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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
November 30, 2001
Date of Report (Date of earliest event reported)
Commission file number: 1-8827
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ARAMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2319139
(State of Incorporation) (I.R.S. Employer identification No.)
ARAMARK Tower
1101 Market Street
Philadelphia, Pennsylvania 19107
(Address of principal executive offices)
Telephone Number: 215-238-3000
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Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 30, 2001 ARAMARK Corporation (the Company) completed the
acquisition of the management services division of The ServiceMaster Company,
referred to herein as ServiceMaster Management Services. The aggregate
consideration for the transaction is approximately $790.6 million in cash,
subject to post closing adjustments.
ServiceMaster Management Services is a leader in the provision of facility
management services in the United States, providing a complete range of
facility management services to the healthcare, education and business and
industry client sectors. The facility management services provided include
custodial services, plant operations and management, groundskeeping, technical
support and food services. ServiceMaster Management Services also has
operations in Canada and maintains licensing arrangements with local service
providers in approximately 25 other countries.
The Company believes that the acquisition of ServiceMaster Management
Services will further enhance its position as a leading provider of outsourced
services. The Company believes the acquisition will enable it to strengthen its
portfolio of services by broadening its facility services base in the United
States and internationally. In addition, the Company believes the acquisition
will provide ARAMARK with additional strategic benefits, including
opportunities to cross-sell facility management services to our existing
clients, and opportunities to cross-sell food and support services and other
outsourced services to ServiceMaster Management Services' existing clients.
The Company has financed the acquisition of ServiceMaster Management
Services and related expenses in an aggregate of approximately $800 million by
borrowing approximately an additional $200 million under the Company's senior
revolving credit facility and $600 million under a new bridge financing
facility with a group of banks 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 its initial public offering of new Class B common stock.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial statements, pro forma financial information and
exhibits were filed as part of this Report:
(a) Financial statements of ServiceMaster Management Services pursuant
to Rule 3-05 of Regulation S-X:
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The ServiceMaster Company:
We have audited the accompanying statement of financial position of
SERVICEMASTER MANAGEMENT SERVICES BUSINESS (the "Business" as described in Note
1) as of December 31, 2000, and the related statements of income, changes in
equity, and cash flows for the year then ended. These financial statements are
the responsibility of The ServiceMaster Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
As discussed more fully in Note 2, on October 3, 2001, The ServiceMaster
Company entered into an agreement to sell the Business.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ServiceMaster Management
Services Business as of December 31, 2000, and the results of its operations,
changes in equity and cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
November 14, 2001
3
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2000
(In thousands)
Assets
Current Assets:
Receivables, less allowance of $5,812................................. $109,167
Inventories........................................................... 11,712
Prepaid expenses and other assets..................................... 24,758
--------
Total current assets................................................ 145,637
--------
Property, Plant and Equipment, at Cost
Land and buildings.................................................... 3,285
Equipment............................................................. 120,615
--------
123,900
Less: accumulated depreciation........................................ 75,682
--------
Net property, plant and equipment..................................... 48,218
--------
Other Assets
Intangible assets, primarily goodwill................................. 42,873
Notes receivable and other assets..................................... 6,813
Deferred income taxes................................................. 22,410
--------
Total assets........................................................ $265,951
========
Liabilities and Equity
Current Liabilities:
Accounts Payable...................................................... $ 25,037
Accrued liabilities:
Payroll............................................................. 20,433
Insurance........................................................... 30,195
Other............................................................... 33,747
Deferred revenues..................................................... 13,601
--------
Total current liabilities........................................... 123,013
--------
Other Long-Term Obligations........................................... 25,478
--------
Commitments and Contingencies (see Note 6)
Equity--Net Advances from The ServiceMaster Company................... 117,460
--------
Total Liabilities and Equity.......................................... $265,951
========
The accompanying Notes to the Financial Statements are an integral part of
this statement.
