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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
October 26, 2002 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 December 1, 2002 was 8,702,080 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
OCTOBER 26, 2002 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Income - Third Quarter and Three
Quarters ended October 26, 2002 and October 27, 2001 (Unaudited) 2
Consolidated Balance Sheets - October 26, 2002
and January 26, 2002 (Unaudited) 3
Consolidated Statements of Cash Flows - Three Quarters
ended October 26, 2002 and October 27, 2001 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and Procedures 14
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16-17
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)
Third Quarter Ended Three Quarters Ended
------------------------------ ------------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
CONTINUING OPERATIONS:
Textile service revenues $ 68,108 $ 65,095 $ 203,284 $ 194,965
Net retail sales 24,525 23,930 71,132 68,606
-------- -------- --------- ---------
92,633 89,025 274,416 263,571
-------- -------- --------- ---------
Cost of textile services 54,506 53,547 161,605 160,648
Cost of goods sold 11,166 11,485 33,369 32,851
-------- -------- --------- ---------
65,672 65,032 194,974 193,499
-------- -------- --------- ---------
Gross profit 26,961 23,993 79,442 70,072
-------- -------- --------- ---------
Selling, general and administrative expenses 22,394 19,587 66,206 59,460
Interest expense 253 1,792 2,403 5,839
Other (income) expense, net (765) 150 (2,442) 17
-------- -------- --------- ---------
21,882 21,529 66,167 65,316
-------- -------- --------- ---------
Income from continuing operations pretax 5,079 2,464 13,275 4,756
Provision for income taxes 1,524 222 4,159 428
-------- -------- --------- ---------
Income from continuing operations
before extraordinary item 3,555 2,242 9,116 4,328
Extraordinary loss on early extinguishment
of debt, net of taxes of $2,374 (Note 4) - - (4,409) -
-------- -------- --------- ---------
Income from continuing operations 3,555 2,242 4,707 4,328
-------- -------- --------- ---------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
segment, net of taxes of $792 and $1,904 - (437) - (179)
Loss on disposal of discontinued segment,
net of taxes of $481 and $3,393 (Note 5) (894) - (6,302) -
-------- -------- --------- ---------
Loss from discontinued operations (894) (437) (6,302) (179)
-------- -------- --------- ---------
Net income (loss) $ 2,661 $ 1,805 $ (1,595) $ 4,149
======== ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations
before extraordinary item $ 0.41 $ 0.26 $ 1.05 $ 0.50
Extraordinary loss, net of tax - - (0.51) -
-------- -------- --------- ---------
Income from continuing operations 0.41 0.26 0.54 0.50
Loss from discontinued operations (0.10) (0.05) (0.72) (0.02)
-------- -------- --------- ---------
Net income (loss) $ 0.31 $ 0.21 $ (0.18) $ 0.48
======== ======== ========= =========
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations
before extraordinary item $ 0.40 $ 0.26 $ 1.04 $ 0.50
Extraordinary loss, net of tax - - (0.50) -
-------- -------- --------- ---------
Income from continuing operations 0.40 0.26 0.54 0.50
Loss from discontinued operations (0.10) (0.05) (0.72) (0.02)
-------- -------- --------- ---------
Net income (loss) $ 0.30 $ 0.21 $ (0.18) $ 0.48
======== ======== ========= =========
The accompanying notes are an integral part of the financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
October 26, January 26,
2002 2002
----------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 7,855 $ 18,742
Receivables, less reserves of $1,873 and $1,306 34,653 33,536
Inventories 13,501 14,435
Linens in service 33,518 32,196
Prepaid expenses and other current assets 4,668 2,968
Deferred income taxes 11,506 16,478
Net current assets of discontinued segment (Note 5) 12,942 61,774
--------- ---------
Total Current Assets 118,643 180,129
--------- ---------
Property and Equipment 179,303 174,893
Less -- reserve for depreciation 102,415 98,208
--------- ---------
76,888 76,685
--------- ---------
