8-K 1 d8k.txt FORM 8-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 November 30, 2001 Date of Report (Date of earliest event reported) Commission file number: 1-8827 ---------------- ARAMARK CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-2319139 (State of Incorporation) (I.R.S. Employer identification No.) ARAMARK Tower 1101 Market Street Philadelphia, Pennsylvania 19107 (Address of principal executive offices) Telephone Number: 215-238-3000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Item 2. ACQUISITION OR DISPOSITION OF ASSETS On November 30, 2001 ARAMARK Corporation (the Company) completed the acquisition of the management services division of The ServiceMaster Company, referred to herein as ServiceMaster Management Services. The aggregate consideration for the transaction is approximately $790.6 million in cash, subject to post closing adjustments. ServiceMaster Management Services is a leader in the provision of facility management services in the United States, providing a complete range of facility management services to the healthcare, education and business and industry client sectors. The facility management services provided include custodial services, plant operations and management, groundskeeping, technical support and food services. ServiceMaster Management Services also has operations in Canada and maintains licensing arrangements with local service providers in approximately 25 other countries. The Company believes that the acquisition of ServiceMaster Management Services will further enhance its position as a leading provider of outsourced services. The Company believes the acquisition will enable it to strengthen its portfolio of services by broadening its facility services base in the United States and internationally. In addition, the Company believes the acquisition will provide ARAMARK with additional strategic benefits, including opportunities to cross-sell facility management services to our existing clients, and opportunities to cross-sell food and support services and other outsourced services to ServiceMaster Management Services' existing clients. The Company has financed the acquisition of ServiceMaster Management Services and related expenses in an aggregate of approximately $800 million by borrowing approximately an additional $200 million under the Company's senior revolving credit facility and $600 million under a new bridge financing facility with a group of banks arranged by J.P. Morgan Securities Inc. The Company expects to repay a portion of the bridge financing with a portion of the proceeds from its initial public offering of new Class B common stock. Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS The following financial statements, pro forma financial information and exhibits were filed as part of this Report: (a) Financial statements of ServiceMaster Management Services pursuant to Rule 3-05 of Regulation S-X: 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The ServiceMaster Company: We have audited the accompanying statement of financial position of SERVICEMASTER MANAGEMENT SERVICES BUSINESS (the "Business" as described in Note 1) as of December 31, 2000, and the related statements of income, changes in equity, and cash flows for the year then ended. These financial statements are the responsibility of The ServiceMaster Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed more fully in Note 2, on October 3, 2001, The ServiceMaster Company entered into an agreement to sell the Business. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ServiceMaster Management Services Business as of December 31, 2000, and the results of its operations, changes in equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Chicago, Illinois November 14, 2001 3 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2000 (In thousands) Assets Current Assets: Receivables, less allowance of $5,812................................. $109,167 Inventories........................................................... 11,712 Prepaid expenses and other assets..................................... 24,758 -------- Total current assets................................................ 145,637 -------- Property, Plant and Equipment, at Cost Land and buildings.................................................... 3,285 Equipment............................................................. 120,615 -------- 123,900 Less: accumulated depreciation........................................ 75,682 -------- Net property, plant and equipment..................................... 48,218 -------- Other Assets Intangible assets, primarily goodwill................................. 42,873 Notes receivable and other assets..................................... 6,813 Deferred income taxes................................................. 22,410 -------- Total assets........................................................ $265,951 ======== Liabilities and Equity Current Liabilities: Accounts Payable...................................................... $ 25,037 Accrued liabilities: Payroll............................................................. 20,433 Insurance........................................................... 30,195 Other............................................................... 33,747 Deferred revenues..................................................... 13,601 -------- Total current liabilities........................................... 123,013 -------- Other Long-Term Obligations........................................... 25,478 -------- Commitments and Contingencies (see Note 6) Equity--Net Advances from The ServiceMaster Company................... 117,460 -------- Total Liabilities and Equity.......................................... $265,951 ========
