Item 1. Business - ----------------
Description of Business Segments
The Company is engaged in providing or managing services, including food and support services, in the United States and internationally, rental of uniform and career apparel, direct marketing of uniform and career apparel and educational resources. ARAMARK was organized in 1959 in Delaware. The Company was formed in September 1984 by the management of ARAMARK and acquired ARAMARK in December 1984 through a merger.
The Company derives most of its sales from services provided in the United States. The Company's international services, primarily the management of food and support services, are provided primarily in Belgium, Canada, the Czech Republic, Germany, Hungary, Japan, Korea, Mexico, Slovakia, Spain and the United Kingdom.
For financial reporting purposes, the Company is comprised of five operating business segments. Financial information by business segment and geographic area appears in note 10 to the consolidated financial statements. The businesses of the Company have been grouped into the segments described below.
Food and Support Services - United States
The Company provides food, refreshment, specialized dietary and support services (including facility maintenance and housekeeping) to businesses, and to educational, governmental and healthcare institutions. Food, lodging and merchandise services are also provided at sports and entertainment facilities such as convention centers, stadiums, parks, arenas and other recreational facilities.
Food, refreshment, specialized dietary and support services are operated at customer locations generally under contracts of indefinite duration, which may be subject to termination by either party. However, food and related services at sports and entertainment facilities usually are for fixed contract terms generally for five to fifteen years. The Company's food and support services are performed under various financial arrangements including management-fee and profit-and-loss based agreements.
In June, 2000, the Company acquired Ogden Entertainment, Inc., which included substantially all of the food and beverage concessions and venue management businesses of Ogden Corporation. See note 2 to the consolidated financial statements.
At most customer food service locations, the equipment and facilities used in providing these services are owned by the customer. Vending machines and related equipment, however, are generally owned by the Company. The equipment is owned by the Company at most sports and entertainment facilities, other than amphitheaters and convention centers.
There is a high level of competition in the food and support services business from local, regional, national and international companies, as well as from businesses and institutions which operate their own services. This competition takes a number of different forms, including pricing, maintaining high food and service standards, and innovative approaches to marketing with a strong emphasis on securing and retaining customer accounts.
The Company believes that it is a significant provider of food and support services, but that its volume of such business is small in relation to the total market. See note 9 to the consolidated financial statements for information relating to the seasonal aspects of this business segment.
Food and Support Services - International
The Company provides food, refreshment, specialized dietary and support services (including facility maintenance and housekeeping) to businesses, and to educational, governmental and healthcare institutions. Food services are also provided at sports and entertainment facilities, such as stadiums, arenas, and fairgrounds.
Food, refreshment, specialized dietary and support services are operated at customer locations generally under contracts of varying duration. Food and related services at sports and entertainment facilities generally are for fixed contract terms in excess of one year. The Company's food and support services are performed under various financial arrangements including management-fee and profit-and-loss based agreements.
At most customer food service locations, the equipment and facilities used in providing these services are owned by the customer. Vending machines and related equipment are generally owned by the Company, except in the United Kingdom where that equipment is generally owned by the customer. At most sports and entertainment facilities, the equipment is owned by the Company.
There is a high level of competition in the food and support services business from numerous companies within each country and from multinational companies, as well as from businesses and institutions which operate their own services. This competition takes a number of different forms, including pricing, maintaining high food and service standards, and innovative approaches to marketing with a strong emphasis on securing and retaining customer accounts.
The Company believes that it is a significant provider of food and support services in Belgium, Canada, Germany, Spain and the United Kingdom, but that its volume of such business is small in relation to the total market.
Uniform and Career Apparel - Rental
The Company rents, sells, cleans, maintains and delivers personalized uniform and career apparel and other textile items for customers throughout the United States on a contract basis. Also provided are walk-off mats, cleaning cloths, disposable towels, and other environmental control items.
Service contracts for the rental and laundering of work apparel and other textile items are generally for periods in excess of one year and typically for an initial term of three to five years.
The uniform rental service business is highly competitive in the areas in which the Company operates, with numerous competitors in each major operating area. Although no one uniform rental services company is predominant in this industry, the Company believes that it is a significant competitor.
The significant competitive factors in the uniform and career apparel business are the quality of services provided to customers and the prices charged for such services.
Uniform and Career Apparel - Direct Marketing
The Company is one of the largest direct marketers of personalized uniforms, career apparel and related items and public safety equipment in the United States. The direct marketing business is generally conducted under an invoice arrangement with customers.
Competition in the direct marketing of work clothing, career apparel and public safety equipment is from numerous retailers and other direct marketers at local, regional and national levels. In this market, while the Company is a significant competitor, the Company's volume of sales is small in relation to the total market.
The significant competitive factors in the direct marketing of uniform and career apparel are the quality of services provided to customers and the prices charged for such services. See note 9 to the consolidated financial statements for information relating to the seasonal nature of this business.
Educational Resources
The Company provides infant, toddler, pre-school, and school-age learning programs. The Company operates community-based child care centers, before and after school programs on the premises of elementary schools, private elementary schools, and employer on-site child care centers. These services are provided to, and are primarily paid for on a weekly or monthly basis directly by individual families under short-term agreements. The Company leases a significant number of its facilities under long-term arrangements.
The Company believes it is a significant provider of educational and child care services in the United States.
Competition in all phases of this business segment is from both national and local providers of educational services as well as from private and public institutions which provide for their own educational services. Significant competitive factors in the Company's educational services business are the quality of care, reputation, physical appearance of facilities, the types of programs offered to the users of these services and the prices charged for such services.
General
The Company has approximately 139,000 full and part-time employees in the United States, and approximately 28,000 full and part-time employees internationally. Approximately 32,500 employees in the United States are represented by various labor unions. The number of employees varies during the year due to the seasonal aspects of certain of the Company's businesses. See note 9 to the consolidated financial statements.
The Company believes it recognizes benefits from its corporate name recognition. Nonetheless, consistent with its businesses, the Company does not have any material trademarks or patents, and its research and development expenditures are not material in amount. Although the Company pursues strategies to increase the number and scope of the services it provides to existing customers, no single customer of the Company accounts for more than 5% of its sales. While the Company focuses its purchasing on selected suppliers and vendors to realize pricing, quality and service benefits, generally, all materials and services that the Company purchases are available from more than one supplier, and the loss of any supplier would not have a material impact on the Company's results of operations. The Company's businesses are subject to various governmental regulations and environmental regulations. Environmental compliance has not had a material impact on the Company's capital expenditures, earnings or competitive position.
Item 2.
Item 2. Properties - ------------------
The principal property and equipment of the Company are its service equipment and fixtures (including vehicles) and real estate.
The service equipment and fixtures include vending, commissary, warehouse and janitorial and maintenance equipment used primarily by the Food and Support Services segments and laundry equipment used by the Uniform and Career Apparel - Rental segment. The vehicles include automobiles and delivery trucks used in the Food and Support Services and Uniform and Career Apparel - Rental segments, and automobiles, vans and small buses used in the Educational Resources segment. The service equipment and fixtures represent 57% of the net book value of all fixed assets as of September 29, 2000.
