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 July 3, 1998 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 July 31, 1998: 827,976 *
Class B common stock outstanding at July 31, 1998: 21,052,979 *
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* Represents the number of shares outstanding on the date indicated and does
not reflect the three-for-one stock split effective September 1, 1998.
(See note 9 to the condensed consolidated financial statements).
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
------
July 3, October 3,
1998 1997
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Current Assets:
Cash and cash equivalents $ 30,174 $ 27,352
Receivables 543,511 517,035
Inventories, at lower of cost or market 369,015 366,515
Prepayments and other current assets 75,645 67,314
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Total current assets 1,018,345 978,216
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Property and Equipment, net 865,873 867,176
Goodwill 606,249 623,841
Other Assets 275,199 284,346
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$2,765,666 $2,753,579
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term borrowings $ 15,565 $ 18,517
Accounts payable 412,653 459,847
Accrued expenses and other liabilities 515,350 458,387
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Total current liabilities 943,568 936,751
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Long-Term Borrowings 1,730,487 1,213,944
Deferred Income Taxes and Other Noncurrent Liabilities 197,556 209,583
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 20,000 23,254
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class A common stock, par value $.01 25 20
Class B common stock, par value $.01 633 205
Earnings retained for use in the business (102,714) 394,090
Cumulative translation adjustment (3,889) (1,014)
Impact of potential repurchase feature of
common stock (20,000) (23,254)
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Total (125,945) 370,047
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$2,765,666 $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 For the Nine Months Ended
-------------------------------- ---------------------------------
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
---------- ---------- ------------ ----------
Revenues $1,634,325 $1,531,614 $4,817,200 $4,676,382
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of services provided 1,478,760 1,384,834 4,381,802 4,261,481
Depreciation and amortization 49,730 47,658 146,732 143,438
Selling and general corporate expenses 19,710 20,803 63,286 60,695
Other expense (income), net - - - (72,393)
---------- ----------- ----------- -----------
1,548,200 1,453,295 4,591,820 4,393,221
---------- ---------- ----------- -----------
Operating income 86,125 78,319 225,380 283,161
Interest Expense, net 28,534 28,596 82,380 88,598
----------- ----------- ----------- ----------
Income before income taxes 57,591 49,723 143,000 194,563
Provision for Income Taxes 20,422 19,589 57,096 48,822
----------- ------------ ------------ ----------
Income before Extraordinary Item 37,169 30,134 85,904 145,741
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) 2,915 - 4,474 -
----------- ----------- ------------ -----------
Net income $ 34,254 $ 30,134 $ 81,430 $ 145,741
=========== =========== ============ ===========
Earnings Per Share:
Income before extraordinary item
Basic $.32 $.24 $.71 $1.15
Diluted $.30 $.23 $.66 $1.09
Net income
Basic $.29 $.24 $.67 $1.15
Diluted $.27 $.23 $.63 $1.09
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
---------------------------------
July 3, June 27,
1998 1997
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Cash flows from operating activities:
Net income $ 81,430 $ 145,741
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 146,732 143,438
Income taxes deferred 9,846 (1,344)
Extraordinary item 4,474 -
Changes in noncash working capital (54,902) (87,544)
Other operating activities (12,280) (82,139)
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Net cash provided by operating activities 175,300 118,152
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Cash flows from investing activities:
Purchases of property and equipment (107,510) (136,497)
Disposals of property and equipment 16,260 14,439
Sale of Investments 5,779 -
Divestiture of certain businesses 31,116 111,613
Acquisition of certain businesses (19,769) (9,536)
Other investing activities (30,499) (4,698)
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Net cash used in investing activities (104,623) (24,679)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 675,065 128,869
Payment of long-term borrowings including premiums (172,440) (171,200)
Proceeds from issuance of common stock 22,330 13,728
Repurchase of stock (584,959) (59,874)
Other financing activities (7,851) (1,548)
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Net cash used in financing activities (67,855) (90,025)
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Increase in cash and cash equivalents 2,822 3,448
Cash and cash equivalents, beginning of period 27,352 25,283
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Cash and cash equivalents, end of period $ 30,174 $ 28,731
=========== ==========
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 were provided on the gain due to permanent differences in the
underlying book and tax basis of Spectrum. In fiscal 1996, the 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 Company's credit facility.
(3) LONG TERM BORROWINGS:
In January 1998, the Company replaced its existing $1 billion credit
facility with a $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.
In the third quarter of fiscal 1998, the Company exercised its option to
redeem its $100 million 8-1/2% subordinated notes at a price of 104.25%
of the principal amount, resulting in an extraordinary item for debt
extinguishment of $2.9 million (net of tax benefit of $1.9 million). In
the second quarter of fiscal 1998, the Company redeemed a $50 million 8%
note due April 2002 for a premium resulting in an extraordinary item for
debt extinguishment of $1.6 million (net of tax benefit of $1.0 million).
(4) CAPITAL STOCK:
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. Pursuant to the Tender Offer, the Company repurchased
1,062,485 shares for an aggregate purchase price of $531.2 million plus
transaction costs. The purchase price was financed through additional
borrowings under the $1.4 billion credit facility.
