As filed with the Securities and Exchange Commission on January 3, 2003
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, 2002
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: 1-31274
SODEXHO ALLIANCE, SA
(Exact name of Registrant as specified in its charter)
Republic of France
(Jurisdiction of incorporation or organization)
3, avenue Newton
78180 Montigny - le - Bretonneux
France
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
American Depositary Shares,
Representing Common Shares New York Stock Exchange
Common Shares,
par value EUR 4 per share New York Stock Exchange*
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
Securities registered or to be registered pursuant
to Section 12(g) of the Act: None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act: None
The number of outstanding shares of each class of
stock of Sodexho Alliance, SA at August 31, 2002 was:
Common Shares, par value EUR4 per share.................... 159,021,416
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18
TABLE OF CONTENTS
Page
Forward-Looking Statements.............................................ii
PART I
Item 1. Identity of Directors, Senior Management and Advisers.......1
Item 2. Offer Statistics And Expected Timetable.....................1
Item 3. Key Information.............................................1
Item 4. Information on the Company..................................7
Item 5. Operating and Financial Review and Prospects...............21
Item 6. Directors, Senior Management and Employees.................40
Item 7. Major Shareholders and Related Party Transactions..........50
Item 8. Financial Information......................................53
Item 9. The Offer and Listing......................................54
Item 10. Additional Information.....................................56
Item 11. Quantitative and Qualitative Disclosures about Market Risk.72
Item 12. Description of Securities Other than Equity Securities.....73
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies............73
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds........................................73
Item 15. Controls and Procedures....................................73
Item 16. [Reserved].................................................73
PART III
Item 17. Financial Statements.......................................73
Item 18. Financial Statements.......................................73
Item 19. Exhibits...................................................74
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
Under the provisions of the Treaty on the European Union negotiated at
Maastricht in 1991 and signed by the then 12 member states of the European Union
in early 1992, a European Monetary Union, known as EMU, was implemented on
January 1, 1999 and a single European currency, the euro, was introduced. The
following 12 member states participate in EMU and have adopted the euro as their
national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, The Netherlands, Portugal and Spain. The legal rate of
conversion between French francs and the euro was fixed on December 31, 1998 at
EUR 1.00 = FF 6.55957. All translations of French francs into euro herein have
been made at that rate.
The following tables set forth, for the periods and dates indicated,
certain information concerning the exchange rate for the French franc and euro
based on the 2 p.m. ECB time rates quoted by the European Central Bank. From
January 1, 1999, the European Central Bank has provided 2 p.m. ECB time rates
quoted for the euro only. No representation is made that franc or euro amounts
have been, could have been or could be converted into dollars at the 2 p.m. ECB
time buying rates indicated for any given date. 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 Average
period(1) rate(2) High Low
French francs per U.S. dollar:
1998...................... 5.9335 5.9931 6.2139 5.7062
Euro per U.S. dollar:
1999...................... 0.9458 0.9061 0.9878 0.8485
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
__________________
(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:
July 31, 2002............................................ 1.0283 0.9856
August 31, 2002.......................................... 1.0323 1.0129
September 30, 2002....................................... 1.0364 1.0025
October 31, 2002......................................... 1.0272 1.0111
November 30, 2002........................................ 1.0096 0.9876
December 31, 2002........................................ 1.0131 0.9536
On December 31, 2002, the 2 p.m. ECB time rate quoted by the European
Central Bank was EUR 0.9536 = U.S. $1.0000, or U.S. $1.0487 = EUR 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."
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").
Risks Related to our Business
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 activity
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 and results of operations 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 and
financial condition.
Our business may suffer if we are unable to hire 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 and retain qualified management
personnel, particularly at the entry management level could also jeopardize our
continued success. 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.
Food shortages, and increases in food costs or other 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. To the extent
that food costs 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 are 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 or 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, 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
Recent weak 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 and River and Harbor Cruises activities, with a negative impact on our
revenues. Further economic downturns may reduce demand for our services as well
as decrease occupancy rates in certain segments of the facilities which 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, 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 costs of compliance with these various regulatory regimes has
a significant impact on our bottom line, 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
activity 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 which 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 2002, approximately 75% of our revenues 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; 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 local political or social conditions. There
can be no assurance that the foregoing factors will not have a material adverse
effect on our international operations or on our consolidated financial
condition and results of operations.
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, 2002, our percentage of total debt to total capitalization
was approximately 52%. Our total capitalization is the
sum of our shareholders' equity, minority interests and borrowings and long-term
debt. 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.
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. We intend to evaluate at the time of any
rights offering 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 us or the
depositary; these holders may have to go to the depositary's offices to inspect
any reports issued.
You may not be able to effect claims or enforce judgments brought against
us for alleged violations of the U.S. securities laws
We are a societe anonyme organized under the laws of France. Almost all of
our directors and officers are not U.S. residents, and a substantial portion of
our assets and the assets of our directors and officers are and will 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 in France judgments of U.S. courts rendered
against our French officers and directors, 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 obtaining 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 four primary business
areas: Food and Management Services, Remote Sites, Service Vouchers and Cards,
and River and Harbor Cruises. In the Food and Management Services business,
which accounted for approximately 92% of our total revenues in fiscal 2002, 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, primary and secondary schools and other
clients. In the fiscal year ended August 31, 2002, we had revenues of
approximately EUR 11.6 billion from this activity, operating through
approximately 24,700 individual outlets in 74 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 Remote Sites activity, which had revenues of EUR 590
million in fiscal 2002, specializes in providing 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 Service Vouchers and Cards activity, which had revenues of EUR279 million in
fiscal 2002, 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 River and Harbor Cruises activity, which had revenues of EUR
95 million in fiscal 2002, operates in various markets, providing tourist
excursions and upscale dinner cruises for individuals and corporate consumers
alike.
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. Between 1971 and 1993, we continued
our international growth with the development of our Remote Sites business in
Africa and the Middle East, the extension of our Service Vouchers and Cards
business into Belgium and Germany, and the expansion of our food services
business into other parts of Europe and Asia and overseas into North America,
Latin America and South Africa.
Since 1995, we have rapidly expanded our worldwide presence through organic
growth and acquisitions. Our acquisition of Gardner Merchant in 1995 made us
the world's largest contract food services company, based on annual revenues,
gave us a significant presence in the United Kingdom and the Netherlands and
strengthened our operations in North America. In January 1996, we acquired a
minority interest in Partena, strengthening our position in the Nordic
countries, a position which we further solidified by increasing our holding to
more than 90% of Partena's outstanding capital stock in 1999.
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 EUR 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 EUR 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-Alps 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 (on
a consolidated basis) for fiscal 2000, 2001 and 2002.
Fiscal year ended August 31,
2002 2001 2000
(millions of euro)
Property, plant and equipment and
intangibles..................... 297 233 174
Acquisitions......................... 107 1,768 93
--- ----- ---
Total................................ 404 2,001 267
=== ===== ===
We estimate that our consolidated capital expenditures for fiscal 2003 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 the boats used in our River and Harbor Cruises business. 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,
1999 are highlighted below.
In May 2002, we divested our entire interest in Lockhart Catering Equipment
Ltd for EUR 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 the remaining shares of Sogeres which we did
not own from BNP Paribas for cash consideration of EUR72 million. Sogeres'
contribution to Group net income for fiscal 2002 totaled EUR 4.9 million.
In November 2001, we acquired 100% of the capital stock of Minesite
Catering Pty Ltd in Australia for EUR 10 million in cash. Minesite Catering is
part of our Remote Sites activity.
In June and July 2001, we acquired 100% of the capital stock of Wood Dining
Services, a North American food and management services company, and 60% of the
capital stock of Sogeres, a French food and management services company. We
exercised our option to purchase the additional 40% of the capital stock of
Sogeres in November 2001. The total cost for all the capital stock of both
companies was EUR 521 million, a portion of which was paid in the fourth quarter
of fiscal 2001 and the balance of which (EUR 72 million)was paid at the time the
remaining shares of Sogeres were acquired in the first quarter of fiscal 2002.
In June 2001, after a negotiation process with a special committee of
independent directors formed by SMS's Board of Directors, we successfully
completed a tender offer for the 53% of SMS we did not already own, as
calculated on a fully-diluted basis, at a total cost of approximately EUR 1.3
billion. Following its merger into SMS Acquisition Corp., SMS became a
wholly-owned subsidiary of Sodexho Alliance, and was renamed Sodexho, Inc.
Funding for the June and July 2001 transactions was provided through a rights
offering in the amount of EUR 1.0 billion and the incurrence of an additional
EUR 0.8 billion in debt.
In May 2001, we divested our entire minority interest in Corrections
Corporation of America ("C.C.A.") (a successor company to Correctional
Management Services Corporation ("C.M.S.C.") and Prison Realty Trust Inc.), for
EUR 3 million in cash.
In April 2000, Sodexho Scandinavian Holding AB sold 50.05% of Attendo Care
(formerly, Partena Care) for EUR 6 million in cash. The remaining interest in
Attendo Care was sold in December 2001.
In January 2000, we acquired the remaining 51% of Universal Services, in
which we had held a 49% interest since March 1997, for EUR 57 million in cash.
In November 1999, we acquired Prebail-Enterprises (subsequently Altys
Gestion) and 30% of the capital stock of Saggel Holding for EUR 14 million in
cash.
Ongoing capital expenditures for property, plant and equipment are expected
to be funded from operating cash flows. Acquisition expenditures, such as our
recent acquisitions of SMS (known now as Sodexho, Inc.), Sogeres and Wood Dining
Services, 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 1995, we have made three bond issuances, three equity offerings and
three syndicated bank borrowings to aid in financing our acquisition
expenditures. In 1995, we raised EUR 155 million by issuing 1,722,708 new
shares for cash and raised EUR 543 million in syndicated bank borrowings to
finance the acquisition and existing indebtedness of the Gardner Merchant
Services Group. These borrowings were repaid in 1996 and 1998. In 1996, we
issued 400,000 bonds for a total of EUR 305 million, each of which bears an
annual interest rate of 6% and matures in 2004. Each of these bonds carries a
warrant entitling the bearer to purchase 16.66 of our shares before the maturity
date for EUR 411.61, which will result in further capital issuances of up to EUR
1.6 billion by 2004. In 1997, we raised EUR 306 million by issuing 835,770 new
shares for cash. In March 1998, Sodexho, Inc. (formerly SMS) raised U.S. $1.3
billion (approximately EUR 1.2 billion, based on the August 31, 1998 U.S.
dollar-to-French franc exchange rate then converted into euro at the fixed rate
of 6.55957 French francs per euro), of which EUR 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 EUR 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 EUR 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 EUR 1.9
billion and U.S. $1.1 billion, divided among four facilities. The first and
second facilities, in the amount of EUR 1.9 billion, financed the acquisitions.
On July 5, 2001, EUR 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
EUR 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 EUR 992,330,000, 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 four broad activities: Food and
Management Services, Remote Sites, Service Vouchers and Cards, and River and
Harbor Cruises. Food and Management Services is our most significant business
and accounted for 92% of our revenues for the fiscal year ended August 31, 2002.
Over half of our revenues in this activity were generated from our North
American subsidiary, Sodexho, Inc. (formerly SMS). Remote Sites accounted for 5%
of our revenues in fiscal 2002. The Service Vouchers and Cards and River and
Harbor Cruises activities together accounted for approximately 3% of our
revenues in fiscal 2002. Within the Food and Management Services business, we
manage our operations in four geographic segments: 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, 2002, 2001 and 2000.
Fiscal year ended August 31,
Revenues 2002 2001 2000
Restated(3) Restated(3)
(in millions of euro)
Food and Management Services
North America......................... 5,995 5,657 4,857
Continental Europe.................... 3,413 3,034 2,852
United Kingdom and Ireland............ 1,671 1,717 1,569
Rest of the World..................... 566 581 495
------ ------ -----
Total Food and Management Services.... 11,645 10,989 9,773
Remote Sites
North America......................... 195 180 98
Continental Europe.................... 51 52 44
United Kingdom and Ireland............ 81 74 65
Rest of the World..................... 263 273 208
----- ----- -----
Total Remote Sites.................... 590 579 415
Service Vouchers and Cards
North America.........................
Continental Europe.................... 124 105 77
United Kingdom and Ireland............ 10 4 2
Rest of the World..................... 145 140 115
----- ----- -----
Total Services Vouchers and Cards..... 279 249 194
River and Harbor Cruises
North America......................... 44 62 64
Continental Europe.................... 41 39 39
United Kingdom and Ireland............ 10 10 11
Rest of the World.....................
----- ----- -----
Total River and Harbor Cruises........ 95 111 114
------ ------ ------
Total...................................... 12,609 11,928 10,496
====== ====== ======
Fiscal year ended August 31,
EBITA(1) 2002 2001 2000
Restated(3) Restated(3)
(in millions of euro)
Food and Management Services
North America......................... 297 295 258
Continental Europe.................... 140 129 132
United Kingdom and Ireland............ 11 87 76
Rest of the World..................... 7 0 14
----- ----- -----
Total Food and Management Services..... 455 511 480
Remote Sites................................ 26 30 20
Service Vouchers and Cards.................. 77 61 47
River and Harbor Cruises.................... 2 7 15
----- ----- -----
EBITA, excluding corporate expenses......... 560 609 562
Corporate expenses(2)....................... (35) (38) (32)
----- ----- -----
Total....................................... 525 571 530
===== ===== =====
(1) EBITA represents net income before interest expense, exceptional items,
income taxes, income from equity method investees, goodwill amortization
and minority interests. EBITA is a line item from our French GAAP
financial statements, similar to operating income.
(2) Refers to corporate holding company level overhead expenses.
(3) Refer to "Item 5-Operating and Financial Review and Prospects", and notes 1
and 5.5 to the Consolidated Financial Statements for further information on
the restatement.
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:
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 rapidly. 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, 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.
Develop synergies. 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.
By leveraging our size across many markets we also
o increase the exchange and transfer within our organization of "best
practices" pertaining to inventory and personnel management and quality
control and delivery techniques, 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.
Invest in our people. 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, which
currently has capacity for 500 executives a year.
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.
Focus on 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 controls and risk management. Reporting on controls and risk
management to the Audit Committee of our Board of Directors, Group management
continues to reinforce our internal controls, including the intensity and
frequency of internal audits. We are in the process of reinforcing our central
audit function, which reports to our Chairman and Chief Executive Officer. Our
internal procedures, delegation and contract review policies are being evaluated
and updated. A summary of risks and financial commitments has been presented to
the Audit Committee.
Further, 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
will be evaluated and updated as appropriate.
Encourage communication and transparency. 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. We are developing a global
intranet aimed at facilitating the exchange of best practices, ideas and
procedures throughout the entire network of our operations. Through our
technology infrastructure, we intend to continue to provide our unit managers
tools that help them manage operations efficiently, thereby enhancing the value
for our clients of the services we provide.
Food and Management Services
Overview
We are a global food and management services contractor. In the fiscal
year ended August 31, 2002, our revenues in this activity were approximately
EUR 11.6 billion. In fiscal 2002, we operated through approximately 23,600
individual outlets in 74 countries. None of our clients generates more than 1%
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 and Education. Within each of these three 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
EUR 5.5 billion of our Food and Management Services activity revenues in fiscal
2002, delivered at over 13,100 sites, representing 47.2% of our total Food and
Management Services activity 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
o providing food and management services to government agencies and other
public clients, such as the defense sectors 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 British Open Golf Tournament, the Tour de
France, the Davis Cup and the 2000 Summer Olympic Games 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.
Healthcare. For fiscal 2002, revenues in the Healthcare market totaled
EUR 3.0 billion at over 5,000 sites, representing 26.3% of our total Food and
Management Services activity 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, catering
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 contract by approximately one percent each year. By contrast,
shifting trends in caring for the elderly have led the long-stay market to
expand by approximately 1.5% 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 2002, revenues in the Education market totaled
EUR 3.1 billion at over 3,300 sites, representing 26.6% of our total Food and
Management Services activity revenues. This portion of our business provides
food and management services to educational institutions ranging from nursery
schools to universities. Clients choose us to design, manage and equip their
food service facilities and to provide a wide range of incidental services.
Besides food, we offer vending, laundry, maintenance, groundskeeping,
environmental services, day care, mealtime supervision and hospitality services.
Like the Healthcare market, the Education market is relatively unresponsive to
changing economic conditions and thus contributes to reducing volatility in our
revenues.
Services Mix
Most of our revenues are generated from food services, but our revenues in
the Food and Management Services activity 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 EUR 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 as a key aspect
of the services we provide. In the Education market, we have profiled and
analyzed different age groups through parent and child interviews, independent
market studies and other methods in order to develop optimal food service
packages for students. In connection with our 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.
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.
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, transportation and day care 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, gas and other utilities to the various areas on a particular
site. In France, for example, our subsidiary Altys provides building
services to large client accounts such as Cisco in Belgium and Germany.
A multiservice approach is especially important in the Healthcare market,
where pressure on cost structures combined with greater life expectancy and
increasingly sophisticated medical technologies has led clients to seek to
reduce the cost of services that are not an integral part of their business. We
estimate the outsourcing potential for multiservice to be two and one-half times
greater than that for food services. We believe this potential reflects not
only low independent contractor penetration but also an increasing trend towards
clients seeking a single-source solution for their facilities and on-site needs.
The Market for Outsourced Food and Management Services
We estimate that approximately two-thirds 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.
Outsourcing recently has grown particularly in the Education and Healthcare
markets, where a large number of the services we provide had historically been
provided 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
roughly half of this market is in short-stay care centers (public and private
hospitals) and half 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.
We estimate that the Education market is about one-third outsourced, with
about half of private sector institutions and about one-fourth 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.
Contracts
We use three broad contract types in our Food and Management Services
activity: profit and loss contracts, profit sharing contracts and management fee
contracts. The primary distinguishing feature of each contract type is the
amount of financial risk we bear and, conversely, our profit or loss potential.
Many of our contracts contain characteristics of more than one type of contract.
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 that the
existence of a captive on-site customer group, the relative ease of determining
sales volumes and operating margins and our broad institutional client base,
however, limits and diversifies our risk on 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.
Profit sharing contracts include elements of both of the foregoing contract
types insofar as they provide for us and our client to share a set percentage of
any profits earned from providing our services. Like profit and loss contracts,
these contracts incentivize us to lower costs and improve operating margins. In
some cases, we are not responsible for covering our expenses if we do not
generate a profit; in other cases, we must share the risk of operating losses
with our client.
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. These cost pressures are
driving the trend toward consolidation of healthcare institutions and fixed-cost
(profit and loss) contracts for hospital services. Many contracts with
healthcare clients condition a portion of our compensation on financial
performance objectives as well as patient satisfaction, as measured by third
parties.
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 40% of their revenues coming
from overseas operations in each case (40% for Elior).
The following table shows the ranking of the three leading contract
caterers, in terms of revenues, in different market segments, as of August 2002.
Business &
Industry Education Healthcare Total
No. 1.......... Compass Sodexho Sodexho Sodexho
No. 2.......... Sodexho Aramark Compass Compass
No. 3.......... Aramark Compass Aramark Aramark
Source: Broker reports, GIRA
On a national scale, competition levels vary significantly, though
concentration is generally higher than on the global stage. High concentration
levels are found in some countries such as France, where we, Compass and Elior
have over 75% of the outsourced market, and the Netherlands, where we, Compass
and Albron, a national provider, have approximately 77%. By contrast, more
fragmented environments tend to exist in some of the other countries in which we
operate.
While the markets in which we operate continue to be highly fragmented, in
recent years the contract food service industry has experienced consolidation
and multinational expansion. Drivers for consolidation come from both the
client and supplier side. A larger entity with international coverage is able to
tender for the larger contracts and can negotiate better terms from its
suppliers. In addition, larger companies can obtain economies of scale and
implement best practices across sites. As a result of these benefits of scale,
consolidation in the industry has been accelerating, both in terms of the number
and size of deals, with the most recent significant examples being the
acquisition of Servicemaster by Aramark in 2001 and the merger between Compass
and Granada in the United Kingdom which was completed in 2000.
Remote Sites
Our Remote Sites activity provides customized services similar to those
provided by our Food and Management Services activity to remotely located
facilities on land and offshore. As of the end of fiscal 2002, this business
operated in nearly 1,100 sites around the world and generated revenues of EUR
590 million. 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. 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. Our contracts in this activity
are substantially similar to those in our Food and Management Services activity.
Traditional clients in oil and gas, mining, construction and public works
have long outsourced support services. Today, their strategy is to consolidate
these services. In a commitment to increasing efficiency and reducing costs,
they are cutting back on the number of service providers and expanding the range
of services they outsource. We estimate the worldwide remote services market,
which spans five continents, to be approximately EUR 10 billion per year, and
our only global competitor currently is Compass. We will continue to focus on
providing a full range of services in client segments such as oil and gas,
construction and engineering, and mining. We anticipate 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. The business is worldwide and we follow current and
potential clients to provide support services around the globe.
Service Vouchers and Cards
In our Service Vouchers and Card activity, we have operations in 11
countries, mainly in Europe and Latin America, and our vouchers are used by
nearly 11 million people. As of the end of fiscal 2002, this activity issued
over 1.48 billion vouchers on behalf of more than 257,000 clients and generated
revenues of EUR 279 million. Our vouchers were accepted at over 736,100
locations and the total nominal value, which is not included in our revenues, of
vouchers issued in fiscal 2000, 2001 and 2002 was EUR 4.2 billion, EUR 5.1
billion and EUR 5.9 billion, respectively. 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 five product families 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 clothes
and medications. Our suite of products is split into five families: daily
life, incentive, residence, mobility and assistance. 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 two-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. In fiscal 2000 and 2001, new order
processing software was rolled out, and custom-designed affiliation programs
were introduced. 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. Smart cards are currently being tested for use by restaurants in
Italy and China.
The current market for service vouchers and cards is estimated at more than
EUR 15 billion worldwide, but we estimate that the potential market for existing
products in countries where we are already present totals more than EUR 30
billion, making it our fastest-growing activity. Between 2000 and 2001, organic
growth in this activity exceeded 20%, and organic growth between 2001 and 2002
approached 20%. 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.
River and Harbor Cruises
Our River and Harbor Cruises business operates with 39 boats and generated
revenues of EUR 95 million in fiscal 2002.
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. We offer day-time harbor cruises and dinner cruises in Paris, London
and New York, together with theme cruises in seven other harbors in the United
States (through our subsidiary, Spirit Cruises), accommodating millions of
passengers. This activity is more capital intensive than the remainder of our
businesses, and our development of these activities will be selective,
leveraging our current expertise in total management of attractions and
optimizing the potential of our river fleet.
Raw Materials
Raw materials essential to the operation of our business are obtained
principally through local and national food distributors in each of the
jurisdictions in which we operate. As such, we are subject to fluctuating food
prices and availability, both of which can vary by location. Furthermore,
because of the relatively short storage life of inventories, especially produce,
limited storage facilities at customer locations and our client requirements for
freshness, a minimum amount of inventory is maintained at customer locations at
any given time. All materials and services that we purchase are available from
more than one supplier, and we believe that the loss of any supplier would not
have a material impact on our business.
Since our inception in 1966, we have been highly proactive in addressing
food safety and health concerns. For example, in November 1999, we formed a
Food Safety Committee in France to anticipate and manage food safety risk.
Comprising four prominent professors and medical doctors specialized in
nutrition and food safety, this committee is supported by the technical
resources of the Institut Pasteur de Lille, a Sodexho partner for more than 20
years, and the French Food Safety Agency. Similar food safety programs are
continuously being developed and extended across Europe and in other countries.
End-to-end traceability has been introduced in all of the procurement channels,
whether for meat or other products.
Seasonality
Although revenues of our business as a whole do not tend to fluctuate
significantly by season, certain market segments have been characterized
historically by seasonal fluctuations in overall demand for services, notably
the Education market of our Food and Management Services business and our River
and Harbor Cruises operations. In the Education market, revenues and operating
performance depends on the school, college and university calendar in each
country, with low activity levels during the long vacation periods, principally
in our fiscal fourth quarter. Our River and Harbor Cruises operations generally
benefit from increased tourism levels in the fourth quarter and may be reduced
to restricted operating levels in our fiscal second and third quarters as a
result of inclement weather.
Regulation
The following description of the regulations to which we are subject does
not purport to be complete and is qualified by reference to the relevant
provisions of applicable law in the jurisdictions in which we operate.
We are subject to various governmental regulations throughout the world in
the course of our operations. These regulations govern such matters as
employment, including wages; environmental protection; human health and safety;
and the bidding for and performance of contracts with governmental entities.
To ensure compliance with these 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 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, 2002, we had 235 subsidiaries in 74 countries. Our
operations are managed locally through these subsidiaries, although our central
management is at the level of Sodexho Alliance, SA. For a complete 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 activity. The vehicles comprise automobiles and delivery trucks used
in the Food and Management Services and Remote Site Services activities 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, 2002 of EUR 208 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 EUR 101 million as of August 31, 2002.
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, 2000, 2001 and 2002 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, 1998 and
1999 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, 2000, 2001 and 2002 were
audited by Befec-Price Waterhouse, member of PricewaterhouseCoopers.
In order to comply with the requirements of the United States Securities
and Exchange Commission, the Group restated the financial statements presented
herein as of August 31, 2001 and for each of the fiscal years ended
August 31, 2001 and 2000 (included elsewhere in this annual report) as described
below. In addition, we also restated certain summary financial data as of
August 31, 2000 and 1999 and for the fiscal year ended August 31, 1999
(included elsewhere in "Item 5-Operating and Financial Review and Prospects").
The restatements relate to revenue recognition and accounts receivable in our
grounds maintenance subsidiary located in the United Kingdom. Pursuant to an
internal audit, we discovered in fiscal 2002 certain anomalies in accounts
receivable in this subsidiary, which led to the improper recognition of EUR 32
million of revenues during the period 1999 through February 2002. This
subsidiary, whose sole activity is grounds maintenance, represents less than
0.5% of our consolidated revenues in each of the years in question. In 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. As a result, the work performed under the contracts was
neither properly documented nor billed to the clients and, accordingly, the
EUR 32 million is not collectible. In addition, bookkeeping entries were posted
during the periods fiscal 1999 through fiscal 2002 which had the effect of
transferring "accounts receivable" to and from other current asset accounts in
an effort to elude detection by regional and Group management.
Upon further investigation by internal audit, the errors were found to be
isolated to this subsidiary and the persons determined to be responsible for
these bookkeeping entries and record-keeping were terminated. These persons did
not have any record keeping responsibilities for any other operations of the
Group. The subsidiary's policies and procedures applied in the processing of
transactions that flow through the accounting system in order to prevent, or
promptly detect, misstatements in revenue, have since been reviewed and controls
have been reinforced. We have not experienced any loss of contracts or business
that would be significant to the consolidated results of operations as a
consequence of this situation.
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 the overstatement of
revenue has been recorded as an exceptional expense when discovered in the year
ended August 31, 2002. The overstatement of revenue amounted to EUR 32 million
(EUR 22 million after income taxes). Under French GAAP, this amount would be
recorded as an exceptional expense in the year ended August 31, 2002. Of the
total EUR 32 million, EUR 29 million (EUR 19 million after taxes) relates to
periods prior to fiscal 2002 and is being restated (EUR 15 million, EUR 9
million and EUR 5 million, respectively, related to fiscal 2001, fiscal 2000 and
fiscal 1999) to comply with the requirements of the SEC. The impact of the
restatement on the balance sheet is to reduce accounts receivable and other
current assets as of August 31, 2001.
As discussed in notes 1 and 5.5 of the Consolidated Financial Statements,
our financial statements presented herein have been restated accordingly.
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 and shareholders'
equity to U.S. GAAP as of August 31, 2002, 2001 and 2000, and for the fiscal
years then ended.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in compliance with relevant French
law and in conformity with accounting principles generally accepted in the
United States of America, requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities, including judgments
related to the selection of appropriate accounting policies as well as the
appropriate application of those policies. Actual results could differ from
those estimates. Our significant accounting policies are described in the notes
to the consolidated financial statements included in this Annual Report on
Form 20-F. However, we have identified a number of those accounting policies
and estimates which we believe are the most significant to our business
operations and to an understanding of our financial statements and related
footnotes.
Revenue Recognition
Our revenue recognition policies are the same for both French and U.S.GAAP.
In the food and management services, remote site, and river and harbor
cruise activities, 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 acquired is allocated to goodwill,
which is amortized over its estimated useful life. Where we have 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
(within intangible assets in our consolidated balance sheet). 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
diminution in value. Initial allocations to market share require management to
exercise judgment in the choice of unrelated recent transactions in the
marketplace. If management believes there has been a significant diminution in
the market share value for more than two consecutive years, as determined based
on actual results of the applicable subsidiary as compared to the original
calculation, it is written down by the amount of the diminution in value.
Market share intangibles are not amortized in the consolidated financial
statements, and no deferred taxes are recorded on market share intangibles.
Under French GAAP, intangible assets (other than market share) 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 than an
intangible asset or goodwill is impaired, the related amortization period is
revised or a write-down is recognized. Impairment for market share intangible
assets is recognized as a diminution in value in accordance with the policy
described above.
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. Intangible assets representing assembled workforce and certain
customer relationship intangibles, totaling EUR 138 million and EUR 17 million,
respectively, were reclassified from intangible assets to goodwill as of the
date of adoption of SFAS 142 which, for the Group, was September 1, 2001.