The accompanying Notes to the Financial Statements are an integral part of this statement. 4 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000 (in thousands) Operating Revenue................................................... $1,909,126 Operating Costs and Expenses: Cost of services rendered and products sold......................... 1,728,695 Selling and administrative expenses................................. 111,335 ---------- Total operating costs and expenses.................................. 1,840,030 ---------- Operating Income.................................................... 69,096 Provision for income taxes.......................................... 27,293 ---------- Net Income.......................................................... $ 41,803 ==========
The accompanying Notes to the Financial Statements are an integral part of this statement. 5 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (In thousands) Cash and Cash Equivalents at January 1................................ $ -- Cash Flows from Operations: Net Income............................................................ 41,803 Adjustments to reconcile net income to net cash provided from operations: Depreciation...................................................... 18,301 Amortization...................................................... 1,392 Deferred income taxes............................................. 719 Change in working capital: Receivables....................................................... (9,387) Inventories and other current assets.............................. (6,315) Accounts payable.................................................. 7,902 Deferred revenue.................................................. 4,118 Accrued liabilities............................................... 9,638 Other, net.......................................................... (2,246) -------- Net Cash Provided by Operations..................................... 65,925 Cash Flows from Investing Activities: Capital expenditures, net........................................... (15,121) Business acquisitions............................................... (3,825) Collection of notes receivable...................................... 8,512 -------- Net Cash Used for Investing Activities.............................. (10,434) Cash Flows from Financing Activities: Distributions to ServiceMaster...................................... (55,491) -------- Net Cash Used for Financing Activities.............................. (55,491) Cash Increase (Decrease) During the Period............................ -- -------- Ending Cash and Cash Equivalents...................................... $ -- ========
The accompanying Notes to the Financial Statements are an integral part of this statement. 6 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 (In thousands) Equity--Net advances from The ServiceMaster Company Beginning Balance..................................................... $131,148 Net Income............................................................ 41,803 Net Remittances to The ServiceMaster Company.......................... (55,491) -------- Ending Balance........................................................ $117,460 ========
The accompanying Notes to the Financial Statements are an integral part of this statement. 7 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS Note 1--Basis of Presentation ServiceMaster Management Services Business (the "Business") is an operating segment of The ServiceMaster Company ("ServiceMaster", a Delaware corporation) and provides a variety of supportive management services to healthcare, education and commercial accounts primarily within the United States. The Business is also engaged in developing, manufacturing and distributing chemicals and equipment. The financial statements presented include the operations of the Business. As a result of the Business's relationship with ServiceMaster, the financial position and results of operations are not necessarily indicative of what actually would have occurred had the Business operated as a stand-alone entity. Additionally, these financial statements are not necessarily indicative of future financial position or results of operations. The preparation of the financial statements requires management to make certain estimates and assumptions required under accounting principles generally accepted in the United States, which may differ from the actual results. The more significant areas requiring the use of management estimates relate to the allowance for receivables, accruals for self-insured medical, workers compensation, auto and general liability insurance, and useful lives for depreciation and amortization. Note 2--Subsequent Event On October 3, 2001, ServiceMaster entered into an agreement to sell the Business to ARAMARK Corporation ("ARAMARK"). Significant terms of the sale include the disposition of substantially all assets and liabilities of the Business, with the primary exception of the majority of its site service product line. ARAMARK is also purchasing ServiceMaster's corporate headquarters campus. The transaction is expected to close in 2001. Supplemental financial information with respect to the corporate headquarters campus excluded from, and the site service product line included in the financial statements of the Business as of and for the year ended December 31, 2000 is set forth below (in thousands): Corporate headquarters campus: Land and buildings..................................................... $24,268 Equipment.............................................................. 6,922 ------- Total................................................................ 31,190 ------- Less--accumulated depreciation......................................... 13,179 ------- Net property, plant and equipment...................................... $18,011 =======
