Item 1. Business
Description of Business Segments
The Company is engaged in providing or managing services, including food, leisure and support services, uniform services, health and education services and distributive services. ARAMARK was organized in 1959 in Delaware. The Company was formed in September 1984 by the management of ARAMARK and acquired ARAMARK in December 1984 through a merger.
The Company provides most of its services in the United States. The Company also conducts operations, primarily the management of food services, in Belgium, Canada, the Czech Republic, Germany, Hungary, Japan, Korea, Mexico, Spain and the United Kingdom.
Financial information by business segment and geographic area appears in note 11 to the consolidated financial statements. The businesses of the Company have been grouped into the segments described below.
Food, Leisure & Support Services
The Company provides food, refreshment, specialized dietary and support services (including maintenance and housekeeping) to business, educational, governmental and medical institutions. These services (and to a lesser extent, merchandise operations) are also provided at leisure and other public facilities such as convention centers, stadiums, parks, arenas, race tracks and recreational facilities.
Food, refreshment, specialized dietary and support services are operated at customer locations generally under contracts of indefinite duration which may be subject to termination by either party. However, food and related services at leisure and other public facilities generally are for fixed contract terms well in excess of one year. The Company's food, leisure and support services are performed under various financial arrangements including a management-fee basis and a profit-and-loss basis. See note 2 to the consolidated financial statements.
In most instances, the equipment and facilities used in providing these services are owned by the customer. Vending machines and related equipment, however, are generally owned by the Company.
There is a high level of competition in the food, leisure and support services business from local, regional and national companies as well as from businesses and institutions which operate their own services. This competition takes a number of different forms, including pricing, maintaining high food and service standards, and innovative approaches to marketing with a strong emphasis on securing and retaining customer accounts. The Company believes that it is a significant provider of food, leisure and support services in the United States, Spain, Germany, Belgium and Canada, but that its volume of such business is small in relation to the total market. See note 10 to the consolidated financial statements for information relating to the seasonal aspects of this business segment.
Subsequent to yearend, the Company entered into agreements to acquire certain Food, Leisure & Support Services businesses. See note 2 to the consolidated financial statements.
Uniform Services
The Company rents, cleans, maintains and delivers personalized work apparel and other textile items for customers throughout the United States on a contract basis. Also provided are walk-off mats, cleaning cloths, disposable towels, and other environmental control items.
The Company also operates one of the largest direct marketers of personalized work clothing, uniforms, casual apparel and related accessories, primarily in the United States.
Service contracts for the rental and laundering of work apparel and other textile items are for well in excess of one year and typically for an initial term of five years. Generally, the direct marketing business is conducted under an invoice arrangement with customers.
The uniform rental services business is highly competitive in the areas in which the Company operates, with numerous competitors in each major operating area. Although no one uniform rental services company is predominant in this industry, the Company believes that it is a significant competitor.
Competition in the sale of work clothing and related items is from numerous retailers and other direct marketers at local, regional and national levels. In this market, while the Company is a significant competitor, the Company's volume of sales is small in relation to the total market.
The significant competitive factors in the uniform services business are the quality of services provided to customers and the prices charged for such services.
Health & Education Services
The Company provides management services (including physician staffing and other specialized services) to hospital emergency and other departments and to military healthcare facilities and clinics as well as medical services to correctional institutions. The Company also provides child care services primarily at Company-operated facilities, and to a lesser extent on customer sites and in before and after school programs.
Revenues from emergency and primary care management services are received generally from the hospitals and clinics at which the care is provided under contracts generally with a term of one or more years and from third party payors. Revenues from medical services to correctional institutions are received directly from governmental authorities under contracts with terms of one or more years.
Child care services are provided to and are primarily paid for on a weekly basis directly by individual families under short-term agreements. The Company leases a significant number of its child care facilities under long-term arrangements.
The Company believes it is a significant provider of emergency and primary care management services, medical services to correctional institutions and child care services in the United States.
Competition in all phases of this business segment is from both national and local providers of health and education services as well as from private and public institutions which provide for their own health and education services. Significant competitive factors in the Company's health and education services businesses are the quality of care, reputation, physical appearance of facilities, the types of programs offered to the users of these services and the prices charged for such services.
Distributive Services
The Company provides wholesale distribution of magazines, books and other printed matter. These materials are purchased from national distributors and publishers and are delivered to retail locations patronized by the general public.
Distribution services are generally rendered under short-term agreements, which ordinarily permit the return of unsold magazines and books with full credit being given to the retailer and with the Company in turn receiving full credit from its suppliers.
Competition in the distribution of books and periodicals exists primarily from magazine and book subscriptions, direct distribution by publishers to retailers and from other wholesale distributors. While the Company's volume of business in the distribution of books and periodicals is small in relation to the total market, the Company believes the volume of its wholesale periodical and book distribution units makes it a significant wholesale distributor.
Subsequent to yearend the Company acquired a wholesale magazine and book distribution business. See note 2 to consolidated financial statements.
Employees
The Company employs approximately 133,000 persons, both full and part time, including approximately 30,000 employees outside the United States. Approximately 22,700 employees in the United States are represented by various labor unions.
Item 2.
Item 2. Properties
The principal property and equipment of the Company are its service equipment and fixtures (including vehicles) and real estate.
The service equipment and fixtures include vending, commissary, warehouse and janitorial and maintenance equipment used primarily by the food, leisure and support services segment, and laundry equipment used by the uniform services segment. The vehicles include automobiles and delivery trucks used in the food, leisure and support services segment and in the distributive services and uniform services segments. The service equipment and fixtures represent approximately 61% of the net book value of all fixed assets as of September 30, 1994.
The Company's real estate is comprised of child care facilities, of which a significant number are held under long-term operating leases. The Company also maintains other real estate and leasehold improvements which it uses in its distributive services and uniform services segments and in commissary and distribution operations in its food, leisure and support services segment. Additional information concerning property and equipment (including other real estate leases and noncancelable lease commitments) is included in notes 1 and 8 to the consolidated financial statements. No individual parcel of real estate owned or leased is of material significance to the Company's total assets.
See note 11 to the consolidated financial statements for information concerning the identifiable assets of the Company's business segments.
Item 3.
Item 3. Legal Proceedings
The Company and its subsidiaries are not parties to any lawsuits (other than ordinary routine litigation incidental to its business) which are material to the Company's business or financial condition. See note 8 to the consolidated financial statements for additional information concerning legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 4A. Directors and Executive Officers of the Registrant
The principal occupations of the Company's directors and directorships currently held by directors are as follows:
Mr. Neubauer has been president and chief executive officer of the Company since February 1983 and the chairman since April 1984. He is a director of Bell Atlantic - Pennsylvania, Inc., Federated Department Stores, Inc., First Fidelity Bancorporation, Penn Mutual Life Insurance Co. and Versa Services Ltd.
Mr. Callander was vice chairman of Chemical Bank from February 1987 until August 1990. He was president of Chemical Bank and Chemical Banking Corporation from August 1990 to June 1992. He is a director of Barnes Group, Inc., Beneficial Corporation, Latin American Dollar Income Fund, New Asia Fund, Omnicom Group, Inc., and Scudder World Income Opportunities Fund.
Dr. Campbell was vice chairman of the Company from April 1984 to February 1991 and was executive vice president from December 1980 until his retirement in September 1990.