Related deferred tax liabilities totaling EUR 55 million were also reclassified
to goodwill. None of the identifiable intangible assets recognized apart from
goodwill were considered to have indefinite lives. In connection with the
transitional goodwill impairment evaluation required by SFAS 142, we determined
that there was no impairment and, accordingly, no transitional impairment loss
was recorded in the fiscal 2002 U.S. GAAP income statement. The transitional
goodwill evaluation required management to make assumptions with respect to the
identification of its reporting units. In addition, it required management to
make certain assumptions and estimates, including estimates of future cash flows
and appropriate discount rates, in order to determine the fair value of the
reporting units so identified. Upon adoption of SFAS 142, we ceased amortizing
goodwill (including that portion of goodwill which was generated by the
reclassification of assembled workforce and certain customer relationship
intangibles as of September 1, 2001). 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. Similar to the transitional impairment evaluation,
this evaluation requires management to make assumptions with respect to the
identification of its reporting units as well as the determination of 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 "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 is
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 (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 France and the United Kingdom. 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 in the United States. These liabilities are estimated using
actuarial methods for both French and U.S. GAAP based on assumptions made by
management with respect to the expected development of known and incurred but
not reported claims.
Derivative Financial Instruments
Under French GAAP, our derivative financial instruments, which consist
primarily of interest rate and cross-currency swap agreements on debt
instruments, are considered to hedge the underlying debt. Any interest rate
differential is recognized as an adjustment to interest expense over the term of
the related underlying debt. For swaps negotiated on inter-company debt, the
difference between the amount of the debt at the period end rates and the
swapped rates is recorded as debt. Where the hedge is of a net investment in a
foreign subsidiary, the resulting foreign currency translation difference is
recorded in the currency translation adjustment account in shareholders equity.
Under U.S. GAAP, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was effective for the Group September 1, 2000,
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, 2002, 2001 and 2000 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, 2002 and 2001, and for the fiscal years then ended, 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). As SFAS No. 133 was effective for the Group
and for Sodexho, Inc. as of September 1, 2000, there are no adjustments to
consolidated shareholders' equity or net income (loss) as of or for the year
ended August 31, 2000.
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 (Turkey,
Argentina, Venezuela), 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.
BALANCE SHEET AND INCOME STATEMENT DATA
Our consolidated financial statements and the selected financial data
presented below are reported in euro. For periods prior to January 1, 1999, our
financial statements were prepared in French francs and translated into euro
using the official fixed exchange rate of EUR 1.00 = FF6.55957, applicable since
December 31, 1998 (see note 1 to our consolidated financial statements).
As of and for the year ended August 31,
2002 2002 2001 2000 1999 1998
U.S. $(3) EUR EUR(4) EUR EUR EUR
Restated(5)Restated(5)Restated(5)
(in millions, except per-share amounts)
Income Statement Data
French GAAP amounts
Revenues.................... 12,398 12,609 11,928 10,496 9,027 6,262
Earnings before interest,
exceptional items, income
taxes, income from equity
method investees, goodwill
amortization and minority
interests (EBITA)........... 516 525 571 530 448 293
Financial expense, net....... (163) (166) (122) (118) (131) (93)
Minority interests in net
income of consolidated
subsidiaries................ (13) (13) (67) (69) (56) (4)
Net income................... 199 202 128 79 128 84
Earnings per share (basic)... 1.25 1.27 0.93 0.59 0.95 0.65
Earnings per share (diluted). 1.20 1.22 0.89 0.56 0.92 0.61
Dividends per share.......... 0.60 0.61 0.56 0.56 0.45 0.34
U.S. GAAP amounts
Revenues.................... 12,407 12,618 7,557 5,648
Operating income............ 397 404 153 195
Net income (loss)........... 134 136 (34) 24
Earnings (loss) per share
(basic).................... 0.85 0.86 (0.25) 0.18
Earnings (loss) per share
(diluted).................. 0.84 0.85 (0.25) 0.17
Balance Sheet Data
French GAAP amounts
Intangible assets, including
acquisition goodwill........ 4,480 4,556 4,731 3,527 3,111 2,859
Tangible fixed assets,
including non-working
capital, financial
investments and other assets 574 584 519 538 556 519
Working capital (1)......... (1,254) (1,275) (1,208) (1,016) (753) (515)
Cash and cash equivalents (2) 1,285 1,307 1,213 897 758 584
Total assets................. 8,401 8,544 8,638 6,951 6,026 5,396
Total borrowings............. 2,648 2,693 2,781 2,009 2,047 1,949
Provisions for contingencies
and losses.................. 97 99 93 115 124 139
Minority interests........... 72 73 131 525 333 251
Total shareholders' equity... 2,358 2,398 2,386 1,402 1,276 1,177
U.S. GAAP amounts
Total assets..................8,361 8,503 8,820 4,397
Total shareholders' equity....1,849 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, 2002 2 p.m.
ECB time rate quoted by the European Central Bank of $1 = EUR 1.016984.
(4) See Note 1 to the consolidated financial statements for a discussion of the
impact of changes in accounting principles.
(5) Refer to "Item 5-Operating and Financial Review and Prospects", and notes
1 and 5.5 to the Consolidated Financial Statements for further information
on the restatement and note 1 to the consolidated financial statements for
a discussion of the impact of changes in accounting principles.
A. Operating Results
The balance sheets of subsidiaries located outside of the euro zone that
operate in a stable currency environment are translated into euro using exchange
rates in effect at the balance sheet dates. Effective for fiscal 2000, the
income statements of these subsidiaries are translated at average exchange rates
for the period. Prior to fiscal 2000, the income statements of these
subsidiaries were translated into euro using exchange rates in effect at the
balance sheet dates. 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
is recorded in shareholders' equity. Transactions in foreign currencies are
translated using the exchange rate in effect at the time of the transaction and
are included 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 at August 31 for consolidation purposes. In spite of
fulfilling the foregoing conditions, subsidiaries with (i) annual revenues of
less than EUR 2 million, (ii) annual profits or losses of less than
EUR 0.1 million or (iii) net assets of less than EUR 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.
Overview
We divide our operations into four broad activities: Food and Management
Services, Remote Sites, Service Vouchers and Cards, and River and Harbor
Cruises. Food and Management Services is our most significant activity, and
accounted for approximately 92% of our revenues and 81% of EBITA (before
corporate expenses) for the fiscal year ended August 31, 2002. It consists of
the supply of food and management services to companies, public agencies and
institutions, hospitals, clinics, retirement homes, schools, colleges and
universities. Over half of our fiscal 2002 revenues in this activity were
generated by our North American subsidiary, Sodexho, Inc. (formerly SMS). Remote
Sites services are provided worldwide to people working on land and offshore on
oil rigs, major construction projects, mining facilities and forestry
operations. The Remote Sites activity accounted for approximately 5% of our
revenues and EBITA (before corporate expenses) in fiscal 2002. The Service
Vouchers and Cards activity accounted for 2% of our revenues and 14% of EBITA
(before corporate expenses) in fiscal 2002. The River and Harbor Cruises
activity accounted for less than 1% of our revenues and EBITA (before corporate
expenses) in fiscal 2002.
Fiscal Year Ended August 31, 2002 Compared with Fiscal Year Ended August 31,
2001
Consolidated Overview of Revenues and EBITA
Revenues for fiscal 2002 totaled EUR 12.6 billion, a 5.7% increase over
fiscal 2001. This increase is net of a 2.5% decrease attributable to the
unfavorable impact of foreign currency translation, principally arising on
revenues denominated in U.S. dollars or reliant on the U.S. dollar exchange
rate. The acquisitions of Wood Dining Services and Sogeres in the fourth
quarter of fiscal 2001 contributed 6.2%. Organic growth of 2.0% reflected
strength in the education and health care segments of the Food and Management
Services activity in North America and in Continental Europe, offset by poor
performance in the United Kingdom, where management problems surfaced during a
year already made difficult by the continuing global economic recession.
Excluding the United Kingdom, organic growth was 2.4%. The recession also
continued to adversely affect the Business and Industry segment of our Food and
Management Services activity, as well as River and Harbor Cruises. We expect
our growth rate in fiscal 2003 to improve on a consolidated basis.
EBITA decreased by 8.2% to EUR 524 million in fiscal 2002. Despite the
higher sales, EBITA growth was hampered by a negligable EBITA margin in the
United Kingdom and Ireland primarily due to management problems in that region,
exacerbated by tough economic conditions in the Business and Industry segment.
Excluding the performance of United Kingdom, our EBITA margin was 4.7%;
including the United Kingdom, our EBITA margin was 4.2%. We have implemented
action plans, including a new management team for the United Kingdom and
Ireland, in order to improve profitability.
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(1) 2002 2001 EUR %(2)
Restated
(in millions of euro, except percentages)
Food and Management Services
North America.............. 5,995 5,657 338 6
Continental Europe......... 3,413 3,034 379 12
United Kingdom and Ireland. 1,671 1,717 (46) (3)
Rest of the World.......... 566 581 (15) (3)
------ ------ -----
Total.................... 11,645 10,989 656 6
Remote Sites................ 590 579 11 2
Service Vouchers and Cards.. 279 249 30 12
River and Harbor Cruises.... 95 111 (16) (15)
------ ------ -----
Total revenues............ 12,609 11,928 681 6
====== ====== =====
(1) Activities reflect the Group's internal management reporting structure.
(2) Percentage figures are derived from actual revenue numbers and so may vary
from those calculated from the numbers in this table due to rounding.
Fiscal Year Ended August 31, Change in EBITA
EBITA by Activity(1) 2002 2001 EUR %(2)
Restated
(in millions of euro, except percentages)
Food and Management Services
North America...................... 297 295 2 0
Continental Europe................. 140 129 11 8
United Kingdom and Ireland......... 11 87 (76) (87)
Rest of the World.................. 7 0 7 N/A
---- ----- ----
Total.............................. 455 511 (56) (11)
Remote Sites........................ 26 30 (4) (13)
Service Vouchers and Cards.......... 77 61 16 26
River and Harbor Cruises............ 2 7 (5) (73)
EBITA, excluding corporate expenses. 560 609 (49) (8)
---- ----- ----
Corporate expenses.................. (35) (38) (3) (7)
---- ----- ----
Total EBITA........................ 525 571 (46) (8)
==== ===== ====
(1) Activities reflect the Group's internal management reporting structure.
(2) Percentage figures are derived from actual EBITA numbers and so may vary
from those calculated from the numbers in this table due to rounding.
Food and Management Services
Food and Management Services represented 92% of our consolidated revenues
and 81% of our consolidated EBITA, excluding corporate expenses. Our revenues
from this segment increased in fiscal 2002 to EUR 11.6 billion, an increase of
6.0% over fiscal 2001 revenues, of which 6.5% was from acquisition growth and
negative 2.4% was from currency fluctuations. Acquisition growth resulted
primarily from our acquisitions of Sogeres and Wood Dining Services during the
fourth quarter of fiscal 2001. Despite the global economic recession, organic
growth was 1.8%.
North America
Food and Management Services revenues in North America for fiscal 2002 were
EUR 6 billion, representing an increase of 6% from fiscal 2001 revenues, which
was net of a negative 3% impact from currency fluctuations. The inclusion of a
full year of operations of Wood Dining Services, acquired in the fourth quarter
of fiscal 2001, increased revenues by 8.6%, and organic growth was 0.4%. Of
particular note were the subsidiary's significant wins in the defense market,
with the reaffirmation in July 2002 of a large contract with the United States
Marine Corps, valued at EUR 967 million over ten years, and the award of
a EUR 192 million contract over 15 years with the U.S. Naval Air Station in
Miramar, California. These important contracts affirm our development strategy
in this segment. Healthcare achieved strong organic growth, in part from the
expansion into multiservices on existing sites as well as with the signing of
several significant new contracts, including University Hospitals of Cleveland,
Loyola University Medical Center in Chicago, and Stamford Hospital in
Connecticut.
The Education segment also achieved a strong performance. In primary and
secondary schools, most of the increase in revenues on existing sites resulted
from the deployment of creative solutions such as Kid's Way Cafe, Crossroads
Cafe and EDZone, a British innovation adapted to the U.S. market. Significant
contracts were signed with Beaufort County School District in South Carolina,
Guildford County School District in North Carolina, and Marysville School
District in Washington. In higher education, important contracts were signed
with Chapman University in California and the University of Wisconsin.
In Business and Industry, despite new contracts signed with, for example,
Perot Systems, Chicago Museum of Science and Industry, Merrill Lynch Asset
Management and BellSouth, our revenues were down 8% given the difficult economic
environment. This decline reflected site closures, reductions in customers
on-site, and client decisions to reduce catering services, which represent 10%
of the activity in Business and Industry and which declined by 20%. Several
contracts signed in 2002 will commence operations in 2003, such as Sony
Pictures, MetLife, Federal Reserve Bank in Atlanta, and Nationwide Training
Center, and are expected to lead to renewed growth in the upcoming year.
In Canada, organic growth continued strongly.
EBITA in North America of EUR 297 million was on par with the prior year.
With the integration of Wood Dining Services for a full year, the EBITA margin
was 5%, compared to 5.2% in the prior year. Synergies and improvements in food
cost management at the sites improved gross profitability. However, a number of
factors weighed on the EBITA margin: increases in overhead with the creation of
a new division in the health care segment; weaker initial margins at Wood Dining
Services as compared to Sodexho, Inc.; the decline in catering services; and an
increase in employee medical insurance costs.
Continental Europe
In Continental Europe, revenues rose to EUR 3.4 billion in fiscal 2002, an
increase of 12.5% over the prior year. Acquisition growth of 7.9% resulted
almost entirely from the integration of Sogeres for a full year. Organic growth
in revenues was 4.9%.
France, Italy, the Netherlands and the countries in Central and Eastern
Europe continued to grow while expanding their service offerings. In addition,
non-food services experienced double digit growth, due in large part to
contract wins generated by our subsidiary, Altys, such as with Cisco in Belgium
and Germany. In France, the Business and Industry segment had positive growth,
defying the economic slowdown affecting not only the high technology sector, but
also some of the more traditional sectors of the economy, such as the automobile
industry. A noteworthy contract was signed with Danone's Vitapole Research and
Development Center.
In Sweden, activities in the transportation sector suffered the fall-out
from the events of September 11. Elsewhere, the importance to the Swedish
economy of the telecommunications, information technology and engineering
sectors was a limiting factor during the period. Nonetheless, a significant
contract was signed in June 2002 with the municipality of Stockholm giving us
the management of equipment provided for the use of handicapped individuals.
Strong performances achieved in the Health Care and Senior segments
throughout Continental Europe allowed us to maintain growth rates close to those
of prior years.
EBITA grew by 8% in fiscal 2002 to EUR 140 million, with Sogeres
contributing EUR 12.7 million. Following the significant increases in food costs
in the prior year, our subsidiaries in France succeeded in negotiating pricing
increases on more than 80% of their contracts. Food cost management and margins
improved significantly as a result. EBITA declined in other countries, most
notably in Sweden and in Italy, where there was an increase in the number of
man-hours lost as a result of worker strikes affecting client sites.
United Kingdom and Ireland
In the United Kingdom and Ireland, revenues totaled EUR 1.7 billion in
fiscal 2002, a decline of 2.7% from the prior year, of which a negative 0.3% was
organic. The currency impact was a negative 1.5% and the remaining difference
was attributable to the third quarter sale of Lockhart, a subsidiary whose
activity is the distribution of kitchen equipment, not a core activity of the
Group.
New contract wins allowed the Education segment to achieve satisfactory
organic growth. A prestigious multiservice contract was signed with the Royal
Air Force in the Defense segment. In the Business and Industry segment, our
subsidiary was awarded a catering contract for the Commonwealth Games.
Multiservice activities continued to develop. However, Business and Industry
was affected by the economic slowdown and the significant decline in demand for
catering services. In Healthcare, revenues declined with a political climate
favoring self-operation.
EBITA went from EUR 87 million in fiscal 2001 to EUR 11 million in fiscal
2002. This deterioration principally arose from the decline in profitability of
the Business and Industry segment, which represents more than two-thirds of the
region's revenues. Faced with reductions in meal subsidies by our clients and a
decrease in the number of consumers at our sites, our teams were not reactive in
adapting their cost structures in a timely manner. In addition, a number of
recently signed or renegotiated contracts were determined to be unprofitable,
and a poorly managed entry into hotel management services generated significant
losses. Reduced purchasing volumes negatively impacted margins. Poorly
controlled overheads and the installation of a new information system also
weighed on profitability. In addition, a restructuring charge of EUR 11 million
has been recorded as an exceptional item.
The new management team has put into place an ambitious action plan, for
which certain costs were recorded in fiscal 2002. The top priority for the next
two to three years is the return to a satisfactory EBITA margin. This will
involve in-depth programs to make our contracts more profitable, to train and
motivate our teams, to tighten on-site management of food and personnel costs,
and to reduce support function overheads.
Rest of the World
In the Rest of the World, revenues of EUR 566 million were down 2.6% in
fiscal 2002, as a result of a negative currency effect of more than 10%. Organic
growth was 6.5%.
Latin America continued its expansion, despite an unfavorable economic
climate in the industrial sector, with several important new multiservice
contracts, such as IBM in Chile, Peru, Venezuela and Columbia, Citibank in Chile
and Peru, and Nestle in Argentina and Chile, which contributed to an overall
organic growth of 10% in that region. In Chile, our teams won two initial
contracts for the management of five correctional facilities, a market with
significant potential.
China saw significant growth, with strong performances across all segments
including contracts signed with Haier, the Chinese leader in electrical
appliances, a multiservice contract with Proctor and Gamble in Guangzhou, and
the French School at the New University of Fine Arts in Peking. Following our
entry into the Healthcare market, new contracts were signed with the
International Peace Maternity Hospital in Shanghai and Beijing United Family
Hospitals and Clinics in Peking, noteworthy accomplishments which resulted from
synergies between our worldwide Healthcare teams, in particular, those in the
United Kingdom, and the local teams. Activities in Singapore and Hong Kong felt
the consequences of numerous client relocations to mainland China.
In Australia, we continued our strategy of selective growth, the
development of the multiservice activity and growing revenues on existing sites.
Of particular note, was the contract signed with Griffith Brisbane, one of the
largest universities in the country.
EBITA increased to EUR 7 million, confirming a return to profitability in
these regions.
Remote Sites
Revenues from Remote Site operations grew 2% to EUR 590 million in fiscal
2002. This growth included 3% acquisition growth from the integration of
Minesite Catering, a company in Western Australia acquired at the beginning of
the year, organic growth of 1%, and a negative currency effect of 2%.
Strong development in petroleum activities in the North Sea and Alaska was
offset by the slowdown in activity on gas platforms in the Gulf of Mexico. A
slowdown in growth in the second half of the fiscal year resulted from the
non-renewal of the Chevron contract in Kazakhstan and the completion of two
large projects in Latin America (the construction of a mine and a drilling
field). However, we have been awarded food and management services contracts for
the operational phase of both of the projects, which will commence in fiscal
2003. Additional significant contracts have been signed with Fluor in the
United States, Camisea in Peru, Schlumberger in the Middle East and the Argyle
Diamond Mine in Australia.
EBITA of EUR 26 million was down 13% from the prior year. This decline
resulted from currency effects as well as strong competition and pressure on our
clients to reduce costs on large projects in Africa, and finally, from the
weaker margins of Minesite Catering in Australia.
Service Vouchers and Cards
Now present in 26 countries, Sodexho Pass had revenues of EUR 279 million
in fiscal 2002, an increase of 12% over the prior year, net of a negative
currency effect of 7%. For the fourth year in a row, organic growth was in the
neighborhood of 20%, as a result of improvements in the revenue mix and strong
development in Europe. This growth resulted from the implementation of creative
solutions, value creators for our clients. In the employee benefits area,
Sodexho Pass implemented a new internet tool, E-SPI, which facilitates,
accelerates, and validates the check order process. In the area of social
benefits, the research into solutions adapted to the needs of institutions led
to the signing of a contract to provide 244,000 students in 550 schools in the
Rhone-Alpes department in France with a "Culture card" allowing them to buy or
rent school books.
The total issue volume of service vouchers and cards (face value of the
service vouchers and cards multiplied by their number) reached EUR 5.9 billion
compared to EUR 5.1 billion in fiscal 2001.
EBITA reached EUR 77 million euro in fiscal 2002, an increase of 26%
compared to fiscal 2001. This growth was net of a negative foreign currency
impact of 4.7%. The EBITA margin increased by 3% in part as a result of the
higher volumes which allowed us to better absorb our fixed production costs, and
secondly from the exchange of savoir faire and experiences between countries.
River and Harbor Cruises
River and Harbor Cruises revenues of EUR 95 million in fiscal 2002
represent less than 1% of the Group's revenues.
Fiscal 2002 EBITA was EUR 2 million, as 46% of the revenues for this
activity are generated in the United States, where the impacts of September 11
and the recession were felt.
Corporate Expenses
Corporate expenses, which are included in EBITA, of EUR 35 million in
fiscal 2002 were down 7% from the prior year, despite the costs related to the
listing of Sodexho Alliance on the New York Stock Exchange, illustrating Group
management's efforts to control overhead expenses.
Financial Expense, Net
Net financial expense totaled EUR 166 million, as compared to EUR 122
million in fiscal 2001. Higher interest expense of EUR 140 million, as compared
to EUR 124 million in fiscal 2001, resulted from the impact on a full year of
the acquisition financing arranged for the June 2001 transactions. In fiscal
2002, financial provisions totaled EUR 26 million, of which EUR 19 million was
on Sodexho Alliance shares held by the Group to be used for stock compensation
programs. The related stock options are exercisable over periods ranging from
one to ten years at a higher exercise price than the closing price of the share
as of August 31, 2002.
Net Exceptional Income/Expense
Net exceptional income totaled EUR 55 million in fiscal 2002 and included
the following principal elements: a gain of EUR 49 million euro (EUR 37 million
net of tax) on the sale of the Lockhart subsidiary in the United Kingdom; a gain
of EUR 37 million representing the reduction in liabilities related to stock
option shares in connection with the acquisition of Sodexho Marriott
Services, Inc. (this gain is partially offset by a EUR 19 million provision
included in net financial expense); a provision for EUR 11million related to a
lawsuit in the United States (see "Item 8A-Legal Proceedings," below); and
restructuring expenses and costs to exit certain contracts in the United
Kingdom totaling EUR 11 million.
Income Taxes
Income taxes declined to EUR 136 million in fiscal 2002 from EUR 157
million in fiscal 2001 for an effective rate of 33%. Excluding permanent
differences, the effective rate was comparable to the prior year effective rate
of 36% as computed in the same manner.
Net Income from Equity Method Investees
Net income from equity method investees increased to EUR 4 million in
fiscal 2002 from a loss of EUR 2 million in fiscal 2001, as we sold our
remaining interest in Attendo Care, which had reported a loss in the prior year.
Minority Interests
Minority interests decreased from EUR 67 million in fiscal 2001 to EUR 13
million in fiscal 2002 as a result of our acquisition of Sodexho, Inc.'s
remaining shares in the fourth quarter of fiscal 2001. In addition, the
remaining shares of Sogeres, of which we acquired 60% in June 2001, were
acquired at the end of the first quarter of fiscal 2002.
Goodwill Amortization
Goodwill amortization increased 54%, from EUR 44 million in fiscal 2001 to
EUR 67 million in fiscal 2002, principally reflecting the additional goodwill
generated by the acquisition of the remaining shares of Sodexho, Inc. and the
acquisitions of Wood Dining Services and Sogeres during fiscal 2001.
Fiscal Year Ended August 31, 2001 Compared with Fiscal Year Ended August 31,
2000 (restated)
Consolidated Overview of Revenues and EBITA (restated)
Revenues for fiscal 2001 totaled EUR 11.9 billion, a 14% increase over
fiscal 2000. This increase comprises a 5% increase attributable to the
favorable impact of foreign currency translation, principally arising on
revenues in U.S. dollars. External growth of 2% resulted principally from the
acquisitions of Wood Dining Services and Sogeres in the fourth quarter of fiscal
2001 and in the prior year, a majority interest in Universal Services and its
affiliates (which allowed us to consolidate Universal Services beginning in
January 2000). Organic growth of 7% reflected strength in all Food and
Management Services markets.
EBITA increased 8% to EUR 571 million in fiscal 2001. Despite the increased
sales, EBITA growth was weakened by several factors: increased costs to address
food safety concerns in Europe, which cannot always be immediately factored into
our pricing, support costs incurred to reinforce our development, and the
inclusion of Wood Dining Services and Sogeres activity in the fourth quarter,
which contributed EUR 3 million in EBITA losses, due to the seasonality of some
of our market segments.
Analysis of Revenues and EBITA (restated)
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(1) 2001 2000 EUR %(2)
Restated Restated
(in millions of euro, except percentages)
Food and Management Services
North America................. 5,657 4,857 800 16
Continental Europe............ 3,034 2,852 182 6
United Kingdom and Ireland.... 1,717 1,569 148 10
Rest of the World............. 581 495 86 17
------ ----- ------
Total......................10,989 9,773 1,216 12
Remote Sites..................... 579 415 164 40
Service Vouchers and Cards....... 249 194 55 28
River and Harbor Cruises......... 111 114 (3) (2)
------ ------ ------
Total revenues..............11,928 10,496 1,432 14
====== ====== ======
(1) Activities reflect the Group's internal management reporting structure.
(2) Percentage figures are derived from actual revenue numbers and so may vary
from those calculated from the numbers in this table due to rounding.
Fiscal Year Ended August 31, Change in EBITA
EBITA by Activity(1) 2001 2000 EUR %(2)
Restated Restated
(in millions of euro, except percentages)
Food and Management Services
North America................. 295 258 37 14
Continental Europe............ 129 132 (3) (2)
United Kingdom and Ireland.... 87 76 11 14
Rest of the World............. 0 14 (14) (98)
----- ---- ----
Total......................... 511 480 31 7
Remote Sites................... 30 20 10 47
Service Vouchers and Cards..... 61 47 14 30
River and Harbor Cruises....... 7 15 (8) (50)
EBITA, excluding corporate
expenses...................... 609 562 47 8
Corporate expenses............. (38) (32) (6) 20
----- ----- ----
Total EBITA................... 571 530 41 8
===== ===== ====
__________
(1) Activities reflect the Group's internal management reporting structure.
(2) Percentage figures are derived from actual EBITA numbers and so may vary
from those calculated from the numbers in this table due to rounding.
Food and Management Services (restated)
North America
Food and Management Services revenues in North America for fiscal 2001 were
EUR 5.7 billion, representing an increase of 16% from fiscal 2000 revenues.
Currency movements accounted for 10% of this increase, the inclusion of Wood
Dining Services in the fourth quarter for 1%, and organic growth for the
remaining 5%. The Education and Healthcare markets grew by 7%. Significant
contract wins in North America included Fidelity, the University of Texas and
Westchester Medical Center. This growth was offset to some extent by lower
growth in the Business and Industry market, which was affected by the economic
downturn in the United States and related severance programs undertaken by some
of our clients.
EBITA increased by 14% over the prior year to EUR 295 million. Unit
operating profit at our Canadian subsidiary and in the Education and Healthcare
markets saw double digit growth, but the consolidation of Wood Dining Services
in the last two months of the year contributed an operating loss. In addition,
the Business and Industry market has been affected and continues to be affected
(particularly after the events of September 11, 2001) by lower demand for
catering services and reduced employment levels by our clients. Sodexho, Inc.
also reinforced its human resource and information systems structures during the
year.
Continental Europe
Revenues in Continental Europe amounted to EUR 3 billion for fiscal 2001, a
6% increase over the prior year. This increase reflected external growth of 2%,
principally arising from the inclusion of Sogeres in the fourth quarter, offset
by a 2% decrease resulting from the partial sale in fiscal 2000 of Partena Care,
a medical and managed care business in Sweden, which is now accounted for under
the equity method. The impact of foreign currency movements on sales was a
negative 1%, and organic growth was 7%, with strong performances in France and
in Central and Eastern Europe. Other European countries saw organic growth
ranging from 3% to 9%. In Italy, the prior year had benefited from the contract
to feed 3 million young people who had traveled to Rome for the Vatican's World
Youth Day XV in August 2000. In Poland, the development of multiservices
continued with the extension of additional services to clients. We established
operations in Portugal during fiscal 2001, signing a contract with Volkswagen,
with the support of our teams in Slovakia, thereby demonstrating the synergies
of our worldwide network.
EBITA decreased by 2% to EUR 129 million in Continental Europe, reflecting
the negative impact of increased food costs in Europe. These increases were not
immediately recoverable from our clients. We also continued in Continental
European countries to reinforce our market segments. Finally, the inclusion of
Sogeres, 30% of whose revenues are in the Education market, for the last two
months of fiscal 2001, weighed on EBITA.
United Kingdom and Ireland (restated)
Revenues in the United Kingdom and Ireland for fiscal 2001 increased by 10%
over the prior period to EUR 1.7 billion. This increase was almost entirely due
to the 8% organic growth, which was strong in all markets. We continued the
organization of our structures by segment. This resulted in commercial success,
in particular in the Education market with primary and secondary public schools,
including the development of multiservice, and in the Business and Industry
markets, such as the expansion of the British Aerospace contract to new sites.
EBITA grew at a faster rate than revenues, by 14% to EUR 87 million.
Productivity improved with further progress in product category and logistics
management, despite increased food costs resulting from the foot-and-mouth
epidemic affecting livestock. Improved real estate management, together with
accelerated mobilization on two significant Healthcare contracts, also
contributed to EBITA improvement.
Rest of the World
Food and Management Services revenues in the rest of the world increased by
17% over the prior year to EUR 581 million for fiscal 2001. This increase was
primarily attributable to organic growth, which was driven by higher revenues in
South America resulting from strong contract wins in Brazil, Argentina and
Chile. Mainland China also saw strong growth in Business and Industry and we
signed our first contract in the Healthcare market. The Olympic Games in
Australia generated AUS $20 million (approximately EUR 12 million). Our
multiservices strategy is continuing with success in these geographic areas.
EBITA decreased from EUR 14 million to a modest positive amount, in spite
of the exceptionally strong contract wins in South America. The economic crisis
in Argentina meant a significant increase in unemployment and a decrease in
salaries. Economic conditions were also unfavorable in Brazil, where industrial
sector employees were put on stoppage for an average of one week per month, as
the energy crisis forced businesses to decrease consumption by 20%. In Mainland
China, our EBITA increased at most sites and we reinforced our sales force. In
Australia, the Olympic Games contract made a negligible contribution to EBITA
and we chose to exit from a significant loss-making contract.