Depreciation expense related to this facility was $1.5 million for the year ended December 31, 2000, of which $660 was allocated to and recorded as a cash transaction by the Business. Site service product line Summary balance sheet: Total current assets.................................................. $ 5,000 Total other assets.................................................... 9,792 Net property, plant and equipment..................................... 4,277 ------- Total assets.......................................................... $19,069 ======= Total current liabilities............................................. $ 822 Equity................................................................ 18,247 ------- Total liabilities and equity.......................................... $19,069 ======= Summary income statement: Operating revenue..................................................... $30,222 Cost of services rendered and products sold........................... 30,794 Selling and administrative expenses................................... 3,103 ------- Total operating costs and expenses.................................. 33,897 ------- Operating loss........................................................ (3,675) Income tax benefit.................................................... 1,452 ------- Net loss.............................................................. $(2,223) =======
8 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS--(Continued) Note 3--Summary of Significant Accounting Policies Revenues: Revenues are recognized as services are rendered and consist of contract fees from facilities for which the Business provides outsourcing services. Revenues reflect the total price of such services since the Business acts as a principal in these transactions and assumes the risks and rewards of the contractual arrangement. As such, contract fees for all payroll costs, including $923 million for the facility employees whose payroll is processed by the facilities, are recognized by the Business as revenues with a corresponding expense included in "Cost of services rendered and products sold" in the Statement of Income. Inventory Valuation: Inventories are valued at the lower of cost (first-in, first-out basis) or market. Inventory costs include material, labor, and factory overhead and related handling costs. Raw materials represent less than three percent of the inventory value at December 31, 2000. The remaining inventory is finished goods to be used on the customers' premises or sold to ServiceMaster's franchisees. Depreciation and Amortization: Buildings and equipment used in the business are stated at cost and depreciated over their estimated useful lives using the straight-line method for financial reporting purposes. The estimated useful lives for building and improvements range from 10 to 40 years, while the estimated useful lives for equipment range from 3 to 10 years. Long-lived assets are periodically reviewed to determine recoverability by comparing their carrying values to the undiscounted future cash flows expected to be realized from their use. No recovery problems have been indicated by these comparisons. Based on the reviews, when the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss is recognized based on the asset's fair value, and the carrying amount of the asset is reduced accordingly. Intangible assets consist primarily of goodwill ($43 million). These assets are amortized on a straight-line basis over their estimated useful lives, which are predominately 40 years. Goodwill is periodically reviewed to determine recoverability utilizing a discounted cash flow methodology. Income Taxes: Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This Statement utilizes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Deferred income taxes are provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Note 4--Related Party Transactions The Business primarily conducts its operations as an integrated component of ServiceMaster. Certain expenses are shared and are charged or allocated to the Business from ServiceMaster. Additionally, certain expenses are allocated from the Business to ServiceMaster. Management believes that the methods of allocating these expenses are reasonable. The majority of these expenses are as follows (in thousands): Allocations from ServiceMaster to the Business which are recorded in the financial statements: Campus................................................................ $2,300 Insurance............................................................. 1,760 Benefits.............................................................. 460 Other................................................................. 420 ------ Total................................................................. $4,940 ======