The Company's real estate is comprised primarily of educational and childcare facilities, of which a significant number are held under long-term operating leases. The Company also maintains other real estate and leasehold improvements, which it uses in the Uniform and Career Apparel and Food and Support Services segments. Additional information concerning property and equipment (including leases and noncancelable lease commitments) is included in notes 1 and 8 to the consolidated financial statements. No individual parcel of real estate owned or leased is of material significance to the Company's total assets.
See note 10 to the consolidated financial statements for information concerning the identifiable assets of the Company's business segments.
Item 3.
Item 3. Legal Proceedings - -------------------------
The Company and its subsidiaries are not parties to any lawsuits that are not covered by insurance (other than ordinary routine litigation incidental to its business) which are material to the Company's business or financial condition. See note 8 to the consolidated financial statements for additional information concerning legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
Not Applicable.
Item 4A. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
Except as set forth below, the principal occupation of each executive officer throughout the past five years has been the performance of the functions of the corporate offices shown above.
Mr. Ksansnak was elected vice chairman of the Company in May 1997. From February 1991 to May 1997 he was executive vice president of the Company and chief financial officer from 1986 to 1997.
Mr. Leonard has been president and chief operating officer of the Company since May 1997. He was executive vice president of the Company from May 1992 until May 1997.
Mr. Colli joined the Company in February 2000 as general counsel and was elected executive vice president and secretary in March 2000. Prior to joining the Company, he was a partner with McCarter & English LLP.
Mr. Mulvaney was elected executive vice president of the Company in August 1996. He was senior vice president of the Company from February 1995 to August 1996 and vice president from February 1993 to February 1995.
Mr. Sutherland became chief financial officer of the Company in May 1997. He was elected executive vice president in May 1993.
Mr. Zillmer was elected executive vice president of the Company in May 2000. He was president of ARAMARK Business Services from May 1995 to August 1999 when be became president of ARAMARK Food and Support Services International. He became president of ARAMARK Food and Support Services in May 2000.
Mr. Lafferty joined the Company and was elected senior vice president and appointed controller and chief accounting officer in August 2000. Prior to joining the Company, he retired as a partner with Arthur Andersen LLP.
Ms. Austell was elected senior vice president and treasurer of the Company in August 1996. Prior to joining the Company in July 1996, she was a managing director of J. P. Morgan & Co.
Mr. Morton was elected vice president of the Company in August 2000. He has been assistant secretary since 1984.
Mr. Murphy was elected vice president in February 2000. Prior to that he was director of audit and controls since September 1995.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - -----------------------------------------------------------------------------
There are currently approximately 3,100 record holders of Class B common stock of the Company, all of whom are or were employees or directors of the Company (or members of their families or trusts created by them). There are currently 75 record holders of the Class A common stock of the Company, all of whom are institutional investors, Company benefit plans or individuals not employed by the Company.
The Company has not paid a cash dividend during the last two fiscal years. From time to time, the Board of Directors may consider paying cash dividends in the future, based upon the Company's circumstances at that time.
There is no established public trading market for the common stock of the Company. However, employees of the Company have been able to sell shares of common stock through various programs maintained by the Company. See note 7 to the consolidated financial statements for information regarding the Company's shareholders' agreement.
Item 6.
Item 6. Selected Financial Data - -------------------------------
The following table presents summary consolidated financial data for the Company. The following data should be read in conjunction with the consolidated financial statements and the related notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition, each included elsewhere herein.
- -----------
(1) Fiscal 1997 is a fifty-three week period. See note 1 to the consolidated financial statements. (2) See note 1 to the consolidated financial statements. (3) See note 2 to the consolidated financial statements. Fiscal 1997 and 1996 include other income of $11.7 million and $2.9 million, respectively. (4) See note 3 to the consolidated financial statements. (5) Fiscal 1996 and 1997 earnings per share amounts have been restated to reflect the 3 for 1 stock split effective on September 1, 1998 and the adoption of Statement of Financial Accounting Standards No. 128, "Earnings per Share" which was effective beginning in fiscal 1998. See notes 1 and 7 to the consolidated financial statements. (6) For the purpose of determining the ratio of earnings to fixed charges, earnings include pre-tax income plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on all indebtedness (including capitalized interest) plus that portion of operating lease rentals representative of the interest factor (deemed to be one-third of operating lease rentals). (7) See note 4 to the consolidated financial statements. (8) See note 7 to the consolidated financial statements. (9) 1998 reflects the impact of the Common Stock Class A Tender Offer. See note 7 to the consolidated financial statements.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and - ------------------------------------------------------------------------- Financial Condition -------------------
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected financial data included on page 8 and the business segment information included in note 10 to the consolidated financial statements.
Fiscal 2000 Compared to Fiscal 1999
Overview. Sales for the fiscal year ended September 29, 2000 were $7.3 billion, an increase of 8% over fiscal 1999. Sales increased in the Food and Support Services, Uniform Career and Apparel - Rental and Educational Resources segments and decreased slightly in the Uniform and Career Apparel - Direct Marketing segment. Excluding the impact of acquisitions, primarily in the Food and Support Services - United States segment (see note 2 to the consolidated financial statements), sales increased approximately 5% over fiscal 1999. Operating income of $419.6 million increased $44 million or 12% over the prior year due to double digit earnings increases in the Food and Support Services and Uniform and Career Apparel segments, partially offset by decreased earnings in the Educational Resources segment. Excluding the impact of acquisitions, operating income increased approximately 8% over the prior year period. The Company's operating income margin increased to 5.8% from 5.6% due primarily to the leveraging of fixed costs and effective cost controls in the Uniform and Career Apparel segments. Throughout fiscal 2000 the operating results of several business segments have been affected by the trend of rising labor, medical insurance and fuel costs. Various cost containment and price increase programs have been initiated, and such efforts will continue into fiscal 2001.
Interest expense increased $12.0 million or 9% over the prior year due to increased debt levels, primarily to fund acquisitions and stock repurchases, and increased interest rates.
Segment Results. Food and Support Services - United States segment sales increased 10% over the prior year due to acquisitions (approximately 5%) and increased volume (approximately 5%) including new accounts. Sales in the Food and Support Services - International segment increased 3% compared to fiscal 1999. Excluding the unfavorable impact of foreign currency translation, sales in this segment increased 9% due to new accounts (approximately 5%) and increased volume (approximately 5%), partially offset by the impact of a divestiture in fiscal 1999 (approximately 1%). Sales in the Uniform and Career Apparel - Rental segment increased 6% over the prior year period due to pricing (approximately 2%) and increased volume (approximately 4%). Uniform and Career Apparel - Direct Marketing segment sales decreased 1% from fiscal 1999. Segment sales performance reflects a decrease in direct uniform sales (approximately 4%), primarily as a result of a planned reduction in catalog circulation, which was partially offset by increased sales in the safety equipment and accessories market (approximately 3%) due to increased volume and the acquisition of Dyna Corporation in the second quarter of fiscal 1999 (see note 2 to the consolidated financial statements). Educational Resources segment sales increased 10% over the prior year due to pricing (approximately 5%) and new locations (approximately 7%), partially offset by lower enrollment at existing locations (approximately 2%).
