UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 28, 1997
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Commission file number 1-8827
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ARAMARK CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-2319139
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ARAMARK TOWER
1101 Market Street
Philadelphia, Pennsylvania 19107
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(Address of principal executive offices) (Zip Code)
(215)238-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class A common stock outstanding at April 25, 1997: 1,993,813
Class B common stock outstanding at April 25, 1997: 21,121,168
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
March 28, September 27,
1997 1996
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Current Assets:
Cash and cash equivalents $ 28,868 $ 25,283
Receivables 502,737 576,447
Inventories, at lower of cost or market 351,093 316,043
Prepayments and other current assets 100,356 67,977
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Total current assets 983,054 985,750
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Property and Equipment, net 842,843 824,635
Goodwill 667,491 643,880
Other Assets 322,621 376,505
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$ 2,816,009 $ 2,830,770
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 17,707 $ 26,041
Accounts payable 389,128 496,040
Accrued expenses and other liabilities 459,556 441,760
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Total current liabilities 866,391 963,841
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Long-Term Borrowings 1,319,646 1,321,865
Deferred Income Taxes and Other Noncurrent Liabilities 231,269 230,249
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 23,367 18,614
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class A common stock, par value $.01 20 20
Class B common stock, par value $.01 213 227
Earnings retained for use in the business 389,797 309,437
Cumulative translation adjustment 4,516 5,131
Unrealized gain on marketable securities, net 4,157 --
Impact of potential repurchase feature of
common stock (23,367) (18,614)
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Total 375,336 296,201
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$ 2,816,009 $ 2,830,770
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months Ended For the Six Months Ended
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March 28, March 29, March 28, March 29,
1997 1996 1997 1996
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Revenues $ 1,458,017 $ 1,464,626 $ 3,144,768 $ 3,014,000
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of services provided 1,336,421 1,343,275 2,876,647 2,756,907
Depreciation and amortization 47,174 45,785 95,780 90,478
Selling and general corporate expenses 18,702 20,260 39,892 42,285
Other expense (income), net (72,393) -- (72,393) (2,850)
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1,329,904 1,409,320 2,939,926 2,886,820
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Operating income 128,113 55,306 204,842 127,180
Interest Expense, net 29,518 30,068 60,002 60,320
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Income before income taxes 98,595 25,238 144,840 66,860
Provision for Income Taxes 10,643 9,939 29,233 26,572
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Income before Extraordinary Item 87,952 15,299 115,607 40,288
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) -- 1,589 -- 1,589
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Net income $ 87,952 $ 13,710 $ 115,607 $ 38,699
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Earnings Per Share:
Income before extraordinary item $ 1.95 $ .32 $ 2.56 $ .84
Net income $ 1.95 $ .28 $ 2.56 $ .80
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
For the Six Months Ended
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March 28, March 29,
1997 1996
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Cash flows from operating activities:
Net income $ 115,607 $ 38,699
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 95,780 90,478
Income taxes deferred (2,502) (12,789)
Extraordinary item -- 1,589
Changes in noncash working capital (106,049) (79,010)
Other operating activities, including gain on
divestiture of certain businesses (73,965) (8,918)
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Net cash provided by operating activities 28,871 30,049
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Cash flows from investing activities:
Purchases of property and equipment (90,449) (77,222)
Disposals of property and equipment 6,642 5,995
Divestiture of certain businesses 108,884 50,823
Acquisition of certain businesses (8,836) (10,295)
Other investing activities (3,125) (7,431)
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Net cash provided by (used in) investing activities 13,116 (38,130)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 133,524 129,219
Payment of long-term borrowings including premiums (144,253) (93,078)
Proceeds from issuance of common stock 12,718 9,978
Repurchase of stock (38,843) (35,822)
Other financing activities (1,548) (621)
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Net cash provided by (used in) financing activities (38,402) 9,676
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Increase in cash and cash equivalents 3,585 1,595
Cash and cash equivalents, beginning of period 25,283 23,082
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Cash and cash equivalents, end of period $ 28,868 $ 24,677
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the statements include all adjustments (which
include only normal recurring adjustments) required for a fair statement
of financial position, results of operations and cash flows for such
periods. The results of operations for the interim periods are not
necessarily indicative of the results for a full year.
(2) OTHER INCOME:
In January 1997, the Company sold an approximate 83% interest in its
Spectrum Healthcare Services, Inc. subsidiary (Spectrum). Total
consideration was approximately $158 million and included cash ($125
million), notes and a warrant. The transaction resulted in a pre-tax gain
of $72.4 million, net of transaction costs and reserves established for
indemnification of certain matters related to insurance, legal and other
matters ($20 million), and is reflected as "other expense (income)" in
the accompanying condensed consolidated statements of income. No income
taxes have been provided on the gain due to permanent differences in the
underlying book and tax basis of the divested entity. In fiscal 1996,
this business had approximately $500 million in annual revenues and a
normalized operating margin of approximately 4%. Cash proceeds from the
divestiture were used to repay borrowings under the $1 billion credit
facility.