9 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS--(Continued) The campus allocation is based upon the square footage used by the Business and includes both depreciation and operating costs associated with the campus. Insurance expense included claims paid related to the umbrella, professional liability, crime, and directors and officers insurance policies. Benefits primarily represent the Business's portion of the company match for the ServiceMaster Employee Share Purchase Plan. Allocations from the Business to ServiceMaster which are recorded in the financial statements: Insurance............................................................ $ 370 Administrative services.............................................. 790 Other................................................................ 300 ------ Total................................................................ $1,460 ======
Insurance expense included claims paid related to the health, auto, and property insurance policies. Administrative services primarily represent information systems support provided by the Business to ServiceMaster. Note 5--Income Taxes For purposes of these financial statements, the Business calculated the current and deferred income tax provision as if it filed a separate tax return. Income taxes are ultimately paid by, and are the responsibility of, ServiceMaster. ServiceMaster will retain the asset/liability for all taxes of the Business for operating activities through the date of sale. The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Business's effective income tax rate is as follows: Tax at U.S. federal statutory rate........................................ 35.0% State and local income taxes, net of U.S. federal benefit................. 6.6 Non-deductible amortization............................................... (3.3) Other..................................................................... 1.2 ---- Effective rate............................................................ 39.5% ====
Income tax expense consists of:
Current Deferred Total ------- -------- ------- (In thousands) U.S. federal........................................ $22,061 $672 $22,733 State and local..................................... 4,513 47 4,560 ------- ---- ------- $26,574 $719 $27,293 ======= ==== =======
The net deferred income tax asset reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Deferred income tax expense results from changes in the net asset balance for the year. Management believes that, based upon its lengthy and consistent history of profitable operations, it is probable that the net deferred 10 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS--(Continued) income tax asset will be realized on future tax returns, primarily from the generation of future taxable income. Significant components of the Business's net deferred income tax asset are as follows (in thousands): Deferred income tax assets (liabilities): Current: Prepaid expenses and other.......................................... $(1,472) Accounts receivable allowance and other............................. 2,419 ------- Total current asset............................................... 947 ------- Long-Term: Long-term assets...................................................... 2,603 Insurance expenses.................................................... 19,195 Other long-term obligations........................................... 612 ------- Total long term asset............................................... 22,410 ------- Net deferred income tax asset......................................... $23,357 =======
Note 6--Commitments and Contingencies The Business carries insurance policies on insurable risks which it believes to be appropriate. The Business generally has self-insured retention limits and has obtained fully insured layers of coverage above such self-insured retention limits. Accruals for self insurance losses are made based on the Business's claims experience and actuarial assumptions. Other long-term obligations primarily represent insurance related reserves. The Business has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The Business accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Certain litigation and the related exposure has been assumed by ServiceMaster. Note 7--Employee Benefit Plans Operating expenses include contributions in 2000 to qualified profit sharing plans for $2.5 million and to the ServiceMaster Employee Share Purchase Plan for $0.5 million. Note 8--Leases Future long-term noncancelable operating lease payments are $4.9 million in 2001, $2.4 million in 2002, $0.8 million in 2003, $0.3 million in 2004, and less than $0.1 million thereafter. Rental expense for 2000 was $5.4 million. Note 9--Equity--Net Advances from ServiceMaster The Business participates in a centralized cash management program administered by ServiceMaster. Cash collected from operations is remitted to ServiceMaster and advances are made by ServiceMaster, as needed, to cover the Business's operating expenses and capital requirements. Cash remitted between the Business and to or from ServiceMaster decreases or increases, respectively, the net advances from ServiceMaster. 11 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2001 (UNAUDITED) (In thousands) Assets Current Assets: Receivables, less allowance of $1,695................................. $ 27,045 Inventories........................................................... 10,069 Prepaid expenses and other assets..................................... 