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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended Commission File
May 1, 2004 Number 1-5674
ANGELICA CORPORATION
(Exact name of Registrant as specified in its charter)
MISSOURI 43-0905260
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
424 South Woods Mill Road
CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
(314) 854-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, par value
$1.00 per share, at June 1, 2004 was 8,958,377 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
MAY 1, 2004 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Consolidated Statements of Income - First Quarter ended
May 1, 2004 and April 26, 2003 (Unaudited) 2
Consolidated Balance Sheets - May 1, 2004
and January 31, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows - First Quarter
ended May 1, 2004 and April 26, 2003 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures 15-16
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
First Quarter Ended
-------------------------------
May 1, 2004 April 26, 2003
----------- --------------
CONTINUING OPERATIONS:
Textile service revenues $ 77,730 $ 71,383
Cost of textile services (65,563) (57,795)
-------- --------
Gross profit 12,167 13,588
Selling, general and administrative expenses (10,180) (10,009)
Other operating expense, net (254) (47)
-------- --------
Income from operations 1,733 3,532
Interest expense (280) (225)
Non-operating income, net (Note 4) 2,100 37
-------- --------
Income from continuing operations before taxes 3,553 3,344
Provision for income taxes (Note 5) (1,030) (1,087)
-------- --------
Income from continuing operations 2,523 2,257
-------- --------
DISCONTINUED OPERATIONS (NOTE 6):
Income from operations of discontinued segment,
net of tax 672 83
Loss on disposal of discontinued segment,
net of tax (3,064) -
-------- --------
(Loss) income from discontinued operations (2,392) 83
-------- --------
Net income $ 131 $ 2,340
======== ========
BASIC EARNINGS PER SHARE (NOTE 7):
Income from continuing operations $ 0.28 $ 0.26
(Loss) income from discontinued operations (0.27) 0.01
-------- --------
Net income $ 0.01 $ 0.27
======== ========
DILUTED EARNINGS PER SHARE (NOTE 7):
Income from continuing operations $ 0.27 $ 0.25
(Loss) income from discontinued operations (0.26) 0.01
-------- --------
Net income $ 0.01 $ 0.26
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
May 1, January 31,
2004 2004
-------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 893 $ 2,188
Receivables, less reserves of $896 and $843 38,208 36,978
Inventories 241 209
Linens in service 36,362 35,255
Prepaid expenses and other current assets 3,747 4,513
Deferred income taxes 8,105 5,036
Assets of discontinued segment held for sale (Note 6) 21,504 24,498
-------- --------
Total Current Assets 109,060 108,677
-------- --------
Property and Equipment 186,296 176,719
Less -- reserve for depreciation 93,814 94,467
-------- --------
Total Property and Equipment 92,482 82,252
-------- --------
Other:
Goodwill (Note 8) 9,626 9,610
Other acquired assets (Note 8) 3,659 3,768
Cash surrender value of life insurance 29,960 30,194
Miscellaneous 1,412 1,280
-------- --------
Total Other Assets 44,657 44,852
-------- --------
Total Assets $246,199 $235,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 3 $ 3
Accounts payable 17,642 18,343
Accrued wages and other compensation 4,754 5,092
Other accrued liabilities 24,896 21,729
Liabilities of discontinued segment held for sale (Note 6) 7,133 7,783
-------- --------
Total Current Liabilities 54,428 52,950
-------- --------
Long-Term Debt, less current maturities (Note 9) 26,742 19,542
Other Long-Term Obligations 18,986 16,629
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,748 4,748
Retained earnings 141,727 142,341
Accumulated other comprehensive loss (977) (1,062)
Unamortized restricted stock (1,078) (210)
Common Stock in treasury, at cost: 540,550 and 587,141 (7,849) (8,629)
-------- --------
Total Shareholders' Equity 146,043 146,660
-------- --------
Total Liabilities and Shareholders' Equity $246,199 $235,781
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
First Quarter Ended
-----------------------------
May 1, 2004 April 26, 2003
----------- --------------
Cash Flows from Operating Activities:
Income from continuing operations $ 2,523 $ 2,257
Non-cash items included in income from continuing operations:
