angelica10q.htm
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
28,
2007
|
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, 2007 was 9,590,694 shares.
ANGELICA
CORPORATION AND SUBSIDIARIES
TABLE
OF
CONTENTS
APRIL
28, 2007 FORM
10-Q QUARTERLY REPORT
|
Page
Number
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|
Reference
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Part
I. Financial Information:
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|
|
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Item
1. Condensed Financial Statements:
|
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|
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2
|
|
|
|
3
|
|
|
|
4
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5-14
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15-19
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20
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20-21
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Part
II. Other Information:
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22
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|
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22
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23
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24
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Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands, except per share amounts)
|
|
First
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
April
28,
2007
|
|
|
April
29,
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
107,777
|
|
|
$ |
107,006
|
|
Cost
of
services
|
|
|
(93,496 |
) |
|
|
(92,265 |
) |
Gross
profit
|
|
|
14,281
|
|
|
|
14,741
|
|
Selling,
general and administrative expenses
|
|
|
(13,398 |
) |
|
|
(14,412 |
) |
Amortization
of other acquired assets
|
|
|
(1,063 |
) |
|
|
(1,080 |
) |
Other
operating income, net
|
|
|
198
|
|
|
|
551
|
|
Income
(loss)
from operations
|
|
|
18
|
|
|
|
(200 |
) |
Interest
expense
|
|
|
(2,336 |
) |
|
|
(2,220 |
) |
Non-operating
income (expense), net
|
|
|
262
|
|
|
|
(56 |
) |
Loss
before
income taxes
|
|
|
(2,056 |
) |
|
|
(2,476 |
) |
Income
tax
benefit
|
|
|
915
|
|
|
|
977
|
|
Net
loss
|
|
$ |
(1,141 |
) |
|
$ |
(1,499 |
) |
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
Diluted
loss per share
|
|
$ |
(0.12 |
) |
|
$ |
(0.16 |
) |
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
April
28,
|
|
|
January
27,
|
|
|
|
2007
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
4,193
|
|
|
$ |
6,254
|
|
Receivables,
less reserves of $1,164 and $848
|
|
|
59,784
|
|
|
|
56,874
|
|
Linens
in
service
|
|
|
52,205
|
|
|
|
50,902
|
|
Prepaid
expenses and other current assets
|
|
|
2,389
|
|
|
|
4,019
|
|
Total
Current
Assets
|
|
|
118,571
|
|
|
|
118,049
|
|
|
|
|
|
|
|
|
|
|
Property
and
Equipment
|
|
|
205,032
|
|
|
|
203,236
|
|
Less
--
accumulated depreciation
|
|
|
110,346
|
|
|
|
106,780
|
|
Total
Property and Equipment
|
|
|
94,686
|
|
|
|
96,456
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
49,259
|
|
|
|
49,259
|
|
Other
acquired assets
|
|
|
37,045
|
|
|
|
38,108
|
|
Cash
surrender value of life insurance
|
|
|
9,784
|
|
|
|
9,664
|
|
Deferred
income taxes
|
|
|
19,686
|
|
|
|
19,035
|
|
Miscellaneous
|
|
|
5,684
|
|
|
|
5,734
|
|
Total
Other
Assets
|
|
|
121,458
|
|
|
|
121,800
|
|
Total
Assets
|
|
$ |
334,715
|
|
|
$ |
336,305
|
|
|
|
|
|
|
|
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LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
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|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
30
|
|
|
$ |
96
|
|
Life
insurance policy loans
|
|
|
8,332
|
|
|
|
8,298
|
|
Accounts
payable
|
|
|
31,613
|
|
|
|
32,867
|
|
Accrued
wages
and other compensation
|
|
|
6,914
|
|
|
|
8,961
|
|
Deferred
compensation and pension liabilities
|
|
|
1,693
|
|
|
|
1,693
|
|
Deferred
income taxes
|
|
|
5,595
|
|
|
|
4,961
|
|
Other
accrued
liabilities
|
|
|
28,469
|
|
|
|
29,392
|
|
Total
Current
Liabilities
|
|
|
82,646
|
|
|
|
86,268
|
|
|
|
|
|
|
|
|
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|
Long-Term
Debt, less current maturities
|
|
|
88,800
|
|
|
|
85,300
|
|
Other
Long-Term Liabilities
