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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
April 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 June 1, 2003 was 8,808,243 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
APRIL 26, 2003 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Income - First Quarter ended
April 26, 2003 and April 27, 2002 (Unaudited) 2
Consolidated Balance Sheets - April 26, 2003
and January 25, 2003 (Unaudited) 3
Consolidated Statements of Cash Flows - First Quarter
ended April 26, 2003 and April 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 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 15
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)
First Quarter Ended
---------------------------------------
April 26, 2003 April 27, 2002
-------------- --------------
CONTINUING OPERATIONS:
Textile service revenues $ 71,383 $ 68,381
Net retail sales 21,656 24,876
-------------- --------------
Combined sales and revenues 93,039 93,257
-------------- --------------
Cost of textile services 57,795 54,300
Cost of goods sold 9,988 12,086
-------------- --------------
Combined cost of textile services and goods sold 67,783 66,386
-------------- --------------
Gross profit 25,256 26,871
-------------- --------------
Selling, general and administrative expenses 21,581 21,541
Restructuring charge, net (Note 6) (130) -
Other operating expense, net 188 260
Interest expense 151 1,543
-------------- --------------
21,790 23,344
-------------- --------------
Income from continuing operations before taxes 3,466 3,527
Provision for income taxes 1,126 1,234
-------------- --------------
Income from continuing operations 2,340 2,293
-------------- --------------
DISCONTINUED OPERATIONS (NOTE 5):
Loss on disposal of discontinued segment - (6,841)
Income tax benefit of loss - 2,394
-------------- --------------
Loss from discontinued operations - (4,447)
-------------- --------------
Net income (loss) $ 2,340 $ (2,154)
============== ==============
BASIC EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations $ 0.27 $ 0.27
Loss from discontinued operations - (0.52)
-------------- --------------
Net income (loss) $ 0.27 $ (0.25)
============== ==============
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations $ 0.26 $ 0.26
Loss from discontinued operations - (0.51)
-------------- --------------
Net income (loss) $ 0.26 $ (0.25)
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
April 26, January 25,
2003 2003
----------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 7,531 $ 18,166
Receivables, less reserves of $775 and $724 35,042 35,316
Inventories 12,168 13,395
Linens in service 33,220 32,520
Prepaid expenses and other current assets 4,000 5,223
Deferred income taxes 6,145 6,110
Net current assets of discontinued segment (Note 5) 100 2,162
----------- -----------
Total Current Assets 98,206 112,892
----------- -----------
Property and Equipment 182,762 178,237
Less -- reserve for depreciation 102,179 99,684
----------- -----------
Total Property and Equipment 80,583 78,553
----------- -----------
Other:
Goodwill (Note 4) 4,256 4,256
Other acquired assets (Note 4) 2,012 2,146
Cash surrender value of life insurance 27,990 27,576
Deferred income taxes 1,322 1,405
Miscellaneous 1,415 1,456
----------- -----------
Total Other Assets 36,995 36,839
----------- -----------
Total Assets $ 215,784 $ 228,284
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 237 $ 237
Accounts payable 16,668 19,905
Accrued wages and other compensation 5,702 9,300
Other accrued liabilities 21,263 22,153
----------- -----------
Total Current Liabilities 43,870 51,595
----------- -----------
Long-Term Debt, less current maturities 13,715 20,574
Other Long-Term Obligations 16,576 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 138,761 137,548
Accumulated other comprehensive (loss) income (554) (511)
Unamortized restricted stock (546) -
Common Stock in treasury, at cost: 671,451 and 741,755 (9,991) (11,330)
----------- -----------
Total Shareholders' Equity 141,623 139,660
----------- -----------
Total Liabilities and Shareholders' Equity $ 215,784 $ 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 Quarter Ended
---------------------------------------
April 26, 2003 April 27, 2002
-------------- --------------
Cash Flows from Operating Activities:
Income from continuing operations $ 2,340 $ 2,293
Non-cash items included in income from continuing operations:
Depreciation 2,980 2,703
Amortization 183 240
Restructuring charge, net (130) -
Cash surrender value of life insurance (414) (426)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of (4,070) 1,979
Utilization of restructuring reserves (Note 6) (91) (1,135)
Other, net 129 35
-------------- --------------
Net cash provided by operating activities of continuing operations 927 5,689
-------------- --------------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (5,010) (2,647)
Cost of businesses acquired (48) -
-------------- --------------
Net cash used in investing activities of continuing operations (5,058) (2,647)
-------------- --------------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing and revolving debt (24,859) (12,054)
Borrowings of long-term revolving debt 18,000 -
Dividends paid (880) (689)
Treasury stock reissued 546 205
-------------- --------------
Net cash used in financing activities of continuing operations (7,193) (12,538)
-------------- --------------
Net cash provided by discontinued operations 689 28,487
-------------- --------------
Net (decrease) increase in cash and short-term investments (10,635) 18,991
Balance at beginning of year 18,166 18,742
-------------- --------------
Balance at end of period $ 7,531 $ 37,733
============== ==============
Supplemental cash flow information:
Income taxes paid $ 70 $ 420
Interest paid $ 168 $ 810
The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED APRIL 26, 2003
AND APRIL 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 first quarter ended
April 26, 2003 are not necessarily indicative of the results that
will be achieved for the full year.
