===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended Commission File
October 29, 2005 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 an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No | |
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). Yes | | No |X|
The number of shares outstanding of Registrant's Common Stock, par value
$1.00 per share, at December 1, 2005 was 9,290,623 shares.
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ANGELICA CORPORATION AND SUBSIDIARIES
INDEX TO
OCTOBER 29, 2005 FORM 10-Q QUARTERLY REPORT
Page Number
-----------
Reference
---------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements:
Consolidated Statements of Income - Third Quarter and
Nine Months ended October 29, 2005 and October 30,
2004 (Unaudited) 2
Consolidated Balance Sheets - October 29, 2005
and January 29, 2005 (Unaudited) 3
Consolidated Statements of Cash Flows - Nine Months
ended October 29, 2005 and October 30, 2004 (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 21-22
PART II. OTHER INFORMATION:
Item 6. Exhibits 23
Signatures 24
Exhibit Index 25
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
----------------------------- ----------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
CONTINUING OPERATIONS:
Net revenues $107,582 $ 76,666 $ 313,281 $ 228,292
Cost of services (93,830) (63,610) (270,335) (190,696)
-------- -------- --------- ---------
Gross profit 13,752 13,056 42,946 37,596
Selling, general and administrative expenses (10,764) (9,606) (36,105) (29,563)
Amortization of other acquired assets (1,111) (236) (2,952) (662)
Other operating income, net 210 120 840 1,642
-------- -------- --------- ---------
Income from operations 2,087 3,334 4,729 9,013
Interest expense (2,045) (244) (4,951) (825)
Non-operating income, net (Note 4) 382 364 1,179 2,466
-------- -------- --------- ---------
Income from continuing operations pretax 424 3,454 957 10,654
Benefit (provision) for income taxes (Note 5) 387 (622) 270 (2,365)
-------- -------- --------- ---------
Income from continuing operations 811 2,832 1,227 8,289
-------- -------- --------- ---------
DISCONTINUED OPERATIONS (NOTE 6):
Loss from operations, net of tax (838) (665) (1,168) (1,463)
Loss on disposal, net of tax (354) (561) (354) (3,569)
-------- -------- --------- ---------
Loss from discontinued operations (1,192) (1,226) (1,522) (5,032)
-------- -------- --------- ---------
Net (loss) income $ (381) $ 1,606 $ (295) $ 3,257
======== ======== ========= =========
BASIC (LOSS) EARNINGS PER SHARE (NOTE 8):
Income from continuing operations $ 0.09 $ 0.32 $ 0.14 $ 0.93
Loss from discontinued operations (0.13) (0.14) (0.17) (0.56)
-------- -------- --------- ---------
Net (loss) income $ (0.04) $ 0.18 $ (0.03) $ 0.37
======== ======== ========= =========
DILUTED (LOSS) EARNINGS PER SHARE (NOTE 8):
Income from continuing operations $ 0.09 $ 0.31 $ 0.13 $ 0.91
Loss from discontinued operations (0.13) (0.13) (0.16) (0.55)
-------- -------- --------- ---------
Net (loss) income $ (0.04) $ 0.18 $ (0.03) $ 0.36
======== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
October 29, January 29,
2005 2005
----------- -----------
ASSETS
------
Current Assets:
Cash and short-term investments $ 1,795 $ 926
Receivables, less reserves of $853 and $510 57,803 44,454
Linens in service 44,426 37,660
Prepaid expenses and other current assets 5,734 3,817
Deferred income taxes - 5,386
Assets of discontinued operations held for sale (Note 6) 1,535 3,617
-------- --------
Total Current Assets 111,293 95,860
-------- --------
Property and Equipment 204,220 189,042
Less -- accumulated depreciation 96,295 89,676
-------- --------
Total Property and Equipment 107,925 99,366
-------- --------
Other:
Goodwill (Note 9) 49,761 31,272
Other acquired assets (Note 9) 43,115 24,728
Cash surrender value of life insurance (Note 10) 1,599 30,942
Deferred income taxes 9,781 2,040
Miscellaneous 5,229 4,745
-------- --------
Total Other Assets 109,485 93,727
-------- --------
Total Assets $328,703 $288,953
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 10,419 $ 419
Accounts payable 22,637 16,865
Accrued wages and other compensation 6,642 5,145
Deferred compensation and pension liabilities 3,814 4,226
Other accrued liabilities 35,274 29,063
-------- --------
Total Current Liabilities 78,786 55,718
-------- --------
Long-Term Debt, less current maturities (Note 10) 83,696 67,811
Other Long-Term Obligations 15,103 14,068
Shareholders' Equity:
Common Stock, $1 par value, authorized 20,000,000
shares, issued:9,471,538 shares 9,472 9,472
Capital surplus 7,128 5,336
Retained earnings 141,285 144,621
Accumulated other comprehensive loss (915) (1,337)
Unamortized restricted stock (3,266) (1,007)
Common Stock in treasury, at cost: 180,915 and 405,304 shares (2,586) (5,729)
-------- --------
Total Shareholders' Equity 151,118 151,356
-------- --------
Total Liabilities and Shareholders' Equity $328,703 $288,953
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Angelica Corporation and Subsidiaries
Unaudited (Dollars in thousands)
Nine Months Ended
-------------------------------------
October 29, 2005 October 30, 2004
---------------- ----------------
Cash Flows from Operating Activities:
Income from continuing operations $ 1,227 $ 8,289
Non-cash items included in income from continuing operations:
Depreciation 11,187 8,350
Amortization 3,260 1,153
Deferred income taxes (2,355) 1,624
Cash surrender value of life insurance (885) (1,101)
Gain on sale of assets (737) (3,004)
Change in working capital components of continuing
operations, net of businesses acquired/disposed of (611) (3,707)
Other, net 1,340 (451)
--------- --------
Net cash provided by operating activities of
continuing operations 12,426 11,153
--------- --------
Cash Flows from Investing Activities:
Expenditures for property and equipment, net (16,100) (9,345)
Cost of businesses and assets acquired (52,284) (7,549)
Disposals of assets 969 3,991
Life insurance premiums paid, net (370) 763
--------- --------
Net cash used in investing activities of continuing operations (67,785) (12,140)
--------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt (144,115) (81,501)