4
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
Operating Revenue................................................... $1,909,126
Operating Costs and Expenses:
Cost of services rendered and products sold......................... 1,728,695
Selling and administrative expenses................................. 111,335
----------
Total operating costs and expenses.................................. 1,840,030
----------
Operating Income.................................................... 69,096
Provision for income taxes.......................................... 27,293
----------
Net Income.......................................................... $ 41,803
==========
The accompanying Notes to the Financial Statements are an integral part of
this statement.
5
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(In thousands)
Cash and Cash Equivalents at January 1................................ $ --
Cash Flows from Operations:
Net Income............................................................ 41,803
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation...................................................... 18,301
Amortization...................................................... 1,392
Deferred income taxes............................................. 719
Change in working capital:
Receivables....................................................... (9,387)
Inventories and other current assets.............................. (6,315)
Accounts payable.................................................. 7,902
Deferred revenue.................................................. 4,118
Accrued liabilities............................................... 9,638
Other, net.......................................................... (2,246)
--------
Net Cash Provided by Operations..................................... 65,925
Cash Flows from Investing Activities:
Capital expenditures, net........................................... (15,121)
Business acquisitions............................................... (3,825)
Collection of notes receivable...................................... 8,512
--------
Net Cash Used for Investing Activities.............................. (10,434)
Cash Flows from Financing Activities:
Distributions to ServiceMaster...................................... (55,491)
--------
Net Cash Used for Financing Activities.............................. (55,491)
Cash Increase (Decrease) During the Period............................ --
--------
Ending Cash and Cash Equivalents...................................... $ --
========
The accompanying Notes to the Financial Statements are an integral part of this
statement.
6
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
(In thousands)
Equity--Net advances from The ServiceMaster Company
Beginning Balance..................................................... $131,148
Net Income............................................................ 41,803
Net Remittances to The ServiceMaster Company.......................... (55,491)
--------
Ending Balance........................................................ $117,460
========
The accompanying Notes to the Financial Statements are an integral part of this
statement.
7
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
Note 1--Basis of Presentation
ServiceMaster Management Services Business (the "Business") is an operating
segment of The ServiceMaster Company ("ServiceMaster", a Delaware corporation)
and provides a variety of supportive management services to healthcare,
education and commercial accounts primarily within the United States. The
Business is also engaged in developing, manufacturing and distributing
chemicals and equipment. The financial statements presented include the
operations of the Business.
As a result of the Business's relationship with ServiceMaster, the financial
position and results of operations are not necessarily indicative of what
actually would have occurred had the Business operated as a stand-alone entity.
Additionally, these financial statements are not necessarily indicative of
future financial position or results of operations.
The preparation of the financial statements requires management to make
certain estimates and assumptions required under accounting principles
generally accepted in the United States, which may differ from the actual
results. The more significant areas requiring the use of management estimates
relate to the allowance for receivables, accruals for self-insured medical,
workers compensation, auto and general liability insurance, and useful lives
for depreciation and amortization.
Note 2--Subsequent Event
On October 3, 2001, ServiceMaster entered into an agreement to sell the
Business to ARAMARK Corporation ("ARAMARK"). Significant terms of the sale
include the disposition of substantially all assets and liabilities of the
Business, with the primary exception of the majority of its site service
product line. ARAMARK is also purchasing ServiceMaster's corporate headquarters
campus. The transaction is expected to close in 2001.
Supplemental financial information with respect to the corporate
headquarters campus excluded from, and the site service product line included
in the financial statements of the Business as of and for the year ended
December 31, 2000 is set forth below (in thousands):
Corporate headquarters campus:
Land and buildings..................................................... $24,268
Equipment.............................................................. 6,922
-------
Total................................................................ 31,190
-------
Less--accumulated depreciation......................................... 13,179
-------
Net property, plant and equipment...................................... $18,011
=======
Depreciation expense related to
this facility was $1.5 million for
the year ended December 31, 2000, of
which $660 was allocated to and
recorded as a cash transaction by
the Business.
