| ANGELICA CORP /NEW/ Item 1A Risk Factors 8 Item 1A Risk Factors Some matters discussed in this Form 10-K or in other documents, a portion of which are incorporated herein by reference, constitute forward-looking statements and are based upon management’s expectations and beliefs 8 _________________________________________________________________ concerning future events impacting us |
| These statements are subject to risks and uncertainties that may cause our actual results to differ materially from those set forth in these statements |
| The following factors, as well as factors described elsewhere in this Form 10-K, or in other SEC filings, could cause our future results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf |
| Such factors are described in accordance with the provisions of the Private Securities Litigation Reform Act of 1995, which encourages companies to disclose such factors |
| Our acquisition strategy involves risks relating to integrating acquired businesses |
| Our growth plan includes the strategic acquisition of selected business facilities, customer contracts and other assets |
| For example, in fiscal 2005 we acquired Royal Institutional Services, Inc |
| and its affiliate, The Surgi-Pack Corporation, as well as a smaller acquisition of customer contracts from Bob White Services, Inc |
| Our inability to integrate acquired companies, business facilities, customer contracts or other assets successfully may render us less able to obtain the expected returns from our acquisitions and harm our results of operations and financial condition |
| The process of integrating acquired operations into our existing operations may result in operating, contract and technology difficulties, including, but not limited to, the following: * potential loss of key employees of acquired businesses; * problems assimilating the purchased technologies, products or business operations; * problems maintaining uniform standards, procedures, controls and policies; * unanticipated costs associated with the transactions, including accounting charges and transaction expenses; * diversion of management’s attention from our core business; and * adverse effects on existing business relationships with suppliers and customers |
| Also, while we have structured most of our recent acquisitions as asset purchases, we may fail to discover liabilities of any acquired companies for which we may be responsible as a successor owner or operator in spite of any investigation we make prior to the acquisition |
| Such difficulties may divert significant financial, operational and managerial resources from our existing operations, and make it more difficult to achieve our operating and strategic objectives |
| The diversion of management attention, particularly in a difficult operating environment, may affect our results |
| A key component of our growth strategy relies on our ability to continue to identify and acquire suitable acquisition candidates |
| To the extent we are unable to continue to identify and acquire such candidates, our growth will slow |
| We may not be able to identify suitable future acquisition candidates or acquire them on commercially reasonable terms or at all |
| In addition, we may not be able to obtain necessary financing for acquisitions |
| Such financing may be restricted by the terms of our debt agreements or it may be more expensive than our current debt |
| Moreover, although our current debt provides for borrowing up to 4dtta0 times debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), our Board has established a long-term target debt to EBITDA of 3dtta0X When debt exceeds this level, as it has the second half of fiscal 2005, the Board may postpone acquisition activity |
| The amount of such debt financing for acquisitions may be significant and the terms of such debt instruments may be more restrictive than our current covenants |
| In addition, competitors for acquisitions, some of which may have substantially greater financial resources at their disposal, may in crease the cost of acquisitions to us or make it impossible for us to make acquisitions within our strategic guidelines, if at all |
| If we do make additional acquisitions, any benefits anticipated from our acquisition strategy may not actually be realized |
| 9 _________________________________________________________________ Our contracts may not contain energy surcharge clauses sufficient to cover energy cost increases |
| If we are not able to recoup some or all of the utility cost increases we may experience, our results of operations may suffer |
| Our operations utilize a large amount of natural gas, electricity, and gasoline and diesel fuel, and our energy purchases vary as to price, payment terms, quantities and timing |
| Our energy costs are also affected by various market factors including the availability of supplies of particular forms of energy, energy prices and local and national regulatory decisions |
| The energy surcharge clauses in our contracts may not permit us to increase our prices to keep pace with energy cost increases we may experience |
| For example, excluding acquisitions, we were only able to pass on to our customers less than 25prca of the energy cost increases we incurred in fiscal 2005, from fiscal 2004 |
| While we have instituted operational hedging models that seek to capture pricing opportunities in the energy markets and lock in natural gas prices as contracts are signed, we may not be fully protected against substantial changes in the price or availability of energy sources and we may not be able to offset these increases with higher prices charged to our customers |
