UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 18, 2011
ARAMARK CORPORATION
(Exact name of registrant as specified in charter)
Delaware | 001-04762 | 95-2051630 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
1101 Market Street Philadelphia, Pennsylvania |
19107 | |||
(Address of Principal Executive Offices) | Zip Code |
Registrants telephone, including area code: 215-238-3000
N/A
(Former name and former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
ARAMARK Corporation (the Registrant) filed a Form 8-K on March 24, 2011 (the March Form 8-K) to report the acquisition of MPBP Holdings, Inc., the ultimate parent company of Masterplan, a clinical technology management and medical equipment maintenance company, by ARAMARK Clinical Technology Services, LLC, a subsidiary of the Registrant. Also acquired in the transaction were ReMedPar, an independent provider of sourced and refurbished medical equipment parts, and MESA, an integrated repair and maintenance services provider in 12 European countries. The purchase price was approximately $154.5 million in cash and revolver borrowings. This amendment is being filed to amend and supplement Item 9.01 of the March Form 8-K to include the financial statements and pro forma financial information required by parts (a) and (b) of Item 9.01 of Form 8-K.
Except as described above, all other information in and exhibits to the March Form 8-K remain unchanged.
Item 9.01 | Financial Statements and Exhibits |
(a) | Financial Statements of Businesses Acquired. |
Attached hereto as Exhibit 99.1, and incorporated herein by reference, are the audited consolidated financial statements of MPBP Holdings Inc. and Subsidiaries as of March 31, 2010 and 2009 and for the fiscal years ended March 31, 2010, March 31, 2009 and March 31, 2008.
Attached hereto as Exhibit 99.2, and incorporated herein by reference, are unaudited condensed consolidated financial statements of MPBP Holdings Inc. and Subsidiaries as of December 31, 2010 and March 31, 2010 and for the three- and nine-month periods ended December 31, 2010 and December 31, 2009.
(b) | Pro Forma Financial Information. |
Attached hereto as Exhibit 99.3, and incorporated herein by reference, is the required unaudited pro forma condensed combined financial information, which was developed by applying pro forma adjustments to the separate historical consolidated financial statements of the Registrant included in its fiscal 2010 Form 10-K and its Form 10-Q for the quarterly period ended April 1, 2011.
(c) | Exhibits |
Exhibit |
Description | |
10.1 | Agreement and Plan of Merger by and among MPBP Holdings, Inc., ARAMARK Clinical Technology Services, LLC, RMK Titan Acquisition Corporation, ARAMARK Corporation and the stockholders of MPBP Holdings, Inc. party thereto dated March 18, 2011 (incorporated by reference to Exhibit 10.1 to ARAMARK Corporations Current Report on Form 8-K filed with the SEC on March 24, 2011, pursuant to the Exchange Act (file number 001-04762)). | |
23.1 | Consent of Independent Public Accounting Firm. | |
99.1 | Audited Consolidated Financial Statements of MPBP Holdings Inc. and Subsidiaries as of March 31, 2010 and 2009 and for the fiscal years ended March 31, 2010, March 31, 2009 and March 31, 2008. | |
99.2 | Unaudited Condensed Consolidated Financial Statements of MPBP Holdings Inc. and Subsidiaries as of December 31, 2010 and March 31, 2010 and for the three- and nine-month periods ended December 31, 2010 and December 31, 2009. | |
99.3 | Unaudited Pro Forma Condensed Combined Financial Information for the fiscal year ended October 1, 2010 and for the six months ended April 1, 2011. |
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 hereunto duly authorized.
ARAMARK CORPORATION | ||||
Date: June 2, 2011 | By: | /s/ L. FREDERICK SUTHERLAND | ||
Name: | L. Frederick Sutherland | |||
Title: | Executive Vice President and Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
Description | |
10.1 | Agreement and Plan of Merger by and among MPBP Holdings, Inc., ARAMARK Clinical Technology Services, LLC, RMK Titan Acquisition Corporation, ARAMARK Corporation and the stockholders of MPBP Holdings, Inc. party thereto dated March 18, 2011 (incorporated by reference to Exhibit 10.1 to ARAMARK Corporations Current Report on Form 8-K filed with the SEC on March 24, 2011, pursuant to the Exchange Act (file number 001-04762)). | |
23.1 | Consent of Independent Public Accounting Firm. | |
99.1 | Audited Consolidated Financial Statements of MPBP Holdings Inc. and Subsidiaries as of March 31, 2010 and 2009 and for the fiscal years ended March 31, 2010, March 31, 2009 and March 31, 2008. | |
99.2 | Unaudited Condensed Consolidated Financial Statements of MPBP Holdings Inc. and Subsidiaries as of December 31, 2010 and March 31, 2010 and for the three- and nine-month periods ended December 31, 2010 and December 31, 2009. | |
99.3 | Unaudited Pro Forma Condensed Combined Financial Information for the fiscal year ended October 1, 2010 and for the six months ended April 1, 2011. |
Exhibit 23.1
Consent of Independent Public Accounting Firm
The Board of Directors
ARAMARK Corporation:
We consent to the incorporation by reference in the registration statements (Nos. 333-172157, 333-143233 and 333-143232) on Form S-8 of ARAMARK Corporation and subsidiaries of our report dated February 28, 2011, with respect to the consolidated balance sheets of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders equity, and cash flows for the fiscal years ended March 31, 2010, 2009 and 2008 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to (1) the effects of incurred goodwill and intangible asset impairment charges and (2) adjustments for the carrying values of assets, liabilities or stockholders deficiency that would be affected by a transaction involving a change in ownership and settlement of existing debt), which report appears in the Form 8-K/A of ARAMARK Corporation filed on June 2, 2011.
/s/ Carter & Balsam |
Sherman Oaks, California |
June 2, 2011 |
Exhibit 99.1
MPBP HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
2 | ||||
3 | ||||
Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008 |
4 | |||
5 | ||||
Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008 |
6 | |||
7 |
Independent Auditors Report
The Board of Directors and Stockholders
MPBP Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders equity, and cash flows for the fiscal years ended March 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Companys 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of its operations and cash flows for the years ended March 31, 2010, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.
As more fully described in Notes 3 and 4 to the consolidated financial statements, MPBP Holdings, Inc. and subsidiaries incurred $46,259,000 and $160,885,000 of goodwill and intangible asset impairment charges during the years ended March 31, 2010 and 2009, respectively, which, net of income tax effects, results of operations and other items, generated a net stockholders deficiency as of March 31, 2010.
As more fully described in Note 15, negotiations are taking place that could result in a change of ownership and settlement of existing debt. The consolidated financial statements do not include any adjustments for the carrying values of assets, liabilities or stockholders deficiency that would be affected by such a transaction.
/s/ Carter & Balsam
Sherman Oaks, California
February 28, 2011
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
March 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 3,788 | $ | 3,840 | ||||
Accounts receivable, net of allowances for doubtful accounts of $1,033 and $791, respectively |
13,365 | 10,823 | ||||||
Inventories |
6,965 | 6,572 | ||||||
Deferred income taxes |
6,285 | 5,489 | ||||||
Prepaid expenses and other current assets |
2,748 | 2,582 | ||||||
Total current assets |
33,151 | 29,306 | ||||||
Property and equipment, net |
5,057 | 4,284 | ||||||
Intangible assets |
33,873 | 50,560 | ||||||
Goodwill |
100,383 | 135,636 | ||||||
Deferred financing costs |
3,949 | 5,230 | ||||||
Total assets |
$ | 176,413 | $ | 225,016 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 1,400 | $ | 1,400 | ||||
Current portion of capital lease obligations |
640 | 519 | ||||||
Accounts payable |
13,648 | 10,135 | ||||||
Accrued expenses |
11,604 | 10,519 | ||||||
Income taxes payable |
792 | 114 | ||||||
Derivative obligation, at fair value |
| 2,329 | ||||||
Deferred revenues |
9,158 | 9,546 | ||||||
Total current liabilities |
37,242 | 34,562 | ||||||
Long-term debt, less current portion |
166,400 | 167,800 | ||||||
Capital lease obligations, net of current portion |
1,354 | 1,303 | ||||||
Deferred income taxes |
8,917 | 14,279 | ||||||
Other liabilities |
75 | 139 | ||||||
Commitments and contingencies |
||||||||
Stockholders' equity (deficiency) |
||||||||
Common stock, $0.001 par value, 2,000,000 shares authorized, 1,699,912 shares issued and outstanding |
1,700 | 1,700 | ||||||
Additional paid-in capital |
170,175 | 169,304 | ||||||
Other comprehensive income |
4 | | ||||||
Accumulated deficiency |
(209,454 | ) | (164,071 | ) | ||||
Net stockholders' equity (deficiency) |
(37,575 | ) | 6,933 | |||||
Total liabilities and stockholders' equity (deficiency) |
$ | 176,413 | $ | 225,016 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 132,353 | $ | 138,689 | $ | 161,279 | ||||||
Direct operating expenses |
(94,219 | ) | (101,328 | ) | (117,523 | ) | ||||||
Gross margin |
38,134 | 37,361 | 43,756 | |||||||||
Selling, general and administrative expenses |
(25,852 | ) | (25,389 | ) | (27,782 | ) | ||||||
Depreciation and amortization expenses |
(7,349 | ) | (9,044 | ) | (10,620 | ) | ||||||
Goodwill and intangible asset impairments |
(46,259 | ) | (160,885 | ) | | |||||||
Operating income (loss) |
(41,326 | ) | (157,957 | ) | 5,354 | |||||||
Interest income |
| 38 | 106 | |||||||||
Interest expense |
(10,918 | ) | (12,432 | ) | (16,090 | ) | ||||||
Decrease (increase) in fair value of derivative obligation |
2,329 | 116 | (2,445 | ) | ||||||||
Litigation settlement |
(645 | ) | | | ||||||||
(Loss) before income taxes |
(50,560 | ) | (170,235 | ) | (13,075 | ) | ||||||