Depreciation 2,711 2,380
Amortization 355 125
Cash surrender value of life insurance (791) (267)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of 775 (5,911)
Other, net (55) 138
-------- --------
Net cash provided by (used in) operating activities of
continuing operations 5,518 (1,278)
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (3,199) (4,607)
Cost of businesses acquired (6,988) (48)
Life insurance premiums paid (163) (147)
-------- --------
Net cash used in investing activities of continuing operations (10,350) (4,802)
-------- --------
Cash Flows from Financing Activities:
Repayments of long-term revolving debt (23,000) (24,814)
Borrowings of long-term revolving debt 30,200 18,000
Dividends paid (983) (880)
Treasury stock reissued 22 546
-------- --------
Net cash provided by (used in) financing activities of
continuing operations 6,239 (7,148)
-------- --------
Net cash (used in) provided by discontinued operations (Note 6) (2,702) 2,643
-------- --------
Net decrease in cash and short-term investments (1,295) (10,585)
Balance at beginning of year 2,188 17,414
-------- --------
Balance at end of period $ 893 $ 6,829
======== ========
Supplemental cash flow information:
Income taxes paid $ 96 $ 70
Interest paid $ 223 $ 168
During the first quarter ended May 1, 2004, the Company acquired
selected assets and customer contracts of various laundry
facilities for $10,611,000. The cost of businesses acquired
reflects the cash paid for these acquisitions, with the remaining
balance of $3,623,000 due in one year.
The accompanying notes are an integral part of the consolidated
financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER ENDED MAY 1, 2004
AND APRIL 26, 2003
Note 1. Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements are
unaudited, and these consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 2004 (fiscal
2003). It is Management's opinion that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement
of the results during the interim period have been included. All
significant intercompany accounts and transactions have been
eliminated. The results of operations and cash flows for the first
quarter ended May 1, 2004 are not necessarily indicative of the
results that will be achieved for the full year.
Certain amounts in the prior periods have been reclassified to conform
to current period presentation.
Note 2. Stock-Based Compensation
- ---------------------------------
In December 2002, the 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. 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 the first quarter ended May
1, 2004 and April 26, 2003 totaled $143,000 and $129,000,
respectively. During the quarter ended May 1, 2004, 45,000 shares of
restricted stock were granted with a weighted-average share price of
$22.18.
Had compensation expense for stock-based compensation plans for the
first quarter ended May 1, 2004 and April 26, 2003 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:
5
May 1, April 26,
(Dollars in thousands, except per share amounts) 2004 2003
- --------------------------------------------------------------------------------------
Net income (loss):
As reported $ 131 $2,340
Add: stock-based employee compensation expense
included in net income, net of tax 102 87
Deduct: stock-based employee compensation
expense determined under fair-value based
method for all awards, net of tax (285) (225)
------ ------
Pro forma net (loss) income $ (52) $2,202
====== ======
Basic earnings (loss) per share:
As reported $ 0.01 $ 0.27
Pro forma (0.01) 0.25
Diluted earnings (loss) per share:
As reported $ 0.01 $ 0.26
Pro forma (0.01) 0.25
The effect of the application of SFAS No. 123 in this disclosure is
not necessarily indicative of the pro forma effect on net income in
future periods.
Note 3. Restructuring Activities
- ---------------------------------
As of January 31, 2004, there was $410,000 of reserve remaining from
the original restructuring charge recorded in the fourth quarter of
fiscal 2001 related primarily to the closing of certain retail stores
in the Life Uniform segment. During the first quarter ended May 1,
2004, a total of $83,000 of the reserve was utilized for lease
termination costs paid. The reserve balance of $327,000 remaining as
of May 1, 2004 is expected to be utilized in fiscal 2004 for
termination costs of the remaining store leases.