| Our operations also use a large amount of water which we purchase, along with sewer service for the wastewater, from local water and sewer utilities that are often municipally owned |
| We are dependent upon these water and sewer utilities to provide uninterrupted water and sewer services for our continued operations and we are subject to the possibility of significantly increased costs for water and sewer services to the extent that these entities face financial difficulties, whether as a result of budget cuts or otherwise |
| We could also face higher costs if there are maintenance or capacity constraint issues within the municipal systems by which we are served |
| The length and pricing terms of our customer contracts may constrain our ability to recover inflationary costs and to make a profit |
| Our customer contracts generally range from three to five years in length |
| Most of our contracts have pricing escalators tied to inflation indexes, but the total amount by which our prices may be increased are generally capped on an annual and/or aggregate basis |
| In addition, some of our contracts only permit us to raise prices once a year, so inflation may rise throughout the course of a year and we may not be able to raise our prices until the end of that year |
| The terms of these contracts require us to guarantee the price of the services we provide and assume the risk that our costs to perform services and provide products will be greater than anticipated |
| Any cost increase to us in performing these contracts may expose us to diminished operating margins or losses |
| These costs may be affected by a variety of factors, some of which may be beyond our control |
| We face considerable pricing pressures from our customers, particularly from large national, regional or local healthcare organizations and group purchasing organizations |
| If we are not able to maintain or improve our operating margins due to these pressures or otherwise, our results of operations may be harmed |
| We face significant pricing pressures arising from our customers’ desire to decrease their operating costs, from consolidation in the healthcare industry, and from other competitors operating in our targeted markets |
| Pricing pressure is particularly pronounced when we compete for new customers and when we negotiate for an extension of the term of an agreement with an existing customer |
| Some of our customers are part of large national, regional or local healthcare organizations that require their affiliates to purchase services from a limited number of preferred vendors or through a group purchasing organization |
| These trends have increased pricing pressures on our contracts with these customers |
| Pricing pressures may also be more pronounced during periods of economic uncertainty |
| Accordingly, improvement, or even maintenance of our operating margins depends on our ability to continually improve our capacity utilization and reduce our operating costs and/or pr ovide delightful customer service to reduce price sensitivity |
| If we are not able to achieve sufficient improvements in efficiency to adequately compensate for pressures on our pricing or reduce price sensitivity via delightful service, our results of operations will be harmed |
| 10 _________________________________________________________________ We are primarily self-insured with respect to health insurance and workers’ compensation |
| If our reserves for health insurance and workers’ compensation claims and other expenses are inadequate, we may incur additional charges if the actual costs of these claims exceed the amounts estimated |
| Because of high deductibles on our insurance policies, we are effectively self-insured with respect to this coverage |
| In our financial statements, we maintain a reserve for health insurance and workers’ compensation claims using actuarial estimates from third-party consultants and historical data for payment patterns, cost trends and other relevant factors |
| We evaluate the accrual rates for our reserves regularly throughout the year and we have in the past made adjustments as needed |
| Due to the uncertainties inherent in the actuarial process, the amount reserved may differ from actual claim amounts and we may be required to further adjust our reserves in the future to reflect the actual cost of claims and related expenses |
| If the actual cost of such claims and related expenses exceeds the amounts estimated, we may be required to record additional charges for th ese claims and/or additional reserves may be required |
| Our business requires significant, periodic capital investment in facilities, machinery and other equipment; however, because our future capital needs are uncertain, we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all |
| Our capital requirements depend on many factors, including: * the age and condition of existing facilities and equipment; * expenses related to investments in new facilities, equipment and technology; * the need to invest in labor-saving and energy-efficient equipment; * the number and timing of acquisitions and other strategic transactions; and * the costs associated with our expansion, if any |
| We believe that our cash flows from operations, borrowing capacity under our credit facilities and loans will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future; however, these funds may not be sufficient to fund all of our activities in the future |
| As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all |
| If we cannot raise funds on acceptable terms, we may not be able to execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements, which may harm our business, results of operations, and financial condition |
