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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
July 31, 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 September 1, 2004 was 8,981,356 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
JULY 31, 2004 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Consolidated Statements of Income - Second Quarter and
First Half ended July 31, 2004 and July 26, 2003
(Unaudited) 2
Consolidated Balance Sheets - July 31, 2004
and January 31, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows - First Half
ended July 31, 2004 and July 26, 2003 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 16-17
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
Exhibit Index 21
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)
Second Quarter Ended First Half Ended
------------------------ --------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------- -------- --------- ---------
CONTINUING OPERATIONS:
Textile service revenues $ 77,864 $ 70,963 $ 155,594 $ 142,346
Cost of textile services (65,354) (57,095) (130,917) (114,890)
-------- -------- --------- ---------
Gross profit 12,510 13,868 24,677 27,456
Selling, general and administrative expenses (10,095) (10,336) (20,275) (20,345)
Other operating income (expense), net 1,316 (82) 1,062 (129)
-------- -------- --------- ---------
Income from operations 3,731 3,450 5,464 6,982
Interest expense (301) (142) (581) (367)
Non-operating income, net (Note 4) 2 1,878 2,102 1,915
-------- -------- --------- ---------
Income from continuing operations before taxes 3,432 5,186 6,985 8,530
Provision for income taxes (Note 5) (661) (1,608) (1,691) (2,695)
-------- -------- --------- ---------
Income from continuing operations 2,771 3,578 5,294 5,835
-------- -------- --------- ---------
DISCONTINUED OPERATIONS (NOTE 6):
Loss from operations of discontinued segment,
net of tax (1,307) (598) (635) (515)
Gain (loss) on disposal of discontinued segment,
net of tax 56 - (3,008) -
-------- -------- --------- ---------
Loss from discontinued operations (1,251) (598) (3,643) (515)
-------- -------- --------- ---------
Net income $ 1,520 $ 2,980 $ 1,651 $ 5,320
======== ======== ========= =========
BASIC EARNINGS PER SHARE (NOTE 8):
Income from continuing operations $ 0.31 $ 0.41 $ 0.60 $ 0.66
Loss from discontinued operations (0.14) (0.07) (0.41) (0.06)
-------- -------- --------- ---------
Net income $ 0.17 $ 0.34 $ 0.19 $ 0.60
======== ======== ========= =========
DILUTED EARNINGS PER SHARE (NOTE 8):
Income from continuing operations $ 0.30 $ 0.40 $ 0.58 $ 0.65
Loss from discontinued operations (0.13) (0.07) (0.40) (0.05)
-------- -------- --------- ---------
Net income $ 0.17 $ 0.33 $ 0.18 $ 0.60
======== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
July 31, January 31,
2004 2004
-------- -----------
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 9,961 $ 2,188
Receivables, less reserves of $871 and $843 37,763 36,978
Linens in service 36,039 35,464
Prepaid expenses and other current assets 5,540 4,513
Deferred income taxes 3,160 5,036
Assets of discontinued segment held for sale (Note 6) - 24,498
-------- --------
Total Current Assets 92,463 108,677
-------- --------
Property and Equipment 183,739 176,719
Less -- reserve for depreciation 91,900 94,467
-------- --------
Total Property and Equipment 91,839 82,252
-------- --------
Other:
Goodwill (Note 9) 9,626 9,610
Other acquired assets (Note 9) 3,782 3,768
Cash surrender value of life insurance 30,238 30,194
Miscellaneous 4,472 1,280
-------- --------
Total Other Assets 48,118 44,852
-------- --------
Total Assets $232,420 $235,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 18,289 $ 18,343
Accrued wages and other compensation 4,503 5,092
Other accrued liabilities 26,849 21,732
Liabilities of discontinued segment held for sale (Note 6) - 7,783
-------- --------
Total Current Liabilities 49,641 52,950
-------- --------
Long-Term Debt, less current maturities (Note 10) 20,441 19,542
Other Long-Term Obligations 15,303 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 142,202 142,341
Accumulated other comprehensive loss (943) (1,062)
Unamortized restricted stock (1,240) (210)
Common Stock in treasury, at cost: 496,721 and 587,141 (7,204) (8,629)
-------- --------
Total Shareholders' Equity 147,035 146,660
-------- --------
Total Liabilities and Shareholders' Equity $232,420 $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 Half Ended
--------------------------------------
July 31, 2004 July 26, 2003
------------- -------------
Cash Flows from Operating Activities:
