1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 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 July 29, 1994: 2,104,347
Class B common stock outstanding at July 29, 1994: 24,707,847
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
ASSETS
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July 1, October 1,
1994 1993
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Current Assets:
Cash and cash equivalents $ 38,750 $ 27,801
Receivables 410,163 388,768
Inventories, at lower of cost or market 246,897 249,858
Prepayments and other current assets 88,529 63,381
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Total current assets 784,339 729,808
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Property and Equipment, net 663,071 648,379
Goodwill 437,145 446,261
Other Assets 201,668 216,193
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$2,086,223 $2,040,641
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term borrowings $ 10,847 $ 15,615
Accounts payable 300,835 329,129
Accrued expenses and other liabilities 376,818 340,722
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Total current liabilities 688,500 685,466
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Long-Term Borrowings 1,018,563 1,008,674
Deferred Income Taxes and Other Noncurrent Liabilities 184,255 182,693
Minority Interest 16,810 18,084
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 23,186 21,651
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Class C preferred stock, redemption value $1,000 17,617 34,596
Class A common stock, par value $.01 21 21
Class B common stock, par value $.01 247 243
Earnings retained for use in the business 154,250 104,827
Cumulative translation adjustment 5,960 6,037
Impact of potential repurchase feature of common stock (23,186) (21,651)
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Total 154,909 124,073
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$2,086,223 $2,040,641
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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
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months Ended For the Nine Months Ended
--------------------------------- --------------------------------
July 1, July 2, July 1, July 2,
1994 1993 1994 1993
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Revenues $1,309,085 $1,242,155 $3,858,719 $3,645,493
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of services provided 1,185,363 1,124,615 3,521,319 3,325,596
Depreciation and amortization 34,362 32,986 103,588 97,568
Selling and general corporate expenses 15,947 16,140 49,419 47,858
Other expense (income) - (190) - (4,535)
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1,235,672 1,173,551 3,674,326 3,466,487
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Operating income 73,413 68,604 184,393 179,006
Interest Expense, net 26,352 29,499 84,108 93,561
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Income before income taxes 47,061 39,105 100,285 85,445
Provision for Income Taxes 19,572 16,481 40,462 34,233
Minority Interest 368 344 1,191 1,106
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Income before Cumulative Effect of Change
in Accounting for Income Taxes and
Extraordinary Item 27,121 22,280 58,632 50,106
Cumulative Effect of Change in Accounting
for Income Taxes - - 1,277 -
Extraordinary Item due to Early Extinguishment
of Debt (net of income taxes) 2,518 902 3,337 5,199
------------ ------------ ------------ ------------
Net income $ 24,603 $ 21,378 $ 54,018 $ 44,907
============ ============ ============ ============
Earnings Per Share:
Income before cumulative effect of change in
accounting for income taxes and extraordinary item $.53 $.44 $1.15 $.98
Net income $.48 $.42 $1.05 $.87
==== ==== ===== ====
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
(Unaudited)
(In Thousands)
For the Nine Months Ended
---------------------------------
July 1, July 2,
1994 1993
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Cash flows from operating activities:
Net income $ 54,018 $ 44,907
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 103,588 97,568
Income taxes deferred (4,099) 240
Minority interest 1,191 1,106
Cumulative effect of accounting change 1,277 -
Extraordinary item 3,337 5,199
Changes in noncash working capital (41,417) (21,632)
Other operating activities (6,759) 2,992
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Net cash provided by operating activities 111,136 130,380
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Cash flows from investing activities:
Purchases of property and equipment (93,931) (95,125)
Disposals of property and equipment 7,705 8,422
Divestiture of certain businesses 6,887 -
Sale of investment 6,194 15,945
Acquisition of certain businesses (9,839) (13,449)
Other investing activities (755) (5,002)
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Net cash used in investing activities (83,739) (89,209)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 87,168 107,170
Payment of long-term borrowings including premiums (84,393) (89,536)
Proceeds from issuance of common stock 12,060 9,308
Repurchase of stock (29,305) (42,423)
Payment of special dividend - (24,157)
Other financing activities (1,978) (3,015)
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Net cash used in financing activities (16,448) (42,653)
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Increase (decrease) in cash and cash equivalents 10,949 (1,482)
Cash and cash equivalents, beginning of period 27,801 23,785
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Cash and cash equivalents, end of period $ 38,750 $ 22,303
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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:
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The condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the statements include all
adjustments (which include only normal recurring adjustments) required
for a fair statement of financial position, results of operations and
cash flows for such periods. The results of operations for the interim
periods are not necessarily indicative of the results for a full year.
(2) OTHER EXPENSE (INCOME):
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During the first nine months of fiscal 1993, the Company sold all of its
remaining 864,000 shares of stock of Living Centers of America, Inc. for
$15.9 million. Other expense (income) in fiscal 1993 includes the gain
from the sale of this investment of $8.0 million and a $3.5 million
addition to the claims and litigation reserve.
(3) EARLY EXTINGUISHMENT OF DEBT:
-----------------------------
Through July 1, 1994, the Company has redeemed $65.8 million of its
12.5% subordinated debentures ($52.4 million in the fiscal third
quarter). As a result of cash premiums paid in connection with the
redemption, the Company recorded an extraordinary item of $3.3 million
and $2.5 million (net of tax benefit of $2.2 million and $1.7 million)
for the nine month and three month periods ended July 1, 1994,
respectively. In July, 1994 the Company redeemed the remaining $116.3
million of 12.5% debentures outstanding and will record an extraordinary
item for debt extinguishment of $4.3 million (net of tax benefit of $2.9
million) in the fiscal 1994 fourth quarter. The debt extinguishments
were financed through additional borrowings under the Company's
revolving credit facility.