Remote Sites
Remote Sites revenues grew 40% to EUR 579 million for fiscal 2001, or 34%
excluding the effects of currency movements. Of this growth, 18% was due to the
consolidation of a full year of Universal Services, in which we acquired the
remaining minority interest on January 1, 2000. Organic growth amounted to 16%,
resulting from the recovery experienced by the oil and gas sector, due to
increased oil prices in fiscal 2001. This led to an increase in the rates of
usage of offshore oil platforms (83% in calendar 2000 as compared to 74% in
1999), particularly in the deep waters of West Africa, the Gulf of Mexico, and
in North America, including Alaska. In the mining sector, the Antamina site, in
Peru, reached its full capacity during the year with food and management
services provided to a camp with a population of 6,000.
EBITA in the Remote Sites business for fiscal 2001 grew 47% to EUR 30
million. This increase reflects the higher revenues discussed above and the
implementation of a quality assurance program in the Gulf of Mexico, as well as
improvements in operating margins on certain newer contracts after the initial
start-up phases.
Service Vouchers and Cards
Service Vouchers and Cards revenues grew to EUR 249 million for fiscal
2001, representing a 28% increase over the prior year. Organic growth of 21%
was due primarily to increased volumes in Europe. Foreign currency effects
contributed to 2% of the growth and 5% was attributable to acquisition of
Transcheck, which enabled us to expand our presence in Brazil.
EBITA amounted to EUR 61 million for fiscal 2001, representing a 30%
increase from the prior year. This increase reflected the strong revenue growth
described above and a widening of margins due primarily to improvements in our
sales mix. This improvement in margins occurred despite continued expenditures
on the development of new business in the activity, notably the expansion into
several new countries, including the United States, China and Morocco, the
reinforcement of country and zone support structures, intensified selling
efforts and the extension of our offer. In addition, development of smart card
technology continued.
River and Harbor Cruises
River and Harbor Cruises revenues for fiscal 2001 decreased by 2% from the
prior year to EUR 111 million. This decrease was net of 6% from foreign
currency effects. Fiscal 2001 was a challenging year for this activity, which
represents 1% of consolidated revenues. The downturn in the United States
economy had an adverse impact on our corporate cruise market there. In the
United Kingdom, the tourism industry suffered from the impact of foot-and-mouth
disease. Finally, the overflowing of the Seine river in Paris limited Bateaux
Parisiens' activities for 40 days during the tourist season.
EBITA decreased by 53% to EUR 7 million as a result of the impact of
unavoidable fixed costs on lower revenues.
Corporate Expenses
Corporate expenses increased by 20% to EUR 38 million for fiscal 2001,
reflecting the development of a new global management training program, Sodexho
Entrepreneur, the launch of a global intranet as an extension of the existing
group intranet systems and reinforcement and expansion of our market champion
structures. In fiscal 2001, we created two new market champion structures,
Defense and Large Accounts, principally in Business and Industry. We also
continued the development of our information systems.
Financial Expense, Net
Net financial expense was stable for the year at EUR 122 million, as
compared to EUR 118 million in fiscal 2000, despite the 10% appreciation of the
US dollar against the euro. Approximately 65% of our debt is denominated in US
dollars. The financing of the three acquisitions during the fourth quarter of
fiscal 2001 contributed an additional EUR 9 million of interest expense. At
constant exchange rates and excluding the acquisition financing, net interest
expense decreased by 11% to EUR 105 million euro.
Net Exceptional Income/Expense
Net exceptional expense amounted to EUR 1 million for fiscal 2001, as
compared to exceptional expense of EUR 78 million for fiscal 2000. Net
exceptional expense for fiscal 2000 principally reflected the full provisioning
of the investment in C.C.A. which was subsequently sold. Net exceptional
expense for fiscal 2001 included EUR 20 million in transaction costs incurred by
SMS and EUR 21 million in provisions related to the 49.95% owned Attendo Care
(previously, Partena Care) subsidiary.
Income Taxes (restated)
Income taxes increased from EUR 156 million to EUR 157 million. Excluding
permanent differences, the effective rate was 36%.
Net Income from Equity Method Investees
Net income from equity method investees decreased from EUR 1 million to a
loss of EUR 2 million in fiscal 2001, principally as a result of the full
consolidation of Universal Services as of January 1, 2000. For the first four
months of fiscal 2000, Universal Services was consolidated under the equity
method.
Minority Interests
Minority interests decreased 3% from EUR 69 million to EUR 67 million as a
result of the full consolidation of Sodexho, Inc. effective upon our acquisition
of its remaining shares in the fourth quarter of fiscal 2001. This was
partially offset by the acquisition of 60% of Sogeres in the fourth quarter of
fiscal 2001.
Goodwill Amortization
Goodwill amortization increased 41%, from EUR 31 million to EUR 44 million,
reflecting the additional goodwill generated upon the acquisition of the
remaining shares of Sodexho, Inc. and the acquisitions of Wood Dining Services
and Sogeres during fiscal 2001. Fiscal 2001 also included a full year of
Universal Services, as we had acquired the remaining interest in Universal
Services in January 2000.
B. Liquidity and Capital Resources
The following table sets forth certain cash flow items for fiscal 2000
through fiscal 2002:
Year ended August 31,
2002 2001 2000
(millions of euro)
Net cash provided by operating activities........... 619 554 529
Net cash used in investing activities...............(315) (1,959) (209)
Net cash provided by (used in) financing activities. (70) 1,763 (225)
Net effect of exchange rate variations on cash......(118) (40) 43
----- ------- -----
Net increase in cash and cash equivalents........... 116 318 138
===== ======= =====
For fiscal 2002, net cash provided by operating activities amounted to
EUR 619 million, an increase of 12% over the prior year, confirming the quality
of the Group's financial model. Net cash generated by changes in operating
working capital amounted to EUR 209 million in fiscal 2002, as compared to
EUR 154 million for fiscal 2001 (restated), with about half of the improvement
being made in the Service Vouchers and Cards activity and the remainder
resulting from the growth in the business and the efforts by our operational
teams to improve collection of accounts receivable, a strategic priority for the
Group.
Capital expenditures, net of disposals of property, plant and equipment,
amounted to EUR 268 million in fiscal 2002, representing 2.1% of revenues.
Net acquisition expenditures of EUR 97 million in fiscal 2002 mainly
included the acquisition of Minesite Catering in Australia and the remaining 40%
of the capital stock of Sogeres.
In May 2002, the Lockhart subsidiary in the United Kingdom was sold for
EUR 61 million.
During fiscal 2002 we paid dividends totaling EUR 102 million. Dividend
payments of EUR 15 million were paid out by our subsidiaries to third-party
shareholders.
In March 2002, we issued EUR 1 billion of debt securities in the European
markets. We used the net proceeds from the sale of these debt securities,
approximately EUR 992,330,000, to refinance outstanding debt. The debt is
issued in 5.875% notes due March 25, 2009.
Negative exchange effects increased net debt EUR 47 million. Despite this,
net debt in our consolidated balance sheet totaled EUR 1,363 million as of
August 31, 2002, a reduction of EUR 205 million from the prior year end and
represents 55% of our shareholders'equity.
Total financial debt of EUR 2,693 million as of August 31, 2002 principally
comprised three bond issues (EUR 305 million in bonds issued in 1996 and
redeemable in 2004, EUR 300 million in bonds issued in 1999 and redeemable in
2009, and EUR 1 billion in bonds issued in 2002 and redeemable in 2009) and
U.S. dollar-denominated credit facilities totaling U.S. $818 million. The
balance of outstanding debt represents leasing, term and revolving credit
facilities by our subsidiaries. As of August 31, 2002, 92% of our debt was at
fixed interest rates, and our weighted average interest cost was 5.7%.
As of August 31, 2002, and in addition to available cash and cash
equivalents and marketable securities (excluding restricted cash) of EUR 1,142
million, we had revolving credit facilities available of EUR 122 million to
provide funds for liquidity, seasonal borrowing needs and other corporate
purposes.
Our off balance sheet commitments totaled EUR 143 million as of
August 31, 2002. Refer to note 3.19 in the consolidated financial statements.
For fiscal 2001, net cash provided by operating activities amounted to
EUR 554 million, an increase of 5% over the prior year. Net cash generated by
changes in operating working capital, as restated, amounted to EUR 154 million
in fiscal 2001, as compared to EUR 160 million for fiscal 2000. In fiscal 2000,
significant progress was made by Sodexho, Inc. in improving the collection of
client receivables. Fiscal 2001 saw continued focus on management of accounts
receivable, notably in the Remote Sites and Service Voucher and Cards
activities.
Capital expenditures, net of disposals of property, plant and equipment,
amounted to EUR 207 million in fiscal 2001, representing 1.7% of revenues.
Net cash provided by operating activities amounted to EUR 554 million, an
increase of 5% over the prior year.
Net acquisition expenditures of EUR 1.8 billion in fiscal 2001 included the
acquisition of Transcheck, a service vouchers and cards business in Brazil, and
the purchase of the remaining equity interest in our correctional service
subsidiaries in the United Kingdom and Australia. In June 2001, we also
completed a transaction by which we acquired the remaining interest in SMS for
approximately EUR 1.3 billion. In the fourth quarter of fiscal 2001, we
acquired 100% of the capital stock of Wood Dining Services and 60% of the
capital stock of Sogeres. In November 2001, we exercised our option to purchase
the remaining shares of Sogeres for EUR 72 million. The total cost for all the
capital stock of both companies was EUR 521 million, a portion of which was paid
in the fourth quarter of fiscal 2001 and the balance of which was paid when the
remaining shares of Sogeres were acquired in November 2001.
During fiscal 2001 we paid dividends totaling EUR 83 million. Dividend
payments of EUR 9 million were paid out by our subsidiaries to third-party
shareholders.
In July 2001, we raised EUR 1.0 billion in new equity by issuing 22,498,729
new shares in a rights offering 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 EUR 45 per share.
In connection with our acquisition of the remaining interest in SMS and of
Sogeres and Wood Dining Services, we entered into a credit agreement in July
2001 for aggregate amounts of EUR 1.9 billion and U.S. $1.1 billion, divided
among four facilities. The first and second facilities, in the amount of
EUR 1.9 billion, financed the acquisitions. On July 5, 2001, EUR 0.9 billion of
these facilities were repaid out of the proceeds of the share issuance described
above. The balance was repaid with the proceeds of the debt securities issued in
March 2002, as described above. The third and fourth facilities, amounting to
U.S. $1.1 billion in the aggregate, are repayable in quarterly installments with
a final maturity date of April 5, 2006. Net debt in our consolidated balance
sheet as of August 31, 2001 totaled EUR 1,568 million, and increased by
EUR 455 million from the prior year end. Exchange rate variations, principally
relating to the strengthening of the U.S. dollar and British pound sterling
against the euro, decreased total debt by EUR 54 million and decreased cash and
cash equivalent balances by EUR 40 million. Excluding the impact of exchange
rate variations, our net debt increased by EUR 468 million in fiscal 2001.
Total financial debt of EUR 2,781 million as of August 31, 2001 was
principally comprised of four instruments and facilities: EUR 305 million in
bonds issued in 1996 and redeemable in 2004, EUR 300 million in bonds issued in
1999 and redeemable in 2009, two U.S.dollar-denominated credit facilities
totaling EUR 1,352 million, held by Sodexho, Inc. (formerly SMS) and EUR 538
million drawn on the two facilities held by Sodexho Alliance and negotiated in
connection with the fourth quarter acquisitions. The balance of outstanding
debt represents leasing, term and revolving credit facilities by our
subsidiaries. As of August 31, 2001, 62% of our debt was at fixed interest
rates, and our weighted average interest cost was 5.6%.
C. U.S. GAAP
General
We prepare our financial statements in accordance with French GAAP, which
differs in certain significant respects from U.S. GAAP, as discussed in note 5
to the consolidated financial statements. The individual differences discussed
in note 5 describe the main adjustments to the French GAAP consolidated
financial statements that include SMS as a consolidated subsidiary in all
periods presented. Under French GAAP, we consolidated SMS, of which we owned
47.5% as of August 31, 2000, until we acquired the remaining shares on
June 20, 2001 (at which time we owned 46.9% of SMS). French GAAP generally
requires consolidation of greater than 40%-owned subsidiaries if there is no
single more significant shareholder. Under U.S. GAAP, SMS is required to be
accounted for by the equity method until the date when the remaining shares were
acquired. The effects of accounting for SMS under the equity method in fiscal
2001 and fiscal 2000 as well as the effects of other U.S. GAAP adjustments are
included in note 5 to the consolidated financial statements.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 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)." The
principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost as defined in
EITF Issue No. 94-3 was recognized at the date of an entity's commitment to an
exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is that
an entity's commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability. Therefore, this
Statement eliminates the definition and requirements for recognition of exit
costs in EITF Issue No. 94-3. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The impact of SFAS
No. 146 on the Group's financial statements is not expected to be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale and to be disposed of by
sale. Although the Statement retains certain of the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," it supersedes SFAS No. 121 and Accounting Principles Board
(APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No.
51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and will thus be adopted by the Group, as
required, on September 1, 2002. The impact of SFAS No. 144 on the Group's
financial statements is not expected to be material.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The impact of
SFAS No.143 on the Group's financial statements is not expected to be material.
D. Research and Development, Patents and Licenses, etc.
We have the patents, trademarks, trade names and licenses that are
necessary for the operation of our business as we currently conduct it. Other
than the Sodexho name, we do not consider our patents, trademarks, trade names
and licenses to be material to the operation of our business.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The table below sets forth, as of December 31, 2002, 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.
Name Date of Birth Position Initially Expiration
Appointed of Term
----------------------- -------------- -------------- ----------- ------------
Pierre Bellon(1) 1/24/1930 Chairman 11/14/1974 2004
Remi Baudin(1)(2) 10/19/1930 Vice Chairman 2/25/1983 2004
Astrid Bellon 4/16/1969 Director 7/26/1989 2004
Bernard Bellon 8/11/1935 Director 2/26/1975 2003
Francois-Xavier Bellon 9/10/1965 Director 7/26/1989 2004
Sophie Clamens(2) 8/19/1961 Director 7/26/1989 2004
Patrice Douce 3/02/1942 Director 2/23/1988 2003
Paul Jeanbart(2) 8/23/1939 Director 2/13/1996 2005
Francois Perigot(1) 5/12/1926 Director 2/13/1996 2005
Edouard de Royere(1)(2) 6/26/1932 Director 2/13/1996 2005
Nathalie Szabo 1/26/1964 Director 7/26/1989 2004
H.J. Mark Tompkins 11/02/1940 Director 2/05/2002 2005
__________________
(1) Member of Selection Committee and Compensation Committee.
(2) Member of Audit Committee.
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 1981. 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 L'Air Liquide and Pinault Printemps La Redoute. Mr. Bellon and his
children, Astrid Bellon, Sophie Clamens, Nathalie Szabo and Francois-Xavier
Bellon, hold 54.9% of the shares in Bellon SA, which holds a 39% economic
interest in Sodexho Alliance as of December 31, 2002.
Remi Baudin. Before helping Pierre Bellon to create Sodexho Alliance,
Mr. Baudin took part in a number of foreign projects for the management
consultant company SEMA from 1957 to 1965. He reorganized and managed its ship
supply business (1965-1969), then created a joint venture with Sonatrach in the
Remote Sites business and headed the two companies' joint subsidiary in Algeria
(1969-1970). He successively managed the Food and Management Services France
division and started up operations in Belgium (1971-1976); the France and Africa
division, overseeing start-ups in Cameroon, Nigeria, Ivory Coast, Angola, Benin,
Guinea, Algeria and Libya (1977-1982); and the Food and Management Services
France and Europe division (1982-1992). Mr. Baudin is also President of
FERCO, the European food services confederation, which he founded in 1988. 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. 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 Perfin SA, CIC France and
Allios Industrie. 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 is a
member of the Executive Board of Bellon SA and currently serves as the Chief
Operating Officer of Sodexho Mexico. 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. Since 1994,
Ms. Clamens has consulted on projects in our finance and strategy departments.
Ms. Clamens became Chairman of the Executive Board of Bellon SA in February
2002. Ms. Clamens is the daughter of Pierre Bellon.
Patrice Douce. After serving as an advisor to the Algerian Finance
Ministry, Mr. Douce joined Sodexho in 1972 to create and manage the Remote Sites
business. He later headed our operations in Latin America and the United
States. He was appointed President and Chief Operating Officer in 1990, with
responsibility for Food and Management Services operations in Latin America,
Asia, the Pacific and North America as well as for Remote Sites and River and
Harbor Cruises, a position from which he withdrew in 2001.
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.
Francois Perigot. After serving as Chairman and Chief Executive Officer of
Thibaud Gibbs et Compagnie from 1968 to 1970, Mr.Perigot successively held the
positions of Chairman and Chief Executive Officer Unilever Spain and Chairman
and Chief Executive Officer Unilever France (1971-1986). From 1986 to 1998, he
was Chairman of Compagnie du Platre, and from 1988 to 1998 he served as Vice
Chairman and later Chairman of UNICE, the European union of employer and
industry confederations. Mr. Perigot has also served as a president of the
Enterprise Institute (1983-1986), a president of the National Council of French
Employers (1986-1994), a member of the Executive Committee of the International
Chamber of Commerce (1987-1989) and a member of the Economic and Social Council
(1989-1999). He has 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 Astra Calve, Lever, CDC Participations and Sabate-Diosos.
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 Chairman of the National Association of
Joint-Stock Companies. Mr. de Royere serves as a director of Danone, L'Oreal
and Michelin.
Nathalie Szabo. Ms. Szabo served as an account manager for Scott Traiteur
from 1989 to 1992. She currently works for Bellon SA as a special projects
advisor for 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 Partners Bio Projects
International Ltd and Calcitech Ltd. Mr.Tompkins is a British citizen.
Executive Officers
The table below sets forth, as of December 31, 2002, the names and dates of
birth of our executive officers, which include Pierre Bellon and all of the
members of our Executive Committee.
Name Date of Birth Position
Pierre Bellon 1/24/1930 Chairman and Chief Executive Officer
Albert George 4/29/1944 Group Chief Operating Officer
Chairman of the Executive Committee
Elisabeth Carpentier 5/08/1954 Senior Vice President, Human Resources
Jean-Michel Dhenain 12/10/1944 Chief Executive Officer, Continental Europe
Vice President of the Executive Committee
Sian Herbert-Jones 9/13/1960 Chief Financial Officer
Michel Landel 11/07/1951 Chief Executive Officer, North America
Vice President of the Executive Committee
Clodine Pincemin 7/20/1952 Senior Vice President, Corporate
Communications
Albert George. Mr. George joined us in 1969 and held different management
positions in the Food and Management Services business until 1980. He was then
appointed Managing Director of the Service Vouchers and Cards business in France
and gradually expanded its operations internationally. In 1992, he was
appointed Chief Operating Officer, Service Vouchers and Cards. On February 21,
2000, Mr. George was appointed Directeur General Adjoint of Sodexho Alliance and
on October 18, 2001 he became Directeur General Delegue of Sodexho Alliance. He
has also been given the responsibility of promoting the use of new information
and communication technologies. Mr. George is a graduate of the Institut
d'Administration des Entreprises de Grenoble and holds a doctorate in economics.
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 Senior Vice President, Corporate Human Resources. Ms. Carpentier
has both a law diploma and a post-graduate degree in human resources management.
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 Chief Executive Officer Continental Europe. 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 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.
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 Chief Executive Officer North America, and 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.
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.
Ms. Pincemin has a degree in French literature.
B. Compensation
During fiscal 2002, we paid total fees, compensation and benefits to
members of our Board of Directors (other than the Chairman, whose compensation
is disclosed separately below), as follows.
Total
Name compensation
-------------------------------- ------------------
(in euro)
Remi Baudin 12,000
Astrid Bellon 6,100
Bernard Bellon 6,100
Francois-Xavier Bellon 263,273
Sophie Clamens 94,753
Patrice Douce(1) 439,629
Paul Jeanbart 12,000
Francois Perigot 12,000
Edouard de Royere 12,000
Nathalie Szabo 84,099
H.J. Mark Tompkins 6,100
__________________
(1) Includes base salary, bonuses for fiscal 2001 and fiscal 2002, and one-time
retirement plan payment.
As a matter of French law, until January 24, 2001 we could not grant
options to non-employee members of our Board of Directors.
Compensation for our executives is comprised of a fixed salary and a
performance bonus tied to the achievement of annual objectives. For fiscal
2002, the aggregate compensation received by members of the Executive Committee
was EUR 2,758,902, and they received options to purchase a total of 107,500
Sodexho Alliance shares. On November 1, 2001, the membership of our Executive
Committee changed, and the Committee now has three fewer members than it did at
the end of fiscal 2001. For this reason, the total compensation figure
described above may not be comparable to the aggregate figure for fiscal 2001.
During fiscal 2002, the total compensation paid to the Chairman and Group Chief
Operating Officer was EUR 550,979 and EUR 480,437, respectively. The table
below provides certain information regarding the options to purchase our common
shares granted to executive officers.
Date of Plan Amount(1) Exercise Price per Share Expiration Date
---------------- -------------- -------------------------- ---------------------
---------------- -------------- -------------------------- ---------------------
January 24, 2001 52,350 EUR 48.42 January 23, 2006
January 11, 2002 77,500 EUR 47.00 January 10, 2007
January 11, 2002 30,000 EUR 47.00 January 10, 2008
________
(1) These amounts have been adjusted retroactively, where appropriate, to
reflect the four-for-one stock split effective March 7, 2001 and the rights
offering on July 4, 2001.
During fiscal 2002, we and our subsidiaries recorded total charges of
EUR 31 million for pension, retirement and similar benefits and, as of
August 31, 2002, we and our subsidiaries had accrued a total of EUR 140 million
for these items.
C. Board Practices
Our Board of Directors has 12 members, of whom only two held executive
positions with our company during the year. 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 Selection 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;
o the Compensation Committee, which proposes compensation packages for
corporate officers and senior executives, including stock option plans;
and
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, communicates with
our internal and external auditors and reports on such matters to the
rest of our Board.
The Compensation committee is chaired by Remi Baudin, Vice Chairman of the
Board of Directors, with the assistance of Pierre Bellon and two non-executive
directors, Francois Perigot and Edouard de Royere. The Selection committee is
chaired by Francois Perigot with the assistance of Pierre Bellon, Edouard de
Royere and Remi Baudin. These committees met four times, and the Board as a
whole met six times during fiscal 2002. The Audit Committee is chaired by
Edouard de Royere with the assistance of Remi Baudin, Sophie Clamens and Paul
Jeanbart. Our external auditors report to the Audit Committee twice annually on
their activity and planned actions. The Chairman of the Audit Committee reports
to the Board twice each year.
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, 2002, we had 315,141 employees worldwide. The table below
shows the number of employees of our company and our subsidiaries by geographic
zone as of August 31, 2002, 2001 and 2000.
August 31,
2002 2001 2000
North America.............. 117,689 120,147 112,061
United Kingdom and Ireland. 60,329 63,142 57,287
France..................... 30,952 29,051 23,154
Rest of Europe............. 50,944 47,467 46,644
Rest of the World.......... 55,227 53,662 46,840
------- ------- -------
Total Number of Employees.. 315,141 313,469 285,986
======= ======= =======
Following is a breakdown of our employees by category as of August 31, 2002,
2001 and 2000.
August 31,
2002 2001 2000
Executives and middle management . 5,759 7,065 7,636
Establishment managers and
supervisory staff............... 25,614 32,677 26,311
Front line service staff and other. 283,768 273,727 252,039
------- ------- -------
Total Number of Employees.......... 315,141 313,469 285,986
======= ======= =======
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.
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 55% (representing
a voting interest of approximately 71%) in Bellon SA, which, as of December 31,
2002, owns an economic interest of approximately 39% (representing a voting
interest of approximately 40%) 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 December 31, 2002, 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 his family own, as of December 31, 2002, 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 December 31, 2002.
Number of
Name Shares Owned
Bellon SA............................................ 61,529,671(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)
Albert George........................................ *(2)
Sian Herbert-Jones................................... *(2)
Michel Landel........................................ *(2)
Clodine Pincemin..................................... *(2)
(1) Pierre Bellon owns .01% of the outstanding shares of Bellon SA; Astrid
Bellon, Francois-Xavier Bellon, Sophie Clamens and Nathalie Szabo each own
an economic interest of 13.72% in Bellon SA. At any ordinary shareholders'
meeting of Bellon SA, Pierre Bellon has a voting interest of 62.7% and each
of Astrid Bellon, Francois-Xavier Bellon, Sophie Clamens and Nathalie Szabo
has a voting interest of 2%. 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 17.7%.
Bernard Bellon owns an economic interest of 2.1% in Bellon SA. At any
ordinary shareholders' meeting, Bernard Bellon has a voting interest of
16.5%. At any extraordinary meeting, Bernard Bellon has a voting interest
of 2.8%. Bellon SA is the beneficial owner of approximately 39% of our
outstanding shares.
(2) Indicates beneficial ownership of less than 1% of the shares outstanding.
As of December 31, 2002, members of our Board of Directors and Executive
Committee held, in the aggregate, options to acquire 231,832 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) -- -- --
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 19,631 EUR 38.17 December 10, 2003
4,172 EUR 39.86 January 24, 2005
5,317 EUR 48.42 January 23, 2006
10,000 EUR 47.00 January 10, 2007
Jean-Michel Dhenain 8,221 EUR 39.86 January 24, 2005
10,225 EUR 48.42 January 23, 2006
15,000 EUR 47.00 January 10, 2007
Albert George 16,359 EUR 27.11 December 12, 2003
10,306 EUR 39.86 January 24, 2005
14,314 EUR 48.42 January 23, 2006
31,000 EUR 47.00 January 10, 2007
Sian Herbert-Jones 6,135 EUR 39.86 January 24, 2005
6,135 EUR 48.42 January 23, 2006
15,000 EUR 47.00 January 10, 2007
Michel Landel 16,359 EUR 27.11 December 12, 2003
30,000 EUR 47.00 January 10, 2008
Clodine Pincemin 3,068 EUR 39.86 January 24, 2005
4,090 EUR 48.42 January 23, 2006
6,500 EUR 47.00 January 10, 2007
-------
Total 231,832
=======
(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) Until January 24, 2001, we were not permitted under French law to grant
options to members of the Board of Directors (other than the Chairman of
the Board) who are not employees.
Our Board of Directors recently approved two Sodexho Alliance Stock Option
Plans. 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. 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 EUR 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 EUR 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).
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 EUR 4 each and an issue price of
EUR 44.10 per share for United States employees and EUR 41.51 for other
employees.
As of August 31, 2002 more than 34,600 employees held 2,590,925 Sodexho
Alliance shares, representing 1.63% of the outstanding shares of Sodexho
Alliance.
Certain members of management have been granted options to purchase Sodexho
Alliance shares repurchased by us in the open market or funded through future
issuances. Options in Sodexho Alliance shares granted under our plans vest in
full five years from the date of grant, except for the December 11, 1997 grant,
which vests in full six years after the date of grant and Plan A and Plan B,
which vest in full four years after the date of grant. In general, if an
optionholder dies during his or her employment, such person's options may be
exercised up to six months after his or her death to the extent vested at the
time of his or her death or termination. Options granted pursuant to Board
resolutions of January 25, 2000, April 4, 2000 and February 21, 2001, however,
provide that if an optionee dies, such person's vested options may be exercised
between March 1, 2005 and January 23, 2006 only (and not in the six months
following such person's death). No option may be transferred by the optionee
other than by will or the laws of intestacy. In any event, all options must be
exercised within one year of vesting.
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.
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 DepositaryShares to be delivered to SMS optionholders
will be purchased by Sodexho Alliance on the open market.
As of November 30, 2002, 2,940 members of management held 4,836,384 options
to purchase Sodexho Alliance shares and 190,866 restricted stock units,
representing 3% of the shares of Sodexho Alliance on a fully-diluted basis.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Below is a diagram illustrating our ownership as of December 31, 2002.
The only shareholder known to management to beneficially own 5% or more of
our shares is Bellon SA, a French company controlled by our chairman, Pierre
Bellon, and members of his family. As of December 31, 2002, Bellon SA
beneficially owned 61,529,671 shares of the company (representing approximately
39% of our outstanding share capital and 40% of the voting power relating to our
outstanding share capital), and Pierre Bellon and his children beneficially
owned approximately 55% of the outstanding capital stock of Bellon SA. As of
the same date, Bernard Bellon and his children owned 13% of the outstanding
capital stock of Bellon SA, and certain others owned 14% of such stock. 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 interest of
approximately 14% in Bellon SA. Sofinsod and another wholly-owned subsidiary,
Etinbis, together have an indirect interest of approximately 2% in Sodexho
Alliance, SA through their respective interests of approximately 57% and 43% in
Societe Financiere de la Porte Verte, which in turn owns approximately 4% of
Bellon SA. 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 December 31, 2002, Pierre Bellon and his children owned 67%
of the outstanding capital stock of Bellon SA, Bernard Bellon and his children
owned 16% of such stock and certain others owned 17% of such stock,
To management's knowledge, there have not been any significant changes in
Bellon SA's ownership interest in the company 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, 2002, our shares were owned by approximately 81,260
shareholders, including approximately 34,600 people acquiring their shares
through our various employee stock ownership plans (together, our employees own
approximately 2% of our outstanding capital stock). French citizens hold
approximately 9% of our shares, while French institutional investors hold
approximately 26% of our shares. To the best of our knowledge and after having
made reasonable inquiries, as of August 31, 2002, foreign shareholders held
approximately 23% 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 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
EUR 3.7 million in fiscal 2002.
