UNITED
STATESSECURITIES AND EXCHANGE COMMISSION

Washington,
D.C. 20549







Form 10-K

ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF
1934

For the
Fiscal Year Ended January 29, 2005

Commission
File 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
    63017-3406Chesterfield,
      Missouri
    (Zip
      Code)(Address
      of principal executive
      offices)


(314)
854-3800(Registrant’s telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:

Title
      of each class
    Name
      of each exchangeon which registeredCommon
      Stock, $1.00 Par Value
    New
      York Stock ExchangePreferred
      Stock Purchase Rights issuable pursuant
      to
      Registrant’s Shareholder Rights Plan
    New
      York Stock Exchange


Securities
registered pursuant to Section 12(g) of the Act:

NONE

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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act) Yes X   No

State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.

$211,916,765
based on the average of the high/low transaction price of the Common Stock on
July 30, 2004.

Indicate
the number of shares outstanding of each of the Registrant’s classes of Common
Stock, as of March 31, 2005.

Common
Stock, $1.00 par value, 9,176,621 shares outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the Registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholders
are incorporated by reference in Part III.






TABLE OF CONTENTS

PagePART
      IItem
      1.
    Business
    1Item
      2.
    Properties
    19Item
      3.
    Legal Proceedings
    19Item
      4.
    Submission of Matters to Vote of Security
      Holders
    20Item
      4A.
    Executive Officers of the
      Registrant
    20PART
      IIItem
      5.
    Market for Registrant’s Common Equity and
      Related Stockholder
    Matters
    21Item
      6.
    Selected Financial Data
      (Unaudited)
    22Item
      7.
    Management’s Discussion and Analysis of
      Financial Condition and Results of
      Operations
    23Item
      7A.
    Quantitative and Qualitative Disclosures About Market
      Risk
    37Item
      8.
    Financial Statements and Supplementary
      Data
    37Item
      9.
    Changes in and Disagreements With Accountants on
      Accounting and Financial
      Disclosure
    37Item
      9A.
    Controls and
      Procedures
    37Item
      9B.
    Other
      Information
    41PART
      IIIItem
      10.
    Directors and Executive Officers of the
      Registrant
    41Item
      11.
    Executive
      Compensation
    41Item
      12.
    Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder
      Matters
    41Item
      13.
    Certain Relationships and Related
      Transactions
    43Item
      14.
    Principal Accountant Fees and
      Services
    43PART
      IVItem
      15.
    Exhibits, Financial Statement
      Schedules
    43







PART I

**Item 1. Business**


Overview

Angelica is a leading provider of
outsourced linen management services to the U.S. healthcare industry. We have
developed a comprehensive service offering that allows healthcare providers to
outsource some or all aspects of their linen management needs. We provide
laundry services, linen and apparel rental and on-site linen management services
to our diverse customer base of approximately 4,500 healthcare providers located
in 24 states. To a more limited extent, we also provide linen management
services to customers in the hospitality business. For the 2004 fiscal year
ended January 29, 2005, we processed over 620 million pounds of linen for our
customers.

Our linen management services are designed to
benefit healthcare providers by enabling them to:

•
    Reduce
      their capital expenditures for linen facilities and
    equipment;•
    Decrease
      their operating costs by outsourcing a non-core
    process;•
    Maximize
      their productivity by allowing them to utilize limited available space
      that would otherwise be dedicated to on-premise laundry facilities for
      revenue generating activities; and•
    Focus
      on their core competencies of providing healthcare services to their
      patients.







As of March 31, 2005, our 6,940 service
associates delivered our value-added services to our customers through our
network of 35 laundry plants and fleet of 600 delivery vehicles. Our plants
provide access to 30 of the 50 largest metropolitan markets in the United States
which approximates 50% of the country’s healthcare facilities. We seek to
concentrate our plants in clusters, enabling us to provide better service to our
customers, as well as lower our operating costs, by maximizing the efficiency of
our delivery routes and by improving the utilization of our sales force. For the
2004 fiscal year, we reported revenues of $316.1 million and net income of $10.4
million from continuing operations.


Our company was founded in 1878 when we began
in business as a uniform manufacturing company. During the 1960s, we expanded
our product offering to three lines of business: Manufacturing, Textile Services
and Retail. In 2002, management and our Board of Directors made a strategic
decision to focus on healthcare linen services and retail. We sold our
Manufacturing business in the spring of 2002. We hired a new president and CEO
in September 2003. Since then, we have streamlined the company further by
selling our Retail business in July 2004, and strengthened our market position
in the healthcare linen management services industry by completing ten
acquisitions.

We believe we are now well positioned to
capitalize on additional revenue opportunities within our existing markets as
well as leverage our large and growing scale and infrastructure to enhance our
profitability and increase shareholder value.

Market Opportunity

The U.S. market for outsourced
healthcare linen management services is large and growing. Based on our
knowledge providing linen management services to the healthcare industry, we
estimate that the U.S. healthcare linen services market represents approximately
a $5.6 billion revenue opportunity annually. Of this

1


$5.6 billion, we estimate $2.0 billion is
attributable to acute-care hospitals, $2.4 billion to surgical and physician
clinics and $1.2 billion to long-term care facilities.

Numberof
      Beds
    
    x
    
    AverageAnnualRevenue/Bed(4)
    
    =
    
    EstimatedMarket
      Sizeas at September 2004Acute-Care
      Hospitals(1)
    
    0.9
      million
    
    
    
    $
    2,222
    
    
    
    
    $2.0
      billionSurgical
      and Physicians Clinics(2)
    
    0.5
      million
    
    
    
    $
    4,800
    
    
    
    
    $2.4
      billionLong-term
      Care Facilities(3)
    
    1.7
      million
    
    
    
    $
    705
    
    
    
    
    $1.2
      billionTotal
    
    —
    
    
    
    
    —
    
    
    
    
    $5.6
      billion




(1)
    
    Source:
      The CDC (Centers for Disease Control/Fed Government) and Company database
      from Solutions Marketing Group (SMG).(2)
    
    Source:
      Dun & Bradstreet and InfoUSA. Consists of total clinics rather than
      number of beds.(3)
    
    Source:
      Dun & Bradstreet and SMG database.(4)
    
    Average
      annual revenue per bed is determined based on our experience in providing
      linen management services to the healthcare industry. Other service
      providers in this industry may be achieving different results.


