shares are effectively connected. Special rules apply to individuals who are
residents of' more than one country. In general, for United States federal
income tax purposes, a U.S. Holder will recognize capital gain or loss on the
sale or exchange of ADSs or shares in the same manner as on the sale or exchange
of any other shares held as capital assets. Any gain or loss will generally be
United States source.
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
72
permanent establishment fixed base in France. Prospective investors in shares or
ADSs should consult their own advisors as to the 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.
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. 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 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.
73
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, 2004,
including the effect of interest and cross-currency swap agreements,
approximately 79% of our borrowings were at fixed rates, with an average
interest rate of 5.2%.
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 2004 net income by approximately (euro)8 million. A
hypothetical strengthening or weakening by 10% in the value of the British pound
sterling relative to the euro would not have resulted in any change to our
fiscal 2004 net income.
A hypothetical increase of 1% in average interest rates would have resulted
in an increase in fiscal 2004 interest expense of approximately (euro)4 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.
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. 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. Based upon our evaluation, the
Chief Executive Officer and Chief Financial Officer 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.
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, 2004, 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, 2005. An English translation of our
French report will be available on the Group's website, www.sodexho.com.
ITEM 16A. Audit Committee Financial Expert.
Our Board of Directors has determined that Mr. Edouard de Royere, who
serves on the audit committee, has the background and qualifications necessary
to be considered an audit committee financial expert.
74
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 Chairman and Chief Executive Officer, Chief Operating Officers,
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.
ITEM 16C. Principal Auditor Fees and Services
PricewaterhouseCoopers KPMG(1)
Amount Percentage Amount Percentage
---------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
2004 2003 2004 2003 2004 2003 2004 2003
---------------------------------------------------------------------------------
Audit and audit-related:
Audit fees 4,108 4,536 78% 66% 1,996 1,013 93% 94%
Audit-related fees 134 240 2% 4% 48 54 2% 5%
Total audit and audit-related fees 4,242 4,776 80% 70% 2,044 1,067 95% 99%
Other non-audit services:
Tax, legal and human resources consulting 997 1,853 19% 28% 47 9 2% 1%
Information technology 0 14 0% 0% 0 0 0% 0%
Other 31 140 1% 2% 51 1 3% 0%
Total other services 1,028 2,007 20% 30% 98 10 5% 1%
Total 5,270 6,783 100% 100% 2,142 1,077 100% 100%
------------------
(1) Listed companies in France are required to have their financial statements
audited by two different independent accounting firms. KPMG SA was named
independent auditor at the February 4, 2003 Shareholders' Meeting,
replacing Olivier Belnet.
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)661,000 for the year ended August 31, 2004.
ITEM 16D. Comparison of French and US 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.
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.
75
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 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 4.2 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 Pierre Bellon, Chairman and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2003
12.2 Certification by Sian Herbert-Jones, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
76
13 Certifications by Pierre Bellon, Chairman and Chief Executive
Officer and Sian Herbert-Jones, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
77
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: November 26, 2004
78
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, 2004, 2003 and 2002...................................... F-2
Consolidated Balance Sheets as of August 31, 2004 and 2003.............. F-3
Consolidated Statements of Cash Flows for each of the fiscal years ended
August 31, 2004, 2003 and 2002...................................... F-4
Notes to the Consolidated Financial Statements.......................... F-5
REPORT OF INDEPENDENT AUDITORS
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, 2004
and 2003 and the related consolidated statements of income and of cash flows for
each of the three fiscal years in the period ended August 31, 2004, 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.
These financial statements have been prepared in accordance with accounting
principles generally accepted in France, except for the following matter. As
described in note 1, in order to comply with the requirements of the United
States Securities and Exchange Commission, the statements of income for the
fiscal years ended through August 31, 2001 were restated in the Annual Report on
Form 20-F for a prior period adjustment identified and recorded in the fiscal
year ended August 31, 2002. Under accounting principles generally accepted in
France (Avis CNC No. 97-06), prior periods are not permitted to be retroactively
restated, and the overstatement of previously reported revenue was recorded as
an exceptional expense when discovered in the year ended August 31, 2002.
In our opinion, except for the effects of the restatement described in the
previous paragraph, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of the Group as of
August 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three fiscal years in the period ended August 31, 2004, in
conformity with accounting principles generally accepted in France.
We draw your attention to note 1, which includes a description of the
impact of changes in accounting principles adopted in the fiscal year ended
August 31, 2002 on the Group's consolidated financial statements.
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 to the consolidated financial statements.
Paris, France
November 16, 2004
PRICEWATERHOUSECOOPERS AUDIT
Hubert Toth
F-1
SODEXHO ALLIANCE, SA
CONSOLIDATED INCOME STATEMENTS
Years ended August 31,
------------------------------
2004 2003 2002
-------- -------- --------
(millions of euro)
Revenues .............................................. 11,494 11,687 12,609
Other income .......................................... 40 37 54
Purchases ............................................. (3.942) (3,955) (4,559)
Employee costs ........................................ (5,277) (5,519) (5,868)
Other external charges ................................ (1,505) (1,482) (1,464)
Taxes, other than income taxes ........................ (82) (79) (74)
Depreciation and increase in provisions ............... (213) (175) (173)
-------- -------- --------
Earnings Before Interest, Exceptional Items, Income
Taxes, Income from Equity Method Investees, Goodwill
Amortization and Minority Interests (EBITA) ....... 515 514 525
Financial expense, net ................................ (118) (152) (166)
-------- -------- --------
Income Before Exceptional Items, Income Taxes, Income
from Equity Method Investees, Goodwill Amortization
and Minority Interests ............................. 397 362 359
Exceptional (expense) income, net ..................... (33) 1 55
Income taxes .......................................... (109) (134) (136)
-------- -------- --------
Income Before Income from Equity Method Investees,
Goodwill Amortization and Minority Interests ....... 255 229 278
Net income from equity method investees ............... 1 4 4
Goodwill amortization ................................. (59) (62) (67)
-------- -------- --------
Group Net Income Before Minority Interests ............ 197 171 215
Minority interests in net income of consolidated
subsidiaries ........................................ (14) (9) (13)
-------- -------- --------
Group Net Income ...................................... 183 162 202
======== ======== ========
Earnings per share (in euro) .......................... 1.15 1.02 1.27
======== ======== ========
Diluted earnings per share (in euro) .................. 1.15 1.00 1.22
======== ======== ========
See accompanying notes to the consolidated financial statements.
F-2
SODEXHO ALLIANCE, SA
CONSOLIDATED BALANCE SHEETS
August 31,
------------------
2004 2003
-------- --------
ASSETS (millions of euro)
Fixed and Intangible Assets, Net
Goodwill ................................................. 1,394 1,492
Intangible assets ........................................ 2,519 2,686
Property, plant and equipment ............................ 362 379
Financial investments .................................... 66 64
Equity method investees .................................. 14 19
-------- --------
Total Fixed and Intangible Assets, Net ..................... 4,355 4,640
Current and Other Assets
Inventories .............................................. 163 170
Accounts receivable, net ................................. 1,368 1,383
Prepaid expenses, other receivables and other
assets ................................................... 552 637
Marketable securities .................................... 536 542
Restricted cash .......................................... 168 166
Cash ..................................................... 505 570
-------- --------
Total Current and Other Assets ............................. 3,292 3,468
-------- --------
TOTAL ASSETS ............................................... 7,647 8,108
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common stock ............................................. 636 636
Additional paid in capital ............................... 1,186 1,186
Consolidated reserves .................................... 370 427
-------- --------
Total Shareholders' Equity ................................. 2,192 2,249
Minority Interests ......................................... 25 66
Provisions for Contingencies and Losses .................... 93 89
Liabilities
Borrowings ............................................... 2,128 2,488
Accounts payable ......................................... 1,035 1,128
Vouchers payable ......................................... 843 794
Other liabilities ........................................ 1,331 1,294
-------- --------
Total Liabilities .......................................... 5,337 5,704
-------- --------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES ................. 7,647 8,108
======== ========
See accompanying notes to the consolidated financial statements.
F-3
SODEXHO ALLIANCE, SA
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended August 31,
------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Operating Activities
Consolidated net income before income (loss)
from equity method investees and minority
interests .................................... 197 167 211
Noncash items:
Depreciation and provisions .............. 263 215 254
Deferred taxes ........................... (14) (9) 5
Losses (gains) on disposals and other,
net of tax ............................ 1 14 (61)
------ ------ ------
Cash provided by operating activities ....... 447 387 409
Dividends received from equity method
investees ............................. 4 3 1
Change in working capital from operating
activities ............................ 163 100 209
------ ------ ------
Net cash from operating activities .............. 614 490 619
Investing Activities
Tangible and intangible fixed assets ............ (181) (241) (297)
Fixed asset disposals ........................... 19 15 33
Acquisitions, net of dispositions, of
consolidated subsidiaries ................... (74) (33) (48)
Change in working capital from investing
activities .................................. (9) (19) (3)
------ ------ ------
Net cash used in investing activities ........... (245) (278) (315)
Financing Activities
Dividends paid to parent company shareholders ... (95) (94) (87)
Dividends paid to minority shareholders of
consolidated subsidiaries .................... (8) (11) (15)
Increase in shareholders' equity ................ 1 0 59
Proceeds from borrowings ........................ 271 104 1,120
Repayment of borrowings ......................... (541) (178) (1,146)
Change in working capital from financing
activities .................................. (29) (23) (1)
------ ------ ------
Net cash provided by (used in) financing
activities ........................... (401) (202) (70)
------ ------ ------
Increase (decrease) in net cash, cash equivalents
and marketable securities .................... (32) 10 234
====== ====== ======
Cash, cash equivalents and marketable
securities, as of beginning of period ........ 1,278 1,307 1,213
Add: provisions as of beginning of period ...... 8 23 1
Cash, cash equivalents and marketable
securities, as of end of period .............. 1,209 1,278 1,307
Add: provisions as of end of period ............ 12 8 23
Net effect of exchange rates on cash ............ 33 54 118
------ ------ ------
(Decrease) increase in net cash, cash
equivalents and marketable securities ........ (32) 10 234
====== ====== ======
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 fully 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 a material 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. The financial statements have been prepared on a basis consistent
with the prior year. Amounts in tables are expressed in millions of euro, unless
indicated otherwise. The consolidated financial statements and information in
the notes thereto are reported in euro.
Significant Events During the Year
In May 2004, the Group arranged a revolving credit facility of (euro)360
million in order to meet its cash commitments including the repayment of the
(euro)305 million bond in June 2004. As of August 31, 2004, (euro)100 million
and USD 100 million were utilized (totaling (euro)183 million). This credit
facility expires in April 2005 but the Group may extend it, at its option, to
April 2006. The bank may extend the term to April 2007.
In March 2004, the Group, through its subsidiary Sodexho Pass do Brazil,
sold the Medcheque subsidiary, which was created in 1997 and whose core business
was the sale of medical care cards in Brazil. A loss on disposal of (euro)6
million ((euro)3.7 million net of tax) was recorded as an exceptional expense in
fiscal 2004.
Pursuant to an agreement signed on December 30, 1999, the Group benefited
from a world-wide tax regime for a period of five years, from September 1, 1998
to August 31, 2003. The Group has decided not to apply for the renewal of the
agreement for future years. As a result, fiscal 2003 was the last period
included in the regime.
