1
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 April 1, 1994 Commission file number 1-8827
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THE ARA GROUP, INC.
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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)
The ARA 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 April 29, 1994: 2,142,596
Class B common stock outstanding at April 29, 1994: 25,377,676
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2
PART I - FINANCIAL INFORMATION
THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 1, 1994 AND OCTOBER 1, 1993
(Unaudited)
(In Thousands)
ASSETS
------
April 1, October 1,
1994 1993
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Current Assets:
Cash and cash equivalents $ 24,066 $ 27,801
Receivables 389,675 388,768
Inventories, at lower of cost or market 251,966 249,858
Prepayments and other current assets 124,519 63,381
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Total current assets 790,226 729,808
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Property and Equipment, net 656,207 648,379
Goodwill 441,682 446,261
Other Assets 206,126 216,193
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$2,094,241 $2,040,641
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term borrowings $ 12,056 $ 15,615
Accounts payable 292,125 329,129
Accrued expenses and other liabilities 384,220 340,722
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Total current liabilities 688,401 685,466
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Long-Term Borrowings 1,039,379 1,008,674
Deferred Income Taxes and Other Noncurrent Liabilities 180,710 182,693
Minority Interest 16,425 18,084
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 22,572 21,651
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class C preferred stock, redemption value $1,000 17,823 34,596
Class A common stock, par value $.01 21 21
Class B common stock, par value $.01 259 243
Capital surplus 13,417 -
Earnings retained for use in the business 133,431 104,827
Cumulative translation adjustment 4,375 6,037
Impact of potential repurchase feature of
common stock (22,572) (21,651)
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Total 146,754 124,073
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$2,094,241 $2,040,641
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
APRIL 1, 1994 AND APRIL 2, 1993
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
April 1, April 2, April 1, April 2,
1994 1993 1994 1993
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Revenues $1,257,614 $1,188,456 $2,549,634 $2,403,338
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of services provided 1,156,230 1,090,870 2,335,956 2,200,981
Depreciation and amortization 34,845 32,468 69,226 64,582
Selling and general corporate expenses 17,069 16,044 33,472 31,718
Other expense (income) - (735) - (4,345)
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1,208,144 1,138,647 2,438,654 2,292,936
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Operating income 49,470 49,809 110,980 110,402
Interest Expense, net 28,275 31,244 57,756 64,062
---------- ---------- ---------- ----------
Income before income taxes 21,195 18,565 53,224 46,340
Provision for Income Taxes 7,750 6,556 20,890 17,752
Minority Interest 321 375 823 762
---------- ---------- ---------- ----------
Income before Cumulative Effect of Change
in Accounting for Income Taxes and
Extraordinary Item 13,124 11,634 31,511 27,826
Cumulative Effect of Change in Accounting
for Income Taxes - - 1,277 -
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) 117 - 819 4,297
---------- ---------- ---------- ----------
Net income $ 13,007 $ 11,634 $ 29,415 $ 23,529
========== ========== ========== ==========
Earnings Per Share:
Income before cumulative effect of
change in accounting for income
taxes and extraordinary item $.25 $.23 $.61 $.55
Net income $.25 $.23 $.57 $.46
==== ==== ==== ====
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
APRIL 1, 1994 AND APRIL 2, 1993
(Unaudited)
(In Thousands)
1994 1993
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Cash flows from operating activities:
Net income $ 29,415 $ 23,529
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 69,226 64,582
Income taxes deferred (1,818) 262
Minority interest 823 762
Extraordinary item 819 4,297
Cumulative effect of accounting change 1,277 -
Changes in noncash working capital (63,465) (60,832)
Other operating activities (3,579) 1,911
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Net cash used in operating activities 32,698 34,511
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Cash flows from investing activities:
Purchases of property and equipment (59,197) (60,719)
Disposals of property and equipment 6,190 5,676
Divestiture of certain businesses 5,223 -
Sale of investment 6,194 13,877
Acquisition of certain businesses (6,279) (12,267)
Other investing activities (2,048) (5,606)
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Net cash used in investing activities (49,917) (59,039)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 52,863 49,058
Payment of long-term borrowings including premiums (27,082) (21,004)
Proceeds from issuance of common stock 10,584 8,440
Repurchase of stock (21,435) (12,926)
Other financing activities (1,446) (1,613)
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Net cash provided by financing activities 13,484 21,955
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Decrease in cash and cash equivalents (3,735) (2,573)
Cash and cash equivalents, beginning of period 27,801 23,785
-------- --------
Cash and cash equivalents, end of period $ 24,066 $ 21,212
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
THE ARA GROUP, INC. 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. 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 on
management's current assessment, the estimated remaining useful life
of goodwill is appropriate and the remaining balance is fully
recoverable.
