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 27, 2003
Commission file number 001-16807
ARAMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 23-3086414 (I.R.S. Employer Identification Number) |
ARAMARK Tower 1101 Market Street Philadelphia, Pennsylvania (Address of principal executive offices) | 19107 (Zip Code) |
(215) 238-3000
(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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
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 25, 2003: 91,910,303
Class B common stock outstanding at July 25, 2003: 93,831,962
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
|
| June 27, |
| September 27, |
| ||
|
|
|
| ||||
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 39,774 |
| $ | 31,572 |
|
Receivables |
|
| 617,178 |
|
| 536,113 |
|
Inventories, at lower of cost or market |
|
| 428,570 |
|
| 425,182 |
|
Prepayments and other current assets |
|
| 114,828 |
|
| 88,218 |
|
Current assets of discontinued operations |
|
| — |
|
| 17,307 |
|
|
|
|
| ||||
Total current assets |
|
| 1,200,350 |
|
| 1,098,392 |
|
|
|
|
| ||||
Property and Equipment, net |
|
| 1,149,086 |
|
| 1,069,868 |
|
Goodwill |
|
| 1,355,606 |
|
| 1,298,808 |
|
Other Intangible Assets |
|
| 322,086 |
|
| 240,777 |
|
Other Assets |
|
| 359,775 |
|
| 296,203 |
|
Noncurrent Assets of Discontinued Operations |
|
| — |
|
| 255,254 |
|
|
|
|
| ||||
|
| $ | 4,386,903 |
| $ | 4,259,302 |
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Current maturities of long-term borrowings |
| $ | 11,764 |
| $ | 39,548 |
|
Accounts payable |
|
| 415,401 |
|
| 486,112 |
|
Accrued expenses and other liabilities |
|
| 770,046 |
|
| 723,806 |
|
Current liabilities of discontinued operations |
|
| — |
|
| 54,096 |
|
|
|
|
| ||||
Total current liabilities |
|
| 1,197,211 |
|
| 1,303,562 |
|
|
|
|
| ||||
Long-Term Borrowings |
|
| 1,932,877 |
|
| 1,835,632 |
|
Deferred Income Taxes and Other Noncurrent Liabilities |
|
| 284,204 |
|
| 254,198 |
|
Noncurrent Liabilities of Discontinued Operations |
|
| — |
|
| 7,725 |
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
Class A common stock, par value $.01 |
|
| 1,116 |
|
| 1,387 |
|
Class B common stock, par value $.01 |
|
| 1,041 |
|
| 700 |
|
Capital surplus |
|
| 905,295 |
|
| 821,242 |
|
Earnings retained for use in the business |
|
| 748,838 |
|
| 553,037 |
|
Accumulated other comprehensive income (loss) |
|
| 2,378 |
|
| (18,671 | ) |
Treasury stock |
|
| (686,057 | ) |
| (499,510 | ) |
|
|
|
| ||||
Total shareholders' equity |
|
| 972,611 |
|
| 858,185 |
|
|
|
|
| ||||
|
| $ | 4,386,903 |
| $ | 4,259,302 |
|
|
|
|
|
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 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
Sales |
| $ | 2,340,554 |
| $ | 2,136,498 |
| $ | 6,859,800 |
| $ | 6,175,082 |
|
|
|
|
|
|
| ||||||||
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided |
|
| 2,118,788 |
|
| 1,923,856 |
|
| 6,228,382 |
|
| 5,594,115 |
|
Depreciation and amortization |
|
| 66,163 |
|
| 56,686 |
|
| 192,599 |
|
| 170,484 |
|
Selling and general corporate expenses |
|
| 27,150 |
|
| 29,973 |
|
| 86,519 |
|
| 86,294 |
|
Other income, net (Note 13) |
|
| — |
|
| (5,806 | ) |
| — |
|
| (43,695 | ) |
|
|
|
|
|
| ||||||||
|
|
| 2,212,101 |
|
| 2,004,709 |
|
| 6,507,500 |
|
| 5,807,198 |
|
|
|
|
|
|
| ||||||||
Operating income |
|
| 128,453 |
|
| 131,789 |
|
| 352,300 |
|
| 367,884 |
|
Interest and Other Financing Costs, net |
|
| 40,776 |
|
| 32,986 |
|
| 110,996 |
|
| 103,576 |
|
|
|
|
|
|
| ||||||||
Income from continuing operations before income taxes |
|
| 87,677 |
|
| 98,803 |
|
| 241,304 |
|
| 264,308 |
|
Provision for Income Taxes |
|
| 23,826 |
|
| 33,530 |
|
| 81,227 |
|
| 94,028 |
|
|
|
|
|
|
| ||||||||
Income from continuing operations |
|
| 63,851 |
|
| 65,273 |
|
| 160,077 |
|
| 170,280 |
|
Income from discontinued operations, net |
|
| 25,453 |
|
| 7,299 |
|
| 35,724 |
|
| 18,106 |
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 89,304 |
| $ | 72,572 |
| $ | 195,801 |
| $ | 188,386 |
|
|
|
|
|
|
| ||||||||
Earnings Per Share - Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | .33 |
| $ | .34 |
| $ | .84 |
| $ | .90 |
|
Net income |
| $ | .47 |
| $ | .37 |
| $ | 1.02 |
| $ | .99 |
|
Earnings Per Share - Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | .33 |
| $ | .32 |
| $ | .81 |
| $ | .85 |
|
Net income |
| $ | .45 |
| $ | .35 |
| $ | .99 |
| $ | .94 |
|
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 27, |
| June 28, |
| ||
|
|
|
| ||||
Cash flows from operating activities from continuing operations: |
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 160,077 |
| $ | 170,280 |
|
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 192,599 |
|
| 170,484 |
|
Income taxes deferred |
|
| 19,082 |
|
| 17,092 |
|
Gain on sale of investments |
|
| — |
|
| (45,320 | ) |
Changes in noncash working capital |
|
| (131,084 | ) |
| (10,425 | ) |
Net proceeds from sale of receivables |
|
| — |
|
| 46,605 |
|
Other operating activities |
|
| (16,590 | ) |
| (13,667 | ) |
|
|
|
| ||||
Net cash provided by operating activities from continuing operations |
|
| 224,084 |
|
| 335,049 |
|
|
|
|
| ||||
Cash flows from investing activities from continuing operations: |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (180,678 | ) |
| (142,354 | ) |
Disposals of property and equipment |
|
| 17,938 |
|
| 8,079 |
|
Proceeds from sale of investments |
|
| — |
|
| 76,964 |
|
Acquisition of certain businesses, net of cash acquired |
|
| (202,254 | ) |
| (865,491 | ) |
Divestiture of certain businesses |
|
| 248,077 |
|
| 4,235 |
|
Other investing activities |
|
| (10,584 | ) |
| 15,614 |
|
|
|
|
| ||||
Net cash used in investing activities from continuing operations |
|
| (127,501 | ) |
| (902,953 | ) |
|
|
|
| ||||
Cash flows from financing activities from continuing operations: |
|
|
|
|
|
|
|
Proceeds from additional long-term borrowings |
|
| 260,174 |
|
| 921,187 |
|
Payment of long-term borrowings |
|
| (217,637 | ) |
| (687,441 | ) |
Proceeds from issuance of common stock |
|
| 20,601 |
|
| 764,583 |
|
Repurchase of stock |
|
| (168,574 | ) |
| (441,653 | ) |
Other financing activities |
|
| 2,333 |
|
| (6,604 | ) |
|
|
|
| ||||
Net cash provided by (used in) financing activities from continuing operations |
|
| (103,103 | ) |
| 550,072 |
|
|
|
|
| ||||
Net cash provided by discontinued operations |
|
| 14,722 |
|
| 29,405 |
|
|
|
|
| ||||
Increase in cash and cash equivalents |
|
| 8,202 |
|
| 11,573 |
|
Cash and cash equivalents, beginning of period |
|
| 31,572 |
|
| 24,799 |
|
|
|
|
| ||||
Cash and cash equivalents, end of period |
| $ | 39,774 |
| $ | 36,372 |
|
|
|
|
|
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. Prior period “Sales” and “Cost of services provided” have been reclassified to conform to the current period classification. The effect was not material. 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) DISCONTINUED OPERATIONS:
During the second quarter of fiscal 2003, the Company executed a definitive agreement for the sale of ARAMARK Educational Resources (AER) to Knowledge Learning Corporation, Inc. for approximately $250 million in cash. The sale closed on May 9, 2003, and resulted in an after-tax gain of $23.6 million.
AER is accounted for as a discontinued operation in the accompanying financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” AER’s results of operations and cash flows have been removed from the Company’s results of continuing operations for all periods presented. All related disclosures have also been adjusted to reflect the discontinued operation. Summarized selected financial information from discontinued operations for fiscal 2003 (excluding the net gain) through the transaction closing date and for fiscal 2002 is as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
|
| (in thousands) |
| ||||||||||
Sales |
| $ | 37,060 |
| $ | 119,350 |
| $ | 264,277 |
| $ | 348,715 |
|
|
|
|
|
|
| ||||||||
Income before income taxes |
| $ | 3,129 |
| $ | 12,018 |
| $ | 20,174 |
| $ | 29,811 |
|
Income tax provision |
|
| (1,228 | ) |
| (4,719 | ) |
| (8,002 | ) |
| (11,705 | ) |
|
|
|
|
|
| ||||||||
Net income |
| $ | 1,901 |
| $ | 7,299 |
| $ | 12,172 |
| $ | 18,106 |
|
|
|
|
|
|
|
The assets and liabilities of the discontinued operation are stated separately in the condensed consolidated balance sheet. The primary asset and liability categories follow:
|
| September 27, |
| |
|
|
| ||
|
| (in thousands) |
| |
Receivables |
| $ | 12,184 |
|
Prepayments and other current assets |
|
| 5,123 |
|
|
|
| ||
|
| $ | 17,307 |
|
|
|
| ||
|
|
|
|
|
Property and equipment, net |
| $ | 179,402 |
|
Goodwill |
|
| 70,732 |
|
Other intangible assets |
|
| 1,564 |
|
Other assets |
|
| 3,556 |
|
|
|
| ||
|
| $ | 255,254 |
|
|
|
| ||
|
|
|
|
|
Accounts payable |
| $ | 15,081 |
|
Accrued expenses and other current liabilities |
|
| 39,015 |
|
|
|
| ||
|
| $ | 54,096 |
|
|
|
| ||
Noncurrent liabilities |
| $ | 7,725 |
|
|
|
|
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(3) CAPITAL STOCK:
On December 14, 2001, the Company completed an initial public offering of 34.5 million 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. 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 stockholders 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 the total outstanding stock and about 98% of the total voting power, while the Class B shares constituted about 17% of the total outstanding shares and about 2% of the 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 at that time.