Income from continuing operations $ 5,294 $ 5,835
Non-cash items included in income from continuing operations:
Depreciation 5,690 4,704
Amortization 799 400
Cash surrender value of life insurance (1,006) (536)
Gain on sale of assets (1,335) -
Change in working capital components of continuing
operations, net of businesses acquired/disposed of (639) (1,498)
Other, net (515) (375)
-------- --------
Net cash provided by operating activities of
continuing operations 8,288 8,530
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (6,185) (12,816)
Cost of businesses and assets acquired (7,500) (106)
Disposals of assets 2,414 -
Life insurance premiums paid, net 962 (188)
-------- --------
Net cash used in investing activities of continuing operations (10,309) (13,110)
-------- --------
Cash Flows from Financing Activities:
Repayments of long-term revolving debt (54,601) (32,135)
Borrowings of long-term revolving debt 55,500 22,000
Dividends paid (1,969) (1,761)
Treasury stock reissued 227 567
-------- --------
Net cash used in financing activities of continuing operations (843) (11,329)
-------- --------
Net cash provided by discontinued operations (Note 6) 10,637 1,994
-------- --------
Net increase (decrease) in cash and short-term investments 7,773 (13,915)
Balance at beginning of year 2,188 17,414
-------- --------
Balance at end of period $ 9,961 $ 3,499
======== ========
Supplemental cash flow information:
Income taxes paid $ 89 $ 133
Interest paid $ 506 $ 252
During the first half ended July 31, 2004, the Company acquired selected
assets and customer contracts of various laundry facilities for $11,123,000.
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
consideration received for the sale of Life Uniform in fiscal 2004 includes
a long-term note receivable valued at $3,056,000.
The accompanying notes are an integral part of the consolidated financial
statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER AND FIRST HALF ENDED
JULY 31, 2004 AND JULY 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 periods have been included. All
significant intercompany accounts and transactions have been
eliminated. The results of operations and cash flows for the second
quarter and first half ended July 31, 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 second quarter ended July
31, 2004 and July 26, 2003 totaled $227,000 and $145,000,
respectively; and $370,000 and $274,000 in the first half ended July
31, 2004 and July 26, 2003, respectively. During the first half ended
July 31, 2004, 62,000 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
second quarter and first half ended July 31, 2004 and July 26, 2003
been determined consistent with SFAS No. 123, the Company's net
income and earnings per share would approximate the following pro
forma amounts:
5
Second Quarter Ended First Half Ended
------------------------- -------------------------
(Dollars in thousands, July 31, July 26, July 31, July 26,
except per share amounts) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Net income:
As reported $1,520 $2,980 $1,651 $5,320
Add: stock-based employee
compensation expense included in
net income, net of tax 184 100 286 187
Deduct: stock-based employee
compensation expense determined
under fair-value based method
for all awards, net of tax (461) (195) (710) (420)
------ ------ ------ ------
Pro forma net income $1,243 $2,885 $1,227 $5,087
====== ====== ====== ======
Basic earnings per share:
As reported $ 0.17 $ 0.34 $ 0.19 $ 0.60
Pro forma 0.14 0.33 0.14 0.58
Diluted earnings per share:
As reported $ 0.17 $ 0.33 $ 0.18 $ 0.60
Pro forma 0.14 0.32 0.13 0.57
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 second quarter and first half
ended July 31, 2004, the amount of the reserve utilized for lease
termination costs paid was $139,000 and $222,000, respectively. In
addition, the Company reversed in discontinued operations in the
second quarter of fiscal 2004 $75,000 of the original restructuring
charge due to favorable termination of a store lease that was settled
during the second quarter. The reserve balance of $113,000 remaining
as of July 31, 2004 is expected to be utilized in the second half of
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 totaling $610,000 for the excess of death benefits from
Company-owned life insurance policies surrendered over the cash value
of the policies. In the second quarter of fiscal 2003, the Company
recorded non-operating income of $1,848,000 from a cash distribution
received in connection with the liquidation of an insurance carrier
of the Company.