Mr. Davenport has been the chairman and president of Sheridan Broadcasting Corporation since 1972. He is a director of Bell Atlantic - Pennsylvania, Inc.
Mr. Davidson founded ARAMARK in 1959, and was its chief executive officer and chairman until his retirement in July 1977.
Mr. Defliese was the chairman and managing partner of Coopers & Lybrand prior to his retirement in 1977 and is currently Professor Emeritus, Graduate School of Business, Columbia University.
Mr. Driscoll was a partner in the Philadelphia law firm of Ballard, Spahr, Andrews & Ingersoll from January 1984 until December 1990. He is a director of Versa Services Ltd.
Mr. Fromstein has been chief executive officer and president of Manpower Inc. since March 1976. He is a director of Manpower Inc. and ARI Network Services, Inc.
Mr. Jordan served as the president of The American College from October 1982 until December 1987. He is a director of Acme Steel Company and Pittston, Inc.
Former Governor Kean was the Governor of the State of New Jersey from 1982 until 1990. He has been the president of Drew University since 1990. He is a director of Amerada Hess Corporation, Bell Atlantic Corporation, Beneficial Corporation, Fiduciary Trust International and United Health Care Corporation.
Mr. MacDonald serves as a consultant to Acme Steel Company. He was chairman of Acme Steel Company from June 1986 until May 1992. He is a director of Acme Steel Company and Kaiser Resources.
Mr. Preston has been the chairman, president, chief executive officer and a director of Avon Products, Inc. since 1989. He is a director of F. W. Woolworth Company and Reader's Digest Association.
Except as set forth below, the principal occupations of the executive officers throughout the past five years have been the performance of the functions of the corporate offices shown above.
Mr. Carr was vice president of the Company from November 1988 until February 1991 when he was elected to his current position.
Mr. Farquharson was vice president of the Company from 1976 until February 1991 when he was elected to his current position.
Mr. Gail was elected senior vice president of the Company in August 1994. Prior to joining the Company in May 1994, he was president and chief executive officer and prior thereto senior vice president of FCB - Philadelphia.
Mr. Ksansnak was senior vice president of the Company from May 1986 until February 1991 when he was elected to his current position.
Mr. Leonard was president of ARAMARK Uniform Services from 1984 until March 1992 when he was elected to his current position.
Mr. Sutherland was vice president and treasurer of the Company from 1983 until February 1991 when he was elected senior vice president. In May 1993 he was elected to his current position.
Mr. Vent was vice president of the Company from 1982 until February 1991 when he was elected to his current position.
Mr. Hill was elected vice president of the Company in January 1993. Prior to joining the Company in 1993, he was vice president of Farley Industries, Inc. and Fruit of the Loom, Inc.
Mr. Mulvaney was vice president of ARAMARK Uniform Services from 1988 until February 1993 when he was elected to his current position.
Mr. Tanzola was vice president and controller of the Company from 1978 until 1993 when he assumed new responsibilities as vice president, controls.
Mr. Griffith was assistant controller of the Company from May 1985 until November 1991 when he became the director of corporate planning. In December 1993 he became controller and chief accounting officer of the Company.
Mr. Mahoney was elected treasurer of the Company in February 1991. He had been assistant treasurer since 1985.
Mr. Thon was elected assistant treasurer of the Company in August 1994. Previously he held various treasury analyst positions since joining the Company in 1987.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There are currently 1,147 record holders of Class B common stock of the Company, all of whom are employees or directors of the Company (or members of their families or trusts created by them). There are currently 132 record holders of the Class A common stock of the Company, all of whom are institutional investors, Company benefit plans or individuals not employed by the Company.
There is no established public trading market for the common stock of the Company. However, employees of the Company are able to sell shares of common stock through various programs maintained by the Company. See note 7 to the consolidated financial statements for information regarding the Company's shareholders' agreement.
Under the Company's primary credit agreement, there are various covenants that restrict the amount of cash dividends that may be paid to the holders of outstanding common stock of the Company and which also limit the amount of funds that may be transferred by ARAMARK to the Company for such purpose. See note 4 to the consolidated financial statements.
Item 6.
Item 6. Selected Financial Data
The following table presents summary consolidated financial data for the Company. The following data should be read in conjunction with the consolidated financial statements and the related notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition, each included elsewhere herein.
- ------------------------------------ (1) Fiscal 1992 is a fifty-three week period. See note 1 to the consolidated financial statements. (2) See note 2 to the consolidated financial statements. (3) See notes 3 and 6 to the consolidated financial statements. (4) Based on weighted average shares of common stock outstanding for all periods. See note 1 to the consolidated financial statements. (5) For the purposes of determining the ratio of earnings to fixed charges, earnings include pre-tax income plus fixed charges (excluding capitalized interest). Fixed charges consist of interest on all indebtedness (including capitalized interest) plus that portion of operating lease rentals representative of the interest factor (deemed to be one-third of operating lease rentals). (6) See note 4 to the consolidated financial statements. (7) See note 7 to the consolidated financial statements.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
Fiscal 1994 Compared to Fiscal 1993
Overview. Revenues for the fiscal year ended September 30, 1994 were $5.2 billion, a 6% increase over fiscal 1993. Earnings before interest and taxes of $272 million increased 1% compared to the prior year. Each of the Company's business segments reflected improvements in operating earnings. However, the 1994 results were adversely impacted by the Major League Baseball strike in the United States and Canada and costs associated with several corporate development and strategic initiatives, including costs related to a change in corporate identity. See note 11 to the consolidated financial statements. Earnings before interest and taxes for both fiscal 1994 and fiscal 1993 include other income of $5.8 million and $5.0 million, respectively, and in fiscal 1994 a gain of $4.7 million on the issuance of stock by an affiliate. See note 2 to the consolidated financial statements.
The Company's operating income margin decreased to 5.2% from 5.5%. The decrease in margin is due primarily to the baseball strike and increased general corporate expenses referred to above.
Interest expense declined $17.2 million or 14%, due primarily to lower borrowing levels and the impact of refinancing certain of the Company's indebtedness. Fiscal 1994 and 1993 net income include an extraordinary item for the early extinguishment of debt of $7.7 million and $7.2 million, respectively, as described in note 3 to the consolidated financial statements. Fiscal 1994 net income also includes a charge of $1.3 million related to the cumulative effect of adopting Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. See note 6 to the consolidated financial statements.
Segment Results. Food, Leisure and Support Services segment revenues were 4% greater than prior year. Increases related to new accounts, primarily in the U.S. business and education markets, and an acquisition of a company in Spain were partially offset by the effects of a divestiture in late fiscal 1993 and the baseball strike in fiscal 1994. See notes 2 and 11 to the consolidated financial statements. Uniform Services segment revenues increased 11% as a result of increased volume in both the uniform rental and direct marketing businesses. Health and Education Services segment revenues increased 9% as a result of new contracts at correctional institutions and hospitals and continued enrollment growth in the child care services business. Revenues for the Distributive Services segment increased 3% due to increased volume.
Operating income for the Food, Leisure and Support Services segment increased 1% over the prior year. Increased earnings in the U.S. business dining market and the gain from the sale of stock of an affiliate were offset by the impact of the baseball strike, start-up costs on new contracts, and continued sluggish economic conditions in selected European markets. Depreciation and amortization in this segment increased by $9 million due to acquisition related amortization and depreciation on recent capital projects. Uniform
Services operating income increased 9% as a result of the revenue growth. Operating income for the Health and Education Services segment increased 11% due to revenue growth plus improvements in operating efficiency due to leveraging of overhead costs. Distributive Services operating income increased 7%, primarily due to increased volume with costs remaining relatively constant.