| Our operating costs may increase or work stoppages may occur if we are unable to reach initial or renewal collective bargaining agreements with the unions representing our employees |
| Approximately 80prca of our employees, principally at our service centers, are represented by unions |
| Collective bargaining agreements with unions representing our employees are typically three years in duration and have staggered expiration dates over consecutive years |
| In order to minimize the potential effect of coordinated or concerted work stoppages, the settlement with UNITE HERE expressly prohibits employees at service centers with collective bargaining agreements from engaging in sympathy strikes to support employees at service centers without collective bargaining agreements in effect |
| The settlement further prospectively restricts the number of contracts that can expire during any given month and within the same quarter |
| Two existing collective bargaining agreements that cover six of our service centers in California expire on June 4, 2006 |
| In addition, the Colton, California service center has an open contract |
| In the event that some or all of the employees at these service centers participate in a work stoppage, there could be a material adverse impact on our results of operations and financial condition |
| 11 _________________________________________________________________ Any work interruptions or stoppages may significantly harm our business, results of operations, and financial condition and may have a material impact on our financial results |
| In addition, a small number of customers or potential customers have chosen not to do business with us as a result of their concerns related to potential or perceived problems that they attribute to having a predominantly unionized workforce |
| An insurance company with which we have previously done business is in financial distress |
| If our insurer does not fulfill their obligations, we may experience significant losses |
| While several claims have been resolved, there are still a number outstanding at the present time |
| Many insurance carriers are experiencing unfavorable claims experience and loss of their own reinsurance coverage |
| As a result, many of these carriers are in substantially weakened financial condition, including Kemper |
| In the event that Kemper files for protection with the bankruptcy court, any outstanding claims previously sold to Kemper, in addition to deposits that have been made to Kemper on claims since fiscal 1999 and amounts in excess of the deductible for claims with Kemper since fiscal 1999 may become our responsibility to the extent not covered by state guaranty associations and may have a detrimental effect on our results |
| If we fail to maintain an effective system of internal control or discover material weaknesses in our internal control over financial reporting, we may not be able to report our financial results accurately or detect fraud, which may harm our business and the trading price of our stock |
| An effective system of internal controls is necessary for us to produce reliable financial reports and is important in our effort to prevent financial fraud |
| We are required to periodically evaluate the effectiveness of the design and operation of our internal controls |
| These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable |
| While we evaluate the effectiveness of our systems of internal control on a regular basis, these systems may require modification from time to time in the future to remain effective |
| There are inherent limitations on the effectiveness of internal controls including collusion, management override, and breakdowns in human judgment |
| If we fail to maintain an effective system of internal controls or if we or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and that may harm our financial condition or results of operations and result in loss of investor confidence or a decline in our stock price |
| Our credit facilities require that we meet specified levels of financial performance |
| In the event we fail either to meet these requirements or have them waived, we may be subject to penalties and we may be forced to seek additional financing |
| Our credit facilities contain strict financial covenants |
| Our lenders may not consent to amendments to these covenants on commercially reasonable terms in the future if we require such relief |
| In the event that we do not comply with the covenants and our lenders do not consent to such non-compliance, we will be in default of our agreement, which may subject us to penalty rates of interest and acceleration of the maturity of the outstanding balances |
| In addition, our credit facilities are secured by certain real estate, equipment, inventory and accounts receivable |
| A significant decline in the value of collateralized assets could put us in default of our credit agreement |
| In the event of a default under our credit facilities, we may be required to seek additional sources of capital to satisfy our liquidity needs |
| These additional sources of financing may not be available on commercially reasonable terms or at all |
| Even if they are available, these financings may result in dilution to our existing shareholders |
| 12 _________________________________________________________________ A significant portion of our revenues is derived from operations in a limited number of markets |
| Recessions, spikes in costs or natural disasters in these markets may harm our operations |