Divergences from French GAAP
The financial statements filed by the Group with the Commission des
Operations de Bourse (the regulatory authority in France, now known as the AMF)
are prepared in accordance with French GAAP. French GAAP does not permit
retroactive adjustments to financial statements. In order to comply with the
requirements of the United States Securities and Exchange Commission ("SEC"),
the Group restated its financial statements as of and for the year ended August
31, 2001 for the effect of a prior year adjustment identified and recorded in
the year ended August 31, 2002. As a result, financial statements presented
herein for the year ended August 31, 2002 differ from those filed with the
Commission des Operations de Bourse.
The Group's financial statements as of and for the year ended August 31,
2001 were restated to reflect revisions discovered in fiscal 2002 related to
revenue recognition and accounts receivable in the Group's grounds maintenance
subsidiary located in the United Kingdom. From fiscal 1999 and continuing
through the first half of fiscal 2002, detailed record-keeping and documentation
contractually required by certain of the subsidiary's public authority clients
were not maintained for orders related to existing contracts. Accordingly, the
related revenue recognized by the subsidiary could not be supported. Under the
requirements of the SEC, prior year financial statements are restated to reduce
revenue in the period the overstatement occurred. Under accounting principles
generally accepted in France (Avis CNC No. 97-06) prior periods are not
permitted to be retroactively restated, and
F-5
the overstatement of revenue was recorded as an exceptional expense when
discovered in the year ended August 31, 2002.
A reconciliation of the amounts reported in accordance with French GAAP in
the Group's Document de Reference (Annual Report) filed with the AMF and those
reported in this Form 20-F filed with the SEC, which have been adjusted for the
overstatement of revenues and the understatement of net income, follows:
Earnings Diluted
Net per Earnings
Revenues EBITA Income Share per Share
-------- ----- ------ ----- ---------
(millions of euro, except per-share amounts)
Fiscal 2002
Annual Report 12,612 528 183 1.15 1.13
Adjustment (3) (3) 19(1) 0.12 0.09
-------- ----- ------ ----- ---------
Form 20-F 12,609 525 202 1.27 1.22
======== ===== ====== ===== =========
(1) Consists of an increase in exceptional income of (euro)32 million partially
offset by a reduction in revenues of (euro)3 million and an increase in
income tax expense of (euro)10 million.
Changes in Accounting Principles
The financial statements have been prepared on a basis consistent with the
prior year, except with respect to the provision of (euro)19 million recorded in
financial expense in fiscal 2002 on Sodexho Alliance shares we acquired in
connection with the employee stock option programs in order to reflect the lower
of cost or market. In conformity with Avis CNCC 98D, such provisions and the
release thereof are now included in exceptional items, where losses pertaining
to stock compensation are also recorded.
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.
A list of subsidiaries and the Group's percentage interest and percentage
of voting rights held is provided in note 4.5.
Revenue Recognition
In the Food and Management Services activity, revenue is recognized in the
period in which services are provided pursuant to the terms of the contractual
relationships with clients. 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).
Vendor Discounts and Allowances
Discounts and allowances obtained from vendors are recorded as a reduction
to the related costs in the income statement.
Employee Costs
Retirement Benefits
For funded plans to which the subsidiary makes a contribution, the amount
of the contribution is recorded as the expense of the plan. The Group's benefit
obligations relating to defined benefit pension and retirement indemnity plans
are recorded in the balance sheet.
F-6
Stock Options
Sodexho Alliance has acquired treasury shares in connection with its stock
option plans, which are included in marketable securities. A liability (and
corresponding expense) is recorded if at the closing date of the period, the
acquisition cost of the shares acquired is superior to 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.
Exceptional income and expenses
Exceptional income and expenses are recorded for significant items which,
due to their unusual character and non-recurring nature, 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 of fixed and intangible assets, or provisions or
expenses recorded in connection with stock option plans.
Earnings per Share
Earnings per share and diluted earnings per share are calculated using
methods recommended by Advice 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 resulted from the issuance of
these shares. For fiscal 2002 and 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, there are 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 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 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 currency devaluations 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 highly inflationary 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, 2004, none of the countries in
which the Group operates was considered to be highly inflationary.
F-7
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 at their respective fair values.
Goodwill
Goodwill represents the excess of acquisition cost over the identified
assets and liabilities assumed, including market share. 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). In fiscal 2002, an
exceptional charge of (euro)2.1 million was recorded relating to the IFREST
subsidiary. 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, 2004 and
based on discounted future cash flows.
Additional information pertaining to goodwill balances is provided in note
3.4.
Intangible Assets
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. 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, 2004, 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, 2002, 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 calculated based on
three-year plans prepared by management. These plans are extrapolated over a
longer period by applying a growth rate specific to the sector of activity and
geographical region concerned. Cash flows are discounted using a weighted
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 did not result in an impairment charge for the year ended
August 31, 2004.
Additional information pertaining to market share is provided in note 3.5.
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.
F-8
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 3.3.
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, 2004, the gross value of inventories was (euro)163 million.
Accounts Receivable
Accounts receivable from clients are recorded at their nominal 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.
F-9
Marketable Securities and Deposits
Marketable securities and deposits represent 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 3,033,771 Sodexho
Alliance shares purchased for a total amount of (euro)89 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 decline in value of Sodexho Alliance
shares as of August 31, 2002, the shares potentially in excess of those needed
to fund the stock option plan were provisioned by (euro)19 million during fiscal
2002 in order to reflect their market value as of August 31, 2002. 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.
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)158
million as of August 31, 2004) and as a guarantee for commitments entered into
by Mexican affiliates ((euro)10 million as of August 31, 2004).
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
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 Losses and Contingencies
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,
------------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Revenues by Operating Activity:
Food and Management Services
North America .......................... 5,031 5,427 6,039
Continental Europe ..................... 3,760 3,585 3,491
United Kingdom and Ireland ............. 1,351 1,453 1,681
F-10
Rest of World .......................... 1,103 974 1,119
------ ------ ------
11,245 11,439 12,330
Service Vouchers and Cards ................. 249 248 279
------ ------ ------
11,494 11,687 12,609
====== ====== ======
Fiscal year ended August 31,
------------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Revenues by Geographic Region:
North America .......................... 5,031 5,427 6,038
United Kingdom and Ireland ............. 1,357 1,465 1,691
France ................................. 1,814 1,734 1,715
Rest of Europe ......................... 2,075 1,978 1,901
Rest of the World ...................... 1,217 1,083 1,264
------ ------ ------
11,494 11,687 12,609
====== ====== ======
August 31,
------------------
2004 2003
------ ------
(millions of euro)
Net Fixed Assets by Operating Activity:
Food and Management Services
North America .......................................... 2,433 2,720
Continental Europe ..................................... 715 715
United Kingdom and Ireland ............................. 877 876
Rest of the World ...................................... 151 148
Service Vouchers and Cards ................................. 147 147
Holding Companies .......................................... 32 34
------ ------
4,355 4,640
====== ======
August 31,
------------------
2004 2003
------ ------
(millions of euro)
Net Fixed Assets by Geographic Region:
North America .......................................... 2,433 2,720
United Kingdom and Ireland ............................. 877 876
France ................................................. 355 364
Rest of Europe ......................................... 423 418
Rest of the World ...................................... 267 262
------ ------
4,355 4,640
====== ======
F-11
Fiscal year ended August 31,
2004 2003 2002
------ ------ ------
(millions of euro)
EBITA by Operating Activity:
Food and Management Services
North America .......................... 239 268 293
Continental Europe ..................... 171 167 150
United Kingdom and Ireland ............. 28 21 9
Rest of the World ...................... 37 18 31
Service Vouchers and Cards ................. 68 68 77
Corporate Expenses ......................... (28) (28) (35)
------ ------ ------
515 514 525
====== ====== ======
August 31,
--------------------
2004 2003
-------- --------
(millions of euro)
Group Employees by Geographic Zone:
North America........................................ 116,772 119,009
United Kingdom and Ireland........................... 49,053 51,843
France............................................... 30,359 30,465
Rest of Europe....................................... 53,132 49,897
Rest of the World.................................... 63,659 57,171
-------- --------
312,975 308,385
======== ========
3. ANALYSIS OF THE INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS
3.1 Financial Expense, Net
Year ended August 31,
-------------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Interest income............................. 31 24 39
Net variation in financial provisions....... (6) (3) (26)
Net exchange gains.......................... (1) (8) 1
Interest expense............................ (142) (165) (180)
------ ------ ------
(118) (152) (166)
====== ====== ======
The improvement of net financial expense of (euro)34 million in fiscal 2004
is mainly the result of decreases in foreign exchange losses of (euro)7 million
and interest expense of (euro)23 million resulting from reduced borrowings. The
improvement in net financial expense of (euro)14 million in fiscal 2003 was the
result of the prior year reflecting a (euro)19 million provision, as described
below. Exchange losses increased by (euro)9 million from fiscal 2002 when
significant exchange gains were realized by our Luncheon Ticket subsidiary on
its investments in strong currencies prior to the devaluation of the Argentine
peso.
Interest expense for fiscal 2004 primarily included (euro)30 million of
interest expense on the credit facility arranged in April 2001, and interest of
(euro)87 million on the 1996, 1999 and 2002 bond
F-12
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.
The increase in financial provisions in fiscal 2002 mainly arose from the
recording of a provision of (euro)19 million on Sodexho Alliance shares we
acquired during fiscal 2001 and fiscal 2002 in connection with employee stock
option programs in order to reflect the lower of cost or market. Interest
expense for fiscal 2002 million primarily included (euro)80 million of interest
expense on the credit facility arranged in April 2001, interest of (euro)58
million on the 1996, 1999 and 2002 bond issuances, and fees of (euro)11 million
incurred in connection with various intercompany swap arrangements.
3.2 Exceptional Items
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.
Net exceptional income totaled (euro)55 million in fiscal 2002 and
primarily included the following items:
o a gain of (euro)49 million on the sale of our kitchen equipment
business (Lockhart) in the United Kingdom;
o income of (euro)37 million from the reduction of the stock
compensation liability recorded in connection with the acquisition of
the remaining shares of Sodexho Marriott Services. The stock
compensation liability recorded related to the rollover of the Sodexho
Marriott Services stock options, which were unvested as of the
transaction date, into options to purchase Sodexho Alliance shares.
The liability was calculated at the acquisition date based on a share
price of (euro)53.47. A portion of this income resulted from our
purchase of Sodexho Alliance shares on the open market for a lower
price, to be used for the stock option program. The remaining amount
resulted from a decrease in the amount of provision required for "in
the money" options as a result of the decline in the price of Sodexho
Alliance shares;
o restructuring costs totaling (euro)11 million, primarily for loss
contracts, and receivables and fixed asset writedowns in the United
Kingdom; and,
o the recording of a (euro)11 million provision for legal and other
costs related to a discrimination lawsuit filed by ten current and
former Sodexho, Inc. employees.