(2) OTHER EXPENSE (INCOME):
-----------------------
During the first six months of fiscal 1993, the Company sold 768,000
shares of stock of Living Centers of America, Inc. for $13.9 million.
Other expense (income) in fiscal 1993 includes gains on the sale of
stock of $6.8 million and a $2.5 million addition to the claims and
litigation reserve in the second quarter.
(3) EARLY EXTINGUISHMENT OF DEBT:
-----------------------------
During the first six months of fiscal 1994, the Company redeemed $13.4
million of its 12.5% subordinated debentures for total cash premiums
of $1.2 million. During the first six months of fiscal 1993, the
Company repurchased $100 million of its 10.55% senior notes for a $7
million cash premium and issued $100 million of 8.25% senior notes.
For the first six months of fiscal 1994 and 1993, the redemption
premiums (net of applicable income tax benefits of $0.5 million and
$2.7 million, respectively), are reflected in the Condensed
Consolidated Statements of Income as an "Extraordinary Item".
(4) CAPITAL STOCK:
--------------
During the first six months of fiscal 1994, pursuant to the ARA
Ownership Program, employees purchased 2,371,195 shares or $14.5
million of Class B Common Stock for $10.6 million of cash plus $3.9
million of deferred payment obligations.
(5) SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
The Company made interest payments of $54.5 million and $63.2 million
and income tax payments of $23.9 million and $18.8 million during the
first six months of fiscal 1994 and 1993, respectively. During the
first six months of fiscal 1994, the Company purchased $16.8 million
of its Preferred Stock and $5.3 million of its Common Stock, issuing
$1.0 million in subordinated installment notes as partial
consideration, and contributed $3.4 million of Class A Common Stock to
its employee benefit plans.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(6) ARA SERVICES, INC. AND SUBSIDIARIES:
------------------------------------
The following financial information has been summarized from the
separate consolidated financial statements of ARA Services, Inc. (a
wholly owned subsidiary of The ARA Group, Inc.) and the subsidiaries
which it currently owns. ARA 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 The ARA Group,
Inc.
For the Three Months Ended For the Six Months Ended
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April 1, April 2, April 1, April 2,
1994 1993 1994 1993
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(in thousands)
Revenues $707.7 $675.0 $1,423.2 $1,348.4
Cost of services provided 665.5 635.1 1,335.5 1,263.1
Income before cumulative effect of
change in accounting for income
taxes and extraordinary item 2.8 2.5 8.2 9.2
Cumulative effect of change in
accounting for income taxes - - 0.3 -
Extraordinary item - - - 4.3
Net income 2.8 2.5 7.9 4.9
April 1, October 1,
1994 1993
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(in thousands)
Current assets $ 342.8 $ 339.9
Noncurrent assets 1,289.6 1,221.2
Current liabilities 382.8 364.6
Noncurrent liabilities 1,174.6 1,126.1
Minority interest 16.4 18.1
7
THE ARA GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
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Overview
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Revenues of $1.3 billion and $2.5 billion for the second quarter and
six months, respectively, were 6% higher than the comparable prior year
periods. Operating income for the second quarter of $49.5 million was
approximately the same as the prior year quarter. For the six month
period, operating income of $111.0 million was also approximately the same
as the prior year period. Excluding the fiscal 1993 other income of $0.7
million for the three months and $4.3 million for the six months,
operating income increased 1% and 5%, respectively, over the comparable
prior year periods. See note 2 to the condensed consolidated financial
statements. The Company's operating margin for the six months, excluding
the 1993 other income, was 4.4% for both periods.