Non-operating income, net, also includes interest earned on invested
cash balances.
6
Note 5. Income Taxes
- ---------------------
Taxes on income from continuing operations of 19.3 percent and 24.2
percent in the second quarter and first half of fiscal 2004,
respectively, reflect the Company's estimated effective tax rate for
the year less an adjustment to reduce the income tax provision due to
the expected favorable resolution of outstanding tax issues. 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 the first quarter of fiscal 2004, the Company decided to exit and
discontinue its Life Uniform retail business segment and, in
conjunction with this decision, it recorded an estimated pretax loss
on disposal of the segment of $4,642,000. This amount represented a
write down of the net assets of the segment to their estimated fair
values, less estimated costs directly incurred in connection with a
proposed sale.
The Company completed the sale of Life Uniform to Healthcare Uniform
Company, Inc., an affiliate of Sun Capital Partners, effective July
31, 2004. The total sales price amounted to $16,240,000, principally
cash of $12,152,000 and an unsecured, long-term note receivable from
Healthcare Uniform Company with a face value of $4,074,000, plus the
assumption of $5,732,000 of liabilities. The note receivable was
discounted to its estimated fair value of 75 percent of face value,
reflecting the note's illiquidity and its subordinated status in the
capital structure of Healthcare Uniform Company. Net assets of the
segment totaling $19,336,000 were sold, including 196 retail uniform
and shoe stores, catalogue and e-commerce operations and associated
inventory, as well as working capital of 17 other stores that were
not acquired. These 17 stores were immediately closed by the Company.
In the second quarter ended July 31, 2004, the Company recorded a
gain on disposal of discontinued segment of $84,000 pretax to adjust
the estimated loss recorded in the first quarter of fiscal 2004 to a
loss of $4,558,000 pretax for the first half ended July 31, 2004.
In accordance with SFAS No. 144, the financial position, cash flows,
results of operations and loss on disposal of the Life Uniform
segment are segregated and reported as discontinued operations for
all periods presented in this report. As of January 31, 2004, total
assets of Life Uniform held for sale were $24,498,000, consisting
mainly of inventories of $11,491,000 and net property and equipment
of $9,237,000, and total liabilities held for sale were $7,783,000,
of which $6,021,000 was for accounts payable.
Results of operations of the Life Uniform segment for the second
quarter and first half ended July 31, 2004 and July 26, 2003 were as
follows (dollars in thousands):
7
Second Quarter First Half
--------------------- ----------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Net retail sales $18,248 $18,761 $38,786 $40,417
===============================================================================================
Loss from operations before taxes $(1,980) $ (867) $ (962) $ (745)
Income tax benefit 673 269 327 230
- -----------------------------------------------------------------------------------------------
Loss from operations $(1,307) $ (598) $ (635) $ (515)
===============================================================================================
The loss from operations in the second quarter and first
half of fiscal 2004 includes $1,606,000 of estimated lease
termination costs related to the stores closed by the Company as well
as $138,000 of employee termination expenses.
