Exhibit 99.1
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In touch with healthcare value(SM)
Angelica Corporation
424 South Woods Mill Road
Suite 300
Angelica [Logo] Chesterfield, Missouri 63017
Tel: 314.854.3800
August 19, 2003
Dear Fellow Shareholder:
Our reported income per share for the second quarter and first half this
year were measurably better than last year -- $.34 per share ($.33 diluted)
in the quarter versus a loss from continuing operations of $.13 per share
last year, and $.60 per share in the half versus $.13 per share last year;
however, the comparisons benefited from non-recurring items in both this
year and last. Our operating earnings were lower in both business segments,
with the decline at Textile Services being expected while the significant
reduction at Life Uniform was unexpected.
Combined sales and revenues in the second quarter were $89,724,000 compared
with $88,526,000 in the same quarter last year, an increase of 1.4 percent,
with revenue gains at Textile Services more than offsetting a significant
sales decrease at Life Uniform. Net income in the second quarter of
$2,980,000 or $.34 per share ($.33 diluted) included a $1,848,000 pretax
distribution related to General American Life Insurance Company policies
which the Company owns. Without the General American distribution, second
quarter earnings would be $.19 per share. In the second quarter last year,
including losses of $1,141,000 from continuing operations and $961,000 from
discontinued operations, we had a net loss of $2,102,000 ($.24 per share).
In the form reported last year, second quarter results last year from
continuing operations before the extraordinary item were earnings of $.38
per share ($.37 diluted). (As we previously indicated, second quarter
results from last year have been restated in accordance with current
accounting rules to treat the prepayment penalty paid to lenders last year
in connection with refinancing our debt as an ordinary item rather than an
extraordinary item.)
In the first half of the year, combined sales and revenues were $182,763,000
versus $181,783,000 in the first half last year, an increase of 0.5 percent.
Net income for the half was $5,320,000 or $.60 per share, and this compares
with $1,152,000 or $.13 per share from continuing operations last year and
with a loss of $4,256,000 or $.49 per share including discontinued
operations. These first half results include the non-recurring distribution
this year and the restatement last year as discussed above.
In the second quarter, Textile Services revenues were up an impressive 6.2
percent to $70,963,000 compared with $66,795,000 in last year's second
quarter, with revenues continuing to benefit from prior increases in net new
business (defined as new business installed less lost business). Although
operating earnings decreased 15.0 percent in the quarter to $5,655,000
versus $6,651,000 last year, Textile Services continues to meet a budget
which provides for higher earnings for the full fiscal year. Earnings
comparisons in the second quarter and first half reflect much higher energy
and fuel costs, higher accruals for workers' compensation costs and a gain
on the sale of our Denver plant last year.
Textile Services continues to achieve good organic growth in its largest
market segment, acute-care hospitals. However, more healthcare is being
delivered on an outpatient basis, and this constitutes one of the reasons we
are investing heavily in sub-acute market segments, such as healthcare
clinics and nursing homes. Actions required to penetrate aggressively these
segments are front-end cost loaded, but are expected to pay dividends in the
future with improved revenue, earnings and cash flow. We are also seeing
some increased pricing pressures in the acute-care marketplace, which is
another reason for our greater emphasis on the sub-acute market, where
pricing levels are more favorable.
www.angelica.com
We are continuing to make capital investments at Textile Services. Newer
equipment is less labor intensive, decreases utility costs, lengthens linen
life and provides our customers with higher quality products. While Textile
Services should not be considered a capital intensive business, continued
reinvestment of capital is required to ensure that we maintain our
leadership position in this industry sector. Absence of routine and
consistent capital reinvestment can contribute to a decline in customer
service, increased operating costs and, potentially, business failure. This
has been proven to be the case by some of our competitors.
Our new plant in Phoenix, AZ is expected to be fully operational by
September, and our new plant in Columbia, SC is expected to come on stream
by the end of this fiscal year. These two plants will allow us to grow at a
faster rate in those two strategically targeted areas of the country and
allow our Colton, CA and Rockmart, GA plants to "back-fill" in their
geographic markets once business is transferred from those existing plants
to the two new ones.