In the first quarter of fiscal 1996, the Company sold the King Size
division of its Uniform Services business. The net selling price was
approximately $51 million in cash plus "warrants" and resulted in a
pre-tax gain of $37 million, which was offset by other charges related to
asset realization ($20 million) and insurance, legal and other matters
($14 million), including a $2 million charge for environmental
liabilities, and is reflected as "other expense (income)" in the
accompanying consolidated statement of income. The environmental
liabilities relate to several minor remediation projects involving
properties no longer in service. These remediation projects will not have
any material on-going financial impact on the Company's financial
statements. The King Size operations were not material to the Company's
consolidated revenues or operating income.
(3) LONG TERM BORROWINGS:
In November 1996, the Company issued $125 million of 7.10% senior notes
due December 2006. The net proceeds from the note offering were used to
repay borrowings under the $1 billion credit facility.
In January 1996, the Company redeemed its $80 million 8-1/4% senior note
for a premium resulting in an extraordinary item for debt extinguishment
of $1.6 million (net of tax benefit of $1.0 million) and issued a $125
million 6.79% senior note due January 2003, with annual principal
repayments of $25 million beginning January 1999.
(4) CAPITAL STOCK:
During the first six months of fiscal 1997, pursuant to the ARAMARK
Ownership Program, employees purchased 2,048,313 shares or $20.6 million
of Class B Common Stock for $12.7 million of cash and $7.9 million of
deferred payment obligations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $53.4 million and $54.6 million and
income tax payments of $38.8 million and $46.3 million during the first
six months of fiscal 1997 and 1996, respectively. During the first six
months of fiscal 1997, the Company purchased $17.3 million of its Class A
Common Stock and $36.3 million of its Class B Common Stock, issuing $14.8
million in subordinated installment notes as partial consideration.
(6) PROSPECTIVE ACCOUNTING CHANGES:
In fiscal 1997, the Company is required to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation". As permitted by SFAS 123, the Company will
continue to apply its existing accounting policy under APB Opinion No.
25, "Accounting for Stock Issued to Employees" and will provide the
expanded disclosures required by SFAS 123 in the fiscal 1997 Form 10-K.
In fiscal 1998, the Company is required to adopt the provisions of SFAS
No. 128, "Earnings per Share". SFAS No. 128 requires the disclosure of
"basic" and "diluted" earnings per share. For the three and six month
periods ended March 28, 1997, pro forma basic earnings per share under
SFAS No. 128 would be $2.06 and $2.72, respectively. Diluted earnings per
share would not be materially different from reported earnings per share.
(7) ARAMARK SERVICES, INC. AND SUBSIDIARIES:
The following financial information has been summarized from the separate
consolidated financial statements of ARAMARK Services, Inc. (a wholly
owned subsidiary of ARAMARK Corporation) and the subsidiaries which it
currently owns. ARAMARK Services, Inc. is the borrower under the
revolving credit facility and certain other senior debt agreements and
incurs the interest expense thereunder. This interest expense is only
partially allocated to all of the other subsidiaries of ARAMARK
Corporation.
For the Three Months Ended For the Six Months Ended
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March 28, March 29, March 28, March 29,
1997 1996 1997 1996
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(in thousands)
Revenues $853.5 $820.0 $1,756.8 $1,653.4
Cost of services provided 804.5 773.9 1,652.4 1,559.6
Net income 5.5 5.2 14.5 7.4
March 28, September 27,
1997 1996
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(in thousands)
Current assets $ 406.2 $ 395.2
Noncurrent assets 1,630.2 1,630.0
Current liabilities 501.9 495.1
Noncurrent liabilities 1,410.1 1,419.6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
Revenues of $1.5 billion for the second quarter were equal with the prior year,
and revenues of $3.1 billion for the six month period increased 4% over the
prior year period. Operating income for the three and six month periods was
$128.1 million and $204.8 million, respectively, which includes a gain of $72.4
million from the divestiture of Spectrum Healthcare Services, Inc. (Spectrum),
which is reflected as "other expense (income)" in the condensed consolidated
statements of income (see note 2 to the condensed consolidated financial
statements). Excluding "other expense (income)" and the operating results for
Spectrum, revenues and operating income increased 8% for the second quarter and
increased 8% and 10%, respectively, for the six months compared to the prior
year periods. Interest expense for the three and six month periods decreased 2%
and 1%, respectively from the prior year periods due to lower interest rates,
partially offset by increased debt levels to finance acquisitions and working
capital requirements. The effective income tax rate for the three and six month
periods was 10.8% and 20.2%, respectively, compared to 39.4% and 39.7% in the
comparable prior year periods. The decrease in the effective tax rate is a
result of a permanent difference in the book and tax basis of the divested
Spectrum business (see note 2 to the condensed consolidated financial
statements). Excluding the Spectrum divestiture gain, the effective tax rates
for the three and six month fiscal 1997 periods were 40.6% and 40.4%,
respectively.