In connection with the combination of our North American subsidiaries and
Marriott Management Services in 1998, we entered into a Royalty Agreement and an
Assistance Agreement with the resulting company, SMS. Pursuant to these
agreements, both effective March 27, 1998, we granted SMS the right to use the
name "Sodexho" in connection with its operations in the United States and Canada
for a period of 10 years, for a royalty payment equal to 0.05% of its annual
gross revenues. Amounts invoiced to SMS (now Sodexho, Inc.) by us were $2.5
million (approximately EUR 2.8 million) in fiscal 2002.
Under the terms of the Assistance Agreement, which now renews automatically
each year unless 30 days prior notice is given by either party requesting
termination, we agreed to provide certain services to SMS, including services
related to purchasing activities, catering and site support services, marketing,
management and administration, legal and financial matters, human resources,
communications and cash management. In exchange for these services, SMS pays us
a fee equal to a percentage of the annual gross revenues of the SMS and its
subsidiaries. Amounts invoiced to SMS (now Sodexho, Inc.) by us under the
contract were approximately $8.6 million (approximately EUR 9.5 million) in
fiscal 2002.
Mr. Patrice Douce is a member of the Board of Directors of both Sodexho
Alliance and Siges, a subsidiary of Sodexho Alliance. Siges has a contractual
agreement with Sodexho Alliance for the rental of facilities and equipment in
western France. In fiscal 2002, Sodexho Alliance invoiced Siges EUR 85,873
under this contract.
In fiscal 2002, Mr. Douce invoiced Sodexho Alliance EUR 13,795 for services
rendered as a speaker at Sodexho Management Institute.
A list of Sodexho Alliance, SA's intercompany loans, advances, deposits and
guarantees outstanding as of August 31, 2002 is provided below.
Amount of
deposits Largest
Loans and and amount
advances guarantees outstanding Total Amount
given and given and as of each outstanding
outstanding outstanding of August as of
as of August as of August 31, 2002, August 31,
31, 2002 31, 2002 2001 and 2000 2002
(thousands of euro)
French subsidiaries
Etin......................53,306 53,306 53,306
Astilbe................... 8,643 8,643 8,643
Societe Francaise de
restauration et de
services................. 2,363 5,818 2,363
Les Bateaux Parisiens..... 134 1,330 134
Sodexho cheques et
cartes de service......... 1,078 1,164 1,078
Sodexho France SAS........ 51 1,414 51
Societe Francaise de
restauration............. 338 1,072 338
Societe Francaise de
services................. 638 3,177 638
Societe Marseillaise de
restauration et de
services................. 395 395 395
Sofinsod.................. 576
Societe de Services de
Proximite................ 440
Universal Sodexho Afrique. 1 2,236 2,822 2,237
RGC....................... 131 302 131
Societe des thermes de
Neyrac les bains......... 826 983 826
Siges..................... 994
Sodexho Pass International 177 14,847 17,092 15,024
Sogeres................... 95 9,884 9,979 9,989
Ogre...................... 100
Foreign subsidiaries
Sodexho, Inc.............349,034 1,045,460 1,922,491 1,394,494
Sodexho Catering and
Services GmbH........... 8 38,731 39,020 38,739
Sodexho Scandinavian
Holding AB.............. 2,556 3,613 2,556
Sodexho Holding Ltd...... 13,530 13,530 13,530
Sodexho Services Group... 46,620 46,620 46,620
Sodexho Prestige......... 3,149 3,149 3,149
Sodexho Ltd.............. 12 15,968 15,980 15,980
Keyline Travel........... 2,361 2,446 2,361
Primary Management
Aldershot............... 22,715 22,715 22,715
UK Detention Services.... 1,631
Kelvin International
Services................ 5,038 5,218 5,038
Universal Services
Partnership............. 18,827 27,159 18,827
Harmondsworth............ 326 28,338 88,056 28,664
AIMS Corp................ 5,182 7,022 7,348 12,204
Sodexho Chili............ 1,906 7,669 1,906
Sodexho Argentine........ 232 960 232
Sodexho Singapore........ 276
Sodexho Venues
Australia pty........... 2,476
Sodexho Australia pty.... 10,674 10,674 10,674
Universal Sodexho Eurasia 2 9,759 2
Universal Sodexho Scotland 8 9,422 9,430 9,430
Saha..................... 8 1,652 2,280 1,660
Sodexho Gabon............ 2 308 2
Sodexho Nigeria.......... 2 282 594 284
Sodexho Tanzanie......... 8 285 317 293
Sodexho Peru............. 3 10,149 3
Sodexho International SA. 12 271 1,827 283
Sodexho Hellas........... 1,700 1,700 1,700
Catamaran Cruises........ 18 707 18
Foreign affiliates
Agecroft Prison
Management............. 4,966 5,144 4,966
Sodexho Defence Services 5,337 6,111 5,337
Other.................... 931 3,743 37,708 4,674
------- --------- ---------
TOTAL.................... 441,007 1,300,477 1,741,484
======= ========= =========
C. Interests of Experts and Counsel
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information.
See Item 17.
Legal Proceedings
We are involved in a number of legal proceedings incidental to the normal
conduct of our business. We do not believe that liabilities relating to the
above proceedings are likely to be, in the aggregate, material to our business
or our consolidated financial position.
Following the mandatory liquidation of SPAN Societe D'Exploitation du Parc
D'Attraction de Nice (Parc Zygofolis)-in 1992, SPAN's receivers sued our
directors and one of our subsidiaries, Sofinsod, demanding payment for our debts
in excess of the proceeds from liquidation. The district court originally ruled
in favor of the plaintiff, and Sofinsod was ordered to pay EUR 7,622,000 to
SPAN's creditors. The ruling was subsequently overturned and the case is now on
final appeal to the French Supreme Court. The French Supreme Court investigated
this final appeal on September 17, 2002 and dismissed it in November 2002.
In connection with the expansion of its activities in Lebanon, Sodexho
Pass International SA (SPI), a subsidiary of Sodexho Alliance SA, acquired 40%
of the share capital of Sodexho Pass Lebanon. Prior to the commencement of
operating activities, SPI exerted its right to cancel the agreement due to a
misunderstanding with one of the partners, the manager of Sodexho Pass Lebanon.
The Lebanon partners are claiming damages up to $27 million from SPI. Based on
the advice of external legal counsel, our exposure with respect to this case is
a maximum of $400,000, and an appropriate amount has been accrued in the
financial statements as of August 31, 2002.
On March 8, 2001, ten current and former employees of Sodexho, Inc., the
majority of whom had worked for Marriott Management Services, Inc.
(a predecessor company of Sodexho Marriott Services, Inc., now 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 of over 2,600 current
and former employees of Sodexho, Inc. relating to the period commencing March
27, 1998, as well as reimbursement of plaintiffs' costs and attorneys' fees.
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. has appealed this
decision. The parties to this litigation have commenced discovery. In fiscal
2002, a provision of EUR 11 million was recorded for defense costs anticipated
in connection with this lawsuit. A resolution of plaintiffs' claims in their
favor could have a material effect on our net income.
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%. 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. Investors in our ADSs or shares
should consult their own advisors with respect to the tax consequences of an
investment in ADSs or shares. For further information regarding taxation of
dividends, see "Item 10.E. Additional Information -- Taxation."
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.
Dividend Dividend Shares
per share per share outstanding
excluding including at the date Total dividend
Year (1) (2) avoir fiscal avoir fiscal of payment paid
EUR $ EUR $ EUR (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
------------------------------------------------------------------------------
(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.
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 EUR 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). In
accordance with the relevant European Union regulations, as of January 1, 1999
all shares listed on Euronext Paris are traded in euro so, for ease of
reference, the table below indicates the euro prices converted at the 2 p.m.
European Central Bank euro-franc exchange rate at the end of fiscal 1997 and
1998.
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.
Average daily
trading volume
Fiscal Year High Low (in shares)
EUR EUR
1998.................................................................. 48.85 23.83 241,824
1999.................................................................. 48.96 32.51 274,315
2000.................................................................. 47.74 31.38 317,693
2001.................................................................. 60.10 41.13 397,875
2002.................................................................. 55.75 25.10 574,261
Average daily
trading volume
Fiscal Year High Low (in shares)
2001 EUR EUR
First Quarter...................................................... 50.43 41.13 265,353
Second Quarter..................................................... 52.88 42.74 374,575
Third Quarter...................................................... 58.22 47.93 397,167
Fourth Quarter..................................................... 60.10 47.10 552,948
2002 EUR EUR
First Quarter...................................................... 55.75 41.65 647,348
Second Quarter..................................................... 48.42 42.65 439,090
Third Quarter...................................................... 48.62 36.63 616,982
Fourth Quarter..................................................... 38.40 25.10 593,625
July............................................................... 38.24 25.10 665,711
August............................................................. 31.15 26.05 542,778
September.......................................................... 30.83 18.25 798,410
October............................................................ 25.00 18.11 766,992
November........................................................... 26.90 20.75 667,148
December........................................................... 26.85 21.50 513,782
ADS trading volumes from April 3, 2002 through December 31, 2002 were less than
2,000 shares per day.
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 EUR 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, 2002 found 45,619 identified holders of bearer shares and
1,041 holders of registered shares.
In accordance with French law concerning dematerialization of securities,
the ownership rights of shareholders are represented not by share certificates
but rather by book entries. We maintain a share account with Societe Generale
for all shares in registered form, which is administered by Societe Generale.
In addition, we maintain separate accounts in the name of each shareholder
either directly or, at a shareholder's request, through the shareholder's
accredited intermediary. Each shareholder account shows the name of the holder,
the number of shares held and, in the case of shares held through an accredited
intermediary, the fact that the shares are held through such intermediary.
Societe Generale, as a matter of course, issues confirmation to each registered
shareholder as to shares registered in the shareholder's account, but these
confirmations are not documents of title.
Shares held in bearer form are held on the shareholder's behalf in an
account maintained by an accredited intermediary and are registered in an
account which the accredited intermediary maintains with Societe Generale. That
account is separate from our share account with Societe Generale. Each
accredited intermediary maintains a record of shares held through it and will
issue certificates of registration for the shares it holds. Shares held in
bearer form may only be transferred through accredited intermediaries and
Societe Generale. Our statuts permit us to request that Societe Generale
provide us at any time with the identity of the holders of our shares or other
securities granting immediate or future voting rights held in bearer form and
with the number of shares or other securities so held.
Our statuts do not contain any restrictions relating to the transfer of
shares. Under French law, registered shares must be converted into bearer form
before being traded on Euronext Paris and, accordingly, must be registered in an
account maintained by an accredited intermediary. A shareholder may initiate a
transfer by giving instructions to the relevant accredited intermediary. A
fee or commission is payable to the broker involved in the transaction,
regardless of whether the transaction occurs within or outside of France. No
registration tariff is normally payable in France unless a transfer instrument
has been executed in France.
As of August 31, 2002, our share capital, as authorized in our statuts, was
EUR 636,085,664, represented by 159,021,416 shares, and, as of December 31,
2002, our share capital was EUR 636,086,260, represented by 159,021,565 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, 2002 and December
31, 2002, we issued a total of 149 shares for these purposes.
As of August 31, 2002 and December 31, 2002, we directly owned 2,647,723
shares, roughly 1.7% of total share capital, with face value EUR 4 per share
and book value of EUR 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 14% in the capital of
Bellon SA. Sofinsod and another wholly-owned subsidiary, Etinbis, together have
an indirect interest of approximately 2% in Sodexho Alliance, SA, through their
respective interests of approximately 57% and 43% in La Societe Financiere de la
Porte Verte, which in turn owns approximately 4% of Bellon SA.
Equity-Linked Securities
In January 2002, the Board of Directors issued 1,657,282 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 EUR 304,898,000. On May 21, 1996, the Board
approved the issue of EUR 304,898,000 in debt pursuant to this authorization at
a face value of EUR 762 per bond. 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 EUR 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
EUR 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 remains unchanged at EUR 411.61. As of December 31, 2002, 374,773 warrants
were still outstanding.
Changes in Share Capital
The table below indicates the changes in our share capital in the fiscal
years ending August 31, 1999, 2000, 2001 and 2002 and in the period commencing
August 31, 2002 and ending December 31, 2002, retroactively adjusted, where
appropriate, to reflect our four-for-one stock split effective March 7, 2001.
Shares
outstanding
Date before new issue Type of transaction Shares created
February 23, 1999 33,465,942 Exercise of warrants (143) (1) 143
June 10, 1999 33,466,085 Exercise of warrants (9) and stock options (224)
(1); cash increase in issued capital before its
conversion into euro (FRF 165,762,689.01) (2) 233
August 31, 1999 33,466,318 Exercise of warrants (38) and stock options
(29,224) (1) 29,379
December 9, 1999 33,495,697 Exercise of warrants (4) and stock options
(71,468) (1) 71,484
August 31, 2000 33,567,181 Exercise of stock options (1) 20,348
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(3) 4,728
July 4, 2001 134,992,376 Share issue(4) 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 (3) 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
__________________
(1) Please see our disclosure in this Annual Report on Form 20-F regarding our
options and warrants.
(2) The cash increase in issued capital was made in order to obtain a EUR 16
per share par value for the outstanding shares due to rounding.
(3) 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.
(4) We raised EUR 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 EUR 45 per
share.
Authorizations
At the Extraordinary Shareholders' Meeting of February 5, 2002, 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 EUR 175,000,000 at any one time; issues of debt
securities may not have the effect of increasing our indebtedness by more than
EUR 1,200,000,000; 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 Commission des Operations de
Bourse. Pursuant to this authorization, we purchased 2,123,500 shares on the
open market in fiscal 2002. The maximum purchase price authorized for each
share was EUR 70.00, 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 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, which is appointed by the Board of
Directors, determines 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 2003, it is expected that two of our directors' terms will be
renewed, one of our director's term will not be renewed and one new director
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.
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 EUR 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.
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.
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 Commission des Operations
de Bourse (the "COB"), 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 COB. 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.
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 33,1/3 % (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 Conseil des Marches Financiers (financial markets council) (the
"CMF") 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 COB, 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 CMF with a written notice. In
order to facilitate compliance with the notification requirements, a holder of
ADSs may notify the Depositary, and the Depositary shall immediately forward the
notification to us and the CMF.
Under the regulations of the CMF, and subject to limited exemptions, anyone
acquiring 33 1/3% or more of the share capital or voting rights of a French
listed company must initiate a public tender offer for the balance of our share
capital (including, for these purposes, all securities convertible into or
exchangeable for equity securities).
Changes in Capital
As of December 31, 2002 our share capital was EUR 636,086,260, divided into
159,021,565 shares at a par value of EUR 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.
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.
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, 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 EUR
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 EUR 153,000 and at a rate of
0.15% thereafter, subject to a rebate of EUR 23 per transaction and a maximum
assessment of EUR 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. French residents
are entitled to a tax credit, known as the avoir fiscal, equal to 50% of the
dividend paid for individuals and for certain entities, or 15% of the dividend
paid for other entities. Pursuant to regulations finalized on December 31, 2001,
the 15%-rate avoir fiscal was increased to 70% of all or part of the precompte
defined below. 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 Ghana Malta Spain
Austria Iceland Mauritius Sweden
Belgium India Mexico Switzerland
Bolivia Israel Namibia Togo
Brazil Italy Netherlands Turkey
Burkina Faso Ivory Coast New Zealand Ukraine
Cameroon Japan Niger United Kingdom
Canada Latvia Norway United States of America
Estonia Lithuania Pakistan Venezuela
Finland Luxembourg Senegal
Gabon Malaysia Singapore
Germany Mali South Korea
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 (with the
exception of certain shareholders resident in Germany and subject to filing
formalities as provided for by an instruction dated May 13, 1994 and released on
June 7, 1994) rather than to the French withholding tax at the rate of 25% to be
later reduced to the treaty rate, provided that they establish, before the date
of payment of the dividend, their entitlement to such reduced rate.
If shares are sold in a trade executed on the monthly settlement market
during the month of a dividend payment date, the seller rather than the
purchaser will be entitled to the avoir fiscal with respect to dividends paid on
those shares on that date, unless the seller elects on the determination date to
settle by the last trading day of the month and the dividend payment date occurs
after the determination date.
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). We believe that we would be subject to payment of a precompte
with respect to any dividends payable in the foreseeable future.
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 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.
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 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. French residents
are entitled to a tax credit, known as the avoir fiscal, equal to 50% of the
dividend paid for individuals and for certain entities, or 25% (reduced to 15%
for dividends received as from January 1, 2002) of the dividend paid for other
entities. Pursuant to pending regulations, the 25%-rate (reduced to 15% for
dividends received as from January 1, 2002) avoir fiscal is expected to be
increased by 50% (increased to 70% for dividends received as from January 1,
2002) of all or part of the precompte defined below. 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.
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.
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 FF 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 FF 85
(the FF 100 dividend less a FF 15 withholding tax). The Eligible Tax-Exempt
Holder would be further entitled to an additional payment from the French
Treasury of FF 15, consisting of the partial avoir fiscal of 30/85ths of FF 50,
less the 15% withholding tax on that amount. Thus, the total net payment to the
Eligible Tax-Exempt Holder would be FF 100. The Eligible Tax-Exempt Holder,
where required by the French tax administration, must show that it is the
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.
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.
If shares are sold in a trade executed on the monthly settlement market of
the Paris Bourse during the month of and prior to a dividend payment date, the
seller of the shares rather than the purchaser will generally be entitled to the
avoir fiscal with respect to dividends paid on such shares on such date.
Precompte
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.
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.
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. 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 the francs (or euro) 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 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. 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 COB. 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-Brettoneux, 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 vironda.jeanjacques@sodexho-alliance.fr.
I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate and foreign exchange rate risks associated
with underlying assets and liabilities. We manage this exposure as it pertains
to our borrowings through the use of interest rate, currency and cross-currency
derivative contracts. These swap contracts are entered into with major high
credit quality institutions, in accordance with procedures and within limits
approved by our Board of Directors. Our policy is not to use derivative
contracts for any other purpose than hedging our financial exposures.
Foreign Exchange Risk Exposure
Foreign exchange risk exposure arises from the possibility that changes in
foreign currency exchange rates will impact the value of revenues, expenses,
assets and liabilities denominated in foreign currencies. Our results of
operations, financial position, and cash flows are directly dependent on the
periodic monitoring and adjustment of the balance of assets and liabilities in
each of our main operating currencies, which are the euro, the U.S. dollar and
the British pound sterling. The impact of fluctuations in exchange rates is
mitigated to a large extent by the fact that within each of our subsidiaries,
revenues and the related expenses are generally denominated in the same
currency. In order to match the cash flows pertaining to borrowing instruments
held by our subsidiaries with the revenues to which they relate, we occasionally
enter into currency or cross-currency swap contracts.
Interest Rate Exposure
In accordance with our policy, we may borrow at variable rates and use
interest rate swaps in order to fix future interest payments, effectively
converting borrowings from floating to fixed rates. As of August 31, 2002,
including the effect of interest and cross-currency swap agreements,
approximately 92% of our borrowings were at fixed rates.
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 2002 net income by approximately EUR 10 million. A
hypothetical strengthening or weakening by 10% in the value of the British pound
sterling relative to the euro would have resulted in an decrease or increase,
respectively, of our fiscal 2002 net income by approximately EUR 3 million.
A hypothetical increase of 1% in average interest rates would have resulted
in an increase in fiscal 2002 interest expense of approximately EUR 28 million.
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
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the
"Evaluation Date") within 90 days of the filing date of this Annual Report on
Form 20-F, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and effective and designed to ensure that
material information relating to us and our consolidated subsidiaries would be
made known to them by others within those entities. There were no significant
changes in our internal controls or, to our knowledge, in other factors that
could significantly affect our internal controls subsequent to the Evaluation
Date.
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-74 of this Annual Report.
ITEM 18. FINANCIAL STATEMENTS
We have responded to Item 17 in lieu of responding to this Item.
ITEM 19. EXHIBITS
(a) The following exhibits are filed as part of this Form 20-F:
Exhibit
Number Description
1 Sodexho Alliance Restated Corporate Statuts (English
translation)(incorporated by reference to Exhibit 1
to the Registration Statement on Form 20-F filed by
Sodexho Alliance SA on March 19, 2002, Commission
File No. 1-31274)
2.1 Composite Conformed Term and Revolving Facilities
Agreement, dated April 6, 2001, for Sodexho Alliance,
SA, arranged by Citibank International plc, Goldman
Sachs International and SG Investment Banking with
Societe Generale acting as Agent and Societe Generale
acting as Issuing Bank (as amended by a letter dated
27 April 2001 and an Amendment and Restatement
Agreement dated 8 June 2001)(incorporated by reference
to Exhibit 2.1 to the Registration Statement on Form
20-F filed by Sodexho Alliance SA on March 19, 2002,
Commission File No. 1-31274)
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. (English translation)
8.1 List of Significant Subsidiaries (incorporated by reference
to note 4.4 of the Consolidated Financial Statements of
Sodexho Alliance, SA)
----------------------------------------------------------------------------
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: January 3, 2003
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Pierre Bellon, the Chief Executive Officer of Sodexho Alliance, SA
(the "registrant"), certify that:
1. I have reviewed this annual report on Form 20-F of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 3, 2003
By: /s/ Pierre Bellon
--------------------------------------------
Name: Pierre Bellon
Title: Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, SiAn Herbert-Jones, the Chief Financial Officer of Sodexho Alliance, SA
(the "registrant"), certify that:
1. I have reviewed this annual report on Form 20-F of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 3, 2003
By: /s/ Sian Herbert-Jones
-----------------------------------------
Name: Sian Herbert-Jones
Title: Chief Financial Officer
Index to financial statements
Consolidated Financial Statements of Sodexho Alliance, SA
Report of Independent Accountants............................ F-1
Consolidated Income Statements for each of the years ended
August 31, 2002, 2001 and 2000............................... F-2
Consolidated Balance Sheets as of August 31, 2002 and 2001... F-3
Consolidated Statements of Cash Flows for each of the years ended
August 31, 2002, 2001 and 2000.......................... F-4
Notes to the Consolidated Financial Statements............... F-5
Consolidated Financial Statements of Sodexho Marriott Services, Inc.
Report of Independent Public Accountants..................... F-54
Consolidated Statement of Income for the fiscal year ended
September 1, 2000............................................ F-55
Consolidated Balance Sheet as of September 1, 2000........... F-56
Consolidated Statement of Cash Flow for the fiscal year ended
September 1, 2000............................................ F-57
Consolidated Statement of Stockholders' Deficit for the fiscal
year ended September 1, 2000................................. F-58
Notes to Consolidated Financial Statements................... F-59
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2002
and 2001 and the related consolidated statements of income, of cash flows and of
changes in shareholders' equity for each of the three years in the period ended
August 31, 2002, 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 auditing standards generally
accepted in the United States of America. 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, prior years have been restated in the
Annual Report on Form 20-F to reduce revenue in the period the overstatement
occurred. Net income has been reduced by EUR 10 million and EUR 6 million, for
the years ended August 31, 2001 and 2000, respectively. 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 has been 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, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 2002, 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, 2001 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. The application of the latter, after giving effect to the
restatement referred to in note 5.5, would have affected the determination of
the consolidated net income expressed in millions of euro for each of the three
years in the period ended August 31, 2002 and the determination of consolidated
shareholders'equity at August 31, 2002 and 2001 to the extent summarized in note
5 to the consolidated financial statements.
Paris, France
November 14, 2002
Gerard Dantheny
Befec - Price Waterhouse
Member of PRICEWATERHOUSECOOPERS
SODEXHO ALLIANCE, SA
CONSOLIDATED INCOME STATEMENTS
Years ended August 31,
2002 2001 2000
Restated Restated
(millions of euro)
Revenues............................................................. 12,609 11,928 10,496
Other income......................................................... 54 113 78
Purchases............................................................ (4,559) (4,416) (3,947)
Employee costs....................................................... (5,868) (5,437) (4,728)
Other external charges............................................... (1,464) (1,430) (1,195)
Taxes, other than income taxes...................................... (74) (75) (66)
Depreciation and increase in provisions.............................. (173) (112) (108)
------ ------ ------
Earnings Before Interest, Exceptional Items, Income Taxes, Income
from Equity Method Investees, Goodwill Amortization and Minority
Interests (EBITA)................................................ 525 571 530
Financial expense, net............................................... (166) (122) (118)
------ ------ ------
Income Before Exceptional Items, Income Taxes, Income from Equity
Method Investees, Goodwill Amortization and Minority Interests.... 359 449 412
Exceptional (expense) income, net.................................... 55 (51) (78)
Income taxes......................................................... (136) (157) (156)
------ ------ ------
Income Before Income from Equity Method Investees, Goodwill
Amortization and Minority Interests............................... 278 241 178
Net income (loss) from equity method investees....................... 4 (2) 1
Goodwill amortization................................................ (67) (44) (31)
------ ------ ------
Group Net Income Before Minority Interests........................... 215 195 148
Minority interests in net income of consolidated subsidiaries........ (13) (67) (69)
------ ------ ------
Group Net Income..................................................... 202 128 79
===== ===== =====
Earnings per share (in euro)......................................... 1.27 .93 .59
Diluted earnings per share (in euro)................................. 1.22 .89 .56
See accompanying notes to the consolidated financial statements.
SODEXHO ALLIANCE, SA
CONSOLIDATED BALANCE SHEETS
August 31,
2002 2001
Restated
ASSETS (millions of euro)
Fixed and Intangible Assets, Net
Goodwill..................................................... 1,616 1,710
Intangible assets............................................ 2,940 3,021
Property, plant and equipment................................ 371 371
Financial investments........................................ 67 68
Equity method investees...................................... 11 6
------ ------
Total Fixed and Intangible Assets, Net.......................... 5,005 5,176
Current and Other Assets
Inventories ................................................. 170 192
Accounts receivable, net..................................... 1,456 1,493
Prepaid expenses, other receivables and other assets......... 606 564
Marketable securities........................................ 553 357
Restricted cash.............................................. 165 152
Cash......................................................... 589 704
Total Current and Other Assets.................................. 3,539 3,462
------- ------
TOTAL ASSETS.................................................... 8,544 8,638
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common stock.............................................. 636 630
Additional paid in capital................................ 1,191 1,141
Consolidated reserves..................................... 571 615
------- -------
Total Shareholders' Equity................................... 2,398 2,386
Minority Interests........................................... 73 131
Provisions for Contingencies and Losses...................... 99 93
Liabilities
Borrowings................................................ 2,693 2,781
Accounts payable.......................................... 1,251 1,268
Vouchers payable.......................................... 732 729
Other liabilities......................................... 1,298 1,250
------- -------
Total Liabilities............................................ 5,974 6,028
------- -------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES................... 8,544 8,638
======= =======
See accompanying notes to the consolidated financial statements.
Sodexho Alliance, SA
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended August 31,
2002 2001 2000
Restated Restated
(millions of euro)
Operating Activities
Consolidated net income before income (loss) from equity
method investees and minority interests................. 211 197 147
Noncash items:
Depreciation and provisions......................... 254 157 204
Deferred taxes...................................... 5 20 23
Losses (gains) on disposals and other, net of tax... (61) 26 (5)
------- ------- -------
Cash provided by operating activities................... 409 400 369
Dividends received from equity method investees..... 1 0 0
Change in working capital from operating activities. 209 154 160
------- ------- -------
Net cash from operating activities.......................... 619 554 529
Investing Activities
Tangible and intangible fixed assets........................ (297) (238) (184)
Fixed asset disposals....................................... 33 31 40
Change in consolidation scope............................... (48) (1,739) (70)
Change in working capital from investing activities......... (3) (13) 6
------- ------- -------
Net cash used in investing activities....................... (315) (1,959) (208)
Financing Activities
Dividends paid to parent company shareholders............... (87) (74) (59)
Dividends paid to minority shareholders of consolidated
subsidiaries............................................ (15) (9) (9)
Increase in shareholders' equity............................ 59 1,020 78
Proceeds from borrowings.................................... 1,120 1,977 59
Repayment of borrowings..................................... (1,146) (1,142) (314)
Change in working capital from financing activities......... (1) (9) 19
------- ------ ------
Net cash provided by (used in) financing activities......... (70) 1,763 (226)
------- ------ ------
Increase in net cash, cash equivalents and marketable
securities.............................................. 234 358 95
======= ====== ======
Cash, cash equivalents and marketable securities, as of
beginning of period..................................... 1,214 896 758
Cash, cash equivalents and marketable securities, as of end
of period .............................................. 1,330 1,214 896
Net effect of exchange rates on cash........................ 118 40 (43)
------- ------ ------
Increase in net cash, cash equivalents and marketable
securities.............................................. 234 358 95
======= ====== ======
See accompanying notes to the consolidated financial statements.
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.
Amounts in tables are expressed in millions of euro, unless indicated
otherwise. Our consolidated financial statements and information in the notes
thereto are reported in euro.
Significant Events During the Year
In October 2001, Sodexho Alliance issued to 18,726 employees 1,385,848
shares (par value of EUR 4) for cash of EUR 54.3 million, net of transaction
expenses of EUR 3.2 million, in connection with the Sodexho Alliance
International Employee Stock Ownership Plan which was offered in April 2001 to
150,000 employees of the Group.
In November 2001, the Group acquired the remaining shares of Sogeres which
it did not own (40% of the outstanding shares) from BNP Paribas for cash
consideration of EUR 72 million. Sogeres is fully consolidated in the Group
financial statements as of August 31, 2002 and for the fiscal year then ended.
Sogeres' contribution to group net income for the year totaled EUR 4.9 million.
On March 25, 2002, Sodexho Alliance issued bonds totaling EUR 1 billion,
maturing on March 25, 2009, and carrying interest at 5.875%. The bond issuance
refinanced the credit facilities obtained in April 2001 in connection with the
June 2001 acquisition of the 53% of Sodexho Marriott Services, Inc.(now Sodexho,
Inc.) held by third parties and the acquisitions of Wood Dining Services and
Sogeres.
