===============================================================================
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 27, 2002 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 (1) has filed all reports 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, 2002 was 8,679,340 shares.
===============================================================================
ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
JULY 27, 2002 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Income - Second Quarter and
First Half ended July 27, 2002 and July 28, 2001 (Unaudited) 2
Consolidated Balance Sheets - July 27, 2002
and January 26, 2002 (Unaudited) 3
Consolidated Statements of Cash Flows - First Half
ended July 27, 2002 and July 28, 2001 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
Exhibit Index 17
PART I. FINANCIAL INFORMATION
ITEM 1. 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 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- ---------- ----------- -----------
CONTINUING OPERATIONS:
Textile service revenues $ 66,795 $ 64,585 $ 135,176 $ 129,870
Net retail sales 21,731 20,774 46,607 44,676
---------- ---------- ----------- -----------
88,526 85,359 181,783 174,546
---------- ---------- ----------- -----------
Cost of textile services 52,799 52,998 107,099 107,101
Cost of goods sold 10,117 9,728 22,203 21,366
---------- ---------- ----------- -----------
62,916 62,726 129,302 128,467
---------- ---------- ----------- -----------
Gross profit 25,610 22,633 52,481 46,079
---------- ---------- ----------- -----------
Selling, general and administrative expenses 21,845 19,639 43,812 39,873
Interest expense 607 2,019 2,150 4,047
Other (income) expense, net (1,511) 220 (1,677) (133)
---------- ---------- ----------- -----------
20,941 21,878 44,285 43,787
---------- ---------- ----------- -----------
Income from continuing operations pretax 4,669 755 8,196 2,292
Provision for income taxes 1,401 68 2,635 206
---------- ---------- ----------- -----------
Income from continuing operations
before extraordinary item 3,268 687 5,561 2,086
Extraordinary loss on early extinguishment
of debt, net of taxes of $2,374 (Note 4) (4,409) - (4,409) -
---------- ---------- ----------- -----------
(Loss) income from continuing operations (1,141) 687 1,152 2,086
---------- ---------- ----------- -----------
DISCONTINUED OPERATIONS:
Income from operations of discontinued
segment, net of taxes of $437 and $1,113 - 208 - 258
Loss on disposal of discontinued segment,
net of taxes of $518 and $2,912 (Note 5) (961) - (5,408) -
---------- ---------- ----------- -----------
(Loss) income from discontinued operations (961) 208 (5,408) 258
---------- ---------- ----------- -----------
Net (loss) income $ (2,102) $ 895 $ (4,256) $ 2,344
========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations
before extraordinary item $ 0.38 $ 0.08 $ 0.64 $ 0.24
Extraordinary loss, net of tax (0.51) - (0.51) -
---------- ---------- ----------- -----------
(Loss) income from continuing operations (0.13) 0.08 0.13 0.24
(Loss) income from discontinued operations (0.11) 0.02 (0.62) 0.03
---------- ---------- ----------- -----------
Net (loss) income $ (0.24) $ 0.10 $ (0.49) $ 0.27
========== ========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (NOTE 8):
Income from continuing operations
before extraordinary item $ 0.37 $ 0.08 $ 0.63 $ 0.24
Extraordinary loss, net of tax (0.50) - (0.50) -
---------- ---------- ----------- -----------
(Loss) income from continuing operations (0.13) 0.08 0.13 0.24
(Loss) income from discontinued operations (0.11) 0.02 (0.62) 0.03
---------- ---------- ----------- -----------
Net (loss) income $ (0.24) $ 0.10 $ (0.49) $ 0.27
========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
July 27, January 26,
2002 2002
------------- -------------
ASSETS
------
Current Assets:
Cash and short-term investments $ 9,163 $ 18,742
Receivables, less reserves of $1,700 and $1,306 34,407 33,536
Inventories 14,529 14,435
Linens in service 31,410 32,196
Prepaid expenses and other current assets 2,538 2,968
Deferred income taxes 19,979 16,478
Net current assets of discontinued segment (Note 5) 14,950 61,774
------------- -------------
Total Current Assets 126,976 180,129
------------- -------------
Property and Equipment 175,425 174,893
Less -- reserve for depreciation 100,172 98,208
------------- -------------