Note 7. Commitments and Contingencies
- --------------------------------------
Prior to the sale of Life Uniform, the Company was a guarantor under
certain Life Uniform store lease agreements. These guarantees
obligated the Company to make all payments due under the leases until
their expiration in the event of default of Life Uniform. In
connection with the sale of Life Uniform, the Company requested
consents, as required, from landlords to assign the store leases to
Healthcare Uniform Company. As a condition to such consents, certain
landlords required that the Company continue as a guarantor of the
leases. Under the Company's agreement with Healthcare Uniform
Company, these guarantees will only extend until the end of each
lease's current term. The Company currently estimates it is
secondarily obligated as a guarantor for 103 store lease agreements
and the maximum potential amount of future payments the Company could
be required to make under these guarantees is $18,100,000. Although
these guarantees expire at various dates through fiscal year 2014,
approximately 70 percent of the estimated maximum potential future
payments expires by the end of fiscal year 2007.
The Company has provided certain indemnities to the buyer in
connection with the sale of Life Uniform. Although indemnification
claims are generally subject to an aggregate limit of $6,000,000, the
Company believes the likelihood of making any payments for
indemnification claims is remote and has reserved accordingly.
Note 8. 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 second quarter and first half ended July 31, 2004 and July 26,
2003 (shares in thousands):
8
Second Quarter Ended First Half Ended
-------------------------- --------------------------
July 31, July 26, July 31, July 26,
2004 2003 2004 2003
-------- -------- -------- --------
Weighted average shares:
Average shares outstanding 8,898 8,811 8,887 8,798
Effect of dilutive securities 243 129 238 135
----- ----- ----- -----
Average shares outstanding,
adjusted for dilutive effects 9,141 8,940 9,125 8,933
===== ===== ===== =====
Note 9. 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 half of fiscal 2004.
During the first half ended July 31, 2004, the Company acquired customer
contracts of businesses valued at $430,000, with amortization periods
of five to 10 years, and non-compete covenants with a value of
$38,000 to be amortized over five years. Other acquired assets
consisted of the following (dollars in thousands):
July 31, 2004 January 31, 2004
-------------------------------------- --------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
------ ------------ ----------- ------ ------------ -----------
Customer contracts $ 8,428 $(5,219) $3,209 $7,998 $(4,876) $3,122
Non-compete covenants 1,638 (1,065) 573 1,600 (954) 646
------- ------- ------ ------ ------- ------
Other acquired assets $10,066 $(6,284) $3,782 $9,598 $(5,830) $3,768
======= ======= ====== ====== ======= ======
9
Aggregate amortization expense for the second quarter ended July 31,
2004 and July 26, 2003 amounted to $229,000 and $131,000, respectively;
and $454,000 and $256,000 for the first half ended July 31, 2004 and
July 26, 2003, 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 $867
2005 812
2006 759
2007 678
2008 430
Note 10. 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 July 31, 2004, the Company was in
compliance with this and all other financial covenants contained in
the credit facility.
Note 11. Derivative Instruments and Hedging Activities
- -------------------------------------------------------
The Company entered into an interest-rate swap agreement with one of
its lenders effective September 9, 2002. The swap agreement fixes the
variable portion of the interest rate (excluding a margin) at 3.58
percent on $10,000,000 of the outstanding debt under the revolving
line of credit until termination on May 30, 2007. The Company has
elected to apply cash flow hedge accounting for the interest-rate
swap agreement in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Accordingly, the
derivative is recorded as an asset or liability at its fair value.
The effective portion of changes in the fair value of the derivative,
as measured quarterly, is reported in accumulated other comprehensive
income, and the ineffective portion, if any, is reported in net
income of the current period. The gain on the derivative included in
accumulated other comprehensive loss in the first half ended July 31,
2004 amounted to $125,000, net of tax. The Company has recorded a
long-term liability of $62,000 and $254,000 for the fair value of the
derivative as of July 31, 2004 and January 31, 2004, respectively.
To moderate price risk due to market fluctuations, the Company has
entered into fixed-price contracts as of July 31, 2004 for
approximately 25 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.
