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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 2002 Commission file number 001-16807
ARAMARK CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-3086414
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ARAMARK Tower
1101 Market Street
Philadelphia, Pennsylvania 19107
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(Address of principal executive offices) (Zip Code)
(215) 238-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class A common stock outstanding at July 26, 2002: 128,316,332
Class B common stock outstanding at July 26, 2002: 61,515,067
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
June 28, September 28,
2002 2001
-------------- ---------------
Current Assets:
Cash and cash equivalents $ 37,325 $ 24,799
Receivables 491,003 503,291
Inventories, at lower of cost or market 422,253 415,798
Prepayments and other current assets 111,374 76,310
-------------- ---------------
Total current assets 1,061,955 1,020,198
-------------- ---------------
Property and Equipment, net 1,156,810 1,087,833
Goodwill 1,322,160 705,016
Other Intangible Assets 254,714 104,272
Other Assets 313,627 299,075
-------------- ---------------
$ 4,109,266 $ 3,216,394
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 31,479 $ 34,710
Accounts payable 400,932 459,249
Accrued expenses and other liabilities 706,744 590,192
-------------- ---------------
Total current liabilities 1,139,155 1,084,151
-------------- ---------------
Long-Term Borrowings 1,881,367 1,635,867
Deferred Income Taxes and Other Noncurrent Liabilities 251,194 229,484
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement - 20,000
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class A common stock, par value $.01 1,469 1,672
Class B common stock, par value $.01 618 -
Capital surplus 815,085 1,065
Earnings retained for use in the business 471,511 283,125
Accumulated other comprehensive income (loss) (11,182) (18,970)
Treasury stock (439,951) -
Impact of potential repurchase feature of
common stock - (20,000)
-------------- ---------------
Total 837,550 246,892
-------------- ---------------
$ 4,109,266 $ 3,216,394
============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1.
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months Ended For the Nine Months Ended
---------------------------- ---------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
----------- ------------- ------------ -----------
Sales $ 2,235,584 $ 1,980,854 $ 6,495,808 $ 5,809,165
----------- ------------- ------------ -----------
Costs and Expenses:
Cost of services provided 2,004,700 1,777,069 5,866,113 5,246,036
Depreciation and amortization 62,877 60,459 189,065 179,519
Selling and general corporate expenses 29,973 27,722 86,294 76,998
Other income, net (Note 11) (5,806) - (43,695) -
----------- ------------- ------------ -----------
2,091,744 1,865,250 6,097,777 5,502,553
----------- ------------- ------------ -----------
Operating income 143,840 115,604 398,031 306,612
Interest and Other Financing Costs, net 33,019 37,631 103,912 119,733
----------- ------------- ------------ -----------
Income before income taxes 110,821 77,973 294,119 186,879
Provision for Income Taxes 38,249 29,922 105,733 71,638
----------- ------------- ------------ -----------
Net income $ 72,572 $ 48,051 $ 188,386 $ 115,241
=========== ============= ============ ===========
Earnings Per Share:
Basic $ .37 $ .28 $ .99 $ .67
Diluted $ .35 $ .27 $ .94 $ .64
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2.
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
For the Nine Months Ended
---------------------------
June 28, June 29,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 188,386 $ 115,241
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 189,065 179,519
Income taxes deferred 18,625 3,790
Gain on sale of investments (45,320) -
Changes in noncash working capital (7,851) (127,214)
Net proceeds from sale of receivables 46,605 159,767
Other operating activities (14,800) (11,313)
----------- -----------
Net cash provided by operating activities 374,710 319,790
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (159,263) (169,987)
Disposals of property and equipment 14,852 20,452
Proceeds from sale of investments 76,964 8,240
Divestiture of businesses 4,235 -
Acquisition of businesses (865,491) (46,654)
Other investing activities 16,791 6,795
----------- -----------
Net cash used in investing activities (911,912) (181,154)
----------- -----------
Cash flows from financing activities:
Proceeds from additional long-term borrowings 921,187 39,404
Payment of long-term borrowings (687,785) (150,668)
Proceeds from issuance of common stock 764,583 32,412
Repurchase of stock (441,653) (54,622)
Other financing activities (6,604) (434)
----------- -----------
Net cash provided by (used in) financing activities 549,728 (133,908)
----------- -----------
Increase in cash and cash equivalents 12,526 4,728
Cash and cash equivalents, beginning of period 24,799 24,592
----------- -----------
Cash and cash equivalents, end of period $ 37,325 $ 29,320
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3.
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of the Company, the statements include all adjustments (which include only
normal recurring adjustments) required for a fair statement of financial
position, results of operations and cash flows for such periods. The
results of operations for interim periods are not necessarily indicative of
the results for a full year, due to the seasonality of some of our business
activities and the possibility of changes in general economic conditions.
(2) CAPITAL STOCK:
On December 14, 2001, the Company completed an initial public offering of
34,500,000 shares of its Class B common stock at a price of $23.00 per
share, raising approximately $742.9 million, net of issuance costs. Just
prior to the completion of the initial public offering, old ARAMARK
Corporation merged with its wholly owned subsidiary, ARAMARK Worldwide
Corporation. Each outstanding ARAMARK old Class B and old Class A common
share was exchanged for two shares and twenty shares, respectively, of the
surviving corporation's Class A common stock which had the effect of a
two-for-one stock split. ARAMARK Worldwide's name was changed to ARAMARK
Corporation, and it succeeded to all the assets, liabilities, rights and
obligations of old ARAMARK. Shareholders' equity, share and per share
amounts have been restated to give effect to the two-for-one merger
exchange ratio and the change in capital stock of the Company. The
restatement had no effect on other amounts, including net income previously
reported by ARAMARK. Upon completion of the merger, the Amended and
Restated Stockholders' Agreement was terminated and the Company's limited
obligation to repurchase shares was eliminated.
Although the Class B shares contain the same economic interests in the
Company as the Class A shares, the Class A shares entitle holders to ten
votes per share while the Class B shareholders are entitled to one vote per
share. After the completion of the initial public offering, but prior to
the stock buybacks discussed below, Class A shares constituted about 83% of
our total outstanding stock and about 98% of our total voting power, while
the Class B shares constituted about 17% of our total outstanding shares
and about 2% of our total voting power.
On December 14, 2001, the Company purchased 3,276,700 Class A shares owned
by employee benefit plans for $23.00 per share, resulting in a cash
expenditure of $75.4 million. These shares, which are reflected as treasury
shares, represented 10% of all Class A shares owned by these benefit plans.
On December 17, 2001, the Company announced an offer to purchase up to 10%
of its Class A common stock, excluding shares owned by benefit plans, for
$23.00 per share. On January 25, 2002, the Company completed the tender
offer for its Class A common stock and purchased 13.7 million shares for
approximately $314 million. The remaining proceeds from the initial public
offering were used to repay a portion of the bridge loan discussed in
Note 10.
On December 10, 2001, shareholders approved the ARAMARK 2001 Equity
Incentive Plan, which provides for the initial issuance of up to 30,000,000
shares of either Class A or Class B common stock, with an additional 3% of
the Company's common stock outstanding as of the end of the prior calendar
year becoming available under the plan on each January 1 following the
adoption of the plan. Concurrent with the initial public offering, the
Company granted 3.7 million options to purchase Class A common stock under
the plan. The options vest ratably over four years, with an exercise price
equal to the initial public offering price. No future stock option grants
will be made under the ARAMARK Ownership Plan.
During the first nine months of fiscal 2002, pursuant to the ARAMARK
Ownership Program, employees purchased approximately 7.1 million shares or
$28.4 million of Class A Common Stock for $21.7 million cash plus $6.7
million of deferred payment obligations. Also, during the first nine months
of fiscal 2002, approximately 27.1 million Class A shares were converted to
Class B shares.
In May 2002, the Company announced the establishment of a Stock Repurchase
Program. Under the Stock Repurchase Program, the Board of Directors has
approved the use of up to $200 million to repurchase shares of the
Company's Class A or Class B Common Stock. Repurchases will be made in
accordance with applicable
4.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(2) CAPITAL STOCK: (CONTINUED)
securities laws in open market or privately negotiated transactions, from
time to time, depending on market conditions, and may be discontinued at
any time. During the third quarter of fiscal 2002, the Company repurchased
433,000 of Class B Common Stock at an aggregate cost of approximately $10.7
million. Additionally, during the third quarter of fiscal 2002, the Company
purchased 1,500,000 shares of Class B Common Stock from employee benefit
plans at an aggregate cost of approximately $39.8 million, to provide plan
liquidity prior to the lapse of restrictions.
The Company has a Deferred Payment Program that enables holders of
installment stock purchase opportunities to defer a portion of the total
amount required to exercise stock options. The deferred payments are full
recourse obligations and the Company holds, as collateral, shares purchased
until the deferred payment is received from the individual by the Company.
During the third quarter of fiscal 2002, the Company sold for cash, without
recourse, approximately $28.1 million of Deferred Payment Program notes
receivable.
(3) GOODWILL AND OTHER INTANGIBLE ASSETS:
At the beginning of the first quarter of fiscal 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" in accordance with the early adoption provisions
of the standard. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization, rather it is subject to at least an annual
assessment for impairment by applying a fair value based test. The Company
has completed the transitional goodwill impairment tests required by SFAS
No. 142, which did not result in an impairment charge.