On April 3, 2002, Sodexho Alliance became listed on the New York
Stock Exchange. With a ticker symbol of SDX, Sodexho shares are negotiated in
the form of American Depositary Shares (ADS), and one ADS is equivalent to
one ordinary share of Sodexho Alliance. No new shares were issued in
connection with the listing.
On May 27, 2002, Sodexho Alliance sold its kitchen equipment
business, Lockhart, in the United Kingdom, for EUR 61 million, which resulted
in a gain of EUR 49 million. Fiscal 2001 revenues for this business
(excluding inter-company revenues) totaled EUR 80 million, of which EUR 22
million related to the fourth quarter of fiscal 2001.
Land Technology Restatement
The financial statements filed by the Group with the Commission des
Operations de Bourse (the regulatory authority in France) 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 presented herein as of August 31, 2001 and for
each of the fiscal years ended August 31, 2001 and 2000 as described below. As
a result, the financial statements presented herein differ from those filed with
the Commission des Operations de Bourse ("COB").
The Group's financial statements presented herein have been 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. The subsidiary's
procedures and controls surrounding documentation and revenue recognition have
since been reviewed and reinforced.
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 the overstatement of
revenue has been recorded as an exceptional expense when discovered in the year
ended August 31, 2002.
The overstatement of revenue amounted to EUR 32 million (EUR 22 million
after income taxes). Under French GAAP, this amount would be recorded as an
exceptional expense in the year ended August 31, 2002. Of the total EUR 32
million, EUR 29 million (EUR 19 million after taxes) relates to periods prior to
fiscal 2002 and is being restated (EUR 15 million, EUR 9 million and EUR 5
million, respectively, related to fiscal 2001, fiscal 2000 and fiscal 1999) to
comply with the requirements of the SEC. The impact of the restatement on the
balance sheet is to reduce accounts receivable and other current assets as of
August 31, 2001.
The effect of restating prior year financial statements filed with the SEC is as
follows:
Current
Diluted and
Net Earnings Earnings Other Total
Revenues EBITA Income per Share per Share Assets Equity
Fiscal 2001
Previously reported 11,943 586 138 1.00 0.99 3,491 2,405
Adjustment (15) (15) (10) (0.07) (0.10) (29) (19)
------ --- --- ----- ----- ----- -----
As adjusted 11,928 571 128 0.93 0.89 3,462 2,386
====== === === ===== ===== ===== =====
Fiscal 2000
Previously reported 10,505 539 85 0.63 0.63
Adjustment (9) (9) (6) (0.04) (0.07)
------ --- -- ----- ----
As adjusted 10,496 530 79 0.59 0.56
====== === == ===== ====
A reconciliation of the amounts reported in accordance with French GAAP
in the Group's Document de Reference (Annual Report) filed with the COB and
those reported in this Form 20-F filed with the SEC, which have been adjusted
for the overstatement of revenues, follows:
Current
Diluted and
Net Earnings Earnings Other Total
Revenues EBITA Income per Share per Share Assets Equity
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
====== === === ==== ====
Fiscal 2001
Annual Report 11,943 586 138 1.00 0.99 3,491 2,405
Adjustment (15) (15) (10) (0.07) (0.10) (29) (19)
------ --- --- ----- ---- ----- -----
Form 20-F 11,928 571 128 0.93 0.89 3,462 2,386
====== === === ===== ==== ===== =====
Fiscal 2000
Annual Report 10,505 539 85 0.63 0.63
Adjustment (9) (9) (6) (0.04) (0.07)
------ --- -- ---- ----
Form 20-F 10,496 530 79 0.59 0.56
====== === == ==== ====
(1) Consists of an increase in exceptional income of EUR 32 million partially
offset by a reduction in revenues of EUR 3 million and an increase in
income tax expense of EUR 10 million.
The restatement described above has similar effects on the Group's US GAAP
financial information. See note 5.5.
Changes in Accounting Principles
The Group adopted the accounting principles recommended by Regulation CRC
99-02 effective September 1, 2000. Following is a discussion of the significant
changes to the Group's accounting and reporting which resulted from the adoption
of these accounting principles.
The presentation of the consolidated balance sheet, income statement and
statement of cash flows conforms to the presentation recommended by
Regulation CRC 99-02, with the inclusion of two additional balance sheet
line items, "Restricted cash" and "Vouchers payable", which relate to
the Service Vouchers and Cards activity.
Effective September 1, 2000, both gains and losses realized on the
translation of foreign currency denominated monetary assets and
liabilities are recorded in the income statement. Previously, only such
losses were recorded. This change in accounting method has been
accounted for with the cumulative effect of the change reflected in
current period earnings.
Employee profit sharing charges have been reclassified to employee costs
in all periods presented.
In order to move toward a methodology similar to SFAS 87 and IAS 19,
effective September 1, 2000, retirement plan obligations which are not
offset by assets held by an externally managed fund are now accounted
for using the projected unit cost method of valuation. This resulted in
the recording of a liability for long-term service awards in France as
well as conforming certain assumptions made in the prior year to the
current year methodology. The impact on the retirement plan obligations
relating to prior periods has been recorded directly to the consolidated
reserves account as of September 1, 2000 and was as follows (in millions
of euro):
Other liabilities.............................. 7
Deferred tax asset............................. (2)
Net impact on consolidated reserves............ 5
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 minimal impact on the Group's consolidated
financial statements have been excluded from consolidation, notably those having
sales of less than EUR 2 million, net income or loss of less than EUR 0.1
million, and total assets of less than EUR 2 million.
A list of subsidiaries and the Group's percentage interest and percentage
of voting rights held is provided in note 4.4.
Revenue Recognition
In the food and management services, remote site and river and harbor
cruise activities, 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 two to three
months).
Employee Costs
Retirement Benefits
As more fully described above, effective September 1, 2000, the Group's
benefit obligations relating to defined benefit pension and retirement indemnity
plans are recorded in the balance sheet. For funded plans to which the
subsidiary makes a contribution, the amount of the contribution is recorded as
the expense of the plan.
Stock Options
Sodexho Alliance has acquired treasury shares in connection with its stock
option plans. 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.
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. 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.
Foreign Currency Transactions and Translation
For subsidiaries located in countries with stable 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 the following subsidiaries reflect currency
devaluations as required by local regulations:
Sodexho Chile (sub-consolidation)
Sodexho Pass Chile
Prestaciones Mexicanas CA de CV (Mexico)
Sodexho Mexico
Promocupon (Mexico)
Sodexho Servicios Operativos (Mexico)
Luncheon Tickets (Argentina)
Sodexho de Colombia
Sodexho Pass de Colombia
Sodexho Pass Venezuela
Sodexho Restoran Servisleri (Turkey)
Sodexho Toplu Yemek (Turkey)
Sodexho D.o.o. (Slovenia)
Sodexho Argentina
The inclusion of monetary corrections imposed by local regulators on these
subsidiaries 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 subsidiaries located in highly inflationary countries (Turkey,
Argentina, Venezuela), 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.
In the application of Regulation 99-02, 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. In
applying Regulation CRC 99-02, the assets and liabilities of acquired companies
have been recorded at their respective fair values effective September 1, 2000.
Due to the insignificant impact, the accounting for acquisitions made in prior
years was not been restated.
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 EUR 2.1 million was recorded relating to the IFREST
subsidiary.
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, totaling EUR 2,795 million as of August 31, 2002. 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 diminution in value. 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, it is written down. Market shares are not amortized in
the consolidated financial statements, and no deferred taxes are recorded on
market shares.
As of August 31, 2002, market share for Sodexho Australia had been
provisioned by EUR 1.2 million.
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.
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%
Organization Costs
Organization costs are capitalized and amortized over a maximum duration of
five years. These costs are included in other intangible assets.
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 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 present valued. In addition,
deferred tax assets pertaining to net operating loss carry-forwards 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, 2002, the gross value of inventories was EUR 172 million.
Accounts Receivable
Concentration of credit risk within accounts receivable is limited because
a large number of customers make up the Group's customer base, thus spreading
risk associated with trade credit. The Group generally does not require
collateral or specific guarantees.
Further information pertaining to accounts receivable is provided in note
3.10.
Marketable Securities and Deposits
Marketable securities and deposits 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 2,647,723
Sodexho Alliance shares purchased for a total amount of EUR 119 million.
These shares are to be used to fulfill our obligation with respect to Sodexho,
Inc. employees, who held Sodexho Marriott Services, Inc. stock options which
were rolled over into options to purchase Sodexho Alliance shares in connection
with the acquisition of the remaiing 53% of Sodexho Marriott Services, Inc.
shares (also see note 3.2). 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 EUR 19 million
in order to reflect their market value as of August 31, 2002.
Further information pertaining to marketable securities and deposits is
provided in note 3.7, and their fair value 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 (EUR 145
million as of August 31, 2002) and as a guarantee for commitments entered into
by Mexican affiliates (EUR 20 million as of August 31, 2002).
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 adopted the recommendations of Regulation CRC 2000-6 effective
September 1, 2001. There was no impact on shareholders' equity as of August 31,
2001.
2. ANALYSIS OF OPERATING ACTIVITIES AND GEOGRAPHIC INFORMATION
Fiscal year ended August 31,
2002 2001 2000
Restated Restated
(millions of euro)
Revenues by Operating Activity:
Food and Management Services
North America........................................... 5,995 5,657 4,857
Continental Europe................................. 3,413 3,034 2,852
United Kingdom and Ireland......................... 1,671 1,717 1,569
Rest of World...................................... 566 581 495
------ ------ ------
11,645 10,989 9,773
Remote Sites............................................ 590 579 415
Service Vouchers and Cards.............................. 279 249 194
River and Harbor Cruises................................ 95 111 114
------- ------- ------
12,609 11,928 10,496
======= ======= ======
Activities reflect the Group's internal management reporting structure: where
the Remote Sites activity is secondary to the Food and Management Services
activity, it has been included with the principal activity.
Fiscal year ended August 31,
2002 2001 2000
Restated Restated
(millions of euro)
Revenues by Geographic Region:
North America...................................... 6,233 5,899 5,019
United Kingdom and Ireland......................... 1,772 1,805 1,647
France............................................. 1,677 1,344 1,208
Rest of Europe..................................... 1,952 1,886 1,804
Rest of World...................................... 975 994 818
------ ------ ------
12,609 11,928 10,496
====== ====== ======
August 31,
2002 2001
(millions of euro)
Net Fixed Assets by Operating Activity:
Food and Management Services
North America...................................................... 3,003 3,183
Continental Europe.............................................. 694 655
United Kingdom and Ireland...................................... 949 955
Rest of World................................................... 68 68
Remote Sites......................................................... 95 92
Service Vouchers and Cards........................................... 132 146
River and Harbor Cruises............................................. 30 28
Holding Companies.................................................... 34 49
------- ------
5,005 5,176
======= ======
Activities reflect the Group's internal management reporting structure: where
the Remote Sites activity is secondary to the Food and Management Services
activity, the related information has been included with the principal activity.
August 31,
2002 2001
(millions of euro)
Net Fixed Assets by Geographic Region:
North America................................................... 3,092 3,277
United Kingdom and Ireland...................................... 957 968
France.......................................................... 358 335
Rest of Europe.................................................. 414 399
Rest of the World............................................... 184 197
------ ------
5,005 5,176
====== ======
Fiscal year ended August 31,
2002 2001 2000
Restated Restated
(millions of euro)
EBITA by Operating Activity:
Food and Management Services
North America.......................................... 297 295 258
Continental Europe................................. 140 129 132
United Kingdom and Ireland......................... 11 87 76
Rest of World...................................... 7 0 14
Remote Sites............................................ 26 30 20
Service Vouchers and Cards.............................. 77 61 47
River and Harbor Cruises................................ 2 7 15
Corporate Expenses...................................... (35) (38) (32)
---- ---- ----
525 571 530
==== ==== ====
Activities reflect the Group's internal management reporting structure: where
the Remote Sites activity is secondary to the Food and Management Services
activity, the related information has been included with the principal activity.
August 31,
2002 2001
(millions of euro)
Group Employees by Geographic Zone:
North America...................................................... 117,689 120,147
United Kingdom and Ireland......................................... 61,835 63,142
France............................................................. 30,334 29,051
Rest of Europe..................................................... 49,438 47,467
Rest of the World.................................................. 55,845 53,662
--------- ---------
315,141 313,469
========= =========
3. ANALYSIS OF THE INCOME STATEMENT, BALANCE SHEET AND
STATEMENT OF CASH FLOWS
3.1 Financial Expense, Net
Year ended August 31,
2002 2001 2000
(millions of euro)
Interest income........................................... 39 34 33
Net variation in financial provisions..................... (26) 2 (1)
Net exchange gains........................................ 1 1 1
Interest expense.......................................... (180) (159) (151)
----- ---- ----
(166) (122) (118)
===== ==== =====
The increase in provisions in fiscal 2002 mainly arose from the recording of
a provision of EUR 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 EUR 80 million of interest expense on the credit
facility arranged in April 2001, interest of EUR 58 million on the 1996, 1999
and 2002 bond issuances, and fees of EUR 11 million incurred in connection with
various intercompany swap arrangements.
Interest expense for fiscal 2001 primarily included EUR 72 million of
interest expense on the Sodexho, Inc. debt, EUR 9 million in financing charges
related to the acquisitions of Wood Dining Services, Sogeres and the remaining
shares of Sodexho Marriott Services, Inc., and interest of EUR 32 million on the
1996 and 1999 bond issuances.
Interest expense for fiscal 2000 primarily included EUR 74 million of
interest expense on the Sodexho, Inc. debt and interest of EUR 34 million on the
1991, 1996 and 1999 bond issuances.
3.2 Exceptional Items
Net exceptional income totaled EUR 55 million in fiscal 2002 and primarily
includes the following items:
- a gain of EUR 49 million on the sale of our kitchen equipment business
(Lockhart) in the United Kingdom;
- income of EUR 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 EUR 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;
- restructuring costs totaling EUR 11 million, primarily for loss
contracts, and receivables and fixed asset writedowns in the United
Kingdom; and,
- the recording of a EUR 11 million provision for legal and other costs
related to a discrimination lawsuit filed by ten current and former
Sodexho, Inc. employees.
Net exceptional charges of EUR 51 million for fiscal 2001 primarily
reflected the following: EUR 20 million in transaction-related expenses, notably
the expenses incurred by the Special Committee of independent directors of
Sodexho Marriott Services, Inc., name change costs and refinancing costs
relating to that acquisition; EUR 7 million in losses on the sale of CCA shares
received as a dividend; and EUR 21 million in provisions on the Group's 49.95%
share of Attendo Care (formerly, Partena Care), a nursing home management
business in Sweden of which 50.05% was sold in fiscal 2000.
Net exceptional charges of EUR 78 million for fiscal 2000 principally
included the EUR 72 million provision recorded on the investment in CCA. See
note 1 for additional information.
3.3Income 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).
Year ended August 31,
2002 2001 2000
Restated Restated
Income before exceptional items, income taxes, income from equity
investees, and goodwill amortization................................. 359 449 412
Exceptional items........................................................ 55 (51) (78)
----- ----- -----
Income before taxes...................................................... 414 398 334
Sodexho Alliance tax rate................................................ 35.43% 36.43% 37.77%
----- ----- -----
Theoretical tax provision................................................ 147 145 126
Effect of differing jurisdictional tax rates............................. (10) (1) (4)
Permanent differences.................................................... (4) (4) (6)
Long-term capital gains offset against long-term capital losses.......... 0 (2) 23
Other taxes.............................................................. (4) 13 12
Net operating loss carryforwards utilized in the current year but
generated in prior years and not previously recognized............... (3) (3) (1)
Current year non-recognition of net operating loss carryforwards......... 8 9 6
----- ----- -----
Tax provision............................................................ 134 157 156
===== ===== =====
Current income taxes..................................................... 129 137 133
Deferred income taxes.................................................... 5 20 23
----- ----- -----
Total.................................................................... 134 157 156
===== ===== =====
Withholding taxes........................................................ 2
----- ----- -----
Total income taxes....................................................... 136 157 156
===== ===== =====
3.4 Goodwill
Additions Decreases
August 31, during the during the Translation August 31,
2001 year year adjustments 2002
(millions of euro)
Goodwill
Cost................................... 1,882 43 11 (69) 1,845
Accumulated amortization............... (172) (67) (6) 4 (229)
------ ---- --- --- -----
Net book value......................... 1,710 (24) 5 (65) 1,616
====== ==== === === =====
Principal goodwill amounts were as follows:
August 31, 2002
Accumulated Net book
Gross value Amortization value
(millions of euro)
Sodexho Inc. (formerly, Sodexho Marriott Services, Inc.)........ 940 (57) 883
Sodexho Services Group (formerly, Gardner Merchant)............. 272 (69) 203
Wood Dining Services............................................ 100 (4) 96
Sodexho Pass do Brazil (formerly, Cardapio)..................... 63 (10) 53
Sodexho Management Services (formerly, Marriott UK)............. 56 (9) 47
Sogeres......................................................... 56 (2) 54
Sodexho Scandinavian Holding.................................... 54 (9) 45
Sodexho Espana.................................................. 28 (7) 21
Sodexho Belgique................................................ 23 (8) 15
Tillery Valley Foods............................................ 23 (4) 19
Luncheon Ticket................................................. 22 (3) 19
Sodexho Italie.................................................. 18 (2) 16
Universal Services.............................................. 17 (2) 15
Other goodwill.................................................. 173 (43) 130
----- ----- -----
Total goodwill.................................................. 1,845 (229) 1,616
===== ===== =====
3.5 Intangible Assets
Additions Decreases Changes in
August 31, during during consolidation Translation August
2001 the year the year scope adjustments 31, 2002
(millions of euro)
Market Shares:
North America (food and
management services)................ 1,987 (136) 1,851
North America (remote
sites).............................. 48 (4) 44
United Kingdom and Ireland............. 595 (6) 589
Netherlands............................ 86 86
Sweden................................. 75 3 78
Australia.............................. 11 (1) 10
France................................. 137 137
------ ------ ----- ----- ------ ------
Total Cost........................... 2,939 0 0 0 (144) 2,795
Diminutions in value................... (1) (1)
------ ------ ----- ----- ------ -----
Net book value....................... 2,938 0 0 0 (144) 2,794
Other Intangible Assets:
Cost................................... 117 83 7 7 (9) 191
Accumulated amortization
and diminutions in value............ (34) (17) (4) 2 (45)
------ ------ ----- ----- ------ ------
Net book value......................... 83 66 3 7 (7) 146
Totals:
Cost................................. 3,056 83 7 7 (153) 2,986
Accumulated amortization
and diminutions in value........... (35) (17) (4) 2 (46)
------ ------ ----- ----- ------ ------
Net book value....................... 3,021 66 3 7 (151) 2,940
====== ====== ===== ===== ====== ======
3.6 Property, Plant and Equipment
Additions Decreases Changes in
August during during consolidation Translation August
31, 2001 the year the year scope adjustments 31, 2002
(millions of euro)
Land
Cost............................... 8 0 0 0 0 8
Diminutions in value...............
----- ----- ----- ----- ----- -----
Net book value.................. 8 0 0 0 0 8
Buildings
Cost................................ 71 2 1 5 (2) 75
Accumulated
depreciation..................... (28) (4) (1) (3) 1 (33)
----- ----- ----- ----- ----- -----
Net book value................... 43 (2) 0 2 (1) 42
Facilities and fixtures
Cost................................ 95 14 15 32 (4) 122
Accumulated
depreciation..................... (54) (13) (11) (17) 2 (71)
----- ----- ----- ----- ----- -----
Net book value................... 41 1 4 15 (2) 51
Plant and machinery
Cost................................ 330 71 62 36 (15) 360
Accumulated
depreciation.................... (216) (51) (52) (18) 9 (224)
----- ----- ----- ----- ----- -----
Net book value................... 114 20 10 18 (6) 136
Vehicles
Cost................................ 94 9 12 1 (5) 87
Accumulated
depreciation..................... (73) (9) (10) 5 (67)
----- ----- ----- ----- ----- -----
Net book value................... 21 0 2 1 0 20
Office and computer
equipment
Cost................................ 193 21 12 (12) (12) 178
Accumulated
depreciation..................... (129) (28) (18) 5 8 (126)
----- ----- ----- ----- ----- -----
Net book value................... 64 (7) (6) (7) (4) 52
Other fixed assets
Cost................................ 131 37 23 (49) (2) 94
Accumulated
depreciation..................... (51) (10) (7) 22 0 (32)
----- ----- ----- ----- ----- -----
Net book value................... 80 27 16 (27) (2) 62
Totals:
Cost................................ 922 154 125 13 (40) 924
Accumulated
amortization..................... (551) (115) (99) (11) 25 (553)
----- ----- ----- ----- ----- -----
Net book value...................... 371 39 26 2 (15) 371
===== ===== ===== ===== ===== =====
3.6.1 Capital Leases
Assets recorded under capital lease arrangements totaled EUR 44 million as
of August 31, 2002.
3.7 Financial investments
Increases/
(decreases) Changes in
August during consolidation Translation August
31, 2001 the year scope adjustments 31, 2002
(millions of euro)
Investment securities
Cost................................... 20 (1) 19
Diminutions in value................... (9) (9)
---- ---- ---- ---- ----
Net book value..................... 11 (1) 0 0 10
Other investments
Cost................................... 25 (1) 24
Diminutions in value................... (2) 1 (1)
---- ---- ---- ---- ----
Net book value..................... 23 0 0 0 23
Receivables from equity method investees
Cost................................... 19 (5) 14
Diminutions in value................... (6) 6 0
---- ---- ---- ---- ----
Net book value..................... 13 1 0 0 14
Loans receivable
Cost................................... 8 (1) 7
Diminutions in value...................
---- ---- ---- ---- ----
Net book value..................... 8 (1) 0 0 7
Deposits and other
Cost................................... 13 13
Diminutions in value...................
---- ---- ---- ---- ----
Net book value..................... 13 0 0 0 13
Total financial investments
Cost................................... 85 (8) 77
Diminutions in value................... (17) 7 (10)
---- ---- ---- ---- ----
Net book value..................... 68 (1) 0 0 67
==== ==== ==== ==== ====
As of August 31, 2002, investment securities principally include a EUR 4
million investment in Stadium Australia Management, in which the Group owns
15.8% of the shares, a EUR 3 million investment in Sodex Japan Company Ltd, of
which it owns 9.3%, and a EUR 1 million investment in Societe Privee de Gestion,
in which the Group owns 10.7% of the shares.
3.8 Investments in Equity Investees
Companies accounted for under the equity method are listed in note 4.4.
Current Gross Diminution
year net Changes in Translation balance, in value,
August 31, income consolidation adjustments August August
2001 (loss) scope and other 31, 2002 31, 2002
(millions of euro)
Equity method investees............ 13 4 (4) (2) 11 0
=== === === === === ===
The value of investments in equity investees was as follows:
As of and for the year As of and for the year
ended August 31, 2002 ended August 31, 2001
Share of Share of
net income net income
(loss) Book value (loss) Book value
(millions of euro)
Attendo Care...................................... (1)
Corrections Corporation of Australia (until December
31, 2000)..................................... (1)
Saggel Holding.................................... 2 4 1 3
BAS Chile......................................... 0 5
Serco Sodexho Defence Services PTY................ (1) (2) (2) (4)
Agecroft Prison Management........................ 0 (1) (1) (1)
Other............................................. 3 5 2 8
--- --- --- ---
Total......................................... 4 11 (2) 6
=== === === ===
3.9 Prepaid Expenses, Other Receivables and Other Assets
Diminutions Diminutions
Gross value, in value, Gross value, in value,
August 31, August 31, August 31, August 31,
2002 2002 2001 2001
Restated Restated
(millions of euro)
Advances........................................ 10 7
Other operating receivables..................... 238 (2) 238 (1)
Investment receivables.......................... 1 10
Financing receivables........................... 1 3
---- ---- ---- ----
Total other receivables..................... 250 (2) 258 (1)
Prepaid expenses ............................... 64 51
Deferred financing charges...................... 29 26
Other deferred charges (1)...................... 155 129
Deferred tax asset (2).......................... 110 101
---- ---- ---- ----
Total....................................... 608 (2) 565 (1)
==== ==== ==== ====
(1) This item is classified as fixed assets in the cash flow statement.
(2) As of August 31, 2001, deferred tax assets were net of deferred tax
liabilities of EUR 16 million.
3.10 Accounts and Other Receivables
Allowance
for
Gross Doubtful Net book Net book
value, Due Due from Accounts, value, value,
August 31, within one to Due after August 31, August August 31,
2002 one year five years five years 2002 31, 2002 2001
Restated
(millions of euro)
Accounts receivable.............1,516 1,455 1 0 (60) 1,456 1,493
Other receivables.................250 207 41 0 (2) 248 256
Prepaid expenses...................65 61 3 1 0 65 54
The allowance for doubtful accounts increased by a net EUR 3 million in
fiscal 2002 and is equivalent to 4% of the accounts receivable balance as of
August 31, 2002. Additions to the allowance were EUR 29 million and EUR 9
million for fiscal 2002 and 2001, respectively.
3.11 Deferred Charges
Gross Accumulated Net book Net book
value, amortization, value, Due Due from value,
August 31, August 31, August 31, within one to Due after August 31,
2002 2002 2002 one year five years five years 2001
(millions of euro)
Deferred financing costs....... 37 8 29 7 21 1 26
Deferred charges............... 255 100 155 27 91 37 129
Included in deferred charges are investments in client facilities in the
U.S. totaling EUR 105 million as of August 31, 2002.
3.12 Deferred taxes
August 31,
2002 2001
(millions of euro)
Deferred tax assets....................................... 110 117
Deferred tax liabilities.................................. (18) (16)
----- -----
Net deferred tax assets................................... 92 101
===== =====
As of August 31, 2002, deferred tax assets which were not recorded because
their realization was not considered probable totaled EUR 24.8 million. As of
August 31, 2001, deferred tax assets which were not recorded because their
realization was not considered probable totaled EUR 18.4 million.
The principal items giving rise to deferred tax assets and liabilities was
as follows:
August 31,
2002
(millions of
euro)
Temporary differences:
Employee benefits liabilities............................. 94
Other temporary differences............................... (21)
Net operating loss carryforwards.......................... 19
----
Net deferred tax assets................................... 92
====
Net deferred tax assets as of August 31, 2001 included tax-effected
deductible and taxable temporary differences totaling EUR 95 million and EUR 16
million, respectively, consolidation adjustments totaling EUR 7 million and net
operating less carryforwards totaling EUR 15 million.
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
Restated Restated Restated
(millions of euro)
Shareholders' equity,
August 31, 2000 ........33,587,529 537 216 432 169 (31) 79 1,402
=========== ==== ===== ==== ==== ==== ==== =====
Share capital increase 92,286
Stock split........... 101,039,445
Share capital
increase .......... 22,840,394 93 925 1,018
Dividend payments by
the holding
company (net of
dividends on
treasury shares)... 5 (79) (74)
Net income for the
period............. 128 128
Changes in accounting
principles........ (5) (5)
Foreign currency
translation
adjustment.......... (83) (83)
----------- ---- ----- ---- --- ---- ---- -----
Shareholders' equity,
August 31, 2001 157,559,654 630 1,141 432 86 (31) 128 2,386
=========== ==== ===== ==== === ==== ==== =====
Share capital increase 1,461,762 6 50 56
Dividend payments by
the holding
company (net of
dividends on
treasury shares).... 41 (128) (87)
Net income for the
period.............. 202 202
Foreign currency
translation
adjustment.......... (159) (159)
----------- ---- ----- ---- --- ---- ---- -----
Shareholders' equity,
August 31, 2002..... 159,021,416 636 1,191 473 (73) (31) 202 2,398
=========== ==== ===== ==== === ==== ==== =====
3.13.1 Indirectly Held Treasury shares
As of August 31, 2002, Sofinsod had a 5.57% indirect interest in Sodexho
Alliance, SA through its 14.4% interest in the capital of Bellon SA, which in
turn holds 38.69% of Sodexho Alliance, SA.
As of August 31, 2002, Sofinsod and Etinbis together had a 1.59% indirect
interest in Sodexho Alliance, SA, through their respective 56.88% and 43.11%
interests in La Societe Financiere De La Porte Verte, which in turn owns 4.1% of
Bellon S.A., which in turn holds 38.69% of Sodexho Alliance, SA.