Income tax benefit |
5,177 | 15,316 | 3,563 | |||||||||
Net (loss) |
$ | (45,383 | ) | $ | (154,919 | ) | $ | (9,512 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
(in thousands, except number of shares)
Common Stock | Additional Paid-in Capital |
Other Comprehensive Income |
Retained Earnings (Accumulated Deficiency) |
Net Stockholders' Equity (Deficiency) |
||||||||||||||||||||
Number of Shares |
Par Value |
|||||||||||||||||||||||
Balance at March 31, 2007 |
1,699,412 | $ | 1,699 | $ | 168,421 | $ | | $ | 360 | $ | 170,480 | |||||||||||||
Share purchase |
500 | 1 | 49 | | | 50 | ||||||||||||||||||
Share-based compensation, net of forfeitures |
| | 1,183 | | | 1,183 | ||||||||||||||||||
Net (loss) |
| | | | (9,512 | ) | (9,512 | ) | ||||||||||||||||
Balance at March 31, 2008 |
1,699,912 | 1,700 | 169,653 | | (9,152 | ) | 162,201 | |||||||||||||||||
Share-based compensation, net of forfeitures |
| | (349 | ) | | | (349 | ) | ||||||||||||||||
Net (loss) |
| | | | (154,919 | ) | (154,919 | ) | ||||||||||||||||
Balance at March 31, 2009 |
1,699,912 | 1,700 | 169,304 | | (164,071 | ) | 6,933 | |||||||||||||||||
Capital contribution |
| | 657 | | | 657 | ||||||||||||||||||
Share-based compensation, net of forfeitures |
| | 214 | | | 214 | ||||||||||||||||||
Foreign currency translation adjustment |
| | | 4 | | 4 | ||||||||||||||||||
Net (loss) |
| | | | (45,383 | ) | (45,383 | ) | ||||||||||||||||
Balance at March 31, 2010 |
1,699,912 | $ | 1,700 | $ | 170,175 | $ | 4 | $ | (209,454 | ) | $ | (37,575 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net (loss) |
$ | (45,383 | ) | $ | (154,919 | ) | $ | (9,512 | ) | |||
Adjustments to reconcile net (loss) to net cash provided by operating activities |
||||||||||||
Goodwill and intangible asset impairments |
46,259 | 160,885 | | |||||||||
Depreciation and amortization |
7,349 | 9,044 | 10,620 | |||||||||
Deferred income tax benefit |
(6,158 | ) | (15,732 | ) | (3,664 | ) | ||||||
Bad debt expense |
288 | 380 | 14 | |||||||||
Increase (decrease) in fair value of derivative obligation |
(2,329 | ) | (116 | ) | 2,445 | |||||||
Amortization of deferred financing costs |
1,391 | 1,404 | 1,371 | |||||||||
Share-based compensation charge (benefit) |
214 | (349 | ) | 1,183 | ||||||||
Changes in assets and liabilities |
||||||||||||
Accounts receivable, excluding bad debt expense |
(2,831 | ) | (1,310 | ) | 1,960 | |||||||
Refundable income taxes |
| | 1,540 | |||||||||
Inventories |
(393 | ) | (362 | ) | (1,622 | ) | ||||||
Prepaid expenses and other current assets |
(166 | ) | 1,202 | (385 | ) | |||||||
Accounts payable |
3,513 | (464 | ) | (5,622 | ) | |||||||
Accrued expenses |
1,085 | (5,459 | ) | 3,390 | ||||||||
Income taxes payable |
678 | 87 | 21 | |||||||||
Deferred revenues |
(388 | ) | 8,611 | 817 | ||||||||
Net cash provided by operating activities |
3,129 | 2,902 | 2,556 | |||||||||
Cash flows used in investing activities |
||||||||||||
Business combination activity |
| | 899 | |||||||||
Purchases of property and equipment |
(2,795 | ) | (1,701 | ) | (1,986 | ) | ||||||
Other |
353 | 100 | (106 | ) | ||||||||
Net cash used in investing activities |
(2,442 | ) | (1,601 | ) | (1,193 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Borrowings under line of credit |
| | 5,200 | |||||||||
Repayments of borrowings under line of credit |
| | (6,200 | ) | ||||||||
Repayments of term notes |
(1,400 | ) | (1,400 | ) | (1,400 | ) | ||||||
Proceeds from sale/leaseback transactions |
| | 1,365 | |||||||||
Capital contribution |
657 | | 50 | |||||||||
Net cash used in financing activities |
(743 | ) | (1,400 | ) | (985 | ) | ||||||
Net increase (decrease) in cash |
(56 | ) | (99 | ) | 378 | |||||||
Cash and cash equivalents at beginning of year |
3,840 | 3,939 | 3,561 | |||||||||
Foreign currency translation adjustment |
4 | | | |||||||||
Cash and cash equivalents at end of year |
$ | 3,788 | $ | 3,840 | $ | 3,939 | ||||||
Supplemental disclosures of cash flow information |
||||||||||||
Cash paid during the year for |
||||||||||||
Income taxes |
$ | 173 | $ | 182 | $ | 82 | ||||||
Interest |
$ | 9,490 | $ | 11,668 | $ | 13,356 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
MPBP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2010 AND 2009
AND FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008
(in thousands)
1. Organization and Nature of Operations
MPBP Holdings, Inc., a Delaware corporation (MPBP), was formed in January 2007. The principal operating subsidiaries of MPBP are Cohr Inc. dba Masterplan (Masterplan) and ReMedPar, Inc. (ReMedPar), Delaware corporations, and Medical Equipment Solutions and Applications SAGL (MESA), a Swiss limited liability company formed in December 2009. These wholly-owned entities are altogether referred to as the Company herein. Masterplan, ReMedPar and MESA are the Companys three reporting units.
The Company services and maintains medical equipment under contracts or on a time and materials basis throughout the United States and, since January 2010, in Europe. Additionally, the Company sells and installs diagnostic imaging equipment and remanufactures and distributes replacement parts for diagnostic imaging equipment principally in the United States. As of and for the year ended March 31, 2010, European operations and assets represent approximately 1% of consolidated operations.
2. Significant Accounting Policies
Presentation Management is responsible for evaluating the effects of events occurring after March 31, 2010 upon these consolidated financial statements. See Note 15.
Principles of Consolidation The consolidated financial statements of the Company include the accounts of MPBP and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation Adjustments The U.S. dollar is the functional currency for the Companys consolidated operations except for its MESA subsidiary, which uses the Euro as its functional currency. MESA assets and liabilities are translated into U.S. dollars based upon the current exchange rate in effect at the balance sheet date. MESA revenues and expenses are translated at weighted average rates for the period presented. Translation adjustments have no effect on net income and are included as the only item in accumulated other comprehensive income in stockholders equity.
Revenue Recognition Service revenue is principally generated from equipment maintenance contracts. Service revenue is recognized ratably over the contract period, which can extend from one to five years. Billings to certain service customers may be adjusted pursuant to contractual performance guarantees. Losses, if any, on service contracts are recorded when known. Equipment sale and parts revenue is generally recognized upon shipment from Company premises or upon direct shipment from vendors to customers. ReMedPar occasionally bills and holds at its facility certain products sold to customers at those customers explicit direction. In each instance wherein revenue is recognized in advance of
7
shipment, management determines that ownership has fully transferred to the customer and no deferral of revenue recognition is warranted. Installation revenue is generally recognized upon customer acceptance of installation. When equipment sale and installation services are combined, management allocates and recognizes the revenue based upon the discrete and separable terms of the transaction. Other operating revenues are recognized when services are performed.
Revenue is recognized net of sales and similar transactional taxes. Such taxes aggregated $2,294, $3,194 and $4,121 for the years ended March 31, 2010, 2009 and 2008, respectively.
The Company occasionally includes cash incentives in service and equipment sale contracts with customers. During the years ended March 31, 2010, 2009 and 2008 payments aggregating $503, $386 and $554, respectively, were made to customers under such rebate arrangements. See Note 9.
During the year ended March 31, 2009 Masterplan accelerated by one month its contractual billing arrangements with customers. The accelerated billings for each month are deferred, and revenue is recognized in the subsequent month when billed contracted services are performed.
Direct Operating Expenses Equipment maintenance costs are expensed as incurred. Certain maintenance services are outsourced to third parties principally on a time and materials basis. Warranty costs on equipment and parts sales are estimated based upon prior experience and accrued at the time of sale. Through March 31, 2010 actual warranty costs have been immaterial. Other direct operating costs, including shipping and handling, are expensed in the period services are rendered or parts are shipped to customers.
Income Taxes Income tax amounts are recognized using the liability method. Under this method, deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Interest and penalties, if any, owed to taxing authorities are accrued in selling, general and administrative expenses. For the years ended March 31, 2010, 2009 and 2008, $124, $0 and $4 of such interest and penalties were accrued, and $110 and $0 was included in income taxes payable as of March 31, 2010 and 2009, respectively.
Tax benefits from any uncertain tax positions are recognized as reductions of income tax expense when it is more likely than not, based on the technical merits of the positions, that the positions will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes. Additionally, the amount of the tax benefits to be recognized is the largest amount of tax benefits that have a greater than fifty percent likelihood of being realized upon ultimate settlements with the taxing authorities.
Concentration of Credit Risk Accounts receivable are unsecured and, accordingly, are stated at net estimated collectible amounts. Accounts receivable are due principally from hospital chains and hospitals in the United States. Management monitors the creditworthiness of its customers and provides allowances for doubtful accounts when considered appropriate. Payment is due when the services begin, and considered past due one month thereafter. Upon exhaustion of collection efforts, uncollected receivables are written off against the allowances.