75,253 76,685
------------- -------------
Goodwill (Note 3) 4,256 4,294
Other acquired assets (Note 3) 876 1,553
Cash surrender value of life insurance 25,661 25,349
Deferred income taxes 143 654
Miscellaneous 1,003 365
------------- -------------
31,939 32,215
Net noncurrent assets of discontinued segment (Note 5) 357 1,836
------------- -------------
Total Assets $ 234,525 $ 290,865
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 227 $ 71,602
Accounts payable 22,155 20,958
Accrued expenses 36,638 40,609
------------- -------------
Total Current Liabilities 59,020 133,169
------------- -------------
Long-Term Debt, less current maturities 23,800 812
Other Long-Term Obligations 15,164 15,380
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,200 4,200
Retained earnings 135,550 142,188
Common Stock in treasury, at cost: 799,316 and 863,329 (12,681) (14,356)
------------- -------------
136,541 141,504
------------- -------------
Total Liabilities and Shareholders' Equity $ 234,525 $ 290,865
============= =============
The accompanying notes are an integral part of the financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
First Half Ended
--------------------------------
July 27, 2002 July 28, 2001
------------- -------------
Cash Flows from Operating Activities:
Income from continuing operations before extraordinary item $ 5,561 $ 2,086
Extraordinary loss (4,409) -
------------- -------------
Income from continuing operations 1,152 2,086
Non-cash items included in income from continuing operations:
Depreciation 6,592 5,499
Amortization 413 1,027
Change in working capital components,
net of businesses acquired/disposed of (1,662) (4,273)
Utilization of restructuring reserves (Note 6) (1,464) -
Other, net (240) (1,106)
------------- -------------
Net cash provided by operating activities of continuing operations 4,791 3,233
------------- -------------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (5,543) (6,303)
Disposals of businesses and property 1,158 302
------------- -------------
Net cash used in investing activities of continuing operations (4,385) (6,001)
------------- -------------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing (71,487) (1,686)
Proceeds from issuance of long-term debt 23,100 -
Dividends paid (1,380) (1,373)
Other, net 673 598
------------- -------------
Net cash used in financing activities of continuing operations (49,094) (2,461)
------------- -------------
Net cash provided by (used in) discontinued operations 39,109 (1,811)
------------- -------------
Net decrease in cash and short-term investments (9,579) (7,040)
Balance at beginning of year 18,742 20,311
------------- -------------
Balance at end of period $ 9,163 $ 13,271
============= =============
Supplemental cash flow information:
Income taxes paid $ 972 $ 2,982
Interest paid $ 3,421 $ 4,138
The accompanying notes are an integral part of the financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER AND FIRST HALF ENDED
JULY 27, 2002 AND JULY 28, 2001
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 26, 2002. 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 half ended July
27, 2002 are not necessarily indicative of the results for the full
year.
Certain amounts in the prior period have been reclassified to conform
to current period presentation.
For purposes of the Consolidated Statements of Cash Flows, the
Company considers short-term, highly liquid investments which are
readily convertible into cash, as cash equivalents.
Note 2. Comprehensive (Loss) Income
------------------------------------
Comprehensive (loss) income, consisting of net (loss) income and
foreign currency translation adjustments, totaled $(2,102,000) and
$917,000 for the quarters ended July 27, 2002 and July 28, 2001,
respectively; and $(4,256,000) and $2,290,000 for the six months
ended July 27, 2002 and July 28, 2001, respectively.
Note 3. Goodwill and Other Intangible Assets
---------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets." Under SFAS No. 142, goodwill is no
longer amortized effective with the Company's adoption date of
January 27, 2002. Additionally, any goodwill recognized from a
business combination completed after June 30, 2001 will not be
amortized. Instead, goodwill will be tested for impairment as of the
date of adoption and at least annually thereafter using a fair-value
based analysis.