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.
During the first nine months of fiscal 2003, 4.3 million options were granted, to purchase common stock under the 2001 Equity Incentive Plan (2001 EIP). The options vest ratably over four years, with an exercise price equal to the fair market value at the date of grant. During the first nine months of fiscal 2003, employees purchased approximately 6.5 million shares or $29.6 million of common stock. Also, during the first nine months of fiscal 2003, approximately 32.6 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, as amended, the Board of Directors approved the use of up to $350 million to repurchase shares of the Company’s Class A or Class B common stock. Repurchases are made in accordance with applicable securities laws in open market or privately negotiated transactions or otherwise, from time to time, depending on market conditions, and may be discontinued at any time. During the first nine months of fiscal 2003, the Company repurchased 7.6 million shares of Class B common stock at an aggregate cost of approximately $166.1 million, resulting in total repurchases of $236.4 million under the Stock Repurchase Program.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(4) GOODWILL AND OTHER INTANGIBLE ASSETS:
At the beginning of the first quarter of fiscal 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” 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.
Goodwill, allocated by reportable segment, follows (in thousands):
|
| September 27, |
| Acquisitions |
| Translation |
| June 27, |
| ||||
|
|
|
|
|
| ||||||||
Food and Support |
|
|
|
|
|
|
|
|
|
|
|
|
|
Services – United States |
| $ | 977,174 |
| $ | 34,248 |
| $ | (215 | ) | $ | 1,011,207 |
|
Food and Support |
|
|
|
|
|
|
|
|
|
|
|
|
|
Services – International |
|
| 53,328 |
|
| 597 |
|
| 5,871 |
|
| 59,796 |
|
Uniform and Career |
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel – Rental |
|
| 156,450 |
|
| 18,522 |
|
| — |
|
| 174,972 |
|
Uniform and Career |
|
|
|
|
|
|
|
|
|
|
|
|
|
Apparel - Direct Marketing |
|
| 111,856 |
|
| — |
|
| (2,225 | ) |
| 109,631 |
|
|
|
|
|
|
| ||||||||
|
| $ | 1,298,808 |
| $ | 53,367 |
| $ | 3,431 |
| $ | 1,355,606 |
|
|
|
|
|
|
|
Goodwill additions during the nine months ended June 27, 2003 reflect the acquisitions of Clinical Technology Services and Fine Host Corporation (see Note 11) in the Food and Support Services – United States segment and the acquisition of three regional uniform rental companies. These amounts may be revised upon final determination of the purchase price allocations.
Other intangible assets as of June 27, 2003 consist of (in thousands):
|
| Gross Amount |
| Accumulated |
| Net Amount |
| |||
|
|
|
|
| ||||||
Customer relationship assets |
| $ | 461,689 |
| $ | (152,776 | ) | $ | 308,913 |
|
Other |
|
| 25,776 |
|
| (12,603 | ) |
| 13,173 |
|
|
|
|
|
| ||||||
Total |
| $ | 487,465 |
| $ | (165,379 | ) | $ | 322,086 |
|
|
|
|
|
|
All intangible assets are amortizable and consist primarily of contract rights, customer lists and non-compete agreements. The intangible assets are being amortized on a straight-line basis over the expected period of benefit, 3 to 20 years. Intangible assets of approximately $117.5 million were acquired during the first nine months of fiscal 2003, primarily as part of the acquisitions of the Clinical Technology Services business, Fine Host Corporation and the three regional uniform rental companies. Amortization of intangible assets for the first nine months of fiscal 2003 was $36.6 million, including $1.2 million related to the writeoff of certain contract assets. Amortization for the first nine months of fiscal 2002 was $32.9 million.
(5) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $106.5 million and $96.6 million and income tax payments of $76.4 million and $62.0 million during the first nine months of fiscal 2003 and 2002, respectively.
Cash provided by operating activities includes the tax benefit from the employee exercise of non-qualified stock options of approximately $22.1 million and $36.0 million during the first nine months of fiscal 2003 and 2002, respectively.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(6) EARNINGS PER SHARE:
The Company follows the provisions of SFAS No. 128, “Earnings per Share.” Earnings applicable to common stock and common shares used in the calculation of basic and diluted earnings per share follow:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
|
| (in thousands, except per share data) |
| ||||||||||
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 63,851 |
| $ | 65,273 |
| $ | 160,077 |
| $ | 170,280 |
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 89,304 |
| $ | 72,572 |
| $ | 195,801 |
| $ | 188,386 |
|
|
|
|
|
|
| ||||||||
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share calculation |
|
| 190,727 |
|
| 194,235 |
|
| 191,383 |
|
| 189,476 |
|
Impact of potential exercise opportunities under the ARAMARK Ownership and Equity Incentive Plans |
|
| 5,648 |
|
| 10,449 |
|
| 7,111 |
|
| 11,197 |
|
|
|
|
|
|
| ||||||||
Total common shares used in diluted earnings per share calculations |
|
| 196,375 |
|
| 204,684 |
|
| 198,494 |
|
| 200,673 |
|
|
|
|
|
|
| ||||||||
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | .33 |
| $ | .34 |
| $ | .84 |
| $ | .90 |
|
|
|
|
|
|
| ||||||||
Net income |
| $ | .47 |
| $ | .37 |
| $ | 1.02 |
| $ | .99 |
|
|
|
|
|
|
| ||||||||
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | .33 |
| $ | .32 |
| $ | .81 |
| $ | .85 |
|
|
|
|
|
|
| ||||||||
Net income |
| $ | .45 |
| $ | .35 |
| $ | .99 |
| $ | .94 |
|
|
|
|
|
|
|
Options to purchase 7,865,651 shares were outstanding at June 27, 2003, but were not included in the computation of diluted earnings per common share for both the three and nine months ended June 27, 2003, as the effect would have been antidilutive.
The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized. If compensation cost for these plans had been determined using the fair-value method prescribed by SFAS No. 123, “Accounting for Stock Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts as follow:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
|
| (in thousands, except per share data) |
| ||||||||||
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | 89,304 |
| $ | 72,572 |
| $ | 195,801 |
| $ | 188,386 |
|
Pro forma |
| $ | 86,134 |
| $ | 70,790 |
| $ | 186,849 |
| $ | 184,184 |
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.47 |
| $ | 0.37 |
| $ | 1.02 |
| $ | 0.99 |
|
Diluted |
| $ | 0.45 |
| $ | 0.35 |
| $ | 0.99 |
| $ | 0.94 |
|
Pro forma: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.45 |
| $ | 0.36 |
| $ | 0.98 |
| $ | 0.97 |
|
Diluted |
| $ | 0.44 |
| $ | 0.35 |
| $ | 0.94 |
| $ | 0.92 |
|
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(7) COMPREHENSIVE INCOME:
Pursuant to the provisions of SFAS No. 130, “Reporting Comprehensive Income”, comprehensive income includes all changes to 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, minimum pension liability and changes in the fair value of cash flow hedges (net of tax). Total comprehensive income was $102.8 million and $216.9 million for the three and nine months ended June 27, 2003, respectively, and $83.4 million and $196.2 million for the three and nine months ended June 28, 2002, respectively.
(8) ACCOUNTING FOR DERIVATIVE INSTRUMENTS:
The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133.” 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. Through May 2003, the Company had $100 million of interest rate swap agreements, which were designated as cash flow hedging instruments, fixing the rate on a like amount of variable rate borrowings. These agreements expired in May 2003. Concurrent with the April 2002 issuance of the Company’s 7% 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 designated as fair-value hedging instruments. Additionally, in connection with the August 2002 issuance of the Company’s 6.375% notes, in October 2002, the Company entered into interest rate swaps, with notional amounts totaling $300 million, to receive fixed (6.375%)/pay variable (six month LIBOR). The swaps mature on February 15, 2008 and are designated as fair-value hedging instruments. There were no material forward exchange contract agreements outstanding as of June 27, 2003.
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 (loss) 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 first nine months of fiscal 2003 and 2002, respectively, credits of approximately $2.3 million (net of tax) and $3.5 million (net of tax) related to interest rate swaps were recorded in comprehensive income. As of June 27, 2003, there were no net unrealized losses related to interest rate swaps included in “Accumulated other comprehensive income (loss).” 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 underlying hedged item. As of June 27, 2003, approximately $37.6 million has been included in “Other assets,” with an offsetting increase in “Long-term borrowings” in the condensed consolidated balance sheet related to fair value hedges. The hedge ineffectiveness for cash flow and fair value hedging instruments for the first nine months of fiscal 2003 and 2002 was not material. The counterparties to the above derivative agreements are major international banks. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties.
(9) 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, consolidated, 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 up to $200 million. 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 $161.6 million and $183.9 million at June 27, 2003 and September 27, 2002, respectively, 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
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(9) ACCOUNTS RECEIVABLE SECURITIZATION (Continued):
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 27, 2003 and September 27, 2002, respectively, $149.9 million and $178.9 million of accounts receivable were sold and removed from the condensed consolidated balance sheet.
The loss on the sale of receivables was $2.8 million and $3.7 million for the first nine months of fiscal 2003 and 2002, respectively, and is included in “Interest and other financing costs, net.”