Site service product line
Summary balance sheet:
Total current assets.................................................. $ 5,000
Total other assets.................................................... 9,792
Net property, plant and equipment..................................... 4,277
-------
Total assets.......................................................... $19,069
=======
Total current liabilities............................................. $ 822
Equity................................................................ 18,247
-------
Total liabilities and equity.......................................... $19,069
=======
Summary income statement:
Operating revenue..................................................... $30,222
Cost of services rendered and products sold........................... 30,794
Selling and administrative expenses................................... 3,103
-------
Total operating costs and expenses.................................. 33,897
-------
Operating loss........................................................ (3,675)
Income tax benefit.................................................... 1,452
-------
Net loss.............................................................. $(2,223)
=======
8
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 3--Summary of Significant Accounting Policies
Revenues: Revenues are recognized as services are rendered and consist of
contract fees from facilities for which the Business provides outsourcing
services. Revenues reflect the total price of such services since the Business
acts as a principal in these transactions and assumes the risks and rewards of
the contractual arrangement. As such, contract fees for all payroll costs,
including $923 million for the facility employees whose payroll is processed by
the facilities, are recognized by the Business as revenues with a corresponding
expense included in "Cost of services rendered and products sold" in the
Statement of Income.
Inventory Valuation: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, and
factory overhead and related handling costs. Raw materials represent less than
three percent of the inventory value at December 31, 2000. The remaining
inventory is finished goods to be used on the customers' premises or sold to
ServiceMaster's franchisees.
Depreciation and Amortization: Buildings and equipment used in the business
are stated at cost and depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the
estimated useful lives for equipment range from 3 to 10 years. Long-lived
assets are periodically reviewed to determine recoverability by comparing their
carrying values to the undiscounted future cash flows expected to be realized
from their use. No recovery problems have been indicated by these comparisons.
Based on the reviews, when the undiscounted future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized based on the
asset's fair value, and the carrying amount of the asset is reduced
accordingly.
Intangible assets consist primarily of goodwill ($43 million). These assets
are amortized on a straight-line basis over their estimated useful lives, which
are predominately 40 years. Goodwill is periodically reviewed to determine
recoverability utilizing a discounted cash flow methodology.
Income Taxes: Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This Statement
utilizes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in an entity's financial statements or tax
returns. Deferred income taxes are provided to reflect the differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements.
Note 4--Related Party Transactions
The Business primarily conducts its operations as an integrated component of
ServiceMaster. Certain expenses are shared and are charged or allocated to the
Business from ServiceMaster. Additionally, certain expenses are allocated from
the Business to ServiceMaster. Management believes that the methods of
allocating these expenses are reasonable. The majority of these expenses are as
follows (in thousands):
Allocations from ServiceMaster to the Business which are recorded in the
financial statements:
Campus................................................................ $2,300
Insurance............................................................. 1,760
Benefits.............................................................. 460
Other................................................................. 420
------
Total................................................................. $4,940
======
9
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The campus allocation is based upon the square footage used by the Business
and includes both depreciation and operating costs associated with the campus.
Insurance expense included claims paid related to the umbrella, professional
liability, crime, and directors and officers insurance policies. Benefits
primarily represent the Business's portion of the company match for the
ServiceMaster Employee Share Purchase Plan.
Allocations from the Business to ServiceMaster which are recorded in the
financial statements:
Insurance............................................................ $ 370
Administrative services.............................................. 790
Other................................................................ 300
------
Total................................................................ $1,460
======
Insurance expense included claims paid related to the health, auto, and
property insurance policies. Administrative services primarily represent
information systems support provided by the Business to ServiceMaster.
Note 5--Income Taxes
For purposes of these financial statements, the Business calculated the
current and deferred income tax provision as if it filed a separate tax return.