| A significant portion of our revenues is derived from our operations in a limited number of states and regions |
| Revenues generated from operations in California and Arizona accounted for approximately 40prca of our revenues from continuing operations in fiscal 2005 |
| Any economic weakness in these or our other key markets may harm our business |
| Our business uses a significant amount of gasoline, diesel, natural gas, electricity and water |
| We may not be able to pass along to our customers all of the increased energy costs we may experience in the event of a regional energy crisis which may harm the results of our business |
| In addition, workers’ compensation costs in California are significantly higher than they are in other states and, as a result, account for a disproportionately large amount of our workers’ compensation expense |
| In the past, legislation has been introduced into the California state legislature that would have modified the current rules governing workers’ compensation insurance in that state, if it had been enacted |
| The implementation of this or other similar legislation in California or our other large markets in the future may significantly increase our costs of doing business and harm our results of operations |
| Severe weather conditions or other natural disasters in our primary markets, such as earthquakes in California or hurricanes in Florida or Texas, may cause significant disruptions to our operations, and result in increased costs and liabilities and decreased revenues, which may harm our business, operating results, financial condition and liquidity |
| We have, in the past, taken advantage of our clustering strategy to allow our customers to be serviced by our other facilities in the area in the event of service disruptions at a particular service center, but we may not be able to do so in the future if a major disaster struck a number of our facilities within a cluster |
| Any increase in the cost of linens and textiles which is not recovered may affect our operating results |
| Significant increases in the price of cotton may result in higher linen costs and, consequently, have an adverse effect on our earnings if we are not successful in offsetting such increases, either through cost reduction efforts or adjustment in prices for our services |
| We may face risks resulting from purchasing linens and other textiles from international sources |
| We purchase most of the linens and other textiles rented to customers from foreign sources, primarily Pakistan and Cambodia, either directly from the manufacturer or through distributors |
| Sourcing products from foreign manufacturers presents several risks, including volatility in gross domestic production; credit risk; civil disturbances; unpredictable political climate; economic and governmental instability; acts of war; changes in regulatory requirements; nationalization and expropriation of private assets; significant fluctuations in interest rates, currency exchange rates and inflation; imposition of additional taxes or other payments by foreign governments or agencies; increases in fuel and other shipping costs; changes in export or import controls and exchange controls and other adverse actions or restrictions imposed by foreign governments |
| Any of these events may make it significantly more costly or more difficult to obtain the linens we require and may ha rm our financial condition and results of operations |
| A decrease in the price of natural gas below the fixed prices we have contracted for may negatively affect our operating results |
| We have entered into natural gas futures contracts to fix the price for a portion of our future purchases of natural gas and reduce our exposure to volatility in the cost of natural gas consumed by our service centers due to fluctuations in the price on the New York Mercantile Exchange (NYMEX) |
| Long term reductions in natural gas prices meaningfully below our contracted price levels may negatively impact our operating results and/or our competitive position |
| 13 _________________________________________________________________ An increase in interest rates may negatively impact our operating results |
| As of January 28, 2006, dlra75dtta0 million of the dlra85dtta0 million outstanding under our credit facility was subject to a variable interest rate |
| Of the dlra29dtta2 million in life insurance policy loans outstanding as of January 28, 2006, a total of dlra23dtta3 million of these loans bore interest at variable rates |
| An increase in interest rates may negatively impact our financial condition and results of operations |
| If we are unable to reduce costs as a result of implementing best practice initiatives company-wide, we will not recover the consulting expenses incurred as part of this implementation |
| As part of our fiscal 2005 reorganization, we launched a best practices improvement project with a leading operations consulting group |
| During fiscal years 2005 and 2006, this project, which was designed to implement best practices and reduce unnecessary costs in our service centers, is expected to cost approximately dlra2dtta0 million |
| If we are unable to achieve the operating efficiencies and cost reductions anticipated we may not recover the project expenses |
| We are dependent on the proper functioning and availability of our information systems, many of which we are currently upgrading |
| We are dependent on the proper functioning and availability of our information systems including security of data, firewalls and virus protection in operating our business |
| Our information systems are protected through physical and software safeguards |