The elimination of goodwill amortization would have increased net income by
$5.5 million and $16.3 million for the three and nine months ended June 29,
2001, respectively, or $.03 and $.09 per diluted share for the three and
nine months periods.
Goodwill as of June 28, 2002, allocated by segment follows:
September 28, 2001 Acquisitions Translation and Other June 28, 2002
------------------ ------------ --------------------- -------------
(in thousands)
Food and Support
Services - United States $ 340,562 $ 599,330 $ - $ 939,892
Food and Support
Services - International 41,852 2,257 2,163 46,272
Uniform and Career
Apparel - Rental 147,800 5,604 - 153,404
Uniform and Career
Apparel - Direct Marketing 104,066 7,790 - 111,856
Educational Resources 70,736 - - 70,736
------------------ ------------ --------------------- -------------
$ 705,016 $ 614,981 $ 2,163 $ 1,322,160
================== ============ ===================== =============
The increase in goodwill results principally from the acquisition of
ServiceMaster Management Services (see Note 10) completed on November 30,
2001, and this amount will be revised based upon final determination of the
purchase price allocation. During the 2002 second quarter, a preliminary
adjustment of approximately $113 million was recorded to reduce the amount
initially allocated to customer contract rights reflecting the results of
an independent valuation of these assets.
5.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) GOODWILL AND OTHER INTANGIBLE ASSETS: (CONTINUED)
Other intangible assets as of June 28, 2002, consist of:
Gross Accumulated Net
Amount Amortization Amount
---------- ------------ -----------
(in thousands)
Customer relationship assets $ 346,678 $ 108,890 $ 237,788
Other 26,075 9,149 16,926
---------- ------------ -----------
Total $ 372,753 $ 118,039 $ 254,714
========== ============ ===========
All intangible assets are amortizable and consist primarily of contract
rights, customer lists and non-compete agreements. Net intangible assets
increased $150.4 million during fiscal 2002, primarily due to the
acquisition of ServiceMaster Management Services (see Note 10).
Amortization expense related to intangible assets for the nine months ended
June 28, 2002 and June 29, 2001 was $32.9 million and $15.6 million,
respectively.
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $96.6 million and $114.6 million and
income tax payments of $62.0 million and $69.6 million during the first
nine months of fiscal 2002 and 2001, respectively. Included in net cash
provided by operating activities is the tax benefit to the Company from the
exercise of non-qualified stock options of approximately $36.0 million and
$10.5 million during the first nine months of fiscal 2002 and 2001,
respectively.
6.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) EARNINGS PER SHARE:
The Company follows the provisions of SFAS No. 128, "Earnings per Share."
Prior year earnings per share amounts have been restated to reflect the
merger discussed in Note 2. As Adjusted net income and earnings per share
information are shown as if the provisions of SFAS No. 142 were in effect
for fiscal 2001 (see Note 3). Earnings applicable to common stock and
common shares utilized in the calculation of basic and diluted earnings per
share are as follows:
Three Months Ended As Adjusted
------------------------------------ ---------------
June 28, June 29, June 29,
2002 2001 2001
---------------- --------------- ---------------
(in thousands, except per share data)
EARNINGS:
Net income $ 72,572 $ 48,051 $ 53,533
================ =============== ===============
SHARES:
Weighted average number of common
shares outstanding used in basic
earnings per share calculation 194,235 171,810 171,810
Impact of potential exercise opportunities
under the ARAMARK Ownership and
Equity Incentive Plans 10,449 8,738 8,738
---------------- --------------- ---------------
Total common shares used in diluted
earnings per share calculation 204,684 180,548 180,548
================ =============== ===============
Basic earnings per common share $ .37 $ .28 $ .31
================ =============== ===============
Diluted earnings per common share $ .35 $ .27 $ .30
================ =============== ===============
Nine Months Ended As Adjusted
------------------------------------ ---------------
June 28, June 29, June 29,
2002 2001 2001
---------------- --------------- ---------------
(in thousands, except per share data)
EARNINGS:
Net income $ 188,386 $ 115,241 $ 131,577
================ =============== ===============
SHARES:
Weighted average number of common
shares outstanding used in basic
earnings per share calculation 189,476 171,795 171,795
Impact of potential exercise opportunities
under the ARAMARK Ownership and
Equity Incentive Plans 11,197 9,663 9,663
---------------- --------------- ---------------
Total common shares used in diluted
earnings per share calculation 200,673 181,458 181,458
================ =============== ===============
Basic earnings per common share $ .99 $ .67 $ .77
================ =============== ===============
Diluted earnings per common share $ .94 $ .64 $ .73
================ =============== ===============
7.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(6) COMPREHENSIVE INCOME:
Pursuant to the provisions of SFAS No. 130, "Reporting Comprehensive
Income", comprehensive income includes all changes in shareholders' equity
during a period, except those resulting from investment by and
distributions to shareholders. Components of comprehensive income include
net income, changes in foreign currency translation adjustments and changes
in the fair value of cash flow hedges (net of tax). Total comprehensive
income was $83.4 million and $196.2 million for the three and nine months
ended June 28, 2002, respectively; and $49.5 million and $113.4 million for
the three and nine months ended June 29, 2001, respectively.
(7) ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
The Company utilizes derivative financial instruments, such as interest
rate swaps and forward exchange contract agreements to manage changes in
market conditions related to debt obligations and foreign currency
exposures. As of June 28, 2002, the Company has $100 million of interest
rate swap agreements, which are designated as cash flow hedging
instruments, fixing the rate on a like amount of variable rate borrowings.
Concurrent with the issuance of the Notes described in Note 10, the Company
entered into interest rate swaps, with notional amounts totaling $300
million, to receive fixed (7%)/pay variable (six month LIBOR). The swaps
mature on May 1, 2007 and are designated as fair-value hedging instruments.
There were no forward exchange contract agreements outstanding as of June
28, 2002.
The Company recognizes all derivatives on the balance sheet at fair value
at the end of each quarter. Changes in the fair value of a derivative that
is designated as and meets all the required criteria for a cash flow hedge
are recorded in accumulated other comprehensive income and reclassified
into earnings as the underlying hedged item affects earnings. Amounts
reclassified into earnings related to interest rate swap agreements are
included in interest expense. During the nine months ended June 28, 2002,
unrealized net gains of approximately $3.5 million (net of tax) related to
interest rate swaps were recorded in Other Comprehensive Income. As of June
28, 2002, approximately $2.9 million of net unrealized losses related to
interest rate swaps was included in "Accumulated other comprehensive
income(loss)," all of which is expected to be reclassified into earnings
during the next twelve months. Changes in the fair value of a derivative
that is designated as and meets all the required criteria for a fair value
hedge are recognized currently in earnings, offset by recognizing currently
in earnings the change in the fair value of the Notes. The hedge
ineffectiveness for existing cash flow and fair value hedging instruments
for the quarter ending June 28, 2002, was not material.
(8) ACCOUNTS RECEIVABLE SECURITIZATION:
The Company has an agreement (the Receivables Facility) with several
financial institutions whereby it sells on a continuous basis an undivided
interest in all eligible trade accounts receivable, as defined in the
Receivables Facility. Pursuant to the Receivables Facility, the Company
formed ARAMARK Receivables, LLC, a wholly-owned, bankruptcy-remote
subsidiary. ARAMARK Receivables, LLC was formed for the sole purpose of
buying and selling receivables generated by certain subsidiaries of the
Company. Under the Receivables Facility, certain subsidiaries of the
Company transfer without recourse all of their accounts receivable to
ARAMARK Receivables, LLC. ARAMARK Receivables, LLC, in turn, has sold and,
subject to certain conditions, may from time to time sell an undivided
interest in these receivables. The Company has retained collection and
administrative responsibility for the participating interest sold, and has
retained an undivided interest in the transferred receivables of
approximately $111.5 million at June 28, 2002, which is subject to a
security interest. The agreement expires in March 2004. This two-step
transaction is accounted for as a sale of receivables following the
provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 125." At June 28, 2002, $186.6 million of accounts receivable
were sold and removed from the consolidated balance sheet. The loss on the
sale of receivables in the first nine months of fiscal 2002 was $3.7
million and is included in "Interest and other financing costs, net." The
Company amended the Receivables Facility during the third quarter of fiscal
2002 to include certain subsidiaries of ServiceMaster Management Services
(see Note 10) as part of the Receivables Facility and increased the maximum
sale amount from $200 million to $250 million.
8.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(9) SEGMENT INFORMATION:
The following tables present a fiscal 2002/2001 comparison of segment
sales and operating income for the three and nine month periods.
Segment information, As Adjusted, is shown as if the provisions of SFAS
No. 142 were in effect for fiscal 2001 (see Note 3).