At the time of the filing of this Annual Report, the Major League Baseball strike, as well as the National Hockey League strike continue in the U.S. and Canada. Due to the uncertainty as to the length of the strikes, the Company cannot determine the potential impact on fiscal 1995 financial results. In fiscal 1994, management estimates that consolidated operating income and income before extraordinary item would have been approximately 3% and 5% higher, respectively, had the baseball strike not occurred. See note 11 to the consolidated financial statements.
Fiscal 1993 Compared to Fiscal 1992
Overview. Revenues for the fiscal year ended October 1, 1993 were $4.9 billion. Operating income for fiscal 1993 was $269 million, an increase of $7 million or 3% over fiscal 1992. Excluding the unfavorable impact of currency translation, revenues and operating income increased 2% and 4%, respectively, over fiscal 1992. Operating results for fiscal 1993 and fiscal 1992 include other income of $5.0 million and $4.2 million, respectively. See note 2 to the consolidated financial statements.
The Company's operating margin increased from 5.4% in fiscal 1992 to 5.5% in fiscal 1993 reflecting declines in cost of services provided and selling and general corporate expenses as a percentage of revenues. The declines are primarily due to the favorable impact of effective controls of costs relative to revenue growth plus the impact of unusual costs included in fiscal 1992 selling and general corporate expenses in connection with a potential acquisition and several special development programs.
Interest expense declined $12.2 million or 9% due primarily to lower interest rates and the impact of refinancing the Company's senior notes and subordinated debentures. Fiscal 1993 and 1992 net income includes an extraordinary item due to early extinguishments of debt of $7.2 million and $3.3 million, respectively. See note 3 to the consolidated financial statements for a description of the debt refinancings and extraordinary item. Income before the extraordinary item for fiscal 1993 was $84.3 million, which exceeded the prior year by 19%.
Segment Results. Food, Leisure and Support Services segment revenues approximated prior year. The impact of new accounts in international and domestic markets for this segment was offset by the adverse effect of economic conditions in the United States and Canada on selected business dining and other accounts and a 2% revenue decline attributable to unfavorable currency exchange rates. Uniform Services segment revenues increased 15% due to the acquisition of WearGuard in fiscal 1992 and growth in volume at uniform rental operations which accounted for 3% of the increase. Health and Education Services segment revenues, excluding the revenues of Living Centers which was divested in fiscal 1992, increased 12% due primarily to new contracts at correctional institutions and hospitals, continued enrollment growth at Children's World and a fiscal 1992 acquisition of a business providing management services to hospital
emergency departments. Revenues for the Distributive Services segment declined slightly due to the continued adverse effect of the economic slowdown on consumer spending particularly in southern California.
Operating income for the Food, Leisure and Support Services segment increased 3% over the prior year. The positive effects of new business, operating efficiencies, and effective controls over product and overhead costs plus a fiscal 1993 divestiture gain, described in note 2, contributed to the increase. This was partially offset by the previously described impact of adverse economic conditions, start-up costs at new accounts, a 2% decline in operating income attributable to unfavorable currency exchange rates and the reserve established for potential adjustments described in note 2. Uniform Services operating income increased 15% due to the acquisition of WearGuard in fiscal 1992 and revenue growth coupled with higher operating margins at uniform rental operations which accounted for 6% of the increase. Depreciation and amortization expense increased by $7.5 million for this segment due primarily to the acquisition of WearGuard in fiscal 1992. Excluding the fiscal 1992 operating results and divestiture gain related to Living Centers, operating income for the Health and Education Services segment increased 4% as higher revenues plus an increase in operating income due to the fiscal 1992 acquisition described above were partially offset by higher operating costs. Distributive Services operating income declined 8% reflecting lower operating margins as a result of the impact of the economic slowdown coupled with an increase in operating costs.
FINANCIAL CONDITION AND LIQUIDITY
Cash flows generated from operating activities during fiscal 1994 were more than sufficient to finance capital expenditures, acquisitions and common and preferred stock repurchases during the year. The Company expects to continue to fund capital expenditures, acquisitions and other liquidity needs from cash provided by operating activities, normal disposals of property and equipment and borrowings available under its credit facility. As of September 30, 1994, the Company has capital commitments of approximately $52 million related to several long-term concession contracts at stadiums and arenas.
During fiscal 1994, the Company amended its credit facility, increasing the maximum borrowing amount from $650 million to $800 million, and extending the final maturity to October 2001. See note 4 to the consolidated financial statements. Currently the Company has approximately $325 million of unused committed credit availability under its credit facility. Subsequent to yearend, the Company has entered into definitive agreements for the acquisition of three businesses and is in the process of completing a tender offer for the remaining minority interest of its Canadian subsidiary. See note 2 to the consolidated financial statements. Although the credit availability is sufficient to fund these transactions, the Company intends to increase the amount of the credit facility to provide additional financing availability.
During fiscal 1994, the Company redeemed $182.3 million of its 12-1/2% subordinated debentures. See note 3 to the consolidated financial statements. During fiscal 1994, the Company repurchased $17.6 million of its Series C Preferred Stock, repurchased $29.7 million of its Class B Common Stock and issued $13.2 million of subordinated installment notes as partial consideration. The Company also purchased $9.2
million of its Class A Common Stock. Additionally, the Company issued $12.4 million of Class B Common Stock to eligible employees, primarily through the exercise of installment stock purchase opportunities.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Schedules at page S-1.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
PART III
Items 10, 11, 12, and 13 of Part III are incorporated by reference to the registrant's Proxy Statement for its 1995 Annual Stockholders' Meeting to be filed with the Commission pursuant to Regulation 14A (except for the stock price performance graph and the committee report on executive compensation in the Company's Proxy Statement).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index to Financial Statements
See Index to Financial Statements and Schedules at page S-1.
(b) Reports on Form 8-K
None.
(c) Exhibits Required by Item 601 of Regulation S-K
See Index to Exhibits.
(d) Financial Statement Schedules
See Index to Financial Statements and Schedules at page S-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARAMARK CORPORATION
By: Alan J. Griffith ---------------------- Alan J. Griffith Controller and Chief Accounting Officer November 22, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 22, 1994.