Income taxes are ultimately paid by, and are the responsibility of,
ServiceMaster. ServiceMaster will retain the asset/liability for all taxes of
the Business for operating activities through the date of sale.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the Business's effective income tax rate is as follows:
Tax at U.S. federal statutory rate........................................ 35.0%
State and local income taxes, net of U.S. federal benefit................. 6.6
Non-deductible amortization............................................... (3.3)
Other..................................................................... 1.2
----
Effective rate............................................................ 39.5%
====
Income tax expense consists of:
Current Deferred Total
------- -------- -------
(In thousands)
U.S. federal........................................ $22,061 $672 $22,733
State and local..................................... 4,513 47 4,560
------- ---- -------
$26,574 $719 $27,293
======= ==== =======
The net deferred income tax asset reflects the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts for income tax purposes. Deferred
income tax expense results from changes in the net asset balance for the year.
Management believes that, based upon its lengthy and consistent history of
profitable operations, it is probable that the net deferred
10
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
income tax asset will be realized on future tax returns, primarily from the
generation of future taxable income. Significant components of the Business's
net deferred income tax asset are as follows (in thousands):
Deferred income tax assets (liabilities):
Current:
Prepaid expenses and other.......................................... $(1,472)
Accounts receivable allowance and other............................. 2,419
-------
Total current asset............................................... 947
-------
Long-Term:
Long-term assets...................................................... 2,603
Insurance expenses.................................................... 19,195
Other long-term obligations........................................... 612
-------
Total long term asset............................................... 22,410
-------
Net deferred income tax asset......................................... $23,357
=======
Note 6--Commitments and Contingencies
The Business carries insurance policies on insurable risks which it believes
to be appropriate. The Business generally has self-insured retention limits and
has obtained fully insured layers of coverage above such self-insured retention
limits. Accruals for self insurance losses are made based on the Business's
claims experience and actuarial assumptions. Other long-term obligations
primarily represent insurance related reserves. The Business has certain
liabilities with respect to existing or potential claims, lawsuits, and other
proceedings. The Business accrues for these liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Certain litigation and the related exposure has been assumed by ServiceMaster.
Note 7--Employee Benefit Plans
Operating expenses include contributions in 2000 to qualified profit sharing
plans for $2.5 million and to the ServiceMaster Employee Share Purchase Plan
for $0.5 million.
Note 8--Leases
Future long-term noncancelable operating lease payments are $4.9 million in
2001, $2.4 million in 2002, $0.8 million in 2003, $0.3 million in 2004, and
less than $0.1 million thereafter. Rental expense for 2000 was $5.4 million.
Note 9--Equity--Net Advances from ServiceMaster
The Business participates in a centralized cash management program
administered by ServiceMaster. Cash collected from operations is remitted to
ServiceMaster and advances are made by ServiceMaster, as needed, to cover the
Business's operating expenses and capital requirements. Cash remitted between
the Business and to or from ServiceMaster decreases or increases, respectively,
the net advances from ServiceMaster.
11
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2001 (UNAUDITED)
(In thousands)
Assets
Current Assets:
Receivables, less allowance of $1,695................................. $ 27,045
Inventories........................................................... 10,069
Prepaid expenses and other assets..................................... 25,133
--------
Total current assets................................................ 62,247
--------
Property, Plant and Equipment, at Cost
Land and buildings.................................................... 4,223
Equipment............................................................. 122,376
--------
126,599
Less: accumulated depreciation........................................ 80,719
--------
Net property, plant and equipment..................................... 45,880
--------
Other Assets
Intangible assets, primarily goodwill................................. 47,811
Notes receivable and other assets..................................... 6,831
Deferred income taxes................................................. 24,440
--------
Total assets........................................................ $187,209
========
Liabilities and Equity
Current Liabilities:
Accounts Payable...................................................... $ 29,288
Accrued liabilities:
Payroll............................................................. 16,520
Insurance........................................................... 30,332
Other............................................................... 32,505
Deferred revenues..................................................... 16,707
--------
Total current liabilities........................................... 125,352
--------
Other Long-Term Obligations........................................... 26,820
--------
Commitments and Contingencies (see Notes)
Equity--Net Advances from The ServiceMaster Company................... 35,037
--------
Total Liabilities and Equity.......................................... $187,209
========
The accompanying Notes to the Financial Statements are an intergral part of
this statement.