|
|
|
15,278
|
|
|
|
17,191
|
|
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|
|
|
|
|
|
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|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock,
$1 par value, authorized 20,000,000
|
|
|
|
|
|
|
|
|
shares,
issued: 9,558,988 and 9,518,688 shares
|
|
|
9,559
|
|
|
|
9,519
|
|
Capital
surplus
|
|
|
8,154
|
|
|
|
7,174
|
|
Retained
earnings
|
|
|
138,099
|
|
|
|
140,277
|
|
Accumulated
other comprehensive loss
|
|
|
(3,253 |
) |
|
|
(4,839 |
) |
Common
Stock
in treasury, at cost: 295,200 and 296,419 shares
|
|
|
(4,568 |
) |
|
|
(4,585 |
) |
Total
Shareholders' Equity
|
|
|
147,991
|
|
|
|
147,546
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
334,715
|
|
|
$ |
336,305
|
|
|
|
|
|
|
|
|
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
Angelica
Corporation and Subsidiaries
Unaudited
(Dollars in thousands)
|
|
First
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
April
28,
2007
|
|
|
April
29,
2006
|
|
|
|
|
|
|
|
|
Cash
Flows
from Operating Activities:
|
|
|
|
|
|
|
Loss
from
continuing operations
|
|
$ |
(1,141 |
) |
|
$ |
(1,499 |
) |
Non-cash
items included in loss from continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,631
|
|
|
|
3,697
|
|
Amortization
|
|
|
1,454
|
|
|
|
1,400
|
|
Deferred
income taxes
|
|
|
(1,065 |
) |
|
|
(977 |
) |
Cash
surrender value of life insurance
|
|
|
(302 |
) |
|
|
(321 |
) |
Gain
on
disposal of assets
|
|
|
(29 |
) |
|
|
(551 |
) |
Change
in
working capital components of continuing operations
|
|
|
(4,829 |
) |
|
|
(1,402 |
) |
Other,
net
|
|
|
(821 |
) |
|
|
(10 |
) |
Net
cash
(used in) provided by operating activities of continuing
operations
|
|
|
(3,102 |
) |
|
|
337
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Expenditures
for property and equipment, net
|
|
|
(2,144 |
) |
|
|
(2,735 |
) |
Disposals
of
assets
|
|
|
70
|
|
|
|
853
|
|
Life
insurance premiums paid, net
|
|
|
(144 |
) |
|
|
382
|
|
Net
cash used
in investing activities of continuing operations
|
|
|
(2,218 |
) |
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments
of
long-term debt
|
|
|
(32,866 |
) |
|
|
(26,686 |
) |
Borrowings
of
long-term debt
|
|
|
36,300
|
|
|
|
28,500
|
|
Repayments
of
life insurance policy loans
|
|
|
(8,298 |
) |
|
|
-
|
|
Borrowings
from life insurance policy loans
|
|
|
8,514
|
|
|
|
-
|
|
Debt
issuance
costs
|
|
|
-
|
|
|
|
(17 |
) |
Dividends
paid
|
|
|
(1,037 |
) |
|
|
(1,034 |
) |
Exercise
of
stock options
|
|
|
658
|
|
|
|
82
|
|
Net
cash
provided by financing activities of continuing operations
|
|
|
3,271
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(12 |
) |
|
|
(279 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease
in cash and cash equivalents
|
|
|
(2,061 |
) |
|
|
(597 |
) |
Balance
at
beginning of year
|
|
|
6,254
|
|
|
|
4,377
|
|
Balance
at
end of period
|
|
$ |
4,193
|
|
|
$ |
3,780
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Purchases
of
property and equipment included in accounts payable
|
|
$ |
219
|
|
|
$ |
99
|
|
The
accompanying
notes are an integral part of the consolidated financial
statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FIRST
QUARTER ENDED
APRIL 28, 2007
AND
APRIL 29,
2006
NOTE
1. BASIS OF PRESENTATION
|
The
accompanying condensed consolidated financial statements are unaudited,
and these consolidated financial 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 27, 2007 (fiscal 2006). 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 28, 2007 are not necessarily
indicative of the results that will be achieved for the full fiscal
year
2007. Cash flows related to operations that were discontinued prior
to
fiscal year 2006 are segregated for reporting purposes in the Statement
of
Cash Flows.
|
NOTE
2. SHARE-BASED PAYMENTS
|
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. 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
periods ranging from six months to four years, and are exercisable
not
less than six months nor 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,
with the
exception of certain retention awards granted in the third quarter
of
fiscal 2006 that vest over a ten year period upon the attainment
of
certain earnings performance goals.