Goodwill (Note 3) 4,256 4,294
Other acquired assets (Note 3) 1,938 1,553
Cash surrender value of life insurance 26,126 25,349
Deferred income taxes - 654
Miscellaneous 1,259 365
--------- ---------
33,579 32,215
Net noncurrent assets of discontinued segment (Note 5) 815 1,836
--------- ---------
Total Assets $ 229,925 $ 290,865
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 227 $ 71,602
Accounts payable 23,407 20,958
Accrued expenses 32,017 40,609
--------- ---------
Total Current Liabilities 55,651 133,169
--------- ---------
Long-Term Debt, less current maturities 20,644 812
Other Long-Term Obligations 14,918 15,380
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,200 4,200
Retained earnings 137,173 142,188
Accumulated other comprehensive (loss) income (Note 9) (79) -
Common Stock in treasury, at cost: 773,358 and 863,329 (12,054) (14,356)
--------- ---------
138,712 141,504
--------- ---------
Total Liabilities and Shareholders' Equity $ 229,925 $ 290,865
========= =========
The accompanying notes are an integral part of the financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
Three Quarters Ended
-------------------------------
October 26, October 27,
2002 2001
-------- --------
Cash Flows from Operating Activities:
Income from continuing operations before extraordinary item $ 9,116 $ 4,328
Extraordinary loss, net of tax (4,409) -
-------- --------
Income from continuing operations 4,707 4,328
Non-cash items included in income from continuing operations:
Depreciation 9,619 8,281
Amortization 558 1,500
Change in working capital components,
net of businesses acquired/disposed of 5,990 471
Utilization of restructuring reserves (Note 6) (647) -
Other, net (63) (1,674)
-------- --------
Net cash provided by operating activities of continuing operations 20,164 12,906
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (10,173) (10,085)
Cost of businesses acquired (2,806) (125)
Disposals of businesses and property 1,432 302
-------- --------
Net cash used in investing activities of continuing operations (11,547) (9,908)
-------- --------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing (71,543) (26,731)
Net borrowings of long-term revolving debt 20,000 12,000
Dividends paid (2,075) (2,062)
Other, net 878 659
-------- --------
Net cash used in financing activities of continuing operations (52,740) (16,134)
-------- --------
Net cash provided by discontinued operations 33,236 2,844
-------- --------
Net decrease in cash and short-term investments (10,887) (10,292)
Balance at beginning of year 18,742 20,311
-------- --------
Balance at end of period $ 7,855 $ 10,019
======== ========
Supplemental cash flow information:
Income taxes paid $ 1,041 $ 4,292
Interest paid $ 3,671 $ 5,282
The accompanying notes are an integral part of the financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER AND THREE QUARTERS ENDED
OCTOBER 26, 2002 AND OCTOBER 27, 2001
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 26, 2002. 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 three quarters ended
October 26, 2002 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.
The Company considers short-term, highly-liquid investments which are
readily convertible into cash, as cash equivalents.
Note 2. Comprehensive Income (Loss)
- ------------------------------------
Comprehensive income (loss), consisting of net income (loss), foreign
currency translation and changes in the fair value of derivatives
used for interest rate risk management, totaled $2,582,000 and
$1,692,000 for the quarters ended October 26, 2002 and October 27,
2001, respectively; and $(1,674,000) and $3,982,000 for the three
quarters ended October 26, 2002 and October 27, 2001, respectively.
Note 3. Goodwill and Other Intangible Assets
- ---------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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. Additionally, any goodwill
recognized from a business combination completed after June 30,
2001 will not be amortized. Instead, goodwill will be tested for
impairment as of the date of adoption of SFAS No. 142 and at least
annually thereafter using a fair-value based analysis.