10
Note 12. 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 $1,554,000 and $2,990,000 for the
second quarter ended July 31, 2004 and July 26, 2003, respectively;
and $1,771,000 and $5,287,000 for the first half ended July 31, 2004
and July 26, 2003, respectively.
Note 13. 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 second quarter and first half ended
July 31, 2004 and July 26, 2003 was as follows:
Second Quarter First Half
------------------- ---------------------
(Dollars in thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
Pension expense:
Service cost $ 149 $ 135 $ 298 $ 270
Interest cost 319 312 638 624
Expected return on plan assets (353) (356) (706) (712)
Plan curtailment 38 - 38 -
Amortization of prior service cost 5 5 10 10
Recognized actuarial loss 29 34 58 68
- ----------------------------------------------------------------------------------------------------
Net periodic pension expense $ 187 $ 130 $ 336 $ 260
====================================================================================================
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST HALF ENDED JULY 31, 2004
COMPARED WITH
SECOND QUARTER AND FIRST HALF ENDED JULY 26, 2003
Analysis of Operations
----------------------
During the first quarter of fiscal 2004, the Company announced its
decision 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 completed the sale of Life Uniform to Healthcare
Uniform Company, Inc., an affiliate of Sun Capital Partners, Inc., at
the end of the second quarter. The Company's continuing operations
reflect the results of its remaining Textile Services healthcare
laundry and linen management business.
Textile service revenues increased 9.7 percent in the second quarter
and 9.3 percent in the first half of fiscal 2004 compared with the same
periods a year ago. Organic growth from net new business additions and
new laundry facilities built within the last 12 months contributed 3.1
percent of the second quarter increase, with the other 6.6 percent
coming from recent acquisitions of plants in Florida and North Carolina
partially offset by the sale of non-healthcare accounts in Daytona
Beach, Florida in the second quarter of fiscal 2004. For the first half
of fiscal 2004, net acquisitions accounted for 6.5 percent of the
revenue increase over the prior year. New business installed during the
first six months of fiscal 2004, net of cancellations of existing
business, represented $11,222,000 in annualized revenue compared with a
breakeven level in last year's first half.
Gross profit margin declined to 16.1 percent and 15.9 percent in the
second quarter and first half of fiscal 2004, respectively, from 19.5
percent and 19.3 percent in the second quarter and first half of fiscal
2003, respectively. These declines are due primarily to moderately
higher linen prices, higher wage rates, increased utility costs
(especially natural gas prices), and production inefficiencies during
the start-up of new plants. Selling, general and administrative
expenses decreased 2.3 percent in the second quarter and 0.3 percent in
the first half of fiscal 2004 compared with the same periods last year.
These expenses also declined as a percent of revenues to 13.0 percent
for both the second quarter and first half this year from 14.6 percent
and 14.3 percent in the second quarter and first half of fiscal 2003,
respectively. The reduction in corporate overhead due to the downsizing
of the corporate office more than offset increases in operating
expenses due to the new plants and professional fees incurred in
connection with union organizing efforts currently targeted against the
Company.
Operating income from continuing operations increased 8.1 percent in
the second quarter this year compared with second quarter fiscal 2003
due to the increased revenue and other operating income of $1,335,000
from the gain on the sale of the Daytona Beach non-
12
healthcare accounts, offset to some extent by the increased production
costs noted above and $424,000 of costs associated with the closing of
the Daytona Beach facility. Second quarter fiscal 2004 operating income
also benefited from a gain of $347,000 on the settlement of a property
insurance claim. Operating income for the first half of fiscal 2004
decreased 21.7 percent from the same period a year ago, due mainly to
unfavorable variances in linen costs ($1,287,000), direct labor
($809,000) and utilities ($1,743,000) more than offsetting the favorable
impact of the revenue increase.
Second quarter fiscal 2004 net income from continuing operations
decreased 22.6 percent from the comparable quarter of a year ago.
