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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended Commission File
July 26, 2003 Number 1-5674
ANGELICA CORPORATION
(Exact name of Registrant as specified in its charter)
MISSOURI 43-0905260
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
424 South Woods Mill Road
CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
(314) 854-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
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
----- -----
The number of shares outstanding of Registrant's Common Stock, par value
$1.00 per share, at September 1, 2003 was 8,822,160 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
JULY 26, 2003 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Income - Second Quarter and
First Half ended July 26, 2003 and July 27, 2002 (Unaudited) 2
Consolidated Balance Sheets - July 26, 2003
and January 25, 2003 (Unaudited) 3
Consolidated Statements of Cash Flows - First Half
ended July 26, 2003 and July 27, 2002 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 14-15
PART II. OTHER INFORMATION:
Item 4. Results of Votes of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
Second Quarter Ended First Half Ended
------------------------- -------------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- --------- ---------
CONTINUING OPERATIONS:
Textile service revenues $ 70,963 $ 66,795 $ 142,346 $ 135,176
Net retail sales 18,761 21,731 40,417 46,607
-------- -------- --------- ---------
Combined sales and revenues 89,724 88,526 182,763 181,783
-------- -------- --------- ---------
Cost of textile services (57,095) (52,621) (114,890) (106,921)
Cost of retail goods sold (8,786) (9,746) (18,774) (21,832)
-------- -------- --------- ---------
Combined cost of textile services and goods sold (65,881) (62,367) (133,664) (128,753)
-------- -------- --------- ---------
Gross profit 23,843 26,159 49,099 53,030
Selling, general and administrative expenses (21,289) (21,536) (42,870) (43,077)
Restructuring charge reversal (Note 4) 180 - 310 -
Other operating (expense) income, net (138) 439 (276) 76
-------- -------- --------- ---------
Income from operations 2,596 5,062 6,263 10,029
Interest expense (155) (684) (393) (2,246)
Non-operating income (Note 5) 1,878 291 1,915 413
Loss on early extinguishment of debt (Note 6) - (6,783) - (6,783)
-------- -------- --------- ---------
Income (loss) from continuing operations pretax 4,319 (2,114) 7,785 1,413
Income tax (provision) benefit (Note 7) (1,339) 973 (2,465) (261)
-------- -------- --------- ---------
Income (loss) from continuing operations 2,980 (1,141) 5,320 1,152
DISCONTINUED OPERATIONS (Note 8):
Loss on disposal of discontinued segment - (1,479) - (8,320)
Income tax benefit of loss - 518 - 2,912
-------- -------- --------- ---------
Loss from discontinued operations - (961) - (5,408)
-------- -------- --------- ---------
Net income (loss) $ 2,980 $ (2,102) $ 5,320 $ (4,256)
======== ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE (Note 9):
Income (loss) from continuing operations $ 0.34 $ (0.13) $ 0.60 $ 0.13
Loss from discontinued operations - (0.11) - (0.62)
-------- -------- --------- ---------
Net income (loss) $ 0.34 $ (0.24) $ 0.60 $ (0.49)
======== ======== ========= =========
DILUTED EARNINGS (LOSS) PER SHARE (Note 9):
Income (loss) from continuing operations $ 0.33 $ (0.13) $ 0.60 $ 0.13
Loss from discontinued operations - (0.11) - (0.62)
-------- -------- --------- ---------
Net income (loss) $ 0.33 $ (0.24) $ 0.60 $ (0.49)
======== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
July 26, January 25,
2003 2003
-------- -----------
ASSETS
------
Current Assets:
Cash and short-term investments $ 4,246 $ 18,166
Receivables, less reserves of $910 and $724 36,214 35,316
Inventories 11,711 13,395
Linens in service 34,102 32,520
Prepaid expenses and other current assets 2,004 5,223
Deferred income taxes 6,806 6,110
Net current assets of discontinued segment (Note 8) - 2,162
-------- --------
Total Current Assets 95,083 112,892
-------- --------
Property and Equipment 191,257 178,237
Less -- reserve for depreciation 104,647 99,684
-------- --------
Total Property and Equipment 86,610 78,553
-------- --------
Other:
Goodwill (Note 10) 4,256 4,256
Other acquired assets (Note 10) 1,885 2,146
Cash surrender value of life insurance 28,300 27,576
Deferred income taxes 1,210 1,405
Miscellaneous 1,157 1,456
-------- --------
Total Other Assets 36,808 36,839
-------- --------
