Angelica Corporation Form 10Q
UNITED
STATES
SECURITIES
AND
EXCHANGE COMMISSION
Washington,
D.C.
20549
Form
10-Q
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES
EXCHANGE ACT OF 1934
For
The
Quarterly Period Ended
|
Commission
File
|
April
29,
2006
|
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 required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. Yes
X
No
___
Indicate
by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer
_
Accelerated
filer
_X_
Non-accelerated
filer
Indicate
by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act). Yes
No
_X_
The
number of
shares outstanding of Registrant's Common Stock, par value $1.00 per share,
at June 1, 2006 was 9,431,341 shares.
ANGELICA
CORPORATION AND SUBSIDIARIES
TABLE
OF
CONTENTS
APRIL
29, 2006 FORM
10-Q QUARTERLY REPORT
|
Page
Number
|
|
Reference
|
|
|
|
|
Part
I. Financial Information:
|
|
|
|
Item
1.
Condensed Financial Statements:
|
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
5-15
|
|
|
|
|
|
16-20
|
|
|
|
|
|
21
|
|
|
|
21-22
|
|
|
|
|
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
|
|
24
|
|
|
|
25
|
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands, except per share amounts)
|
|
First
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
April
29,
2006
|
|
April
30,
2005
|
|
Continuing
Operations:
|
|
|
|
|
|
Textile
service revenues
|
|
$
|
107,006
|
|
$
|
100,481
|
|
Cost
of
textile services
|
|
|
(92,265
|
)
|
|
(84,946
|
)
|
Gross
profit
|
|
|
14,741
|
|
|
15,535
|
|
Selling,
general and administrative expenses
|
|
|
(14,412
|
)
|
|
(12,513
|
)
|
Amortization
of other acquired assets
|
|
|
(1,080
|
)
|
|
(799
|
)
|
Other
operating income (expense), net
|
|
|
551
|
|
|
(52
|
)
|
(Loss)
income
from operations
|
|
|
(200
|
)
|
|
2,171
|
|
Interest
expense
|
|
|
(2,220
|
)
|
|
(1,150
|
)
|
Non-operating
(expense) income, net
|
|
|
(56
|
)
|
|
539
|
|
(Loss)
income
from continuing operations
|
|
|
|
|
|
|
|
before
income
taxes
|
|
|
(2,476
|
)
|
|
1,560
|
|
Income
tax
benefit (provision)
|
|
|
977
|
|
|
(421
|
)
|
(Loss)
income
from continuing operations
|
|
|
(1,499
|
)
|
|
1,139
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
Loss
from
discontinued operations, net of
|
|
|
|
|
|
|
|
tax
benefit
of $0 and $44
|
|
|
-
|
|
|
(119
|
)
|
Net
(loss)
income
|
|
$
|
(1,499
|
)
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
|
|
|
|
|
|
(Loss)
income
from continuing operations
|
|
$
|
(0.16
|
)
|
$
|
0.13
|
|
Loss
from
discontinued operations
|
|
|
-
|
|
|
(0.02
|
)
|
Net
(loss)
income
|
|
$
|
(0.16
|
)
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share:
|
|
|
|
|
|
|
|
(Loss)
income
from continuing operations
|
|
$
|
(0.16
|
)
|
$
|
0.12
|
|
Loss
from
discontinued operations
|
|
|
-
|
|
|
(0.01
|
)
|
Net
(loss)
income
|
|
$
|
(0.16
|
)
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
April
29,
|
|
January
28,
|
|
|
|
2006
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
3,780
|
|
$
|
4,377
|
|
Receivables,
less reserves of $1,484 and $994
|
|
|
57,326
|
|
|
58,151
|
|
Linens
in
service
|
|
|
46,075
|
|
|
43,785
|
|
Prepaid
expenses and other current assets
|
|
|
3,573
|
|
|
3,602
|
|
Total
Current
Assets
|
|
|
110,754
|
|
|
109,915
|
|
Property
and
Equipment
|
|
|
204,594
|
|
|
202,927
|
|
Less
--
accumulated depreciation
|
|
|
100,309
|
|
|
96,634
|
|
Total
Property and Equipment
|
|
|
104,285
|
|
|
106,293
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
49,259
|
|
|
49,259
|
|
Other
acquired assets
|
|
|
41,337
|
|
|
42,470
|
|
Cash
surrender value of life insurance
|
|
|
2,254
|
|
|
1,941
|
|
Deferred
income taxes
|
|
|
16,355
|
|
|
15,389
|
|
Miscellaneous
|
|
|
6,167
|
|
|
6,161
|
|
Total
Other
Assets
|
|
|
115,372
|
|
|
115,220
|
|
Total
Assets
|
|
$
|
330,411
|
|
$
|
331,428
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
299
|
|
$
|
319
|
|
Accounts
payable
|
|
|
34,582
|
|
|
37,229
|
|
Accrued
wages
and other compensation
|
|
|
7,029
|
|
|
7,037
|
|
Deferred
compensation and pension liabilities
|
|
|
2,977
|
|
|
2,977
|
|
Deferred
income taxes
|
|
|
3,105
|
|
|
3,321
|
|
Other
accrued
liabilities
|
|
|
33,227
|
|
|
30,535
|
|
Total
Current
Liabilities
|
|
|
81,219
|
|
|
81,418
|
|
Long-Term
Debt, less current maturities
|
|
|
86,930
|
|
|
85,096
|
|
Other
Long-Term Liabilities
|
|
|
15,186
|
|
|
15,366
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
Common
Stock,
$1 par value, authorized 20,000,000
|
|
|
|
|
|
|
|
shares,
issued: 9,478,587 and 9,471,538 shares
|
|
|
9,478
|
|
|
9,472
|
|
Capital
surplus
|
|
|
7,961
|
|
|
7,189
|
|
Retained
earnings
|
|
|
138,272
|
|
|
140,805
|
|
Accumulated
other comprehensive loss
|
|
|
(2,882
|
)
|
|
(2,553
|
)
|
Unamortized
restricted stock
|
|
|
(4,161
|
)
|
|
(2,841
|
)
|
Common
Stock
in treasury, at cost: 68,744 and 169,415 shares
|
|
|
(1,592
|
)
|
|
(2,524
|
)
|
Total
Shareholders' Equity
|
|
|
147,076
|
|
|
149,548
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
330,411
|
|
$
|
331,428
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
First
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
April
29,
2006
|
|
April
30,
2005
|
|
|
|
|
|
|
|
Cash
Flows
from Operating Activities:
|
|
|
|
|
|
(Loss)
income
from continuing operations
|
|
$
|
(1,499
|
)
|
$
|
1,139
|
|
Non-cash
items included in (loss) income from continuing
operations:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,697
|
|
|
3,690
|
|
Amortization
|
|
|
1,400
|
|
|
1,127
|
|
Deferred
income taxes
|
|
|
(977
|
)
|
|
1,558
|
|
Cash
surrender value of life insurance
|
|
|
(321
|
)
|
|
(168
|
)
|
(Gain)
loss
on sale of assets
|
|
|
(551
|
)
|
|
61
|
|
Change
in
working capital components of continuing
|
|
|
|
|
|
|
|
operations,
net of businesses acquired/disposed of
|
|
|
(1,402
|
)
|
|
(4,745
|
)
|
Other,
net
|
|
|
(10
|
)
|
|
(202
|
)
|
Net
cash
provided by operating activities of
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
337
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Investing Activities:
|
|
|
|
|
|
|
|
Expenditures
for property and equipment, net
|
|
|
(2,735
|
)
|
|
(4,081
|
)
|
Cost
of
businesses and assets acquired
|
|
|
-
|
|
|
(49,491
|
)
|
Disposals
of
assets
|
|
|
853
|
|
|
26
|
|
Life
insurance premiums paid, net
|
|
|
382
|
|
|
(149
|
)
|
Net
cash used
in investing activities of continuing operations
|
|
|
(1,500
|
)
|
|
(53,695
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
|
|
Repayments
of
long-term debt
|
|
|
(26,686
|
)
|
|
(41,705
|
)
|
Borrowings
of
long-term debt
|
|
|
28,500
|
|
|
76,100
|
|
Borrowings
from life insurance policy loans
|
|
|
-
|
|
|
19,474
|
|
Debt
issuance
costs
|
|
|
(17
|
)
|
|
