<PAGE>
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 2, 1999 Commission file number 1-8827
------------ ------
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 30, 1999 2,731,361
Class B common stock outstanding at July 30, 1999 66,008,502
- -------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
July 2, October 2,
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 26,634 $ 20,614
Receivables 510,416 526,506
Inventories, at lower of cost or market 359,904 361,451
Prepayments and other current assets 80,785 60,734
----------- -----------
Total current assets 977,739 969,305
----------- -----------
Property and Equipment, net 897,168 874,393
Goodwill 604,872 603,937
Other Assets 298,972 293,664
----------- -----------
$ 2,778,751 $ 2,741,299
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term borrowings $ 25,075 $ 24,560
Accounts payable 324,164 373,696
Accrued expenses and other liabilities 553,092 502,482
----------- -----------
Total current liabilities 902,331 900,738
----------- -----------
Long-Term Borrowings 1,597,677 1,705,049
Deferred Income Taxes and Other Noncurrent Liabilities 182,652 194,388
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 20,000 20,000
Shareholders' Equity/(Deficit) Excluding Common Stock
Subject to Repurchase:
Class A common stock, par value $.01 27 25
Class B common stock, par value $.01 662 629
Capital Surplus 64,955 --
Earnings retained for use in the business 34,553 (56,815)
Cumulative translation adjustment (4,106) (2,715)
Impact of potential repurchase feature of
common stock (20,000) (20,000)
----------- -----------
Total 76,091 (78,876)
----------- -----------
$ 2,778,751 $ 2,741,299
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,650,438 $1,634,325 $4,836,358 $4,817,200
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of services provided 1,482,561 1,478,760 4,380,620 4,381,802
Depreciation and amortization 48,966 49,730 143,496 146,732
Selling and general corporate expenses 20,352 19,710 62,683 63,286
---------- ---------- ---------- ----------
1,551,879 1,548,200 4,586,799 4,591,820
---------- ---------- ---------- ----------
Operating income 98,559 86,125 249,559 225,380
Interest Expense, net 33,295 28,534 102,760 82,380
---------- ---------- ---------- ----------
Income before income taxes 65,264 57,591 146,799 143,000
Provision for Income Taxes 23,405 20,422 55,430 57,096
---------- ---------- ---------- ----------
Income before extraordinary item 41,859 37,169 91,369 85,904
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) -- 2,915 -- 4,474
---------- ---------- ---------- ----------
Net income $ 41,859 $ 34,254 $ 91,369 $ 81,430
========== ========== ========== ==========
Earnings Per Share:
Income before extraordinary item
Basic $ .44 $ .32 $ .97 $ .71
Diluted $ .41 $ .30 $ .90 $ .66
Net income
Basic $ .44 $ .29 $ .97 $ .67
Diluted $ .41 $ .27 $ .90 $ .63
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ARAMARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
July 2, July 3,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 91,369 $ 81,430
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 143,496 146,732
Income taxes deferred 5,611 9,846
Extraordinary item -- 4,474
Changes in noncash working capital (10,200) (54,902)
Other operating activities (11,854) (12,280)
--------- ---------
Net cash provided by operating activities 218,422 175,300
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (126,147) (107,510)
Disposals of property and equipment 10,401 16,260
Sale of Investments 40,722 5,779
Divestiture of certain businesses 8,380 31,116
Acquisition of certain businesses (60,614) (19,769)
Other investing activities (14,425) (30,499)
--------- ---------
Net cash used in investing activities (141,683) (104,623)
--------- ---------
Cash flows from financing activities:
Proceeds from additional long-term borrowings 4,323 675,065
Payment of long-term borrowings including premiums (117,880) (172,440)
Proceeds from issuance of common stock 59,336 22,330
Repurchase of stock (16,313) (584,959)
Other financing activities (185) (7,851)
--------- ---------
Net cash used in financing activities (70,719) (67,855)
--------- ---------
Increase in cash and cash equivalents 6,020 2,822
Cash and cash equivalents, beginning of period 20,614 27,352
--------- ---------
Cash and cash equivalents, end of period $ 26,634 $ 30,174
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
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) LONG TERM BORROWINGS:
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).
