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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 2004
Commission File Number 1-5674
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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 63017-3406
Chesterfield, Missouri (Zip Code)
(Address of principal executive offices)
(314) 854-3800
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------- -------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Preferred Stock Purchase Rights
issuable pursuant to Registrant's
Shareholder Rights Plan New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No
----- -----
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently
completed second fiscal quarter.
$160,284,287 based on the average of the high/low transaction price of the
Common Stock on July 25, 2003.
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of March 31, 2004.
Common Stock, $1.00 par value, 8,931,529 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders are incorporated by reference in Parts II and III.
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TABLE OF CONTENTS
Page
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PART I
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Item 1. Business......................................................................................1
Item 2. Properties....................................................................................2
Item 3. Legal Proceedings.............................................................................3
Item 4. Submission of Matters to Vote of Security Holders.............................................3
Item 4A. Executive Officers of the Registrant..........................................................4
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................5
Item 6. Selected Financial Data (Unaudited)...........................................................5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................13
Item 8. Financial Statements and Supplementary Data..................................................14
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.........14
Item 9A. Controls and Procedures......................................................................14
PART III
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Item 10. Directors and Executive Officers of the Registrant...........................................14
Item 11. Executive Compensation.......................................................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................15
Item 13. Certain Relationships and Related Transactions...............................................16
Item 14. Principal Accountant Fees and Services.......................................................16
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................16
i
PART I
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ITEM 1. BUSINESS
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GENERAL DEVELOPMENT OF BUSINESS
- -------------------------------
Angelica Corporation (the "Company") provides linen management services,
primarily to healthcare providers, through its Textile Services segment and
sells medical apparel to individuals providing healthcare services through
its Life Uniform retail segment. The Company was founded in 1878 and was
incorporated as Angelica Corporation in 1968. The Company's principal
executive offices are located in Chesterfield, Missouri.
The Company's businesses are reported in two industry segments: Textile
Services and Life Uniform. Information about the Company's industry segments
appears in Note 17 of the Notes to Consolidated Financial Statements
included in response to Item 15 of this Form 10-K and is incorporated herein
by reference. This information includes, for each segment, sales and
revenues, income from operations, assets, depreciation and amortization and
capital additions for each of the three years in the period ended January
31, 2004. The Company's current business segments are described below.
On February 25, 2004, the Board of Directors of the Company announced that
it has decided to pursue the sale of Life Uniform. Accordingly, beginning
the first quarter ending May 1, 2004, the Company will reclassify on its
balance sheet the assets and liabilities and on the income statement the
results of operations relating to the Life Uniform division as discontinued
operations. However, the Company intends to continue to operate the division
pending successful negotiation of its sale.
TEXTILE SERVICES
- ----------------
As of January 31, 2004, the Textile Services segment had 28 laundry plants
generally in or near various major metropolitan areas in the United States,
principally providing textile rental and linen management services to
healthcare institutions. This segment also provides a limited amount of
general linen services in selected areas, principally to restaurants, hotels
and motels.
The markets in which the Textile Services segment operates are very
competitive, being characterized generally by a large number of independent,
privately-owned competitors. Industry statistics are not available, but the
Company estimates the healthcare linen services market at approximately $5.3
billion and believes that its Textile Services segment constitutes the
largest supplier of textile rental and linen management services to
healthcare institutions in the United States. Competition is on the basis of
quality, reliability and price, not necessarily in that order.
LIFE UNIFORM
- ------------
The Life Uniform segment is a specialty retailer offering uniforms and shoes
primarily for nurses and other healthcare professionals through a nationwide
chain of retail stores under the name of Life Uniform and Shoe Shops,
located primarily in malls and strip shopping centers and, to a limited
extent, inside hospitals. The segment also offers merchandise by means of
catalogues and e-commerce to complement its retail stores, as well as by
means of "on-the-job shopping events" where merchandise is taken to a
particular healthcare location for sale.
The Company believes there are approximately 1,250 specialty retail stores
and approximately ten catalogue operations in the United States, all
primarily privately-owned, offering merchandise comparable to that offered
by the Company's Life Uniform segment. In addition, this type of merchandise
is also offered by others, including some large chain retailers, including
Wal-Mart. The Company believes that approximately 30 percent of all uniforms
sold to healthcare professionals are sold through catalogues. Retail
operations are conducted under highly competitive conditions in the local
area where each of the Company's stores is located, with the Company
competing on the basis of store location, merchandise selection and value.
Industry statistics are not available, but the Company estimates the
healthcare uniform retail market at approximately $1 billion and believes
its Life Uniform segment is the nation's largest specialty retailer offering
uniforms and shoes to nurses and other healthcare professionals and the only
national provider through the four distribution channels of retail stores,
catalogues, e-commerce and on-the-job shopping events.
1
ADDITIONAL INFORMATION
- ----------------------
The Company does not hold any material patents, licenses, franchises or
concessions. It does not consider its business to be seasonal to any
significant extent. No single customer represents ten percent or more of
revenue. No portion of the Company's business is subject to renegotiation of
profits under a government contract.
ENVIRONMENTAL CONSIDERATIONS
- ----------------------------
The operations of the Company are subject to various laws and regulations
relating to public health, worker safety and the environment. The Company is
not presently engaged in any material issues or controversies related to
such matters. Compliance with laws regulating the discharge of materials
into the environment or otherwise relating to the protection of the
environment has not had a material effect on the Company's capital
expenditures, earnings or competitive position. The Company does not expect
any material expenditures will be required in order to comply with any
federal, state or local environmental regulations.
EMPLOYEES
- ---------
As of January 31, 2004, the Company employed approximately 5,700 persons,
including approximately 650 part-time employees (Textile Services, 4,725;
Life Uniform, 925; and Corporate, 50).
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
- --------------------------------------------
The Company provides linen management services in 13 states and manages
retail stores in 37 states. No sales are sought outside of the United
States.
AVAILABLE INFORMATION
- ---------------------
Since November 15, 2002, the Company has made available free of charge on or
through its web site, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports, as
soon as reasonably practicable after they are electronically filed with or
furnished to the SEC. The Company's web site is www.angelica.com.
In addition, the Company has adopted a Code of Conduct and Ethics that
applies to the Company's senior executive and financial officers pursuant to
Section 406 of the Sarbanes-Oxley Act of 2002. This code, as well as
charters relating to the Company's audit committee, compensation and
organization committee and corporate governance and nominating committee,
are available free of charge on or through its web site. In the event of any
amendments to or waivers from provisions of the Code of Conduct and Ethics,
the Company will satisfy its disclosure requirement under the Securities and
Exchange Act of 1934, as amended, by posting the amendments or waivers on
its web site in lieu of filing a report of such events on Form 8-K.
ITEM 2. PROPERTIES
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A list of the Company's principal facilities as of January 31, 2004 follows.
Unless otherwise indicated, each of the facilities is owned by the Company.
There is no individual parcel of real estate owned or leased which is of
material significance to the Company's operations or total assets. In the
opinion of the Company, all such facilities are maintained in good condition
and are adequate and suitable for the purposes for which they are used.
Textile Services Laundries
--------------------------
Antioch, CA Colton, CA Edison, NJ
Ballston Spa, NY Fresno, CA Pawtucket, RI
Batavia, NY Holly Hill, FL Pomona, CA
Chicago, IL Houston, TX Phoenix, AZ
Colton, CA Long Beach, CA Rio Vista, CA
Columbia, SC(1) Lorain, OH Rockmart, GA
Dallas, TX (leased) Los Angeles, CA San Diego, CA
Daytona Beach, FL Ooltewah, TN San Fernando, CA
St. Louis, MO Tampa, FL
Stockton, CA Vallejo, CA (leased)
(1) Our new facility in Columbia, SC commenced operations February 2, 2004.
2
The Company's laundry facility at Vallejo, CA is owned by the City of
Vallejo and is occupied by the Company pursuant to a sublease with the
City's prime tenant. The Company has been informed that the site may be
required for use by the City's sanitation and flood control district as a
wastewater storage basin and that it may be necessary for the City to take
the property by way of an eminent domain proceeding. Should that become
necessary, it is anticipated that the Company will be compensated for the
cost of relocating its Vallejo business operations to an alternative
facility. The Company believes that an acceptable alternative site is
available and does not anticipate a material impact to its business should
relocation become necessary.
The Company occupies its Dallas, TX facility pursuant to a lease agreement
that will be expiring in 2005. The Company has been informed that the owner
of the facility may not be willing to renew the Company's current lease upon
terms considered acceptable to the Company. Accordingly, although the
Company is continuing its efforts to negotiate an acceptable extension of
its current lease agreement for its existing facility, it is also evaluating
alternative sites to which its Dallas, TX business operations can be moved.
The Company believes that an acceptable alternative site is available, if
needed, and does not anticipate a material impact to its business should
relocation become necessary.
As of January 31, 2004, 28 laundries, both owned and leased, plus warehouse
facilities and depots located in 13 states, were used in the Textile
Services segment. Laundry facilities generally are not fully utilized,
although some of them operate on a multi-shift basis. The Company estimates
that, assuming the availability of labor, output of these facilities could
be increased by 20 percent with existing equipment by working longer hours,
and by an additional 25 percent (for a total of 45 percent) with the
installation of additional equipment.
Life Uniform Stores
-------------------
As of January 31, 2004, there were 228 retail specialty stores, located in
37 states, used in the Life Uniform segment. All retail store premises are
leased.
Miscellaneous
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Angelica Corporation
Corporate headquarters
St. Louis County, MO (leased)
Angelica Textile Services
Principal executive offices
Alpharetta, GA (leased)
Life Uniform Offices
St. Louis County, MO (leased)
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not a party, and none of its property is subject, to any
material pending legal proceeding other than ordinary routine litigation
incidental to the business. Management believes that liabilities, if any,
resulting from pending routine litigation in the ordinary course of the
Company's business should not materially affect the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
No matters were submitted to a vote of shareholders during the fourth
quarter of the Company's year ended January 31, 2004.
3
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------
Year First
Elected as
Name Present Position(1)(2) an Officer Age
- ---- ---------------------- ---------- ---
Stephen M. O'Hara(3) President and Chief Executive 2003 49
Officer
Paul R. Anderegg(4) Vice President; President, 2001 53
Textile Services
Business Segment
Steven L. Frey(5) Vice President, General Counsel 1999 54
and Secretary
James W. Shaffer(6) Vice President, Treasurer and Chief 1999 51
Financial Officer
(1) The principal occupations of the officers throughout the past five
years are set forth below.
(2) All officers serve at the pleasure of the Board of Directors.
(3) Stephen M. O'Hara joined the Company as President and Chief
Executive Officer on September 15, 2003. He has served on the
Company's Board of Directors since 2000. Mr. O'Hara was Chief
Executive Officer of Rawlings Sporting Goods Company, Inc., a
seller of athletic equipment and uniforms, from November 1998 to
September 2003 and Chairman from November 1998 to March 2003.
(4) Paul R. Anderegg has been a Vice President of the Company and
President of the Textile Services Business Segment since February
1, 2001. Prior to that time, he served in the following capacities
with The TruGreen Companies, a residential and commercial landscape
and lawn care business: Vice President, Sales & Marketing from July
2000 to February 2001; President/Chief Operating Officer of
TruGreen Landcare from July 1999 to July 2000; Executive Vice
President/Chief Operating Officer of TruGreen Landscape Division
from January 1999 to July 1999; and Senior Vice President-
Operations of TruGreen Chemlawn from 1996 to 1999.
(5) Steven L. Frey has been Vice President, General Counsel and
Secretary of the Company since March 1, 1999. Prior to that time,
he was in private practice from 1996 to 1999 with the law firm of
Helfrey, Simon & Jones, P.C.
(6) James W. Shaffer has been Vice President and Treasurer of the
Company since September 1999 and was appointed Chief Financial
Officer on February 29, 2004. He also served as Corporate
Controller of the Company from May 1999 to September 1999. Prior to
that time, he was Director of Financial Reporting and Tax for
Edison Brothers Stores, Inc., a shoe and apparel retailer, from
October 1995 to April 1999.
None of the executive officers of the Company are related to any director or
other executive officer of the Company.
There are no arrangements or understandings between any executive officer of
the Company or any other person pursuant to which such officer was selected.
4
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "AGL." Set forth below are the high and low sale prices of the Common
Stock and the dividends per share paid during each of the quarterly periods
in the two-year period ended January 31, 2004.
Year Ended January 31, 2004 Year Ended January 25, 2003
----------------------------------------- -------------------------------------------
High Low Dividend High Low Dividend
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First quarter $20.73 $14.91 $0.10 $17.48 $11.10 $0.08
Second quarter 18.79 15.00 0.10 17.62 14.95 0.08
Third quarter 21.10 17.88 0.10 23.50 15.97 0.08
Fourth quarter 23.34 19.30 0.11 24.31 18.80 0.10
========================================================================================================================
There were 1,077 shareholders of record as of March 31, 2004. The Company's
Board of Directors regularly reviews the dividends paid. There can be no
assurance that dividends will be paid in the future because they are
dependent on earnings, the financial condition of the Company and other
factors.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
- --------------------------------------------
The following selected financial data is derived from the audited
consolidated financial statements of the Company. The information set forth
below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in the Form 10-K.