Signature Title - --------- ----------------------------------- Joseph Neubauer Chairman and President and Director Joseph Neubauer (Principal Executive Officer)
James E. Ksansnak Executive Vice President James E. Ksansnak (Principal Financial Officer)
Alan J. Griffith Controller Alan J. Griffith (Principal Accounting Officer)
Robert J. Callander Alan K. Campbell Ronald R. Davenport Davre J. Davidson Philip L. Defliese Lee F. Driscoll, Jr. Directors Mitchell S. Fromstein Edward G. Jordan Thomas H. Kean Reynold C. MacDonald James E. Preston
Martin W. Spector Martin W. Spector Attorney-in-Fact
ARAMARK CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ----
Report of Independent Public Accountants S-2
Report of Chartered Accountants S-3
Consolidated Balance Sheets - As of September 30, 1994 and October 1, 1993 S-4
Consolidated Statements of Income - Fiscal Years 1994, 1993 and 1992 S-6
Consolidated Statements of Cash Flows - Fiscal Years 1994, 1993 and 1992 S-7
Consolidated Statements of Shareholders' Equity - Fiscal Years 1994, 1993 and 1992 S-8
Notes to Consolidated Financial Statements S-11
Consolidated Supporting Schedules Filed:
Schedule Number - --------
III - Condensed Financial Information of Registrant S-26
V - Property and Equipment S-30
VI - Accumulated Depreciation and Amortization of Property and Equipment S-33
VIII - Valuation and Qualifying Accounts and Reserves S-36
X - Supplementary Income Statement Information S-37
All other schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ARAMARK Corporation:
We have audited the accompanying consolidated balance sheets of ARAMARK Corporation (a Delaware corporation) (formerly The ARA Group, Inc.) and subsidiaries as of September 30, 1994 and October 1, 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended September 30, 1994. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We did not audit the financial statements of Versa Services Ltd., the Company's Canadian subsidiary, which statements reflect assets representing 3.6% of consolidated assets as of both September 30, 1994 and October 1, 1993, and revenues representing 5.6%, 6.3% and 7.4% of consolidated revenues for the fiscal years 1994, 1993 and 1992, respectively. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Versa Services Ltd., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of ARAMARK Corporation and subsidiaries as of September 30, 1994 and October 1, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
As discussed in Note 6 to the consolidated financial statements, ARAMARK Corporation changed its method of accounting for income taxes in fiscal 1994.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania November 7, 1994
S-2
REPORT OF CHARTERED ACCOUNTANTS
To The Directors of Versa Services Ltd.:
We have audited the consolidated balance sheets of Versa Services Ltd. as at September 28, 1994 and September 29, 1993 and the consolidated statements of income and retained earnings and cash flows for the fifty-two week period ended September 28, 1994, the fifty-two week period ended September 29, 1993, and the fifty-three week period ended September 30, 1992 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 28, 1994 and September 29, 1993, and the results of its operations and the changes in its financial position for the fifty-two week period ended September 28, 1994, the fifty-two week period ended September 29, 1993 and the fifty-three week period ended September 30, 1992 in accordance with accounting principles generally accepted in Canada.
Mississauga, Canada ERNST & YOUNG November 16, 1994 Chartered Accountants
S-3
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS September 30, 1994 and October 1, 1993
The accompanying notes are an integral part of these financial statements.
S-4
ARAMARK CORPORATION AND SUBSIDIARIES
The accompanying notes are an integral part of these financial statements.
S-5
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the Fiscal Years Ended September 30, 1994, October 1, 1993 and October 2, 1992
(dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements.
S-8
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED OCTOBER 1, 1993 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-9
ARAMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED OCTOBER 2, 1992 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-10
ARAMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Effective October 10, 1994 the Company changed its name from The ARA Group, Inc. to ARAMARK Corporation.
FISCAL YEAR
The Company's fiscal year is the fifty-two or fifty-three week period which ends on the Friday nearest September 30th. The years ended September 30, 1994, October 1, 1993 and October 2, 1992 are fifty-two, fifty-two and fifty-three week periods, respectively.
PRINCIPLES OF CONSOLIDATION, ETC.
The consolidated financial statements include the accounts of the Company and all its subsidiaries. All significant intercompany balances and transactions have been eliminated and net income is reduced by the portion of income applicable to minority shareholders of less than wholly-owned subsidiaries. Certain 1993 items have been reclassified to conform to the 1994 presentation.
In fiscal 1995, the Company is required to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Adoption of these standards will not have a material impact on the consolidated financial statements.
CURRENCY TRANSLATION
Gains and losses resulting from the translation of financial statements of non-U.S. subsidiaries are reflected as a currency translation adjustment in shareholders' equity. Currency transaction gains and losses included in operating results for fiscal 1994, 1993 and 1992 were not significant.
CURRENT ASSETS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At September 30, 1994, securities having maturities in excess of three months, all of which were owned by the Company's Canadian subsidiary, are classified as short-term investments and are recorded at cost which approximates market value.
Inventories are valued at the lower of cost (principally the first-in, first-out method) or market. The LIFO (last-in, first-out) method of determining cost is used to value directly marketed work clothing and casual apparel. The stated value of inventories determined using the LIFO method is not significantly different from replacement or current cost. Personalized work apparel and linens in service are recorded at cost and are amortized over their estimated useful lives, approximately two years. In accordance with industry practice, magazines and books are sold to retailers with the right to return unsold items for ultimate credit from the publishers.
The components of inventories as of the respective yearends are as follows:
1994 1993 - ------------------------------------------------------------------------------- Food 24.9% 29.0% Work apparel, casual apparel and linens 60.9% 55.7% Magazines and books 5.6% 4.7% Parts, supplies and novelties 8.6% 10.6% - ------------------------------------------------------------------------------- 100.0% 100.0% - -------------------------------------------------------------------------------
S-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their estimated useful lives on a straight-line basis. Gains and losses on dispositions are included in operating results. Maintenance and repairs are charged to operations currently, and replacements and significant improvements are capitalized. The estimated useful lives for the major categories of property and equipment are 10 to 40 years for buildings and improvements and 3 to 10 years for service equipment and fixtures.
GOODWILL
Goodwill, which represents the excess of cost over fair value of the net assets of acquired businesses, is being amortized on a straight-line basis principally over 40 years. The Company develops operating income projections for each of its lines of business and evaluates the recoverability and amortization period of goodwill using these projections. Based upon management's current assessment, the estimated remaining amortization period of goodwill is appropriate and the remaining balance is fully recoverable. Accumulated amortization at September 30, 1994 and October 1, 1993 is $113.7 million and $97.4 million, respectively.
OTHER ASSETS
Other assets consist primarily of investments in less than 50% owned entities, contract rights, customer lists, long-term receivables and noncurrent marketable equity securities. Investments in which the Company owns more than 20% but less than a majority are accounted for using the equity method. Contract rights and customer lists are being amortized on a straight-line basis over the expected period of benefit, 5 to 20 years. Noncurrent marketable equity securities are stated at the lower of aggregate cost or market. At September 30, 1994 and October 1, 1993 the cost and market value of the Company's noncurrent marketable equity securities approximated $2 million and $5 million, respectively.
OTHER LIABILITIES
Other noncurrent liabilities consist primarily of deferred compensation, insurance accruals, deferred gains arising from sale and leaseback transactions and subordinated installment notes arising from repurchases of common stock.
The Company is self-insured for a limited portion of the risk retained under its general liability and workers' compensation insurance arrangements. Self-insurance reserves are actuarially determined based on the estimated timing of future insurance claim payments associated with the Company's retained risk. The current and noncurrent portions of the self-insurance reserves for workers' compensation insurance are accrued on a present value basis using a discount rate which approximates a risk-free rate.