25,133 -------- Total current assets................................................ 62,247 -------- Property, Plant and Equipment, at Cost Land and buildings.................................................... 4,223 Equipment............................................................. 122,376 -------- 126,599 Less: accumulated depreciation........................................ 80,719 -------- Net property, plant and equipment..................................... 45,880 -------- Other Assets Intangible assets, primarily goodwill................................. 47,811 Notes receivable and other assets..................................... 6,831 Deferred income taxes................................................. 24,440 -------- Total assets........................................................ $187,209 ======== Liabilities and Equity Current Liabilities: Accounts Payable...................................................... $ 29,288 Accrued liabilities: Payroll............................................................. 16,520 Insurance........................................................... 30,332 Other............................................................... 32,505 Deferred revenues..................................................... 16,707 -------- Total current liabilities........................................... 125,352 -------- Other Long-Term Obligations........................................... 26,820 -------- Commitments and Contingencies (see Notes) Equity--Net Advances from The ServiceMaster Company................... 35,037 -------- Total Liabilities and Equity.......................................... $187,209 ========
The accompanying Notes to the Financial Statements are an intergral part of this statement. 12 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (In thousands) Operating Revenue................................................... $1,439,877 Operating Costs and Expenses: Cost of services rendered and products sold......................... 1,304,084 Selling and administrative expenses................................. 88,064 ---------- Total operating costs and expenses.................................. 1,392,148 ---------- Operating Income.................................................... 47,729 Provision for income taxes.......................................... 18,853 ---------- Net Income.......................................................... $ 28,876 ==========
The accompanying Notes to the Financial Statements are an integral part of this statement. 13 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (In thousands) Cash and Cash Equivalents at January 1............................... $ -- Cash Flows from Operations: Net Income........................................................... 28,876 Adjustments to reconcile net income to net cash provided from operations: Depreciation..................................................... 13,568 Amortization..................................................... 1,046 Deferred income taxes............................................ 1,224 Change in working capital: Receivables...................................................... 9,101 Sale of receivables (Note 5)..................................... 73,021 Inventories and other current assets............................. 2,074 Accounts payable................................................. 4,250 Deferred revenue................................................. 3,106 Accrued liabilities.............................................. (5,018) Other, net......................................................... (2,428) --------- Net Cash Provided by Operations.................................... 128,820 Cash Flows from Investing Activities: Capital expenditures, net.......................................... (11,230) Business acquisitions.............................................. (6,291) --------- Net Cash Used for Investing Activities............................. (17,521) Cash Flows from Financing Activities: Distributions to ServiceMaster..................................... (111,299) --------- Net Cash Used for Financing Activities............................. (111,299) Cash Increase (Decrease) During the Period........................... -- --------- Ending Cash and Cash Equivalents..................................... $ -- =========
The accompanying Notes to the Financial Statements are an integral part of this statement. 14 SERVICEMASTER MANAGEMENT SERVICES BUSINESS STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (In thousands) Equity--net advances from The ServiceMaster Company Beginning Balance.................................................... $ 117,460 Net Income........................................................... 28,876 Net Remittances to The ServiceMaster Company......................... (111,299) --------- Ending Balance....................................................... $ 35,037 =========