(44
|
)
|
Dividends
paid
|
|
|
(1,034
|
)
|
|
(1,009
|
)
|
Exercise
of
stock options
|
|
|
82
|
|
|
488
|
|
Net
cash
provided by financing activities of
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
845
|
|
|
53,304
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Discontinued Operations:
|
|
|
|
|
|
|
|
(Restated
-
See Note 1)
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(279
|
)
|
|
(247
|
)
|
Investing
cash flows
|
|
|
-
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(597
|
)
|
|
1,562
|
|
Balance
at
beginning of year
|
|
|
4,377
|
|
|
926
|
|
Balance
at
end of period
|
|
$
|
3,780
|
|
$
|
2,488
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
FIRST
QUARTER ENDED
APRIL 29, 2006
AND
APRIL 30,
2005
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 28, 2006 (fiscal
2005). It is management’s opinion that all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
during the interim period have been included. All significant intercompany
accounts and transactions have been eliminated. The results of operations and
cash flows for the first quarter ended April 29, 2006 are not necessarily
indicative of the results that will be achieved for the full fiscal year
2006.
Subsequent
to the
issuance of its unaudited consolidated financial statements for the quarter
ended April 30, 2005, management of the Company determined that the cash flows
associated with discontinued operations should not have been presented as a
single line item within the Consolidated Statements of Cash Flows. As a result,
in the fourth quarter of fiscal 2005, the Company changed the presentation
of
cash flows from discontinued operations to present separate disclosure of the
cash flows from operating, investing, and financing activities.
Note
2.
Stock-Based Compensation
The
Company has
various stock option and stock bonus plans that provide for the granting of
incentive stock options, non-qualified stock options, restricted stock and
performance awards to certain employees and directors. A total of 1,975,000
shares have been authorized to be issued under all such plans. Options and
awards have been granted at or above the fair market value at the date of grant,
although certain plans allow for awards to be granted at a price below fair
market value. Options vest over four years except for those granted in fiscal
2004 and 2005 which vest in six months, and are exercisable not less than six
months or more than 10 years after the date of grant. Restricted shares granted
to non-employee directors generally vest over one to three years. Restricted
shares granted to employees generally represent performance-contingent awards
that vest at the end of three years upon the attainment of certain earnings
performance goals.
Effective
January
29, 2006, the first day of fiscal 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment”
(SFAS 123(R)) using the modified prospective method of adoption, which does
not
require restatement of prior periods. Under the modified prospective method,
the
Company is required to record compensation cost for all awards granted after
the
date of adoption and for the unvested portion of previously granted awards
that
remain outstanding at the date
of
adoption, net of
an estimate of expected forfeitures. Under SFAS 123(R), compensation cost is
based on the estimated fair values of stock options and restricted stock
determined on the date of grant and is recognized over the related vesting
period. For performance-contingent restricted stock, if it is determined that
the performance contingency will not be satisfied, any previously recognized
compensation cost is reversed in the period such determination is made. As
of
January 17, 2006, the Board of Directors approved the accelerated vesting of
64,334 unvested stock options. The exercise price of these options was greater
than the market price of the underlying stock on the date of modification.
By
accelerating the vesting of these options, approximately $173,000 and $43,000
of
compensation expense will be avoided in fiscal years 2006 and 2007,
respectively.
The adoption of
SFAS No. 123(R) did not have a material impact on the consolidated financial
statements.
The
Company
determines the fair value of its restricted stock awards based on the market
price of its common stock on the date of grant. Restricted stock activity for
the quarter ended April 29, 2006 was as follows:
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
Nonvested
at
January 29, 2006
|
|
|
141,972
|
|
$
|
25.64
|
|
Granted
|
|
|
109,042
|
|
|
16.75
|
|
Vested
|
|
|
(1,642
|
)
|
|
26.26
|
|
Forfeited
|
|
|
(7,911
|
)
|
|
25.94
|
|
Nonvested
at
April 29, 2006
|
|
|
241,461
|
|
$
|
21.61
|
|
The
Company
estimates the fair value of its option awards on the date of grant using the
Black-Scholes option pricing model. No options were granted in the quarter
ended
April 29, 2006. For the quarter ended April 28, 2005, the Company granted 6,000
options with a weighted average fair value of $6.94, using the Black-Scholes
model and the following assumptions: risk-free interest rate of 4.04%; expected
dividend yield of 3.8%; volatility of 31.4% and expected lives of nine to ten
years. The risk-free interest rate was based on external data while all other
assumptions were determined based on the Company’s historical experience with
stock options. Activity in the Company’s stock option plans for the quarter
ended April 29, 2006 was as follows:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding at January 29, 2006
|
|
|
813,675
|
|
$
|
21.77
|
|
|
6.1
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,000
|
)
|
|
11.38
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,450
|
)
|
|
27.65
|
|
|
|
|
|
|
|
Expired
|
|
|
(125,000
|
)
|
|
20.42
|
|
|
|
|
|
|
|
Options
outstanding at April 29, 2006
|
|
|
669,225
|
|
$
|
22.04
|
|
|
6.9
|
|
$
|
1,542,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at April 29, 2006
|
|
|
647,100
|
|
$
|
22.23
|
|
|
6.9
|
|
$
|
1,458,000
|
|
Cash
proceeds, tax
benefits and intrinsic value related to total stock options exercised during
the
first quarters of 2006 and 2005 were as follows:
|
|
First
Quarter
Ended
|
|
|
|
April
29,
|
|
April
30,
|
|
|
|
2006
|
|
2005
|
|
Proceeds
from
stock options exercised
|
|
$
|
91,000
|
|
$
|
633,000
|
|
Tax
benefits
related to stock options exercised
|
|
$
|
-
|
|
$
|
300,000
|
|
Intrinsic
value of stock options exercised
|
|
$
|
70,000
|
|
$
|
779,000
|
|
The
Company did not
realize a tax benefit related to the exercise of stock options in the first
quarter of fiscal 2006 as there was no taxable income for the benefit to
offset.
