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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 25, 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 December 1, 2003 was 8,846,332 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
OCTOBER 25, 2003 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Consolidated Statements of Income - Third Quarter and
Nine Months ended October 25, 2003 and October 26, 2002
(Unaudited) 2
Consolidated Balance Sheets - October 25, 2003
and January 25, 2003 (Unaudited) 3
Consolidated Statements of Cash Flows - Nine Months
ended October 25, 2003 and October 26, 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 11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures 15-16
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19-20
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 Nine Months Ended
------------------------- --------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
CONTINUING OPERATIONS:
Textile service revenues $ 70,576 $ 68,108 $ 212,922 $ 203,284
Net retail sales 21,422 24,525 61,839 71,132
---------- ---------- ----------- -----------
Combined sales and revenues 91,998 92,633 274,761 274,416
---------- ---------- ----------- -----------
Cost of textile services (57,699) (54,706) (172,589) (161,627)
Cost of retail goods sold (9,822) (10,754) (28,596) (32,586)
---------- ---------- ----------- -----------
Combined cost of textile services and goods sold (67,521) (65,460) (201,185) (194,213)
---------- ---------- ----------- -----------
Gross profit 24,477 27,173 73,576 80,203
Selling, general and administrative expenses (21,254) (21,729) (64,124) (64,806)
Restructuring charge reversal (Note 4) - - 310 -
Other operating (expense) income, net (194) (69) (470) 7
---------- ---------- ----------- -----------
Income from operations 3,029 5,375 9,292 15,404
Interest expense (117) (345) (510) (2,591)
Non-operating income (Note 5) 23 49 1,938 462
Loss on early extinguishment of debt (Note 6) - - - (6,783)
---------- ---------- ----------- -----------
Income from continuing operations pretax 2,935 5,079 10,720 6,492
Income tax provision (Note 7) (751) (1,524) (3,216) (1,785)
---------- ---------- ----------- -----------
Income from continuing operations 2,184 3,555 7,504 4,707
DISCONTINUED OPERATIONS (NOTE 8):
Loss on disposal of discontinued segment - (1,375) - (9,695)
Income tax benefit of loss - 481 - 3,393
---------- ---------- ----------- -----------
Loss from discontinued operations - (894) - (6,302)
---------- ---------- ----------- -----------
Net income (loss) $ 2,184 $ 2,661 $ 7,504 $ (1,595)
========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE (NOTE 9):
Income from continuing operations $ 0.25 $ 0.41 $ 0.85 $ 0.54
Loss from discontinued operations - (0.10) - (0.72)
---------- ---------- ----------- -----------
Net income (loss) $ 0.25 $ 0.31 $ 0.85 $ (0.18)
========== ========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 9):
Income from continuing operations $ 0.24 $ 0.40 $ 0.84 $ 0.54
Loss from discontinued operations - (0.10) - (0.72)
---------- ---------- ----------- -----------
Net income (loss) $ 0.24 $ 0.30 $ 0.84 $ (0.18)
========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
October 25, January 25,
2003 2003
----------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 9,780 $ 18,166
Receivables, less reserves of $1,098 and $724 35,077 35,316
Inventories 12,563 13,395
Linens in service 33,558 32,520
Prepaid expenses and other current assets 1,876 5,223
Deferred income taxes 6,530 6,110
Net current assets of discontinued segment (Note 8) - 2,162
---------- ----------
Total Current Assets 99,384 112,892
---------- ----------
Property and Equipment 193,088 178,237
Less -- reserve for depreciation 105,216 99,684
---------- ----------
Total Property and Equipment 87,872 78,553
---------- ----------
Other:
Goodwill (Note 10) 4,256 4,256
Other acquired assets (Note 10) 1,677 2,146
Cash surrender value of life insurance 28,758 27,576
Deferred income taxes 1,652 1,405
Miscellaneous 1,044 1,456
---------- ----------
Total Other Assets 37,387 36,839
---------- ----------
Total Assets $224,643 $228,284
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 184 $ 237
Accounts payable 19,496 19,905
Accrued wages and other compensation 5,482 9,300
Other accrued liabilities 28,154 22,153
---------- ----------
Total Current Liabilities 53,316 51,595
---------- ----------
Long-Term Debt, less current maturities 10,353 20,574
Other Long-Term Obligations 15,470 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 141,962 137,548
Accumulated other comprehensive loss (503) (511)
Unamortized restricted stock (540) -
Common Stock in treasury, at cost: 634,903 and 741,755 (9,368) (11,330)
---------- ----------
Total Shareholders' Equity 145,504 139,660
---------- ----------
Total Liabilities and Shareholders' Equity $224,643 $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)
Nine Months Ended
------------------------------
October 25, October 26,