Note 4. Non-Operating Income
- -----------------------------
In the first quarter of fiscal 2004, the Company recorded
non-operating income of $2,100,000 which included a gain of
$1,472,000 from the sale of real estate of the former Miami plant
which closed in January 2000. In addition, the Company recognized
gains of $610,000 for the excess of death benefits from Company-owned
life insurance policies surrendered over the cash value of the
policies.
Non-operating income, net, also includes interest earned on invested
cash balances.
6
Note 5. Income Taxes
- ---------------------
Taxes on income from continuing operations were provided for at an
effective tax rate of 29.0 percent and 32.5 percent in the first
quarter of fiscal 2004 and fiscal 2003, respectively, based upon the
Company's estimated effective tax rate for the year including the
effects of permanent items and tax credits. The effective tax rate of
34.0 percent on the loss from discontinued operations in fiscal 2004
reflects the statutory tax rate adjusted for unutilized State net
operating losses.
Note 6. Discontinued Operations
- --------------------------------
In fiscal 2003, the Company retained an investment bank to review
strategic alternatives for its underperforming Life Uniform retail
business segment. Upon conclusion of that review in the first quarter
of fiscal 2004, the Company decided to exit and discontinue the
segment within the next 12 months, and focus its resources on growing
the Textile Services healthcare laundry and linen management
business. The Company is pursuing a divestiture strategy for Life
Uniform through sale of the business or otherwise closing the stores
and liquidating the assets in a manner to maximize the value of the
segment. The Company intends to continue to operate the segment
pending successful completion of its sale or liquidation.
In the first quarter of fiscal 2004, the Company recorded an
estimated pretax loss on disposal of the discontinued Life Uniform
segment of $4,642,000 to write down the net assets of the segment to
their estimated fair values, less costs directly incurred in
connection with the proposed sale. The estimated loss on disposal is
based upon preliminary negotiations on an exclusive basis with a
potential buyer for Life Uniform. The final charge associated with
the disposition of the segment may differ materially depending upon
the outcome of these negotiations. The Company expects to conclude
the sale of the segment during the second quarter of fiscal 2004.
However, there is a risk that the Company will be unable to
consummate the sale of Life Uniform which could result in additional
losses upon closing of the stores and liquidation of the assets.
In accordance with SFAS No. 144, the financial position, cash flows
and results of operations of the Life Uniform segment are segregated
and reported as discontinued operations for all periods presented in
this report. Assets and liabilities of the discontinued segment held
for sale as of May 1, 2004 consisted primarily of inventories of
$12,880,000, net property and equipment of $9,517,000, and accounts
payable of $5,512,000, less the loss on disposal.
Results of operations of the Life Uniform segment for the first
quarter ended May 1, 2004 and April 26, 2003 were as follows (dollars
in thousands):
7
2004 2003
- --------------------------------------------------------------------------
Net retail sales $20,538 $21,656
==========================================================================
Income from operations before taxes $ 1,018 $ 122
Provision for income taxes (346) (39)
- --------------------------------------------------------------------------
Income from operations $ 672 $ 83
==========================================================================
Note 7. Earnings Per Share
- ---------------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of Common Stock outstanding during
the period. Diluted earnings per share is computed by dividing net
income by the weighted average number of Common and Common equivalent
shares outstanding.
The following table reconciles weighted average shares outstanding to
amounts used to calculate basic and diluted earnings per share for
the first quarter ended May 1, 2004 and April 26, 2003 (shares in
thousands):
First Quarter Ended
-----------------------
May 1, April 26,
2004 2003
------ ---------
Weighted average shares:
Average shares outstanding 8,876 8,786
Effect of dilutive securities 229 141
----- -----
Average shares outstanding, adjusted for dilutive effects 9,105 8,927
===== =====
Note 8. Goodwill and Other Intangible Assets
- ---------------------------------------------
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company performs its annual goodwill impairment test at the end
of the third quarter. There were no material changes in the carrying
value of goodwill during the first quarter of fiscal 2004.