12
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
(In thousands)
Operating Revenue................................................... $1,439,877
Operating Costs and Expenses:
Cost of services rendered and products sold......................... 1,304,084
Selling and administrative expenses................................. 88,064
----------
Total operating costs and expenses.................................. 1,392,148
----------
Operating Income.................................................... 47,729
Provision for income taxes.......................................... 18,853
----------
Net Income.......................................................... $ 28,876
==========
The accompanying Notes to the Financial Statements are an integral part of this
statement.
13
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
(In thousands)
Cash and Cash Equivalents at January 1............................... $ --
Cash Flows from Operations:
Net Income........................................................... 28,876
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation..................................................... 13,568
Amortization..................................................... 1,046
Deferred income taxes............................................ 1,224
Change in working capital:
Receivables...................................................... 9,101
Sale of receivables (Note 5)..................................... 73,021
Inventories and other current assets............................. 2,074
Accounts payable................................................. 4,250
Deferred revenue................................................. 3,106
Accrued liabilities.............................................. (5,018)
Other, net......................................................... (2,428)
---------
Net Cash Provided by Operations.................................... 128,820
Cash Flows from Investing Activities:
Capital expenditures, net.......................................... (11,230)
Business acquisitions.............................................. (6,291)
---------
Net Cash Used for Investing Activities............................. (17,521)
Cash Flows from Financing Activities:
Distributions to ServiceMaster..................................... (111,299)
---------
Net Cash Used for Financing Activities............................. (111,299)
Cash Increase (Decrease) During the Period........................... --
---------
Ending Cash and Cash Equivalents..................................... $ --
=========
The accompanying Notes to the Financial Statements are an integral part of this
statement.
14
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
(In thousands)
Equity--net advances from The ServiceMaster Company
Beginning Balance.................................................... $ 117,460
Net Income........................................................... 28,876
Net Remittances to The ServiceMaster Company......................... (111,299)
---------
Ending Balance....................................................... $ 35,037
=========
The accompanying Notes to the Financial Statements are an integral part of this
statement.
15
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
Note 1--Basis of Presentation
ServiceMaster Management Services Business (the "Business") is an operating
segment of The ServiceMaster Company ("ServiceMaster", a Delaware corporation)
and provides a variety of supportive management services to healthcare,
education and commercial accounts primarily within the United States. The
Business is also engaged in developing, manufacturing and distributing
chemicals and equipment.
The financial statements presented include the operations of the Business.
In the opinion of management, these financial statements include all
adjustments necessary to present fairly the financial position as of September
30, 2001 and results of operations and cash flows for the nine months then
ended. All adjustments made have been of a normal and recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States have been condensed or omitted. The Business believes that the
disclosures included are adequate and provide a fair presentation of interim
period results.
As a result of the Business's relationship with ServiceMaster, the financial
position and results of operations are not necessarily indicative of what
actually would have occurred had the Business operated as a stand-alone entity.
Additionally, these financial statements are not necessarily indicative of
future financial position or results of operations.
The preparation of the financial statements requires management to make
certain estimates and assumptions required under accounting principles
generally accepted in the United States, which may differ from the actual
results. The more significant areas requiring the use of management estimates
relate to the allowance for receivables, accruals for self-insured medical,
workers compensation, auto and general liability insurance, and useful lives
for depreciation and amortization.
Note 2--Subsequent Event
On October 3, 2001, ServiceMaster entered into an agreement to sell the
Business to ARAMARK Corporation ("ARAMARK"). Significant terms of the sale
include the disposition of substantially all assets and liabilities of the
Business, with the exception of the majority of its site service product line.
ARAMARK is also purchasing ServiceMaster's corporate headquarters campus. The
transaction is expected to close in 2001.