Food and Support Services - United States segment operating income increased 10%. Excluding the impact of acquisitions, operating income increased 3% over fiscal 1999 due to the sales increases noted above, partially offset by increased employee healthcare and other operating costs, including a provision in the first quarter for a receivable from a customer that filed for bankruptcy. Food and Support Services - International segment operating income increased 26% over the prior year. Excluding the impact of asset sale gains from both years ($3.8 million and $1.1 million, respectively), foreign currency translation and fiscal 1999 operating losses at a Mexican subsidiary, operating income increased 1% over the prior year due to the sales increases noted above, partially offset by increased operating and business expansion costs. Uniform and Career Apparel - - Rental segment operating income increased 11% over the prior year period due to the sales increases noted above and leveraging of fixed costs, partially offset by costs related to the startup of certain garment manufacturing operations. Operating income in the Uniform and Career Apparel - Direct Marketing segment increased to $10.8 million in fiscal 2000 from $3.9 million in fiscal 1999 due to increased margins and reduced catalog and other costs, partially offset by the impact of lower sales and increased costs related to a new distribution center. Educational Resources segment operating income decreased 7%. Operating results have been adversely impacted by the limited supply and increased cost of labor resulting from the very competitive labor markets, as well as increased employee medical costs. It is anticipated that competition for scarce labor resources will continue to affect results in this segment during fiscal 2001.
Fiscal 1999 Compared to Fiscal 1998
Overview. Sales for the fiscal year ended October 1, 1999 were $6.7 billion, an increase of 2% over fiscal 1998, with increases in all operating segments being partially offset by the impact of the distribution business transaction in fiscal 1998 (see note 2 to the consolidated financial statements). Excluding the impact of the distribution business transaction, sales increased 7% over the prior year. Operating income of $375.2 million increased $42 million or 13% over the prior year. Total Company operating income in fiscal 1998 includes other expense of $5 million as described in note 2 to the consolidated financial statements. Excluding the impact of other expense and the operating results of the distribution business, which are reflected in the Corporate and Other segment, operating income increased 7% over the prior year due to strong performances in the Food and Support Services - United States, Uniform and Career Apparel - Rental, and Educational Resources segments, partially offset by a decline in operating income in the Uniform and Career Apparel - Direct Marketing segment and an increase in costs in the Corporate and Other segment due in part to the impact in 1998 of a gain from the sale of certain assets. Excluding other expense/income, the Company's operating income margin increased to 5.6% from 5.1%, due primarily to the impact of the distribution business transaction noted above.
Interest expense increased $18.4 million or 16% over the prior year due primarily to increased debt levels resulting from the impact of the Tender Offer in June 1998 (see note 7 to the consolidated financial statements).
Segment Results. Food and Support Services - United States segment sales were 9% higher than the prior year due to increased volume (approximately 5%) and the acquisitions described in note 2 to the consolidated financial statements (approximately 4%). Sales in the Food and Support Services - International segment increased 4% versus the prior year due to new accounts (approximately 3%) and increased volume (approximately 3%), partially offset by the unfavorable impact of foreign currency translation (approximately 2%). Sales in the Uniform and Career Apparel - Rental segment increased 6% over the prior year period due to increased volume. Uniform and Career Apparel - Direct Marketing sales increased 1% over the prior year period due to increased sales of safety equipment and related accessories (approximately 4%) and the impact of the Dyna Corporation acquisition (approximately 2%; see note 2 to the consolidated financial statements), partially offset by a decline in sales of uniforms and career apparel. Educational Resources segment sales increased 11% versus the prior year due to pricing and new locations.
Food and Support Services - United States segment operating income increased 14% due to the sales increases noted above and effective cost controls. Food and Support Services - International segment operating income decreased 1% versus the prior year as the impact of the increased volume noted above plus effective cost controls was offset by operating losses at one subsidiary and the unfavorable impact of foreign currency translation. Excluding the impact of the operating losses noted above and foreign currency translation, operating income in the Food and Support Services - International segment increased 19%. Uniform and Career Apparel - Rental segment operating income increased 6% due to the increased volume noted above and gains on disposition of assets, partially offset by costs related to the startup of certain manufacturing operations and the implementation of a new marketing initiative. Operating income in the Uniform and Career Apparel - Direct Marketing segment decreased 62% versus the prior year period due to the decline in sales of uniforms and career apparel noted above, a reduction in gross margin reflecting product mix changes and increased operating costs. Educational Resources segment operating income increased 11% due to the sales growth noted above.
FINANCIAL CONDITION AND LIQUIDITY - Reference to the consolidated statement of cash flows on page S-6 will facilitate understanding of the discussion that follows.
Cash provided by operating activities in fiscal 2000 was $407 million, an increase of $114 million over fiscal 1999, reflecting the growth in operations and rigorous working capital management. Debt increased by $203 million, as cash required to fund acquisitions, capital expenditures and stock repurchases exceeded cash provided by operating activities. The Company currently expects to continue to fund capital expenditures, acquisitions and other liquidity needs from cash provided from operating activities, normal disposals of property and equipment and borrowings available under its credit facilities or note issuances. Currently, the Company has approximately $450 million of unused committed credit availability under its credit facilities. Additionally, the Company has registration statements on file with the Securities and Exchange Commission for the issuance of up to $500 million of debt securities. As of September 29, 2000, the Company had capital commitments of approximately $70 million related to several long-term concession contracts.
During the third quarter of fiscal 2000, the Company entered into two variable rate term loan agreements totaling $125 million, which mature in May 2005. During the fourth quarter, the Company entered into a $45 million variable rate term loan agreement which matures in July 2003. Proceeds from the term loans were used to repay borrowings under the Company's revolving credit facility. Additionally, during the third quarter, the Company entered into interest rate swap agreements totaling $300 million (notional amount) which fix the interest rate on a like amount of variable rate borrowings at an average effective rate of 8.1%. The interest rate swaps have terms of one to three years.