| However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events |
| Any interruption, impairment or loss of data integrity or malfunction of these systems may severely hamper our business and may require that we commit significant additional capital and management resources to rectify the problem |
| Our business interruption insurance may be inadequate to protect us in the event of a catastrophe |
| Furthermore, we are currently undertaking a substantial upgrade to our information systems |
| If we experience unforeseen difficulties or delays in connection with this implementation our business and results of operations may be harmed |
| We face intense competition in our business |
| If we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues and profitability may decline |
| The market for our linen management services is highly competitive |
| The principal elements of competition include quality, service, reliability and price |
| Our competitors range from divisions of large multi-national organizations, namely Sodexho Inc |
| (a subsidiary of Sodexho Alliance SA) and Crothall Services Group (a subsidiary of Compass Group, PLC), to regional midsize firms |
| Also, we have many small independently-owned competitors, including individual hospital on-premise laundries and hospital cooperatives |
| Our competitors Sodexho and Crothall Services Group have significantly more financial resources, larger professional staffs, greater brand recognition and broader service offerings than us |
| In addition, there are other large outsource services providers with significant resources who do not currently serve the healthcare linens services market but may enter this market in the future |
| These competitors may devote substantial resources to the development and marketing (including discounting) of products and services that compete with those offered by us |
| Significant price competition may seriously harm our revenues, operating margins and market share |
| Our continued success depends on our ability to attract new customers, retain our current customers and renew our existing customer contracts |
| Our ability to do so generally depends on a variety of factors, including quality, service, reliability and price, as well as our ability to market our services effectively and differentiate ourselves from our competitors |
| Approximately 30prca of our customer contracts come up for renewal each year |
| We may not be able to renew existing customer contracts at the same or more favorable rates or terms and our current customers may terminate or not renew contracts with us |
| The failure to renew a significant number of our existing contracts may harm our business and results of operations |
| In addition, many companies in the healthcare industry are seeking to consolidate their outsourced services with one or two vendors, instead of using multiple vendors |
| Since we 14 _________________________________________________________________ focus primarily on healthcare linen management services, we may lose customers to vendors who provide multiple outsourced services, and our results of operations may be harmed, if this trend continues |
| We are subject to numerous federal, state, and local regulatory requirements involving employees, including those covering employment, wage and hour and occupational health and safety issues |
| Any changes to existing regulations or new laws may result in significant, unanticipated costs |
| Our facilities are, and any operations we may acquire in the future will be, subject to various federal, state, and local regulatory requirements, including employment rules; wage and hour laws (including minimum wage, workers’ compensation and unemployment insurance); and occupational health and safety regulations |
| Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants |
| We believe that our facilities are currently in substantial compliance with all applicable regulatory requirements, although future expenditures may be necessary to comply with changes in these laws and to otherwise improve or enhance our policies and procedures pursuant to those applicable regulatory requirements |
| Environmental issues, whether arising from our current operations or from the facilities we have recently acquired, or may in the future acquire, may subject us to significant liability and limit our ability to grow |
| Our facilities are subject to various federal, state and local laws and regulations, including the federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes and regulations |
| In particular, we use and must dispose of wastewater containing detergent and other residues from the laundering of linens and other products through publicly operated treatment works or sewer systems and are subject to volume and chemical discharge limits and penalties and fines for non-compliance |
| Under environmental laws, as an owner, lessee or operator of our facilities we may be liable for the costs of removal or remediation of hazardous or toxic substances located on or in or emanating from our owned, leased or operated property, as well as related costs of investigation and property damage |
| Liability may be imposed upon us without regard to whether we knew of or were re sponsible for the presence of hazardous or toxic substances |
| Locations which we own, lease or operate or which we may acquire, lease or operate in the future may have been operated in a manner that may not be in compliance with environmental laws and regulations and these future uses or conditions may result in the imposition of liability upon us under such laws or expose us to third party actions such as tort suits |
