- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended September 28, 2001 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
Commission file number: 1-8827
----------------
ARAMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2319139
(I.R.S. Employer identification No.)
(State of Incorporation)
ARAMARK Tower
1101 Market Street
Philadelphia, Pennsylvania 19107
(Address of principal executive offices)
Telephone Number: 215-238-3000
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by nonaffiliates at October
26, 2001: $1.7 billion
Common stock outstanding at October 26, 2001: Class A Common Stock -2,385,438 shares
Class B Common Stock -59,812,405 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2001 annual meeting of
stockholders are incorporated by reference in Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Item 1.
BUSINESS
Overview
We are a leading provider of a broad range of outsourced services to
business, educational, healthcare and governmental institutions and sports,
entertainment and recreational facilities. We have leadership positions in food
and support services, uniform and career apparel services and childcare and
early education. Our strong presence in food service allows us to serve clients
in many of the key industrial countries, whose economies represent over 60% of
world GDP and which continue to experience substantial growth in the
outsourcing services we provide. We plan to continue our growth by capitalizing
on this worldwide outsourcing trend, providing our clients with innovative and
high quality services and by pursuing acquisitions.
Our objective is to be a world leader in managed services by exceeding our
customers' expectations, continuing to grow our business and providing an
environment where exceptional people want to work. In the United States, we are
the second largest food service company, and in most of the other countries in
which we operate, we are among the top three. Our uniform and career apparel
business is the second largest in the United States and provides both rental
and direct marketing services. Our education business is the second largest in
the United States, providing childcare and early education to over 100,000
children. Through our expansive service offerings and geographic presence, our
approximately 200,000 employees serve millions of clients and customers in
17 countries around the world, providing services that are key to the
successful operations of our clients.
The Merger and the Public Offering
On July 17, 2001, ARAMARK Corporation filed with the Securities and Exchange
Commission (SEC) a joint proxy statement/prospectus contained in a Registration
Statement on Form S-4 relating to the proposed merger of ARAMARK Corporation
with ARAMARK Worldwide Corporation (AWC). In the merger, ARAMARK Corporation
will merge with and into its newly formed subsidiary, AWC, and each outstanding
ARAMARK Corporation old Class B and old Class A common share will become two
shares and twenty shares, respectively, of the surviving corporation's Class A
common stock. AWC's name will become ARAMARK Corporation, and the surviving
corporation will succeed to all of the assets, liabilities, rights and
obligations of ARAMARK Corporation. On November 16, 2001, the SEC declared
effective our joint proxy statement/prospectus.
Soon after the merger is approved by our stockholders which is expected to
occur on or about December 10, 2001, subject to market conditions, ARAMARK
Corporation plans to make an initial public offering of new Class B common
stock. In that regard, on July 17, 2001, ARAMARK Corporation also filed with
the SEC a registration statement on Form S-1.
The Stock Buyback
After the initial public offering, we intend to purchase up to 10% in the
aggregate of the outstanding shares of our class A common stock in a stock
buyback, which will consist of a cash tender offer for a portion of our
outstanding shares of class A common stock outstanding after the merger and a
repurchase of shares of our class A common stock from our 401(k) plans.
Acquisition of ServiceMaster Management Services
On October 3, 2001, ARAMARK Corporation signed an agreement to acquire the
management services division of The ServiceMaster Company, which we refer to as
ServiceMaster Management Services. The aggregate consideration for the
transaction is approximately $800 million in cash. The transaction is subject
to
2
customary consents, approvals, conditions and clearances. The transaction has
been cleared under the Hart Scott-Rodino Act of 1976, as amended. ServiceMaster
Management Services provides a complete range of facility management services
to the healthcare, education and business and industry client sectors.
ARAMARK Corporation intends to finance the acquisition of ServiceMaster
Management Services and related expenses in an aggregate of approximately $806
million by borrowing approximately an additional $206 million under its senior
revolving credit facility and $600 million under a new bridge financing
facility with a group of banks arranged by J.P. Morgan Securities Inc. ARAMARK
Corporation expects to repay a portion of the bridge financing with a portion
of the proceeds from the initial public offering.
3
The following diagram provides a brief overview of our business:
[FLOW CHART]
History
Our business traces its history back to the 1930's, when we began providing
vending services to plant employees in the aviation industry in Southern
California. In 1959, our founders, Davre J. Davidson and William S. Fishman
combined their two businesses to form our predecessor company, which became
public in 1960. In the ensuing years, we broadened our service offerings and
expanded our client base while retaining our entrepreneurial character. These
increased service offerings included our uniform services business, acquired in
1977, and education services, acquired in 1980. Our present ownership structure
resulted from a 1984 management buyout. Since 1984, our management and
employees have continued to increase their ownership of the company and,
directly and through our employee benefit plans, currently own approximately
90% of our equity capital.
4
Business Strengths
Leading Provider to Growing Outsourced Services Market
We are a leading provider of a broad range of outsourced services to
business, educational, healthcare, governmental, sports, entertainment and
recreational clients. As a leading provider, we believe we are well positioned
to capitalize on the growth of outsourcing worldwide, which we believe has
outpaced and will continue to outpace overall economic growth. As many
organizations focus on their core activities, they are increasingly outsourcing
support functions to improve the quality and consistency of service, provide
service innovation and increase cost-effectiveness through the economies of
scale achieved by a large service provider. Given the large percentage of these
functions that remain self-operated worldwide, we believe this trend represents
a substantial growth opportunity for us.
We have a top three market position in food and support services in key
developed countries, including the United States, Canada, United Kingdom,
Germany, Spain, Mexico and Korea and, in Japan and Ireland, through ownership
of minority interests in large food service providers. We believe our
capabilities as one of the world's leading providers of outsourced food and
support services and our recognized brand name allow us to:
. creatively and effectively meet the needs of our clients at either
single or multiple client locations, contributing to high client
retention rates;
. expand our existing client relationships by providing additional
services; and
. successfully compete for new accounts, including large regional or
multi-regional accounts and for special events, such as the Olympic
Games, that draw on our international experience.
We are the second largest U.S. provider of uniforms and career apparel
services and one of only a small number of uniform providers able to provide a
full range of uniform services to our clients across product lines and across
the United States. We offer this coast-to-coast service through a network of
pick-up and delivery routes, cleaning facilities, distribution centers, as well
as through a direct sales force, catalog mailings and telemarketing.
Our Educational Resources business, which accounts for 6% of our sales, is
the second largest provider of childcare services in the United States, serving
children and their families in 28 states and the District of Columbia.
Broad Portfolio of Services
We believe that the breadth and creativity of our service capabilities,
including customized, client specific solutions, position us to meet the needs
of clients who increasingly seek a single provider of multiple services. Our
food and support services business offers not only food and refreshment
services, but, for many clients, also provides a number of other services which
enhance the efficient use and maintenance of their facilities. For example, we
provide:
. food, dormitory, convenience store and entertainment services to many
offshore drilling rigs in the North Sea and the Gulf of Mexico;
. lodging and recreational activities such as tours and boating at many
U.S. National Parks, state parks and other recreational locations,
including Glen Canyon National Recreation Area at Lake Powell and Denali
National Park and Preserve; and
. merchandise and housekeeping services at sports and entertainment
facilities such as Fenway Park and Turner Field.
5
The consumers of our services are primarily employees, students, patients or
patrons at our client locations. We match these consumers' diverse preferences
with a variety of internally developed and third party brands.
We believe our uniform and career apparel business provides one of the
broadest arrays of such products and services available in the United States,
serving mechanics for American Airlines, route drivers for Coca-Cola bottling
companies, customer service workers at McDonald's and Pizza Hut, nurses, police
officers, firefighters and many others. Our comprehensive selection of services
enables us to meet the spectrum of our clients' uniform needs, from protecting
workers to promoting corporate image. We are well positioned to capitalize on
the growing trend of service companies to use personalized employee uniforms to
convey a desired company image. Our capabilities include:
. a nationwide pick-up, cleaning and delivery network for rented uniforms
and ancillary items consisting of a fleet of vehicles serving
approximately 2,700 routes which operate from over 200 laundry and
distribution facilities throughout the United States;
. a broad range of career apparel available for purchase, which is sold
via catalog, outbound telemarketing, a direct sales force and across the
Internet; and
. the ability to design customized uniform programs, manufacture uniforms
and personalize our products through direct embroidery of company logos
and employee names.
Diverse Client Base and Strong Client Retention
Our large client base, high retention rates and broad array of customers
provide us with a diversified source of sales, earnings and cash flow. We have
increased operating income in all but one of the last 15 years (in fiscal 1994
operating income declined less than 1%). This performance is due in part to:
. our large client base, which currently includes over two million clients
in 17 countries. In fiscal 2001, no individual client represented more
than 2% of our sales;
. the diversity of our clients' activities, which include operations in
business and industry, education, government, healthcare, sports,
entertainment, recreation and corrections; and
. high client retention rates, which are approximately 95% for our food
and support service clients and 92% for our uniform rental customers.
Although many contracts are cancelable upon short notice, we believe most
clients remain loyal due to our high quality service, and numerous clients have
used our services for many years. Clients may also be reluctant to change due
to the effort involved, the potential disruption of services provided to their
employees and, in some cases, the costs associated with a change in service
provider.
Significant Scale and Strong Operating Infrastructure
Our ability to improve operating performance is derived in part from our
ability to create economies of scale. Each year we purchase over $1.8 billion
of food and related items and purchase or self-manufacture over $400 million of
uniform and career apparel. Our size and resulting importance to vendors,
manufacturers and distributors allow us to obtain high quality products and
services at attractive prices. In our food and support services business, our
operating performance benefits from our flexible cost structure and low overall
capital needs.
We have developed sophisticated operating systems and procedures, including
labor scheduling, route dispatch, computerized menu management and inventory
control systems, as well as internal communication and administrative systems.
This operating and logistical infrastructure enables us to:
. efficiently manage labor, one of the main components of our cost
structure, by providing just-in-time labor deployment to our many
locations to meet day-to-day, seasonal and event-specific demands;
6
. provide efficient administrative support to our managers in the field so
they may concentrate on serving clients' needs and identifying and
capturing opportunities to expand our service relationships;
. provide facility design services to our clients to improve the customer
appeal and effectiveness of their food service facilities; and
. reduce delivery costs in uniform rental and refreshment services by
designing efficient route structures.
In addition, our technology infrastructure and centralized administration
allow us to efficiently add and integrate new customer locations. For example,
following our purchase of Ogden Entertainment in June 2000, during the height
of the summer baseball and concert season, we deployed our systems in over 80
sites in a period of four months, transitioned 10,000 employees to our payroll
and took over the management of the operations of the business without
disruption.
Our uniform services business includes approximately 2,700 pick-up and
delivery routes supported by 73 laundry plants and 132 satellite plants and
depots in a hub-and-spoke configuration covering all of the top 50 metropolitan
statistical areas in the United States. This extensive network allows us to
easily and rapidly add clients at low marginal delivery cost.
Entrepreneurial Management Culture and Significant Employee Ownership
Our entrepreneurial culture is fostered by our distinctive management and
employee ownership programs, which began over 15 years ago.
. Over 3,500 managers collectively own over 70% of our equity.
. Over 15,000 of our managers and employees collectively own approximately
90% of our equity, directly and through their participation in our
benefit plans.
Following our proposed offering of new Class B common stock and assuming we
purchase 10% of our outstanding shares of Class A common stock in the
anticipated stock buyback, management and employees will continue, directly and
through their participation in our benefit plans, to own approximately 76% of
our common stock. Since our December 1984 going private transaction, our
employee ownership program has been a critical component of our entrepreneurial
culture. Importantly, this high level of ownership has developed in large part
through voluntary employee stock purchases. We believe that the high level of
continuing ownership effectively aligns our management's and employees'
interests with those of our company and its other stockholders. Together with
our philosophy of placing profit and loss responsibility at the local manager
level and linking managers' compensation to operating performance, this
alignment has contributed significantly to our success by focusing our people
on the creation of shareholder value through the efficient growth of the
business.
Business Strategy
Building on these strengths, we will continue our growth through the
following strategies, while maintaining our focus on meeting and exceeding our
customers' requirements.
Capitalize on Favorable Outsourcing Trends
Worldwide demand for outsourced food and support services is estimated to
exceed $350 billion annually. Notwithstanding this significant demand, a
substantial majority of these services worldwide remain self-operated. Our
markets continue to grow as more organizations decide to outsource non-core
support services, and we believe we are well positioned to capitalize on this
trend. Our strategy includes identifying and educating existing and potential
clients in current and new sectors on the benefits of outsourcing non-core
activities.
The increasing demand for outsourcing services is supported by several
factors, led by the increasing strategic desire of business, healthcare,
educational, governmental and other organizations to focus on their core
7
activities. Most of our services are provided directly to key constituencies of
our clients such as their employees in the case of business and governmental
organizations, students in the case of universities, colleges and schools,
patients, staff and visitors in the case of healthcare institutions, and fans
and patrons in the case of stadiums, arenas, amphitheaters, convention centers
and national and state parks. As these consumers' demands have become more
sophisticated and as the responsiveness of our clients to these demands has
increased, our clients have increasingly turned to outside service providers to
meet these needs. Outsourcing support functions allows our clients to:
. improve the quality and consistency of support services through
professional management;
. increase satisfaction of their key constituencies such as employees,
students, patients and customers;
. benefit from current, innovative trends in the quality, variety and
delivery of these services; and
. improve cost effectiveness through the economies of scale and
efficiencies achieved by a leading service provider.
In certain of our sectors, large organizations are increasingly deciding to
outsource, having previously provided such services themselves. Some recent
examples of our success in capitalizing on new or expanded outsourcing
opportunities include the following:
. The Department of Corrections for the State of Florida decided to
outsource to us a virtually statewide foodservice contract, increasing
the number of facilities we serve from less than ten to 129. We believe
this is a significantly underpenetrated sector, as only a few states and
the District of Columbia fully outsource their statewide correctional
food service.
. In the last three years, we have been awarded national uniform contracts
by Boeing, Safeway, Wal-Mart and ConAgra Foods. To our knowledge, there
are few national contracts of similar size and scale and, as other
companies recognize the benefits of a single source provider, we are
well positioned to serve them.
Increase Base Sales Through Expanded Client Partnerships
A key element of our growth strategy is to increase our sales at our
existing client locations by:
. increasing the participation in our service offerings by our clients'
employees, students, patients, patrons and customers;
. increasing the per capita spending of these consumers; and
. providing additional services to our clients.
We seek to increase consumer participation and per capita spending primarily
through innovative marketing and merchandising programs directed at the
ultimate consumers of our services. These programs include the extensive use of
both internally developed and third party brands. Internally developed brands
include PanGeos(R), Bene Pizza(R), One World CafeSM and Euro BaguettesSM. These
brands are implemented across multiple client locations using proprietary
menus, signage and merchandising programs. At our client locations, we also
serve established third party branded products from Pizza Hut(R), Taco Bell(R),
Subway(R), Dunkin' Donuts(R) and from other well recognized national, regional
and local brands.
An example of our product enhancement capability and ability to increase per
capita spending is the strategic use of nationally recognized specialty coffee
brands such as Starbucks(R), Seattle's Best(R) and Java City(TM), which
satisfies the demand by clients' employees and other constituents for popular
brand name products and provides us higher pricing and margin opportunities at
our client locations. We believe that by using this strategy, we will continue
to increase sales to our existing clients, improve our high retention rates and
expand our client base.
We provide a broad array of services and products and plan to expand our
sales to existing clients through the provision of additional services. In the
food and support services business, our leadership position and
8
quality reputation position us to provide our clients with facilities, related
support services, such as facility operations and maintenance, energy
management, housekeeping, custodial, and groundskeeping, among other services
we offer.
Our success in continuing to add new services to existing clients is
illustrated by the development of our relationship with a prestigious
northeastern U.S. university:
. 1987--we began managing the conference center of the university's
business school;
. 2000--we added a broad range of food and facilities management services
to the university's affiliated healthcare system, serving several
hospitals throughout the network; and
. 2001--we contracted to provide food and concession services at the
university's athletic fields.
Primarily because of these additional activities, annual sales from this
client have grown to more than $30 million. We believe we have many similar
opportunities to provide additional services to many of our clients.
Expand Margins by Realizing Additional Operating Efficiencies
From fiscal 1997 through fiscal 2001, we increased our operating income
margin by more than 75 basis points. We plan to continue to expand our margins
by capitalizing on our increasing scale and further improving our strong
operating infrastructure. Our scale and infrastructure allow us to manage
effectively our key costs of labor, food and uniforms, which together
represented approximately 73% of our operating costs in fiscal 2001. We believe
we can continue to expand margins through:
. Labor: Many of our operating initiatives are designed to more
efficiently use our work force such as better use of labor scheduling
practices, cross training employees to engage in multiple tasks and
using technology to simplify food preparation and automate laundry
plants.
. Technology: We have implemented food service systems allowing managers
at client locations to manage inventory, labor, menu planning and
financial reporting more efficiently, so that they may concentrate their
efforts on client-related activities. In the uniform businesses, as we
expand and upgrade our operations, we are automating our plants to
reduce handling, enhance energy efficiency, and simplify processes and
procedures. We have also upgraded, and are continuing to invest in, many
of the systems we rely on for our centrally administered services such
as payroll, billing, receivables management and vendor management.
. Purchasing and inventory management: Through expanded use of centrally
negotiated contracts with food manufacturers and distributors, we expect
to continue to control quality and consistency in food preparation and
simplify operations in order to reduce food costs. In the uniform direct
marketing business, we have standardized styles, colors, and sizes
available, and regularly review our offerings in order to simplify our
operations, improve customer fulfillment and reduce costs.
. Self-manufacturing: As we have developed and expanded our garment
manufacturing capability during the last few years, we have reduced the
cost of garments. We continue to increase the percentage of garments
manufactured and should continue to realize related cost reductions.
Increase Penetration of International Markets
We believe that the size of international markets and their relatively low
rates of outsourcing present a substantial growth opportunity. This opportunity
has three key elements:
. further penetration in the countries and sectors in which we currently
operate, many of which have relatively low penetration rates;
. expansion into additional countries through acquisitions and
investments; and
. expansion of our service offerings to include services we provide in the
United States.
9
We plan to expand our presence and penetration in each of the 16 countries
outside the United States in which we operate. For example, in Germany, we
believe there is substantial opportunity to grow our services in the business
sector, where the penetration by outside service providers continues to be
relatively low. In addition, we have recently entered both the healthcare and
sports, entertainment and recreation sectors in Germany which also have low
outsourcing rates. In Japan, through our ownership of a minority interest in
the country's second largest food service company, we believe we are well
positioned to participate in the considerable future opportunities as
outsourcing continues to develop. We expect that the ability to service our
clients in multiple countries may grow in importance, and accordingly, our
international presence will assist us in meeting these needs.
We believe that acquisitions, strategic alliances and joint ventures are
effective in facilitating our entry into new countries. We seek partners based
on their existing services, customer relationships, expertise and market
prominence. One recent example of this strategy is our entry in fiscal 2001
into a partnership with Dublin-based Campbell Bewley Group, facilitating our
entrance into Ireland and expanding our presence in the United Kingdom. We
believe that additional opportunities exist for us to make minority investments
in independent service providers in markets we seek to penetrate. Our strategy
provides us with the benefit of having the continued involvement of an
established local partner and may allow us the opportunity to purchase the
entire business at an appropriate time. In addition, larger acquisitions are
also likely to continue to be a part of our strategy for future growth.
Pursue and Integrate Strategic Acquisitions
We anticipate that a continued consolidation in the worldwide food and
support services business and the uniform and career apparel business will
create opportunities for us to acquire businesses with complementary geographic
and product profiles. We intend to continue to strengthen our existing business
through disciplined, selective acquisitions and strategic investments in both
the United States and other countries. We have a history of successful
acquisitions, including six in the last three years, which we have integrated
into our existing operations, while achieving targeted synergies with minimal
client losses. We believe our acquisition strategy differentiates us from some
of our key competitors who typically do not fully integrate acquisitions, which
we believe allows us to achieve efficiencies and deliver high quality services.
Historically, our lack of a publicly traded equity security, our need for
funds to repurchase stock from our employee stockholders and our leverage have
limited our ability to make some acquisitions. While we will continue to
critically evaluate acquisitions subject to strict financial criteria, we
believe that the initial public offering will better position us to take
advantage of strategic opportunities by providing a publicly traded security
and by increasing our financial flexibility.
Food and Support Services
Our food and support services group manages a growing number of interrelated
services--including food, refreshment, facility and other support services--for
businesses, healthcare facilities, school districts, colleges and universities,
conference and convention centers, national and state parks, sports,
entertainment and recreational venues and correctional institutions. In fiscal
2001, our Food and Support Services--United States segment generated $4.8
billion in sales, or 61% of our total sales. In fiscal 2001, our Food and
Support Services--International segment generated $1.1 billion in sales or 14%
of our total sales. Serving tens of thousands client locations, we believe we
are a leader in size, capability, quality and innovation in the contract food
and support services industry.
We are the exclusive provider of food and beverage management services at
most of the facilities we serve and are responsible for hiring, training and
supervising substantially all of the food service personnel in addition to
ordering, receiving, preparing and serving food and beverage items sold at
those facilities. In governmental, business, educational and healthcare
facilities (for example, offices and industrial plants, schools and
universities and hospitals), our client generally provides us access to
customers in the form of employees,
10
students and patients. At sports, entertainment and recreational facilities,
which include convention centers, our clients are responsible for attracting
patrons on an event-specific basis. We focus strongly on new business
development, client retention and sales growth at existing locations through
marketing efforts directed toward customers and potential customers at the
client locations we serve. We focus our marketing on increasing customer
traffic flow and therefore sales at facilities that we serve.
Industry Overview
The food and support service industry consists of the supply of food and
beverage services and facilities services management to a range of clients,
including businesses, educational, governmental, correctional and healthcare
institutions, and operators of sports, entertainment and recreational
facilities in a variety of formats, service levels and price points. We
believe that the worldwide food and support service market represents over
$350 billion in potential annual sales, the substantial majority of which is
currently self-operated.
Although the markets in which we operate are highly fragmented, in recent
years the contract food service industry has experienced consolidation and
multi-national expansion. We believe that other recent market dynamics in the
food and support services industry include:
. continued growth in the outsourcing of food service and facilities
management as a result of:
-- clients focusing on their core competencies and outsourcing their non-
core activities and services;
-- clients addressing the need to satisfy demanding customers; and
-- clients facing increasing cost pressures and looking for cost-
effective alternatives to self-administered food and support
activities;
. increasing market penetration by large, well-capitalized participants
due to their ability to:
-- offer a broader range of modern, innovative services than local and
regional competitors can;
-- provide multi-regional coverage to clients who have a multi-regional
or multi-national presence;
-- make infrastructure investments in client locations as necessary; and
-- provide cost-effective services as a result of economies of scale;
. an increase in the retail orientation of food service management due to
the proliferation of alternative retail outlets, including quick serve
restaurants; and
. a trend toward a single source alternative for all facilities-related
outsourcing needs, including food service and facilities support
management.
Customers and Services--United States Segment
Our Food and Support Services--United States segment serves a number of
customer sectors, distinguished by the types of customers they serve and types
of services they offer. No individual client represents more than 2% of our
sales, other than, collectively, a number of U.S. government agencies.
Business. We satisfy the business dining needs of several million people
annually delivering customized solutions to clients in business and industry.
We provide a range of services which includes on-site restaurants, catering,
convenience stores, executive dining rooms and conference center management.
In addition, we provide many of our food service clients with facilities
management services.
We are a leader in vending and coffee services providing services to
business and industry clients at tens of thousands of locations in the United
States. We have expanded our service and product offerings to include gourmet
coffee and beverage offerings, "grab and go' food operations, convenience
stores, home meal replacement programs and a proprietary drinking water
filtration system.
11
We believe that food services to business and industrial organizations,
including vending services but excluding support services, represent at least
$30 billion of potential sales annually in the United States. While this sector
is well developed relative to others in which we participate, approximately 40%
is not yet outsourced.
Sports & Entertainment. We serve the concessions, premium banquet and
catering, retail, merchandise and novelty sales, recreational and lodging needs
of millions of people annually at approximately 165 sports, entertainment and
recreational facilities. We serve over 35 professional sports arenas and
stadiums, 28 convention centers, 14 national and state parks, plus numerous
concert venues, entertainment complexes, resorts and other popular tourist
attractions across the United States. We are the leading provider to major
league sports, serving 44 teams in Major League Baseball, the National
Basketball Association, the National Football League and the National Hockey
League. We have provided services at many of the highest visibility sporting
events in the United States, including the World Series, the Major League
Baseball All-Star Game, the Stanley Cup Finals, the NBA All-Star Game and the
National Basketball Association Championship Series. We also provide services
at highly visible special events, including serving food to the athletes at ten
Olympic Games since 1968, including most recently in Sydney, Australia.