2003 2002
----------- -----------
Cash Flows from Operating Activities:
Income from continuing operations $ 7,504 $ 4,707
Non-cash items included in income from continuing operations:
Depreciation 9,016 9,619
Amortization 776 558
Restructuring charge reversal (Note 4) (310) -
Cash surrender value of life insurance (1,182) (1,200)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of 7,007 5,990
Utilization of restructuring reserves (325) (647)
Other, net (466) 1,137
---------- -----------
Net cash provided by operating activities of continuing operations 22,020 20,164
---------- -----------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (18,335) (10,173)
Cost of businesses acquired (72) (2,806)
Disposals of businesses and property - 1,432
---------- -----------
Net cash used in investing activities of continuing operations (18,407) (11,547)
---------- -----------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing and revolving debt (33,574) (110,043)
Borrowings of long-term revolving debt 23,300 58,500
Dividends paid (2,643) (2,075)
Treasury stock reissued 741 878
---------- -----------
Net cash used in financing activities of continuing operations (12,176) (52,740)
---------- -----------
Net cash provided by discontinued operations (Note 8) 177 33,236
---------- -----------
Net decrease in cash and short-term investments (8,386) (10,887)
Balance at beginning of year 18,166 18,742
---------- -----------
Balance at end of period $ 9,780 $ 7,855
========== ===========
Supplemental cash flow information:
Income taxes (refunded) paid $ (3,868) $ 1,041
Interest paid $ 281 $ 3,671
The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER AND NINE MONTHS ENDED
OCTOBER 25, 2003 AND OCTOBER 26, 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 third quarter and nine
months ended October 25, 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.
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 third quarter ended October
25, 2003 and October 26, 2002 amounted to $59,000 and $3,000,
respectively; and $792,000 and $164,000 for the nine months ended
October 25, 2003 and October 26, 2002, respectively. The amounts
included in reported net income (loss) for restricted stock and
performance-based awards in the third quarter ended October 25, 2003
and October 26, 2002 totaled $92,000 and $50,000, respectively; and
$279,000 and $145,000 for the nine months ended October 25, 2003 and
October 26, 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 third quarter and nine
months ended October 25, 2003 and October 26, 2002 would approximate
the following pro forma amounts (dollars in thousands, except per
share data):
Third Quarter Ended Nine Months Ended
--------------------------- --------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss):
As reported $2,184 $2,661 $7,504 $(1,595)
Deduct: Additional stock-based employee
compensation expense determined under
fair-value based method for all awards,
net of related tax effects (109) (117) (309) (338)
-------- -------- -------- --------
Pro forma net income (loss) $2,075 $2,544 $7,195 $(1,933)
======== ======== ======== ========
Basic earnings (loss) per share:
As reported $ 0.25 $ 0.31 $ 0.85 $ (0.18)
Pro forma 0.23 0.29 0.82 (0.22)
Diluted earnings (loss) per share:
As reported $ 0.24 $ 0.30 $ 0.84 $ (0.18)
Pro forma 0.23 0.29 0.80 (0.22)
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 standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. 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.
6
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 nine months of fiscal 2004, a total of $334,000 was charged
to the restructuring reserve, including $325,000 for lease
termination costs paid. In addition, the Company reversed $310,000 of
the original restructuring charge in the nine months ended October
25, 2003 due to favorable terminations of the store leases that have
been settled to date. As of October 25, 2003, there was $619,000
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 third quarter of fiscal 2004, the Company received a pretax
cash distribution of $1,857,000 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
distribution was recorded in non-operating income in the nine months
ended October 25, 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 of fiscal 2004, 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 first nine
months of fiscal 2003 have been restated to reflect this change in
accounting treatment.
Note 7. Income Taxes
- ---------------------
Taxes on income from continuing operations have been provided for at
an effective tax rate of 25.6 percent and 30.0 percent in the third
quarter and first nine months of fiscal 2004, respectively, based
upon the Company's estimated effective tax rate for the year. The
effective tax rate on income from continuing operations of 27.5
percent in the first nine months of fiscal 2003 was 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 from continuing operations in fiscal 2003 in accordance with
SFAS No. 109.