Total Assets $218,501 $228,284
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 184 $ 237
Accounts payable 19,458 19,905
Accrued wages and other compensation 5,669 9,300
Other accrued liabilities 22,653 22,153
-------- --------
Total Current Liabilities 47,964 51,595
-------- --------
Long-Term Debt, less current maturities 10,401 20,574
Other Long-Term Obligations 16,239 16,455
-------- --------
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,481 4,481
Retained earnings 140,761 137,548
Accumulated other comprehensive loss (544) (511)
Unamortized restricted stock (573) -
Common Stock in treasury, at cost: 654,494 and 741,755 (9,700) (11,330)
-------- --------
Total Shareholders' Equity 143,897 139,660
-------- --------
Total Liabilities and Shareholders' Equity $218,501 $228,284
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
First Half Ended
-------------------------------------
July 26, 2003 July 27, 2002
------------- -------------
Cash Flows from Operating Activities:
Income from continuing operations $ 5,320 $ 1,152
Non-cash items included in income from continuing operations:
Depreciation 5,925 6,592
Amortization 510 413
Restructuring charge reversal (Note 4) (310) -
Cash surrender value of life insurance (724) (735)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of 1,460 (2,149)
Other, net (706) (482)
-------- --------
Net cash provided by operating activities of continuing operations 11,475 4,791
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (13,982) (5,543)
Cost of businesses acquired (106) -
Disposals of businesses and property - 1,158
-------- --------
Net cash used in investing activities of continuing operations (14,088) (4,385)
-------- --------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing and revolving debt (32,226) (81,587)
Borrowings of long-term revolving debt 22,000 33,200
Dividends paid (1,761) (1,380)
Treasury stock reissued 567 673
-------- --------
Net cash used in financing activities of continuing operations (11,420) (49,094)
-------- --------
Net cash provided by discontinued operations (Note 8) 113 39,109
-------- --------
Net decrease in cash and short-term investments (13,920) (9,579)
Balance at beginning of year 18,166 18,742
-------- --------
Balance at end of period $ 4,246 $ 9,163
======== ========
Supplemental cash flow information:
Income taxes paid $ 133 $ 972
Interest paid $ 252 $ 3,421
The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER AND FIRST HALF ENDED
JULY 26, 2003 AND JULY 27, 2002
Note 1. Basis of Presentation
------------------------------
The accompanying condensed consolidated financial statements are
unaudited, and these consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the fiscal year ended January 25, 2003. It is
Management's opinion that all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results
during the interim periods have been included. All significant
intercompany accounts and transactions have been eliminated. The
results of operations and cash flows for the second quarter and first
half ended July 26, 2003 are not necessarily indicative of the
results that will be achieved for the full year.
Certain amounts in the prior periods have been reclassified to
conform to current period presentation.
Note 2. Stock-Based Compensation
---------------------------------
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair-value based
method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. See below for the Company's disclosure required by SFAS No.
148.
The Company has various stock option and stock bonus plans that
provide for the granting of incentive stock options, non-qualified
stock options, restricted stock and performance awards to certain
employees and directors. As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company applies Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans other than for restricted stock and performance-
based awards. Total restricted stock and performance-based awards
issued in the second quarter ended July 26, 2003 and July 27, 2002
amounted to $128,000 and $123,000, respectively; and $733,000 and
$161,000 for the first half ended July 26, 2003 and July 27, 2002,
respectively. The amounts included in reported net income (loss) for
restricted stock and performance-based awards in the second quarter
ended July 26, 2003 and July 27, 2002 totaled $100,000 and $51,000,
respectively; and $187,000 and $95,000 for the first half ended July
26, 2003 and July 27, 2002, respectively.