3.14 Minority Interests
Changes in minority interests are as follows:
August 31
2002 2001
(millions of euro)
Minority interests, beginning of year....................................... 131 525
Share capital increase.................................................... 0 2
Dividends paid............................................................ (15) (9)
Net income for the period................................................. 13 67
Change in consolidation scope............................................. (54) (449)
Currency translation and other............................................ (2) (5)
---- ----
Minority interests, end of year............................................. 73 131
==== ====
3.15 Provisions for Contingencies and Losses
Provisions for contingencies and losses include the following amounts:
Release
without
corres- Translation Change in
August ponding differences consolidation August 31,
31, 2001 Increase Release charge and other scope 2002
(millions of euro)
Sodexho Inc. acquisition provisions..... 5 0 0 0 0 0 5
Payroll and other taxes............... 44 6 (6) (1) (4) 0 39
Contract termination
costs.................................. 11 11 (7) 0 7 22
Client and supplier
litigation............................. 9 1 (4) (1) 0 5
Employee litigation.................... 8 14 (3) (1) 0 18
Large repairs.......................... 6 0 0 0 6
Attendo Care.......................... 6 0 (7) 1 0 0
Other.................................. 4 4 (2) (2) 0 4
--- --- ---- ---- ---- --- ---
93 36 (22) (8) (7) 7 99
=== === ==== ==== ==== === ===
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, 2002:
Increases Releases
(millions of euro)
Operating 14 (13)
Financial 0 0
Exceptional 22 (17)
--- ---
36 (30)
=== ===
3.16 Borrowings and Financial Debt
Future payments on borrowings and other debt balances as of August 31, 2002
were due as follows:
Less than One to five More than
one year years five years Total
(millions of euro)
Bonds
Euro.................................................... 37 305 1,300 1,642
---- ----- ----- -----
Total bonds......................................... 37 305 1,300 1,642
Bank borrowings
U.S. Dollars............................................ 129 1,043 3 1,175
Euro.................................................... (117) (445) 61 (501)
Pounds Sterling......................................... 129 95 0 224
Other currencies........................................ 25 16 0 41
---- ----- ----- -----
Total bank borrowings.............................. 166 709 64 939
Capital lease obligations
U.S. Dollars............................................ 3 9 0 12
Euro.................................................... 11 23 2 36
Other currencies........................................ 0 4 0 4
---- ----- ----- -----
Total capital lease obligations.................... 14 36 2 52
Other borrowings
Euro.................................................... 1 4 0 5
---- ----- ----- -----
Total other borrowings.............................. 1 4 0 5
Bank overdraft balances
Euro.................................................... 18 18
Pounds Sterling......................................... 31 31
Other currencies........................................ 6 6
---- ----- ----- -----
Total bank overdrafts.............................. 55 0 0 55
---- ----- ----- -----
Total...................................................... 273 1,054 1,366 2,693
==== ===== ===== =====
3.16.1 Bond Issues
August 31, Translation August 31,
2001 Increase Repayments Differences 2002
(millions of euro, except for number of securities)
1996 bond issuance -
FRF 2,000,000,000
Principal................................... 305 305
Accrued interest............................ 4 4
------- ----- ----- -------
Total.................................. 309 0 0 309
Number of securities........................ 400,000 400,000
1999 bond issuance -
EUR 300,000,000
Principal................................... 300 300
Accrued interest............................ 7 7
------- ----- ----- -------
Total................................... 307 0 0 307
Number of securities........................ 300,000 300,000
2002 bond issuance
EUR 1,000,000,000
Principal................................... 1,000 1,000
Accrued interest............................ 26 26
------ ----- ----- ----- -------
Total................................... 0 1,026 0 0 1,026
------ ----- ----- ----- -------
Total....................................... 616 1,026 0 0 1,642
====== ===== ===== ===== =======
EUR 305 million bond issue
On May 22, 1996, Sodexho Alliance issued 400,000 bonds with a face value of
EUR 762 per bond, representing a total of EUR 304,898,000. The bonds are
redeemable at par on June 7, 2004 and bear interest at 6% per annum, which is
payable on June 7 annually. Each bond carried a warrant, entitling the bearer to
purchase one Sodexho Alliance share prior to June 7, 2004 for EUR 411.61. After
giving effect to share issuances and stock splits, each warrant currently
entitles the holder to 16.66 shares per warrant. There were 374,782 warrants
and 400,000 bonds outstanding as of August 31, 2002.
EUR 300 million bond issue
On March 16, 1999, Sodexho Alliance issued 300,000 bonds of EUR 1,000 each
for total proceeds of EUR 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 at August 31,
2002.
EUR 1 billion bond issue
On March 25, 2002, Sodexho Alliance issued bonds totaling EUR 1 billion,
maturing on March 25, 2009, and carrying interest of 5.875% payable on March 25
annually.
3.16.2 Other Borrowings
In connection with the acquisitions of Sogeres, Wood Dining Services, and
the shares in SMS held by third parties, the total debt of an initial amount of
$1,355 million resulting from the 1998 acquisition of 48% of SMS was reimbursed
in full on June 20, 2001. Pursuant to these transactions, a credit facility
guaranteed by Sodexho Alliance was negotiated with a syndicate of banks. As of
August 31, 2002, portions of the three tranches of this credit facility had been
reimbursed as follows:
>> Tranche A totaling EUR 1,932 million, of which EUR 875 million was
outstanding as of August 31, 2001, was fully reimbursed;
>> Tranche B totaling U.S.$930 million, with quarterly repayments over the
next five years, of which the entire amount was outstanding as of August
31, 2001, was reimbursed for an amount of U.S.$112 million (pursuant to the
swap agreement described in note 3.17 below the U.S. dollar variable LIBOR-
based rate on this debt has been swapped for a fixed rate); and
>> Tranche C totaling U.S.$150 million, to be utilized for short-term
financing, working capital needs and for bank guarantees and reimbursable
in full in five years was not utilized as of August 31, 2002.
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, 2002,
92% percent of borrowings were at fixed rates (including those swapped) and the
average interest rate for fiscal 2002 was 5.7%.
3.17 Financial Instruments
3.17.1 Swap Agreements with Notional Amounts Greater than EUR 5
million
Currency Swaps
In order to match the cash flows on debt repayments with the currency of an
operating subsidiary in the United Kingdom, the Group negotiated the following
swap transactions:
>> in fiscal 1996, a cross currency swap (8.3% against 5.25% in pounds
sterling against euro) on an intercompany loan of EUR 305 million (EUR 214
million as of August 31, 2002); and
>> in October 1999, a cross currency swap (capped LIBOR in pounds sterling
against 5.25% in pounds sterling against euro) on an intercompany loan of
EUR 93 million (EUR 84 million as of August 31, 2002).
The increase in the value of the pound sterling against the euro increased
borrowings as converted to euro by EUR 33.4 million related to these instruments
as of August 31, 2002.
In May 1999, a cross currency swap was negotiated on a loan of $8 million
to Sodexho do Brazil repayable over four years (10% against 7.54% in euro
against U.S. dollars). As of August 31, 2002, the increase in the U.S. dollar
against the euro led to an increase in the debt as converted to euro of EUR 0.3
million.
In June 1999, a cross currency swap was negotiated on a loan of EUR 50.1
million (EUR 39 million as of August 31, 2002) to Sodexho Scandinavia Holding AB
(4.15% against a variable interest rate in Swedish crowns). This swap terminates
in August 2004.
In March 2002, a cross currency swap was negotiated on an inter-company loan
of U.S. $309 million to Sodexho, Inc. (6.325% in euro against U.S. dollars). As
of August 31, 2002, the decrease in the dollar against the euro led to a
decrease in the debt as converted to euro of EUR 35.1 million.
Interest Rate Swaps
Several interest rate swaps (1.8% to 5.9% against US dollar LIBOR) with the
following maturities were negotiated in order to convert variable rate interest
to fixed on U.S.$818 million drawn on Tranche B of the credit facility described
above. Following are the maturities of the underlying notional amounts.
2002-2003 2003-2004 2004-2005
Notional amounts (in millions).............. 170 278 370
In October 1999, the Group negotiated an interest rate swap maturing in 2004
on a notional amount of EUR 68 million, which converted fixed rate debt at 5.2%
to Euribor.
Fair Values of Financial Instruments
Following are the fair values of the Group's financial instruments as of
August 31, 2002:
ASSETS Net book value Fair value Difference
(millions of euro)
Financial investments.................................................. 67 73 6
Equity method investees................................................ 11 11 0
Marketable securities and other:
Sodexho Alliance shares (1)............................................ 100 74 (26)
Cash 34 34 0
Term deposits.......................................................... 172 172 0
Mutual funds - SICAV................................................... 197 197 0
Debt securities........................................................ 38 38 0
Mutual funds - other................................................... 12 12 0
----- ----- ----
Total marketable securities and other............................... 553 527 (26)
Restricted cash........................................................ 165 165 0
----- ----- ----
Total.................................................................. 796 776 (20)
===== ===== ====
LIABILITIES
Bonds
2002 EUR 1 billion bond issuance.................................... 1,026 1,053 27
1999 EUR 300 million bond issuance.................................. 307 298 (9)
1996 EUR 305 million (FRF 2,000 million) bond issuance.............. 309 319 10
----- ----- ----
Total bonds................................................... 1,642 1,670 28
Bank debt
Sodexho, Inc. borrowings......................................... 839 846 7
Swap on intercompany loan with Sodexho Holdings Ltd.............. 1 3 2
Swap on intercompany loan with Sodexho Services Group Ltd........ 32 35 3
Swap on intercompany loan with Sodexho, Inc...................... (35) (26) 9
Other bank debt.................................................. 102 100 (2)
----- ----- ----
Total bank debt............................................... 939 958 19
Bank overdrafts. ................................................ 55 55 0
Other borrowings................................................. 57 57 0
----- ----- ----
Total borrowings................................................. 2,693 2,740 47
===== ===== ====
Other liabilities
SMS acquisition debt (1)......................................... 38 12 (26)
----- ----- ----
Total............................................................ 2,731 2,752 21
===== ===== ====
(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.
3.18 Statement of Cash Flows - Additional Information
3.18.1 Change in Working Capital
Assets Liabilities Total Change
(millions of euro)
Loans receivable, deposits and other..........................
Inventories................................................... (8)
Accounts receivable, net of allowance for doubtful accounts... 29
Other operating receivables................................... 52
Advances...................................................... 2
Accounts payable.............................................. 78
Vouchers payable.............................................. 126
Taxes and social charges payable.............................. 63
Other operating payables...................................... 11
Deferred revenues............................................. 6
---- ---- ----
Change in working capital from operating activities........ 75 284 209
==== ==== ====
Investment related receivables................................
Investment related payables................................... (3)
---- ----- ----
Change in working capital from investing activities........ 0 (3) (3)
==== ===== ====
Financing related receivables................................. 2
Financing related payables.................................... 1
---- ----- ----
Change in working capital from financing activities........ 2 1 (1)
==== ===== ====
3.18.2 Acquisitions of Tangible and Intangible Assets and Subsidiaries
The following table presents the cash flows for tangible and intangible
fixed assets for fiscal 2002.
Acquisitions Disposals Net
(millions of euro)
Tangible and intangible assets, including certain deferred charges .... 297 29 268
Variation in financial assets ......................................... 0 4 (4)
---- ---- ----
Total change in tangible and intangible assets ................... 297 33 264
Acquisitions (disposals) of subsidiaries............................... 107 61
Less: capital gains taxes.............................................. (12)
Less: cash in acquired companies....................................... (10) 0
---- ---- ----
Total change in consolidation scope .............................. 97 49 48
---- ---- ----
Total ................................................................. 394 82 312
==== ==== ====
3.19 Commitments
Commitments made as of August 31, 2002 (millions of euro) were as follows:
Financial guarantees to third parties .............................. 41
Performance bonds on operating leases .............................. 62
Client performance bonds ........................................... 22
Other commitments .................................................. 18
---
Total .............................................................. 143
===
==========
4. OTHER INFORMATION
4.1 Compensation, Advances, Loans and Retirement Plan Commitments Made to
Members of the Sodexho Alliance Board of Directors
Compensation totaling EUR 0.11 million was allocated to members of the
Board of Directors during fiscal 2002 and EUR 0.03 million was paid to the
defined contribution retirement plan for members of the Board of Directors of
Sodexho Alliance. There were no advances or loans to members of the Board of
Directors of Sodexho Alliance as of August 31, 2002.
4.2 Related Parties
Bellon S.A. holds 38.69% of the capital of Sodexho Alliance. Pursuant to an
agreement between Bellon S.A. and Sodexho Alliance, Bellon S.A. invoiced Sodexho
Alliance EUR 3.7 million for consulting and advisory services during fiscal
2002. Sodexho Alliance paid dividends of EUR 34.5 million to Bellon S.A. during
fiscal 2002.
4.3 French Tax Consolidation
The companies included in the Sodexho Alliance tax group for French tax
consolidation purposes are as follows. The annotation "N" denotes the three
companies included in the tax consolidation for the first time during the
current fiscal year.
SODEXHO ALLIANCE R.G.C. LA SALAMANDRE
SODEXHO France CIR S.I.G.E.S. GUYANE
SOFINSOD SAGERE S.D.T.S.
ETINBIS LA NORMANDE SA S.H.T. GUYANE
ETIN LA NORMANDE Sarl SODEX'NET
G.M. GROUPE HEDELREST S.E.V.P.T.E.
S.F.R. SOGEREST S.A.V.P.T.E.
COMREST COREST EIFFEL BRETAGNE
SOFOMEDI S.D.A.M. BATOBUS
SORESCOM S.I.R. SEINOVISION
SODEXHO PRESTIGE SODEXHO C.C.S. N S.T.V.B.
OGRE S.P.I. S.T.N.B.
S.F.S. UNIVERSAL SODEXHO NORTH AFRICA
S.F.R.S. CATESCO UNIVERSAL SODEXHO AFRIQUE
S.M.R.S. EMIS S.I.G.E.S.
S.H.R.S. GUYANE PROPRETE A.L.B.
SODEQUIP IFREST LOISIRS DEVELOPPEMENT
SHM HOLDING ALTYS UNIVERSAL SODEXHO
N S.R.R.S. N A.A. DEVELOPPEMENT
STRS SBRS
4.4 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 nineteen companies consolidated for
the first time in fiscal 2002. Four of these companies were acquired during the
year, and the remainder were newly created entities or previously deconsolidated
companies. The annotation "EM" denotes the ten companies accounted for by the
equity method. All other companies are fully consolidated.
% voting Principal Country
% interest rights activity
Metropolitan France
Societe Francaise de Restauration FMS France
Soderp FMS France
Comrest FMS France
Sofomedi FMS France
Sorescom FMS France
Sorepar FMS France
Ogre FMS France
Altys Multiservices 80% 80% FMS France
Altys Gestion FMS France
EM Saggel Holding 30% 30% FMS France
Societe Francaise de Services FMS France
Societe Francaise de Restauration et
Services FMS France
Societe Marseillaise de Restauration et
Services FMS France
Societe de Developpement des Services de
Proximite 92% 92% FMS France
Sodequip FMS France
Societe Havraise de Restauration et
Services FMS France
Ifrest FMS France
Ecorest 51% 51% FMS France
Sodexho Prestige FMS France
S.I.R. FMS France
Ceredial 90% 90% FMS France
Societe Hoteliere du Mantois 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
Sagere FMS France
Sogerest FMS France
N Midi service FMS France
Societe Bretonne de Restauration et
Services FMS France
Societe Thononaise de Restauration et FMS France
Services
Sogeres (sub-consolidation) FMS France
Bateaux Parisiens (sub-consolidation) RHC France
Armement Lebert Buisson RHC France
Societe de Restauration Nantaise 50% RHC France
Societe d'exploitation des Croisieres
Nantaises 50% 50% RHC France
Societe des Thermes de Neyrac-les-bains RHC France
Emis RS France
Catesco RS France
Sodexho Cheques et Cartes de Services SVC France
Sodexho Pass International HOL France
Sodexho France SAS 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 86% 86% HOL France
Holding Sogeres HOL France
AA Developpement HOL France
% interest % voting Principal Country
rights activity
Americas
Sodexho, Inc. (sub-consolidation) FMS USA
Abela Enterprises, Inc. (Wood Dining
Services) (sub-consolidation) FMS USA
Spirit Cruises RHC USA
Delta Catering Management 49% 49% RS USA
Universal Sodexho, Inc. HOL USA
Universal Services Partnership RS USA
Universal Services Enterprises LLC RS USA
Sodexho Pass USA SVC USA
Energy Catering Services LLC RS USA
Universal Sodexho Empresa de Servicios y RS Venezuela
Compartamentos
Universal Sodexho Services de Venezuela RS Venezuela
Universal Sodexho do Brazil Comercial RS Brazil
Ltda
Sodexho Do Brazil Comercial Ltda 90% 90% FMS Brazil
Sodexho Argentina FMS Argentina
Sodexho de 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% RS USA
Sodexho Peru RS Peru
N Sodexho sitios remotos de Peru RS Peru
N, EM B.A.S. SA 33% 33% FMS Chile
N Siges Chile FMS Chile
Sodexho Chile (sub-consolidation) FMS Chile
N Sodexho Mexico servicios de personnel FMS Mexico
N Sodexho mantenimiento y servicios RS Mexico
Sodexho Pass do Brazil 77% 77% HOL Brazil
Medcheque 50% 65% SVC Brazil
Cardapio informatica 77% SVC Brazil
National administracao de restaurentes 77% SVC Brazil
Sodexho Pass Do Brazill Commercial E
Servicio 77% SVC Brazil
Sodexho Pass Chile SVC Chile
Sodexho Pass Venezuela 64% 64% SVC Venezuela
Sodexho Pass de Colombia 51% 51% SVC Colombia
Luncheon Ticket 60% 60% SVC Argentina
Promocupon SVC Mexico
Prestaciones Mexicanas SA de CV SVC Mexico
Sodexho Servicios Operativos SVC Venezuela
Siges Guyane FMS France
Societe Hoteliere de Tourisme de Guyane FMS France
Sodex'Net FMS France
Guyane Proprete FMS France
N La Salamandre FMS France
Societe Guyanaise de Protection et
N Gardiennage FMS France
N Sodexho Antilles FMS France
% interest % voting Principal Country
rights activity
Africa
Universal Sodexho Afrique RS France
Universal Sodexho North Africa RS France
Sodexho Nigeria RS Nigeria
Universal Sodexho Gabon 90% 90% RS Gabon
Sodexho Pass Tunisie 49% 49% SVC Tunisia
Sodexho Pass Maroc SVC Morocco
Equatorial
Sodexho Equatorial Guinea 70% 70% RS Guinea
Universal Sodexho Cote d'Ivoire RS Ivory Coast
Sodexho Cameroun 70% 70% RS Cameroon
Universal Sodexho Congo RS Congo
Sodexho Southern Africa (sub-consolidation) 74% 74% FMS South Africa
Sodexho Investments Ltd HOL South Africa
Sodexho Tanzanie RS Tanzania
% interest % voting Principal Country
rights activity
Europe
Sodexho Monaco FMS Monaco
Sodexho Belgique FMS Belgium
Altys Belgium 80% FMS Belgium
Restaura FMS Belgium
Sodexho Luxembourg (sub-consolidation) FMS Luxembourg
Sodexho Italia (sub-consolidation) FMS Italy
Sodexho D.O.O. FMS Slovakia
Sodexho Oy (Finland) FMS Finland
Sodexho Scandinavian Holding
(sub-consolidation) FMS Sweden
Sodexho Espana (sub-consolidation) FMS Spain
N Lisrestal 80% 80% FMS Portugal
Sodexho Portugal Catering FMS Portugal
N Sodexho Hellas 51% 51% FMS Greece
Sodexho Catering & Services GmbH FMS Germany
Eiring S.C.S. Catering Services GmbH FMS Germany
Plauen Menu 90% FMS Germany
Baren Menu GmbH 90% 90% FMS Germany
Sodexho A.O. FMS Russia
Imagor Services HOL Belgium
Sodexho Catering Spol Sro FMS Czech Republic
Sodexho Skolni Hidelny Sro FMS Czech Republic
Sodexho Spolocne FMS Slovakia
Sodexho Magyarorszag Kft FMS Hungary
Zona Vendeglato 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 RS United Kingdom
N Harmondsworth Detention Services ltd 51% 51% FMS United Kingdom
UKDS FMS United Kingdom
Tillery Valley Foods Ltd FMS United Kingdom
N Rugby Hospitality 2003 Ltd 55% 55% FMS United Kingdom
Sodexho Holding Limited HOL United Kingdom
N Sodexho Education Services Ltd FMS United Kingdom
Sodexho Management Services Ltd FMS United Kingdom
Cadogan Caterers Ltd FMS United Kingdom
Sodexho Services Ltd FMS United Kingdom
Sodexho Support Services HOL United Kingdom
Universal Sodexho Norway RS Norway
Universal Sodexho Holdings Ltd HOL United Kingdom
Universal Services Europe Ltd RS United Kingdom
Universal Sodexho Nederlands BV RS Netherlands
Primary Management Aldershot 60% 60% FMS United Kingdom
EM Mercia Healthcare Holding Ltd 25% 25% FMS United Kingdom
EM South Manchester Healthcare Ltd 25% 25% FMS United Kingdom
Sodexho Holdings - Ireland Ltd HOL Ireland
Sodexho Services Limited FMS Ireland
Van Hecke Catering BV FMS Netherlands
Sodexho Nederland BV FMS Netherlands
Sodexho Prestige BV FMS Netherlands
Sodexho Catering Services BV FMS Netherlands
Sodexho Pass Belgique SVC Belgium
Special Event 70% 70% SVC Belgium
Sodexho Pass Luxembourg SVC Luxembourg
Sodexho Pass GmbH SVC Germany
Wergutschein - Systeme GmbH SVC Germany
Sodexho Card Services GmbH 74% 74% SVC Germany
Sodexho Pass srl SVC Italy
Sodexho Pass Espana 95% SVC Spain
Ticket Menu 95% 95% SVC Spain
Sodexho Pass Austria SVC Austria
EM Adicarte Technology Ltd 33% 33% SVC United Kingdom
Sodexho Pass Limited SVC United Kingdom
Sodehxo Pass Hungaria Kft SVC Hungary
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
Sodexho Pass Romania SVC Romania
Catamaran Cruisers RHC United Kingdom
Florida HOL Belgium
Compagnie Financiere Aurore
International HOL Belgium
Pakzon HOL Switzerland
% interest % voting Principal Country
rights activity
Asian - Pacific, Middle East
Kelvin Catering Services 49% 49% RS United Arab
Emirates
Teyseer Services Qatar 49% 49% RS Qatar
Socat llc 50% 50% RS Oman
N.C.M.S. 50% 50% RS Saudi Arabia
Abbar & Zainy 50% 50% RS Saudi Arabia
Sodexho International (SISA) Holding HOL Switzerand
United Arab
SISA llc RS Emirates
Restauration Francaise (New Caledonia) 72% 72% FMS France
N Sodexho Nouvelle Caledonie FMS France
N SRRS (la Reunion) FMS France
Sodexho Singapore FMS Singapore
Sodexho Malaysia FMS Malaysia
Sodexho - Hong Kong Ltd FMS Hong Kong
Sodexho Korea Co Ltd FMS Korea
Universal Sodexho Eurasia RS United Kingdom
Universal Remote Site Services RS Singapore
Aims Corporation FMS Australia
PT Universal Ogden Indonesia 50% 50% RS Indonesia
Sodexho - Australia FMS Australia
EM Serco Sodexho Defence Services Pty
Ltd 50% 50% FMS Australia
EM Rowland Sodexho Pty 50% 50% FMS Australia
Sodexho Venues Australia Pty FMS Australia
EM Serco Sodexho Defence Services Pty Ltd 50% 50% FMS New Zealand
N Minesite Catering Pty Ltd RS Australia
Sodexho (Tianjing) Catering Company Ltd FMS China
Sodexho Services Company Ltd Shanghai FMS China
Sodexho (Suzhou) Catering Company FMS China
Beijing Sodexho Catering Services
Company Ltd FMS China
Guangzhou Sodexho Management Services
ltd FMS China
Sodexho Pass Shanghai SVC China
Sodexho India FMS India
Sodexho Pass Services India SVC India
N Sakhalin Support Services 95% 95% RS Russia
N Allied Support Sakhalin RS Russia
Business: FMS = Food and Management Services, RS = Remote Sites, SVC = Service
Vouchers and Cards, HOL = Holding Company, RHC = River and Harbor Cruises
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,
-----------------------------------------------
2002 2001 2000
Restated Restated
(millions of euro, except per-share amounts)
Net income, as restated.......................................................... 202 128 79
U.S. GAAP adjustments: (1)
(a) Business combinations...................................................... (100) (135) (109)
(b) Stock-based compensation.................................................... (10) (2)
(c) Pensions and postretirement benefits........................................ (3) 2 4
(d) Investments in marketable equity securities................................. 0 (35) 40
(e) Detachable stock purchase warrants.......................................... (7) (6) (6)
(f) Derivative financial instruments............................................ (6) 9 (7)
(g) Foreign currency transactions............................................... 0 (8) 2
(h) Treasury shares............................................................ 19 0 0
(i) Other, net.................................................................. (4) (14) 1
(j) Deferred income tax effect.................................................. 45 27 20
----- ----- -----
Total U.S. GAAP adjustments...................................................... (66) (162) (55)
----- ----- -----
Net income (loss), as determined under U.S. GAAP................................. 136 (34) 24
===== ===== =====
Earnings (loss) per share, as determined under U.S. GAAP
(k) Basic earnings (loss) per share........................................... 0.86 (0.25) 0.18
(k) Diluted earnings (loss) per share......................................... 0.85 (0.25) 0.17
(1) Refer to note 5.5 for explanations.
5.2 Reconciliation of consolidated shareholders' equity
August 31,
2002 2001
Restated
(millions of euro)
Shareholders' equity, as restated.................... 2,398 2,386
U.S. GAAP adjustments: (1)
(a) Business combinations....................................... (337) (278)
(b) Stock-based compensation.................................... (1) (2)
(c) Pensions and postretirement benefits........................ (26) 22
(d) Investments in marketable equity securities................. 0 0
(e) Detachable stock purchase warrants.......................... 12 19
(f) Derivative financial instruments............................ (16) (10)
(g) Foreign currency transactions............................... 0 0
(h) Treasury shares............................................. (100) (29)
(i) Other, net.................................................. 15 21
(j) Deferred income tax effects................................. (65) (100)
------ ------
Total U.S. GAAP adjustments...................................... (518) (357)
------ ------
Shareholders' equity, as determined under U.S. GAAP.............. 1,880 2,029
====== ======
(1) Refer to note 5.5 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,
2002 2001 2000
Restated Restated
(millions of euro)
Net income (loss), as determined under U.S. GAAP................................ 136 (34) 24
----- ----- -----
(d) Unrealized gains and losses on available-for-sale securities(1):
Net unrealized holding loss arising during the period................ (31) (100)
Reclassification adjustment for losses included in net
income..................................................................... 31 34
(f) Change in fair value of cash flow hedge(1) (7) (6)
(c) Additional minimum pension liability(1) (33)
Foreign currency translation adjustments..................................... (130) (53) 103
----- ---- ----
Other comprehensive income (loss), as determined under U.S. GAAP............. (170) (59) 37
----- ---- ----
Comprehensive income (loss), as determined under U.S. GAAP...................... (34) (93) 61
===== ==== ====
(1) Refer to note 5.5 for explanations.
5.4.1 Condensed U.S. GAAP statement of operations
For the year ended August 31,
2002 2001(1) 2000(1)
Restated Restated
(millions of euro)
Revenues............................................................... 12,618 7,557 5,648
Other operating income................................................. 78 24 31
------ ----- -----
Operating expenses, excluding goodwill and intangible assets
amortization...................................................... 12,166 7,284 5,391
Goodwill and intangible assets amortization ........................... 126 144 93
------ ----- -----
Operating income.................................................. 404 153 195
Interest expense....................................................... 203 109 91
Equity in income (loss) of investees................................... 6 2 (1)
Other non-operating income (expense)................................... 33 (7) 1
------ ----- -----
Income before income taxes, minority interest and
extraordinary item..................... 240 39 104
Income tax expense..................................................... 91 61 70
Minority interest in net income of consolidated subsidiaries........... 13 9 10
------ ----- -----
Income (loss) before extraordinary item................................ 136 (31) 24
Extraordinary loss on extinguishment of debt........................... (3)
------ ----- -----
Net income (loss)................................................. 136 (34) 24
====== ===== =====
____________________
(1)For fiscal 2000 and fiscal 2001, the most significant differences between the
amounts reported in accordance with French GAAP and those reported under US
GAAP relate to the accounting for Sodexho, Inc. (formerly, Sodexho Marriott
Services, Inc.). See note 5.5 (a) for additional information on the nature
of this accounting difference.
5.4.2 Condensed U.S. GAAP balance sheet
August 31,
2002 2001
Restated
(millions of euro)
ASSETS:
Current assets:
Cash and cash equivalents....................................................... 1,044 1,033
Restricted cash................................................................. 165 152
Accounts receivable............................................................. 1,457 1,493
Inventories..................................................................... 170 192
Deferred tax assets............................................................. 79 93
Other current assets............................................................ 272 260
------ ------
Total current assets........................................................ 3,187 3,223
Fixed assets, net............................................................... 429 436
Goodwill and intangible assets, net............................................. 4,514 4,815
Other non-current assets........................................................ 373 346
------ ------
Total assets................................................................ 8,503 8,820
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt............................................... 291 625
Accounts payable................................................................ 1,255 1,268
Vouchers payable................................................................ 732 729
Accrued expenses and other current liabilities.................................. 1,089 1,113
------ ------
Total current liabilities 3,367 3,735
Long-term debt.................................................................. 2,507 2,232
Other long-term liabilities..................................................... 304 162
Deferred tax liabilities........................................................ 372 531
Minority interests.............................................................. 73 131
Shareholders' equity............................................................ 1,880 2,029
------ ------
Total liabilities, minority interest and shareholders' equity............... 8,503 8,820
====== ======
5.5 Notes to reconciliation of consolidated net income and consolidated
shareholders' equity
As discussed in note 1, in order to comply with the requirements of the
United States Securities and Exchange Commission, the Group restated its French
GAAP financial statements as presented herein for each of the fiscal years ended
August 31, 2001 and 2000. The impact of the restatement on previously reported
US GAAP amounts is summarized in the table below.
Basic Diluted
Operating Net Earnings Earnings Current Total
Revenues Income Income per Share per Share Assets Equity
Fiscal 2001
Previously reported 7,572 168 (24) (0.18) (0.18) 3,252 2,048
Adjustment (15) (15) (10) (0.07) (0.07) (29) (19)
------ ----- ----- ------ ------ ------ ------
As adjusted 7,557 153 (34) (0.25) (0.25) 3,223 2,029
====== ===== ===== ====== ====== ====== ======
Fiscal 2000
Previously reported 5,657 204 30 0.22 0.22
Adjustment (9) (9) (6) (0.04) (0.05)
------ ----- ---- ------ ------
As adjusted 5,648 195 24 0.18 0.17
====== ===== ==== ====== ======
(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.