3.3 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-13
Year ended August 31,
--------------------------
2004 2003 2002
------ ------ ------
Income before exceptional items, income taxes, income
from equity investees, and goodwill amortization .... 397 362 359
Exceptional items ...................................... (33) 1 55
------ ------ ------
Income before taxes .................................... 364 363 414
Sodexho Alliance tax rate .............................. 35.43% 35.43% 35.43%
------ ------ ------
Theoretical tax provision .............................. 129 129 147
Effect of differing jurisdictional tax rates ........... (3) 2 (10)
Permanent differences .................................. (13) (7) (4)
Other taxes ............................................ (3) 4 (4)
Net operating loss carryforwards utilized in the current
year but generated in prior years and not previously
recognized .......................................... (3) (2) (3)
Current year non-recognition of net operating loss
carryforwards .......................................... 1 5 8
------ ------ ------
Tax provision .......................................... 108 131 134
====== ====== ======
Current income taxes ................................... 122 140 129
Deferred income taxes .................................. (14) (9) 5
------ ------ ------
Total .................................................. 108 131 134
Withholding taxes ...................................... 1 3 2
------ ------ ------
Total income taxes ..................................... 109 134 136
====== ====== ======
F-14
3.4 Goodwill
Additions Decreases
August 31, during the during the Translation August 31,
2003 year year adjustments 2004
------------ ------------ ------------ ------------ ------------
(millions of euro)
Sodexho, Inc. ............................... Gross 969.0 1.4 (69.1) 898.5
Accumulated
Amortization (90.4) (29.9) (0.1) 5.2 (115.0)
Sodexho United Kingdom (1) ................. Gross 340.1 8.3 348.4
Accumulated
Amortization (90.5) (11.6) (2.3) (104.4)
Sodexho Pass do Brazil ..................... Gross 87.6 (1.2) 86.4
Accumulated
Amortization (12.5) (2.9) 0.2 (15.2)
Sogeres .................................... Gross 56.5 53.9
Accumulated
Amortization (4.0) (1.6) 2.6 (5.6)
Sodexho Scandinavia ........................ Gross 55.8 0.7 0.4 56.9
Accumulated
Amortization (10.8) (1.9) (0.1) (12.8)
Sodexho Spain .............................. Gross 28.5 28.5
Accumulated
Amortization (8.3) (1.0) (9.3)
Sodexho Belgium ............................ Gross 22.9 1.2 24.1
Accumulated
Amortization (8.7) (0.8) (9.5)
Luncheon Tickets ........................... Gross 22.5 10.3 32.8
Accumulated
Amortization (3.7) (0.9) (4.6)
Sodexho Italy .............................. Gross 17.7 17.7
Accumulated
Amortization (3.1) (0.7) (3.8)
Universal Services.......................... Gross 17.2 17.2
Accumulated
Amortization (2.1) (0.6) (2.7)
Sodexho Germany ............................ Gross 13.3 2.4 15.7
Accumulated
Amortization (4.7) (0.5) (5.2)
Other goodwill (gross amount less than 15 Gross
million)................................ 138.1 10.7 5.2 (0.8) 142.8
Accumulated
Amortization (38.2) (6.7) (4.3) 0.1 (40.5)
Total goodwill..............................
Cost.................................. 1,769.2 25.3 9.2 (62.4) 1,722.9
Accumulated amortization.............. (277.0) (59.1) (4.4) 3.1 (328.6)
------------ ------------ ------------ ------------ ------------
Net book value........................ 1,492.2 (33.8) 4,8 (59.3) 1,394.3
(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.
3.5 Intangible Assets
F-15
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:
North America (food and
management services) .... 1,665.7 (162.8) 1,502.9
North America (remote sites) 40.0 (3.9) 36.1
United Kingdom and Ireland . 540.4 13.7 554.1
Netherlands ................ 86.1 86.1
Sweden ..................... 77.4 0.8 78.2
Australia .................. 10.7 (0.2) 10.5
France ..................... 137.0 137.0
---------- ---------- ---------- ------------- ----------- ----------
Total Cost ................. 2,557.3 0.0 0.0 0.0 (152.4) 2,404.9
Diminutions in value
(Australia) ............. (1.0) (1.0) 0.0
---------- ---------- ---------- ------------- ----------- ----------
Net book value ............. 2,556.3 0.0 0.0 0.0 (152.4) 2,404.9
Other Intangible Assets (1):
Cost ....................... 187.3 12.2 3.0 (3.0) 3.2 196.7
Accumulated amortization and
diminutions in value .... (57.6) (34.8) (2.2) 2.1 5.6 (82.5)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ............. 129.7 (22.6) 0.8 (0.9) 8.8 114.2
Totals:
Cost ....................... 2,744.6 12.2 3.0 (3.0) (149.2) 2,601.6
Accumulated amortization and
diminutions in value .... (58.6) (34.8) (3.2) 2.1 5.6 (82.5)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ............. 2,686.0 (22.6) (0.2) (0.9) (143.6) 2,519.1
========== ========== ========== ============= =========== ==========
The methodology used for valuing market shares and the valuation as of
August 31, 2004 are described in note 1.
(1) Other intangible assets mainly includes software with a net value of
(euro)88 million as of August 31, 2004.
F-16
3.6 Property, Plant and Equipment
Additions Decreases Changes in
August 31, during the during the consolidation Translation August 31,
2003 year year scope adjustments 2004
---------- ---------- ---------- ------------- ----------- ----------
(millions of euro)
Land
Cost ................... 7.8 0.2 0.1 0.6 (0.3) 8.2
Diminutions in value ... (0.4) (0.2) (0.2) 0.2 (0.6)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 7.4 0.0 0.1 0.4 (0.1) 7.6
Buildings
Cost ................... 71.2 5.6 4.8 1.1 11.2 84.3
Accumulated depreciation (32.4) (4.2) (2.3) (0.3) (0.3) (34.9)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 38.8 1.4 2.5 0.8 10.9 49.4
Facilities and fixtures
Cost ................... 124.0 17.7 6.7 0.0 (2.1) 132.9
Accumulated depreciation (70.9) (16.3) (5.2) 0.0 1.9 (80.1)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 53.1 1.4 1.5 0.0 (0.2) 52.8
Plant and machinery
Cost ................... 346.4 53.6 26.3 2.3 (17.3) 358.7
Accumulated depreciation (218.2) (51.0) (21.2) (1.4) 17.2 (232.2)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 128.2 2.6 5.1 0.9 (0.1) 126.5
Vehicles
Cost ................... 81.4 4.7 8.8 0.1 (5.8) 71.6
Accumulated depreciation (61.3) (6.5) (7.6) 0.2 6.5 (53.5)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 20.1 (1.8) 1.2 0.3 0.7 18.1
Office and computer equipment
Cost ................... 194.9 25.4 14.7 (0.3) (14.9) 190.4
Accumulated depreciation (135.3) (27.3) (13.6) 0.4 11.8 (136.8)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 59.6 (1.9) 1.1 0.1 (3.1) 53.6
Other fixed assets
Cost ................... 122.7 27.2 3.0 (0.5) (36.9) 109.5
Accumulated depreciation (50.6) (12.7) (3.0) 0.9 3.8 (55.6)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ..... 72.1 14.5 0.0 0.4 (33.1) 53.9
Totals:
Cost ................... 948.4 134.4 64.4 3.3 (66.1) 955.6
Accumulated amortization (569.1) (118.2) (52.9) (0.4) 41.1 (593.7)
---------- ---------- ---------- ------------- ----------- ----------
Net book value ......... 379.3 16.2 11.5 2.9 (25.0) 361.9
========== ========== ========== ============= =========== ==========
3.6.1 Capital Leases
Assets recorded under capital lease arrangements totaled (euro)44 million
as of August 31, 2004 ((euro)48 million as of August 31, 2003), which was net of
accumulated amortization of (euro)79 million.
F-17
3.7 Financial investments
Increases/
(decreases) Changes in
August 31, during the consolidation Translation August 31,
2003 year scope adjustments 2004
---------- ----------- ------------- ----------- ----------
(millions of euro)
Investment securities
Cost ........................ 20.5 0.2 (1.6) 0.1 19.2
Diminutions in value......... (9.5) (0.7) (0.1) (10.3)
---------- ----------- ------------- ----------- ----------
Net book value .......... 11.0 (0.5) (1.6) 0.0 8.9
Other investments
Cost ........................ 22.2 (1.9) (0.2) 20.1
Diminutions in value ........ (1.3) 0.9 0.2 (0.2)
---------- ----------- ------------- ----------- ----------
Net book value .......... 20.9 (1.0) 0.0 0.0 19.9
Receivables from investees
Cost ........................ 13.7 5.4 0.3 19.4
Diminutions in value ........ 0.0 (0.1) (0.1)
---------- ----------- ------------- ----------- ----------
Net book value .......... 13.7 5.3 0.0 0.3 19.3
Loans receivable *
Cost ........................ 6.1 0.3 (0.2) 6.2
Diminutions in value ........ (0.1) (0.1)
---------- ----------- ------------- ----------- ----------
Net book value .......... 6.0 0.3 0.0 (0.2) 6.1
Deposits and other *
Cost ........................ 12.0 (0.6) 0.4 (0.5) 11.3
Diminutions in value ........ 0.0
---------- ----------- ------------- ----------- ----------
Net book value .......... 12.0 (0.6) 0.4 (0.5) 11.3
Total financial investments
Cost ........................ 74.5 3.4 (1.4) (0.3) 76.2
Diminutions in value ........ (10.9) 0.1 0.2 (0.1) (10.7)
---------- ----------- ------------- ----------- ----------
Net book value .......... 63.6 3.5 (1.2) (0.4) 65.5
========== =========== ============= =========== ==========
Included in working capital in the cash flow statement.
Principal investment securities in non-consolidated companies
As of August 31, 2004, investment securities principally include a
(euro)2.5 million investment in Stadium Australia Management, in which the Group
owns an equity interest of 15.8% of the shares, a (euro)2.8 million investment
in Leoc Japan Co (previously, Sodex Japan Company Ltd), of which it owns an
equity interest of 9.3%, and a (euro)1 million investment in Societe Privee de
Gestion, in which the Group owns an equity interest of 10.7%.
3.8 Investments in Equity Investees
Companies accounted for under the equity method are listed in note 4.5.
Gross
Current Current year Changes in Translation balance,
August 31, year net dividends consolidation adjustments August 31,
2003 income (loss) received scope and other 2004
---------- ------------- ------------ ------------- ------------- ----------
(millions of euro)
Equity method investees....... 19.3 1.5 (3.7) (3.2) 0.6 14.5
========== ============= ============ ============= ============= ==========
F-18
3.9 Prepaid Expenses, Other Receivables and Other Assets
Gross value, Diminutions in Net value, Net value,
August 31, value, August August 31, August 31,
2004 31, 2004 2004 2003
-------------- -------------- -------------- --------------
(millions of euro)
Advances ......................... 5 5 8
Other operating receivables....... 224 (2) 222 264
Investment receivables ........... 3 3 3
Financing receivables ............ 1 1 2
-------------- -------------- -------------- --------------
Total other receivables ...... 233 (2) 231 277
Prepaid expenses ................. 53 53 70
Deferred financing charges ....... 16 16 22
Other deferred charges (1) ....... 146 146 170
Deferred tax asset ............... 106 106 98
-------------- -------------- -------------- --------------
Total ........................ 554 (2) 552 637
============== ============== ============== ==============
(1) These items are classified as fixed assets in the cash flow statement.
3.10 Accounts and Other Receivables
Allowance
for Doubtful Net book Net book
Gross value, Accounts, value value
August 31, August 31, August 31, Due within Due from one Due after August 31,
2004 2004 2004 one year to five years five years 2003
------------ ------------ ------------ ------------ ------------- ------------ ------------
(millions of euro
Accounts
receivable ......... 1,446 (78) 1,368 1,368 1,383
============ ============ ============ ============ ============= ============ ============
Other receivables .. 233 (2) 231 204 27 277
============ ============ ============ ============ ============= ============ ============
Prepaid expenses ... 53 0 53 51 1 1 70
============ ============ ============ ============ ============= ============ ============
The allowance for doubtful accounts represents 5.4% of the accounts
receivable balance as of August 31, 2004 compared to 4.4% as of August 31, 2003.