Prior
to March 24,
2006, the Company generally issued shares from treasury stock to satisfy
restricted stock awards and stock option exercises. Effective on this date,
the
Company began issuing new shares to satisfy such awards and
exercises.
Total
compensation
expense charged to income for all stock option and stock bonus plans during
the
quarter ended April 29, 2006 was $229,000 (net of $144,000 related income tax
benefit). During the quarter ended April 30, 2005, the Company recognized
$243,000 of expense for restricted stock and performance-based awards, net
of
$90,000 related income tax benefit. The total compensation cost related to
nonvested stock options and awards not yet recognized is currently expected
to
be a combined total of approximately $2,915,000. This cost is expected to be
recognized over a weighted average period of 2.5 years. Substantially all of
the
Company’s current quarter and expected future stock-based compensation expense
is related to restricted stock awards.
Prior
to the
adoption of SFAS 123(R), the Company measured compensation expense for
stock-based compensation plans using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (APB 25), and followed the disclosure-only
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition
and Disclosure.” Accordingly, no compensation expense was recognized for
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation expense for stock-based compensation
plans for the first quarter ended April 30, 2005 been determined consistent
with
SFAS No. 123, the Company’s net income and earnings per share would approximate
the following pro forma amounts:
|
First
Quarter
Ended
|
|
|
April
30,
|
|
(Dollars
in
thousands, except per share amounts)
|
|
2005
|
|
Net
income:
|
|
|
|
As
reported
|
|
$
|
1,020
|
|
Add:
stock-based employee compensation expense
|
|
|
|
|
included
in
net income, net of tax
|
|
|
243
|
|
Deduct:
stock-based employee compensation
|
|
|
|
|
expense
determined under fair-value based
|
|
|
|
|
method
for
all awards, net of tax
|
|
|
(562
|
)
|
Pro
forma net
income
|
|
$
|
701
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.11
|
|
Pro
forma
|
|
|
0.08
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.11
|
|
Pro
forma
|
|
|
0.08
|
|
Note
3.
Acquisitions
On
March 21, 2005,
the Company acquired one hundred percent of the issued and outstanding shares
of
common stock and warrants of Royal Institutional Services, Inc. and its
affiliate, The Surgi-Pack Corporation (together “Royal”). The total purchase
price of $45,179,000 was paid in cash, plus an additional $713,000 of related
acquisition costs, and was funded through long-term borrowings. The net assets
acquired consisted primarily of working capital, leasehold interests in two
operating facilities and the related equipment, customer contracts and
goodwill.
The
results of
operations of Royal are included in the Company’s Consolidated Statement of
Income for the first quarter ended April 30, 2005 since the date of acquisition
on March 21, 2005. Unaudited pro forma consolidated textile service revenues
for
the first quarter ended April 30, 2005, assuming the Royal acquisition had
been
completed as of the beginning of the period, totaled $107,272,000, and unaudited
pro forma consolidated income from continuing operations amounted to $1,047,000
or $0.11 per diluted share. These pro forma amounts are not necessarily
indicative of the consolidated results of operations that would have occurred
had this acquisition been made at the beginning of the 2005 first quarter.
Note
4.
Non-Operating (Expense) Income, Net
In
the first
quarter of fiscal 2006, the Company recorded non-operating expense of $56,000
which included a $281,000 loss related to a natural gas derivative (see Note
11)
offset primarily by interest income.
In
the first
quarter of fiscal 2005, the Company recorded non-operating income
of
$539,000
which
included $360,000 from the second cash distribution received in connection
with
the liquidation of the parent company of an issuer of life insurance policies
owned by the Company following its demutualization in 2000. These distributions
did not affect the life insurance policies or their cash surrender value. The
Company does not anticipate any further significant distributions from this
liquidation.
Non-operating
(expense) income, net, also includes interest earned on invested cash balances
and notes receivable.
Note
5. Income
Taxes
The
Company
recorded a tax benefit of $725,000 from continuing operations for the first
quarter ended April 29, 2006, based upon the Company’s estimated effective tax
rate of 29.3% for the year, in addition to a tax benefit of $252,000 from
federal and state tax credits. The effective tax rate of 29.3% on income from
continuing operations for the first quarter ended April 29, 2006, reflects
the
statutory tax rate adjusted for permanent items and state tax benefits, as
applicable.
Management
has
established accruals for tax contingencies for exposures associated with
tax
deductions and return filing positions which may be challenged. The ultimate
disposition of any of these items is not expected to have a material impact
on
the Company’s financial condition but may be material to the period of
resolution. The tax contingency accruals are reviewed quarterly and adjusted
as
necessary in light of changing circumstances.
The
Company has a
federal net operating loss carryover of $29,286,000 which will expire beginning
in 2025; $2,532,000 in federal tax credit carryover which expires at various
dates beginning in 2022; $8,027,000 of state tax credit carryover which expires
at various dates beginning in 2012 or have no expiration date; and various
other
charitable contribution carryovers, tax credits and state net operating loss
carryovers.
In
assessing the
adequacy of the deferred tax assets, the Company considers whether it is
more
likely than not that some portion or all of the deferred tax assets will
not be
realized. The Company considers projected future taxable income and tax planning
strategies in making this assessment.