|
|
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 28, 2007 or April 29, 2006. A summary of the
status of
the Company’s stock option plans as of April 28, 2007, and changes for the
quarter then ended is presented in the table
below:
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
|
Options
outstanding at January 28, 2007
|
|
|
581,850
|
|
|
$ |
21.49
|
|
|
|
6.4
|
|
|
$ |
3,496,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,300 |
) |
|
|
16.33
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,000 |
) |
|
|
32.88
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options
outstanding at April 28, 2007
|
|
|
538,550
|
|
|
$ |
21.81
|
|
|
|
6.2
|
|
|
$ |
3,384,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at April 28, 2007
|
|
|
462,050
|
|
|
$ |
21.56
|
|
|
|
5.7
|
|
|
$ |
3,102,000
|
|
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 28, 2007 was as follows:
|
|
Shares
|
|
|
Weighted
Average Grant Date
Fair
Value
|
Nonvested
at
January 28, 2007
|
|
|
296,269
|
|
|
$ |
19.70
|
Granted
|
|
|
70,811
|
|
|
|
26.95
|
Vested
|
|
|
(1,668 |
) |
|
|
19.18
|
Forfeited
|
|
|
(50,290 |
) |
|
|
21.64
|
Nonvested
at
April 28, 2007
|
|
|
315,122
|
|
|
$ |
21.02
|
Total
compensation
expense charged to income for all stock option and stock bonus plans during
the
quarter ended April 28, 2007 was $243,000 (net of $148,000 related income tax
benefit). During the quarter ended April 29, 2006, the Company recognized
$229,000 of expense for restricted stock and performance-based awards, net
of
$144,000 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 $3,857,000. This cost is expected to be
recognized over a weighted average period of 4.3 years.
NOTE
3. NON-OPERATING INCOME (EXPENSE), NET
In
the first
quarter of fiscal 2007, the Company recorded non-operating income of $262,000
which consisted primarily of interest income earned on invested cash balances
and notes receivable.
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
9)
offset primarily by interest income.
|
On
July 13,
2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity’s
financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes” and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax
positions
taken or expected to be taken on a tax return. Under FIN 48, the
impact of
an uncertain income tax position on the income tax return must be
recognized at the largest amount that is more-likely-than-not to
be
sustained upon audit by the relevant taxing authority. An uncertain
income
tax position will not be recognized if it has less than a 50% likelihood
of being sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure and transition. FIN 48 is effective for
fiscal
years beginning after December 15,
2006.
|
|
The
Company
adopted the provisions of FIN 48 on January 28, 2007, the first day
of its
2007 fiscal year. The implementation of FIN 48 did not result in
a
cumulative adjustment to the Company’s previously recorded liability for
unrecognized tax benefits, which amounted to $2,329,000 as of the
date of
adoption. If recognized, $2,217,000 of this amount would impact the
Company’s effective tax rate.
|
|
The
Company
recognizes interest and penalties accrued related to unrecognized
tax
benefits in its tax provision. Due to its net operating loss and
tax
credit carryforward position, the Company recognized no penalties
or
interest during the quarters ended April 28, 2007 and April 29, 2006,
and
had no interest and penalties accrued as of April 28, 2007 or January
27,
2007.
|
|
The
Company
believes that it is reasonably possible that the total amount of
unrecognized tax benefits will significantly change within 12 months
of
the date of adoption of FIN 48. The Company has certain tax return
years subject to statutes of limitation which are anticipated to
close within 12 months of the date of adoption. Unless challenged
by tax
authorities, the closure of those statutes of limitation is expected
to
result in the recognition of uncertain tax positions in the amount
of
$2,217,000.
|
|
The
Company
is subject to taxation in the United States, and its tax years for
2003
through 2006 are subject to examination by the tax authorities. With
few
exceptions, the Company is no longer subject to U.S. federal, state
or
local examinations by tax authorities for years before
2003.
|
|
The
Company
recorded a tax benefit of $915,000 for the first quarter ended April
28,
2007. This benefit consisted of $780,000 based upon the Company’s
estimated effective tax rate of 37.9% for the year and $135,000 from
federal and state tax credits. The effective tax rate for the first
quarter ended April 28, 2007, reflects the statutory tax rate adjusted
for
permanent items and state tax benefits, as
applicable.
|
|
The
Company
has a federal net operating loss carryover of $36,551,000 which will
expire beginning in 2025; $3,554,000 in federal tax credit carryovers
which expire at various dates beginning in 2021 or have no expiration
date; $8,897,000 of state tax
credit
|
|
carryovers
which expire 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.
|
Loss
per share is
computed by dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Diluted loss per share is computed by
dividing net loss by the weighted average number of Common and Common equivalent
shares outstanding.