3.11 Deferred Charges
Net book Net book
value, value,
August 31, Due within Due from one Due after August 31,
2004 one year to five years five years 2003
------------ ---------- ------------- ---------- -----------
Deferred financing costs 16 6 10 0 22
============ ========== ============= ========== ===========
Deferred charges 146 31 75 40 170
============ ========== ============= ========== ===========
Included in deferred charges are investments in client facilities,
principally in the U.S., totaling (euro)119 million as of August 31, 2004,
(euro)12 million of bid costs and (euro)7 million of start-up costs on long term
contracts, which are amortized over the shorter of their estimated useful life
and 10 years.
F-19
3.12 Deferred taxes
August 31,
2004 2003
------ ------
(millions of euro)
Deferred tax assets .................... 106 98
Deferred tax liabilities ............... (20) (17)
------ ------
Net deferred tax assets ................ 86 81
====== ======
As of August 31, 2004, deferred tax assets which were not recorded because
their realization was not considered probable totaled (euro)21 million,
including (euro)3 million of net operating loss carrybacks recorded by the
subsidiaries prior to their acquisition. As of August 31, 2003, deferred tax
assets which were not recorded because their realization was not considered
probable totaled (euro)25 million.
The principal items giving rise to deferred tax assets and liabilities were
as follows:
August 31, August 31,
2004 2003
------------------ ------------------
(millions of euro) (millions of euro)
Employee benefits liabilities ......... 75 94
Other temporary differences ........... 8 (22)
Net operating loss carryforwards....... 3 9
------------------ ------------------
Net deferred tax assets ............... 86 81
================== ==================
3.13 Cash
Cash is comprised of the following:
August 31, 2004 August 31, 2004 August 31, 2004
Gross Provisions Net
---------------- ---------------- ----------------
Marketable securities 548 12 536
Restricted cash 168 0 168
Cash 505 0 505
---------------- ---------------- ----------------
Total 1,221 12 1,209
================ ================ ================
Cash by type of currency as of August 31, 2004 was as follows:
Euro 675 55%
US Dollars 91 8%
Pounds Sterling 85 7%
Other currencies 370 30%
------ -----
Total 1,221 100%
====== =====
F-20
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, 2002 ...... 159,021,416 636 1,191 476 (76) (31) 202 2,398
=========== ======== ============ ========= ============== ========== ========== ============
Share capital
increase ............ 149 0
Reclassification of
deferred taxes on
share capital
increase expenses .... (5) 5 0
Dividend payments
by the holding
company (net of
dividends on
treasury shares) 107 (202) (95)
Net income for the
period ............... 162 162
Foreign currency
translation
adjustment ........... (218) (1) (216)
----------- -------- ------------ --------- -------------- ---------- ---------- ------------
Shareholders'
equity,
August 31, 2003 ...... 159,021,565 636 1,186 591 (294) (32) 162 2,249
=========== ======== ============ ========= ============== ========== ========== ============
Share capital
increase ............. 4,848 0
Reclassification of
deferred taxes on
share capital
increase expenses
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
=========== ======== ============ ========= ============== ========== ========== ============
3.13.1 Indirectly Held Treasury shares
As of August 31, 2004, Sofinsod had a 7.13% indirect interest in Sodexho
Alliance, SA through its 18.5% interest in the capital of Bellon SA, which in
turn held 38.53% 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
F-21
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
----------------
2004 2003
------ ------
(millions of euro)
Minority interests, beginning of year ..................... 66 73
Share capital increase .................................. 1 0
Dividends paid .......................................... (8) (11)
Net income for the period ............................... 14 9
Change in consolidation scope ........................... (47) (2)
Currency translation and other .......................... (1) (3)
------ ------
Minority interests, end of year ........................... 25 66
====== ======
3.15 Provisions for Contingencies and Losses
Provisions for contingencies and losses include the following amounts:
Release
without
corres- Translation Change in
August 31, ponding Differences Consolidation August 31,
2003 Increase Release charge and Other Scope 2004
---------- ---------- --------- --------- ----------- ------------- ----------
(millions of euro)
Payroll and other taxes ......... 37 7 (3) (2) (5) 34
Employee litigation ............. 16 9 (7) (1) (1) 16
Contract termination costs ...... 11 6 (4) (1) (3) 9
Client and supplier litigation .. 5 5 (1) 9
Equity method investees ......... 8 1 9
Stock options ................... 0 (3) 7 4
Sodexho Inc. acquisition
provisions. ..................... 4 (1) 3
Large repairs ................... 5 1 (3) 3
---------- ---------- --------- --------- ----------- ------------- ----------
Other 3 3 (2) 1 1 6
---------- ---------- --------- --------- ----------- ------------- ----------
89 31 (17) (7) (4) 1 93
========== ========== ========= ========= =========== ============= ==========
F-22
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, 2004:
Increases Releases
--------- --------
(millions of euro)
Operating ............................................ 15 (11)
Financial ............................................ 1 0
Exceptional .......................................... 15 (13)
--------- --------
31 (24)
========= ========
3.16 Borrowings and Financial Debt
Future payments on borrowings and other debt balances as of August 31, 2004
were due as follows:
Total Total
Less than one One to five More than five August 31, August 31,
year years years 2004 2003
------------- ------------- ---------------- ---------- ----------
(millions of euro)
Bonds 32 1,300 1,332 1,641
Euro ............................... 32 1,300 0 1,332 1,641
------------- ------------- ---------------- ---------- ----------
Total bonds ......................
Bank borrowings (1) 218 483 701 953
U.S. Dollars ....................... (41) (116) 20 (137) (388)
Euro ............................... 132 (1) 131 85
Pounds Sterling .................... 18 5 23 45
Other currencies ................... 327 371 20 718 695
------------- ------------- ---------------- ---------- ----------
Total bank borrowings ...........
Capital lease obligations 3 2 5 7
U.S. Dollars ....................... 11 22 5 38 38
Euro ............................... 3 3 3
Other currencies ................... 14 27 5 46 48
------------- ------------- ---------------- ---------- ----------
Total capital lease obligations .
Other borrowings 6 2 1 9 4
Euro ............................... 0 1
Other currencies ................... 6 2 1 9 5
------------- ------------- ---------------- ---------- ----------
Total other borrowings ...........
Bank overdraft balances 16 16 25
Euro ............................... 1 1
Pounds Sterling .................... 0 70
Other currencies ................... 6 6 4
------------- ------------- ---------------- ---------- ----------
Total bank overdrafts ........... 23 0 0 23 99
------------- ------------- ---------------- ---------- ----------
Total 402 1,700 26 2,128 2,488
============= ============= ================ ========== ==========
(1) Includes impact of swaps; see note 3.17 for further information.
F-23
3.16.1 Bond Issues
August 31, Translation August 31,
2003 Increase Repayments Differences 2004
--------- ---------- ---------- ----------- ----------
(millions of euro, except for number of securities)
1996 bond issuance -
FRF 2,000,000,000
Principal 305 305 0
Accrued interest 4 4 0
--------- ---------- ---------- ----------- ----------
Total 309 0 309 0 0
Number of securities 400,000 0
1999 bond issuance -
(euro)300,000,000
Principal 300 300
Accrued interest 6 6
--------- ---------- ---------- ----------- ----------
Total 306 306
Number of securities 300,000 300,000
2002 bond issuance -
(euro)1,000,000,000
Principal 1,000 1,000
Accrued interest 26 26
--------- ---------- ---------- ----------- ----------
Total 1,026 1,026
--------- ---------- ---------- ----------- ----------
Total 1,641 0 309 0 1,332
========= ========== ========== =========== ==========
(euro)305 million bond issue
The bonds issued on May 22, 1996 and totaling FRF 2 billion ((euro)305
million) were fully redeemed on June 7, 2004.
(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. The bonds carry interest at 4.625% per annum, which is
payable on March 16 annually. There were 300,000 bonds outstanding as of August
31, 2004.
(euro)1 billion bond issue
On March 25, 2002, Sodexho Alliance issued bonds totaling (euro)1 billion,
maturing on March 25, 2009, and carrying interest of 5.875% payable on March 25
annually.
3.16.2 Other Borrowings
Syndicated credit facility - April 2001
As of August 31, 2004, outstanding borrowings under the credit facility
negotiated in April 2001 with a syndicate of banks, totaled U.S. $577 million
((euro)476 million) and comprised the following:
o Tranche B, totaling U.S. $542 million, with quarterly repayments over
5 years, equated to (euro)447 million using the August 31,2004
exchange rate (pursuant to the swap agreement described in note 3.16.3
below, the U.S. dollar variable LIBOR-based rate on this debt has
largely been swapped for a fixed rate)
o Tranche C totaling U.S. $150 million and reimbursable in April, 2006,
of which U.S. $35 million ((euro)29 million using the August 31, 2004
exchange rate) was utilized, including letters of credit as of August
31, 2004.
F-24
Since the creation of this syndicated credit facility, (euro)2.252
million has been reimbursed, including U.S. $156 million ((euro)129
million), which was repaid in fiscal 2004.
Revolving credit facility - May 2004
In May 2004, the Group arranged a revolving credit facility of (euro)360
million in order meet its working capital needs including the repayment of the
(euro)305 million bond in June 2004. As of August 31, 2004, (euro)100 million
and U.S. $100 million were utilized (totaling (euro)183 million). This revolving
credit facility expires in April 2005 but the Group may extend it, at its
discretion, to April 2006, or at the discretion of the banks to April 2007.
Covenants
The (euro)300 million bond issue redeemable on March 2009 and the May 2004
revolving credit facility are not subject to financial covenants.
The credit facilities arranged in April 2001 with a syndicate of banks
amounted to U.S. $577 million as of August 31, 2004 and include accelerated
repayment conditions typical of this type of arrangement.
Also included in the terms are various specific covenants related to the
level of ownership in Sodexho Alliance by Bellon S.A., which is not permitted to
be lower than 33.3%, as well as to ratios pertaining to the Group's consolidated
net debt, its EBITA, and its net financial expense. As of August 31, 2004, the
Group was in compliance with these covenants.
Should a covenant requirement not be met, the credit facilities agent or
the banks representing more than two thirds of the credit facilities are
authorized to require accelerated repayment of the balance of the credit
facilities.
Accelerated repayment of the credit facilities gives the holders of the
March 2002 (euro)1 billion bond issue, and the banks included in the May 2004
revolving credit facility the right to demand repayment.
3.16.3 Interest rate swap agreements
In accordance with Group policy, the majority of variable rate borrowings
are swapped to fixed interest rates. If borrowings are arranged other than in
local currency, a currency swap agreement is negotiated. As of August 31, 2004,
79% percent of borrowings were at fixed rates (including those swapped) and the
average interest rate for fiscal 2004 was 5.20%.
F-25
3.17 Financial Instruments
The table below summarizes the impact on the financial statements of the
financial instruments described in note 3.16.
Borrowings in
Borrowings in Borrowings in Borrowings in other TOTAL
euro USD GBP currencies
------------- -------------- ------------- -------------- -------
(millions of euro)
a) Borrowings subject to cross currency agreements:
- UK borrowings
(GPB 91 million)
Due to the bank GBP 91 million 135 135
Due from the bank EUR 135 million (135) (135)
- Sodexho Scandinavia swaps
(SEK 75
million) 8 8
Due to the bank SEK 75 million
Due from the bank EUR 8.3 million (8) (8)
- Sodexho Inc. swaps
(US dollar 111.7 million)
95 95
Due to the bank US $114.9 million (130) (130)
Due from the bank EUR 129.6 million
2 (4) 2 0
- other subsidiaries swaps (not detailed)
b) Borrowings subject to interest rate swap 305 305
agreements
c) Borrowings not subject to hedging 134 301 0 13 448
arrangements
------------- -------------- ------------- -------------- -------
Total borrowings (137) 701 131 23 718
============= ============== ============= ============== =======
3.17.1 Cross currency swaps
In August 2004, a cross currency swap was negotiated (GBP 91 million
against (euro)135 million) on an intercompany loan totaling GBP 91 million. This
swap terminates during fiscal 2005.