Additionally, management evaluates the creditworthiness of the financial institutions in which it invests its idle cash. At March 31, 2010 and 2009, cash account balances at financial institutions exceeded the federally insured limits by $3,368 and $3,392, respectively.
8
Cash and Cash Equivalents Cash equivalents include highly liquid investments maturing within three months after purchase.
Financial Instruments The Company is exposed to fluctuations of interest rates and foreign currency translation rates. Management addresses certain financial exposures through a controlled program of risk management that may include the use of derivative instruments. The types of derivative instruments permitted for such risk management are specified in policies set by management.
In 2007 the Company entered into an interest rate swap contract to reduce interest rate risks and to modify the interest rate characteristics of its outstanding debt. The swap contract expired in February 2010. An affiliate of the Companys first lien lender was counterparty to the swap contract. Through February 2010 the Company recognized the swap contract as a derivative on its consolidated balance sheets at fair value. The Company may designate the derivative as either a hedge of the variability of cash flows to be paid or not. Changes in the fair value of a derivative that is designated as, and meets all of 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. The Company did not designate the derivative as a hedge. A change in the fair value of a derivative that is not designated as a hedge is recognized as a non-operating item in the statement of operations.
The carrying amounts of the Companys financial instruments, including cash and cash equivalents, receivables, borrowings under secured line of credit arrangements, payables and accrued expenses, approximate their fair values at March 31, 2010 due to the short-term nature of these instruments. See Note 7 for discussion of the fair value of the Companys debt.
Inventories Inventories, primarily consisting of medical equipment and parts, are stated at the lower of specific cost, on an average cost basis, or market (net realizable value). In most instances specific cost includes the purchase price and all other costs incurred in restoring the inventory item to a saleable condition.
Property and Equipment Property and equipment is recognized at cost less accumulated depreciation and amortization. Depreciation and amortization is recorded using the straight-line method with no residual value and over the following useful lives:
Computer equipment 3 years
Computer software 2 to 7 years
Technical equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements shorter of 10 years or remaining term of lease
Goodwill and Intangible Assets Goodwill is assessed for impairment at least annually as of September 30. Management evaluates the recoverability of investments in long-lived assets on an ongoing basis and recognizes any impairment in the year of determination. The significant estimates and assumptions used by management in assessing the recoverability of goodwill and intangible assets include present value discount rates, fair value estimates for other assets and liabilities, and comparable business financial performance multiples (only for goodwill), future revenues and cash flows, future rates of customer contract renewal and other factors. Any change in these estimates or assumptions could result in an impairment charge. The estimates, based upon managements reasonable and supportable assumptions and projections, require managements subjective judgment. Evaluations of long-lived assets can vary within a range of outcomes depending upon the assumptions and projections used.
9
The future occurrence of a potential indicator of impairment would require an interim assessment for either or both of the Masterplan and ReMedPar reporting units prior to the scheduled annual tests. Examples of such potential indicators include a significant adverse change in business climate, unanticipated competition, a material negative change in relationships with significant customers, an adverse action or assessment by a regulator, a strategic decision made in response to economic or competitive conditions, the loss of key personnel, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of.
Goodwill and trademarks are not amortized as their lives are considered to be indefinite. Other intangible assets are amortized using the following estimated useful lives and methods with no residual value:
Estimated Useful Lives |
Method | |||
Customer contracts and relationships | 7 years | Declining balance | ||
Internally-created computer software | 3 years | Straight-line | ||
Non-competition agreements | 2 years | Straight-line |
As of March 31, 2010 the weighted average period prior to the next renewal or extension of Masterplans major customer contracts was 3 years. ReMedPar customers contract via purchase order, so there is a nominal contractual duration, generally less than 3 months including the customers returns of exchanged parts. Costs incurred to renew customer contracts for the years ended March 31, 2010, 2009 and 2008 were nominal. During the year ended March 31, 2010, management determined that the remaining estimated useful lives of all customer contracts and relationships assets would be shortened from 10 to 7 years. During the year ended March 31, 2009, management determined that the remaining estimated useful lives of all customer contracts and relationships assets would be shortened from 20 to 10 years. For the year ended March 31, 2008, customer contracts and relationships were amortized using a declining-balance method over 20 year estimated useful lives.
Share-Based Compensation The Company recognizes in selling, general and administrative expenses and as adjustments to additional paid-in capital the current period effects of awards of stock or options in exchange for goods or services benefiting the Company. The Company uses the Black-Scholes model to estimate fair market values of stock options on the dates of grant.
New Accounting Standards Updates In December 2010 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-28, pursuant to which certain reporting units goodwill impairments may be reported earlier than under current standards. Management expects to implement this standard on April 1, 2011. Management is currently assessing the impact of this new standard.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, which establishes the accounting and reporting guidance for arrangements under which the Company performs multiple revenue-generating activities, including how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The Company implemented this standard on April 1, 2010. Management has determined that the financial statement impact will be minimal, although disclosures will be enhanced.
10
3. Operational and Financing Issues
During the year ended March 31, 2008 Masterplans largest customer gave notice of its intent to seek competitive bids for maintenance services. Management determined that there was no impairment to either the customer contracts and relationships intangible asset or to goodwill through March 31, 2008. During the year ended March 31, 2009, the customer declined to accept Masterplans bid to continue. Masterplans services to that customer are included in results of operations for the first five months of the year ended March 31, 2009. ReMedPars largest customer cancelled its existing purchase orders during the year ended March 31, 2009. During the year ended March 31, 2010, a large customer of Masterplan sought competitive bids for maintenance services, and subsequently declined Masterplans bid to continue. Masterplans services to that customer are included in results of operations for the year ended March 31, 2010. ReMedPars revenues for the year ended March 31, 2010 were less than management had previously estimated.
Management determined that impairment events had occurred at the Masterplan and ReMedPar reporting units and recognized the following non-cash impairment charges in the Companys March 31, 2010 and March 31, 2009 consolidated results of operations:
March 31, 2010 |
March 31, 2009 |
|||||||||
Masterplan: |
Goodwill |
$ | 28,865 | $ | 126,719 | |||||
Trademark |
800 | 7,700 | ||||||||
Customer contracts and relationships |
10,206 | 25,836 | ||||||||
39,871 | 160,255 | |||||||||
ReMedPar: |
Goodwill |
6,388 | | |||||||
Trademark |
| 630 | ||||||||
6,388 | 630 | |||||||||
Total |
46,259 | 160,885 | ||||||||
Deferred income tax benefit |
(6,254 | ) | (13,195 | ) | ||||||
Impairments, net |
$ | 40,005 | $ | 147,690 | ||||||
See Note 4 for the impacts of these impairments upon the long-term assets carrying values.
During the years ended March 31, 2010 and 2009 management took actions to replace lost revenues and to reduce costs, including terminating direct and indirect staff, suspending employer matching retirement plan contributions, curtailing outside purchased services, and downsizing and moving its corporate offices. The Companys board of directors also hired two new Chief Executive Officers for Company subsidiaries during the year ended March 31, 2009.
As a result of the effect of recognized impairments on the Companys stockholders equity, it would be difficult for the Company to draw on its line of credit or obtain incremental term loans from its lending syndicate without violating a debt covenant (see Note 7). The Companys future cash flows could be adversely affected should any major hospital group cancel their contract with Masterplan, customers fail to continue payment to the Company in a timely manner, or interest rates under variable-rate borrowings increase significantly. Management has instituted revenue growth and cost reduction actions and has adopted contingency plans to further reduce its cost infrastructure should any further adverse cash flow
11
events occur. Management is satisfied that the execution of these actions and plans will provide sufficient cash flows if the previously described adverse cash flow events do occur.
Management believes that its actions and alternative courses of action will permit the Company to meet its business objectives and fulfill its anticipated current obligations.
4. Goodwill and Intangible Assets
During the years ended March 31, 2010 and 2009 several impairment events were identified by management. As a result of managements assessments, impairment charges aggregating $46,259 and $160,885, respectively, were recognized in the accompanying consolidated statements of operations. See Note 3.
A summary of goodwill activity by the Masterplan and ReMedPar reporting units follows:
Masterplan | ReMedPar | Total | ||||||||||
Balance at March 31, 2008 |
$ | 255,967 | $ | 6,388 | $ | 262,355 | ||||||
Impairment |
(126,719 | ) | | (126,719 | ) | |||||||
Balance at March 31, 2009 |
$ | 129,248 | $ | 6,388 | $ | 135,636 | ||||||
Impairment |
(28,865 | ) | (6,388 | ) | (35,253 | ) | ||||||
Balance at March 31, 2010 |
$ | 100,383 | $ | | $ | 100,383 | ||||||
A summary of intangible assets activity by the Masterplan and ReMedPar reporting units follows:
Masterplan | ReMedPar | Total | ||||||||||
Balance at March 31, 2008 |
$ | 82,517 | $ | 9,662 | $ | 92,179 | ||||||
Amortization |
(6,631 | ) | (822 | ) | (7,453 | ) | ||||||
Impairment |
(33,536 | ) | (630 | ) | (34,166 | ) | ||||||
Balance at March 31, 2009 |
$ | 42,350 | $ | 8,210 | $ | 50,560 | ||||||
Amortization |
(4,731 | ) | (950 | ) | (5,681 | ) | ||||||
Impairment |
(11,006 | ) | | (11,006 | ) | |||||||
Balance at March 31, 2010 |
$ | 26,613 | $ | 7,260 | $ | 33,873 | ||||||
12
Intangible assets are detailed as follows:
Original Carrying Amount |
Accumulated Amortization |
Impairments | Net Carrying Amount |
|||||||||||||
March 31, 2010 |
||||||||||||||||
Amortized intangible assets: |
||||||||||||||||
Customer contracts and relationships |
$ | 81,490 | $ | (20,675 | ) | $ | (36,042 | ) | $ | 24,773 | ||||||
Software |
2,304 | (2,304 | ) | | | |||||||||||
Non-competition agreements |
1,013 | (1,013 | ) | | | |||||||||||
84,807 | (23,992 | ) | (36,042 | ) | 24,773 | |||||||||||
Unamortized intangible assets: |
||||||||||||||||
Trademarks |
18,230 | | (9,130 | ) | 9,100 | |||||||||||
Total intangible assets |
$ | 103,037 | $ | (23,992 | ) | $ | (45,172 | ) | $ | 33,873 | ||||||
March 31, 2009 |
||||||||||||||||
Amortized intangible assets: |
||||||||||||||||
Customer contracts and relationships |
$ | 81,490 | $ | (15,634 | ) | $ | (25,836 | ) | $ | 40,020 | ||||||
Software |
2,304 | (1,664 | ) | | 640 | |||||||||||
Non-competition agreements |
1,013 | (1,013 | ) | | | |||||||||||
84,807 | (18,311 | ) | (25,836 | ) | 40,660 | |||||||||||
Unamortized intangible assets: |
||||||||||||||||
Trademarks |
18,230 | | (8,330 | ) | 9,900 | |||||||||||
Total intangible assets |
$ | 103,037 | $ | (18,311 | ) | $ | (34,166 | ) | $ | 50,560 | ||||||
Amortization expense for intangible assets totaled $5,680, $7,453 and $9,288 for the years ended March 31, 2010, 2009 and 2008, respectively. Absent any future changes in estimated useful lives or recognition of any impairment of intangible assets, amortization expense of $6,704, $4,863, $3,534, $2,616, and $2,232 is expected to be recognized in each of the next five fiscal years.