However, fiscal 2003 second quarter earnings included pretax
non-operating income of $1,848,000 ($.14 per diluted share net of tax)
from a cash distribution received in connection with the liquidation of
an insurance carrier of the Company. In the first half of fiscal 2004,
net income from continuing operations was 9.3 percent lower than the
first half of fiscal 2003 as reduced operating income and higher
interest expense more than offset a reduction in income tax expense due
to the expected favorable resolution of outstanding tax issues.
Non-operating income in this year's first half is comparable to the
first half of fiscal 2003 due to gains recorded in the first quarter of
fiscal 2004 of $1,472,000 from the sale of vacant property in Miami,
Florida and $610,000 from death benefits on Company-owned life
insurance policies.
Discontinued Operations
-----------------------
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 write down 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 completed the sale
of Life Uniform in the second quarter of fiscal 2004 and adjusted the
estimated first-quarter loss to a pretax loss of $4,558,000. An
increase in proceeds from the sale of working capital in stores not
acquired was generally offset by a reduction in the value of the note
receivable taken by the Company as part of the consideration for the
sale. Although the Company believes the discounted note is fairly
valued, this security is not readily marketable and is subordinate to
other outstanding debt of the issuer. Ultimately, the value of the note
is dependent upon the success of Healthcare Uniform Company.
As provided in the sale agreement, an adjustment to the sale proceeds
will be made not later than 90 days after the July 31, 2004 closing
date based upon a final determination of working capital transferred as
of the closing date. Although the Company has included an estimate of
the working capital adjustment in the loss on disposal, the actual
adjustment may differ materially from this estimate, which could result
in the recognition of additional losses.
The loss from operations of the discontinued segment in the second
quarter of fiscal 2004 includes $1,606,000 of estimated lease
termination costs related to stores closed by the Company. The Company
is actively negotiating the termination of these leases and has
resolved many of them. The Company may be unable to settle all of the
remaining leases for the amounts reserved resulting in recognition of
additional losses. In addition, $138,000 of employee termination
expenses were recorded in discontinued operations in the second quarter
this year, including a curtailment loss from the defined-benefit
pension plan of
13
$38,000. Additional losses could result from the settlement of the
pension liabilities.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
As of July 31, 2004, working capital of continuing operations totaled
$42,822,000 compared with $39,012,000 at January 31, 2004, and the
current ratio was unchanged at 1.9 to 1. Accounts receivable days
outstanding of 42 at July 31, 2004 was unchanged from the end of fiscal
2003. The first half fiscal 2004 increase in net property and equipment
of $9,587,000 reflects primarily the acquisition of the Duke University
Health System Laundry in Durham, NC in April 2004. The increase in
other accrued liabilities of $5,117,000 in the first half this year
reflects mainly a holdback of a portion of the Duke acquisition
purchase price and reserves for estimated lease termination costs for
Life Uniform stores closed by the Company.
Cash flow from investing activities in the first half ended July 31,
2004 includes the proceeds of $2,414,000 from the sale of the Daytona
Beach non-healthcare accounts and death benefits on Company-owned life
insurance policies received in the second quarter totaling $1,188,000.
Capital expenditures were $6,631,000 lower in the first half this year
compared with last year's first half level, which included costs
associated with the Phoenix, AZ and Columbia, SC plants then under
construction.
As of July 31, 2004, the assets and liabilities of the discontinued
Life Uniform segment were written off against the cash proceeds and
long-term note receivable from the sale of the business. Since the sale
of Life Uniform was closed effective on the last day of the second
quarter, the Company was not able to utilize the cash proceeds of
$12,152,000 to pay down its long-term debt until the beginning of the
third quarter of fiscal 2004.