The Company has completed the initial impairment test of goodwill,
and there was no impairment upon adoption of SFAS No. 142. As of July
27, 2002, the carrying amount of goodwill allocated to the Textile
Services and Life Retail Stores segments was $3,465,000 and $791,000,
respectively.
Following is a reconciliation of reported income from continuing
operations before extraordinary item and net income (loss), including
related earnings (loss) per share, to
5
adjusted amounts excluding goodwill amortization (dollars in thousands,
except per share amounts):
Second Quarter Ended First Half Ended
------------------------- --------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income from continuing operations before
extraordinary item:
As reported $ 3,268 $ 687 $ 5,561 $ 2,086
Goodwill amortization, net of taxes - 70 - 146
---------- ---------- ---------- ----------
As adjusted $ 3,268 $ 757 $ 5,561 $ 2,232
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.38 $ 0.08 $ 0.64 $ 0.24
As adjusted 0.38 0.09 0.64 0.26
Diluted earnings per share:
As reported $ 0.37 $ 0.08 $ 0.63 $ 0.24
As adjusted 0.37 0.09 0.63 0.26
Net (loss) income:
As reported $ (2,102) $ 895 $ (4,256) $ 2,344
Goodwill amortization, net of taxes - 72 - 156
---------- ---------- ---------- ----------
As adjusted $ (2,102) $ 967 $ (4,256) $ 2,500
========== ========== ========== ==========
Basic earnings (loss) per share:
As reported $ (0.24) $ 0.10 $ (0.49) $ 0.27
As adjusted (0.24) 0.11 (0.49) 0.29
Diluted earnings (loss) per share:
As reported $ (0.24) $ 0.10 $ (0.49) $ 0.27
As adjusted (0.24) 0.11 (0.49) 0.29
During the second quarter ended July 27, 2002, there were no
material acquisitions of other acquired assets, and no material
changes in the carrying amount of goodwill. Other acquired assets
consisted of the following (dollars in thousands):
July 27, 2002 January 26, 2002
--------------------------------------------------------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
--------------------------------------------------------------------------------------
Customer contracts $4,345 $(4,275) $ 70 $4,599 $(4,074) $ 525
Non-compete covenants 2,590 (1,784) 806 2,590 (1,562) 1,028
--------------------------------------------------------------------------------------
Other acquired assets $6,935 $(6,059) $876 $7,189 $(5,636) $1,553
--------------------------------------------------------------------------------------
6
Other acquired assets are scheduled to be fully amortized by fiscal
year 2007 with corresponding annual amortization expense estimated
for each fiscal year as follows (dollars in thousands):
2003 $619
2004 318
2005 185
2006 101
2007 76
Note 4. Extraordinary Item
---------------------------
During the second quarter of this fiscal year, the Company incurred a
loss on early extinguishment of debt of $6,783,000 ($4,409,000 net of
tax). 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, the loss has been treated as an
extraordinary item. Under recently issued SFAS No. 145, effective
next fiscal year, the loss on early extinguishment of debt will not
be treated as an extraordinary item, and accordingly, results will be
restated at that time to reflect this change in accounting treatment.
Note 5. Discontinued Operations
--------------------------------
The consolidated balance sheets as of July 27, 2002 and January 26, 2002
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. The differences between these
estimates as of July 27, 2002 and January 26, 2002 resulted in the
recording of an after-tax loss on disposal of $4,447,000 in the first
quarter and $961,000 in the second quarter. 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 realization of total proceeds from the sale of assets,
primarily inventory and accounts receivable, is subject to subsequent
sale and collection activities, respectively, of the buyers. These
amounts are included in the net assets of the discontinued segment at
their estimated net realizable values.
Note 6. Restructuring Activities
---------------------------------
In the second quarter of fiscal 2003, the Company closed an
additional two underperforming Life Retail stores, bringing the total
stores closed in the first half to 22 of the 27 stores included in
the plan of restructuring. A total of $329,000 and $1,464,000 was
charged to the restructuring reserve and related asset valuation
allowances in the second quarter and first half, respectively. The
total first half charge of $1,464,000 represents $529,000 to write
off net book value of assets in closed stores, $480,000 to dispose of
inventory and $455,000 for lease termination costs. As of July 27,
2002, the restructuring reserve and related asset valuation
allowances totaled $2,716,000.