The accompanying Notes to the Financial Statements are an integral part of this statement. 15 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS Note 1--Basis of Presentation ServiceMaster Management Services Business (the "Business") is an operating segment of The ServiceMaster Company ("ServiceMaster", a Delaware corporation) and provides a variety of supportive management services to healthcare, education and commercial accounts primarily within the United States. The Business is also engaged in developing, manufacturing and distributing chemicals and equipment. The financial statements presented include the operations of the Business. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position as of September 30, 2001 and results of operations and cash flows for the nine months then ended. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted. The Business believes that the disclosures included are adequate and provide a fair presentation of interim period results. As a result of the Business's relationship with ServiceMaster, the financial position and results of operations are not necessarily indicative of what actually would have occurred had the Business operated as a stand-alone entity. Additionally, these financial statements are not necessarily indicative of future financial position or results of operations. The preparation of the financial statements requires management to make certain estimates and assumptions required under accounting principles generally accepted in the United States, which may differ from the actual results. The more significant areas requiring the use of management estimates relate to the allowance for receivables, accruals for self-insured medical, workers compensation, auto and general liability insurance, and useful lives for depreciation and amortization. Note 2--Subsequent Event On October 3, 2001, ServiceMaster entered into an agreement to sell the Business to ARAMARK Corporation ("ARAMARK"). Significant terms of the sale include the disposition of substantially all assets and liabilities of the Business, with the exception of the majority of its site service product line. ARAMARK is also purchasing ServiceMaster's corporate headquarters campus. The transaction is expected to close in 2001. Supplemental financial information with respect to the corporate headquarters campus excluded from, and the site service product line included in the financial statements of the Business as of and for the nine months ended September 30, 2001 is set forth below (in thousands): Site service product line Summary balance sheet: Total current assets........................ $ 6,796 Total other assets.......................... 9,580 Net property, plant and equipment........... 4,525 ------- Total assets................................ $20,901 ======= Total current liabilities................... $ 145 Equity...................................... 20,756 ------- Total liabilities and equity................ $20,901 ======= Summary income statement: Operating revenue........................... $22,741 Cost of services rendered and products sold....................................... 28,767 Selling and administrative expenses......... 1,970 ------- Total operating costs and expenses........ 30,737 ------- Operating loss.............................. (7,996) Income tax benefit.......................... 3,158 ------- Net loss.................................... $(4,838) =======
Corporate headquarters campus: Land and buildings........ $24,505 Equipment................. 7,095 ------- Total................... 31,600 ------- Less--accumulated depreciation............. 14,367 ------- Net property, plant and equipment................ $17,233 =======
Depreciation expense related to this facility was $1.2 million for the nine months ended September 30, 2001 of which $490 was allocated to and recorded as a cash transaction by the Business. 16 SERVICEMASTER MANAGEMENT SERVICES BUSINESS NOTES TO THE FINANCIAL STATEMENTS--(Continued) Note 3--Summary of Significant Accounting Policies Revenues: Revenues are recognized as services are rendered and consist of contract fees from facilities for which the Business provides outsourcing services. Revenues reflect the total price of such services since the Business acts as a principal in these transactions and assumes the risks and rewards of the contractual arrangement. As such, contract fees for all payroll costs, including $699 million for the facility employees whose payroll is processed by the facilities, are recognized by the Business as revenues with a corresponding expense included in "Cost of services rendered and products sold" in the Statement of Income. Inventory Valuation: Inventories are valued at the lower of cost (first-in, first-out basis) or market. Inventory costs include material, labor, and factory overhead and related handling costs. Raw materials represent less than three percent of the inventory value at September 30, 2001. The remaining inventory is finished goods to be used on the customers' premises or sold to ServiceMaster's franchisees. Depreciation and Amortization: Buildings and equipment used in the business are stated at cost and depreciated over their estimated useful lives using the straight-line method for financial reporting purposes. The estimated useful lives for building and improvements range from 10 to 40 years, while the estimated useful lives for equipment range from 3 to 10 years. Long-lived assets are periodically reviewed to determine recoverability by comparing their carrying values to the undiscounted future cash flows expected to be realized from their use. No recovery problems have been indicated by these comparisons. Based on the reviews, when the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss is recognized based on the asset's fair value, and the carrying amount of the asset is reduced accordingly. Intangible assets consist primarily of goodwill ($48 million). These assets are amortized on a straight-line basis over their estimated useful