5
Had compensation expense for stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share for the second quarter and first
half ended July 26, 2003 and July 27, 2002 would approximate the
following pro forma amounts (dollars in thousands, except per share
data):
Second Quarter Ended First Half Ended
------------------------ ------------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss):
As reported $ 2,980 $ (2,102) $ 5,320 $ (4,256)
Deduct: Additional stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects (97) (113) (200) (221)
-------- -------- -------- --------
Pro forma net income (loss) $ 2,883 $ (2,215) $ 5,120 $ (4,477)
======== ======== ======== ========
Basic earnings (loss) per share:
As reported $ 0.34 $ (0.24) $ 0.60 $ (0.49)
Pro forma 0.33 (0.26) 0.58 (0.52)
Diluted earnings (loss) per share:
As reported $ 0.33 $ (0.24) $ 0.60 $ (0.49)
Pro forma 0.32 (0.26) 0.57 (0.51)
The effect of the application of SFAS No. 123 in this disclosure is
not necessarily indicative of the pro forma effect on net income in
future periods.
Note 3. New Accounting Pronouncements
--------------------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting
standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. The
Company adopted the provisions of SFAS No. 143 in the first quarter
ended April 26, 2003, which did not have a material impact on the
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments and for hedging activities under SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The Company adopted the provisions of SFAS No. 149 in
the second quarter ended July 26, 2003, which did not have a material
impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes
6
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The Company adopted the provisions of SFAS No. 150 in the second
quarter ended July 26, 2003, which did not have a material impact on
the consolidated financial statements.
Note 4. Restructuring Activities
---------------------------------
In fiscal 2003, the Company closed 25 of the 27 Life Uniform stores
included in the plan of restructuring adopted in fiscal 2002. In the
fourth quarter of fiscal 2003, Management decided not to close the
remaining two stores and, consequently, reversed $269,000 of the
restructuring charge related to these two stores. As of January 25,
2003, the balance in the restructuring reserve totaled $1,263,000. In
the first half of fiscal 2004, a total of $331,000 was charged to the
restructuring reserve, including $322,000 for lease termination costs
paid. In addition, the Company reversed $180,000 of the original
restructuring charge in the second quarter and $310,000 in the first
half ended July 26, 2003 due to favorable terminations of the store
leases that have been settled to date. As of July 26, 2003, there was
$622,000 remaining in the restructuring reserve that is expected to
be utilized for termination costs of the remaining store leases.
Note 5. General American Distribution
--------------------------------------
In the second quarter of fiscal 2004, the Company was notified it
will receive a pretax cash distribution of $1,848,000 in connection
with the liquidation of the parent company of General American Life
Insurance Company, an issuer of life insurance policies owned by the
Company for funding supplemental pension and deferred compensation
benefits. The Company expects to receive the distribution in the
third quarter this year. Accordingly, $1,848,000 was recorded in
non-operating income and receivables in the second quarter ended July
26, 2003. The Company anticipates it will receive at some time in the
future a second distribution of a nominal amount at the conclusion of
the liquidation proceedings. These distributions do not affect the
life insurance policies owned by the Company or their cash surrender
value.
Note 6. Loss on Early Extinguishment of Debt
---------------------------------------------
In the first quarter ended April 26, 2003, the Company adopted SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." Among other
things, this statement rescinds the extraordinary treatment applied
to gains and losses from extinguishment of debt pursuant to SFAS No.
4. During the second quarter of fiscal 2003, the Company incurred a
pretax loss of $6,783,000 on early extinguishment of debt that was
treated as an extraordinary item under SFAS No. 4. In accordance with
SFAS No. 145, the loss is treated as an ordinary rather than
extraordinary item, and accordingly, results for the second quarter
of fiscal 2003 have been restated to reflect this change in
accounting treatment.
7
Note 7. Income Taxes
---------------------
Taxes on income from continuing operations have been provided for at
an effective tax rate of 31.0 percent and 31.7 percent in the second
quarter and first half of fiscal 2004, respectively, based upon the
Company's estimated effective tax rate for the year. The effective
tax rate on income (loss) from continuing operations of 46.0 percent
and 18.5 percent in the second quarter and first half of fiscal 2003,
respectively, is due to the effect of the restatement of the
extraordinary loss (see Note 6) which was tax effected at the
incremental tax rate as a separate component of income (loss) from
continuing operations in fiscal 2003 in accordance with SFAS No. 109.
Note 8. Discontinued Operations
--------------------------------
In January 2002, the Company announced plans to dispose of its
Manufacturing and Marketing business. Consequently, the Manufacturing
and Marketing segment was accounted for as a discontinued operation
as of January 26, 2002, and a loss on disposal was recorded to write
down the net assets of the segment to their estimated net realizable
value, including estimates of the costs of disposal and transition.