During fiscal 2000, the Company repurchased $53 million of its Class A Common Stock and $190 million of its Class B Common Stock, for $155 million in cash plus installment notes. Additionally, the Company received approximately $31 million related to the issuance of Class B Common Stock to eligible employees, primarily through the exercise of installment stock purchase opportunities. The Company has generally exercised its option to repurchase common stock when shares have become available. The amount of such repurchases and other liquidity needs, including those related to employee benefit plans, in the near term will likely approximate or exceed the fiscal 2000 level.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements that reflect the Company's current views as to future events and financial performance with respect to its operations. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "estimate," "expect," "will be," "will continue," "will likely result," "project," "intend," "plan," "believe," and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of insurance, materials, labor and fuel, financing availability, the outcome of environmental and litigation matters, competition in terms of price and service, the ability of the Company to retain clients and obtain new clients on satisfactory terms, and the effects of general economic conditions. Forward-looking statements speak only as of the date made. The Company undertakes 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 elsewhere from time to time by, or on behalf of, the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk - ------------------------------------------------------------------
The Company is exposed to the impact of interest rate changes and manages this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. The Company does not enter into contracts for trading purposes and does not use leveraged instruments. The information below summarizes the Company's market risks associated with debt obligations and other significant financial instruments as of September 29, 2000 and October 1, 1999. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods. The information presented below should be read in conjunction with note 4 to the consolidated financial statements. For debt obligations, the table presents principal cash flows and related interest rates by expected fiscal year of maturity. Variable interest rates disclosed represent the weighted-average rates of the portfolio at September 29, 2000 and October 1, 1999. For interest rate swaps, the table presents the notional amounts and related weighted-average interest rates by fiscal year of maturity. The variable rates presented are the average forward rates for the term of each contract.
(a) Each balance includes $300 million of senior notes callable by the Company at any time.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements and Schedules at page S-1.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - -----------------------------------------------------------------------
Not Applicable.
PART III
Items 10, 11, 12, and 13 of Part III are incorporated by reference to the Section titled "Election of Directors" in the registrant's Proxy Statement for its annual meeting of stockholders, to be filed with the Commission pursuant to Regulation 14A (except for the stock price performance graph, the committee report on executive compensation and the audit committee report in the Company's Proxy Statement).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------
(a) Financial Statements
See Index to Financial Statements and Schedules at page S-1.
(b) Reports on Form 8-K
None.
(c) Exhibits Required by Item 601 of Regulation S-K
See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Schedules at page S-1.
ARAMARK CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Public Accountants S-2
Consolidated Balance Sheets: As of September 29, 2000 and October 1, 1999 S-3
Consolidated Statements of Income: Fiscal Years 2000, 1999 and 1998 S-5
Consolidated Statements of Cash Flows: Fiscal Years 2000, 1999 and 1998 S-6
Consolidated Statements of Shareholders' Equity: Fiscal Years 2000, 1999 and 1998 S-7
Notes to Consolidated Financial Statements S-10
Consolidated Supporting Schedules Filed:
Schedule Number - --------
II Valuation and Qualifying Accounts and Reserves S-36
All other schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ARAMARK Corporation:
We have audited the accompanying consolidated balance sheets of ARAMARK Corporation (a Delaware corporation) and subsidiaries as of September 29, 2000 and October 1, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended September 29, 2000. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ARAMARK Corporation and subsidiaries as of September 29, 2000 and October 1, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 29, 2000, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania November 6, 2000
S-2
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS September 29, 2000 and October 1, 1999
(dollars in thousands, except share amounts)
The accompanying notes are an integral part of these financial statements.
S-3
ARAMARK CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements.
S-4
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the Fiscal Years Ended September 29, 2000, October 1, 1999 and October 2,
(dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
S-5
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 29, 2000, October 1, 1999 and October 2, (in thousands)
The accompanying notes are an integral part of these financial statements.
S-6
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-7
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED OCTOBER 1, 1999 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-8
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED OCTOBER 2, 1998 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-9
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
The Company's fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The fiscal years ended September 29, 2000, October 1, 1999 and October 2, 1998 are each fifty-two week periods.
PRINCIPLES OF CONSOLIDATION, ETC.
The consolidated financial statements include the accounts of the Company and all its subsidiaries. All significant intercompany balances and transactions have been eliminated. At fiscal 1999 yearend, the Company reclassified its reporting of the reimbursement of direct costs under management fee contracts to an element of sales rather than a reduction of the related expense item. The change in classification, which was made to conform more closely to industry practice, is not a change in revenue recognition policy and has no effect on pre-tax or net income. Prior year amounts have been reclassified to conform with this presentation.
In fiscal 2000, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 did not have a material effect on the consolidated financial statements. At fiscal 2000 yearend, the Company adopted the provisions of Emerging Issues Task Force (EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs", which requires amounts billed to customers for shipping and handling be classified as sales in the income statement. Previously, amounts billed for shipping and handling have been shown as an offset to shipping costs which are classified in costs of services provided in the consolidated income statement. The impact of adopting EITF 00-10, which primarily affects the Company's Direct Marketing segment (see Note 10), was not material to the Company's consolidated financial statements. Prior year amounts have been reclassified to conform with the current year presentation.
Beginning in the first quarter of fiscal 2001, the Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. See Note 4.
The Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin 101 (SAB 101) which sets forth the SEC's guidelines on revenue recognition. The Company must adopt SAB 101 no later than the fourth quarter of fiscal 2001. Adoption of SAB 101 is not expected to have a material impact on consolidated financial condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
S-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". Comprehensive income includes all changes to shareholders' equity during a period, except those resulting from investments by and distributions to shareholders. The components of comprehensive income are shown in the Consolidated Statements of Shareholders' Equity.
CURRENCY TRANSLATION
Gains and losses resulting from the translation of financial statements of non-U.S. subsidiaries are reflected as a component of comprehensive income in shareholders' equity. Currency transaction gains and losses included in operating results for fiscal 2000, 1999 and 1998 were not significant.
CURRENT ASSETS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories are valued at the lower of cost (principally the first-in, first-out method) or market. The LIFO (last-in, first-out) method of determining cost is used to value directly marketed career apparel and public safety clothing and equipment. The stated value of inventories determined using the LIFO method is not significantly different from replacement or current cost. Personalized work apparel and linens in service are recorded at cost and are amortized over their estimated useful lives, approximately two years.
The components of inventories are as follows:
2000 1999 - ------------------------------------------------------------------------------ Food 26.2% 25.8% Career apparel, safety equipment and linens 68.7% 69.0% Parts, supplies and novelties 5.1% 5.2% - ------------------------------------------------------------------------------ 100.0% 100.0% - ------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their estimated useful lives on a straight-line basis. Gains and losses on dispositions are included in operating results. Maintenance and repairs are charged to operations currently, and replacements and significant improvements are capitalized. The estimated useful lives for the major categories of property and equipment are 10 to 40 years for buildings and improvements and 3 to 10 years for service equipment and fixtures. Depreciation expense in fiscal 2000, 1999, and 1998 was $162.8 million, $146.7 million and $144.3 million, respectively.