Note 7. Business Segment Information
-------------------------------------
The Company has operated principally in three industry segments:
Textile Services, Manufacturing and Marketing, and Retail Stores. For
fiscal years 2003 and 2002, Manufacturing and Marketing is being
treated as a discontinued operation. Textile Services provides textile
rental, laundry and linen management services to healthcare
institutions. Life Retail
7
Stores operates a nationwide chain of specialty uniform and shoe
stores, together with a fully-integrated catalogue and e-commerce
operation, selling to healthcare professionals. All of the Company's
services of its continuing business segments are provided in the
United States. Summary data about each of the Company's continuing
business segments for the second quarter and first half ended July 27,
2002 and July 28, 2001 appears below (dollars in thousands):
Second Quarter Ended First Half Ended
------------------------- --------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Combined sales and revenues:
Textile Services $ 66,795 $ 64,585 $ 135,176 $ 129,870
Retail Sales 21,731 20,774 46,607 44,676
---------- ---------- ---------- ----------
$ 88,526 $ 85,359 $ 181,783 $ 174,546
========== ========== ========== ==========
Income from continuing operations pretax:
Textile Services $ 6,478 $ 4,831 $ 12,362 $ 9,571
Retail Sales 151 (712) 852 (773)
Interest, corporate expenses and other, net (1,960) (3,364) (5,018) (6,506)
---------- ---------- ---------- ----------
$ 4,669 $ 755 $ 8,196 $ 2,292
========== ========== ========== ==========
Depreciation and amortization:
Textile Services $ 3,322 $ 2,425 $ 5,621 $ 4,782
Retail Sales 580 661 1,142 1,331
Corporate 160 203 242 413
---------- ---------- ---------- ----------
$ 4,062 $ 3,289 $ 7,005 $ 6,526
========== ========== ========== ==========
Note 8. Earnings (Loss) Per Share
----------------------------------
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of Common Stock
outstanding during the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number
of Common and Common equivalent shares outstanding.
The following table reconciles weighted average shares outstanding
to amounts used to calculate basic and diluted earnings (loss) per
share for the second quarter and first half ended July 27, 2002 and
July 28, 2001 (shares in thousands):
Second Quarter Ended First Half Ended
------------------------- --------------------------
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares:
Average shares outstanding 8,654 8,602 8,635 8,587
Effect of dilutive securities - option shares 151 114 135 109
---------- ---------- ---------- ----------
Average shares outstanding, adjusted for
dilutive effects 8,805 8,716 8,770 8,696
========== ========== ========== ==========
8
Note 9. New Accounting Pronouncements
--------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses the recognition and measurement of certain costs associated
with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company has
not determined the impact, if any, of SFAS No. 146 on financial
condition and results of operations for fiscal 2003 upon adoption.
Note 10. Subsequent Events
---------------------------
As discussed in Item 3 below, the Company entered into an interest-rate
swap agreement with one of its lenders effective September 9, 2002. The
swap fixes the interest rate at 4.83 percent on $10,000,000 of the
outstanding debt under the line of credit until maturity on May 30,
2007. The Company has not determined the impact, if any, on financial
condition and results of operations for fiscal 2003 of accounting for
the interest-rate swap as a derivative instrument in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST HALF ENDED JULY 27, 2002
COMPARED WITH
SECOND QUARTER AND FIRST HALF ENDED JULY 28, 2001
Analysis of Operations
----------------------
Second quarter and first half combined sales and revenues from continuing
operations increased 3.7 percent and 4.1 percent, respectively, over the
comparable prior year periods. The Company earned $.38 per share ($.37
diluted) from continuing operations before extraordinary item in the second
quarter, representing a 375.0 percent increase over the $.08 earned in last
year's second quarter. As with the first quarter this year, both of the
Company's continuing business segments, Textile Services and Life Retail
Stores, posted top-line growth as well as operating earnings increases in
the quarter. First half earnings per share from continuing operations before
extraordinary item were $.64 ($.63 diluted) compared to $.24 a year ago, an
increase of 166.7 percent.