During the first quarter ended May 1, 2004, the Company acquired
businesses with customer contracts valued at $116,000, with
amortization periods of five to 10 years. Other acquired assets
consisted of the following (dollars in thousands):
May 1, 2004 January 31, 2004
-------------------------------------- --------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
------ ------------ ----------- ------ ------------ -----------
Customer contracts $8,114 $(5,046) $3,068 $7,998 $(4,876) $3,122
Non-compete covenants 1,600 (1,009) 591 1,600 (954) 646
------ ------- ------ ------ ------- ------
Other acquired assets $9,714 $(6,055) $3,659 $9,598 $(5,830) $3,768
====== ======= ====== ====== ======= ======
8
Aggregate amortization expense for the first quarter ended May 1,
2004 and April 26, 2003 amounted to $225,000 and $125,000,
respectively. Other acquired assets are scheduled to be fully
amortized by fiscal year 2014 with corresponding annual amortization
expense estimated for each of the next five fiscal years as follows
(dollars in thousands):
2004 $851
2005 746
2006 693
2007 601
2008 364
Note 9. Long-Term Debt
- -----------------------
On March 8, 2004, the Company amended the terms of its long-term
credit facility. Under the terms of the amendment, the maximum amount
which may be borrowed under the credit facility was increased from
$70,000,000 to $100,000,000, and the maturity date of the credit
facility was extended by one year to May 30, 2007 with two optional
one-year extensions. In addition, certain financial covenants
contained in the credit agreement were amended, including the minimum
net worth requirement. This covenant requires that the Company
maintain a minimum consolidated net worth equal to 85 percent of the
Company's consolidated net worth as of January 31, 2004, plus an
aggregate amount equal to 50 percent of quarterly net income
beginning with the first quarter of fiscal 2004 (with no reduction
for net losses except as permitted for the sale of the discontinued
Life Uniform segment). As of May 1, 2004, the Company was in
compliance with this and all other financial covenants in the credit
facility.
Note 10. Derivative Instruments and Hedging Activities
- -------------------------------------------------------
The Company entered into an interest-rate swap agreement with one of
its lenders effective September 9, 2002. The swap agreement fixes the
variable portion of the interest rate (excluding a margin) at 3.58
percent on $10,000,000 of the outstanding debt under the revolving
line of credit until termination on May 30, 2007. The Company has
elected to apply cash flow hedge accounting for the interest-rate
swap agreement in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Accordingly, the
derivative is recorded as an asset or liability at its fair value.
The effective portion of changes in the fair value of the derivative,
as measured quarterly, is reported in accumulated other comprehensive
income, and the ineffective portion, if any, is reported in net
income of the current period. The gain (loss) on the derivative
included in accumulated other comprehensive loss in the first quarter
ended May 1, 2004 and April 26, 2003 amounted to $89,000 and
$(43,000), respectively, net of tax. The Company has recorded a
long-term liability of $118,000 and $254,000 for the fair value of
the derivative as of May 1, 2004 and January 31, 2004, respectively.
To moderate price risk due to market fluctuations, the Company has
entered into fixed-price contracts as of May 1, 2004 for
approximately 33 percent of its estimated natural gas purchase
requirements in the next 12 months. Although these contracts are
considered derivative instruments, they meet the normal purchases
exclusion contained in SFAS No. 133, as amended by SFAS No. 138 and
SFAS No. 149, and are therefore exempted from the related accounting
requirements.
9
Note 11. Comprehensive Income
- ------------------------------
Comprehensive income, consisting primarily of net income and changes
in the fair value of derivatives used for interest rate risk
management, net of taxes, totaled $217,000 and $2,297,000 for the
first quarter ended May 1, 2004 and April 26, 2003, respectively.