Sales and operating income by segment follow:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
June 28, June 29, June 28, June 29,
Sales 2002 2001 2002 2001
--------------------------------------------- ------------ ----------- ------------ -----------
(in thousands)
Food and Support Services - United States $ 1,467,843 $ 1,230,394 $ 4,167,935 $ 3,533,848
Food and Support Services - International 298,948 277,070 894,634 831,249
Uniform and Career Apparel - Rental 250,458 249,077 752,632 748,003
Uniform and Career Apparel - Direct Marketing 98,985 101,585 331,892 341,268
Educational Resources 119,350 122,728 348,715 354,797
------------ ----------- ------------ -----------
$ 2,235,584 $ 1,980,854 $ 6,495,808 $ 5,809,165
============ =========== ============ ===========
Three Months Ended As Adjusted
---------------------------- ------------
June 28, June 29, June 29,
Operating Income 2002 2001 2001
--------------------------------------------- ------------ ----------- ------------
(in thousands)
Food and Support Services - United States $ 86,704 $ 68,670 $ 71,329
Food and Support Services - International 11,771 8,562 9,029
Uniform and Career Apparel - Rental 30,136 30,680 31,992
Uniform and Career Apparel - Direct Marketing 3,867 3,174 3,946
Educational Resources 11,674 10,517 11,302
------------ ----------- ------------
144,152 121,603 127,598
Corporate and Other (6,118) (5,999) (5,678)
Other Income, net 5,806 - -
------------ ----------- ------------
Operating Income 143,840 115,604 121,920
Interest Expense, net (33,019) (37,631) (37,631)
------------ ----------- ------------
Income Before Income Taxes $ 110,821 $ 77,973 $ 84,289
============ =========== ============
Nine Months Ended As Adjusted
---------------------------- ------------
June 28, June 29, June 29,
Operating Income 2002 2001 2001
--------------------------------------------- ------------ ----------- ------------
(in thousands)
Food and Support Services - United States $ 204,923 $ 166,477 $ 174,417
Food and Support Services - International 34,551 29,038 30,391
Uniform and Career Apparel - Rental 89,760 88,823 92,727
Uniform and Career Apparel - Direct Marketing 18,583 13,769 16,085
Educational Resources 29,016 26,506 28,847
------------ ----------- ------------
376,833 324,613 342,467
Corporate and Other (22,497) (18,001) (17,038)
Other Income, net 43,695 - -
------------ ----------- ------------
Operating Income 398,031 306,612 325,429
Interest Expense, net (103,912) (119,733) (119,733)
------------ ----------- ------------
Income Before Income Taxes $ 294,119 $ 186,879 $ 205,696
============ =========== ============
9.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(9) SEGMENT INFORMATION: (CONTINUED)
Included in "Food and Support Services - United States" Operating income in
the third quarter of fiscal 2002 is approximately $3.2 million of business
interruption proceeds received, related to losses incurred as a result of
the September 11, 2001 terrorist attacks. Additional proceeds from the
business interruption coverage will be recognized in future periods as
claims are settled.
Included in "Corporate and Other" in the first quarter of fiscal 2001 is a
gain of $6.6 million resulting from the redemption of preferred stock by an
entity which the Company divested in fiscal 1997. Also included in
"Corporate and Other" in fiscal 2001 are charges related to certain
litigation pertaining to a previously divested entity ($1.5 million),
merger and acquisition related costs ($0.5 million), and the immaterial
cumulative effect ($2.6 million) of a change by the Educational Resources
business in accounting for non-refundable registration fees pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 101.
Certain prior year amounts have been reclassified to conform to current
year presentation.
In the first and second fiscal quarters, within the Food and Support
Services--United States segment, historically there has been a lower level
of activity at the higher margin sports, entertainment and recreational
food service operations which is partly offset by increased activity in the
educational market. However, in the third and fourth fiscal quarters,
historically there has been a significant increase at sports, entertainment
and recreational accounts which is partially offset by the effect of summer
recess in the educational market. In addition, there is a seasonal increase
in volume of directly marketed work clothing during the first quarter.
(10) ACQUISITIONS:
During the third quarter of fiscal 2002, the Company completed the
acquisition of the Harrison Conference Centers portfolio of conference
centers and university hotels from Hilton Hotels Corporation for
approximately $49 million in cash. The Company also acquired Long Beach
Uniform, a direct retail and contract marketer of uniforms and public
safety equipment in Southern California, for approximately $9.5 million in
cash, and Uniforms for Industry, a uniform rental company serving the New
York City area, for approximately $10.4 million in cash. Each of these
acquisitions was completed at or near the end of the third quarter, and had
no material impact on the condensed consolidated financial statements.
On November 30, 2001 the Company completed the acquisition of the
management services division of The ServiceMaster Company (ServiceMaster
Management Services). The aggregate consideration for the transaction was
approximately $790 million in cash, subject to post closing adjustments,
plus costs of the acquisition.
ServiceMaster Management Services is a leader in the provision of facility
management services in the United States, providing a complete range of
facility management services to the healthcare, education and business and
industry client sectors. The facility management services provided include
custodial services, plant operations and maintenance, groundskeeping,
technical support and food services. ServiceMaster Management Services also
has operations in Canada and maintains licensing arrangements with local
service providers in approximately 25 other countries.
The Company believes that the acquisition of ServiceMaster Management
Services will further enhance its position as a leading provider of
outsourced services. The Company believes the acquisition will enable it to
strengthen its portfolio of services by broadening its facility services
base in the United States and internationally. In addition, the Company
believes the acquisition will provide ARAMARK with additional strategic
benefits, including opportunities to cross-sell food and support services
and other outsourced services to ServiceMaster Management Services'
existing clients.
The Company financed the acquisition and related expenses in an aggregate
of approximately $800 million by borrowing approximately an additional $200
million under the Company's senior revolving credit facility and $600
million under a new bridge financing facility with a group of banks. A
portion of the bridge financing was repaid with proceeds from the initial
public offering of Class B common stock discussed in Note 2. In April 2002,
a subsidiary of the Company issued $300 million of 7% notes (the Notes)
which mature on May 1, 2007. The Notes are fully and unconditionally
guaranteed by the Company and will rank equally with all of the Company's
other unsecured senior indebtedness. The net proceeds of the offering
(approximately $297.1 million) were used to repay the outstanding
borrowings under the ServiceMaster acquisition bridge financing facility
and a portion of the senior revolving credit facility.
The results of ServiceMaster Management Services have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition and are included in the Food and Support
10.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(10) ACQUISITIONS: (CONTINUED)
Services - United States segment. The cost of the acquisition was allocated
to the assets acquired and liabilities assumed based on a preliminary
estimate of their respective fair values. The Company is in the process of
obtaining information supporting the fair value of the individual assets
acquired and liabilities assumed in order to complete the allocation of the
purchase price. The initial purchase price allocation may be revised in the
future based on such additional information.
The following table presents pro forma financial information as if the
acquisition of ServiceMaster Management Services had occurred at the
beginning of the respective fiscal periods:
Three Months Ended Nine Months Ended
------------------ -----------------------------
June 29, 2001 June 28, 2002 June 29, 2001
------------------ ------------- -------------
(in millions, except per share amounts)
Sales $ 2,228.9 $ 6,657.3 $ 6,539.3
Net Income $ 47.7 $ 189.8 $ 114.2
Diluted Earnings per Share $ 0.26 $ 0.95 $ 0.63
These pro forma disclosures are unaudited and are based on historical
results, adjusted for the impact of certain acquisition related items, such
as: amortization of identified intangibles, increased interest expense on
acquisition debt and the related income tax effects. Pro forma results do
not reflect any synergies that might be achieved from the combined
operations, and therefore, in management's opinion, are not indicative of
what actual results would have been if the acquisition had occurred at the
beginning of the respective periods. Pro forma results are not intended to
be a projection of future results.
During the first quarter of fiscal 2001, the Company acquired the UK food
and support services business of the Campbell Bewley Group Limited, issuing
stock of a subsidiary (8% interest) as consideration. Additionally, the
Company acquired a 45% interest in the Campbell Bewley Group Limited's food
and support services business in Ireland for approximately $19 million in
cash.
(11) OTHER INCOME:
In the third quarter of fiscal 2002, the Company recorded a pre-tax net
gain of $5.8 million, consisting of a gain ($7.4 million) on the sale of a
residual interest in a previously divested business and charges ($1.6
million) incurred in connection with initiating the shareholder stock sale
program in June 2002. In February 2002, the Company sold its interests in
the Boston Red Sox Baseball Club and a related entity, which controls
rights to broadcast Red Sox games. The sale resulted in a pre-tax gain of
approximately $37.9 million. These pre-tax gains are presented in "Other
income, net" in the accompanying condensed consolidated statements of
income.
(12) NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. 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. The Company is required to adopt these standards no
later than the beginning of fiscal 2003. In June 2002, the FASB issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
which is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently evaluating the impact of these
pronouncements.
(13) SUBSEQUENT EVENTS:
In July 2002, the Company signed a definitive agreement to acquire the
Clinical Technology Services (CTS) business of Premier, Inc. for
approximately $100 million in cash. CTS currently handles the management,
maintenance and repair of clinical equipment for more than 180 hospital and
healthcare systems across the country. The transaction is subject to
customary regulatory approvals and is currently expected to close in the
fourth quarter of fiscal 2002. The Company also recently completed an
acquisition in Canada of Travers Food
11.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(13) SUBSEQUENT EVENTS: (CONTINUED)
Services, a remote camp business, for approximately $18 million.
Additionally, ARAMARK and Mitsui & Company, Ltd. have announced a plan
whereby ARAMARK and Mitsui each are targeting to increase their existing
ownership interests in AIM Services to as much as 50%, with an estimated
cost to ARAMARK of $35 to $40 million. The Company intends to fund these
acquisitions through borrowings under the revolving credit facility.