The differences between these estimates as of July 27, 2002 compared
with April 27, 2002 and January 26, 2002 resulted in the recording of
an additional loss on disposal of $961,000 and $5,408,000 net of tax
in the second quarter and first half of fiscal 2003, respectively. In
fiscal 2003, the sale and discontinuation of the Manufacturing and
Marketing segment was completed and substantially all of the net
assets of the segment, primarily accounts receivable and inventory,
were disposed of. During the first half of fiscal 2004, the remaining
net current assets of the discontinued segment were disposed of for
amounts approximating their carrying values.
Note 9. Earnings (Loss) Per Share
----------------------------------
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of Common Stock
outstanding during the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number
of Common and Common equivalent shares outstanding.
The following table reconciles weighted average shares outstanding to
amounts used to calculate basic and diluted earnings (loss) per share
for the second quarter and first half ended July 26, 2003 and July
27, 2002 (shares in thousands):
Second Quarter Ended First Half Ended
------------------------- ------------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- -------- --------
Weighted average shares:
Average shares outstanding 8,811 8,654 8,798 8,635
Effect of dilutive securities - option shares 129 - 135 135
-------- -------- -------- --------
Average shares outstanding, adjusted for
dilutive effects 8,940 8,654 8,933 8,770
======== ======== ======== ========
Stock options having a potentially dilutive impact of 151 Common
equivalent shares are not included in the calculation of earnings
(loss) per share in the second quarter ended July 27, 2002, as their
effect is antidilutive on loss from continuing operations.
8
Note 10. Goodwill and Other Intangible Assets
----------------------------------------------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill is no longer
amortized effective with the Company's adoption date of January 27,
2002. Instead, goodwill is tested for impairment using a fair-value
based analysis at least annually as of a selected date, which is the
end of the third quarter for the Company.
As of July 26, 2003, the carrying amounts of goodwill allocated to
the Textile Services and Life Uniform segments were $3,465,000 and
$791,000, respectively, which were unchanged from the carrying values
as of January 25, 2003. During the first half ended July 26, 2003,
there were no material acquisitions or dispositions of other acquired
assets. Other acquired assets consisted of the following (dollars in
thousands):
July 26, 2003 January 25, 2003
---------------------------------------- -----------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
------ ------------ ----------- ------ ------------ -----------
Customer contracts $6,029 $(4,618) $1,411 $5,923 $(4,411) $1,512
Non-compete covenants 2,650 (2,176) 474 2,650 (2,016) 634
------ ------- ------ ------ ------- ------
Other acquired assets $8,679 $(6,794) $1,885 $8,573 $(6,427) $2,146
====== ======= ====== ====== ======= ======
Other acquired assets are scheduled to be fully amortized by fiscal
year 2009 with corresponding annual amortization expense estimated
for each fiscal year as follows (dollars in thousands):
2004 $703
2005 552
2006 436
2007 351
2008 183
2009 27
Note 11. Derivative Instruments and Hedging Activities
-------------------------------------------------------
The Company entered into an interest-rate swap agreement with one of
its lenders effective September 9, 2002. The swap agreement fixes the
variable portion of the interest rate at 3.58 percent on $10,000,000
of the outstanding debt under the revolving line of credit until
termination on May 30, 2007. The Company has elected to apply cash
flow hedge accounting for the interest-rate swap agreement in
accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Accordingly, the derivative is recorded as
an asset or liability at its fair value. The effective portion of
changes in the fair value of the derivative, as measured quarterly,
is reported in accumulated other comprehensive income, and the
ineffective portion, if any, is reported in net income of the current
period. The gain (loss) on the derivative included in accumulated
other comprehensive loss in the second quarter and first half ended
July 26, 2003 amounted to $10,000 and $(33,000), respectively, net of
tax. As of July 26, 2003, the Company has recorded a long-term
liability of $313,000 for the fair value of the derivative.
9
To minimize price risk due to market fluctuations, the Company has
entered into fixed-price contracts for approximately 58 percent of
its estimated natural gas purchase requirements in the next 12
months. Although these contracts are considered derivative
instruments, they meet the normal purchases exclusion contained in
SFAS No. 133, as amended by SFAS No. 138 and SFAS No. 149, and are
therefore exempted from the related accounting requirements.