EARNINGS PER SHARE
Earnings per share is reported on a fully diluted Common Stock, Class B equivalent basis (which reflects Common Stock, Class A shares converted to a Class B basis; ten for one) and is based upon 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. Fully diluted earnings per share approximates primary earnings per share and is equivalent to fully diluted earnings per share under the "two-class" method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
1994 1993 1992 ------ ------ ------ (in millions) Interest Paid $108.2 $113.5 $127.3 Income Taxes Paid $ 54.0 $ 41.0 $ 39.0
Significant noncash investing and financing activities are as follows:
o During fiscal 1994, 1993, and 1992, the Company contributed $8.9 million, $10.7 million, and $8.6 million, respectively, of Class A Common Stock to its employee benefit plans to fund previously accrued obligations. In addition, during fiscal 1994, 1993 and 1992 the Company contributed $1.8 million, $1.7 million and $1.7 million, respectively, of stock units to its stock unit retirement plan in satisfaction of its accrued obligations. See Note 5 to the consolidated financial statements.
o During the third quarter of fiscal 1993, the Company paid a special dividend on its common stock which included $34.7 million of new Series C Preferred Stock. See Note 7 to the consolidated financial statements.
o During fiscal 1994 and 1993, the Company received $4.0 million and $5.9 million, respectively, of employee notes under its Deferred Payment program as partial consideration for the issuance of Common Stock Class B. Also, during fiscal 1994, 1993, and 1992, the Company issued subordinated installment notes of $13.2 million, $8.3 million and $7.1 million, respectively, as part consideration for repurchases of Common Stock. See Note 7 to the consolidated financial statements.
NOTE 2. ACQUISITIONS AND DIVESTITURES, ETC.:
During the fourth quarter of fiscal 1994, an affiliate, 33% owned by the Company, sold common stock through a public offering. The Company sold approximately 9% of its equity investment in connection with the public offering, receiving net proceeds of $6.9 million and recorded a gain of $5.8 million, which is included in "Other expense (income)." At the time a subsidiary/affiliate sells its stock to third parties, the Company recognizes the resultant change in its net investment in the subsidiary/affiliate through the income statement in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 51 (SAB No. 51). In accordance with SAB No. 51, the Company recognized a pre-tax gain of $4.7 million, and recorded a related tax provision of $1.9 million, representing the increase in book value of the Company's remaining investment created by the sale of the incremental new shares in the public offering. The Company's percentage ownership of the affiliate after the transaction is 28%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS AND DIVESTITURES, ETC.: (Continued)
In September 1993, the Company acquired an 80% interest in the contract food service division of the HUSA Group ("HUSA"), a provider of food services to hospitals, schools and governmental facilities located in Spain, for aggregate consideration, including all costs, of approximately $30 million. The purchase price of the HUSA acquisition was allocated principally to contract rights and goodwill. The Company's unaudited pro forma results of operations for fiscal 1993 and 1992 would not be materially different assuming the acquisition occurred as of the beginning of the respective periods.
During the fourth quarter of fiscal 1993, the Company sold Encore Service Systems, Inc. for approximately $20 million resulting in a gain of approximately $15 million. In addition, all of the Company's remaining shares of Living Centers of America common stock were sold during fiscal 1993 for approximately $16 million, resulting in a gain of approximately $8 million. These gains have been included in "Other expense (income)" in the accompanying consolidated statements of income. Also included in "Other expense (income)" is an amount of $18 million to establish a reserve for potential adjustments related to certain cost-based food service contracts. This resulted from a 1993 internal review of billing procedures covering primarily insurance and employee fringe benefits. The review revealed some past inconsistencies between the billings and the literal contractual language.
During the second quarter of fiscal 1992, the Company acquired the assets of WearGuard Corporation ("WearGuard"), a direct marketer of work clothing and casual apparel and late in the third quarter acquired the business of Coordinated Health Services, Inc. ("CHS"), a provider of physician staffing and patient billing services for hospital emergency departments for aggregate consideration of $124 million. Also in the second quarter of 1992, the Company divested approximately 90% of its interest in Living Centers of America, Inc. ("Living Centers") in a sale of stock through a public offering. The net effect of these transactions resulted in a reduction of the Company's indebtedness of approximately $69 million. "Other expense (income)" of $4.2 million in fiscal 1992 represents a gain of $13 million on the Living Centers divestiture transaction partially offset by charges for insurance and related matters.
The Company's fiscal 1992 financial statements reflect results of operations and cash flows for WearGuard and CHS for seven months and four months, respectively. The Company's unaudited pro forma results of operations for fiscal 1992 would not be materially different assuming the acquisitions occurred as of the beginning of the period.
Subsequent to fiscal yearend 1994, the Company has entered into definitive agreements for the acquisition of three businesses (two are in the Food, Leisure and Support business segment and one in the Distributive segment) for total consideration, in the form of cash and preferred stock, of approximately $260 million. Revenues of these businesses would increase the Company's total revenues by approximately 5.5%. The cash portion of the consideration will be financed through the Company's existing Credit Agreement. The acquisitions, subject to certain third party approvals, are presently expected to close by the end of calendar year 1994.
In the fourth quarter of fiscal 1994, the Company initiated a tender offer for the 30% minority interest of its Canadian subsidiary. The transaction is expected to be completed by the end of calendar year 1994 for total consideration of approximately $33 million, of which $17.6 million has been paid as of September 30, 1994.
NOTE 3. EXTRAORDINARY ITEM:
The following items have been reflected as extraordinary items in the consolidated financial statements.
During fiscal 1994, the Company redeemed the remaining $182.3 million of its 12-1/2% subordinated debentures for a premium. The debt extinguishment was financed through borrowings under the Company's revolving credit facility. The resultant extraordinary charge was $7.7 million or $0.15 per share.
S-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. EXTRAORDINARY ITEM: (Continued)
During fiscal 1993, the Company repurchased the entire $100 million of its 10.55% senior notes for a premium and concurrently issued $100 million of 8-1/4% senior notes. The Company also paid a premium to redeem $38.6 million of its 12-1/2% subordinated debentures.
During fiscal 1992, the Company exchanged $28.6 million of 10% subordinated debentures plus a premium for $28.6 million of its 13% subordinated debentures and paid a premium to redeem $1.5 million of its 12-1/2% subordinated convertible notes.
NOTE 4. BORROWINGS:
Long-term borrowings at September 30, 1994 and October 1, 1993 are summarized in the following table:
The $800 million revolving credit facility ("Credit Agreement") is provided by a group of banks and matures in October 2001 with quarterly commitment reductions of $12.5 million starting in December 1995 which increase annually thereafter. Interest under the credit agreement is based on the Prime Rate plus a spread of 0% to 5/8% (as of September 30, 1994 - 0%), London Inter-Bank Offered Rate (LIBOR) plus a spread of 1/8% to 1-1/8% (as of September 30, 1994 - 1/2%) or the Certificate of Deposit Rate plus a spread of 1/4% to 1-1/4% (as of September 30, 1994 - 5/8%), at the option of the Company. The spread is based on certain financial ratios and borrowing levels as defined. The Company pays a fee of 1/4 of 1% on the entire credit facility.
The 8-1/4% notes are payable in $20 million annual installments commencing March 1995 with a final maturity of March 1999. The $20 million installment due in fiscal 1995 has been classified as non-current in the accompanying consolidated balance sheet as the Company has the ability and intent to finance it through additional borrowings under the Credit Agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BORROWINGS: (Continued)
The 10-5/8% senior notes require a sinking fund payment of $50 million in August 1999 with a final maturity in August 2000.
The 8-1/2% subordinated notes may be redeemed at the Company's option, in whole or in part, beginning June 1998 at a price equal to 104.25% of their principal amount and thereafter at prices declining to par in 2002, together with accrued interest.
The 10% subordinated exchangeable debentures and notes may be exchanged at any time in whole or part, at the option of the holder, for 10-5/8% senior notes due August 2000 at an exchange ratio of .93.