(14) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK CORPORATION
AND SUBSIDIARIES:
The following condensed consolidating financial statements of ARAMARK
Corporation and subsidiaries have been prepared pursuant to Rule 3-10 of
Regulation S-X.
These condensed consolidating financial statements have been prepared from
the Company's financial information on the same basis of accounting as the
condensed consolidated financial statements. ARAMARK Services, Inc. is the
borrower under the Credit Agreement and certain other senior debt and
incurs interest expense thereunder. The interest expense and certain
administrative costs are only partially allocated to all of the other
subsidiaries of the Company. The Company has fully and unconditionally
guaranteed certain debt obligations of ARAMARK Services, Inc., its
wholly-owned subsidiary, which totaled $1.9 billion as of June 28, 2002.
The other subsidiaries do not guarantee any registered securities of the
Company or ARAMARK Services, Inc., although certain other subsidiaries
guarantee, along with the Company, certain other unregistered debt.
12.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 28, 2002
(IN MILLIONS)
ASSETS
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
-------------- ------------ ----------- ------------ ------------
Current Assets:
Cash and cash equivalents $ 21.1 $ 15.9 $ 0.3 $ - $ 37.3
Receivables 306.8 183.6 0.6 - 491.0
Inventories, at lower of cost or market 90.9 331.4 - - 422.3
Prepayments and other current assets 69.9 39.8 1.7 - 111.4
-------------- ------------ ----------- ------------ ------------
Total current assets 488.7 570.7 2.6 - 1,062.0
-------------- ------------ ----------- ------------ ------------
Property and Equipment, net 315.6 838.9 2.3 - 1,156.8
Goodwill 807.5 514.7 - - 1,322.2
Intercompany Receivable 2,268.4 105.6 - (2,374.0) -
Investment in Subsidiaries - - 2,263.4 (2,263.4) -
Other Intangible Assets 183.4 71.3 - - 254.7
Other Assets 198.3 111.6 3.7 - 313.6
-------------- ------------ ----------- ------------ ------------
$ 4,261.9 $ 2,212.8 $ 2,272.0 $ (4,637.4) $ 4,109.3
============== ============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
borrowings $ 31.1 $ 0.4 $ - $ - $ 31.5
Accounts payable 272.0 96.8 32.1 - 400.9
Accrued expenses and other liabilities 439.1 251.3 16.4 - 706.8
-------------- ------------ ----------- ------------ ------------
Total current liabilities 742.2 348.5 48.5 - 1,139.2
-------------- ------------ ----------- ------------ ------------
Long-Term Borrowings 1,877.3 4.1 - - 1,881.4
Deferred Income Taxes and Other Noncurrent
Liabilities 125.8 98.4 27.0 - 251.2
Intercompany Payable 937.7 77.3 1,359.0 (2,374.0) -
Shareholders' Equity 578.9 1,684.5 837.5 (2,263.4) 837.5
-------------- ------------ ----------- ------------ ------------
$ 4,261.9 $ 2,212.8 $ 2,272.0 $ (4,637.4) $ 4,109.3
============== ============ =========== ============ ============
13.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 28, 2001
(IN MILLIONS)
ASSETS
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
-------------- ------------ ----------- ------------ ------------
Current Assets:
Cash and cash equivalents $ 17.3 $ 7.1 $ 0.4 $ - $ 24.8
Receivables 310.8 191.6 0.9 - 503.3
Inventories, at lower of cost or market 93.3 322.5 - - 415.8
Prepayments and other current assets 34.0 39.9 2.4 - 76.3
-------------- ------------ ----------- ------------ ------------
Total current assets 455.4 561.1 3.7 - 1,020.2
-------------- ------------ ----------- ------------ ------------
Property and Equipment, net 249.1 836.4 2.3 - 1,087.8
Goodwill 206.2 498.8 - - 705.0
Intercompany Receivable 2,243.5 105.6 - (2,349.1) -
Investment in Subsidiaries - - 1,709.5 (1,709.5) -
Other Intangible Assets 28.2 76.1 - - 104.3
Other Assets 162.0 133.6 3.5 - 299.1
-------------- ------------ ----------- ------------ ------------
$ 3,344.4 $ 2,211.6 $ 1,719.0 $ (4,058.6) $ 3,216.4
============== ============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
borrowings $ 34.3 $ 0.4 $ - $ - $ 34.7
Accounts payable 293.6 117.0 48.6 - 459.2
Accrued expenses and other liabilities 348.4 224.1 17.7 - 590.2
-------------- ------------ ----------- ------------ ------------
Total current liabilities 676.3 341.5 66.3 - 1,084.1
-------------- ------------ ----------- ------------ ------------
Long-Term Borrowings 1,629.4 6.5 - - 1,635.9
Deferred Income Taxes and Other Noncurrent
Liabilities 74.1 103.7 51.7 - 229.5
Intercompany Payable 773.4 241.6 1,334.1 (2,349.1) -
Common Stock Subject to Potential Repurchase
Under Provisions of Shareholders'
Agreement - - 20.0 - 20.0
Shareholders' Equity Excluding Common Stock
Subject to Repurchase 191.2 1,518.3 246.9 (1,709.5) 246.9
-------------- ------------ ----------- ------------ ------------
$ 3,344.4 $ 2,211.6 $ 1,719.0 $ (4,058.6) $ 3,216.4
============== ============ =========== ============ ============
14.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 28, 2002
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
-------------- ------------ ----------- ------------ ------------
Sales $ 1,439.2 $ 796.4 $ - $ - $ 2,235.6
Equity in Net Income of Subsidiaries - - 72.6 (72.6) -
Management Fee Income - - 8.3 (8.3) -
-------------- ------------ ----------- ------------ ------------
1,439.2 796.4 80.9 (80.9) 2,235.6
Costs and Expenses:
Cost of services provided 1,353.6 660.5 - (9.4) 2,004.7
Depreciation and amortization 30.1 32.7 - 0.1 62.9
Selling and general corporate expenses 16.5 5.8 6.1 1.6 30.0
Other income, net - (7.4) 1.6 - (5.8)
-------------- ------------ ----------- ------------ ------------
1,400.2 691.6 7.7 (7.7) 2,091.8
-------------- ------------ ----------- ------------ ------------
Operating Income 39.0 104.8 73.2 (73.2) 143.8
Interest and other financing costs, net:
Interest expense, net 32.6 (0.2) 0.6 - 33.0
Intercompany interest, net (4.3) 4.9 - (0.6) -
-------------- ------------ ----------- ------------ ------------
Interest and other financing costs, net 28.3 4.7 0.6 (0.6) 33.0
-------------- ------------ ----------- ------------ ------------
Income before income taxes 10.7 100.1 72.6 (72.6) 110.8
Provision for Income Taxes 3.8 34.4 - - 38.2
-------------- ------------ ----------- ------------ ------------
Net Income $ 6.9 $ 65.7 $ 72.6 $ (72.6) $ 72.6
============== ============ =========== ============ ============
15.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 29, 2001
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
-------------- ------------ ----------- ------------ ------------
Sales $ 1,176.2 $ 804.7 $ - $ - $ 1,980.9
Equity in Net Income of Subsidiaries - - 48.0 (48.0) -
Management Fee Income - - 7.1 (7.1) -
-------------- ------------ ----------- ------------ ------------
1,176.2 804.7 55.1 (55.1) 1,980.9
Costs and Expenses:
Cost of services provided 1,109.4 673.3 - (5.6) 1,777.1
Depreciation and amortization 24.6 35.8 - 0.1 60.5
Selling and general corporate
expenses 15.6 6.6 5.5 - 27.7
-------------- ------------ ----------- ------------ ------------
1,149.6 715.7 5.5 (5.5) 1,865.3
-------------- ------------ ----------- ------------ ------------
Operating Income 26.6 89.0 49.6 (49.6) 115.6
Interest and other financing costs, net:
Interest expense, net 36.3 (0.2) 1.5 - 37.6
Intercompany interest, net (10.5) 12.0 - (1.5) -
-------------- ------------ ----------- ------------ ------------
Interest and other financing costs, net 25.8 11.8 1.5 (1.5) 37.6
-------------- ------------ ----------- ------------ ------------
Income before income taxes 0.8 77.2 48.1 (48.1) 78.0
Provision for Income Taxes (0.2) 30.1 - - 29.9
-------------- ------------ ----------- ------------ ------------
Net Income $ 1.0 $ 47.1 $ 48.1 $ (48.1) $ 48.1
============== ============ =========== ============ ============
16.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 28, 2002
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Sales $ 4,329.0 $ 2,166.8 $ - $ - $ 6,495.8
Equity in Net Income of Subsidiaries - - 188.4 (188.4) -
Management Fee Income - - 26.0 (26.0) -
--------------- --------------- --------------- --------------- ---------------
4,329.0 2,166.8 214.4 (214.4) 6,495.8
Costs and Expenses:
Cost of services provided 4,056.0 1,835.4 - (25.3) 5,866.1
Depreciation and amortization 91.5 97.2 - 0.4 189.1
Selling and general corporate expenses 43.2 19.8 21.8 1.5 86.3
Other income, net (37.9) (7.4) 1.6 - (43.7)
--------------- --------------- --------------- --------------- ---------------
4,152.8 1,945.0 23.4 (23.4) 6,097.8
--------------- --------------- --------------- --------------- ---------------
Operating Income 176.2 221.8 191.0 (191.0) 398.0
Interest and other financing costs, net:
Interest expense, net 101.0 0.3 2.6 - 103.9
Intercompany interest, net (12.2) 14.8 - (2.6) -
--------------- --------------- --------------- --------------- ---------------