5
For Years Ended January 31, January 25, January 26, January 27, January 29, January 30,
(Dollars in thousands, except per share amounts) 2004 2003(a) 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Combined sales and revenues $ 374,276 $ 363,419 $ 350,063 $ 335,298 $ 335,441 $ 342,500
Gross profit 98,544 102,368 91,299 86,953 83,967 89,126
Operating expenses and other, net,
excluding interest expense (84,313) (84,508) (79,089) (74,320) (72,158) (68,301)
Restructuring charge, net 434 269 (2,982) - - -
Asset impairment charge (1,320) - - - - -
Interest expense (738) (2,843) (7,438) (8,085) (8,593) (9,658)
Loss on early extinguishment of debt - (6,783) - - - -
Income from continuing operations
before income taxes 12,607 8,503 1,790 4,548 3,216 11,167
Provision for income taxes (3,404) (1,906) (161) (1,501) (1,190) (4,132)
Income from continuing operations 9,203 6,597 1,629 3,047 2,026 7,035
(Loss) income from operations of
discontinued segment, net of tax - - (340) 3,539 3,248 1,857
Loss on disposal of discontinued segment,
net of tax - (6,662) (23,998) - - -
Net income (loss) $ 9,203 $ (65) $ (22,709) $ 6,586 $ 5,274 $ 8,892
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Diluted income from continuing operations $ 1.03 $ .75 $ .19 $ .35 $ .23 $ .78
Diluted (loss) income from discontinued
operations - (.76) (2.81) .41 .38 .21
Diluted net income (loss) 1.03 (.01) (2.62) .76 .61 .99
Cash dividends paid .41 .34 .32 .48 .96 .96
Common shareholders' equity $ 16.51 $ 16.00 $ 16.44 $ 19.24 $ 18.84 $ 19.12
- -------------------------------------------------------------------------------------------------------------------------
RATIOS AND PERCENTAGES
Current ratio
(current assets to current liabilities) 1.9 to 1 2.1 to 1 1.4 to 1 2.5 to 1 3.9 to 1 3.2 to 1
Total debt to total debt and equity 12.0% 13.0% 33.9% 35.1% 35.8% 36.8%
Gross profit margin 26.3% 28.2% 26.1% 25.9% 25.0% 26.0%
Effective tax rate (continuing operations) 27.0% 22.4% 9.0% 33.0% 37.0% 37.0%
Income margin from continuing operations,
net of tax 2.5% 1.8% 0.5% 0.9% 0.6% 2.1%
Return on average shareholders' equity 6.4% (0)% (14.9)% 4.0% 3.2% 5.2%
Return on average total assets 4.0% (0)% (7.3)% 2.0% 1.6% 2.5%
- -------------------------------------------------------------------------------------------------------------------------
OTHER SELECTED DATA
Working capital $ 45,687 $ 59,833 $ 46,960 $ 124,449 $ 141,122 $ 136,071
Additions to property and equipment, net 24,349 14,651 13,873 10,595 6,677 7,404
Depreciation and amortization 13,864 13,217 13,074 13,502 14,383 13,907
Cash flow from operating activities of
continuing operations 27,476 25,017 14,991 25,734 12,383 35,047
Long-term debt, including current maturities 19,965 20,811 72,414 88,804 90,942 96,751
Total assets $ 235,781 $ 228,284 $ 290,865 $ 330,255 $ 319,595 $ 339,090
Average number of shares of Common
Stock outstanding 8,957,996 8,822,785 8,663,586 8,681,417 8,686,146 9,014,070
Approximate number of associates 5,700 5,400 7,100 7,600 8,100 8,600
- -------------------------------------------------------------------------------------------------------------------------
(a) Results for the year ended January 25, 2003 have been restated to
reflect the loss on early extinguishment of debt as an ordinary
rather than extraordinary item.
This information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
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ANALYSIS OF FISCAL 2003 CONTINUING OPERATIONS COMPARED TO 2002
In the year ended January 31, 2004 (fiscal 2003), combined sales and
revenues were $374.3 million, an increase of 3.0 percent over fiscal 2002
combined sales and revenues of $363.4 million, as a revenue gain in the
Textile Services segment was partially offset by a sales decline in the Life
Uniform segment. Combined sales and revenues benefited from an extra week in
fiscal 2003 versus fiscal 2002, as discussed below and in Note 1. Income
from continuing operations increased 39.5 percent to $9.2 million in fiscal
2003, or $1.04 per share ($1.03 diluted) compared with $.76 per share ($.75
diluted) in fiscal 2002. Including the loss from discontinued operations of
$6.7 million net of tax, discussed in Note 8, the fiscal 2002 net loss was
$65,000, or $.01 per share. Fiscal 2003 earnings included non-recurring
income of $1.9 million pretax ($.15 per 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), offset in part by an asset
impairment charge of $1.3 million pretax ($.11 per share net of tax) related
to certain underperforming retail stores in the Life Uniform segment (see
Note 4).
As discussed in Note 6, the Company incurred a $6.8 million pretax loss on
early extinguishment of debt ($.50 per diluted share net of tax) in the
second quarter of fiscal 2002 as a result of a prepayment penalty paid to
lenders in connection with the complete refinancing of the Company's debt
following the sale of the Manufacturing and Marketing segment. The loss was
originally shown as an extraordinary item, net of tax, in fiscal 2002.
However, under a new accounting pronouncement adopted in fiscal 2003, the
loss is treated as an ordinary rather than extraordinary item, and
accordingly, fiscal 2002 results of continuing operations have been restated
to reflect this change in accounting treatment.
Textile Services segment revenues of $291.5 million in fiscal 2003 were
$20.2 million or 7.5 percent above the prior year. Over one-half of the
revenue increase was due to net new business additions (new business
installed less lost business). The remaining increase in revenue was
primarily attributable to the 53rd week and fourth-quarter fiscal 2003
acquisitions. During the fourth quarter of fiscal 2003, Textile Services
acquired a healthcare laundry plant and business located in Tampa, FL with
annual revenues of approximately $13.0 million, and customer contracts and
selected assets of a competitor in Batavia, NY with annual revenues of
approximately $2.6 million. Gross margin in this segment decreased to 18.6
percent in fiscal 2003 from 19.3 percent in fiscal 2002. Margins were
negatively affected by increases of $2.9 million in utilities and delivery
fuel, and $1.2 million in workers' compensation and other insurance costs
over the prior year. Competitive pricing pressures in the marketplace have
limited Textile Services' ability to offset these cost increases with higher
prices charged to its customers. These cost increases, along with start-up
costs for the new Phoenix, AZ and Columbia, SC plants, were mitigated to an
extent by favorable impacts from improved linen management, net new business
added during the year and the extra week. Operating income of the Textile
Services segment showed a slight decrease of 1.8 percent to $21.5 million in
fiscal 2003 from $21.9 million in fiscal 2002.
Net retail sales in the Life Uniform segment totaled $82.8 million in fiscal
2003, down $9.4 million or 10.2 percent from $92.2 million in fiscal 2002. A
same-store sales decline of 7.4 percent for the year accounted for $5.8
million of the decrease, partially offset by $1.6 million of sales in the
extra week. Sales also decreased $5.6 million in fiscal 2003 due to the
closing of 59 stores in the past two years. Gross margin of the Life Uniform
segment of 53.5 percent in fiscal 2003 was lower than the 54.2 percent of a
year ago. Fiscal 2002 gross margin included a gain of $.8 million, or 0.8
percent of sales, from the reversal of an intercompany profit deferral due
to the sale of the Manufacturing and Marketing segment. As noted above, a
pretax charge of $1.3 million was recorded in the fourth quarter of fiscal
2003 to write down the carrying amounts of long-lived assets in certain
underperforming stores to their fair values. Including the asset impairment
charge, Life Uniform posted an operating loss of $2.7 million in fiscal 2003
compared with operating income of $2.9 million in fiscal 2002.
Selling, general and administrative expenses increased 0.8 percent in fiscal
2003, but declined as a percent of combined sales and revenues, from 23.3
percent in fiscal 2002 to 22.9 percent in fiscal 2003. Lower incentive
compensation accruals across the Company and decreases in Life Uniform store
operating expenses due to fewer stores were offset by increases in operating
expenses for support and maintenance of new information systems at Life
Uniform and corporate costs related to the Company's search for, and
transition to, a new Chief Executive Officer. The reduction in interest
expense of $2.1 million or 74.0 percent in fiscal 2003 reflects the lower
debt level and lower interest rates following the complete refinancing of
the Company's debt in the second quarter of fiscal 2002. Taxes on income
from continuing operations were provided for at an effective tax rate of
7
27.0 percent in fiscal 2003. The lower effective tax rate on income from
continuing operations of 22.4 percent in fiscal 2002 was primarily due to
the effect of the aforementioned restatement of the extraordinary loss which
was tax effected at the incremental tax rate as a separate component of
income from continuing operations in fiscal 2002 in accordance with SFAS No.
109.
ANALYSIS OF FISCAL 2002 CONTINUING OPERATIONS COMPARED TO 2001
Income from continuing operations in fiscal 2002 of $6.6 million increased
305.0 percent from the prior year, on a 3.8 percent increase in combined
sales and revenues to $363.4 million. On a per-share basis, income from
continuing operations amounted to $.76 ($.75 diluted) in fiscal 2002 versus
$.19 in fiscal 2001, an increase of 300.0 percent. Fiscal 2001 results
included restructuring and other charges of $4.2 million pretax ($.44 per
share net of tax), discussed below and in Note 3. In fiscal 2002, both of
the Company's continuing business segments, Textile Services and Life
Uniform, posted growth in sales and revenues as well as operating earnings
increases.
As discussed in Note 6, the Company incurred a loss on early extinguishment
of debt of $6.8 million pretax ($.50 per diluted share net of tax) in the
second quarter of fiscal 2002 as a result of a prepayment penalty paid in
connection with the complete refinancing of the Company's debt following the
sale of the Manufacturing and Marketing segment.
As discussed below and in Note 8, the Company recorded a loss of $6.7
million net of tax in fiscal 2002 on the disposal of the discontinued
Manufacturing and Marketing segment, in addition to the loss on disposal of
$24.0 million net of tax in fiscal 2001. Combining continuing and
discontinued operations, the Company had a net loss of $.01 per share in
fiscal 2002 compared with a net loss of $2.64 per share ($2.62 diluted) in
fiscal 2001.
Revenues of the Textile Services segment in fiscal 2002 were $271.3 million,
an increase of $12.2 million or 4.7 percent from the prior year. Net new
business additions were strong in fiscal 2002, although slightly below the
record level in fiscal 2001. The sale of the Denver, CO plant in fiscal 2002
negatively affected revenues by $2.2 million, offset in part by an
acquisition of selected assets and textile linen management services of a
hospital-owned laundry in Macon, GA. Gross margin benefited from control of
linen expense and other production costs, offset to some extent by
significantly higher workers' compensation costs. As a result of the gross
margin and revenue improvements, operating income of the Textile Services
segment increased 16.8 percent in fiscal 2002. Fiscal 2002 earnings also
included a gain on the sale of the Denver, CO plant of $.5 million reported
in other operating expense, net.
Sales at Life Uniform increased 1.3 percent to $92.2 million from $91.0
million in fiscal 2001. Same-store sales increased 3.8 percent in fiscal
2002 compared with a 4.3 percent decrease in fiscal 2001, although the
increase in the fourth quarter of fiscal 2002 was the smallest of the year
at 1.9 percent. Sales from this segment's catalogue and e-commerce
distribution channels increased 62.9 percent to $5.2 million. Life Uniform's
fiscal 2002 sales were negatively affected by approximately $5.0 million
resulting from having 38 fewer stores in operation compared with fiscal
2001. Gross margins improved in both the stores and the catalogue/e-commerce
operation. Operating income of the Life Uniform segment was $2.9 million in
fiscal 2002 compared with an operating loss of $5.0 million in fiscal 2001
(including restructuring and other charges), as a result of the improved
gross margins, closing of restructured and other unprofitable stores as well
as the higher sales levels.
Selling, general and administrative expenses increased 8.7 percent in fiscal
2002, representing 23.3 percent of combined sales and revenues compared with
22.3 percent in fiscal 2001. The increase was due mainly to filling several
new sales and administrative positions at Textile Services, higher incentive
compensation expense as a result of improved operating results, and
increased employee healthcare costs. Interest expense decreased $4.6 million
in fiscal 2002 to $2.8 million resulting from the lower debt level and lower
interest rates following the aforementioned debt refinancing. The effective
tax rate on income from continuing operations of 22.4 percent in fiscal 2002
is higher than the 9.0 percent tax rate in the prior year due to the impact
of permanent differences on the relatively low level of income in fiscal
2001.
FINANCIAL CONDITION
Receivables and linens in service increased $2.3 million and $2.7 million,
respectively, in fiscal 2003 due to businesses acquired by the Textile
Services segment in the fourth quarter of fiscal 2003 and the revenue
increase in Textile Services. Days outstanding in receivables were 42 at the
end of fiscal 2003 versus 43 at the end of fiscal 2002. Increases in total
property and equipment of $12.9 million and goodwill and other acquired
assets of
8
$8.0 million reflect the cost of businesses acquired by Textile Services, as
well as capital expenditures related to the new Phoenix, AZ and Columbia, SC
laundry facilities. At the end of fiscal 2003, the Company's working capital
of $45.7 million and current ratio of 1.9 to 1 were both lower than $59.8
million and 2.1 to 1 at the end of fiscal 2002.
Accrued wages declined $3.2 million at the end of fiscal 2003 as a result of
lower incentive compensation accruals and the payment of severance costs
associated with the fiscal 2002 sale of the Manufacturing and Marketing
segment. Total debt of $20.0 million at fiscal 2003 year end was $.8 million
lower than a year ago, and represented 12.0 percent of total capitalization
versus 13.0 percent at the end of fiscal 2002. Book value per share
increased 3.2 percent to $16.51 at the end of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments of $2.7 million at the end of fiscal 2003
decreased $15.5 million from fiscal 2002 year end. Cash flow provided by
operating activities of continuing operations increased 9.8 percent to $27.5
million in fiscal 2003. In fiscal 2003, the Company received cash of $1.9
million in connection with the life insurance company liquidation referred
to above, and a Federal income tax refund of $4.1 million due mainly to the
loss on the sale of the Manufacturing and Marketing segment recorded in
prior fiscal years. Capital expenditures for property and equipment
increased $9.7 million in fiscal 2003 primarily due to the new Textile
Services' plants. Cash flows from discontinued operations reflect the
proceeds from the liquidation of assets of the Manufacturing and Marketing
segment, principally accounts receivable and inventories, substantially
completed in fiscal 2002, net of the payment of certain sale-related
liabilities.