Supplemental financial information with respect to the corporate
headquarters campus excluded from, and the site service product line included
in the financial statements of the Business as of and for the nine months ended
September 30, 2001 is set forth below (in thousands):
Site service product line
Summary balance sheet:
Total current assets........................ $ 6,796
Total other assets.......................... 9,580
Net property, plant and equipment........... 4,525
-------
Total assets................................ $20,901
=======
Total current liabilities................... $ 145
Equity...................................... 20,756
-------
Total liabilities and equity................ $20,901
=======
Summary income statement:
Operating revenue........................... $22,741
Cost of services rendered and products
sold....................................... 28,767
Selling and administrative expenses......... 1,970
-------
Total operating costs and expenses........ 30,737
-------
Operating loss.............................. (7,996)
Income tax benefit.......................... 3,158
-------
Net loss.................................... $(4,838)
=======
Corporate headquarters
campus:
Land and buildings........ $24,505
Equipment................. 7,095
-------
Total................... 31,600
-------
Less--accumulated
depreciation............. 14,367
-------
Net property, plant and
equipment................ $17,233
=======
Depreciation expense
related to this facility was
$1.2 million for the nine
months ended September 30,
2001 of which $490 was
allocated to and recorded as
a cash transaction by the
Business.
16
SERVICEMASTER MANAGEMENT SERVICES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 3--Summary of Significant Accounting Policies
Revenues: Revenues are recognized as services are rendered and consist of
contract fees from facilities for which the Business provides outsourcing
services. Revenues reflect the total price of such services since the Business
acts as a principal in these transactions and assumes the risks and rewards of
the contractual arrangement. As such, contract fees for all payroll costs,
including $699 million for the facility employees whose payroll is processed by
the facilities, are recognized by the Business as revenues with a corresponding
expense included in "Cost of services rendered and products sold" in the
Statement of Income.
Inventory Valuation: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, and
factory overhead and related handling costs. Raw materials represent less than
three percent of the inventory value at September 30, 2001. The remaining
inventory is finished goods to be used on the customers' premises or sold to
ServiceMaster's franchisees.
Depreciation and Amortization: Buildings and equipment used in the business
are stated at cost and depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the
estimated useful lives for equipment range from 3 to 10 years. Long-lived
assets are periodically reviewed to determine recoverability by comparing their
carrying values to the undiscounted future cash flows expected to be realized
from their use. No recovery problems have been indicated by these comparisons.
Based on the reviews, when the undiscounted future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized based on the
asset's fair value, and the carrying amount of the asset is reduced
accordingly.
Intangible assets consist primarily of goodwill ($48 million). These assets
are amortized on a straight-line basis over their estimated useful lives, which
are predominately 40 years. Goodwill is periodically reviewed to determine
recoverability utilizing a discounted cash flow methodology.
Note 4--Commitments and Contingencies
The Business carries insurance policies on insurable risks which it believes
to be appropriate. The Business generally has self insured retention limits and
has obtained fully insured layers of coverage above such self insured retention
limits. Accruals for self insurance losses are made based on the Business's
claims experience and actuarial assumptions. Other long-term obligations
primarily include insurance related reserves. The Business has certain
liabilities with respect to existing or potential claims, lawsuits, and other
proceedings. The Business accrues for these liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Certain litigation and the related exposure has been assumed by ServiceMaster.
Note 5--Equity--Net Advances from ServiceMaster
The Business participates in a centralized cash management program
administered by ServiceMaster. Cash collected from operations is remitted to
ServiceMaster and advances are made by ServiceMaster, as needed, to cover the
Business's operating expenses and capital requirements. Cash remitted between
the Business and to or from ServiceMaster decreases or increases, respectively,
the net advances from ServiceMaster. In 2001, the Business participates in
ServiceMaster's accounts receivable securitization program. As such, $77.9
million of the Business's accounts receivable were sold under this program as
of September 30, 2001. Cash proceeds of $73 million from the sale of the
Business's accounts receivable are included in net remittances to
ServiceMaster.