We believe there are a number of favorable
market dynamics within the U.S. healthcare sector that will continue to expand
the overall outsourced healthcare linen management services
opportunity:

Favorable demographic trends—The
U.S. Census forecasts that the U.S. population over 65 will double over the next
25 years. The American Hospital Association (AHA) estimates that people over the
age of 65 use hospital services at three times the rate of the general
population.

Expanding customer base—According
to the AHA, the number of community hospitals in the U.S. increased in 2002 for
the first time since 1975 and as of September 2004, there were more than 800 new
hospitals being planned. Furthermore, according to the AHA, there was a 47%
increase in the number of U.S. outpatient surgery centers, or clinics, from 1996
to 2002. In addition, according to government estimates, the number of people
needing long-term care is expected to increase 30% in the next 15
years.

In addition, we also believe there are several
positive factors that will increase the market penetration of outsourced
healthcare linen management services:

Increasing awareness of in-house operating costs—Even though the outsourced hospital linen management services
market is relatively mature and there are numerous benefits to outsourcing, our
internal analysis indicates that a significant percentage of hospitals continue
to handle their linen needs in-house. We believe that many hospital
administrators are not aware of the true economic costs of on-premise laundries
and that they may underestimate the opportunity costs as well. For instance, we
believe many administrators do not account for the opportunity cost of space
used for laundry equipment and that utility costs are often shared by or
arbitrarily allocated to various divisions within a hospital without the actual
usage of the laundry facilities being appropriately measured. As hospital
administrators become more aware of the true costs of on-premise laundries, we
believe that many hospitals will likely decide to outsource their linen
services.

Underpenetrated clinics and long-term care
facilities—We believe the market for outsourced
clinic and long-term care linen services is underpenetrated by both us and our
major competitors. According to industry sources, there are over 540,000 clinics
and long-term care facilities in the United States that require linen services.
In addition, we believe there are also thousands of other outpatient care
facilities such as dialysis centers and walk-in clinics that also require linen
services in the course of their business. We believe that as

2


outsourced linen services providers begin to
actively target these customers, market penetration of these sectors will likely
increase.

Aging hospital facilities—According
to the AHA, as of September 2004, 60% of hospitals in the United States needed
to replace aging healthcare facilities. Due to the significant capital costs
associated with laundry equipment replacement, we believe that many hospitals
may outsource their linen needs in order to reduce costs, free up space
dedicated to on-premise laundries and preserve capital for direct patient care
uses.

Competitive Strengths

We believe we are well positioned to
capitalize on the attractive market opportunities for outsourced healthcare
linen management services as a result of our competitive strengths:

Strong regional clusters—We believe
our cluster approach of having a number of plants in localized areas enables us
to provide superior service to our customers at a lower cost. Operating numerous
plants within close proximity to one another enables us to provide more reliable
customer service, better handle customer requests and mitigate the risks
associated with temporary capacity reductions at a single plant. Furthermore,
these clusters allow us to lower costs by maximizing delivery route densities
and better utilizing our sales force across plants. Our cluster approach has
enabled us to establish a strong market position in several markets in which we
operate.

Significant scale creates opportunities for cost
reduction—We believe our significant and growing
operating scale and infrastructure provides us with opportunities to realize
significant financial benefits. In fiscal 2004, we purchased approximately $60
million of linens and invested $15.3 million in capital improvements to our
plants. We believe the realignment of our purchasing functions at our operations
headquarters in 2004 will enable us to better coordinate our purchasing
activities and negotiate better pricing from our existing suppliers, as well as
to pursue direct sourcing opportunities. We hired a director of engineering in
2004 to enable us to implement best practices and standardization across our
organization, as well as to optimize capital expenditures by standardizing
equipment and centralizing capital equipment procurement to take advantage of
volume purchase discounts. In addition, our 35 plants allow us to test new
technologies and operating techniques on a limited basis and implement best
practices throughout our plant network.

Experienced market leader—Our
position as a market leader provides us with significant credibility with
current and prospective customers. We are a leading provider of outsourced linen
management services to the U.S. healthcare industry. Based on healthcare linen
services revenue, we believe that we are twice the size of our nearest
competitor.

Large, experienced sales force—Our
large, experienced sales force enables us to cater to the needs of
sophisticated, national customers while also allowing us to deploy the
appropriate sales resources to local market opportunities. We believe our sales
force is the largest in the healthcare linen services industry. Our sales force
consists of six national and regional managers focused on multi-facility
hospital networks, 17 account executives focused on major hospitals and 29
market representatives focused on clinics and long-term care facilities.
Furthermore, our sales force is augmented by 74 local customer service
representatives who provide customer service and enhance revenue
opportunities.

Stable customer base—Our large and
diverse customer base, high customer retention rates and long-term contracts
provide us with a stable revenue base. As of March 31, 2005, we served
approximately 800 hospitals, 350 long-term care facilities and 3,300 surgical
and physician clinics in 24 states. In fiscal 2004, no individual customer
represented more than 10% of our total revenue. Our annual customer retention
rate is approximately 93% of total revenues and our average contract length is
approximately 3 years.