(10) SEGMENT INFORMATION:
Sales and operating income by reportable segment follow:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
Sales |
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
|
| (in thousands) |
| ||||||||||
Food and Support Services - United States |
| $ | 1,623,463 |
| $ | 1,488,107 |
| $ | 4,712,854 |
| $ | 4,195,924 |
|
Food and Support Services - International |
|
| 362,701 |
|
| 298,948 |
|
| 1,052,255 |
|
| 894,634 |
|
Uniform and Career Apparel - Rental |
|
| 253,517 |
|
| 250,458 |
|
| 759,281 |
|
| 752,632 |
|
Uniform and Career Apparel - Direct Marketing |
|
| 100,873 |
|
| 98,985 |
|
| 335,410 |
|
| 331,892 |
|
|
|
|
|
|
| ||||||||
|
| $ | 2,340,554 |
| $ | 2,136,498 |
| $ | 6,859,800 |
| $ | 6,175,082 |
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
Operating Income |
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||
|
|
|
|
|
| ||||||||
|
| (in thousands) |
| ||||||||||
Food and Support Services - United States |
| $ | 85,897 |
| $ | 86,704 |
| $ | 227,206 |
| $ | 204,923 |
|
Food and Support Services - International |
|
| 16,181 |
|
| 11,771 |
|
| 47,252 |
|
| 34,551 |
|
Uniform and Career Apparel - Rental |
|
| 28,869 |
|
| 30,136 |
|
| 80,868 |
|
| 89,760 |
|
Uniform and Career Apparel - Direct Marketing |
|
| 4,201 |
|
| 3,867 |
|
| 18,832 |
|
| 18,583 |
|
|
|
|
|
|
| ||||||||
|
|
| 135,148 |
|
| 132,478 |
|
| 374,158 |
|
| 347,817 |
|
Corporate and Other |
|
| (6,695 | ) |
| (6,495 | ) |
| (21,858 | ) |
| (23,628 | ) |
Other Income, net (Note 13) |
|
| — |
|
| 5,806 |
|
| — |
|
| 43,695 |
|
|
|
|
|
|
| ||||||||
Operating Income |
|
| 128,453 |
|
| 131,789 |
|
| 352,300 |
|
| 367,884 |
|
Interest Expense, net |
|
| (40,776 | ) |
| (32,986 | ) |
| (110,996 | ) |
| (103,576 | ) |
|
|
|
|
|
| ||||||||
Income Before Income Taxes |
| $ | 87,677 |
| $ | 98,803 |
| $ | 241,304 |
| $ | 264,308 |
|
|
|
|
|
|
|
“Food and Support Services—United States” operating income for the second quarter of fiscal 2003 includes approximately $6 million of business interruption proceeds, 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. The second quarter of fiscal 2003 also includes approximately $6 million of costs related to the special manager meeting to launch our “Mission One” initiatives.
“Corporate and Other” in the second quarter of fiscal 2003 includes a gain of $1.4 million representing a residual cash payment from a previous divestiture.
“Food and Support Services - United States” operating income in the third quarter of fiscal 2002 includes approximately $3.2 million of business interruption proceeds, related to losses incurred as a result of the September 11, 2001 terrorist attacks.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(10) | SEGMENT INFORMATION: (Continued) |
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 operations. 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 on the educational accounts. In addition, there is a seasonal increase in volume of directly marketed work clothing during the first fiscal quarter.
(11) | ACQUISITIONS |
During fiscal 2003, the Company acquired three regional uniform rental companies for a total of approximately $27 million in cash. The Company’s pro forma results of operations for fiscal 2003 and 2002 would not have been materially different than reported, assuming that these acquisitions had occurred at the beginning of the respective fiscal periods.
On September 30, 2002, the Company completed the acquisition of the Clinical Technology Services (CTS) business from Premier, Inc. for approximately $100 million in cash. Additionally, in mid-December 2002, the Company closed the acquisition of Fine Host Corporation, a food service management company, for approximately $100 million. The results of Fine Host Corporation have been included starting in the second quarter of fiscal 2003. These acquisitions were funded through borrowings under the revolving credit facility. The proforma results of operations for the first nine months of fiscal 2003 and 2002 would not have been materially different than reported, assuming that these acquisitions had occurred at the beginning of the respective periods.
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 Uniform 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 plus costs of the acquisition, and was allocated to the assets acquired and liabilities assumed based on estimates of the respective fair values, as follows: approximately $(34) million to working capital; approximately $43 million to other noncurrent assets, net; and approximately $167 million to amortizable intangible assets. The excess of the purchase price over the net assets acquired was allocated to goodwill.
The results of ServiceMaster Management Services have been included in the accompanying condensed consolidated financial statements from the date of acquisition and are included in the Food and Support Services—United States segment. Had the acquisition of ServiceMaster Management Services occurred at the beginning of fiscal 2002, pro forma sales, net income and diluted earnings per share for the nine months ended June 28, 2002 would have been higher by approximately $0.2 billion, $1.5 million and $0.01 per share. These pro forma disclosures 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 fiscal 2002. Pro forma results are not intended to be a projection of future results.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(12) | NEW ACCOUNTING PRONOUNCEMENTS: |
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. Adoption of this pronouncement did not have a material effect on the Company’s financial statements.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” See Note 15.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of this statement (see Note 6) and can elect to adopt any of the three transitional recognition provisions of this statement prior to the end of the 2004 fiscal year.
In January 2003, the FASB issued Interpretation Number 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation addresses consolidation by business enterprises of variable interest entities. The interpretation is not expected to have a material effect on the Company’s financial statements.
(13) | OTHER INCOME: |
In the second quarter of fiscal 2002, the Company sold its interests in the Boston Red Sox Baseball Club and a related entity, which controls the rights to broadcast Red Sox games. The sale resulted in a pre-tax gain of approximately $37.9 million. In the third quarter of fiscal 2002, the Company recorded a pretax 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. These pretax gains are presented in “Other Income, net” in the accompanying condensed consolidated statements of income.
(14) | FINANCING ACTIVITIES: |
During the third quarter of fiscal 2003, the Company completed a tender offer for its 6-3/4% guaranteed notes due August 1, 2004 issued by ARAMARK Services, Inc. and guaranteed by ARAMARK Corporation. The total cash consideration paid for the purchase of the notes, including accrued interest, is $102 million. Additionally, during the third quarter of fiscal 2003, the Company retired a $45 million term loan due March 2005. These two transactions resulted in an extinguishment charge of $7.7 million which is included in “Interest and Other Financing Costs, net.”
During the second quarter of fiscal 2003, a Canadian subsidiary entered into a non-revolving credit facility, in the amount of C$25 million, which matures in September 2007. Interest is based on the Canadian Bankers Acceptance Rate (plus a spread of 1.50%), Canadian Prime Rate (plus a spread of 0.75%) or LIBOR (plus a spread of 1.50%). Proceeds were used to fund an acquisition in Canada.
During the first quarter of fiscal 2003, a subsidiary completed a private placement of 30 million GBP and 30 million Euro notes. The notes bear interest based on six-month GBP LIBOR (plus a spread of 2.32%) and six-month EURIBOR (plus a spread of 2.25%), respectively. Proceeds were used to repay borrowings primarily in the United Kingdom and Germany. The notes mature in November 2007.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(15) | COMMITMENTS AND CONTINGENCIES: |
ARAMARK has guaranteed certain indebtedness of two investee entities in the maximum amount of $27 million. Maturities of the guaranteed debt range from one to three years. Certain of the Company’s operating lease arrangements, primarily vehicle leases, with terms of one to eight years, contain provisions related to residual value guarantees. The maximum potential liability to ARAMARK under such arrangements was approximately $81.8 million at June 27, 2003. Consistent with past experience, management does not expect any significant payments will be required pursuant to these arrangements. No amounts have been accrued for guarantee arrangements at June 27, 2003.
The Company may be exposed to liability resulting from the non-performance of certain indemnification obligations by an entity currently in bankruptcy from which the Company 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 or relating to the pre-acquisition period. The Company has $25 million of insurance coverage for such exposure with a $5 million retained loss limit.
The Company advanced funds to a concession services client which has filed for the equivalent of bankruptcy protection. At June 27, 2003, the client’s reorganization activities were substantially completed, and the carrying value of ARAMARK’s advance has been adjusted, without material effect on the consolidated financial statements.
During the second quarter of fiscal 2003, ARAMARK issued a demand, for overdue payment, to an insurance carrier with respect to certain outstanding insured claims. Subsequent to June 27, 2003, proceeds were received in full satisfaction of the claim.
During the third quarter of fiscal 2003, the Company reduced the provision for income taxes by approximately $8.4 million, based upon the settlement of certain of its open tax years.
The Company is party to certain claims and litigation. Such items include, among others, employment matters, compliance with various government regulations, contractual disputes and other matters arising in the normal course of business. The Company is vigorously defending these matters and believes that the ultimate resolution is not likely to have a material effect on the consolidated financial condition or results of operations.