Segment Results
Revenues - Food and Support Services segment revenues for the three and six
month periods increased 6% and 7%, respectively, over the prior year periods due
to new accounts (approximately 2%) and increased volume (approximately 4% and
5%, respectively), primarily in the United States food businesses. Uniform
Services segment revenues for the three and six month periods increased 18% and
15%, respectively, due to the impact of recent acquisitions (approximately 11%
and 9%, respectively) and increased volume in both the uniform rental and direct
marketing businesses. Health and Education segment revenues, excluding the
divested Spectrum operations, for both the three and six months increased 13%
over the comparable prior year periods due to enrollment growth, pricing and new
locations at Children's World. Distributive segment revenues for the second
quarter were equal with the prior year period, with the impact of acquisitions
offsetting a 5% decrease in base business. Distributive segment revenues for the
six month period decreased 2% from the prior year period due to a 7% decrease in
base business, partially offset by the impact of recent acquisitions.
Operating Income, Before Other Expense (Income) - Food and Support Services
segment operating income increased 7% and 15% for the three and six month
periods versus the comparable prior year period as a result of the revenue
increase noted above plus cost controls. Uniform Services segment second quarter
operating income increased 1% over the prior year period reflecting the revenue
increase noted above, offset by increased operating costs in the uniform rental
business. Uniform Services segment operating income for the six month period
increased 9% due to the revenue increases noted above plus cost controls in the
direct marketing businesses. Health and Education segment operating income for
the three and six month periods, excluding the operating results of the divested
Spectrum business, increased 16% and 17%, respectively, over the comparable
prior year period due to the revenue increases at Children's World noted above.
The Distributive segment incurred an operating loss of $3.2 million and $5.4
million for the three and six month periods, respectively, a deterioration from
the comparable prior year periods of approximately $1.4 million and $9.7
million, respectively. Results for this segment continue to be severely impacted
by higher operating expenses due to costs of servicing new customers and reduced
margins and volume resulting from increased competition and consolidation in the
magazine wholesale distribution industry. The Company continues to believe it is
well positioned to take advantage of the current competitive conditions in the
industry. However, the future impact of these changes is uncertain at this time.
The Company projects that operating results in the Distributive segment will
continue to be significantly below historical levels achieved prior to fiscal
1996.
FINANCIAL CONDITION
The Company's indebtedness decreased $10.6 million in the first six months of
fiscal 1997, with a reduction from the application of the divestiture proceeds
being partially offset by increased borrowings for seasonal working capital
needs and capital additions.
In November 1996, the Company issued $125 million of 7.10% senior notes due
December 2006. The net proceeds from the note offering were used to repay
borrowings under the $1 billion credit facility.
As discussed in note 2 to the condensed consolidated financial statements, in
January 1997, the Company sold an approximate 83% interest in its Spectrum
subsidiary. The cash proceeds were used to repay borrowings under the $1 billion
credit facility. The divestiture will not have a material impact on the
Company's liquidity.
The Company currently has approximately $625 million of unused credit
availability under its credit facilities, which management believes, along with
cash flows from operations, is sufficient to fund operating requirements.
PART II - OTHER INFORMATION
Item 1: Not Applicable.
Item 2: Not Applicable.
Item 3: Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on
February 11, 1997.
(b) Not Applicable
(c) (1) A proposal to approve the CEO Annual Performance
Bonus Arrangement was voted upon and approved,
with 20,355,739 affirmative votes
and 156,250 negative or abstained votes cast.
(2) There were 20,505,323 affirmative votes cast and
6,666 votes withheld with respect to the uncontested
election of directors.
(d) Not Applicable.
Item 5: Not Applicable.
Item 6: Exhibits.
(a) (1) Exhibit 11 - Computation of Fully Diluted Earnings
Per Share.
(2) Exhibit 27 - Financial Data Schedule
(b) None
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.
ARAMARK CORPORATION
/s/Alan J. Griffith
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Alan J. Griffith
May 12, 1997 Vice President, Controller
and Chief Accounting Officer