Borrowings of long-term debt 170,000 78,700
Repayments of life insurance policy loans (22,988) -
Borrowings from life insurance policy loans 53,216 -
Debt issuance costs (323) (157)
Dividends paid (3,041) (2,958)
Treasury stock reissued 1,449 737
--------- --------
Net cash provided by (used in) financing activities of
continuing operations 54,198 (5,179)
--------- --------
Net cash provided by discontinued operations 2,030 8,109
--------- --------
Net increase in cash and short-term investments 869 1,943
Balance at beginning of year 926 2,188
--------- --------
Balance at end of period $ 1,795 $ 4,131
========= ========
Supplemental cash flow information:
Income taxes paid $ 94 $ 439
Interest paid, net of amounts capitalized $ 4,572 $ 723
The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER AND NINE MONTHS ENDED
OCTOBER 29, 2005 AND OCTOBER 30, 2004
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 29, 2005 (fiscal
2004). It is management's opinion that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement
of the results during the interim periods have been included. All
significant intercompany accounts and transactions have been
eliminated. The results of operations for the third quarter and nine
months ended October 29, 2005, and cash flows for the nine months
ended October 29, 2005, are not necessarily indicative of the results
of operations and cash flows that will be achieved for the full
fiscal year 2005.
Certain amounts in the prior periods have been reclassified to
conform to current period presentation.
Note 2. Stock-Based Compensation
---------------------------------
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amended SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair-value based method of
accounting for stock-based employee compensation. In addition, this
statement amended the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
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. As permitted by SFAS No. 123, the Company
applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans
other than for restricted stock and performance-based awards, as to
which the amounts (credited) charged to expense in the third quarter
ended October 29, 2005 and October 30, 2004 totaled $(357,000) and
$152,000, respectively; and $330,000 and $522,000 in the nine months
ended October 29, 2005 and October 30, 2004, respectively. During the
quarter ended October 29, 2005, it was determined that the
probability of certain performance-based awards becoming vested was
remote. Accordingly, total amortization expense related to these
awards of $718,000 recognized in prior periods was reversed. During
the nine months ended October 29, 2005, 100,000
5
shares of restricted stock were granted with a weighted-average share
price of $28.02.
Had compensation expense for stock-based compensation plans for the
third quarter and nine months ended October 29, 2005 and October 30,
2004 been determined consistent with SFAS No. 123, the Company's net
(loss) income and (loss) earnings per share would approximate the
following pro forma amounts:
Third Quarter Ended Nine Months Ended
--------------------------- --------------------------
(Dollars in thousands, October 29, October 30, October 29, October 30,
except per share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------
Net (loss) income:
As reported $ (381) $1,606 $ (295) $3,257
Add: stock-based employee
compensation expense included in
net (loss) income, net of tax (384) 120 152 406
Deduct: stock-based employee
compensation expense determined
under fair-value based method
for all awards, net of tax 543 (237) (788) (947)
------ ------ ------ ------
Pro forma net (loss) income $ (222) $1,489 $ (931) $2,716
====== ====== ====== ======
Basic (loss) earnings per share:
As reported $(0.04) $ 0.18 $(0.03) $ 0.37
Pro forma (0.02) 0.17 (0.10) 0.31
Diluted (loss) earnings per share:
As reported $(0.04) $ 0.18 $(0.03) $ 0.36
Pro forma (0.02) 0.16 (0.10) 0.30
The effect of the application of SFAS No. 123 in this disclosure is
not necessarily indicative of the pro forma effect on net income in
future periods.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment," which revises SFAS No. 123 and supersedes APB No. 25 and
its related implementation guidance. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the consolidated financial statements
based on their fair values and eliminates the alternative method of
accounting for employee share-based payments previously available
under APB No. 25. The provisions of this statement are required to be
adopted by the Company beginning in the first quarter of fiscal 2006.
The impact of adoption of this statement on the Company's net income
in future periods will include the remaining amortization of the fair
value of existing unamortized stock options currently disclosed as
pro-forma expense above, and is contingent upon the number of future
options granted, the selected transition method and the selection
between acceptable valuation methodologies for valuing options.
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
6
its affiliate, The Surgi-Pack Corporation (together "Royal"). The
total purchase price of $45,000,000 was paid in cash, plus an
additional $724,000 of related acquisition costs.
Royal is the largest healthcare linen services company in New
England, providing full linen management services to the healthcare
industry in a manner consistent with the Company's core business.
With annual revenues of approximately $45,000,000, the Royal
acquisition strengthens the Company's market position in this region
of the country. The net assets acquired consisted primarily of
working capital, leasehold interests in two operating facilities and
the related equipment, and customer contracts. The Company recorded
the preliminary purchase price allocation for this acquisition in the
first quarter ended April 30, 2005, which was adjusted for a working
capital adjustment due the seller of $179,000 in the second quarter
ended July 30, 2005, and expects to finalize the allocation in the
fourth quarter of fiscal 2005 once all required information is
obtained.