(16) | 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 27, 2003. 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 27, 2003
(In Millions)
ASSETS
|
| ARAMARK |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 28.9 |
| $ | 10.8 |
| $ | 0.1 |
| $ | — |
| $ | 39.8 |
|
Receivables |
|
| 435.6 |
|
| 181.4 |
|
| 0.2 |
|
| — |
|
| 617.2 |
|
Inventories, at lower of cost or market |
|
| 99.7 |
|
| 328.9 |
|
| — |
|
| — |
|
| 428.6 |
|
Prepayments and other current assets |
|
| 96.6 |
|
| 14.0 |
|
| 4.2 |
|
| — |
|
| 114.8 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 660.8 |
|
| 535.1 |
|
| 4.5 |
|
| — |
|
| 1,200.4 |
|
|
|
|
|
|
|
| ||||||||||
Property and Equipment, net |
|
| 417.4 |
|
| 729.3 |
|
| 2.4 |
|
| — |
|
| 1,149.1 |
|
Goodwill |
|
| 890.3 |
|
| 465.3 |
|
| — |
|
| — |
|
| 1,355.6 |
|
Intercompany Receivable |
|
| 1,414.0 |
|
| 765.8 |
|
| — |
|
| (2,179.8 | ) |
| — |
|
Investment in Subsidiaries |
|
| — |
|
| — |
|
| 2,429.8 |
|
| (2,429.8 | ) |
| — |
|
Other Intangible Assets |
|
| 262.7 |
|
| 59.4 |
|
| — |
|
| — |
|
| 322.1 |
|
Other Assets |
|
| 253.1 |
|
| 103.9 |
|
| 2.7 |
|
| — |
|
| 359.7 |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 3,898.3 |
| $ | 2,658.8 |
| $ | 2,439.4 |
| $ | (4,609.6 | ) | $ | 4,386.9 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current Liabilities: |
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term borrowings |
| $ | 7.2 |
| $ | 4.6 |
| $ | — |
| $ | — |
| $ | 11.8 |
|
Accounts payable |
|
| 321.5 |
|
| 74.4 |
|
| 19.5 |
|
| — |
|
| 415.4 |
|
Accrued expenses and other liabilities |
|
| 525.2 |
|
| 230.8 |
|
| 14.0 |
|
| — |
|
| 770.0 |
|
|
|
|
|
|
|
| ||||||||||
Total current liabilities |
|
| 853.9 |
|
| 309.8 |
|
| 33.5 |
|
| — |
|
| 1,197.2 |
|
|
|
|
|
|
|
| ||||||||||
Long-Term Borrowings |
|
| 1,921.7 |
|
| 11.2 |
|
| — |
|
| — |
|
| 1,932.9 |
|
Deferred Income Taxes and Other Noncurrent Liabilities |
|
| 173.6 |
|
| 91.3 |
|
| 19.3 |
|
| — |
|
| 284.2 |
|
Intercompany Payable |
|
| 203.9 |
|
| 561.9 |
|
| 1,414.0 |
|
| (2,179.8 | ) |
| — |
|
Shareholders’ Equity |
|
| 745.2 |
|
| 1,684.6 |
|
| 972.6 |
|
| (2,429.8 | ) |
| 972.6 |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 3,898.3 |
| $ | 2,658.8 |
| $ | 2,439.4 |
| $ | (4,609.6 | ) | $ | 4,386.9 |
|
|
|
|
|
|
|
|
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
September 27, 2002
(In Millions)
ASSETS
|
| ARAMARK |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 19.1 |
| $ | 12.3 |
| $ | 0.2 |
| $ | — |
| $ | 31.6 |
|
Receivables |
|
| 343.1 |
|
| 192.5 |
|
| 0.4 |
|
| — |
|
| 536.0 |
|
Inventories, at lower of cost or market |
|
| 98.6 |
|
| 326.6 |
|
| — |
|
| — |
|
| 425.2 |
|
Prepayments and other current assets |
|
| 50.6 |
|
| 36.6 |
|
| 1.0 |
|
| — |
|
| 88.2 |
|
Current assets of discontinued operations |
|
| — |
|
| 17.3 |
|
| — |
|
| — |
|
| 17.3 |
|
|
|
|
|
|
|
| ||||||||||
Total current assets |
|
| 511.4 |
|
| 585.3 |
|
| 1.6 |
|
| — |
|
| 1,098.3 |
|
|
|
|
|
|
|
| ||||||||||
Property and Equipment, net |
|
| 367.1 |
|
| 700.5 |
|
| 2.3 |
|
| — |
|
| 1,069.9 |
|
Goodwill |
|
| 849.9 |
|
| 448.9 |
|
| — |
|
| — |
|
| 1,298.8 |
|
Intercompany Receivable |
|
| 2,317.9 |
|
| 105.6 |
|
| — |
|
| (2,423.5 | ) |
| — |
|
Investment in Subsidiaries |
|
| — |
|
| — |
|
| 2,337.4 |
|
| (2,337.4 | ) |
| — |
|
Other Intangible Assets |
|
| 179.5 |
|
| 61.3 |
|
| — |
|
| — |
|
| 240.8 |
|
Other Assets |
|
| 196.8 |
|
| 96.9 |
|
| 2.5 |
|
| — |
|
| 296.2 |
|
Noncurrent Assets of Discontinued Operations |
|
| — |
|
| 255.3 |
|
| — |
|
| — |
|
| 255.3 |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 4,422.6 |
| $ | 2,253.8 |
| $ | 2,343.8 |
| $ | (4,760.9 | ) | $ | 4,259.3 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term borrowings |
| $ | 38.4 |
| $ | 1.1 |
| $ | — |
| $ | — |
| $ | 39.5 |
|
Accounts payable |
|
| 352.3 |
|
| 101.4 |
|
| 32.5 |
|
| — |
|
| 486.2 |
|
Accrued expenses and other liabilities |
|
| 508.9 |
|
| 198.2 |
|
| 16.7 |
|
| — |
|
| 723.8 |
|
Current liabilities of discontinued operations |
|
| — |
|
| 54.1 |
|
| — |
|
| — |
|
| 54.1 |
|
|
|
|
|
|
|
| ||||||||||
Total current liabilities |
|
| 899.6 |
|
| 354.8 |
|
| 49.2 |
|
| — |
|
| 1,303.6 |
|
|
|
|
|
|
|
| ||||||||||
Long-Term Borrowings |
|
| 1,828.8 |
|
| 6.8 |
|
| — |
|
| — |
|
| 1,835.6 |
|
Deferred Income Taxes and Other Noncurrent Liabilities |
|
| 146.1 |
|
| 80.2 |
|
| 28.0 |
|
| — |
|
| 254.3 |
|
Noncurrent Liabilities of Discontinued Operations |
|
| — |
|
| 7.7 |
|
| — |
|
| — |
|
| 7.7 |
|
Intercompany Payable |
|
| 942.5 |
|
| 72.5 |
|
| 1,408.5 |
|
| (2,423.5 | ) |
| — |
|
Shareholders’ Equity |
|
| 605.6 |
|
| 1,731.8 |
|
| 858.1 |
|
| (2,337.4 | ) |
| 858.1 |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 4,422.6 |
| $ | 2,253.8 |
| $ | 2,343.8 |
| $ | (4,760.9 | ) | $ | 4,259.3 |
|
|
|
|
|
|
|
|
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the three months ended June 27, 2003
(In Millions)
|
| ARAMARK |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 1,650.8 |
| $ | 689.8 |
| $ | — |
| $ | — |
| $ | 2,340.6 |
|
Equity in Net Income of Subsidiaries |
|
| — |
|
| — |
|
| 89.3 |
|
| (89.3 | ) |
| — |
|
Management Fee Income |
|
| — |
|
| — |
|
| 7.0 |
|
| (7.0 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 1,650.8 |
|
| 689.8 |
|
| 96.3 |
|
| (96.3 | ) |
| 2,340.6 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided |
|
| 1,543.5 |
|
| 582.2 |
|
| — |
|
| (6.9 | ) |
| 2,118.8 |
|
Depreciation and amortization |
|
| 37.7 |
|
| 28.4 |
|
| — |
|
| 0.1 |
|
| 66.2 |
|
Selling and general corporate expenses |
|
| 12.7 |
|
| 7.7 |
|
| 6.8 |
|
| — |
|
| 27.2 |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 1,593.9 |
|
| 618.3 |
|
| 6.8 |
|
| (6.8 | ) |
| 2,212.2 |
|
|
|
|
|
|
|
| ||||||||||
Operating Income |
|
| 56.9 |
|
| 71.5 |
|
| 89.5 |
|
| (89.5 | ) |
| 128.4 |
|
Interest and Other Financing Costs, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 40.4 |
|
| 0.2 |
|
| 0.2 |
|
| — |
|
| 40.8 |
|
Intercompany interest, net |
|
| (8.9 | ) |
| 9.1 |
|
| — |
|
| (0.2 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Interest and Other Financing Costs, net |
|
| 31.5 |
|
| 9.3 |
|
| 0.2 |
|
| (0.2 | ) |
| 40.8 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations before income taxes |
|
| 25.4 |
|
| 62.2 |
|
| 89.3 |
|
| (89.3 | ) |
| 87.6 |
|
Provision for Income Taxes |
|
| 8.7 |
|
| 15.1 |
|
| — |
|
| — |
|
| 23.8 |
|
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations |
|
| 16.7 |
|
| 47.1 |
|
| 89.3 |
|
| (89.3 | ) |
| 63.8 |
|
Income from discontinued operations, net |
|
| — |
|
| 25.5 |
|
| — |
|
| — |
|
| 25.5 |
|
|
|
|
|
|
|
| ||||||||||
Net Income |
| $ | 16.7 |
| $ | 72.6 |
| $ | 89.3 |
| $ | (89.3 | ) | $ | 89.3 |
|
|
|
|
|
|
|
|
15
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 |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 1,441.4 |
| $ | 695.1 |
| $ | — |
| $ | — |
| $ | 2,136.5 |
|
Equity in Net Income of Subsidiaries |
|
| — |
|
| — |
|
| 72.6 |
|
| (72.6 | ) |
| — |
|
Management Fee Income |
|
| — |
|
| — |
|
| 8.3 |
|
| (8.3 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 1,441.4 |
|
| 695.1 |
|
| 80.9 |
|
| (80.9 | ) |
| 2,136.5 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided |
|
| 1,355.8 |
|
| 577.4 |
|
| — |
|
| (9.4 | ) |
| 1,923.8 |
|
Depreciation and amortization |
|
| 30.1 |
|
| 26.5 |
|
| — |
|
| 0.1 |
|
| 56.7 |
|
Selling and general corporate expenses |
|
| 16.5 |
|
| 5.8 |
|
| 6.1 |
|
| 1.6 |
|
| 30.0 |
|
Other income, net |
|
| — |
|
| (7.4 | ) |
| 1.6 |
|
| — |
|
| (5.8 | ) |
|
|
|
|
|
|
| ||||||||||
|
|
| 1,402.4 |
|
| 602.3 |
|
| 7.7 |
|
| (7.7 | ) |
| 2,004.7 |
|
|
|
|
|
|
|
| ||||||||||
Operating income |
|
| 39.0 |
|
| 92.8 |
|
| 73.2 |
|
| (73.2 | ) |
| 131.8 |
|
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 from continuing operations before income taxes |
|
| 10.7 |
|
| 88.1 |
|
| 72.6 |
|
| (72.6 | ) |
| 98.8 |
|
Provision for Income Taxes |
|
| 3.8 |
|
| 29.7 |
|
| — |
|
| — |
|
| 33.5 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations |
|
| 6.9 |
|
| 58.4 |
|
| 72.6 |
|
| (72.6 | ) |
| 65.3 |
|
Income from discontinued operations, net |
|
| — |
|
| 7.3 |
|
| — |
|
| — |
|
| 7.3 |
|
|
|
|
|
|
|
| ||||||||||
Net Income |
| $ | 6.9 |
| $ | 65.7 |
| $ | 72.6 |
| $ | (72.6 | ) | $ | 72.6 |
|
|
|
|
|
|
|
|
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the nine months ended June 27, 2003
(In Millions)
|
| ARAMARK |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 4,998.9 |
| $ | 1,860.9 |
| $ | — |
| $ | — |
| $ | 6,859.8 |
|
Equity in Net Income of Subsidiaries |
|
| — |
|
| — |
|
| 195.8 |
|
| (195.8 | ) |
| — |
|