13
5. Inventories
Inventories consist of the following:
March 31, 2010 |
March 31, 2009 |
|||||||
Unfinished goods |
$ | 1,298 | $ | 2,133 | ||||
Work-in-progress |
3,460 | 2,538 | ||||||
Finished goods |
4,389 | 3,737 | ||||||
Total |
9,147 | 8,408 | ||||||
Less allowance for obsolescence |
(2,182 | ) | (1,836 | ) | ||||
Net |
$ | 6,965 | $ | 6,572 | ||||
6. Property and Equipment
Property and equipment, including assets under capital leases (see Note 8), consist of the following:
March 31, 2010 |
March 31, 2009 |
|||||||
Computer equipment and software |
$ | 1,906 | $ | 1,534 | ||||
Technical equipment |
6,380 | 5,255 | ||||||
Furniture and fixtures |
710 | 256 | ||||||
Leasehold improvements and other |
1,190 | 741 | ||||||
Total |
10,186 | 7,786 | ||||||
Less accumulated depreciation and amortization |
(5,129 | ) | (3,502 | ) | ||||
Net |
$ | 5,057 | $ | 4,284 | ||||
Depreciation and amortization expense relating to property and equipment for the years ended March 31, 2010, 2009 and 2008 totaled $1,668, $1,591 and $1,333, respectively.
14
7. Financial Obligations
The Companys subsidiaries are obligated under a first lien term loan credit facility to a syndicated group of institutional lenders. The loan balances outstanding as of March 31, 2010 and 2009 were $135,800 and $137,200, respectively. Interest on the first lien term loan has been calculated using a selected Eurodollar rate (0.25% at March 31, 2010) plus 2.50%, and is payable at least quarterly. The subsidiaries have not used a prime rate-based interest calculation option available to them. The subsidiaries originally capitalized $3,884 of deferred financing costs in the accompanying consolidated balance sheets. These and other deferred financing costs are being amortized to interest expense using the interest method over the duration of the term loan. During the years ended March 31, 2010, 2009 and 2008, interest expense of $4,024, $6,705 and $12,316, respectively, was incurred pursuant to the first lien term loan credit facility. First lien term loan principal payments of $350 are due quarterly. Additional principal payments are required annually if consolidated cash flows exceed certain minimum thresholds.
The subsidiaries have a $20,000 secured revolving credit facility from the same syndicated group of institutional lenders. Advances may take the form of cash or draws pursuant to letters of credit. Interest on revolving loan advances is calculated at either the prime rate plus 1% to 1.50% or a selected Eurodollar rate plus 2% to 2.50%, and is payable at least quarterly. The subsidiaries pay the institutional lender a quarterly commitment fee of 0.25% to 0.375% per year of the unborrowed commitment. During the years ended March 31, 2010, 2009 and 2008, commitment and other fees included in interest expense aggregated $101, $105 and $75, respectively. Since March 31, 2008, the subsidiaries secured revolving credit facility has not been available due to a financial ratio covenant that would be violated if advances were obtained. During the year ended March 31, 2008, interest expense of $129 (at an average annual rate of 9.8%) was incurred pursuant to the secured revolving credit facility. No advances or letters of credit were outstanding on March 31, 2010 or March 31, 2009.
The first lien term loan credit facility and the secured revolving credit facility expire in 2013. Loans are secured by first priority liens and security interests in all of the common stock of all of the Companys subsidiaries, by all of their assets, and by a guarantee of MPBP. The Company must adhere to various loan covenants including financial performance covenants. Covenants limit other debt arrangements, sales of assets, investments, capital expenditures and cash dividends. The Company is in compliance with all such covenants.
The subsidiaries are obligated under a $32,000 second lien term loan credit facility to a financial institution. Interest has been calculated using a selected Eurodollar rate (0.23% at March 31, 2010) plus 6.25% and is payable at least quarterly. The subsidiaries have not used a prime rate-based interest calculation option available to them. The subsidiaries paid $420 in loan origination costs, which are capitalized as deferred financing costs in the accompanying consolidated balance sheets. These costs are being amortized to interest expense using the interest method over the duration of the second lien term loan. Additionally, the subsidiaries pay the lender an annual fee of $50. During the years ended March 31, 2010, 2009 and 2008, interest expense of $2,220, $2,981 and $3,740, respectively, was incurred pursuant to the second lien term loan credit facility. This financial institution also owns a minor stock interest in MPBP.
The second lien term loan credit facility expires in 2014. No principal payments are required prior to maturity. The second lien term loan is secured by second priority liens and security interests in all of the common stock of the Companys subsidiaries, by all of their assets, and by a guarantee of MPBP. The Company must adhere to various loan covenants including financial performance covenants. Covenants
15
limit other debt arrangements, sales of assets, investments, capital expenditures and cash dividends. The Company is in compliance with all such covenants.
The first and second lien term loans are scheduled to be repaid as follows:
Fiscal Year Ending |
Scheduled Amount |
|||
March 31, 2011 |
$ | 1,400 | ||
March 31, 2012 |
1,400 | |||
March 31, 2013 |
133,000 | |||
March 31, 2014 |
32,000 | |||
Total due |
167,800 | |||
Less current portion |
(1,400 | ) | ||
Non-current portion |
$ | 166,400 | ||
The estimated fair values of the first and second lien term loans total $84,900 at March 31, 2010. Management has estimated these fair values based upon a limited number of transactions occurring in the secondary syndicated debt market (deemed to be a Level 2 assessment pursuant to FASB Statement No. 157) and assumed transfers of certain of the liabilities to a theoretical market participant (deemed to be a Level 3 assessment). The latter estimate includes managements assessment of the Companys non-performance risk and other factors.
Through February 2010 the Company had a fixed income derivative instrument with an affiliate of its first lien term loan credit facility agent. The derivative was designed to manage the Companys risk relating to floating rate interest on its first lien term loan credit facility. It established minimum and maximum ranges of net interest expense on $100,000 of the Companys total indebtedness. The instrument was not designated by management as a cash flow hedge. As of March 31, 2010 and 2009, $0 and $2,329 of fair values, respectively, were attributed to the derivative instrument and included in consolidated current liabilities. Changes in fair value were charged or credited as non-operating items in the accompanying consolidated statements of operations. The derivatives fair value was estimated using a market-based interest swap valuation model (deemed to be a Level 3 assessment).
16
The following table presents for the years ended March 31, 2010 and 2009 the level within the fair value hierarchy in which the fair value measurements fall:
Quoted Prices in Active Markets for Identical Liabilities: Level 1 |
Significant Other Observable Inputs: Level 2 |
Significant Other Unobservable Inputs: Level 3 |
||||||||||
Balance at March 31, 2008 |
$ | | $ | 138,600 | $ | 34,445 | ||||||
Changes in fair values |
| (80,500 | ) | (20,773 | ) | |||||||
Settlements |
| (1,400 | ) | (143 | ) | |||||||
Balance at March 31, 2009 |
| 56,700 | 13,529 | |||||||||
Changes in fair values |
| 26,400 | (7,286 | ) | ||||||||
Settlements |
| (1,400 | ) | (3,043 | ) | |||||||
Balance at March 31, 2010 |
$ | | $ | 81,700 | $ | 3,200 | ||||||
The following table presents the changes in fair values of financial instruments for which Level 3 inputs were significant to their valuation for the years ended March 31, 2010 and 2009:
Second Lien Term Loan Credit Facility |
Fixed Income Derivative Instrument |
|||||||
Balance at March 31, 2008 |
$ | 32,000 | $ | 2,445 | ||||
Change in fair market value |
(20,800 | ) | 27 | |||||
Net settlements |
| (143 | ) | |||||
Balance at March 31, 2009 |
11,200 | 2,329 | ||||||
Change in fair market value |
(8,000 | ) | 714 | |||||
Net settlements |
| (3,043 | ) | |||||
Balance at March 31, 2010 |
$ | 3,200 | $ | | ||||
17
8. Capital Leases
During the year ended March 31, 2008, ReMedPar sold to a third party and leased back a medical imaging system valued at $1,250. As of March 31, 2010 and 2009, $111 and $157, respectively, of gain on the sale was deferred and included in current and non-current liabilities in the accompanying consolidated balance sheets. During the year ended March 31, 2008, ReMedPar sold to a third party and leased back a medical imaging system valued at $115. No gain or loss was recognized or deferred on this sale-leaseback. During the year ended March 31, 2010, ReMedPar leased equipment from third parties valued at $677. Each such lease, which is treated as a capital lease, includes a bargain purchase option exercisable by ReMedPar at the end of the lease. Monthly lease payments include base rent and relevant taxes. ReMedPar previously entered into certain minor capital lease transactions. Assets obtained under capital leases aggregate to $2,996 and $2,319 at cost, and are included in property and equipment, net of $972 and $430 of accumulated amortization, in the accompanying consolidated balance sheets as of March 31, 2010 and March 31, 2009, respectively.