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 $50,752,000 of borrowing capacity
available as of July 31, 2004. The Company's ratio of total debt to
total capitalization as of July 31, 2004 was 12.2 percent, up from 11.8
percent as of January 31, 2004, but lower than 15.5 percent as of May
1, 2004. As of July 31, 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
14
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, the ability of the
Company to recover its seller note and avoid future lease obligations
as part of its sale of Life Uniform, the ability of the Company to
accomplish its strategy of redirecting 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.
15
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 its laundry plants. The total cost of natural gas in the
second quarter and first half ended July 31, 2004 was $3,157,000 and
$6,677,000, respectively. To reduce the uncertainty of fluctuating
energy prices, the Company has entered into fixed-price contracts as of
July 31, 2004 for approximately 25 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 $1,002,000 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. The total
cost of truck fuel in the second quarter and first half ended July 31,
2004 was $1,199,000 and $2,373,000, respectively. A hypothetical 10
percent increase in the cost of delivery fuel would result in a
decrease of approximately $475,000 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 July 31, 2004, there was $20,400,000 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 July 31, 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 $104,000 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
16
Financial Officer also concluded based upon their evaluation that the
Company's disclosure controls and procedures are effective in ensuring
that the information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
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.
17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The shareholders of the Company voted on four items at the 2004 Annual
Meeting of Shareholders held on May 25, 2004:
The first proposal requested a vote for each of four nominees for directors
of the Company. Each nominee was elected based on the following votes:
VOTES VOTES
NAME "FOR" "WITHHELD"
---- ----- ----------
For terms expiring at the 2007 Annual Meeting:
Susan S. Elliott 8,299,374 235,960
Don W. Hubble 8,260,702 274,632
Kelvin R. Westbrook 8,152,821 382,513
For a term expiring at the 2006 Annual Meeting:
Ronald J. Kruszewski 8,512,488 22,846
Charles W. Mueller and William A. Peck, with terms ending in 2005, and
Stephen M. O'Hara with a term ending in 2006, all continue as directors of
the Company.
The second proposal requesting approval of the Amendment and Restatement of
the Angelica Corporation 1999 Performance Plan was approved, with 5,605,505
shares voting for, 1,693,910 shares voting against, 17,255 shares
abstaining, and 1,218,664 broker non-votes.
The third proposal requesting re-affirmation of the performance goals under
the Angelica Corporation 1999 Performance Plan was approved, with 6,416,746
shares voting for, 878,973 shares voting against, 20,951 shares abstaining,
and 1,218,664 broker non-votes.
The fourth proposal requesting approval of the 2004 Equity Incentive Plan
for Non-Employee Directors of Angelica Corporation was approved, with
6,308,877 shares voting for, 986,479 shares voting against, 21,315 shares
abstaining, and 1,218,664 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) See Exhibit Index on page 21.
(b) REPORTS ON FORM 8-K
On May 25, 2004, the Company furnished a report on Form 8-K under
Items 7 and 12 containing a press release announcing its earnings
for the first quarter ended May 1, 2004.
18
On July 8, 2004, the Company filed a report on Form 8-K under
Items 5 and 7 containing a press release announcing that it had
entered into an Asset Purchase Agreement for the sale of
substantially all of the assets of its Life Uniform retail
division to Healthcare Uniform Company, Inc.
19
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: September 9, 2004 /s/ James W. Shaffer
--------------------
James W. Shaffer
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
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.**
10.1 Amended and Restated Angelica Corporation 1999 Performance Plan. Filed
as Appendix B to the Proxy Statement for the Annual Meeting of
Shareholders held on May 25, 2004.**
10.2 Angelica Corporation 2004 Equity Incentive Plan for Non-Employee
Directors. Filed as Appendix C to the Proxy Statement for the Annual
Meeting of Shareholders held on May 25, 2004.**
10.3 Form of Restricted Stock Agreement under the 1999 Performance Plan.*
10.4 Form of Restricted Stock Agreement under the 2004 Equity Incentive
Plan for Non-Employee Directors.*
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.*
21