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 January 2, 1998 Commission file number 1-8827
---------------- ------
ARAMARK CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2319139
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ARAMARK Tower
1101 Market Street
Philadelphia, Pennsylvania 19107
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 238-3000
- ------------------------------------------------------------------------------
(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 January 30, 1998: 1,966,211
Class B common stock outstanding at January 30, 1998: 22,055,634
- ------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
January 2, October 3,
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents $ 21,433 $ 27,352
Receivables 542,467 517,035
Inventories, at lower of cost or market 376,913 366,515
Prepayments and other current assets 127,431 67,314
----------- -----------
Total current assets 1,068,244 978,216
----------- -----------
Property and Equipment, net 865,663 867,176
Goodwill 629,355 623,841
Other Assets 277,100 284,346
----------- -----------
$ 2,840,362 $ 2,753,579
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 25,393 $ 18,517
Accounts payable 397,618 459,847
Accrued expenses and other liabilities 514,672 458,387
----------- -----------
Total current liabilities 937,683 936,751
----------- -----------
Long-Term Borrowings 1,283,683 1,213,944
Deferred Income Taxes and Other Noncurrent Liabilities 199,458 209,583
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 24,396 23,254
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class A common stock, par value $.01 20 20
Class B common stock, par value $.01 208 205
Earnings retained for use in the business 421,401 394,090
Cumulative translation adjustment (2,091) (1,014)
Impact of potential repurchase feature of
common stock (24,396) (23,254)
----------- -----------
Total 395,142 370,047
----------- -----------
$ 2,840,362 $ 2,753,579
=========== ===========
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
--------------------------
January 2, December 27,
1998 1996
---------- ----------
Revenues $1,590,661 $1,686,751
---------- ----------
Costs and Expenses:
Cost of services provided 1,441,708 1,540,226
Depreciation and amortization 47,450 48,606
Selling and general corporate expenses 22,350 21,190
---------- ----------
1,511,508 1,610,022
---------- ----------
Operating income 79,153 76,729
Interest Expense, net 25,762 30,484
---------- ----------
Income before income taxes 53,391 46,245
Provision for Income Taxes 23,314 18,590
---------- ----------
Net income $ 30,077 $ 27,655
========== ==========
Earnings Per Share:
Basic $.74 $.65
==== ====
Diluted $.70 $.62
==== ====
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 Three Months Ended
--------------------------
January 2, December 27,
1998 1996
--------- ---------
Cash flows from operating activities:
Net income $ 30,077 $ 27,655
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 47,450 48,606
Income taxes deferred 1,708 (1,619)
Changes in noncash working capital (132,343) (142,276)
Other operating activities (6,543) (1,725)
--------- ---------
Net cash used in operating activities (59,651) (69,359)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (24,935) (32,590)
Disposals of property and equipment 5,629 3,330
Sale of investments 3,718 --
Divestiture of certain businesses 19,291 --
Acquisition of certain businesses (9,175) (4,093)
Other investing activities (5,977) (1,255)
--------- ---------
Net cash used in investing activities (11,449) (34,608)
--------- ---------
Cash flows from financing activities:
Proceeds from additional long-term borrowings 69,047 141,443
Payment of long-term borrowings (2,164) (24,567)
Repurchase of stock (3,300) (16,335)
Other financing activities 1,598 688
--------- ---------
Net cash provided by financing activities 65,181 101,229
--------- ---------
Decrease in cash and cash equivalents (5,919) (2,738)
Cash and cash equivalents, beginning of period 27,352 25,283
--------- ---------
Cash and cash equivalents, end of period $ 21,433 $ 22,545
========= =========
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) CAPITAL STOCK:
During the first quarter of fiscal 1998, pursuant to the ARAMARK
Ownership Program, employees purchased 472,352 shares or $6.4 million
of Class B Common Stock for $1.6 million cash plus $4.8 million of
deferred payment obligations.
(3) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $29.5 million and $27.7 million
and income tax payments of $5.4 million and $5.5 million during the
first quarter of fiscal 1998 and 1997, respectively. During the first
quarter of fiscal 1998, the Company purchased $4.5 million of its
Class B Common Stock, issuing $1.2 million in subordinated
installment notes as partial consideration.