During the first nine months of fiscal 1998, pursuant to the ARAMARK
Ownership Program, employees purchased 2,357,260 shares or $30.8 million
of Class B Common Stock for $22.3 million cash plus $8.5 million of
deferred payment obligations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $83.0 million and $84.6 million and
income tax payments of $32.6 million and $43.7 million during the first
nine months of fiscal 1998 and 1997, respectively. During the first nine
months of fiscal 1998, the Company purchased $71.4 million of its Class B
Common Stock, issuing $17.7 million in subordinated installment notes as
partial consideration.
(6) PROSPECTIVE ACCOUNTING CHANGES:
In fiscal 1999, the Company is required to adopt the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is currently assessing
the impact the adoption will have on the consolidated financial
statements. The Company will complete its analysis of the disclosure
requirements of these standards in fiscal 1998.
In fiscal 2000, the Company is required to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company is
currently assessing the impact the adoption of these standards will have
on the consolidated financial statements.
(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 Nine Months Ended
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July 3, June 27, July 3, June 27,
1998 1997 1998 1997
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(in millions)
Revenues $896.4 $846.0 $2,777.7 $2,602.9
Cost of services provided 846.6 795.5 2,609.6 2,447.8
Net income 4.7 6.9 26.2 21.4
July 3, October 3,
1998 1997
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(in millions)
Current assets $ 411.9 $ 408.0
Noncurrent assets 2,189.8 1,558.0
Current liabilities 506.5 507.2
Noncurrent liabilities 1,946.6 1,333.8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(8) 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. Share and per
share amounts have been restated to reflect the three-for-one stock split
(see note 9).
Three Months Ended Nine Months Ended
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July 3, June 27, July 3, June 27,
1998 1997 1998 1997
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(in thousands, except per share data)
Earnings:
Income before extraordinary item $37,169 $30,134 $85,904 $145,741
======= ======= ======= ========
Shares:
Weighted average number of common
shares outstanding used in basic
earnings per share calculation 117,432 124,999 121,762 126,709
Impact of potential exercise opportunities
under the ARAMARK Ownership Plan 8,097 6,286 7,927 6,956
--------- --------- ---------- -----------
Total common shares used in diluted
earnings per share calculation 125,529 131,285 129,689 133,665
======== ======== ========= ========
Basic earnings per common share $.32 $.24 $.71 $1.15
==== ==== ==== =====
Diluted earnings per common share $.30 $.23 $.66 $1.09
==== ==== ==== =====
(9) SUBSEQUENT EVENTS:
In July 1998, the Company issued $300 million of 7% senior notes due July
2006 and $300 million of 6.75% senior notes due August 2004. The net
proceeds of approximately $594 million were used to repay borrowings
under the $1.4 billion credit facility.
Effective in July 1998, the Company consummated an agreement to form a
joint venture for its distributive business with another leading magazine
and book wholesaler. The Company contributed substantially all of its
distribution segment's assets and liabilities to the venture in exchange
for a significant minority interest in the venture. The Company
expects that any costs recognized in connection with the transaction
would be immaterial. The Company will account for its interest in the
venture on the cost basis.
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. In the financial
statements, all per share amounts have been restated to reflect the stock
split. In addition an amount equal to $.01 par value of the new shares to
be issued has been transferred from earnings retained for use in the
business to common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
Revenues and operating income for the third quarter were $1.6 billion and
$86.1 million, an increase of 7% and 10%, respectively, over the prior year
period. Revenues and operating income for the nine month period were $4.8
billion and $225.4 million versus $4.7 billion and $283.2 million,
respectively, in fiscal 1997. Operating income for the nine month period in
fiscal 1997 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 of Spectrum, revenues and operating income
increased 6% and 9%, respectively, for the nine months compared to the prior
year period. The Company's operating margin, excluding "other expense
(income)", increased to 4.7% from 4.5% for the nine month period due to
improved cost controls and leveraging of fixed costs, primarily in the Food
and Support Services segment. Interest expense, net for the nine month period
decreased 7% from the prior year period due to lower debt levels and interest
income received from the settlement of a contract dispute. The effective
income tax rate for the three and nine month periods was 35.5% and 39.9%,
respectively, compared to 39.4% and 25.1%, in the comparable prior year
periods. The fiscal 1998 third quarter effective tax rate was favorably
impacted by the settlement of certain state tax matters, and the prior year
nine month effective income tax rate was favorably impacted by a permanent
difference in the book and tax basis of the divested Spectrum business (See
Note 2 to the condensed consolidated financial statements).
Segment Results
Revenues - Food and Support Services segment revenues for both the three and
nine month periods increased 7% over the prior year periods due to new
accounts (approximately 5% and 4%, respectively), and increased volume,
(approximately 3% and 4%, respectively), partially offset by the unfavorable
impact of foreign currency translation (approximately 1%). Uniform and Career
Apparel segment revenues for the three and nine month periods increased 6%
over the prior year periods due to increased volume in both the uniform rental
and direct marketing businesses. Health and Educational Resources segment
revenues, excluding the Spectrum operations, for the three and nine month
periods increased 9% and 10%, respectively, due to enrollment growth, pricing
and new locations at Educational Resources. Distributive segment revenues
increased 2% for the three months and decreased 1% for the nine months versus
the prior year periods. Effective in July 1998 the Company consummated an
agreement to form a joint venture for its distributive business (See note 9 to
the condensed consolidated financial statements).