GOODWILL
Goodwill, which represents the excess of cost over fair value of the net assets of acquired businesses, is being amortized on a straight-line basis principally over 40 years. The Company develops operating income projections for each of its lines of business and evaluates the recoverability and amortization period of goodwill using these projections. Based upon management's current assessment, the estimated remaining amortization period of goodwill is appropriate and the remaining balance is fully recoverable. Accumulated amortization at September 29, 2000 and October 1, 1999 was $220.8 million and $199.3 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
OTHER ASSETS
Other assets consist primarily of investments in 50% or less owned entities, contract rights, customer lists, computer software costs, and long-term receivables. Investments in which the Company owns more than 20% but less than a majority are accounted for using the equity method. Investments in which the Company owns less than 20% are accounted for under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" or the cost method, as applicable. Contract rights and customer lists are being amortized on a straight-line basis over the expected period of benefit, 3 to 20 years.
OTHER LIABILITIES
Other noncurrent liabilities consist primarily of deferred compensation, insurance accruals, deferred gains arising from sale and leaseback transactions and subordinated installment notes arising from repurchases of common stock.
The Company is self-insured for a limited portion of the risk retained under its general liability and workers' compensation arrangements. Self-insurance reserves are determined based on actuarial analyses. The self-insurance reserves for workers' compensation insurance are accrued on a present value basis using a discount rate which approximates a risk-free rate.
EARNINGS PER SHARE
Earnings per share is reported on a Common Stock, Class B equivalent basis (which reflects Common Stock, Class A shares converted to a Class B basis, ten for one - see Note 7). Basic earnings per share is based on the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share is based on the weighted average number of common shares outstanding during the respective periods, plus the common equivalent shares, if dilutive, that would result from the exercise of stock options. Earnings applicable to common stock and common shares utilized in the calculation of basic and diluted earnings per share are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998 ---- ---- ---- (in millions)
Interest Paid $136.3 $131.4 $109.5 Income Taxes Paid $60.4 $70.5 $54.9
Significant noncash investing and financing activities are as follows:
o During fiscal 2000, 1999 and 1998, the Company contributed $7.1 million, $14.5 million and $0.4 million, respectively, of Class A Common Stock to its employee benefit plans to fund previously accrued obligations. In addition, during fiscal 2000, 1999 and 1998, the Company contributed $2.1 million, $2.0 million and $1.9 million, respectively, of stock units to its stock unit retirement plan in satisfaction of its accrued obligations. See Note 5.
o During fiscal 1998, the Company contributed assets and liabilities with a net book value of $14 million into a newly formed joint venture. See Note 2.
o During fiscal 2000, 1999 and 1998, the Company received $31.8 million, $16.7 million and $14.9 million, respectively, of employee notes under its Deferred Payment program as partial consideration for the issuance of Common Stock, Class B. Also, during fiscal 2000, 1999 and 1998, the Company issued installment notes of $75.5 million, $6.7 million and $18.4 million, respectively, as partial consideration for repurchases of Common Stock. See Note 7.
NOTE 2. ACQUISITIONS AND DIVESTITURES, ETC.:
During the third quarter of fiscal 2000, the Company acquired substantially all of the food and beverage concessions and venue management businesses of Ogden Corporation for approximately $235 million in cash and assumed debt. The acquisition was accounted for as a purchase and was financed through the Company's revolving credit facility. The results of the food and beverage concessions businesses of Ogden Corporation have been included in the accompanying consolidated financial statements since the date of acquisition. The costs of the acquisition were allocated to the assets acquired and liabilities assumed based on a preliminary estimate of their respective fair values. The purchase price allocation may be revised in the future based on final estimates. Amounts allocated to goodwill are being amortized on a straight-line basis over 40 years.
In connection with this acquisition, the Company has an agreement to sell the venue management portion of the business to an affiliate for approximately $35 million. The sale of the venue management contracts is contingent upon the approval of other parties to the contracts. As of September 29, 2000, venue management contracts representing $21 million of the total selling price have been transferred and the proceeds received by the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS AND DIVESTITURES, ETC.: (Continued)
Had the acquisition taken place at the beginning of the fiscal periods, pro forma sales for fiscal 2000 and fiscal 1999 would have been approximately $7.5 billion and $7.1 billion, respectively. Pro forma net income and earnings per share would not have been materially different from reported results. These pro forma disclosures are unaudited and are based on historical results, adjusted for the impact of certain acquisition related adjustments, such as: increased amortization of intangibles, increased interest expense on acquisition debt, and the related income tax effects. Pro forma results do not reflect any synergies that might be achieved from combined operations and therefore, in management's opinion, are not indicative of what actual results would have been if the acquisition had occurred at the beginning of the respective periods. Pro forma results are not intended to be a projection of future results.
During the second quarter of fiscal 1999, the Company acquired Restaura, Inc., a provider of food and support services, and Dyna Corporation, a leading distributor of emergency medical supplies for approximately $46 million and $13 million in cash, respectively. The acquisitions were accounted for using the purchase method of accounting. The Company's pro forma results from operations for fiscal 1999 and 1998 would not have been materially different assuming the acquisitions had occurred at the beginning of the respective periods.
In the fourth quarter of fiscal 1998, the Company formed a joint venture between its magazine and book distribution business and another leading magazine and book wholesaler, Anderson News Corporation. The Company contributed substantially all of its magazine and book distribution business assets and liabilities in exchange for a minority interest in the venture. In connection with the transaction, the Company recorded a $5 million pre-tax charge, which is reflected as "Other expense" in the accompanying consolidated statements of income. The Company accounts for its interest in the venture on the cost basis.
During the fourth quarter of fiscal 1998, the Company acquired Facilities Resource Management Co., a provider of energy and facilities management consulting services, for approximately $20 million in cash and common stock. The acquisition was accounted for using the purchase method of accounting. The Company's pro forma results of operations for fiscal 1998 would not have been materially different assuming the acquisition had occurred at the beginning of the fiscal period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. EXTRAORDINARY ITEM:
During fiscal 1998, the Company exercised its option to redeem its $100 million 8.5% subordinated notes at a price of 104.25% of the principal amount and also redeemed a $50 million 8% note due April 2002 for a premium. The resultant extraordinary charge on these transactions was $4.5 million, or $0.04 per share.
NOTE 4. BORROWINGS:
Long-term borrowings at September 29, 2000 and October 1, 1999 are summarized in the following table:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BORROWINGS: (Continued)
The non-amortizing $1.0 billion revolving credit facility ("Credit Agreement") is provided by a group of banks and matures in March 2005. Interest under the Credit Agreement is based on the Prime Rate, LIBOR plus a spread of .18% to .70% (as of September 29, 2000 - .30%) or the Certificate of Deposit Rate plus a spread of .28% to .80% (as of September 29, 2000 - .40%), at the option of the Company. There is a fee of .10% to .30% (as of September 29, 2000 - .15%) on the entire credit facility. The spread and fee margins are based on certain financial ratios as defined.