| In addition, such regulations may limit our ability to identify suitable sites for new or expanded service centers |
| In connection with our operations, hazardous or toxic substances may migrate from properties on which we operate or which were operated by companies we acquired to other properties |
| We may be subject to significant liabilities to the extent that human health is damaged or the value of such properties is diminished by such migration |
| We now operate two new facilities from acquisitions in fiscal 2005 and we may face similar or more extensive issues at these facilities or other facili ties we may in the future acquire |
| Although we conduct environmental due diligence on properties which we acquire, lease or operate, including in some cases having Phase I environmental audits conducted, because of the difficulty in detecting some environmental conditions we may not have discovered all environmental conditions on those properties |
| In addition, some of our properties contain underground storage tanks |
| Although we have been working to remove these tanks from our properties and are not aware of any material remediation arising from them, the presence of these tanks on our properties may result in environmental liabilities being imposed on us |
| We may be exposed to employment-related claims and costs that could harm our business, financial condition, or results of operations |
| Our business is labor intensive |
| As a result, we are subject to a large number of federal and state regulations relating to employment |
| This creates a risk of potential claims of discrimination and harassment, alleged violations of health and safety and wage and hour laws, criminal activity and other claims |
| For instance, employees working in certain areas of our facilities may be exposed to blood-borne or other pathogens |
| Although we have implemented training programs for employees working in the soiled linen sorting areas of our facilities and have provided our employees with protective clothing and hepatitis B vaccinations, there may 15 _________________________________________________________________ be potential threats to the health and welfare of our employees during the course of their employment, which may result in workers’ compensation and occupational health and safety claims being made against us |
| From time to time, we are subject to audit by various governmental authorities to determine our compliance with a variety of occupational health and safety regulations |
| We may, from time to time, incur fines and other losses or negative publicity with respect to any such violation |
| In addition, some or all of these claims may also give rise to civil litigation, which could be time-consuming for our management team and costly and could harm our business |
| Our insurance coverage may not be sufficient in amount or scope to cover all types of liabilities that we may incur, which may result in significant costs to us |
| If any such incidents occur and we are not able to resolve them favorably, we may be subject to civil fines or criminal penalties and abatement costs (including possible business interruption costs) |
| If we are not able to hire and retain qualified employees, our ability to service our existing customers and retain new customers will be adversely affected |
| Our success is largely dependent on our ability to recruit, hire, train and retain qualified employees |
| Our business is labor intensive and, as is typical for our industry, continues to experience relatively high personnel turnover |
| Increases in our employee turnover rate could increase our recruiting and training costs and decrease our operating efficiency and productivity |
| Also, the addition of new customers may require us to recruit, hire, and train personnel at accelerated rates |
| We may not be able to successfully recruit, hire, train, and retain sufficient qualified personnel to adequately staff our existing business or future growth, particularly when we undertake new customer relationships for which we have not previously provided services |
| In addition, as labor related costs represented approximately 43dtta5prca of revenues from continuing operations in fiscal 2005, labor shortages or increases in wages (including minimum wages as mandated by federal and state g overnments, employee benefit costs, employment tax rates, and other labor related expenses) may cause our business, results of operations, and financial condition to suffer |
| Furthermore, wages may be driven up with additional unionization of our work force |
| As wage rates, health insurance costs and workers’ compensation costs increase, we may not be able to timely offset these increases with higher prices charged to our customers |
| Ineffective management could cause our business, results of operations and financial condition to suffer |
| Our continued success in our business is based upon many factors, including but not limited to, the expansion of our customer base, the enhancement of the services we provide to existing customers, aggressive sales and marketing efforts, effective cost containment and capital investment measures, and a strong strategic vision |
| During fiscal 2005 we implemented an operational reorganization designed to improve customer service and satisfaction |
| Proper execution will require effective management both in headquarters and in field operations |
| Our inability to effectively manage our existing business and our future growth may harm our business, results of operations, and financial condition |