Note 2. Significant Accounting Policies
- ----------------------------------------
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.
The Company has various stock option and stock bonus plans that
provide for the granting to certain employees and directors of
incentive stock options, non-qualified stock options, restricted
stock and performance awards. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company applies 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 first quarter ended April
26, 2003 and April 27, 2002 amounted to $605,000 and $38,000,
respectively. The amounts included in net income (loss) as reported
in the first quarter ended April 26, 2003 and April 27, 2002 totaled
$77,000 and $44,000, respectively, for restricted stock and
performance-based awards.
Had compensation expense for stock-based compensation plans for the
first quarter ended April 26, 2003 and April 27, 2002 been determined
consistent with SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would approximate the following pro forma
amounts (dollars in thousands, except per share data):
5
First Quarter Ended
-----------------------------
April 26, April 27,
2003 2002
------------- -------------
Net income (loss):
As reported $ 2,340 $(2,154)
Deduct: Additional stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects (103) (108)
------------- -------------
Pro forma net income (loss) $ 2,237 $(2,262)
============= =============
Basic earnings (loss) per share:
As reported $ 0.27 $ (0.25)
Pro forma 0.25 (0.26)
Diluted earnings (loss) per share:
As reported $ 0.26 $ (0.25)
Pro forma 0.25 (0.26)
The effects of the application of SFAS No. 123 in this disclosure are
not necessarily indicative of the pro forma effect on net income in
future periods.
Other significant accounting policies of the Company are as described
in Note 1 to the Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the fiscal year ended January 25,
2003.
Note 3. 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 $2,297,000 and $(2,154,000) for the
quarters ended April 26, 2003 and April 27, 2002, respectively.
Note 4. 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. 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.
In fiscal 2003, the Company performed its initial and annual
impairment tests of goodwill, both of which resulted in no impairment
of goodwill. As of April 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 was unchanged from the
carrying values as of January 25, 2003.
6
During the first quarter ended April 26, 2003, there were no material
acquisitions or dispositions of other acquired assets. Other acquired
assets consisted of the following (dollars in thousands):
April 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 $5,972 $(4,512) $1,460 $5,923 $(4,411) $1,512
Non-compete covenants 2,650 (2,098) 552 2,650 (2,016) 634
------ ------- ------ ------ ------- ------
Other acquired assets $8,622 $(6,610) $2,012 $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 $707
2005 548
2006 424
2007 353
2008 159
2009 4
Note 5. 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 April 27, 2002 and
January 26, 2002 resulted in the recording of an additional loss on
disposal of $4,447,000 net of tax in the first quarter of fiscal
2003. 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 quarter of fiscal
2004, most of the remaining net current assets of the discontinued
segment were disposed of for amounts approximating the carrying
values.