As discussed in Note 11, the Company's total debt at the end of fiscal 2003
consisted principally of the amount outstanding under a revolving bank line
of credit. As of fiscal 2003 year end, the amount available to borrow under
the line of credit was $35.2 million. On March 8, 2004, the Company amended
the terms of the credit facility to increase the maximum borrowing capacity
by $30.0 million to $100.0 million, and extend the maturity date to May 30,
2007 with two optional one-year extensions. In addition to the bank credit,
the Company has significant borrowing capacity against the cash value of its
company-owned life insurance policies.
Management believes that the Company's financial condition, operating cash
flow and available sources of external funds are sufficient to satisfy the
Company's requirements for debt service, capital expenditures, acquisitions,
dividends and working capital over the course of the next 12 months.
CONTRACTUAL OBLIGATIONS
Future payments due under contractual obligations, aggregated by type of
obligation, as of the end of fiscal 2003 are as follows:
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) PAYMENTS DUE BY PERIOD
- -------------------------------------------------------------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
CONTRACTUAL OBLIGATIONS: Total 1 year years years 5 years
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt, including interest $ 23,901 $ 858 $ 1,839 $ 21, 204 $ -
- -------------------------------------------------------------------------------------------------------------------------
Capital lease obligations, including interest 468 220 248 - -
- -------------------------------------------------------------------------------------------------------------------------
Operating leases 38,182 10,304 14,204 8,814 4,860
- -------------------------------------------------------------------------------------------------------------------------
Purchase obligations:
Linen contracts 12,846 12,846 - - -
Natural gas contracts 4,888 4,277 611 - -
- -------------------------------------------------------------------------------------------------------------------------
Deferred compensation and pension liabilities 30,758 2,319 3,153 2,915 22,371
- -------------------------------------------------------------------------------------------------------------------------
Total $ 111,043 $ 30,824 $ 29,055 $ 32,933 $ 27,231
- -------------------------------------------------------------------------------------------------------------------------
Future payments of long-term debt reflect the amended terms of the credit
facility on March 8, 2004, as discussed in Note 11.
DISCONTINUED OPERATIONS
In January 2002, the Company's Board of Directors approved a plan to
discontinue the Manufacturing and Marketing segment. At that time, the
assets of the segment were written down and a loss on disposal of $24.0
9
million net of tax was recorded based on the estimated net realizable value
from the pending sale of the business, as well as estimates of the costs of
disposal and transition. During fiscal 2002, the sale and transition of the
business to the buyers was completed and the assets of the segment were
substantially liquidated. An additional loss on disposal of $6.7 million net
of tax was recorded in fiscal 2002 to reflect the actual value received upon
ultimate disposition of the segment's assets, including actual costs of
disposition and transition. Of this amount, $6.1 million was due to a
reduction in the value of the inventories realized. The remaining assets of
the segment of $2.2 million as of January 25, 2003, primarily accounts
receivable and inventory, were disposed of in fiscal 2003 for amounts
approximating their carrying values. Operating results of the Manufacturing
and Marketing segment in fiscal 2001 prior to its discontinuation are
included in the Consolidated Statements of Income as net loss from
operations of discontinued segment.
As discussed in Note 19, on February 24, 2004, the Company's Board of
Directors approved a plan to exit and discontinue the Life Uniform segment.
Accordingly, the assets and liabilities of Life Uniform will be segregated,
and its results of operations reported in discontinued operations, effective
in the first quarter of fiscal 2004. Although the segment is being actively
marketed for sale, the Company intends to continue to operate it pending
completion of a sale. Management has expressed a willingness to exclude
certain underperforming retail stores from a potential sale. As noted above,
an asset impairment charge of $1.3 million pretax was recorded in the fourth
quarter of fiscal 2003 related to certain underperforming Life Uniform
stores. The final sale price and the costs associated with exiting stores
that are not included in the sale will determine whether the sale will
result in recognition of a gain or a loss. Although consummation of a sale
of the business is anticipated in fiscal 2004, there is a risk that the
Company will be unable to sell the Life Uniform segment under financial
terms and conditions that are acceptable which could result in losses upon
the closing of stores and liquidation of the assets. Should the Company be
unable to successfully conclude the sale of Life Uniform, it is expected
that the Company would wind down Life's operations in a manner to maximize
the recovery of the asset values. The net book value of the Life Uniform
segment at January 31, 2004 was $17.7 million.
RESTRUCTURING ACTIVITIES
In the fourth quarter of fiscal 2001, the Company developed plans to close
27 underperforming Life Uniform retail stores which collectively lost $.9
million in fiscal 2001 and exit the hospitality line of business in the Life
Uniform segment. At that time, the Company recorded restructuring and other
charges of $4.2 million pretax relating to these activities. During fiscal
2002, the Company closed 25 of the 27 Life Uniform stores included in the
plan of restructuring and liquidated the hospitality (non-healthcare) line
of inventory. In the fourth quarter of fiscal 2002, Management decided that
the remaining two stores included in the restructuring plan would not be
closed, and reversed $.3 million of the restructuring charge related to
these two stores. In fiscal 2003, the Company reversed into income from
continuing operations $.4 million of the original restructuring charge
recorded in fiscal 2001 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.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
Note 1 to the consolidated financial statements. Certain of these policies
as discussed below require the application of significant judgment by
Management in selecting appropriate assumptions for calculating amounts to
record in the consolidated financial statements. By their nature, these
judgments are subject to an inherent degree of uncertainty.
INVENTORIES AND LINENS IN SERVICE
Substantially all of the Company's inventories are finished goods held for
resale in Life Uniform's retail stores and catalogue/e-commerce operation.
These inventories are stated at the lower of cost or fair market value, net
of a reserve for inventory shrinkage based upon a percentage of sales.
Inventory costs are determined principally by the use of the retail
inventory method. Linens in service represent the unamortized cost of
textile and linen products purchased for service in the Textile Services
segment. Linens in service are amortized on a straight-line basis over their
expected useful lives of one to two years.
10
SELF-INSURANCE LIABILITIES
The Company self-insures liabilities for non-union employee medical coverage
and liabilities for casualty insurance claims, including workers'
compensation, general liability and vehicle liability, up to certain levels.
The Company purchases insurance coverage for large claims over the
self-insured retention levels. In fiscal 1999, the Company negotiated a
buyout of all casualty claims occurring prior to February 1, 1999. The
liability for casualty claims as of January 31, 2004 includes losses for
claims that occurred since the buyout date. Self-insurance liabilities are
estimated using actuarial methods and historical data for payment patterns,
cost trends and other relevant factors. While Management believes that the
estimated liabilities recorded for casualty and employee medical claims as
of January 31, 2004 are adequate, and that appropriate judgment has been
applied in determining the estimates, such estimated liabilities could
differ materially from actual liabilities resulting from the ultimate
disposition of the claims.
DEFERRED INCOME TAXES
The Company recognizes deferred income tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of the assets and liabilities. Balances in the deferred income tax
accounts are regularly reviewed for adequacy and recoverability by analyzing
the expected income necessary to realize the deferred assets, the
anticipated tax rates applicable when the deferred items are expected to be
recognized and the ability to utilize carryforward items. The Company does
not provide for deferred tax liabilities related to the cash surrender value
of its company-owned life insurance under the assumption that these policies
will be held by the Company until death of the insured. It is Management's
opinion that adequate provisions for income taxes have been made for all
periods presented, and all net deferred tax assets will be fully recovered.
STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock-based compensation plans.
Accordingly, no compensation expense has been recognized for the issuance of
stock options to employees and directors. Under SFAS No. 123, "Accounting
for Stock-Based Compensation," companies are encouraged but not required to
adopt a fair-value based method to recognize compensation expense of equity
instruments awarded to employees. Had the Company recorded compensation
expense for stock options issued consistent with SFAS No. 123, the Company's
net income and earnings per share would approximate the pro forma amounts
disclosed in Note 2.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, the Company considers the possible
impairment of its long-lived assets, excluding goodwill, whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Indications of possible impairment include, but are not limited
to, operating or cash flow losses associated with the use of a long-lived
asset, or a current expectation that, more likely than not, a long-lived
asset will be sold or otherwise disposed of significantly before the end of
its previously estimated useful life. To determine the potential impairment
of long-lived assets, the Company is required to make estimates of the
projected future cash flows associated with the use of the assets, as well
as their fair values. Management believes that the carrying values of the
Company's long-lived assets as of January 31, 2004, as adjusted for the
fiscal 2003 asset impairment charge discussed in Note 4, are fully
recoverable.
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, disruption to the Company's
operations by union activities, the ability of the Company to sell the Life
Uniform segment under financial terms
11
and conditions currently anticipated, the ability of the Company to
accomplish its strategy of re-directing its resources to its healthcare
linen management business in a timely and financially advantageous manner,
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain matters discussed in this Form 10-K or in other documents, a portion
of which are incorporated herein by reference, constitute forward-looking
statements and are based upon Management's expectations and beliefs
concerning future events impacting the Company. There can be no assurance
that these events will occur or that the Company's results will be as
estimated. Such statements are subject to certain risks and uncertainties
that may cause actual results to differ materially from those set forth in
these statements.
The following factors, as well as factors described elsewhere in this Form
10-K, or in other SEC filings, could cause the Company's future results to
differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company. Such factors are described in
accordance with the provisions of the Private Securities Litigation Reform
Act of 1995, which encourages companies to disclose such factors.
COMPETITIVE ENVIRONMENT
The Company experiences significant competition in its major markets from
its competitors. The principal elements of competition include quality,
reliability and price. While many competitors are independent and
privately-owned, certain of the Company's competitors are publicly-owned and
have greater financial and other resources. In addition, in some markets,
the Company competes with smaller regional competitors with significant
market share. There can be no assurance that these competitors will not
substantially increase the resources devoted to the development and
marketing, including discounting, of products and services that compete with
those offered by the Company. Significant price competition could seriously
harm the Company's revenue, operating margins and market share.
COST OF LINENS AND TEXTILES
In the Company's Textile Services business segment, the acquisition cost of
linens and other textiles rented to customers comprises just under 20
percent of the Company's revenues. During the past fiscal year, the cost of
cotton increased approximately 15 percent, and, like most commodities, is
subject to regular fluctuation. Significant increases in the price of cotton
could result in higher linen costs and, consequently, have an adverse effect
on the Company's earnings if the Company is not successful in offsetting
such increases through cost reduction efforts, prices for the Company's
services are not adjusted or if adjustments significantly trail the
increases in linen costs.
UTILITY AND ENERGY COSTS
The Company's operations utilize natural gas, electricity, gasoline and
diesel fuel. The Company's energy purchases vary as to price, payment terms,
quantities and timing. The Company's energy costs are also affected by
various market factors including the availability of supplies of particular
forms of energy, energy prices and local and national regulatory decisions.
There can be no assurance that the Company will be fully protected against
substantial changes in the price or availability of energy sources.
WORKERS' COMPENSATION COSTS
The Company is primarily self-insured with respect to workers' compensation
costs. Self-insurance liabilities are estimated using actuarial methods and
historical data for payment patterns, cost trends and other relevant
factors. To the extent that actual liabilities resulting from the ultimate
disposition of workers' compensation claims exceed the amount of the
Company's reserve, the Company's financial results could be negatively
impacted.
12
COLLECTIVE BARGAINING AGREEMENTS
Approximately two-thirds of our hourly employees, principally at our laundry
facilities, are represented by collective bargaining agreements with
contracts that expire on varying dates. Additionally, UNITE! (formerly the
Union of Needletrades, Industrial and Textile Employees), the labor union
that currently represents many of those employees, has recently initiated a
corporate campaign targeting the Company's non-union facilities. It is
believed that the intent of this campaign is to persuade the Company to
recognize the union as the bargaining representative for the Company's
non-union workers, without providing those workers the opportunity to vote,
through a secret ballot election supervised by the U.S. National Labor
Relations Board, as to whether or not they wish to be represented by UNITE!.
The Company has expended considerable resources resisting these efforts.
Therefore, the Company is at greater risk of work interruptions or stoppages
than are non-union competitors who are not the target of campaigns such as
that undertaken against the Company by UNITE!. Any work interruptions or
stoppages could significantly impact the Company's operations. In addition,
the existence of collective bargaining agreements may limit or impair the
Company's ability to optimize production efficiencies and reduce labor
costs.
LABOR COSTS
Direct and indirect labor costs, coupled with related fringe benefit costs,
represent approximately 35 percent of revenues of the Textile Services
segment. As wage rates, health insurance premiums and workers' compensation
costs increase, there can be no guarantee the Company will be able to offset
these increases with higher prices charged to its customers.
ACQUISITIONS AND INTEGRATION OF ACQUIRED BUSINESSES
The Company's long-term growth strategy depends, in part, on its ability to
acquire and successfully integrate and operate additional businesses. There
can be no assurances that the Company can successfully identify, negotiate,
complete and integrate acquisitions.
ITEM 7A. 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 fiscal 2003 was $10.8 million. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed-price
contracts for approximately 37 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 $.7 million 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 fiscal 2003 was $4.2
million. A hypothetical 10 percent increase in the cost of delivery fuel
would result in a decrease of approximately $.4 million 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 2002. As of January 31, 2004, there was $19.5 million of outstanding
debt under the credit facility, of which $10.0 million 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 to moderate
the exposure. Amounts borrowed under the credit facility in excess of the
$10.0 million 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 or (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 January 31, 2004,
the margin was 1.0 percent. 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 $.1 million in annual pretax earnings.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements and financial statement schedule listed in Item
15(a) of this Form 10-K are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Company had no disagreements with its accountants during the last two
fiscal years. On April 15, 2002, we engaged Deloitte & Touche LLP to serve
as our independent auditors. Information with respect to changes in
accountants under the caption "Independent Public Accountants" in the
Company's Proxy Statement for the 2004 Annual Meeting of Shareholders
(hereinafter "proxy statement") is incorporated herein by reference.