lives, which are predominately 40 years. Goodwill is periodically reviewed to determine recoverability utilizing a discounted cash flow methodology. Note 4--Commitments and Contingencies The Business carries insurance policies on insurable risks which it believes to be appropriate. The Business generally has self insured retention limits and has obtained fully insured layers of coverage above such self insured retention limits. Accruals for self insurance losses are made based on the Business's claims experience and actuarial assumptions. Other long-term obligations primarily include insurance related reserves. The Business has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The Business accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Certain litigation and the related exposure has been assumed by ServiceMaster. Note 5--Equity--Net Advances from ServiceMaster The Business participates in a centralized cash management program administered by ServiceMaster. Cash collected from operations is remitted to ServiceMaster and advances are made by ServiceMaster, as needed, to cover the Business's operating expenses and capital requirements. Cash remitted between the Business and to or from ServiceMaster decreases or increases, respectively, the net advances from ServiceMaster. In 2001, the Business participates in ServiceMaster's accounts receivable securitization program. As such, $77.9 million of the Business's accounts receivable were sold under this program as of September 30, 2001. Cash proceeds of $73 million from the sale of the Business's accounts receivable are included in net remittances to ServiceMaster. 17 (b) Pro Forma financial information required pursuant to Article 11 of Regulation S-X: UNAUDITED PRO FORMA FINANCIAL INFORMATION The pro forma financial statements give pro forma effect to the acquisition by the Company of ServiceMaster Management Services for approximately $800 million in cash (the Acquisition). The unaudited pro forma consolidated balance sheet was prepared as if the Acquisition occurred as of September 28, 2001. The unaudited pro forma consolidated statement of income was prepared as if the Acquisition occurred as of the beginning of the Company's 2001 fiscal year. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The pro forma adjustment to reflect the allocation of the purchase price is based upon the preliminary information currently available, which may be revised, as additional information becomes available. The notes to the unaudited pro forma financial statements provide a more detailed discussion of how such adjustments were derived and presented in the pro forma financial statements. Such financial statements have been compiled from historical financial statements and other information, but do not purport to represent what the Company's financial position or results of operations actually would have been had the transactions occurred on the dates indicated, or to project the Company's financial performance for any future period. The pro forma statement of income does not reflect any synergies or other operating benefits that may be realized as the Company integrates ServiceMaster Management Services with the Company's existing operations. 18 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 28, 2001 (in thousands)
ServiceMaster Pro Forma Management Adjustments Pro Forma ARAMARK Services for the for the Historical Historical (a) Acquisition Acquisition ---------- ------------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents............. $ 24,799 $ -- $ -- $ 24,799 Receivables, net......... 503,291 96,195 -- 599,486 Inventories.............. 415,798 9,937 -- 425,735 Prepayments and other current assets.......... 76,310 22,198 -- 98,508 ---------- -------- -------- ---------- Total current assets..... 1,020,198 128,330 -- 1,148,528 ---------- -------- -------- ---------- Property and Equipment, net...................... 1,087,833 58,588 10,000(b) 1,156,421 Goodwill.................. 705,016 38,231 436,047(b) 1,179,294 Other Assets.............. 403,347 6,831 280,000(b) 690,178 ---------- -------- -------- ---------- $3,216,394 $231,980 $726,047 $4,174,421 ========== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term borrowings.... $ 34,710 $ -- $ -- $ 34,710 Accounts payable......... 459,249 29,288 -- 488,537 Accrued expenses and other liabilities....... 590,192 95,919 -- 686,111 ---------- -------- -------- ---------- Total current liabilities............. 1,084,151 125,207 -- 1,209,358 ---------- -------- -------- ---------- Long-Term Borrowings...... 1,635,867 -- 806,000(b) 2,441,867 Deferred Income Taxes and Other Noncurrent Liabilities.............. 229,484 26,820 -- 256,304 Common Stock Subject to Potential Repurchase Under Provisions of Shareholders' Agreement.. 20,000 -- -- 20,000 Shareholders' Equity Excluding Common Stock Subject to Repurchase.... 79,953 (79,953)(b) -- Class A common stock..... 24 -- -- 24 Class B common stock..... 597 -- -- 597 Capital surplus 1,057 -- -- 1,057 Earnings retained for use in the business......... 284,184 -- -- 284,184 Accumulated other comprehensive income (loss).................. (18,970) -- -- (18,970) Impact of potential repurchase feature of common stock............ (20,000) -- -- (20,000) ---------- -------- -------- ---------- 246,892 79,953 (79,953) 246,892 ---------- -------- -------- ---------- $3,216,394 $231,980 $726,047 $4,174,421 ========== ======== ======== ==========