The results of operations of Royal are included in the Company's
consolidated statements of income for the third quarter and nine
months ended October 29, 2005 since the date of acquisition on March
21, 2005. Unaudited pro forma consolidated net revenues for the nine
months ended October 29, 2005 and October 30, 2004, assuming the
Royal acquisition had been completed as of the beginning of those
periods, totaled $320,072,000 and $261,867,000, respectively; and
unaudited pro forma consolidated income from continuing operations
amounted to $1,076,000 or $.12 per diluted share, and $9,389,000 or
$1.03 per diluted share, in the nine months ended October 29, 2005
and October 30, 2004, respectively. Unaudited pro forma consolidated
net revenues and income from continuing operations for the third
quarter ended October 30, 2004, had the Royal acquisition been
completed as of the beginning of fiscal 2004, totaled $88,005,000 and
$3,236,000 ($.35 per diluted share), respectively. 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 each period.
On August 9, 2005, the Company acquired customer contracts and
selected assets located in the Cleveland, Ohio and upstate New York
areas. These contracts represent approximately $3,100,000 in annual
revenues, and will be serviced by the Company's existing facilities
in Lorain, Ohio and Batavia, New York.
Note 4. Non-Operating Income, Net
----------------------------------
During the nine months ended October 29, 2005, the Company recorded
non-operating income of $1,179,000 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.
During the nine months ended October 30, 2004, the Company recorded
non-operating income of $2,466,000 which included a gain of
$1,472,000 from the sale of real estate in Miami, FL. In addition,
the Company recognized gains totaling $610,000 for the excess of
death benefits from Company-owned life insurance policies surrendered
over the cash value of the policies. Third quarter fiscal 2004
non-operating income includes a $197,000 bankruptcy settlement of a
receivable related to a former business.
7
Non-operating income, net, also includes interest earned on invested
cash balances and notes receivable.
Note 5. Income Taxes
---------------------
Tax benefit on income from continuing operations for the nine months
ended October 29, 2005 includes taxes provided for based upon the
Company's estimated effective tax rate of 53.9 percent for the fiscal
year, including the effects of permanent items as discussed in
the Company's Annual Report on Form 10-K, and a $786,000 benefit from
significant, unusual, or extraordinary items, which consists of
federal and state tax credits. The effective tax rate of 22.2 percent
on income from continuing operations for the nine months ended
October 30, 2004 reflects an adjustment to reduce the income tax
provision due to the expected favorable resolution of outstanding tax
issues. The effective tax rate of 40.7 percent and 33.3 percent on
the loss from discontinued operations for the nine months ended
October 29, 2005 and October 30, 2004, respectively, reflects the
statutory tax rate adjusted for permanent items and state tax
benefits, as applicable.
The Company maintains tax reserves pending the resolution of certain
tax issues. Once established, these reserves are adjusted as
information becomes available or when an event requiring a change in
the reserves occurs. The ultimate resolution of tax matters could
have a material impact on the Company's net income and financial
condition in the period in which the item is resolved.
The Company believes all deferred tax items will be realized and
therefore no valuation allowances have been recorded.
Note 6. Discontinued Operations
--------------------------------
On September 2, 2005, the Company completed the sale of customer
contracts serviced by its Columbia, Illinois facility and certain
other assets related to the servicing of those contracts for
$1,392,000 in cash. The Columbia plant, which primarily served the
St. Louis, Missouri market area, had been unprofitable for several
periods and in fiscal 2005 suffered the loss of a major customer. Due
to the limited potential to improve the profitability of the plant,
combined with its relative geographic isolation to the Company's
other facilities, the decision was made to sell the customer
contracts serviced by the plant and related assets, and pursue a sale
of the idle facility.
The transition of the servicing of customers to the buyer's facility
was completed in the third quarter fiscal 2005, and a gain on
disposal of $154,000 pretax was recorded net of the writeoff of
$860,000 of goodwill associated with the business. The Company
anticipates that the disposition of the real estate and personal
property of the Columbia plant will be completed in the fourth
quarter fiscal 2005 through sale of the assets or transfer to other
facilities. An asset impairment charge of $751,000 pretax was
recorded as part of the loss on disposal in the third quarter fiscal
2005 to write down the net book value of the real estate and personal
property to its estimated fair value of $1,535,000 as of October 29,
2005.
In accordance with SFAS No. 144, the assets held for sale, cash
flows, results of operations and loss on disposal of the Columbia
plant are segregated and reported as discontinued operations for all
periods presented in this report. As of January 29, 2005,
8
total assets of the Columbia plant held for sale were $3,617,000,
consisting mainly of linens in service of $1,186,000 and property and
equipment of $2,299,000.
Results of operations of the Columbia plant for the third quarter and
nine months ended October 29, 2005 and October 30, 2004 were as
follows (dollars in thousands):
Third Quarter Ended Nine Months Ended
---------------------------- ------------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------
Net revenues $ 938 $2,071 $ 5,060 $6,039
===========================================================================================================
Loss from operations before taxes $(1,546) $ (192) $(1,968) $ (407)
Income tax benefit 708 35 800 87
-----------------------------------------------------------------------------------------------------------
Loss from operations $ (838) $ (157) $(1,168) $ (320)
===========================================================================================================
The loss from operations before taxes in the third quarter and nine
months ended October 29, 2005 includes $543,000 in employee
termination expenses.
The loss from discontinued operations in the third quarter and nine
months ended October 30, 2004 includes the loss from operations of
the discontinued Life Uniform retail business segment of $508,000 and
$1,143,000, respectively, net of tax, and loss on disposal of the
Life Uniform segment of $561,000 and $3,569,000, respectively, net of
tax, as previously reported.