Note
6. Commitments and Contingencies
Prior
to its sale
of the Life Uniform retail business segment to Healthcare Uniform Company,
Inc.
in fiscal 2004, the Company was a guarantor under certain Life Uniform store
lease agreements. These guarantees obligated the Company to make all payments
due under the leases until their expiration in the event of default of Life
Uniform. In connection with the sale of Life Uniform, the Company requested
consents, as required, from landlords to assign the store leases to Healthcare
Uniform Company. As a condition to such consents, certain landlords required
that the Company continue as a guarantor of the leases. Under the Company’s
agreement with Healthcare Uniform Company, these guarantees will only extend
until the end of each lease’s then current term. As of April 29, 2006, the
Company is secondarily obligated as a guarantor for 67 store lease agreements
and the estimated maximum potential amount of future payments the Company could
be required to make under these guarantees is $10,900,000. Although these
guarantees
expire
at various
dates through fiscal year 2014, approximately 68% of the estimated maximum
potential future payments expires by the end of fiscal year 2008.
The
Company has
provided certain indemnities to the buyer in connection with the sale of Life
Uniform. Although indemnification claims are generally subject to an aggregate
limit of $6,000,000, the Company believes the likelihood of making any payments
for indemnification claims is remote and has reserved accordingly.
In
connection with
the March 2005 Royal acquisition (see Note 3), a portion of the purchase price
was placed into escrow, with payment to the sellers contingent upon the
occurrence
of
certain events as specified in the purchase agreement. As of April 29, 2006,
$2,050,000 remained in escrow. Of this amount, $1,000,000 is due the sellers
in
March 2015 upon compliance with the restrictive covenants. The sellers are
also
scheduled to receive $1,000,000 in March 2007 absent indemnification claims.
The
remaining $50,000 relates to the March 2006 general indemnification payment
which is being held in escrow pending a potential indemnification
claim.
The
Company faces a
possible exposure to outstanding workers’ compensation claims incurred prior to
fiscal 1999 that were sold to a former insurance carrier, in addition to
exposure for deposits with that carrier for claims incurred in fiscal years
1999, 2000 and 2001 that have not yet been resolved and for claims in excess
of
the deductible for fiscal years 1999, 2000, 2001 and 2002. This carrier is
experiencing financial difficulties and may be unable to fulfill its obligation
to pay these claims, which could have a material unfavorable impact on the
Company’s results of operations and financial condition if it is forced to
assume these liabilities. The Company estimates its possible exposure from
these
outstanding claims and deposits to be approximately $1,250,000 as of April
29,
2006.
The
Company faces
some significant risk and uncertainty to its business operations related to
the
status of labor relations at its service centers. Approximately 80% of the
Company’s workforce is represented by one of several unions. In May 2006, the
Company and UNITE HERE reached agreement on collective bargaining agreements
covering service centers in Colton and San Diego, California, and covering
several service centers in the Los Angeles, California area. In addition, the
Company and UNITE HERE have reached agreement on collective bargaining
agreements at seven service centers that were organized in the last half of
fiscal 2005; these agreements were ratified by the membership and are expected
to be finalized in the second quarter of fiscal 2006. Collectively, these new
agreements apply to approximately 30% of the Company’s workforce. At five other
service centers, collective bargaining agreements covering production employees
are scheduled to expire in mid- to late fiscal 2006. These contracts apply
to
approximately 22% of the Company’s workforce. Any work interruptions or
stoppages that may result from the inability to reach ratified agreements at
any, some or all of these locations could have a material adverse impact on
the
Company’s results of operations and financial condition.
The
Company is a
party to various claims and legal proceedings which arose in the ordinary course
of its business. Although the ultimate disposition of these proceedings is
not
presently determinable, management does not believe that an adverse
determination in any or all of such proceedings will have a material adverse
effect upon the consolidated financial condition or operating results of the
Company.
Note
7.
Discontinued Operations
During
the third
quarter of fiscal 2005, the Company made the decision to close its Columbia,
Illinois service center and exit the St. Louis market. The service center’s
customer contracts, personal property and real estate were sold prior to the
end
of fiscal 2005. The results of operations and cash flows for the service center
are segregated and reported as discontinued operations for all periods presented
in this report.
Note
8. (Loss)
Earnings Per Share
Basic
(loss)
earnings per share is computed by dividing net (loss) income by the weighted
average number of shares of Common Stock outstanding during the period. Diluted
(loss) earnings per share is computed by dividing net income by the weighted
average number of Common and Common equivalent shares outstanding.
The
following table
reconciles weighted average shares outstanding to amounts used to calculate
basic and diluted (loss) earnings per share for the first quarter ended April
29, 2006 and April 30, 2005 (shares in thousands):
|
|
First
Quarter
Ended
|
|
|
|
April
29,
2006
|
|
April
30,
2005
|
|
Weighted
Average Shares:
|
|
|
|
|
|
Average
shares outstanding
|
|
|
9,164
|
|
|
9,032
|
|
Effect
of
dilutive securities
|
|
|
-
|
|
|
279
|
|
Average
shares outstanding,
|
|
|
|
|
|
|
|
adjusted
for
dilutive effects
|
|
|
9,164
|
|
|
9,311
|
|
Potentially
dilutive securities of 48,000 shares were not included in the calculation of
weighted average shares outstanding for the quarter ended April 29, 2006 as
their effect is antidilutive on loss per share for the period.
Note
9. Goodwill
and Other Acquired Assets
In
accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets,” the Company performed its
annual goodwill impairment test at the end of the third quarter of fiscal 2005
which resulted in no indication of impairment.
Other
acquired
assets consisted of the following (dollars in thousands):
|
|
April
29,
2006
|
|
January
28,
2006
|
|
|
|
Gross
|
|
|
|
Other
|
|
Gross
|
|
|
|
Other
|
|
|
|
Carrying
|
|
Accumulated
|
|
Acquired
|
|
Carrying
|
|
Accumulated
|
|
Acquired
|
|
|
|
Amount
|
|
Amortization
|
|
Assets,
net
|
|
Amount
|
|
Amortization
|
|
Assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts
|
|
$
|
42,041
|
|
$
|
(9,023
|
)
|
$
|
33,018
|
|
$
|
42,094
|
|
$
|
(8,290
|
)
|
$
|
33,804
|
|
Non-compete
covenants
|
|
|
11,089
|
|
|
(2,770
|
)
|
|
8,319
|
|
|
11,089
|
|
|
(2,423
|
)
|
|
8,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
acquired assets
|
|
$
|
53,130
|
|
$
|
(11,793
|
)
|
$
|
41,337
|
|
$
|
53,183
|
|
$
|
(10,713
|
)
|
$
|
42,470
|
|
Aggregate
amortization expense for the first quarter ended April 29, 2006 and April 30,
2005 amounted to $1,080,000 and $799,000, respectively. Other acquired assets
are scheduled to be fully amortized by fiscal year 2020 with corresponding
annual amortization expense estimated for each of the next five fiscal years
as
follows (dollars in thousands):
2006
|
$4,292
|
2007
|
4,189
|
2008
|
3,836
|
2009
|
3,527
|
2010
|
3,061
|
Note
10. Long
Term Debt
The
Company’s
long-term bank borrowings are financed through a $150,000,000 revolving credit
facility that matures on November 30, 2010. Amounts borrowed under the credit
facility bear interest at a floating rate equal to either (i) LIBOR plus a
margin, or (ii) a Base Rate, defined as the higher of either (a) the Federal
Funds Rate plus 0.50% or (b) the Prime Rate. The margin for the LIBOR rate
option is based on the Company’s ratio of “Funded Debt” to “EBITDA,” as each is
defined in the loan agreement, and may range from 2.0% to 2.75%. The LIBOR
interest rate option may be selected for periods of 1 to 3 months, 6 months
or
12 months. The Company has fixed the interest rate on $10,000,000 of the credit
facility borrowings with an interest rate swap agreement that extends through
May 2007.