Note 12. Comprehensive Income (Loss)
-------------------------------------
Comprehensive income (loss), consisting of net income (loss) and
changes in the fair value of derivatives used for interest rate risk
management, net of taxes, totaled $2,990,000 and $(2,102,000) for the
quarters ended July 26, 2003 and July 27, 2002, respectively; and
$5,287,000 and $(4,256,000) for the first half ended July 26, 2003
and July 27, 2002, respectively.
Note 13. Business Segment Information
--------------------------------------
Historically, the Company has operated principally in three industry
segments: Textile Services, Manufacturing and Marketing and Life
Uniform. Manufacturing and Marketing has been treated as a
discontinued operation for all periods presented due to the
discontinuation of this segment in January 2002. Textile Services
provides textile rental, laundry and linen management services
primarily to healthcare institutions. Life Uniform operates a
nationwide chain of specialty uniform and shoe stores, together with
a fully-integrated catalogue and e-commerce operation, selling to
healthcare professionals. All of the Company's services of its
continuing business segments are provided in the United States.
Summary data about each of the Company's continuing business segments
for the second quarter and first half ended July 26, 2003 and July
27, 2002 appears below (dollars in thousands):
Second Quarter Ended First Half Ended
-------------------------- ----------------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- --------- ---------
Combined sales and revenues:
Textile Services $ 70,963 $ 66,795 $ 142,346 $ 135,176
Life Uniform 18,761 21,731 40,417 46,607
-------- -------- --------- ---------
$ 89,724 $ 88,526 $ 182,763 $ 181,783
======== ======== ========= =========
Income from operations:
Textile Services $ 5,655 $ 6,651 $ 11,113 $ 12,535
Life Uniform (854) 522 (719) 1,223
Corporate expense (2,205) (2,111) (4,131) (3,729)
-------- -------- --------- ---------
$ 2,596 $ 5,062 $ 6,263 $ 10,029
======== ======== ========= =========
Depreciation and amortization:
Textile Services $ 2,348 $ 3,322 $ 4,785 $ 5,621
Life Uniform 673 580 1,331 1,142
Corporate 192 160 319 242
-------- -------- --------- ---------
$ 3,213 $ 4,062 $ 6,435 $ 7,005
======== ======== ========= =========
10
PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST HALF ENDED JULY 26, 2003
COMPARED WITH
SECOND QUARTER AND FIRST HALF ENDED JULY 27, 2002
Analysis of Operations
----------------------
Combined sales and revenues of $89,724,000 in the second quarter were
1.4 percent higher than the same quarter last year, and are up 0.5
percent to $182,763,000 for the first half versus the first half last
year. Strong revenue increases in the Textile Services segment more
than offset significant sales declines in the Life Uniform segment.
Operating income declined in both segments in the second quarter and
first half compared with the same periods a year ago. However, second
quarter income from continuing operations benefited from a pretax
distribution of $1,848,000 in connection with the liquidation of the
parent company of an issuer of life insurance policies owned by the
Company (see Note 5). Including this non-recurring item, net income was
$.34 per share ($.33 diluted) in the second quarter and $.60 per share
in the first half this year.
As discussed in Note 6, the Company restated its second quarter fiscal
2003 results to reflect the change from extraordinary to ordinary
accounting treatment of the loss on early extinguishment of debt of
$6,783,000 pretax. As a result of the restatement, the Company reported
a loss from continuing operations of $.13 per share in the second
quarter and income of $.13 per share from continuing operations in the
first half ended July 27, 2002. Including the loss on disposal of the
discontinued Manufacturing and Marketing segment of $961,000 and
$5,408,000 in the second quarter and first half of fiscal 2003,
respectively (see Note 8), the Company reported a per share net loss of
$.24 and $.49 in the second quarter and first half last year,
respectively.
Excluding the aforementioned non-recurring income in the second quarter this
year ($.14 per diluted share net of tax) and loss on early extinguishment of
debt in last year's second quarter ($.50 per diluted share net of tax),
income from continuing operations in the second quarter and first half ended
July 26, 2003 decreased to $.19 and $.45 per diluted share, respectively,
from $.37 and $.63 per diluted share in the second quarter and first half
ended July 27, 2002, respectively, as reported last year.