Future minimum rental payments required as of March 31, 2010 under capital leases which have initial or remaining non-cancelable lease terms in excess of one year are as follows:
Fiscal Year Ending |
Scheduled Amount |
|||
March 31, 2011 |
$ | 750 | ||
March 31, 2012 |
641 | |||
March 31, 2013 |
547 | |||
March 31, 2014 |
190 | |||
March 31, 2015 |
103 | |||
Total minimum lease payments |
2,231 | |||
Less amount representing interest at rates of 8% to 9.5% |
(237 | ) | ||
Present value of minimum lease payments |
1,994 | |||
Less current portion |
(640 | ) | ||
Capital lease obligations, less current portion |
$ | 1,354 | ||
Rental expenditures pertaining to capital leases for the year ended March 31, 2010, 2009 and 2008 totaled $727, $387 and $269, respectively.
18
9. Accrued Expenses
Accrued expenses included in current liabilities consist of the following:
March 31, 2010 |
March 31, 2009 |
|||||||
Accrued trade obligations |
$ | 5,473 | $ | 6,178 | ||||
Employment obligations |
4,194 | 2,435 | ||||||
Customer rebates |
825 | 392 | ||||||
Interest |
479 | 442 | ||||||
Business taxes and licenses |
373 | 381 | ||||||
Acquisition obligations |
135 | 691 | ||||||
Related parties |
125 | | ||||||
Total |
$ | 11,604 | $ | 10,519 | ||||
10. Related Party Transactions
The Company has a management and financial services arrangement with an affiliate of MPBPs majority stockholders. Pursuant to the arrangement, the Company paid the affiliate $30, $367 and $501 during the years ended March 31, 2010, 2009 and 2008, respectively, and has included $2,008 and $939 owed to the affiliate in accounts payable in the accompanying consolidated balance sheets as of March 31, 2010 and 2009, respectively. Current period operating effects of these transactions are recognized in selling, general and administrative expenses.
Several executives of the Company own minor stock interests in MPBP.
Stock-Based Incentive Plan
Employees of the Company and others are eligible to participate in an equity incentive plan. An aggregate of 188,824 shares of authorized MPBP common stock are reserved for possible future issuance upon exercise of awards under the plan. As of March 31, 2010, MPBP had 102,154 shares of its common stock available for possible future grant under its plan.
All options granted to Company employees have $100 per MPBP common share exercise prices, ten-year terms, and vesting arrangements based upon either (a) 20% annual vesting requisite service requirements or (b) performance parameters linked to the internal rate of return which the principal shareholders of MPBP attain on their investment in the Company. Grantees received half of their awards with requisite service vesting terms and half with performance vesting terms.
Factors used in establishing the fair market value of the option grants include expectations of performance parameters not being fully met and, at grant date, fair values based upon the Black-Scholes model using MPBP stock price volatility of 60% (measured using an average of quoted stock prices of a group of five peer public companies), risk-free interest rates equal to five year U.S. treasury bill auction rates at the grant
19
dates (ranging from 3.05% to 3.17%), 3% annual forfeiture rates and five year expected option lives. For the years ended March 31, 2010 and 2009, it was determined that no performance options would vest.
A summary of MPBP stock option activity (not expressed in thousands) follows:
Options | Weighted Average Grant Date Fair Values |
|||||||||||||||||||
Nonvested | Vested | Total | Nonvested | Vested | ||||||||||||||||
Outstanding at March 31, 2007 |
135,953 | | 135,953 | $ | 47.38 | | ||||||||||||||
Grants |
23,603 | | 23,603 | $ | 47.90 | | ||||||||||||||
Vested |
(13,595 | ) | 13,595 | | | $ | 47.38 | |||||||||||||
Outstanding at March 31, 2008 |
145,961 | 13,595 | 159,556 | $ | 47.46 | $ | 47.38 | |||||||||||||
Grants |
13,690 | | 13,690 | | | |||||||||||||||
Vested |
(11,613 | ) | 11,613 | | | $ | 47.49 | |||||||||||||
Forfeitures |
(81,289 | ) | | (81,289 | ) | $ | 47.41 | | ||||||||||||
Outstanding at March 31, 2009 |
66,749 | 25,208 | 91,957 | $ | 37.79 | $ | 47.43 | |||||||||||||
Vested |
(5,901 | ) | 5,901 | | | $ | 34.66 | |||||||||||||
Forfeitures |
(5,287 | ) | | (5,287 | ) | $ | 16.92 | | ||||||||||||
Outstanding at March 31, 2010 |
55,561 | 31,109 | 86,670 | $ | 40.11 | $ | 45.01 | |||||||||||||
Weighted average remaining contractual years |
7.0 | 7.2 |
Vested options are exercisable into newly-issued shares of MPBP common stock which are reserved for that purpose. Certain employees were permitted to retain vested options after leaving the Companys employment. The aggregate grant date fair values of all options vested during the years ended March 31, 2010, 2009 and 2008 were $205, $551 and $644, respectively. No vested options were exercised. Of the remaining unvested options, 41,352 could become immediately exercisable in the event performance criteria were met.
During the years ended March 31, 2010, 2009 and 2008, the Company recognized $214, ($349) and $1,183 of compensation expense or (benefit), respectively, in selling, general and administrative expenses, and adjusted additional paid-in capital for the capital contribution or (withdrawal). No related compensation tax deduction benefits have been recognized. As of March 31, 2010 the Company had $400 of unrecognized compensation expense that is expected to be recognized over a weighted-average period of 2.2 years.
20
11. Commitments and Contingencies
The Company leases its corporate offices and a subsidiary warehouse and office facility under operating leases that expire from May 2010 through May 2012. The leases also provide for payments of the Companys share of common area operating expenses. The Company also utilizes various property and equipment under operating leases.
At March 31, 2010, future minimum rental payments under operating lease agreements that expire after March 31, 2010 are as follows:
Fiscal Year Ending |
Amounts | |||
March 31, 2011 |
$ | 838 | ||
March 31, 2012 |
751 | |||
March 31, 2013 |
378 | |||
March 31, 2014 |
230 | |||
Total |
$ | 2,197 | ||
Rent expense for the years ended March 31, 2010, 2009 and 2008 totaled $903, $890 and $806, respectively, and is included in selling, general and administrative expenses.
From time to time the Company is involved in various legal proceedings incidental to the normal conduct of its business. During the year ended March 31, 2010 the Company settled most aspects of one matter by agreeing with the claimant to a monthly payment arrangement extending through the year ending March 31, 2011. The $645 settlement is included in accrued expenses as of March 31, 2010. An additional $121 was settled after March 31, 2010, but the liability was not determined and therefore not accrued as of March 31, 2010. The Company also has received claims involving employment matters claiming discrimination and unpaid compensation. These matters have been referred to the Companys insurance carriers for defense. Several matters seek damages, including punitive damages, which may not be insured. These matters are in preliminary stages and the outcomes are not predictable. Management believes that its insurance coverage is sufficient, has accrued no loss provision in addition to the settlement noted above, and does not believe that the legal proceedings are likely to have a material adverse effect upon the Company.
12. Benefit Plans
Masterplan maintains a voluntary defined contribution 401(k) plan. Participation in the plan is available to all Masterplan employees after 90 days employment. Masterplan matched a portion of the employees contributions up to 3% for the years ended March 31, 2009 and 2008. Masterplan suspended employer contributions in April 2009, but has accrued $500 as of March 31, 2010. Masterplans contribution payments to its plan during the years ended March 31, 2010, 2009 and 2008 totaled $0, $536 and $521, respectively, and are included in selling, general and administrative expenses.
21
ReMedPar also maintains a 401(k) plan covering substantially all ReMedPar employees. ReMedPar contributions are made at managements discretion. ReMedPar suspended employer contributions in April 2009. ReMedPars contributions to its plan during the years ended March 31, 2010, 2009 and 2008 totaled $0, $50 and $50, respectively, and are included in selling, general and administrative expenses.