(3) CAPITAL STOCK:
During the first nine months of fiscal 1999, pursuant to the ARAMARK
Ownership Program, employees purchased 5,920,406 shares or $29.9 million of
Class B Common Stock for $15.1 million cash plus $14.8 million of deferred
payment obligations. At the end of the third quarter, the Company sold for
cash, without recourse, approximately $44 million of notes receivable
(deferred payment obligations) which resulted from sales of stock pursuant
to the Company's stock option program. The sales price approximated book
value and the proceeds were used to repay borrowings under the credit
facility. Shareholders' Equity increased by $44 million as the notes were
previously reflected as a reduction of Shareholders' Equity.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made interest payments of $88.4 million and $83.0 million and
income tax payments of $53.1 million and $32.6 million during the first
nine months of fiscal 1999 and 1998, respectively. During the first nine
months of fiscal 1999, the Company purchased $8.3 million of its Class A
Common Stock and $14.7 million of its Class B Common Stock, issuing $6.7
million in subordinated installment notes as partial consideration.
(5) COMPREHENSIVE INCOME:
In the first quarter of fiscal 1999, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income". Comprehensive income
includes all changes in Shareholders' Equity during a period, except those
resulting from investment by and distributions to shareholders. Components
of comprehensive income include net income, changes in foreign currency
translation adjustments and unrealized holding gains/losses in marketable
equity securities. Total comprehensive income was $42.0 million and $90.0
million for the three and nine months ended July 2, 1999, respectively; and
$32.7 million and $75.9 million for the three and nine months ended July 3,
1998.
(6) ACQUISITIONS:
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.
(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.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------- --------------------------------
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
----------- ---------- -------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Revenues $1,002.3 $896.4 $ 3,072.6 $2,777.7
Cost of services provided 944.3 846.6 2,878.8 2,609.6
Net income 8.4 4.7 32.2 26.2
<CAPTION>
July 2, October 2,
1999 1998
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(in millions)
<S> <C> <C>
Current assets $ 459.8 $ 451.1
Noncurrent assets 1,999.7 2,079.8
Current liabilities 542.0 545.4
Noncurrent liabilities 1,725.3 1,823.9
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(8) EARNINGS PER SHARE:
The Company follows 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). Share and
per share amounts have been restated to reflect the three-for-one stock
split in September 1998. Earnings applicable to common stock and common
shares utilized in the calculation of basic and diluted earnings per share
are as follows;
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
-------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Earnings:
Income before extraordinary item $ 41,859 $ 37,169 $ 91,369 $ 85,904
======== ======== ======== ========
Shares:
Weighted average number of common
shares outstanding used in basic
earnings per share calculation 95,707 117,432 93,812 121,762
Impact of potential exercise opportunities
under the ARAMARK Ownership Plan 6,639 8,097 7,407 7,927
-------- -------- -------- --------
Total common shares used in diluted
earnings per share calculation 102,346 125,529 101,219 129,689
======== ======== ======== ========
Basic earnings per common share $ .44 $ .32 $ .97 $ .71
======== ======== ======== ========
Diluted earnings per common share $ .41 $ .30 $ .90 $ .66
======== ======== ======== ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
Revenues of $1.7 billion for the third quarter increased 1% and revenues of $4.8
billion for the nine month period were equal compared to the prior year periods.
Operating income of $98.6 million for the third quarter and $249.6 million for
the nine month period increased 14% and 11%, respectively, over the prior year
periods. Excluding the operating results of the Distributive segment, which was
contributed to a joint venture in exchange for a minority interest in the
venture in the fourth quarter of fiscal 1998, revenues for the three and nine
month periods increased 9% and 8%, respectively, over the prior year due to
increases in all three of the Company's segments. Operating income, excluding
the Distributive segment, for the three months increased 8% over the prior year
period, with earnings increasing in all segments. Operating income, excluding
the Distributive segment, for the nine month period increased 5%, due to
increased earnings in the Food and Support Services and Educational Resources
segments, partially offset by lower earnings in the Uniform and Career Apparel
segment. Results for the nine month period were also adversely impacted by the
National Basketball Association (NBA) labor dispute, which was settled in
January 1999. Had the labor dispute not occurred, it is estimated that fiscal
1999 operating income and net income for the nine months would have been
approximately 1% and 2% higher, respectively. The Company's operating margin for
the nine month period increased to 5.2% from 4.7%, primarily as a result of the
previously described Distributive segment transaction. Interest expense, net
increased 17% and 25% for the three and nine month periods, respectively, due
primarily to increased debt levels resulting from the tender offer transaction
in June 1998.