We also are actively evaluating some acquisition opportunities, both
on-premise laundry conversions as well as freestanding competitive plants.
It should be noted that we could have made some acquisitions during the past
12 months had we chosen to be more aggressive and to compromise our
investment return standards. We recognize that overly optimistic pro-formas
for acquisitions can be encouraging, but reality ultimately prevails. We do
expect to make acquisitions in our Textile Services segment, but only when
we are convinced that our financial performance can legitimately be improved
in the long-term as well as the short-term. A fundamental principle, which
we honor, is that revenue growth must be accompanied by earnings growth at a
higher relative level. One of the purported major reasons that many
acquisitions fail is because purchase prices for those acquisitions were too
high. We don't intend to make that mistake.
Life Uniform's sales in the second quarter decreased to $18,761,000 compared
with $21,731,000 in the same period last year, a decrease of 13.7 percent.
Same-store sales continued to be negative, down 8.7 percent in the second
quarter and 8.0 percent for the first half this year. The result of the
lower sales levels was a loss of $854,000 for the second quarter compared
with earnings of $522,000 last year.
Although we are surprised by the precipitous decline in sales, we do not
believe we are losing market share. Our analyses suggest that there are a
number of reasons for the declines in Life Uniform's same-store sales, the
most significant being: weak consumer confidence, lower turnover of nurses,
reduced number of work days for nurses, a shortage of nurses and a temporary
slow-down in the use of healthcare services in general. As a part of last
year's restructuring, we also eliminated hospitality apparel products from
our stores, as these products had low gross margins and low turnover, and
this negatively affected same-store sales as well.
In response to the sharp decline in sales, we have reduced our operating
costs at Life Uniform, however not to the same relative levels as the
percentage sales decline. We invested heavily last year and this year in
management information systems, thereby experiencing increased depreciation
costs this year as a consequence. Administrative costs are higher as well
caused by integrating these new systems into place. As a result, however, we
will be better prepared to optimize operating costs once the new information
systems are fully integrated. These investments clearly will benefit Life
Uniform in the future, but are costly today. We also are continuing to
expand our catalogue and e-commerce efforts, which likewise are costly
initially and beneficial in the future.
In other actions taken in response to lower sales at Life, we are
intensifying our efforts to increase our market share in each of our four
distribution channels. We have increased the number of on-the-job shopping
events to overcome the reduction in traffic in our brick-and-mortar stores.
We also are continuing to increase our marketing and sales efforts in the
catalogue and e-commerce distribution
channels. The retail industry, including healthcare apparel, has proven to
be cyclical, and we believe that we are at the trough of one such cycle.
Enrollment in nursing schools is ramping up significantly, and healthcare
employment continues to be positive. The healthcare industry and
corresponding healthcare employment should grow more significantly in the
future as a higher percentage of our population enters the age 65-and-older
demographic group. As a consequence, demand for healthcare services should
increase in the future, and Life will benefit from that increased demand.
Cash flow continues to be very strong. In the first half of the year, cash
flow from operations exceeded $11,000,000, and even though the level of
capital expenditures increased significantly relative to the same period
last year, our debt has decreased by over $10,000,000 since the start of
this year.
Alan Henderson, the former CEO of RehabCare Group, Inc., resigned from our
Board during the second quarter. Alan retired from his position at
RehabCare, and subsequently, resigned from our Board. I want to thank Alan
publicly for his many contributions. We will be challenged to replace him
with another senior executive with strong financial experience and business
acumen.
The final slate of candidates for the CEO position at Angelica has been
interviewed by each of our Board members. We are pleased with the quality of
these candidates and feel that their interest in the position is testimony
to the fact that Angelica has a strong balance sheet and excellent corporate
culture, and to the fact that both operating segments are clearly industry
leaders. It is expected that a selection will be made early in the third
quarter. I remind you that the Board has decided to split the Chairman and
CEO roles, and I will remain as Chairman. This should allow for a seamless
transition of responsibility and further reinforce the ability of our
independent Directors to assist management in adding shareholder value.