As discussed in Note 4, the Company incurred an extraordinary loss of
$4,409,000 net of tax in the second quarter this year as a result of a
prepayment penalty paid in connection with refinancing the Company's debt.
Including this extraordinary loss of $.51 per share ($.50 diluted), results
of continuing operations were a loss of $.13 per share in the second quarter
and income of $.13 per share in the first half.
In the second quarter this year, an additional after-tax loss of $961,000
($.11 per share) on the disposal of the discontinued Manufacturing and
Marketing segment was recorded in discontinued operations to reflect
differences between current and prior estimates. Discontinued operations
earned $.02 per share in last year's second quarter. Net loss after
combining continuing and discontinued operations and the extraordinary loss
was $.24 per share in the second quarter and $.49 per share in the first
half this year compared with net income per share of $.10 and $.27 in the
comparable prior year periods, respectively.
Textile Services
----------------
Revenues of the Textile Services segment increased 3.4 percent in the second
quarter and were up 4.1 percent for the first half of the year on the
continued strength of net new business additions. Operating earnings rose
34.1 percent in the quarter and 29.2 percent in the first half due to the
revenue increase combined with good control over linen expense and
production expenses, including labor and utilities. Gross margin of 21.0
percent for the quarter exceeded the 17.9 percent margin of the prior year's
second quarter. During the second quarter, the Textile Services segment sold
its underperforming Denver, Colorado plant, which reduced revenues by
approximately $600,000 but resulted in a gain on the sale of $474,000.
Life Retail Stores
------------------
Second quarter sales at Life Retail Stores increased 4.6 percent on the
strength of a same-store sales increase of 6.7 percent following a
same-store sales increase of 2.5 percent in the first quarter and compared
to a 6.2 percent same-store sales decrease in last year's second quarter.
The sales increase was achieved despite the loss of approximately $1,200,000
in sales due to
10
having 23 fewer stores in operation compared to last year. For the first
half of the year, sales were up 4.3 percent resulting from a same-store
sales gain of 4.3 percent versus a decline of 2.1 percent in the same period
last year. Catalogue and e-commerce sales continue to improve over prior
year levels, with increases of 63.2 percent to $1,116,000 in the second
quarter and 104.2 percent to $2,587,000 in the first half. The segment's
gross margin of 53.4 percent in the quarter and 52.4 percent in the half
improved slightly from 53.2 percent and 52.2 percent in last year's quarter
and half, respectively. Primarily as a result of the sales increases and the
closing of underperforming stores, operating earnings of this segment
improved to $151,000 in the second quarter and $852,000 in the first half
compared with operating losses of $712,000 and $773,000 in the second
quarter and first half last year, respectively.
Operating Expenses and Other
----------------------------
Selling, general and administrative expenses increased 11.2 percent in the
second quarter, representing 24.7 percent of combined sales and revenues
from continuing operations compared with 23.0 percent in the same period
last year. For the first half, these expenses increased 9.9 percent to
24.1 percent of combined sales and revenues from continuing operations from
22.8 percent a year ago. The increases in the second quarter and first half
are due mainly to higher incentive compensation. A $1,412,000 reduction in
interest expense in the second quarter this year ($1,897,000 decrease for
the half) reflects the much lower level of debt outstanding after the
refinancing coupled with lower interest rates. Net other income of
$1,511,000 in this year's second quarter includes the gain on the sale of
the Denver plant and $549,000 from the elimination of the intercompany
profit in inventory reserve due to the sale of the Manufacturing and
Marketing segment. The effective tax rate on income from continuing
operations of 9.0 percent in the first half last year is lower than the
32.2 percent in this year's first half due to the impact of permanent
differences on the relatively low level of income in fiscal 2002.