Interest and other financing costs, net 88.8 15.1 2.6 (2.6) 103.9
--------------- --------------- --------------- --------------- ---------------
Income before income taxes 87.4 206.7 188.4 (188.4) 294.1
Provision for Income Taxes 32.6 73.1 - - 105.7
--------------- --------------- --------------- --------------- ---------------
Net Income $ 54.8 $ 133.6 $ 188.4 $ (188.4) $ 188.4
=============== =============== =============== =============== ===============
17.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 29, 2001
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Sales $ 3,633.4 $ 2,175.8 $ - $ - $ 5,809.2
Equity in Net Income of Subsidiaries - - 115.3 (115.3) -
Management Fee Income - - 24.6 (24.6) -
--------------- --------------- --------------- --------------- ---------------
3,633.4 2,175.8 139.9 (139.9) 5,809.2
Costs and Expenses:
Cost of services provided 3,408.7 1,857.7 - (20.3) 5,246.1
Depreciation and amortization 73.0 106.2 - 0.3 179.5
Selling and general corporate expenses 37.0 20.0 20.1 (0.1) 77.0
--------------- --------------- --------------- --------------- ---------------
3,518.7 1,983.9 20.1 (20.1) 5,502.6
--------------- --------------- --------------- --------------- ---------------
Operating Income 114.7 191.9 119.8 (119.8) 306.6
Interest and other financing costs, net:
Interest expense, net 115.2 - 4.5 - 119.7
Intercompany interest, net (21.0) 25.5 - (4.5) -
--------------- --------------- --------------- --------------- ---------------
Interest and other financing costs, net 94.2 25.5 4.5 (4.5) 119.7
--------------- --------------- --------------- --------------- ---------------
Income before income taxes 20.5 166.4 115.3 (115.3) 186.9
Provision for Income Taxes 10.3 61.3 - - 71.6
--------------- --------------- --------------- --------------- ---------------
Net Income $ 10.2 $ 105.1 $ 115.3 $ (115.3) $ 115.3
=============== =============== =============== =============== ===============
18.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 28, 2002
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net cash provided by (used in) operating
activities $ 192.7 $ 216.3 $ (34.3) $ - $ 374.7
Cash flows from investing activities:
Purchases of property and equipment (67.5) (91.8) - - (159.3)
Disposals of property and equipment 8.7 6.2 - - 14.9
Proceeds from sale of investments 68.8 8.2 - - 77.0
Divestiture of businesses 2.5 1.7 - - 4.2
Acquisition of businesses (843.6) (21.9) - - (865.5)
Other investing activities (9.5) 26.6 (0.3) - 16.8
--------------- --------------- --------------- --------------- ---------------
Net cash used in investing activities (840.6) (71.0) (0.3) - (911.9)
--------------- --------------- --------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from additional long-term
borrowings 921.2 - - - 921.2
Payment of long-term borrowings (685.1) (2.7) - - (687.8)
Proceeds from issuance of common stock - - 764.6 - 764.6
Repurchase of stock - - (441.7) - (441.7)
Change in intercompany, net 420.0 (133.8) (286.2) - -
Other financing activities (4.4) - (2.2) - (6.6)
--------------- --------------- --------------- --------------- ---------------
Net cash provided by (used in) financing
activities 651.7 (136.5) 34.5 - 549.7
--------------- --------------- --------------- --------------- ---------------
Increase (decrease) in cash and cash
equivalents 3.8 8.8 (0.1) - 12.5
Cash and cash equivalents, beginning of
period 17.3 7.1 0.4 - 24.8
--------------- --------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 21.1 $ 15.9 $ 0.3 $ - $ 37.3
=============== =============== =============== =============== ===============
19.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 29, 2001
(IN MILLIONS)
ARAMARK
SERVICES, INC.
AND OTHER ARAMARK
SUBSIDIARIES SUBSIDIARIES CORPORATION ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net cash provided by (used in) operating
activities $ 188.5 $ 193.2 $ (61.9) $ - $ 319.8
Cash flows from investing activities:
Purchases of property and equipment (72.2) (97.8) - - (170.0)
Disposals of property and equipment 4.3 16.2 - - 20.5
Proceeds from sale of investments - 8.2 - - 8.2
Acquisition of businesses (33.7) (13.0) - - (46.7)
Other investing activities (0.3) 7.4 (0.3) - 6.8
--------------- --------------- --------------- --------------- ---------------
Net cash used in investing activities (101.9) (79.0) (0.3) - (181.2)
--------------- --------------- --------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from additional long-term
borrowings 32.8 6.6 - - 39.4
Payment of long-term borrowings (148.4) (2.3) - - (150.7)
Proceeds from issuance of common stock - - 32.4 - 32.4
Repurchase of stock - - (54.6) - (54.6)
Change in intercompany, net 27.2 (111.7) 84.5 - -
Other financing activities (0.4) - - - (0.4)
--------------- --------------- --------------- --------------- ---------------
Net cash provided by (used in) financing
activities (88.8) (107.4) 62.3 - (133.9)
--------------- --------------- --------------- --------------- ---------------
Increase (decrease) in cash and cash
equivalents (2.2) 6.8 0.1 - 4.7
Cash and cash equivalents, beginning of
period 19.5 4.8 0.3 - 24.6
--------------- --------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 17.3 $ 11.6 $ 0.4 $ - $ 29.3
=============== =============== =============== =============== ===============
20.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's significant accounting policies are described in the
notes to the consolidated financial statements included in the Annual Report on
Form 10-K. Judgements and estimates of uncertainties are required in applying
such accounting policies in certain areas. Following are some of the areas
requiring significant judgements and estimates: cash flow and valuation
assumptions in performing asset impairment tests of long-lived assets and
goodwill; estimated costs to be incurred for environmental matters, contract
disputes, and litigation; and estimates of allowances for bad debts and
inventory obsolescence.
There are numerous critical assumptions which may influence accounting
estimates in these and other areas. We base our critical assumptions on our
historical experience and on various other estimates we believe to be
reasonable. Certain of the more critical assumptions include -
Asset Impairment Determinations
. The intended use of assets and the expected future cash flows
resulting directly from such use.
. Comparable market valuations of businesses similar to ARAMARK's
business segments.
. Industry specific economic conditions.
. Competitor activities and regulatory initiatives.
. Client and customer preferences and behavior patterns.
Environmental Matters
. Government regulations and enforcement activity.
. Changes in remediation technology and practices.
. Financial obligations and credit worthiness of other responsible
parties.
Litigation and Claims
. Interpretation of contractual rights and obligations.
. Government regulatory initiatives, activities, and interpretations of
regulations.
Bad Debt Risk
. Credit worthiness of specific customers and aging of customer
balances.
. General and specific industry economic conditions as well as industry
concentrations.
. Contractual rights and obligations.
Inventory Obsolescence
. History of customer demand and sales within specific product
categories.
. Economic conditions within customer specific industries.
. Style and product changes.
Critical accounting estimates and the related assumptions are evaluated
periodically as conditions warrant, and changes to such estimates are recorded
as new information or changed conditions require revision.
RESULTS OF OPERATIONS
The following tables present our sales and operating income, and the
related percentages attributable to each operating segment for the three and
nine month periods ended June 28, 2002 and June 29, 2001. As discussed in Note 3
to the condensed consolidated financial statements, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", as of the
beginning of fiscal 2002. As prescribed by SFAS No. 142, goodwill is no longer
amortized, but must be reviewed periodically for impairment. The Company has
completed the transitional goodwill impairment tests required by SFAS No. 142,
which did not result in an impairment charge. No goodwill amortization is
reflected in the fiscal 2002 results shown below. To facilitate comparability,
the As Adjusted fiscal 2001 amounts shown below have been adjusted to eliminate
goodwill amortization from the fiscal 2001 as reported results. The following
discussion of results compares fiscal 2002 operating results to the As Adjusted
fiscal 2001 results,
21.
except as otherwise indicated. As described in Note 10, on November 30, 2001,
ARAMARK acquired the management services business of the ServiceMaster Company.