As stated last quarter, we still expect that Textile Services will
outperform the previous year and will achieve its operating budget for the
year. That is not the case for Life Uniform, as the economy has not
strengthened, and consumer spending is still weak -- even for healthcare
apparel. As a consequence, our earnings target needs to be modified. At this
time, it appears that reported earnings for continuing operations will be
flat or slightly above last year's level of $1.27 per share ($1.25 diluted),
which excluded the prepayment penalty paid to lenders to refinance our debt.
For the longer term, we continue to believe that it is an ideal time for us
to reinvest in selected areas of our business for future revenue, earnings
and cash flow growth, and we are doing just that. Healthcare is a robust
part of our country's economy and our participation in that sector, coupled
with management's commitment to add shareholder value, should be encouraging
to you, our shareholders.
Respectfully submitted,
/s/ Don W. Hubble
Don W. Hubble
Chairman, President and Chief Executive Officer
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
Second Quarter Ended First Half Ended
--------------------- -----------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- --------- ---------
CONTINUING OPERATIONS:
Textile service revenues $ 70,963 $ 66,795 $ 142,346 $ 135,176
Net retail sales 18,761 21,731 40,417 46,607
-------- -------- --------- ---------
Combined sales and revenues 89,724 88,526 182,763 181,783
-------- -------- --------- ---------
Cost of textile services (57,095) (52,621) (114,890) (106,921)
Cost of retail goods sold (8,786) (9,746) (18,774) (21,832)
-------- -------- --------- ---------
Combined cost of textile services and goods sold (65,881) (62,367) (133,664) (128,753)
-------- -------- --------- ---------
Gross profit 23,843 26,159 49,099 53,030
Selling, general and administrative expenses (21,289) (21,536) (42,870) (43,077)
Restructuring charge reversal 180 - 310 -
Other operating (expense) income, net (138) 439 (276) 76
-------- -------- --------- ---------
Income from operations 2,596 5,062 6,263 10,029
Interest expense (155) (684) (393) (2,246)
Non-operating income 1,878 291 1,915 413
Loss on early extinguishment of debt (Note 3) - (6,783) - (6,783)
-------- -------- --------- ---------
Income (loss) from continuing operations pretax 4,319 (2,114) 7,785 1,413
Income tax (provision) benefit (Note 4) (1,339) 973 (2,465) (261)
-------- -------- --------- ---------
Income (loss) from continuing operations 2,980 (1,141) 5,320 1,152
DISCONTINUED OPERATIONS (Note 5):
Loss on disposal of discontinued segment - (1,479) - (8,320)
Income tax benefit of loss - 518 - 2,912
-------- -------- --------- ---------
Loss from discontinued operations - (961) - (5,408)
-------- -------- --------- ---------
Net income (loss) $ 2,980 $ (2,102) $ 5,320 $ (4,256)
======== ======== ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.34 $ (0.13) $ 0.60 $ 0.13
Loss from discontinued operations - (0.11) - (0.62)
-------- -------- --------- ---------
Net income (loss) $ 0.34 $ (0.24) $ 0.60 $ (0.49)
======== ======== ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.33 $ (0.13) $ 0.60 $ 0.13
Loss from discontinued operations - (0.11) - (0.62)
-------- -------- --------- ---------
Net income (loss) $ 0.33 $ (0.24) $ 0.60 $ (0.49)
======== ======== ========= =========
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
July 26, January 25,
2003 2003
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ASSETS
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Current Assets:
Cash and short-term investments $ 4,246 $ 18,166
Receivables, less reserves of $910 and $724 36,214 35,316
Inventories 11,711 13,395
Linens in service 34,102 32,520
Prepaid expenses and other current assets 2,004 5,223
Deferred income taxes 6,806 6,110
Net current assets of discontinued segment (Note 5) - 2,162
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Total Current Assets 95,083 112,892
-------- --------
Property and Equipment 191,257 178,237
Less -- reserve for depreciation 104,647 99,684
-------- --------
Total Property and Equipment 86,610 78,553
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Other:
Goodwill 4,256 4,256
Other acquired assets 1,885 2,146
Cash surrender value of life insurance 28,300 27,576
Deferred income taxes 1,210 1,405
Miscellaneous 1,157 1,456
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Total Other Assets 36,808 36,839