Management Fee Income |
|
| — |
|
| — |
|
| 22.7 |
|
| (22.7 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 4,998.9 |
|
| 1,860.9 |
|
| 218.5 |
|
| (218.5 | ) |
| 6,859.8 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided |
|
| 4,662.2 |
|
| 1,588.4 |
|
| — |
|
| (22.3 | ) |
| 6,228.3 |
|
Depreciation and amortization |
|
| 108.6 |
|
| 83.8 |
|
| — |
|
| 0.2 |
|
| 192.6 |
|
Selling and general corporate expenses |
|
| 41.9 |
|
| 22.6 |
|
| 21.9 |
|
| 0.2 |
|
| 86.6 |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 4,812.7 |
|
| 1,694.8 |
|
| 21.9 |
|
| (21.9 | ) |
| 6,507.5 |
|
|
|
|
|
|
|
| ||||||||||
Operating Income |
|
| 186.2 |
|
| 166.1 |
|
| 196.6 |
|
| (196.6 | ) |
| 352.3 |
|
Interest and Other Financing Costs, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 109.4 |
|
| 0.8 |
|
| 0.8 |
|
| — |
|
| 111.0 |
|
Intercompany interest, net |
|
| (26.7 | ) |
| 27.5 |
|
| — |
|
| (0.8 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Interest and Other Financing Costs, net |
|
| 82.7 |
|
| 28.3 |
|
| 0.8 |
|
| (0.8 | ) |
| 111.0 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations before income taxes |
|
| 103.5 |
|
| 137.8 |
|
| 195.8 |
|
| (195.8 | ) |
| 241.3 |
|
Provision for Income Taxes |
|
| 36.1 |
|
| 45.1 |
|
| — |
|
| — |
|
| 81.2 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations |
|
| 67.4 |
|
| 92.7 |
|
| 195.8 |
|
| (195.8 | ) |
| 160.1 |
|
Income from discontinued operations, net |
|
| — |
|
| 35.7 |
|
| — |
|
| — |
|
| 35.7 |
|
|
|
|
|
|
|
| ||||||||||
Net Income |
| $ | 67.4 |
| $ | 128.4 |
| $ | 195.8 |
| $ | (195.8 | ) | $ | 195.8 |
|
|
|
|
|
|
|
|
17
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 |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 4,331.9 |
| $ | 1,843.2 |
| $ | — |
| $ | — |
| $ | 6,175.1 |
|
Equity in Net Income of Subsidiaries |
|
| — |
|
| — |
|
| 188.4 |
|
| (188.4 | ) |
| — |
|
Management Fee Income |
|
| — |
|
| — |
|
| 26.0 |
|
| (26.0 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
|
|
| 4,331.9 |
|
| 1,843.2 |
|
| 214.4 |
|
| (214.4 | ) |
| 6,175.1 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services provided |
|
| 4,058.9 |
|
| 1,560.5 |
|
| — |
|
| (25.3 | ) |
| 5,594.1 |
|
Depreciation and amortization |
|
| 91.5 |
|
| 78.6 |
|
| — |
|
| 0.4 |
|
| 170.5 |
|
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 | ) |
|
|
|
|
|
|
| ||||||||||
|
|
| 4,155.7 |
|
| 1,651.5 |
|
| 23.4 |
|
| (23.4 | ) |
| 5,807.2 |
|
|
|
|
|
|
|
| ||||||||||
Operating income |
|
| 176.2 |
|
| 191.7 |
|
| 191.0 |
|
| (191.0 | ) |
| 367.9 |
|
Interest and Other Financing Costs, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| 101.0 |
|
| — |
|
| 2.6 |
|
| — |
|
| 103.6 |
|
Intercompany interest, net |
|
| (12.2 | ) |
| 14.8 |
|
| — |
|
| (2.6 | ) |
| — |
|
|
|
|
|
|
|
| ||||||||||
Interest and Other Financing Costs, net |
|
| 88.8 |
|
| 14.8 |
|
| 2.6 |
|
| (2.6 | ) |
| 103.6 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations before income taxes |
|
| 87.4 |
|
| 176.9 |
|
| 188.4 |
|
| (188.4 | ) |
| 264.3 |
|
Provision for Income Taxes |
|
| 32.6 |
|
| 61.4 |
|
| — |
|
| — |
|
| 94.0 |
|
|
|
|
|
|
|
| ||||||||||
Income from continuing operations |
|
| 54.8 |
|
| 115.5 |
|
| 188.4 |
|
| (188.4 | ) |
| 170.3 |
|
Income from discontinued operations, net |
|
| — |
|
| 18.1 |
|
| — |
|
| — |
|
| 18.1 |
|
|
|
|
|
|
|
| ||||||||||
Net Income |
| $ | 54.8 |
| $ | 133.6 |
| $ | 188.4 |
| $ | (188.4 | ) | $ | 188.4 |
|
|
|
|
|
|
|
|
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the nine months ended June 27, 2003
(In Millions)
|
| ARAMARK |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Net cash provided by (used in) operating activities from continuing operations |
| $ | 53.9 |
| $ | 196.0 |
| $ | (25.8 | ) | $ | — |
| $ | 224.1 |
|
Cash flows from investing activities from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (97.5 | ) |
| (83.0 | ) |
| (0.2 | ) |
| — |
|
| (180.7 | ) |
Disposals of property and equipment |
|
| 13.8 |
|
| 4.1 |
|
| — |
|
| — |
|
| 17.9 |
|
Acquisition of certain businesses, net of cash acquired |
|
| (173.5 | ) |
| (28.7 | ) |
| — |
|
| — |
|
| (202.2 | ) |
Divestiture of certain businesses |
|
| — |
|
| 248.1 |
|
| — |
|
| — |
|
| 248.1 |
|
Other investing activities |
|
| (8.7 | ) |
| (1.9 | ) |
| — |
|
| — |
|
| (10.6 | ) |
|
|
|
|
|
|
| ||||||||||
Net cash used in investing activities from continuing operations |
|
| (265.9 | ) |
| 138.6 |
|
| (0.2 | ) |
| — |
|
| (127.5 | ) |
|
|
|
|
|
|
| ||||||||||
Cash flows from financing activities from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from additional long-term borrowings |
|
| 259.3 |
|
| 0.9 |
|
| — |
|
| — |
|
| 260.2 |
|
Payment of long-term borrowings |
|
| (212.5 | ) |
| (5.1 | ) |
| — |
|
| — |
|
| (217.6 | ) |
Repurchase of stock |
|
| — |
|
| — |
|
| (168.6 | ) |
| — |
|
| (168.6 | ) |
Proceeds from issuance of common stock |
|
| — |
|
| — |
|
| 20.6 |
|
| — |
|
| 20.6 |
|
Other financing activities |
|
| (0.7 | ) |
| — |
|
| 3.0 |
|
| — |
|
| 2.3 |
|
Change in intercompany, net |
|
| 175.7 |
|
| (346.6 | ) |
| 170.9 |
|
| — |
|
| — |
|
|
|
|
|
|
|
| ||||||||||
Net cash provided by (used in) financing activities from continuing operations |
|
| 221.8 |
|
| (350.8 | ) |
| 25.9 |
|
| — |
|
| (103.1 | ) |
|
|
|
|
|
|
| ||||||||||
Net cash provided by discontinued operations |
|
| — |
|
| 14.7 |
|
| — |
|
| — |
|
| 14.7 |
|
Increase (decrease) in cash and cash equivalents |
|
| 9.8 |
|
| (1.5 | ) |
| (0.1 | ) |
| — |
|
| 8.2 |
|
Cash and cash equivalents, beginning of period |
|
| 19.1 |
|
| 12.3 |
| �� | 0.2 |
|
| — |
|
| 31.6 |
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents, end of period |
| $ | 28.9 |
| $ | 10.8 |
| $ | 0.1 |
| $ | — |
| $ | 39.8 |
|
|
|
|
|
|
|
|
19
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 |
| Other |
| ARAMARK |
| Eliminations |
| Consolidated |
| |||||
|
|
|
|
|
|
| ||||||||||
Net cash provided by (used in) operating activities from continuing operations |
| $ | 192.7 |
| $ | 176.7 |
| $ | (34.3 | ) | $ | — |
| $ | 335.1 |
|
Cash flows from investing activities from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (67.5 | ) |
| (74.8 | ) |
| — |
|
| — |
|
| (142.3 | ) |
Disposals of property and equipment |
|
| 8.7 |
|
| (0.6 | ) |
| — |
|
| — |
|
| 8.1 |
|
Proceeds from sale of investments |
|
| 68.8 |
|
| 8.2 |
|
| — |
|
| — |
|
| 77.0 |
|
Divestiture of certain businesses |
|
| 2.5 |
|
| 1.7 |
|
| — |
|
| — |
|
| 4.2 |
|
Acquisition of certain businesses, net of cash acquired |
|
| (843.6 | ) |
| (21.9 | ) |
| — |
|
| — |
|
| (865.5 | ) |
Other investing activities |
|
| (9.5 | ) |
| 25.4 |
|
| (0.3 | ) |
| — |
|
| 15.6 |
|
|
|
|
|
|
|
| ||||||||||
Net cash used in investing activities from continuing operations |
|
| (840.6 | ) |
| (62.0 | ) |
| (0.3 | ) |
| — |
|
| (902.9 | ) |
|
|
|
|
|
|
| ||||||||||
Cash flows from financing activities from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from additional long-term borrowings |
|
| 921.2 |
|
| — |
|
| — |
|
| — |
|
| 921.2 |
|
Payment of long-term borrowings |
|
| (685.1 | ) |
| (2.4 | ) |
| — |
|
| — |
|
| (687.5 | ) |
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 from continuing operations |
|
| 651.7 |
|
| (136.2 | ) |
| 34.5 |
|
| — |
|
| 550.0 |
|
|
|
|
|
|
|
| ||||||||||
Net cash provided by discontinued operations |
|
| — |
|
| 29.4 |
|
| — |
|
| — |
|
| 29.4 |
|
Increase (decrease) in cash and cash equivalents |
|
| 3.8 |
|
| 7.9 |
|
| (0.1 | ) |
| — |
|
| 11.6 |
|
Cash and cash equivalents, beginning of period |
|
| 17.3 |
|
| 7.1 |
|
| 0.4 |
|
| — |
|
| 24.8 |
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents, end of period |
| $ | 21.1 |
| $ | 15.0 |
| $ | 0.3 |
| $ | — |
| $ | 36.4 |
|
|
|
|
|
|
|
|
20
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
The following discussion and analysis of our results of operations and financial condition for the three and nine-month periods ended June 27, 2003 and June 28, 2002 should be read in conjunction with the quarterly financial statements and notes thereto contained in this Form 10-Q and our audited consolidated financial statements, and the notes to those statements, for the fiscal year ended September 27, 2002. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations, intentions and beliefs. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors, including those set forth under the Special Note About Forward-Looking Statements and elsewhere in this quarterly report on Form 10-Q. In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in Exhibit(s) 99.1 to this quarterly report on Form 10-Q, and is incorporated by reference herein.