We believe that concessions services in the sports and entertainment sector
in the United States represent approximately $17 billion of potential sales
annually, of which more than 50% are not yet outsourced. A significant source
of growth in the sports facilities category has been the increased level of per
capita spending on food, beverages and merchandise by attendees of events held
at newly constructed or refurbished sports facilities. Management believes that
the sports facilities category of the industry will continue to benefit from
the construction of new, and the refurbishment of existing, sports facilities.
We own 50% of SMG, a leader in providing outsourced management of public
assembly facilities including arenas, stadiums and theaters, as well as
convention, exhibition and trade centers. SMG offers services such as event
booking and management, cash management, maintenance services and risk
management while seeking to maximize the number of events and attendance at
such facilities. The approximately 133 facilities managed by SMG are located
throughout the United States and also include facilities in Europe, the United
Kingdom and Canada.
Education. We are a leading provider to colleges, universities and
preparatory schools, serving over 200 million meals annually to students,
faculty and visitors at over 350 institutions. The campus dining marketplace,
which was historically focused on residential board plans, has expanded to
include more diverse and convenience-oriented retail operations that operate as
gourmet coffee outlets and other new points of service offering traditional
convenience store items, health and beauty items, snacks and beverages. We
believe campus administrators increasingly recognize students as paying
customers with sophisticated tastes and preferences who demand greater quality,
more menu choices and greater flexibility. Based on these trends, we seek to
create an appealing, healthy and attractive dining experience that is designed
to enhance the school's reputation while integrating our services into the
school's structure and campus life.
We are a leading provider of food services to school districts. We serve
more than 325 school systems and districts. We offer our clients solutions to
their goal of increasing student participation in school lunch programs,
improving service, increasing student satisfaction and achieving cost
reductions. Our One World CafeSM has been established in more than 100 school
districts offering student-friendly merchandising, branded concepts and
promotional programs. We believe this is an underpenetrated market and that a
large number of school districts do not currently outsource their food service.
Following the successful outsourcing of food services at school systems in
several major cities, such as Chicago, Atlanta and Houston, increasingly large
metropolitan school systems are considering outsourcing their food services,
and we believe this is a substantial growth opportunity. As an example, the
Detroit school district in 2001 made the decision to outsource its food service
needs and we were successful in winning this business.
We believe that food and support services to educational institutions
represent approximately $18 billion of potential sales annually, and
approximately 70% are not yet outsourced.
12
Healthcare. We are a leader in providing innovative non-clinical support
services solutions to hospitals, long-term care facilities and regional
healthcare systems. We believe that major healthcare systems will increasingly
look to a single supplier for their three primary non-clinical service needs:
food service, environmental services and laundry and linen distribution. We
estimate that U.S. food and support services to healthcare institutions, not
including other non-clinical support services, represent approximately $12
billion of sales annually, with approximately 75% not yet outsourced.
Facilities Services. We are a leader in providing facilities management
services that support our business, educational, correctional, healthcare and
recreational clients. We work closely with our clients to efficiently maintain
and operate their facilities, lower their operating costs and provide quality
support services which permits our clients to focus on managing their core
activities rather than on managing their environment. Our services include
physical plant management and janitorial services, as well as design and
consulting services, including capital management consulting services, to
enhance the operation of client facilities at the most economical cost. The
market is significantly underpenetrated as only a limited number of existing
clients outsource these services.
Correctional. We are a leader in correctional food services, providing
state, county and municipal clients with improved quality and lower operating
costs at more than 325 correctional facilities in 38 states and serving over
325,000 inmates. We believe that food and support services to correctional
facilities represent over $2 billion annually, with approximately 70% not yet
outsourced. Public demands for increased public sector cost efficiency is
prompting many correctional facilities to outsource many of their needs. The
size of inmate populations, the number of correctional facilities in the United
States and the low outsourcing penetration rates have made this segment one of
the fastest growing of the outsourced food service industry. In addition, we
believe this is an underpenetrated sector as only a few states currently
outsource their statewide correctional systems' food services. We have
increased our presence in this sector by recently acquiring certain assets of
Correctional Foodservice Management, the food service division of The Wackenhut
Corporation.
Customers and Services--International Segment
Our Food and Support Services--International segment provides substantially
the same range of customized, high quality managed services provided to our
United States clients, but primarily to business and industry clients. In
addition, in the international segment, we also provide lodging, food service,
commissary and facilities management in remote sites, such as offshore drilling
platforms and mining camps. Our international services are provided in three
geographical areas: Europe, North America and Asia. Our largest international
operations are in Canada, the U.K. and Germany, where we are among the top
three largest food service providers. The clients served in each country are
typically similar to those served in the United States and vary by country
depending upon local market dynamics and conditions. Our sales in this segment
were approximately $1.1 billion in fiscal 2001. Not included in our segment
sales are the sales of AIM Services, our 27% affiliate and one of the largest
food service providers in Japan, the sales of Campbell Catering, our 45%
affiliate in Ireland, and the sales of ARAKOR, our South Korean subsidiary,
which had been a 49% affiliate until we acquired the remaining 51% in August
2001. We believe that the international market for food and support services is
approximately double the size of the United States market, with substantially
lower current outsourcing penetration rates.
Purchasing
We negotiate the pricing and other terms for the majority of our purchases
of food and related products directly with national manufacturers. We purchase
these and other items through SYSCO Corporation pursuant to a national master
distribution agreement, as well as from other distributors. SYSCO is
responsible for tracking our orders and delivering products to our specific
locations. This relationship provides our location managers with the ability to
order high quality food and non-food products at competitive prices while
relieving our managers of many of the details of purchasing and distribution
activities. We receive volume discounts from SYSCO, based on the overall volume
of purchases we make from SYSCO, including SYSCO-based products. Our location
managers also purchase a number of items, including bread, dairy products and
alcoholic beverages from local suppliers, and we purchase certain items
directly from manufacturers.
13
Our distribution agreements with our suppliers are generally for an
indefinite term, subject to termination by either party after a notice period,
which is generally 120 days. The pricing and other financial terms of these
agreements are renegotiated periodically. We have had distribution agreements
with SYSCO for more than 10 years. Our current agreement with SYSCO is
terminable by either party with 120 days notice.
Our relationship with SYSCO is important to our operations. In fiscal 2001,
SYSCO distributed approximately 55% of our food and non-food products in the
United States (approximately 37% of our consolidated purchases of food and non-
food products), and we believe that we are one of SYSCO's largest customers.
However, we believe that the products acquired through SYSCO can, in all
significant cases, be purchased through other sources and that termination of
our relationship with SYSCO or any disruption of SYSCO's business would cause
only short-term disruptions to our operations.
Sales and Marketing
We maintain sales organizations focused on each specific client or service
sector that are responsible for: identifying and pursuing potential new
business opportunities, analyzing and evaluating such opportunities together
with our operational and financial management and developing specific contract
proposals. In addition to our professionals dedicated exclusively to sales
efforts, our food and support field management shares responsibility for
identifying and pursuing new sales opportunities, both with the clients for
which they are directly responsible and for potential clients in their
geographic area of responsibility. In addition, in several of our markets we
also have dedicated sales retention teams.
Our marketing efforts are directed primarily toward increasing our business
with existing clients as well as obtaining business from new clients. We
regularly develop and offer innovations in products and services for our
clients that allow us to grow sales at existing locations while enhancing value
to those clients and their customers or employees by tailoring new offerings to
their needs.
Types of Contracts
We use three general contract types in our food and support services
segments: profit and loss contracts, profit sharing contracts and management
fee contracts. These contracts differ in their provision for the amount of risk
that we bear and potential compensation, profits or fees we may receive. Many
of our contracts contain characteristics of more than one of the three general
types of contracts described below. Commission rates and management fees, if
any, may vary significantly among contracts based upon various factors,
including the type of facility involved, the term of the contract and the
services we provide and the amount of capital we invest. Generally, our
contracts require that the client's consent be obtained in order to raise
prices on the food, beverages and merchandise we sell within a particular
facility.
Profit and Loss Contracts. Under profit and loss contracts, we receive all
of the revenue from and bear all of the expenses of the provision of our
services at a client location. Under this type of contract, we assume the
downside risk of the operation while benefiting from any potential upside
benefit. Expenses under profit and loss contracts sometimes include commissions
paid to the client, typically calculated as a percentage of various categories
of sales, and, in some cases, require minimum guaranteed commissions. While we
often benefit from greater upside potential with a profit and loss contract, we
are responsible for the operating costs and consequently bear greater risk than
with a management fee or profit sharing contract. The majority of our contracts
fall into this category.
Profit Sharing Contracts. Under profit sharing contracts or limited profit
and loss contracts, we may receive either a percentage of any profits earned
from the provision of our services at the facility or a fixed fee after
deducting expenses, and we generally receive no payments if there are losses.
Approximately half of our business service clients partially subsidize our food
service operations for the benefit of their employees.
Management Fee Contracts. Under management fee contracts, we receive a
management fee, typically calculated as a fixed dollar amount or a fixed or
variable percentage of various categories of sales. Some management fee
contracts entitle us to receive incentive fees based upon our performance under
the contract, as measured by factors such as sales or operating costs. We are
reimbursed for substantially all of our costs and charges under these
contracts. Both our upside potential and downside risk are reduced.
14
The length of contracts that we enter into with clients varies. Business,
campus and healthcare support services are generally provided under contracts
of indefinite duration, which may be subject to termination on short notice by
either party without cause. Contracts in other businesses generally are for
fixed terms, some of which may be well in excess of one year. Client contracts
for sports, entertainment and recreational services typically require capital
investments, but have correspondingly longer and fixed terms, usually from five
to 15 years.
When we enter into new contracts, or extend or renew existing contracts,
particularly those for stadiums, arenas, convention centers and other sports,
entertainment and recreational facilities, we are sometimes contractually
required to make some form of up-front or future capital investment to help
finance facility improvement construction or renovation. Contractually required
capital expenditures typically take the form of investment in leasehold
improvements, food service equipment and/or grants to clients. At the end of
the contract term or its earlier termination, assets such as equipment and
leasehold improvements typically become the property of the client, but
generally the client must reimburse us for any undepreciated or unamortized
capital expenditures.
Contracts within the food and support services group are generally obtained
and renewed either through a competitive process or on a negotiated basis. We
selectively bid on contracts to provide services at facilities within the
private and public sectors with contracts in the public sector frequently being
awarded on a competitive bid basis under the requirements of applicable law.
Contracts for food services with school districts and correctional clients are
typically awarded through a formal bid process. Contracts in the private sector
may be entered into on a less formal basis, but we and other companies will
compete in the process leading up to the contract.
Competition
There is significant competition in the food and support services business
from local, regional, national and international companies, as well as from
businesses, healthcare institutions, colleges and universities, correctional
facilities, school districts and public assembly facilities. These institutions
may decide to operate their own services following the expiration or
termination of contracts with us or with our competitors. In our U.S. Food and
Support Services business, our major external competitors include other multi-
regional food service providers, such as Compass Group plc, Delaware North
Companies Inc., Fine Host Corporation, Sodexho Alliance SA and Volume Services
America, Inc. Internationally, our major food service and support service
competitors in the outsourced market include Compass Group plc, Elior SA,
International Service System A/S, Pedus Service and Sodexho Alliance SA. We
also face competition from many regional and many local service providers, some
of which are well-established within a specific region or country.
While the markets in which we operate continue to be highly fragmented, in
recent years the contract food service industry has experienced consolidation
and multi-national expansion. Recently, Sodexho Alliance has completed
significant acquisitions in the United States and France and recently completed
a tender offer to acquire the majority position of Sodexho Marriott Services
Inc., which it did not already own. Likewise, Compass Group recently completed
several transactions in the United Kingdom and the United States.
We believe that the principal competitive factors in our business include:
. quality and breadth of services and management talent;
. service innovation;
. reputation within the industry;
. pricing; and
. the ability to make capital investments.
We believe that the breadth and creativity of our food and support services
capabilities are competitive strengths, enabling us to meet the needs of
clients seeking a single provider of multiple services. We also
15
believe that our entrepreneurial stockholder/managers enhance these strengths
by driving service innovations to improve the quality and consistency of our
services. These factors lead to a level of customer satisfaction that fosters a
reputation for excellence in the industry. We further believe that our scale
and strong operating infrastructure are competitive strengths.
Seasonality
Our sales and operating results have varied, and are expected to continue to
vary, from quarter to quarter as a result of different factors. Within our
United States Food and Support Services segment, there is a lower level of
activity during the first and second fiscal quarters in the generally higher
margin sports, entertainment and recreational services. This lower level of
activity is partially offset during our first and second fiscal quarters by the
increased provision of campus and school support services. Conversely, there is
a significant increase in the provision of sports, entertainment and
recreational services during the third and fourth fiscal quarters, which is
partially offset by the effect of summer recess at colleges, universities and
schools. Similar, but less pronounced seasonal factors, affect our
international Food and Support Services segment.
Uniform and Career Apparel
Overview
Our Uniform and Career Apparel Group provides uniforms, career and image
apparel, equipment, work clothes and accessories to meet the needs of clients
in a wide range of industries in the United States, including manufacturing,
transportation, construction, restaurants and hotels, public safety and
healthcare industries and many others. We supply garments, other textile and
paper products, public safety equipment and other accessories through rental,
purchase and direct mail programs to approximately two million individuals and
businesses each year. The combined rental and direct sales market in the United
States totals approximately $18 billion, including garments and other textile
products but not including an additional $6 to $7 billion of uniforms sold to
individuals through retail channels.
Customers use our uniforms to meet a variety of needs, including:
. establishing corporate identity and brand awareness--uniforms help
identify employees working for a particular company or department and
promote a company's brand identity. Uniformed employees are perceived as
trained, competent and dependable, and uniforms provide a professional
image of employees by enhancing the public appearance of those employees
and their company;
. protecting workers--uniforms help protect workers from difficult
environments such as heavy soils, heat, flame or chemicals;
. protecting products--uniforms help protect products against
contamination in the food, pharmaceutical, electronics and health care
industries; and
. retaining employees--uniforms enhance worker morale and help promote
teamwork.
Uniform and Career Apparel -- Rental Segment
Our Uniform and Career Apparel--Rental segment provides a full service
employee uniform solution, including design, sourcing and manufacturing,
delivery, cleaning and maintenance. We rent or lease uniforms, career and image
apparel, work clothing, outerwear, particulate-free garments and additional
textile and related products to businesses in a wide range of industries
throughout the United States. Our uniform products include shirts, pants,
jackets, coveralls, jumpsuits, smocks, aprons and specialized protective wear.
We also offer non-garment items and related services, including industrial
towels, floor mats, mops, linen products, as well as paper products and safety
products. Our uniform business is the second largest in the United States,
generating $995 million in sales, or 13% of our total fiscal 2001 sales. In
addition to our United States operations, we own a minority interest in ARATEX
Corporation, which provides uniform rental services in Japan.
16
The outsourcing of career apparel needs through a uniform rental program
offers customers advantages over ownership. Renting eliminates investment in
uniforms and the related costs associated with employee turnover, offers
flexibility in styles, colors and quantities as customer requirements change,
assures consistent professional cleaning, finishing, repair and replacement of
items in use and decreases expense and management time necessary to administer
a uniform program. Centralized services, specialized equipment and economies of
scale generally allow us to be more cost effective in providing garments and
garment services than customers could be by themselves. We believe that of the
approximately 140 million person U.S. civilian workforce, approximately 30
million workers wear some type of uniform, and of these only 20% currently use
a rental service for their uniforms.
Customers and Services
Our Uniform and Career Apparel--Rental segment serves businesses of all
sizes in many different industries. We have a diverse customer base, serving
more than 300,000 customer locations in 39 states from over 200 service
locations and distribution centers nationwide. Our customers include companies
such as American Airlines, Inc., Safeway, Inc. and Wal-Mart Stores, Inc. We
offer a range of garment rental service options, from full-service rental
programs in which we clean and service garments and replace uniforms as needed,
to lease programs in which garments are cleaned and maintained by individual
employees. We also clean and service customer-owned uniforms.
As part of our full service rental business, we design and choose fabrics,
styles and colors specific to a customer's needs. We stock a broad product line
of uniforms and career apparel. We typically visit our customers' sites weekly,
delivering clean, finished uniforms and, at the same time, removing the soiled
uniforms or other items for cleaning, repair or replacement as necessary. Under
our leasing program, we provide the customer with rental garments which are
cleaned either by the customer or individual employees. This program is ideal
for customers operating in low soil environments. This program also benefits
clients by reducing their capital investment in garments. We administer and
manage the program, and repair and replace garments as necessary.
Our cleanroom service offers advanced static dissipative garments, barrier
apparel, sterile garments and cleanroom application accessories for customers
with contamination-free operations in the technology, food, healthcare and
pharmaceutical industries. We provide reusable and disposable garment programs
and were the first national cleanroom garment provider to have ISO-9002
certification at all of our cleanrooms. We believe we are a recognized leader
in the highly specialized and exacting cleanroom garment industry.
Operations
We operate our uniform rental business as a hub-and-spoke network of plants
and depots in strategic locations. This network is comprised of 73 laundry
plants and 132 satellite plants and depots supporting approximately 2,700 pick-
up and delivery routes. We lease and operate a fleet of approximately 4,300
service vehicles that pick up and deliver uniforms for cleaning and
maintenance.
We operate a fabric cutting facility in Georgia and sewing plants in Puerto
Rico and Mexico, which satisfy a substantial amount of our standard uniform
inventory needs. We also purchase additional uniform and textile products as
well as equipment and supplies from several domestic suppliers and, to some
extent, from non-domestic suppliers. The loss of any one vendor would not have
a significant impact on us.
We have undertaken several initiatives in the last several years to improve
operating efficiency and cut costs in our uniform rental business. For example,
in fiscal 2000 we opened new manufacturing facilities to source more of our
garments in-house and reduce garment costs. Further, we have invested, and
continue to invest, in automated equipment and processes in our laundry
facilities, which we believe will improve throughput and reduce labor costs.
17
Sales and Marketing
We locate our plants and depots in areas characterized by expanding
industries and economic growth. We employ more than 300 trained sales
representatives whose sole function is to sell our services to potential
customers and develop new accounts through the use of an extensive, proprietary
database of pre-screened and qualified business prospects. However, our more
than 3,000 customer service representatives and approximately 500 district
managers are active salespersons as well. We build our brand identity through
local advertising, promotional initiatives and through our distinctive service
vehicles. Our customers frequently come to us through client referrals, either
from our uniform rental business or from our other service sectors. Our
customer service representatives generally interact on a weekly basis with
their clients, while our support personnel are charged with expeditiously
handling customer requirements regarding the outfitting of new customer
employees and other customer service needs.
In connection with the provision of our services, we have developed or
acquired long-standing brand name recognition through our ApparelOne(R),
WearGuard and Crest(R) uniform programs. Our ApparelOne program assists
customers in meeting their specific needs by offering quality and brand name
products through a combination of rental, lease or purchase options. We
customize the program on an individual client basis to offer a single catalog
and/or website specifically tailored to the client's needs.
Types of Contracts
We typically serve our rental customers pursuant to written service
contracts for an initial term of three to five years. While customers are not
required to make an up-front investment for their uniforms, in the case of non-
standard uniforms and certain specialty products or programs, customers do
agree to reimburse us for our costs if they terminate their agreement before
completion of the current service term.
Competition
Although there is a continuing trend towards consolidation in the United
States, the rental markets we serve are highly fragmented, and competition
varies from location to location. Much of the competition consists of smaller
local and regional firms, however, our major competitors include Cintas
Corporation, G&K Services, Inc. and Unifirst Corporation. We believe that the
primary competitive factors that affect our operations, in order of importance,
are quality, service, design consistency of product, garment cost and
distribution capability, particularly for large multi-location customers, and
price. We believe that our ability to compete effectively is enhanced by the
quality and breadth of our product line.
Uniform and Career Apparel -- Direct Marketing Segment
Our Uniform and Career Apparel--Direct Marketing segment designs, sells and
distributes personalized uniforms, rugged work clothing, outerwear, business
casual apparel, and footwear, public safety equipment and accessories through
mail order catalogs, websites, telemarketing and field sales representatives.
In fiscal 2001, this segment generated $439 million in sales, or 6% of our
total company sales, substantially all in the United States. Teamed with our
rental business, our direct marketing enables us to provide a total uniform
solution to our clients.
After experiencing declines in operating results in fiscal 1998 and 1999, we
have recently repositioned our direct marketing businesses. At WearGuard, we
reduced the number of our catalog mailings while increasing our telemarketing
efforts to shift our emphasis to business-to-business sales. In our Galls
business we recently completed the integration of a new warehouse into our
distribution network and, after a year of operating difficulties, we have
increased the efficiency of this unit. We also have recently completed the
integration of WearGuard with Crest. Our operating performance in our direct
marketing business improved in fiscal 2000 and fiscal 2001.
18
Customers and Services
WearGuard-Crest. We are a leading national distributor of distinctive image
apparel, which include uniforms and work clothing, to workers in a wide variety
of industries including construction, utilities, repair and maintenance
services, restaurant and hospitality and healthcare. The combination of these
two operations allows us to deliver expanded services to customers through
catalog, web and telemarketing sectors.
. WearGuard. With its recognized brand name, WearGuard is America's
largest direct mail and telemarketing retailer of work clothes, serving
personalized work clothing needs for almost 50 years. WearGuard designs
and embroiders personalized uniforms and logos for customers through an
extensive computer assisted design center and distributes work clothing,
outerwear, business casual apparel and footwear throughout the United
States. Our customer service function is further supported by our
management information systems, which provide our personnel with access
to information on the status of customers' orders, inventory
availability and shipping information, as well as information regarding
customers' individual employees, including names, sizes, uniform styles
and colors.
. Crest. Crest is a leading designer and distributor of uniform apparel
programs to the restaurant, hotel and healthcare industries. Crest is a
leading supplier to the quick service restaurant industry and is the
largest domestic supplier of uniforms to McDonald's Corporation.
Galls. Galls is the country's largest mail order supplier of uniforms and
equipment to public safety professionals and is currently celebrating its 30th
year of service. This business caters to the special needs of people involved
in public safety, fire fighting, correctional, and emergency medical services.
Galls markets uniforms, equipment and accessories under the Galls(R), DynaMed
and other well-known brand names to over one million individuals and public
safety departments and private safety agencies.
Operations
We conduct our direct marketing activities principally from our facilities
in Norwell, Massachusetts, Roanoke, Virginia and Lexington, Kentucky. Customer
orders are filled by our warehouse personnel and generally shipped directly to
customers within one business day. None of our customers represents
individually a material portion of our sales. We manufacture a significant
portion of our uniform requirements and offer a variety of customized
personalization options such as embroidery and logos. We also purchase uniforms
and other products from a number of domestic and international suppliers.
In the last few years, we have undertaken several initiatives to reduce
operating costs in our direct marketing operations and provide better service
to our clients. By reducing the number of WearGuard catalogs in circulation and
increasing our business telemarketing sales force, we shifted our sales focus
from the less profitable individual consumer to the business purchaser. We have
also sourced more of our garments from our own manufacturing facilities to
reduce the cost of garments and simplify operations. We have integrated and
streamlined our WearGuard and Crest operations, consolidating operating
personnel and distribution at one location. As part of this process, we
reviewed our product offering and reduced the number of items offered by
eliminating redundant and low-volume items.
Sales and Marketing
Our direct marketing operations distribute approximately 25 million catalogs
annually to approximately ten million existing and prospective customers.
Catalog distribution is based on the selection of recipients in accordance with
predetermined criteria from customer lists developed by WearGuard and Galls as
well as those purchased or rented from other organizations. Our substantial in-
bound and out-bound telemarketing operations are staffed by approximately 580
trained professionals. We also sell across the Internet at www.wearguard.com
and www.galls.com.
19
Types of Contracts
Because the bulk of our customers purchase on a recurring basis, our backlog
of orders at any given time consists principally of orders in the process of
being filled. With the exception of certain governmental bid business, most of
our direct marketing business is conducted under invoice arrangement with
repeat customers.
Competition
The direct sales markets we serve are highly fragmented. We believe that the
primary competitive factors that affect our direct marketing operations are
quality, service, design consistency of products, distribution and price. There
are other companies in the uniform, work clothing or public safety direct
marketing business that have financial resources comparable to ours. Much of
the competition consists of smaller local and regional companies and numerous
retailers, including some large chain apparel retailers, as well as numerous
catalog sales sources.
Seasonality
Due to a number of factors, primarily related to the weather in the northern
tier of the United States and the Thanksgiving-Christmas holiday period, there
is a seasonal increase in the sales of directly marketed work clothing during
our first fiscal quarter.
Educational Resources
We are the second largest provider of for-profit childcare services in the
United States, operating community-based and employer on-site childcare centers
and elementary schools and before and after school programs on the premises of
elementary schools. Since 1969 we have served the childcare and early education
markets, providing education to children between the ages of six weeks and 12
years. We operate the highest percentage of childcare centers accredited by the
National Association for the Education of Young Children (NAEYC) among the
major community childcare providers. Our Educational Resources segment employs
approximately 17,000 individuals across 28 states and the District of Columbia,
serving more than 100,000 children at more than 1,200 locations. In fiscal
2001, our Educational Resources segment generated $463 million in sales, or 6%
of our total sales.