Segment Results
Revenues - Food and Support Services segment revenues for the three and nine
month periods increased 10% and 9%, respectively, over the prior year due to new
accounts (approximately 1% and 2%, respectively), acquisitions (approximately 4%
and 3%, respectively) and increased volume (approximately 5% and 4%,
respectively). Uniform and Career Apparel segment revenues for the three and
nine month periods increased 4% over the prior year due primarily to increased
volume in the Uniform rental business. Educational Resources segment revenues
for the three and nine month periods increased 10% and 11%, respectively, over
the prior year periods due to pricing and new locations.
Operating Income - Food and Support Services segment operating income increased
12% and 11% for the three and nine month periods, respectively, versus the prior
year periods due to the increased revenues noted above and effective cost
controls, partially offset in the nine month period by the impact of the NBA
labor situation. Had the labor dispute not occurred, it is estimated that Food
and Support Services segment operating income for the nine month period would
have been 2% higher. Uniform and Career Apparel segment operating income for the
three and nine month periods increased 1% and decreased 12%, respectively,
versus the prior year periods. Excluding the impact of gains on the sale of
assets and the impact of provisions to write-down certain inventory to net
realizable value from both the current year and prior year results, Uniform and
Career Apparel segment operating income for the three and nine month periods
decreased 5% and 9%, respectively, from the prior year periods. The decreases
are due to costs incurred in connection with the implementation of a new
marketing initiative and increased costs in the direct marketing businesses.
Educational Resources segment operating income for the three and nine month
periods increased 6% and 9%, respectively, due to the revenue increases noted
above.
<PAGE>
FINANCIAL CONDITION
The Company's indebtedness decreased $107 million in the first nine months of
fiscal 1999. The Company currently has approximately $675 million of unused
committed credit availability under its credit facilities, which management
believes, along with cash flows from operations, is sufficient to fund operating
requirements. At the end of the third quarter, the Company sold for cash,
without recourse, approximately $44 million of notes receivable which resulted
from sales of stock pursuant to the Company's stock option program. The sales
price approximated book value and the proceeds were used to repay borrowings
under the credit facility. Shareholders' Equity increased by $44 million as the
notes were previously reflected as a reduction of Shareholders' Equity.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As a result, on or near
the change of the century, date-sensitive systems may recognize the Year 2000 as
1900, or not at all, which may cause systems to fail or process financial and
operational information incorrectly.
The Company has developed plans to address its Year 2000 issues. The plans
address three broad areas: (1) internal information technology systems -
including financial and operational application systems, computer hardware and
systems software; (2) non-information technology systems - such as communication
systems, building systems and devices with embedded computer chips; and (3)
third party compliance - which addresses Year 2000 compliance efforts of key
vendors and suppliers. The project plans consist of the following phases:
1) Organizational awareness - general awareness of the Year 2000 issues,
which has been completed, and ongoing communication of Year 2000 project
status.
2) Inventory of current applications, which has been completed.
3) Risk assessment of inventoried systems, with identification of
mission-critical systems, which has been completed.
4) Replacement/remediation of systems.
5) Year 2000 testing and conversion of systems, including rollout of
compliant hardware/software to front line locations.
6) Contingency planning.
Program management offices, staffed with a combination of business unit
personnel and external consultants, have been established to address Year 2000
issues. Additionally, a Corporate Compliance Task Force consisting of internal
audit, information technology, legal and risk management personnel, with
assistance from external consultants, was formed in 1997 to review and monitor
the Year 2000 compliance programs. The Task Force meets regularly to review
corporate-wide Year 2000 issues and progress. The Company's Year 2000 compliance
effort is monitored by senior management on a regular basis and the Audit
Committee of the Board of Directors receives progress reports at least
quarterly.