The non-amortizing C$80 million Canadian revolving credit facility provides for either U.S. dollar or Canadian dollar borrowings and matures in June 2001. Interest on this facility is based on the Canadian Bankers Acceptance Rate, U.S. Prime Rate, Canadian Prime Rate or LIBOR plus a spread of up to 5/8%, as defined. As of September 29, 2000, all borrowings under this facility are payable in Canadian dollars, with a weighted average interest rate of 6.4%. There is a fee of .17% on the entire credit facility.
The $170 million Bank Term Loans ("Term Loans") are comprised of three separate Term Loans used to repay borrowings under the Credit Agreement. Interest under the Term Loans is based on the higher of (a) the Prime Rate and (b) the sum of .5% plus the Federal Funds Rate; or LIBOR plus a spread, as defined in the Term Loans (approximately .90% for all three loans as of September 29, 2000). The spread is based on certain financial ratios, as defined in the respective Term Loans. $45 million of the Term Loans mature in July 2003 and the remaining $125 million matures in May 2005.
The Company's ARAMARK Educational Resources, Inc. (AER) subsidiary also has a $125 million revolving credit facility with a group of banks. The credit facility matures in August 2003, with quarterly commitment reductions of $5 million starting in September 2001, which increase to $6.25 million starting September 2002. Interest under the credit facility is based on the Prime Rate plus a spread of 0% to 1/4% or LIBOR plus a spread of 1/2% to 1%, at the option of AER. There is a fee of .20% to .375% (as of September 29, 2000 - .20%) on the unborrowed portion of the credit facility. The spread and fee margins are based on certain financial ratios as defined. As of September 29, 2000 there were no borrowings outstanding under this credit facility.
The 6.75% and 7.0% notes may be redeemed, in whole or in part, at any time at the Company's option. The redemption price equals the greater of (i) 100% of the principal amount or (ii) an amount based on the discounted present value of scheduled principal and interest payments, as defined.
The 6.79% note is payable in $25 million annual installments, with a final maturity of January 2003.
The 7.25% notes and debentures may be exchanged, in whole or in part, at the option of the holder, for 7.10% senior notes due December 2006. The Company has the right to redeem these notes and debentures, at par, upon being presented with a notice of conversion or at any time after June 2004.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BORROWINGS: (Continued)
Debt repayments of $25.0 million, contractually due in fiscal 2001, have been classified as non-current in the accompanying consolidated balance sheet as the Company has the ability and intent to finance the repayments through additional borrowings under the Credit Agreement. Accrued interest on borrowings totaling $36.6 million at September 29, 2000 and $29.7 million at October 1, 1999 is included in current liabilities as "Other accrued expenses."
The Company utilizes derivative financial instruments, such as interest rate swap and forward exchange agreements to manage changes in market conditions related to debt obligations and foreign currency exposures. At September 29, 2000 and October 1, 1999, the Company has $350 million and $125 million, respectively, of interest rate swap agreements fixing the rate on a like amount of variable rate borrowings under the Credit Agreement at an average effective rate of 7.9% and 6.5%, respectively. As of September 29, 2000, interest rate swap agreements remain in effect for periods ranging from 4 to 32 months. All interest rate swaps are accounted for as hedges under the accrual method with the net payments under the terms of the swap agreements recognized currently in income as a component of interest expense. Gains or losses on the termination of interest rate swaps are deferred and amortized over the remaining life of the terminated swap agreement. Interest rate swaps, for which the designated debt instrument being hedged is extinguished, are accounted for on the fair value method from the extinguishment date, if not concurrently terminated, with gains and losses recognized currently in the consolidated statement of income. The counterparties to the above derivative agreements are major international banks. The Company continually monitors its positions and credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties.
The following summarizes the fair value of the Company's financial instruments as of September 29, 2000 and October 1, 1999. The fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the respective periods.
The Company is required to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, beginning in the first quarter of fiscal 2001. This standard, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value and that changes in fair value be recorded each period in current earnings or comprehensive income. The Company anticipates that the adoption of SFAS No. 133 will result in the recording of a cumulative adjustment as of the beginning of fiscal 2001 to increase current liabilities to record the fair value of interest rate swap agreements of approximately $4.0 million, and a decrease to other comprehensive income of approximately $2.5 million (net of tax). The Company currently does not expect the adoption of SFAS No. 133 to have a material impact on future net income as current hedging instruments are considered to be highly effective.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BORROWINGS: (Continued)
The Credit Agreement contains restrictive covenants which provide, among other things, limitations on liens, dispositions of material assets and repurchases of capital stock. The terms of the Credit Agreement also require that the Company maintain certain specified minimum ratios of cash flow to fixed charges and to total borrowings and certain minimum levels of net worth (as defined). At September 29, 2000, the Company was in compliance with all of these covenants. Assets with a net book value of $2.1 million at September 29, 2000, are subject to liens under several of the Company's borrowing arrangements.
Long-term borrowings maturing in the next five fiscal years are as follows:
Amount -------------- (in thousands)
2001 $ 59,736 2002 25,518 2003 70,389 2004 304,311 2005 911,127
NOTE 5. EMPLOYEE PENSION AND PROFIT SHARING PLANS:
In the United States, the Company maintains qualified contributory and non-contributory retirement plans for eligible employees, with Company contributions to the plans based on earnings performance or salary level. The Company has a non-qualified stock unit retirement plan for certain employees. The total expense of the above plans for fiscal 2000, 1999 and 1998 was $18.0 million, $16.2 million and $15.7 million, respectively. During fiscal 2000, 1999 and 1998, the Company contributed 42,800 shares, 106,703 shares and 4,161 shares, respectively, of Common Stock, Class A to these plans to partially fund previously accrued obligations. In addition, during fiscal 2000, 1999, and 1998, the Company contributed to the stock unit retirement plan 119,984 stock units, 135,508 stock units and 163,873 stock units, respectively, which are convertible into Common Stock, Class B, in satisfaction of its accrued obligations. The value of the stock units was credited to capital surplus. The Company participates in various multi-employer union administered pension plans. Contributions to these plans, which are primarily defined benefit plans, result from contractual provisions of labor contracts and were $15.8 million, $15.5 million and $14.8 million for fiscal 2000, 1999 and 1998, respectively.
Additionally, the Company maintains several contributory and non-contributory defined benefit pension plans, primarily in Canada and the United Kingdom. The projected benefit obligation of these plans as of September 29, 2000, which is fully funded, was $61.0 million. Pension expense related to these plans is not material to the consolidated financial statements.