Customers and Services
Our Educational Resources segment provides parents with a comprehensive set
of educational choices: early care and education, work/life partnerships and
school partnerships. We also operate eight private elementary schools in seven
states under the Meritor Academy and Warren Walker brand names.
Early Care and Education. Branded under the name Children's World, our early
care and education business serves approximately 75,000 children from 50,000
households at 613 centers. Our largest presence is in Minneapolis (43 centers),
Denver/Boulder (48 centers), Chicago (46 centers) and Dallas/Fort Worth (40
centers). We seek to differentiate ourselves from our competitors by focusing
on enriched educational content, particularly when compared with the standard
childcare option offered by local providers.
Our typical Children's World center is configured for 100 to 180 children,
contains five to seven classrooms and a full-service kitchen and outdoor play
area. We are pursuing a strategy to build or acquire new centers in newer
upper-middle to upper income suburban areas with high concentrations of dual-
income families. Generally, our customers have had a previous childcare
experience and choose center-based care within a two-to-five mile radius of
their homes in order to provide their children with educational preparation,
socialization and safety.
20
We believe that a significant percentage of new business is the result of
direct referrals from existing customers. In addition to marketing directly to
families, we also seek to enter into preferred customer agreements with
particular employers, which provide a discount for their employees.
Work/Life Partnerships. Our work/life partnerships business offers a variety
of childcare services to employers at 30 employer-based sites, and corporate
relationships are offered at our community locations under the brand name
ARAMARK Work/Life Partnerships.
School Partnerships. Our school partnerships business provides before and
after-school enrichment programs, pre-school programs, such as pre-math, pre-
reading and early science, kindergarten enrichment and summer camps at 575
sites under the brand name Medallion. These services are usually provided on-
site at elementary schools.
Competition
The childcare and early educational services market is highly fragmented and
competitive. We believe the significant competitive factors for educational
services include quality of care, reputation, location, physical appearance at
facilities, types of programs offered and price. We face significant
competition from local nursery schools and childcare centers, including church-
affiliated and other non-profit centers, such as the YMCA; other for-profit,
center-based childcare providers; providers of childcare services operating out
of homes; in-home care provided primarily by nannies and relatives; and
preschool, kindergarten and before and after school programs provided by public
schools, as well as state or locally operated preschools. There are also
several national, such as KinderCare Learning Centers and La Petite Academy, or
regional for-profit companies with sizeable numbers of centers and similar
economies of scale in curriculum development, marketing and site development.
Seasonality
Operations of our Educational Resources segment typically follow a seasonal
cycle linked to the elementary school calendar and holiday periods. New
enrollments are highest in the mid-August to mid-September period, coinciding
with the start of the school year. Enrollment typically builds throughout the
school year, reaching a peak in April or May. Enrollment in the summer months
is generally lower as parents choose from a greater number of summer camp and
other childcare options.
Employees of ARAMARK
As of September 28, 2001, we had a total of approximately 200,000 employees,
consisting of approximately 124,000 full-time and approximately 76,000 part-
time employees in our five business segments. The number of part-time employees
varies significantly from time to time during the year due to seasonal and
other operating requirements. We generally experience our highest level of
employment during the fourth quarter. The approximate number of employees by
segment is as follows: Food and Support Services--United States: 133,000; Food
and Support Services--International: 35,000; Uniform and Career Apparel--
Rental: 13,000, Uniform and Career Apparel--Direct Marketing: 2,200; and
Educational Resources: 16,500. In addition, the ARAMARK corporate staff is
approximately 115 employees. Approximately 33,000 employees in the United
States are covered by collective bargaining agreements. We have not experienced
any material interruptions of operations due to disputes with our employees and
consider our relations with our employees to be satisfactory.
Governmental Regulation
We are subject to various governmental regulations, such as environmental,
employment and health and safety. In addition, our facilities and products are
subject to periodic inspection by federal, state, and local authorities. We
have installed various internal controls and procedures designed to maintain a
high level of compliance with these regulations. The cost of our compliance
programs is not material, but is subject to additions to or changes in federal
or state legislation, or changes in regulatory implementation or interpretation
of government regulations. If we fail to comply with applicable laws, we could
be subject to civil remedies, including fines and injunctions, as well as
potential criminal sanctions.
21
Food and Support Services Segments
Our operations are subject to various governmental regulations, such as
those governing:
. the service of food and alcoholic beverages;
. minimum wage and employment;
. governmentally funded entitlement programs;
. environmental protection; and
. human health and safety.
While there are a variety of regulations at various governmental levels
relating to the handling, preparation and serving of food, including in some
cases requirements relating to the temperature of food, and the cleanliness of
the kitchen and the hygiene of its personnel, these regulations are enforced
primarily at the local public health department level. We cannot assure you
that we are in full compliance at all times with all applicable laws and
regulations. Furthermore, additional or amended regulations in this area may
significantly increase the cost of compliance.
In addition, various federal and state agencies impose nutritional
guidelines and other requirements on us at certain of the education and
corrections facilities we serve. There can be no assurance that federal or
state legislation, or changes in regulatory implementation or interpretation of
government regulations, would not limit our activities in the future or
significantly increase the cost of regulatory compliance.
Since we serve alcoholic beverages at many sports, entertainment and
recreational facilities, including convention centers, we also hold liquor
licenses incidental to our contract food service business and are subject to
the liquor license requirements of the states in which we hold a liquor
license. As of September 28, 2001, we and our subsidiaries held liquor licenses
in 40 states.
Typically, liquor licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of our operations, including minimum age of patrons and
employees, hours of operation, advertising, wholesale purchasing, inventory
control and handling, and storage and dispensing of alcoholic beverages. We
have not encountered any material problems relating to alcoholic beverage
licenses to date. The failure to receive or retain a liquor license in a
particular location could adversely affect our ability to obtain such a license
elsewhere. A few of our contracts require us to pay liquidated damages during
any period in which our liquor license for the relevant facility is suspended
and most contracts are subject to termination in the event that we lose our
liquor license for the relevant facility.
Our service of alcoholic beverages must also comply with applicable state,
provincial and local service laws, commonly called dram shop statutes. Dram
shop statutes generally prohibit serving alcoholic beverages to certain persons
such as one who is intoxicated or a minor. If we violate dram shop laws, we may
be liable to third parties for the acts of the patron. We sponsor regular
training programs to minimize the likelihood of such a situation although we
cannot guarantee that intoxicated or minor patrons will not be served or that
liability for their acts will not be imposed on us.
Uniform and Career Apparel Segments
Our uniform rental segment is subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of hazardous wastes and other
substances. In particular, industrial laundries use and must dispose of
detergent wastewater and other residues through publicly operated treatment
works or similar government bodies and are subject to volume and chemical
discharge limits and penalties and fines for non-compliance. We are attentive
to the environmental concerns surrounding the disposal of these materials and
have through the years taken measures
22
to avoid their improper disposal. In the past, we have settled, or contributed
to the settlement of, actions or claims brought against us relating to the
disposal of hazardous materials and there can be no assurance that we will not
have to expend material amounts to rectify the consequences of any such
disposal in the future. Further, under environmental laws, an owner or lessee
of real estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in or emanating from such property,
as well as related costs of investigation and property damage. Such laws often
impose liability without regard to whether the owner or lessee knew of or was
responsible for the presence of such hazardous or toxic substances. There can
be no assurances that acquired or leased locations have been operated in
compliance with environmental laws and regulations or that future uses or
conditions will not result in the imposition of liability upon us under such
laws or expose us to third party actions such as tort suits.
We do not anticipate any material capital expenditures for environmental
remediation that would have a material effect on our financial condition, and
we are not aware of any material non-compliance with environmental laws.
Educational Resources Segment
Center Licensing Requirements. Our childcare centers are subject to numerous
state and local regulations and licensing requirements which generally cover
the fitness and adequacy of buildings and equipment, the ratio of staff
personnel to enrolled children, staff training, record keeping, the dietary
program, the curriculum and compliance with health and safety standards. Some
changes, such as increasing the ratio of staff to enrolled children, can result
in significantly increased costs to operate our business. If one of our centers
fails to comply with applicable regulations, that center could be subject to
state sanctions. These sanctions may include fines, corrective orders,
placement on probation or, in more serious cases, suspension or revocation of
the center's license to operate or all of our centers' licenses to operate in
that state. Changes in the regulatory frameworks within which we operate may
cause us to incur substantial costs in order to comply.
Childcare Tax Incentives. Tax incentives for childcare programs potentially
can benefit us. Section 21 of the Internal Revenue Code of 1986 provides a
federal income tax credit ranging from 20% to 30% of specified childcare
expenses. For eligible taxpayers with one child, a credit can be claimed on a
maximum of $2,400 of eligible expenses. For eligible taxpayers with two or more
children, a credit can be claimed on a maximum of $4,800 of eligible expenses.
The fees paid to us by eligible taxpayers for childcare services qualify for
these tax credits, subject to the limitations of Section 21 of the Code.
However, these tax incentives are subject to change.
Childcare Assistance Programs. During fiscal 2001, approximately 15% of this
segment's net sales were generated from federal and state childcare assistance
programs, primarily the Childcare and Development Block Grant and Social
Services Block Grant. These programs are designed to assist low-income families
with childcare expenses and are administered through various state agencies.
Although additional funding for childcare may be available for low-income
families as part of welfare reform, there is no assurance that we will benefit
from any such additional funding.
Intellectual Property
We have the patents, trademarks, trade names and licenses that are necessary
for the operation of our business as we currently conduct it. Other than the
ARAMARK name, we do not consider our patents, trademarks, trade names and
licenses to be material to the operation of our business.
The Proposed ServiceMaster Acquisition
On October 3, 2001, we signed a definitive agreement to acquire
ServiceMaster Management Services. The aggregate consideration of the
transaction is approximately $800 million in cash. The transaction is subject
to customary consents, approvals, conditions and clearances. The transaction
has been cleared under the Hart-Scott-Rodino Act.
23
We believe that the ServiceMaster Management Services acquisition is a
significant strategic acquisition for us. We believe the acquisition will
further enhance our leadership position in outsourced services by making us a
more effective competitor for facility management services accounts. We believe
the acquisition will provide us with strategic benefits including:
. opportunities to cross-sell: facility management services to our
existing clients, clinical equipment maintenance services to our
existing healthcare clients, and food and support services and other
outsourced services to ServiceMaster Management Services' existing
clients;
. cost synergies including selling, general and administrative synergies,
and synergies resulting from sharing of best practices, such as our
purchasing practices; and
. infusing our entrepreneurial culture and our business-to-business focus
to improve service quality and client retention at ServiceMaster
Management Services.
Business of ServiceMaster Management Services. ServiceMaster Management
Services and its related entities provide a variety of facility management
services to the healthcare, education and business and industry client sectors.
These services are provided nationwide and include the management of
housekeeping, plant operations and maintenance, laundry and linen, grounds
keeping and landscaping, clinical equipment maintenance, food service,
engineering consulting services relating to building operations, materials
management and total facility management. ServiceMaster Management Services
also has operations in Canada and maintains licensing arrangements with local
service providers in approximately 30 other countries.
ServiceMaster Management Services generally provides management services to
supervise clients' labor forces under fixed price or similar contracts. In a
portion of the contracts, it shares with the client the benefit from cost
savings and efficiencies it realizes over the agreed budget but bears the risk
of costs incurred in excess of the agreed budget.
Healthcare. ServiceMaster Management Services is a leading provider of
supportive management services, including the management of housekeeping,
clinical equipment maintenance, food services, plant operations and
maintenance, laundry and linen, grounds and landscaping and the provision of
total facility management to hospitals, healthcare systems, long term care
communities and other healthcare organizations. ServiceMaster Management
Services also provides consulting services to healthcare clients, including
assessments of supply chain, equipment, food service and other hospital-based
services. ServiceMaster Management Services serves approximately 850 clients in
the healthcare sector. Significant clients in the healthcare sector include Mt.
Sinai Hospital in New York and University of Virginia Medical Center.
Education. ServiceMaster Management Services is a leading provider of plant
operations and maintenance, custodial and grounds management and landscape
services to primary schools, secondary schools and school districts, private
specialty schools and colleges and universities. ServiceMaster Management
Services serves approximately 300 educational clients. Significant clients in
the education sector include Princeton University and Houston Independent
School District.
Business and Industry. ServiceMaster Management Services is a leading
provider of plant operations and maintenance and custodial and grounds
management services to business and industry clients, serving approximately 400
clients.
Services provided include facility operations and maintenance,
groundskeeping and landscaping, housekeeping, production equipment maintenance
and cleanroom services to corporate headquarters, manufacturing plants and
distribution centers. Services provided to the business and industry client
sector also include housekeeping, facility maintenance, contract staffing, pest
management and grounds care, as well as other specialized services, to clients
in the food processing industry. In addition, ServiceMaster Management Services
provides certain airport auxiliary services, transportation related services
and temporary placement services.
24
Financings. We intend to finance our acquisition of ServiceMaster Management
Services and related expenses in an aggregate of approximately $806 million in
cash by borrowing approximately an additional $206 million under our existing
senior revolving credit facility and $600 million under a new bridge financing
facility with a group of banks arranged by J.P. Morgan Securities Inc. We
expect the bridge financing facility to be unsecured and to have a one-year
term, beginning on the date that we close the acquisition. We expect that
ARAMARK Services, Inc., our wholly owned subsidiary, will be the borrower under
the bridge financing facility and that we and certain other subsidiaries will
guaranty the obligations in the same manner as our senior revolving credit
facility. We expect interest under the bridge financing facility to be based
on, at our option, LIBOR plus a spread ranging from 1.125% to 1.875% per annum
and an initial spread of 1.375% (with the spread increasing by 0.25% after six
months and by an additional 0.25% after nine months) or the higher of the prime
rate or 0.5% per annum over the federal funds rate. We expect the bridge
financing facility to have restrictive covenants, financial covenants and
events of default substantially similar to those included in our senior
revolving credit facility.
We expect to repay a portion of the bridge financing with a portion of the
proceeds from our offering of new Class B common stock. In addition, we may
consider several different types of financing arrangements to replace the
remainder of the borrowings under the bridge financing prior to its expiration
date. These arrangements may include a publicly or privately offered debt
financing and accounts receivable sale.
Item 2. Properties
Our principal executive offices are located at ARAMARK Tower, 1101 Market
Street, Philadelphia, Pennsylvania 19107. Our principal real estate is
comprised primarily of educational and childcare facilities, of which a
significant number are held under long-term operating leases. As of September
28, 2001, we operated approximately 652 facilities in our educational resources
segment. Of these, 493 are leased, 136 are owned and 23 are managed for third
parties. Some leases provide for contingent rent if the center's operating
revenue exceeds a specified base level. Generally, the leases provide for
renewal options under the same terms and conditions. We believe that if we were
unable to renew the lease on any of these facilities, other suitable facilities
would be available to meet our needs. As of September 28, 2001, we operated
approximately 200 facilities in our uniform and career apparel segments. Of
these, approximately half are leased and approximately half are owned. We also
maintain other real estate and leasehold improvements, which we use in the
uniform and career apparel and food and support services segments. No
individual parcel of real estate owned or leased is of material significance to
our total assets.
Item 3. Legal Proceedings
We are presently engaged in discussions with the U.S government towards a
civil settlement and resolution of a grand jury investigation in Illinois
involving our school support services business. The investigation has been
conducted by the United States Attorneys' Offices in the Southern District of
Illinois, with assistance from the United States Department of Agriculture's
Office of Inspector General. The investigation relates to whether certain
pricing practices in connection with the management services provided by us to
public school food service programs are consistent with United States
Department of Agriculture regulations. A grand jury subpoena was also issued
out of the Eastern District of Missouri. As of November 1, 2001, we are
currently negotiating a settlement of certain of the matters raised in the
Illinois investigation and we do not believe that the settlement currently
being discussed will have a material adverse effect on us. During these
negotiations, all investigative activities have been stayed. With respect to
any matters that will not be resolved by the settlement, we believe that our
interpretation of the applicable government regulations is correct and if any
claims were to be pursued, we would vigorously pursue our defenses. However, we
can give no assurance that the outcome of any such claim would not have a
material adverse effect on us. Recently, a civil complaint alleging breach of
contract, common law fraud and common law civil conspiracy has been filed on
behalf of the East St. Louis School District seeking the certification of a
class action for the restitution to all school districts served by us of the
value of federally donated commodities and discovery has just recently
25
commenced. We intend to vigorously defend ourselves against these claims.
However, we can give no assurance that the outcome of any such claim would not
have a material adverse effect on us.
Our uniform rental segment is subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of water wastes and other
substances. A subsidiary of ARAMARK, as a result of activities of acquired
businesses prior to their acquisition by us, has been identified as a
potentially responsible party, along with numerous other parties, for cleanup
of a Superfund site in Monterrey, California. In September 2001, the subsidiary
entered into a consent decree in which it agreed to pay $1.2 million to fully
settle the matter. We engage in informal settlement discussions with federal,
state and local authorities regarding allegations of violations of
environmental laws at operations relating to our uniform rental segment or to
businesses conducted by our predecessors, the aggregate amount of which and
related remediation costs would not have a material adverse effect on our
financial condition or results of operations.
From time to time, we are a party to various legal actions involving claims
incidental to the normal conduct of our business, including actions by clients,
customers and employees, but we do not believe that any such actions are likely
to be, individually or in the aggregate, material to our business, financial
condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
Item 4A. Directors and Executive Officers of the Registrant
Directors
The following table presents the names and positions of our directors, their
ages as of September 28, 2001 and the length of time they have been directors:
Name Age Position Since
---- --- -------- -----
Joseph Neubauer.............. 59 Chairman and Chief Executive Officer 1979
and Director (2)(3)
Lawrence T. Babbio, Jr. ..... 56 Director (3)(4) 1999
Patricia C. Barron........... 58 Director (1) 1997
Robert J. Callander.......... 70 Director (2)(3)(4)(5) 1986
Leonard S. Coleman, Jr. ..... 52 Director (1) 2000
Ronald R. Davenport.......... 65 Director (1)(4)(5) 1980
Edward G. Jordan............. 71 Director (1)(2)(3) 1980
Thomas H. Kean............... 66 Director (3)(4) 1994
James E. Ksansnak............ 61 Director (3) 1997
James E. Preston............. 68 Director (2)(3)(4) 1993
Karl M. von der Heyden....... 65 Director 2001
- --------
The numbers following the positions held by the directors indicate membership
in the following board committees at September 28, 2001:
(1) Audit and Corporate Practices
(2) Executive
(3) Finance
(4) Human Resources, Compensation and Public Affairs
(5) Stock
Joseph Neubauer has been our chief executive officer since February 1983 and
the chairman since April 1984; he was our president from February 1983 to May
1997. He is a director of Verizon Communications Inc.,
26
formerly Bell Atlantic Corporation, CIGNA Corporation, Federated Department
Stores, Inc. and Wachovia Corporation.
Lawrence T. Babbio, Jr. has been vice-chairman and president of Verizon
Communications Inc., formerly Bell Atlantic Corporation, since July 2000. He
was president and chief operating officer of Verizon from December 1998 until
July 2000. He was president and chief executive officer of Verizon's Network
Group and chairman of Verizon's Global Wireless Group from August 1997 until
December 1998. From January 1995 to August 1997 he was vice chairman of Verizon
Communications and prior to that was executive vice president and chief
operating officer of Verizon. He is a director of Compaq Computer Corporation.
Patricia C. Barron has been clinical associate professor at the Leonard N.
Stern School of Business of New York University since September 1999 and prior
to that was an executive-in-residence and senior fellow. She was vice president
of Business Operations Support of Xerox Corporation from April 1997 to July
1998. From 1995 to 1997, she was president of Engineering Systems of Xerox
Corporation and from 1992 to 1994, was president of Office Document Products of
Xerox Corporation. She is a director of Quaker Chemical Corporation, Teleflex
Corporation, Ultralife Batteries, Inc. and United Services Automobile
Association.
Robert J. Callander was executive-in-residence at the Business School of
Columbia University from 1992 to June 2000. He was president of Chemical Bank
and Chemical Banking Corporation from August 1990 to June 1992. He is a
director of Omnicom Group, Inc., Scudder Global High Income Fund Inc., Scudder
New Asia Fund Inc., The Korea Fund Inc., The Brazil Fund Inc. and The Argentina
Fund Inc.
Leonard S. Coleman, Jr. has been the chairman of Arena Co. since September
2001 and Senior Advisor, Major League Baseball since November 1999. He was
President, The National League of Professional Baseball Clubs from 1994 to
1999. He is a director of Cendant Corporation, Churchill Downs Incorporated,
Electronic Arts Inc. H.J. Heinz Company, New Jersey Resources Corporation,
Omnicom Group, Inc., Owens Corning and Radio Unica Communications Corp.
Ronald R. Davenport has been the chairman of Sheridan Broadcasting
Corporation since 1972. He is a director of Mellon Private Asset Management.
Edward G. Jordan was the chairman and chief executive officer of
Consolidated Rail Corporation from 1975 to 1981 and served as the president of
The American College from 1982 until 1987.
Former Governor Thomas H. Kean was the Governor of the State of New Jersey
from 1982 until 1990. He has been the president of Drew University since 1990.
He is a director of Amerada Hess Corporation, Fiduciary Trust Company
International, The Pepsi Bottling Group, Inc. and United HealthCare
Corporation.
James E. Ksansnak was our vice chairman from May 1997 until February 2001.
From February 1991 to May 1997, he was our executive vice president; from May
1986 to February 1991, he was our senior vice president; and from May 1986 to
May 1997, he was our chief financial officer. He is a director of Advanta Corp.
and CSS Industries, Inc.
James E. Preston was the chairman of Avon Products, Inc. from 1989 to 1999
and president and chief executive officer from September 1988 until June 1998.
He is a director of Reader's Digest Association and Venator Group, Inc.
Karl M. von der Heyden was the vice chairman of PepsiCo, Inc. from February
1998 until February 2001 and vice chairman and chief financial officer from
September 1996 to February 1998. Between December 1993 and August 1994 he was
president and chief executive officer of Metallgesellschaft Corp. In May 1993,
he retired as co-chairman and chief executive officer of RJR Nabisco Inc. He is
a director of AstraZeneca PLC and Federated Departments Stores, Inc.
27
Executive Officers
The following table presents the names and positions of our executive
officers, their ages as of September 28, 2001 and the length of time they have
been officers:
Name Age Position Officer Since
---- --- -------- -------------
Joseph Neubauer......... 59 Chairman and Chief Executive Officer and Director 1979
William Leonard......... 53 President and Chief Operating Officer 1992
Bart J. Colli........... 53 Executive Vice President, General Counsel and 2000
Secretary
Brian G. Mulvaney....... 45 Executive Vice President, Human Resources and 1993
Public Affairs
L. Frederick 49 Executive Vice President and Chief Financial 1983
Sutherland............. Officer
John J. Zillmer......... 46 Executive Vice President 2000
Barbara A. Austell...... 48 Senior Vice President and Treasurer 1996
John M. Lafferty........ 57 Senior Vice President, Controller and Chief 2000
Accounting Officer
Dean E. Hill............ 50 Vice President, Investor Relations 1993
Donald S. Morton........ 53 Vice President, Assistant Secretary and 1984
Associate General Counsel
Michael R. Murphy....... 44 Vice President 1995
Richard M. Thon......... 46 Assistant Treasurer 1994
Except as set forth below, the principal occupation of each executive
officer throughout the past five years has been the performance of the
functions of the corporate offices shown above.
William Leonard has been our president and chief operating officer since May
1997. He was our executive vice president from May 1992 until May 1997.
Bart J. Colli joined us in February 2000 as general counsel and was elected
as our executive vice president and secretary in March 2000. Prior to joining
us, he was a partner with McCarter & English LLP since 1985.
Brian G. Mulvaney was elected our executive vice president in August 1996.
He was our senior vice president from February 1995 to August 1996 and our vice
president from February 1993 to February 1995.
L. Frederick Sutherland became our chief financial officer in May 1997. He
has served as our executive vice president since May 1993.
John J. Zillmer was elected as our executive vice president in May 2000. He
was president of our Business Services division from May 1995 to August 1999
when be became president of our Food and Support Services International
division. He became president of our Food and Support Services division in May
2000.
John M. Lafferty joined us and was elected as our senior vice president and
appointed controller and chief accounting officer in August 2000. Prior to
joining us, he retired as a partner with Arthur Andersen LLP, where he had been
a partner since 1977.
Barbara A. Austell was elected as our senior vice president and treasurer in
August 1996. Prior to joining us in July 1996, she was a managing director of
J.P. Morgan & Co.
Donald S. Morton was elected as our vice president in August 2000. He has
been assistant secretary since 1984.
28
Michael R. Murphy was elected as our vice president in February 2000. Prior
to that he was director of audit and controls since September 1995.
Our executive officers are elected annually by the board of directors and
serve at their discretion or until their successors are duly elected and
qualified.