The
following table
reconciles weighted average shares outstanding to amounts used to calculate
basic and diluted loss per share for the first quarter ended April 28, 2007
and
April 29, 2006 (shares in thousands):
|
|
First
Quarter
Ended
|
|
|
|
April
28,
|
|
|
April
29,
|
|
|
|
2007
|
|
|
2006
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
9,239
|
|
|
|
9,164
|
|
Effect
of
dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Average
shares outstanding,
|
|
|
|
|
|
|
|
|
adjusted
for dilutive effects
|
|
|
9,239
|
|
|
|
9,164
|
|
Potentially
dilutive securities of 88,000 and 48,000 shares were not included in the
calculation of weighted average shares outstanding for the quarters ended April
28, 2007 and April 29, 2006, respectively, as their effect is antidilutive
on
loss per share for the respective periods.
NOTE
6. GOODWILL AND OTHER ACQUIRED ASSETS
In
accordance with
Statement of Financial Accounting Standards (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 2006 which resulted
in
no indication of impairment.
Other
acquired
assets consisted of the following (dollars in thousands):
|
|
April
28,
2007
|
|
|
January
27,
2007
|
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Acquired
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets,
net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts
|
|
$ |
41,813
|
|
|
$ |
(11,700 |
) |
|
$ |
30,113
|
|
|
$ |
41,813
|
|
|
$ |
(10,984 |
) |
|
$ |
30,829
|
|
Non-compete
covenants
|
|
|
11,089
|
|
|
|
(4,157 |
) |
|
|
6,932
|
|
|
|
11,089
|
|
|
|
(3,810 |
) |
|
|
7,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
acquired assets
|
|
$ |
52,902
|
|
|
$ |
(15,857 |
) |
|
$ |
37,045
|
|
|
$ |
52,902
|
|
|
$ |
(14,794 |
) |
|
$ |
38,108
|
|
Aggregate
amortization expense for the first quarter ended April 28, 2007 and April 29,
2006 amounted to $1,063,000 and $1,080,000, respectively. Other acquired assets
are scheduled to be fully amortized by fiscal year 2021 with corresponding
annual amortization expense estimated for each of the next five fiscal years
as
follows (dollars in thousands):
2007
|
$4,173
|
2008
|
3,820
|
2009
|
3,511
|
2010
|
3,045
|
2011
|
3,039
|
The
Company’s
long-term bank borrowings are financed through a $125,000,000 revolving credit
facility under a loan agreement 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
Indebtedness” to “EBITDA,” as each is defined in the loan agreement, and may
range from 1.5% to 2.0%. 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 28,
2007, there was $88,800,000 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 1.75% as of April 28, 2007. Of the
remaining debt, $75,000,000 bore interest at 5.32% under LIBOR contracts, plus
a
margin (1.75% as of April 28, 2007), and $3,800,000 bore interest at 8.25%,
the
Prime Rate, as of April 28, 2007. Furthermore, the Company had $13,055,000
outstanding in irrevocable letters of credit as of April 28, 2007, which reduced
the amount available to borrow under the line of credit to $13,228,000. As
of
April 28, 2007, the fee on the outstanding letters of credit and unused funds
was 1.75% and 0.25%, 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 no less than 1 to 1. Other covenants
require the Company to maintain a minimum ratio of “EBITDA” to “Fixed Charges”
of no less than 1.15 to 1, and a maximum ratio of “Funded Indebtedness” to
“EBITDA” of no more than 3.5 to 1. The Company was in compliance with these loan
covenants as of April 28, 2007.
As
of April 28,
2007, there was $30,867,000 of life insurance policy loans outstanding. The
loans bore interest at a fixed rate of 8.0% or variable rates ranging from
5.7%
to 6.3%. 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. Of the total amount outstanding at April 28, 2007, approximately
$8,332,000 is considered a current liability
and
presented as
such in the Consolidated Balance Sheet. The remainder is netted against cash
surrender value of life insurance in the Consolidated Balance Sheet as of April
28, 2007.
NOTE
8. 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 28, 2007 and April
29, 2006 was as follows:
|
|
First
Quarter
Ended
|
|
|
|
April
28,
|
|
|
April
29,
|
|
(Dollars
in
thousands)
|
|
2007
|
|
|
2006
|
|
Pension
expense:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
86
|
|
|
$ |
113
|
|
Interest
cost
|
|
|
331
|
|
|
|
312
|
|
Expected
return on plan assets
|
|
|
(333 |
) |
|
|
(322 |
) |
Unrecognized
loss
|
|
|
17
|
|
|
|
17
|
|
Net
periodic
pension expense
|
|
$ |
101
|
|
|
$ |
120
|
|
NOTE
9. 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
Company’s revolving credit facility until the swap’s 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 other comprehensive income. The (loss) gain on the derivative included in
other comprehensive income (loss) in the first quarter ended April 28, 2007
and
April 29, 2006 amounted to $(26,000) and $7,000, respectively, net of tax.