ITEM 9A. 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 directors, provides oversight to the
financial reporting process.
As of the end of the period covered by this report, the Company's
management, with the participation of 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 such 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 in which this Annual Report on Form 10-K was being prepared. The
Chief Executive Officer and Chief Financial Officer also concluded based
upon such 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.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recently completed fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's control over financial reporting.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Information with respect to directors of the Company under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Compensation Committee Interlocks" in the Company's proxy
statement is incorporated herein by reference. Information with respect to
executive officers of the Company appears in Item 4A of this Form 10-K.
The Company has adopted a Code of Conduct and Ethics for its senior
executive and financial officers pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002. The Company has posted this Code, as well as any
waivers or changes to the Code, on its web site, www.angelica.com.
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------
Information with respect to executive compensation under the captions
"Director Compensation," "Compensation and Organization Committee Report on
Executive Compensation," "Summary Compensation Table," "Employment Contracts
and Termination of Employment and Change-In-Control Arrangements,"
"Retirement Plans," and "Stock Options" in the Company's proxy statement is
incorporated herein by reference.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners
and management under the caption "Stock Ownership of Certain Beneficial
Owners" and "Stock Ownership of Management" in the Company's proxy statement
is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of fiscal year ended January 31,
2004 with respect to the shares of Common Stock that may be issued under our
existing equity compensation plans:
NUMBER OF
SECURITIES
REMAINING
NUMBER OF AVAILABLE FOR
SECURITIES TO BE FUTURE ISSUANCE
ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE PRICE COMPENSATION
OUTSTANDING OF OUTSTANDING PLANS (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS AND WARRANTS AND REFLECTED IN
RIGHTS RIGHTS COLUMN(a))
(a) (b) (c)
=======================================================================================================================
Equity compensation plans approved by security holders 677,625 $14.21 198,245(1)
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by security holders 300,000(2) 23.03 --
- -----------------------------------------------------------------------------------------------------------------------
Total 977,625 $16.92 198,245(1)
=======================================================================================================================
(1) Includes 82,031 shares available for issuance under the 1994
Non-Employee Directors Stock Plan as of fiscal year ended January 31,
2004. The plan will terminate on May 31, 2004 and no additional option
shares will be available for further issuance under that plan after
that date.
(2) On January 2, 1998, the Company made a one-time grant of 100,000 stock
options to Don W. Hubble at an exercise price of $21.9375 in order to
induce Mr. Hubble to become the Chairman, President and Chief Executive
Officer of the Company. These options were granted under a
non-qualified stock option agreement upon substantially similar terms
to grants made to other officers and Company employees under the
Angelica Corporation 1999 Performance Plan, which plan was approved by
the shareholders. Mr. Hubble has since become fully vested in each of
these options. Mr. Hubble relinquished the titles of President and
Chief Executive Officer on September 15, 2003 and became non-executive
Chairman of the Board on February 1, 2004.
On September 15, 2003, the Company made three one-time grants of stock
options to Stephen M. O'Hara for a total of 200,000 shares as an
inducement to accept employment as its President and Chief Executive
Officer. One grant for 100,000 stock options at an exercise price of
$19.66 was granted under substantially similar terms to the 1999
Performance Plan. Two additional employment-inducement stock option
grants of 50,000 shares each will vest and become exercisable only upon
the closing price of the Company's Common Stock on the New York Stock
Exchange being at least, for the respective options, $25.00 per share,
or $30.00 per share, during any period of five consecutive trading days
during Mr. O'Hara's term of employment. Each option has a term of ten
years from the date of grant. The option grants were filed as exhibits
10.3, 10.4 and 10.5 to the Form 10-Q for fiscal quarter ended October
25, 2003.
On January 1, 1991, the Company established the Angelica Corporation Stock
Award Plan in order to recognize key employees. The Company's Chief
Executive Officer administers the Stock Award Plan and may award up to an
aggregate of 3,000 shares of our Common Stock per fiscal year under the
Plan. Any employee, except the Company's Chief Executive Officer, is
eligible to receive awards under the Plan, upon nomination by the Chief
Executive Officer of the Company, or the President of any subsidiary or
operating division. The Company's Board of Directors may, in its sole
discretion, terminate or amend the Plan at any time.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Not Applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -------------------------------------------------
Information with respect to principal accountant fees and services under the
caption "Independent Public Accountants" in the Company's proxy statement is
incorporated herein by reference.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
(a) Document List
1. Financial Statements Page
-------------------- ----
The following financial statements are attached hereto and incorporated
by reference in Item 8 above:
(i) Reports of Independent Public Accountants F-1 - F-2
(ii) Consolidated Statements of Income - Years ended January 31, 2004, F-3
January 25, 2003 and January 26, 2002
(iii) Consolidated Balance Sheets - January 31, 2004 and January 25, 2003 F-4
(iv) Consolidated Statements of Shareholders' Equity - Years F-5
ended January 31, 2004, January 25, 2003 and January 26, 2002
(v) Consolidated Statements of Cash Flows - Years ended F-6
January 31, 2004, January 25, 2003 and January 26, 2002
(vi) Notes to Consolidated Financial Statements F-7 - F-24
2. Financial Statement Schedule
----------------------------
(i) Report of Independent Public Accountants on
Schedule II appears on page S-1 of this Form
10-K.
(ii) The following financial statement schedule
appears on page S-2 of this Form 10-K:
Schedule II - Valuation and Qualifying Accounts -
For the Three Years Ended January 31, 2004
All other schedules are not submitted because
they are not applicable or not required or
because the information is included in the
financial statements or notes thereto.
3. Exhibits
--------
See Exhibit Index for a list of all management contracts,
compensatory plans and arrangements required by this item
(Exhibit Nos. 10.1 through 10.39) and all other exhibits
filed or incorporated by reference as a part of this
report.
(b) Reports on Form 8-K
On November 18, 2003, the Registrant furnished a report on
Form 8-K under Items 7 and 12 containing a press release
announcing its earnings for the third quarter ended
October 25, 2003.
16
On December 3, 2003, the Registrant furnished a report on
Form 8-K under Item 11 when a blackout period on
transactions in the Company's Common Stock was triggered
by the transfer of responsibilities for recordkeeping and
administration of the Company's Retirement Savings Plan
401(k) from its then-current custodian to a successor
custodian.
On December 4, 2003, the Registrant furnished a report on
Form 8-K under Items 7 and 9 attaching a slide
presentation presented at an analyst meeting held on
December 4, 2003, pursuant to Regulation FD.
(c) See Exhibit Index.
(d) See Item 15(a)2(i) above.
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Shareholders of Angelica Corporation:
We have audited the accompanying consolidated balance sheets of Angelica
Corporation and subsidiaries (the "Company") as of January 31, 2004 and
January 25, 2003, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years then ended. Our audits
also included the information for the years ended January 31, 2004 and
January 25, 2003 included in the financial statement schedule listed in the
Index at Item 15(a)2(i). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based
on our audits. The consolidated financial statements and the financial
statement schedule of Angelica Corporation and subsidiaries for the year
ended January 26, 2002 (fiscal 2001), before the inclusion of the
disclosures discussed in Note 10 to the financial statements, were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements and stated
that the information for the year ended January 26, 2002 in the financial
statement schedule, when considered in relation to the 2001 basic financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein, in their report dated March 21, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Angelica
Corporation and subsidiaries at January 31, 2004 (fiscal 2003) and January
25, 2003 (fiscal 2002), and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the 2003 and 2002 information in the financial statement schedule,
when considered in relation to the 2003 and 2002 basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements,
effective January 27, 2002, the Company changed its method of accounting for
goodwill to conform to Statement of Financial Accounting Standards
(Statement) No. 142, "Goodwill and Other Intangible Assets" and effective
January 26, 2003, the Company changed the manner in which it accounts for
gains and losses on the early retirement of debt to conform to Statement
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections."
As discussed above, the consolidated financial statements of Angelica
Corporation and subsidiaries as of January 26, 2002, and for the year then
ended, were audited by other auditors who have ceased operations. As
described in Note 10, these financial statements have been revised to
include the transitional disclosures required by Statement No. 142, which
was adopted by the Company as of January 27, 2002. Our audit procedures with
respect to the disclosure in Note 10 with respect to fiscal 2001 included
(i) agreeing the previously reported net income to the previously issued
financial statements and the adjustments to reported net income representing
amortization expense (including any related tax effects) recognized in those
periods related to goodwill as a result of initially applying Statement
No. 142 (including any related tax effects) to the Company's underlying records
obtained from management, and (ii) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income, and the
related earnings per share amounts. In our opinion, the disclosures for
fiscal 2001 in Note 10 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 financial statements of
the Company other than with respect to such adjustments and, accordingly, we
do not express an opinion or any other form of assurance on the 2001
financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
April 7, 2004
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
[The following report is a copy of a report previously issued by Arthur
Andersen LLP in connection with the Company's Annual Report to Shareholders
for the year ended January 26, 2002 (fiscal 2001). This opinion has not been
reissued by Arthur Andersen LLP, which has ceased operations. In fiscal
2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." As described in Note 10, the Company has presented the transitional
disclosures for fiscal 2001 required by SFAS No. 142. The Arthur Andersen
LLP report does not extend to these transitional disclosures. These
disclosures are reported on by Deloitte & Touche LLP as stated in their
report appearing on page F-1.]
To Angelica Corporation:
We have audited the accompanying consolidated balance sheets of Angelica
Corporation (a Missouri corporation) and subsidiaries as of January 26, 2002
and January 27, 2001, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended January 26, 2002. These financial statements are the
responsibility of the Company's Management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Angelica Corporation and
subsidiaries as of January 26, 2002 and January 27, 2001, and the results of
their operations and their cash flows for each of three years in the period
ended January 26, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 21, 2002
F-2
CONSOLIDATED STATEMENTS OF INCOME
ANGELICA CORPORATION AND SUBSIDIARIES
For Years Ended January 31, January 25, January 26,
(Dollars in thousands, except per share amounts) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS:
Textile service revenues $ 291,499 $ 271,250 $ 259,078
Net retail sales 82,777 92,169 90,985
- ----------------------------------------------------------------------------------------------------------------------------
Combined sales and revenues 374,276 363,419 350,063
- ----------------------------------------------------------------------------------------------------------------------------
Cost of textile services (237,261) (218,858) (212,984)
Cost of retail goods sold (Note 3) (38,471) (42,193) (45,780)
- ----------------------------------------------------------------------------------------------------------------------------
Combined cost of textile services and retail goods sold (275,732) (261,051) (258,764)
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 98,544 102,368 91,299
Selling, general and administrative expenses (85,535) (84,841) (78,065)
Restructuring charge, net (Note 3) 434 269 (2,982)
Other operating expense, net (1,022) (169) (1,611)
Asset impairment charge (Note 4) (1,320) - -
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations 11,101 17,627 8,641
Interest expense (738) (2,843) (7,438)
Non-operating income, net (Note 5) 2,244 502 587
Loss on early extinguishment of debt (Note 6) - (6,783) -
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 12,607 8,503 1,790
Provision for income taxes (Note 7) (3,404) (1,906) (161)
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 9,203 6,597 1,629
- ----------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS (NOTE 8):
Loss from operations of discontinued segment, net of tax - - (340)
Loss on disposal of discontinued segment, net of tax - (6,662) (23,998)
- ----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations - (6,662) (24,338)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,203 $ (65) $ (22,709)
============================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE (NOTE 9):
Income from continuing operations $ 1.04 $ 0.76 $ 0.19
Loss from discontinued operations - (0.77) (2.83)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.04 $ (0.01) $ (2.64)
============================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 9):
Income from continuing operations $ 1.03 $ 0.75 $ 0.19
Loss from discontinued operations - (0.76) (2.81)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.03 $ (0.01) $ (2.62)
============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-3
CONSOLIDATED BALANCE SHEETS
ANGELICA CORPORATION AND SUBSIDIARIES
For Years Ended January 31, January 25,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and short-term investments $ 2,712 $ 18,166
Receivables, less reserves of $928 and $724 37,664 35,316
Inventories 11,700 13,395
Linens in service 35,255 32,520
Prepaid expenses and other current assets 5,952 5,223
Deferred income taxes 5,036 6,110
Net current assets of discontinued segment (Note 8) - 2,162
- -------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 98,319 112,892
- -------------------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Land 6,844 6,044
Buildings and leasehold improvements 64,367 61,582
Machinery and equipment 127,941 109,714
Capitalized leased property 897 897
- -------------------------------------------------------------------------------------------------------------------------------
200,049 178,237
Less - reserve for depreciation 108,560 99,684
- -------------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment 91,489 78,553
- -------------------------------------------------------------------------------------------------------------------------------
Other:
Goodwill (Note 10) 10,401 4,256
Other acquired assets (Note 10) 4,047 2,146
Cash surrender value of life insurance 30,194 27,576
Deferred income taxes - 1,405
Miscellaneous 1,331 1,456
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 45,973 36,839
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 235,781 $ 228,284
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 11) $ 192 $ 237
Accounts payable 24,364 21,369
Accrued wages and other compensation 6,145 9,300
Other accrued liabilities 21,931 22,153
- -------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 52,632 53,059
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt, less current maturities (Note 11) 19,773 20,574
- -------------------------------------------------------------------------------------------------------------------------------
Other:
Deferred compensation and pension liabilities (Note 12) 14,016 14,397
Deferred income taxes 2,218 -
Other long-term liabilities 482 594
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Liabilities 16,716 14,991
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 shares 9,472 9,472
Capital surplus 4,748 4,481
Retained earnings 142,341 137,548