29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There are currently approximately 3,674 record holders of Class B common
stock of the Company, all of whom are or were employees or directors of the
Company (or members of their families or trusts created by them). There are
currently 75 record holders of the Class A common stock of the Company, all of
whom are institutional investors, Company benefit plans or individuals not
employed by the Company.
The Company has not paid a cash dividend during the last two fiscal years.
From time to time, the Board of Directors may consider paying cash dividends in
the future, based upon the Company's circumstances at that time.
There is no established public trading market for the common stock of the
Company. However, employees of the Company have been able to sell shares of
common stock through various programs maintained by the Company. See Note 6 to
the consolidated financial statements for information regarding the Company's
shareholders' agreement.
The Merger and the Public Offering
On July 17, 2001, ARAMARK Corporation filed with the Securities and Exchange
Commission (SEC) a joint proxy statement/prospectus contained in a Registration
Statement on Form S-4 relating to the proposed merger of ARAMARK Corporation
with ARAMARK Worldwide Corporation (AWC). In the merger, ARAMARK Corporation
will merge with and into its newly formed subsidiary, AWC, and each outstanding
ARAMARK Corporation old Class B and old Class A common share will become two
shares and twenty shares, respectively, of the surviving corporation's Class A
common stock. AWC's name will become ARAMARK Corporation, and the surviving
corporation will succeed to all of the assets, liabilities, rights and
obligations of ARAMARK Corporation. On November 16, 2001, the SEC declared
effective our joint proxy statement/prospectus.
Soon after the merger is approved by our stockholders which is expected to
occur on or about December 10, 2001, subject to market conditions, ARAMARK
Corporation plans to make an initial public offering of new Class B common
stock. In that regard, on July 17, 2001, ARAMARK Corporation also filed with
the SEC a registration statement on Form S-1.
The Stock Buyback
After the initial public offering, we intend to purchase up to 10% in the
aggregate of the outstanding shares of our class A common stock in a stock
buyback, which will consist of a cash tender offer for a portion of our
outstanding shares of class A common stock outstanding after the merger and a
repurchase of shares of our class A common stock from our 401(k) plans.
30
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data. This
information should be read in conjunction with the consolidated financial
statements and the related notes thereto and Management's Discussion and
Analysis of Results of Operations and Financial Condition, each included
elsewhere herein.
ARAMARK Corporation and Subsidiaries
------------------------------------------------
Fiscal Year Ended on or near September 30
------------------------------------------------
1997(1) 1998(2) 1999 2000 2001
-------- -------- -------- -------- --------
(in millions, except per share amounts and
ratios)
Income Statement Data:
Sales....................... $6,576.1 $6,638.9 $6,742.3 $7,262.9 $7,788.7
Operating income............ 331.9 333.1 375.2 419.6 439.5
Interest and other financing
costs, net................. 116.0 117.3 135.8 147.8 153.3
Income before extraordinary
item....................... 146.1 133.7 150.2 168.0 176.5
Net income.................. 146.1 129.2 150.2 168.0 176.5
Earnings per share:
Basic..................... $1.16 $1.17 $1.59 $1.88 $2.06
Diluted................... 1.10 1.10 1.48 1.77 1.95
Ratio of earnings to fixed
charges (3)................ 2.3x 2.3x 2.2x 2.3x 2.3x
Balance sheet data (at
period end):
Total assets................ $2,753.6 $2,741.3 $2,870.5 $3,199.4 $3,216.4
Long-term borrowings........ 1,213.9 1,705.0 1,609.7 1,777.7 1,635.9
Common stock subject to
potential repurchase (4) .. 23.3 20.0 20.0 20.0 20.0
Shareholders equity(deficit)
(5)........................ 370.0 (78.9) 126.6 111.5 246.9
Other Financial Data:
EBITDA (6).................. $523.6 $528.9 $568.9 $640.4 $679.7
Net cash provided by
operating activities....... 230.1 276.7 293.2 407.1 496.9
Net cash used in investing
activities................. (59.7) (189.6) (216.2) (483.6) (279.2)
Net cash provided by/(used
in) financing activities... (168.3) (93.8) (69.9) 73.4 (217.5)
- --------
(1) Fiscal 1997 is a fifty-three week period, and includes other income of
$11.7 million.
(2) During fiscal 1998, the Company redeemed or replaced certain indebtedness,
resulting in extraordinary charges, net of taxes, of $4.5 million, or $0.04
per share.
(3) For the purpose of determining the ratio of earnings to fixed charges,
earnings include pre-tax income plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest on all indebtedness (including
capitalized interest) plus that portion of operating lease rentals
representative of the interest factor (deemed to be one-third of operating
lease rentals).
(4) See Note 6 to the consolidated financial statements.
(5) Fiscal 1998 shareholders' equity (deficit) reflects the repurchase of
approximately $530 million of the Company's Class A common stock pursuant
to a cash tender offer in June 1998.
(6) EBITDA represents net income before interest, taxes, depreciation and
amortization, a measurement used by management to measure operating
performance. EBITDA is not a recognized term under generally accepted
accounting principles and does not purport to be an alternative to
operating income as an indicator of operating performance or to cash flows
from operating activities as a measure of liquidity. Because not all
companies calculate EBITDA identically, this presentation of EBITDA may not
be comparable to other similarly titled measures of other companies.
Additionally, EBITDA is not intended to be a measure of free cash flow for
management's discretionary use, as it does not consider certain cash
requirements such as interest payments, tax payments and debt service
requirements.
31
Item 7.
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 fiscal years ended October 1, 1999, September 29,
2000 and September 28, 2001 should be read in conjunction with Selected
Consolidated Financial Data and our audited consolidated financial statements
and the notes to those statements. Our discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Special Note About
Forward-Looking Statements and Business sections and elsewhere in this annual
report.
Results of Operations
The following tables present our sales and operating income and related
percentages attributable to each operating segment for fiscal years 1999, 2000
and 2001.
Fiscal
-------------------------------------------
1999 2000 2001
------------- ------------- -------------
Sales $ % $ % $ %
----- -------- --- -------- --- -------- ---
(dollars in millions)
Food and Support Services--United
States.......................... $3,993.5 59% $4,396.3 61% $4,782.1 61%
Food and Support Services--
International................... 975.2 14 1,001.9 14 1,109.3 14
Uniform and Career Apparel--
Rental.......................... 911.9 14 969.6 13 995.2 13
Uniform and Career Apparel--
Direct Marketing................ 462.0 7 455.7 6 438.8 6
Educational Resources............ 399.7 6 439.4 6 463.3 6
-------- --- -------- --- -------- ---
$6,742.3 100% $7,262.9 100% $7,788.7 100%
======== === ======== === ======== ===
Fiscal
-------------------------------------------
1999 2000 2001
------------- ------------- -------------
Operating Income $ % $ % $ %
---------------- -------- --- -------- --- -------- ---
(dollars in millions)
Food and Support Services--United
States.......................... $222.3 59% $244.5 58% $264.7 60%
Food and Support Services--
International................... 32.0 9 40.2 10 39.4 9
Uniform and Career Apparel--
Rental.......................... 106.9 29 118.5 28 119.7 27
Uniform and Career Apparel--
Direct Marketing................ 3.9 1 10.8 2 15.6 4
Educational Resources............ 34.7 9 32.3 8 25.4 6
-------- --- -------- --- -------- ---
399.8 446.3 464.8
Corporate and other.............. (24.6) (7) (26.7) (6) (25.3) (6)
-------- --- -------- --- -------- ---
$375.2 100% $419.6 100% $439.5 100%
======== === ======== === ======== ===
32
Fiscal 2001 Compared to Fiscal 2000
Consolidated Overview
Sales for fiscal 2001 were $7.8 billion, an increase of 7% over fiscal 2000.
Sales increases in the Food and Support Services segments, the Uniform and
Career Apparel--Rental segment, and the Educational Resources segment were
partially offset by a decline in sales in the Uniform and Career Apparel--
Direct Marketing segment. Excluding the impact of acquisitions, primarily in
the Food and Support Services segments, and the unfavorable impact of foreign
currency translation, sales for fiscal 2001 increased 4% over the prior year.
Further excluding the estimated effect on sales of the September 11th terrorist
attacks, the increase would have been approximately 5%. Operating income of
$439.5 million increased $19.9 million or 5% over the prior year. Excluding the
impact of acquisitions and foreign currency translation, operating income
increased 3%. Higher unemployment levels in the United States manufacturing and
automotive sectors, along with increased energy costs, the general economic
slowdown in the United States, a litigation related charge, and the terrorist
attacks of September 11, 2001, have adversely impacted the fiscal 2001 results.
As discussed below, the Company was directly and indirectly impacted by the
terrorist attacks on September 11th (primarily in the Food and Support
Services--United States segment). Had the terrorist attacks not occurred,
management estimates that operating income, net income and diluted earnings per
share would have been approximately 2%, 3% and 3% higher in fiscal 2001,
respectively.
Interest and other financing costs, net for fiscal 2001 increased 4%
compared to the prior year due to increased borrowing levels to fund
acquisitions, stock repurchases and working capital requirements, partially
offset by the impact of lower interest rates.
Segment Results
Fiscal Change
----------------- ------------
2000 2001 $ %
-------- -------- ------ ----
(dollars in millions)
Sales by Segment
Food and Support Services--United States....... $4,396.3 $4,782.1 $385.8 8.8%
Food and Support Services--International....... 1,001.9 1,109.3 107.4 10.7
Uniform and Career Apparel--Rental............. 969.6 995.2 25.6 2.6
Uniform and Career Apparel--Direct Marketing... 455.7 438.8 (16.9) (3.7)
Educational Resources.......................... 439.4 463.3 23.9 5.4
-------- -------- ------ ----
Consolidated Sales............................. $7,262.9 $7,788.7 $525.8 7.2%
======== ======== ====== ====
Food and Support Services--United States segment sales increased 9% over the
prior year due to acquisitions, primarily the Ogden Entertainment, Inc.
acquisition in the third quarter of fiscal 2000 (approximately 5%), net new
accounts (approximately 2%) and increased volume (approximately 2%). Softness
in employment levels, particularly in the manufacturing and automotive sectors,
slowed growth in the business services and vending sectors, while sales growth
was strong in the correctional and healthcare sectors. Sales in the sports and
entertainment sector were also adversely impacted by the general economic
slowdown and the terrorist attacks of September 11th. As a result of the events
of September 11th, customer locations in and around the World Trade Center were
either destroyed or closed and Major League Baseball and National Football
League games scheduled for September were postponed until fiscal 2002. Had the
terrorists attacks not occurred, management estimates that segment sales would
have been approximately 1% higher. Sales in the Food and Support Services--
International segment increased 11% over the prior year period. Excluding the
unfavorable impact of foreign currency translation, sales increased 18% due to
net new accounts (approximately 8%), increased volume (approximately 5%) and
the impact of the Campbell Bewley acquisition (approximately 5%), with double-
digit growth in the United Kingdom and European markets. Sales in the Uniform
and Career Apparel--Rental segment increased 3% due to increased volume
(approximately 2%) and
33
pricing (approximately 1%). Sales growth in this sector has been constrained by
softness in the manufacturing, automotive and airline sectors. Uniform and
Career Apparel--Direct Marketing segment sales decreased 4% compared to the
prior year due primarily to lower volume. The general softening of the economy
and a decrease in business spending have adversely impacted 2001 sales in this
segment. In fiscal 2000, sales to the safety equipment and accessories market
were adversely impacted by the startup of a distribution facility. Educational
Resources segment sales increased 5% over the prior year due primarily to
pricing (approximately 3%) and new locations (approximately 6%), partially
offset by lower enrollment at existing locations (approximately 4%).
Fiscal Change
-------------- -------------
2000 2001 $ %
------ ------ ----- ------
(dollars in millions)
Operating Income by Segment
Food and Support Services--United States......... $244.5 $264.7 $20.2 8.3%
Food and Support Services--International......... 40.2 39.4 (0.8) (2.0)
Uniform and Career Apparel--Rental............... 118.5 119.7 1.2 1.0
Uniform and Career Apparel--Direct Marketing..... 10.8 15.6 4.8 44.4
Educational Resources............................ 32.3 25.4 (6.9) (21.4)
Corporate and other.............................. (26.7) (25.3) 1.4 5.2
------ ------ ----- ------
Consolidated Operating Income.................... $419.6 $439.5 $19.9 4.7%
====== ====== ===== ======
Food and Support Services--United States segment operating income increased
8%. Excluding the impact of acquisitions, operating income increased 4% due to
the sales increases noted above, partially offset by the impact of the
September 11th events, a litigation related charge and startup costs on a large
correctional services contract in the fourth quarter of fiscal 2001. Excluding
the litigation charge and startup costs, reported segment operating income
increased 12%. Additionally, had the terrorist attacks not occurred, management
estimates that 2001 segment operating income would have been approximately 3%
higher than reported. Reduced employment levels and generally soft economic
conditions (including the September 11th impact) constrained profit growth,
particularly in the second half of fiscal 2001. Operating income in the Food
and Support Services--International segment decreased 2%. Excluding the
unfavorable impact of foreign currency translation, acquisitions, and an asset
sale gain in the prior year, segment operating income increased 14% over the
prior year due to the sales increases noted above, partially offset by
increased infrastructure and acquisition integration costs in the U.K. and
increased food costs in Germany as a result of previous bovine spongiform
encephalopathy (BSE), or so-called "mad cow disease," and foot and mouth
disease outbreaks in Europe. Uniform and Career Apparel--Rental segment
operating income increased 1% over the prior year due to the sales increases
noted above and the absence of garment manufacturing startup costs incurred in
the prior year, partially offset by increased fuel, energy and other operating
costs. The slowdown in the United States economy has constrained both volume
and pricing growth, negatively impacting operating income, particularly in the
last half of fiscal 2001. Operating income in the Uniform and Career Apparel--
Direct Marketing segment increased 44% over the prior year due to reduced
catalog, distribution and administrative expenses, partially offset by the
impact of lower sales. Additionally, operating results in the segment were
adversely impacted in the prior year by start up costs related to a
distribution facility. Educational Resources segment operating income decreased
21%. Operating results in this segment continue to be adversely affected by
reduced enrollment at mature centers and continuing high labor and employee
medical costs.
Near Term Outlook
As discussed above, the events of September 11th, together with the
continuing economic slowdown in the United States have negatively affected
recent operating results, and we anticipate such conditions will continue into
the first quarter of fiscal 2002. While many of our businesses are likely to be
affected to some degree, we anticipate the effects to be more pronounced in our
U.S. food and support services operations, particularly those serving business
customers and tourist and convention center customers; in our uniform rental
operations and in
34
our childcare business. Although the near term economic outlook is uncertain,
we believe it is likely that first quarter 2002 consolidated operating income
will be approximately 5% below the amount reported in the comparable prior year
period. When economic conditions return to more normal levels, we anticipate
that our operating results will improve.
Fiscal 2000 Compared to Fiscal 1999
Consolidated Overview
Sales for the fiscal year ended September 29, 2000 were $7.3 billion, an
increase of 8% over fiscal 1999. Sales increased in the Food and Support
Services, Uniform Career and Apparel--Rental and Educational Resources segments
and decreased slightly in the Uniform and Career Apparel--Direct Marketing
segment. Excluding the impact of acquisitions, primarily in the Food and
Support Services--United States segment, sales increased approximately 5% over
fiscal 1999. Operating income of $419.6 million increased $44.4 million or 12%
over the prior year due to double-digit earnings increases in the Food and
Support Services and Uniform and Career Apparel segments, partially offset by
decreased earnings in the Educational Resources segment. Excluding the impact
of acquisitions, operating income increased approximately 8% over the prior
year period. Our operating income margin increased to 5.8% from 5.6% due
primarily to the leveraging of fixed costs and effective cost controls in the
Uniform and Career Apparel segments. Throughout fiscal 2000 the operating
results of several business segments have been affected by the trend of rising
labor, medical insurance and fuel costs. Various cost containment and price
increase programs have been initiated, and such efforts continued into fiscal
2001.
Interest expense increased $12.0 million or 9% over the prior year due to
increased debt levels, primarily to fund acquisitions and stock repurchases,
and increased interest rates.
Segment Results
Fiscal Change
----------------- -------------------
1999 2000 $ %
-------- -------- -------- ---------
(dollars in millions)
Sales by Segment
Food and Support Services--United
States................................ $3,993.5 $4,396.3 $ 402.8 10.1%
Food and Support Services--
International......................... 975.2 1,001.9 26.7 2.7
Uniform and Career Apparel--Rental..... 911.9 969.6 57.7 6.3
Uniform and Career Apparel--Direct
Marketing............................. 462.0 455.7 (6.3) (1.4)
Educational Resources.................. 399.7 439.4 39.7 9.9
-------- -------- -------- ---------
Consolidated Sales..................... $6,742.3 $7,262.9 $ 520.6 7.7%
======== ======== ======== =========
Food and Support Services--United States segment sales increased 10% over
the prior year due to acquisitions (approximately 5%) and increased volume
(approximately 5%) including new accounts. Sales in the Food and Support
Services--International segment increased 3% compared to fiscal 1999. Excluding
the unfavorable impact of foreign currency translation, sales in this segment
increased 9% due to new accounts (approximately 5%) and increased volume
(approximately 5%), partially offset by the impact of a divestiture in fiscal
1999 (approximately 1%). Sales in the Uniform and Career Apparel--Rental
segment increased 6% over the prior year period due to pricing (approximately
2%) and increased volume (approximately 4%). Uniform and Career Apparel--Direct
Marketing segment sales decreased 1% from fiscal 1999. Segment sales
performance reflects a decrease in direct uniform sales (approximately 4%),
primarily as a result of a planned reduction in catalog circulation, which was
partially offset by increased sales in the safety equipment and accessories
market (approximately 3%) due to increased volume and the acquisition of Dyna
Corporation in the second quarter of fiscal 1999. Educational Resources segment
sales increased 10% over the prior year due to pricing (approximately 5%) and
new locations (approximately 7%), partially offset by lower enrollment at
existing locations (approximately 2%).
35
Fiscal Change
------------------ -------------------
1999 2000 $ %
-------- -------- -------- ---------
(dollars in millions)
Operating Income by Segment
Food and Support Services--United
States.............................. $222.3 $244.5 $22.2 10.0%
Food and Support Services--
International....................... 32.0 40.2 8.2 25.6
Uniform and Career Apparel--Rental... 106.9 118.5 11.6 10.9
Uniform and Career Apparel--Direct
Marketing........................... 3.9 10.8 6.9 176.9
Educational Resources................ 34.7 32.3 (2.4) (6.9)
Corporate and other.................. (24.6) (26.7) (2.1) (8.5)
-------- -------- -------- ---------
Consolidated Operating Income........ $375.2 $419.6 $44.4 11.8%
======== ======== ======== =========
Food and Support Services--United States segment operating income increased
10%. Excluding the impact of acquisitions, operating income increased 3% over
fiscal 1999 due to the sales increases noted above, partially offset by
increased employee healthcare and other operating costs, including a provision
in the first quarter for a receivable from a customer that filed for
bankruptcy. Food and Support Services--International segment operating income
increased 26% over the prior year. Excluding the impact of asset sale gains
from both years ($3.8 million and $1.1 million, respectively), foreign currency
translation and fiscal 1999 operating losses at a Mexican subsidiary, operating
income increased 1% over the prior year due to the sales increases noted above,
partially offset by increased operating and business expansion costs. Uniform
and Career Apparel--Rental segment operating income increased 11% over the
prior year period due to the sales increases noted above and leveraging of
fixed costs, partially offset by costs related to the startup of certain
garment manufacturing operations. Operating income in the Uniform and Career
Apparel--Direct Marketing segment increased to $10.8 million in fiscal 2000
from $3.9 million in fiscal 1999 due to increased margins and reduced catalog
and other costs, partially offset by the impact of lower sales and increased
costs related to a new distribution center. Educational Resources segment
operating income decreased 7%. Operating results have been adversely impacted
by the limited supply and increased cost of labor resulting from the very
competitive labor markets, as well as increased employee medical costs.
Competition for scarce labor resources continued to affect results in this
segment during fiscal 2001.
Financial Condition and Liquidity
Reference to the consolidated statements of cash flows will facilitate
understanding of the discussion that follows:
Fiscal 2001
Cash provided by operating activities was $497 million in fiscal 2001 and
$407 million in fiscal 2000. Excluding the impact of the accounts receivable
sale transaction described below, cash provided by operating activities for
fiscal 2001 was $356 million, reflecting a reduction in current liabilities due
to the timing of certain payments such as taxes, commissions, retirement
benefits and stock repurchase obligations. Debt decreased by $167 million,
primarily due to the accounts receivable sale transaction noted above.
During fiscal 2001, we repurchased $91 million of our Class A and B common
stock, issuing $36 million in installment notes as partial consideration.
Additionally, we received approximately $32 million (including proceeds from
the sale of deferred payment obligations) related to the issuance of Class B
common stock through the exercise of installment stock purchase opportunities.
During fiscal 2001, we terminated the $125 million Educational Resources
credit facility, reduced borrowing capacity under the Canadian credit facility
from C$80 million to C$70 million, and established a $200 million accounts
receivable sale facility. During the second quarter of fiscal 2001, we entered
into an agreement, which we refer to as the receivables facility, with several
financial institutions whereby we sell on a continuous basis an undivided
interest in all eligible trade accounts receivable, as defined. Pursuant to the
36
receivables facility, we formed ARAMARK Receivables, LLC, a wholly-owned,
special purpose, bankruptcy-remote subsidiary. Under the receivables facility,
certain of our subsidiaries transfer without recourse all of their trade
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. We have retained
collection and administrative responsibility for the participating interests
sold. The agreement expires in March 2004. We have approximately $525 million
of unused committed credit availability under our senior revolving credit
facility. Additionally, we have shelf registration statements on file with the
SEC for the issuance of up to $500 million of debt securities. The debt
securities can be issued under an indenture dated July 15, 1991, which permits
us to issue unsecured debt obligations with interest rates and terms to be
established at the time of issuance based on prevailing market conditions. As
of September 28, 2001, we have capital commitments of approximately $108
million in connection with several long-term concession contracts. We currently
expect to fund most 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
note issuances. As of September 28, 2001, we had approximately $86 million
outstanding in foreign currency borrowings.
On October 3, 2001, we signed a definitive agreement to acquire the
management services division of The ServiceMaster Company, which we refer to as
ServiceMaster Management Services. The aggregate consideration for the
transaction is approximately $800 million in cash. The transaction is subject
to customary consents, approvals, conditions and clearances.
We intend to finance the acquisition of ServiceMaster Management Services by
borrowing approximately an additional $200 million under the senior revolving
credit facility and $600 million under a new bridge financing facility with a
group of banks arranged by J.P. Morgan Securities, Inc. We expect to repay a
portion of the bridge financing with a portion of the proceeds from the
proposed public offering described below.
A subsidiary of the Company has filed Form S-1 and S-4 registration
statements (as amended) with the Securities and Exchange Commission and is in
the process of becoming a publicly traded company. The Company expects to merge
with this subsidiary just prior to the completion of the public offering of new
Class B common stock. In the merger, ARAMARK will merge with and into its newly
formed subsidiary, ARAMARK Worldwide Corporation, and each outstanding ARAMARK
old Class B and old Class A common share will become two shares and twenty
shares, respectively, of the surviving corporation's Class A common stock and
have the effect of a two-for-one stock split. ARAMARK Worldwide Corporation's
name will become ARAMARK Corporation, and the surviving corporation will
succeed to all of the assets, liabilities, rights and obligations of ARAMARK.
The proposed transaction is intended to put in place a capital structure
that will give ARAMARK greater financial flexibility to respond to changes in
worldwide market conditions with a publicly-traded equity security that can be
used, when appropriate, for strategic initiatives. ARAMARK intends to use a
portion of the proceeds of the public offering to fund a cash tender offer for
some of the new class A common stock which will be held by current shareholders
and to repurchase shares from employee benefit plans. ARAMARK intends to begin
the cash tender offer as soon as practicable after the proposed offering of
class B common stock. The remainder of the proceeds will be used to reduce debt
as described above.
New Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board (FASB) finalized
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. With the adoption of SFAS No. 142, goodwill is no longer subject to
amortization, rather it will be subject to at least an annual assessment for
impairment by applying a fair value based test. We are required to adopt the
provisions of this pronouncement no later than the beginning of fiscal 2003.
However, goodwill and other intangible assets acquired after June 30, 2001, are
subject immediately to the nonamortization and amortization provisions of this
statement. We will adopt the nonamortization and
37
amortization provisions of SFAS No. 142 beginning in the first quarter of
fiscal 2002. During fiscal 1999, 2000 and 2001, goodwill amortization (pre-tax)
was $21.3 million, $22.2 million and $25.4 million, respectively. We are
currently evaluating the impact of the transitional goodwill impairment test
required by SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. We are required to adopt the provisions
of this pronouncement no later than the beginning of fiscal 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. We are
required to adopt the provisions of this pronouncement no later than the
beginning of fiscal 2003.