Note 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 net periodic pension
expense recognized in the first quarter of fiscal years 2004 and 2003
was as follows:
(Dollars in thousands) 2004 2003
- ----------------------------------------------------------------------
Pension expense:
Service cost $ 149 $ 135
Interest cost 319 312
Expected return on plan assets (353) (356)
Amortization of prior service cost 5 5
Recognized actuarial loss 29 34
- ----------------------------------------------------------------------
Net periodic pension expense $ 149 $ 130
======================================================================
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST QUARTER ENDED MAY 1, 2004 COMPARED WITH
FIRST QUARTER ENDED APRIL 26, 2003
Analysis of Operations
----------------------
As previously announced during the first quarter of fiscal 2004, the
Company decided to exit and discontinue its Life Uniform retail
business segment and actively market the segment for sale. As a result,
the segment's financial position, cash flows and results of operations
are shown as discontinued operations for all periods presented in this
report. The Company's continuing operations reflect the results of its
remaining Textile Services healthcare laundry and linen management
business.
Income from continuing operations of $2,523,000 in the first quarter of
fiscal 2004 increased 11.8 percent from the same quarter last year, as
non-operating income of $2,100,000 recorded in this year's first
quarter more than offset a 50.9 percent decrease in operating income.
Operating earnings were negatively affected by increased costs of
utilities, linen and labor, as well as start-up costs for new laundry
facilities in Columbia, SC and Durham, NC, which more than offset the
impact of the revenue gains. The first quarter fiscal 2004
non-operating income included gains of $1,472,000 from the sale of the
vacant Miami property and $610,000 from death benefits on Company-owned
life insurance policies.
Loss from discontinued operations, net of tax, totaled $2,392,000 in
the first quarter of fiscal 2004, including $672,000 income from store
operations and $3,064,000 estimated loss on disposal of the
discontinued Life Uniform segment. In the first quarter of fiscal 2003,
income from operations of discontinued segment was $83,000, net of tax.
On a per-share basis, the Company earned $.28 ($.27 diluted) from
continuing operations in first quarter fiscal 2004, including
non-operating income of $.17 ($.16 diluted), compared with $.26 ($.25
diluted) earned in the first quarter a year ago. The loss from
discontinued operations in the first quarter this year amounted to $.27
per share ($.26 diluted) including the estimated loss on disposal of
$.35 ($.34 diluted). Combining continuing and discontinued operations,
first quarter fiscal 2004 net income of $.01 per share was 96.3 percent
lower than net income of $.27 per share ($.26 diluted) in the first
quarter of fiscal 2003.
Textile service revenues increased 8.9 percent to $77,730,000 in the
first quarter compared with the same period a year ago. The acquisition
of the Tampa Bay plant in the fourth quarter of fiscal 2003 accounted
for nearly 60 percent of the revenue increase in the first quarter,
with the remainder due primarily to net new business added during the
past year. Net new business added during the first quarter of fiscal
2004 was $10,312,000 in annualized revenue compared with $3,259,000 in
annualized revenue added during the first quarter last year. Gross
profit margin declined to 15.7 percent in the first quarter this year
from 19.0 percent a year earlier, reflecting greater cost pressures.
Linen costs increased $756,000 in the first quarter due mainly to
moderately higher linen prices. Utility costs were $912,000 unfavorable
to prior year in the first quarter mostly as a result of higher natural
gas prices paid for that portion of purchases not covered by
fixed-price contracts. Direct labor and production payroll fringe costs
were $585,000 higher than last year's first quarter due primarily to
higher wage rates, increases in health
11
insurance costs and unemployment taxes, and inefficiencies during the
start-up of new plants. The Company is addressing these cost
pressures through cost reduction efforts utilizing capital
expenditures to improve plant efficiency, as well as implementation
of energy surcharges where possible, annual CPI price increases
permitted in existing customer contracts, and reflecting higher costs
in competitive bids for new contracts.
Selling, general and administrative expenses increased 1.7 percent in
first quarter fiscal 2004 compared with first quarter fiscal 2003 due
to having four more plants this year and a reduction in bad debt
expense last year of $216,000 from a favorable settlement of
litigation. As a percent of revenues, these expenses declined to 13.1
percent in the first quarter this year from 14.0 percent a year ago.