Proven management team—Since
transitioning to a new president and CEO in September 2003, we have become a
more streamlined organization primarily focused on the healthcare linen
management services industry. Under our new focus, we have divested non-core
assets, completed ten acquisitions that strengthened

3


our position in our core business, and
significantly reduced our corporate overhead expenses. From September 2003 to
March 31, 2005, these initiatives have increased our number of plants from 28 to
35, increased our weekly pounds of linen processed 43.4% from 10.6 million to
15.2 million, and reduced our corporate office headcount from 50 to 15
associates, which was partially offset by the addition of 15 associates in our
operations headquarters. Going forward, we will continue to focus on new revenue
opportunities by more aggressively targeting clinics and long-term care
facilities as well as hospitals. We will also seek to further leverage our
significant and growing operating scale and infrastructure to enhance
profitability and increase shareholder value.

Business Strategy

Due to the local and regional nature of
our business, our goal is to become the market leader in each of the local
markets we serve while simultaneously expanding our coverage to new markets. We
believe that with respect to total beds served, we are among the three largest
providers of outsourced healthcare linen management services in each of the
local markets in which we operate and number one or two in the majority of our
markets.

Increase presence in existing markets—We believe that increasing the penetration of our existing markets
is an effective and cost-efficient means of growth as we are able to capitalize
on our reputation, brand awareness and existing infrastructure in the markets in
which we operate.

To strengthen our presence in our existing
markets, we plan to:

•
    Facilitate
      additional hospital conversions from on-premise to outsourced linen
      management services by educating hospital administrators about the true
      economic and opportunity costs associated with operating on-premise
      laundries;•
    Identify
      and implement sales and marketing and customer service best practices
      across our organization;•
    Designate
      senior level managers to facilitate better execution of our clinic and
      long-term care business strategies; and•
    Focus
      our efforts on acquiring new business from clinics associated or
      affiliated with our existing hospital
customers.


Pursue
complementary and accretive acquisitions—To increase our customer base,
expand our presence in existing markets and enter new markets, we will continue
to pursue strategic acquisitions. Since November 2003, we have completed ten
acquisitions for an aggregate consideration of $126.0 million that we believe
have created numerous benefits to our market position and our customers. In
evaluating acquisition opportunities, we consider factors such as strategic
value, projected EBITDA, impact on earnings per share, return on net assets and
internal rate of return.

4


The
following chart depicts the acquisitions we have completed during the past 18
months.



DateCompleted
    
    Transaction
    
    BenefitMarch
      2005
    
    Purchased
      the stock of Royal Institutional Services, Inc. and its affiliate, The
      Surgi-Pack Corporation and accompanying healthcare linen services business
      in Somerville and Worcester, MA
    
    Strengthened
      our New England positionJanuary
      2005
    
    Purchased
      National Service Industries’ (d/b/a National Linen Services) laundry
      facilities and linen services business in Dallas and Wichita Falls, TX
    
    Strengthened
      our Southwest positionJanuary
      2005
    
    Purchased
      Tartan Textile Services’ healthcare linen services business and assumed
      lease for laundry facility in Hempstead, NY
    
    Improved
      our access to New York market and access to long-term care facilitiesDecember
      2004
    
    Purchased
      United Linen Service’s (d/b/a Golden State Services) healthcare linen
      services business and assumed leases for laundry facilities in Sacramento
      and Turlock, CA
    
    Strengthened
      our Northern California positionMay
      2004
    
    Purchased
      Tartan Textile Services’ healthcare linen services contracts from Tartan’s
      Portland, ME laundry facility
    
    Strengthened
      our New England positionApril
      2004
    
    Purchased
      Duke University Health Systems’ laundry in Durham, NC and signed a
      long-term supply agreement with Duke healthcare facilities
    
    Allowed
      expansion into North Carolina market with state-of-the-art
    facilityApril
      2004
    
    Purchased
      inventory and equipment and assumed healthcare linen services contracts at
      two on-premise laundries located at hospitals in TX and GA
    
    Improved
      capacity rationalization in existing Angelica facilitiesDecember
      2003
    
    Purchased
      National Service Industries’ healthcare laundry facility and healthcare
      linen services business in Safety Harbor, FL
    
    Strengthened
      our western Florida positionNovember
      2003
    
    Purchased
      healthcare linen services contracts and selected assets of Tenney Laundry
      Services in Batavia, NY
    
    Strengthened
      our New York position


Increase
gross margin by leveraging scale—As a result of our focused business
strategy and recent acquisitions, we believe we are now well positioned to use
our scale to improve our operating performance. We plan to expand our gross
margin through a number of cost savings initiatives including:

•
    Reducing
      linen costs through centralized purchasing and the implementation of a
      direct sourcing program;•
    Optimizing
      capital expenditures by standardizing equipment and centralizing capital
      equipment procurement;•
    Reducing
      energy cost volatility by hedging more of our anticipated natural gas
      requirements;•
    Implementing
      best practices and new technology solutions to improve efficiency while
      reducing labor costs; and•
    Reducing
      distribution costs by testing new software and optimizing routes as volume
      grows.




5


Service
Offering

We
provide textile rental and linen management services primarily to the healthcare
industry. Among the items we rent and clean are bed linens, towels, patient
gowns, surgical scrubs, surgical linens and surgical packs as well as mops, mats
and other dust control products. We also provide flexible, customized solutions
for our customers ranging from à la carte services to full textile rental
services - a total outsourcing package including apparel, textile and linen
rental, laundering, service delivery and distribution systems designed to
replace on-premise laundries and reduce expenses associated with these various
services. In addition, we offer many of these services utilizing textiles owned
by the customer (customer-owned goods).

Furthermore,
we also offer the following customizable services:

•
    AngelLink®,
      a computerized linen management system, available for either rented or
      customer-owned goods, designed to streamline linen tracking and ordering
      processes;•
    On-site
      linen distribution management of all aspects of linen distribution ranging
      from the linen room to utilization reports that optimize the linen use,
      ordering, receiving and use of linens; and•
    Customized
      surgical packs for use in operating suites, providing a cost-effective
      alternative to disposable surgical packs.