| Our management teams at the corporate and operating levels are small and any unforeseen crises or loss of one or more of our officers or key employees may place a significant strain on our remaining management team and our employees, operations, operating and financial systems, and other resources |
| If our goodwill and other intangible assets become impaired, we will be required to write down their carrying value and incur a charge against income |
| At January 28, 2006, our goodwill and other intangible assets, net of accumulated amortization, was approximately dlra91dtta7 million |
| We acquired the majority of our goodwill and other intangible assets in our acquisitions |
| At least once every year and more often as we deem necessary, we review whether these assets have been impaired |
| If these assets become impaired, we will be required to write down their carrying value to the current fair value of the assets and to incur charges against our income equal to the amount of the writedown |
| These charges while cash neutral will decrease our reported net income in the period in which we take them and may harm our financial condition and results of operations |
| 16 _________________________________________________________________ We have contingent liabilities on guarantees of leases for some of our former retail store locations |
| We also have received an unsecured junior subordinated promissory note from the acquiring company of our retail business |
| As a term of the sale of our retail business in July 2004, we agreed to guarantee payments due under leases for 103 of the retail stores operated by our former retail business until the end of the current term of each lease |
| As of January 28, 2006, we are guarantor on the remaining 69 leases and our maximum aggregate potential liability under these leases is approximately dlra11dtta6 million |
| If we were required to make significant payments under these leases and were unable to recoup them from the buyer of the retail business, our results of operations and financial condition may be harmed |
| We also received an unsecured junior subordinated promissory note for approximately dlra4dtta0 million of the purchase price for our former retail business |
| The payment of this note is subordinated to the bank indebtedness which the buyer of the retail business incurred in connection with its acquisition of that business |
| We understand that the buyer has no significant assets other than t hose purchased from us in the transaction |
| We are currently carrying this note on our balance sheet at dlra3dtta3 million, which reflects a discount of dlra1dtta0 million made on the note at the time of the sale accreted through January 28, 2006 |
| We may be subject to costly and time-consuming product liability or personal injury actions that would materially harm our business |
| One of the services we offer is to provide sterile linen items to our customers |
| If those items or any of our products such as linen, towels, or patient gowns were cross-contaminated within our facilities we may be exposed to potential product liability risks |
| We take every precaution to prevent such occurrences through quality control procedures we have developed, but it is possible that contamination may occur through sabotage or human error |
| We may be held liable if customers or their patients using our products are injured |
| Product liability insurance is generally expensive, if available at all, and our present insurance coverage may not be adequate |
| We may not be able to obtain adequate insurance coverage at a reasonable cost in the future |
| We deliver our products to our customers via a fleet of delivery trucks that are on the road exposed to the public throughout most of every week |
| We have in the past experienced claims of injury relating to accidents involving our delivery fleet and we may be subject to such claims in the future |
| In addition, we utilize a large deductible for auto insurance and if we have underestimated the aggregate amount of claims, our financial results may be negatively impacted |
| One of the locations of our laundry facilities is subject to a pending condemnation action in conjunction with an eminent domain situation |
| If a number of facilities were subject to this type of action, our ability to continue operations could be interrupted |
| A portion of our property adjacent to our Edison, New Jersey facility is in the process of a condemnation action by the local governing body as part of eminent domain actions |
| The area being taken is not part of our operational space and should not affect production |
| If, however, future condemnation actions were to occur at one or more of our facilities without sufficient notice, our operations may be affected and we may experience service interruptions to our customers in the market area served by the affected facility or facilities |
| Our customer base is concentrated in the healthcare industry and our strategy partially depends on a trend of healthcare providers to outsource non-core services, such as linen management services |
| If the healthcare industry suffers a downturn or the trend toward outsourcing reverses, our growth may be hindered |
| Our current customer base primarily consists of healthcare providers, representing approximately 92prca of our revenues from continuing operations in fiscal 2005 |
| Our business and growth strategy is largely dependent on continued demand for our services from healthcare providers and other industries we may target in the future, and on trends in those industries to purchase outsourced services such as linen management |
| A slowdown or reversal of the trend in the healthcare industry to outsource linen management services may harm our business, results of operations, growth prospects, and financial condition |