As
of April 29,
2006, there was $86,900,000 of outstanding debt under the credit facility,
secured
by a first
lien on all equipment, inventory, and accounts receivable, and certain real
estate. Of this amount, $10,000,000 bears interest at a fixed rate of 3.58%
pursuant to an interest rate swap agreement plus the LIBOR margin under the
credit facility, which was 2.75% as of April 29, 2006. Of the remaining debt,
$70,000,000 bore interest at 5.07% under a LIBOR contract, plus a margin (2.75%
as of April 29, 2006), and $6,900,000 bore interest at 7.75%, the Prime Rate,
as
of April 29, 2006. Furthermore, the Company had $13,540,000 outstanding in
irrevocable letters of credit as of April 29, 2006, which reduced the amount
available to borrow under the line of credit to $7,600,000. As of April 29,
2006, the fee on the outstanding letters of credit and unused funds was 2.75%
and 0.375%, respectively.
The
Company is
subject to certain financial covenants under its loan agreement. One
of
these
covenants
requires that the Company maintain a minimum consolidated net worth of
$120,920,000 plus an aggregate amount equal to 50% of quarterly net income
beginning with the fourth quarter of fiscal 2005 (with no reduction for net
losses), and an asset coverage ratio of 1 to 1. Other covenants require the
Company to maintain a minimum ratio of “EBITDA” to “Fixed Charges” of no less
than 1.05 to 1, increasing to 1.15 to 1 effective October 31, 2006, and a
maximum ratio of “Funded Debt” to “EBITDA” of no more than 4.0 to 1, decreasing
to 3.5 to 1 effective January 31, 2010. The Company was in compliance with
these
loan covenants as of April 29, 2006.
As
of April 29,
2006, there was $29,177,000 of life insurance policy loans outstanding. The
loans bear interest at a fixed rate of 8.0% or variable rates ranging from
5.3%
to 5.8%. The proceeds upon surrender of the policies will be reduced by the
amount of any loans outstanding, unless repaid by the Company prior to that
time. The total amount borrowed is netted against cash surrender value of life
insurance in the Consolidated Balance Sheet as of April 29, 2006 and January
28,
2006.
Note
11.
Derivative Instruments and Hedging Activities
The
Company entered
into an interest rate swap agreement with one of its lenders effective September
9, 2002. The swap agreement fixes the variable portion of the interest rate
(excluding a margin) at 3.58% on $10,000,000 of the outstanding debt under
the
revolving line of credit until termination on May 30, 2007. The Company has
elected to apply cash flow hedge accounting for the interest rate swap agreement
in accordance with SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” Accordingly, the derivative is recorded as an asset or
liability at its fair value and the effective portion of changes in the fair
value of the derivative, as measured quarterly, is reported in accumulated
other
comprehensive income. The gain on the derivative included in accumulated other
comprehensive loss in the first quarter ended April 29, 2006 and April 30,
2005
amounted to $7,000 and $54,000, respectively, net of tax. The Company has
recorded a long-term asset of $176,000 and $165,000 for the fair value of the
derivative as of April 29, 2006 and January 28, 2006, respectively.
Since
October 2005,
the Company has entered into natural gas futures contracts to fix the price
for
a portion of its future purchases of natural gas and reduce its exposure to
volatility in the cost of natural gas consumed by its service centers due to
fluctuations in the price on the New York Mercantile Exchange (NYMEX). These
futures contracts combined are expected to hedge approximately 58% of the
Company’s total requirements for natural gas (measured at current usage rates)
for 2006 and 2007 fiscal years, and approximately 38% and
16% of the
Company’s natural gas requirements, respectively, in 2008 and 2009. As of April
29, 2006, the weighted-average cost of natural gas under these contracts for
the
remainder of their term is $9.77 per decatherm. The Company has elected to
apply
cash flow hedge accounting for a portion of these derivatives in accordance
with
SFAS No. 133. Accordingly, the net loss on the derivatives included in
accumulated other comprehensive loss for the quarter ended April 29, 2006,
amounted to $336,000, net of tax. The change in fair market value of a portion
of the derivatives not considered as a cash flow hedge for accounting purposes
was included in non-operating income for the quarter ended April 29, 2006,
and
amounted to a loss of $281,000. The Company has recorded a current liability
of
$1,614,000 and $914,000 as of April 29, 2006 and January 28, 2006, respectively,
and a long-term liability of $312,000 and $340,000 as of April 29, 2006 and
January 28, 2006, respectively for the fair value of the derivatives. The
Company estimates that $1,315,000
of
unrealized
losses included in accumulated other comprehensive loss before taxes as of
April
29, 2006 will be reclassified to cost of textile services within the next 12
months as natural gas is purchased for consumption in the service
centers.
In
addition to the
futures contracts, the Company has existing contracts as of April 29, 2006
for
the physical delivery of natural gas that fix the NYMEX cost of gas for
approximately 4% of its estimated natural gas purchase requirements in the
next
12 months, and that fix the basis cost of gas for approximately 79% of its
estimated natural gas purchase requirements in the next 12 months. Although
these contracts are considered derivative instruments, they meet the normal
purchases exclusion contained in SFAS No. 133, as amended by SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities,”
and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities,” and are therefore exempted from the related accounting
requirements.
Note
12.
Comprehensive (Loss) Income
Comprehensive
(loss) income, consisting primarily of net (loss) income and changes in the
fair
value of derivatives (see Note 11), net of taxes, totaled $(1,828,000) and
$1,074,000 for the first quarter ended April 29, 2006 and April 30, 2005,
respectively.
Note
13.