Discontinued Operations
-----------------------
As described in Note 5, the Company recorded an additional pretax loss on
disposal of the Manufacturing and Marketing segment of $1,479,000 in the
second quarter, bringing the year-to-date pretax loss to $8,320,000. The
first half loss on discontinued operations is in addition to the $36,734,000
pretax loss recorded in the prior year, and is primarily attributable to a
reduction in the value of the inventories of this segment realized in
closing the sales or expected to be recovered subsequently. The assets of
the segment that were not sold, primarily inventory, are expected to be
liquidated during the remainder of fiscal 2003. Although Management believes
that its estimates used to write down the assets and record the loss on
disposal of the assets as of July 27, 2002 are reasonable, there is a risk
that the actual value received upon ultimate disposition of all of the
segment's assets, including actual costs of disposal and transition, may
differ materially from these estimates. Such risks relate primarily to
realization of the estimated net realizable value of the remaining inventory
through sale activities of the buyers and the Company.
Restructuring Activities
------------------------
See Note 6 for a discussion of the Company's utilization of the
restructuring reserve and related asset valuation allowances in the second
quarter and first half of fiscal 2003. As of July 27, 2002, there was
$2,716,000 of restructuring reserve and asset valuation allowances
remaining, of which $1,809,000 is for lease termination costs that are being
negotiated for 21 Life Retail
11
stores closed or to be closed in fiscal 2003. It is Management's opinion
that the remaining restructuring reserve and related asset valuation
allowances are adequate. However, actual charges to the reserve and related
asset valuation allowances may differ significantly, which could result in
additional costs. Any additional costs would most likely result from the
Company's inability to terminate the leases of the closed stores for the
amounts reserved.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
On May 30, 2002, the Company repaid $54,375,000 of existing debt (plus a
prepayment penalty of $6,684,000 as discussed in Note 4) using proceeds from
the sale of the Manufacturing and Marketing segment and $22,500,000 of
borrowings from a new three-year $70,000,000 unsecured revolving credit
facility. The unused portion of the credit line will be utilized to fund
growth in continuing operations, including acquisitions, and for working
capital needs. The refinancing is expected to reduce future interest expense
as a result of lower debt levels and lower interest rates. At July 27, 2002,
the Company's debt was 15.0 percent of total capitalization and its current
ratio was 2.2 to 1 as compared with 33.9 percent and 1.4 to 1 as of January
26, 2002, respectively. As of July 27, 2002, the Company was in compliance
with all financial covenants contained in its debt agreements.
Cash generated by operating activities of continuing operations was
$10,664,000 in the first half excluding the extraordinary loss and
utilization of restructuring reserves. This represents a $7,431,000 increase
over last year's first half due mainly to higher earnings and better
management of accounts receivable and linens in service in the Textile
Services segment. Capital expenditures are down $760,000 in the first half
versus last year, but are expected to exceed last year's level for the
entire year. Cash flows used in financing activities of continuing
operations of $49,094,000 in the first half reflect the complete refinancing
of the Company's debt during the second quarter. Cash provided by
discontinued operations of $39,109,000 in the first half reflects the
proceeds from the liquidation of assets of the Manufacturing and Marketing
segment. Cash and short-term investments totaled $9,163,000 at July 27,
2002, down from $13,271,000 a year ago and $18,742,000 at the beginning of
the year.
Management believes that the Company's financial condition is such that
internal and external resources are sufficient and available to satisfy the
Company's requirements for debt repayment, as well as future requirements
for capital expenditures, acquisitions, dividends and working capital.
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, availability of
non-domestic image apparel contractors to manufacture and deliver at an
appropriate cost and in a timely manner, the ability to attract and retain
key personnel, actual value received on disposition of the Manufacturing and
Marketing segment significantly different than the estimated net realizable
value, actual charges to the
12
restructuring reserve and related asset valuation allowances significantly
different than the estimated charges, unusual or unexpected cash needs for
operations or capital transactions, the ability to obtain financing in
required amounts and at appropriate rates, and other factors which may be
identified in the Company's filings with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to commodity price risk related to the use of natural
gas in laundry plants of the Textile Services segment. The total cost of
natural gas in the second quarter and first half ended July 27, 2002 was
$1,887,000 and $4,434,000, respectively. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed price
contracts for approximately 70% of the segment's natural gas purchase
requirements for the remainder of fiscal 2003. A 10% increase in the cost of
natural gas not covered by these contracts would result in a reduction of
approximately $266,000 in annual pretax earnings.