In June 1999, a cross currency swap was negotiated on a loan of (euro)50.1
million to Sodexho Scandinavia Holding AB (4.15% against a variable interest
rate in Swedish crowns). As of August 31, 2004, the debt at the swapped rate
totaled SEK 75 million against (euro)8.3 million. The swap terminates in fiscal
2005.
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
F-26
August 31, 2004, 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.
3.17.2 Interest Rate Swaps
Several interest rate swaps (3.3% to 5.9% against U.S. dollar LIBOR) with
the following maturities were negotiated in order to convert variable rate
interest to fixed on a portion of Sodexho Inc.'s borrowings totaling U.S.$370
million ((euro)305 million).
F-27
Fair Values of Financial Instruments
Following are the fair values of the Group's financial instruments as of
August 31, 2004:
Net book
ASSETS value Fair value Difference
---------- -------------- -----------
(millions of euro)
Financial fixed assets
Investments............................................... 9 9 0
Receivables from investees................................ 20 20 0
Loans receivable.......................................... 6 6 0
Other long-term investments............................... 20 20 0
Other financial fixed assets.............................. 11 11 0
---------- -------------- -----------
Total financial fixed assets.............................. 66 66 0
Equity method investees............. 14 14 0
Marketable securities and other
Cash...................................................... 92 92 0
Term deposits............................................. 131 131 0
Debt securities........................................... 100 100 0
Mutual funds - SICAV...................................... 116 116 0
Listed securities......................................... 3 3 0
Mutual funds - other...................................... 5 5 0
Sodexho Alliance shares (1)............................... 89 65 (24)
---------- -------------- -----------
Total marketable securities and other .................... 536 512 (24)
---------- -------------- -----------
Restricted cash ......................................... 168 168 0
Total..................................................... 1,231 1,207 (24)
========== ============== ===========
LIABILITIES
Bonds
2002 (euro)1 billion bond issuance........................ 1,026 1,095 69
1999 (euro)300 million bond issuance...................... 306 306 0
---------- -------------- -----------
Total bonds............................................ 1,332 1,401 69
Bank debt
Sodexho, Inc. borrowings.................................. 607 608 1
Swap on intercompany loan with Sodexho, Inc............... (35) (37) (2)
Sodexho Alliance borrowings............................... 100 100 0
Other bank debt........................................... 46 46 0
---------- -------------- -----------
Total bank debt........................................ 718 717 (1)
Bank overdrafts. ......................................... 23 23 0
Other borrowings.......................................... 55 55 0
---------- -------------- -----------
Total borrowings.......................................... 2,128 2,196 68
========== ============== ===========
Other liabilities
SMS acquisition debt (1).................................. 28 4 (24)
---------- -------------- -----------
Total..................................................... 2,156 2,200 44
========== ============== ===========
(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, 2004, the fair value
of the Sodexho Alliance shares was (euro)24 million lower than its net book
value; the fair value of the related debt was (euro)24 million lower than its
net book value.
3.18 Maturities of other liabilities
F-28
Net value at Less More
August 31, than 1 1 to 5 than 5 August
2004 year years years 31, 2003
------------ ------ ------ ------ ---------
Advances from clients............ 123 122 0 1 171
Tax and employee liabilities..... 1,048 912 8 128 974
Other operating
liabilities...................... 64 63 1 0 59
Investment related liabilities... 28 1 27 0 37
Financing related liabilities.... 0 0 0 0 1
Deferred revenues................ 48 44 3 1 35
----------- ------ ------ ------ ---------
Other liabilities................ 1,311 1,142 39 130 1,277
Deferred tax liabilities (1)..... 20 -- -- -- 17
----------- ------ ------ ------ ---------
Total ........................... 1,331 -- -- -- 1,294
=========== ====== ====== ====== =========
(1) Maturity not available.
3.19 Statement of Cash Flows - Additional Information
3.19.1 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.
Translation Change in
August 31, Increase/ Securitization adjustments consolidation August 31,
2003 (decrease) (2) scope 2004
---------- ---------- -------------- ------------ ------------- ----------
Loans receivable and other
financial investments .......... 18 18
Inventories .................... 170 (8) 1 163
Advances to
suppliers ...................... 8 (3) 5
Accounts receivable ............ 1,383 5 36 (62) 6 1,368
Other operating receivables .... 264 (31) (12) 1 222
Prepaid
expenses ....................... 70 (14) (3) 53
---------- ---------- -------------- ------------ ------------- ----------
Operating
receivables .................... 1,913 (43) 36 (85) 8 1,829
Investment related receivables.. 3 3
Financing related
receivables .................... 24 29 (36) -- -- 17
---------- ---------- -------------- ------------ ------------- ----------
Changes in assets .............. 1,940 (14) 0 (85) 8 1,849
========== ========== ============== ============ ============= ==========
Advances from
customers ...................... 171 (43) (6) 1 123
Accounts
payable ........................ 1,128 (47) (53) 7 1,035
Vouchers payable ............... 794 80 (28) (3) 843
F-29
Taxes and social charges
payable ........................ 974 111 (39) 2 1,048
Other operating payables ....... 59 6 (1) -- 64
Deferred revenues .............. 35 13 -- -- 48
---------- ---------- ----------- ------------- ----------
Operating liabilities .......... 3,161 120 (127) 7 3,161
Investment related payables .... 37 (9) 28
Financing related payables ..... 1 (1) 0
---------- ---------- ----------- ------------- ----------
Changes in liabilities ......... 3,199 110 (127) 7 3,189
========== ========== =========== ============= ==========
Net effect on working capital:
Change in working capital
from operating activities ..... 163
=====
Change in working capital
from investment activities ..... (9)
=====
Change in working capital
from financing activities ...... (30)
=====
(1) This item is included in Financial Investments in the Balance Sheet.
(2) The securitization affects the changes in working capital from financing
activities.
3.19.2 Changes in financial borrowings
Change in
Increase/ Translation consolidation August
August 31, 2003 (decrease) adjustments scope 31, 2004
--------------- ---------- ----------- ------------- --------
Bonds 1,641 (309) 1,332
Bank borrowings 695 113 (90) 718
Bank overdraft balances 99 (78) 1 1 23
Capital lease obligations 48 (1) (1) 46
Other borrowings 5 5 (1) 9
--------------- ---------- ----------- ------------- --------
2,488 (270) (91) 1 2,128
=============== ========== =========== ============= ========
3.19.3 Acquisitions and disposals of tangible and intangible assets
and subsidiaries
Acquisitions Disposals Net
------------ --------- -----
Tangible and intangible assets (*) (176) 14 (162)
Variation in financial assets (5) 6 1
Less: tax effects on disposals (1) (1)
------------ --------- -----
Total change in tangible and intangible assets (181) 19 (162)
Acquisitions (disposals) of subsidiaries (79) 1 (78)
Less: cash in acquired and disposed of 3 (2) 1
companies, net
Less: tax effects on disposals -- 3 3
Net cash from changes in consolidation scope (76) 2 (74)
------------ --------- -----
TOTAL (257) 21 (236)
============ ========= =====
(*) includes other deferred charges relating to fixed assets.
F-30
3.20 Commitments
3.20.1 Off balance sheet commitments
Commitments made as of August 31, 2004 (millions of euro) were as follows:
-----------------------------------------------------------------------------------------------------
August 31, 2004 August 31, 2003
-----------------------------------------------------------------------------------------------------
< 1 year 1 - 5 years > 5 years Total Total
Financial guarantees to third parties 46 19 9 74 59
Performance bonds on operating leases 17 17 4 38 33
Client performance bonds 6 10 0 16 48
Other commitments 4 3 0 7 10
-----------------------------------------------------------------------------------------------------
Total 73 49 13 135 150
-----------------------------------------------------------------------------------------------------
With respect to the above table, there are no other significant off
balance sheet commitments.
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)10 million as of August 31, 2004. Other surety
arrangements (security granted over equipment or buildings used for collateral)
agreed to by Sodexho Alliance and its subsidiaries during fiscal 2004 were not
significant.
3.20.2 Commitments to purchase or sell shares in companies
Commitments made:
Abra (subsidiary of Sodexho Scandinavian Holding AB)
Through its Sodexho Scandinavian Holding AB subsidiary, the Group has
entered into a put agreement with the minority shareholders of Abra (located in
Norway) to acquire the remaining 8% of the shares outstanding by November 2005,
at the latest, for a price based upon a profit multiple. The minimum purchase
price amount per the agreement is (euro)0.5 million and it is estimated at
(euro)1.9 million, based on current projections.
Altys Multiservices
The Group has entered into a put agreement to acquire 18.5% of the shares
of Altys Multiservices from 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.
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.
Sodexho MM Catering
F-31
The Group has entered into a put agreement to acquire the remaining 9.5% of
the shares of Sodexho MM Catering from the minority shareholders at any time for
a purchase price based on a multiple of the average economic profits as defined
contractually for a minimum amount of (euro)0.2 million.
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.
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.
3.20.3 Other commitments
Securitization
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) within a program authorizing a maximum amount of GBP 55
million.
The decrease in securitization of (euro)36 million (excluding currency
effects) compared to August 31, 2003 is included under the caption "working
capital from financing activities" in the cash flow statement.
3.20.4 Commitments for stock options in Sodexho Alliance shares
The group, through its stock option plans, is committed to deliver
2,168,641 Sodexho Alliance shares to employees of Sodexho, Inc. at an average
price of USD 27.30 in connection with the acquisition of 53% of the shares of
Sodexho Marriott Services in June 2001.
F-32
Exercise period
---------------
Issuance date From To Subscription price Number of shares
------------- ------------- ----------- ------------------ ----------------
June, 2001 Before August April, 2011 U.S.$ 28.16 1,898,259
31,2004
June, 2001 Fiscal 2005 April, 2011 U.S.$ 21.31 270,382
----------------
TOTAL 2,168,641
================
To date, 5,669,293 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 shares
Issuance date From To Exercise price on August 31, 2004
------------- ------------- ------------- -------------- ------------------
January, 2000 March, 2004 January, 2005 39.86 euros 69,026
April, 2000 March, 2004 January, 2005 39.86 euros 2,251
January, 2001 March, 2005 January, 2006 48.42 euros 298,761
January, 2002 January, 2006 January, 2007 47.00 euros 394,340
January, 2002 January, 2006 January, 2008 47.00 euros 1,068,242
September, 2002 April, 2006 March, 2008 47.00 euros 12,000
October, 2002 October, 2006 October, 2007 21.87 euros 2,730
January, 2003 January, 2004 January, 2009 24.00 euros 2,739,100
June, 2003 January, 2004 January, 2009 24.00 euros 84,660
January, 2004 January, 2005 January, 2010 24.50 euros 998,183
-----------
TOTAL 5,669,293
===========
(Number of options) Fiscal 2004
------------------- -----------
Options outstanding as of September 1, 2003 5,085,838
Options granted 1,009,683
Options exercised (4,150)
Forfeitures due to employee departures (273,739)
Forfeitures due to unmet performance objectives (148,339)
-----------
Options outstanding as of August 31, 2004 5,669,293
===========
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)3.5 million was recorded in the consolidated financial
statements as of August 31, 2004.