13. Income Taxes
Income tax (benefit) consists of the following:
Fiscal Year Ended March 31, 2010 |
Fiscal Year Ended March 31, 2009 |
Fiscal Year Ended March 31, 2008 |
||||||||||
Current federal income taxes |
$ | 681 | $ | | $ | | ||||||
Current state income taxes |
281 | 416 | 101 | |||||||||
Current foreign income taxes |
19 | | | |||||||||
Deferred income taxes |
(6,158 | ) | (15,732 | ) | (3,664 | ) | ||||||
Net income tax (benefit) |
$ | (5,177 | ) | $ | (15,316 | ) | $ | (3,563 | ) | |||
The differences between federal income taxes computed at the statutory rate and at the actual rate provided consist of the following:
Fiscal Year Ended March 31, 2010 |
Fiscal Year Ended March 31, 2009 |
Fiscal Year Ended March 31, 2008 |
||||||||||
Statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
Non-deductible goodwill impairment |
(23.7 | ) | (28.8 | ) | | |||||||
State income taxes |
(0.4 | ) | (0.2 | ) | (1.0 | ) | ||||||
Other |
0.3 | 4.0 | (6.0 | ) | ||||||||
Effective tax rate |
10.2 | % | 9.0 | % | 27.0 | % | ||||||
22
Deferred income taxes reflect the impact of temporary differences between the financial statement and tax bases of assets and liabilities and tax loss carryforwards. The tax effects of temporary differences that create deferred tax assets and liabilities consist of the following:
March 31, 2010 |
March 31, 2009 |
March 31, 2008 |
||||||||||
Deferred tax assets |
||||||||||||
Net operating loss carryforwards |
$ | 3,488 | $ | 3,488 | $ | 3,488 | ||||||
Accrued expenses |
2,380 | 1,641 | 1,061 | |||||||||
Derivative obligation |
| 900 | 944 | |||||||||
Doubtful accounts |
399 | 305 | 171 | |||||||||
Inventories |
843 | 709 | 531 | |||||||||
Other |
195 | 337 | 532 | |||||||||
Total gross deferred tax assets |
7,305 | 7,380 | 6,727 | |||||||||
Less valuation allowance |
(991 | ) | (1,036 | ) | (355 | ) | ||||||
Net deferred tax assets |
6,314 | 6,344 | 6,372 | |||||||||
Deferred tax liabilities |
||||||||||||
Intangible assets |
(8,735 | ) | (14,989 | ) | (30,534 | ) | ||||||
Depreciation and amortization |
(211 | ) | (145 | ) | (360 | ) | ||||||
Net deferred tax liabilities |
(8,946 | ) | (15,134 | ) | (30,894 | ) | ||||||
Net deferred tax assets (liabilities) |
$ | (2,632 | ) | $ | (8,790 | ) | $ | (24,522 | ) | |||
March 31, 2010 |
March 31, 2009 |
March 31, 2008 |
||||||||||
Current deferred tax assets |
$ | 6,285 | $ | 5,489 | $ | 5,067 | ||||||
Net non-current deferred tax assets (liabilities) |
(8,917 | ) | (14,279 | ) | (29,589 | ) | ||||||
Net deferred tax assets (liabilities) |
$ | (2,632 | ) | $ | (8,790 | ) | $ | (24,522 | ) | |||
The various entities within the Company have a tax-allocation agreement.
At March 31, 2010, the Company had net operating loss carryforwards of $26,000 for federal income tax reporting purposes and $8,000 for various state income tax reporting purposes. Should there be a change of ownership (see Note 15), there will be limits on the utilization of the net operating loss carryforwards to
23
offset taxable income. As of March 31, 2010, the valuation allowance does not take into account such a change of ownership. Certain states have deferred or limited the Companys ability to utilize state net operating loss carryforwards. The Companys federal net operating loss carryforwards expire beginning in 2022 and state net operating loss carryforwards began expiring in 2005. During the years ended March 31, 2010, 2009 and 2008, the deferred tax asset valuation allowance increased (decreased) by ($45), $681 and ($624), respectively.
Federal income tax returns for the fiscal years ended March 31, 2007 and later are open for examination by taxing authorities. State income tax returns for the fiscal years ended March 31, 2006 and later are similarly open for examination.
14. Major Customers
Four customers represented 13%, 13%, 9% and 7% of total revenue for the year ended March 31, 2010, and receivables from these four customers represented 0%, 11%, 6% and 8%, respectively, of net accounts receivable at March 31, 2010.
Four customers represented 13%, 13%, 8% and 7% of total revenue for the year ended March 31, 2009, and receivables from these four customers represented 11%, 1%, 3% and 3%, respectively, of net accounts receivable at March 31, 2009.
Four customers represented 22%, 11%, 10% and 7% of total revenue for the year ended March 31, 2008.
15. Subsequent Events
In April 2010 the Companys board of directors engaged an investment banking firm to evaluate the Company. In September 2010 the Companys board of directors engaged the investment banking firm to pursue strategic alternatives and hold discussions with lenders, and also approved severance agreements for seven Company executives. In January 2011 the Companys board of directors authorized the investment banking firm to negotiate an exclusive arrangement with another business which could result in a change of ownership and settlement of existing debt, and to negotiate further with lenders. Such negotiations are taking place. Certain bonuses and severance payments would be triggered if there is a change of control. These consolidated financial statements do not include any adjustments for the carrying values of assets, liabilities or stockholders deficiency that would be affected by such a transaction.
24
Exhibit 99.2
MPBP HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 31, 2010 and March 31, 2010 |
2 | |||
3 | ||||
4 | ||||
5 |
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
December 31, 2010 |
March 31, 2010 |
|||||||
(unaudited | ) | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 3,611 | $ | 3,788 | ||||
Accounts receivable, net of allowances for doubtful accounts of $616 and $877, respectively |
10,502 | 13,365 | ||||||
Inventories |
6,430 | 6,965 | ||||||
Deferred income taxes |
6,329 | 6,285 | ||||||
Prepaid expenses and other current assets |
2,742 | 2,748 | ||||||
Total current assets |
29,614 | 33,151 | ||||||
Property and equipment, net |
3,847 | 5,057 | ||||||
Intangible assets |
28,634 | 33,873 | ||||||
Goodwill |
100,383 | 100,383 | ||||||
Deferred financing costs |
3,139 | 3,949 | ||||||
Total assets |
$ | 165,617 | $ | 176,413 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 1,400 | $ | 1,400 | ||||
Current portion of capital lease obligations |
583 | 640 | ||||||
Accounts payable |
15,040 | 13,648 | ||||||
Accrued expenses |
8,742 | 11,604 | ||||||
Income taxes payable |
320 | 792 | ||||||
Deferred revenues |
6,548 | 9,158 | ||||||
Total current liabilities |
32,633 | 37,242 | ||||||
Long-term debt, less current portion |
165,350 | 166,400 | ||||||
Capital lease obligations, net of current portion |
924 | 1,354 | ||||||
Deferred income taxes |
8,917 | 8,917 | ||||||
Other liabilities |
| 75 | ||||||
Commitments and contingencies |
||||||||
Stockholders' equity (deficiency) |
||||||||
Common stock, $0.001 par value, 2,000,000 shares authorized, 1,699,912 shares issued and outstanding |
1,700 | 1,700 | ||||||
Additional paid-in capital |
170,305 | 170,175 | ||||||
Other comprehensive income |
(15 | ) | 4 | |||||
Accumulated deficiency |
(214,197 | ) | (209,454 | ) | ||||
Net stockholders' equity (deficiency) |
(42,207 | ) | (37,575 | ) | ||||
Total liabilities and stockholders' equity (deficiency) |
$ | 165,617 | $ | 176,413 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(in thousands)
Three Months Ended December 31, |
Nine Months Ended December 31, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues |
$ | 27,997 | $ | 32,688 | $ | 86,852 | $ | 97,905 | ||||||||
Direct operating expenses |
(19,699 | ) | (23,690 | ) | (61,441 | ) | (70,017 | ) | ||||||||
Gross margin |
8,298 | 8,998 | 25,411 | 27,888 | ||||||||||||
Selling, general and administrative expenses |
(4,728 | ) | (5,691 | ) | (16,700 | ) | (18,589 | ) | ||||||||
Depreciation and amortization expenses |
(2,236 | ) | (1,779 | ) | (6,706 | ) | (5,257 | ) | ||||||||
Goodwill and intangible asset impairments |
| | | (28,798 | ) | |||||||||||
Operating income (loss) |
1,334 | 1,528 | 2,005 | (24,756 | ) | |||||||||||
Interest expense |
(1,944 | ) | (3,116 | ) | (5,951 | ) | (9,173 | ) | ||||||||
Decrease in fair value of derivative obligation |
| 706 | | 2,114 | ||||||||||||
Litigation settlement |
| | (121 | ) | | |||||||||||
(Loss) before income taxes |
(610 | ) | (882 | ) | (4,067 | ) | (31,815 | ) | ||||||||
Income tax benefit (expense) |
(102 | ) | 90 | (676 | ) | 3,258 | ||||||||||
Net (loss) |
(712 | ) | (792 | ) | (4,743 | ) | (28,557 | ) | ||||||||
Other comprehensive income foreign currency translation |
| | (19 | ) | | |||||||||||
Net comprehensive (loss) |
$ | (712 | ) | $ | (792 | ) | $ | (4,762 | ) | $ | (28,557 | ) | ||||
Accumulated deficiency beginning of period |
$ | (213,485 | ) | $ | (191,836 | ) | $ | (209,454 | ) | $ | (164,071 | ) | ||||
Net (loss) |
(712 | ) | (792 | ) | (4,743 | ) | (28,557 | ) | ||||||||
Accumulated deficiency end of period |
$ | (214,197 | ) | $ | (192,628 | ) | $ | (214,197 | ) | $ | (192,628 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
MPBP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended December 31, |
||||||||
2010 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Cash flows from operating activities |
||||||||
Net (loss) |
$ | (4,743 | ) | $ | (28,557 | ) | ||
Adjustments to reconcile net (loss) to net cash provided by operating activities |
||||||||
Goodwill and intangible asset impairments |
| 28,798 | ||||||
Depreciation and amortization |
6,706 | 5,257 | ||||||
Deferred income tax benefit |
(44 | ) | (4,542 | ) | ||||
Bad debt expense |
(25 | ) | 131 | |||||
Decrease in fair value of derivative obligation |
| (2,114 | ) | |||||
Amortization of deferred financing costs |
810 | 760 | ||||||
Share-based compensation charge |
130 | 160 | ||||||
Changes in assets and liabilities |
||||||||
Accounts receivable, excluding bad debt expense |
2,888 | (1,409 | ) | |||||
Inventories |
535 | (1,061 | ) | |||||
Prepaid expenses and other current assets |
6 | (50 | ) | |||||
Accounts payable |
1,392 | 1,280 | ||||||
Accrued expenses |
(2,862 | ) | 294 | |||||
Income taxes payable |
(472 | ) | 788 | |||||
Deferred revenues |
(2,610 | ) | 850 | |||||
Net cash provided by operating activities |
1,711 | 585 | ||||||
Cash flows used in investing activities |
||||||||
Purchases of property and equipment |
(144 | ) | (1,693 | ) | ||||
Other |
(138 | ) | | |||||
Net cash used in investing activities |
(282 | ) | (1,693 | ) | ||||
Cash flows from financing activities |
||||||||
Repayments of term notes |
(1,050 | ) | (1,050 | ) | ||||
Other |
(537 | ) | (210 | ) | ||||
Net cash used in financing activities |
(1,587 | ) | (1,260 | ) | ||||
Net decrease in cash |
(158 | ) | (2,368 | ) | ||||
Cash and cash equivalents at beginning of period |
3,788 | 3,840 | ||||||
Foreign currency translation adjustment |
(19 | ) | | |||||
Cash and cash equivalents at end of period |
$ | 3,611 | $ | 1,472 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for |
||||||||
Income taxes |
$ | 214 | $ | 173 | ||||
Interest |
$ | 5,559 | $ | 6,909 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
MPBP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE
THREE AND NINE MONTH PERIODS ENDED
DECEMBER 31, 2010 AND 2009
(in thousands)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and footnotes thereto as of and for the years ended March 31, 2010, 2009 and 2008, filed as Exhibit 99.1 of this Form 8-K/A.