The Company's initial impairment test of goodwill indicated there was
no impairment upon adoption of SFAS No. 142. At the end of the third
quarter ended October 26, 2002, the Company performed its annual
impairment test of goodwill, which also resulted in no impairment of
goodwill. As of October 26, 2002, the carrying amount of goodwill
allocated to the Textile Services and Life Retail Stores segments was
$3,465,000 and $791,000, respectively. There were no material changes
in the carrying amount of goodwill in the third quarter ended October
26, 2002.
5
Following is a reconciliation of reported income from continuing
operations before extraordinary item and net income (loss), including
related earnings (loss) per share, to adjusted amounts excluding
goodwill amortization (dollars in thousands, except per share
amounts):
Third Quarter Ended Three Quarters Ended
------------------------------ -----------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Income from continuing operations before
extraordinary item:
As reported $ 3,555 $ 2,242 $ 9,116 $ 4,328
Goodwill amortization, net of taxes - 70 - 216
------- ------- ------- -------
As adjusted $ 3,555 $ 2,312 $ 9,116 $ 4,544
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.41 $ 0.26 $ 1.05 $ 0.50
As adjusted 0.41 0.27 1.05 0.53
Diluted earnings per share:
As reported $ 0.40 $ 0.26 $ 1.04 $ 0.50
As adjusted 0.40 0.27 1.04 0.52
Net income (loss):
As reported $ 2,661 $ 1,805 $(1,595) $ 4,149
Goodwill amortization, net of taxes - 52 - 208
------- ------- ------- -------
As adjusted $ 2,661 $ 1,857 $(1,595) $ 4,357
======= ======= ======= =======
Basic earnings (loss) per share:
As reported $ 0.31 $ 0.21 $ (0.18) $ 0.48
As adjusted 0.31 0.22 (0.18) 0.51
Diluted earnings (loss) per share:
As reported $ 0.30 $ 0.21 $ (0.18) $ 0.48
As adjusted 0.30 0.21 (0.18) 0.50
During the third quarter ended October 26, 2002, the Textile Services
segment acquired customer contracts totaling $1,207,000 with
amortization periods of three to five years. Other acquired assets
consisted of the following (dollars in thousands):
October 26, 2002 January 26, 2002
----------------------------------------- ------------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
-------- ------------ ----------- -------- ------------ -----------
Customer contracts $5,552 $(4,320) $1,232 $4,599 $(4,074) $ 525
Non-compete covenants 2,590 (1,884) 706 2,590 (1,562) 1,028
------ ------- ------ ------ ------- ------
Other acquired assets $8,142 $(6,204) $1,938 $7,189 $(5,636) $1,553
====== ======= ====== ====== ======= ======
6
Other acquired assets are scheduled to be fully amortized by fiscal
year 2008 with corresponding annual amortization expense estimated
for each fiscal year as follows (dollars in thousands):
2003 $723
2004 575
2005 444
2006 325
2007 269
2008 170
Note 4. Extraordinary Item
- ---------------------------
During the second quarter of this fiscal year, the Company incurred a
loss on early extinguishment of debt of $6,783,000 ($4,409,000 net of
tax). The loss was due to a prepayment penalty of $6,684,000 paid to
lenders in connection with the complete refinancing of the Company's
debt following the sale of the Manufacturing and Marketing segment
(plus the writeoff of unamortized loan fees of $99,000). In
accordance with SFAS No. 4, the loss has been treated as an
extraordinary item. Under SFAS No. 145, effective next fiscal year,
the loss on early extinguishment of debt will not be treated as an
extraordinary item, and accordingly, results will be restated at that
time to reflect this change in accounting treatment.