Note 7. Commitments and Contingencies
--------------------------------------
Prior to the sale of its Life Uniform retail business to Healthcare
Uniform Company 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 current term. As of October 29, 2005, the Company is
secondarily obligated as a guarantor for 74 store lease agreements
and the estimated maximum potential amount of future payments the
Company could be required to make under these guarantees is
$12,700,000. Although these guarantees expire at various dates
through fiscal year 2014, approximately 73 percent of the estimated
maximum potential future payments expires by the end of fiscal year
2008. These guarantees are not subject to the initial recognition and
measurement provisions of FASB Interpretation No. 45, and the Company
believes the likelihood of making any payments under these guarantees
is remote based upon its review of Healthcare Uniform Company's
financial condition and results of operations.
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
9
indemnification claims is remote and has reserved accordingly.
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 exposure from these outstanding claims and
deposits to be approximately $1,415,000 as of October 29, 2005.
The Company faces certain risks and uncertainties related to having a
predominantly union-represented workforce. Certain of its collective
bargaining agreements are scheduled to expire in the regular course
of business and several other Company locations are negotiating
initial collective bargaining agreements in the second half of fiscal
2005. Any work interruptions or stoppages resulting from labor
disputes could have a material unfavorable impact on the Company's
results of operations and financial condition. However, the Company
believes that the risk of such work interruptions or stoppages has
been diminished because the Company renewed several expired labor
contracts and reached agreement with UNITE HERE on Company-wide
union-organizing activities and related issues in June 2005. Aspects
of the settlement with the union include prohibiting the union from
disparaging the Company and putting certain limitations on the
union's ability to strike. The Company and the union also agreed upon
a process for unrepresented production employees to decide whether to
be represented by a union. Upon completion of this process, most of
the Company's employees will be covered by collective bargaining
agreements, either with UNITE HERE or other labor unions.
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 (loss) 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 third quarter and nine months ended October 29, 2005 and
October 30, 2004 (shares in thousands):
Third Quarter Ended Nine Months Ended
---------------------------- -----------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Weighted average shares:
Average shares outstanding 9,132 8,930 9,079 8,901
Effect of dilutive securities 217 223 268 214
----- ----- ----- -----
Average shares outstanding,
adjusted for dilutive effects 9,349 9,153 9,347 9,115
===== ===== ===== =====
10
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. During the nine months ended October 29,
2005, the Company recorded goodwill from business combinations
totaling $19,349,000, due principally to the acquisition of Royal
disclosed in Note 3.
During the nine months ended October 29, 2005, the Company acquired
customer contracts of Royal and various other laundry businesses
valued at $14,802,000, with a weighted average amortization period of
14.2 years, and non-compete covenants with a value of $6,674,000 and
a weighted average amortization period of 9.8 years. Other acquired
assets consisted of the following (dollars in thousands):
October 29, 2005 January 29, 2005
------------------------------------- ---------------------------------------
Gross Other Gross Other
Carrying Accumulated Acquired Carrying Accumulated Acquired
Amount Amortization Assets, net Amount Amortization Assets, net
------ ------------ ----------- ------ ------------ -----------
Customer contracts $42,197 $(7,714) $34,483 $27,395 $(5,511) $21,884
Non-compete covenants 10,684 (2,052) 8,632 4,010 (1,166) 2,844
------- ------- ------- ------- ------- -------
Other acquired assets $52,881 $(9,766) $43,115 $31,405 $(6,677) $24,728
======= ======= ======= ======= ======= =======
Goodwill and other acquired assets recorded in connection with the
Royal acquisition are based on the preliminary purchase price
allocation, which is subject to change once all required information
is obtained.
Other acquired assets are scheduled to be fully amortized by fiscal
year 2020 with corresponding annual amortization expense estimated
for the current and next five fiscal years as follows (dollars in
thousands):
2005 $4,075
2006 4,347
2007 4,245
2008 3,892
2009 3,583
2010 3,121
Note 10. Long Term Debt
------------------------
On March 21, 2005, the Company borrowed the entire amount of its term
loan of $50,000,000. The proceeds of the term loan were used to fund
the acquisition of Royal (see Note 3), and reduce the amount
outstanding on the Company's revolving credit facility. As of October
29, 2005, the remaining $47,500,000 outstanding under the term loan
bears interest at 3.94 percent under a LIBOR contract, plus a margin
(2.50 percent as of October 29, 2005) based on the Company's ratio of
"Funded Debt" to "EBITDA," as each is defined in the loan agreement.
The term loan is payable in quarterly installments
11
of $2,500,000, with the final payment due on January 27, 2010.
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 $126,023,000 plus an aggregate
amount equal to 50 percent of quarterly net income beginning with the
fourth quarter of fiscal 2004 (with no reduction for net losses).
Other covenants require the Company to maintain a minimum ratio of
"EBITDA" to "fixed charges" of no less than 1.2 to 1, and a maximum
ratio of "Funded Debt" to "EBITDA" of no more than 2.75 to 1. On July
29, 2005, the loan agreement was amended to increase the maximum
ratio of "Funded Debt" to "EBITDA" covenant to no more than 4.0 to 1.
At the time of this amendment, the Company provided its lenders with
a first lien on all personal and intangible property excluding cash
surrender value of life insurance, and agreed to pledge certain real
estate as additional security. The Company was in compliance with
these loan covenants, as amended, as of October 29, 2005.
The Company's loan facility was subsequently amended on November 30,
2005 upon completion of the real estate security appraisals. The
covenants require a minimum ratio of "EBITDA" to "fixed charges" (as
defined in the loan documents) of no less than 1.05 to 1, increasing
to 1.15 to 1 effective October 31, 2006, and a 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 is also required to maintain
a consolidated net worth of $120,920,000 plus an aggregate amount
equal to 50 percent 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. The amendment increased the revolving
loan agreement from $100,000,000 to $150,000,000 and the term loan
was repaid. In connection with this amendment, the margin paid to the
banks on the amounts borrowed under the credit facility increased
from 2.50 percent to 2.75 percent as of November 30, 2005.