Accumulated other comprehensive loss (1,062) (511)
Unamortized restricted stock (210) -
Common Stock in treasury, at cost: 587,141 and 741,755 shares (8,629) (11,330)
- -------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 146,660 139,660
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 235,781 $ 228,284
===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ANGELICA CORPORATION AND SUBSIDIARIES
For Years Ended January 31, January 25, January 26,
(Dollars in thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ($1 PAR VALUE)
Balance beginning of year $ 9,472 $ 9,472 $ 9,472
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ 9,472 $ 9,472 $ 9,472
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance beginning of year $ 4,481 $ 4,200 $ 4,196
Tax benefit of stock options exercised 267 281 4
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ 4,748 $ 4,481 $ 4,200
- ----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance beginning of year $ 137,548 $ 142,188 $ 168,677
Net income (loss) 9,203 (65) (22,709)
Cash dividends (3,619) (2,947) (2,751)
Treasury stock reissued (791) (1,628) (1,029)
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ 142,341 $ 137,548 $ 142,188
- ----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance beginning of year $ (511) $ - $ (1,980)
Change in fair value of interest-rate swap (Note 13) 5 (170) -
Other changes during year (556) (341) (285)
Effect of discontinued operations (Note 8) - - 2,265
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ (1,062) $ (511) $ -
- ----------------------------------------------------------------------------------------------------------------------------
UNAMORTIZED RESTRICTED STOCK
Balance beginning of year $ - $ - $ -
Treasury stock reissued (768) - -
Amortization expense 558 - -
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ (210) $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance beginning of year $ (11,330) $ (14,356) $ (16,046)
Treasury stock reissued 2,701 3,026 1,690
- ----------------------------------------------------------------------------------------------------------------------------
Balance end of year $ (8,629) $ (11,330) $ (14,356)
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY, END OF YEAR $ 146,660 $ 139,660 $ 141,504
============================================================================================================================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 9,203 $ (65) $ (22,709)
Change in fair value of interest-rate swap, net of tax:
Unrealized losses deferred during year (154) (220) -
Realized losses reclassified to net income (loss) during
year 159 50 -
Minimum pension liability adjustment, net of tax (560) (341) -
Other changes 4 - -
Change in cumulative translation adjustment - - (285)
Effect of discontinued operations (Note 8) - - 2,265
- ----------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) $ 8,652 $ (576) $ (20,729)
============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
ANGELICA CORPORATION AND SUBSIDIARIES
For Years Ended January 31, January 25, January 26,
(Dollars in thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 9,203 $ 6,597 $ 1,629
Non-cash items included in income from continuing operations:
Depreciation 12,532 12,480 11,100
Amortization 1,332 737 1,974
Restructuring charge, net (Note 3) (434) (269) 4,180
Asset impairment charge (Note 4) 1,320 - -
Cash surrender value of life insurance (1,504) (1,097) (1,528)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of:
Receivables, net (1,208) (2,044) 2,535
Inventories and linens in service 228 1,511 1,835
Prepaid expenses and other current assets (1,347) 720 1,014
Accounts payable 3,047 2,235 (6,817)
Compensation and other accruals (56) 674 2,369
Income taxes 5,517 1,526 (4,686)
Utilization of restructuring reserves (Note 3) (412) (803) -
Other, net (742) 2,750 1,386
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations 27,476 25,017 14,991
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment, net (24,349) (14,651) (13,873)
Cost of businesses acquired (14,372) (3,279) (785)
Disposition of businesses and property - 1,971 302
Life insurance premiums paid (1,114) (1,130) (1,193)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations (39,835) (17,089) (15,549)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt repayments on refinancing and revolving debt (44,746) (140,103) (28,390)
Borrowings of long-term revolving debt 43,900 88,500 12,000
Debt issuance costs - (794) -
Dividends paid (3,619) (2,947) (2,751)
Treasury stock reissued 1,409 1,679 665
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities of continuing operations (3,056) (53,665) (18,476)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS
Net cash (used in) provided by discontinued operations (39) 45,161 17,465
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and short-term investments (15,454) (576) (1,569)
Cash and short-term investments at beginning of year 18,166 18,742 20,311
- ----------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments at end of year $ 2,712 $ 18,166 $ 18,742
============================================================================================================================
Supplemental cash flow information:
Income taxes (refunded) paid $ (3,314) $ (3,500) $ 4,438
Interest paid, net of amounts capitalized $ 454 $ 3,850 $ 7,688
============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ANGELICA CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
In February 2004, the Company announced that it was changing the terminology
of how it refers to its fiscal year, although the actual fiscal year did not
change. Instead of referring to the 52- or 53-week period ending the last
Saturday in January by the calendar year in which it ends, the fiscal period
is now called by the calendar year containing the first 11 months of the
fiscal year. This change in terminology has been applied retroactively to
all periods presented in this report.
Fiscal years 2003, 2002 and 2001 ended January 31, 2004, January 25, 2003
and January 26, 2002, respectively. Fiscal year 2003 consisted of 53 weeks
with 14 weeks in the fourth quarter; fiscal years 2002 and 2001 consisted of
52 weeks with 13 weeks in each quarter.
NATURE OF OPERATIONS
The Company provides textile rental and linen management services
principally to healthcare institutions, and to a limited extent to hotels,
motels and restaurants, in or near major metropolitan areas in the United
States. The Company also operates a national chain of retail healthcare
uniform and shoe stores primarily for nurses and other healthcare
professionals with a fully-integrated catalogue and e-commerce operation.
In January 2002, the Company's Board of Directors approved a plan to
discontinue the Manufacturing and Marketing segment, as discussed in Note 8,
Discontinued Operations.
As discussed in Note 19, Subsequent Event, in February 2004 the Company's
Board of Directors approved a plan to discontinue the Life Uniform segment.
PRINCIPLES OF CONSOLIDATION
All subsidiaries are wholly-owned and are included in the consolidated
financial statements. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
Textile service revenues are recognized at the time the service is provided
to the customer. Volume-based rebates paid to customers are recorded as a
reduction of textile service revenues at the time the related revenue is
earned. Net retail sales are recognized at the time the merchandise is
shipped to or picked up by the customer. Returned products are estimated
based on historical returns and are accrued as a reduction of sales and cost
of sales at the time of the original sale.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
USE OF ESTIMATES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America, which required the use of certain estimates by Management in
determining the Company's assets, liabilities, revenues and expenses. Actual
results may vary from these estimates.
CASH EQUIVALENTS
The Company considers short-term, highly-liquid investments (securities with
an original maturity date of less than three months) as cash equivalents.
INVENTORIES
Inventory costs are determined principally by the use of the retail
inventory method, and are stated at the lower of cost or market.
Substantially all of the Company's inventories are finished goods.
F-7
LINENS IN SERVICE
Linens in service are stated at depreciated cost and amortized over their
expected useful lives of one to two years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Renewals and betterments are
capitalized. Property and equipment are depreciated over their expected
useful lives (buildings -- 15 to 40 years; machinery and equipment -- three
to 10 years). Depreciation is computed principally on the straight-line
method. Leasehold improvements are amortized using the straight-line method
over the lesser of their useful lives or lease terms.
LONG-LIVED ASSETS
The Company considers the possible impairment of long-lived assets,
excluding goodwill, in its laundry plants and retail stores whenever events
or changes in circumstances indicate the carrying amount of an asset may not
be recoverable. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company periodically assesses the carrying value of
its long-lived assets by reviewing the current and projected cash flows of
the property and recognizes impairment losses if it is determined that the
carrying values are not recoverable. See Note 4.
GOODWILL
Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
recorded as of June 30, 2001 was no longer amortized effective in fiscal
2002. Additionally, any goodwill recognized from a business combination
completed after June 30, 2001 is not amortized. Instead, goodwill is tested
for impairment using a fair-value based analysis at least annually as of the
end of the third quarter.
OTHER ACQUIRED ASSETS
Other acquired assets, consisting of customer contracts and non-competition
agreements, are being amortized on the straight-line basis generally over
periods of two to 10 years.
SELF-INSURANCE PROGRAMS
The Company is self-insured up to certain levels for workers' compensation,
general liability and vehicle liability coverages after February 1, 1999.
Provision for losses relating to these programs are recorded based on
estimates for claims incurred using actuarial analyses. The estimated
liabilities for these programs recorded in other accrued liabilities were
$13,800,000 and $12,754,000 at January 31, 2004 and January 25, 2003,
respectively. In addition, the Company is primarily self-insured for
non-union employee medical coverage. The liability is determined actuarially
based on claims filed and an estimate of claims incurred but not yet
reported. The amounts included in other accrued liabilities for this
liability at January 31, 2004 and January 25, 2003 were $1,046,000 and
$1,835,000, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which utilizes the liability method. Under
this method, deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax laws.
STOCK-BASED COMPENSATION PLANS
The Company applies the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and the related
interpretations to account for its employee stock option plans. As a
consequence, compensation expense is not recorded by the Company for the
issuance of stock options.
FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." The cumulative effect of this
method is reflected as accumulated other comprehensive income in
shareholders' equity. In fiscal 2001, as part of the disposal of the
Manufacturing and Marketing segment, the accumulated other comprehensive
income related to foreign currency translation was reversed.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
Common shareholders by the weighted average number of shares of Common Stock
outstanding during the year. Diluted earnings per share is computed
F-8
by dividing net income available to Common shareholders by the weighted
average number of Common and Common equivalent shares outstanding using the
treasury stock method.
ADVERTISING EXPENSE
Advertising expense, including cost of catalogues, charged to continuing
operations in fiscal years 2003, 2002 and 2001 totaled $3,432,000,
$3,264,000 and $3,343,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires that the purchase
method of accounting be used and governs the initial recognition and
measurement of intangible assets acquired in business combinations initiated
after June 30, 2001. The Company has adopted SFAS No. 141 for all
acquisitions consummated subsequent to June 30, 2001.
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 of fiscal 2003, which did not have a material
impact on the consolidated financial statements.
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." This statement rescinds, updates, clarifies and simplifies
existing accounting pronouncements. Among other things, the statement
rescinds SFAS No. 4, which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. Under SFAS No. 145, the criteria in
APB No. 30 will now be used to classify those gains and losses. SFAS No. 145
is effective for financial statements issued for years beginning after May
15, 2002. The Company adopted the provisions of SFAS No. 145 in fiscal 2003.
See Note 6.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires the recording of
costs associated with exit or disposal activities at their fair values when
a liability has been incurred. Under previous guidance, certain exit costs
were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. The requirements of
SFAS No. 146 are effective prospectively for exit or disposal activities
initiated after December 31, 2002. Previously issued financial statements
were not restated.
In November 2002, the FASB issued Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of
a guarantee, a guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual financial statements
about the obligations associated with guarantees issued. The recognition
provisions of FIN 45 are effective for any guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 for the years ended January 31, 2004 and
January 25, 2003 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
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 of fiscal 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 of
fiscal 2003, which did not have a material impact on the consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
(revised 2003) retains the disclosure requirements of SFAS No. 132, which it
replaces, and addresses the need for additional annual disclosures related
to a company's pensions
F-9
and other postretirement benefits. SFAS No. 132 (revised 2003) does not
change the measurement or recognition criteria of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," or SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 (revised 2003)
requires new annual disclosures about the types of plan assets, investment
strategy, measurement date, plan obligations and cash flows related to a
company's pensions and other postretirement benefits. It also requires
disclosure of the components of net periodic benefit cost recognized in
interim periods and, if significantly different from previously disclosed
amounts, the projected contributions to fund pension and other
postretirement benefit plans. The Company adopted the disclosure
requirements of SFAS No. 132 (revised 2003) in January 2004.
2. STOCK-BASED COMPENSATION PLANS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," 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.
A total of 1,375,000 shares have been authorized to be issued under all such
plans. Options and awards have been granted at the fair market value at the
date of grant, although certain plans allow for awards to be granted at a
price below fair market value. Options vest over four years and are
exercisable not less than six months nor more than 10 years after the date
of grant.
As permitted by SFAS No. 123, 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, as to which the amounts charged to expense in fiscal years 2003,
2002 and 2001 totaled $733,000, $282,000 and $295,000, respectively. During
the year ended January 31, 2004, 42,000 shares of restricted stock were
granted with a weighted-average share price of $18.29.
A summary of the status of the Company's stock option plans for fiscal years
2003, 2002 and 2001 and changes during the years then ended is presented in
the table below:
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 861,300 $ 14.35 975,025 $ 13.78 906,150 $ 15.10
Granted 301,000 22.05 134,900 16.52 151,000 10.37
Exercised (112,675) 10.94 (111,425) 11.04 (3,625) 7.25
Lapsed (72,000) 16.98 (137,200) 15.19 (78,500) 22.70
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 977,625 $ 16.92 861,300 $ 14.35 975,025 $ 13.78
==============================================================================================================================
Options exercisable at year end 489,350 $ 15.42 477,030 $ 16.17 473,511 $ 17.58
==============================================================================================================================
Options available for future grants 198,245 255,819 287,253
==============================================================================================================================
Weighted average fair value for
options granted during the year $ 4.71 $ 3.66 $ 2.81
==============================================================================================================================
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants in fiscal 2003, 2002 and 2001, respectively: risk-free
interest rates of 4.1%, 3.3% and 5.2%; expected dividend yields of 4.2%,
4.3% and 4.5%; volatilities of 31.0%, 30.7% and 33.8%; and expected lives of
nine to 10 years in all periods. The range of exercise prices for the
977,625 options outstanding at year end was $7.25 to $30.00, and the
weighted-average remaining contractual life was 6.7 years.