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
June 28, 2002 June 29, 2001 June 28, 2002 June 29, 2001
---------------- ---------------- ---------------- ----------------
Sales $ % $ % $ % $ %
- --------------------------------------------- ---------------- ---------------- ---------------- ----------------
(dollars in millions)
Food & Support Services - United States $ 1,467.8 66% $ 1,230.4 62% $ 4,168.0 64% $ 3,533.8 61%
Food & Support Services - International 298.9 14% 277.1 14% 894.6 14% 831.3 14%
Uniform and Career Apparel - Rental 250.5 11% 249.1 13% 752.6 12% 748.0 13%
Uniform and Career Apparel - Direct Marketing 99.0 4% 101.6 5% 331.9 5% 341.3 6%
Educational Resources 119.4 5% 122.7 6% 348.7 5% 354.8 6%
--------- ---- --------- ---- --------- ---- --------- ----
$ 2,235.6 100% $ 1,980.9 100% $ 6,495.8 100% $ 5,809.2 100%
========= ==== ========= ==== ========= ==== ========= ====
Three Months Ended As Adjusted
----------------------------------- ----------------
June 28, 2002 June 29, 2001 June 29, 2001
---------------- ---------------- ----------------
Operating Income $ % $ % $ %
- --------------------------------------------- ---------------- ---------------- ----------------
(dollars in millions)
Food & Support Services - United States $ 86.7 60% $ 68.6 59% $ 71.3 59%
Food & Support Services - International 11.8 8% 8.6 7% 9.0 8%
Uniform and Career Apparel - Rental 30.1 21% 30.7 27% 32.0 26%
Uniform and Career Apparel - Direct Marketing 3.9 3% 3.2 3% 4.0 3%
Educational Resources 11.6 8% 10.5 9% 11.3 9%
--------- ---- --------- ---- --------- ----
144.1 100% 121.6 105% 127.6 105%
Corporate and Other (6.1) -4% (6.0) -5% (5.7) -5%
Other Income, net 5.8 4% 0.0 0% 0.0 0%
--------- ---- --------- ---- --------- ----
$ 143.8 100% $ 115.6 100% $ 121.9 100%
========= ==== ========= ==== ========= ====
Nine Months Ended As Adjusted
----------------------------------- ----------------
June 28, 2002 June 29, 2001 June 29, 2001
---------------- ---------------- ----------------
Operating Income $ % $ % $ %
- --------------------------------------------- ---------------- ---------------- ----------------
(dollars in millions)
Food & Support Services - United States $ 204.9 51% $ 166.5 54% $ 174.4 54%
Food & Support Services - International 34.5 9% 29.0 9% 30.4 9%
Uniform and Career Apparel - Rental 89.8 23% 88.8 29% 92.7 28%
Uniform and Career Apparel - Direct Marketing 18.6 5% 13.8 5% 16.1 5%
Educational Resources 29.0 7% 26.5 9% 28.8 9%
--------- ---- --------- ---- --------- ----
376.8 95% 324.6 106% 342.4 105%
Corporate and Other (22.5) -6% (18.0) -6% (17.0) -5%
Other Income, net 43.7 11% 0.0 0% 0.0 0%
--------- ---- --------- ---- --------- ----
$ 398.0 100% $ 306.6 100% $ 325.4 100%
========= ==== ========= ==== ========= ====
CONSOLIDATED OVERVIEW
Sales of $2.2 billion for the third quarter and $6.5 billion for the
nine month period increased 13% and 12%, respectively, over the prior year
periods, related principally to double-digit increases in the Food and Support
Services - United States segment. Excluding the impact of acquisitions and the
impact of foreign currency translation, sales were level with prior year for the
three month period and increased 1% over the prior year for the nine month
period. Operating income for the third quarter was $143.8 million and $398.0
million for the nine month period, increases of 18% and 22%, respectively, from
the prior year As Adjusted amounts. Fiscal 2002 operating income for the third
quarter includes a $5.8 million net gain, resulting principally from the sale of
a residual investment in a previously divested business, and operating income
for the nine month period also includes a gain of $37.9 million from the sale of
our ownership interests in the Boston Red Sox and a related entity, which are
presented as "Other income, net" (see Note 11 to the condensed consolidated
financial statements). Excluding other income, operating income increased 13%
and 9% for the three and nine month periods. Further, excluding the impact of
acquisitions and foreign currency translation, operating income increased
approximately 1% for the three month period and was equal to the prior year for
the nine month period. The sales and operating income of certain of our
businesses continued to be adversely affected by weak economic conditions,
particularly lower levels of employment, and the ongoing effects of the
September 11, 2001 terrorist attacks. Had the attacks not occurred, management
estimates that consolidated sales for the third quarter would have been
approximately 1% higher than reported and operating income would have been about
the same as reported. For the nine months, management estimates that
consolidated sales and operating income both would have been approximately 1%
higher than reported. For purposes of making these adjustments we have increased
reported sales and operating income for the estimated amount of sales and income
related to the affected operations, and excluded from the reported operating
income the amount (approximately $3.2 million) of business
22.
interruption proceeds received in the current quarter. For the 2002 third
quarter, those proceeds were about equal to the estimated September 11th impact
on operating income.
Interest and other financing costs, net for the three and nine month
periods decreased 12% and 13%, respectively, compared to the prior year due to
lower interest rates, partially offset by increased average borrowing levels.
The effective tax rate for the nine month period was 35.9%, compared to 38.3%
for the prior year nine month period, with the decrease due primarily to the
change in accounting for goodwill amortization and a permanent book and tax
basis difference on the investment sale noted above.
Net income for the three and nine months was $72.6 million and $188.4
million. Excluding "Other income", net income for the three and nine month
periods was $66.1 million and $157.6 million, respectively, increasing 38% and
37% over the reported amounts for the comparable prior year periods. On an As
Adjusted basis, adjusting fiscal 2001 net income for the impact of the goodwill
accounting change, fiscal 2002 net income for the three and nine month periods
increased 24% and 20%. Fiscal 2002 diluted earnings per share for the three and
nine month periods (excluding Other income) was $0.32 per share and $0.79 per
share on a weighted average share count of 205 million shares and 201 million
shares, respectively. Fiscal 2001 diluted earnings per share, adjusted for the
goodwill accounting change, was $0.30 per share and $0.73 per share for the
three and nine month periods on a lower weighted average share count of
approximately 181 million shares in both periods.
SEGMENT RESULTS
The following tables present a 2002/2001 comparison of segment sales and
operating income for the three and nine month periods together with the amount
and percentage of change between periods.
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
June Change June Change
--------------------- ------------- --------------------- -------------
2002 2001 $ % 2002 2001 $ %
--------------------- ------------- --------------------- -------------
(dollars in millions)
Sales by Segment
Food & Support Services - United States $ 1,467.8 $ 1,230.4 $ 237.4 19% $ 4,168.0 $ 3,533.8 $ 634.2 18%
Food & Support Services - International 298.9 277.1 21.8 8% 894.6 831.3 63.3 8%
Uniform and Career Apparel - Rental 250.5 249.1 1.4 1% 752.6 748.0 4.6 1%
Uniform and Career Apparel - Direct Marketing 99.0 101.6 (2.6) -3% 331.9 341.3 (9.4) -3%
Educational Resources 119.4 122.7 (3.3) -3% 348.7 354.8 (6.1) -2%
--------- --------- ------- -- --------- --------- ------- --
$ 2,235.6 $ 1,980.9 $ 254.7 13% $ 6,495.8 $ 5,809.2 $ 686.6 12%
========= ========= ======= == ========= ========= ======= ==
Three Months Ended
------------------ Change vs. Change vs.
June As Adjusted Reported As Adjusted
------------------ ------------ ------------ ------------
2002 2001 2001 $ % $ %
------------------ ------------ ------------ ------------
(dollars in millions)
Operating Income by Segment
Food & Support Services - United States $ 86.7 $ 68.6 $ 71.3 $ 18.1 26% $ 15.4 22%
Food & Support Services - International 11.8 8.6 9.0 3.2 37% 2.8 30%
Uniform and Career Apparel - Rental 30.1 30.7 32.0 (0.6) -2% (1.9) -6%
Uniform and Career Apparel - Direct Marketing 3.9 3.2 4.0 0.7 22% (0.1) -2%
Educational Resources 11.6 10.5 11.3 1.1 10% 0.3 3%
Corporate and Other (6.1) (6.0) (5.7) (0.1) 2% (0.4) 8%
------- ------- ------------ ------ -- ------ --
138.0 115.6 121.9 22.4 19% 16.1 13%
Other Income, net 5.8 - - 5.8 - 5.8 -
------- ------- ------------ ------ -- ------ --
$ 143.8 $ 115.6 $ 121.9 $ 28.2 24% $ 21.9 18%
======= ======= ============ ====== == ====== ==
Nine Months Ended
------------------ Change vs. Change vs.
June As Adjusted Reported As Adjusted
------------------ ------------ ------------ ------------
2002 2001 2001 $ % $ %
------- ------- ------------ ------------ ------------
(dollars in millions)
Operating Income by Segment
Food & Support Services - United States $ 204.9 $ 166.5 $ 174.4 $ 38.4 23% $ 30.5 17%
Food & Support Services - International 34.5 29.0 30.4 5.5 19% 4.1 14%
Uniform and Career Apparel - Rental 89.8 88.8 92.7 1.0 1% (2.9) -3%
Uniform and Career Apparel - Direct Marketing 18.6 13.8 16.1 4.8 35% 2.5 16%
Educational Resources 29.0 26.5 28.8 2.5 9% 0.2 1%
Corporate and Other (22.5) (18.0) (17.0) (4.5) 25% (5.5) 32%
------- ------- ------------ ------ -- ------ --
354.3 306.6 325.4 47.7 16% 28.9 9%
Other Income, net 43.7 - - 43.7 - 43.7 -
------- ------- ------------ ------ -- ------ --
$ 398.0 $ 306.6 $ 325.4 $ 91.4 30% $ 72.6 22%
======= ======= ============ ====== == ====== ==
23.
FOOD AND SUPPORT SERVICES - UNITED STATES SEGMENT
Food and Support Services - United States segment sales for the current
three month period increased 19% over the prior year period due to the
ServiceMaster Management Services acquisition. Excluding the ServiceMaster
acquisition, and before the estimated impact of the September 11th terrorist
attacks, sales for the current quarter were even with the prior year quarter.