Note 5. Discontinued Operations
- --------------------------------
The consolidated balance sheets as of October 26, 2002 and January
26, 2002 reflect the segregation of the net assets of the
discontinued Manufacturing and Marketing segment and writedown of
those assets to their estimated net realizable value, as well as
estimates of the costs of disposal and transition. The differences
between these estimates as of October 26, 2002 and January 26, 2002
resulted in the recording of an after-tax loss on disposal of
$894,000 in the third quarter and $6,302,000 in the first three
quarters. The sale of certain assets of this segment's non-healthcare
business to Cintas Corporation closed on April 19, 2002, and the sale
of certain assets of the healthcare business to Medline Industries
closed on May 17, 2002. The realization of total proceeds from the
sale of assets is subject in part to subsequent sale of the segment's
inventory by Cintas Corporation and the Company. This inventory is
included in the net current assets of the discontinued segment at its
estimated net realizable value.
Note 6. Restructuring Activities
- ---------------------------------
In the third quarter of fiscal 2003, the Company closed an additional
two Life Retail stores included in the plan of restructuring adopted
in fiscal 2002, bringing the total stores closed in the first three
quarters to 24 of the 27 stores included in the restructuring. A
total of $294,000 and $1,758,000 was charged to the restructuring
reserve and related asset valuation allowances in the third quarter
and three quarters, respectively. The total year-to-date charge of
$1,758,000 represents $538,000 to write off net book value of assets
in closed stores, $573,000 to dispose of inventory and $647,000 for
lease termination costs. As of October 26, 2002, the restructuring
reserve and related asset valuation allowances totaled $2,422,000.
Note 7. Business Segment Information
- -------------------------------------
Historically, the Company has operated principally in three
industry segments: Textile Services, Manufacturing and Marketing,
and Retail Stores. For fiscal years 2003 and
7
2002, Manufacturing and Marketing is being treated as a discontinued
operation. Textile Services provides textile rental, laundry and
linen management services primarily to healthcare institutions. Life
Retail Stores 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 third quarter and three quarters
ended October 26, 2002 and October 27, 2001 appears below (dollars in
thousands):
Third Quarter Ended Three Quarters Ended
------------------------------ -----------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Combined sales and revenues:
Textile Services $ 68,108 $ 65,095 $ 203,284 $ 194,965
Retail Sales 24,525 23,930 71,132 68,606
-------- -------- --------- ---------
$ 92,633 $ 89,025 $ 274,416 $ 263,571
======== ======== ========= =========
Income from continuing operations pretax:
Textile Services $ 5,770 $ 4,785 $ 18,132 $ 14,356
Retail Sales 1,256 812 2,108 39
Interest, corporate expenses and other, net (1,947) (3,133) (6,965) (9,639)
-------- -------- --------- ---------
$ 5,079 $ 2,464 $ 13,275 $ 4,756
======== ======== ========= =========
Depreciation and amortization:
Textile Services $ 2,249 $ 2,408 $ 7,870 $ 7,190
Retail Sales 626 668 1,768 1,999
Corporate 297 179 539 592
-------- -------- --------- ---------
$ 3,172 $ 3,255 $ 10,177 $ 9,781
======== ======== ========= =========
Note 8. 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 third quarter and three quarters ended October 26, 2002 and
October 27, 2001 (shares in thousands):
Third Quarter Ended Three Quarters Ended
----------------------------- ------------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Weighted average shares:
Average shares outstanding 8,686 8,608 8,652 8,594
Effect of dilutive securities - option shares 184 63 145 105
----- ----- ----- -----
Average shares outstanding, adjusted for
dilutive effects 8,870 8,671 8,797 8,699
===== ===== ===== =====
8
Note 9. 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
interest rate at 3.58 percent plus a margin (currently 1.25 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. As of October 26, 2002, the Company has recorded a
long-term liability of $79,000 and the related loss is included in
accumulated other comprehensive (loss) income.
Also, the Company has entered into fixed price contracts for
approximately 60% of its estimated natural gas purchase requirements
in the next twelve 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 are
therefore exempted from the related accounting requirements.
Note 10. New Accounting Pronouncements
- ---------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
the recognition and measurement of certain costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the adoption of
SFAS No. 146 to have a material impact on financial condition and
results of operations for fiscal 2003.