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 APB 16, "Business Combinations", and related
interpretations (SFAS 141 effective 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 have been
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 APB 17 (SFAS 142 effective September 1, 2001) all intangible assets
acquired, including goodwill (through fiscal 2001; thereafter it is no longer
amortized), customer relationships, trademarks, software and assembled
workforces (through fiscal 2001; thereafter it has been reclassified to goodwill
and is no longer amortized), are amortized over their estimated useful lives. 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:
For the year ended August 31,
2002 2001 2000
(millions of euro)
Sodexho, Inc.................................................... (88) (74) (51)
Gardner Merchant................................................ (21) (39) (41)
Other........................................................... 9 (22) (17)
------ ----- -----
(100) (135) (109)
====== ===== =====
For the years ended August 31, 2001 and 2000, the effects of deferred income
taxes and minority interests pertainting to Sodexho, Inc. were included in the
business combinations adjustment as follows:
For the year ended August 31,
2001 2000
(millions of euro)
Sodexho, Inc.:
Adjustment before deferred income taxes and minority
interest ....................................................... (200) (174)
Effect of deferred income taxes ................................ 68 65
Effect of minority interest .................................... 58 58
----- -----
Total Sodexho, Inc.............................................. (74) (51)
===== =====
The deferred income tax effect related to the adjustments for the
acquisition of Sodexho, Inc. (for fiscal 2002 only), 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, 2002, the principal effects on the Group's balance sheet
related to the accounting for business combinations were to increase goodwill by
EUR 1.5 billion, decrease intangible assets other than goodwill by EUR 1.6
billion and increase deferred tax liabilities by EUR 0.4 billion. As of August
31, 2001, the principal effects on the Group's balance sheet related to the
accounting for business combinations were to increase goodwill by EUR 1.5
billion, decrease intangible assets other than goodwill by EUR 1.4 billion and
increase deferred tax liabilities by EUR 0.5 billion.
The following table presents the allocation of intangible assets and
goodwill, their estimated useful lives and the related amortization expense.
Amortization Expense
------------------------------------
Year Ended August 31,
Estimated
August 31, Useful Life
2002 2001 2002 2001 2000
(millions
(millions of euro) (years) of euro)
Customer relationships.................... 1,599 1,561 10 - 19 97 57 38
Assembled workforce....................... - 193 6 7
Trademarks................................ 33 33 5 3
Software and other........................ 226 143 3 - 7 29 16 9
Goodwill.................................. 3,484 3,736 0 64 42
----- ------ ---- ---- ----
5,342 5,666 126 144 92
==== ==== ====
Accumulated amortization.................. (828) (851)
----- -----
Total intangible assets and goodwill, net. 4,514 4,815
===== =====
Incremental U.S. GAAP amortization with respect to software and other
intangible assets totaled EUR 7 million, EUR 6 million and EUR 3 million in
fiscal 2002, fiscal 2001 and fiscal 2000, respectively, and principally related
to leased assets which are capitalized under U.S. GAAP but treated as operating
leases under French GAAP.
Additional information with respect to the differences between French GAAP
and U.S. GAAP for the Group's significant acquisitions is provided below.
Sodexho, Inc. (formerly Sodexho Marriott Services, Inc.)
Under French GAAP, the Group consolidated Sodexho, Inc., of which it owned
47.4% as of August 31, 2000, until the Group acquired the remaining shares on
June 20, 2001 (at which time it owned 46.9% of Sodexho, Inc.). French GAAP
generally requires consolidation of greater than 40%-owned subsidiaries if there
is no single more significant shareholder. Under U.S. GAAP, Sodexho, Inc. is
required to be accounted for by the equity method until the date when the
remaining shares were acquired. The reconciling items included in the tables
above related to net income and shareholders' equity principally reflect the
impact of re-allocating market share and goodwill, as recorded under French
GAAP, to identified intangible assets, including customer contracts, software
and assembled workforce as well as the related deferred tax effects. These
assets are being amortized over their estimated useful lives of 17 years, seven
years and six years, respectively, under U.S. GAAP for purposes of the
reconciliation. The remaining excess was allocated to goodwill which is being
amortized over its estimated useful life of 30 years through August 31, 2001.
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 EUR 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 EUR 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, 2002, the
liability was reduced by an amount equal to the lesser of a) the original
provision and b) the difference between EUR 53.47 per share and the acquisition
cost of the related treasury shares (see note 5.5 (h)).
Under US 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.
The impact of the adjustment related to the accounting for Sodexho, Inc.
between French and U.S. GAAP on the Group's statement of operations and balance
sheet is summarized below (decreases in parentheses):
2002 2001 2000
(millions of euro)
For the year ended August 31,
Revenues - (4,379) (4,857)
Operating income (103) (291) (249)
As of August 31,
Total assets 129 551
Total liabilities 304 675
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, which are
being amortized over their estimated useful lives of 14 years, five years and
four years, respectively. The remaining excess was allocated to goodwill which
was being amortized over its estimated useful life of 30 years through August
31, 2001.
(b) Stock-based compensation
Stock options
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 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 EUR 0.8 million, EUR 1.2 million and EUR 0.2 million for each of
the years ended August 31, 2002, 2001 and 2000, respectively.
Stock purchase plan
In addition, 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 EUR 44.10 per share for United States
employees and EUR 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 EUR 11 million for the year ended August 31, 2002.
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 certain 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 EUR 1 million
and EUR 2 million for each of the years ended August 31, 2001 and 2000,
respectively, compared to EUR 0.5 million and EUR 2 million recognized under
French GAAP for the same periods, respectively. 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
Prior to fiscal 2001, the Group accounted for certain of its pension and
similar obligations on a pay as you go basis for French GAAP purposes. In fiscal
2001, a new accounting policy was adopted for French GAAP under which pension
and similar obligations are accrued using the projected unit credit valuation
method. Accrued pension obligations were recorded as an adjustment directly to
shareholders' equity as of September 1, 2000. However, 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 have
been calculated as of September 1, 1999 as permitted for companies outside the
United States and have been 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,
2002, an additional minimum liability has been recorded, with a corresponding
entry recorded net of tax as other comprehensive income, a component of
shareholders' equity. For the funded plans which were in a net asset position as
of August 31, 2000 and 2001, the amount of expense computed under SFAS 87 was
lower than that recorded by the Group subsidiary in each of the years then
ended.
(d) Investments in marketable equity securities
The adjustment for investments in marketable equity securities relates
principally to the Group's investment in Corrections Corporation of America
("CCA"). Under French GAAP, this investment was considered an investment in a
non-consolidated company. Due principally to the uncertainty of the outcome of
litigation between CCA and some of its shareholders, the investment was fully
provisioned in fiscal 2000. Under U.S. GAAP, marketable equity securities are
classified as trading securities, available-for-sale securities, or
held-to-maturity. Available-for-sale securities are reported at market value,
with unrealized gains and losses excluded from earnings and recorded directly in
equity as a separate component of accumulated other comprehensive income.
Unrealized gains and losses on available-for-sale securities are generally
transferred from accumulated other comprehensive income to the profit and loss
account when they are realized. However, unrealized losses which are considered
other than temporary in nature are transferred to the profit and loss account
when such determination is made. The Group's investment in CCA is considered
available-for-sale under U.S. GAAP. Accordingly, under U.S. GAAP the Group's
investment in CCA was written down to its market value as of August 31, 2000
which resulted in a lower write-down than under French GAAP in that year. The
decline was considered other than temporary and, therefore, was recognized in
earnings of the period. During fiscal 2001, when the investment was sold, an
additional charge was recorded under U.S. GAAP to reflect the incremental
decline in value from the August 31, 2000 until the sale date.
Under U.S. GAAP, the Group wrote down its investment in CCA to its quoted
market value of EUR 35 million as of August 31, 2000 resulting in the
recognition of a loss amounting to EUR 32 million for U.S. GAAP for the year
ended August 31, 2000. Under French GAAP, the Group recorded a provision and
corresponding loss of EUR 72 million for the year ended August 31, 2000. In
addition to the EUR 3 million loss described in note 1, which was recognized
under French and U.S. GAAP for the year ended August 31, 2001, the Group also
recorded an additional loss for U.S. GAAP in fiscal 2001 of EUR 35 million
related to the carrying value of the Group's investment in CCA which remained in
the U.S. GAAP balance sheet as of August 31, 2000 compared to the French GAAP
balance sheet. As of August 31, 2001, the Group had divested its entire
investment in CCA.
(e) 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.
(f) 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 inter-company debt, the
difference between the amount of the debt at the period end rates and the
swapped rates is recorded as debt. Where the hedge is of a net investment in a
foreign subsidiary, the resulting foreign currency translation difference is
recorded in the currency translation adjustment account in shareholders equity.
Under U.S. GAAP (prior to the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"), derivative financial
instruments must be designated to a specific asset or liability or group of
similar assets or liabilities in order to be accounted for as a hedge.
Derivative financial instruments, which are not designated to specific assets or
liabilities that are accounted for as hedges under French GAAP, are accounted
for as trading derivatives and recorded at fair value with changes in fair value
reflected through the income statement.
Subsequent to the adoption of SFAS No. 133 (effective as of September 1,
2000 for the Group), 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.) 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) as of and for the year ended August 31, 2001 and
2000 for "Derivative financial instruments" is comprised entirely of derivative
financial instruments accounted for at fair value.
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,
2002 and 2001, and for the fiscal years 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 a reduction of consolidated
shareholders' equity of EUR 7 million and EUR 6 million as of August 31, 2002
and 2001, respectively, and no adjustment to consolidated net income (loss) for
the year ended August 31, 2001. As SFAS No. 133 was effective for the Group and
for Sodexho, Inc. as of September 1, 2000, there are no adjustments to net
income (loss) for the year ended August 31, 2000.
(g) Foreign currency transaction gains
Under French GAAP (prior to the adoption of Regulation CRC 99-02),
unrealized gains and losses resulting from assets and liabilities denominated in
currencies other than a company's functional currency are deferred as
liabilities and assets, respectively, on a company's balance sheet. A separate
provision is recorded to recognize the unrealized losses at the balance sheet in
the profit and loss account. Unrealized gains are recognized when realized.
Under U.S. GAAP, unrealized gains and losses resulting from assets and
liabilities denominated in currencies other than a company's functional currency
are both recognized in the profit and loss account. Subsequent to the adoption
of Regulation CRC 99-02 for French GAAP (September 1, 2000 for the Group), there
is no difference between French GAAP and U.S. GAAP related to foreign currency
transactions. For the year ended August 31, 2001, the difference included in
the reconciliation of net income (loss) represents the reversal of the
cumulative effect adjustment recorded for French GAAP upon adoption of the
provisions of Regulation CRC 99-02 on September 1, 2000.
(h) 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, 2002
(except as described in the following paragraph), 2001, or 2000.
During the year ended August 31, 2002, 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, 2002 ("out of the money options"), the Group recorded a provision and
corresponding charge, amounting to EUR 19 million, representing the difference
between the fair market value of the treasury shares as of August 31, 2002 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.
(i) Other, net
Other consists of the impacts on net income (loss) and shareholders' equity
for the differences between U.S. GAAP and French GAAP summarized in the table
below:
Net Income (Loss) for the Year Shareholders' Equity
Ended August 31, as of August 31,
---------------------------------- -----------------------
2002 2001 2000 2002 2001
---------------------------------- -----------------------
Provisions for contingencies and losses (4) (1) 1 5 9
Leases (1) (3) 1 (6) (4)
Scope of consolidation 0 (1) 1 (1) (1)
Organization costs 1 (1) 1 0 (1)
Indirectly-held treasury shares 0 - - 31 31
Deferred charges and other 0 (8) (3) (14) (13)
---- ---- ---- ---- ----
Total - Other, net (4) (14) 1 15 21
==== ==== ==== ==== ====
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.
As disclosed in note 3.15, the Group recorded a provision under French GAAP
in the amount of EUR 6 million during the year ended August 31, 2001 related to
performance guarantees with respect to its investment in Attendo Care. Under
French GAAP, the related expense is included in "Exceptional (expense) income,
net" in the consolidated income statement. The adjustment to net income (loss)
for the year ended August 31, 2001 included in the table above for "Provisions
for contingencies and losses" includes a positive adjustment of EUR 5 million
related to Attendo Care related to provisions which are not recognizable under
U.S. GAAP. The Attendo Care adjustment is offset by a negative adjustment of
EUR 6 million related to a variety of other provisions, principally the impact
in fiscal 2001 of adjustments to August 31, 2000 balances primarily related to
major repairs, reengineering costs, certain tax risks, flood contingencies and
other provisions which did not meet U.S. GAAP criteria for liability
recognition.
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 EUR 67 million and EUR 110 million as of August 31,
2002 and 2001, respectively. The aggregate impact on total liabilities (debt)
is an increase of EUR 71 million and EUR 111 million as of August 31, 2002 and
2001, 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 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.
(j) 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) except for the adjustments related to SMS, which are reflected net
of taxes in the business combinations adjustment.
(k) 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,
2002 2001 2000
Basic earnings (loss) per share...................... 157,395,975 137,689,214 134,103,032
Diluted earnings (loss) per share.................... 159,953,836 137,689,214 136,895,874
For 2001, the number of weighted average shares used to compute diluted
earnings per share is the same as the number used to compute basic earnings per
share because the Group's outstanding stock options and warrants are
anti-dilutive for that period (since the Group reported a net loss for U.S.
GAAP). Had the Group reported net income the number of shares used to compute
diluted earnings for 2001, per share in accordance with U.S. GAAP would have
been 141,039,135.
5.6 New U.S. GAAP accounting pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 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)." The
principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred.Under EITF Issue No. 94-3, a liability for an exit cost as defined in
EITF Issue No. 94-3 was recognized at the date of an entity's commitment to an
exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is that
an entity's commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability. Therefore, this
Statement eliminates the definition and requirements for recognition of exit
costs in EITF Issue No. 94-3. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The impact of SFAS No.
146 on the Group's financial statements is not expected to be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale and to be disposed of by
sale. Although the Statement retains certain of the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," it supersedes SFAS No. 121 and Accounting Principles Board
(APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS No. 144 also amends Accounting Research Bulletin (ARB) No.
51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and will thus be adopted by the Group, as
required, on September 1, 2002. The impact of SFAS No. 144 on Group's financial
statements is not expected to be material.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The impact of
SFAS No. 143 on the Group's financial statements is not expected to be material.
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 for market share intangible assets are recognized as a
diminution in value in accordance with the policy described in note 1.
(b) Allowance for doubtful accounts
Set forth below is a table which provides information on the Group's
allowance for doubtful accounts.
August 31,
------------------------------------------------
2002 2001 2000
------------------------------ ---------------
(millions of euro)
Balance at beginning of period............. 57 59 47
Additions.................................. 29 8 13
Deductions................................. (20) (11) (7)
Scope of consolidation and currency
translation adjustment..................... (6) 1 6
---- ---- ----
Balance at end of period 60 57 59
==== ==== ====
(a) IAS 7 Consolidated Statements of Cash Flow
Following are consolidated statements of cash flows presented in accordance
with IAS 7:
Years ended August 31,
2002 2001 2000
(millions of euro)
Cash flows from operating activities
Group net income....................................................... 202 128 79
Minority interests in net income....................................... 13 67 69
Net (income) loss from equity method investees......................... (3) 2 (1)
Adjustments for:
Depreciation and provisions....................................... 187 113 173
Goodwill amortization............................................. 67 44 31
Deferred taxes.................................................... 5 20 23
Less: gains or losses on disposal net of tax...................... (61) 26 (5)
----- ----- -----
Operating profit before working capital changes........................ 410 400 369
Increase in inventories........................................... 8 (8) (21)
Increase in account receivables................................... (29) (23) (144)
Increase in prepaid expenses, other receivables and other assets.. (54) (7) (53)
Increase in accounts payable...................................... 78 114 159
Increase in vouchers payable...................................... 126 110 96
Increase in other liabilities..................................... 80 (32) 123
------ ----- -----
Net cash flow from operating activities........................... 619 554 529
------ ----- -----
Cash flows from investing activities
Purchases of tangible and intangible fixed assets................. (297) (233) (174)
Acquisitions of subsidiaries net of cash acquired................. (97) (1,741) (82)
Proceeds on disposal of fixed assets.............................. 81 31 49
Decrease (increase) in loans to equity method investees........... 1 (4) (8)
Other investing activities........................................ (3) (12) 6
------ ------- -----
Net cash used in investing activities............................. (315) (1,959) (209)
------ ------- -----
Cash flows from financing activities
Dividends paid.................................................... (87) (74) (59)
Dividends paid to minority shareholders........................... (15) (9) (9)
Proceeds from issuance of share capital, including minority
interests..................................................... 59 1,020 58
Purchases of treasury shares...................................... (90) (28)
Proceeds from long-term borrowings................................ 1,113 1,966 59
Repayment of borrowings........................................... (1,146) (1,142) (299)
Increase (decrease) in bank overdrafts............................ 7 11 6
Other financing activities........................................ (1) (9) 19
------ ------ -----
Net cash provided by (used in) financing activities............... (160) 1,735 (225)
------ ------ -----
Net increase in cash and cash equivalents.............................. 144 330 95
====== ====== =====
Cash and cash equivalents at beginning of period....................... 1,185 896 758
Net effect of exchange rates on cash................................... (118) (41) 43
------ ------ -----
Cash and cash equivalents at end of period............................. 1,211 1,185 896
====== ====== =====
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 EUR 119 million and EUR
28 million as of August 31, 2002 and 2001 and zero as of August 31, 2000) and
restricted cash, which are compensating balances.
(a) 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.
Attendo Care
The Attendo Care provision relates to performance guarantees provided
by the Group to certain clients of that subsidiary for which monetary
compensation must be provided should Attendo Care fail to perform with respect
to the terms of the contract.
Incentive compensation
Provisions for incentive compensation were recorded with respect to the
subsidiary level formula based stock option plans, which were discontinued in
fiscal 2001.
Under-utilized premises
Under-utilized premises are recorded in order to fair value leased
premises of acquired companies.
Other
Other provisions include re-engineering costs, exchange loss risks and
flood contingencies related to the River and Harbor Cruises activity.
Report of Independent Public Accountants
To the Board of Directors and
Shareholders of Sodexho Marriott Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, stockholders' deficit and cash flow present
fairly, in all material respects, the financial position of Sodexho Marriott
Services, Inc. and its subsidiaries at September 1, 2000, and the results of
their operations and their cash flow for the fifty-two weeks ended September 1,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
October 11, 2000
F-62
Sodexho Marriott Services, Inc.
Consolidated Statement of Income
For The Fiscal Year Ended September 1, 2000
($ in millions, except per-share amounts)
2000
----------
(52 weeks)
Sales........................................................................ $4,734
Operating Costs and Expenses
Operating expenses...................................................... (4,415)
Corporate expenses, including amortization of intangible assets......... (123)
-------
(4,538)
Operating Profit............................................................. 196
Interest expense............................................................. (85)
Interest income.............................................................. 1
------
Income Before Taxes.......................................................... 112
Provision for income taxes................................................... (49)
------
Net Income................................................................... $ 63
======
Basic Earnings Per Share..................................................... $1.01
======
Diluted Earnings Per Share................................................... $1.00
======
See Notes to Consolidated Financial Statements.
Sodexho Marriott Services, Inc.
Consolidated Balance Sheet
September 1, 2000
($ in millions)
September 1,
2000
----------------
Assets
Current Assets
Cash and equivalents............................................... $ 54
Accounts and notes receivable, net................................. 463
Inventories........................................................ 67
Other.............................................................. 98
-----
Total current assets....................................... 682
Property and equipment, net............................................. 96
Intangible assets, net.................................................. 497
Investments in affiliates............................................... 8
Other................................................................... 81
-----
$1,364
=====
Liabilities and Stockholders' Deficit
Current Liabilities
Current portion of long-term debt.................................. $ 81
Accounts payable................................................... 305
Accrued payroll, benefits and
other current liabilities........................................ 379
----
Total current liabilities.................................. 765
Long-term debt.......................................................... 900
Other long-term liabilities............................................. 112
Convertible subordinated debt........................................... -
Commitments and Contingencies (Note 9)
Stockholders' Deficit
Preferred stock, no par value, 1 million shares
authorized; no shares issued..................................... -
Common stock, $1 par value; 300 million
authorized, 63.2 million shares
issued and outstanding .......................................... 63
Additional paid-in capital......................................... 1,348
Accumulated deficit................................................ (1,826)
Accumulated other comprehensive income............................. 2
------
Total stockholders' deficit..................................... (413)
------
Total liabilities and stockholders' deficit..................... $ 1,364
======
See Notes to Consolidated Financial Statements.
Sodexho Marriott Services, Inc.
Consolidated Statement of Cash Flow
For the Fiscal Year Ended September 1, 2000
($ in millions)
2000
(52 weeks)
-----------
Cash Flow Provided by Operating Activities
Net income................................................................... $ 63
Adjustments to net cash provided by operating activities:
Depreciation and amortization expense................................... 84
Provision for deferred taxes............................................ 10
Allowance for doubtful accounts......................................... 8
Other non-cash items.................................................... 9
Changes in working capital:
Inventories........................................................ (7)
Accounts and notes receivable...................................... (28)
Prepaids and other current assets.................................. (14)
Accounts payable................................................... 67
Accrued expenses................................................... 46
Other.............................................................. (17)
----
Net Cash Provided by Operating Activities 221
Cash Flow from Investing Activities
Capital expenditures......................................................... (66)
Dispositions of property and equipment....................................... 5
Other........................................................................ (7)
---
Net Cash Used in Investing Activities........................................ (68)
Cash Flow from Financing Activities
Repayments of long-term debt................................................. (92)
Decrease in short-term debt.................................................. (52)
Common stock issued - ESOP & other........................................... 2
Dividends paid - common...................................................... (5)
----
Net Cash Used in Financing Activities........................................ (147)
Net Increase in Cash and Equivalents......................................... $ 6
Cash & Cash equivalents Beginning of Period.................................. 48
----
Cash & Cash Equivalents End of Period........................................ $ 54
====
Supplemental:
Interest paid............................................................. $ 77
Income tax payments....................................................... 40
See Notes to Consolidated Financial Statements.
Sodexho Marriott Services, Inc.
Consolidated Statement of Stockholders' Deficit
For the Fiscal Year Ended September 1, 2000
(in millions, except per share amounts)
Accumulated
Common Additional other
shares Common paid-in Accumulated comprehensive
outstanding stock capital Deficit income Total
----------- ------ ---------- ----------- ------------- -----
62.3 Balance, September 3, 1999........... $ 62 $1,326 $(1,884) $ (2) $(494)
- Net income........................... - - 63 - 63
----- ----- ------ ---- ----
- Total Comprehensive Income........... - - 63 - 63
Conversion of convertible
0.8 subordinated debt............ 1 19 - - 20
- Dividends ($0.08 per share).......... - - (5) - (5)
Employee stock plan issuance and
0.1 other............................. - 3 - - 3
---- ----- ----- ------ ---- ----
63.2 Balance, September 1, 2000........... $ 63 $1,348 $(1,826) $ (2) $ (413)
==== ===== ===== ====== ==== ====
See Notes to Consolidated Financial Statements.
Sodexho Marriott Services, Inc.
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in
North America of outsourced food and facilities management services to
businesses, health care facilities, colleges and universities, and primary and
secondary schools. Food services include food and beverage procurement,
preparation and menu planning, as well as the operation and maintenance of food
service and catering facilities, generally on a client's premises. Facilities
management services include plant maintenance, energy management, grounds
keeping, and housekeeping and custodial services.
All material intercompany transactions and balances between Sodexho
Marriott Services, Inc., and its consolidated subsidiaries have been eliminated.
Certain amounts previously presented have been reclassified to conform to the
current presentation.
On March 27, 1998, the Company completed a distribution to its shareholders
of all outstanding shares of New Marriott MI, Inc. ("New Marriott"), a
wholly-owned subsidiary of the Company, which principally conducted its lodging
business and was renamed Marriott International, Inc. ("MI") (the
"Distribution"). The remaining line of business following the Distribution was
the food and management services business - Marriott Management Services
("MMS"), which became the principal business of the Company. Immediately after
the Distribution, the Company acquired the North American food and management
services operations of Sodexho Alliance, SA ("Sodexho") ("Sodexho North
America", "SNA"), in exchange for stock of the Company and $304 million in cash.
The combined operations of MMS and SNA continued to operate under the name,
"Sodexho Marriott Services, Inc." Following the issuance of shares in
connection with the acquisition, the former shareholders of the Company owned
51.6% of Sodexho Marriott Services, Inc.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
In the latter half of fiscal year 2000, a new procurement system was
implemented to improve the tracking and analysis of food procurement
activities. A key benefit of this new system is the improved capturing of data
regarding the Company's procurement activity. This capability also improves the
Company's ability to better match the procurement process to the period in which
it occurs, including the Company's ability to recognize rebates on purchases.
The Company's policy has been and continues to be to recognize rebates once they
are quantifiable. The Company views these rebates as contingent income and
consistently records these rebates only when the related contingency is
resolved. The new procurement system allowed the Company to receive and process
procurement data on a real-time basis, thereby eliminating the contingency,
which resulted in the recording of an increase in pretax earnings of $8 million
($5 million after-tax, or $0.07 per diluted share) in the Company's fourth
quarter of fiscal year 2000, accounted for as a change in estimate under APB
Opinion No. 20, "Accounting Changes." The Company estimates that approximately
$5 million (pretax), or $0.04 per diluted share, of this change in estimate
relates to procurement activity prior to fiscal year 2000, with the remainder of
this impact being related to enhancements and improved procurement-related
efficiencies attributable to fiscal year 2000.
Fiscal Year
Fiscal year 2000 had 52 weeks and ended on September 1, 2000.
Revenue Recognition and Accounts and Notes Receivable
Revenues are recognized at the time services are rendered or products are
delivered. Revenues include reimbursements for food and payroll costs incurred
on behalf of customers under contracts in which the Company manages food service
programs for a fee.
The allowance for doubtful accounts was $23 million as of September 1,
2000. Concentration of credit risk within accounts receivable is limited
because a large number of customers make up the Company's customer base, thus
spreading risk associated with trade credit. In addition, the Company closely
monitors its accounts receivable. The Company generally does not require
collateral and maintains reserves for potential uncollectible amounts, which, in
the aggregate, have not exceeded management's expectations.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of undiscounted expected future cash flow is less than
the carrying amount of long-lived assets, the Company recognizes an impairment
loss based on the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
Interest-Rate Agreements
The Company's policies prohibit the use of derivative instruments for
trading purposes and procedures are in place to monitor and control their use.
The use of derivative instruments is limited to interest-rate agreements for the
purpose of reducing the variability of the Company's debt costs. The majority
of these agreements were entered into in conjunction with the issuance of the
debt they were intended to modify.
The notional balances of these agreements represent a balance used to
calculate the exchange of cash flows and are not assets or liabilities of the
Company, in addition to not representing an exposure to credit loss. The
notional amount and interest payment of these agreements match the cash flows of
the related debt. Accordingly, any market risk or opportunity associated with
these agreements is offset by the opposite market impact on the related debt.
The Company's credit risk related to interest-rate agreements is considered low
because they are entered into only with strong creditworthy counterparties and
are generally settled on a net basis. The difference paid or received on
interest-rate agreements is recognized as an adjustment to interest expense.
See Note 6 for the notional amounts, related interest rates, maturities, and
fair values of these interest-rate agreements.
Income Taxes
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of outstanding common shares. Diluted earnings per
share is computed by dividing net income by the diluted weighted-average number
of outstanding common shares, and includes the affect of the Company's employee
stock option plan, the deferred stock incentive plan and the convertible
subordinated debt securities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents. The Company
uses drafts in its cash management system. At September 1, 2000, the Company
had $134 million of outstanding drafts included in accounts payable.
Inventories
Inventories consist of food items and supplies, which are stated at the
lower of average cost or market, generally using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Buildings are amortized over their estimated useful life, generally from 20 to
30 years, with computer equipment depreciated generally from 3 to 7 years, and
furniture, fixtures and equipment generally depreciated from 3 to 10 years.
Total depreciation expense for fiscal year 2000 was $32 million. Replacements
and improvements are capitalized. Leasehold improvements, net of estimated
residual value, are amortized over the shorter of the useful life of the asset
or the lease term.
Intangible Assets
Intangible assets primarily consist of goodwill and customer
relationships. Intangible assets are amortized on a straight-line basis over
periods generally ranging from 30 to 40 years for goodwill and 10 to 20 years
for customer relationships.
Other Assets
Included in other assets are client investments, which generally represent
amounts provided by the Company to clients at contract inception for the
purchase of property and equipment pertaining to the contract. These amounts
are amortized over the life of the related contract. When a contract terminates
prior to its scheduled termination date, the client generally must repay any
unamortized client investment balance to the Company.
Insurance
The Company is partially self-insured for certain levels of workers'
compensation, general liability, employment practices and employee medical
coverage. Self-insurance levels are the result of the Company using certain
insurance programs that include higher deductibles for the Company, resulting in
the Company being "self-insured" for claims below the deductible levels.
Estimated costs for these self-insurance programs are accrued at the present
value (discounted at a rate of 6% at fiscal year end 2000) of projected
settlements for known and anticipated claims. Self insurance accruals are based
on the Company's estimate of the aggregate liability for uninsured claims
incurred using claims filed, as well as an estimate for significant claims
incurred but not reported and case-development reserves (collectively, "IBNR"),
and are subject to certain actuarial assumptions followed in the insurance
industry. The accrued liabilities for self-insured losses included in other
accrued expenses in the accompanying consolidated balance sheets totaled $75
million at September 1, 2000, of which approximately $38 million relates to the
IBNR obligations.