17
(b) Pro Forma financial information required pursuant to Article 11 of
Regulation S-X:
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial statements give pro forma effect to the acquisition
by the Company of ServiceMaster Management Services for approximately $800
million in cash (the Acquisition). The unaudited pro forma consolidated balance
sheet was prepared as if the Acquisition occurred as of September 28, 2001. The
unaudited pro forma consolidated statement of income was prepared as if the
Acquisition occurred as of the beginning of the Company's 2001 fiscal year.
The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable. The pro forma adjustment
to reflect the allocation of the purchase price is based upon the preliminary
information currently available, which may be revised, as additional
information becomes available. The notes to the unaudited pro forma financial
statements provide a more detailed discussion of how such adjustments were
derived and presented in the pro forma financial statements. Such financial
statements have been compiled from historical financial statements and other
information, but do not purport to represent what the Company's financial
position or results of operations actually would have been had the transactions
occurred on the dates indicated, or to project the Company's financial
performance for any future period. The pro forma statement of income does not
reflect any synergies or other operating benefits that may be realized as the
Company integrates ServiceMaster Management Services with the Company's
existing operations.
18
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 28, 2001
(in thousands)
ServiceMaster Pro Forma
Management Adjustments Pro Forma
ARAMARK Services for the for the
Historical Historical (a) Acquisition Acquisition
---------- ------------- ----------- -----------
ASSETS
Current Assets:
Cash and cash
equivalents............. $ 24,799 $ -- $ -- $ 24,799
Receivables, net......... 503,291 96,195 -- 599,486
Inventories.............. 415,798 9,937 -- 425,735
Prepayments and other
current assets.......... 76,310 22,198 -- 98,508
---------- -------- -------- ----------
Total current assets..... 1,020,198 128,330 -- 1,148,528
---------- -------- -------- ----------
Property and Equipment,
net...................... 1,087,833 58,588 10,000(b) 1,156,421
Goodwill.................. 705,016 38,231 436,047(b) 1,179,294
Other Assets.............. 403,347 6,831 280,000(b) 690,178
---------- -------- -------- ----------
$3,216,394 $231,980 $726,047 $4,174,421
========== ======== ======== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term borrowings.... $ 34,710 $ -- $ -- $ 34,710
Accounts payable......... 459,249 29,288 -- 488,537
Accrued expenses and
other liabilities....... 590,192 95,919 -- 686,111
---------- -------- -------- ----------
Total current
liabilities............. 1,084,151 125,207 -- 1,209,358
---------- -------- -------- ----------
Long-Term Borrowings...... 1,635,867 -- 806,000(b) 2,441,867
Deferred Income Taxes and
Other Noncurrent
Liabilities.............. 229,484 26,820 -- 256,304
Common Stock Subject to
Potential Repurchase
Under Provisions of
Shareholders' Agreement.. 20,000 -- -- 20,000
Shareholders' Equity
Excluding Common Stock
Subject to Repurchase.... 79,953 (79,953)(b) --
Class A common stock..... 24 -- -- 24
Class B common stock..... 597 -- -- 597
Capital surplus 1,057 -- -- 1,057
Earnings retained for use
in the business......... 284,184 -- -- 284,184
Accumulated other
comprehensive income
(loss).................. (18,970) -- -- (18,970)
Impact of potential
repurchase feature of
common stock............ (20,000) -- -- (20,000)
---------- -------- -------- ----------
246,892 79,953 (79,953) 246,892
---------- -------- -------- ----------
$3,216,394 $231,980 $726,047 $4,174,421
========== ======== ======== ==========
19
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2001
(in thousands, except per share amounts)
ServiceMaster Pro Forma
Management Adjustments Pro Forma
ARAMARK Services for the for the
Historical Historical (a) Acquisition Acquisition
---------- ------------- ----------- -----------
Sales.................... $7,788,690 $980,248 $ -- $8,768,938
Costs and Expenses:
Cost of services
provided............... 7,002,730 788,793 -- 7,791,523
Depreciation and
amortization 240,243 19,484 29,950(d) 289,677
Selling and general
corporate expenses..... 106,210 94,712 -- 200,922
---------- -------- -------- ----------
7,349,183 902,989 29,950 8,282,122
---------- -------- -------- ----------
Operating income........ 439,507 77,259 (29,950) 486,816
Interest and other
financing costs, net 153,292 -- 53,069(c) 206,361
---------- -------- -------- ----------
Income before income
taxes.................. 286,215 77,259 (83,019) 280,455
Provision for Income
Taxes 109,719 30,517 (32,377)(e) 107,859
---------- -------- -------- ----------
Net income.............. $ 176,496 $ 46,742 $(50,642) $ 172,596
========== ======== ======== ==========
Earnings Per Share
Basic................... $ 2.06 $ 2.01
Diluted................. $ 1.95 $ 1.90
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Represents the unaudited historical financial statements of the
ServiceMaster Management Services business being acquired as of and for the
twelve months ended September 30, 2001, including the trade accounts
receivable balance and accounts related to the ServiceMaster corporate
campus which were also acquired. Sales and Cost of Services Provided have
been adjusted to exclude client employee payroll costs of $914 million
consistent with ARAMARK'S accounting practice.