2. Inventories
Inventories as of December 31, 2010 consist of the following:
Unfinished goods |
$ | 1,873 | ||
Work-in-progress |
2,653 | |||
Finished goods |
4,198 | |||
Total |
8,724 | |||
Less allowance for obsolescence |
(2,294 | ) | ||
Net |
$ | 6,430 | ||
3. Commitments and Contingencies
From time to time the Company is involved in various legal proceedings incidental to the normal conduct of its business. During the year ended March 31, 2010 the Company settled most aspects of one matter by agreeing with the claimant to a monthly payment arrangement extending through the year ending March 31, 2011. The settlement was expensed during the year ended March 31, 2010. An additional $121 was settled and expensed during the nine-month period ended December 31, 2010. The Company also has received claims involving employment matters claiming discrimination and unpaid compensation. These matters have been referred to the Companys insurance carriers for defense. Several matters seek damages, including punitive damages, which may not be insured. These matters are in preliminary stages,
5
and the outcomes are not predictable. Management believes that its insurance coverage is sufficient, has accrued no loss provision in addition to the settlement noted above, and does not believe that the legal proceedings are likely to have a material adverse effect upon the Company.
4. Subsequent Events
The Company was acquired on March 18, 2011. See Note 15 to the Companys audited financial statements at Exhibit 99.1. These condensed consolidated financial statements do not include any adjustments for the carrying values of assets, liabilities or stockholders deficiency that are affected by such a transaction.
6
Exhibit 99.3
ARAMARK Corporation
Index to Unaudited Pro Forma Condensed Combined Financial Information
Pages | ||||
Pro Forma Condensed Combined Financial Statements: |
||||
Introduction to Unaudited Pro Forma Condensed Combined Financial Statements |
1 | |||
Unaudited Pro Forma Condensed Combined Statement of Operations for the fiscal year ended October 1, 2010 |
3 | |||
Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended April 1, 2011 |
4 | |||
Notes to Unaudited Pro Forma Condensed Combined Financial Statements |
5-6 |
Introduction to Unaudited Pro Forma Condensed Combined Financial Statements
On March 18, 2011, ARAMARK Clinical Technology Services, LLC, a subsidiary of ARAMARK Corporation (the Registrant), purchased the common stock of MPBP Holdings, Inc. (MPBP Holdings), the parent company of Masterplan, a clinical technology management and medical equipment maintenance company, for cash and revolver borrowings of approximately $154.5 million. Also acquired in the transaction were ReMedPar, an independent provider of sourced and refurbished medical equipment parts, and MESA, an integrated repair and maintenance services provider in 12 European countries.
The MPBP Holdings acquisition is included in the Registrants historical results since March 18, 2011, as reflected in the Registrants Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2011. As a result, the Unaudited Pro Forma Condensed Combined Balance Sheet has not been presented. See Note 2 to the condensed consolidated financial statements in the Registrants Form 10-Q for the quarterly period ended April 1, 2011 for the preliminary purchase price allocation. The following unaudited pro forma condensed combined statements of operations have been developed by applying pro forma adjustments to the separate historical audited consolidated statement of operations of ARAMARK Corporation included in ARAMARK Corporations Form 10-K for the fiscal year ended October 1, 2010, the separate historical unaudited condensed consolidated statement of operations of ARAMARK Corporation included in ARAMARK Corporations Form 10-Q for the six months ended April 1, 2011, the separate historical unaudited consolidated statement of operations of MPBP Holdings, Inc. and subsidiaries for the twelve months ended September 30, 2010 and the separate historical unaudited consolidated statement of operations of MPBP Holdings, Inc. and subsidiaries for the period from October 1, 2010 to March 17, 2011, the period prior to the acquisition. MPBP Holdings results of operations for the period from the date of the acquisition through April 1, 2011 are included in the Registrants historical results. The historical financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) expected to have a continuing impact on the operating results of the combined company.
The following unaudited pro forma condensed combined statements of operations for the fiscal year ended October 1, 2010 and for the six months ended April 1, 2011 present the combined results of the Registrants operations including the results of operations of MPBP Holdings as if the acquisition had occurred at the beginning of the Registrants 2010 fiscal year.
The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed combined financial information is presented for informational purposes only. The unaudited pro forma condensed combined financial information does not purport to represent what the Registrants results of operations would have been had the acquisition actually occurred on the date indicated and it does not purport to project the Registrants results of operations for any future period. There were no material transactions between ARAMARK Corporation and MPBP Holdings during the periods presented in the unaudited pro forma condensed combined statements of operations that would need to be eliminated.
The unaudited pro forma condensed combined statements of operations should be read in conjunction with the separate historical audited consolidated statement of operations of ARAMARK Corporation included in ARAMARK Corporations Form 10-K for the fiscal year ended October 1, 2010, the separate historical unaudited condensed consolidated statement of operations of ARAMARK Corporation included in ARAMARK Corporations Form 10-Q for the six months ended April 1, 2011, the separate historical audited consolidated financial statements of MPBP Holdings, Inc. and subsidiaries as of March 31, 2010 and 2009 and for the fiscal years ended March 31, 2010, March 31, 2009 and March 31, 2008 attached hereto as Exhibit 99.1 to this Form 8-K/A, the separate historical unaudited condensed consolidated financial statements of MPBP Holdings, Inc and subsidiaries as of December 31, 2010 and March 31, 2010 and for the three- and nine-month periods ended December 31, 2010 and December 31, 2009 attached hereto as Exhibit 99.2 to this Form 8-K/A and the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements. All pro forma adjustments and their underlying assumptions are described more fully in the accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting under accounting principles generally accepted in the United States of America (U.S. GAAP). The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a significant impact on the accompanying unaudited pro forma condensed combined statements of operations and the combined companys future results of operations and financial position.
1
The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisition or the costs to combine or associated with the combination of the operations of ARAMARK Corporation and MPBP Holdings or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements.
In addition, future results may vary significantly from the results reflected in the unaudited pro forma condensed combined financial information set forth herein due to certain factors beyond the Registrants control. See Risk Factors in the Registrants annual report on Form 10-K for the fiscal year ended October 1, 2010 for more information regarding these risks.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This presentation of unaudited condensed combined financial information includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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, are confident, estimate, expect, will be, will continue, will likely result, project, intend, plan, believe, look to and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include: unfavorable economic conditions, including ramifications of any future terrorist attacks or increased security alert levels; increased operating costs, including increased food costs, labor-related, energy or product sourcing and distribution costs; shortages of qualified personnel or increases in labor costs; the impact on our business of healthcare reform legislation; costs and possible effects of further unionization of our workforce; liability resulting from our participation in multi-employer defined benefit pension plans; currency risks and other risks associated with international markets; risks associated with acquisitions, including acquisition integration issues and costs; our ability to integrate and derive the expected benefits from our recent acquisitions; competition; a decline in attendance at client facilities; the unpredictability of sales and expenses due to contract terms and terminations; the impact of natural disasters or a flu pandemic on our sales and operating results; the risk that clients may become insolvent; the risk that our insurers may become insolvent or may liquidate; the contract intensive nature of our business, which may lead to client disputes; high leverage; claims relating to the provision of food services; costs of compliance with governmental regulations and government investigations; liability associated with noncompliance with our business conduct policy and governmental regulations, including regulations pertaining to food services, the environment, the Federal school lunch program, Federal and state employment and wage and hour laws, human health and safety laws and import and export controls and customs laws; dram shop compliance and litigation; contract compliance and administration issues; inability to retain current clients and renew existing client contracts; a determination by customers to reduce their outsourcing and use of preferred vendors; seasonality; our competitors activities or announced planned activities; the effect on our operations of increased leverage and limitations on our flexibility as a result of increased restrictions in our debt agreements; potential future conflicts of interest between our Sponsors and other stakeholders; the impact on our business if we are unable to generate sufficient cash to service all of our indebtedness; the inability of our subsidiaries to generate enough cash flow to repay our debt; risks related to the structuring of our debt; our potential inability to repurchase our notes upon a change of control; and other risks that are set forth in the Risk Factors, Legal Proceedings and Management Discussion and Analysis of Financial Condition and Results of Operations sections of and elsewhere in ARAMARKs SEC filings, copies of which may be obtained by contacting ARAMARKs investor relations department via its website www.aramark.com.