Textile Services
----------------
Textile Services segment revenues increased 6.2 percent in the second
quarter and 5.3 percent in the first half compared with the same
periods a year ago, benefiting from previous increases in net new
business. Revenues have also increased in the sub-acute market segment
(long-term care facilities and clinics). Operating earnings of the
segment decreased 15.0 percent in the second quarter this year, and are
down 11.3 percent in the first half, due to increased costs of workers'
compensation, utilities and delivery fuel. The unfavorable expense
comparison in workers' compensation costs, which totaled $514,000 in
the second quarter and $1,028,000 in the first half, is expected to be
offset by a favorable expense comparison approximating $1,000,000 in
this year's fourth quarter due to a significant increase in the prior
year's fourth quarter expense. Utilities and delivery fuel have
combined to account for $1,017,000 and
11
$1,356,000 of cost increases in the second quarter and first half,
respectively. In addition, second quarter fiscal 2003 segment earnings
included gains of $474,000 on the sale of the Denver, Colorado plant, and
$178,000 from the reversal of the intercompany profit deferral due to the
sale of the Manufacturing and Marketing segment. This year's first quarter
earnings benefited from a favorable settlement of litigation of $216,000
which reduced bad debt expense.
Life Uniform
------------
Life Uniform continued to experience significant sales declines in
fiscal 2004 due to weak demand. Sales decreased 13.7 percent in the
second quarter following a 12.9 percent decrease in the first quarter
compared with the prior year. Same-store sales were down 8.7 percent in
the second quarter, accounting for approximately one-half of the sales
decline. For the first half, same-store sales decreased 8.0 percent in
fiscal 2004 versus a 4.3 percent increase in fiscal 2003. Sales also
declined due to having 22 fewer stores in operation at the end of the
second quarter this year compared with last year, and the exiting of
the low-margin hospitality line of business last year as part of the
segment's fiscal 2002 restructuring plan. Catalogue and e-commerce
sales decreased 8.0 percent in the second quarter, but were up slightly
for the first half. This distribution channel has yet to reach the
breakeven level despite efforts to optimize costs. Gross margin of 53.2
percent in the second quarter was lower than the 55.2 percent of a year
ago which included a gain of $371,000, or 1.8 percent gross margin,
from the reversal of the intercompany profit deferral referred to
above. Primarily reflecting the lower sales volume, Life Uniform
suffered operating losses of $854,000 in the second quarter and
$719,000 in the first half of fiscal 2004, compared with operating
earnings of $522,000 and $1,223,000 in the second quarter and first
half of fiscal 2003, respectively. Expense reduction initiatives
implemented near the end of the first quarter this year are beginning
to have a positive impact on segment earnings. Life's operating results
in fiscal 2004 include restructuring charge reversals of $180,000 in
the second quarter and $310,000 in the first half (see Note 4).
Operating Expenses and Other
----------------------------
Selling, general and administrative expenses decreased 1.1 percent in
the second quarter to 23.7 percent of combined sales and revenues from
24.3 percent in the second quarter last year. For the first half, these
expenses decreased 0.5 percent to 23.5 percent of combined sales and
revenues from 23.7 percent a year ago. A second quarter decrease in
Life Uniform store operating expenses of $471,000 due to fewer stores
and lower catalogue expenses of $169,000 were mostly offset by
increases of $280,000 for support and maintenance of Life's new
information systems and $160,000 of corporate expense related to the
Company's search for a new Chief Executive Officer. The $439,000 of net
other operating income in the second quarter last year includes the
aforementioned gain on the sale of Textile Services' Denver plant. The
reduction in interest expense of $529,000 in the second quarter and
$1,853,000 in the first half reflects the lower debt level and lower
interest rates following the complete refinancing of the Company's debt
in the second quarter last year.