Note 6. 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 quarter of fiscal 2004, a total of $100,000 was charged to
the restructuring reserve, including $91,000 for lease termination
costs paid. In addition, the Company reversed $130,000 of the
original restructuring charge due to favorable terminations of the
store leases that have been
7
settled to date. As of April 26, 2003, there was $1,033,000 remaining
in the restructuring reserve that is expected to be utilized for
lease termination costs in fiscal 2004.
Note 7. 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 first quarter ended April 26, 2003 and April 27, 2002 appears
below (dollars in thousands):
First Quarter Ended
-----------------------------------------
April 26, 2003 April 27, 2002
----------------- -----------------
Combined sales and revenues:
Textile Services $ 71,383 $ 68,381
Life Uniform 21,656 24,876
----------------- -----------------
$ 93,039 $ 93,257
================= =================
Income from continuing operations before taxes:
Textile Services $ 5,462 $ 5,884
Life Uniform 135 701
Interest, corporate expenses and other, net (2,131) (3,058)
----------------- -----------------
$ 3,466 $ 3,527
================= =================
Depreciation and amortization:
Textile Services $ 2,437 $ 2,299
Life Uniform 658 562
Corporate 68 82
----------------- -----------------
$ 3,163 $ 2,943
================= =================
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 first quarter ended April 26, 2003 and April 27, 2002 (shares
in thousands):
8
First Quarter Ended
----------------------------------
April 26, April 27,
2003 2002
--------------- ----------------
Weighted average shares:
Average shares outstanding 8,786 8,616
Effect of dilutive securities - option shares 141 122
--------------- ----------------
Average shares outstanding, adjusted for
dilutive effects 8,927 8,738
=============== ================
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
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. In the first quarter of fiscal 2004, the Company recorded a
loss on the derivative of $43,000 net of tax in accumulated other
comprehensive (loss) income. As of April 26, 2003, the Company has
recorded a long-term liability of $328,000 for the fair value of the
derivative.
To minimize price risk due to market fluctuations, the Company has
entered into fixed-price contracts for approximately 42 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 are therefore exempted
from the related accounting requirements.
Note 10. New Accounting Pronouncements
- ---------------------------------------
The following new accounting pronouncements were adopted by the
Company in the first quarter ended April 26, 2003:
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.
Adoption of this statement did not have, and is not expected to have,
a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued 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 on early
extinguishment of debt of $6,783,000
9
that was treated as an extraordinary item under SFAS No. 4. In
accordance with SFAS No. 145, the loss will not be treated as an
extraordinary item, and accordingly, results for the second quarter
of fiscal 2003 will be restated to reflect this change in accounting
treatment.
In December 2002, the FASB issued 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 Note 2 for the
Company's disclosure required by SFAS No. 148.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST QUARTER ENDED APRIL 26, 2003 COMPARED WITH
FIRST QUARTER ENDED APRIL 27, 2002
Analysis of Operations
----------------------
First quarter fiscal 2004 combined sales and revenues of $93,039,000
were 0.2 percent lower than the first quarter last year, as a revenue
increase in the Textile Services segment was negated by a sales decline
at Life Uniform. Operating earnings decreased in both continuing
business segments, but the total decrease was more than offset by
significantly lower interest expense and a lower effective income tax
rate. As a result, income from continuing operations increased 2.0
percent over the comparable prior year period. As discussed in Note 5,
first quarter fiscal 2003 results included an additional loss on
disposal of the discontinued Manufacturing and Marketing segment.
Including this loss, first quarter results last year were a net loss of
$2,154,000 or $.25 per basic and diluted share compared with net income
of $2,340,000 this year, or $.27 per share ($.26 diluted).
Textile Services
----------------
Textile Services revenues increased 4.4 percent in the first quarter
this year on the strength of increases in net new business throughout
fiscal 2003 and in the first quarter this year. Operating earnings of
this segment fell to 7.7 percent of revenues from 8.6 percent a year
ago. Earnings suffered from higher workers' compensation and employee
healthcare costs, which were planned for, as well as an unexpected
increase of $345,000 in delivery fuel expense, especially in the State
of California. The unfavorable expense comparison in workers'
compensation costs, which approximated $500,000 in the first quarter
and will have a similar effect in the second quarter, is expected to be
offset by a large favorable expense comparison in this year's fourth
quarter due to a significant increase in the prior year. 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 experienced a 12.9 percent decrease in sales in the
quarter as the softening of demand that began in the fourth quarter
last year worsened in this year's first quarter. Same-store sales were
down 7.8 percent in the first quarter versus a 2.5 percent increase in
the comparable prior year period and a 1.9 percent increase in the
fourth quarter last year. Sales also declined due to having 21 fewer
stores in operation at the end of the first 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 restructuring plan.