Other
services we provide include colored linen programs, scrub security programs and
just-in-time linen cart exchange programs. These services have been designed to
meet the total linen management needs of our customers. We also furnish a
limited number of general linen services in select areas, mainly to restaurants,
hotels and motels.

Customers

We
serve customers in a number of healthcare sectors that are distinguished by both
the types of patients they serve and the types of services they offer. Within
the hospital and long-term care sector, many patient visits involve overnight
stays. In contrast, within the clinic sector, most patient visits are outpatient
in nature. Consequently, hospitals and long-term care facilities typically
require rental of, and linen management services for, substantial amounts of
bulk items such as bed linens and bath towels, in addition to other items such
as patient gowns and surgical scrubs. Our clinic customers typically require
linen rental services for smaller items, such as lab coats and scrubs. As a
result, hospitals and long-term care facilities generally involve larger,
lower-price per pound orders, while the products and services provided to
our clinic customers generally have a higher price per pound.

For the
2004 fiscal year ended January 29, 2005, no individual customer represented more
than 10% of our total revenues.

Competition

The
markets in which we operate are very competitive and highly fragmented. Our
primary competitors include two multi-national corporations: Crothall Services
Group (a subsidiary of Compass Group PLC) and Sodexho Inc. (a subsidiary of
Sodexho Alliance SA); approximately eleven regional midsize firms; and more than
1,500 small, independent, privately-owned competitors. In addition, many
hospitals have captive on-premise laundries and hospital cooperative laundries.
In addition, we compete indirectly with large facility service providers, such
as ARAMARK Corporation, that provide linen services in conjunction with other
services.

Within
each of our acute-care hospital markets, we typically compete with one or two
larger regional or national competitors and two to four small independent,
privately-owned competitors. Within the clinic and long-term care markets, we
typically compete with small local companies and regional providers that
specialize in small accounts. In addition, garment and uniform providers such as
ARAMARK Corporation or Cintas Corporation sometimes compete in the clinic
market.



6


Operations

We
typically provide our services to customers located within a 150 mile radius of
our plants. As of March 31, 2005, we operated 35 laundry plants serving 24
states all of which are in or near major metropolitan areas. Our plants are
concentrated in clusters which provide us with access to 30 of the 50 largest
metropolitan markets in the United States which approximates 50% of the
country’s healthcare facilities. In fiscal 2004, our plant capacity utilization
averaged 73% (based on two eight-hour shifts running six days per week).

We
maintain a fleet of approximately 600 delivery vehicles and our drivers
typically pick up and deliver linen daily at hospitals and two to three times
per week at outpatient facilities.

Our
laundry process involves several steps to ensure effective cleaning. Soiled
linen is delivered to the plant by truck, sorted and weighed into appropriately
sized loads, washed, dried, ironed, folded, arranged on carts and then delivered
back to the customer.

Sales
and Marketing

We
believe our sales force is the largest in the healthcare linen management
services industry. Our sales force consists of six national and regional
managers focused on multi-facility hospital networks, 17 account executives
focused on major hospitals, 29 market representatives focused on clinics and
long-term care facilities and 74 local customer service representatives who
provide customer service and enhance revenue opportunities by providing our
existing customers with information about additional services and products we
offer.

Our sales
force compensation typically consists of a fixed base salary as well as a
variable component based on amount of revenue sold.

Types
of Contracts

We
typically serve our customers pursuant to written service contracts for an
initial term of three years. Once we have developed a relationship with our
customers and understand their needs and our customers have had an opportunity
to evaluate the quality of our services, we generally seek to convert them to
five year service contracts. Most of our contracts have pricing escalators tied
to the Consumer Price Index; however, the total amount by which our prices may
be increased annually is often capped.

Many of
our customers have used our services for many years and we believe most
customers remain loyal to us due to our high quality service. In addition, we
believe that customers may be reluctant to change service providers due to the
effort involved, the potential disruption of services provided and, in many
cases, the hidden costs associated with a change in service provider.

Regulatory
Considerations

Our
operations are subject to various laws and regulations relating to public
health, worker safety and the environment.

In
conjunction with the corporate campaign discussed in Item 3. Legal Proceedings,
approximately half of our locations have been inspected since the beginning of
fiscal 2004 by the Occupational Safety and Health Administration or the state
agency equivalent (OSHA). Any citations resulting from these inspections have
been completely abated or are in the process of being abated. OSHA citations are
often accompanied by proposed fines. In many instances, we have successfully
contested the citations and/or paid a considerably reduced amount than the fine
OSHA initially proposed. Inspections of two facilities resulted in alleged
willful citations that we have contested and are in the process of resolving
with OSHA.

Compliance
with laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment has not had a material
effect on our capital expenditures, earnings or competitive



7


position.
We do not expect any material expenditures will be required in order to comply
with any federal, state or local environmental regulations.

Employees

As
of January 29, 2005, we employed approximately 6,130 persons. As of March 31,
2005, we employed 6,940 persons. Approximately two-thirds of those employees are
covered by 35 union contracts. Unions that represent our employees include the
International Brotherhood of Teamsters, the International Union of Operating
Engineers, the United Food and Commercial Workers Union, and UNITE HERE.
Overall, we consider our relationship with our employees to be good at both
union and non-union facilities. With respect to production employees represented
by UNITE HERE, we believe relations with the vast majority of those employees to
be good despite that union’s corporate campaign, which is largely sustained by
its International organization, and is described in “Item 3. Legal
Proceedings”.

As of
March 31, 2005, we had three open contracts with UNITE HERE and two open
contracts with the International Brotherhood of Teamsters. We are participating
in ongoing negotiations in good faith with the intention of reaching agreements
in all cases.

When we
acquired Royal Institutional Services, Inc., a recognition petition filed by the
International Brotherhood of Teamsters Local 25 was pending with the National
Labor Relations Board. The proposed bargaining unit consists of truck drivers at
the Somerville, Massachusetts facility.