The
Company has recorded a current asset of $25,000 and $67,000 for the fair value
of the derivative as of April 28, 2007 and January 27, 2007,
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). For
fiscal years 2007, 2008 and 2009,
these
futures
contracts are expected to hedge approximately 66%, 49% and 22%, respectively,
of
the Company’s total requirements for natural gas (measured at current usage
rates). As of April 28, 2007, the weighted-average cost of natural gas under
these contracts is $9.38 per decatherm. The Company has elected to apply cash
flow hedge accounting for these derivatives in accordance with SFAS No. 133.
Accordingly, the net gain (loss) on the derivatives included in other
comprehensive income (loss) for the quarter ended April 28, 2007, amounted
to
$1,611,000, net of tax, and $(336,000), net of tax, for the quarter ended April
29, 2006. Prior to the second quarter of fiscal 2006, a portion of the Company’s
natural gas derivatives were not considered a cash flow hedge for accounting
purposes. The change in fair value for these derivatives 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 $1,271,000
and
$2,863,000 as of April 28, 2007 and January 27, 2007, respectively, and a
long-term liability of $883,000 and $1,968,000 as of April 28, 2007 and January
27, 2007, respectively, for the fair value of the derivatives. The Company
estimates that $1,271,000 of unrealized losses included in accumulated other
comprehensive loss before taxes as of April 28, 2007 will be reclassified to
cost of 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 28, 2007
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 87% 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
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss), consisting primarily of net loss and changes in the fair value
of
derivatives (see Note 9), net of taxes, totaled $444,000 and $(1,828,000) for
the first quarter ended April 28, 2007 and April 29, 2006,
respectively.
NOTE
11. 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 28, 2007, the
Company is secondarily obligated as a guarantor for 46 store lease agreements
and the estimated maximum potential amount of future payments the Company could
be required to make under these guarantees is $7,503,000. Although these
guarantees expire
at
various dates
through fiscal year 2014, approximately 73% of the estimated maximum potential
future payments expires by the end of fiscal year 2009.
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 acquisition of Royal Institutional Services, Inc. and its
affiliate, The Surgi-Pack Corporation, 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 28, 2007,
$1,000,000 remained in escrow and is due the sellers in March 2015 upon
compliance with the restrictive covenants.
The
Company carries
insurance policies on insurable risks with coverage and other terms that it
believes to be appropriate. The Company generally has self-insured retention
limits and has obtained fully-insured layers of coverage above such self-insured
retention limits. Accruals for self-insurance losses are made based on claims
experience. Liabilities for existing and unreported claims are accrued for
when
it is probable that future costs will be incurred.
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 $827,000 as of April 28,
2007.
A
significant
portion of the Company’s revenues is derived from operations in a limited number
of markets. Revenues generated from operations in California and Arizona
accounted for approximately 39% of revenues for the quarter ended April 28,
2007. The Company also faces some significant risk and uncertainty to its
business operations related to the status of labor relations at its service
centers. Approximately 75% of the Company’s workforce is represented by one of
several unions. Collective bargaining agreements covering drivers associated
with seven service centers will expire in fiscal 2007. A collective bargaining
agreement covering recently organized drivers at the Company’s Turlock,
California service center is in the process of being ratified and finalized.
Collectively, these new and renewal agreements apply to approximately 2% of
the
Company’s total workforce. Any work interruptions or shortages 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
12. NEW ACCOUNTING PRONOUNCEMENTS
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 the Company’s fiscal year ending January 26, 2008.
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.
In
June 2006, the
EITF reached a consensus on Issue No. 06-5, “Accounting for Purchases of Life
Insurance – Determining the Amount that Could Be Realized in Accordance with
FASB Technical Bulletin 85-4.” EITF 06-5 stipulates that the cash surrender
value and any additional amounts provided by the contractual terms of the
insurance policy that are realizable at the balance sheet date should be
considered in determining the amount that could be realized under the life
insurance policy. The consensus also provides additional guidance for
determining the amount to be realized, including the policy level for which
the
analysis should be performed, amounts excluded and measurement criteria.
Entities will have the option of applying the provisions of EITF 06-5 as a
cumulative effect adjustment to the opening balance of retained earnings or
retrospectively to all prior periods. EITF 06-5 is effective for the Company’s
fiscal year ending January 26, 2008. The Company does not expect that the
adoption of EITF 06-5 will have a material impact on its consolidated financial
statements.