| Government healthcare reimbursement programs, such as Medicare or Medicaid, and third-party healthcare insurers have placed increasing pressure on healthcare providers to control operating costs by changing the basis of the provider’s reimbursement for 17 _________________________________________________________________ medical services from actual cost to fixed reimbursement based upon diagnoses |
| This has, in turn, caused our healthcare customers to pursue aggressive cost containment measures with us and other third-party suppliers of goods and services |
| This pricing pressure has resulted in recent consolidation in the healthcare industry |
| This consolidation has decreased, and will continue to decrease, the potential number of customers for our services, thereby providing customers with additional leverage to negotiate lower pricing from us |
| Any future consolidation in the industry may further increase this leverage and harm our results of operations |
| Our business is dependent on the healthcare industry and will decline if the demand for healthcare services declines |
| Our business is dependent on the healthcare industry |
| Due to medical advances and pressure from governmental healthcare reimbursement programs and private healthcare insurers, the average hospital stay has decreased from 7dtta5 days in 1980 to 4dtta8 days in 2003 |
| As these trends continue, demand for our linen management services in the healthcare industry may decline |
| This decreased demand for our linen management services may harm our business, operating results, and financial condition |
| A small number of existing shareholders have considerable control over our company, which may lead to conflicts with other shareholders over corporate governance |
| Steel Partners II, LP (“Steel”) beneficially owns approximately 19dtta9prca of our outstanding common stock and Steel has recently expressed its intention to seek greater control of the Company |
| In addition, four other entities individually own between 5prca and 12prca of our common stock |
| One of these, Pirate Capital, LLC, has worked closely with Steel on other occasions, and has indicated in a recent SEC filing, that it is supportive of Steel’s efforts regarding our Company |
| As a result, these entities, acting alone or together, may be able to significantly influence all matters requiring stockholder approval, including the election of directors and the approval of mergers and other business combination transactions, and they may exercise this ability in a manner that advances their best interests and not necessarily those of all other stockholders |
| A declining stock market and lower interest rates negatively affect the value of our defined benefit pension assets and the defined benefit pension assets of the union-sponsored multi-employer plans to which we contribute and may harm our financial position |
| We have a defined benefit pension plan covering most of our non-union employees |
| Also, pursuant to obligations imposed by collective bargaining agreements that cover union workers in many of our facilities, we contribute to union-sponsored multi-employer pension plans for the benefit of these employees |
| At the end of fiscal 2005, notwithstanding improving conditions in the stock market and improved investment returns, because of earlier significant declines in the stock market and low interest rates, the value of the pension assets decreased in these plans, compared to their value at the end of fiscal 2004, and the assets held in these plans may not be sufficient to fund our obligations under these plans |
| If future returns from the stock market and other investments are insufficient to remedy this shortfall, we may be required to increase our contributions to these pension plans in future years to satisfy this underfunding |
| Also, specified events such as sales or closings of facilities at which a significant number of employees covered by the plans work may trigger withdrawal liability under the multi-employer plans into which we contribute, which may also require us to make substantial additional payments into such plans |
| While we have paid dividends regularly in the past, we may not be able to continue to pay dividends at the same level or at all in the future |
| If we fail to pay quarterly dividends to our common stockholders, the market price of our shares of common stock may decline |
| Our ability to pay quarterly dividends is at the discretion of our board of directors and the declaration of future dividends will depend on, among other things, availability of funds, future earnings, capital requirements, contractual restrictions, financial condition and general business conditions |
| Although we have regularly paid quarterly dividends on our common stock, we may not be able to pay dividends on a regular quarterly basis or, if 18 _________________________________________________________________ we are able to pay dividends, that we will be able to pay them at the same level in the future |
| Furthermore, any new shares of common stock that we may issue will substantially increase the cash required to continue to pay cash dividends at current levels |
| Any reduction or discontinuation of quarterly dividends may cause the market price of our shares of common stock to decline significantly |
| In addition, in the event our payment of quarterly dividends is reduced or discontinued, our failure or inability to resume paying dividends at historical levels may result in a persistently low market valuation of our shares of common stock |