(4) 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
--------------------------
January 2, December 27,
1998 1996
---------- ------------
(in millions)
Revenues $ 922.8 $ 903.3
Cost of services provided 861.5 847.8
Net income 13.3 9.0
January 2, October 3,
1998 1997
---------- ------------
(in millions)
Current assets $ 433.4 $ 408.0
Noncurrent assets 1,616.8 1,558.0
Current liabilities 519.5 507.2
Noncurrent liabilities 1,393.1 1,333.8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) EARNINGS PER SHARE:
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "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). 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 per
share for prior periods have been restated to conform with the
requirements of SFAS No. 128. Earnings applicable to common stock and
common shares utilized in the calculation of basic and diluted
earnings per share are as follows:
Three Months Ended
---------------------------
January 2, December 27,
1998 1996
------- -------
(in thousands, except per share data)
Earnings:
Net income $30,077 $27,655
======= =======
Shares:
Weighted average number of common
shares outstanding used in basic
earnings per share calculation 40,737 42,344
Impact of potential exercise opportunities
under the ARAMARK Ownership Plan 2,474 2,610
------- -------
Total common shares used in diluted
earnings per share calculation 43,211 44,954
======= =======
Basic earnings per common share $ .74 $ .65
======= =======
Diluted earnings per common share $ .70 $ .62
======= =======
(6) SUBSEQUENT EVENT:
In January 1998, the Company replaced its existing $1 billion credit
facility with a new $1.4 billion credit facility. The new facility
matures on March 31, 2005, with commitment reductions of $100 million
in March 2000 and $150 million in March 2001 and March 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
Revenues were $1.6 billion for the first quarter of fiscal 1998 versus $1.7
billion in the first quarter of fiscal 1997. The decrease is due to the sale
of Spectrum in the second quarter of fiscal 1997. Excluding Spectrum, revenues
increased 2% over the prior year period. First quarter 1998 revenues were
affected by the calendarization of the Company's accounting period. The full
impact of the December holiday season, which typically has a reduced level of
activity, is reflected fully in the first quarter of fiscal 1998 whereas, in
the prior year, the holiday impact was split between the first and second
quarters of fiscal 1997. First quarter operating income of $79.2 million was
$2.4 million or 3% higher than the prior year period. Excluding the operating
results of Spectrum, operating income increased 10% over the prior year period
due to increased earnings in the Food and Support Services, Uniform and Career
Apparel and Health and Educational Resources segments, and a reduced operating
loss in the Distributive segment. The Company's operating margin increased to
5.0% from 4.5% due to improved cost controls and leveraging of fixed costs,
primarily in the Food and Support Services segment. Interest expense, net
decreased $4.7 million or 15% from the prior year due to lower debt levels and
interest income received from the settlement of a contract dispute. The
effective income tax rate increased to 43.7% in the first quarter of fiscal
1998 versus 40.2% in the prior year period due to permanent book/tax
differences.
Segment Results
Revenues - Food and Support Services segment revenues increased 2% over the
prior year period due to new accounts (approximately 2%) and increased volume
net of the calendarization effect described above (approximately 2%),
partially offset by the unfavorable impact of foreign currency translation
(approximately 2%). Uniform and Career Apparel segment revenues increased 6%
over the prior year period due to increased volume in both the uniform rental
and direct marketing businesses. Health and Educational Resources segment
revenues, excluding the Spectrum operations, increased 10% over the prior year
period due to enrollment growth, pricing and new locations at Children's
World. Distributive segment revenues decreased 6% from the prior year period
due to the net impact of recent acquisition and divestiture activity and a
decrease in base business.
Operating Income - Food and Support Services segment operating income
increased 16% over the prior year period due to the increased revenues noted
above and effective cost controls. Uniform and Career Apparel segment
operating income increased 7% due to a gain on the sale of assets. Excluding
the asset gain, operating income in the Uniform and Career Apparel segment
decreased 4% from the prior year period due to increased operating costs in
the direct marketing businesses, partially offset by increased revenues.
Health and Educational Resources segment operating income, excluding the
operating results of Spectrum, increased 28% over the prior year period due to
the revenue increases at Children's World. The Distributive segment incurred
an operating loss of $1.5 million versus an operating loss of $2.3 million in
the comparable prior year period. Results continue to be impacted by the high
costs of servicing customers and reduced volume and margins resulting from the
increased competition and consolidation in the magazine wholesale distribution
industry. The Company continues to implement its plan to improve operating
results in the Distributive segment through selected acquisitions in certain
geographic areas, the divestiture of certain operations and initiatives to
increase volume and margins and reduce costs. The impact of these initiatives
is uncertain at this time and the Company projects that the Distributive segment
will incur an operating loss for fiscal 1998.
FINANCIAL CONDITION
The Company's indebtedness increased $76.6 million in the first three months
of fiscal 1998, principally to finance seasonal working capital needs and
capital additions.