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Total Assets $218,501 $228,284
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 184 $ 237
Accounts payable 19,458 19,905
Accrued wages and other compensation 5,669 9,300
Other accrued liabilities 22,653 22,153
-------- --------
Total Current Liabilities 47,964 51,595
-------- --------
Long-Term Debt, less current maturities 10,401 20,574
Other Long-Term Obligations 16,239 16,455
-------- --------
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued: 9,471,538 9,472 9,472
Capital surplus 4,481 4,481
Retained earnings 140,761 137,548
Accumulated other comprehensive loss (544) (511)
Unamortized restricted stock (573) -
Common Stock in treasury, at cost: 654,494 and 741,755 (9,700) (11,330)
-------- --------
Total Shareholders' Equity 143,897 139,660
-------- --------
Total Liabilities and Shareholders' Equity $218,501 $228,284
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
First Half Ended
-------------------------------------
July 26, 2003 July 27, 2002
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Cash Flows from Operating Activities:
Income from continuing operations $ 5,320 $ 1,152
Non-cash items included in income from continuing operations:
Depreciation 5,925 6,592
Amortization 510 413
Restructuring charge reversal (310) -
Cash surrender value of life insurance (724) (735)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of 1,460 (2,149)
Other, net (706) (482)
-------- --------
Net cash provided by operating activities of continuing operations 11,475 4,791
-------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (13,982) (5,543)
Cost of businesses acquired (106) -
Disposals of businesses and property - 1,158
-------- --------
Net cash used in investing activities of continuing operations (14,088) (4,385)
-------- --------
Cash Flows from Financing Activities:
Long-term debt repayments on refinancing and revolving debt (32,226) (81,587)
Borrowings of long-term revolving debt 22,000 33,200
Dividends paid (1,761) (1,380)
Treasury stock reissued 567 673
-------- --------
Net cash used in financing activities of continuing operations (11,420) (49,094)
-------- --------
Net cash provided by discontinued operations (Note 5) 113 39,109
-------- --------
Net decrease in cash and short-term investments (13,920) (9,579)
Balance at beginning of year 18,166 18,742
-------- --------
Balance at end of period $ 4,246 $ 9,163
======== ========
Supplemental cash flow information:
Income taxes paid $ 133 $ 972
Interest paid $ 252 $ 3,421
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Angelica Corporation and Subsidiaries
Unaudited
Note 1. Basis of Presentation
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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 to Shareholders for the fiscal year
ended January 25, 2003. It is Management's opinion that all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results during the interim periods have been included. All
significant intercompany accounts and transactions have been eliminated. The
results of operations and cash flows for the first half ended July 26, 2003
are not necessarily indicative of the results that will be achieved for the
full year.
Certain amounts in the prior periods have been reclassified to conform to
current period presentation.
Note 2. Comprehensive Income (Loss)
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Comprehensive income (loss), consisting of net income (loss) and changes in
the fair value of derivatives used for interest rate risk management, net of
taxes, totaled $2,990,000 and $(2,102,000) for the quarters ended July 26,
2003 and July 27, 2002, respectively; and $5,287,000 and $(4,256,000) for
the first half ended July 26, 2003 and July 27, 2002, respectively.
Note 3. Loss on Early Extinguishment of Debt
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In the first quarter ended April 26, 2003, the Company adopted SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." Among other things, this
statement rescinds the extraordinary treatment applied to gains and losses
from extinguishment of debt pursuant to SFAS No. 4. During the second
quarter of fiscal 2003, the Company incurred a pretax loss of $6,783,000 on
early extinguishment of debt that was treated as an extraordinary item under
SFAS No. 4. In accordance with SFAS No. 145, the loss is treated as an
ordinary rather than extraordinary item, and accordingly, results for the
second quarter of fiscal 2003 have been restated to reflect this change in
accounting treatment.