CRITICAL ACCOUNTING ESTIMATES
The condensed 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 our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. As described in such notes, the Company recognizes sales in the period in which services are provided pursuant to the terms of our contractual relationships with our clients. Direct marketing segment sales are recognized upon shipment.
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 that 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 and insurers.
21
Litigation and Claims
• Interpretation of contractual rights and obligations.
• Government regulatory initiatives, investigations, 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 CONTINUING OPERATIONS
On May 9, 2003, the Company closed the sale of its Educational Resources segment (see Note 2). Accordingly, as required by generally accepted accounting principles, fiscal 2003 third quarter and year-to-date operating results, along with the comparable prior year periods, for this business are reported as “discontinued operations.” The following tables present our sales and operating income from continuing operations, and related percentages attributable to each operating segment for the three and nine month periods ended June 27, 2003 and June 28, 2002. The discussion that follows compares fiscal 2003 results of continuing operations to the fiscal 2002 results of continuing operations.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
|
|
| ||||||||||||||||||
|
| June 27, 2003 |
| June 28, 2002 |
| June 27, 2003 |
| June 28, 2002 |
| ||||||||||||
|
|
|
|
|
| ||||||||||||||||
Sales by Reportable Segment |
| $ |
| % |
| $ |
| % |
| $ |
| % |
| $ |
| % |
| ||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| (dollars in millions) |
| ||||||||||||||||||
Food & Support Services - United States |
| $ | 1,623.5 |
| 69 | % | $ | 1,488.1 |
| 69 | % | $ | 4,712.8 |
| 69 | % | $ | 4,195.9 |
| 68 | % |
Food & Support Services - International |
|
| 362.7 |
| 15 | % |
| 298.9 |
| 14 | % |
| 1,052.3 |
| 15 | % |
| 894.7 |
| 15 | % |
Uniform and Career Apparel - Rental |
|
| 253.5 |
| 11 | % |
| 250.5 |
| 12 | % |
| 759.3 |
| 11 | % |
| 752.6 |
| 12 | % |
Uniform and Career Apparel - Direct Marketing |
|
| 100.9 |
| 5 | % |
| 99.0 |
| 5 | % |
| 335.4 |
| 5 | % |
| 331.9 |
| 5 | % |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| $ | 2,340.6 |
| 100 | % | $ | 2,136.5 |
| 100 | % | $ | 6,859.8 |
| 100 | % | $ | 6,175.1 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
|
|
| ||||||||||||||||||
|
| June 27, 2003 |
| June 28, 2002 |
| June 27, 2003 |
| June 28, 2002 |
| ||||||||||||
|
|
|
|
|
| ||||||||||||||||
Operating Income by Reportable Segment |
| $ |
| % |
| $ |
| % |
| $ |
| % |
| $ |
| % |
| ||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| (dollars in millions) |
| ||||||||||||||||||
Food & Support Services - United States |
| $ | 85.9 |
| 67 | % | $ | 86.7 |
| 66 | % | $ | 227.2 |
| 65 | % | $ | 204.9 |
| 56 | % |
Food & Support Services - International |
|
| 16.2 |
| 13 | % |
| 11.8 |
| 9 | % |
| 47.3 |
| 13 | % |
| 34.5 |
| 9 | % |
Uniform and Career Apparel - Rental |
|
| 28.9 |
| 22 | % |
| 30.1 |
| 23 | % |
| 80.9 |
| 23 | % |
| 89.8 |
| 24 | % |
Uniform and Career Apparel - Direct Marketing |
|
| 4.2 |
| 3 | % |
| 3.9 |
| 3 | % |
| 18.8 |
| 5 | % |
| 18.6 |
| 5 | % |
Corporate and Other |
|
| (6.7 | ) | -5 | % |
| (6.5 | ) | -5 | % |
| (21.9 | ) | -6 | % |
| (23.6 | ) | -6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
| 128.5 |
| 100 | % |
| 126.0 |
| 96 | % |
| 352.3 |
| 100 | % |
| 324.2 |
| 88 | % |
Other Income |
|
| 0.0 |
| 0 | % |
| 5.8 |
| 4 | % |
| 0.0 |
| 0 | % |
| 43.7 |
| 12 | % |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| $ | 128.5 |
| 100 | % | $ | 131.8 |
| 100 | % | $ | 352.3 |
| 100 | % | $ | 367.9 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
22
Consolidated Overview
Sales of $2.3 billion for the third quarter and $6.9 billion for the nine-month period increased 10% and 11%, respectively, over the prior year periods; with acquisitions and the favorable impact of foreign currency translation contributing 8% and 9% for the three and nine-month periods. The Food and Support Services - United States segment experienced high single digit sales growth in third quarter, while sales in the Uniform and Career Apparel Rental and Direct Marketing segments increased slightly. The Food and Support Services – International segment reported double-digit sales growth, which was favorably affected by the impact of foreign currency translation. For the nine-month period, the Food and Support Services segments experienced double-digit sales growth, while sales in the Uniform and Career Apparel Rental and Direct Marketing segments were essentially equal with the prior year period. Operating income for the third quarter was $128.5 million and $352.3 million for the nine-month period, a decrease of 3% and 4%, respectively, from the fiscal 2002 periods. Fiscal 2002 operating income in the third quarter included a $5.8 million pre-tax net gain resulting principally from the sale of a residual investment in a previously divested business, and in the fiscal 2002 nine-month period also included a pretax gain of $37.9 million from the sale of our ownership interests in the Boston Red Sox Baseball Club (presented as “Other Income” -see Note 13 to the condensed consolidated financial statements). Excluding other income, 2003 operating income increased 2% and 9% for the three and nine-month periods, with approximately 3% and 7% due to the impact of acquisitions and foreign currency translation. Continuing weak economic conditions and sluggish employment levels have continued to adversely affect all operating segments. Year-to-date operating income margin of 5.1% was lower than the prior year (5.2% - excluding other income), with margin improvements in the Food and Support Services – International segment being offset by margin declines in the Uniform and Career Apparel – Rental segment and softness in the Sports and Entertainment sector of the Food and Support Services – United States segment.
Interest and other financing costs, net for the three and nine-month periods was $40.8 million and $111 million, respectively, an increase of 24% and 7% over the prior year periods due to a debt extinguishment charge of $7.7 million related to the tender offer for the Company’s 6.75% Notes and the retirement of a term loan (see Note 14), with the impact of lower interest rates being largely offset by increased average borrowing levels. The effective income tax rate on income from continuing operations for the nine-month period was 33.7%, compared to 35.6% for the prior year nine-month period. The Company reduced its tax provision in the third quarter of fiscal 2003 by approximately $8.4 million, based on the settlement of certain open tax years (see Note 15). Also, the fiscal 2002 effective tax rate for the nine-month period was favorably impacted by a permanent book and tax basis difference on the investment sale noted above.
Income from continuing operations for the three and nine-month periods was $63.9 million and $160.1 million, compared to $65.3 million and $170.3 million in the respective prior year periods. The fiscal 2003 three and nine-month periods include the impact of the debt extinguishment ($4.7 million after-tax charge) and the $8.4 million tax adjustment noted above, and fiscal 2002 amounts include the divestiture gains noted above (after-tax gain of $6.4 million and $30.8 million for the three and nine-month periods, respectively). Net income for the three and nine-month periods was $89.3 million and $195.8 million, compared to $72.6 million and $188.4 million in the respective prior year periods. Net income for the fiscal 2003 three and nine-month periods includes the after-tax gain of $23.6 million related to the divestiture of the Educational Resources business.
Fiscal 2003 third quarter diluted earnings per share from continuing operations was $0.33 per share compared to $0.32 per share in fiscal 2002. The debt extinguishment loss and the tax provision adjustment resulted in a net increase of $0.02 per share in the fiscal 2003 third quarter. The divestiture gain increased earnings $0.03 per share in the fiscal 2002 third quarter. Diluted earnings per share (which includes discontinued operations) was $0.45 per share in fiscal 2003 compared to $0.35 per share in fiscal 2002. The impact of the gain on the sale of the Educational Resources business was $0.12 per share. The weighted average share count for the three-month period was 196 million shares and 205 million shares in fiscal 2003 and 2002, respectively.
For the nine-month period, diluted earnings per share from continuing operations was $0.81 per share compared to $0.85 per share in fiscal 2002. The debt extinguishment loss and the tax provision adjustment increased per share earnings by $0.02 in the fiscal 2003 period, while the divestiture and Red Sox gains increased per share earnings $0.15 in the fiscal 2002 period. Diluted earnings per share (which includes discontinued operations) was $0.99 per share in fiscal 2003 compared to $0.94 per share in fiscal 2002. The weighted average share count for the nine-month period was 198 million shares and 201 million shares in fiscal 2003 and 2002, respectively.