Retirement Benefits
The
Company has a
non-contributory defined benefit pension plan covering primarily all salaried
and hourly administrative non-union personnel who had met participation
requirements prior to September 1, 2004. The benefit formula is based on years
of service and compensation during employment. The funding policy of the pension
plan is in accordance with the requirements of the Employee Retirement Income
Security Act of 1974. The Company amended the pension plan, effective September
1, 2004, to freeze participation in the plan. No employee shall become a
participant in the pension plan on or after that date.
The
net periodic
pension expense recognized in the first quarter ended April 29, 2006 and April
30, 2005 was as follows:
|
|
First
Quarter
Ended
|
|
|
|
April
29,
|
|
April
30,
|
|
(Dollars
in
thousands)
|
|
2006
|
|
2005
|
|
Pension
expense:
|
|
|
|
|
|
Service
cost
|
|
$
|
113
|
|
$
|
105
|
|
Interest
cost
|
|
|
312
|
|
|
317
|
|
Expected
return on plan assets
|
|
|
(322
|
)
|
|
(333
|
)
|
Amortization
of prior service cost
|
|
|
-
|
|
|
5
|
|
Recognized
actuarial loss
|
|
|
17
|
|
|
-
|
|
Net
periodic
pension expense
|
|
$
|
120
|
|
$
|
94
|
|
Note
14. New
Accounting Pronouncements
In
May 2005, the
FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
SFAS
No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
requirements for the accounting for and reporting of a voluntary change in
accounting principle. This statement requires retrospective application to
prior
periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change, instead of including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. SFAS
No. 154 is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005.
In
February 2006,
the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 155
simplifies the accounting for certain derivatives embedded in other financial
instruments by allowing them to be accounted for as a whole if the holder elects
to account for the whole instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No.
140.
SFAS No. 155 is effective for all financial instruments acquired, issued or
subject to a remeasurement event occurring in fiscal years beginning after
September 15, 2006. Earlier adoption is permitted, provided the Company has
not
yet issued financial statements, including for interim periods, for that fiscal
year. The Company does not expect the adoption of SFAS No. 155 to have a
material impact on its consolidated financial statements.
Note
15.
Subsequent Event
Subsequent
to the
end of the first quarter, the Company completed the transfer of all customer
accounts from its Rio Vista service center to other service centers within
its
Los Angeles market area. The Company is pursuing a sale of the Rio Vista real
estate and does not expect to recognize any significant asset impairment or
other charges related to the closing of this service center.
FIRST
QUARTER ENDED
APRIL 29, 2006
COMPARED
WITH
FIRST
QUARTER ENDED
APRIL 30, 2005
General
Angelica
Corporation is a leading provider of outsourced linen management services to
the
healthcare industry in the United States. We offer comprehensive linen
management services to the U.S. healthcare industry, including hospitals,
long-term care facilities, surgery centers, medical clinics, dental offices,
and
other medical providers. Among the items that we clean and provide, on either
a
rental or customer-owned basis, are bed linens, towels, gowns, scrubs, surgical
linens and surgical packs, as well as mops, mats and other dust control
products. To a more limited extent, we also provide linen management services
to
customers in the hospitality business. Currently, we operate 31 laundry service
centers and serve customers in 23 states.
Results
of
Operations
First
quarter
fiscal 2006 textile service revenues were $107.0 million, an increase of $6.5
million, or 6.5%, compared with the same period in fiscal 2005. Organic growth
from net new business additions and price increases contributed $2.8 million
of
the first quarter increase, representing an organic growth rate of 3.1%. Fiscal
2005 acquisitions contributed $8.3 million of the revenue increase, offset
in
part by the loss of $4.6 million of revenues due to the sale of non-healthcare
customer accounts in fiscal 2005.
Cost
of textile
services of $92.3 million in the first quarter of fiscal 2006 increased by
$7.3
million, or 8.6%, from the same year ago period. The principal factor for this
increase is our higher revenue level resulting from the acquisition we completed
in the first quarter of fiscal 2005. Direct and indirect production labor and
fringe benefit costs increased $2.7 million to 34.6% of revenues in first
quarter fiscal 2006 versus 34.2% of revenues in first quarter fiscal 2005,
due
largely to temporary labor expenses incurred during the union strike at our
Colton facility. Higher energy prices continue to impact fiscal 2006, as natural
gas costs rose to 6.1% of revenues in first quarter fiscal 2006 from 4.9% of
revenues in first quarter fiscal 2005, and delivery fuel increased to 2.0%
of
revenues in first quarter fiscal 2006 from 1.8% of revenues in first quarter
fiscal 2005.
Gross
margin
percentage increased from 10.6% in fourth quarter fiscal 2005 to 13.8% in first
quarter fiscal 2006, although it remained below the 15.5% in the year ago period
for the reasons noted above.
In
the first
quarter fiscal 2006, selling, general and administrative expenses increased
by
$1.9 million over first quarter fiscal 2005 to $14.4 million, or 13.5% of
revenues, compared to 12.5% of revenues a year ago. The increase in SG&A
expenses as a
percent
of revenues
resulted primarily from $0.6 million of consulting fees incurred related to
our
operations process improvement implementation and $0.3 million of legal expenses
associated with the Board of Directors’ Special Committee. Legal fees associated
with labor activity were consistent with a year ago as efforts to resolve open
contracts in 13 service centers and costs associated with the Colton strike
were
comparable to first quarter fiscal 2005 legal costs when the Company was
defending itself against a union corporate campaign. Other legal fees increased
from prior year due to the Special Committee previously mentioned and costs
associated with a third-party lawsuit.
Amortization
expense of other acquired assets increased by $0.3 million, or 35.2%, to $1.1
million in the first quarter of fiscal 2006, reflecting the impact of intangible
assets acquired during fiscal 2005.
In
the first
quarter fiscal 2006, we reported other operating income of $0.6 million
reflecting gains from the sale of two parcels of real estate.
Interest
expense in
first quarter fiscal 2006 increased by $1.0 million to $2.2 million resulting
from a combination of both higher interest rates and higher borrowings. Interest
rates increased from an average 4.7% in first quarter fiscal 2005 to an average
7.1% in first quarter fiscal 2006. Higher average debt levels for the first
quarter of 2006 reflected the impact of the March 2005 acquisition borrowings
outstanding for a full quarter. At April 29, 2006, we had $86.9 million in
total
debt outstanding under our bank credit facility. In addition, there was $29.2
million of life insurance policy loans outstanding against the cash surrender
value of life insurance policies we own. Interest from bank and insurance debt
is included in our interest expense.
We
recorded $0.1
million pretax non-operating expense during the first quarter of fiscal 2006
which included a $0.3 million loss related to a natural gas derivative, mostly
offset by interest income. During the first quarter of fiscal 2005, we recorded
pretax non-operating income of $0.5 million, due primarily to a $0.4 million
distribution from the liquidation of the parent company of the issuer of life
insurance policies we own.