The Company's exposure to interest rate risk relates primarily to its new
debt obligations entered into in the second quarter. As discussed in Item 2
above, the Company refinanced its existing debt partially by using
borrowings of $22,500,000 from a new $70,000,000 three-year revolving credit
facility. The revolving line of credit and the term loan bear interest at a
rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate plus a
margin. The margins are based on the Company's ratio of "Funded Debt" to
"EBITDA," as each is defined in the Loan Agreement. As of July 27, 2002,
there was $23,100,000 of outstanding debt under the credit facility. A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction of approximately $231,000 in annual pretax earnings.
To mitigate the exposure from variable-rate debt, the Company entered into
an interest-rate swap agreement with one of its lenders effective September
9, 2002. The swap fixes the interest rate at 4.83 percent on $10,000,000 of
the outstanding debt under the line of credit until maturity on May 30, 2007.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
At the Annual Meeting of Shareholders held on May 29, 2002, the only matter
submitted to a vote of shareholders was the election of Directors.
The following Directors were elected to the following term (or until a
successor is elected and has qualified or until his earlier death,
resignation or removal):
VOTES VOTES
NAME "FOR" "WITHHELD"
---- ----- ----------
For Term expiring at the 2005 Annual Meeting:
Charles W. Mueller.................................. 8,115,675 38,098
William A. Peck..................................... 8,099,760 54,013
The following Directors are continuing current terms expiring at the 2003
Annual Meeting: David A. Abrahamson, Alan C. Henderson, and Stephen M.
O'Hara. The following Directors are continuing current terms expiring at the
2004 Annual Meeting: Susan S. Elliott, Don W. Hubble, and Kelvin R.
Westbrook.
Brokers were permitted to vote on the election of Directors in the absence
of instructions from street-name holders; therefore broker non-votes did not
occur in this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) See Exhibit Index included herein on page 17.
(b) REPORTS ON FORM 8-K - On July 2, 2002, the Company filed a
report on Form 8-K/A as Amendment No. 1 to the Company's
reports on Form 8-K, dated April 19, 2002 and May 17, 2002 in
connection with the sale of the Manufacturing and Marketing
segment to Cintas Corporation and Medline Industries, Inc., to
provide under Item 7 a narrative description of the pro forma
financial effects of these sale transactions.
A report on Form 8-K dated August 15, 2002 was filed under Item 9
which included the Quarterly Report to Shareholders dated
August 15, 2002 (and mailed to shareholders on August 22, 2002)
as an exhibit, pursuant to Regulation FD.
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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, 2002 /s/ T. M. Armstrong
---------------------------------
T. M. Armstrong
Senior Vice President -
Finance and Administration
Chief Financial Officer
(Principal Financial Officer)
/s/ James W. Shaffer
---------------------------------
James W. Shaffer
Vice President and Treasurer
(Principal Accounting Officer)
15
CERTIFICATIONS
I, Don W. Hubble, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
Angelica Corporation;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
September 9, 2002 /s/ Don W. Hubble
---------------------------------
Don W. Hubble
Chairman, President and
Chief Executive Officer
I, T. M. Armstrong, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of
Angelica Corporation;
(2) Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
September 9, 2002 /s/ T. M. Armstrong
---------------------------------
T. M. Armstrong
Senior Vice President - Finance
& Administration and Chief
Financial Officer
16
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
*Asterisk indicates exhibits filed herewith.
**Incorporated by reference from the document listed.
3.1 Restated Articles of Incorporation of the Company, as currently in
effect. Filed as Exhibit 3.1 to the Form 10-K for the fiscal year
ended January 26, 1991**
3.2 Current By-Laws of the Company, as last amended March 27, 2001.
Filed as Exhibit 3.2 to the Form 10-K for the fiscal year ended
January 27, 2001**
4.1 Shareholder Rights Plan dated August 25, 1998. Filed as Exhibit 1
to Registration Statement on Form 8-A on August 28, 1998**
99.1 Section 906 Certifications of Chief Executive Officer and Chief
Financial Officer*
17