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 June 27, 1997 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 _____
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 July 25, 1997: 1,959,545
Class B common stock outstanding at July 25, 1997: 20,482,820
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
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June 27, September 27,
1997 1996
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Current Assets:
Cash and cash equivalents $ 28,731 $ 25,283
Receivables 486,963 576,447
Inventories, at lower of cost or market 359,511 316,043
Prepayments and other current assets 73,337 67,977
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Total current assets 948,542 985,750
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Property and Equipment, net 846,316 824,635
Goodwill 661,406 643,880
Other Assets 327,178 376,505
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$ 2,783,442 $ 2,830,770
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term borrowings $ 16,565 $ 26,041
Accounts payable 396,980 496,040
Accrued expenses and other liabilities 455,264 441,760
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Total current liabilities 868,809 963,841
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Long-Term Borrowings 1,289,186 1,321,865
Deferred Income Taxes and Other Noncurrent Liabilities 220,815 230,249
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 23,591 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 $.01 205 227
Earnings retained for use in the business 395,322 309,437
Cumulative translation adjustment 1,601 5,131
Unrealized gain on marketable securities, net 7,484 --
Impact of potential repurchase feature of
common stock (23,591) (18,614)
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Total 381,041 296,201
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$ 2,783,442 $ 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 Nine Months Ended
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June 27, June 28, June 27, June 28,
1997 1996 1997 1996
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Revenues $ 1,531,614 $ 1,546,296 $ 4,676,382 $ 4,560,296
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of services provided 1,384,834 1,407,732 4,261,481 4,164,639
Depreciation and amortization 47,658 45,787 143,438 136,265
Selling and general corporate expenses 20,803 19,068 60,695 61,353
Other expense (income), net -- -- (72,393) (2,850)
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1,453,295 1,472,587 4,393,221 4,359,407
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Operating income 78,319 73,709 283,161 200,889
Interest Expense, net 28,596 28,580 88,598 88,900
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Income before income taxes 49,723 45,129 194,563 111,989
Provision for Income Taxes 19,589 15,324 48,822 41,896
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Income before Extraordinary Item 30,134 29,805 145,741 70,093
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) -- 1,169 -- 2,758
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Net income $ 30,134 $ 28,636 $ 145,741 $ 67,335
=========== =========== =========== ===========
Earnings Per Share:
Income before extraordinary item $ .69 $ .64 $ 3.26 $ 1.47
Net income $ .69 $ .61 $ 3.26 $ 1.41
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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 Nine Months Ended
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June 27, June 28,
1997 1996
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Cash flows from operating activities:
Net income $ 145,741 $ 67,335
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 143,438 136,265
Income taxes deferred (1,344) (25,343)
Extraordinary item -- 2,758
Changes in noncash working capital (87,544) (89,961)
Other operating activities, including gain
on divestiture of certain businesses (82,139) (9,810)
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Net cash provided by operating activities 118,152 81,244
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Cash flows from investing activities:
Purchases of property and equipment (136,497) (119,197)
Disposals of property and equipment 14,439 5,761
Divestiture of certain businesses 111,613 50,823
Acquisition of certain businesses (9,536) (10,445)
Other investing activities (4,698) (11,628)
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Net cash used in investing activities (24,679) (84,686)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 128,869 166,568
Payment of long-term borrowings including premiums (171,200) (128,250)
Proceeds from issuance of common stock 13,728 13,674
Repurchase of stock (59,874) (48,956)
Other financing activities (1,548) (1,616)
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Net cash provided by (used in) financing activities (90,025) 1,420
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Increase (decrease) in cash and cash equivalents 3,448 (2,022)
Cash and cash equivalents, beginning of period 25,283 23,082
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Cash and cash equivalents, end of period $ 28,731 $ 21,060
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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:
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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:
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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:
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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. During the third
quarter of fiscal 1996, the Company replaced its existing credit facility
with a new $1 billion credit facility. The new facility is non-amortizing
and matures on June 30, 2001. The Company wrote off the unamortized
balances of financing costs related to the old credit facility which is
reflected as an extraordinary item for debt extinguishment of $1.2
million (net of tax benefit of $0.8 million).
(4) CAPITAL STOCK:
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During the first nine months of fiscal 1997, pursuant to the ARAMARK
Ownership Program, employees purchased 2,111,131 shares or $20.9 million
of Class B Common Stock for $13.7 million of cash and $7.2 million of
deferred payment obligations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
The Company made interest payments of $84.6 million and $81.9 million and
income tax payments of $43.7 million and $70.6 million during the first
nine months of fiscal 1997 and 1996, respectively. During the first nine
months of fiscal 1997, the Company purchased $31.6 million of its Class A
Common Stock and $48.1 million of its Class B Common Stock, issuing $19.8
million in subordinated installment notes as partial consideration.
