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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 Commission file number
December 31, 1993 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 January 28, 1994: 2,100,761
Class B common stock outstanding at January 28, 1994: 26,139,143
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PART I - FINANCIAL INFORMATION
THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND OCTOBER 1, 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
------ December 31, October 1,
1993 1993
Current Assets: ------------- ----------
<S> <C> <C>
Cash and cash equivalents $ 21,693 $ 27,801
Receivables 392,550 388,768
Inventories, at lower of cost or market 246,333 249,858
Prepayments and other current assets 144,002 63,381
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Total current assets 804,578 729,808
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Property and Equipment, net 658,071 648,379
Goodwill 443,849 446,261
Other Assets 209,147 216,193
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$2,115,645 $2,040,641
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: ------------------------------------
Current maturities of long-term borrowings $ 12,405 $ 15,615
Accounts payable 286,704 329,129
Accrued expenses and other liabilities 409,947 340,722
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Total current liabilities 709,056 685,466
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Long-Term Borrowings 1,041,551 1,008,674
Deferred Income Taxes and Other Noncurrent Liabilities 180,177 182,693
Minority Interest 18,052 18,084
Common Stock Subject to Potential Repurchase Under
Provisions of Shareholders' Agreement 22,488 21,651
Shareholders' Equity Excluding Common Stock
Subject to Repurchase:
Series C preferred stock, redemption value $1,000 34,445 34,596
Class A common stock, par value $.01 21 21
Class B common stock, par value $.01 248 243
Capital surplus 5,813 -
Earnings retained for use in the business 120,720 104,827
Cumulative translation adjustment 5,562 6,037
Impact of potential repurchase feature of common stock (22,488) (21,651)
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Total 144,321 124,073
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$2,115,645 $2,040,641
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The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1993 AND JANUARY 1, 1993
(Unaudited)
(In Thousands, Except Per Share Amounts)
Fiscal Fiscal
1994 1993
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Revenues $1,292,020 $1,214,882
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Costs and Expenses:
Cost of services provided 1,179,726 1,110,111
Depreciation and amortization 34,381 32,114
Selling and general corporate expenses 16,403 15,674
Other income - (3,610)
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1,230,510 1,154,289
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Operating income 61,510 60,593
Interest Expense, net 29,481 32,818
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Income before income taxes 32,029 27,775
Provision for Income Taxes 13,140 11,196
Minority Interest 502 387
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Income before Cumulative Effect of Change
in Accounting for Income Taxes and
Extraordinary Item 18,387 16,192
Cumulative Effect of Change in Accounting
for Income Taxes 1,277 -
Extraordinary Item Due to Early Extinguishment
of Debt (net of income taxes of $468 in
fiscal 1994 and $2,747 in fiscal 1993) 702 4,297
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Net income $ 16,408 $ 11,895
========== =========
Earnings Per Share:
Income before cumulative effect of change
in accounting for income taxes and
extraordinary item $.36 $.32
Net income $.32 $.24
==== ====
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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THE ARA GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1993 AND JANUARY 1, 1993
(Unaudited)
(In Thousands)
Fiscal Fiscal
1994 1993
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Cash flows from operating activities:
Net income $ 16,408 $ 11,895
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 34,381 32,114
Income taxes deferred (1,067) 785
Minority interest 502 387
Extraordinary item 702 4,297
Cumulative effect of accounting change 1,277 -
Changes in noncash working capital (62,261) (57,614)
Other operating activities (2,189) 85
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Net cash used in operating activities (12,247) (8,051)
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Cash flows from investing activities:
Purchases of property and equipment (28,213) (24,381)
Disposals of property and equipment 4,209 4,239
Sale of investments 6,194 8,270
Acquisition of certain businesses (3,472) (7,413)
Other investing activities (814) (1,460)
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Net cash used in investing activities (22,096) (20,745)
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Cash flows from financing activities:
Proceeds from additional long-term borrowings 49,163 33,589
Payment of long-term borrowings including premiums (20,666) (12,152)
Other financing activities (262) 2,181
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Net cash provided by financing activities 28,235 23,618
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Decrease in cash and cash equivalents (6,108) (5,178)
Cash and cash equivalents, beginning of period 27,801 23,785
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Cash and cash equivalents, end of period $ 21,693 $ 18,607
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 INCOME:
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During the first quarter of fiscal 1993, the Company sold 509,000 shares
of stock of Living Centers of America, Inc. for $8.3 million, resulting
in a gain of $3.6 million which is reflected in the Condensed
Consolidated Statement of Income as "Other Income".
(3) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES:
-----------------------------------------------------------
On October 2, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("FAS 109"), "Accounting for Income Taxes", which
requires a change from the deferred method to the liability method of
income tax accounting. FAS 109 was adopted prospectively by recording a
cumulative effect adjustment of $1.3 million ($.03 per share). The
adoption of FAS 109 did not have a material impact on the Company's
effective tax rate.
The components of the Company's deferred tax assets and liabilities at
the beginning of fiscal 1994 are as follows (in millions):
Deferred tax liabilities:
Depreciation and amortization $70.8
Inventory 5.8
Other 3.7
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Gross deferred tax liability 80.3
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Deferred tax assets:
Insurance 16.1
Employee compensation and benefits 24.9
Other accruals and allowances 24.4
Valuation allowance (2.3)
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Net deferred tax asset 63.1
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Net deferred income taxes $17.2
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(Continued)
The Company has not provided for possible U.S. or foreign taxes on the
undistributed earnings of non-U.S. subsidiaries that are considered to be
permanently invested. Determination of the unrecognized deferred tax
liability for temporary differences related to the undistributed earnings
is not practicable. Certain fiscal 1993 balance sheet items have been
reclassified to conform to the fiscal 1994 presentation.