On April
2, 2005, UNITE HERE publicly announced that it plans to orchestrate a work
stoppage against us on May 5, 2005. Approximately half of our facilities could
theoretically be affected by such action. We have developed and are prepared to
implement contingency plans at all of our facilities to ensure continued quality
service to our customers. This could have a material impact on our financial
results.

Factors
That May Affect Future Results

Some
matters discussed in this Form 10-K or in other documents, a portion of which
are incorporated herein by reference, constitute forward-looking statements and
are based upon management’s expectations and beliefs concerning future events
impacting us. These statements are subject to risks and uncertainties that may
cause our actual results to differ materially from those set forth in these
statements.

The
following factors, as well as factors described elsewhere in this Form 10-K, or
in other SEC filings, could cause our future results to differ materially from
those expressed in any forward-looking statements made by, or on our behalf.
Such factors are described in accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, which encourages companies to disclose
such factors.

Our
acquisition strategy involves risks relating to integrating acquired
businesses.

Our
growth plan includes the strategic acquisition of selected business facilities,
customer contracts and other assets. For example, in fiscal 2004, we acquired
linen service facilities from Duke Health System, United Linen Services d/b/a
Golden State Services, Tartan Textile Services, National Service Industries
d/b/a National Linen and Uniform Service as well as two smaller on-premise
laundry operations from individual hospitals. In the first quarter of fiscal
2005 we acquired Royal Institutional Services. Our inability to integrate
acquired companies, business facilities, customer contracts or other assets
successfully may render us less able to obtain the expected returns from our
acquisitions and harm our results of operations and financial
condition.

The
process of integrating acquired operations into our existing operations may
result in operating, contract and technology difficulties, including, but not
limited to, the following:

•
    potential
      losses of key employees of acquired businesses;•
    problems
      assimilating the purchased technologies, products or business
      operations;

8
•
    problems
      maintaining uniform standards, procedures, controls and
      policies;•
    unanticipated
      costs associated with the transactions, including accounting charges and
      transaction expenses;•
    diversion
      of management’s attention from our core business;
  and•
    adverse
      effects on existing business relationships with suppliers and
      customers.


Also,
while we have structured most of our recent acquisitions as asset purchases, we
may fail to discover liabilities of any acquired companies for which we may be
responsible as a successor owner or operator in spite of any investigation we
make prior to the acquisition. Such difficulties may divert significant
financial, operational and managerial resources from our existing operations,
and make it more difficult to achieve our operating and strategic objectives.
The diversion of management attention, particularly in a difficult operating
environment, may affect our results.

A key
component of our growth strategy relies on our ability to continue to identify
and acquire suitable acquisition candidates. To the extent we are unable to
continue to identify and acquire such candidates, our growth will
slow.

We
may not be able to identify suitable future acquisition candidates or acquire
them on commercially reasonable terms or at all. In addition, we may not be able
to obtain necessary financing for acquisitions. Such financing may be restricted
by the terms of our debt agreements or it may be more expensive than our current
debt. The amount of such debt financing for acquisitions may be significant and
the terms of such debt instruments may be more restrictive than our current
covenants. In addition, competitors for acquisitions, some of which may have
substantially greater financial resources at their disposal, may increase the
cost of acquisitions to us or make it impossible for us to make acquisitions
within our strategic guidelines, if at all. If we do make additional
acquisitions, any benefits anticipated from our acquisition strategy may not
actually be realized.

Our
contracts may not contain energy surcharge clauses sufficient to cover energy
cost increases. If we are not able to recoup some or all of the utility cost
increases we may experience, our results of operations may
suffer.

Our
operations utilize a large amount of natural gas, electricity, and gasoline and
diesel fuel and our energy purchases vary as to price, payment terms, quantities
and timing. Our energy costs are also affected by various market factors
including the availability of supplies of particular forms of energy, energy
prices and local and national regulatory decisions. The price escalator
provisions in our contracts may not permit us to increase our prices to keep
pace with energy cost increases we may experience. For example, we were only
able to pass on to our customers approximately 20% of the energy cost increases
we incurred in fiscal 2004, from fiscal 2003. While we have instituted
operational hedging models that seek to capture pricing opportunities in the
energy markets, we may not be fully protected against substantial changes in the
price or availability of energy sources and we may not be able to offset these
increases with higher prices charged to our customers. Our operations also use a
large amount of water which we purchase, along with sewer service for the
wastewater, from local water and sewer utilities that are often municipally
owned. We are dependent upon these water and sewer utilities to provide
uninterrupted water and sewer services for our continued operations and we are
subject to the possibility of significantly increased costs for water and sewer
services to the extent that these entities face financial difficulties, whether
as a result of budget cuts or otherwise. We could also face higher costs if
there are maintenance or capacity constraint issues within the municipal systems
by which we are served.

The
length and pricing terms of our customer contracts may constrain our ability to
recover inflationary costs and to make a profit.

Our
customer contracts generally range from three to five years in length. Most of
our contracts have pricing escalators tied to inflation indexes, but the total
amount by which our prices may be increased are generally capped on an annual
and/or aggregate basis. In addition, some of our contracts only permit us to
raise prices



9


once a
year, so inflation may rise throughout the course of a year and we may not be
able to raise our prices until the end of that year. The terms of these
contracts require us to guarantee the price of the services we provide and
assume the risk that our costs to perform services and provide products will be
greater than anticipated. Any cost increase to us in performing these contracts
may expose us to diminished operating margins or losses. These costs may be
affected by a variety of factors, some of which may be beyond our
control.

We
face considerable pricing pressures from our customers, particularly from large
national, regional or local healthcare organizations and group purchasing
organizations. If we are not able to maintain or improve our operating margins
due to these pressures or otherwise, our results of operations may be
harmed.