3.20.5- Commitments for operating leases
F-33
As of August 31, 2004, over the residual life of operating leases, the
total future payments are as follows:
o Less than one year: (euro)100 million
o Greater than one year and less than three years (euro)121 million
o Greater than three years and less than five years (euro)53 million
o More than five years: (euro) 24 million
Operating lease commitments relate to central kitchens under tri-partite
agreements and counter-guarantees from French local authorities for (euro)52
million; rent for office space for (euro)132 million; and various equipment
(site equipment, vehicles, and other equipment) for (euro)114 million.
3.21 Retirement plans and other commitments
The following table presents defined benefit obligations by geographic
zones:
United
Kingdom and Continental Others August 31, August 31,
Ireland Europe 2004 2003
----------- ----------- ------ ---------- ----------
Benefit obligation to employees 376 150 9 535 477
Liability recorded 0 84 9 93 80
Fair value of assets 255 43 0 298 269
----------- ----------- ------ ------- ------
Deficit 121 23 0 144 128
=========== =========== ====== ======= ======
Obligations recorded in the balance sheet
Obligations recorded as a liability in the balance sheet relate to
retirement indemnities and related payments totaling (euro)93 million as of
August 31, 2004.
Other obligations
As of August 31, 2004, obligations, which were not recorded as a liability
in the balance sheet totaled (euro)442 million.
United Kingdom
In the United Kingdom, the retirement plan obligations of (euro)376 million
for which there is an external fund relate to a complementary retirement plan
based on a percentage of ending salary (regarding employees working in the
private sector) or based on comparable payments in the public sector (regarding
employees working in the public sector).
The obligations have been calculated using the projected unit credit
valuation method using the following assumptions:
o Discount rate........................... 5.60%
o Rate of salary increase................. 4.25%
o Inflation rate.......................... 3.00%
o Rate of return on plan assets........... 7.40%
It was decided to close the plan to new employees effective July 1, 2003
and to increase the contributions to the funds, which should allow for full
coverage of the obligation at the end of a period of eight years.
Continental Europe
F-34
In Continental Europe the main defined benefit plan is in the Netherlands,
where retirement plan indemnities are provided to certain employees. As of
August 31, 2004, obligations which were not recorded in the balance sheet
totaled (euro)65 million.
The obligations are calculated using the projected unit credit valuation
method with the following assumptions:
o Discount rate........................... 5.25%
o Rate of salary increase................. 3.00%
o Inflation rate.......................... 2.00%
o Rate of return on plan assets........... 5.90%
United States
Our subsidiaries in the United States do not have significant defined benefit
plans. Defined contribution plans are in place.
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:
--------------------------------------------------------------------
o Compensation (euro)0.27 million
o Advances and loans None
o Defined contribution retirement plan (euro)0.05 million
4.2 Related parties
The subsidiaries of the Sodexho Alliance Group paid Sodexho Alliance SA
(euro)67 million for management and coordination services provided during fiscal
2004.
Bellon SA holds 38.53% of the capital of Sodexho Alliance.
Pursuant to an agreement between Bellon SA and Sodexho Alliance, Bellon SA
invoiced Sodexho Alliance (euro)3 million for consulting and advisory services
during fiscal 2004.
Sodexho Alliance paid dividends of (euro)37.5 million to Bellon SA during
fiscal 2004.
4.3 Litigation
Mc Reynolds vs. Sodexho Marriott Services, Inc.
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 on the basis of their race. The plaintiffs' complaint
alleges unspecified damages on behalf of a class relating to the period
commencing March 27, 1998 and ending on July 1, 2001, as well as reimbursement
of plaintiffs' costs and attorneys' fees. After substantially completing
discovery, Sodexho estimates the size of the class to be approximately 2,400
current and former employees of Sodexho, Inc. Sodexho, Inc. has denied the
plaintiffs' allegations and is vigorously defending the lawsuit. On June 25,
2002, the district court certified the case as a class action for purposes of
determining liability. Sodexho, Inc.'s requests for permission to appeal this
decision have been denied by both the U.S. Court of Appeals for the District of
Columbia and the U.S. Supreme Court. In December 2003, the court directed the
parties to engage in mediation, but no settlement has been reached. In October
2004, the Judge scheduled a hearing on two Sodexho pre-trial motions, including
a motion for summary judgment for early December 2004 and in the event that the
matter proceeds to trial, the judge has indicated a trial date of April 2005. A
resolution of the plaintiffs' claims in
F-35
their favor could have a material effect on our net income. As from fiscal 2002,
a provision of U.S. $10 million ((euro)8.3 million as of August 31, 2004) has
been maintained for defense costs anticipated in connection with this lawsuit.
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,
2004.
4.5 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 fourteen companies consolidated for
the first time in fiscal 2004. 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 fifteen companies accounted for by
the equity method. All other companies are fully consolidated.
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
France
--------------------------------------------------------------------------------------------------------------------
Societe Francaise de Restauration FMS France
--------------------------------------------------------------------------------------------------------------------
Comrest FMS France
--------------------------------------------------------------------------------------------------------------------
Sofomedi FMS France
--------------------------------------------------------------------------------------------------------------------
Sorescom FMS France
--------------------------------------------------------------------------------------------------------------------
Sorepar FMS France
--------------------------------------------------------------------------------------------------------------------
Altys Multiservice 80% 80% FMS France
--------------------------------------------------------------------------------------------------------------------
Altys Gestion FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Francaise de Services FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Francaise de Restauration et Services FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Marseillaise de Restauration et Services FMS France
--------------------------------------------------------------------------------------------------------------------
Sodequip FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Havraise de Restauration et Services FMS France
--------------------------------------------------------------------------------------------------------------------
O.L. Restauration 70 % 70 % FMS France
--------------------------------------------------------------------------------------------------------------------
Ecorest 51 % 51 % FMS France
--------------------------------------------------------------------------------------------------------------------
Sodexho Prestige FMS France
--------------------------------------------------------------------------------------------------------------------
S.I.R. FMS France
--------------------------------------------------------------------------------------------------------------------
C.I.R. FMS France
--------------------------------------------------------------------------------------------------------------------
Siges FMS France
--------------------------------------------------------------------------------------------------------------------
La Normande SA FMS France
--------------------------------------------------------------------------------------------------------------------
La Normande Sarl FMS France
--------------------------------------------------------------------------------------------------------------------
Hedelrest FMS France
--------------------------------------------------------------------------------------------------------------------
R.G.C. FMS France
--------------------------------------------------------------------------------------------------------------------
F-36
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
France
--------------------------------------------------------------------------------------------------------------------
Sogerest FMS France
--------------------------------------------------------------------------------------------------------------------
Sagere FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Bretonne de Restauration et Services FMS France
--------------------------------------------------------------------------------------------------------------------
Societe Thononaise de Restauration et Services FMS France
--------------------------------------------------------------------------------------------------------------------
Sogeres (consolide) FMS France
--------------------------------------------------------------------------------------------------------------------
Bateaux Parisiens (consolide) 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 SA 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 Europe Continentale HOL France
--------------------------------------------------------------------------------------------------------------------
Sodexho Asie Oceanie HOL France
--------------------------------------------------------------------------------------------------------------------
Sodexho I.S & 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 Gardiennage FMS France
--------------------------------------------------------------------------------------------------------------------
Sodexho Antilles FMS France
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Americas
--------------------------------------------------------------------------------------------------------------------
Sodexho, Inc. (consolide) FMS USA
--------------------------------------------------------------------------------------------------------------------
Sodexho Vending Services 51% 51% FMS USA
--------------------------------------------------------------------------------------------------------------------
Sodexho Canada FMS Canada
--------------------------------------------------------------------------------------------------------------------
EM NANA 49% 49% FMS USA
--------------------------------------------------------------------------------------------------------------------
F-37
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Americas
--------------------------------------------------------------------------------------------------------------------
Spirit Cruises FMS USA
--------------------------------------------------------------------------------------------------------------------
Delta Catering Management 49% 49% FMS USA
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho USA, Inc. HOL USA
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Partnership FMS USA
--------------------------------------------------------------------------------------------------------------------
Universal Services Enterprises LLC FMS USA
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass USA SVC USA
--------------------------------------------------------------------------------------------------------------------
Energy Catering Services LLC FMS USA
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Empresa de servicios y Campamentos FMS Venezuela
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Services de Venezuela Venezuela FMS Venezuela
--------------------------------------------------------------------------------------------------------------------
Universal Services do Brazil Ltda FMS Brazil
--------------------------------------------------------------------------------------------------------------------
Sodexho Do Brazil Comercial Ltda FMS Brazil
--------------------------------------------------------------------------------------------------------------------
Sodexho Argentina FMS Argentina
--------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------
Doyon Universal Services JV 50% 50% FMS USA
--------------------------------------------------------------------------------------------------------------------
Sodexho Peru FMS Peru
--------------------------------------------------------------------------------------------------------------------
Sodexho Sitios Remotos Peru FMS Peru
--------------------------------------------------------------------------------------------------------------------
EM BAS 33% 33% FMS Chile
--------------------------------------------------------------------------------------------------------------------
EM BAS II 33% 33% FMS Chile
--------------------------------------------------------------------------------------------------------------------
Siges Chile FMS Chile
--------------------------------------------------------------------------------------------------------------------
Sodexho Chile (consolide) FMS Chile
--------------------------------------------------------------------------------------------------------------------
Sodexho Servicios de Personal FMS Mexico
--------------------------------------------------------------------------------------------------------------------
Sodexho Mantenimiento y Servicios FMS Mexico
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass do Brazil HOL Brazil
--------------------------------------------------------------------------------------------------------------------
Cardapio Informatica SVC Brazil
--------------------------------------------------------------------------------------------------------------------
National Administracao de Restaurentes SVC Brazil
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass do Brazil Servicio e Comercia SVC Brazil
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Chile SVC Chile
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Venezuela 64% 64% SVC Venezuela
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass de Colombia 51% 51% SVC Colombia
--------------------------------------------------------------------------------------------------------------------
N Sodexho Pass Perou SVC Peru
--------------------------------------------------------------------------------------------------------------------
N Sodexho Pass Panama 51% 51% SVC Panama
--------------------------------------------------------------------------------------------------------------------
Luncheon Tickets SVC Argentina
--------------------------------------------------------------------------------------------------------------------
Prestaciones Mexicanas SA de CV SVC Mexico
--------------------------------------------------------------------------------------------------------------------
Sodexho Servicios Operativos SVC Venezuela
--------------------------------------------------------------------------------------------------------------------
F-38
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
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 SVC Morocco
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Guinea Ecuatorial 70% 70% FMS Guinea
Equatorial
--------------------------------------------------------------------------------------------------------------------
Sodexho Cameroon 70% 70% FMS Cameroon
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Congo FMS Congo
--------------------------------------------------------------------------------------------------------------------
Sodexho Southern Africa (consolidated) 55% 55% FMS South
Africa
--------------------------------------------------------------------------------------------------------------------
Sodexho Investments Ltd. HOL South
Africa
--------------------------------------------------------------------------------------------------------------------
Sodexho Tanzania FMS Tanzania
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Europe
--------------------------------------------------------------------------------------------------------------------
Sodexho Monaco FMS Monaco
--------------------------------------------------------------------------------------------------------------------
Sodexho Belgique FMS Belgium
--------------------------------------------------------------------------------------------------------------------
Altys Belgique FMS Belgium
--------------------------------------------------------------------------------------------------------------------
Restaura FMS Belgium
--------------------------------------------------------------------------------------------------------------------
N SIMA FMS Belgium
--------------------------------------------------------------------------------------------------------------------
Altys Suisse FMS Switzerland