NOTE 6. INCOME TAXES:
The Company accounts for income taxes following the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires deferred tax assets or liabilities to be recognized for the estimated future tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities based on the enacted tax law and statutory tax rates applicable to the periods in which the temporary differences are expected to affect taxable income. In September 1998 the Company settled certain prior year tax returns.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES: (Continued)
The components of income before income taxes by source of income are as follows:
The provision for income taxes varies from the amount determined by applying the United States Federal statutory rate to pre-tax income as a result of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES: (Continued)
As of September 29, 2000 and October 1, 1999, the components of deferred taxes are as follows:
2000 1999 --------- -------- (in thousands) Deferred tax liabilities: Property and equipment $ 77,902 $ 77,929 Inventory 1,840 6,431 Investments 21,386 10,161 Other 14,096 15,731 -------- -------- Gross deferred tax liability 115,224 110,252 -------- --------
Deferred tax assets: Insurance $ 9,995 $ 7,416 Employee compensation and benefits 48,018 43,682 Accruals and allowances 22,935 30,744 Other 2,708 4,856 -------- -------- Gross deferred tax asset 83,656 86,698 -------- -------- Net deferred tax liability $ 31,568 $ 23,554 ======== ========
NOTE 7. CAPITAL STOCK:
There are two classes of common stock authorized and outstanding, Common Stock, Class A and Common Stock, Class B. Each Class A and Class B Share is entitled to one vote on all matters submitted to shareholders, voting together as a single class except where otherwise required by law. Each Class A Share is entitled to ten times the dividends and other distributions payable on each Class B Share.
On June 15, 1998, the Company completed a cash tender offer (the "Tender Offer") for outstanding shares of its Class A common stock at a price of $500 per share (pre-split). Pursuant to the Tender Offer, the Company repurchased 1,062,485 shares (pre-split) for an aggregate purchase price of $531.2 million plus transaction costs.
On August 11, 1998, the Company's Board of Directors declared, effective September 1, 1998, a three-for-one split of the Class B and Class A Common Stock effected in the form of a stock dividend to shareholders of record on September 1, 1998. The stated par value of $.01 per share of Class B and Class A common stock was not changed.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CAPITAL STOCK: (Continued)
As of September 29, 2000, the Company's stock option plans provided for the issuance of up to 134,584,926 options to purchase shares of Common Stock, Class B. The exercise price of each option is equal to the current fair market value at the date of grant. The Company granted installment stock purchase opportunities under its stock ownership program in fiscal 2000, 1999 and 1998, which provide for the purchase of shares of Common Stock, Class B. Installment stock purchase opportunities are exercisable in six annual installments with the exercise price of each purchase opportunity equal to the current fair market value at the time the purchase opportunity is granted. The Company has a program to grant non-qualified stock options to additional qualified employees on an annual basis. Under the program, options begin to vest after three years and may be exercised for a period of three years after vesting. The Company also grants cumulative installment stock purchase opportunities under its existing stock ownership program which are similar to the installment stock purchase opportunities discussed above; however, the number of installments and vesting schedule may vary and any purchase opportunities not exercised during an installment period may be carried forward to subsequent installment periods. The Company has a Deferred Payment Program which enables holders of installment purchase opportunities to defer a portion of the total amount required to exercise the options. Interest currently accrues on deferred payments at rates ranging from 7.75% to 8.75% and is payable when the deferred payments are due. At September 29, 2000 and October 1, 1999, the receivables from individuals under the Deferred Payment Program were $2.4 million and $5.8 million, respectively, which are reflected as a reduction of Shareholders' Equity. The deferred payments are full recourse obligations and the Company holds as collateral all shares purchased in which any portion of the purchase price is financed under the Deferred Payment Program until the deferred payment is received from the individual by the Company. During fiscal 2000 and 1999, the Company sold for cash, without recourse, approximately $27 million and $44 million, respectively, of Deferred Payment Program notes receivable. The sales price approximated book value and the proceeds were used to repay borrowings under the credit facility. Status of the options under the various ownership programs, adjusted to reflect the three-for-one stock split in fiscal 1998, follows:
The exercise prices on outstanding options at September 29, 2000 range from $4.50 to $16.50 with a weighted average remaining life of approximately three years. The Company has reserved 19,991,742 shares of Common Stock, Class B at September 29, 2000 for issuance of stock pursuant to its employee ownership and benefit programs.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized related to the plans described above. If compensation cost for these plans had been determined using the fair-value method prescribed by SFAS No. 123, "Accounting for Stock Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CAPITAL STOCK: (Continued)
2000 1999 1998 ---- ---- ----
Net Income As reported $167,960 $150,191 $129,236 Pro forma $163,760 $146,501 $125,658
Earnings per share As reported: Basic $1.88 $1.59 $1.14 Diluted $1.77 $1.48 $1.06
Pro forma: Basic $1.83 $1.56 $1.10 Diluted $1.72 $1.44 $1.03
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to fiscal 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The weighted average fair value of options granted in fiscal 2000, 1999 and 1998 was $2.64, $1.61 and $1.12 per option, respectively. As the Company's stock is not publicly traded, the fair value of each option was estimated on the grant date using the minimum value method (which excludes a volatility assumption), with the following assumptions:
2000 1999 1998 ------ ------ ------
Risk-free interest rate 5.2 - 6.1% 4.5 - 4.8% 5.3 - 5.9% Expected life in years 3.4 3.3 3.2 Dividend yield 0% 0% 0%
The Company and its shareholders are parties to an Amended and Restated Stockholders' Agreement. Pursuant to this agreement, holders of common stock who are individuals, upon their death, complete disability or normal retirement, may cause the Company to repurchase up to 30% of their shares for cash at the then appraised value, but only to the extent such repurchase by the Company is permitted under the Credit Agreement. Under this Credit Agreement restriction, repurchases of capital stock cannot exceed an aggregate limit, which amount was $20 million at September 29, 2000 and October 1, 1999. Pursuant to interpretations of its rules related to "Redeemable Preferred Stock," the Securities and Exchange Commission has requested that these amounts representing the Company's potential repurchase of its Common Stock be presented as a separate item and accordingly, the Company's Shareholders' Equity reflects this reclassification in the consolidated financial statements. Also, the Shareholders' Agreement provides that the Company may, at its option, repurchase shares from individuals who are no longer employees. Such repurchased shares may be resold to others including replacement personnel at prices equal to or greater than the repurchase price. Generally, payment for shares repurchased can be, at the Company's option, in cash or subordinated installment notes, which are subordinated to all other indebtedness of the Company. Interest on these notes is payable semi-annually and principal payments are made annually over varying periods not to exceed ten years. The noncurrent portion of these notes ($48.3 million as of September 29, 2000 and $25.1 million as of October 1, 1999) is included in the consolidated balance sheets as "Other Noncurrent Liabilities" and the current portion of these notes ($47.8 million as of September 29, 2000 and $18.9 million as of October 1, 1999) is included in the consolidated balance sheets as "Accounts Payable."
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES:
Rental expense for all operating leases was $167.4 million, $146.5 million and $143.2 million for fiscal 2000, 1999 and 1998, respectively.