Note 11. Acquisitions of Businesses
- ------------------------------------
Businesses and properties acquired by the Company in the first three
quarters of fiscal 2003 and fiscal 2002 have been accounted for under
the purchase method of accounting and, accordingly, the results of
operations of these acquired entities have been included in the
Company's Consolidated Statements of Income since the date of
acquisition. Pro forma results for these acquisitions have not been
provided because the impact is not material to the Company's
consolidated operations or financial condition.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER AND THREE QUARTERS ENDED OCTOBER 26, 2002
COMPARED WITH
THIRD QUARTER AND THREE QUARTERS ENDED OCTOBER 27, 2001
Analysis of Operations
- ----------------------
Third quarter earnings from continuing operations of $.41 per share ($.40
diluted) increased 57.7 percent over the $.26 per share in the third quarter
last year, on a 4.1 percent increase in combined sales and revenues. Both of
the Company's continuing business segments, Textile Services and Life Retail
Stores, posted growth in sales and revenues as well as operating earnings
increases in the quarter. For the first three quarters of the year, combined
sales and revenues from continuing operations increased 4.1 percent over the
comparable prior year period. Earnings for the first three quarters from
continuing operations, before the second quarter extraordinary item related
to debt refinancing, amounted to $1.05 per share ($1.04 diluted) compared
with $.50 per share last year, an increase of 110.0 percent.
As discussed in Note 4, the Company incurred an extraordinary loss of
$4,409,000 net of tax in the second quarter this year as a result of a
prepayment penalty paid in connection with refinancing the Company's debt
following the sale of the Manufacturing and Marketing segment. Including
this extraordinary loss of $.51 per share ($.50 diluted), earnings from
continuing operations for the first three quarters of the year were $.54 per
share versus $.50 per share a year ago.
In the third quarter this year, an additional after-tax loss of $894,000
($.10 per share) on the disposal of the discontinued Manufacturing and
Marketing segment was recorded in discontinued operations to reflect
differences between current and prior estimates of the net realizable value
of the assets of the segment and costs of disposition and transition.
Combining continuing and discontinued operations and the extraordinary loss,
the Company had net income of $.31 per share ($.30 diluted) in the third
quarter and a net loss of $.18 per share in the first three quarters this
year compared with net income per share of $.21 and $.48 in the comparable
prior year periods, respectively.
Textile Services
- ----------------
Revenues of the Textile Services segment increased 4.6 percent in the third
quarter and 4.3 percent in the first three quarters of the year on the
strength of a 5.4 percent increase in net new business additions
year-to-date. Third quarter revenues began to benefit from an acquisition
during the quarter of selected assets and textile linen management services
of a hospital-owned laundry in Macon, Georgia. Operating earnings rose 20.6
percent in the quarter and 26.3 percent through three quarters as this
segment continues to realize operating efficiencies in the areas of linen
management and production payroll, offset to some extent by higher workers'
compensation costs. Furthermore, utility costs have stabilized. Year-to-date
segment earnings also include a gain on the sale of the Denver, Colorado
plant of $474,000 which occurred in the second quarter.
10
Life Retail Stores
- ------------------
Third quarter sales at Life Retail Stores increased 2.5 percent on the
strength of a same-store sales increase of 5.2 percent offset in part by the
closing of 32 stores during the year. Same-store sales decreased 6.6 percent
in the third quarter last year compared with the same period in fiscal 2001.
For the first three quarters of the year, sales were up 3.7 percent
resulting from a same-store sales increase of 4.7 percent versus a decline
of 3.6 percent for three quarters of fiscal 2002 compared with fiscal 2001.
Sales from the catalogue and e-commerce distribution channels contributed
increases of 50.5 percent to $1,513,000 in the third quarter and 80.4
percent to $4,101,000 in the first three quarters. The segment's gross
margin of 54.5 percent in the quarter and 53.1 percent through three
quarters improved slightly from 52.0 percent and 52.1 percent in last year's
third quarter and three quarters, respectively. Primarily as a result of the
sales increases and the closing of underperforming stores, operating
earnings of this segment increased 54.7 percent in the third quarter, and
improved to $2,108,000 in the first three quarters compared with earnings of
$39,000 in the same period last year.