F-10
Had compensation expense for stock-based compensation plans for 2003, 2002
and 2001 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 amounts) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $ 9,203 $ (65) $ (22,709)
Add: stock-based employee compensation expense
included in net income (loss), net of tax 535 219 268
Deduct: stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax (1,004) (674) (698)
------------- ------------- -------------
Pro forma net income (loss) $ 8,734 $ (520) $ (23,139)
============= ============= =============
Basic earnings (loss) per share:
As reported $ 1.04 $ (0.01) $ (2.64)
Pro forma 0.99 (0.06) (2.69)
Diluted earnings (loss) per share:
As reported $ 1.03 $ (0.01) $ (2.62)
Pro forma 0.97 (0.06) (2.67)
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
years.
3. RESTRUCTURING ACTIVITIES
In the fourth quarter of fiscal 2001, the Company recorded restructuring and
other charges of $4,180,000 related primarily to the closing of certain
retail stores and the liquidation of non-healthcare inventory in the Life
Uniform segment. These charges consisted of inventory writedowns of
$1,198,000 included in cost of retail goods sold and other charges totaling
$2,982,000 included in restructuring charge, net. The other charges included
an accrual for lease termination costs of $2,263,000 and writedowns of fixed
assets and other assets totaling $719,000.
In fiscal 2002, the Company closed 25 of the 27 Life Uniform stores included
in the plan of restructuring adopted in fiscal 2001. All of the inventory
related to these 25 stores was disposed of or written off in fiscal 2002.
Also in fiscal 2002, a total of $1,450,000 was charged to the restructuring
reserve, representing $803,000 of lease termination costs and $647,000 to
write off the net book value of the assets in closed stores. In the fourth
quarter of fiscal 2002, Management decided that two stores that were
included in the restructuring plan would not be closed. Consequently, the
Company reversed $269,000 of the restructuring charge related to these two
stores, representing $204,000 of lease termination accruals and $65,000 to
write down the net book value of assets.
In fiscal 2003, a total of $419,000 was charged to the restructuring
reserve, including $412,000 for lease termination costs paid. In addition,
the Company reversed $434,000 of the original restructuring charge due to
favorable terminations of the store leases that have been settled to date.
As of January 31, 2004, there was $410,000 remaining in the restructuring
reserve that is expected to be utilized in fiscal 2004 for termination costs
of the remaining store leases.
4. IMPAIRMENT OF LONG-LIVED ASSETS
Due to continuing same-store sales declines and operating losses of certain
retail stores in the Life Uniform segment, the Company performed a review of
the recoverability of long-lived assets of these stores in the fourth
quarter of fiscal 2003, in accordance with SFAS No. 144. As a result of that
review, the Company recorded an impairment loss of $1,320,000 to write down
the carrying values of long-lived assets, consisting of leasehold
F-11
improvements and store fixtures, to their estimated fair values for these
underperforming retail stores. In estimating future cash flows used to test
the recoverability of these long-lived assets, the Company considered the
likelihood of possible outcomes associated with alternative courses of
action, including the sale or closing of these stores. Fair value of the
long-lived assets was determined based on the present value of the projected
future cash flows for each store.
5. NON-OPERATING INCOME, NET
In the second quarter of fiscal 2003, the Company recorded non-operating
income of $1,848,000 in connection with the liquidation of the parent
company of General American Life Insurance Company, an issuer of life
insurance policies owned by the Company for funding supplemental pension and
deferred compensation benefits. The Company 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.
Other non-operating income, net, consists of interest earned on invested
cash balances, foreign currency exchange gains and losses, and gains
realized on company-owned life insurance policies surrendered upon death of
the insured.
6. LOSS ON EARLY EXTINGUISHMENT OF DEBT
In the second quarter of fiscal 2002, the Company incurred a loss on early
extinguishment of debt of $6,783,000. 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, "Reporting Gains and Losses from
Extinguishment of Debt," the loss was shown as an extraordinary item, net of
tax, in fiscal 2002. Under SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," adopted in fiscal 2003, the loss on early extinguishment of
debt is treated as an ordinary rather than extraordinary item, and
accordingly, fiscal 2002 results of continuing operations have been restated
to reflect this change in accounting treatment.
F-12
7. INCOME TAXES
The provision for income taxes from continuing operations consisted of the
following:
(Dollars in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 458 $ 2,407 $ 2,801
State 74 82 310
Foreign (63) 43 70
Deferred:
Federal 2,926 (536) (2,738)
State 9 (90) (282)
- -----------------------------------------------------------------------------------------------------------------------
$ 3,404 $ 1,906 $ 161
=======================================================================================================================
Reconciliation between the statutory income tax rate and
effective tax rate from continuing operations is summarized below:
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 3.3 2.8 1.0
Effect of permanent items:
Cash surrender value, net of expense (4.0) (5.2) (19.2)
Goodwill amortization - - 4.6
Meals and entertainment 0.6 0.8 3.8
Other (0.7) (1.3) (0.9)
Effect of tax credits from employment programs (6.2) (8.7) (14.3)
- -----------------------------------------------------------------------------------------------------------------------
27.0% 22.4% 9.0%
=======================================================================================================================
The tax effect of significant temporary differences
representing deferred tax assets and liabilities were as follows:
(Dollars in thousands) January 31, January 25,
2004 2003
- ------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 4,897 $ 5,163
Insurance reserves not yet deductible 5,252 5,079
Customer contracts 1,693 2,045
Loss on disposal of discontinued segment - 1,242
Other 7,586 9,701
- ------------------------------------------------------------------------------------------------------------------------
$ 19,428 $ 23,230
========================================================================================================================
Deferred tax liabilities:
Property and equipment $ (9,286) $ (7,162)
Linens in service (7,105) (8,129)
Other (219) (424)
- ------------------------------------------------------------------------------------------------------------------------
(16,610) (15,715)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 2,818 $ 7,515
========================================================================================================================
The fiscal 2002 deferred tax asset related to discontinued operations
consists primarily of the writedown of inventory and fixed assets, estimated
severance payments and estimated losses on transitional operations.
Temporary differences of approximately $8,816,000 related to investments in
foreign subsidiaries reversed in fiscal 2003. Included in deferred tax
liabilities at the end of fiscal 2002 was $441,000 related to these
temporary differences.
F-13
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, accordingly, its operating results and net assets are segregated
in the Company's consolidated financial statements and related notes for all
periods presented. 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 consolidated financial statements 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, summarized as follows:
(Dollars in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Writedown of assets to estimated net realizable value $ - $ 7,657 $ 23,365
Net curtailment gain in pension plan - 175 (1,358)
Other costs of disposal, including operating losses during
phase-out period - 2,418 14,727
Tax benefit of disposal - (3,588) (12,736)
- -----------------------------------------------------------------------------------------------------------------------------
Loss on disposal of discontinued segment, net of tax $ - $ 6,662 $ 23,998
=============================================================================================================================
The additional loss on disposal of the Manufacturing and Marketing segment
recorded in fiscal 2002 was due primarily to a reduction in the value of
inventories realized through transition and disposition of the business. The
loss on disposal in fiscal 2001 included an estimated curtailment gain in
the defined benefit pension plan due to the reduction of a significant
portion of the workforce. The estimated gain was adjusted in fiscal 2002 to
the actual gain of $1,183,000.
The net current assets of the discontinued segment of $2,162,000 at January
25, 2003 were primarily accounts receivable and inventory which were
disposed of in fiscal 2003 for amounts approximating their carrying values.
Net noncurrent assets were completely disposed of or written off as of
January 25, 2003.
Operating results for the Manufacturing and Marketing segment are included
in the Consolidated Statements of Income as net loss from operations of
discontinued segment for all periods presented. Results for the discontinued
segment are as follows:
(Dollars in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Sales, including intersegment sales $ - $ - $143,064
Less - intersegment sales - - 26,165
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ - $ - $116,899
=============================================================================================================================
Loss before income taxes $ - $ - $ (539)
Income tax benefit - - (199)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss $ - $ - $ (340)
=============================================================================================================================
In accordance with SFAS No. 52, "Foreign Currency Translation," the
cumulative translation adjustment, which related entirely to foreign
operations of the discontinued segment, has been removed as a separate
component of shareholders' equity and has been reported as part of the loss
on disposal of discontinued operations.
F-14
9. EARNINGS PER SHARE
The following table reconciles weighted average shares outstanding to
amounts used to calculate basic and diluted earnings per share for fiscal
years 2003, 2002 and 2001:
(Dollars and shares in thousands, except per share amounts) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net income available to Common shareholders:
Income from continuing operations $ 9,203 $ 6,597 $ 1,629
Loss from operations of discontinued segment, net of tax - - (340)
Loss on disposal of discontinued segment, net of tax - (6,662) (23,998)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,203 $ (65) $(22,709)
=============================================================================================================================
Weighted average shares:
Average shares outstanding 8,823 8,669 8,598
Effect of dilutive securities - option shares 135 154 66
- -----------------------------------------------------------------------------------------------------------------------------
Average shares outstanding, adjusted for dilutive effects 8,958 8,823 8,664
=============================================================================================================================
Earnings (loss) per share - basic:
Income from continuing operations $ 1.04 $ 0.76 $ 0.19
Loss from operations of discontinued segment - - (0.04)
Loss on disposal of discontinued segment - (0.77) (2.79)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.04 $ (0.01) $ (2.64)
=============================================================================================================================
Earnings (loss) per share - diluted:
Income from continuing operations $ 1.03 $ 0.75 $ 0.19
Loss from operations of discontinued segment - - (0.04)
Loss on disposal of discontinued segment - (0.76) (2.77)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.03 $ (0.01) $ (2.62)
=============================================================================================================================
10. GOODWILL AND OTHER ACQUIRED ASSETS
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company performed its annual goodwill impairment test as of October 25, 2003
and October 26, 2002, which resulted in no indication of goodwill
impairment.
As of January 31, 2004, the carrying amounts of goodwill allocated to the
Textile Services and Life Uniform segments were $9,610,000 and $791,000,
respectively. During the year ended January 31, 2004, Textile Services
acquired $6,145,000 of goodwill recognized from business combinations. There
were no material changes in the carrying amount of goodwill in the year
ended January 25, 2003.
F-15
Following is a reconciliation of reported income from continuing operations
and net income (loss), including related earnings (loss) per share, to
adjusted amounts excluding goodwill amortization:
Fiscal Year Ended
--------------------------------------------------
January 31, January 25, January 26,
(Dollars in thousands, except per share amounts) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations:
As reported $ 9,203 $ 6,597 $ 1,629
Goodwill amortization, net of taxes - - 287
- -----------------------------------------------------------------------------------------------------------------------------
As adjusted $ 9,203 $ 6,597 $ 1,916
=============================================================================================================================
Basic earnings per share:
As reported $ 1.04 $ 0.76 $ 0.19
As adjusted 1.04 0.76 0.22
Diluted earnings per share:
As reported $ 1.03 $ 0.75 $ 0.19
As adjusted 1.03 0.75 0.22
=============================================================================================================================
Net income (loss):
As reported $ 9,203 $ (65) $(22,709)
Goodwill amortization, net of taxes - - 355
- -----------------------------------------------------------------------------------------------------------------------------
As adjusted $ 9,203 $ (65) $(22,354)
=============================================================================================================================
Basic earnings (loss) per share:
As reported $ 1.04 $ (0.01) $ (2.64)
As adjusted 1.04 (0.01) (2.60)
Diluted earnings (loss) per share:
As reported $ 1.03 $ (0.01) $ (2.62)
As adjusted 1.03 (0.01) (2.58)
=============================================================================================================================
During the year ended January 31, 2004, the Textile Services segment
acquired customer contracts and non-compete covenants totaling $2,075,000
and $600,000, respectively, with amortization periods of five to 10 years.
During the year ended January 25, 2003, the Textile Services segment
acquired customer contracts totaling $1,593,000 with amortization periods of
three to five years. Other acquired assets consisted of the following:
January 31, 2004 January 25, 2003
--------------------------------------------- --------------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
(Dollars in thousands) Amount Amortization Assets, net Amount Amortization Assets, net
- ---------------------------------------------------------------------------------------------------------------------------------
Customer contracts $ 7,998 $(4,876) $3,122 $5,923 $(4,411) $1,512
Non-compete covenants 2,782 (1,857) 925 2,650 (2,016) 634
- ---------------------------------------------------------------------------------------------------------------------------------
Other acquired assets $10,780 $(6,733) $4,047 $8,573 $(6,427) $2,146
=================================================================================================================================
Aggregate amortization expense for the years ended January 31, 2004 and
January 25, 2003 amounted to $774,000 and $737,000, respectively. Other
acquired assets are scheduled to be fully amortized by fiscal year 2013 with
corresponding annual amortization expense estimated for each of the next
five fiscal years as follows (dollars in thousands):
2004 $938
2005 825
2006 749
2007 579
2008 346
F-16
11. LONG-TERM DEBT
The following table summarizes information with respect to long-term debt
for fiscal 2003 and 2002:
January 31, January 25,
(Dollars in thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Note to banks due May 30, 2006 $ 19,500 $ 20,000
Other long-term debt including obligations under
capital leases 465 811
- -----------------------------------------------------------------------------------------------------------------------
19,965 20,811
Less - current maturities 192 237
- -----------------------------------------------------------------------------------------------------------------------
$ 19,773 $ 20,574
=======================================================================================================================
As discussed in Note 6, the Company refinanced its existing debt in the
second quarter of fiscal 2002. At that time, the 10.2% and 8.225% notes to
insurance companies were repaid 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 with three banks. The term
of the credit facility was three years with two optional one-year
extensions. Amounts borrowed under the credit facility in excess of the
$10,000,000 covered by the interest-rate swap, discussed in Note 13, 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% or (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 January 31,
2004, the margin was 1.0%. In connection with the refinancing, the Company
paid debt issuance costs totaling $794,000 that are being amortized over the
term of the loan.
As of January 31, 2004, there was $19,500,000 of outstanding debt under the
credit facility, of which $10,000,000 bears interest at a fixed rate of
3.58% (plus the margin) under the interest-rate swap agreement. The
remaining debt of $9,500,000 bears interest at 4.00%, the Prime Rate.