Following is a schedule of the future minimum rental and similar commitments under all noncancelable operating leases as of September 29, 2000:
Fiscal Year - ---------------------------------------------------------------------------- (in thousands) 2001 $221,354 2002 121,758 2003 108,872 2004 95,465 2005 74,492 Subsequent years 299,888 - ---------------------------------------------------------------------------- Total minimum rental obligations $921,829 ============================================================================
The Company has capital commitments of approximately $70 million at September 29, 2000 in connection with several long-term concession contracts. The Company is party to certain claims and litigation. Such items include, among others, employment matters, compliance with various government regulations (including certain issues related to divested businesses), contractual disputes and other matters arising in the normal course of business. The Company is vigorously defending these matters and believes that the ultimate resolution is not likely to have a material effect on the consolidated financial condition or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. QUARTERLY RESULTS (Unaudited):
The following table summarizes quarterly financial data for fiscal 2000 and 1999:
In the first and second fiscal quarters, within the Food and Support Services - United States segment, there is a lower level of activity at the higher margin leisure and recreational food service operations which is partly offset by increased activity in the educational market. However, in the third and fourth fiscal quarters, there is a significant increase at leisure and recreational accounts which is partially offset by the effect of summer closings in the educational market. In addition, there is a seasonal increase in volume of directly marketed work clothing during the first quarter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BUSINESS SEGMENTS:
The Company provides or manages services in three strategic markets; Food and Support Services, Uniform and Career Apparel and Educational Resources which are organized and managed by the following reportable business segments:
Food and Support Services - United States - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational, governmental and healthcare institutions and in recreational and other facilities serving the general public.
Food and Support Services - International - Food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational, governmental and healthcare institutions and in recreational and other facilities serving the general public. Operations are conducted in Belgium, Canada, the Czech Republic, Germany, Hungary, Japan, Korea, Mexico, Spain and the United Kingdom.
Uniform and Career Apparel - Rental - Rental, sale, cleaning, maintenance and delivery of personalized uniform and career apparel and other textile items on a contract basis. Also provided are walk-off mats, cleaning cloths, disposable towels and other environmental control items.
Uniform and Career Apparel - Direct Marketing - Direct marketing of personalized uniforms and career apparel, public safety equipment and accessories to businesses, public institutions and individuals.
Educational Resources - Provider of infant, toddler, pre-school and school-age learning programs through community-based child care centers, before and after school programs, employer on-site child care centers and private elementary schools.
Corporate and Other - The corporate and other segment includes general corporate expenses not specifically allocated to an individual segment and the sales and operating results of the company's magazine and book distribution business which was divested in fiscal 1998 (See Note 2). Included in the Corporate and Other segment in fiscal 1998 are operating losses of approximately $14 million related to the magazine and book distribution business.
Sales by segment are substantially comprised of services to unaffiliated customers and clients. Operating income reflects expenses directly related to individual segments plus an allocation of corporate expenses applicable to more than one segment.
Net property and equipment by geographic area is as follows:
2000 1999 ---------- ----------- (in millions)
United States $1,006.1 $887.6 International 47.1 46.1 -------- ------
Total $1,053.2 $933.7 ======== ======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BUSINESS SEGMENTS: (Continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF ARAMARK CORPORATION AND SUBSIDIARIES
The following condensed consolidating financial statements of ARAMARK Corporation and subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.
These condensed consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the consolidated financial statements. ARAMARK Services, Inc. is the borrower under the Credit Agreement and certain other senior debt described in Note 4 and incurs interest expense thereunder. The interest expense and certain administrative costs are only partially allocated to all of the other subsidiaries of the Company. The Company has fully and unconditionally guaranteed certain debt obligations of ARAMARK Services, Inc., its wholly-owned subsidiary, which totaled $2.1 billion as of September 29, 2000 (See Note 4). Non-guarantor subsidiaries are all wholly owned subsidiaries of the Company that are not subsidiaries of ARAMARK Services, Inc., and therefore are not issuers under the Credit Agreement and certain other senior debt described in Note 4. The Non-guarantor subsidiaries do not guarantee any registered securities of the Company or ARAMARK Services, Inc., although certain Non-guarantor subsidiaries guarantee, along with the Company, certain other unregistered debt.
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ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED SEPTEMBER 29, 2000, OCTOBER 1, 1999 AND OCTOBER 2, 1998
(1) Allowances granted and amounts determined not to be collectible.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARAMARK CORPORATION
By: John M. Lafferty ---------------------------------- John M. Lafferty Senior Vice President, Controller and Chief Accounting Officer
November 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 22, 2000.
Signature Title - --------- ----- Joseph Neubauer Chairman and Director - ------------------------------ (Principal Executive Officer) Joseph Neubauer
L. Frederick Sutherland Executive Vice President - ------------------------------ (Principal Financial Officer) L. Frederick Sutherland
John M. Lafferty Senior Vice President, Controller - ------------------------------ and Chief Accounting Officer John M. Lafferty (Principal Accounting Officer)
Lawrence T. Babbio, Jr. Patricia C. Barron Robert J. Callander Leonard S. Coleman, Jr. Ronald R. Davenport Directors Edward G. Jordan Thomas H. Kean James E. Ksansnak James E. Preston
Donald S. Morton - ------------------------------ Donald S. Morton Attorney-in-Fact
INDEX TO EXHIBITS
Copies of any of the following exhibits are available to stockholders for the cost of reproduction upon written request from the Assistant Secretary, ARAMARK Corporation, 1101 Market Street, Philadelphia, PA 19107.
3.1 Restated Certificate of Incorporation is incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1999.
3.2 Corporate By-Laws, as ratified and approved February 8, 2000, are incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1999.
4.1 Amended and Restated Stockholders' Agreement is incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994.
4.2 Amended and Restated Registration Rights Agreement is incorporated by reference to the Company's quarterly report on Form 10-Q for the fiscal quarter ended April 1, 1988.
4.3 7.0% Guaranteed Notes due July 15, 2006; Indenture dated July 15, 1991, is incorporated by reference to the Company's Registration Statements on Form S-3, Registration No. 33-525887, 33-64259 and 333-53161.
4.4 6 3/4% Guaranteed Notes due August 1, 2004; Indenture dated July 15, 1991, is incorporated by reference to the Company's Registration Statement on Form S-3, Registration No. 333-53161.
Long-term debt instruments authorizing debt that does not exceed 10% of the total consolidated assets of the Company are not filed herewith but will be furnished on request of the Commission.
10.1 1999 Employment Agreement with Joseph Neubauer is incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1999.
10.2 Agreement relating to employment and post-employment competition dated October 4, 1991 with William Leonard is incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1993.
10.3 Agreement relating to employment and post-employment competition dated June 7, 1993 with L. Frederick Sutherland is incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1996.
10.4 Agreement relating to employment and post-employment competition dated November 19, 1996 with Brian G. Mulvaney.
10.5 Agreement relating to employment and post-employment competition dated April 17, 2000 with John J. Zillmer.
10.6 Credit and Guaranty Agreement dated January 7, 1998 and amendments thereto dated May 7, 1998 and September 10, 1998 are incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 1998.
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23 Consent of Arthur Andersen LLP
24 Powers of Attorney
27 Financial Data Schedule