Despite costs incurred in connection with union efforts currently
targeted against the Company, corporate expenses decreased 9.1 percent
in the quarter versus the prior year, reflecting the beginning of the
corporate office downsizing that will continue during the remainder of
fiscal 2004. Net other operating expense in first quarter fiscal 2003
was mostly offset by $164,000 of income related to the disposition of
an administrative office building in St. Louis. The increase in
interest expense of $55,000 in the first quarter this year reflects the
higher level of debt outstanding compared to a year ago.
Discontinued Operations
-----------------------
Net retail sales of the discontinued Life Uniform segment decreased 5.2
percent in the first quarter this year compared with the same period
last year. A same-store sales increase of 1.4 percent for the quarter
was more than offset by 24 fewer stores in operation this year compared
with last year. Catalogue and e-commerce sales declined $228,000, or
14.3 percent, as a result of reduced distribution of catalogues this
year. Gross profit margin improved to 54.7 percent in the first quarter
this year from 53.9 percent in last year's first quarter due to lower
cost sourcing of products. Operating expenses of the segment in the
first quarter fiscal 2004 decreased $1,427,000, or 12.3 percent, from
the comparable period a year ago due to fewer stores in operation,
reduced catalogue expenses, and $601,000 of depreciation expense
recorded in the first quarter last year compared with no depreciation
expense for the discontinued operation in fiscal 2004. First quarter
fiscal 2003 earnings of the Life Uniform segment included $130,000 of
income from the reversal of a portion of the fiscal 2001 restructuring
charge due to favorable terminations of store leases.
In the first quarter of fiscal 2004, the Company recorded an estimated
loss on disposal of the discontinued Life Uniform segment of $4,642,000
pretax. The loss consisted of a $3,917,000 writedown of net assets of
the segment, primarily inventories, leasehold improvements and accounts
payable, to their estimated fair values and $725,000 of estimated costs
directly related to the proposed sale. The Company has entered into a
period of exclusive negotiations with a potential buyer for Life
Uniform and expects to conclude the sale of the segment during the
second quarter of fiscal 2004. The outcome of the pending negotiations
with the buyer will determine the amount and timing of the ultimate
charge associated with disposal of the Life Uniform segment. However,
there is a risk that the Company will be unable to consummate the sale
of Life Uniform which could result in additional losses upon closing of
the stores and liquidation of the assets.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
As of May 1, 2004, working capital of continuing operations totaled
$40,261,000 compared with $39,012,000 at January 31, 2004, and current
ratio was unchanged at 1.9 to 1. Receivables
12
increased $1,230,000 in the first quarter of fiscal 2004 due mainly
to death benefits on company-owned life insurance policies received
in the second quarter this year totaling $1,188,000. Receivable days
outstanding of 42 at May 1, 2004 was unchanged from the end of fiscal
2003. First quarter fiscal 2004 increases in linens in service of
$1,107,000 and in net property and equipment of $10,230,000 reflect
primarily the acquisition of the Duke University Health System
Laundry in Durham, NC in April 2004. Corresponding increases in other
accrued liabilities and long-term debt reflect mainly the financing
of the Duke acquisition.
Cash used for working capital of continuing operations in the first
quarter last year was due to a reduction in the level of accounts
payable and higher incentive compensation payments related to fiscal
2002 financial performance. Capital expenditures were lower in the
first quarter this year compared with last year's first quarter level,
which included construction costs associated with the Phoenix, AZ
plant.
Assets of the discontinued Life Uniform segment held for sale decreased
$2,994,000 in the first quarter fiscal 2004 as a result of the loss
recognized to write down the assets to their estimated fair values less
costs to sell, offset in part by an increase of $1,389,000 in
inventories of the segment during the quarter. Net cash used in
discontinued operations in the first quarter this year reflects the
inventory increase as well as a decrease in accounts payable of
$509,000, whereas cash provided by discontinued operations in the first
quarter fiscal 2003 included a decrease in inventories and increase in
accounts payable of $1,199,000 and $843,000, respectively. Concentrated
efforts have been made in fiscal 2004 to increase store inventories to
optimal selling levels while reducing the backlog of accounts payable.