For
the first
quarter of fiscal 2006, we recorded a tax benefit of $1.0 million compared
to
income tax expense of $0.4 million in the first quarter of fiscal 2005. The
lower income tax expense in the current year quarter resulted primarily from
the
decline in pretax income for the first quarter of fiscal 2006.
We
reported a net
loss from continuing operations of $1.5 million in the first quarter of fiscal
2006 compared with income of $1.1 million in the prior year quarter. The
decrease resulted from the combination of higher prices for natural gas,
delivery fuel and labor that negatively impacted gross profit, higher
professional fees, increased intangible amortization and higher interest expense
that reflected both higher rates and acquisition borrowings. These higher
expenses were partially offset by the increase in textile service revenues
resulting from prior year acquisitions and current year organic
growth.
Financial
Condition
As
of April 29,
2006, working capital totaled $29.5 million and the current ratio (i.e.,
the ratio of
current assets to current liabilities) was 1.4 to 1, compared with $28.5 million
and 1.4 to 1, respectively, at January 28, 2006. The increase in working capital
reflects a $2.3 million increase in linens in service explained
below.
Although
receivables decreased by $0.8 million in the first quarter fiscal 2006, accounts
receivable days outstanding increased slightly to 46 from 45 days sales
outstanding at the end of fiscal 2005. Linens in service increased by $2.3
million as a result of a significant injection of linens into the system to
increase our customer order fill rates.
Accounts
payable
decreased by $2.6 million as higher payable balances at the beginning of the
quarter were paid down to more normal levels. The higher balances at January
28,
2006, were attributable to higher in-transit payments at January 28, 2006,
yielding increased payables and increased cash, as well as the timing of certain
invoices. The decline in accounts payable was offset by an increase in other
accrued liabilities reflecting higher accrued interest and insurance reserves
as
well as changes in the fair value of our natural gas derivatives. Long-term
debt
of $86.9 million as of April 29, 2006 was $1.8 million greater than at January
28, 2006, reflecting additional borrowings from our credit facility. Our ratio
of total debt to total capitalization as of April 29, 2006 was 37.2% compared
to
36.4% as of January 28, 2006. Book value per share at the end of first quarter
fiscal 2006 was $15.63, a decline from $16.08 as of January 28,
2006.
Liquidity
and
Capital Resources
Cash
flow provided
by operating activities of continuing operations decreased $2.2 million for
the
quarter ended April 29, 2006 compared with the same period a year ago. The
current year decline resulted primarily from a pretax loss of $2.5 million
in
the first quarter of fiscal 2006 compared with pretax income of $1.6 million
in
the comparable quarter of the prior year. Partially offsetting the income
decline was a favorable change in working capital components of $2.0 million,
excluding income tax changes, as the prior year amount reflected a significant
increase in working capital subsequent to acquisition activity in fiscal year
2004.
Cash
flows from
investing activities for the quarter ended April 29, 2006, included capital
expenditures of $2.7 million, down from the prior year quarter as we implement
best practices systemwide before expending discretionary capital expenditures.
In the first quarter of fiscal 2006, we also received net proceeds of $0.8
million from the disposal of certain real estate and $0.5 million from the
death
benefit of a Company-owned life insurance policy, the gain on which was
recognized in the fourth quarter of fiscal 2005. Cash flows from investing
activities for the quarter ended April 30, 2005 included $49.5 million of cost
of businesses acquired, including cash paid for Royal and the final payment
of
$3.6 million for the fiscal year 2004 acquisition of the Duke University Health
System laundry.
Cash
provided by
financing activities was $0.8 million in the first quarter of fiscal 2006
reflecting additional borrowings of $1.8 million under our loan agreement.
In
the first quarter of fiscal 2005, cash provided by financing activities of
$53.3
million reflected the net proceeds from bank debt and life insurance policy
loans of $53.8 million, used primarily to fund the prior year acquisition of
Royal. In addition, proceeds from stock option exercises decreased from $0.5
million in the first quarter of fiscal 2005 to $0.1 million in the first quarter
of fiscal 2006.
As
of April 29,
2006, there was $86.9 million outstanding debt under our credit facility.
Of
this amount, $10.0 million bears interest at a fixed rate of 3.58% pursuant
to
an interest rate swap agreement plus a margin under the credit facility (2.75%
as of April 29, 2006). Of the remaining debt, $70.0 million bore interest at
5.07% under a LIBOR contract, plus a margin (2.75% at April 29, 2006), and
$6.9
million bore interest at 7.75%, the Prime Rate, as of April 29,
2006.
In
addition to
amounts due under our loan agreement, at the end of the first quarter there
was
$29.2 million of life insurance policy loans outstanding. The proceeds of these
loans, bearing interest at a fixed rate of 8.0% or variable rates ranging from
5.3% to 5.8%, were used to pay down our revolving line of credit in fiscal
2005.
On April 29, 2006, we also had $13.5 million in irrevocable letters of credit
outstanding, which reduced the amount available to borrow under the loan
agreement to $7.6 million.
We
are subject to
certain financial covenants under our loan agreement. The covenants require
us
to maintain a minimum consolidated net worth of $120.9 million plus an aggregate
amount equal to 50% of quarterly net income beginning with the fourth quarter
of
fiscal 2005 (with no reductions for net losses), and an asset coverage ratio
of
1 to 1. We are also required to maintain a minimum ratio of “EBITDA” to “Fixed
Charges” of no less than 1.05 to 1, increasing to 1.15 to 1 effective October
31, 2006, and a maximum ratio of “Funded Debt” to “EBITDA” of no more than 4.0
to 1, decreasing to 3.5 to 1 effective January 31, 2010. We were in compliance
with these debt covenants as of April 29, 2006.
Management
believes
that our financial condition, operating cash flow and available sources of
external funds are sufficient to satisfy our requirements for debt service,
capital expenditures, dividends and working capital over the course of the
next
12 months. However, if we pursue a large acquisition or are unable to achieve
our forecasted operating results during the next twelve months, our forecasted
cash flows could be negatively impacted requiring that we consider alternative
funding sources in order to avoid violations of our loan covenants.
Recent
Accounting Pronouncements
Effective
January
29, 2006, the first day of fiscal 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (SFAS 123(R))
using the modified prospective method of adoption, which does not require
restatement of prior periods. Under the modified prospective method, we are
required to record compensation cost for all awards granted after the date
of
adoption and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption, net of an
estimate
of
expected forfeitures. Under SFAS 123(R), compensation cost is based on the
estimated fair values of stock options and restricted stock determined on the
date of grant and is recognized over the related vesting period. For
performance-contingent restricted stock, if it is determined that the
performance contingency will not be satisfied, any previously recognized
compensation cost is reversed in the period such determination is made. As
of
January 17, 2006, the Board of Directors approved the accelerated vesting of
64,334 unvested stock options. The exercise price of these options was greater
than the market price of the underlying stock on the date of modification.