7
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 October 26, 2002
compared with July 27, 2002 and January 26, 2002 resulted in the
recording of an additional loss on disposal of $894,000 and
$6,302,000 net of tax in the third quarter and first nine months 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 nine months 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 third quarter and nine months ended October 25, 2003
and October 26, 2002 (shares in thousands):
Third Quarter Ended Nine Months Ended
--------------------------- ---------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Weighted average shares:
Average shares outstanding 8,830 8,686 8,809 8,652
Effect of dilutive securities - option shares 158 184 140 145
------- ------- ------- -------
Average shares outstanding, adjusted for
dilutive effects 8,988 8,870 8,949 8,797
======= ======= ======= =======
8
Note 10. Goodwill and Other Intangible Assets
- ----------------------------------------------
Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
is no longer amortized. 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.
Accordingly, the Company performed its annual impairment test as of
October 25, 2003, which resulted in no indication of goodwill
impairment.
As of October 25, 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 nine months ended October 25,
2003, there were no material acquisitions or dispositions of other
acquired assets. Other acquired assets consisted of the following
(dollars in thousands):
October 25, 2003 January 25, 2003
------------------------------------------ ------------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
-------- ------------ ----------- -------- ------------ -----------
Customer contracts $5,995 $(4,726) $1,269 $5,923 $(4,411) $1,512
Non-compete covenants 2,650 (2,242) 408 2,650 (2,016) 634
-------- --------- -------- -------- --------- --------
Other acquired assets $8,645 $(6,968) $1,677 $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 $698
2005 557
2006 445
2007 366
2008 150
2009 2
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 (excluding a margin) 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 on the derivative included in
accumulated other comprehensive loss in the third quarter and nine
months ended October 25, 2003 amounted to $41,000 and $8,000,
respectively, net of tax. The Company has recorded a long-term
liability of $249,000 and $260,000 for the fair value of the
derivative as of October 25, 2003 and January 25, 2003, respectively.
9
To minimize price risk due to market fluctuations, the Company has
entered into fixed-price contracts for approximately 50 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 $2,225,000 and $2,582,000 for the
third quarter ended October 25, 2003 and October 26, 2002,
respectively; and $7,512,000 and $(1,674,000) for the nine months
ended October 25, 2003 and October 26, 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
retail 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
nine months ended October 25, 2003 and October 26, 2002 appears below
(dollars in thousands):
Third Quarter Ended Nine Months Ended
----------------------------- -----------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Combined sales and revenues:
Textile Services $70,576 $68,108 $212,922 $203,284
Life Uniform 21,422 24,525 61,839 71,132
--------- --------- ---------- ----------
$91,998 $92,633 $274,761 $274,416
========= ========= ========== ==========
Income from operations:
Textile Services $ 4,729 $ 5,765 $ 15,842 $ 18,300
Life Uniform (6) 1,668 (725) 2,891
Corporate expense (1,694) (2,058) (5,825) (5,787)
--------- --------- ---------- ----------
$ 3,029 $ 5,375 $ 9,292 $ 15,404
========= ========= ========== ==========
Depreciation and amortization:
Textile Services $ 2,456 $ 2,249 $ 7,241 $ 7,870
Life Uniform 700 626 2,031 1,768
Corporate 201 297 520 539
--------- --------- ---------- ----------
$ 3,357 $ 3,172 $ 9,792 $ 10,177
========= ========= ========== ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 25, 2003
COMPARED WITH
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 26, 2002
Analysis of Operations
----------------------
Combined sales and revenues of $91,998,000 in the third quarter of
fiscal 2004 declined 0.7 percent from the same quarter last year, as
revenue gains in the Textile Services segment failed to offset
continued sales declines in the Life Uniform segment. Operating income
was lower in both segments in the current quarter compared with the
prior-year quarter, reflecting the significantly lower sales volume at
Life Uniform and cost pressures affecting Textile Services. Net income
of $.25 per share ($.24 diluted) in the quarter was 19.4 percent below
the $.31 per share ($.30 diluted), which included a loss from
discontinued operations of $894,000 or $.10 per share, earned in the
third quarter last year.