We are currently evaluating the impact of both SFAS No. 143 and 144.
38
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 the September 11th
terrorist attacks, increased operating costs, shortages of qualified personnel,
costly compliance with governmental regulations, currency risks and other risks
associated with international markets, risks associated with acquisitions, our
ability to integrate and derive the expected benefits from our acquisition of
ServiceMaster Management Services, competition, decline in attendance at client
facilities, unpredictability of sales and expenses due to contract terms, high
leverage, claims relating to the provision of food services, liability
associated with non-compliance with governmental regulations, including
regulations pertaining to food services, the environment and childcare service,
seasonality and adverse publicity concerning incidents at childcare centers.
In this annual report and particularly in "Risk Factors", we have estimated
the impact that unfavorable economic conditions, including ramifications of the
September 11th terrorist attacks, competition for labor, the labor stoppage
that disrupted the 1994 and 1995 Major League Baseball seasons, and the effect
of event cancellations, have had on our expected sales and results of
operations. The actual impact of such estimates may vary from those stated in
this annual report.
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 annual report or
that may be made elsewhere from time to time by, or on behalf of, us.
39
RISK FACTORS
Risk Factors Relating to Our Business
General
Unfavorable economic conditions and increased operating costs adversely
affect our results of operations and financial condition.
Recently, our food and support services and uniform and career apparel
segments have been adversely affected by weaker economic conditions in the
United States, particularly with respect to manufacturing and technology
clients. Production cutbacks in the manufacturing industry have adversely
affected our results of operations for fiscal 2001. Layoffs and business
downturns have increased among our business clients, which has negatively
affected our sales. We estimate that these unfavorable economic conditions have
reduced our consolidated sales for fiscal 2001 by approximately 2% from the
level of sales we would have expected absent such conditions. A national or
international economic downturn reduces demand for our services in each of our
operating segments, which has resulted, and may in the future result, in the
loss of business or increased pressure to contract for business on less
favorable terms than our generally preferred terms. Although the near term
economic outlook is uncertain, we believe that it is likely that first quarter
fiscal 2002 consolidated operating income will be approximately 5% below the
amount reported in the comparable prior year period.
Our profitability could be adversely affected if we were faced with cost
increases for food, fuel, utilities, wages, piece goods, clothing and
equipment, especially to the extent we were unable to recover such increased
costs through increases in the prices for our services, due to general economic
conditions, competitive conditions, or both. For example, substantial increases
in the cost of fuel and utilities have resulted in substantial cost increases
in our uniform services business, and to a lesser extent in our food and
support services segment, which have not been fully recoverable due to general
economic conditions, competitive conditions, or both. In particular, our
business segments that operate in California have been negatively impacted by
significant increases in electricity, natural gas and fuel costs. We estimate
that our costs have increased in the range of $6 million to $8 million in
fiscal 2001 as a result of these factors. Increases in energy costs
particularly impact our uniform and career apparel business.
Our business may suffer if we are unable to hire and retain sufficient
qualified personnel or if labor costs continue to increase.
Over the past several years, the United States has experienced reduced
levels of unemployment. This has created a shortage of qualified workers at all
levels. Given that our workforce requires large numbers of entry level and
skilled workers and managers, continuation of low levels of unemployment could
compromise our ability in certain of our businesses to continue to provide
quality service or compete for new business. From time to time, we have had
difficulty in hiring and maintaining qualified management personnel,
particularly at the entry management level. We will continue to have
significant requirements to hire such personnel. Our success depends to a
substantial extent on the ability, experience and performance of our
management, particularly our Chairman and Chief Executive Officer, Joseph
Neubauer. After the offering of new Class B common stock, we may experience
more employees leaving our employ, as employees will now have the ability to
leave our employ with their ARAMARK common stock, which they could not
previously do, and with potentially more financial resources. We also regularly
hire a large number of part-time workers, particularly in our food and support
services segments. Any difficulty we may encounter in hiring such workers could
result in significant increases in labor costs which could have a material
adverse effect on our business, financial condition and results of operations.
Competition for labor has resulted in wage increases that in some recent
periods have had the effect of substantially increasing our labor costs. We
estimate that such competition
40
for labor has increased our wage costs for certain of our businesses in the
range of 3% to 5% from what such costs would have been absent such conditions.
Due to the labor intensive nature of our businesses, a continued shortage of
labor or increases in wage levels in excess of normal levels could have a
material adverse effect on our results of operations.
Our expansion strategy involves risks.
We may seek to acquire companies or enter into joint ventures that
complement our business, and our inability to complete acquisitions, integrate
acquired companies successfully or enter into joint ventures may render us less
competitive. We may be evaluating acquisitions or engage in acquisition
negotiations at any given time. We cannot assure you that we will be able to
identify acquisition candidates or joint venture partners on commercially
reasonable terms or at all. If we make additional acquisitions, we also cannot
be sure that any benefits anticipated from the acquisitions will actually be
realized. Likewise, we cannot be sure that we will be able to obtain additional
financing for acquisitions. Such additional financing could be restricted by
the terms of our debt agreements or it could be more expensive than our current
debt. In addition, our ability to control the planning and operations of our
joint ventures may be subject to numerous restrictions imposed by the joint
venture agreements. Our joint venture partners may also have interests which
differ from ours.
The process of integrating acquired operations into our existing operations
may result in unforeseen operating difficulties and may require significant
financial, operational and managerial resources that would otherwise be
available for the ongoing development or expansion of our existing operations.
To the extent that we have miscalculated our ability to integrate and operate
the business to be acquired, we may have difficulty in achieving our operating
and strategic objectives. The diversion of management attention, particularly
in a difficult operating environment, may affect our sales. Possible future
acquisitions could result in the incurrence of additional debt and related
interest expense, contingent liabilities and amortization expenses related to
intangible assets, all of which could have a materially adverse effect on our
financial condition, operating results and/or cash flow. After this offering,
we may finance acquisitions through the issuance of additional shares of our
common stock.
If we are unable to successfully integrate ServiceMaster Management Services
or derive the benefits we expect, our operating results, sales and profits may
be materially adversely affected.
Our future results of operations and cash flow may depend in part upon our
ability to integrate ServiceMaster Management Services and achieve the
strategic operating objectives we anticipate from this acquisition. We have not
previously undertaken an integration process as large as the integration plans
required by this acquisition. In order to succeed, we will need to:
. capitalize on the opportunities afforded by ARAMARK's and ServiceMaster's
combined services offerings;
. maintain strong relationships with clients, which as a result of the
ServiceMaster acquisition will increase the number of our facilities
management clients by approximately 1,550 to approximately 1,800;
. combine and manage our employee base, which as a result of the
ServiceMaster acquisition will increase the number of our employees by
approximately 18,000 to a total of approximately 218,000; and
. integrate operating and financial systems.
ServiceMaster's business is based upon contractual relationships with
customers. Some or all of those customers may choose not to continue their
contractual relationship with us at the time of contract renewal. In addition,
the acquisition of ServiceMaster Management Services will increase our debt
levels by approximately $806 million, significantly exceeding historical
levels, and our interest expense in fiscal 2001 on a pro forma basis giving
effect to this acquisition would have increased by approximately $53 million.
As a result, we will need to manage effectively our cash position and working
capital levels.
41
The recent terrorist attacks on the United States have directly and
indirectly negatively affected our operating results, sales and profits.
The September 11, 2001 terrorist attacks on New York City and Washington,
D.C. have adversely affected our operating results in the fourth fiscal quarter
of 2001. Had the terrorist attacks not occurred, management estimates that
operating income would have been approximately 2% higher in fiscal 2001. Our
retail and food service operations in the World Trade Center and our childcare
and food service operations at the Pentagon were directly affected by the
attacks. Certain of our other businesses were indirectly affected as described
below. To the extent the events of September 11th result in a further economic
slowdown and disruptions in the United States and Europe, the negative effects
on our business could be prolonged and pervasive, however, it is not possible
to estimate such effects at this time. The national and global response to
these terrorist attacks, many of which are still being formulated, including
recent military, diplomatic and financial responses and any possible reprisals
as a consequence of allied actions, may materially adversely affect us in ways
we cannot predict at this time.
Our business has been, and will continue to be affected in various ways
including, but not limited to:
. the loss of property such as operating equipment and merchandise
inventory;
. costs incurred in providing assistance to the victim relief efforts;
. direct costs of restoring our operations including cleanup,
relocation, data re-creation;
. impairment of intangible assets;
. lost sales and profits from closed and curtailed operations in the
affected areas;
. the lost opportunity to generate sales and profits as a result of
sporting and other recreational event cancellations/postponements
and reduced attendance at such events, reduced employment levels,
particularly in the airline and related industries, reduced
visitation at parks and resorts, and reduced attendance at
conventions; and
. increased cost of property and liability insurance and possible
increased retentions due to uncertainty in the worldwide insurance
and reinsurance markets.
The impact of the above was significant to our fiscal fourth quarter 2001
operating results as stated above. Although the near term economic outlook is
uncertain, we believe it is likely that first quarter fiscal 2002 consolidated
operating income will be approximately 5% below the amount reported in the
comparable prior year period.
We anticipate a substantial portion of our direct costs and other losses
will be covered by insurance. We maintain workers compensation, general
liability, property damage and business interruption coverages. The process of
quantifying and compiling insurance claims and arranging settlements with
multiple insurance carriers is continuing and will be ongoing for an extended
time period.
Requirements imposed by governmental regulations or interpretation of
governmental regulations may change and require us to incur substantial
expenditures to comply.
We are subject to governmental regulation at the federal, state, provincial
and local level in many areas of our business, such as food safety and
sanitation, the sale of alcoholic beverages, environmental issues, childcare
and the services we provide in connection with governmentally funded
entitlement programs. While we endeavor to attain and maintain compliance with
all applicable laws and regulations, governmental units may make changes in the
regulatory frameworks within which we operate that may require either the
corporation as a whole or individual businesses to incur substantial increases
in costs in order to comply with such laws and regulations. While we attempt to
comply with all applicable laws and regulations, we cannot assure you that we
are in full compliance with all applicable laws and regulations or
interpretations thereof at all times or that we will be able to comply with any
future laws, regulations or interpretations thereof. If we fail to comply with
42
applicable laws and regulations, we may be subject to criminal sanctions or
civil remedies, including fines or injunctions. The cost of compliance or the
consequences of non-compliance could have a material adverse effect on our
business and results of operations.
Changes in or new interpretations of the governmental regulatory framework
may affect our contract terms and may reduce our sales or profits.
A portion of our sales, estimated to be approximately 15% in fiscal 2001, is
derived from contracts with U.S. federal, state and local governments and
agencies. Changes or new interpretations in the regulatory framework applicable
to services provided under governmental contracts or bidding procedures,
particularly by our food and support services businesses, could result in
modifications to the methods we apply to price government contracts and in
contract terms of shorter duration than we have historically experienced, each
of which could result in sales or profits lower than we have historically
achieved, which could have an adverse effect on our results of operations.
Our international business results are influenced by currency fluctuations
and other factors that are different than in the U.S. market.
A significant portion of our sales is derived from international markets.
During fiscal 2001, approximately 14% of our sales were generated outside the
United States. The operating results of our international subsidiaries are
translated into U.S. dollars and such results are affected by movements in
foreign currencies relative to the U.S. dollar. Sales of our Food and Support
Services--International segment were unfavorably affected by currency
translation by approximately 7% for fiscal 2001.
Our international operations are also subject to other risks, including
national and local regulatory requirements; potential difficulties in staffing
and labor disputes; managing and obtaining support and distribution for local
operations; credit risk or financial condition of local customers; potential
imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes
on remittances and other payments by subsidiaries; foreign exchange
restrictions; and local political and social conditions. There can be no
assurance that the foregoing factors will not have a material adverse effect on
our international operations or on our consolidated financial condition and
results of operations.
Our operations are seasonal.
In the first and second fiscal quarters, within the Food and Support
Services--United States segment, there is a lower level of sales at the
historically higher margin sports, entertainment and recreational food service
operations which is partly offset by increased activity in the educational
sector. In the third and fourth fiscal quarters, there has historically been a
significant increase in sales at sports, entertainment and recreational
accounts, which is partially offset by the effect of summer recess in the
educational sector. The sales of WearGuard(R), one of our direct marketing
companies, generally increase during the first quarter of the fiscal year
because of the onset of colder weather in the northern tier of the United
States as well as the gift giving holidays. For these reasons, a quarter to
quarter comparison is not a good indication of our performance or how we will
perform in the future.
Our indebtedness may restrict certain growth opportunities.
As of September 28, 2001, on a pro forma basis, we would have had
approximately $2.2 billion of outstanding indebtedness, including $806 million
of indebtedness to be incurred to finance the acquisition of ServiceMaster
Management Services and related expenses. The size of our indebtedness may
restrict the pursuit of certain new business opportunities. We will also have
to use a portion of our cash flow to service our debt, which may prevent us
from pursuing certain new business opportunities and certain acquisitions.
Failure to maintain certain financial ratios could cause us to violate the
terms of our credit facility agreements and thereby result in acceleration of
our indebtedness, impair our liquidity and limit our ability to raise
additional capital. Our failure to make required debt payments could result in
an acceleration of our indebtedness, in which case
43
the lenders thereunder would be entitled to exercise their remedies. We may
incur additional indebtedness in the future.
Food and Support Services
Competition in our industry could adversely affect our results of
operations.
There is significant competition in the food and support services business
from local, regional, national and international companies, of varying sizes,
many of which have substantial financial resources. Our ability to successfully
compete depends on our ability to provide quality services at a reasonable
price and to provide value to our customers. Certain of our competitors may be
willing to underbid us or accept a lower profit margin or expend more capital
in order to obtain or retain business. In addition, existing or potential
clients may elect to self operate their food service, eliminating the
opportunity for us to serve them or compete for the account. While we have a
significant international presence, should business sector clients require
multi-national bidding, we may be placed at a competitive disadvantage because
we may not be able to offer services in as many countries as some of our
competitors.
Sales of sports, entertainment and recreational services would be adversely
affected by a decline in attendance at client facilities or by a reduction or
cessation of events.
The portion of our food and support services business which provides
services in public facilities such as stadiums, arenas, amphitheaters,
convention centers and tourist and recreational attractions is sensitive to an
economic downturn, as expenditures to attend sporting events or concerts, take
vacations, or hold or attend conventions is funded to a partial or total extent
by discretionary income. A decrease in such discretionary income on the part of
potential attendees at events in our clients' facilities could result in a
reduction in our sales.
Further, because our exposure to the ultimate consumer of what we provide is
limited by our dependence on our clients to attract customers to their
facilities and events, our ability to respond to such a reduction in
attendance, and therefore our sales, is limited. For example, we have recently
experienced an increase in event cancellation at convention centers which we
believe is attributable to the current economic slowdown. As a result of such
cancellations, we estimate our consolidated sales for fiscal 2001 were reduced
by less than 1% from the level of sales we would have expected absent such
cancellations. We believe the impact of the terrorist attacks resulted in
additional event cancellations in our fourth fiscal quarter, as well as in the
first quarter of fiscal 2002. We estimate that had the terrorist attacks not
occurred, consolidated sales and operating income in fiscal 2001 would have
been approximately 1% and 2% higher, respectively, than reported results. There
are other occurrences which could reduce events in a facility or attendance at
an event including labor disruptions involving sports leagues, poor performance
by the teams playing in a facility and inclement weather, which would adversely
affect sales and profits. Our sales and results of operations were adversely
affected by the labor stoppage that disrupted the 1994 and 1995 Major League
Baseball seasons. We estimated, at the time, that our consolidated operating
income would have been approximately 5% higher in fiscal 1995 and approximately
3% higher in fiscal 1994 had the Major League Baseball and other labor
disruptions not occurred. The Major League Baseball Collective Bargaining
Agreement expired after the 2001 season. A shortened or cancelled 2002 season
could result in a substantial loss of sales and reduced profits at Major League
Baseball stadiums. In addition, many professional sports teams, including some
of our clients, are currently either planning to move to a new facility or are
considering doing so. Generally our sports facility contracts do not entitle us
to move to a new facility when the sports team tenant of the present facility
moves.
The pricing and cancellation terms of our food and support services
contracts may constrain our ability to recover costs and to make a profit on
our contracts.
The amount of risk that we bear and our profit potential vary depending on
the type of contract under which we provide food and support services. We may
be unable to fully recover costs on contracts that limit our ability to
increase prices. In addition, we provide many of our services under short term,
open ended
44
cancelable contracts. Some of our profit and loss contracts contain minimum
guaranteed remittances to our client regardless of our sales or profit at the
facility involved. If sales do not exceed costs under a contract which contains
minimum guaranteed commissions, we will be liable for bearing any losses which
are incurred, as well as the guaranteed commission. Generally, our contracts
limit our ability to raise prices on the food, beverages and merchandise we
sell within a particular facility without the client's consent. In addition,
some of our contracts exclude certain events or products from the scope of the
contract, or give the client the right to modify the terms under which we may
operate at certain events. The refusal by individual clients to permit the sale
of some products at their venues, or the imposition by clients of limits on
prices which are not economically feasible for us, could adversely affect our
sales and results of operations.
Claims of illness or injury associated with the service of food and beverage
to the public could adversely affect us.
Claims of illness or injury relating to food quality or food handling are
common in the food service industry, and a number of these claims may exist at
any given time. As a result, we could be adversely affected by negative
publicity resulting from food quality or handling claims at one or more of the
facilities that we serve. In addition to decreasing our sales and profitability
at our facilities, adverse publicity could negatively impact our service
reputation, hindering our ability to renew contracts on favorable terms or to
obtain new business. In addition, broader trends in food consumption, such as
the recent concern about beef consumption in Europe, may from time to time
disrupt our business.
One distributor provides approximately 55% of our U.S. food and non-food
products (approximately 37% of our consolidated purchases of food and non-food
products), and if our relationship or their business were to be disrupted, we
could experience short term disruptions to our operations and cost structure.
If our relationship with, or the business of, our main U.S. distributor of
our food and non-food products were to be disrupted, we would have to arrange
alternative distributors and our operations and cost structure could be
adversely affected in the short-term.
Governmental regulations may subject us to significant liability.
Our operations are subject to various governmental regulations, including
those governing:
. the service of food and alcoholic beverages;
. minimum wage and employment;
. governmentally funded entitlement programs;
. environmental protection; and
. human health and safety.
The regulations relating to each of our food and support service sectors are
many and complex. For example, while there are a variety of regulations at
various governmental levels relating to the handling, preparation and serving
of food (including in some cases requirements relating to the temperature of
food), and the cleanliness of food production facilities and the hygiene of
food-handling personnel, these regulations are enforced primarily at the local
public health department level. While we attempt to fully comply with all
applicable laws and regulations, we cannot assure you that we are in full
compliance with all applicable laws and regulations at all times or that we
will be able to comply with any future laws and regulations. Furthermore,
additional or amended regulations in this area may significantly increase the
cost of compliance. We are currently negotiating a settlement with the U.S.
government of certain matters related to public school food service programs,
and we do not believe such settlement will have a material adverse effect on
our financial condition or results of operations. It is possible, however, that
future claims could be asserted related to such public school programs, and
while management believes its interpretation of the applicable government
regulations is correct, no assurance can be given as to the outcome of such
claims, if asserted.
45
We serve alcoholic beverages at many facilities, and must comply with
applicable licensing laws, as well as state and local service laws, commonly
called dram shop statutes. Dram shop statutes generally prohibit serving
alcoholic beverages to certain persons such as an individual who is intoxicated
or a minor. If we violate dram shop laws, we may be liable to third parties for
the acts of the patron. Although we sponsor regular training programs to
minimize the likelihood of such a situation, we cannot guarantee that
intoxicated or minor patrons will not be served or that liability for their
acts will not be imposed on us. There can be no assurance that additional
regulation in this area would not limit our activities in the future or
significantly increase the cost of regulatory compliance. We must also obtain
and comply with the terms of licenses in order to sell alcoholic beverages in
the states in which we serve alcoholic beverages. Some of our contracts require
us to pay liquidated damages during any period in which our liquor license for
the facility is suspended, and most contracts are subject to termination if we
lose our liquor license for the facility.
Uniform and Career Apparel
Competition in the uniform rental industry could adversely affect our
results of operations.
We have a number of major national competitors with significant financial
resources. In addition there are strong regional and local uniform suppliers,
whom we believe may have strong customer loyalty. While most customers focus
primarily on quality of service, uniform rental is a price-sensitive service
and if existing or future competitors seek to gain or retain market share by
reducing prices, we may be required to lower prices, which would reduce our
sales and profits. The uniform rental business requires investment capital for
growth. Failure to maintain capital investment in this segment would put us at
a competitive disadvantage.
Environmental regulations may subject us to significant liability and limit
our ability to grow.
Our uniform rental segment is subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of water wastes and other
substances. In particular, industrial laundries use and must dispose of
detergent wastewater and other residues through publicly operated treatment
works or similar government facilities and are subject to volume and chemical
discharge limits and penalties and fines for non-compliance. In the past, we
have settled, or contributed to the settlement of, actions or claims brought
against us relating to the disposal of hazardous materials. Although past
settlements and contributions have not been material, there can be no assurance
that we will not have to expend material amounts to rectify the consequences of
any such disposal in the future. Further, under environmental laws, an owner or
lessee of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in or emanating from such
property, as well as related costs of investigation and property damage. Such
laws often impose liability without regard to whether the owner or lessee knew
of or was responsible for the presence of such hazardous or toxic substances.
While we conduct diligence investigations on acquired properties and attempt to
fully comply with all applicable laws and regulations, there can be no
assurances that acquired or leased locations have been operated in compliance
with environmental laws and regulations or that future uses or conditions will
not result in the imposition of liability upon us under such laws or expose us
to third party actions such as tort suits. In addition, such regulations may
limit our ability to identify suitable sites for new or expanded plants.
Educational Resources
Competition in the childcare and early education industry is extensive and
competitors may price their offerings below ours, which could cause a reduction
in our sales and profits.
Local nursery schools, childcare centers and in-home providers generally
charge less for their services than we do. Many church-affiliated and other
non-profit childcare centers have lower operating expenses than we do and may
receive donations and/or other funding to subsidize operating expenses.
Consequently, operators of such centers often charge tuition rates that are
less than our rates. In addition, fees for home-based care are normally
substantially lower than fees for center-based care because providers of home-
based care are not
46
always required to satisfy the same health, safety, insurance or operational
regulations as our centers. Our competition also includes other large,
geographically broad-based, for-profit early education and childcare companies.
In addition, a number of states and local governments are operating or
considering operating public preschools. In recent periods, reduced enrollment
at mature centers and competitive pricing pressures have reduced our sales and
profits.
Adverse publicity and litigation concerning incidents at childcare centers
could adversely affect our business and results of operations.
Parent trust and referrals by other parents are very significant in the
maintenance and growth of our business, and any decrease in trust or referrals
can adversely affect our business. This trust is directly related to our
reputation and favorable brand identity. However, like many other childcare
providers, we are periodically subject to litigation alleging negligent hiring,
training or supervision, inappropriate contact with children or other acts
arising out of alleged incidents at our centers. Any adverse publicity
concerning such incidents at one of our childcare centers, or childcare centers
generally, could damage our reputation and could have an adverse effect on
enrollment at our centers. Claims in the past have been covered by insurance.
We believe our current claims will be covered by insurance. However, our
insurance premiums may increase substantially in the future as a consequence of
conditions in the insurance business generally, or our situation in particular,
and continuing publicity with respect to alleged instances of child abuse in
our industry could result in our inability to obtain insurance without a
substantial increase in cost. Furthermore, our current or future insurance
coverage may not protect us against all such claims.
The childcare industry is heavily regulated and our failure to comply with
those regulations could subject us to substantial liability or inhibit our
ability to operate.
Childcare centers are subject to numerous state, local and federal
regulations and licensing requirements which generally cover the fitness and
adequacy of buildings and equipment, the ratio of staff to enrolled children,
staff training, record keeping, the dietary program, the curriculum and
compliance with health and safety standards, and if we fail to comply with
these, we may be prohibited from operating one or more of our childcare
centers. Some changes, such as increasing the ratio of staff to enrolled
children, can result in significantly increased costs to operate our business.
If one of our centers fails to comply with applicable regulations, that center
could be subject to state sanctions. These sanctions may include fines,
corrective orders, probation or, in more serious cases, suspension or
revocation of the center's license to operate. Changes in the regulatory
frameworks within which we operate may cause us to incur substantial increases
in costs in order to comply. While we attempt to fully comply with all
applicable laws and regulations, we cannot assure you that we are in full
compliance with all applicable laws and regulations at all times or that we
will be able to comply with any future laws and regulations. If we fail to
comply with applicable laws and regulations, civil remedies, including fines,
could be imposed on us. The cost of compliance or the consequences of non-
compliance could have a material adverse effect on our business and results of
operations.