Restructuring Activities
------------------------
See Note 4 for a discussion of the Company's utilization of the
restructuring reserve in the first half of fiscal 2004. As of July 26,
2003, there was $622,000 of restructuring reserve remaining for lease
termination costs that are being negotiated for the remaining six Life
Uniform stores closed in fiscal 2003. In the second quarter and first
half of fiscal 2004, the Company reversed into income from continuing
operations $180,000 and $310,000 of the original restructuring
12
charge recorded in fiscal 2002 due to terminations of store leases for
amounts less than reserved, and the current estimate of the reserve required
to terminate the remaining store leases. It is Management's opinion that the
remaining restructuring reserve is adequate. However, there is a risk that
additional costs could result from the Company's inability to terminate the
leases of the remaining closed stores for the amounts reserved. Conversely,
any remaining restructuring reserve not needed for its original intended
purpose will be reversed into income in the period such determination is
made.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
In the first half ended July 26, 2003, the Company used strong cash
flow generated by operating activities of continuing operations to
further reduce long-term debt, principally consisting of the amount
outstanding under the line of credit, to 6.9 percent of total
capitalization from 13.0 percent at the beginning of the year. The
reduction in long-term debt of $10,226,000 in the first half this year
was achieved despite significantly higher capital expenditures due to
Textile Services' new plants in Phoenix, AZ and Columbia, SC. Net cash
provided by discontinued operations reflects the proceeds from the
liquidation of assets of the Manufacturing and Marketing segment which
was substantially completed in fiscal 2003, net of the payment of
certain sale-related liabilities. The Company's cash balance will be
augmented by the expected receipts in the second half of fiscal 2004 of
the $1,848,000 General American distribution and a Federal income tax
refund of approximately $4,000,000 due mainly to the loss on the sale
of the Manufacturing and Marketing segment recorded previously.
As of July 26, 2003, the Company had working capital of $47,119,000 and
a current ratio of 2.0 to 1, both lower than $61,297,000 and 2.2 to 1
as of January 25, 2003 due primarily to the decrease in cash and
short-term investments of $13,920,000 in the first half ended July 26,
2003. As of July 26, 2003, the Company was in compliance with all
financial covenants contained in its debt agreements.
Management believes that the Company's financial condition is such that
internal and external resources are sufficient and available to satisfy
the Company's present and future requirements for debt service, capital
expenditures, acquisitions, dividends and working capital.
Forward-Looking Statements
--------------------------
Any forward-looking statements made in this document reflect the
Company's current views with respect to future events and financial
performance and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties that may cause actual
results to differ materially from those set forth in these statements.
These potential risks and uncertainties include, but are not limited
to, competitive and general economic conditions, the ability to retain
current customers and to add new customers in competitive market
environments, competitive pricing in the marketplace, delays in the
shipment of orders, availability of labor at appropriate rates,
availability and cost of energy and water supplies, the cost of
workers' compensation and healthcare benefits, the ability to attract
and retain key personnel, actual charges to the restructuring reserve
significantly different from estimated charges, unusual or unexpected
cash needs for operations or capital transactions, the effectiveness of
certain expense reduction initiatives, the ability to obtain financing
in required amounts and at appropriate rates, and other factors which
may be identified in the Company's filings with the Securities and
Exchange Commission.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to commodity price risk related to the use of
natural gas in laundry plants of the Textile Services segment. The
total cost of natural gas in the second quarter and first half ended
July 26, 2003 was $2,484,000 and $5,223,000, respectively. To reduce
the uncertainty of fluctuating energy prices, the Company has entered
into fixed-price contracts for approximately 58 percent of the
segment's estimated natural gas purchase requirements in the next 12
months. A hypothetical 10 percent increase in the cost of natural gas
not covered by these contracts would result in a reduction of
approximately $439,000 in annual pretax earnings.
The Company is also exposed to commodity price risk resulting from the
consumption of gasoline and diesel fuel for delivery trucks in the
Textile Services segment. The total cost of truck fuel in the second
quarter and first half ended July 26, 2003 was $986,000 and $2,152,000,
respectively. A hypothetical 10 percent increase in the cost of
delivery fuel would result in a decrease of approximately $430,000 in
annual pretax earnings.
The Company's exposure to interest rate risk relates primarily to its
variable-rate revolving debt agreement entered into in the second
quarter of fiscal 2003. As of July 26, 2003, there was $10,000,000 of
outstanding debt under the credit facility, all of which bears interest
at a fixed rate of 3.58 percent (plus a margin) under an interest-rate
swap agreement entered into by the Company with one of its lenders
effective September 9, 2002. Amounts borrowed under the credit facility
in excess of the $10,000,000 covered by the interest-rate swap
agreement bear interest at a rate equal to either (i) LIBOR plus a
margin, or (ii) a Base Rate, defined as the higher of (a) the Federal
Funds Rate plus .50 percent and (b) the Prime Rate. The margin is based
on the Company's ratio of "Funded Debt" to "EBITDA," as each is defined
in the Loan Agreement (currently 1.0 percent).