We
face significant pricing pressures arising from our customers’ desire to
decrease their operating costs, from consolidation in the healthcare industry,
and from other competitors operating in our targeted markets. Pricing pressure
is particularly pronounced when we compete for new customers and when we
negotiate for an extension of the term of an agreement with an existing
customer. Some of our customers are part of large national, regional or local
healthcare organizations that require their affiliates to purchase services from
a limited number of preferred vendors or through a group purchasing
organization. These trends have increased pricing pressures on our contracts
with these customers. Pricing pressures may also be more pronounced during
periods of economic uncertainty. Accordingly, improvement, or even maintenance
of our operating margins depends on our ability to continually improve our
capacity utilization and reduce our operating costs. If we are not able to
achieve sufficient improvements in efficiency to adequately compensate for
pressures on our pricing, our results of operations will be harmed.

We are
primarily self-insured with respect to health insurance and workers’
compensation. If our reserves for health insurance and workers’ compensation
claims and other expenses are inadequate, we may incur additional charges if the
actual costs of these claims exceed the amounts estimated.

Because
of high deductibles on our insurance policies, we are effectively self-insured
with respect to this coverage. Employee health claims are self-insured except to
the extent of stop-loss coverage on large claims. In our financial statements,
we maintain a reserve for health insurance and workers’ compensation claims
using actuarial estimates from third-party consultants and historical data for
payment patterns, cost trends and other relevant factors. We evaluate the
accrual rates for our reserves regularly throughout the year and we have in the
past made adjustments as needed. Due to the uncertainties inherent in the
actuarial process, the amount reserved may differ from actual claim amounts and
we may be required to further adjust our reserves in the future to reflect the
actual cost of claims and related expenses. If the actual cost of such claims
and related expenses exceeds the amounts estimated, we may be required to record
additional charges for these claims and/or additional reserves may be
required.

Our
business requires significant, periodic capital investment in facilities,
machinery and other equipment, however because our future capital needs are
uncertain, we may need to raise additional funds in the future, and such funds
may not be available on acceptable terms or at all.

Our
capital requirements depend on many factors, including:

•
    the
      age and condition of existing facilities and
  equipment;•
    expenses
      related to investments in new facilities, equipment and
      technology;•
    the
      need to invest in labor saving and energy efficient
      equipment;•
    the
      number and timing of acquisitions and other strategic transactions;
      and•
    the
      costs associated with our expansion, if
any.


We
believe that our cash flows from operations, borrowing capacity under our credit
facilities and loans will be sufficient to fund our working capital and capital
expenditure requirements for the foreseeable future; however, these funds may
not be sufficient to fund all of our activities in the future. As a result, we
may need to raise



10


additional
funds, and such funds may not be available on favorable terms, or at all. If we
cannot raise funds on acceptable terms, we may not be able to execute our
business plan, take advantage of future opportunities, or respond to competitive
pressures or unanticipated customer requirements, which may harm our business,
results of operations, and financial condition.

Our
operating costs may increase or work stoppages may occur due to the corporate
campaign currently being conducted by a union against us.

Approximately
two-thirds of our hourly employees, principally at our linen management
facilities, are represented by collective bargaining agreements with contracts
that have expired in the recent past or will expire over the next four years. In
January 2004, UNITE HERE, the labor union that currently represents many of
those employees, initiated a corporate campaign against us targeting our
non-union facilities. The intent of this campaign is to pressure us to recognize
the union as the bargaining representative for our non-union workers, without
providing those workers the opportunity to vote, through a secret ballot
election supervised by the U.S. National Labor Relations Board, as to whether or
not they wish to be represented by UNITE HERE. We believe our employees have the
right to a fair process with respect to union representation and have resisted
the union’s efforts to unilaterally impose union representation on our non-union
workers. In fiscal 2004, we expended in excess of $1.0 million resisting these
efforts and anticipate continuing to incur significant expenses in resisting
these efforts in the future.

Five
collective bargaining agreements have expired, only one of which has an
extension in place, and additional collective bargaining agreements are
scheduled to expire in fiscal 2005. We believe that we are experiencing and may
continue to experience significant delays in renewing these collective
bargaining agreements due, in large part, to the corporate campaign undertaken
by UNITE HERE against us. As a result, we are at greater risk of work
interruptions or stoppages than are our competitors which are either non-union
or which are not the target of a similar corporate campaign. Threats of work
stoppages have occurred and we expect to receive additional threats in the
future. On April 2, 2005, UNITE HERE publicly announced that it plans to
orchestrate a work stoppage against us on May 5, 2005. Approximately half of our
facilities could theoretically be affected by such actions. Any work
interruptions or stoppages may significantly harm our business, results of
operations, and financial condition and may have a material impact on our
financial results. In addition, a small number of our customers have chosen not
to renew contracts with us due to concerns or opinions about the corporate
campaign, which resulted in our loss of their business. We may lose additional
customers as this campaign continues, which may harm our business and results of
operations.

An
insurance company with which we have previously done business is in financial
distress. If our insurer does not fulfill their obligations, we may experience
significant losses.

We
sold our pre-1999 workers’ compensation claims exposure to Kemper Insurance
Company in fiscal 1999. While several claims have been resolved, there are still
a number outstanding at the present time. Many insurance carriers are
experiencing unfavorable claims experience and loss of their own reinsurance
coverage. As a result, many of these carriers are in substantially weakened
financial condition, including Kemper. In the event that Kemper files for
protection with the bankruptcy court any outstanding claims previously sold to
Kemper, in addition to deposits that have been made to Kemper on claims since
fiscal 1999 and amounts in excess of the deductible for claims with Kemper since
fiscal 1999 may become our responsibility to the extent not covered by state
guaranty associations and may have a detrimental effect on our results. We
estimate our exposure to be $1.7 million as of January 29, 2005.