(4) EARLY EXTINGUISHMENT OF DEBT:
-----------------------------
During the first quarter of fiscal 1994, the Company redeemed $11.4
million of its 12.5% subordinated debentures for a $1 million cash
premium. The Company entered into an agreement during the first quarter
of fiscal 1993 to redeem $100 million of its 10.55% senior notes for a $7
million cash premium paid in March, 1993. The redemption premiums, net
of related tax benefits, are reflected in the Condensed Consolidated
Statements of Income as an "Extraordinary Item".
(5) CAPITAL STOCK:
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During the first quarter of fiscal 1994, pursuant to the ARA Ownership
Program, employees purchased 652,128 shares or $3.9 million of Class B
Common Stock for $2.8 million cash plus $1.1 million of deferred payment
obligations.
(6) SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
The Company made interest payments of $20.6 million and $21.1 million and
income tax payments of $9.5 million and $8.5 million during the first
quarter of fiscal 1994 and 1993, respectively. During the first quarter
of fiscal 1994, the Company purchased $2.2 million of its Class B Common
Stock, issuing $0.6 million in subordinated installment notes as partial
consideration, and contributed $3.4 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(Continued)
For the Three Months Ended
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December 31, January 1,
1993 1993
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(in millions)
Revenues $715.5 $673.4
Cost of services provided 670.0 628.0
Income before cumulative effect of
change in accounting for income
taxes and extraordinary item 5.4 6.7
Cumulative effect of change in
accounting for income taxes 0.3 -
Extraordinary item - 4.3
Net income 5.1 2.4
December 31, October 1,
1993 1993
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(in millions)
Current assets $ 348.2 $ 339.9
Noncurrent assets 1,303.3 1,221.2
Current liabilities 405.7 364.6
Noncurrent liabilities 1,170.8 1,126.1
Minority interest 18.1 18.1
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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 for the first quarter of fiscal 1994 were 6%
higher than the comparable prior year. First quarter operating income of
$61.5 million was 2% higher than the comparable prior year period. Excluding
the fiscal 1993 $3.6 million other income described in note 2, operating
income increased 8%.
First quarter interest expense declined $3.3 million or 10% due primarily
to the favorable impact of refinancing certain of the Company's long-term
notes and subordinated debentures. The first quarter net income for fiscal
1994 and 1993 includes an extraordinary item due to early extinguishments of
debt of $.7 million and $4.3 million, respectively. Fiscal 1994 first quarter
net income also reflects a $1.3 million cumulative effect adjustment for the
change in method of accounting for income taxes. See notes 3 and 4 to the
condensed consolidated financial statements. Income before the extraordinary
item and cumulative effect adjustment was $18.4 million or 14% higher than the
prior year.
Segment Results
- ---------------
Food, Leisure and Support Services segment revenues increased 5% due to
new accounts in domestic food business, new arena contracts, and the September
1993 acquisition of a Spanish food service company. Uniform Services segment
revenues increased 12% reflecting increased volume at uniform rental
operations and WearGuard. Revenues for the Health and Education Services
segment increased 9% due to new contracts, higher volume at existing accounts
at Spectrum Healthcare Services and continued enrollment growth at Children's
World. The Distributive Services segment recorded a 4% increase in revenues
resulting from the favorable impact of higher unit volume of magazines in
certain geographical areas.
Food, Leisure and Support Services segment operating income increased 3%
due to the positive effects of higher revenues partially offset by lower
operating margins due to somewhat higher costs. Uniform Services operating
income increased 11% due to the higher revenues. Operating income for the
Health and Education Services segment increased 2% due primarily to the higher
segment revenues and operating efficiencies at Children's World partially
offset by an increase in costs incurred at Spectrum Healthcare Services. The
Distributive Services segment recorded a 12% increase in operating income as
higher revenues coupled with operating efficiencies resulted in improved
profits.
On January 17, 1994, Southern California, where the Company operates a
number of facilities, experienced a significant earthquake. The damage to the
Company's facilities and the related interruption in business were minor and
will not have a material affect on results of operations or financial
condition.
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FINANCIAL CONDITION
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The Company's indebtedness increased $30 million during the first quarter
of fiscal 1994 principally to finance capital expenditures and a seasonal
increase in working capital. The Company currently has approximately $280
million of unused committed credit availability under its $650 million
revolving credit facility.
The Company adopted Statement of Financial Accounting Standards No. 109
("FAS 109"), "Accounting for Income Taxes" during the first quarter of 1994.
The cumulative effect of the change in method of accounting for income taxes
was to reduce net income by $1.3 million ($.03 per share). See note 3 to the
condensed consolidated financial statements.
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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) Exhibit 11 - Computation of Fully Diluted Earnings Per Share
(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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February 11, 1994 Alan J. Griffith
Controller and Chief Accounting Officer
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EXHIBIT 11
THE ARA GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share data)
Three Months Ended
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December 31, January 1,
1993 1993
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Earnings:
Net Income $16,408 $11,895
Preferred stock dividends (511) -
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Earnings applicable to common stock $15,897 $11,895
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Shares:
Weighted average number of common
shares outstanding (2) 45,758 44,851
Impact of potential exercise opportunities
under the ARA Ownership Plan 3,828 5,687
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Total common and common
equivalent shares 49,586 50,538
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Fully diluted earnings per common share (1) $.32 $.24
==== ====
(1) Primary and fully diluted earnings per share are approximately the same.
(2) Includes Class B plus Class A Common Shares stated on a Class B Common
Share Equivalent Basis.
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