47
Item 7A. Quantitative and Qualitative Disclosure 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 information below summarizes our market
risks associated with debt obligations and other significant financial
instruments as of September 29, 2000 and September 28, 2001. Fair values were
computed using market quotes, if available, or based on discounted cash flows
using market interest rates as of the end of the respective periods. For debt
obligations, the table presents principal cash flows and related interest rates
by expected fiscal year of maturity. Variable interest rates disclosed
represent the weighted-average rates of the portfolio at September 29, 2000 and
September 28, 2001. For interest rate swaps, the table presents the notional
amounts and related weighted-average interest rates by fiscal year of maturity.
The variable rates presented are the average forward rates for the term of each
contract.
Expected Fiscal Year of Maturity
-----------------------------------------------------------
Fair
As of September 29, 2000 2001 2002 2003 2004 2005 Thereafter Total Value
- ------------------------ ---- ---- ---- ---- ---- ---------- ----- -----
(US$ equivalent in millions)
Debt:
Fixed rate.............. $25 $25 $25 $300(a) $150 $467(a) $992 $951
Average interest rate... 6.8% 6.8% 6.8% 6.8% 8.2% 7.1% 7.2%
Variable rate........... $60 $45 $4 $736 $845 $845
Average interest rate... 5.8% 8.0% 6.6% 7.6% 7.5%
Interest Rate Swaps:
Receive variable/pay
fixed.................. $150 $100 $100 $(4)
Average pay rate........ 7.0% 7.6% 7.7%
Average receive rate.... 6.8% 6.7% 6.7%
Expected Fiscal Year of Maturity
-----------------------------------------------------------
Fair
As of September 28, 2001 2002 2003 2004 2005 2006 Thereafter Total Value
- ------------------------ ---- ---- ---- ---- ---- ---------- ----- -----
(US$ equivalent in millions)
Debt:
Fixed rate.............. $31 $25 $300(a) $150 $300(a) $172 $978 $997
Average interest rate... 6.6% 6.8% 6.8% 8.2% 7.0% 7.2% 7.1%
Variable rate........... $35 $50 $55 $550 $3 -- $693 $693
Average interest rate... 6.2% 4.9% 4.2% 4.1% 6.4% 4.3%
Interest Rate Swaps:
Receive variable/pay
fixed.................. $100 $100 $(11)
Average pay rate........ 7.6% 7.7%
Average receive rate.... 3.6% 3.5%
- --------
(a) Each balance includes $300 million of senior notes callable by us at any
time.
48
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Schedule at page S-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Items 10, 11, 12, and 13 of Part III are incorporated by reference to the
Section titled "Election of Directors" in the registrant's Proxy Statement for
its annual meeting of stockholders, to be filed with the Commission pursuant to
Regulation 14A (except for the committee report on executive compensation and
the audit committee report in the Company's Proxy Statement).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements
See Index to Financial Statements and Schedule at page S-1.
(b) Reports on Form 8-K
On July 17, 2001, ARAMARK Worldwide Corporation filed a report on Form 8-K
relating to an announcement regarding a registration statement it filed with
the Securities and Exchange Commission for an initial public offering of shares
of new Class B common stock.
(c) Exhibits Required by Item 601 of Regulation S-K
See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Schedule at page S-1.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Philadelphia, Commonwealth of Pennsylvania, on November 28, 2001.
ARAMARK Corporation
/s/ Joseph Neubauer
By: _________________________________
Name: Joseph Neubauer
Title: Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose name appears
below hereby appoints Joseph Neubauer, L. Frederick Sutherland, Bart J. Colli
and Donald S. Morton, and each of them, as his true and lawful agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute any and all amendments to the
within annual report, and to file the same, together with all exhibits thereto,
with the Securities and Exchange Commission, granting unto each said attorney-
in-fact and agent, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agent may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this annual report has been signed below by the following persons in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Joseph Neubauer Chairman and Director November 28, 2001
______________________________________ (Principal Executive
Joseph Neubauer Officer)
/s/ L. Frederick Sutherland Executive Vice President, November 28, 2001
______________________________________ Chief Financial Officer
L. Frederick Sutherland (Principal Financial
Officer)
/s/ John M. Lafferty Senior Vice President, November 28, 2001
______________________________________ Controller and Chief
John M. Lafferty Accounting Officer
(Principal Accounting
Officer)
/s/ Lawrence T. Babbio, Jr. Director November 28, 2001
______________________________________
Lawrence T. Babbio, Jr.
/s/ Patricia C. Barron Director November 28, 2001
______________________________________
Patricia C. Barron
50
Name Title Date
---- ----- ----
/s/ Robert J. Callander Director November 6, 2001
______________________________________
Robert J. Callander
/s/ Leonard S. Coleman, Jr. Director November 6, 2001
______________________________________
Leonard S. Coleman, Jr.
/s/ Ronald R. Davenport Director November 28, 2001
______________________________________
Ronald R. Davenport
/s/ Edward G. Jordan Director November 28, 2001
______________________________________
Edward G. Jordan
/s/ Thomas H. Kean Director November 6, 2001
______________________________________
Thomas H. Kean
/s/ James E. Ksansnak Director November 28, 2001
______________________________________
James E. Ksansnak
/s/ James E. Preston Director November 6, 2001
______________________________________
James E. Preston
/s/ Karl M. von der Heyden Director November 6, 2001
______________________________________
Karl M. von der Heyden
51
ARAMARK CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Audited Consolidated Financial Statements
Report of Independent Public Accountants................................ S-2
Consolidated Balance Sheets as of September 29, 2000 and September 28,
2001................................................................... S-3
Consolidated Statements of Income for the Fiscal Years Ended October 1,
1999, September 29, 2000 and September 28, 2001........................ S-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended October
1, 1999, September 29, 2000 and September 28, 2001..................... S-5
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended October 1, 1999, September 29, 2000 and September 28, 2001....... S-6
Notes to Consolidated Financial Statements.............................. S-7
Schedule II--Valuation and Qualifying Accounts and Reserves............. S-30
All other schedules are omitted because they are not applicable, not
required, or the information required to be set forth therein is included in
the consolidated financial statements or in the notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ARAMARK Corporation:
We have audited the accompanying consolidated balance sheets of ARAMARK
Corporation (a Delaware corporation) and subsidiaries as of September 29, 2000
and September 28, 2001, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended September 28, 2001. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ARAMARK Corporation and
subsidiaries as of September 29, 2000 and September 28, 2001, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended September 28, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and schedule is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
November 14, 2001
S-2
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2000 AND SEPTEMBER 28, 2001
(dollars in thousands, except share amounts)
Fiscal
----------------------
2000 2001
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 24,592 $ 24,799
Receivables (less allowances: 2000--$24,803; 2001--
$22,571)........................................... 585,630 503,291
Inventories......................................... 416,413 415,798
Prepayments and other current assets................ 72,230 76,310
---------- ----------
Total current assets.............................. 1,098,865 1,020,198
---------- ----------
Property and Equipment, at Cost:
Land, buildings and improvements.................... 688,624 786,697
Service equipment and fixtures...................... 1,409,265 1,447,861
---------- ----------
2,097,889 2,234,558
Less-Accumulated depreciation....................... 1,044,646 1,146,725
---------- ----------
1,053,243 1,087,833
---------- ----------
Goodwill.............................................. 684,940 705,016
Other Assets.......................................... 362,335 403,347
---------- ----------
$3,199,383 $3,216,394
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings.......... $ 59,736 $ 34,710
Accounts payable.................................... 431,123 459,249
Accrued payroll and related expenses................ 198,958 209,904
Other accrued expenses and current liabilities...... 377,043 380,288
---------- ----------
Total current liabilities......................... 1,066,860 1,084,151
---------- ----------
Long-Term Borrowings................................ 1,837,396 1,670,577
Less-current portion................................ 59,736 34,710
---------- ----------
Total long-term borrowings........................ 1,777,660 1,635,867
---------- ----------
Deferred Income Taxes and Other Noncurrent
Liabilities.......................................... 223,367 229,484
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement................ 20,000 20,000
Shareholders' Equity Excluding Common Stock Subject to
Repurchase:
Class A common stock, par value $.01; authorized:
25,000,000 shares; issued:
2000--2,422,396 shares; 2001--2,385,438........... 24 24
Class B common stock, par value $.01; authorized:
150,000,000 shares; issued:
2000--59,802,606 shares; 2001--59,765,397.......... 598 597
Capital surplus..................................... -- 1,057
Earnings retained for use in the business........... 149,771 284,184
Accumulated other comprehensive income (loss)....... (18,897) (18,970)
Impact of potential repurchase feature of common
stock.............................................. (20,000) (20,000)
---------- ----------
Total............................................. 111,496 246,892
---------- ----------
$3,199,383 $3,216,394
========== ==========
The accompanying notes are an integral part of these financial statements.
S-3
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED OCTOBER 1, 1999, SEPTEMBER 29, 2000 AND SEPTEMBER
28, 2001
(dollars in thousands, except per share amounts)
Fiscal
--------------------------------
1999 2000 2001
---------- ---------- ----------
Sales......................................... $6,742,264 $7,262,867 $7,788,690
Costs and Expenses:
Cost of services provided................... 6,087,432 6,531,025 7,002,730
Depreciation and amortization............... 193,703 220,794 240,243
Selling and general corporate expense....... 85,963 91,465 106,210
---------- ---------- ----------
6,367,098 6,843,284 7,349,183
---------- ---------- ----------
Operating income............................ 375,166 419,583 439,507
Interest and Other Financing Costs, net....... 135,753 147,803 153,292
---------- ---------- ----------
Income before income taxes.................. 239,413 271,780 286,215
Provision For Income Taxes.................... 89,222 103,820 109,719
---------- ---------- ----------
Net Income.................................... $ 150,191 $ 167,960 $ 176,496
========== ========== ==========
Earnings Per Share:
Net income
Basic..................................... $1.59 $1.88 $2.06
Diluted................................... $1.48 $1.77 $1.95
The accompanying notes are an integral part of these financial statements.
S-4
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 1, 1999, SEPTEMBER 29, 2000 AND SEPTEMBER
28, 2001
(dollars in thousands)
Fiscal
-------------------------------
1999 2000 2001
--------- --------- ---------
Cash flows from operating activities:
Net income.................................. $ 150,191 $ 167,960 $ 176,496
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 193,703 220,794 240,243
Income taxes deferred..................... 10,845 4,851 9,333
Changes in noncash working capital:
Receivables............................... (47,599) (14,716) (47,351)
Inventories............................... (1,951) (35,992) 4,930
Prepayments............................... (1,922) 5,638 (11,006)
Accounts payable.......................... (10,095) (10,548) (20,881)
Accrued expenses.......................... 25,371 90,311 26,132
Net proceeds from sale of receivables....... -- -- 140,885
Changes in other noncurrent liabilities..... (3,319) (1,788) 3,128
Changes in other assets..................... (8,429) (8,063) (21,355)
Other, net.................................. (13,635) (11,387) (3,665)
--------- --------- ---------
Net cash provided by operating activities..... 293,160 407,060 496,889
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment......... (207,223) (234,583) (240,998)
Disposals of property and equipment......... 23,999 27,546 22,321
Sale of investments......................... 40,722 -- 8,240
Divestiture of certain businesses........... 8,380 -- --
Acquisition of certain businesses:
Working capital other than cash acquired.. (1,742) 11,896 (2,298)
Property and equipment.................... (20,325) (76,717) (5,525)
Additions to intangibles and other
assets................................... (40,672) (168,741) (71,748)
Other....................................... (19,318) (42,973) 10,833
--------- --------- ---------
Net cash used in investing activities......... (216,179) (483,572) (279,175)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from additional long-term
borrowings................................. 4,855 357,717 27,918
Payment of long-term borrowings............. (106,744) (159,741) (220,830)
Proceeds from issuance of common stock...... 60,731 31,185 31,509
Repurchase of common stock.................. (28,563) (155,417) (55,135)
Other....................................... (184) (330) (969)
--------- --------- ---------
Net cash provided by/(used in) financing
activities................................... (69,905) 73,414 (217,507)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................. 7,076 (3,098) 207
Cash and cash equivalents, beginning of year.. 20,614 27,690 24,592
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 27,690 $ 24,592 $ 24,799
========= ========= =========
The accompanying notes are an integral part of these financial statements.
S-5
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 1, 1999, SEPTEMBER 29, 2000 AND SEPTEMBER
28, 2001
(dollars in thousands)
Impact of
Potential
Class Class Repurchase Accumulated
A B Feature of Other
Common Common Capital Retained Common Comprehensive
Stock Stock Surplus Earnings Stock Income (Loss) Total
------ ------ --------- --------- ---------- ------------- ---------
Balance, October 2,
1998................... $25 $ 629 $ -- $ (56,815) $(20,000) $ (2,715) $ (78,876)
Net income............ 150,191 150,191
Foreign currency
translation
adjustments.......... (2,129) (2,129)
---------
Total comprehensive
income............. 148,062
---------
Issuance of Class A
common stock to
employee benefit
plans................ 1 14,506 14,507
Conversion of Class B
to Class A........... 2 (18) 16 --
Issuance of Class B
common stock......... 61 35,623 35,684
Sale of deferred
payment obligations.. 44,172 44,172
Retirement of common
stock................ (1) (16) (36,961) (36,978)
--- ----- --------- --------- -------- -------- ---------
Balance, October 1,
1999................... $27 $ 656 $ 57,356 $ 93,376 $(20,000) $ (4,844) $ 126,571
Net income............ 167,960 167,960
Foreign currency
translation
adjustments.......... (14,053) (14,053)
---------
Total comprehensive
income............. 153,907
---------
Issuance of Class A
common stock to
employee benefit
plans................ 7,139 7,139
Issuance of Class B
common stock......... 65 40,505 40,570
Sale of deferred
payment obligations.. 26,710 26,710
Retirement of common
stock................ (3) (123) (131,710) (111,565) (243,401)
--- ----- --------- --------- -------- -------- ---------
Balance, September 29,
2000................... $24 $ 598 $ -- $ 149,771 $(20,000) $(18,897) $ 111,496
Net income............ 176,496 176,496
Foreign currency
translation
adjustments.......... 6,397 6,397
Change in fair value
of cash flow hedges
(net of tax)......... (6,470) (6,470)
---------
Total comprehensive
income............. 176,423
---------
Issuance of Class B
common stock......... 46 30,747 30,793
Sale of deferred
payment obligations.. 24,027 24,027
Retirement of common
stock................ (47) (53,717) (42,083) (95,847)
--- ----- --------- --------- -------- -------- ---------
Balance, September 28,
2001................... $24 $ 597 $ 1,057 $ 284,184 $(20,000) $(18,970) $ 246,892
=== ===== ========= ========= ======== ======== =========
The accompanying notes are an integral part of these financial statements.
S-6
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fiscal Year
The Company's fiscal year is the fifty-two or fifty-three week period which
ends on the Friday nearest September 30th. The fiscal years ended October 1,
1999, September 29, 2000 and September 28, 2001 are each fifty-two week
periods.
Principles of Consolidation, Etc.
The consolidated financial statements include the accounts of the Company
and all its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
In fiscal 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. See Note 3.
Additionally, in fiscal 2001, the Company adopted the Securities and
Exchange Commission's (SEC) Staff Accounting Bulletin 101 (SAB 101), which sets
forth the SEC's guidelines on revenue recognition. Adoption of SAB 101 did not
have a material impact on consolidated financial condition or results of
operations. See Note 10.
On June 30, 2001, the Financial Accounting Standards Board (FASB) finalized
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. With the adoption of SFAS No. 142, goodwill is no longer subject to
amortization, rather it will be subject to at least an annual assessment for
impairment by applying a fair value based test. The Company is required to
adopt the provisions of this pronouncement no later than the beginning of
fiscal 2003. However, goodwill and other intangible assets acquired after June
30, 2001, are subject immediately to the nonamortization and amortization
provisions of this statement. The Company will adopt the nonamortization and
amortization provisions of SFAS No. 142 beginning in the first quarter of
fiscal 2002. During fiscal 1999, 2000 and 2001, goodwill amortization (pre-tax)
was $21.3 million, $22.2 million and $25.4 million, respectively. The Company
is currently evaluating the impact of the transitional goodwill impairment test
required by SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The Company is required to adopt the
provisions of this pronouncement no later than the beginning of fiscal 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The Company
is required to adopt the provisions of this pronouncement no later than the
beginning of fiscal 2003.
The Company is currently evaluating the impact of both SFAS No. 143 and 144.
Revenue Recognition
In each of our operating segments we recognize revenue in the period in
which services are provided pursuant to the terms of our contractual
relationships with our clients. Direct marketing revenues are recognized upon
shipment.
S-7
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Comprehensive Income
Comprehensive income includes all changes to shareholders' equity during a
period, except those resulting from investments by and distributions to
shareholders. The components of comprehensive income are shown in the
Consolidated Statements of Shareholders' Equity.
Currency Translation
Gains and losses resulting from the translation of financial statements of
non-U.S. subsidiaries are reflected as a component of comprehensive income in
shareholders' equity. Currency transaction gains and losses included in
operating results for fiscal 1999, 2000 and 2001 were not significant.
Current Assets
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories are valued at the lower of cost (principally the first-in,
first-out method) or market. The LIFO (last-in, first-out) method of
determining cost is used to value directly marketed career apparel and public
safety clothing and equipment. The stated value of inventories determined using
the LIFO method is not significantly different from replacement or current
cost. Personalized work apparel and linens in service are recorded at cost and
are amortized over their estimated useful lives, approximately two years.
The components of inventories are as follows:
Fiscal
-------------
2000 2001
------ ------
Food........................................................... 26.2% 29.2%
Career apparel, safety equipment and linens.................... 68.7% 66.0%
Parts, supplies and novelties.................................. 5.1% 4.8%
------ ------
100.0% 100.0%
====== ======
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives on a straight-line basis. Gains and losses on
dispositions are included in operating results. Maintenance and repairs are
charged to operations currently, and replacements and significant improvements
are capitalized. The estimated useful lives for the major categories of
property and equipment are 10 to 40 years for buildings and improvements and 3
to 10 years for service equipment and fixtures. Depreciation expense in fiscal
1999, 2000 and 2001 was $146.7 million, $162.8 million and $176.4 million,
respectively.
S-8
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
Goodwill, which represents the excess of cost over fair value of the net
assets of acquired businesses, is being amortized on a straight-line basis
principally over 40 years. The Company develops operating income projections
for each of its lines of business and evaluates the recoverability and
amortization period of goodwill using these projections. Based upon
management's current assessment, the estimated remaining amortization period of
goodwill is appropriate and the remaining balance is fully recoverable.
Accumulated amortization at September 29, 2000 and September 28, 2001 was
$220.8 million and $245.0 million, respectively.
Other Assets
Other assets consist primarily of investments in 50% or less owned entities,
contract rights, customer lists, computer software costs, and long-term
receivables. Investments in which the Company owns more than 20% but less than
a majority are accounted for using the equity method. Investments in which the
Company owns less than 20% are accounted for under the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" or the
cost method, as applicable. Contract rights and customer lists are being
amortized on a straight-line basis over the expected period of benefit, 3 to 20
years.
As a result of the terrorist attacks of September 11, 2001, the Company
incurred asset losses of approximately $11.5 million, primarily related to the
destruction of the World Trade Center Towers. An initial property loss claim
has been filed with the insurance carrier and additional claims will be filed
as the required information is completed. A receivable in the amount of $11.5
million has been recorded for the expected insurance recovery related to this
portion of the Company's loss. The Company also maintains business interruption
insurance and is in the process of compiling claims related to locations in and
around the World Trade Center, the Pentagon and other locations. The amount of
such claims has not yet been determined but is expected to be material.
Proceeds from the business interruption coverage will be recognized in future
periods as claims are settled.
Other Liabilities
Other noncurrent liabilities consist primarily of deferred compensation,
insurance accruals, deferred gains arising from sale and leaseback transactions
and subordinated installment notes arising from repurchases of common stock.
The Company is self-insured for a limited portion of the risk retained under
its general liability and workers' compensation arrangements. Self-insurance
reserves are determined based on actuarial analyses. The self-insurance
reserves for workers' compensation insurance are accrued on a present value
basis using a discount rate which approximates a risk-free rate.
S-9
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Earnings per share is reported on a Common Stock, Class B equivalent basis
(which reflects Common Stock, Class A shares converted to a Class B basis, ten
for one--see Note 6). Basic earnings per share is based on the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per share is based on the weighted average number of common shares
outstanding during the respective periods, plus the common equivalent shares,
if dilutive, that would result from the exercise of stock options. Earnings
applicable to common stock and common shares utilized in the calculation of
basic and diluted earnings per share are as follows:
Fiscal
--------------------------
1999 2000 2001
-------- -------- --------
(in thousands, except per
share data)
Earnings:
Earnings available to common stock......... $150,191 $167,960 $176,496
-------- -------- --------
Shares:
Weighted average number of common shares
outstanding used in basic earnings per
share calculation......................... 94,197 89,344 85,766
Impact of potential exercise opportunities
under the ARAMARK Ownership Plan.......... 7,275 5,763 4,897
-------- -------- --------
Total common shares used in diluted
earnings per share calculation............ 101,472 95,107 90,663
======== ======== ========
Basic earnings per common share............ $1.59 $1.88 $2.06
======== ======== ========
Diluted earnings per common share.......... $1.48 $1.77 $1.95
======== ======== ========
A subsidiary of the Company has filed Form S-1 and S-4 registration
statements (as amended) with the Securities and Exchange Commission and is in
the process of becoming a publicly traded company. The Company expects to merge
with this subsidiary just prior to the completion of the public offering under
the terms of a Merger Agreement. In the merger, ARAMARK will merge with and
into its newly formed subsidiary, ARAMARK Worldwide Corporation, and each
outstanding ARAMARK old Class B and old Class A common share will become two
shares and twenty shares, respectively, of the surviving corporation's Class A
common stock and have the effect of a two-for-one stock split. ARAMARK
Worldwide Corporation's name will become ARAMARK Corporation, and the surviving
corporation will succeed to all of the assets, liabilities, rights and
obligations of ARAMARK. Upon completion of the merger, the Amended and Restated
Stockholders' Agreement, described in Note 6 will be terminated.
S-10
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Cash Flow Information
Fiscal
--------------------
1999 2000 2001
------ ------ ------
(in millions)
Interest Paid........................................... $131.4 $136.3 $151.5
Income Taxes Paid....................................... 70.5 60.4 69.8
Significant noncash investing and financing activities are as follows:
. During fiscal 1999 and 2000, the Company contributed $14.5 million and
$7.1 million, respectively, of Class A Common Stock to its employee
benefit plans to fund previously accrued obligations. In addition, during
fiscal 1999, 2000 and 2001, the Company contributed $2.0 million, $2.1
million and $2.3 million, respectively, of stock units to its stock unit
retirement plan in satisfaction of its accrued obligations. See Note 4.
. During fiscal 1999, 2000 and 2001, the Company received $16.7 million,
$31.8 million and $28.6 million, respectively, of employee notes under
its Deferred Payment program as partial consideration for the issuance of
Common Stock, Class B. Also, during fiscal 1999, 2000 and 2001, the
Company issued installment notes of $6.7 million, $75.5 million and $35.6
million, respectively, as partial consideration for repurchases of Common
Stock. See Note 6.
NOTE 2. ACQUISITIONS AND DIVESTITURES:
Fiscal 2001
During the first quarter of fiscal 2001, the Company acquired the UK food
and support services business of the Campbell Bewley Group Limited, issuing
stock (8% interest) of a subsidiary as consideration. Additionally, the Company
acquired a 45% interest in the Campbell Bewley Group Limited's food and support
services business in Ireland for approximately $19 million in cash.
Additionally, during the second quarter of fiscal 2001, the Company acquired
certain assets of Correctional Foodservice Management (CFM), from The Wackenhut
Corporation for approximately $16 million in cash.
These acquisitions were accounted for as a purchase and were financed
through the Company's revolving credit facility. The Company's pro forma
results from operations for fiscal 2001 and 2000 would not have been materially
different assuming that both the Campbell Bewley and CFM acquisitions had
occurred at the beginning of the respective periods.
Fiscal 2000
During the third quarter of fiscal 2000, the Company acquired substantially
all of the food and beverage concessions and venue management businesses of
Ogden Corporation for approximately $235 million in cash and assumed debt. The
acquisition was accounted for as a purchase and was financed through the
Company's revolving credit facility. The results of the food and beverage
concessions businesses of Ogden Corporation have been included in the
accompanying consolidated financial statements since the date of acquisition.
Amounts allocated to goodwill are being amortized on a straight-line basis over
40 years.
Had the acquisition taken place at the beginning of the fiscal periods, pro
forma sales for fiscal 2000 and fiscal 1999 would have been approximately $7.5
billion and $7.1 billion, respectively. Pro forma net income and earnings per
share would not have been materially different from reported results. These pro
forma disclosures are unaudited and are based on historical results, adjusted
for the impact of certain acquisition related adjustments, such as: increased
amortization of intangibles, increased interest expense on acquisition
S-11
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
debt, and the related income tax effects. Pro forma results do not reflect any
synergies that might be achieved from combined operations and therefore, in
management's opinion, are not indicative of what actual results would have been
if the acquisition had occurred at the beginning of the respective periods. Pro
forma results are not intended to be a projection of future results.