The 12% subordinated debentures may be redeemed at the Company's option, in whole or in part, beginning April 1995 at a price equal to 105% of the principal amount and thereafter at prices declining to par in April 1997, together with accrued interest.
The 12-1/2% subordinated convertible notes are convertible at par, in whole, at the option of the holder, into a series of the Company's 13% subordinated debentures due January 1997. At any time on or after January 15, 1998, the Company may, at its option, redeem the notes, in whole or in part, at a price equal to 100% of their principal amount plus accrued interest.
The 13% subordinated debentures may be redeemed by the Company on or after January 15, 1996, in whole or in part, at a price equal to 100% of their principal amount plus accrued interest.
The fair value of the Company's aggregate senior and subordinated debt, based primarily on quoted market prices, was $705 million and $291 million, respectively at September 30, 1994 and $568 million and $511 million, respectively, at October 1, 1993. Accrued interest on borrowings totaling $23.6 million in 1994 and $29.2 million in 1993 is included in current liabilities as "Other accrued expenses."
At September 30, 1994, the Company has $200 million of interest rate exchange agreements fixing the rate on a like amount of borrowings under the Credit Agreement at an average effective rate of 5.7% for remaining periods ranging between 1 and 34 months. The counterparties to the interest rate exchange agreements are major international banks. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. All interest rate agreements are accounted for as hedges and the related gains or losses are recognized in income as a component of interest expense over the period being hedged. As of October 1, 1993 the Company had $202 million of interest rate exchange agreements fixing the rate on a like amount of variable rate borrowings at an average effective rate of 6.3%. During fiscal 1993, the Company entered into a $28 million foreign currency swap agreement maturing in August 1996, which hedges the currency exposure of its net investment in Spain. See Note 2 to the consolidated financial statements.
The fair value of the Company's swap agreements as of September 30, 1994 is approximately $5.5 million. At October 1, 1993, the fair value of the swap agreements was not significant.
The Credit Agreement contains restrictive covenants which provide, among other things, limitations on the incurrence of debt, dispositions of material assets, payment of dividends and repurchases of capital stock. The terms of the Credit Agreement also limit the transfer of funds to the Company by its subsidiaries and require that the Company maintain certain specified minimum ratios of cash flow to fixed charges and to total borrowings and certain minimum levels of net worth (as defined). At September 30, 1994, the Company was in compliance with all of these covenants.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. BORROWINGS: (Continued)
Long-term borrowings maturing in the next five years, excluding capital lease obligations, are as follows: Amount ------------- (in thousands) 1995 $ 8,701 1996 22,080 1997 25,571 1998 71,771 1999 85,015
NOTE 5. EMPLOYEE PENSION AND PROFIT SHARING PLANS:
The Company maintains contributory and non-contributory defined benefit pension plans, primarily in Canada and the United Kingdom, providing retirement benefits to eligible employees not covered by collective bargaining agreements. Total pension expense under these plans for fiscal 1994, 1993 and 1992 was $1.4 million, $1.3 million and $1.1 million, respectively. The Company's policy is to fund the minimum contribution required under the applicable law.
Defined benefit pension expense for 1994, 1993 and 1992 includes the following components:
The discount rates and rates of return on assets represent weighted averages that reflect the combined assumptions of plans located primarily in Canada and the United Kingdom.
The defined benefit pension plans' funded status at September 30, 1994 and October 1, 1993 is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. EMPLOYEE PENSION AND PROFIT SHARING PLANS: (Continued)
In the United States, the Company also maintains qualified contributory and non-contributory retirement plans for eligible employees, with Company contributions to the plans based on earnings performance or salary level. Qualified non-contributory profit sharing plans are maintained by certain businesses, with annual contributions determined by management. The Company has a non-qualified stock unit retirement plan for certain employees. The total expense of the above plans for fiscal 1994, 1993 and 1992 was $14.5 million, $14.1 million and $13.6 million, respectively. During fiscal 1994, 1993 and 1992, the Company contributed 59,919 shares, 86,184 shares and 75,684 shares, respectively, of Common Stock, Class A to these plans to fund previously accrued obligations. In addition, during fiscal 1994, 1993 and 1992, the Company contributed to the stock unit retirement plan 143,125 stock units, 159,144 stock units and 175,596 stock units, respectively, which are convertible into Common Stock, Class B, in satisfaction of its accrued obligations. The value of the stock units was credited to capital surplus. The Company participates in various multi-employer union administered pension plans. Contributions to these plans, which are primarily defined benefit plans, result from contractual provisions of labor contracts and were $11.9 million, $10.2 million and $10.3 million for fiscal 1994, 1993 and 1992, respectively.
NOTE 6. INCOME TAXES:
Effective October 2, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Prior to fiscal 1994, the Company followed the provisions of Accounting Principles Board Opinion No. 11. SFAS No. 109 requires deferred tax assets or liabilities to be recognized for the estimated future tax effects of temporary differences between the financial reporting and tax bases of the Company's assets and liabilities based on the enacted tax law and statutory tax rates applicable to the periods in which the temporary differences are expected to affect taxable income. The cumulative effect of this change in accounting principle was a charge of $1.3 million, or $0.03 per share, in the first quarter of fiscal 1994.
The components of income before income taxes by source of income are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES: (Continued)
The provision for income taxes varies from the amount determined by applying the United States Federal statutory rate to pre-tax income as a result of the following:
As of September 30, 1994, the components of the net deferred tax asset are as follows:
Deferred tax liabilities: Property and equipment $64,718 Inventory 5,484 Other 4,725 ------- Gross deferred tax liability 74,927 -------
Deferred tax assets: Insurance 17,797 Employee compensation and benefits 30,228 Accruals and allowances 20,648 Intangibles 9,954 Other 2,254 Valuation allowance (1,000) ------ Net deferred tax asset 79,881 ------
Net deferred tax asset $ 4,954 ======
The Company does not provide for U.S. or foreign taxes on the undistributed earnings of non-U.S. subsidiaries that are considered to be permanently reinvested. At September 30, 1994, undistributed earnings of these foreign subsidiaries or affiliates totaled $38.7 million, which will not be subject to U.S. tax until distributed as dividends. Foreign tax credits will be available to reduce U.S. taxes on this income upon distribution. Determination of the unrecognized deferred tax liability for temporary differences related to the undistributed earnings is not practicable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES: (Continued)
The components of deferred income taxes for years prior to the adoption of SFAS No. 109 are as follows: 1993 1992 ---- ---- (in thousands)
Excess of tax over book depreciation $ 1,905 $ 5,445 Accrued vacation 52 (3,272) Provision for insurance costs (3,009) (1,668) Tax vs. book basis of dispositions 5,598 12,755 Other 1,512 435 ------- ------- $ 6,058 $13,695 ======= ======= NOTE 7. CAPITAL STOCK:
There are two classes of common stock authorized and outstanding, Common Stock, Class A and Common Stock, Class B. Each Class A and Class B Share is entitled to one vote on all matters submitted to stockholders, voting together as a single class except where otherwise required by law. Each Class A Share is entitled to ten times the dividends and other distributions payable on each Class B Share. Class B Shares may be held only by employees, directors and their family members, and upon termination of employment each Class B Share is automatically converted into 1/10 of a Class A Share.