If we
fail to maintain an effective system of internal control or discover material
weaknesses in our internal control over financial reporting, we may not be able
to report our financial results accurately or detect fraud, which may harm our
business and the trading price of our stock.

An
effective system of internal controls is necessary for us to produce reliable
financial reports and is important in our effort to prevent financial fraud. We
are required to periodically evaluate the effectiveness of the design and
operation of our internal controls. These evaluations may result in the
conclusion that enhancements,



11


modifications
or changes to our internal controls are necessary or desirable. While we
evaluate the effectiveness of our systems of internal control on a regular
basis, these systems may require modification from time to time in the future to
remain effective. There are inherent limitations on the effectiveness of
internal controls including collusion, management override, and breakdowns in
human judgment. Because of this, control procedures are designed to reduce
rather than eliminate business risks. If we fail to maintain an effective system
of internal controls or if we or our independent registered public accounting
firm were to discover material weaknesses in our internal controls, we may be
unable to produce reliable financial reports or prevent fraud and that may harm
our financial condition or results of operations and result in loss of investor
confidence or a decline in our stock price.

Our
credit facilities require that we meet specified levels of financial
performance. In the event we fail either to meet these requirements or have them
waived, we may be subject to penalties and we may be forced to seek additional
financing.

Our
credit facilities contain strict financial covenants. Among other things, these
covenants require us to maintain specified ratios of earnings to fixed expenses
and debt to earnings, as well as specified minimum net worth levels. Our lenders
may not consent to amendments to these covenants on commercially reasonable
terms in the future if we required such relief. In the event that we do not
comply with the covenants and our lenders do not consent to such non-compliance,
we will be in default of our agreement, which may subject us to penalty rates of
interest and acceleration of the maturity of the outstanding balances.
Accordingly, in the event of a default under our credit facilities, we may be
required to seek additional sources of capital to satisfy our liquidity needs.
These additional sources of financing may not be available on commercially
reasonable terms or at all. Even if they are available, these financings may
result in dilution to our existing shareholders.

A
significant portion of our revenues is derived from operations in a limited
number of markets. Recessions, spikes in costs or natural disasters in these
markets may harm our operations.

A
significant portion of our revenues is derived from our operations in a limited
number of states and regions. Revenues generated from operations in California
accounted for approximately 47% of our revenues from continuing operations in
fiscal 2004. Any economic weakness in California or our other key markets may
harm our business.

Our
business uses a significant amount of gasoline, diesel, natural gas, electricity
and water. We may not be able to pass along to our customers all of the
increased energy costs we may experience in the event of a regional energy
crisis which may harm the results of our business. In addition, workers’
compensation costs in California are significantly higher than they are in other
states and, as a result, account for a disproportionately large amount of our
workers’ compensation expense. In the past, legislation has been introduced into
the California state legislature that would have modified the current rules
governing workers’ compensation insurance in that state, if it had been enacted.
The implementation of this or other similar legislation in California or our
other large markets in the future may significantly increase our costs of doing
business and harm our results of operations.

Severe
weather conditions or other natural disasters in our primary markets, such as
earthquakes in California or hurricanes in Florida, may cause significant
disruptions to our operations, and result in increased costs and liabilities and
decreased revenues, which may harm our business, operating results, financial
condition and liquidity. We have, in the past, taken advantage of our clustering
strategy to allow our customers to be serviced by our other facilities in the
area in the event of service disruptions at a particular plant, but we may not
be able to do so in the future if a major disaster struck a number of our
facilities within a cluster.



12


Any
increase in the cost of linens and textiles which is not recovered may affect
our operating results.

The
acquisition cost of linens and other textiles that we rent to customers
comprised nearly 19% of our revenues from continuing operations in fiscal 2004.
Significant increases in the price of cotton may result in higher linen costs
and, consequently, have an adverse effect on our earnings if we are not
successful in offsetting such increases, either through cost reduction efforts
or adjustment in prices for our services.

We may
face risks resulting from purchasing linens and other textiles from
international sources.

We
purchase most of the linens and other textiles rented to customers from foreign
sources, primarily China, either directly from the manufacturer or through
distributors. Currently, the Chinese Yuan is pegged to the US dollar but the
Chinese government is facing significant international pressure to allow its
currency to float against the US dollar. If this were to occur, any revaluation
of the US dollar versus the Chinese Yuan may exacerbate increases in the cost of
linen purchases and may harm our profit margins and results of operations. In
addition, sourcing products from foreign manufacturers presents several risks,
including volatility in gross domestic production; credit risk; civil
disturbances; economic and governmental instability; changes in regulatory
requirements; nationalization and expropriation of private assets; significant
fluctuations in interest rates, currency exchange rates and inflation;
imposition of additional taxes or other payments by foreign governments or
agencies; increases in fuel and other shipping costs; changes in export or
import controls and exchange controls and other adverse actions or restrictions
imposed by foreign governments. Any of these events may make it significantly
more costly or more difficult to obtain the linens we require and may harm our
financial condition and results of operation.

We are
dependent on the proper functioning and availability of our information systems,
many of which we are currently upgrading.

We
are dependent on the proper functioning and availability of our information
systems including security of data, firewalls and virus protection in operating
our business. Our information systems are protected through physical and
software safeguards. However, they are still vulnerable to fire, storm, flood,
power loss, telecommunications failures, physical or software break-ins and
similar events. Any interruption, impairment or loss of data integrity or
malfunction of these systems may severely hamper our business and may require
that we commit significant additional capital and management resources to
rectify the problem. Our business interruption insurance may be inadequate to
protect us in the event of a catastrophe. Furthermore, we are currently
undertaking a substantial upgrade to our information systems. If we experience
unforeseen difficulties or delays in connection with this implementation our
business and results of operations may be harmed.

We
face intense competition in our business. If we fail to compete effectively, we
may miss new business opportunities or lose existing clients, and our revenues
and profitability may decline.