(6) PROSPECTIVE ACCOUNTING CHANGES:
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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 No. 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 No. 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 nine month
periods ended June 27, 1997, pro forma basic earnings per share under
SFAS No. 128 would be $0.72 and $3.45, respectively. Diluted earnings per
share would not be materially different from reported earnings per share.
(7) ARAMARK SERVICES, INC. AND SUBSIDIARIES:
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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 Nine Months Ended
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June 27, June 28, June 27, June 28,
1997 1996 1997 1996
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(in thousands)
Revenues $846.0 $789.6 $2,602.9 $2,443.0
Cost of services provided 795.5 748.3 2,447.8 2,307.9
Net income 6.9 2.8 21.4 10.2
June 27, September 27,
1997 1996
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(in thousands)
Current assets $ 380.0 $ 395.2
Noncurrent assets 1,636.4 1,630.0
Current liabilities 473.5 495.1
Noncurrent liabilities 1,414.6 1,419.6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(8) DERIVATIVES:
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The Company utilizes derivative financial instruments, such as interest
rate swaps and forward exchange agreements to manage changes in market
conditions related to debt obligations and foreign currency exposures.
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 condensed consolidated statement of
income. The Company has a foreign currency swap agreement which hedges
the currency exposure of its net investment in a foreign subsidiary and
accordingly, gains and losses on the currency swap are recorded as a
component of the cumulative translation adjustment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
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Overview
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Revenues of $1.5 billion for the third quarter were 1% lower than the prior year
period, and revenues of $4.7 billion for the nine month period increased 3% over
the prior year period. Operating income for the three and nine month periods was
$78.3 million and $283.2 million, respectively. Operating income for the nine
month period 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 statement 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% and 15%, respectively, for the third quarter and increased 8% and 11%,
respectively, for the nine months compared to the prior year periods. Interest
expense for the three and nine months was equal with the prior year periods,
with the impact of lower interest rates being offset by increased debt levels to
finance acquisitions and working capital requirements. The effective income tax
rate for the three and nine month periods was 39.4% and 25.1%, respectively. The
decrease in the effective tax rate for the nine month period 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 rate for the nine month fiscal 1997
period was 40%. The effective tax rates for the fiscal 1996 third quarter and
nine months were 34.0% and 37.4%, respectively, and reflects the favorable
impact from the settlement of an audit of certain prior years federal income tax
returns in June 1996.
Segment Results
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Revenues - Food and Support Services segment revenues for the three and nine
month periods increased 6% and 7%, respectively, over the prior year periods due
to new accounts (approximately 5% and 3%, respectively) and increased volume
(approximately 2% and 5%, respectively), primarily in the United States food
businesses, partially offset by the unfavorable impact of foreign currency
translation (1%). Uniform Services segment revenues for the three and nine month
periods increased 20% and 17%, respectively, due to the impact of recent
acquisitions (approximately 13% and 10%, 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 nine 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 third quarter and nine months decreased 6% and 3%,
respectively, from the comparable prior year periods, due to a decrease in base
business of 10% and 8%, respectively, partially offset by the impact of recent
acquisitions.
Operating Income, Before Other Expense (Income) - Food and Support Services
segment operating income increased 19% and 18% for the three and nine month
periods versus the comparable prior year period as a result of the revenue
increase noted above plus effective cost controls at both United States and
international operations. Uniform Services segment third quarter and nine month
operating income increased 8% and 9%, respectively, over the prior year period
due to the revenue increase noted above plus effective cost controls in the
direct marketing businesses, partially offset by increased operating costs in
the uniform rental business. Health and Education segment operating income for
the three and nine 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 $8.0 million
and $13.4 million for the three and nine month periods, respectively, a
deterioration from the comparable prior year periods of approximately $4.2
million and $13.9 million, respectively. During the third quarter the
Distributive segment recorded a charge of approximately $4.0 million related to
asset realization. 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 income in the Distributive
segment will continue to be significantly below historical levels achieved
prior to fiscal 1996.
FINANCIAL CONDITION
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The Company's indebtedness decreased $42.2 million in the first nine months of
fiscal 1997, with a reduction from application of the divestiture proceeds (see
note 2) 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 $675 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: 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
August 11, 1997 Vice President, Controller
Chief Accounting Officer