By
accelerating the vesting of these options, approximately $173,000 and $43,000
of
compensation expense will be avoided in fiscal years 2006 and 2007,
respectively. Substantially all of the Company’s current quarter and expected
future stock-based compensation expense is related to restricted stock awards.
The adoption of SFAS No. 123(R) did not have a material impact on our
consolidated financial statements.
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, the ability of the Company to
recover its seller note and avoid future lease obligations as part of its sale
of Life Uniform, the ability of the Company to execute its strategy of providing
delightful service to every customer every day pursuant to its fiscal 2005
reorganization, unusual or unexpected cash needs for operations or capital
transactions, the effectiveness of the Company’s initiatives to reduce key
operating costs as a percent of revenues, the ability to obtain financing in
required amounts and at appropriate rates and terms, the ability to identify,
negotiate, fund, consummate and integrate acquisitions, and other factors which
may be identified in the Company's filings with the Securities and Exchange
Commission.
The
Company is
exposed to commodity price risk related to the use of natural gas in its laundry
service centers. The total cost of natural gas in the first quarter ended April
29, 2006 was approximately $6.5 million. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed-price contracts
as
of April 29, 2006 for approximately 65% of its estimated natural gas purchase
requirements in the next 12 months. A hypothetical 10% increase in the cost
of
natural gas not covered by these contracts would result in a reduction of
approximately $0.9 million in annual pretax earnings.
The
Company is also
exposed to commodity price risk resulting from the consumption of gasoline
and
diesel fuel for delivery trucks. The total cost of delivery fuel in the first
quarter ended April 29, 2006 was approximately $2.1 million. A hypothetical
10%
increase in the cost of delivery fuel would result in a decrease of
approximately $0.9 million in annual pretax earnings.
The
Company’s
exposure to interest rate risk relates primarily to its variable-rate revolving
debt agreement and life insurance policy loans. As of April 29, 2006, there
was
$86.9 million of outstanding debt under the credit facility, of which $10.0
million bore interest at a fixed rate of 3.58% (plus a margin) under an interest
rate swap agreement entered into by the Company with one of its lenders to
moderate the exposure. Amounts borrowed under the credit facility in excess
of
the $10.0 million covered by the interest rate swap agreement bore interest
at a
rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate, defined
as
the higher of (a) the Federal Funds Rate plus .50% or (b) the Prime Rate. The
margin is based on the Company’s ratio of “Funded Debt” to “EBITDA,” as each is
defined in the Loan Agreement. As of April 29, 2006, the margin was 2.75%.
Of
the $29.2 million in life insurance policy loans outstanding as of April 29,
2006, a total of $23.3 million of these loans bore interest at variable rates
ranging from 5.3% to 5.8%. A hypothetical increase of 100 basis points in
short-term interest rates applicable to the outstanding variable-rate debt
not
covered by the interest rate swap agreement would result in a reduction of
approximately $1.0 million in annual pretax earnings.
The
Company
maintains a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of the unaudited consolidated
financial statements and other disclosures included in this report. The
Company’s Board of Directors, operating through its Audit Committee which is
composed entirely of independent Directors, provides oversight to the financial
reporting process.
As
of the end of
the period covered by this report, the Company’s Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based upon their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to them by others within
those entities in a timely manner, particularly during the period for which
this
quarterly report is being prepared. The Chief Executive Officer and Chief
Financial Officer also concluded based upon their evaluation that the Company’s
disclosure
controls
and
procedures are effective in ensuring that the information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission’s
rules and forms.
There
were no
changes in the Company’s internal control over financial reporting during the
Company’s most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
There
have been no
material changes to the risk factors set forth in Part I, Item 1A, “Risk
Factors,” of the Company’s Form 10-K for the fiscal year ended January 28, 2006,
except as follows:
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.
The
two collective
bargaining agreements that cover six of our service centers in Southern
California, as well as the collective bargaining agreement for Colton,
California, have recently been renegotiated and ratified by the represented
employees. In addition, initial collective bargaining agreements for seven
newly
organized service centers have been negotiated and ratified by the represented
employees.
The
following table
sets forth information with respect to shares of our common stock that we
purchased during the three fiscal months ended April 29, 2006.
Period
|
Total
Number
of
Shares
Purchased
(1)
|
Average
Price
Paid
Per
Share
|
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Programs
|
Maximum
Number
of
Shares
That
May
Yet Be
Purchased
Under
the
Programs
|
Jan.
29, 2006
- Feb. 25, 2006
|
—
|
—
|
—
|
—
|
Feb.
26, 2006
- Mar. 25, 2006
|
—
|
—
|
—
|
—
|
Mar.
26, 2006
- Apr. 29, 2006
|
660
|
$20.805
|
—
|
—
|
Total
|
660
|
$20.805
|
—
|
—
|
(1)
|
The
shares
purchased were restricted stock withheld for the payment of withholding
taxes upon vesting of restricted
stock.
|
(a)
|
See
Exhibit
Index on page 25.
|
Items 1, 3, 4 and 5
are not
applicable for the current quarter and have been
omitted.
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
Angelica
Corporation
|
|
(Registrant)
|
|
|
|
|
|
|
Date:
June 8,
2006
|
/s/
Stephen M. O’Hara
|
|
Stephen
M.
O’Hara
|
|
Chairman
and
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
/s/
James
W. Shaffer
|
|
James
W.
Shaffer
|
|
Vice
President and Chief
|
|
Financial
Officer
|
|
(Principal
Financial Officer)
|
|
(Principal
Accounting Officer)
|
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 amended and restated.*
|
|
|
4.1
|
Shareholder
Rights Plan dated August 25, 1998. Filed as Exhibit 1 to Registration
Statement on Form 8-A on August 28, 1998.**
|
|
|
10.1
|
Product
and
Services Supply Agreement effective June 1, 2006, between the Company
and
Ecolab Inc. Filed as Exhibit 10.1 to the current report on Form 8-K
on May
30, 2006.**
|
|
|
31.1
|
Section
302
Certification of Chief Executive Officer.*
|
|
|
31.2
|
Section
302
Certification of Chief Financial Officer.*
|
|
|
32.1
|
Section
906
Certification of Chief Executive Officer.*
|
|
|
32.2
|
Section
906
Certification of Chief Financial
Officer.*
|