In
September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a
framework for measuring the fair value of assets and liabilities. This framework
is intended to provide increased consistency in how fair value determinations
are made under various existing accounting standards which permit, or in some
cases require, estimates of fair market value. SFAS No. 157 also expands
financial statement disclosure requirements about a company’s use of fair value
measurements, including the effect of such measures on earnings. SFAS No. 157
is
effective for the Company’s fiscal year ending January 31, 2009. The Company is
currently evaluating the impact SFAS No. 157 will have on its consolidated
financial statements.
In
September 2006,
the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans,” which amends SFAS No. 87, “Employers’
Accounting for Pension,” SFAS No. 88, “Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than
Pension” and SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pension
and Other Postretirement Benefits.” SFAS No. 158 requires that employers
recognize on a prospective basis the funded status of their defined benefit
pension and other postretirement plans on their consolidated balance sheet
and
recognize as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or
credits
that arise
during the period but are not recognized as components of net periodic benefit
cost. On January 27, 2007, the Company adopted the recognition and disclosure
provisions of SFAS No. 158, and included the related cumulative effect
adjustment in its consolidated balance sheet for fiscal 2006. The statement
also
requires that employers measure plan assets and obligations as of the date
of
their year-end financial statements beginning with the Company’s fiscal year
ending January 31, 2009. The Company currently measures its plan assets and
obligations as of January 1. The Company has not yet determined the impact
that
adopting this portion of SFAS No. 158 will have on its consolidated balance
sheets.
In
February 2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Liabilities.” SFAS No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value, with the objective to reduce
both the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently.
SFAS
No. 159 is effective for the Company’s fiscal year ending January 31, 2009. The
Company has not yet determined the impact that adoption of SFAS No. 159 will
have on its consolidated financial statements.
Item
2. Management’s Discussion and Analysis of
Financial Condition
and
Results
of Operations
FIRST
QUARTER ENDED
APRIL 28, 2007
COMPARED
WITH
FIRST
QUARTER ENDED
APRIL 29, 2006
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, 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 29 laundry service centers and
serve
customers in 23 states.
Results
of
Operations
First
quarter
fiscal 2007 revenues were $107.8 million, an increase of $0.8 million compared
with the same period in fiscal 2006. Organic growth contributed $1.1 million
of
the increase, representing an organic growth rate of 1.0%. The current year
organic growth rate resulted from an approximate 4.0% improvement in pricing,
partially offset by a volume decline primarily related to a large customer
contract that was not renewed. The revenue growth was partially offset by a
net reduction in revenues of $0.3 million related to acquisitions and
divestitures, primarily due to the sale of non-healthcare customer accounts
in
fiscal 2006. Total healthcare revenues increased 1.9% compared with the same
period in fiscal 2006.
Cost
of services of
$93.5 million in the first quarter of fiscal 2007 increased by $1.2 million,
or
1.3%, from the same period last year. The principal factors for this increase
were operational difficulties at our Edison, New Jersey facility, which
negatively impacted the operations in the New York City/New Jersey area, as
well
as increased linen costs. While total company direct and indirect production
labor and fringe benefit costs decreased $0.2 million in first quarter fiscal
2007 from first quarter fiscal 2006, the same costs for the service centers
in
the New York City/New Jersey area increased $1.3 million year over year due
to
inefficiencies caused by equipment failures and management turnover. The $1.5
million favorable variance in these costs for all other service centers
(excluding the service centers in the New York City/New Jersey area) was a
result of increased operating efficiencies and lower operating volumes. In
addition, linen amortization expense increased $1.0 million as a result of
increased linen purchases to satisfy our 100% fill initiative and higher quality
linen.
Gross
margin was
13.3% in the first quarter of fiscal 2007, a decrease from the 14.0% reported
in
the fourth quarter of fiscal 2006 and 13.8% reported in the same period
a
year
ago for the
reasons noted above. Gross profit from the service centers in the New York
City/New Jersey area declined $1.9 million in the first quarter of fiscal 2007
from the same period in fiscal 2006 due to the factors mentioned above. In
the
balance of the country, gross profit increased $1.4 million year over
year.
In
the first
quarter fiscal 2007, selling, general and administrative (SG&A) expenses
decreased by $1.0 million from first quarter fiscal 2006 to $13.4 million,
or
12.4% of revenues, compared to 13.5% of revenues a year ago. The decrease in
SG&A expenses resulted primarily from $0.6 million of consulting fees
incurred in prior year related to our operations process improvement
implementation and $0.3 million of legal expenses incurred in prior year
associated with the Board of Directors’ Special Committee.
In
the first
quarter fiscal 2007, we reported other operating income of $0.2 million
consisting primarily of insurance proceeds from a property insurance claim.