During the third quarter of fiscal 1993, the Company paid a special dividend of $5 per Class B equivalent share on all shares of its Common Stock owned as of April 19, 1993, with $2 per Class B equivalent share, or $24.2 million, paid in cash and $3 per Class B equivalent share, or $34.7 million, in new Series C Preferred Stock ("Preferred Stock"). Concurrent with the dividend, the Company repurchased for cash 55,495 shares of its Class A Common Stock for $28.9 million.
Holders of the Preferred Stock are entitled to cumulative dividends payable semi-annually; voting rights in the event of failure to pay dividends for four consecutive periods (two years); and upon liquidation, $1,000 per share plus accrued and unpaid dividends. The current dividend rate on the Preferred Stock is $60 per share and is reset annually in December of each year at a rate equal to $1,000 multiplied by 80% of Chemical Bank's announced prime rate of interest, but not less than $60 per share nor greater than $100 per share. The Preferred Stock may be repurchased, in whole or in part, at any time only at the Company's option at a price equal to $1,000 per share plus accrued and unpaid dividends. During fiscal 1994 the Company repurchased 17,647 preferred shares for $17.6 million.
On November 9, 1993, the Company's Board of Directors declared a four-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 November 10. The Company issued 18,158,097 shares of Common Stock, Class B and 1,544,868 shares of Common Stock, Class A in connection with the stock split. The stated par value of $.01 per share of Class B and Class A common stock was not changed.
As of September 30, 1994 the Company's stock option plans provided for the issuance of up to 33,001,148 options to purchase shares of Common Stock, Class B. The Company granted installment stock purchase opportunities under its stock ownership program in fiscal 1994, 1993 and 1992 which provide for the purchase of shares of Common Stock, Class B. Installment stock purchase opportunities are exercisable in six annual installments with the exercise price of each purchase opportunity equal to the current fair market value at the time the purchase opportunity is granted. During fiscal 1994, the Company implemented a program to extend non-qualified stock options to additional qualified employees. Under the program, options vest after three years and may be exercised for a period of three years after vesting. The exercise price of each option is equal to the current fair market value at the date of grant. In 1993, the Company implemented the Deferred Payment Program which enables holders of non-qualified stock options and installment purchase opportunities to defer a portion of the total amount required to exercise the options. Interest currently
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CAPITAL STOCK: (Continued)
accrues on deferred payments at 6% compounded annually and is payable when the deferred payments are due. At September 30, 1994 and October 1, 1993 the receivables from individuals under the Deferred Payment Program were $9.8 million and $5.9 million, respectively, which are classified in the consolidated balance sheet as a reduction of Shareholders' Equity. The Company holds as collateral all shares purchased in which any portion of the purchase price is financed under the Deferred Payment Program until the deferred payment is received from the individual by the Company. Status of the options, including installment stock purchase opportunities, under the various ownership programs follows:
At September 30, 1994, 1,129,160 of the outstanding option shares were exercisable at an average option price of $1.81. The Company has reserved 11,063,004 shares of Common Stock, Class B at September 30, 1994 for issuance of stock pursuant to its employee ownership and benefit programs.
The Company and its shareholders are parties to an Amended and Restated Shareholders' Agreement. Pursuant to this agreement, holders of common stock who are individuals, upon their death, complete disability or normal retirement, may cause the Company to repurchase up to 30% of their shares for cash at the then appraised value, but only to the extent such repurchase by the Company is permitted under the Credit Agreement. Under this Credit Agreement restriction, repurchases of capital stock cannot exceed an aggregate limit, which amount was $20.8 million at September 30, 1994 and $21.7 million at October 1, 1993. Pursuant to interpretations of its rules related to "Redeemable Preferred Stock," the Securities and Exchange Commission has requested that these amounts representing the Company's potential repurchase of its Common Stock be presented as a separate item and accordingly, the Company's Shareholders' Equity reflects this reclassification in the consolidated financial statements. Also, the Shareholders' Agreement provides that the Company may, at its option, repurchase shares from individuals who are no longer employees. Such repurchased shares may be resold to others including replacement personnel at prices equal to or greater than the repurchase price. Generally, payment for shares repurchased can be, at the Company's option, in cash or subordinated installment notes, which are subordinated to all other indebtedness of the Company. Interest on these notes is payable semi-annually and principal payments are made annually over varying periods not to exceed ten years. The noncurrent portion of these notes ($24.9 million as of September 30, 1994, $20.4 million as of October 1, 1993) is included in the consolidated balance sheets as "Other Noncurrent Liabilities" and the current portion of these notes ($8.7 million as of September 30, 1994 and $6.2 million as of October 1, 1993) is included in the consolidated balance sheets as "Accounts Payable."
NOTE 8. COMMITMENTS AND CONTINGENCIES:
1994 1993 - ------------------------------------------------------------------------------- (in thousands) Facilities under capital leases $8,204 $8,204 Less-accumulated amortization 5,590 4,891 - ------------------------------------------------------------------------------- $2,614 $3,313 ===============================================================================
Rental expense for all operating leases was $121.2 million, $119.4 million and $118.5 million for fiscal 1994, 1993 and 1992, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES: (Continued)
Following is a schedule of the future minimum rental commitments under all noncancelable leases as of September 30, 1994:
Fiscal Year Operating Capital - ----------------------------------------------------------------------- (in thousands) 1995 $115,003 $ 962 1996 71,781 778 1997 63,407 695 1998 58,555 551 1999 53,384 368 Subsequent years 218,265 743 - ------------------------------------------------------------------------ Total minimum rental obligations $580,395 4,097 =============================================== Less-amount representing interest 866 - ------------------------------------------------------------------------ Present value of capital leases 3,231 Less-current portion 690 - ------------------------------------------------------------------------- Noncurrent obligations under capital leases $2,541 =========================================================================
The Company has capital commitments of approximately $52 million at September 30, 1994 in connection with several long-term concession contracts at stadiums and arenas. The Company is party to certain claims and litigation arising in the ordinary course of business, including a dispute with a former insurance carrier involving certain coverages relating to prior years. The Company believes it has meritorious defenses to the insurance and other claims and is of the opinion that adequate reserves have been provided for the ultimate resolution of these matters.
NOTE 9. 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 Credit Agreement and certain other senior debt described in Note 4 and incurs the interest expense thereunder. This interest expense is only partially allocated to all of the other subsidiaries of ARAMARK Corporation.
(1) See Note 3. (2) Includes cumulative effect of change in accounting for income taxes of $1,277 in the fiscal 1994 first quarter. See Note 6.
In the first and second fiscal quarters, within the Food, Leisure and Support Services Segment there is a lower level of activity at the higher margin leisure and recreational food service operations which is partly offset by increased activity in the educational market. In addition, there is a seasonal increase in volume of directly marketed work clothing and casual apparel during the first quarter. Whereas in the third and fourth fiscal quarters, there is a significant increase at leisure and recreational accounts which is partially offset by the effect of summer closings in the educational market.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. BUSINESS SEGMENTS:
The Company provides or manages services in the following business segments:
Food, Leisure and Support Services - Food, refreshment, specialized dietary and support services, including maintenance and housekeeping, provided to business, educational, governmental and medical institutions and in recreational and other facilities serving the general public. Fiscal 1994 operating income includes a $5.8 million gain on the sale of stock of an affiliate and the 1993 operating income includes a $15 million gain from a divestiture and a reserve of approximately $18 million for potential adjustments as described in Note 2. The 1994 segment operating results have been adversely impacted by the U.S. Major League Baseball strike which began on August 12. Had the strike not occurred, it is estimated that segment revenues and operating income would have been approximately 2% and 6% greater than the reported results, respectively. Also, total Company operating income and income before extraordinary items would have been approximately 3% and 5% higher, respectively.