Fiscal 1999
During the second quarter of fiscal 1999, the Company acquired Restaura,
Inc., a provider of food and support services, and Dyna Corporation, a leading
distributor of emergency medical supplies for approximately $46 million and $13
million in cash, respectively. The acquisitions were accounted for using the
purchase method of accounting. The Company's pro forma results from operations
for fiscal 1999 would not have been materially different assuming the
acquisitions had occurred at the beginning of the period.
NOTE 3. BORROWINGS:
Long-term borrowings at September 29, 2000 and September 28, 2001 are
summarized in the following table:
Fiscal
---------------------
2000 2001
---------- ----------
(in thousands)
Credit facility borrowings............................... $ 611,100 $ 419,500
Canadian credit facility................................. 33,608 33,876
Bank term loan due July 2003............................. 45,000 45,000
Bank term loan due May 2005.............................. 50,000 50,000
Bank term loan due May 2005.............................. 75,000 75,000
United Kingdom term loan due December 2005............... -- 20,303
6.75% notes, due August 2004............................. 299,032 299,288
6.79% note, payable in installments through 2003......... 75,000 50,000
7.00% notes, due July 2006............................... 299,945 299,957
7.10% notes, due December 2006........................... 124,877 124,893
7.25% notes and debentures, due August 2007.............. 30,730 30,730
8.15% notes, due May 2005................................ 150,000 150,000
Other.................................................... 43,104 72,030
---------- ----------
1,837,396 1,670,577
---------- ----------
Less-current portion..................................... 59,736 34,710
---------- ----------
$1,777,660 $1,635,867
========== ==========
The non-amortizing $1.0 billion revolving credit facility ("Credit
Agreement") is provided by a group of banks and matures in March 2005. Interest
under the Credit Agreement is based on the Prime Rate, LIBOR plus a spread of
0.18% to 0.70% (as of September 28, 2001--0.30%) or the Certificate of Deposit
Rate plus a spread of 0.28% to 0.80% (as of September 28, 2001--0.40%), at the
option of the Company. There is a fee of 0.10% to 0.30% (as of September 28,
2001--0.15%) on the entire credit facility. The spread and fee margins are
based on certain financial ratios as defined.
The non-amortizing C$70 million Canadian revolving credit facility provides
for either U.S. dollar or Canadian dollar borrowings. This credit facility
currently matures in March 2002 and contains options to extend the maturity
date. Interest on the facility is based on the Canadian Bankers Acceptance
Rate, U.S. Prime Rate plus a spread of .0% to .125% (as of September 28, 2001--
0%), Canadian Prime Rate plus a spread of .0% to .125%
S-12
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(as of September 28, 2001--0%), or LIBOR plus a spread of .70% to 1.75% (as of
September 28, 2001--.825%). As of September 28, 2001, all borrowings under this
facility are payable in Canadian dollars, with a weighted average interest rate
of 4.6%. There is a fee of .15% to .25% (as of September 28, 2001--.175%) on
the entire credit facility.
The $170 million Bank Term Loans ("Term Loans") are comprised of three
separate Term Loans. Interest under the Term Loans is based on the higher of
(a) the Prime Rate and (b) the sum of 0.5% plus the Federal Funds Rate, or
LIBOR plus a spread, as defined in the Term Loans (approximately 0.90% for all
three loans as of September 28, 2001). The spread is based on certain financial
ratios, as defined in the respective Term Loans. $45 million of the Term Loans
mature in July 2003 and the remaining $125 million matures in May 2005.
The United Kingdom Term Loan is payable in semi-annual installments, with
final maturity in December 2005. Installment payments increase over the term,
as defined. Interest under the UK Term Loan is based on LIBOR plus a spread of
1.0% to 1.5% (1.25% as of September 28, 2001). The spread is based on certain
financial ratios as defined.
The 6.75% and 7.0% notes may be redeemed, in whole or in part, at any time
at the Company's option. The redemption price equals the greater of (i) 100% of
the principal amount or (ii) an amount based on the discounted present value of
scheduled principal and interest payments, as defined.
The 6.79% note is payable in $25 million annual installments, with a final
maturity of January 2003.
The 7.25% notes and debentures may be exchanged, in whole or in part, at the
option of the holder, for 7.10% senior notes due December 2006. The Company has
the right to redeem these notes and debentures, at par, upon being presented
with a notice of conversion or at any time after June 2004.
Debt repayments of $31.1 million, contractually due in fiscal 2002, have
been classified as non-current in the accompanying consolidated balance sheet
as the Company has the ability and intent to finance the repayments through
additional borrowings under the Credit Agreement. Accrued interest on
borrowings totaling $36.6 million at September 29, 2000 and $31.5 million at
September 28, 2001 is included in current liabilities as "Other accrued
expenses."
The Company adopted 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", on September 30, 2000. SFAS No. 133 requires the transition adjustment
resulting from adopting these Statements to be reported in net income or other
comprehensive income, as appropriate, as the cumulative effect of a change in
accounting principle. In accordance with the transition provisions of SFAS No.
133, the Company recorded a cumulative transition adjustment to decrease Other
Comprehensive Income by approximately $2.5 million (net of tax), to recognize
the fair value of its derivative instruments as of the date of adoption.
The Company utilizes derivative financial instruments, such as interest rate
swaps and forward exchange contract agreements to manage changes in market
conditions related to debt obligations and foreign currency exposures. As of
September 29, 2000 and September 28, 2001, the Company had $350 million and
$200 million, respectively, of interest rate swap agreements fixing the rate on
a like amount of variable rate borrowings, at an average effective rate of 7.9%
and 8.3%, respectively. As of September 28, 2001, interest rate swap agreements
remain in effect for periods ranging from eight to twenty months. The
counterparties to the above derivative agreements are major international
banks. The Company continually monitors its positions and credit ratings of its
counterparties, and does not anticipate nonperformance by the counterparties.
S-13
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recognizes all derivatives on the balance sheet at fair value at
the end of each quarter. Changes in the fair value of a derivative that is
designated as and meets all the required criteria for a cash flow hedge are
recorded in accumulated other comprehensive income and reclassified into
earnings as the underlying hedged item affects earnings. Amounts reclassified
into earnings related to interest rate swap agreements are included in interest
expense. As of September 28, 2001, approximately $6.5 million of net unrealized
losses related to interest rate swaps was included in Accumulated Other
Comprehensive Income, approximately $5.9 million of which is expected to be
reclassified into earnings during the next twelve months. The hedge
ineffectiveness of existing derivative instruments during fiscal 2001 was not
material.
The following summarizes the fair value of the Company's financial
instruments as of September 29, 2000 and September 28, 2001. The fair values
were computed using market quotes, if available, or based on discounted cash
flows using market interest rates as of the end of the respective periods.
Fiscal
------------------------------------------
2000 2001
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Asset/(Liability) in millions
Long-term debt..................... $(1,837.4) $(1,796.3) $(1,670.6) $(1,689.9)
Interest rate swap agreements...... -- (4.0) (10.6) (10.6)
The Credit Agreement contains restrictive covenants which provide, among
other things, limitations on liens, dispositions of material assets and
repurchases of capital stock. The terms of the Credit Agreement also require
that the Company maintain certain specified minimum ratios of cash flow to
fixed charges and to total borrowings and certain minimum levels of net worth
(as defined). At September 28, 2001, the Company was in compliance with all of
these covenants. Assets with a net book value of $2.4 million at September 28,
2001, are subject to liens under several of the Company's borrowing
arrangements.
Long-term borrowings maturing in the next five fiscal years are as follows:
Amount
--------------
(in thousands)
2002.......................................................... $ 34,710
2003.......................................................... 74,796
2004.......................................................... 354,812
2005.......................................................... 731,487
2006.......................................................... 303,206
The components of interest and other financing costs, net are summarized as
follows:
Fiscal
(Income) Expense ----------------------------
1999 2000 2001
-------- -------- --------
Interest expense.................................. $139,829 $149,430 $152,289
Interest income................................... (4,076) (1,627) (2,087)
Other financing costs............................. -- -- 3,090
-------- -------- --------
Total........................................... $135,753 $147,803 $153,292
======== ======== ========
S-14
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. EMPLOYEE PENSION AND PROFIT SHARING PLANS:
In the United States, the Company maintains qualified contributory and non-
contributory retirement plans for eligible employees, with Company
contributions to the plans based on earnings performance or salary level. The
Company has a non-qualified stock unit retirement plan for certain employees.
The total expense of the above plans for fiscal 1999, 2000 and 2001 was $16.2
million, $18.0 million and $17.8 million, respectively. During fiscal 1999 and
2000, the Company contributed 106,703 shares and 42,800 shares, respectively,
of Common Stock, Class A to these plans to partially fund previously accrued
obligations. In addition, during fiscal 1999, 2000 and 2001, the Company
contributed to the stock unit retirement plan 135,508 stock units, 119,984
stock units and 77,369 stock units, respectively, which are convertible into
Common Stock, Class B, in satisfaction of its accrued obligations. The value of
the stock units was credited to capital surplus. The Company participates in
various multi-employer union administered pension plans. Contributions to these
plans, which are primarily defined benefit plans, result from contractual
provisions of labor contracts and were $15.5 million, $15.8 million and $21.9
million for fiscal 1999, 2000 and 2001, respectively.
Additionally, the Company maintains several contributory and non-
contributory defined benefit pension plans, primarily in Canada and the United
Kingdom. As of September 28, 2001, the projected benefit obligation of these
plans was $67.2 million, which exceeded plan assets by $5.5 million. Pension
expense related to these plans is not material to the consolidated financial
statements.
S-15
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5. INCOME TAXES:
The Company accounts for income taxes following the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires deferred tax assets
or liabilities to be recognized for the estimated future tax effects of
temporary differences between the financial reporting and tax bases of assets
and liabilities based on the enacted tax law and statutory tax rates applicable
to the periods in which the temporary differences are expected to affect
taxable income.
The components of income before income taxes by source of income are as
follows:
Fiscal
--------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
United States........................................ $222,259 $249,093 $261,731
Non-U.S.............................................. 17,154 22,687 24,484
-------- -------- --------
$239,413 $271,780 $286,215
======== ======== ========
The provision for income taxes consists of:
Fiscal
--------------------------
1999 2000 2001
------- -------- --------
(in thousands)
Current:
Federal........................................... $60,402 $ 74,879 $ 76,024
State and local................................... 13,016 14,627 14,631
Non-U.S........................................... 4,959 9,463 9,731
------- -------- --------
78,377 98,969 100,386
------- -------- --------
Deferred:
Federal........................................... 8,453 5,713 7,895
State and local................................... 1,624 1,042 1,440
Non-U.S........................................... 768 (1,904) (2)
------- -------- --------
10,845 4,851 9,333
------- -------- --------
$89,222 $103,820 $109,719
======= ======== ========
The provision for income taxes varies from the amount determined by applying
the United States Federal statutory rate to pre-tax income as a result of the
following:
Fiscal
----------------
1999 2000 2001
---- ---- ----
(% of pre-tax
income)
United States statutory income tax rate...................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes, resulting from:
State income taxes, net of Federal tax benefit............. 4.0 3.7 3.6
Foreign tax benefits....................................... (4.5) (2.2) (0.9)
Permanent book/tax differences, primarily resulting from
purchase accounting....................................... 3.6 3.2 2.9
Tax credits and other...................................... (0.8) (1.5) (2.3)
---- ---- ----
Effective income tax rate.................................... 37.3% 38.2% 38.3%
==== ==== ====
S-16
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 29, 2000 and September 28, 2001, the components of deferred
taxes are as follows:
Fiscal
-----------------
2000 2001
-------- --------
(in thousands)
Deferred tax liabilities:
Property and equipment..................................... $ 77,902 $ 80,370
Inventory.................................................. 1,840 8,607
Investments................................................ 21,386 25,555
Other...................................................... 14,096 13,175
-------- --------
Gross deferred tax liability............................. 115,224 127,707
-------- --------
Deferred tax assets:
Insurance.................................................. 9,995 9,003
Employee compensation and benefits......................... 48,018 52,429
Accruals and allowances.................................... 22,935 23,400
Other...................................................... 2,708 5,736
-------- --------
Gross deferred tax asset................................. 83,656 90,568
-------- --------
Net deferred tax liability............................... $ 31,568 $ 37,139
======== ========
NOTE 6. CAPITAL STOCK:
There are two classes of common stock authorized and outstanding, Common
Stock, Class A and Common Stock, Class B. Each Class A and Class B Share is
entitled to one vote on all matters submitted to shareholders, voting together
as a single class except where otherwise required by law. Each Class A Share is
entitled to ten times the dividends and other distributions payable on each
Class B Share.
As of September 28, 2001, the Company's stock option plans provided for the
issuance of up to 84,215,777 options to purchase shares of Common Stock, Class
B. The exercise price of each option is equal to the current fair market value
at the date of grant. The Company granted installment stock purchase
opportunities under its stock ownership program in fiscal 1999, 2000 and 2001,
which provide for the purchase of shares of Common Stock, Class B. Installment
stock purchase opportunities are exercisable in six annual installments with
the exercise price of each purchase opportunity equal to the current fair
market value at the time the purchase opportunity is granted. The Company has a
program to grant non-qualified stock options to additional qualified employees
on an annual basis. Under the program, options begin to vest after three years
and may be exercised for a period of three years after vesting. The Company
also grants cumulative installment stock purchase opportunities under its
existing stock ownership program which are similar to the installment stock
purchase opportunities discussed above; however, the number of installments and
vesting schedule may vary and any purchase opportunities not exercised during
an installment period may be carried forward to subsequent installment periods.
The Company has a Deferred Payment Program which enables holders of installment
purchase opportunities to defer a portion of the total amount required to
exercise the options. Interest currently accrues on deferred payments at rates
ranging from 6.75% to 9.5% and is payable when the deferred payments are due.
At September 29, 2000 and September 28, 2001, the receivables from individuals
under the Deferred Payment Program were $2.4 million and $3.4 million,
respectively, which are reflected as a reduction of Shareholders' Equity. The
deferred payments are full recourse obligations and the Company holds as
collateral shares purchased until the deferred payment is received from the
individual by the Company. During fiscal 1999, 2000 and 2001, the Company sold
for cash, without recourse, approximately $44 million, $27 million and $38
million, respectively, of Deferred Payment Program notes receivable. The sales
price for
S-17
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
sales of Deferred Payment Program notes receivable sold during fiscal 1999 and
2000 approximated book value. The sales price of $41 million during fiscal 2001
resulted in a gain of $2 million (net of transaction costs), which is included
in "Interest and other financing costs, net." The proceeds were used to repay
borrowings under the credit facility. Status of the options under the various
ownership programs, follows:
Average Option
Number of Shares(1) Price(1)
-------------------------------- --------------------
Price 1999 2000 2001 1999 2000 2001
- ----- ---------- ---------- ---------- ------ ------ ------
Outstanding at beginning
of year................ 24,701,205 20,529,608 18,021,686 $ 5.78 $ 7.19 $10.31
Options granted......... 4,912,500 7,380,700 5,322,500 $11.57 $14.70 $17.74
Options exercised....... 6,125,906 6,475,146 4,596,521 $ 5.28 $ 6.20 $ 8.14
Canceled/Forfeited...... 2,958,191 3,413,476 2,649,916 $ 6.50 $ 8.56 $11.35
Outstanding at end of
year................... 20,529,608 18,021,686 16,097,749 $ 7.19 $10.31 $13.22
Exercisable at end of
year................... 2,001,697 808,247 710,892 $ 4.84 $ 5.39 $ 6.77
- --------
(1) Number of shares and option prices do not reflect the proposed merger
and the merger exchange ratios that have the effect of a 2 for 1 split
described in Note 1.
The exercise prices on outstanding options at September 28, 2001 range from
$5.13 to $19.90 with a weighted average remaining life of approximately three
years. The Company has reserved 17,917,598 shares of Common Stock, Class B at
September 28, 2001 for issuance of stock pursuant to its employee ownership and
benefit programs.
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 related to the plans described above. 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 indicated
below.
Fiscal
--------------------------
1999 2000 2001
-------- -------- --------
(in thousands, except per
share data)
Net Income
As reported........................................ $150,191 $167,960 $176,496
Pro forma.......................................... $146,501 $163,760 $173,354
Earnings per share
As reported:
Basic............................................ $1.59 $1.88 $2.06
Diluted.......................................... $1.48 $1.77 $1.95
Pro forma:
Basic............................................ $1.56 $1.83 $2.02
Diluted.......................................... $1.44 $1.72 $1.91
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to fiscal 1996, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
S-18
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted in fiscal 1999, 2000 and
2001 was $1.61, $2.64 and $3.08 per option, respectively. As the Company's
stock is not publicly traded, the fair value of each option was estimated on
the grant date using the minimum value method (which excludes a volatility
assumption), with the following assumptions:
Fiscal
--------------------------
1999 2000 2001
-------- -------- --------
Risk-free interest rate.............................. 4.5-4.8% 5.2-6.1% 5.9-6.4%
Expected life in years............................... 3.3 3.4 3.3
Dividend yield....................................... -- -- --
The Company and its shareholders are parties to an Amended and Restated
Stockholders' Agreement. Pursuant to this agreement, holders of common stock
who are individuals, upon their death, complete disability or normal
retirement, may cause the Company to repurchase up to 30% of their shares for
cash at the then appraised value, but only to the extent such repurchase by
the Company is permitted under the Credit Agreement. Under this Credit
Agreement restriction, repurchases of capital stock cannot exceed an aggregate
limit, which amount was $20 million at September 29, 2000 and September 28,
2001. This potential repurchase obligation has been classified outside of
Shareholders' Equity in the accompanying balance sheet. Also, the
Shareholders' Agreement provides that the Company may, at its option,
repurchase shares from individuals who are no longer employees. Such
repurchased shares may be resold to others including replacement personnel at
prices equal to or greater than the repurchase price. Generally, payment for
shares repurchased can be, at the Company's option, in cash or subordinated
installment notes, which are subordinated to all other indebtedness of the
Company. Interest on these notes is payable semi-annually and principal
payments are made annually over varying periods not to exceed ten years. The
noncurrent portion of these notes ($48.3 million as of September 29, 2000 and
$34.9 million as of September 28, 2001) is included in the consolidated
balance sheets as "Other Noncurrent Liabilities" and the current portion of
these notes ($47.8 million as of September 29, 2000 and $43.8 million as of
September 28, 2001) is included in the consolidated balance sheets as
"Accounts Payable."
NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION:
During fiscal 2001, the Company entered into 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. Pursuant to the Receivables Facility, the Company
formed ARAMARK Receivables, LLC a wholly-owned, special purpose, 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. 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. At September
28, 2001, $141 million of accounts receivable were sold and removed from the
consolidated balance sheet. The loss on the sale of receivables in fiscal 2001
was $5.1 million and is included in "Interest and other financing costs, net."
The proceeds from the accounts receivable sales were used to repay
borrowings under the credit facility.
S-19
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES:
The Company has capital commitments of approximately $108.0 million at
September 28, 2001 in connection with several long-term concession contracts.
The Company has guaranteed approximately $13 million of affiliate indebtedness
at September 28, 2001.
Rental expense for all operating leases was $146.5 million, $167.4 million
and $174.8 million for fiscal 1999, 2000 and 2001, respectively. The following
is a schedule of the future minimum rental and similar commitments under all
noncancelable operating leases as of September 28, 2001:
Fiscal Year (in thousands)
2002........................................................... $213,287
2003........................................................... 117,601
2004........................................................... 99,184
2005........................................................... 76,741
2006........................................................... 62,671
Subsequent years............................................... 238,187
--------
Total minimum rental obligations................................. $807,671
========
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. Negotiations
are currently underway toward a settlement of certain matters related to public
school food service programs, and management does not believe such settlement
will have a material effect on the consolidated financial statements. During
the fourth quarter of fiscal 2001, the liability related to these matters was
adjusted to reflect the current status of the settlement discussions. It is
possible that future claims could be asserted related to such public school
programs, however, management believes its interpretation of the applicable
government regulations is correct and will defend vigorously against any such
claims if asserted.
NOTE 9. QUARTERLY RESULTS (Unaudited):
The following table summarizes quarterly financial data for fiscal 2000 and
2001:
Fiscal Quarter
-------------------------------------------
2000 First Second Third Fourth Year
---- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Sales................... $1,767,615 $1,746,380 $1,835,543 $1,913,329 $7,262,867
Cost of services
provided............... 1,598,558 1,597,660 1,651,739 1,683,068 6,531,025
Net Income.............. 37,270 22,816 43,363 64,511 167,960
Diluted earnings per
share.................. $0.38 $0.24 $0.46 $0.70 $1.77
Fiscal Quarter
-------------------------------------------
2001 First Second Third Fourth Year
---- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Sales................... $1,947,278 $1,881,033 $1,980,854 $1,979,525 $7,788,690
Cost of services
provided............... 1,751,969 1,716,998 1,777,069 1,756,694 7,002,730
Net Income.............. 43,428 23,762 48,051 61,255 176,496
Diluted earnings per
share.................. $0.48 $0.26 $0.53 $0.68 $1.95
S-20
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the first and second fiscal quarters, within the Food and Support
Services--United States segment, there is a lower level of activity at the
higher margin sports, entertainment and recreational food service operations
which is partly offset by increased activity in the educational market.
However, in the third and fourth fiscal quarters, there is a significant
increase at sports, entertainment and recreational accounts which is partially
offset by the effect of summer recess in the educational market. In addition,
there is a seasonal increase in volume of directly marketed work clothing
during the first quarter.
During the fourth quarter of fiscal 2001, operating results were negatively
affected by the September 11th terrorist attacks, a litigation related charge
and start up costs incurred in connection with a new correctional services
contract.
NOTE 10. BUSINESS SEGMENTS:
The Company provides or manages services in three strategic areas; Food and
Support Services, Uniform and Career Apparel and Educational Resources which
are organized and managed by the following reportable business segments:
Food and Support Services--United States--Food, refreshment, specialized
dietary and support services, including facility maintenance and housekeeping,
provided to business, educational, governmental and healthcare institutions and
in sports, entertainment, recreational and other facilities serving the general
public. As a result of the terrorist attacks of September 11th, customer
locations in and around the World Trade Center were either destroyed or closed
and Major League Baseball and National Football League games were postponed
until fiscal 2002, adversely impacting fiscal 2001 financial results in this
segment. Had the terrorist attacks not occurred, management estimates that
segment sales and operating income would have been approximately 1% and 3%,
respectively, higher than reported.
Food and Support Services--International--Food, refreshment, specialized
dietary and support services, including facility maintenance and housekeeping,
provided to business, educational, governmental and healthcare institutions and
in sports, entertainment, recreational and other facilities serving the general
public. Operations are conducted in Belgium, Canada, the Czech Republic,
Germany, Hungary, Japan, Korea, Mexico, Spain and the United Kingdom.
Uniform and Career Apparel--Rental--Rental, sale, cleaning, maintenance and
delivery of personalized uniform and career apparel and other textile items on
a contract basis. Also provided are walk-off mats, cleaning cloths, disposable
towels and other environmental control items.
Uniform and Career Apparel--Direct Marketing--Direct marketing of
personalized uniforms and career apparel, public safety equipment and
accessories to businesses, public institutions and individuals.
Educational Resources--Provider of infant, toddler, pre-school and school-
age learning programs through community-based child care centers, before and
after school programs, employer on-site child care centers and private
elementary schools.
Corporate and Other--The corporate and other segment includes general
corporate expenses not specifically allocated to an individual segment.
Included in the Corporate and Other segment during fiscal 2001 is a gain of
$6.6 million resulting from the redemption of preferred stock by an entity
which the Company divested in fiscal 1997. Also included in Corporate and Other
in fiscal 2001 are charges related to certain litigation pertaining to a
previously divested entity ($1.5 million), merger and acquisition related costs
($0.5 million), and the immaterial cumulative effect ($2.6 million) of a change
by the Educational Resources business in accounting for non-refundable
registration fees pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 101.
S-21
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sales by segment are substantially comprised of services to unaffiliated
customers and clients. Operating income reflects expenses directly related to
individual segments plus an allocation of corporate expenses applicable to more
than one segment.