Operating Expenses and Other
- ----------------------------
Selling, general and administrative expenses increased 14.3 percent in the
third quarter, representing 24.2 percent of combined sales and revenues from
continuing operations compared with 22.0 percent in the same period last
year. For the first three quarters, these expenses increased 11.3 percent to
24.1 percent of combined sales and revenues from continuing operations
compared with 22.6 percent a year ago. The increases in third quarter and
three quarters expenses are due mainly to higher incentive compensation
reflecting improved operating results, and rising employee healthcare costs.
The reduction in interest expense of $1,539,000 in the third quarter and
$3,436,000 year-to-date reflects the lower debt level and lower interest
rates following the aforementioned debt refinancing. Net other income of
$2,442,000 through three quarters this year includes the gain on the sale of
the Denver plant and $961,000 from the elimination of the intercompany
profit in inventory reserve due to the sale of the Manufacturing and
Marketing segment. The effective tax rate on income from continuing
operations of 31.3 percent in the first three quarters this year is higher
than the 9.0 percent tax rate last year due to the impact of permanent
differences on the relatively low level of income in fiscal 2002.
Discontinued Operations
- -----------------------
As described in Note 5, the Company recorded an additional after-tax loss on
disposal of the Manufacturing and Marketing segment of $894,000 in the third
quarter, bringing the year-to-date after-tax loss to $6,302,000. The current
year loss from discontinued operations is in addition to the $23,998,000
after-tax loss on disposal and discontinuation recorded in the prior year,
and is primarily attributable to a reduction in the value of the inventories
of this segment realized in closing the sales or expected to be recovered
through transition of the business. The transition of the business to the
buyers is substantially completed and the remaining assets of the segment,
primarily inventory, are expected to be liquidated over the next several
months. Although Management believes that its estimates used to write down
the assets and record the loss on disposal of the assets as of October 26,
2002 are reasonable, there is a risk that the actual value received upon
ultimate disposition of all of the segment's assets, including actual costs
of disposition and transition, may differ materially from these estimates.
Such risks relate primarily to realization of the estimated net realizable
value of the remaining inventory through sale activities of Cintas
Corporation and the Company.
11
Restructuring Activities
- ------------------------
See Note 6 for a discussion of the Company's utilization of the
restructuring reserve and related asset valuation allowances in the third
quarter and first three quarters of fiscal 2003. As of October 26, 2002,
there was $2,422,000 of restructuring reserve and asset valuation allowances
remaining, of which $1,616,000 is for lease termination costs that are being
negotiated for 17 Life Retail stores closed or expected to be closed in
fiscal 2003. It is Management's opinion that the remaining restructuring
reserve and related asset valuation allowances are adequate. However, actual
charges to the reserve and related asset valuation allowances may differ
significantly from the amounts recorded, which could result in additional
costs. Any additional costs would most likely result from the Company's
inability to terminate the leases of the closed stores for the amounts
reserved. Conversely, any remaining restructuring reserve and asset
valuation allowances not needed for their original intended purpose will be
reversed into income in the period such determination is made.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
In the second quarter this year, the Company repaid $54,375,000 of existing
debt (plus a prepayment penalty of $6,684,000 as discussed in Note 4) using
proceeds from the sale of the Manufacturing and Marketing segment and
$22,500,000 of borrowings from a new $70,000,000 unsecured revolving credit
facility. The term of the credit facility is three years with two optional
one-year extensions. As of October 26, 2002, the Company's debt, principally
the $20,000,000 outstanding under the credit line, represented 13.1 percent
of total capitalization as compared with 33.9 percent as of January 26,
2002. As of October 26, 2002, the Company was in compliance with all
financial covenants contained in its debt agreements. Current ratio improved
from 1.4 to 1 at January 26, 2002 to 2.1 to 1 at October 26, 2002.