During the first half of fiscal 2005, the Company borrowed a total of
$22,988,000 from the issuers of its Company-owned life insurance
policies against the cash surrender value of the policies. The
proceeds of the policy loans were used to reduce the amount
outstanding on the revolving credit facility. During the third
quarter of fiscal 2005, the Company repaid all of the life insurance
policy loans outstanding. At the end of the third quarter fiscal
2005, the Company borrowed a total of $30,228,000 under the policies.
The loans bear interest at a fixed rate of 8.0 percent or variable
rates ranging from 5.3 percent to 6.3 percent. 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 October 29, 2005.
As of October 29, 2005, the Company had $13,275,000 in irrevocable
letters of credit outstanding, which reduced the amount available to
borrow under the credit facility to $13,543,000.
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
percent 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
12
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. The effective
portion of changes in the fair value of the derivative, as measured
quarterly, is reported in accumulated other comprehensive income, and
the ineffective portion, if any, is reported in net income of the
current period. The gain (loss) on the derivative included in
accumulated other comprehensive loss in the third quarter ended
October 29, 2005 and October 30, 2004 amounted to $32,000 and
$(56,000), respectively, net of tax; and $121,000 and $69,000 for the
nine months ended October 29, 2005 and October 30, 2004,
respectively, net of tax. The Company has recorded a long-term asset
(liability) of $169,000 and $(9,000) for the fair value of the
derivative as of October 29, 2005 and January 29, 2005, respectively.
At the end of the third quarter fiscal 2005, the Company 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 plants due to fluctuations
in the price on the New York Mercantile Exchange (NYMEX). These
futures contracts combined are expected to hedge approximately 53
percent of the Company's total requirements for natural gas (measured
at current usage rates) for each year in the two-year period
commencing November 1, 2005, and approximately 38 percent and 19
percent of the Company's natural gas requirements, respectively, in
each of the next two years following the initial two-year period. The
weighted-average cost of natural gas under these contracts is $9.85
per decatherm. The Company has elected to apply cash flow hedge
accounting for these hedging instruments in accordance with SFAS No.
133. Accordingly, the net gain on the derivatives included in
accumulated other comprehensive loss in the third quarter and nine
months ended October 29, 2005 amounted to $302,000, net of tax. The
change in fair market value of a portion of the derivatives not
qualifying as a cash flow hedge for accounting purposes was included
in non-operating income in the third quarter and nine months ended
October 29, 2005, and amounted to a gain of $158,000. The Company has
recorded a current asset of $2,232,000 and a long-term liability of
$1,616,000 for the fair value of the derivatives as of October 29,
2005. The Company estimates that $2,074,000 of unrealized gains
included in accumulated other comprehensive loss before taxes as of
October 29, 2005 will be reclassified to cost of services within the
next 12 months as natural gas is purchased for consumption in the
plants.
In addition to the futures contracts, the Company has existing
contracts for physical delivery of natural gas as of October 29, 2005
that fix the NYMEX cost of gas for approximately 7 percent of its
estimated natural gas purchase requirements in the next 12 months,
and fix the basis (transportation) cost of the gas for approximately
62 percent 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 and SFAS No. 149, and are
therefore exempted from the related accounting requirements.
Note 12. Comprehensive (Loss) Income
-------------------------------------
Comprehensive (loss) income, consisting primarily of net (loss)
income, changes in the fair value of derivatives used for interest
rate risk management, and changes in the fair value of derivatives
used for natural gas hedging, net of taxes, totaled $(47,000) and
$1,559,000
13
for the third quarter ended October 29, 2005 and October 30, 2004,
respectively; and $128,000 and $3,330,000 for the nine months ended
October 29, 2005 and October 30, 2004, respectively.
Note 13. Retirement Benefits
-----------------------------
The Company has a non-contributory defined benefit pension plan
covering primarily salaried and hourly administrative non-union
personnel. 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 third quarter and
nine months ended October 29, 2005 and October 30, 2004 was as
follows:
Third Quarter Ended Nine Months Ended
------------------------ ------------------------
October 29, October 30, October 29, October 30,
(Dollars in thousands) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------
Pension expense:
Service cost $ 105 $ 122 $ 315 $ 420
Interest cost 316 311 950 949
Expected return on plan assets (333) (356) (999) (1,062)
Plan curtailment - sale of Life Uniform - - - 38
Amortization of prior service cost 5 5 15 15
Recognized actuarial loss - 21 - 79
------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 93 $ 103 $ 281 $ 439
==================================================================================================================
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 29, 2005
COMPARED WITH
THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 30, 2004
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. As of October 29, 2005, we operated 32 laundry facilities and
served customers in 23 states.
Results of Continuing Operations
--------------------------------
Revenues from continuing operations increased by 40.3 percent in the third
quarter of fiscal 2005 to $107.6 million from $76.7 million in the same
period in fiscal 2004. Organic growth from net new business additions and
price increases contributed 3.5 percent, or $2.7 million, of the third
quarter increase, with the remaining 36.8 percent, or $28.2 million,
attributed to recent acquisitions net of divestitures. Revenues from
continuing operations in the first nine months of fiscal 2005 were $313.3
million, a 37.2 percent increase over revenues from continuing operations of
$228.3 million in the same period in fiscal 2004. For the first nine months
of fiscal 2005, organic growth from net new business additions and price
increases contributed 3.2 percent, or $7.2 million, of the revenue increase,
with the remaining 34.0 percent, or $77.8 million, attributed to
acquisitions net of divestitures. New business installed during the first
nine months of fiscal 2005, net of cancellations of existing business,
represented $10.8 million in annualized revenue compared with $11.2 million
in last year's first nine months, which includes $5.2 million attributed to
the acquisition from Duke Health Systems.