--------------------------------------------------------------------------------------------------------------------
Altys Deutschland FMS Germany
--------------------------------------------------------------------------------------------------------------------
N Altys Austria GmbH FMS Austria
--------------------------------------------------------------------------------------------------------------------
N Altys Republique Tcheque FMS Czech
Republic
--------------------------------------------------------------------------------------------------------------------
Sodexho Luxembourg (consolide) FMS Luxembourg
--------------------------------------------------------------------------------------------------------------------
Sodexho Italia (consolide) FMS Italy
--------------------------------------------------------------------------------------------------------------------
Sodexho D.O.O. FMS Slovenia
--------------------------------------------------------------------------------------------------------------------
Sodexho Oy FMS Finland
--------------------------------------------------------------------------------------------------------------------
Coffee Queen Oy 92% 92% FMS Finland
--------------------------------------------------------------------------------------------------------------------
Sodexho Scandinavian Holding AB (consolide) FMS Sweden
--------------------------------------------------------------------------------------------------------------------
Sodexho Espana (consolide) FMS Spain
--------------------------------------------------------------------------------------------------------------------
Sodexho Portugal II Restauracao e Servicios FMS Portugal
--------------------------------------------------------------------------------------------------------------------
Sodexho Portugal Catering FMS Portugal
--------------------------------------------------------------------------------------------------------------------
Sodexho Hellas 56% 56% FMS Greece
--------------------------------------------------------------------------------------------------------------------
Sodexho Catering & Services GmbH FMS Germany
--------------------------------------------------------------------------------------------------------------------
Sodexho S.C.S.GmbH FMS Germany
--------------------------------------------------------------------------------------------------------------------
Plauen Menu 90% FMS Germany
--------------------------------------------------------------------------------------------------------------------
Barenmenu GmbH FMS Germany
--------------------------------------------------------------------------------------------------------------------
N HDL Catering FMS Germany
--------------------------------------------------------------------------------------------------------------------
F-39
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Europe
--------------------------------------------------------------------------------------------------------------------
Sodexho A.O. FMS Russia
--------------------------------------------------------------------------------------------------------------------
Sodexho Euroasia FMS Russia
--------------------------------------------------------------------------------------------------------------------
Imagor Services HOL Belgium
--------------------------------------------------------------------------------------------------------------------
Sodexho Spolecne Stravovani FMS Czech
Republic
--------------------------------------------------------------------------------------------------------------------
Sodexho Skolni Jidelny Sro FMS Czech
Republic
--------------------------------------------------------------------------------------------------------------------
Sodexho Spolocne 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 91% 91% 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
--------------------------------------------------------------------------------------------------------------------
N, EM Sodexho Catalyst Romford Havering 25% 25% FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
N, 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
--------------------------------------------------------------------------------------------------------------------
EM Peterborough Prison Management Limited 33% 33% FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
F-40
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Europe
--------------------------------------------------------------------------------------------------------------------
EM Ashford Prison Services Limited 33% 33% FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Sodexho Holding 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 FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Universal Services Europe Ltd FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho The Netherlands BV FMS Netherlands
--------------------------------------------------------------------------------------------------------------------
Universal Services Europe - Iceland 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
--------------------------------------------------------------------------------------------------------------------
Sodexho Holdings - Ireland Ltd HOL Ireland
--------------------------------------------------------------------------------------------------------------------
Sodexho Ireland Limited FMS Ireland
--------------------------------------------------------------------------------------------------------------------
Sodexho BV FMS Netherlands
--------------------------------------------------------------------------------------------------------------------
Sodexho Nederland BV FMS Netherlands
--------------------------------------------------------------------------------------------------------------------
Sodexho Prestige BV 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 95% SVC Spain
--------------------------------------------------------------------------------------------------------------------
Ticket Menu 95% 95% SVC Spain
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Austria GmbH SVC Austria
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Limited SVC United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Hungaria Kft SVC Hungary
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Bulgaria SVC Bulgary
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Ceska Republika SVC Czech
Republic
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Slovak Republic SVC Slovakia
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Polska SVC Poland
--------------------------------------------------------------------------------------------------------------------
Sodexho Restoran Servisleri AS 80% 80% SVC Turkey
--------------------------------------------------------------------------------------------------------------------
N Netser 40% 50% SVC Turkey
--------------------------------------------------------------------------------------------------------------------
F-41
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Europe
--------------------------------------------------------------------------------------------------------------------
Sodexho Pass Romania SVC Roumania
--------------------------------------------------------------------------------------------------------------------
Catamaran Cruisers FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Compagnie Financiere Aurore International HOL Belgium
--------------------------------------------------------------------------------------------------------------------
Pakzon HOL Netherlands
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Asia - Pacific, Middle East
--------------------------------------------------------------------------------------------------------------------
Kelvin Catering Ltd 49% 49% FMS United Arab
Emirates
--------------------------------------------------------------------------------------------------------------------
Teyseer Services Company 49% 49% FMS Qatar
--------------------------------------------------------------------------------------------------------------------
Restauration Francaise (New Caledonia) 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
--------------------------------------------------------------------------------------------------------------------
N,EM Sodexho Healthcare Support Services (Thailande) 26% 26% FMS Thailand
--------------------------------------------------------------------------------------------------------------------
Sodexho Korea Co Ltd FMS Korea
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Eurasia FMS United
Kingdom
--------------------------------------------------------------------------------------------------------------------
Aims Corporation FMS Australia
--------------------------------------------------------------------------------------------------------------------
Universal Remote Sites Services FMS Singapore
--------------------------------------------------------------------------------------------------------------------
PT Universal Ogden Indonesia 50% 50% FMS Indonesia
--------------------------------------------------------------------------------------------------------------------
N 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
--------------------------------------------------------------------------------------------------------------------
Universal Sodexho Pty Ltd FMS Australia
--------------------------------------------------------------------------------------------------------------------
Sodexho (Tianjing) Services Management Company Ltd FMS China
--------------------------------------------------------------------------------------------------------------------
N Sodexho Shanghai Management Services FMS China
--------------------------------------------------------------------------------------------------------------------
Sodexho Services Company Ltd Shanghai FMS China
--------------------------------------------------------------------------------------------------------------------
Sodexho (Suzhou) Services Company Ltd FMS China
--------------------------------------------------------------------------------------------------------------------
Beijing Sodexho Services 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
--------------------------------------------------------------------------------------------------------------------
N Sodexho Pass Inc. 60% 60% SVC Philippines
--------------------------------------------------------------------------------------------------------------------
F-42
--------------------------------------------------------------------------------------------------------------------
% voting Principal
% interest rights activity Country
--------------------------------------------------------------------------------------------------------------------
Asia - Pacific, Middle East
--------------------------------------------------------------------------------------------------------------------
Sodexho Services Lebanon 60% 60% FMS Lebanon
--------------------------------------------------------------------------------------------------------------------
S.I.S.A. UAE FMS United Arab
Emirates
--------------------------------------------------------------------------------------------------------------------
N, 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
F-43
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:
5.1 Reconciliation of consolidated net income (loss)
For the year ended August 31,
---------------------------------
2004 2003 2002
------ ------ ------
(millions of euro, except per-share
amounts)
Net income........................................................ 183 162 202
------ ------ ------
U.S. GAAP adjustments: (1)
(a) Business combinations......................................... (24) (39) (100)
(b) Stock-based compensation...................................... (4) 5 (10)
(c) Pensions and postretirement benefits.......................... (13) (27) (3)
(d) Detachable stock purchase warrants............................ (5) (7) (7)
(e) Derivative financial instruments.............................. (4) 22 (6)
(f) Treasury shares............................................... 2 4 19
(g) Other, net.................................................... 3 (2) (4)
(h) Deferred income tax effect.................................... 31 29 45
------ ------ ------
Total U.S. GAAP adjustments....................................... (14) (15) (66)
------ ------ ------
Net income, as determined under U.S. GAAP......................... 169 147 136
====== ====== ======
Earnings per share, as determined under U.S. GAAP
(j) Basic earnings per share...................................... 1.08 0.94 0.86
(j) Diluted earnings per share.................................... 1.08 0.94 0.85
---------------------------------------
(1) Refer to note 5.4 for explanations.
F-44
5.2 Reconciliation of consolidated shareholders' equity
August 31,
--------------------
2004 2003
------ ------
(millions of euro)
Shareholders' equity................................. 2,192 2,249
U.S. GAAP adjustments: (1)
(a) Business combinations............................ (350) (352)
(b) Stock-based compensation......................... -- 4
(c) Pensions and postretirement benefits............. (66) (63)
(d) Detachable stock purchase warrants............... -- 5
(e) Derivative financial instruments................. 3 6
(f) Treasury shares.................................. (111) (78)
(g) Other, net....................................... 15 12
(h) Deferred income tax effects...................... (31) (47)
------ ------
Total U.S. GAAP adjustments.......................... (540) (513)
------ ------
Shareholders' equity, as determined under U.S. GAAP.. 1,652 1,736
====== ======
---------------------------------------
(1) Refer to note 5.4 for explanations.
5.3 Statement of comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", established standards for
the reporting and display of comprehensive income and its components.
Comprehensive income includes net income and all changes in equity during a
period that relate to transactions with other than owners, including foreign
currency translation adjustments, unrealized gains and losses on marketable
securities classified as available-for-sale, minimum pension liability
adjustments and certain unrealized gains and losses on derivative financial
instruments.
For the year ended August 31,
------------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Net income, as determined under U.S. GAAP.................. 169 147 136
------ ------ ------
(e) Change in fair value of cash flow hedge(1) 8 4 (7)
(c) Additional minimum pension liability(1) 12 (9) (33)
Foreign currency translation adjustments................ (147) (223) (130)
------ ------ ------
Other comprehensive loss, as determined under U.S.
GAAP................................................... (127) (228) (170)
------ ------ ------
Comprehensive income (loss), as determined under U.S.
GAAP................................................... 42 (81) (34)
====== ====== ======
(1) Refer to note 5.4 for explanations.
F-45
5.4 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) and consolidated shareholders'
equity related to the Group's business combinations follows:
F-46
For the year ended August 31,
------------------------------
2004 2003 2002
------ ------ ------
(millions of euro)
Sodexho, Inc........................... (19) (30) (88)
Gardner Merchant....................... (12) (11) (21)
Other.................................. 7 2 9
------ ------ ------
(24) (39) (100)
====== ====== ======
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, 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) 0.2 billion. As of
August 31, 2003, the principal effects on the Group's balance sheet related to
the accounting for business combinations were to increase goodwill by (euro)1.4
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.
Amortization Expense
August 31, Year Ended August 31,
------------------- Estimated ------------------------------
2004 2003 Useful Life 2004 2003 2002
-------- --------- ----------- --------- -------- ---------
(millions of euro) (years) (millions of euro)
Customer relationships .... 1,445 1,565 10 - 19 86 87 97
Trademarks ................ 30 30 5 -- -- --
Software and other ........ 216 182 3 - 7 35 28 29
Goodwill .................. 3,036 3,209 -- -- --
-------- --------- --------- -------- ---------
4,727 4,986 121 115 126
==============================
Accumulated amortization .. (966) (899)
-------- ---------
Total intangible assets and
goodwill, net ........... 3,761 4,087
======== =========
Incremental U.S. GAAP amortization with respect to software and other
intangible assets totaled (euro)4 million, (euro)7 million and (euro)7 million
in fiscal 2004, fiscal 2003 and fiscal 2002, 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.
F-47
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 year ended August 31, 2004, the
liability was reduced (with a corresponding benefit recorded in the income
statement) by (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 5.5(f)). For the year
ended August 31, 2003, the liability was reduced (with a corresponding benefit
recorded in the income statement) by (euro)3.1 million.
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.