For the first nine months of this fiscal year, combined sales and
revenues were essentially even with the comparable prior-year period,
but operating income decreased in both Textile Services and Life
Uniform. However, income from continuing operations benefited from a
pretax distribution of $1,857,000 ($.15 per diluted share net of tax)
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 distribution, net income was $.85 per share ($.84 diluted) in the
first nine months this year.
As discussed in Note 6, the Company restated its results for the first
nine months of fiscal 2003 to reflect the change from extraordinary to
ordinary accounting treatment of the loss on early extinguishment of
debt of $6,783,000 pretax ($.50 per diluted share net of tax). As a
result of the restatement, the Company reported income from continuing
operations of $.54 per share for the nine months ended October 26,
2002. Including the loss on disposal of the discontinued Manufacturing
and Marketing segment of $6,302,000 in the first nine months of fiscal
2003 (see Note 8), the Company reported a per share net loss of $.18
for the nine-month period last year.
Textile Services
----------------
Textile Services segment revenues increased 3.6 percent in the third
quarter and 4.7 percent in the first nine months compared with the same
periods a year ago, benefiting from previous increases in net new
business. Revenues in the first nine months last year included $854,000
from the Denver, CO plant, which was sold in May 2002 at a gain of
$474,000. Despite the revenue increases, operating earnings of the
segment decreased 18.0 percent and 13.4 percent in the third quarter
and first nine months this year, respectively, as compared with last
year's same periods. An increase of $981,000 in workers' compensation
costs in this year's first nine months is expected to be offset by a
favorable expense comparison 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 approximately
$777,000 and $2,046,000 of cost increases in the third quarter and
first nine months, respectively. Textile Services has been unable to
completely offset these cost increases with higher prices charged to
its customers due to competitive pricing pressures in the marketplace.
Segment results were also negatively affected, as
11
expected, by an operating loss of $411,000 from the start up of the
new Phoenix, AZ plant that opened during the third quarter this year.
Life Uniform
------------
Life Uniform continued to experience significant sales declines in
fiscal 2004. Sales decreased 12.7 percent in the third quarter compared
with the prior year, and are 13.1 percent below last year for the first
nine months. Same-store sales were down 7.7 percent and 7.8 percent in
the third quarter and first nine months, respectively, accounting for
approximately one-half of the sales declines. Sales also declined due
to having 18 fewer stores in operation at the end of the third quarter
this year compared with the same time 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 13.1 percent in the third quarter, and were down 4.1
percent for the first nine months at $3,934,000. Segment gross margin
of 54.1 percent in the third quarter was lower than the 56.2 percent of
a year ago which included a gain of $412,000, or 1.7 percent gross
margin, from the reversal of an intercompany profit deferral due to the
sale of the Manufacturing and Marketing segment. Gross margin in the
first nine months of fiscal 2004 was 53.8 percent as compared with 54.2
percent of a year ago, which included the reversal of the intercompany
profit deferral of $783,000, or 1.1 percent gross margin. Primarily
reflecting the lower sales volume, Life Uniform posted operating losses
of $6,000 in the third quarter and $725,000 in the first nine months of
fiscal 2004, compared with operating earnings of $1,668,000 and
$2,891,000 in the third quarter and first nine months of fiscal 2003,
respectively. Life's operating results in fiscal 2004 include a
restructuring charge reversal of $310,000 in the first nine months (see
Note 4).
On October 29, 2003, the Company announced that it has hired an
investment banking firm to review strategic alternatives for the
under-performing Life Uniform segment. At the same time, the Company
announced the resignation of the segment President. The strategic
review process is currently under way.
Operating Expenses and Other
----------------------------
Selling, general and administrative expenses decreased 2.2 percent in
the third quarter to 23.1 percent of combined sales and revenues from
23.5 percent in the third quarter last year. For the first nine months,
these expenses decreased 1.1 percent to 23.3 percent of combined sales
and revenues from 23.6 percent a year ago. Decreases in Life Uniform
store operating expenses due to fewer stores and lower incentive
compensation accruals across the Company were mostly offset by
increases in operating expenses for support and maintenance of Life's
new information systems and corporate costs related to the Company's
search for a new Chief Executive Officer. The $7,000 of net other
operating income in the first nine months last year includes the
aforementioned gain on the sale of Textile Services' Denver plant. The
reductions in interest expense of $228,000 in the third quarter and
$2,081,000 in the first nine months reflect the lower debt level and
lower interest rates following the complete refinancing of the
Company's debt in the second quarter last year. In addition, imputed
interest cost of $209,000 has been capitalized in the nine months ended
October 25, 2003 in connection with the capital spending for Textile
Services' new plants in Phoenix, AZ and Columbia, SC.