Internal information technology systems - As of July 30, 1999, the inventory and
risk assessment phases for all mission-critical systems have been completed. For
most systems, replacement/remediation and the related testing have also been
completed. For a few systems, replacement/remediation or testing activities are
still underway. The Company expects that its mission-critical internal systems
will be Year 2000 compliant by October 1999. Based on the current status of
project plans, the Company believes that Year 2000 events caused by the
Company's internal financial and operational systems would not have a material
adverse impact on the Company's operations or financial condition.
Non-information technology systems - The inventory and risk assessment phases
are essentially completed. Based on the results of these phases, the Company has
determined that there are few mission-critical systems with non-compliant date
logic. These systems are expected to be replaced by September 1999. Given the
nature and geographic dispersion of the Company's business units, the Company
believes that any events caused by Year 2000 failures of non-information
technology systems would be short-term in nature and would not have a material
adverse impact on the Company's operations or financial condition.
<PAGE>
Third party compliance - The Company has identified, and initiated
communications with, key third party suppliers and customers to determine
potential exposure to these third parties' failure to remediate their own Year
2000 issues. The Company has conducted on site reviews of key suppliers' project
status and issues. The Company continues to monitor suppliers' Year 2000 status
and is developing contingency plans to address potential third party Year 2000
failures. The basic materials required to operate the Company's businesses are
generally available from a number of suppliers, and in the event of an inability
of a key supplier to deliver product, the Company believes alternative sources
will be available. However, an extended outage by utilities (electric, water,
telephone, etc.), key third-party suppliers or financial institutions, while
somewhat mitigated by the geographic dispersion of the Company's businesses,
could have material adverse impacts on the Company's operations and financial
condition.
Contingency Plans
The Company has contingency plans for computer failures, power outages, natural
disasters, etc. Year 2000 contingency plans for mission-critical systems, in the
areas discussed above, are being developed and will be integrated with the
existing contingency plans where appropriate by December 1999.
Costs
The Company currently estimates spending approximately $15 to $20 million,
excluding internal costs, to complete its Year 2000 compliance program,
including approximately $12 million that has been expended through the third
quarter of fiscal 1999. Year 2000 costs related to systems or equipment
replacement are capitalized in accordance with the Company's accounting
policies. Year 2000 remediation costs are expensed as incurred.
The Company's ability to achieve Year 2000 compliance, the level of costs
associated therewith and the resultant impact on operations and financial
condition could be adversely impacted by, among other things, the availability
and cost of applicable resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
program.
<PAGE>
PART II - OTHER INFORMATION
Item 1 through 5 are not applicable.
Item 6: Exhibits.
(a) Exhibit 27 - Financial Data Schedule
(b) Not Applicable.
<PAGE>
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 16, 1999 Vice President, Controller
and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Income filed
as part of Form 10-Q and is qualified in its entirety by reference to such Form
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> JUL-02-1999
<CASH> 26,634
<SECURITIES> 0
<RECEIVABLES> 510,416
<ALLOWANCES> 23,001
<INVENTORY> 359,904
<CURRENT-ASSETS> 977,739
<PP&E> 1,833,061
<DEPRECIATION> 935,893
<TOTAL-ASSETS> 2,778,751
<CURRENT-LIABILITIES> 902,331
<BONDS> 1,597,677
0
0
<COMMON> 689
<OTHER-SE> 75,402
<TOTAL-LIABILITY-AND-EQUITY> 2,778,751
<SALES> 0
<TOTAL-REVENUES> 4,836,358
<CGS> 0
<TOTAL-COSTS> 4,371,523
<OTHER-EXPENSES> 143,496
<LOSS-PROVISION> 10,101
<INTEREST-EXPENSE> 102,760
<INCOME-PRETAX> 146,799
<INCOME-TAX> 55,430
<INCOME-CONTINUING> 91,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,369
<EPS-BASIC> .97
<EPS-DILUTED> .90
</TABLE>