Uniform Services - Rental of personalized work apparel and linens for business and institutions on a contract basis and the direct marketing of work clothing, casual apparel, and accessories.
Health and Education Services - General management of child care centers, and specialized services to emergency rooms, and other hospital specialties, and medical services to correctional institutions. As described in Note 2, the Company divested Living Centers, the operator of nursing care facilities, in February 1992 and sold its remaining Living Centers common stock during fiscal 1993. Revenues related to Living Centers for fiscal 1992 were $132.8 million. The Health and Education Services segment operating income for fiscal 1992 includes a divestiture gain of $13 million, as described in Note 2. Approximately 40% of the segment operating income for fiscal 1992 was related to Living Centers, including the 1992 divestiture gain. The operating income of this segment, excluding Living Centers results, was $32.5 million in 1992.
Distributive Services - Wholesale distribution of magazines and other published materials to retail locations patronized by the general public.
Revenues by segment are substantially comprised of services to unaffiliated customers and clients. Operating income reflects expenses directly related to individual segments plus an allocation of expenses applicable to more than one segment. General corporate expenses include expenses not specifically identifiable with an individual segment. Fiscal 1994 expenses include unusual costs related to several corporate development and strategic initiatives, including costs related to a change in corporate identity. In 1992 unusual costs were incurred in connection with a potential acquisition and several special development programs. Direct selling expenses are approximately 1% of revenues for fiscal 1994, 1993 and 1992. Corporate assets consist principally of goodwill not allocable to any individual segment and other noncurrent assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. BUSINESS SEGMENTS: (Continued)
Depreciation and Amortization, Capital Expenditures and Identifiable Assets
Identifiable Assets ------------------------------------- 1994 1993 1992 ---- ---- ---- (in millions)
Food, Leisure & Support Services $1,085.7 $1,054.6 $1,046.5 Uniform Services 608.7 570.7 567.6 Health & Education 280.2 261.3 241.0 Distributive 74.2 65.6 69.1 -------- -------- -------- 2,048.8 1,952.2 1,924.2
Corporate 73.2 88.4 80.8 -------- -------- --------
$2,122.0 $2,040.6 $2,005.0 ======== ======== ========
Most services are provided in the United States, with operations also being conducted in Belgium, Canada, the Czech Republic, Germany, Hungary, Japan, Korea, Mexico, Spain and the United Kingdom. The Company's non-U.S. operations for each year contributed approximately 15% of total revenues and 9% of total operating income, and identifiable assets for these operations were approximately 11% of the total.
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ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ARAMARK CORPORATION BALANCE SHEETS SEPTEMBER 30, 1994 AND OCTOBER 1, 1993 (in thousands)
ASSETS
1994 1993 ----------- ---------- Current Assets: Receivables $ 498 $ 341 Inventories 187 270 Prepayments 2,032 1,411 ----------- ----------
Total current assets 2,717 2,022 ----------- ----------
Property & Equipment, net 9,436 7,857
Investment in Subsidiaries 634,154 611,573
Notes Receivable from ARAMARK Services, Inc. 225,000 400,000
Other Assets 6,634 6,304 ----------- ----------
$ 877,941 $1,027,756 =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Accounts payable $ 12,832 $ 10,457 Accrued expenses 23,093 25,760 ----------- ----------
Total current liabilities 35,925 36,217 ---------- ----------
Long-Term Borrowings 290,414 474,875
Other Noncurrent Liabilities 45,217 39,048
Payable to Subsidiaries 303,035 331,892
Common Stock Subject to Potential Repurchase Under Provisions of Shareholders' Agreement 20,791 21,651
Shareholders' Equity Excluding Common Stock Subject to Repurchase: Series C preferred stock, redemption value $1,000 16,949 34,596 Class A common stock, par value $.01 21 21 Class B common stock, par value $.01 243 243 Earnings retained for use in the business 178,587 104,827 Cumulative translation adjustment 7,550 6,037 Impact of potential repurchase feature of common stock (20,791) (21,651) ---------- ----------
Total 182,559 124,073 ---------- ----------
$ 877,941 $1,027,756 ========== ==========
The accompanying notes are an integral part of these financial statements.
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ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
ARAMARK CORPORATION STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1994, OCTOBER 1, 1993 AND OCTOBER 2, 1992 (in thousands)
The accompanying notes are an integral part of these financial statements.
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ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
ARAMARK CORPORATION STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1994, OCTOBER 1, 1993 AND OCTOBER 2, 1992 (in thousands)
The accompanying notes are an integral part of these financial statements.
S-28
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
ARAMARK CORPORATION NOTES TO FINANCIAL STATEMENTS
Note 1.
These statements should be read in conjunction with the Company's consolidated financial statements and notes thereto beginning on page S-4.
Property and equipment are stated at cost and are depreciated over their estimated useful lives on a straight-line basis.
Other assets consist primarily of long-term receivables arising from the divestiture of subsidiaries.
Other noncurrent liabilities consist primarily of deferred compensation and subordinated installment notes arising from repurchases of common stock.
Note 2.
During fiscal 1993, certain subsidiaries of the Company made a dividend distribution totaling approximately $140 million. This transaction resulted in a reduction in the payable to subsidiaries.
Note 3.
The Company has guaranteed certain obligations of ARAMARK Services, Inc., its wholly-owned subsidiary, primarily those incurred pursuant to the Credit Agreement borrowings. See Note 4 to the Company's consolidated financial statements. Total guarantees were $725 million on September 30, 1994.
S-29
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
(1) Represents the fair market value at the date of acquisition of assets acquired in business combinations accounted for as purchases.
(2) Reflects primarily the adoption of SFAS No. 109 and the impact of currency translation.
S-30
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT FOR THE FISCAL YEAR ENDED OCTOBER 1, 1993
(1) Represents the fair market value at the date of acquisition of assets acquired in business combinations accounted for as purchases.
(2) Reflects the impact of currency translation and reclassification of assets between categories.
S-31
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT FOR THE FISCAL YEAR ENDED OCTOBER 2, 1992
(1) Represents the fair market value at the date of acquisition of assets acquired in business combinations accounted for as purchases.
(2) Reflects the impact of currency translation.
S-32
(1) Reference is made to Note 1 of the consolidated financial statements concerning the Company's depreciation policies.
S-33
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT FOR THE FISCAL YEAR ENDED OCTOBER 1, 1993
(1) Reference is made to Note 1 of the consolidated financial statements concerning the Company's depreciation policies.
(2) Reflects reclassification between categories.
S-34
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT FOR THE FISCAL YEAR ENDED OCTOBER 2, 1992
(1) Reference is made to Note 1 of the consolidated financial statements concerning the Company's depreciation policies.
S-35
ARAMARK CORPORATION AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1994, OCTOBER 1, 1993 AND OCTOBER 2, 1992
(1) Allowances granted and amounts determined not to be collectible.
S-36
ARAMARK CORPORATION AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1994, OCTOBER 1, 1993 AND OCTOBER 2, 1992
(in thousands)
(1) Not presented because each amount was less than one percent of revenues.
S-37
INDEX TO EXHIBITS