Forward-looking statements speak only as of the date made. We undertake no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date as of which they are made. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this report or that may be made in other filings with the Securities and Exchange Commission or elsewhere from time to time by, or on behalf of, us.
2
ARAMARK CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands)
ARAMARK Corporation Fiscal Year Ended October 1, 2010 |
MPBP Holdings, Inc. and Subsidiaries Twelve Months Ended September 30, 2010 (A) |
Pro Forma Adjustments (Note 3) |
Pro Forma Combined |
|||||||||||||
Sales |
$ | 12,571,676 | $ | 125,992 | $ | | $ | 12,697,668 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of services provided |
11,396,446 | 110,653 | 846 | a) | 11,507,945 | |||||||||||
Depreciation and amortization |
508,875 | 8,341 | 838 | b) | 518,054 | |||||||||||
Selling and general corporate expenses |
191,561 | 4,672 | | 196,233 | ||||||||||||
Goodwill and intangible asset impairments |
| 17,461 | (17,461 | ) c) | | |||||||||||
12,096,882 | 141,127 | (15,777 | ) | 12,222,232 | ||||||||||||
Operating Income (Loss) |
474,794 | (15,135 | ) | 15,777 | 475,436 | |||||||||||
Interest and Other Financing Costs, net |
444,510 | 7,946 | (7,781 | ) d) | 444,675 | |||||||||||
Income (Loss) Before Income Taxes |
30,284 | (23,081 | ) | 23,558 | 30,761 | |||||||||||
Benefit for Income Taxes |
(404 | ) | (1,435 | ) | 1,623 | e) | (216 | ) | ||||||||
Net income (loss) |
$ | 30,688 | $ | (21,646 | ) | $ | 21,935 | $ | 30,977 | |||||||
(A) | The statement of operations of MPBP Holdings, Inc. and subsidiaries was derived by adding the results for the six months ended September 30, 2010, to the results for the fiscal year ended March 31, 2010 and removing the results for the six months ended September 30, 2009. |
See accompanying notes to unaudited pro forma condensed combined financial statements.
3
ARAMARK CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands)
ARAMARK Corporation Six Months Ended April 1, 2011 |
MPBP Holdings, Inc. and Subsidiaries for the Period from October 1, 2010 to March 17, 2011 |
Pro Forma Adjustments (Note 3) |
Pro Forma Combined |
|||||||||||||
Sales |
$ | 6,586,129 | $ | 51,728 | $ | | $ | 6,637,857 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of services provided |
5,952,278 | 46,182 | (50 | ) a) | 5,998,410 | |||||||||||
Depreciation and amortization |
256,706 | 3,950 | (492 | ) b) | 260,164 | |||||||||||
Selling and general corporate expenses |
90,460 | 2,091 | (286 | ) f) | 92,265 | |||||||||||
6,299,444 | 52,223 | (828 | ) | 6,350,839 | ||||||||||||
Operating Income (Loss) |
286,685 | (495 | ) | 828 | 287,018 | |||||||||||
Interest and Other Financing Costs, net |
201,911 | 3,248 | (3,174 | ) d) | 201,985 | |||||||||||
Income (Loss) Before Income Taxes |
84,774 | (3,743 | ) | 4,002 | 85,033 | |||||||||||
Provision for Income Taxes |
25,983 | 200 | (97 | ) e) | 26,086 | |||||||||||
Net income (loss) |
$ | 58,791 | $ | (3,943 | ) | $ | 4,099 | $ | 58,947 | |||||||
See accompanying notes to unaudited pro forma condensed combined financial statements
4
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands)
NOTE 1DESCRIPTION OF TRANSACTION
On March 18, 2011, ARAMARK Clinical Technology Services, LLC, a subsidiary of ARAMARK Corporation (the Registrant), purchased the common stock of MPBP Holdings, Inc. (MPBP Holdings), the parent company of Masterplan, a clinical technology management and medical equipment maintenance company, for cash and revolver borrowings of approximately $154.5 million. Also acquired in the transaction were ReMedPar, an independent provider of sourced and refurbished medical equipment parts, and MESA, an integrated repair and maintenance services provider in 12 European countries.
NOTE 2BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations have been prepared using the acquisition method of accounting under accounting principles generally accepted in the United States of America (U.S. GAAP). The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing the unaudited pro forma condensed combined statements of operations. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a significant impact on the unaudited pro forma condensed combined statements of operations and the combined companys future results of operations and financial position.
The unaudited pro forma condensed combined statements of operations for the fiscal year ended October 1, 2010 and for the six months ended April 1, 2011 assumes that the acquisition of MPBP Holdings took place on October 3, 2009, the first day of the Registrants 2010 fiscal year. The unaudited pro forma condensed combined statement of operations for the fiscal year ended October 1, 2010 combines the Registrants audited consolidated statement of operations for the fiscal year ended October 1, 2010 with MPBP Holdings, Inc. and Subsidiaries unaudited consolidated statement of operations for the twelve months ended September 30, 2010. The unaudited pro forma condensed combined statement of operations for the six months ended April 1, 2011 combines the Registrants unaudited condensed consolidated statement of operations for the six months ended April 1, 2011 with MPBP Holdings Inc. and Subsidiaries unaudited consolidated statement of operations for the period from October 1, 2010 to March 17, 2011.
The pro forma condensed combined statements of operations have been prepared for informational purposes only and do not purport to be indicative of the actual results that would have been achieved by the Registrant or the combined Registrant for the periods presented or that will be achieved by the Registrant or the combined Registrant in the future.
MPBP Holdings Inc. and Subsidiaries consolidated statements of operations were prepared in accordance with U.S. GAAP. In addition, certain reclassifications have been made to the historical financial statements of MPBP Holdings to conform with the Registrants presentation, primarily related to the presentation of selling and general corporate expenses.
The unaudited pro forma condensed combined statements of operations included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and certain note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.
5
NOTE 3UNAUDITED PRO FORMA ADJUSTMENTS TO CONDENSED COMBINED FINANCIAL STATEMENTS
a) | Represents the realization of the fair value adjustment of the acquired inventory as the acquired inventory would be sold within the first twelve months after the acquisition. |
b) | Represents the following adjustments to depreciation and amortization: |
| The amortization of customer relationship assets based upon the preliminary estimates of fair value and useful life. Customer relationship assets are required to be measured at fair value. The fair value of these customer relationship assets is normally determined primarily through the use of the income approach, which requires an estimate or forecast of all the expected future cash flows through the use of the multi-period excess earnings method. At this time, the Registrant does not have sufficient information as to the amount, timing and risk of the estimated future cash flows needed to value the customer relationship assets. Some of the more significant assumptions inherent in the development of estimated cash flows, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of revenue, sales and marketing expenses and working capital/contributory asset charges) and the discount rate selected to measure the risks inherent in the future cash flows. However, for purposes of these unaudited pro forma condensed combined statements of operations, using currently available information, such as MPBP Holdings historical and projected revenues, customer attrition rates, cost structure, and certain other high-level assumptions, the fair value of the customer relationship assets was estimated by the Registrant. The estimated value of the customer relationship assets is approximately $32.2 million and has a weighted average useful life of approximately 14 years and will be amortized over such period using an accelerated approach. This preliminary estimate of fair value and weighted-average useful life will likely be different from the final acquisition accounting, and the difference could have a significant impact on the unaudited pro forma condensed combined statements of operations. |
| The amortization of trade names based upon the preliminary estimates of fair value and useful life. The fair value of the acquired trade names was calculated using the relief from the royalty method, which is another form of the income approach. Under this method, the subjects trade name is valued by reference to the amount of royalty income it could generate if it were licensed, in an arms-length transaction, to a third party. Typically, a sample of a comparable arms-length royalty or license agreement is selected that reflects similar risk and return investment characteristics with the subjects trade name. The royalty rate selected is then multiplied by the net revenue expected to be generated by the trade name over the course of the assumed life of the trade name. The product of the royalty rate times the net revenue is an estimate of the royalty income that could be generated, hypothetically, by licensing the subjects trade name. Therefore, in selecting a royalty rate for trade names, consideration was given to the types of services being provided, the historical and projected operating profitability of the business and relative importance of the trade names compared to other factors driving profitability. |
| The incremental depreciation of the acquired fixed assets based upon the preliminary estimates of fair value and useful life. |
| The elimination of the historical MPBP Holdings amortization expense of $6.7 million for the twelve months ended September 30, 2010 and $3.1 million for the period from October 1, 2010 to March 17, 2011. |
c) | Represents the elimination of the MPBP Holdings goodwill and intangible asset impairments charge of $17.5 million recognized by MPBP Holdings in the twelve months ended September 30, 2010. |
d) | Since the Registrant purchased MPBP Holdings with a combination of excess cash and revolver borrowings, all net interest expense of MPBP Holdings, except the interest expense related to its capital leases, was eliminated as the interest expense in the statements of operations primarily related to long-term borrowings which were repaid by MPBP Holdings with the proceeds of the acquisition by the Registrant. This pro forma adjustment excludes incremental interest expense attributable to the additional revolver borrowings which were used to partially finance the acquisition. If these borrowings had occurred at the beginning of the Registrants fiscal 2010, the Registrant would have incurred additional interest expense of approximately $1.5 million for the fiscal year ended October 1, 2010 and $0.7 million for the six months ended April 1, 2011. |
e) | Represents the following two adjustments to the provision (benefit) for income taxes: |
| The income tax effect of the pro forma adjustments noted above, calculated at an effective tax rate of 39.5%. |
| An adjustment was recorded to conform the provision (benefit) for income taxes of the MPBP Holdings unaudited condensed statements of operations for the twelve months ended September 30, 2010 and for the period from October 1, 2010 to March 17, 2011 to 39.5%, the Registrants statutory income tax rate. |
f) | Represents elimination of acquisition-related expenses incurred by the Registrant. |
6