As previously announced during the first quarter this year, the Company
amended the terms of its credit facility to increase the maximum
borrowing capacity by $30,000,000 to $100,000,000. Under the terms of
the amended loan agreement, there was $53,096,000 of borrowing capacity
available as of May 1, 2004. The Company's ratio of total debt to total
capitalization as of May 1, 2004 was 15.5 percent, up from 11.8 percent
as of January 31, 2004 and 8.6 percent as of April 26, 2003. As of May
1, 2004, the Company was in compliance with all financial covenants
contained in its credit facility.
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.
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, disruption to the Company's operation by
union activities, the ability of the Company to sell the Life Uniform
segment under financial terms and conditions currently anticipated, the
ability of the Company to accomplish its strategy of re-
13
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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to commodity price risk related to the use of
natural gas in laundry plants of the Textile Services segment. The
total cost of natural gas in the first quarter ended May 1, 2004 was
$3,520,000. To reduce the uncertainty of fluctuating energy prices,
the Company has entered into fixed-price contracts for approximately
33 percent of its 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 $943,000 in annual pretax earnings.
The Company is also exposed to commodity price risk resulting from
the consumption of gasoline and diesel fuel for delivery trucks in
the Textile Services segment. The total cost of truck fuel in the
first quarter ended May 1, 2004 was $1,174,000. A hypothetical 10
percent increase in the cost of delivery fuel would result in a
decrease of approximately $470,000 in annual pretax earnings.
The Company's exposure to interest rate risk relates primarily to its
variable-rate revolving debt agreement entered into in the second
quarter of fiscal 2002. As of May 1, 2004, there was $26,700,000 of
outstanding debt under the credit facility, of which $10,000,000
bears interest at a fixed rate of 3.58 percent (plus a margin) under
an interest-rate swap agreement entered into by the Company with one
of its lenders to moderate the exposure. Amounts borrowed under the
credit facility in excess of the $10,000,000 covered by the
interest-rate swap agreement bear interest at a rate equal to either
(i) LIBOR plus a margin, or (ii) a Base Rate, defined as the higher
of (a) the Federal Funds Rate plus .50 percent 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 May 1,
2004, the margin was 1.125 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 $167,000 in annual
pretax earnings.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of internal controls and procedures
designed to provide reasonable assurance as to the reliability of the
unaudited consolidated financial statements and other disclosures
included in this report. The Company's Board of Directors, operating
through its Audit Committee which is composed entirely of independent
Directors, provides oversight to the financial reporting process.
As of the end of the period covered by this report, the Company's
Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended). Based upon
their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that material information
relating to the Company, including its consolidated subsidiaries, is
made known to them by others within those entities in a timely
manner, particularly during the period for which this quarterly
report is being prepared. The Chief Executive Officer and Chief
Financial Officer also concluded based upon their evaluation that the
Company's disclosure controls and procedures are effective in
ensuring that the information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and
15
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 control over
financial reporting during the Company's most recent fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting
subsequent to the date of this most recent evaluation, nor were any
corrective actions required with regard to significant deficiencies
and material weaknesses.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) See Exhibit Index on page 19.
(b) REPORTS ON FORM 8-K - On March 18, 2004, the Company furnished
a report on Form 8-K under Items 7 and 12 containing a press
release announcing its earnings for the fourth quarter and
fiscal year ended January 31, 2004.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Angelica Corporation
--------------------
(Registrant)
Date: June 10, 2004 /s/ James W. Shaffer
-----------------------------
James W. Shaffer
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
*Asterisk indicates exhibits filed herewith.
**Incorporated by reference from the document listed.
3.1 Restated Articles of Incorporation of the Company, as currently in
effect. Filed as Exhibit 3.1 to the Form 10-K for the fiscal year
ended January 26, 1991.**
3.2 Current By-Laws of the Company, as last amended January 27, 2004.
Filed as Exhibit 3.2 to the Form 10-K for the fiscal year ended
January 31, 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.**
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.*
19