Cost of services of $93.8 million in the third quarter of fiscal 2005
increased by 47.5 percent from $63.6 million recorded in the same period in
fiscal 2004. The principal factor for this increase is our higher revenue
level resulting from the acquisitions we have completed. Production labor
costs increased $12.2 million to 34.6 percent of revenue in third quarter
fiscal 2005 versus 32.7 percent of revenue in third quarter fiscal 2004.
Included in this increase were $0.3 million of costs related to the
consolidation of our two Dallas facilities into one. Rising energy costs
continue to negatively impact our cost of services as well. Natural gas
costs rose to 5.3 percent of revenues in third quarter fiscal 2005 from 3.8
percent of revenues in third quarter fiscal 2004 and delivery fuel increased
to 2.2 percent of revenues in this year's third quarter from 1.7 percent of
revenues in third
15
quarter fiscal 2004. Partially offsetting these increases was a decline in
linen expense to 16.8 percent of revenues in the third quarter fiscal 2005
from 18.2 percent of revenues in third quarter fiscal 2004. The reduction in
linen expense as a percentage of revenues primarily reflects an increase in
non-rental customers obtained through acquisitions and to a lesser extent,
lower linen prices from new procurement efforts.
In the first nine months of fiscal 2005, cost of services of $270.3 million
reflected a 41.7 percent increase from $190.7 million recorded in the same
period in fiscal 2004. The principal factor for this increase is our higher
revenue level resulting from the acquisitions we have completed. Also,
contributing to the increase were production labor costs which increased
$33.6 million to 34.6 percent of revenues in the first nine months of fiscal
2005 versus 32.8 percent of revenues during the same period in fiscal 2004.
Costs related to labor strike contingency planning of $0.7 million are
included in the increase, as well as the costs associated with the closure
of our Vallejo facility and the combination of our two Dallas facilities.
Energy costs also contributed to this increase. Natural gas costs rose to
5.0 percent of revenues in the first nine months fiscal 2005 from 4.0
percent of revenues in the first nine months of fiscal 2004 and delivery
fuel increased to 1.9 percent of revenues in the first nine months of fiscal
2005 from 1.6 percent of revenues in the first nine months of fiscal 2004.
The decline in linen expense to 16.9 percent of revenues in the first nine
months of fiscal 2005 from 18.6 percent of revenues in the same period in
fiscal 2004 partially offset these increases.
Gross profit margin declined to 12.8 percent and 13.7 percent in the third
quarter and first nine months of fiscal 2005, respectively, from 17.0
percent and 16.5 percent in the third quarter and first nine months of
fiscal 2004, respectively, for the reasons noted above.
Selling, general and administrative expenses declined as a percent of
revenues to 10.0 percent and 11.5 percent in the third quarter and first
nine months of fiscal 2005, respectively, compared with 12.5 percent and
12.9 percent in the third quarter and first nine months of fiscal 2004,
respectively. The third quarter decline reflects increased revenues and the
efficiencies from our increasing scale in addition to a $0.7 million
reversal of amortization expense related to our long term incentive plan
during the third quarter fiscal 2005. The decline as a percent of revenues
in the first nine months of fiscal 2005 from the same period in fiscal 2004
also reflects efficiencies attained from our greater scale and the reversal
of the long term incentive plan amortization expense partially offset by
$0.8 million expended in connection with the union corporate campaign, $0.4
million in connection with changes in our senior management, $0.4 million
expended evaluating alternatives to our debt structure, and increased
corporate expenses associated with Sarbanes-Oxley compliance.
Income from operations declined 37.4 percent in the third quarter this year
compared with third quarter fiscal 2004 due to the increased cost of
services and $1.1 million of amortization expense recorded in the third
quarter of fiscal 2005 substantially related to recent acquisitions compared
to amortization expense in third quarter fiscal 2004 of $0.2 million. Income
from operations for the first nine months of fiscal 2005 decreased 47.5
percent to $4.7 million from the $9.0 million recorded during the same
period a year ago, due to the increased cost of services and amortization
expense and decreased other operating
16
income recorded in the first nine months of fiscal 2005 compared to the
first nine months of fiscal 2004. Specifically, amortization of acquired
assets for the first nine months of fiscal 2005 was $3.0 million, a $2.3
million increase from the $0.7 million amortization recorded in the first
nine months of fiscal 2004, and other income from operations decreased to
$0.8 million in the first nine months of fiscal 2005 from $1.6 million in
the first nine months fiscal 2004.
Interest expense in third quarter fiscal 2005 increased by $1.8 million to
$2.0 million. Interest expense for the first nine months of fiscal 2005
increased by $4.1 million to $5.0 million. The increases resulted from the
increased indebtedness incurred to finance acquisitions, plus an increase in
interest rates from an average 2.9 percent in the first nine months of
fiscal 2004 to an average 5.4 percent in the first nine months of fiscal
2005. At October 29, 2005, we had $46.1 million in total debt outstanding
under a revolving loan agreement along with a $47.5 million term loan. After
repaying all loans outstanding against the cash value of the life insurance
policies we own, we borrowed $30.2 million against that cash value later in
the third quarter. Interest from bank and life insurance debt is included in
our interest expense.