Other operating income of $0.6 million in the first quarter of fiscal 2006
reflected gains from the sale of two parcels of real estate.
Interest
expense in
first quarter fiscal 2007 increased by $0.1 million to $2.3 million resulting
from higher interest rates. Interest rates increased from an average 7.1% in
first quarter fiscal 2006 to an average 7.4% in first quarter fiscal 2007.
At
April 28, 2007, we had $88.8 million in total debt outstanding under our bank
credit facility. In addition, there was $30.9 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 $0.3
million non-operating income during the first quarter of fiscal 2007 which
consisted primarily of interest income from a note receivable. During the first
quarter of fiscal 2006, we recorded non-operating expense of $0.1 million which
included a $0.3 million loss related to a natural gas derivative, mostly offset
by interest income.
For
the first
quarter of fiscal 2007, we recorded a tax benefit of $0.9 million compared
to
$1.0 million in the first quarter of fiscal 2006. The lower income tax benefit
in the current year quarter resulted primarily from the decline in pretax loss
for the first quarter of fiscal 2007.
We
reported a net
loss of $1.1 million in the first quarter of fiscal 2007 compared with a net
loss of $1.5 million in the prior year quarter. The variance resulted primarily
from the decrease in selling, general and administrative expenses and increase
in non-operating income discussed above.
Financial
Condition
As
of April 28,
2007, working capital totaled $35.9 million and the current ratio
(i.e., the ratio of current assets to current liabilities) was 1.4 to
1, compared with $31.8 million and 1.4 to 1, respectively, at January 27, 2007.
The increase in working capital is
primarily
due to
higher balances in accounts receivable and linens in service and a lower balance
in accrued wages and other compensation, as explained below.
Accounts
receivable
increased by $2.9 million in the first quarter fiscal 2007 due to a combination
of higher revenue and the timing of cash receipts around the quarter end. Linens
in service increased by $1.3 million as we continue to support our 100% customer
order fill initiative and add higher quality linen. Prepaid expenses and other
current assets decreased $1.6 million in the first quarter due to the collection
of a miscellaneous receivable and the normal amortization of prepaid
items.
Accounts
payable
decreased by $1.3 million due to the timing of invoice payments near the fiscal
2006 year end. Accrued wages and other compensation decreased $2.0 million
from
January 27, 2007, as incentive compensation accrued at year end was paid out
in
the first quarter of fiscal 2007. Long-term debt of $88.8 million as of April
28, 2007 was $3.5 million greater than at January 27, 2007, reflecting
additional borrowings from our credit facility to fund the higher working
capital balances discussed above. The $0.9 million and $1.9 million decrease
in
other accrued liabilities and other long-term liabilities, respectively,
resulted from a decrease in liabilities related to our natural gas hedges and
first quarter contributions to our defined benefit pension plan. Our ratio
of
total debt to total capitalization as of April 28, 2007 was 37.5% compared
to
36.7% as of January 27, 2007. Book value per share at the end of first quarter
fiscal 2007 was $15.98, a slight decline from $16.00 as of January 27,
2007.
Liquidity
and
Capital Resources
Cash
flow provided
by operating activities of continuing operations decreased $3.4 million for
the
quarter ended April 28, 2007 compared with the same period a year ago. The
current year decline resulted primarily from the increase in working capital
and
pension plan contributions discussed above.
Cash
flows from
investing activities for the quarter ended April 28, 2007 included capital
expenditures of $2.1 million. Cash flows from investing activities for the
quarter ended April 29, 2006 included $2.7 million of capital expenditures,
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. We expect
capital expenditures to be approximately $15.0 million for fiscal
2007.
Cash
provided by
financing activities was $3.3 million in the first quarter of fiscal 2007
reflecting additional borrowings of $3.5 million under our loan agreement and
$0.2 million from life insurance policy loans, partially offset by dividend
payments of $1.0 million. In the first quarter of fiscal 2006, cash provided
by
financing activities of $0.8 million reflected additional borrowings of $1.9
million under our loan agreement. In addition, proceeds from stock option
exercises increased to $0.7 million in the first quarter of fiscal 2007 from
$0.1 million in the first quarter of fiscal 2006.
As
of April 28,
2007, there was $88.8 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 (1.75% as of April 28, 2007).
Of the remaining debt, $75.0 million bore interest at 5.32% under LIBOR
contracts, plus a margin (1.75% at April 28, 2007), and $3.8 million bore
interest at 8.25%, the Prime Rate, as of April 28, 2007.
In
addition to
amounts due under our loan agreement, at the end of the first quarter there
was
$30.9 million of life insurance policy loans outstanding bearing interest at
a
fixed rate of 8.0% or variable rates ranging from 5.7% to 6.3%. On April 28,
2007, we also had $13.1 million in irrevocable letters of credit outstanding,
which reduced the amount available to borrow under the loan agreement to $13.2
million.