Operating Income - Food and Support Services segment operating income
increased 14% and 18% for the three and nine month periods versus the prior
year periods due to the increased revenues noted above and effective cost
controls. Uniform and Career Apparel operating income decreased 9% for the
three month period and increased 1% for the nine month period. Included in
fiscal 1998 three and nine month results is a provision to write-down certain
inventory to net realizable value and also included in the nine month results
is a gain on the sale of certain assets. Excluding these items, operating income
increased 1% for the three months and equaled the prior year nine month
results with the impact of increased revenues being offset by increased
operating costs in the direct marketing businesses. Health and Educational
Resources segment operating income for the three and nine month periods,
excluding the operating results of Spectrum, increased 11% and 16%,
respectively, over the prior year periods due to the revenue increases at
Educational Resources. The Distributive segment incurred operating losses of
$4.7 million and $12.6 million, respectively, for the three and nine month
periods, compared to operating losses of $8.1 million and $13.8 million in the
comparable prior year periods.
FINANCIAL CONDITION
The Company's indebtedness increased $514 million in the first nine months of
fiscal 1998 due primarily to the completion of a cash tender offer for
outstanding shares of Common Stock, Class A (the "Tender Offer"). See note 4
to the condensed consolidated financial statements. In January 1998, the
Company replaced its existing $1 billion credit facility with a $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.
In the third quarter of fiscal 1998, the Company exercised its option to
redeem its $100 million 8-1/2% subordinated notes at a price of 104.25% of the
principal amount, resulting in an extraordinary item for debt extinguishment of
$2.9 million (net of tax benefit of $1.9 million). In the second quarter of
fiscal 1998, the Company redeemed a $50 million 8% note due April 2002 for a
premium resulting in an extraordinary item for debt extinguishment of $1.6
million (net of tax benefit of $1.0 million).
In July 1998, the Company issued $300 million of 7% senior notes due July 2006
and $300 million of 6.75% senior notes due August 2004. The net proceeds of
approximately $594 million were used to repay borrowings under the $1.4
billion credit facility.
Currently, the Company has approximately $1.0 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, including the increased interest expense resulting from the
additional indebtedness incurred in connection with the Tender Offer.
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. In the financial statements, all per share
amounts have been restated to reflect the stock split. In addition an amount
equal to $.01 par value of the new shares to be issued has been transferred from
earnings retained for use in the business to common stock.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As previously disclosed, Metropolitan Life Insurance Company
("MetLife") filed a complaint against the Company and its Board of
Directors in the Court of Chancery of the State of Delaware in and
for New Castle County (the "Court") seeking to enjoin the
consummation of the Company's proposed recapitalization plan (the
"MetLife Action"). Two additional actions were commenced by certain
holders of the Company's shares of Common Stock, Class A, par value
$0.01 per share (the "Class A Shares"), one of which was brought
individually and as a purported class action on behalf of all
similarly situated stockholders (the "Class Action") and the other
of which was brought individually (the "Webb Action"). Both the
complaint filed in connection with the Class Action and the
complaint filed in connection with the Webb Action asserted claims
and sought remedies that were substantially similar to those set
forth in the complaint filed in connection with the Met Life Action.
The Court granted a preliminary injunction and subsequently ARAMARK
abandoned its recapitalization plan.
On May 15, 1998, the Company commenced a cash tender offer for all
of its outstanding Class A Shares at a price of $500.00 per share,
upon the terms and subject to the conditions set forth in the
Company's Offer to Purchase dated May 15, 1998 (the "Offer").
In connection with the Offer, the parties to the Class Action
executed and filed with the Court a Stipulation and Agreement of
Compromise and Settlement (the "Stipulation"), the terms of which
were set forth in a Notice of Pendency of Class Action, Class Action
Determination, Proposed Settlement of Class Action, Settlement
Hearing and Right to Appear (the "Notice"). At a hearing held on
June 15, 1998, the settlement of the Class Action was approved by
the Court. The plaintiffs in each of the MetLife and the Webb
Actions dismissed their respective actions, and the Company paid
their respective fees and expenses. The Court awarded fees and
expenses to the Plaintiffs in the Class Action. The Court dismissed
the MetLife, Class and Webb Actions.
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 10,
1998 and adjourned until March 12, 1998 when directors were
elected. The meeting was re convened on April 10, 1998 at
which time it was adjourned.
(b) Not Applicable
(c) Not Applicable
(d) See Item 1, Legal Proceedings
Item 5: Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) (1) Exhibit 3 (i) - Restated Certificate of Incorporation
dated August 12, 1998
(2) Exhibit 3 (ii) - Bylaws, as amended May 12, 1998
(3) Exhibit 27 - Financial Data Schedule for the nine months
ended July 3, 1998.
(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
--------------------------
Alan J. Griffith
August 17, 1998 Vice President, Controller
and Chief Accounting Officer