We recorded $0.4 million pretax non-operating income during both the third
quarter of fiscal 2005 and the same period in fiscal 2004. In the first nine
months of fiscal 2005, we recorded $1.2 million of non-operating income
which includes a $0.4 million distribution from the liquidation of the
parent company of the issuer of life insurance policies we own, along with
interest on invested cash balances, notes receivable and income related to
our natural gas hedge. During the first nine months of fiscal 2004, we
recorded pretax non-operating income of $2.5 million, which included a $1.5
million gain from the sale of real estate we owned in Miami, Florida and
$0.6 million of death benefits from company-owned life insurance policies
surrendered.
The income tax benefit of $0.4 million in the third quarter and $0.3 million
for the first nine months of fiscal 2005 reflect taxes on income from
continuing operations being more than offset by the effects of permanent
items and tax credits. Income from continuing operations for the third
quarter fiscal 2005 was $0.8 million compared with income from continuing
operations of $2.8 million in the third quarter fiscal 2004, a 71.3 percent
decrease. Income from continuing operations of $1.2 million in the first
nine months of fiscal 2005 decreased 85.2 percent from $8.3 million in the
same period last year as the increased interest expense and decreased
non-operating income combined with the other items mentioned above more than
offset the impact of the increase in revenues from continuing operations.
Discontinued Operations
-----------------------
In September 2005, we sold customer contracts served by our Columbia,
Illinois operations, exited the St. Louis market, and subsequently closed
the facility. Accordingly, the assets and liabilities of this facility were
segregated, and its results of operations are reported in discontinued
operations, effective in the third quarter of fiscal 2005. When we completed
this sale in the third quarter fiscal 2005, we recorded a loss on disposal
of the discontinued business of $0.4 million, net of tax. Additionally, we
recorded a loss from operations of the discontinued business, net of tax, of
$0.8 million
17
in the quarter. In the third quarter fiscal 2004 we recorded a total loss
from discontinued operations of $1.2 million which included $1.1 million
related to our discontinued retail business. In the first nine months of
fiscal 2005, the total loss from discontinued operations was $1.5 million
net of tax, including a $1.1 million loss from operations of the
discontinued Columbia, Illinois plant, net of tax and the $0.4 million loss
on disposal of the discontinued operations, net of tax. First nine months
fiscal 2004 loss from discontinued operations net of tax was $5.0 million of
which $4.7 million was attributable to the discontinued Life Uniform retail
business segment.
Financial Condition
-------------------
As of October 29, 2005, working capital totaled $32.5 million and the
current ratio (i.e., the ratio of current assets to current liabilities) was
1.4 to 1, compared with $40.1 million and 1.7 to 1, respectively, at January
29, 2005. The decrease in the dollar amount of working capital reflects
increases in receivables and linens in service, more than offset by
increases in current maturities of long-term debt, accounts payable, and
other accrued liabilities.
Receivables and linens in service increased by $13.3 million and $6.8
million, respectively, in the first nine months of fiscal 2005 as a result
of our larger scale after completing recent acquisitions. Accounts
receivable days outstanding increased to 46 days as of October 29, 2005 from
42 days sales outstanding at the end of fiscal 2004. The increase reflects
increased business in the New York market in which accounts receivable,
historically, remain outstanding for a longer period of time than in other
markets. Days sales outstanding are projected to settle at a more normalized
level of approximately 45 days. Increases in total property and equipment of
$8.6 million and goodwill and other acquired assets of $36.9 million reflect
mainly the cost of the business acquired in first quarter fiscal 2005.
The increase in current maturities of long-term debt of $10.0 million in the
first nine months this year reflects the current portion of our term loan.
Long-term debt of $83.7 million, net of current maturities, as of October
29, 2005 was $15.9 million greater than at January 29, 2005, reflecting
borrowing used to fund the acquisition completed in first quarter fiscal
2005. Our ratio of total debt to total capitalization as of October 29, 2005
was 38.4 percent compared to 31.1 percent as of January 29, 2005. Book value
per share at the end of third quarter fiscal 2005 was $16.27, compared with
$16.69 as of January 29, 2005.
Liquidity and Capital Resources
-------------------------------
Cash flow provided by operating activities of continuing operations
increased $1.3 million in the nine months ended October 29, 2005 over the
same period a year ago. In the first nine months of fiscal 2005, we recorded
a $0.6 million net increase in working capital components of continuing
operations compared with a $3.7 million net increase in the year ago period
primarily due to higher accounts payable in fiscal 2005 resulting from
acquisitions and timing. Cash flows from investing activities in the nine
months ended October 29, 2005 include $52.3 million of cost of businesses
acquired, including cash paid for Royal and the final payment of $3.6
million for the acquisition of the Duke University Health System laundry in
the previous year. Capital expenditures were $6.8 million higher during the
first nine months this year compared with the same period last year as we
18
continue to invest in energy-saving and labor-saving equipment in our
facilities.
As of October 29, 2005, there was $93.6 million of outstanding debt under
our credit facility, including a $47.5 million term loan and $46.1 million
under the revolving loan agreement. Of this amount, $10.0 million bears
interest at a fixed rate of 3.58 percent pursuant to an interest rate swap
agreement plus a margin under the credit facility (2.5 percent as of October
29, 2005). Another $82.5 million was in LIBOR contracts bearing interest of
3.94 percent plus the margin. The remaining $1.1 million outstanding bears
interest at our base rate (prime) of 6.75 percent as of October 29, 2005.
In addition to amounts due under our loan agreement, during the third
quarter fiscal 2005 we borrowed $30.2 million against the cash surrender
value of life insurance policies we own. The proceeds of these loans,
bearing interest at variable rates ranging from 5.3 percent to 6.3 percent,
or a fixed rate of 8.0 percent, were used to pay down our revolving line of
credit. Approximately 80.6 percent of this debt was charged a variable rate.