Accumulated Other Comprehensive Income
Comprehensive income entails reporting certain financial activity typically
disclosed in stockholders' deficit as an adjustment to net income in determining
total comprehensive income. Items applicable to the Company include activity in
foreign exchange translation adjustments and securities available for sale under
SFAS No. 115. Items identified as comprehensive income are reported in the
Consolidated Balance Sheet and the Consolidated Statement of Stockholders'
Deficit, under separate captions. Results for the Canada division are
translated to U.S. dollars using the average exchange rates during the period.
Assets and liabilities are translated using the exchange rate in effect at the
applicable balance sheet date, and resulting translation adjustments are
reflected in stockholders' deficit as accumulated other comprehensive income.
Total accumulated other comprehensive income for fiscal year 2000 included
$3 million of gross foreign exchange translation gains, net of taxes totaling $1
million. For fiscal year 2000, total comprehensive income was comprised of $63
million in net income.
Segment Reporting
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. The Company
does not have any material activity outside of the United States and does not
presently analyze it operations by geographic regions. In addition, the Company
offers a wide array of food and facilities products within its operations,
customized to individual client's requirements, and thus the Company's
management has not found it practical to track results by individual products or
services in relationship to the financial statements presented in this report.
New Accounting Standards
On September 2, 2000, the Company adopted Statement of Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS No. 133"). In accordance with the provisions in SFAS No. 133, the Company
has designated all of its interest rate swap agreements as cash flow hedges.
The Company has determined that these interest rate swap agreements are highly
effective in offsetting the variable interest cash flows of the Company's debt
portfolio. The interest rate swap agreements were recorded on the balance sheet
at fair value in other assets (or other liabilities) with the offsetting entry
to accumulated other comprehensive income, a component of stockholders' deficit
for the effective portion of the hedge. The ineffective portion of the hedge
will be recorded directly to the statement of income. The fair value of the
interest rate swap contracts were approximately $15 million (pretax) in the
aggregate as of September 1, 2000 (see Note 6). There were no net gains or
losses on derivatives that had previously been deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of the hedged items. Currently, the Company does not have any other financial
contracts which contain embedded derivatives or fair value hedge relationships
which would fall within the scope of SFAS No. 133.
(2) INTEGRATION AND RESTRUCTURING
No integration costs were recorded in the Consolidated Statement of Income
during fiscal year 2000. Restructuring costs represent employee termination
benefits, office closure expenditures, and other costs related to a
restructuring plan initiated in fiscal 1998.
Balance as of Balance as of
September 3, September 1,
1999 Payments 2000
------------- -------- -------------
($ in millions)
Employee Terminations....................................... $ 2.4 $ (2.4) $ -
Relocation of Sodexho Facilities............................ 0.7 (0.5) 0.2
Closures.................................................... 1.9 (1.4) 0.5
Other Restructuring......................................... 2.6 (1.8) 0.8
---- ----- -----
Total....................................................... $ 7.6 $ (6.1) $ 1.5
==== ===== =====
(3) RELATIONSHIP WITH MARRIOTT INTERNATIONAL, INC. AND SODEXHO ALLIANCE, S.A.
In connection with transactions which occurred during fiscal 1998 which
resulted in its creation, the Company is a party to several agreements with
Marriott International, Inc. and Sodexho Alliance, S.A. The following
agreements were in effect during the fiscal year presented.
Relationship with Marriott International ("MI")
Tax Sharing Agreement. The Tax Sharing Agreement by and among the Company,
MI and Sodexho provides that MI is liable for all taxes of the Company (other
than sales, use and property taxes, which are borne by the entities filing such
returns) for all periods up to and including March 27, 1998 (the "Distribution
date"). In addition, the parties have agreed for certain specified periods
after the Distribution date not to take specific actions that could cause the
Distribution not to have Tax-Free Status.
Employee Benefits Allocation Agreement. On September 30, 1997, the Company
and MI entered into an Employee Benefits and Other Employment Matters Allocation
Agreement providing for the allocation of employees of the Company and
obligations and responsibilities regarding compensation, benefits and labor
matters.
Medical and Other Welfare Benefits Plans. MI assumed the administration of
the Company's medical, dental, short-term disability, vacation and group term
life insurance plans incurred before March 27, 1998 by MI employees, the
Company's employees and former employees. The Company established and maintains
separate medical, dental, short-term disability, vacation and group term life
insurance plans for its employees after the Distribution.
Trademark License Agreement. As part of the contribution of assets to MI,
the Company transferred and assigned to MI all of the Company's right, title and
interest in certain trademarks, including the trademarks "Marriott,"
"Courtyard," "Residence Inns by Marriott" and "Fairfield Inns by Marriott."
Pursuant to the terms of the agreement MI generally granted to the Company a
limited nonexclusive right to use the "Marriott" name solely in connection with
the Company's business as defined in the agreement. For four years after March
27, 1998, the Company is permitted to use the "Marriott" name as part of its
corporate name and the names of its principal business divisions. During the
term of the license, the Company pays MI a license fee of $1 million per year,
payable quarterly in advance. MI may terminate the Trademark License Agreement
prior to the expiration of its term under certain conditions. In addition, the
Company may terminate this agreement upon 180 days' prior written notice to MI.
Noncompetition Agreement. The Company and MI entered into a Noncompetition
Agreement generally prohibiting MI from competing in the core business of MMS
(as defined) in the United States, Canada and the United Kingdom for a period of
four years. However, per the agreement, MI may enter into certain negligible
investments (as defined) in businesses that compete with the Company through
direct investment or acquisitions.
LYONs Allocation Agreement and Supplemental Indenture. The Company had
issued $540 million face amount of Liquid Yield Option TM Notes ("LYONs"), with
an accreted value as of January 2, 1998 of approximately $310 million. Pursuant
to the LYONs Allocation Agreement and a supplemental indenture to the LYONs
Indenture, MI assumed responsibility for all of the debt obligations evidenced
by the LYONs by becoming a successor to the Company in accordance with the terms
of the LYONs Indenture. The Company assumed responsibility for a portion of the
LYONs equal to its pro rata share based on the relative equity values of the
Company and MI, although MI will remain liable for any payments that the Company
fails to make on its allocable portion. On October 7, 1999, Marriott
International notified all holders of the LYONs, that Marriott International had
elected to redeem all of the LYONs at a price of $619.65 for each $1,000
principal amount at maturity of the LYONs, redeemed on November 8, 1999-See Note
6.
Additional Agreements Between the Company and MI. In connection with the
Distribution agreement, the Company and MI (or a subsidiary of MI) have entered
into a number of additional agreements providing for the delivery of certain
transitional and other services between the companies. The terms and conditions
of these agreements were negotiated by the parties bargaining at arm's length.
Absent the Transactions, the Company believes that it may have been able to
negotiate more favorable terms with outside parties on certain of these
agreements. However, the Company further believes the terms of these agreements
are within the range of the prevailing markets for such services.
Such additional agreements include agreements regarding payroll processing,
benefits administration, procurement, distribution, information technology, and
office space and related facilities management in the MI corporate headquarters
(see Note 1).
Under these agreements, services provided by MI to be paid by the Company
as well as services provided by the Company to be paid by MI (excluding
pass-through product costs) were approximately $64 million and $4 million,
respectively, for fiscal year 2000.
Relationship with Sodexho Alliance, S.A. ("Sodexho")
Royalty Agreement and Assistance Agreement. The Company and Sodexho
entered into a Royalty Agreement and an Assistance Agreement effective March 27,
1998. Pursuant to these agreements, the Company has the right to use the name
"Sodexho" in connection with its operations in the United States and Canada for
a period of 10 years, for a royalty payment equal to 0.05% of the annual gross
revenues of the Company during the first three years of the Royalty Agreement.
Thereafter, Sodexho and the Company will negotiate in good faith to determine
the royalty fee, based on fair market value. The Royalty Agreement may be
terminated by the Company at any time after Sodexho owns less than 10% of the
outstanding Common Stock of the Company. Sodexho may terminate the Royalty
Agreement prior to the expiration of its term under certain circumstances.
Payments made to Sodexho were $2 million in fiscal year 2000.
The Assistance Agreement sets forth certain services provided by Sodexho to
the Company, including services related to purchasing activities, catering and
site support services, marketing, management and administration, legal and
financial matters, human relations, communications and cash management. In
exchange for these services, the Company pays to Sodexho a fee equal to a
percentage of the annual gross revenues of the Company and its subsidiaries.
Payments from the Company to Sodexho associated with the performance of services
were approximately $7 million in fiscal year 2000.
Other Arrangements. Sodexho has agreed to guarantee the following: (i) the
payment when due of certain deferred compensation amounts payable by the Company
to the Company's employees, (ii) the obligations of the Company under the LYONs
allocation agreement and the LYONs indenture (see Note 6), (iii) obligations
with respect to certain insurance costs that are set forth in the Distribution
agreement, and (iv) Senior Credit Guarantee Facility (see Note 6) where Sodexho
has guaranteed the Company's obligation under a $620 million credit facility in
exchange for a guarantee fee equal to 0.50% per annum ($3 million pretax) of the
outstanding principal amount of indebtedness. In addition, the Company and
Sodexho entered into a stockholder agreement covering certain corporate
governance matters and that grants Sodexho certain registration rights with
respect to stock of the Company held by Sodexho as well as certain rights to
nominate members of the Company's Board of Directors.
(4) PROPERTY AND EQUIPMENT
2000
($ in millions)
Land $ 1
Buildings and leasehold improvements................................ 14
Furniture and equipment............................................. 247
Construction in progress............................................ 10
----
272
Accumulated depreciation and amortization........................... (176)
----
$ 96
====
Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Replacements and
improvements that extend the useful life of property and equipment are
capitalized. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of the asset life or lease term.
(5) INTANGIBLE ASSETS
2000
--------------
($ in millions)
Customer relationships............................................ $ 461
Goodwill.......................................................... 374
Other............................................................. 23
----
858
Accumulated amortization.......................................... (361)
----
$ 497
====
Amortization expense totaled $37 million for fiscal year 2000.
(6) DEBT
September 1,
2000
--------------
($ in millions)
Short-Term Debt:
Current Portion of Long-Term Debt...............................................$ 80
Senior Secured Revolving Credit Facility........................................ -
Other........................................................................... 1
---
Total........................................................................$ 81
---
Long-Term Debt:
Senior Secured Credit Facility, maturing 2004 averaging 6.94% in 2000...........$ 350
Senior Guaranteed Credit Facility, due 2005 averaging 6.99% in 2000............. 620
Unsecured debt:
Senior Debt, maturing through 2009 averaging 7.07% in 2000................... 6
Other........................................................................ 1
Capital Lease Obligations....................................................... 3
---
Total........................................................................$ 980
Amount Reclassified to Short-Term Debt.......................................... (80)
---
$ 900
===
Senior Secured Credit Facility-- the senior secured credit facility consists of
$235 million of revolving credit and an additional $500 million, six-year term
loan facility. Interest is based on a bank prime rate, an amount over the
Federal funds rate, or an amount over the London interbank offered rate for
Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At September 1,
2000, the Company was paying a rate of 6.90% on the term loan facility, adjusted
for fee amortization and hedging costs. The senior secured credit facility is
secured predominantly by inventory and accounts receivable of the Company. Up
to $100 million of the $235 million revolving credit may be used to
collateralize letters of credit, which totaled $21 million at September 1,
2000. At September 1, 2000, $214 million of this facility was not used and was
available to the Company.
Senior Guaranteed Credit Facility-- the senior guaranteed credit facility
consists of a $620 million seven-year term loan. Interest is based on a bank
prime rate, an amount over the Federal funds rate, or an amount over LIBOR,
payable in arrears quarterly. At September 1, 2000, the Company was paying a
rate of 6.99% on this facility, adjusted for fee amortization and hedging costs
and including an annual guarantee fee of 0.5% ($3 million pretax) paid to
Sodexho for this facility (see Note 3).
Aggregate debt maturities, excluding capital lease obligations, are: 2001
- $80 million; 2002 - $90 million; 2003 - $115 million; 2004 - $65 million and
$627 million thereafter.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flow.
The Company met the financial covenants of the debt agreements as of September
1, 2000 and the year then ended.
Convertible Subordinated Debt
On March 25, 1996, the Company issued $540 million (principal amount at
maturity) of zero coupon convertible subordinated debt in the form of Liquid
Yield Option TM Notes ("LYONs") due 2011. Each $1,000 LYON was convertible at
any time, at the option of the holder, into 8.76 shares of the Company's Common
Stock. The LYONs were issued at a discount representing a yield to maturity of
4.25%. The Company recorded the LYONs at the discounted amount at issuance.
Accretion was recorded as interest expense and an increase to the carrying
value. Gross proceeds from the LYONs issuance were $288 million.
Upon consummation of the Distribution, each LYON was convertible into 2.19
shares of the Company's common stock (after giving effect to a one-for-four
reverse stock split), as well as 17.52 shares of MI's Common Stock. The LYONs
were assumed by MI, and the Company assumed responsibility for a portion of the
LYONs equal to its pro rata share of the relative equity values of the Company
and MI as determined in good faith by the Company prior to the Distribution,
although MI had remained liable to the holders of the LYONs if the Company had
failed to make any payments on its allocable portion. The Company's allocated
portion of the LYONs totaled $30 million at the end of fiscal year 1999.
On October 7, 1999, MI notified all holders of the LYONs, that MI would
redeem on November 8, 1999 all of the LYONs at a price of $619.65 for each
$1,000 principal amount at maturity of the LYONs. The result of the redemption
for the Company was the issuance of approximately 760,000 common shares and a
payment of $11 million to MI for the Company's share of bondholders choosing to
redeem in cash.
Interest-Rate Agreements
At September 1, 2000, the majority of the Company's debt was payable at
variable rates of interest. As part of the Refinancing of the Company's debt,
the Company entered into several interest-rate agreements on May 29, 1998
totaling $900 million in notional principal balances to hedge a portion of its
variable rate debt. These agreements guarantee a fixed rate of interest over
the life of the agreements. The Company is paying a fixed rate ranging between
5.70% and 5.90%, plus a residual margin that is not hedged relating to the
underlying variable-rate debt. The weighted-average rate for the total debt
portfolio, including the effect of the interest-rate agreements, was 7.01% at
September 1, 2000. These agreements expire between May 2001 and February 2005.
Details of these interest rate agreements as of September 1, 2000 are as
follows:
Notional Year-to-Date Net
Principal Weighted-Average Impact To Earnings-
Terms Balance Fair Value* Interest Rate FY 2000 (pretax)
-------------------------------- --------- ----------- ---------------- -------------------
Paid Received
----- --------
($ in millions) ($ in millions)
Receive Variable, Pay Fixed,
Maturing 5/01-8/01........... $ 400 $ 3 5.73% 6.83% $ 2
Receive Variable, Pay Fixed,
Maturing 8/02................ 300 5 5.84% 6.83% 1
Receive Variable, Pay Fixed,
Maturing 2/05................ 200 7 5.90% 6.83%
--- --- ---
$ 900 $ 15 5.80% 6.83% $ 3
=== === ===
____________
* Based on the termination cost for these agreements obtained from third party
market quotes.
At September 1, 2000, the Company did not have any material accrued
interest receivable or payable to its counterparties and did not have any
unamortized fees or premiums under these agreements. All of the Company's
interest rate agreements are for purposes other than trading.
(7) STOCKHOLDERS' DEFICIT
Stockholders' Deficit
The Company is authorized to issue three hundred million shares of the
Company's common stock, with a par value of $1 per share. One million shares of
preferred stock, without par value, are authorized, with none issued. At the
Distribution, each shareholder received one share of the Company's stock and one
share of New Marriott, Inc. stock (renamed Marriott International, Inc.). In
addition, the Company's stock underwent a one-for-four reverse stock split on
March 27, 1998. Prior to the Distribution, the Company's charter authorized the
issuance of seventy-five million shares of the Company's common stock, with a
par value of $1 per share, with one million shares of preferred stock, without
par value, authorized, with none issued.
In addition, on March 27, 1998, the Company issued to Sodexho Alliance,
S.A., approximately 48% of its shares of common stock, representing 29.9 million
shares (after the effect of the reverse stock split), in exchange for $304
million in cash and the operations of Sodexho North America (see Note 3). At
September 1, 2000, the Company had 63,244,970 shares outstanding.
On July 23, 1993, the Company's Board of Directors adopted a shareholder
rights plan under which one preferred stock purchase right was distributed for
each share of Company common stock. Each right entitles the holder to buy
1/1000th of a share of a newly issued series of junior participating preferred
stock of the Company at an exercise price of $150. The rights will be
exercisable ten days after a person or group acquires beneficial ownership of 20
percent or more of the Company's common stock, or begins a tender or exchange
offer for 30 percent or more of the Company's common stock. Shares owned by a
person or group on September 30, 1993 and held continuously thereafter are
exempt for purposes of determining beneficial ownership under the rights plan.
The rights are nonvoting and will expire on the tenth anniversary of the
adoption of the Company's shareholder rights plan, unless exercised or
previously redeemed by the Company for $.01 each. If the Company is involved in
a merger or certain other business combinations not approved by the Board of
Directors, each right entitles its holder, other than the acquiring person or
group, to purchase common stock of either the Company or the acquirer having a
value of twice the exercise price of the right. The shareholder rights plan
continued in effect after the Distribution and was amended to exempt shares
acquired by Sodexho and its affiliates.
The payment and amount of cash dividends on the Company's common stock will
continue to be subject to the sole discretion of the Company's Board, which will
review the Company's dividend policy at such times as may be deemed appropriate.
The Board will continue to closely monitor the results of the Company's
operations, capital requirements, and other considerations to determine the
extent to which a dividend may be declared in future periods.
On October 13, 1999, the Board of Directors declared an $0.08 per common
share dividend for fiscal year 1999, paid on December 10, 1999, to shareholders
of record on November 22, 1999. The payment and amount of cash dividends on the
Company's common stock will continue to be subject to the sole discretion of the
Company's Board, which will review the Company's dividend policy at such times
as may be deemed appropriate. The Board will continue to closely monitor the
results of the Company's operations, capital requirements, and other
considerations to determine the extent to which a dividend may be declared in
future periods.
Earnings Per Share
The following table details earnings and number of shares used in the basic
and diluted earnings per share calculations.
2000
--------------
(in millions,
except per
share amounts)
Computation of Basic Earnings Per Share:
Net Income................................................................. $ 63
----
Weighted Average Shares Outstanding........................................ 63.0
----
Basic Earnings Per Share................................................... $ 1.01
====
Computation of Diluted Earnings Per Share:
Net Income................................................................. $ 63
After-tax Interest Expense on Convertible Subordinated Debt................ -
----
Diluted Net Income......................................................... $ 63
----
Weighted Average Shares Outstanding........................................ 63.0
Effect of Dilutive Securities:.............................................
Employee Stock Option Plan............................................ 0.2
Deferred Stock Incentive Plan......................................... 0.1
Convertible Subordinated Debt......................................... 0.2
----
Diluted Weighted Average Shares Outstanding................................ 63.5
----
Diluted Earnings Per Share................................................. $ 1.00
====
Certain employee and deferred stock options to purchase shares of common
stock were outstanding but were not included in the computation of diluted
earnings per share because the exercise prices of the options were greater than
the average market price of the common shares as follows:
2000
------
Weighted average number of shares (in millions).............................. 5.4
Weighted average exercise price.............................................. $ 22
Weighted average remaining life (in years)................................... 8
(8) INCOME TAXES
The provision for income taxes was comprised of the following:
2000
-------------
($ in millions)
- Federal..................................................... $33
- Other....................................................... 6
---
39
---
Deferred:
- Federal..................................................... 9
- Other....................................................... 1
---
10
---
$49
===
A reconciliation of the Federal statutory tax rate to the Company's
effective income tax rate follows:
2000
-----------
Federal statutory tax rate.................................... 35.0%
State income taxes, net of Federal tax benefit................ 4.8
Tax credits................................................... (0.9)
Goodwill amortization......................................... 3.1
Other, net.................................................... 1.5
-----
Effective income tax rate...................................... 43.5%
=====
The tax effect of significant temporary differences is as follows:
2000
------------
($ in millions)
Self-insurance.......................................................... $ 29
Employee benefits....................................................... 28
Other liabilities....................................................... 16
Property and equipment.................................................. 2
Intangible assets....................................................... (54)
Other, net.............................................................. 10
----
Net deferred tax assets................................................. $ 31
====
Total deferred tax assets and liabilities were as follows:
September 1,
2000
------------
Deferred tax assets.................................................... $ 95
Deferred tax liabilities............................................... (64)
----
Net deferred taxes..................................................... $(31)
====
At year end fiscal 2000, the Company had current deferred tax assets of $55
million and long-term deferred tax liabilities of $24 million.
The Company has not established a valuation allowance for deferred tax
assets. In assessing the realizability of deferred tax assets, management
considers the Company's ability to generate sufficient future taxable income
during periods in which temporary differences reverse. The amount of net
deferred tax assets considered realizable could be reduced if estimated future
taxable income cannot be achieved. Management believes it is more likely than
not the Company will realize the benefits of its net deferred tax assets.
As part of the Distribution and Acquisition, the Company, MI and Sodexho
entered into tax sharing agreements which reflect each party's rights and
obligations with respect to deficiencies and refunds, if any, of federal, state
or other taxes relating to the business of the Company, MI and Sodexho prior to
the Transactions (see Note 3). Under these agreements, the Company received
approximately $9 million during fiscal year 2000 from Sodexho related to the
closing of a tax audit during fiscal year 2000 related to tax returns filed
prior to the merger and payments made by the Company in fiscal year 2000 or to
be made in subsequent tax years.
During fiscal year 2000, the Internal Revenue Service granted the Company
permission to change its tax year to correspond to its financial reporting year
end, the Friday closest to the end of August, effective for the year ended
September 3, 1999.
F-81
(9) COMMITMENTS AND CONTINGENCIES
The Company issues bid and performance bonds for its client-related
contracts in the normal course of business. These guarantees are limited, in
the aggregate, to $70 million at September 1, 2000, with expected funding of
zero. Letters of credit outstanding on the Company's behalf at September 1,
2000 totaled $21 million related to the Company's insurance programs.
Summarized below are the Company's future obligations under leases at
September 1, 2000:
Capital Leases Operating
Leases
-------------- ---------
($ in millions)
Fiscal Year
2001 $0.7 $10.9
2002 0.8 9.4
2003 0.8 7.9
2004 0.8 6.6
2005 0.7 3.9
Thereafter............................................. 0.2 9.9
---- -----
Total minimum lease payments........................... 4.0 $48.6
Less amount representing interest...................... (0.8) =====
----
Present value of minimum lease payments................ $3.2
====
The Company generally leases office space and equipment under
noncancellable agreements, primarily to support its administrative operations.
Most leases have initial terms of one to 20 years, and contain one or more
renewal options, generally for five or 10-year periods. The leases provide for
minimum rentals, and additional rentals, which are based on the operations of
the leased property. Total rent expense for fiscal year 2000 totaled $27
million.
The nature of the business of the Company causes it to be involved in
routine legal proceedings from time to time. Management of the Company believes
that there are no pending or threatened legal proceedings that upon resolution
would have a material adverse impact to the Company.
Deferred Compensation Plans
Employees meeting certain eligibility requirements can participate in the
Company's deferred compensation and savings plans. The Company assumed the
obligations and liabilities of the undistributed portion of the deferred
compensation plan in relationship to the employees retained by the Company after
the Distribution. The Company currently contributes generally 50% of the
participants' contributions to these plans, limited to 6% of compensation, with
certain exceptions. Within these plans, the Company contributed approximately
$13 million per year for the fiscal year ended September 1, 2000.
Stock Option Plans
The Company has two stock-based incentive plans-- the Sodexho Marriott
Services, Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (the "1993
Plan" or the "1998 Plan"). The purpose of these plans is to promote and enhance
the long-term growth of the Company by aligning the interests of the employees
with the interests of the Company's shareholders. The 1993 Plan administers
converted stock options prior to the Distribution, with no new awards made under
this plan. The 1998 Plan governs the issuance and administration of conversion
awards and is also available for the issuance of new awards. These stock plans
are administered by the Compensation Policy Committee as authorized by the Board
of Directors. As part of the Distribution and the amendment of these plans, and
in relationship to the changes in the capital structure of the Company after the
Distribution, the Board of Directors has approved up to 10 million shares of
common stock to be available under the 1998 Plan for converted options as well
as new awards.
Employee stock options may be granted to officers and key employees at
exercise prices not less than the market price of the Company's stock on the
date of grant. Most options under the stock option plans are exercisable in
cumulative installments of one-fourth at the end of each of the first four years
following the date of grant. The Company issued 2.6 million new stock option
awards in fiscal year 2000.
A summary of the Company's stock option activity during fiscal 2000 is
presented below:
2000 Weighted
Number of Average
Options Exercise
------------- Price
(in millions) --------
Outstanding at beginning of year......... 4.6 $ 21
Granted during the year.................. 2.6 16
Exercised during the year................ (0.2) 9
Forfeited during the year................ (0.5) 22
-----
Outstanding at end of year............... 6.5 $ 20
=====
Options exercisable at end of year....... 2.6 $ 20
=====
Stock options under the 1993 and 1998 Plans that were outstanding at
September 1, 2000 are summarized as follows:
Outstanding Exercisable
------------------------------------------------ ----------------------------------
Number of Weighted average Weighted
Range of Options remaining life average Number of Options Weighted Average
Exercise Prices (in millions) (in years) exercise price (in millions) Exercise Price
--------------- ------------- ---------------- -------------- ----------------- ----------------
$2.30 to 10.00 0.4 3 $8 0.3 $8
10.10 to 15.00 0.5 6 13 0.4 12
15.10 to 20.00 3.1 8 17 0.6 18
20.10 to 25.00 0.9 7 22 0.5 22
25.10 to 31.40 1.6 8 29 0.8 29
--- ---
$2.30 to 31.40 6.5 8 $20 2.6 $20
=== ===
Pro forma compensation cost for the Stock Option Plans, the Deferred
Compensation Plan, the Supplemental Executive Stock Option awards and employee
purchases would reduce the Company's net income as follows:
2000
---------------
($ in millions,
except for per
share amounts)
Net income as reported............................................. $63
Pro forma net income............................................... $57
Diluted earnings per share as reported............................. $1.00
Pro forma diluted earnings per share............................... $0.89
The aggregate weighted-average fair value for each option granted during
fiscal year 2000 was $7. Since the pro forma compensation cost is recognized
over the vesting period, the foregoing pro forma reductions in the Company's net
income are not representative of anticipated amounts in future years.
The fair value of each option granted has been estimated on the date of
grant using the Black-Scholes option-pricing model, with the following
assumptions:
2000
------
Annual dividends.................................................... $0.08
Expected volatility................................................. 46%
Estimated forfeitures............................................... 35%
Risk-free interest rate............................................. 6.2%
Expected life (in years)............................................ 10
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
For current assets, current liabilities and notes and other receivables,
management believes the carrying amounts are reasonable estimates of their fair
values. The fair values of noncurrent financial liabilities are shown below.
2000
----------------------
Carrying
Amount Fair Value
--------- ----------
($ in millions)
Long-term debt, convertible
subordinated debt and other long-term
liabilities..................................... $900 $882
The difference between carrying amounts and fair values for notes and other
receivables were not material as of September 1, 2000. Valuations for long-term
debt, convertible subordinated debt and other long-term liabilities were
determined based on quoted market prices or expected future payments discounted
at risk adjusted rates.
(12) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has identified six business segments within these markets: Corporate Services,
Health Care, Education, Schools, Canada, and Laundries/Other.
Information from operating segments presented has been derived consistent
with the Company's methodology in allocating resources and measuring performance
after the Distribution (see Note 1).
Sales and operating profit by business segment:
2000
--------------
($ in millions)
Gross Sales
Corporate Services........................................ $1,429
Health Care............................................... 1,399
Education................................................. 1,280
Schools................................................... 392
Canada.................................................... 158
Laundries/Other........................................... 76
------
Total Gross Sales.............................................. $4,734
======
Gross Operating Profit
Corporate Services........................................ $93
Health Care............................................... 117
Education................................................. 76
Schools................................................... 20
Canada.................................................... 7
Laundries/Other........................................... 6
Corporate Expenses........................................ (123)
----
Total Gross Operating Profit................................... $196
----
Gain on Investment and Net Interest Expense.................... (84)
----
Income Before Taxes............................................ $112
====
The Company does not have any material activity outside of the United
States and does not presently analyze its operations by geographic regions. In
addition, the Company offers a wide array of food and facilities products within
its operations, customized to individual client's requirements, and thus the
Company's management has not found it practical to track results by individual
products or services in relationship to the financial statements presented in
this report. At September 1, 2000, the Company had a diverse client base and
does not have any individual clients that are material to its overall
operations.
Identifiable assets, capital expenditures and depreciation and amortization
by business segment:
2000
--------------
($ in millions)
Identifiable assets
Corporate Services.......................................... $176
Health Care................................................. 190
Education................................................... 182
Schools..................................................... 48
Canada...................................................... 40
Laundries/Other............................................. 22
Corporate................................................... 706
------
$1,364
======
Capital expenditures
Corporate Services.......................................... $14
Health Care................................................. 11
Education................................................... 21
Schools..................................................... 3
Canada...................................................... 4
Laundries/Other............................................. 1
Corporate................................................... 12
----
$66
====
Depreciation and amortization
Corporate Services.......................................... $12
Health Care................................................. 8
Education................................................... 18
Schools..................................................... 2
Canada...................................................... 3
Laundries/Other............................................. 1
Corporate................................................... 40
----
$84
====
Sodexho Marriott Services, Inc.
Supplementary Data
HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITED
($ in millions, except per share amounts)
2000
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Fiscal Year
--------- ---------- ---------- --------- -----------
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
Sales............................................... $1,288 $1,179 $1,225 $1,042 $4,734)
Operating profit.................................... $72 $47 $56 $21 $196)
Net income.......................................... $28 $14 $21 $- $63)
Diluted earnings per share.......................... $0.44 $0.23 $0.32 $0.01 $1.00)