23
Segment Results
As noted above, operating results of the Educational Resources business are reported as discontinued operations and are not included in segment results. The following tables present a fiscal 2003/2002 comparison of reportable segment sales and operating income together with the amount of and percentage change between periods.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||||
|
|
|
| ||||||||||||||||||||
|
| June |
| Change |
| June |
| Change |
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||
Sales by Reportable Segment |
| 2003 |
| 2002 |
| $ |
| % |
| 2003 |
| 2002 |
| $ |
| % |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| (dollars in millions) |
| ||||||||||||||||||||
Food & Support Services - United States |
| $ | 1,623.5 |
| $ | 1,488.1 |
| $ | 135.4 |
| 9 | % | $ | 4,712.8 |
| $ | 4,195.9 |
| $ | 516.9 |
| 12 | % |
Food & Support Services - International |
|
| 362.7 |
|
| 298.9 |
|
| 63.8 |
| 21 | % |
| 1,052.3 |
|
| 894.7 |
|
| 157.6 |
| 18 | % |
Uniform and Career Apparel - Rental |
|
| 253.5 |
|
| 250.5 |
|
| 3.0 |
| 1 | % |
| 759.3 |
|
| 752.6 |
|
| 6.7 |
| 1 | % |
Uniform and Career Apparel - Direct Marketing |
|
| 100.9 |
|
| 99.0 |
|
| 1.9 |
| 2 | % |
| 335.4 |
|
| 331.9 |
|
| 3.5 |
| 1 | % |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| $ | 2,340.6 |
| $ | 2,136.5 |
| $ | 204.1 |
| 10 | % | $ | 6,859.8 |
| $ | 6,175.1 |
| $ | 684.7 |
| 11 | % |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||||
|
|
|
| ||||||||||||||||||||
|
| June |
| Change |
| June |
| Change |
| ||||||||||||||
|
|
|
|
|
| ||||||||||||||||||
Operating Income by Reportable Segment |
| 2003 |
| 2002 |
| $ |
| % |
| 2003 |
| 2002 |
| $ |
| % |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| (dollars in millions) |
| ||||||||||||||||||||
Food & Support Services - United States |
| $ | 85.9 |
| $ | 86.7 |
| $ | (0.8 | ) | -1 | % | $ | 227.2 |
| $ | 204.9 |
| $ | 22.3 |
| 11 | % |
Food & Support Services - International |
|
| 16.2 |
|
| 11.8 |
|
| 4.4 |
| 37 | % |
| 47.3 |
|
| 34.5 |
|
| 12.8 |
| 37 | % |
Uniform and Career Apparel - Rental |
|
| 28.9 |
|
| 30.1 |
|
| (1.2 | ) | -4 | % |
| 80.9 |
|
| 89.8 |
|
| (8.9 | ) | -10 | % |
Uniform and Career Apparel - Direct Marketing |
|
| 4.2 |
|
| 3.9 |
|
| 0.3 |
| 9 | % |
| 18.8 |
|
| 18.6 |
|
| 0.2 |
| 1 | % |
Corporate and Other |
|
| (6.7 | ) |
| (6.5 | ) |
| (0.2 | ) | -3 | % |
| (21.9 | ) |
| (23.6 | ) |
| 1.7 |
| 7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
| 128.5 |
|
| 126.0 |
|
| 2.5 |
| 2 | % |
| 352.3 |
|
| 324.2 |
|
| 28.1 |
| 9 | % |
Other Income |
|
| 0.0 |
|
| 5.8 |
|
| (5.8 | ) | — |
|
| 0.0 |
|
| 43.7 |
|
| (43.7 | ) | — |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| $ | 128.5 |
| $ | 131.8 |
| $ | (3.3 | ) | -3 | % | $ | 352.3 |
| $ | 367.9 |
| $ | (15.6 | ) | -4 | % |
|
|
|
|
|
|
|
|
|
|
Food and Support Services—United States Segment
Food and Support Services—United States segment sales for the three and nine-month periods increased 9% and 12% over the prior year periods due to acquisitions (approximately 7% and 10%, respectively), net new accounts (approximately 2% and 1%, respectively) and increased volume (approximately 1% for the nine month period). Sales growth for the third quarter in the Healthcare/Corrections sector continued in the high single digits and sales growth in the Education sector was in the mid-single digits due primarily to increased volume at existing accounts. Continuing weak employment levels and the sluggish economy have continued to adversely impact sales growth in our economically sensitive businesses, with third quarter sales down about 2% in the Business Services sector (excluding acquisitions), which, however, compared favorably to the 7% decline in the second quarter. The Facilities Services sector sales growth (excluding acquisitions) continued in the low single digits during the current quarter. Sales in the Sports and Entertainment sector were about equal with the prior year, with increases due to additional NHL and NBA playoff games offset by fewer Major League Baseball games in the fiscal 2003 third quarter and lower average attendance, and significantly decreased visitations at National parks. Park visitation was reported down almost 15% from the prior year at several popular locations.
Segment operating income for the third quarter decreased 1% compared to the prior year period which included insurance proceeds of approximately $3 million related to our World Trade Center claim. For the third quarter, strong performance in the Healthcare/Corrections and Education sectors, continued realization of synergies from the ServiceMaster acquisition and effective cost controls in the Business Services sector, were offset by significantly reduced profitability in the Sports and Entertainment sector, due to continued softness in the tourist and convention center businesses, which continued to be adversely affected by lower visitation and spending levels, as well as fewer games and lower average attendance at Major League Baseball games. Operating income for the nine-month period of fiscal 2003 increased 11% compared to the prior year period, with acquisitions contributing approximately 7%. Included in fiscal 2003 results for the nine-month period are approximately $6 million of business interruption insurance proceeds related to our World Trade Center claim and approximately $6 million of costs related to a company-wide front-line managers meeting to launch our “Mission One” initiatives, both incurred in the second quarter of fiscal 2003.
24
Food and Support Services—International Segment
Sales in the Food and Support Services—International segment for the three and nine-month periods increased 21% and 18% over the prior year. Excluding the impact of foreign currency translation, sales increased 6% for both the three and nine-month periods due to acquisitions (approximately 1% and 2% respectively) and net new accounts (approximately 5% and 4%, respectively). Sales growth in the United Kingdom was in the high single-digits and sales growth in Spain was in the low double-digits. Sales growth in Germany was in the low single-digits and sales in Canada, excluding acquisitions, were equal with the prior year period, reflective of the continuing economic weakness in these countries.
Operating income in this segment for both the three and nine-month periods increased 37% compared to the prior year periods. Excluding the impact of foreign currency translation, segment operating income for the three and nine-month periods increased 19% and 21%, with acquisitions contributing approximately 4% and 6%, respectively, of the increase. Base business growth rates were 15% for both the three and nine-month periods, driven principally by strong performances in Germany and Spain.
Uniform and Career Apparel—Rental Segment
Uniform and Career Apparel—Rental segment sales increased 1% for both the three and nine-month periods compared to the prior year due to acquisitions. Sales increases from net new business have been offset by reduced volume at existing accounts. Sales growth in this segment continues to be constrained by soft economic conditions and persistent low employment levels.
Operating income in this segment for the three and nine-month periods decreased 4% and 10% from the prior year periods. Net new sales growth and modest price increases were substantially offset by continued contraction in the base business, and while cost control and operational improvement initiatives mitigated to a large extent normal operating cost increases, increased medical and fuel costs and a very competitive business environment put continued downward pressure on margins compared to the prior year periods.
Uniform and Career Apparel—Direct Marketing Segment
Uniform and Career Apparel—Direct Marketing segment sales for the three and nine-month periods increased 2% and 1%, respectively, over the prior year periods, with the increase from an acquisition largely offset by a decrease in base business, particularly in work clothing products where sales continued to be constrained by sluggish economic conditions. Segment operating income for the three and nine-month periods increased 9% and 1%, respectively, from the prior year periods due primarily to the impact of the acquisition and a higher margin sales mix.
Corporate and Other
Corporate and other expenses, those administrative expenses not allocated to the business segments, were $6.7 million and $21.9 million for the three and nine-month periods of fiscal 2003, respectively, compared to $6.5 million and $23.6 million for the prior year periods. The fiscal 2003 nine-month period includes a gain of $1.4 million related to a residual payment from a previously divested entity.
Results of Discontinued Operations
As discussed above, on May 9, 2003 the Company closed the sale of its Educational Resources business to Knowledge Universe Corporation for $250 million in cash, subject to certain post closing adjustments. The proceeds were used to repay outstanding borrowings and the sale resulted in a net gain of $23.6 million. The results of this business are reflected in the accompanying condensed consolidated financial statements as discontinued operations for all periods presented in accordance with generally accepted accounting principles. Sales, operating income and income from discontinued operations for fiscal 2003 (excluding the net gain) through the transaction closing date and for fiscal 2002 are as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
(In millions) |
| June 27, 2003 |
| June 28, 2002 |
| June 27, 2003 |
| June 28, 2002 |
| ||||
|
|
|
|
|
| ||||||||
Sales |
| $ | 37.1 |
| $ | 119.4 |
| $ | 264.3 |
| $ | 348.7 |
|
Operating income |
|
| 3.1 |
|
| 12.0 |
|
| 20.2 |
|
| 29.8 |
|
Income from discontinued operations |
| $ | 1.9 |
| $ | 7.3 |
| $ | 12.1 |
| $ | 18.1 |
|
25
OUTLOOK
As discussed above, the continuing weak economy and persistent low employment levels have had a negative effect on sales growth and operating results in our economically sensitive businesses and we expect this trend to continue into the fourth quarter of fiscal 2003. Difficult economic conditions are expected to affect results in both the Uniform and Career Apparel segments and in the Sports and Entertainment sector, particularly in the tourist and convention center business, and possibly at our Major League Baseball venues, based on continuing reduced attendance levels.
During the fourth quarter of fiscal 2002, certain of the Company’s insurance coverages were renewed with premium increases. Fiscal 2004 premiums for the Company’s casualty and general liability coverage will be renegotiated during the fourth quarter of fiscal 2003, and we currently expect further premium increases and that certain coverages, such as terrorist acts coverage, will be 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. Those statements reflect the Educational Resources business as a discontinued operation.
Cash provided by operating activities from continuing operations for the nine-month period was $224.1 million in the fiscal 2003 period compared to $335.0 million in fiscal 2002, a decrease of $110.9 million. The reduction in the accounts receivable sale facility (see Note 9) earlier this year resulted in approximately $75.0 million of the decrease, as the level of receivable balances sold decreased during the current period. The remainder of the decrease resulted from higher working capital requirements, due in part to increased receivable balances and the timing of supplier and income tax payments, offset by higher income and non cash charges in the current period. Total debt increased $69.5 million from September 27, 2002, due primarily to the acquisitions of CTS and Fine Host (see below) and common stock repurchases, less repayments from the proceeds of the Educational Resources sale noted above.