Net property and equipment by geographic area is as follows:
Fiscal
-----------------
2000 2001
-------- --------
(in millions)
United States................................................. $1,006.1 $1,026.9
International................................................. 47.1 60.9
-------- --------
Total....................................................... $1,053.2 $1,087.8
======== ========
Depreciation and
Sales Amortization
-------------------------- --------------------
1999 2000 2001 1999 2000 2001
-------- -------- -------- ------ ------ ------
(in millions)
Food and Support Services--
United States................ $3,993.5 $4,396.3 $4,782.1 $ 93.6 $113.7 $127.3
Food and Support Services--
International................ 975.2 1,001.9 1,109.3 16.0 16.7 19.0
Uniform and Career Apparel--
Rental....................... 911.9 969.6 995.2 43.4 45.7 48.3
Uniform and Career Apparel--
Direct Marketing............. 462.0 455.7 438.8 18.7 19.8 17.9
Educational Resources......... 399.7 439.4 463.3 20.0 23.0 25.7
Corporate and Other........... -- -- -- 2.0 1.9 2.0
-------- -------- -------- ------ ------ ------
Total....................... $6,742.3 $7,262.9 $7,788.7 $193.7 $220.8 $240.2
======== ======== ======== ====== ====== ======
Operating Income
-------------------------
1999 2000 2001
------- ------- -------
(in millions)
Food and Support Services--United States............. $ 222.3 $ 244.5 $ 264.7
Food and Support Services--International............. 32.0 40.2 39.4
Uniform and Career Apparel--Rental................... 106.9 118.5 119.7
Uniform and Career Apparel--Direct Marketing......... 3.9 10.8 15.6
Educational Resources................................ 34.7 32.3 25.4
------- ------- -------
399.8 446.3 464.8
Corporate and Other.................................. (24.6) (26.7) (25.3)
------- ------- -------
Operating Income..................................... 375.2 419.6 439.5
Interest and Other Financing Costs, net.............. (135.8) (147.8) (153.3)
------- ------- -------
Income Before Income Taxes........................... $ 239.4 $ 271.8 $ 286.2
======= ======= =======
Capital Expenditures Identifiable Assets
-------------------- --------------------------
1999 2000 2001 1999 2000 2001
------ ------ ------ -------- -------- --------
(in millions)
Food and Support Services--
United States................ $ 94.6 $160.6 $ 94.0 $1,186.9 $1,442.3 $1,344.9
Food and Support Services--
International................ 20.1 22.0 31.2 246.5 253.0 359.1
Uniform and Career Apparel--
Rental....................... 64.4 65.2 72.8 762.2 818.3 856.4
Uniform and Career Apparel--
Direct Marketing............. 8.8 7.0 7.8 311.4 301.7 272.9
Educational Resources......... 39.6 56.4 40.5 234.7 257.4 264.1
Corporate and Other........... -- 0.1 0.2 128.8 126.7 119.0
------ ------ ------ -------- -------- --------
$227.5 $311.3 $246.5 $2,870.5 $3,199.4 $3,216.4
====== ====== ====== ======== ======== ========
S-22
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11. SUBSEQUENT EVENT:
On October 3, 2001, the Company signed an agreement to acquire the
management services division of The ServiceMaster Company, which we refer to as
ServiceMaster Management Services. The aggregate consideration for the
transaction is approximately $800 million in cash. The transaction is subject
to customary consents, approvals, conditions and clearances. ServiceMaster
Management Services provides a complete range of facility management services
to the healthcare, education and business and industry client sectors.
The Company intends to finance the acquisition of ServiceMaster Management
Services by borrowing approximately an additional $200 million under the senior
revolving credit facility and $600 million under a new bridge financing
facility with a group of banks arranged by J.P. Morgan Securities Inc. The
Company expects to repay a portion of the bridge financing with a portion of
the proceeds from the initial public offering further described in Note 1.
NOTE 12. 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
consolidated financial statements. ARAMARK Services, Inc. is the borrower under
the Credit Agreement and certain other senior debt described in Note 3 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 $1.7 billion as of September 28, 2001 (See Note 3).
The other subsidiaries, which are not subsidiaries of ARAMARK Services, Inc.,
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.
S-23
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING BALANCE SHEETS
September 29, 2000
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 19.5 $ 4.8 $ 0.3 $ -- $ 24.6
Receivables............ 391.7 193.4 0.6 -- 585.7
Inventories, at lower
of cost or market..... 83.4 333.0 -- -- 416.4
Prepayments and other
current assets........ 25.9 44.6 1.7 -- 72.2
-------- -------- -------- --------- --------
Total current
assets............ 520.5 575.8 2.6 -- 1,098.9
-------- -------- -------- --------- --------
Property and Equipment,
net.................... 232.4 818.8 2.1 -- 1,053.3
Goodwill................ 196.0 488.9 -- -- 684.9
Intercompany
Receivable............. 2,186.4 105.6 -- (2,292.0) --
Investment in
Subsidiaries........... -- -- 1,533.0 (1,533.0) --
Other Assets............ 124.2 235.4 2.7 -- 362.3
-------- -------- -------- --------- --------
$3,259.5 $2,224.5 $1,540.4 $(3,825.0) $3,199.4
======== ======== ======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term
borrowings............ $ 57.7 $ 2.0 $ -- $ -- $ 59.7
Accounts payable....... 254.3 120.9 55.9 -- 431.1
Accrued expenses and
other liabilities..... 343.1 221.4 11.5 -- 576.0
-------- -------- -------- --------- --------
Total current
liabilities....... 655.1 344.3 67.4 -- 1,066.8
-------- -------- -------- --------- --------
Long-Term Borrowings.... 1,776.8 0.9 -- -- 1,777.7
Deferred Income Taxes
and Other Noncurrent
Liabilities............ 61.4 97.5 64.5 -- 223.4
Intercompany Payable.... 590.6 424.4 1,277.0 (2,292.0) --
Common Stock Subject to
Potential Repurchase
Under Provisions of
Shareholders'
Agreement.............. -- -- 20.0 -- 20.0
Shareholders' Equity
Excluding Common Stock
Subject to Repurchase.. 175.6 1,357.4 111.5 (1,533.0) 111.5
-------- -------- -------- --------- --------
$3,259.5 $2,224.5 $1,540.4 $(3,825.0) $3,199.4
======== ======== ======== ========= ========
S-24
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING BALANCE SHEETS
September 28, 2001
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 17.3 $ 7.1 $ 0.4 $ -- $ 24.8
Receivables............ 310.8 191.6 0.9 -- 503.3
Inventories, at lower
of cost or market..... 93.3 322.5 -- -- 415.8
Prepayments and other
current assets........ 34.0 39.9 2.4 -- 76.3
-------- -------- -------- --------- --------
Total current
assets............ 455.4 561.1 3.7 -- 1,020.2
-------- -------- -------- --------- --------
Property and Equipment,
net.................... 249.1 836.4 2.3 -- 1,087.8
Goodwill................ 206.2 498.8 -- -- 705.0
Intercompany
Receivable............. 2,243.5 105.6 -- (2,349.1) --
Investment in
Subsidiaries........... -- -- 1,709.5 (1,709.5) --
Other Assets............ 190.2 209.7 3.5 -- 403.4
-------- -------- -------- --------- --------
$3,344.4 $2,211.6 $1,719.0 $(4,058.6) $3,216.4
======== ======== ======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term
borrowings............ $ 34.3 $ 0.4 $ -- $ -- $ 34.7
Accounts payable....... 293.6 117.0 48.6 -- 459.2
Accrued expenses and
other liabilities..... 348.4 224.1 17.7 -- 590.2
-------- -------- -------- --------- --------
Total current
liabilities....... 676.3 341.5 66.3 -- 1,084.1
-------- -------- -------- --------- --------
Long-Term Borrowings.... 1,629.4 6.5 -- -- 1,635.9
Deferred Income Taxes
and Other Noncurrent
Liabilities............ 74.1 103.7 51.7 -- 229.5
Intercompany Payable.... 773.4 241.6 1,334.1 (2,349.1) --
Common Stock Subject to
Potential Repurchase
Under Provisions of
Shareholders'
Agreement.............. -- -- 20.0 -- 20.0
Shareholders' Equity
Excluding Common Stock
Subject to Repurchase.. 191.2 1,518.3 246.9 (1,709.5) 246.9
-------- -------- -------- --------- --------
$3,344.4 $2,211.6 $1,719.0 $(4,058.6) $3,216.4
======== ======== ======== ========= ========
S-25
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF INCOME
For the fiscal year ended October 1, 1999
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Sales................... $4,282.4 $2,459.9 $ -- $ -- $6,742.3
Equity in Net Income of
Subsidiaries........... -- -- 150.2 (150.2) --
Management Fee Income... -- -- 25.4 (25.4) --
-------- -------- ------ ------- --------
4,282.4 2,459.9 175.6 (175.6) 6,742.3
Costs and Expenses:
Cost of services
provided.............. 4,047.3 2,061.0 -- (20.9) 6,087.4
Depreciation and
amortization.......... 77.2 116.0 -- 0.5 193.7
Selling and general
corporate expenses.... 40.6 25.0 20.6 (0.2) 86.0
-------- -------- ------ ------- --------
4,165.1 2,202.0 20.6 (20.6) 6,367.1
-------- -------- ------ ------- --------
Operating Income... 117.3 257.9 155.0 (155.0) 375.2
Interest, net:
Interest expense,
net................... 130.4 0.6 4.8 -- 135.8
Intercompany interest,
net................... (50.4) 55.2 -- (4.8) --
-------- -------- ------ ------- --------
Interest Expense, net... 80.0 55.8 4.8 (4.8) 135.8
-------- -------- ------ ------- --------
Income before
income taxes...... 37.3 202.1 150.2 (150.2) 239.4
Provision for Income
Taxes.................. 10.6 78.6 -- -- 89.2
-------- -------- ------ ------- --------
Net Income......... $ 26.7 $ 123.5 $150.2 $(150.2) $ 150.2
======== ======== ====== ======= ========
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF INCOME
For the fiscal year ended September 29, 2000
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Sales................... $4,477.9 $2,785.0 $ -- $ -- $7,262.9
Equity in Net Income of
Subsidiaries........... -- -- 168.0 (168.0) --
Management Fee Income... -- -- 29.5 (29.5) --
-------- -------- ------ ------- --------
4,477.9 2,785.0 197.5 (197.5) 7,262.9
Costs and Expenses:
Cost of services
provided.............. 4,211.5 2,342.5 -- (23.0) 6,531.0
Depreciation and
amortization.......... 91.5 129.0 -- 0.3 220.8
Selling and general
corporate expenses.... 45.4 23.4 21.1 1.6 91.5
-------- -------- ------ ------- --------
4,348.4 2,494.9 21.1 (21.1) 6,843.3
-------- -------- ------ ------- --------
Operating Income... 129.5 290.1 176.4 (176.4) 419.6
Interest, net:
Interest expense,
net................... 139.1 0.3 8.4 -- 147.8
Intercompany interest,
net................... (19.8) 28.2 -- (8.4) --
-------- -------- ------ ------- --------
Interest Expense, net... 119.3 28.5 8.4 (8.4) 147.8
-------- -------- ------ ------- --------
Income before
income taxes...... 10.2 261.6 168.0 (168.0) 271.8
Provision for Income
Taxes.................. 6.7 97.1 -- -- 103.8
-------- -------- ------ ------- --------
Net Income......... $ 3.5 $ 164.5 $168.0 $(168.0) $ 168.0
======== ======== ====== ======= ========
S-26
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF INCOME
For the fiscal year ended September 28, 2001
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Sales................... $4,780.1 $3,008.6 $ -- $ -- $7,788.7
Equity in Net Income of
Subsidiaries........... -- -- 176.5 (176.5) --
Management Fee Income... -- -- 32.6 (32.6) --
-------- -------- ------ ------- --------
4,780.1 3,008.6 209.1 (209.1) 7,788.7
Costs and Expenses:
Cost of services
provided.............. 4,485.0 2,544.7 -- (26.9) 7,002.8
Depreciation and
amortization.......... 97.7 142.1 -- 0.4 240.2
Selling and general
corporate expenses.... 53.2 26.5 26.6 (0.1) 106.2
-------- -------- ------ ------- --------
4,635.9 2,713.3 26.6 (26.6) 7,349.2
-------- -------- ------ ------- --------
Operating Income... 144.2 295.3 182.5 (182.5) 439.5
Interest and other
financing costs, net:
Interest expense,
net................... 147.1 0.2 6.0 -- 153.3
Intercompany interest,
net................... (33.8) 39.8 -- (6.0) --
-------- -------- ------ ------- --------
Interest and other
financing costs, net... 113.3 40.0 6.0 (6.0) 153.3
-------- -------- ------ ------- --------
Income before
income taxes...... 30.9 255.3 176.5 (176.5) 286.2
Provision for Income
Taxes.................. 16.5 93.2 -- -- 109.7
-------- -------- ------ ------- --------
Net Income......... $ 14.4 $ 162.1 $176.5 $(176.5) $ 176.5
======== ======== ====== ======= ========
S-27
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the fiscal year ended October 1, 1999
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............. $ 108.1 $ 211.9 $(26.8) $-- $ 293.2
Cash flows from
investing activities:
Purchases of property
and equipment......... (78.4) (128.8) -- -- (207.2)
Disposals of property
and equipment......... 3.9 20.1 -- -- 24.0
Sale of investments.... -- 40.7 -- -- 40.7
Divestiture of certain
businesses............ 8.4 (0.1) -- -- 8.3
Acquisition of
businesses............ (45.0) (17.7) -- -- (62.7)
Other investing
activities............ (24.1) 5.1 (0.3) -- (19.3)
------- ------- ------ ---- -------
Net cash used in
investing activities... (135.2) (80.7) (0.3) -- (216.2)
------- ------- ------ ---- -------
Cash flows from
financing activities:
Proceeds from
additional long-term
borrowings............ 4.9 -- -- -- 4.9
Payment of long-term
borrowings............ (106.1) (0.6) -- -- (106.7)
Proceeds from issuance
of common stock....... -- -- 60.7 -- 60.7
Repurchase of common
stock................. -- -- (28.6) -- (28.6)
Change in intercompany,
net................... 134.7 (129.9) (4.8) -- --
Other financing
activities............ (0.2) -- -- -- (0.2)
------- ------- ------ ---- -------
Net cash provided by
(used in) financing
activities............. 33.3 (130.5) 27.3 -- (69.9)
------- ------- ------ ---- -------
Increase in cash and
cash equivalents....... 6.2 0.7 0.2 -- 7.1
Cash and cash
equivalents, beginning
of period.............. 14.1 6.5 -- -- 20.6
------- ------- ------ ---- -------
Cash and cash
equivalents, end of
period................. $ 20.3 $ 7.2 $ 0.2 $-- $ 27.7
======= ======= ====== ==== =======
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the fiscal year ended September 29, 2000
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............. $ 165.5 $ 267.3 $ (25.7) $-- $ 407.1
Cash flows from
investing activities:
Purchases of property
and equipment......... (80.3) (154.3) -- -- (234.6)
Disposals of property
and equipment......... 11.5 16.0 -- -- 27.5
Acquisition of
businesses............ -- (233.5) -- -- (233.5)
Other investing
activities............ (28.1) (14.6) (0.3) -- (43.0)
------- ------- ------- ---- -------
Net cash used in
investing activities... (96.9) (386.4) (0.3) -- (483.6)
------- ------- ------- ---- -------
Cash flows from
financing activities:
Proceeds from
additional long-term
borrowings............ 357.7 -- -- -- 357.7
Payment of long-term
borrowings............ (129.9) (3.2) (26.7) -- (159.8)
Proceeds from issuance
of common stock....... -- -- 31.2 -- 31.2
Repurchase of common
stock................. -- -- (155.4) -- (155.4)
Change in intercompany,
net................... (296.9) 119.9 177.0 -- --
Other financing
activities............ (0.3) -- -- -- (0.3)
------- ------- ------- ---- -------
Net cash provided by
(used in) financing
activities............. (69.4) 116.7 26.1 -- 73.4
------- ------- ------- ---- -------
Increase (decrease) in
cash and cash
equivalents............ (0.8) (2.4) 0.1 -- (3.1)
Cash and cash
equivalents, beginning
of period.............. 20.3 7.2 0.2 -- 27.7
------- ------- ------- ---- -------
Cash and cash
equivalents, end of
period................. $ 19.5 $ 4.8 $ 0.3 $-- $ 24.6
======= ======= ======= ==== =======
S-28
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ARAMARK CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the fiscal year ended September 28, 2001
(dollars in millions)
ARAMARK
Services, Inc.
and Other ARAMARK
Subsidiaries Subsidiaries Corporation Eliminations Consolidated
-------------- ------------ ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............. $ 233.0 $ 307.7 $(43.8) $-- $ 496.9
Cash flows from
investing activities:
Purchases of property
and equipment......... (89.8) (151.0) (0.2) -- (241.0)
Disposals of property
and equipment......... 6.2 16.1 -- -- 22.3
Sale of investments.... -- 8.2 -- -- 8.2
Acquisition of
businesses............ (49.0) (30.6) -- -- (79.6)
Other investing
activities............ (8.3) 19.5 (0.3) -- 10.9
------- ------- ------ ---- -------
Net cash used in
investing activities... (140.9) (137.8) (0.5) -- (279.2)
------- ------- ------ ---- -------
Cash flows from
financing activities:
Proceeds from
additional long-term
borrowings............ 21.3 6.6 -- -- 27.9
Payment of long-term
borrowings............ (218.1) (2.7) -- -- (220.8)
Proceeds from issuance
of common stock....... -- -- 31.5 -- 31.5
Repurchase of common
stock................. -- -- (55.1) -- (55.1)
Change in intercompany,
net................... 103.5 (171.5) 68.0 -- --
Other financing
activities............ (1.0) -- -- -- (1.0)
------- ------- ------ ---- -------
Net cash provided by
(used in) financing
activities............. (94.3) (167.6) 44.4 -- (217.5)
------- ------- ------ ---- -------
Increase (decrease) in
cash and cash
equivalents............ (2.2) 2.3 0.1 -- 0.2
Cash and cash
equivalents, beginning
of period.............. 19.5 4.8 0.3 -- 24.6
------- ------- ------ ---- -------
Cash and cash
equivalents, end of
period................. $ 17.3 $ 7.1 $ 0.4 $-- $ 24.8
======= ======= ====== ==== =======
S-29
ARAMARK CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED OCTOBER 1, 1999, SEPTEMBER 29, 2000AND SEPTEMBER 28,
2001
Additions Reductions
------------------- ----------------------- Balance,
Balance, Acquisition Charged Divestiture Deductions End of
Beginning of of to of from Fiscal
Description Fiscal Year Businesses Income Businesses Reserves(1) Year
- ----------- ------------ ----------- ------- ----------- ----------- --------
(in thousands)
Fiscal Year 1999
Reserve for doubtful
accounts, advances &
current notes
receivable............ $24,457 $ 165 $13,413 $ 41 $15,498 $22,496
======= ===== ======= ===== ======= =======
Fiscal Year 2000
Reserve for doubtful
accounts, advances &
current notes
receivable............ $22,496 $ 647 $15,048 $ -- $13,388 $24,803
======= ===== ======= ===== ======= =======
Fiscal Year 2001
Reserve for doubtful
accounts, advances &
current notes
receivable............ $24,803 $ -- $18,039 $ -- $20,271 $22,571
======= ===== ======= ===== ======= =======
- --------
(1) Allowances granted and amounts determined not to be collectible.
S-30
EXHIBIT INDEX
Copies of any of the following exhibits are available to Stockholders for
the cost of reproduction upon written request from the Assistant Secretary,
ARAMARK Corporation, 1101 Market Street, Philadelphia, PA 19107
1* Form of Underwriting Agreement.
2* Form of Merger Agreement.
3.1 Restated Certificate of Incorporation is incorporated by reference to
exhibit 3.1 to ARAMARK Corporation's Annual Report on Form 10-K filed
with the SEC on November 24, 1999, pursuant to the Exchange Act (File
No. 001-8827).
3.2* Form of Amended and Restated Certificate of Incorporation (post-
merger).
3.3 Corporate By-Laws, as ratified and approved February 8, 2000, are
incorporated by reference to exhibit 3.2 to ARAMARK Corporation's
Annual Report on Form 10-K filed with the SEC on November 24, 1999,
pursuant to the Exchange Act (File No. 001-8827).
3.4* Form of Amended and Restated Bylaws (post-merger).
4.1* Amended and Restated Stockholders' Agreement dated as of December 14,
1994, by and among ARAMARK Corporation and the parties identified on
its books as "Management Investors" or their "Permitted Transferees" or
as "Individual Investors" or "Institutional Investors".
4.2* Amended and Restated Registration Rights Agreement dated April 7, 1988,
between ARAMARK Corporation and certain stockholders.
4.3* Amendment and Waiver to the Amended and Restated Registration Rights
Agreement dated July 16, 2001 among ARAMARK Corporation and
Metropolitan Life Insurance Company.
4.4* Form of Rights Agreement.
4.5 7.0% Guaranteed Notes due July 15, 2006; Indenture dated as of July 15,
1991, among ARAMARK Services, Inc., ARAMARK Corporation, as guarantor,
and The Bank of New York, as trustee, is incorporated by reference to
Exhibit (4)(b) to ARAMARK Corporation's Registration Statement on Form
S-3 filed with the SEC on June 21, 1991, pursuant to the Securities Act
(Registration No. 33-41357).
4.6 6 3/4% Guaranteed Notes due August 1, 2004; Indenture dated as of July
15, 1991, among ARAMARK Services, Inc., ARAMARK Corporation, as
guarantor, and The Bank of New York, as trustee, is incorporated by
reference to Exhibit (4)(b) to ARAMARK Corporation's Registration
Statement on Form S-3 filed with the SEC on June 21, 1991, pursuant to
the Securities Act (Registration No. 33-41357).
4.7 Indenture dated as of July 15, 1991, among ARAMARK Services, Inc.,
ARAMARK Corporation, as guarantor, and The Bank of New York, as
trustee, is incorporated by reference to Exhibit (4)(b) to ARAMARK
Corporation's Registration Statement on Form S-3 filed with the SEC on
June 21, 1991, pursuant to the Securities Act (Registration No. 33-
41357).
Long-term debt instruments authorizing debt that does not exceed 10% of
the total consolidated assets of ARAMARK are not filed herewith but
will be furnished on request of the Commission.
4.8* Form of stock certificate for Class B common stock.
4.9* Form of stock certificate for Class A-1, Class A-2, Class A-3, Class B-
1, Class B-2 and Class B-3 common stock.
4.10* Amendment and Waiver dated as of July 24, 2001 among ARAMARK
Corporation and Ameritrust Co., TTEE, George Gund 1959 Trust C-2;
Ameritrust Co., TTEE, George Gund 1959 Trust C-1; Gordon Gund/Grant
Gund Trust and Gordon Gund/Zachary Gund Trust 10/1/1978.
4.11* Amendment and Waiver dated as of July 30, 2001 among ARAMARK
Corporation and Lee F. Driscoll, III; Phoebe P. Driscoll; Patrick MCG.
Driscoll; Helen Louise Driscoll, M.D.; and Lee F. Driscoll, III, Trust
u/a/d 12/17/98 Phoebe Fisher, TTEE f/b/o C. Driscoll.
4.12* Agreement dated as of July 16, 2001 between ARAMARK Corporation and
Metropolitan Life Insurance Company.
4.13* Form of Registration Rights Agreement among ARAMARK Worldwide
Corporation and Joseph Neubauer and each of the other holders listed on
Schedule 1 thereto.
1
10.1 1999 Employment Agreement with Joseph Neubauer is incorporated by
reference to Exhibit 10.1 to ARAMARK Corporation's Annual Report on
Form 10-K filed with the SEC on November 24, 1999, pursuant to the
Exchange Act (File No. 001-08827).
10.2* Form of Agreement relating to employment and post-employment
competition with William Leonard.
10.3* Form of Agreement relating to employment and post-employment
competition with L. Frederick Sutherland.
10.4* Form of Agreement relating to employment and post-employment
competition with Brian G. Mulvaney.
10.5* Form of Agreement relating to employment and post-employment
competition with John J. Zillmer.
10.6 Credit and Guaranty Agreement dated January 7, 1998 and amendments
thereto dated May 7, 1998 and September 10, 1998 are incorporated by
reference to Exhibit 10.8 to ARAMARK Corporation's Annual Report on
Form 10-K filed with the SEC on November 25, 1998, pursuant to the
Exchange Act (File No. 001-08827).
10.7* Form of Amendment No. 1 to Employment Agreement among ARAMARK
Corporation, ARAMARK Worldwide Corporation and Joseph Neubauer.
10.8* Amendment No. 2 to the Credit and Guaranty Agreement dated August 13,
2001.
10.9* Letter Agreement dated February 12, 2001 between ARAMARK Corporation
and James E. Ksansnak.
10.10*+ Composite and Conformed Master Distribution Agreement between SYSCO
Corporation and ARAMARK Food and Support Services Group, Inc.
10.11* Purchase Agreement between the ServiceMaster Company and ARAMARK
Corporation, dated as of October 3, 2001.
10.12* Amendment No. 3 to the Credit and Guarantee Agreement dated November
9, 2001.
12 Ratio of Earnings to Fixed Charges.
21 List of subsidiaries of ARAMARK Corporation.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney (included on signatures page - page 50).
- --------
+ Portions omitted pursuant to a request for confidential treatment.
* Incorporated by reference to ARAMARK Corporation's Registration Statement on
Form S-1 filed with the SEC on July 17, 2001, pursuant to the Securities Act
(Registration No. 333-65226).
2