(b) To reflect the acquisition of ServiceMaster Management Services by
ARAMARK for a total purchase cost of $806 million (including direct
acquisition costs) in cash. The purchase is assumed to have been funded
with proceeds from the one-year bridge financing facility provided by a
group of banks ($600 million) and borrowings under the Company's senior
revolving credit facility ($206 million). The Company expects to repay a
portion of the bridge financing with a portion of the proceeds from the
Company's initial public offering of new Class B common stock. In addition,
the Company expects to replace the remaining portion of the bridge
financing within one year of closing the acquisition. The Company 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. The Company expects to
refinance the bridge financing on a long-term basis within one year of
closing the acquisition.
The excess ($726.0 million) of purchase cost over the carrying amount of
the net assets acquired has been allocated as follows:
(in millions)
-------------
Property and equipment...................................... $ 10
Service mark rights......................................... 10
Non compete agreement....................................... 5
Customer contract rights.................................... 265
Goodwill.................................................... 436
----
$726
====
20
(c) To reflect additional interest expense resulting from the
acquisition related borrowings. The interest rate on the bridge financing
is based on LIBOR plus-1 3/8% or 6.7% (including the syndication fee) for
the full year. The average interest rate on the Company's senior revolving
credit facility was 5.8% for the year.
(d) To reflect additional depreciation and amortization related to the
tangible and intangible assets acquired, based upon the following
depreciation / amortization periods:
Property and equipment........................................... 30 Years
Service mark rights.............................................. 3 Years
Non compete agreement............................................ 4 Years
Customer contract rights......................................... 10 Years
In accordance with the recently issued Statement of Financial Accounting
Standard No. 142, goodwill resulting from the acquisition is not amortized.
(e) To reflect the income tax effect resulting form the pro forma
adjustments using an effective tax rate of 39%.
21
(c) Exhibits:
2.1 Purchase Agreement between The ServiceMaster Company and ARAMARK
Corporation, dated as of October 3, 2001.
2.2 First Amendment to Purchase Agreement, dated as of November 30, 2001
between The ServiceMaster Company and ARAMARK Corporation.
99.1 Press Release, dated November 30, 2001, announcing the completion
by ARAMARK Corporation of the acquisition of ServiceMaster Management
Services.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 10, 2001
ARAMARK Corporation
By: /s/ John M. Lafferty
-----------------------------
Name: John M. Lafferty
Title: Senior Vice President,
Controller and Chief
Accounting Officer
23
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Purchase Agreement between The ServiceMaster Company and ARAMARK
Corporation, dated as of October 3, 2001.
2.2 First Amendment to Purchase Agreement, dated as of November 30, 2001,
between The ServiceMaster Company and ARAMARK Corporation.
99.1 Press Release, dated November 30, 2001, announcing the completion by
ARAMARK Corporation of the acquisition of ServiceMaster Management
Services.
24