On September 30, 2002, the Company completed the acquisition of the Clinical Technology Services (CTS) business from Premier, Inc. for approximately $100 million in cash. Additionally, in mid-December 2002, the Company closed the acquisition of Fine Host Corporation, a food service management company, for approximately $100 million. The Company funded the cash portion of these acquisitions through borrowings under the revolving credit facility.
During the third quarter of fiscal 2003, the Company completed a tender offer for its 6-3/4% guaranteed notes due August 1, 2004, issued by ARAMARK Services, Inc. and guaranteed by ARAMARK Corporation. The total cash consideration paid for the purchase of the notes, including accrued interest, was $102 million. Additionally, during the third quarter of fiscal 2003, the Company retired a $45 million term loan due March 2005. These two transactions resulted in an extinguishment charge of $7.7 million, which is included in “Interest and Other Financing Costs, net,” and were financed through borrowings under the Company’s $1 billion bank credit facility.
During the second quarter of fiscal 2003, a Canadian subsidiary of the Company entered into a non-revolving credit facility in the amount of C$25 million, which matures in September 2007. Interest on the facility is based on the Canadian Bankers Acceptance Rate (plus a spread of 1.50%), Canadian Prime Rate (plus a spread of 0.75%) or LIBOR (plus a spread of 1.50%). Proceeds were used to fund an acquisition in Canada.
During the first quarter of fiscal 2003, a subsidiary of the Company completed a private placement of 30 million GBP and 30 million Euro notes. The notes bear interest based on six-month GBP LIBOR (plus a spread of 2.32%) and six-month EURIBOR (plus a spread of 2.25%), respectively. Proceeds from the private placement were used to repay existing borrowings primarily in the United Kingdom and Germany. The private placement notes mature in November 2007. Also, in October 2002, the Company entered into interest rate swaps, with notional amounts totaling $300 million, to receive fixed (6.375%)/pay variable (six month LIBOR). The swaps mature on February 15, 2008 and are designated as fair-value hedging instruments.
The Company established a Stock Repurchase Program, under which the Board of Directors has approved the use of up to $350 million to repurchase shares of the Company’s common stock. Repurchases are to be made in accordance with applicable securities laws in open market or privately negotiated transactions or otherwise, from time to time, depending on market conditions, and may be discontinued at any time. During the first nine months of fiscal 2003, the Company repurchased approximately 7.6 million shares for $166.1 million, resulting in total repurchases under the authorization of $236.4 million.
26
At July 25, 2003, there was approximately $835 million of unused committed credit availability under our senior revolving credit facility. Additionally, the Company has a shelf registration statement on file with the SEC for the issuance of up to $400 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 27, 2003, there was approximately $145.4 million outstanding in foreign currency borrowings.
The following table summarizes the Company’s future obligations for debt repayments, capital leases, future minimum rental and similar commitments under noncancelable operating leases and other long-term liabilities, as well as contingent obligations related to outstanding letters of credit and guarantees as of September 27, 2002. Other than the increase in debt described above, and the reduction in operating lease commitments as a result of the AER divestiture described in footnote (1) below, since September 27, 2002, there has been no material change in the Company’s future obligations for these obligations.
|
| Payments Due by Period |
| |||||||||||||
|
|
| ||||||||||||||
Contractual Obligations |
| Total |
| Less than |
| 1-3 years |
| 3-5 years |
| After 5 |
| |||||
|
|
|
|
|
|
| ||||||||||
Long-term borrowings |
| $ | 1,870,431 |
| $ | 38,659 |
| $ | 1,035,581 |
| $ | 779,291 |
| $ | 16,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
| 5,136 |
|
| 1,195 |
|
| 2,252 |
|
| 1,116 |
|
| 573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1) |
|
| 806,082 |
|
| 216,251 |
|
| 209,684 |
|
| 130,684 |
|
| 249,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchasing obligations (2) |
|
| 120,301 |
|
| 97,805 |
|
| 22,496 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities reflected on the Registrant’s balance sheet under GAAP (3) |
|
| 85,575 |
|
| — |
|
| 10,519 |
|
| 114 |
|
| 74,942 |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 2,887,525 |
| $ | 353,910 |
| $ | 1,280,532 |
| $ | 911,205 |
| $ | 341,878 |
|
|
|
|
|
|
|
|
|
| Amount of Commitment Expiration per Period |
| |||||||||||||
|
|
| ||||||||||||||
Other Commercial Commitments |
| Total |
| Less than |
| 1-3 |
| 3-5 years |
| Over 5 |
| |||||
|
|
|
|
|
|
| ||||||||||
Letters of credit |
| $ | 32,978 |
| $ | 15,981 |
| $ | 16,997 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees |
|
| 26,803 |
|
| — |
|
| 26,803 |
|
| — |
|
| — |
|
|
|
|
|
|
|
| ||||||||||
|
| $ | 59,781 |
| $ | 15,981 |
| $ | 43,800 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
______________
(1) The operating lease commitments shown above include the following amounts related to the Educational Resources business, which was divested on May 9, 2003:
|
| Payments Due by Period |
| |||||||||||||
|
|
| ||||||||||||||
Contractual Obligations |
| Total |
| Less than |
| 1-3 years |
| 3-5 years |
| After 5 |
| |||||
|
|
|
|
|
|
| ||||||||||
Operating leases |
| $ | 271,709 |
| $ | 49,640 |
| $ | 79,048 |
| $ | 53,619 |
| $ | 89,402 |
|
|
|
|
|
|
|
|
(2) Represents capital commitments in connection with several long-term concession contracts.
(3) Primarily represents certain unfunded employee retirement obligations.
27
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, consolidated 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 up to $200 million. 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 $161.6 million at June 27, 2003, 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.
The Company’s business activities do not include the use of unconsolidated special purpose entities, and there are no significant business transactions that have not been reflected in the accompanying financial statements. ARAMARK may be exposed to liability resulting from the non-performance of certain 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 or relating to the pre-acquisition period. ARAMARK has $25 million of insurance coverage for such exposure with a $5 million retained loss limit. The Company advanced funds to a concession services client which has filed for the equivalent of bankruptcy protection. At June 27, 2003, the client’s reorganization activities were substantially completed, and the carrying value of ARAMARK’s advance has been adjusted. During the second quarter of fiscal 2003, ARAMARK issued a demand, for overdue payment, to an insurance carrier with respect to certain outstanding insured claims. Subsequent to June 27, 2003, proceeds were received in full satisfaction of the claim.
NEW ACCOUNTING PRONOUNCEMENTS
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. Adoption of this pronouncement did not have a material effect on the Company’s financial statements.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” See Note 15.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of this statement (see Note 6). The Company can elect to adopt any of the three transitional recognition provisions of this statement prior to the end of the 2004 fiscal year.
In January 2003, the FASB issued Interpretation Number 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation addresses consolidation by business enterprises of variable interest entities. The interpretation is not expected to have a material effect on the Company’s financial statements.
SPECIAL NOTE ABOUT 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 any future terrorist attacks; increased operating costs; shortages of qualified personnel; currency risks and other risks associated with international markets; risks associated with acquisitions, including acquisition integration costs; our ability to integrate and derive the expected benefits from our recent acquisitions; 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; costs of compliance with governmental regulations; liability associated with noncompliance with governmental regulations, including regulations pertaining to food services and the environment; and seasonality.
28
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 report 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.
ITEM 3. QUANTITATIVE 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 27, 2003, has not materially changed from September 27, 2002 (See Item 7A of the Annual Report on Form 10-K), with the exception of the interest rate swap agreements entered into in connection with the issuance of $300 million of 6.375% notes that mature on February 15, 2008, as described in Note 8 to the condensed consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot proved absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
29
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ARAMARK Corporation’s (the “Company”) annual meeting of stockholders (“2003 Annual Meeting”) was held on February 4, 2003. At the 2003 Annual Meeting, the stockholders voted upon the election of four directors. The results of such vote were as follows:
|
| For |
| Withheld |
| Broker Non-Votes |
|
|
|
|
|
| |||
Name of nominee: |
|
|
|
|
|
|
|
Patricia C. Barron |
| 975,076,450 |
| 1,539,660 |
| N/A |
|
Robert J. Callander |
| 976,508,010 |
| 108,100 |
| N/A |
|
Ronald R. Davenport |
| 976,475,730 |
| 140,380 |
| N/A |
|
Ronald L. Sargent |
| 976,498,010 |
| 118,100 |
| N/A |
|
The terms of the following directors of the Company continued after the 2003 Annual Meeting: Joseph Neubauer, Lawrence T. Babbio, Jr., Leonard S. Coleman, Jr., Thomas H. Kean, James E. Ksansnak, James E. Preston and Karl M. von der Heyden.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) —Exhibits:
3.1 | Amended and Restated Certificate of Incorporation of ARAMARK Corporation. |
|
|
10.1 | Second Amendment to Stock Purchase Agreement, dated May 9, 2003, among Knowledge Schools, Inc., Knowledge Learning Corporation formerly known as Children’s Discovery Centers of America, Inc., ARAMARK Corporation, ARAMARK Organizational Services, Inc. and ARAMARK Educational Resources, Inc. |
|
|
10.2 | Agreement Relating to Employment and Post-Employment Competition with Timothy P. Cost. |
|
|
31.1 | Certification of Joseph Neubauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 | Certification of L. Frederick Sutherland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 | Certification of Joseph Neubauer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 | Certification of L. Frederick Sutherland pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
99.1 | Reconciliation of non-GAAP financial measures. |
|
|
(b) —Reports on Form 8-K:
On May 8, 2003, the Company filed a Form 8-K to furnish a document reflecting financial information adjusted to reflect the Company’s Educational Resources segment as a discontinued operation and a document explaining the Company’s revised earnings per share guidance. On May 8, 2003, the Company filed a second Form 8-K to furnish its earnings press release for the fiscal quarter ended March 28, 2003.
30
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 |
|
|
|
|
|
|
| |
|
|
| John M. Lafferty |
31