Cash generated by operating activities of continuing operations of
$20,164,000 in the first three quarters increased 56.2 percent over last
year's first three quarters due mainly to an increase of $5,519,000 in cash
provided by working capital changes. Cash flows from investing activities of
continuing operations include Textile Services' acquisition of assets of the
hospital-owned laundry in Macon, Georgia and sale of the Denver, Colorado
plant. Cash flows used in financing activities of continuing operations of
$52,740,000 in the first three quarters reflect the complete refinancing of
the Company's debt in the second quarter. Cash provided by discontinued
operations of $33,236,000 through three quarters reflects the net proceeds
from the liquidation of net assets of the Manufacturing and Marketing
segment and payment of certain sale-related liabilities. Cash and short-term
investments totaled $7,855,000 at October 26, 2002, down from $10,019,000 a
year ago and $18,742,000 at the beginning of the year.
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,
12
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 value
received on disposition of the Manufacturing and Marketing segment assets
significantly different than the estimated net realizable value, actual
charges to the restructuring reserve and related asset valuation allowances
significantly different than the estimated charges, unusual or unexpected
cash needs for operations or capital transactions, 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.
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 third quarter and three quarters ended October 26, 2002
was $1,899,000 and $6,333,000, respectively. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed price
contracts for approximately 60% of the segment's estimated natural gas
purchase requirements in the next twelve months. A hypothetical 10% increase
in the cost of natural gas not covered by these contracts would result in a
reduction of approximately $338,000 in annual pretax earnings.
The Company's exposure to interest rate risk relates primarily to its new
debt obligations entered into in the second quarter this year. As discussed
in Item 2 above, the Company refinanced its existing debt in part by
borrowing $22,500,000 from a new $70,000,000 revolving credit facility with
three banks. The revolving line of credit and the term loan bear interest at
a rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate plus a
margin. The margins are based on the Company's ratio of "Funded Debt" to
"EBITDA," as each is defined in the Loan Agreement. As of October 26, 2002,
there was $20,000,000 of outstanding debt under the credit facility. To
mitigate the exposure from variable-rate debt, the Company entered into an
interest-rate swap agreement with one of its lenders effective September 9,
2002. The swap agreement fixes the interest rate at 3.58 percent plus the
margin (currently 1.25 percent) on $10,000,000 of the outstanding debt under
the line of credit until termination on May 30, 2007. A hypothetical
increase of 100 basis points in short-term interest rates applicable to the
outstanding debt not covered by the interest-rate swap agreement would
result in a reduction of approximately $100,000 in annual pretax earnings.
13
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 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.
Within the 90-day period preceding the date of 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 the Securities Exchange Act of 1934.
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.
There have been no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of this most recent evaluation, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) See Exhibit Index included herein on page 18.
(b) REPORTS ON FORM 8-K - A report on Form 8-K dated August 15, 2002 was
filed under Item 9 which included the Quarterly Report to Shareholders
dated August 15, 2002 (and mailed to shareholders on August 22, 2002)
as an exhibit, pursuant to Regulation FD.
14
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: December 6, 2002 /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)
15
CERTIFICATIONS
I, Don W. Hubble, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Angelica
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 6, 2002 /s/ Don W. Hubble
-------------------------
Don W. Hubble
Chairman, President and
Chief Executive Officer
16
CERTIFICATIONS
I, T. M. Armstrong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Angelica
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 6, 2002 /s/ T. M. Armstrong
------------------------------------------------
T. M. Armstrong
Senior Vice President - Finance & Administration
and Chief Financial 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.**
10.1 Letter agreement between the Company and Charles D. Molloy, Jr. dated
October 8, 2002.*
99.1 Section 906 Certification of Chief Executive Officer.*
99.2 Section 906 Certification of Chief Financial Officer.*
18