Furthermore, the Company has $15,300,000 in letters of credit outstanding as
of January 31, 2004, which reduces the amount available to borrow under the
line of credit to $35,200,000. The Company pays a fee on the unused funds
based on the ratio of "Funded Debt" to "EBITDA" described above. As of
January 31, 2004, the fee on the unused funds was .20%.
The Company is subject to certain financial covenants under its loan
agreement. One of these covenants requires that the Company maintain a
minimum consolidated net worth of $112,600,000 plus an aggregate amount
equal to 50% of quarterly net income beginning with the second quarter of
fiscal 2002 (with no reduction for net losses). The Company is in compliance
with this and all other loan covenants.
The estimated fair value of the Company's debt at January 31, 2004 and
January 25, 2003 approximates book value since the interest rates on nearly
all of the outstanding borrowings approximate current market rates.
On March 8, 2004, the Company amended the terms of the credit facility.
Under the terms of the amendment, the maximum amount which may be borrowed
under the credit facility was increased to $100,000,000, and the due date of
the credit facility was extended until May 30, 2007 with two optional
one-year extensions.
Aggregate maturities of long-term debt for each of the three years
subsequent to January 29, 2005, taking into account the amended terms, are
$228,000, $45,000 and $19,500,000, respectively.
F-17
12. RETIREMENT BENEFITS
The Company has a non-contributory defined benefit pension plan covering
primarily all salaried and hourly administrative non-union personnel. The
benefit formula is based on years of service and compensation during
employment. The funding policy of the pension plan is in accordance with the
requirements of the Employee Retirement Income Security Act of 1974. The
Company expects to contribute $716,000 to the pension plan in fiscal 2004.
The funded status of the plan, the net pension liability at January 1, 2004
and January 1, 2003, and the net pension expense (income) for 2003, 2002 and
2001 were as follows:
January 1, January 1,
(Dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 20,701 $ 19,574
Service cost 539 612
Interest cost 1,247 1,269
Actuarial loss 1,815 871
Effect of curtailment - Manufacturing and Marketing participants (Note 8) - 60
Benefits paid (1,510) (1,685)
- --------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 22,792 $ 20,701
================================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 15,298 $ 18,203
Contributions 979 -
Actual gain (loss) on plan assets 2,089 (1,220)
Benefits paid (1,510) (1,685)
- --------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 16,856 $ 15,298
================================================================================================================================
Net pension liability:
Funded status $ (5,936) $ (5,403)
Unrecognized actuarial loss 3,118 1,967
Unrecognized prior service cost 57 77
Unrecognized initial obligation 115 249
- --------------------------------------------------------------------------------------------------------------------------------
Net pension liability at end of year $ (2,646) $ (3,110)
================================================================================================================================
Minimum pension liability:
Accumulated benefit obligation $ (21,060) $ (19,259)
Fair value of plan assets 16,856 15,298
- --------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability at end of year $ (4,204) $ (3,961)
================================================================================================================================
Amounts recognized in the Consolidated Balance Sheets:
Accrued benefit liability $ (4,204) $ (3,961)
Intangible asset 172 326
Accumulated other comprehensive loss 1,386 525
- --------------------------------------------------------------------------------------------------------------------------------
Net liability recognized $ (2,646) $ (3,110)
================================================================================================================================
F-18
(Dollars in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Pension expense:
Service cost $ 539 $ 612 $ 641
Interest cost 1,247 1,269 1,307
Expected return on plan assets (1,423) (1,471) (1,655)
Plan curtailment (Note 8) - 175 (1,358)
Amortization of prior service cost 20 20 20
Recognized actuarial loss (gain) 132 (33) (73)
- --------------------------------------------------------------------------------------------------------------------------
Net pension expense (income) $ 515 $ 572 $ (1,118)
==========================================================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Actuarial assumptions used in determining projected benefit obligation:
Discount rate 5.75% 6.25% 6.75%
Rate of compensation increase 5.00% 5.00% 5.00%
Actuarial assumptions used in determining net pension expense:
Discount rate 6.25% 6.75% 7.00%
Expected return on plan assets 7.50% 7.50% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00%
- --------------------------------------------------------------------------------------------------------------------------
The discount rate is determined annually as of the measurement date based
upon a review of interest rates associated with long-term, high quality
corporate bonds, U.S. Treasury securities and a corporate adjusted
duration-matched yield calculated by the Company's pension plan actuary.
The Company's pension fund investment policy is to be actively invested in
high quality, marketable securities consisting of a balanced portfolio of
stocks, bonds and short-term assets and utilizing a long-term value-oriented
process with a moderate risk level and an objective of achieving a
competitive investment return. The investment portfolio consists of equity
and fixed-income components with equities being not more than 55% of the
portfolio nor less than 30%. The policy includes investment quality
standards and portfolio concentration limitations to lower risk and provide
for diversification. It also enumerates prohibited transactions (such as
short sales and margin transactions) and prohibited investments (such as
commodities, derivatives and restricted stock).
The allocation of plan assets held as of January 1, 2004 and 2003, by asset
category, was as follows:
January 1, January 1,
2004 2003
--------------- --------------
Cash and cash equivalents 4% 2%
Equity securities 54% 43%
Fixed-income securities 42% 55%
--------------- --------------
100% 100%
=============== ==============
The Company's long-term, annual rate-of-return-on-assets assumption is
determined based upon a combination of review of historical returns on
pension plan assets, a review of rate-of-return assumptions used by other
companies, advice from the Company's plan actuary and the Company's general
expectations of long-term prospective returns on plan assets.
The Company's 401(k) retirement savings plan provides retirement benefits to
eligible employees in addition to those provided by the defined benefit
pension plan. The plan permits participants to voluntarily defer up to 12%
of their compensation, subject to Internal Revenue Code limitations. The
Company also contributes a percentage of the employee's deferrals to the
account of each eligible employee. The cost to the Company for this plan was
$555,000, $533,000 and $619,000, for fiscal years 2003, 2002 and 2001,
respectively.
The Company maintains a voluntary deferred compensation plan providing
retirement benefits to certain employees and directors in return for
deferral of compensation payments. The amount of the retirement benefit is
F-19
determined based on the amount of compensation deferred and is payable over
15 years following retirement. In addition, the Company maintains a
supplemental retirement benefit plan for selected employees. The benefit
amount is determined as a percentage of final average compensation, as
defined, and is generally payable over 10 years beginning at age 65. The
liability recorded in deferred compensation and pension liabilities for
long-term retirement obligations related to these plans as of January 31,
2004 and January 25, 2003 was $12,004,000 and $12,152,000, respectively. The
Company funds these liabilities through the purchase of company-owned life
insurance policies on plan participants.
The Company generally does not provide retirees with post-retirement
benefits other than pensions.
13. 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% on $10,000,000 of
the outstanding debt under the revolving line of credit until termination on
May 30, 2007. The Company has elected to apply cash flow hedge accounting
for the interest-rate swap agreement in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Accordingly,
the derivative is recorded as an asset or liability at its fair value. The
effective portion of changes in the fair value of the derivative, as
measured quarterly, is reported in accumulated other comprehensive income,
and the ineffective portion, if any, is reported in net income of the
current period. The gain (loss) on the derivative included in accumulated
other comprehensive loss in the years ended January 31, 2004 and January 25,
2003 amounted to $5,000 and $(170,000), respectively, net of tax. The
Company has recorded a long-term liability of $254,000 and $260,000 for the
fair value of the derivative as of January 31, 2004 and January 25, 2003,
respectively.
To moderate price risk due to market fluctuations, the Company has entered
into fixed-price contracts as of January 31, 2004 for approximately 37% 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.
14. PREFERRED STOCK
The Company has two classes of authorized Preferred Stock: Class A, $1
stated value per share, authorized in the amount of 100,000 shares; and
Class B, authorized in the amount of 2,500,000 shares. As of January 31,
2004 and January 25, 2003, no shares of Class A or Class B were outstanding.
15. SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan, under which a Right is attached
to each share of the Company's Common Stock. The Rights may only become
exercisable under certain circumstances involving actual or potential
acquisitions of the Company's Common Stock by a person or group of
affiliated or associated persons. Depending upon the circumstances, if the
Rights become exercisable, the holders thereof may be entitled to purchase
units of the Company's Class B Series 2 Junior Participating Preferred
Stock, shares of the Company's Common Stock or shares of common stock of the
surviving or acquiring company. The Rights will remain in existence until
September 7, 2008, unless they are earlier exercised, redeemed or exchanged.
F-20
16. COMMITMENTS AND CONTINGENCIES
Future minimum payments by year and in the aggregate under operating leases
with initial or remaining terms of one year or more, consisted of the
following at January 31, 2004:
Minimum
(Dollars in thousands) Payments
- ----------------------------------------------------------------------------------
2004 $ 10,304
2005 7,758
2006 6,446
2007 5,101
2008 3,713
Later years 4,860
- ----------------------------------------------------------------------------------
Total minimum lease payments $ 38,182
==================================================================================
Rental expense for all operating leases consisted of:
(Dollars in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Minimum rentals $ 14,432 $ 14,620 $ 14,787
Contingent rentals 371 460 346
- --------------------------------------------------------------------------------------------------------------------
$ 14,803 $ 15,080 $ 15,133
====================================================================================================================
Contingent rentals represents the portion of Life Uniform's store rental
expense that is determined as a percentage of retail sales.
The Company carries insurance policies on insurable risks with coverage and
other terms that it believes to be appropriate. The Company generally has
self-insured retention limits and has obtained fully-insured layers of
coverage above such self-insured retention limits. Accruals for
self-insurance losses are made based on claims experience. Liabilities for
existing and unreported claims are accrued for when it is probable that
future costs will be incurred.
The Company is a party to various claims and legal proceedings which arose
in the ordinary course of its business. Although the ultimate disposition of
these proceedings is not presently determinable, Management does not believe
that an adverse determination in any or all of such proceedings will have a
material adverse effect upon the consolidated financial condition or
operating results of the Company.
F-21
17. 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 years presented in this report. The Company's continuing business
segments, including products and principal markets, are described elsewhere
in this report.
(Dollars in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Combined sales and revenues:
Textile Services $291,499 $271,250 $259,078
Life Uniform 82,777 92,169 90,985
- -----------------------------------------------------------------------------------------------------------------------
$374,276 $363,419 $350,063
=======================================================================================================================
Income from operations:
Textile Services $ 21,487 $ 21,891 $ 18,741
Life Uniform (2,659) 2,948 (4,951)
Corporate expense (7,727) (7,212) (5,149)
- -----------------------------------------------------------------------------------------------------------------------
$ 11,101 $ 17,627 $ 8,641
=======================================================================================================================
Assets (as of year end):
Textile Services $174,514 $145,829 $140,498
Life Uniform 25,136 29,015 30,318
Corporate 36,131 51,278 56,439
Net assets of discontinued segment - 2,162 63,610
- -----------------------------------------------------------------------------------------------------------------------
$235,781 $228,284 $290,865
=======================================================================================================================
Depreciation and amortization:
Textile Services $ 10,160 $ 10,115 $ 9,621
Life Uniform 2,766 2,445 2,686
Corporate 938 657 767
- -----------------------------------------------------------------------------------------------------------------------
$ 13,864 $ 13,217 $ 13,074
=======================================================================================================================
Capital additions, net:
Textile Services $ 22,181 $ 11,801 $ 10,134
Life Uniform 1,497 2,516 3,694
Corporate 671 334 45
- -----------------------------------------------------------------------------------------------------------------------
$ 24,349 $ 14,651 $ 13,873
=======================================================================================================================
All of the Company's sales and revenues of its continuing business segments
are provided in the United States. The Company has no one major customer.
Corporate assets consist primarily of cash, investments, deferred income
taxes, cash surrender value of company-owned life insurance, information
systems equipment and office furniture and fixtures. Corporate expenses
consist of the Company's principal administrative and financial functions,
which are centrally managed. Capital additions do not include the cost of
properties acquired in business acquisitions.
F-22
18. UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results for 2003 and 2002 are shown below:
Fiscal 2003 Quarter Ended
(Dollars in thousands, except per share amounts) April 26 July 26 October 25 January 31
- -----------------------------------------------------------------------------------------------------------------------------
Combined sales and revenues:
Textile Services $ 71,383 $ 70,963 $ 70,576 $ 78,577
Life Uniform 21,656 18,761 21,422 20,938
- -----------------------------------------------------------------------------------------------------------------------------
$ 93,039 $ 89,724 $ 91,998 $ 99,515
=============================================================================================================================
Gross profit:
Textile Services $ 13,588 $ 13,868 $ 12,877 $ 13,905
Life Uniform 11,668 9,975 11,600 11,063
- -----------------------------------------------------------------------------------------------------------------------------
$ 25,256 $ 23,843 $ 24,477 $ 24,968
=============================================================================================================================
Income from operations:
Textile Services $ 5,458 $ 5,655 $ 4,729 $ 5,645
Life Uniform 135 (854) (6) (1,934)
Corporate expense (1,926) (2,205) (1,694) (1,902)
- -----------------------------------------------------------------------------------------------------------------------------
$ 3,667 $ 2,596 $ 3,029 $ 1,809
=============================================================================================================================
Income from continuing operations $ 2,340 $ 2,980 $ 2,184 $ 1,699
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 2,340 $ 2,980 $ 2,184 $ 1,699
=============================================================================================================================
Income from continuing operations
Basic earnings per share* $ .27 $ .34 $ .25 $ .19
Diluted earnings per share* $ .26 $ .33 $ .24 $ .19
=============================================================================================================================
Fiscal 2002 Quarter Ended
(Dollars in thousands, except per share amounts) April 27 July 27 October 26 January 25
- -----------------------------------------------------------------------------------------------------------------------------
Combined sales and revenues:
Textile Services $ 68,381 $ 66,795 $ 68,108 $ 67,966
Life Uniform 24,876 21,731 24,525 21,037
- -----------------------------------------------------------------------------------------------------------------------------
$ 93,257 $ 88,526 $ 92,633 $ 89,003
=============================================================================================================================
Gross profit:
Textile Services $ 14,081 $ 14,174 $ 13,402 $ 10,735
Life Uniform 12,790 11,985 13,771 11,430
- -----------------------------------------------------------------------------------------------------------------------------
$ 26,871 $ 26,159 $ 27,173 $ 22,165
=============================================================================================================================
Income from operations:
Textile Services $ 5,884 $ 6,651 $ 5,765 $ 3,591
Life Uniform 701 522 1,668 57
Corporate expense (1,618) (2,111) (2,058) (1,425)
- -----------------------------------------------------------------------------------------------------------------------------
$ 4,967 $ 5,062 $ 5,375 $ 2,223
=============================================================================================================================
Income (loss) from continuing operations $ 2,293 $ (1,141) $ 3,555 $ 1,890
Loss from discontinued operations (4,447) (961) (894) (360)
- -----------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,154) $ (2,102) $ 2,661 $ 1,530
=============================================================================================================================
Income (loss) from continuing operations
Basic earnings (loss) per share* $ .27 $ (0.13) $ .41 $ .22
Diluted earnings (loss) per share* $ .26 $ (0.13) $ .40 $ .21
=============================================================================================================================
* Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may
not equal the total earnings per share for the year.