During the first nine months of fiscal 1993, the Company repurchased
$100 million of its 10.55% senior notes (issuing $100 million of 8.25%
senior notes) and redeemed $12.3 million of its 12.5% subordinated
debentures. As a result of cash premiums paid in connection with these
transactions the Company recorded an extraordinary item of $5.2 million
(net of tax benefit of $3.3 million).
(4) REVOLVING CREDIT AGREEMENT
--------------------------
Subsequent to July 1, 1994, the revolving credit facility was amended
to, among other matters, increase the maximum borrowing limit from $650
million to $800 million, and extend the final maturity to October 2001.
(5) CAPITAL STOCK:
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During the first nine months of fiscal 1994, pursuant to the ARA
Ownership Program, employees purchased 2,555,606 shares or $16.1 million
of Class B Common Stock for $12.1 million of cash plus $4.0 million of
deferred payment obligations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(6) SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
The Company made interest payments of $76.1 million and $80.3 million
and income tax payments of $38.4 million and $26.7 million during the
first nine months of fiscal 1994 and 1993, respectively. During the
first nine months of fiscal 1994, the Company repurchased $17.0 million
of its Preferred Stock and $24.3 million of its Common Stock, issuing
$11.9 million in subordinated installment notes as partial
consideration, and contributed $3.5 million of Class A Common Stock to
its employee benefit plans.
(7) ARA SERVICES, INC. AND SUBSIDIARIES:
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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 Nine Months Ended
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July 1, July 2, July 1, July 2,
1994 1993 1994 1993
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(in millions)
Revenues $681.8 $643.7 $2,105.0 $1,992.1
Cost of services provided 642.8 607.8 1,978.3 1,870.9
Income before cumulative effect of
change in accounting for income
taxes and extraordinary item 2.1 1.5 10.3 10.7
Cumulative effect of change in
accounting for income taxes - - 0.3 -
Extraordinary item - - - 4.3
Net income 2.1 1.5 10.0 6.4
July 1, October 1,
1994 1993
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(in millions)
Current assets $ 331.6 $ 339.9
Noncurrent assets 1,259.2 1,221.2
Current liabilities 365.9 364.6
Noncurrent liabilities 1,147.1 1,126.1
Minority interest 16.8 18.1
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Item 2. 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 for the third quarter and $3.9 billion for the
nine month period increased 5% and 6%, respectively, over the comparable
prior year periods. Operating income for the third quarter was 7% higher
than the prior year quarter. Operating income for the nine months increased
3% over the comparable prior year period. Excluding fiscal 1993 "other
income" of $4.5 million, operating income increased 6% for the nine months.
(See note 2 to the condensed consolidated financial statements). The
Company's operating margin for the nine months of both fiscal 1994 and 1993,
was 4.8%
Interest expense for the three and nine month periods decreased 11% and
10%, respectively, compared to the prior year 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 third quarter and
nine months increased 22% and 17%, respectively. Net income for the nine
months includes a $1.3 million cumulative effect adjustment for a change in
method of accounting for income taxes. Extraordinary items attributed to the
early extinguishment of debt equaled $2.5 million and $0.9 million for the
third quarter of fiscal 1994 and 1993, respectively, and $3.3 million and
$5.2 million for the nine months of fiscal 1994 and 1993, respectively See
note 3 to the condensed consolidated financial statements.
Segment Results
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Food, Leisure and Support Services segment revenues increased 4% and 5%,
respectively, for the three and nine 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 nine months
reflecting increased volume from uniform rental operations and WearGuard.
Health and Education Services segment revenues increased 8% for the three and
nine 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 revenues increased approximately 2%
for the three and nine month periods due to volume increases in certain
geographical areas.
Food, Leisure and Support Services segment operating income increased
11% and 8% for the three and nine month periods, respectively, due to higher
revenues plus the positive effect of lower operating costs at certain
recreational facilities. Uniform Services segment operating income increased
6% and 8% for the respective three and nine month periods primarily due to
increased sales volume partially offset by the impact of somewhat higher
operating and marketing costs. Health and Education segment operating income
increased 13% for the third quarter and 9% for the nine months due primarily
to higher revenues. Distributive Services segment third quarter operating
income was about equal to the prior year due to higher operating costs
offsetting the effect of the revenue growth. Operating income for this
segment increased 3% for the nine month period due to higher revenues
combined with first quarter operating efficiencies. On August 12, 1994, the
Major League Baseball Players Association went on strike resulting in an
interruption at the stadiums where the Company provides food service. Due to
the uncertainty about the length of the strike at this time, the Company
cannot determine the financial impact.
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FINANCIAL CONDITION
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During the first nine months of fiscal 1994, cash flow generated from
operating activities principally financed seasonal working capital
requirements, capital expenditures and stock repurchases. Indebtedness
increased $5 million during the nine months ended July 1, 1994.
During July 1994, the Company amended its revolving credit agreement and
redeemed its remaining $116.3 million of 12.5% debentures - see notes 3 and 4
to the condensed consolidated financial statements. The Company currently
has approximately $315 million of unused committed credit (after the July
1994 redemption of the 12.5% debentures) available under its $800 million
revolving credit facility.
The Company has announced plans for a tender offer for the remaining
minority interest of its Canadian subsidiary. The tender offer is expected
to be completed by calendar yearend and the investment will approximate $30
million.
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PART II - OTHER INFORMATION
Items 1 through 4 are not applicable.
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Item 5: None.
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Item 6: Exhibits and Reports on Form 8-K
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(a) (1) Exhibit 11 - Computation of Fully Diluted Earnings
Per Share
(2) Exhibit 23 - Consent of Independent Securities Appraiser
(b) None
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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
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Alan J. Griffith
August 15, 1994 Controller and Chief Accounting Officer