Interest expense decreased 10% for the three and six month periods due
primarily to the favorable impact of refinancing certain of the Company's
long-term notes and subordinated debentures. Income before cumulative
effect of change in accounting for income taxes and extraordinary item for
the three and six months increased 13% versus 1993. Net income for the
six months includes a $1.3 million cumulative effect adjustment for a
change in method of accounting for income taxes. Extraordinary items for
the six month period in fiscal 1994 and 1993 equaled $0.8 million and $4.3
million, respectively. See note 3 to the condensed consolidated financial
statements.
Segment Results
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Food, Leisure and Support Services segment revenues increased 5% for
the three and six month periods due to new domestic food service accounts,
new arena and convention center contracts and the September 1993
acquisition of a Spanish food service company partially offset by a 1%
revenue decline due to the unfavorable effect of currency exchange rates.
Uniform Services segment revenues increased 11% for the three and six
months reflecting increased volume from uniform rental operations and
WearGuard. Health and Education Services segment revenues increased 7%
and 8%, respectively, for the three and six month periods due primarily to
new contracts and higher base business volume at Spectrum Healthcare and
continued enrollment growth at Children's World. The Distributive
Services segment posted revenue increases of 2% and 3% for the three and
six month periods, respectively, due to volume increases in certain
geographical areas.
8
Food, Leisure and Support Services segment operating income increased
10% and 5% for the three and six month periods, respectively, compared to
the prior year due to higher revenues plus the positive effect of lower
off-season costs at certain recreational facilities. Uniform Services
segment operating income increased 8% and 10% for the respective three and
six month periods primarily due to increased sales volume partially offset
by somewhat higher operating costs at uniform rental operations. Health
and Education segment operating income increased 10% for the second
quarter and 7% for the six months due primarily to higher revenues.
Distributive Services segment operating income for the three months
approximated the prior year as the favorable impact of higher revenues was
offset by higher costs incurred as a result of the January, 1994
California earthquake. Operating income for this segment increased 6% for
the six months due to higher revenues combined with first quarter
operating efficiencies.
FINANCIAL CONDITION
-------------------
The Company's indebtedness increased $27 million during the first six
months of fiscal 1994 principally to finance capital expenditures,
seasonal working capital requirements and stock repurchases. Stock
repurchases of $21 million include $17 million of preferred stock
repurchases. The Company currently has approximately $240 million of
unused committed credit available under its $650 million revolving credit
facility.
9
PART II - OTHER INFORMATION
Item 1: Not Applicable.
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Item 2: The Restated Certificate of Incorporation was amended to
------- eliminate the requirement of a supermajority vote of directors
for certain Board actions and to provide for certain other
matters.
Item 3: Not Applicable.
-------
Item 4: (a) The Annual Meeting of Stockholders was held on January 11,
------- 1994.
(b) Not Applicable.
(c) A proposal to amend the Restated Certificate of
Incorporation to eliminate the requirement of a
supermajority vote of directors for certain Board actions
and to provide for certain other matters was voted upon and
approved at the meeting. There were 23,843,155 affirmative
votes and 205,917 negative or abstained votes cast with
respect to this matter.
(d) Not Applicable.
Item 5: Not Applicable.
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Item 6: Exhibits and Reports on Form 8-K
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(a)(1)Exhibit 3 - Restated Certificate of Incorporation
(2)Exhibit 11 - Computation of Fully Diluted Earnings Per
Share
(b)None
10
SIGNATURE
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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.
THE ARA GROUP, INC.
s/Alan J. Griffith
---------------------------------
Alan J. Griffith
May 16, 1994 Controller and Chief Accounting
Officer