On October 29, 2005, we also had $13.3 million in irrevocable letters of
credit outstanding, which reduced the amount available to borrow under the
loan agreement to $13.5 million.
As previously announced, we amended the terms of our credit facility during
the second quarter fiscal 2005 moving to a secured facility to increase
credit availability. Under the terms of the amendment, the credit facility
becomes secured and the total amount of the facility remains unchanged at
$150 million. The covenants require us to maintain a minimum ratio of
"EBITDA" to "fixed charges" (as defined in the loan documents) of no less
than 1.2 to 1, and a maximum ratio of "Funded Debt" to "EBITDA" of no more
than 4.0 to 1, which was raised from 2.75 to 1 in connection with the loan
amendment. We are also required to maintain a minimum consolidated net worth
of $126.0 million plus an aggregate amount equal to 50 percent of quarterly
net income beginning with the fourth quarter fiscal 2004 (with no reductions
for net losses). We were in compliance with these debt covenants, as
amended, as of October 29, 2005.
Our loan facility was subsequently amended on November 30, 2005 upon
completion of the real estate appraisals. At that time, under the terms of
the agreement the margin rate was 2.75 percent. The covenants require us to
maintain a minimum ratio of "EBITDA" to "fixed charges" (as defined in the
loan documents) of no less than 1.05 to 1, increasing to 1.15 to 1 effective
October 31, 2006, and a 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 are also
required to maintain a consolidated net worth of $120.9 million plus an
aggregate amount equal to 50 percent of quarterly net income beginning with
the fourth quarter fiscal 2005 (with no reductions for net losses), and an
asset coverage ratio of 1 to 1.
We believe that our financial condition, operating cash flow and available
sources of external funds are sufficient to satisfy our requirements for
debt service, capital expenditures, acquisitions, dividends and working
capital over the course of the next 12 months. However, if we pursue a large
acquisition for which we pay cash as consideration for the assets purchased,
we may require alternative funding sources to finance the purchase price.
19
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 accomplish its strategy of redirecting its
resources to its healthcare linen management business in a timely and
financially advantageous manner, unusual or unexpected cash needs for
operations or capital transactions, the effectiveness of the Company's
initiatives to reduce key operating costs as a percentage 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.
20
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 plants. The total cost of natural gas in the third
quarter and nine months ended October 29, 2005 was $5.7 million and $15.7
million, respectively. To reduce the uncertainty of fluctuating energy
prices, the Company has entered into contracts as of October 29, 2005 to fix
the NYMEX cost of gas for approximately 60 percent of its estimated natural
gas purchase requirements in the next 12 months. A hypothetical 10 percent
increase in the cost of natural gas not covered by these contracts would
result in a reduction of approximately $1.2 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 third quarter and nine months ended October 29, 2005
was $2.4 million and $6.1 million, respectively. A hypothetical 10 percent
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 bank debt. As of October 29, 2005, there was $93.6 million of
outstanding debt under the bank credit facility, of which $10.0 million
bears interest at a fixed rate of 3.58 percent (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
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
percent 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
October 29, 2005, the margin was 2.50 percent. Of the $30.2 million in life
insurance policy loans outstanding as of October 29, 2005, a total of $24.4
million of these loans bear interest at variable rates ranging from 5.3
percent to 6.3 percent. 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 $1.1 million in annual pretax earnings.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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
21
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.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
During the second quarter of fiscal 2005, the Company began replacing its
legacy plant accounting system with a more integrated technology platform
which includes invoicing and accounts receivable, purchasing, and laundry
management applications. As part of this initiative, the Company completed
the implementation of the Accounts Receivable module of Oracle financials
during the second quarter of fiscal 2005. The purchasing and laundry
management applications are scheduled to be implemented on a plant by plant
basis over the next 24 months.
The Company also implemented a new human resource, payroll and time and
attendance system during the second quarter of fiscal 2005. This new system,
Ceridian, will improve the efficiency of the Company's payroll processes.
As with any new technology application the Company implements, the design of
the internal controls affected by the implementation of the Accounts
Receivable module of Oracle financials and the new human resource, payroll
and time and attendance system have been evaluated by management and deemed
to be effective.
Other than the changes noted above, there were no other changes in the
Company's internal control over financial reporting during the first nine
months of fiscal 2005 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
-----------------
(a) See Exhibit Index on page 25.
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Angelica Corporation
--------------------
(Registrant)
Date: December 8, 2005 /s/ James W. Shaffer
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James W. Shaffer
Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
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EXHIBIT INDEX
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Exhibit
Number Description
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*Asterisk indicates exhibits filed herewith.
**Incorporated by reference from the document listed.
3.1 Restated Articles of Incorporation of the Company, as currently in
effect. Filed as Exhibit 3.1 to the Form 10-K for the fiscal year
ended January 26, 1991.**
3.2 Current By-Laws of the Company, as last amended January 27, 2004.
Filed as Exhibit 3.2 to the Form 10-K for the fiscal year ended
January 31, 2004.**
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 Three order agreements for natural gas with Sempra Energy Solutions
entered into on October 21, and October 25, 2005. Reported on a
Form 8-K filed on October 26, 2005.**
10.2 Employment Agreement between the Company and Richard M. Fiorillo,
dated November 15, 2005. *
10.3 Second Amendment to Amended and Restated Loan Agreement dated
October 28, 2005, among Angelica Corporation, LaSalle Bank National
Association, as Administrative Agent, and LaSalle and other
Lenders. *
10.4 Second Amended and Restated Loan Agreement dated November 30, 2005,
among Angelica Corporation, LaSalle Bank National Association, as
Administrative Agent, and LaSalle and other Lenders. Filed as
Exhibit 99 to a Form 8-K filed on December 5, 2005. **
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.*
25