Sales for the nine month period increased 18% due to acquisitions (approximately
16%, principally Service Master Management Services) and to net new accounts
(approximately 2%). Management estimates that had the September 11th terrorist
attacks not occurred, total segment sales would have been approximately 1%
higher than reported for both the three and nine month periods.
Sales growth in the Education Sector and the Other Sector, which includes
correctional and healthcare clients, continued to be strong in the third
quarter, with high single digit and low double-digit increases, respectively,
compared to the prior year period. The Business Services Sector continued to be
negatively affected by weak employment levels, particularly among manufacturing
clients. The June employment report, recently issued by the United States
Department of Labor Bureau of Labor Statistics, shows total employment levels
down from a year ago in the categories most important to our business. Third
quarter sales in this Sector declined about 8% from the comparable prior year
period. Sports and Entertainment Sector third quarter sales decreased about 5%
compared to the prior year period. After adjusting for management's estimate of
the effect of the September 11th attacks, the decrease was about 2%. Attendance
and spending levels within the convention and tourism businesses were soft.
Sales at stadiums and arenas were also down as a result of the lower level of
NBA and NHL playoff activity at venues we serve this quarter, compared to the
same quarter last year, and the loss of a significant race track account.
Segment operating income increased 22% and 17% for the three and nine month
periods. Excluding the impact of acquisitions, operating income increased 1% for
both periods compared to the prior year. The profit performance in both the
three and nine month periods followed the sales growth trends described above,
with the strong performance in the Education Sector offset by weakness in the
Business and Sports and Entertainment Sectors. Excluding the impact of
acquisitions, and adjusting for management's estimate of the effects of the
terrorist attacks, operating income was about flat for the third quarter and
increased 3% for the nine month period compared to the comparable prior year
periods.
FOOD AND SUPPORT SERVICES - INTERNATIONAL SEGMENT
Sales in the Food and Support Services - International segment increased 8%
for both the three and nine month periods. Excluding the impact of foreign
currency translation, sales increased 5% and 8% for the three and nine month
periods due to acquisitions (approximately 4% and 5%, respectively) and net new
business (approximately 1% and 3%, respectively). Sales growth for the third
quarter in the United Kingdom was in the mid-single digits, while sales in
Germany and Canada were down slightly from the prior year third quarter,
reflective of the continuing economic weakness in these countries.
Segment operating income for the three and nine month periods increased 30%
and 14%. Excluding the impact of acquisitions and foreign currency translation,
segment operating income increased 24% and 10% compared to the prior year
periods. The United Kingdom continued its solid earnings growth in the third
quarter and Germany and Spain achieved significant double-digit operating income
growth. Germany was negatively impacted in the prior year period by the European
outbreaks of mad cow and foot and mouth disease. Results in Canada were lower
than the prior year due to sluggish economic conditions, similar to those in the
United States.
UNIFORM AND CAREER APPAREL - RENTAL SEGMENT
Uniform and Career Apparel - Rental segment sales increased 1% for both the
three and nine months compared to the prior year periods due primarily to
pricing. Sales growth in this segment continues to be significantly constrained
by continued depressed employment levels, particularly in the manufacturing,
automotive and airline sectors. Segment operating income decreased 6% and 3%,
respectively, for the three and nine months compared to the prior year periods.
Despite continuing cost control initiatives, the combination of limited net
internal sales growth, together with higher sales costs and normal operating
cost increases (particularly in the payroll and related benefit areas) reduced
operating income for both the three and nine month periods.
24.
UNIFORM AND CAREER APPAREL - DIRECT MARKETING SEGMENT
Uniform and Career Apparel - Direct Marketing segment sales decreased by 3%
for both the three and nine month periods. The decrease was primarily due to
lower volume in work clothing sales, partially offset by increased sales of
safety products. Segment operating income for the third quarter decreased 2%
compared to the prior year due to the lower sales noted above and higher
distribution costs in the safety products operation, partially offset by lower
product costs and reduced overhead spending. Operating income for the nine month
period increased 16% due to lower product and other operating costs, partially
offset by the impact of lower sales.
EDUCATIONAL RESOURCES SEGMENT
Educational Resources segment sales decreased 3% and 2%, respectively, for
the three and nine month periods compared to the prior year periods, due to
lower enrollment at existing centers (approximately 7% and 5%, respectively) and
closed centers (approximately 3% and 4%, respectively), partially offset by
increases due to pricing (approximately 4% and 3%, respectively) and new
locations (approximately 3% and 4%, respectively). Segment operating profit
increased 3% and 1%, respectively, for the three and nine months due to
effective operating cost controls, partially offset by the impact of lower sales
noted above.
CORPORATE AND OTHER
Corporate and other expenses, those administrative expenses not allocated
to the business segments, were $6.1 million and $22.5 million for the three and
nine month periods of fiscal 2002. The increases over the prior year periods
were due principally to increased staff and related costs.
OUTLOOK
As discussed above, the continuing weak economy has had an adverse impact
on the trend of organic sales growth and our operating results to-date in our
economically sensitive businesses, and we anticipate such conditions will
continue into the fourth quarter of fiscal 2002. A Major League Baseball work
stoppage could negatively affect the Company's operating results should it
occur. The potential impact would depend on the timing and length of any such
work stoppage and therefore, cannot be quantified at this time. However, at the
time of the previous labor stoppage in 1994, management estimated that
consolidated operating income for the fiscal year would have been approximately
3% higher than reported if the work stoppage had not occurred. See "Risk
Factors" contained in the Company's fiscal 2001 Annual Report on Form 10-K.
During the fourth quarter of 2002, certain of the Company's insurance
coverages were or will be renewed, and it is currently expected that insurance
premiums will increase and certain coverages, such as terrorist acts coverage,
will no longer be available or will be meaningfully reduced. Management is
evaluating alternative insurance arrangements in response to these changes.
FINANCIAL CONDITION AND LIQUIDITY
Reference to the condensed consolidated statements of cash flows will
facilitate understanding of the discussion that follows.
Cash provided by operating activities for the nine month period was $375
million in fiscal 2002 and $320 million in fiscal 2001. Excluding the sale of
accounts receivable (see Note 8), cash provided by operating activities was $328
million and $160 million for the fiscal 2002 and 2001 periods, respectively. The
increase in cash flow was due principally to the increase in net income and non
cash adjustments for depreciation and amortization and deferred income taxes,
lower accounts receivable balances and the timing of payments related to accrued
taxes and insurance. Total debt increased by $242 million primarily due to the
ServiceMaster Management Services acquisition and the repurchase of stock,
offset by the proceeds from our initial public stock offering in December 2001,
and operating cash flow.
As discussed further in Note 10 to the condensed consolidated financial
statements, on November 30, 2001, the Company completed the acquisition of the
management services division of The ServiceMaster Company (the ServiceMaster
Management Services business) for approximately $800 million. The initial
acquisition financing consisted of $200 million from the Company's revolving
credit facility and $600 million under a bridge financing facility with a group
of banks. Approximately $350 million of the bridge facility was repaid with a
portion of the proceeds from the initial public offering. The remaining balance
of the bridge loan was repaid in April 2002 with a portion of the proceeds from
the Company's $300 million note offering discussed below.
25.
As discussed further in Note 2 to the condensed consolidated financial
statements, on December 14, 2001, the Company completed an initial public
offering (IPO) of 34.5 million shares of its Class B common stock at a price of
$23.00 per share, raising approximately $743 million, net of issuance costs. The
proceeds from the IPO were used to complete a tender offer for up to 10% of the
outstanding Class A shares and to repay indebtedness under the bridge facility
and the revolving credit facility. Specifically, on December 14, 2001, the
Company purchased from its employee benefit plans approximately 3.3 million
Class A shares for $75.4 million, and on January 25, 2002 the Company completed
the tender offer for its class A common stock and purchased 13.7 million shares
for approximately $314 million.
Also, during the first nine months of fiscal 2002, pursuant to the ARAMARK
Ownership Program, employees purchased approximately 7.1 million shares or $28.4
million of Class A Common Stock for $21.7 million cash plus $6.7 million of
deferred payment obligations.
In April 2002, a subsidiary of the Company issued $300 million of 7% notes
(the Notes) which mature on May 1, 2007. The Notes are fully and unconditionally
guaranteed by the Company and will rank equally with all of the Company's other
unsecured senior indebtedness. The net proceeds of the offering (approximately
$297.1 million) were used to repay the outstanding borrowings under the
ServiceMaster acquisition bridge financing facility described above and the
senior revolving credit facility. Concurrent with the issuance of the Notes, the
Company entered into interest rate swaps, with notional amounts totaling $300
million, to receive fixed (7%)/pay variable (six month LIBOR). The swaps mature
on May 1, 2007 and are being accounted for as fair-value hedges in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
In May 2002, the Company announced the establishment of a Stock Repurchase
Program. Under the Stock Repurchase Program, the Board of Directors has approved
the use of up to $200 million to repurchase shares of the Corporation's common
stock. Repurchases will be made in accordance with applicable securities law in
open market or privately negotiated transactions, from time to time, depending
on market conditions, and may be discontinued at any time. As of June 28, 2002,
the Company has repurchased 433,000 shares for approximately $10.7 million.
Additionally, the Company repurchased 1.5 million shares for approximately $39.8
million from the employee benefit plans to provide liquidity prior to the
scheduled lapse of the IPO restrictions.