In January 1998, the Company replaced its existing $1 billion credit facility
with a new $1.4 billion credit facility. The new facility matures on March 31,
2005, with commitment reductions of $100 million in March 2000 and $150
million in March 2001 and March 2002. Currently, the Company has approximately
$1.1 billion of unused committed credit availability under its credit
facilities, which management believes, along with cash flows from operations,
is sufficient to fund operating requirements.
The Company has announced a plan of recapitalization (Share 100) which
involves more closely aligning management stockholders' investment interests
with the performance of the Company's business group for which they work and
the repurchase of all outstanding Class A Common Stock shares held by outside
stockholders and approximately 30% of the shares owned by its employee benefit
plans. Share 100 requires the approval of stockholders and is more fully
described in a proxy statement filed with the Securities and Exchange
Commission. Certain outside stockholders have filed suit to prevent the
implementation of Share 100 and on February 5, 1998, the Delaware Chancery
Court granted the plantiff's motion and subsequently issued a preliminary
injunction (see Part II, Item 1 - Legal Proceedings for additional information
regarding this matter). As a result, the implementation of Share 100 has been
postponed and the Company is appealing the injunction.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
On January 14, 1998, Metropolitan Life Insurance Company ("MetLife"),
a holder of the Company's Class A Stock, commenced a proceeding by
filing a complaint (the "MetLife Complaint") against the Company and
each of its directors (the "Directors") in the Court of Chancery
of the State of Delaware in and for New Castle County. The MetLife
Complaint alleged, among other things, that the Company's plan of
recapitalization (Share 100) was a discriminatory reclassification
that was allegedly approved by the Company's Directors in breach of
their fiduciary duties at a price that MetLife asserts was unfair to
the Company's Class A shareholders who would be cashed out in Share
100. The MetLife Complaint also asserted that the Company's Directors
had failed to provide adeqate disclosure in connection with Share
100. The MetLife Complaint sought a preliminary injunction enjoining
the consummation and closing of Share 100 and monetary damages.
On January 30, 1998, MetLife filed an amended complaint that added
certain additional allegations relating to the sufficiency of the
disclosure of the valuation methodology, including the use of a
so-called "private company discount," in the Company's proxy
materials.
On February 2, 1998, two additional actions were commenced by
certain Class A shareholders in the Delaware Chancery Court, one of
which purports to be brought on behalf of a class of all Class A
shareholders that would receive cash in connection with Share 100.
The complaints in these actions alleged claims substantially
similar to those asserted in the MetLife Complaint, plus certain
additional alleged disclosure deficiencies in connection with Share
100.
On February 5, 1998, following expedited discovery, briefing and
argument on MetLife's motion for a preliminary injunction, the
Chancery Court found that the Company's Directors' decision to
adopt Share 100, at this preliminary stage of the proceedings,
should be reviewed under the business judgment rule and that the
Directors were independent and disinterested and had acted with
due care in the sense of "carefully evaluating this business plan
and deciding on the merits." The Court further determined, however,
that the application of a "private company discount" in evaluating
the fairness of the price being paid to outside shareholders in the
context of a "cashout" recapitalization was inconsistent with
Delaware law, although the Court recognized that "whether a
private company discount is permissible has not been directly
decided." The Court also noted certain disclosure concerns related
to the private company discount issue. For these principal
reasons, on February 10, 1998, the Court issued an order
preliminarily enjoining proceeding with, voting on, consummating or
closing the Share 100 recapitalization transaction and permitting
the Company to make supplemental disclosures.
The day before the injunction order was entered, on February 9,
1998, the Court of Chancery issued an order that allowed the
Company to convene the annual meeting of stockholders on February
10, 1998 for the purpose of adjourning the meeting to a date 30
days from the date of the meeting.
On February 10, 1998, the Chancery Court granted the Company's
application for certification of an appeal to the Delaware Supreme
Court of the Chancery Court's order granting the injunction on the
grounds, among others, that the Court's decision on the private
company discount issue concerned unsettled issues of Delaware law
and because an immediate expedited appeal would serve the
considerations of justice and could make further proceedings
unnecessary.
On February 12, 1998, the Supreme Court of Delaware issued an order
accepting the Company's appeal and setting an expedited briefing
schedule.
Items 2 through 4 are not applicable.
Item 5: None
Item 6: Exhibits and Reports on Form 8-K
(a) (1) 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
February 16, 1998 s/Alan J. Griffith
-----------------------------
Alan J. Griffith
Vice President, Controller
and Chief Accounting Officer