We
are subject to
certain financial covenants under our loan agreement. One of the covenants
requires 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 no less than 1 to 1. We are also required to maintain a
minimum ratio of “EBITDA” to “Fixed Charges” of no less than 1.15 to 1, and a
maximum ratio of “Funded Indebtedness” to “EBITDA” of no more than 3.5 to 1. We
were in compliance with these debt covenants as of April 28, 2007.
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, incur significant
expenditures for new facilities, 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
On
July 13, 2006,
the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with
FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax return.
Under
FIN 48, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income
tax
position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We adopted the provisions of FIN 48 on January 28, 2007,
the
first day of our 2007 fiscal year. The implementation of FIN 48 had no 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 its former Life Uniform division, the ability of the Company to execute
its
operational strategies, 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.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
The
Company is
exposed to commodity price risk related to the use of natural gas in its laundry
service centers. The total cost of natural gas in the first quarter ended April
28, 2007, was approximately $6.9 million. To reduce the uncertainty of
fluctuating energy prices, the Company has entered into fixed-price contracts
as
of April 28, 2007, 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 28, 2007, was approximately $2.1 million. A hypothetical
10%
increase in the cost of delivery fuel would result in a decrease of
approximately $0.8 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 28, 2007, there
was
$88.8 million of outstanding debt under the credit facility that bear interest
at a rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate, defined
as the higher of (a) the Federal Funds Rate plus .50% or (b) the Prime Rate.
The
margin is based on the Company’s ratio of “Funded Indebtedness” to “EBITDA,” as
each is defined in the loan agreement. As of April 28, 2007, the margin was
1.75%. Of the $30.9 million in life insurance policy loans outstanding as of
April 28, 2007, a total of $25.1 million of these loans bore interest at
variable rates ranging from 5.7% to 6.3%. A hypothetical increase of 100 basis
points in short-term interest rates applicable to the outstanding variable-rate
debt would result in a reduction of approximately $1.1 million in annual pretax
earnings.
Item
4. Controls and Procedures
The
Company
maintains a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of the unaudited consolidated
financial statements and other disclosures included in this report. The
Company’s Board of Directors, operating through its Audit Committee which is
composed entirely of independent Directors, provides oversight to the financial
reporting process.
As
of the end of
the period covered by this report, the Company’s Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based upon their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to them by others within
those entities in a timely manner, particularly during the period for which
this
quarterly report is being prepared. The Chief Executive Officer and Chief
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.
PART
II. OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and
Use of Proceeds
The
following table
sets forth information with respect to shares of our common stock that we
purchased during the three fiscal months ended April 28, 2007.
Period
|
Total
Number
of
Shares
Purchased
(a)
|
|
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.
28, 2007
– Feb. 24, 2007
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb.
25, 2007
– Mar. 24, 2007
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar.
25, 2007
– Apr. 28, 2007
|
|
|
449
|
|
|
|
$26.485
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
449
|
|
|
|
$26.485
|
|
|
|
—
|
|
|
—
|
(a)
|
The
shares
purchased were restricted stock withheld for the payment of withholding
taxes upon vesting of restricted
stock.
|
(a)
|
See
Exhibit
Index on page 24.
|
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
7, 2007
|
/s/
Stephen M. O’Hara
|
|
Stephen
M.
O’Hara
|
|
Chairman,
President 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
|
Amendment
to
Certificate of Designation, Preferences and Rights of Class B Series
2
Junior Participating Preferred Stock. Filed as Exhibit 3.1 to a current
report on Form 8-K on September 5, 2006.**
|
|
|
3.3
|
Current
By-Laws of the Company, as amended and restated. Filed as Exhibit
3.2 to
the Form 10-K for fiscal year ended January 27, 2007.**
|
|
|
4.1
|
Shareholder
Rights Plan dated August 25, 1998. Filed as Exhibit 1 to
Registration Statement on Form 8-A on August 28,
1998.**
|
|
|
4.2
|
Form
of
Amendment No. 1 to Rights Agreement, dated as of August 29, 2006,
between
Angelica Corporation and UMB Bank, N.A. Filed as Exhibit 4.1 to a
current
report on Form 8-K on September 5, 2006.**
|
|
|
4.3
|
Form
of
Amendment No. 2 to Rights Agreement, dated September 19, 2006, by
and
between Angelica Corporation and UMB Bank, N.A. Filed as Exhibit
4.1 to a
current report on Form 8-K on September 22, 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.*
|