19 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2001 (in thousands, except per share amounts)
ServiceMaster Pro Forma Management Adjustments Pro Forma ARAMARK Services for the for the Historical Historical (a) Acquisition Acquisition ---------- ------------- ----------- ----------- Sales.................... $7,788,690 $980,248 $ -- $8,768,938 Costs and Expenses: Cost of services provided............... 7,002,730 788,793 -- 7,791,523 Depreciation and amortization 240,243 19,484 29,950(d) 289,677 Selling and general corporate expenses..... 106,210 94,712 -- 200,922 ---------- -------- -------- ---------- 7,349,183 902,989 29,950 8,282,122 ---------- -------- -------- ---------- Operating income........ 439,507 77,259 (29,950) 486,816 Interest and other financing costs, net 153,292 -- 53,069(c) 206,361 ---------- -------- -------- ---------- Income before income taxes.................. 286,215 77,259 (83,019) 280,455 Provision for Income Taxes 109,719 30,517 (32,377)(e) 107,859 ---------- -------- -------- ---------- Net income.............. $ 176,496 $ 46,742 $(50,642) $ 172,596 ========== ======== ======== ========== Earnings Per Share Basic................... $ 2.06 $ 2.01 Diluted................. $ 1.95 $ 1.90
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (a) Represents the unaudited historical financial statements of the ServiceMaster Management Services business being acquired as of and for the twelve months ended September 30, 2001, including the trade accounts receivable balance and accounts related to the ServiceMaster corporate campus which were also acquired. Sales and Cost of Services Provided have been adjusted to exclude client employee payroll costs of $914 million consistent with ARAMARK'S accounting practice. (b) To reflect the acquisition of ServiceMaster Management Services by ARAMARK for a total purchase cost of $806 million (including direct acquisition costs) in cash. The purchase is assumed to have been funded with proceeds from the one-year bridge financing facility provided by a group of banks ($600 million) and borrowings under the Company's senior revolving credit facility ($206 million). The Company expects to repay a portion of the bridge financing with a portion of the proceeds from the Company's initial public offering of new Class B common stock. In addition, the Company expects to replace the remaining portion of the bridge financing within one year of closing the acquisition. The Company may consider several different types of financing arrangements to replace the remainder of the borrowings under the bridge financing prior to its expiration date. These arrangements may include a publicly or privately offered debt financing and accounts receivable sale. The Company expects to refinance the bridge financing on a long-term basis within one year of closing the acquisition. The excess ($726.0 million) of purchase cost over the carrying amount of the net assets acquired has been allocated as follows:
(in millions) ------------- Property and equipment...................................... $ 10 Service mark rights......................................... 10 Non compete agreement....................................... 5 Customer contract rights.................................... 265 Goodwill.................................................... 436 ---- $726 ====
20 (c) To reflect additional interest expense resulting from the acquisition related borrowings. The interest rate on the bridge financing is based on LIBOR plus-1 3/8% or 6.7% (including the syndication fee) for the full year. The average interest rate on the Company's senior revolving credit facility was 5.8% for the year. (d) To reflect additional depreciation and amortization related to the tangible and intangible assets acquired, based upon the following depreciation / amortization periods: Property and equipment........................................... 30 Years Service mark rights.............................................. 3 Years Non compete agreement............................................ 4 Years Customer contract rights......................................... 10 Years
In accordance with the recently issued Statement of Financial Accounting Standard No. 142, goodwill resulting from the acquisition is not amortized. (e) To reflect the income tax effect resulting form the pro forma adjustments using an effective tax rate of 39%. 21 (c) Exhibits: 2.1 Purchase Agreement between The ServiceMaster Company and ARAMARK Corporation, dated as of October 3, 2001. 2.2 First Amendment to Purchase Agreement, dated as of November 30, 2001 between The ServiceMaster Company and ARAMARK Corporation. 99.1 Press Release, dated November 30, 2001, announcing the completion by ARAMARK Corporation of the acquisition of ServiceMaster Management Services. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 10, 2001 ARAMARK Corporation By: /s/ John M. Lafferty ----------------------------- Name: John M. Lafferty Title: Senior Vice President, Controller and Chief Accounting Officer 23 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 2.1 Purchase Agreement between The ServiceMaster Company and ARAMARK Corporation, dated as of October 3, 2001. 2.2 First Amendment to Purchase Agreement, dated as of November 30, 2001, between The ServiceMaster Company and ARAMARK Corporation. 99.1 Press Release, dated November 30, 2001, announcing the completion by ARAMARK Corporation of the acquisition of ServiceMaster Management Services.
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