Results for fiscal 2002 second quarter ended July 27, 2002 reflect the
restatement of the loss on early extinguishment of debt as an ordinary
rather than extraordinary item. See Note 6.
F-23
19. SUBSEQUENT EVENT
On February 24, 2004, the Company's Board of Directors approved Management's
recommendation to exit and discontinue the Life Uniform business segment
within the next twelve-month period. As previously announced in fiscal 2003,
the Company had retained the investment bank Morgan Joseph & Co. to review
strategic alternatives for the underperforming segment. As a result of that
review, the Company plans to pursue a divestiture strategy for Life Uniform,
and is actively marketing the segment for sale. However, the Company intends
to continue to operate the segment pending successful negotiation of its
sale.
In accordance with SFAS No. 144, the assets and liabilities of the Life
Uniform segment will be segregated, and its results of operations reported
in discontinued operations, effective in the first quarter of fiscal 2004.
As of January 31, 2004, total assets of Life Uniform were $25,136,000,
consisting mainly of inventories of $11,491,000 and net property and
equipment of $9,237,000, and total liabilities were $7,390,000, of which
$6,021,000 was for accounts payable.
F-24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To Angelica Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Angelica
Corporation and subsidiaries included in this Form 10-K, and have issued our
report thereon dated March 21, 2002. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed
in Item 14(a)2(i) included in this Form 10-K is the responsibility of the
Corporation's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 21, 2002
EXPLANATORY NOTE REGARDING ARTHUR ANDERSEN LLP
- ----------------------------------------------
The Company could not obtain permission of Arthur Andersen LLP to the
inclusion in this Annual Report on Form 10-K of its Report of Independent
Public Accountants above because Arthur Andersen LLP has ceased operations.
Accordingly, the report of Arthur Andersen LLP above is merely reproduced
from the Company's Annual Report on Form 10-K for the fiscal year ended
January 26, 2002. Reference to Item 14(a)2(i) in the report is now Item
15(a)2(i) in the Form 10-K as revised.
S-1
Schedule II
ANGELICA CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 31, 2004
Reserve for doubtful accounts - deducted from receivables in the balance
sheet:
Balance at Charged to Costs Balance at End of
Year Beginning of Period and Expenses Deductions(a) Period
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 2004 $724 $418 $214 $928
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended January 25, 2003 1,306 603 1,185 724
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended January 26, 2002 1,909 869 1,472 1,306
- --------------------------------------------------------------------------------------------------------------------------------
- -------------------
(a) Doubtful accounts written off against reserve provided, net of
recoveries.
S-2
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to
be signed on its behalf by the undersigned thereunto duly authorized.
ANGELICA CORPORATION
----------------------------------------
(Registrant)
By: /s/ Stephen M. O'Hara
-------------------------------------
Stephen M. O'Hara
President and Chief Executive Officer
Date: April 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ Stephen M. O'Hara By: /s/ James W. Shaffer
------------------------------------------------ ----------------------------------------------
Stephen M. O'Hara James W. Shaffer
President and Chief Vice President, Treasurer and Chief
Executive Officer Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
(Principal Accounting Officer)
Don W. Hubble * Susan S. Elliott *
- ----------------------------------------------------- --------------------------------------------------
(Don W. Hubble) (Susan S. Elliott)
Director Director
Ronald J. Kruszewski * Charles W. Mueller *
- ----------------------------------------------------- --------------------------------------------------
(Ronald J. Kruszewski) (Charles W. Mueller)
Director Director
Kelvin R. Westbrook * William A. Peck *
- ----------------------------------------------------- --------------------------------------------------
(Kelvin R. Westbrook) (William A. Peck)
Director Director
By his signature below, Stephen M. O'Hara has signed this Form 10-K on
behalf of each person named above whose name is followed by an asterisk,
pursuant to power of attorney filed with this Form 10-K.
/s/ Stephen M. O'Hara
--------------------------------------------------
Stephen M. O'Hara, as attorney-in-fact
Date: April 15, 2004
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 January 27, 2004.*
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 Loan Agreement with LaSalle Bank N.A. et al, dated May 30, 2002.
Filed as Exhibit 10.1 to the Form 10-Q for fiscal quarter ended
April 27, 2002.**
10.2 First Amendment, effective January 24, 2003, to Loan Agreement with
LaSalle Bank N.A. et al., dated May 30, 2002. Filed as Exhibit 10.2
to the Form 10-K for fiscal year ended January 25, 2003.**
10.3 First Extension Agreement, effective March 1, 2003, to Loan
Agreement with LaSalle Bank N.A. et al., dated May 30, 2002. Filed
as Exhibit 10.3 to the Form 10-K for fiscal year ended January 25,
2003.**
10.4 Second Amendment to Loan Agreement with LaSalle Bank N.A. et al,
effective March 8, 2004.*
10.5 Angelica Corporation 1994 Performance Plan (as amended 1/31/95).
Filed as Exhibit 10.1 to the Form 10-K for fiscal year ended
January 28, 1995.**
10.6 Angelica Corporation Stock Award Plan. Filed as Exhibit 10 to the
Form 10-K for fiscal year ended February 1, 1992.**
10.7 Angelica Corporation Supplemental Plan restated as of September 1,
2000. Filed as Exhibit 10.6 to the Form 10-Q for fiscal quarter
ended October 28, 2000. Amendment dated August 27, 2003 filed as
Exhibit 10.9 to the Form 10-Q for fiscal quarter ended October 25,
2003.**
10.8 Deferred Compensation Option Plan for Selected Management
Employees, filed as Exhibit 19.9 to the Form 10-K for fiscal year
ended January 26, 1991. Amendment dated October 25, 1994 filed as
Exhibit 10.27 to the Form 10-K for fiscal year ended January 28,
1995; and amendment dated February 25, 1997 filed as Exhibit 10.34
to the Form 10-K for fiscal year ended January 25, 1997.**
10.9 Deferred Compensation Option Plan for Directors, filed as Exhibit
19.8 to the Form 10-K for fiscal year ended January 26, 1991.
Amendment dated July 28, 1992 filed as Exhibit 19.3 to the Form
10-K for fiscal year ended January 30, 1993; and amendment dated
November 29, 1994 filed as Exhibit 10.24 to the Form 10-K for
fiscal year ended January 28, 1995.**
10.10 Supplemental and Deferred Compensation Trust. Filed as Exhibit 19.5
to the Form 10-K for fiscal year ended February 1, 1992.**
10.11 Restated Deferred Compensation Plan for Non-Employee Directors,
filed as Exhibit 10 (v) to the Form 10-K for fiscal year ended
January 28, 1984. Amendment No. 1 dated November 29, 1994 was filed
as Exhibit 10.25 to the Form 10-K for fiscal year ended January 28,
1995.**
10.12 Angelica Corporation 1994 Non-Employee Directors Stock Plan. Filed
as Appendix A to the Proxy Statement for the Annual Meeting of
Shareholders held on May 23, 1995. First amendment dated January
27, 1998 was filed as Exhibit 10.35 to the Form 10-K for fiscal
year ended January 31, 1998.**
10.13 Second Amendment to Angelica Corporation 1994 Non-Employee
Directors Stock Plan, dated January 27, 2004.*
10.14 Amended specimen form of Stock Option Agreement under the Angelica
Corporation 1994 Performance Plan. Filed as Exhibit 10.7 to the
Form 10-Q for fiscal quarter ended October 25, 2003.**
10.15 Amended specimen form of Stock Option Agreement under the Angelica
Corporation 1999 Performance Plan. Filed as Exhibit 10.8 to the
Form 10-Q for fiscal quarter ended October 25, 2003.**
10.16 Form of Indemnification Agreement between the Company and each of
its directors and executive officers. Filed as Exhibit 10.22 to the
Form 10-K for fiscal year ended January 30, 1999.**
10.17 Employment Agreement between the Company and Theodore M. Armstrong,
dated January 1, 2003. Filed as Exhibit 10.18 to the Form 10-K for
fiscal year ended January 25, 2003.**
10.18 Employment Agreement between the Company and Don W. Hubble, dated
February 5, 2003. Filed as Exhibit 10.19 to the Form 10-K for
fiscal year ended January 25, 2003.**
10.19 Retirement Benefit Agreement between the Company and Don W. Hubble
dated January 1, 1998. Filed as Exhibit 10.31 to the Form 10-K for
fiscal year ended January 31, 1998.**
10.20 Non-Qualified Stock Option Agreement between the Company and Don W.
Hubble dated January 2, 1998. Filed as Exhibit 10.32 to the Form
10-K for fiscal year ended January 31, 1998.**
10.21 First Amendment to Non-Qualified Stock Option Agreements between
the Company and Don W. Hubble, dated February 5, 2003. Filed as
Exhibit 10.22 to the Form 10-K for fiscal year ended January 25,
2003.**
10.22 Restricted Stock Agreement between the Company and Don W. Hubble,
dated February 5, 2003. Filed as Exhibit 10.23 to the Form 10-K for
fiscal year ended January 25, 2003.**
10.23 Retirement Transition Agreement between the Company and Don W.
Hubble, dated January 28, 2004.*
10.24 Employment Agreement between the Company and Steven L. Frey, dated
March 1, 2003. Filed as Exhibit 10.24 to the Form 10-K for fiscal
year ended January 25, 2003.**
10.25 First Amendment to Employment Agreement between the Company and
Steven L. Frey, dated March 1, 2004.*
10.26 Angelica Corporation 1999 Performance Plan. Filed as Appendix A to
the Proxy Statement for the Annual Meeting of Shareholders held May
25, 1999.**
10.27 Employment Agreement between the Company and James W. Shaffer,
dated February 1, 2003. Filed as Exhibit 10.27 to the Form 10-K for
fiscal year ended January 25, 2003.**
10.28 First Amendment to Employment Agreement between the Company and
James W. Shaffer, dated February 1, 2004.*
10.29 Employment Agreement between the Company and Paul R. Anderegg,
dated February 1, 2003. Filed as Exhibit 10.29 to the Form 10-K for
the fiscal year ended January 25, 2003. First Amendment to
Employment Agreement dated September 15, 2003 filed as Exhibit 10.6
to the Form 10-Q for fiscal quarter ended October 25, 2003.**
10.30 Second Amendment to Employment Agreement between the Company and
Paul R. Anderegg, dated February 1, 2004.*
10.31 Employment Agreement between the Company and Stephen M. O'Hara,
dated September 15, 2003. Filed as Exhibit 10.1 to the Form 10-Q
for fiscal quarter ended October 25, 2003.**
10.32 Restricted Stock Agreement between the Company and Stephen M.
O'Hara, dated September 15, 2003. Filed as Exhibit 10.2 to the Form
10-Q for fiscal quarter ended October 25, 2003.**
10.33 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). Filed as Exhibit 10.3 to the form 10-Q for
fiscal quarter ended October 25, 2003.**
10.34 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). Filed as Exhibit 10.4 to the Form 10-Q for
fiscal quarter ended October 25, 2003.**
10.35 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). Filed as Exhibit 10.5 to the Form 10-Q for
fiscal quarter ended October 25, 2003.**
10.36 Angelica Corporation Mirror 401(k) and Deferred Compensation Plan,
dated November 1, 2003.*
10.37 Trust under Angelica Corporation Mirror 401(k) and Deferred
Compensation Plan, dated November 1, 2003.*
10.38 Settlement Agreement between the Company and Denis R. Raab, dated
October 31, 2003.*
10.39 Retention and Transition Employment Agreement between the Company
and Daniel J. Westrich, dated January 29, 2004.*
21 Subsidiaries of the Company.*
23 Consent of Independent Public Accountants.*
24.1 Powers of Attorney submitted by Susan S. Elliott, Don W. Hubble,
Charles W. Mueller, William A. Peck and Kelvin R. Westbrook.*
24.2 Power of attorney submitted by Ronald J. Kruszewski.*
24.3 Certified copy of Board Resolution authorizing Form 10-K filing
utilizing powers of attorney.*
31.1 Section 302 Certification of Chief Executive Officer.*
31.2 Section 302 Certification of Chief Financial Officer.*
32.1 Section 906 Certification of Chief Executive Officer.*
32.2 Section 906 Certification of Chief Financial Officer.*
The Company will furnish to any record or beneficial shareholder requesting
a copy of this Annual Report on Form 10-K a copy of any exhibit indicated in
the above list as filed with this Annual Report on Form 10-K upon payment to
it of its reasonable expenses in furnishing such exhibit.