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of internal controls and procedures
designed to provide reasonable assurance as to the reliability of the
unaudited consolidated financial statements and other disclosures
included in this report. The Company's Board of Directors, operating
through its Audit Committee which is composed entirely of independent
outside Directors, provides oversight to the financial reporting
process.
As of the end of the period covered by this report, the Company's Chief
Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended). Based upon
their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective in ensuring that material information relating to the
Company, including its consolidated subsidiaries, is made known to them
by others within those entities in a timely manner, particularly during
the period for which this quarterly report is being prepared. The Chief
Executive Officer and Chief Financial Officer also concluded based upon
their evaluation that the Company's disclosure controls and procedures
are effective in ensuring that the information required to be disclosed
by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms.
14
There have been no significant changes in internal controls over
financial reporting or in other factors that could significantly affect
internal controls over financial reporting subsequent to the date of
this most recent evaluation, nor were any corrective actions required
with regard to significant deficiencies and material weaknesses. It
should be noted that any system of internal controls, however well
designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met. In addition, the
design of any internal control system is based in part upon certain
assumptions about the likelihood of future events. Because of these and
other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals
under all future conditions, regardless of how remote.
15
PART II. OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 28, 2003, the only
matter submitted to a vote of shareholders was the election of
Directors.
The following Directors were elected to the following terms (or until a
successor is elected and has qualified or until his or her earlier
death, resignation or removal):
VOTES VOTES
NAME "FOR" "WITHHELD"
---- ----- ----------
For Term expiring at the 2006 Annual Meeting:
David A. Abrahamson.................................7,715,344 81,892
Alan C. Henderson*..................................7,716,180 81,056
Stephen M. O'Hara...................................7,716,238 80,998
* Mr. Henderson resigned from the Company's Board of Directors,
effective June 24, 2003. The Company's Corporate Governance Guidelines
require a Director to submit his or her resignation if there is a
substantial reduction in his or her role with their employer.
Consistent with that requirement, Mr. Henderson submitted his
resignation when he retired as Chief Executive Officer of RehabCare
Group, Inc.
The following Directors are continuing current terms expiring at the
2004 Annual Meeting: Susan S. Elliott, Don W. Hubble, and Kelvin R.
Westbrook. The following Directors are continuing current terms
expiring at the 2005 Annual Meeting: Charles W. Mueller and William A.
Peck.
Brokers were permitted to vote on the election of Directors in the
absence of instructions from street-name holders; therefore broker
non-votes did not occur in that matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index included herein on page 18.
(b) REPORTS ON FORM 8-K - On May 20, 2003, the Company filed a
report on Form 8-K under Item 9 and Item 12 containing a press
release announcing its earnings for the first quarter ended
April 26, 2003.
A report on Form 8-K was filed on May 29, 2003 under Item 9
which included the Quarterly Report to Shareholders for the
first quarter ended April 26, 2003 as an exhibit, pursuant to
Regulation FD.
16
SIGNATURES
----------
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.
Angelica Corporation
--------------------
(Registrant)
Date: September 4, 2003 /s/ T. M. Armstrong
-------------------
T. M. Armstrong
Senior Vice President -
Finance and Administration
Chief Financial Officer
(Principal Financial Officer)
/s/ James W. Shaffer
--------------------
James W. Shaffer
Vice President and Treasurer
(Principal Accounting Officer)
17
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
*Asterisk indicates exhibits filed herewith.
**Incorporated by reference from the document listed.
3.1 Restated Articles of Incorporation of the Company, as currently
in effect. Filed as Exhibit 3.1 to the Form 10-K for the fiscal
year ended January 26, 1991.**
3.2 Current By-Laws of the Company, as last amended March 27, 2001.
Filed as Exhibit 3.2 to the Form 10-K for the fiscal year ended
January 27, 2001.**
4.1 Shareholder Rights Plan dated August 25, 1998. Filed as Exhibit 1
to Registration Statement on Form 8-A on August 28, 1998.**
31.1 Section 302 Certification of Chief Executive Officer.*
31.2 Section 302 Certification of Chief Financial Officer.*
32.1 Section 906 Certification of Chief Executive Officer.*
32.2 Section 906 Certification of Chief Financial Officer.*
18