Restructuring Activities
------------------------
See Note 4 for a discussion of the Company's utilization of the Life
Uniform restructuring
12
reserve in the first nine months of fiscal 2004. As of October 25,
2003, there was $619,000 of restructuring reserve remaining for lease
termination costs that are being negotiated for the remaining Life
Uniform stores closed in fiscal 2003. In the first nine months of
fiscal 2004, the Company reversed into income from continuing
operations $310,000 of the original restructuring charge recorded in
fiscal 2002 due to terminations of store leases for amounts less than
reserved and Management's revised 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 nine months ended October 25, 2003, the Company used cash flow
generated by operating activities of continuing operations to further
reduce its debt, principally consisting of the amount outstanding under
a bank line of credit, to 6.8 percent of total capitalization from 13.0
percent at the beginning of the year. The $10,274,000 reduction in
total debt in the first nine months this year was achieved despite
capital expenditures of $7,288,000 and $1,539,000 related to Textile
Services' new plants in Phoenix, AZ and Columbia, SC, respectively. 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. During the third quarter this year,
the Company received the $1,857,000 General American distribution
referred to above and a Federal income tax refund of $4,054,000 due
mainly to the loss on the sale of the Manufacturing and Marketing
segment recorded in prior fiscal years.
As of October 25, 2003, the Company had working capital of $46,068,000
and a current ratio of 1.9 to 1, both lower than $61,297,000 and 2.2 to
1 as of January 25, 2003 due primarily to the reduction in debt and
higher capital expenditures in the first nine months ended October 25,
2003. As of October 25, 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 requirements for debt service, capital expenditures,
acquisitions, dividends and working capital over the course of the next
12 months.
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
13
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, the ability to identify,
negotiate, fund and integrate acquisitions, and other factors which
may be identified in the Company's filings with the Securities and
Exchange Commission.
14
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 nine months ended
October 25, 2003 was $2,401,000 and $7,624,000, respectively. To reduce
the uncertainty of fluctuating energy prices, the Company has entered
into fixed-price contracts for approximately 50 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 $508,000 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 third
quarter and nine months ended October 25, 2003 was $965,000 and
$3,117,000, respectively. A hypothetical 10 percent increase in the
cost of delivery fuel would result in a decrease of approximately
$416,000 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 October 25, 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. As of October 25, 2003, the
margin was 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
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.
15
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.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) See Exhibit Index on page 19.
(b) REPORTS ON FORM 8-K - On August 19, 2003, the Company filed
and/or furnished a report on Form 8-K under Items 7 and 12
containing a press release announcing its earnings for the
second quarter ended July 26, 2003.
A report on Form 8-K was filed and/or furnished on August 27,
2003 under Items 7 and 9 which included the Quarterly Report to
Shareholders for the second quarter ended July 26, 2003 as an
exhibit, pursuant to Regulation FD.
17
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 8, 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)
18
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 Employment Agreement between the Company and Stephen M. O'Hara, dated
September 15, 2003.*
10.2 Restricted Stock Agreement between the Company and Stephen M. O'Hara,
dated September 15, 2003.*
10.3 Non-Qualified Stock Option Agreement between the Company and Stephen
M. O'Hara, dated September 15, 2003 (100,000 shares at $19.66 exercise
price).*
10.4 Non-Qualified Stock Option Agreement between the Company and Stephen
M. O'Hara, dated September 15, 2003 (50,000 shares at $25.00 exercise
price).*
10.5 Non-Qualified Stock Option Agreement between the Company and Stephen
M. O'Hara, dated September 15, 2003 (50,000 shares at $30.00 exercise
price).*
10.6 First Amendment to Employment Agreement between the Company and Paul
R. Anderegg, dated September 15, 2003.*
10.7 Amended specimen form of Stock Option Agreement under the Angelica
Corporation 1994 Performance Plan.*
10.8 Amended specimen form of Stock Option Agreement under the Angelica
Corporation 1999 Performance Plan.*
10.9 Amendment to Angelica Corporation Supplemental Plan restated as of
September 1, 2000, dated August 27, 2003.*
31.1 Section 302 Certification of Chief Executive Officer.*
19
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.*
20