Note 4. Income Taxes
- ---------------------
Taxes on income from continuing operations have been provided for at an
effective tax rate of 31.0 percent and 31.7 percent in the second quarter
and first half of fiscal 2004, respectively, based upon the Company's
estimated effective tax rate for the year. The effective tax rate on income
(loss) from continuing operations of 46.0 percent and 18.5 percent in the
second quarter and first half of fiscal 2003, respectively, is due to the
effect of the restatement of the extraordinary loss (see Note 3) which was
taxed as a separate component of income (loss) from continuing operations in
fiscal 2003 in accordance with SFAS No. 109.
Note 5. Discontinued Operations
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In January 2002, the Company announced plans to dispose of its Manufacturing
and Marketing business. Consequently, the Manufacturing and Marketing
segment was accounted for as a discontinued operation as of January 26,
2002, and a loss on disposal was recorded to write down the net assets of
the segment to their estimated net realizable value, including estimates of
the costs of disposal and transition. The differences between these
estimates as of July 27, 2002 compared with April 27, 2002 and January 26,
2002 resulted in the recording of an additional loss on disposal of $961,000
and $5,408,000 net of tax in the second quarter and first half of fiscal
2003, respectively. In fiscal 2003, the sale and discontinuation of the
Manufacturing and Marketing segment was completed and substantially all of
the net assets of the segment, primarily accounts receivable and inventory,
were disposed of. During the first half of fiscal 2004, the remaining net
current assets of the discontinued segment were disposed of for amounts
approximating their carrying values.
BUSINESS SEGMENT INFORMATION
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
Second Quarter Ended First Half Ended
-------------------------- --------------------------
July 26, July 27, July 26, July 27,
2003 2002 2003 2002
-------- -------- -------- --------
Combined sales and revenues:
Textile Services $ 70,963 $ 66,795 $ 142,346 $ 135,176
Life Uniform 18,761 21,731 40,417 46,607
-------- -------- --------- ---------
$ 89,724 $ 88,526 $ 182,763 $ 181,783
======== ======== ========= =========
Income from operations:
Textile Services $ 5,655 $ 6,651 $ 11,113 $ 12,535
Life Uniform (854) 522 (719) 1,223
Corporate expense (2,205) (2,111) (4,131) (3,729)
-------- -------- --------- ---------
$ 2,596 $ 5,062 $ 6,263 $ 10,029
======== ======== ========= =========
Depreciation and amortization:
Textile Services $ 2,348 $ 3,322 $ 4,785 $ 5,621
Life Uniform 673 580 1,331 1,142
Corporate 192 160 319 242
-------- -------- --------- ---------
$ 3,213 $ 4,062 $ 6,435 $ 7,005
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SUMMARY FINANCIAL POSITION DATA
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except ratios, shares and per share amounts)
July 26, January 25,
2003 2003
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Working capital $ 47,119 $ 61,297
Current ratio 2.0 to 1 2.2 to 1
Long-term debt, including current maturities $ 10,585 $ 20,811
Shareholders' equity $ 143,897 $ 139,660
Percent total debt to debt and equity 6.9% 13.0%
Book value per common share $ 16.32 $ 16.00
Common shares outstanding 8,817,044 8,729,783
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Forward-Looking Statements:
Any forward-looking statements made in this document reflect the Company's
current views with respect to future events and financial performance and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties that may cause actual results to differ materially from
those set forth in these statements. These potential risks and uncertainties
include, but are not limited to, competitive and general economic
conditions, the ability to retain current customers and to add new customers
in competitive market environments, competitive pricing in the marketplace,
delays in the shipment of orders, availability of labor at appropriate
rates, availability and cost of energy and water supplies, the cost of
workers' compensation and healthcare benefits, the ability to attract and
retain key personnel, actual charges to the restructuring reserve
significantly different from estimated charges, 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, and other factors which may be identified
in the Company's filings with the Securities and Exchange Commission.
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