(b) Stock-based compensation
Stock purchase plan
In fiscal 2001 the Group created the Sodexho Alliance International
Employee Stock Ownership Plan in which approximately 150,000 employees of
Sodexho Alliance and its majority-owned subsidiaries were eligible to
participate. The plan 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 pay. The employee in both cases
benefited from a discount of up to 20% of the fair market value of the shares at
the time the shares were issued and was limited to a total subscription of 25%
of gross annual pay. On October 18, 2001, the Board of Directors issued
1,385,848 shares at an issue price of (euro)44.10 per share for United States
employees and (euro)41.51 for other employees.
Under French GAAP, these transactions are recorded directly in equity upon
issuance. Under US GAAP, the plan is considered compensatory and, therefore,
results in the recognition of compensation expense for the difference, if any,
between the fair value, as determined on the measurement date, and the purchase
price of the shares. Total compensation expense recognized under US GAAP with
respect to this plan was (euro)11 million for the year ended August 31, 2002.
Stock options
In addition, the Group has historically granted certain employees options
to purchase common shares of Sodexho Alliance. Under French GAAP, these
transactions have no impact on the income statement. For U.S. GAAP, the Group
has elected to account for its stock-based compensation plans in accordance with
the intrinsic
F-48
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)0.3 million, (euro)0.3 million and (euro)0.8 million and for
each of the years ended August 31, 2004, 2003 and 2002, 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)2.3
million and (euro)1.4 million for the years ended August 31, 2004 and 2003
compared to (euro)3.5 million and (euro)3.4 million recognized under French GAAP
for the same period. There was no compensation expense recognized under U.S.
GAAP with respect to these plans for the year ended August 31, 2002.
(c) Pensions and postretirement benefits
Under French GAAP (except for funded plans as described below), pension and
similar obligations are accrued using the projected unit credit valuation
method. For funded plans to which the Group subsidiary makes a contribution, the
amount of the contribution is recorded as the annual expense of the plan.
Under U.S. GAAP, the Group accounts for its pension plans in accordance
with SFAS 87, "Employers' Accounting for 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 post
retirement benefits. For the funded plans where the accumulated benefit
obligation exceeded the fair value of the plan assets as of August 31, 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) Detachable stock purchase warrants
Under French GAAP, detachable stock purchase warrants issued in connection
with the issuance of debt obligations are not separated and accounted for apart
from the related debt instrument. Under U.S. GAAP, proceeds received for debt
obligations issued with detachable stock purchase warrants are required to be
allocated between the debt obligation and the stock purchase warrants. Amounts
allocated to the stock purchase warrants are accounted for as additional paid in
capital and debt discount. The debt discount is required to be amortized to
interest expense over the life of the debt obligation by the effective interest
method. The debt and warrants were fully extinguished on June 7, 2004.
(e) 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
F-49
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, 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. As of August 31,
2004 and for the fiscal year then ended, 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)8 and (euro)4 million as of August 31, 2004 and 2003, respectively, and a
decrease of (euro)7 million as of August 31, 2002.
(f) Treasury shares
Under French GAAP, treasury shares are recorded, at cost, as an asset in a
company's balance sheet when re-purchased for re-issuance in connection with
stock-based compensation plans. A provision is recorded when the shares are
expected to re-issued at below their recorded cost. Upon issuance, 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. No provisions were recorded under French GAAP with
respect to the Group's treasury shares for the years ended August 31, 2004, 2003
and 2002 (except as described in the following paragraph).
During the years ended August 31, 2002, 2003 and 2004, the Group acquired
treasury shares to be reissued in connection with the exercise of certain
employee stock options (see note 5.5 (a)). To the extent that the treasury
shares were related to options whose exercise price was higher than the fair
value of the shares at August 31, 2004, 2003 and 2002 ("out of the money
options"), the Group had provisioned (euro)2 million, (euro)7 million and
(euro)19 million, respectively, representing the difference between the fair
market value of the treasury shares as of August 31, 2004, 2003 and 2002,
respectively, and their cost. No provision was recorded with respect to treasury
shares held for reissuance in connection with the exercise of in the money
options (also see note 3.17 to the consolidated financial statements).
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:
F-50
Shareholders'
Net Income (Loss) for the Equity as of
Year Ended August 31, August 31,
--------------------------- -------------------
2004 2003 2002 2004 2003
--------------------------- -------------------
Provisions for contingencies and
losses (1) (3) (4) 2 3
Leases 1 1 (1) (5) (6)
Scope of consolidation -- -- -- (1) (1)
Organization costs -- -- 1 -- --
Indirectly-held treasury shares 1 -- -- 32 31
Deferred charges and other 2 -- -- (13) (15)
--------------------------- -------------------
Total - Other, net 3 (2) (4) 15 12
=========================== ===================
Provisions for contingencies and losses
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 represent
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 (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.
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)44 million and (euro)61 million as of August 31,
2004 and 2003, respectively. The aggregate impact on total liabilities (debt) is
an increase of (euro)47 million and (euro)64 million as of August 31, 2004 and
2003, 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.
Organization costs
Under French GAAP, certain organization costs are capitalized and amortized
over a period not exceeding five years. Under U.S. GAAP, organization costs are
required to be expensed as incurred.
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). A portion of the Group's investment in these
subsidiaries is reclassified and treated as a reduction of equity in the
consolidated French GAAP
F-51
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 mobilization 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,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Basic earnings per share................. 156,381,370 156,422,010 157,395,975
Diluted earnings per share............... 156,381,370 156,422,141 159,953,836
5.6 New U.S. GAAP accounting pronouncements
In January 2003, the FASB issued FASB Interpretation, FIN No. 46,
Consolidation of Variable Interest Entities, which is an interpretation of
Accounting Research Bulletin, ARB No. 51 Consolidation of Financial Statements.
FIN No. 46 provides additional guidance regarding how to identify variable
interest entities and how an enterprise assesses its interest in the variable
interest entity to determine whether an entity is required to be consolidated.
The interpretation establishes that an enterprise consolidate a variable
interest entity if the enterprise is the primary beneficiary of the variable
interest entity. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. For
interests in variable interest entities
F-52
existing as of January 31, 2003, the guidance of FIN No. 46 applied in the first
fiscal year or interim period beginning after June 15, 2003. The adoption of FIN
No. 46 did not have a significant impact on the Group's consolidated results of
operations, financial position, or cash flows.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The principal difference between FAS 146 and EITF 94-3 relates to the
requirements of FAS 146 related to the recognition of a liability for a cost
associated with an exit or disposal activity. FAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for exit costs was
recognized at the date of an entity's commitment to an exit plan. In accordance
with FAS 146, an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. In
addition, FAS 146 also establishes that fair value is the objective for initial
measurement of the liability. FAS 146 was effective for exit or disposal
activities initiated after December 31, 2002. The Company has applied the
provisions of FAS 146 to all costs associated with exit or disposal activities
initiated after December 31, 2002.
In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 affects the issuer's accounting for three
types of freestanding financial instruments: and equity. It requires that an
issuer classify a financial instrument that is (1) mandatorily redeemable
shares, which embodies an unconditional obligation requiring the issuer to
redeem the instrument in exchange for cash or other assets at a specified or
determinable date(s) or upon an event that is certain to occur; (2) instruments
that require or may require the issuer to repurchase some of its shares in
exchange for cash or other assets, including written put options and forward
purchase contracts; and (3) obligations that must or may be settled by issuing a
variable number of equity shares, the monetary value of which is fixed, tied
solely or predominantly to a variable such as a market index or varies inversely
with the value of the issuers' shares. SFAS 150 does not apply to features
embedded in a financial instrument that is not a derivative in its entirety.
SFAS 150 is effective for all financial instruments entered into or modified
after May 31, 2003. For instruments entered into prior to May 31, 2003, the
provisions of SFAS 150 are effective at the beginning of the first interim
period beginning after June 15, 2003 (for the Group, as of September 1, 2003).
The adoption of SFAS 150 did not have a material impact on the results of
operations, financial position or cash flows of the Group.
In November 2000, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables". EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF 00-21
apply to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the
results of operations, financial position or cash flows of the Group.
5.7 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 a write-down is recognized. Impairment
of market share intangible assets is recognized as an impairment loss in
accordance with the policy described in note 1.
F-53
(b) Allowance for doubtful accounts
Set forth below is a table which provides information on the Group's
allowance for doubtful accounts.
August 31,
---------------------------------------
2004 2003 2002
------------------------ ------------
(millions of euro)
Balance at beginning of period 64 60 57
Additions 31 14 29
Deductions (13) (3) (20)
Scope of consolidation and
currency translation adjustment (4) (7) (6)
---------- ---------- ----------
Balance at end of period 78 64 60
========== ========== ============
F-54
(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,
------------------------------
2004 2003 2002
-------- -------- --------
(millions of euro)
Cash flows from operating activities
Group net income.......................................... 183 162 202
Minority interests in net income.......................... 14 9 13
Net (income) loss from equity method investees, net of
dividends received.................................... 3 (1) (3)
Adjustments for:
Depreciation and provisions........................... 205 153 187
Goodwill amortization................................. 59 62 67
Deferred taxes........................................ (14) (9) 5
Less: gains or losses on disposal net of tax.......... 1 14 (61)
-------- -------- --------
Operating profit before working capital changes........... 451 390 410
Increase in inventories............................... 0 (9) 8
Increase in account receivables....................... (5) 5 (29)
Increase in prepaid expenses, other receivables and
other assets....................................... 48 (7) (54)
Increase in accounts payable.......................... (46) 6 78
Increase in vouchers payable.......................... 80 43 126
Increase in other liabilities......................... 86 62 80
-------- -------- --------
Net cash flow from operating activities............... 614 490 619
-------- -------- --------
Cash flows from investing activities
Purchases of tangible and intangible fixed assets..... (180) (241) (297)
Acquisitions of subsidiaries net of cash acquired..... (76) (34) (97)
Proceeds on disposal of fixed assets.................. 13 14 81
Decrease (increase) in loans to equity method
investees.......................................... - - 1
Other investing activities............................ (2) (18) (3)
-------- -------- --------
Net cash used in investing activities................. (245) (278) (315)
-------- -------- --------
Cash flows from financing activities
Dividends paid........................................ (95) (94) (87)
Dividends paid to minority shareholders............... (8) (11) (15)
Proceeds from issuance of share capital, including
minority interests................................. 1 - 59
Purchases of treasury shares.......................... (4) 23 (90)
Proceeds from long-term borrowings.................... 271 57 1,113
Repayment of borrowings............................... (465) (178) (1,146)
Increase (decrease) in bank overdrafts................ (78) 47 7
Other financing activities............................ (29) (21) (1)
-------- -------- --------
Net cash provided by (used in) financing activities... (407) (177) (160)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (38) 35 144
-------- -------- --------
Cash and cash equivalents at beginning of period.......... 1,192 1,211 1,185
Net effect of exchange rates on cash...................... (33) (54) (118)
-------- -------- --------
Cash and cash equivalents at end of period................ 1,121 1,192 1,211
======== ======== ========
Cash and cash equivalents include marketable securities, which are short-term
investments readily convertible to cash and with maturities of three months or
less (excluding treasury shares totaling (euro)100 million, (euro)96 million and
(euro)119 million as of August 31, 2004, 2003 and 2002) and restricted cash,
which are compensating balances.
F-55
(d) 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-56
EXHIBIT INDEX
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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 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 4.2 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 Pierre Bellon, Chairman and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2003
12.2 Certification by Sian Herbert-Jones, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
13 Certifications by Pierre Bellon, Chairman and Chief Executive
Officer and Sian Herbert-Jones, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003