In June 2002, the Company acquired the Harrison Conference Centers from
Hilton Hotels Corporation for approximately $49 million in cash. In July 2002,
the Company signed a definitive agreement to acquire Clinical Technology
Services (CTS) from Premier, Inc. for approximately $100 million in cash. The
transaction is subject to customary regulatory approvals and is currently
expected to close in the fourth quarter of fiscal 2002. The Company also
recently completed an acquisition in Canada of Travers Food Services, a remote
camp business, for approximately $18 million. Additionally, ARAMARK and Mitsui &
Company, Ltd. have announced a plan whereby ARAMARK and Mitsui each are
targeting to increase their existing ownership interests in AIM Services to as
much as 50%, with an estimated cost to ARAMARK of $35 to $40 million. We intend
to fund these acquisitions through borrowings under the revolving credit
facility.
At August 9, 2002 there is approximately $575 million of unused committed
credit availability under our senior revolving credit facility. Additionally,
the Company has shelf registration statements on file with the SEC for the
issuance of up to $700 million of debt securities. The Company currently expects
to fund acquisitions, capital expenditures and other liquidity needs from cash
provided from operating activities, normal disposals of property and equipment,
and borrowings available under our credit facilities or registered or private
note issuances. As of June 28, 2002, there was approximately $84 million
outstanding in foreign currency borrowings.
From September 28, 2001 through June 28, 2002, there has been no material
change in the Company's future obligations for debt repayments (except for the
issuance of the Notes described above) or future minimum rental and similar
commitments under noncancelable operating leases, which are summarized below as
of September 28, 2001:
Fiscal Year Debt Leases Total
----------- ----------- --------- -----------
(in thousands)
2002 $ 34,710 $ 213,287 $ 247,997
2003 74,796 117,601 192,397
2004 354,812 99,184 453,996
2005 731,487 76,741 808,228
2006 303,206 62,671 365,877
Subsequent Years 171,566 238,187 409,753
----------- --------- -----------
Total $ 1,670,577 $ 807,671 $ 2,478,248
=========== ========= ===========
26.
The Company has an agreement (the Receivables Facility) with several
financial institutions whereby it sells on a continuous basis an undivided
interest in all eligible trade accounts receivable, as defined in the
Receivables Facility. Pursuant to the Receivables Facility, the Company formed
ARAMARK Receivables, LLC, a wholly owned, bankruptcy-remote subsidiary. ARAMARK
Receivables, LLC was formed for the sole purpose of buying and selling
receivables generated by certain subsidiaries of the Company. Under the
Receivables Facility, certain subsidiaries of the Company transfer, without
recourse, all of their accounts receivable to ARAMARK Receivables, LLC. ARAMARK
Receivables, LLC, in turn, has sold and, subject to certain conditions, may from
time to time sell an undivided interest in these receivables. The Company has
retained collection and administrative responsibility for the participating
interest sold, and has retained an undivided interest in the transferred
receivables of approximately $111.5 million at June 28, 2002, which is subject
to a security interest. The agreement expires in March 2004. This two-step
transaction is accounted for as a sale of receivables following the provisions
of SFAS No. 140. In June 2002, the Receivables Facility was amended to include
certain of the ServiceMaster subsidiaries and to increase the size of the
facility to $250 million.
The Company's business activities do not include the use of unconsolidated
special purpose entities, and there are no significant business transactions
which have not been reflected in the accompanying financial statements. ARAMARK
has guaranteed certain indebtedness of two investee entities in the amount of
$27 million. ARAMARK may be exposed to liability resulting from the non
performance of indemnification obligations by an entity currently in bankruptcy
from which ARAMARK acquired a business in fiscal 2000. The amount of such
exposure cannot be quantified at the present time due to uncertainty with
respect to the number and amount of claims, if any, originating from the pre
acquisition period. ARAMARK has $25 million of insurance coverage for such
exposure with a $5.0 million retained loss limit.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations"
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs, and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company is required to adopt
these standards no later than the beginning of fiscal 2003. In June 2002, the
FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" which is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is currently evaluating the
impact of these new pronouncements.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
from civil litigation for forward-looking statements that reflect our current
views as to future events and financial performance with respect to our
operations. These statements can be identified by the fact that they do not
relate strictly to historical or current facts. They use words such as "aim,"
anticipate," "estimate," "expect," "will be," "will continue," will likely
result," "project," "intend," "plan," "believe" and other words and terms of
similar meaning in conjunction with a discussion of future operating or
financial performance.
These statements are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Factors that might cause such a difference include:
unfavorable economic conditions, including ramifications of the September 11th
terrorist attacks, increased operating costs, shortages of qualified personnel,
costly compliance with governmental regulations, currency risks and other risks
associated with international markets, risks associated with acquisitions, our
ability to integrate and derive the expected benefits from our acquisition of
ServiceMaster Management Services, competition, decline in attendance at client
facilities, unpredictability of sales and expenses due to contract terms and
terminations, high leverage, claims relating to the provision of food services,
liability associated with noncompliance with governmental regulations, including
regulations pertaining to food services, the environment and childcare service,
seasonality, adverse publicity concerning incidents at childcare centers and
levels of enrollment in our education business.
In this quarterly report on Form 10-Q we have estimated the impact that
unfavorable economic conditions, including ramifications of the September 11th
terrorist attacks, have had, and may have, on our sales and results of
operations. The actual impact may vary from those estimates stated in this Form
10-Q.
Forward-looking statements speak only as of the date made. We undertake no
obligation to update any forward-looking statements to reflect the events or
circumstances arising after the date as of which they are made. As a result of
these risks and uncertainties, readers are cautioned not to place undue reliance
on the forward-looking statements included in this Form 10-Q or that may be made
in other filings with the Securities and Exchange Commission or elsewhere from
time to time by, or on behalf of, us.
27.
In order to facilitate the orderly sale of some of their stock holdings, we
anticipate that certain directors and executives of ARAMARK will enter into what
are commonly referred to as "10b5-1 plans" with respect to the sale of ARAMARK
common stock. 10b5-1 plans are often implemented by directors and executives of
public companies during window periods so that they may sell stock of the
employer/issuer under a prearranged written plan that generally sets forth in
advance the amount of shares to be sold and the timing of such sales, and may
provide price parameters. Under such plans, such sales are considered to be made
not "on the basis of" material non-public information.
ITEM 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and manage this
exposure through the use of variable-rate and fixed-rate debt and by utilizing
interest rate swaps. We do not enter into contracts for trading purposes and do
not use leveraged instruments. The market risk associated with debt obligations
and other significant instruments as of June 28, 2002, has not materially
changed from September 28, 2001 (See Item 7A of the Annual Report on Form 10-K),
with the exception of the issuance of $300 million of 7% notes that mature on
May 1, 2007, and the related interest rate swap agreements, as described in
Notes 7 and 10 to the condensed consolidated financial statements.
28.
PART II - OTHER INFORMATION
Item 1 is not applicable
Items 2(a) - 2(d) are not applicable.
Item 3 is not applicable.
Item 4 is not applicable.
Item 5 - is not applicable.
Item 6(a) - Exhibits
See Exhibit Index.
Item 6(b) - Reports on Form 8-K.
On April 19, 2002, the Company filed a Form 8-K to announce the initiation of an
offering of $300,000,000 aggregate principal amount of 7.00% Notes Due 2007 by
ARAMARK Services, Inc., its wholly-owned subsidiary (see Note 10 to condensed
consolidated financial statements included in Part I - Financial Information).
On May 24, 2002, the Company filed a Form 8-K announcing that the Company had
dismissed Arthur Andersen LLP as the Company's independent public accountants
and engaged KPMG LLP to serve as the Company's independent public accountants
for fiscal 2002.
On May 28, 2002, the Company filed a Form 8-K to attach a press release dated
May 28, 2002, announcing the establishment of a Stock Repurchase Program and an
Employee Stock Trading Program.
29.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARAMARK CORPORATION
August 12, 2002 s/John M. Lafferty
-----------------------------------
John M. Lafferty
Senior Vice President, Controller
and Chief Accounting Officer
30.
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
2 Form of Merger Agreement (incorporated by reference to Exhibit
2 to ARAMARK Corporation's Registration Statement on Form S-1
(Registration No. 333-65226) (the "S-1 Registration
Statement").
3.1 Certificate of Incorporation of ARAMARK Corporation
(incorporated by reference to Exhibit 3.1 to the S-1
Registration Statement).
3.2 Bylaws of ARAMARK Corporation (incorporated by reference to
Exhibit 3.3 to ARAMARK Corporation's Registration Statement on
Form S-3 (Registration No. 333-85050).
4.1 Form of Rights Agreement (incorporated by reference to Exhibit
4.4 to the S-1 Registration Statement).
4.2 Form of Registration Rights Agreement among ARAMARK Worldwide
Corporation (now ARAMARK Corporation) and Joseph Neubauer and
each of the other holders listed on Schedule 1 thereto
(incorporated by reference to Exhibit 4.13 to the S-1
Registration Statement).
10.1 Master Distribution Agreement dated as of February 1, 2002
between SYSCO Corporation and ARAMARK Food and Support
Services Group, Inc.+
99.1 Certification of the Chief Executive Officer of ARAMARK
Corporation pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of ARAMARK
Corporation pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
+ Portions omitted pursuant to a request for confidential treatment.
31.