Catalogue and e-commerce sales increased 8.2 percent or $120,000. First
quarter operating earnings decreased 80.7 percent to $135,000,
primarily reflecting the lower sales volume, but were helped by the
closing of underperforming stores in fiscal 2003. Gross margin improved
to 53.9 percent from 51.4 percent a year ago due to lower discounting
and better inventory control. In April 2003, Life's management
implemented an expense reduction initiative that did not significantly
impact the first quarter, but is expected to benefit the segment's
operating results over the remainder of the year.
11
Operating Expenses and Other
----------------------------
Selling, general and administrative expenses were essentially unchanged
at 23.2 percent of combined sales and revenues in the first quarter. A
decrease in Life Uniform store operating expenses of $929,000 was
offset by $325,000 of higher depreciation and maintenance of Life's new
information systems and increased corporate expenses of $464,000 due in
part to the Company's search for a new Chief Executive Officer. The
reduction in interest expense of $1,392,000 reflects the lower debt
level and lower interest rates following the complete refinancing of
the Company's debt in the second quarter last year. Taxes on income
from continuing operations have been provided for at an effective tax
rate of 32.5 percent in the first quarter fiscal 2004 based upon the
Company's estimated effective tax rate for the year.
Restructuring Activities
------------------------
See Note 6 for a discussion of the Company's utilization of the
restructuring reserve in the first quarter of fiscal 2004. As of April
26, 2003, there was $1,033,000 of restructuring reserve remaining for
lease termination costs that are being negotiated for the remaining 10
Life Uniform stores closed in fiscal 2003. In the first quarter of
fiscal 2004, the Company reversed into income $130,000 of the original
restructuring charge recorded in fiscal 2002 based on favorable
terminations of the store leases that have been settled to date, as
well as an estimate of the reserve required to settle 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 quarter this year, the Company used its cash balances to
further reduce long-term debt, principally consisting of the amount
outstanding under the line of credit, to 9.0 percent of total
capitalization from 13.0 percent at the beginning of the year. Cash
generated from operations was used to reduce accounts payable and for
higher incentive compensation payments related to fiscal 2003 financial
performance. Capital expenditures increased $2,363,000 over the same
period last year mainly as a result of construction of the Textile
Services plant in Phoenix, Arizona. 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.
As of April 26, 2003, the Company had working capital of $54,336,000
and a current ratio of 2.2 to 1 compared with working capital of
$61,297,000 and a current ratio of 2.2 to 1 as of January 25, 2003. As
of April 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.
12
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.
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 first quarter ended April 26, 2003 was
$2,739,000. To reduce the uncertainty of fluctuating energy prices, the
Company has entered into fixed-price contracts for approximately 42
percent of the segment's estimated natural gas purchase requirements in
the next 12 months. A hypothetical 10% increase in the cost of natural
gas not covered by these contracts would result in a reduction of
approximately $635,000 in annual pretax earnings.
The Company's exposure to interest rate risk relates primarily to its
new variable-rate revolving debt agreement entered into in the second
quarter last year. As of April 26, 2003, there was $13,200,000 of
outstanding debt under the credit facility, of which $10,000,000 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. 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 $32,000 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
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.
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. 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.
14
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 - On March 14, 2003, the Company filed a
report on Form 8-K containing a press release announcing its
earnings for the fourth quarter and fiscal year ended
January 25, 2003.
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: June 6, 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)
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 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 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: June 6, 2003 /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 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 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: June 6, 2003 /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.**
99.1 Section 906 Certification of Chief Executive Officer.*
99.2 Section 906 Certification of Chief Financial Officer.*
18