The
market for our linen management services is highly competitive. The principal
elements of competition include quality, service, reliability and price. Our
competitors range from divisions of large multi-national organizations, namely
Sodexho Inc. (a subsidiary of Sodexho Alliance SA) and Crothall Services Group
(a subsidiary of Compass Group, PLC), to regional midsize firms. Also, we have
many small independently-owned competitors, including individual hospital
on-premise laundries and hospital cooperatives. Our competitors Sodexho and
Crothall Services Group have significantly more financial resources, larger
professional staffs, greater brand recognition and broader service offerings
than we do. In addition, there are other large outsource services providers with
greater resources than we who do not currently serve the healthcare linens
services market but may enter this market in the future. These competitors may
devote substantial resources to the development and marketing, including
discounting of products and services that compete with those offered by us.
Significant price competition may seriously harm our revenue, operating margins
and market share.

Our
continued success depends on our ability to attract new customers, retain our
current customers and renew our existing customer contracts. Our ability to do
so generally depends on a variety of factors, including the quality, service,
reliability and price, as well as our ability to market our services effectively
and differentiate



13


ourselves
from our competitors. Approximately 30% of our customer contracts come up for
renewal each year. Over the past 3 years, we have averaged a 93% retention rate
based on total revenues. We may not be able to renew existing customer contracts
at the same or more favorable rates or terms and our current customers may
terminate or not renew contracts with us. The failure to renew a significant
number of our existing contracts may harm our business and results of
operations. In addition, many companies in the healthcare industry are seeking
to consolidate their outsourced services with one or two vendors, instead of
using multiple vendors. Since we focus primarily on healthcare linen management
services, we may lose customers to vendors who provide multiple outsourced
services, and our results of operations may be harmed, if this trend
continues.

We are
subject to numerous federal, state, and local regulatory requirements involving
employees, including those covering employment, wage and hour and occupational
health and safety issues. Any changes to existing regulations or new laws may
result in significant, unanticipated costs.

Our
facilities are, and any operations we may acquire in the future will be, subject
to various federal, state, and local regulatory requirements, including
employment rules; wage and hour laws (including minimum wage, workers’
compensation and unemployment insurance); and occupational health and safety
regulations. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. We believe that our facilities are currently in substantial
compliance with all applicable regulatory requirements, although future
expenditures may be necessary to comply with changes in these laws.

Since the
commencement of the UNITE HERE corporate campaign in January 2004, employee
complaints have resulted in occupational health and safety inspections by the
federal Occupational Safety and Health Administration or the state agency
equivalent (OSHA) at approximately half of our laundry facilities. Citations
resulting from these inspections have been completely abated or are in the
process of being abated. OSHA citations are often accompanied by proposed fines.
In many instances, we have successfully contested the citations or paid a
considerably reduced amount than the fine OSHA initially imposed. Inspections of
two facilities resulted in citations for willful breaches of OSHA regulations,
which we contested and are currently in the process of resolving with OSHA. If
we are not able to resolve these issues favorably, or if we are cited with
additional violations, we may be subject to civil fines or criminal penalties
and abatement costs (including possible business interruption costs) to correct
the violations cited.

Environmental
issues, whether arising from our current operations or from the facilities we
have recently acquired, or may in the future acquire, may subject us to
significant liability and limit our ability to grow.

Our
facilities are subject to various federal, state and local laws and regulations,
including the federal Clean Water Act, Clean Air Act, Resource Conservation and
Recovery Act, Comprehensive Environmental Response, Compensation, and Liability
Act and similar state statutes and regulations. In particular, we use and must
dispose of wastewater containing detergent and other residues from the
laundering of linens and other products through publicly operated treatment
works or sewer systems and are subject to volume and chemical discharge limits
and penalties and fines for non-compliance. Under environmental laws, as an
owner, lessee or operator of our facilities we may be liable for the costs of
removal or remediation of hazardous or toxic substances located on or in or
emanating from our owned, leased or operated property, as well as related costs
of investigation and property damage. Liability may be imposed upon us without
regard to whether we knew of or were responsible for the presence of hazardous
or toxic substances. Locations which we own, lease or operate or which we may
acquire, lease or operate in the future may have been operated in a manner that
may not be in compliance with environmental laws and regulations and these
future uses or conditions may result in the imposition of liability upon us
under such laws or expose us to third party actions such as tort suits. In
addition, such regulations may limit our ability to identify suitable sites for
new or expanded plants. In connection with our operations, hazardous or toxic
substances may migrate from properties on which we operate or which were
operated by companies we acquired to other properties. We may be subject to
significant liabilities to the extent that human health is damaged or the value
of such properties is diminished by such migration. We now operate six new
facilities from acquisitions in fiscal 2004 and two new facilities from
acquisition during the first quarter of fiscal 2005 and we may face similar or
more extensive issues at these facilities or other facilities we may in
the



14


future
acquire. Although we conduct environmental due diligence on properties which we
acquire, lease or operate, including in some cases having Phase I environmental
audits conducted, because of the difficulty in detecting some environmental
conditions we may not have discovered all environmental conditions on those
properties. In addition, some of our properties contain underground storage
tanks. Although we have been working to remove these tanks from our properties
and are not aware of any material remediations arising from them, the presence
of these tanks on our properties may result in environmental liabilities being
imposed on us.

We may
be exposed to employment-related claims and costs that could harm our business,
financial condition, or results of operations.

Our
business is labor intensive. As a result, we are subject to a large number of
federal and state regulations relating to employment. This creates a risk of
potential claims of discrimination and harassment, violations of health and
safety and wage and hour laws, criminal activity and other claims. For instance,
employees may be exposed to blood-borne or other pathogens or injured by a sharp
object inadvertently left in the soiled linens processed at our facilities.
Although we have implemented training programs for employees working in the
soiled linen sorting areas of our facilities and have provided our employees
with protective clothing and hepatitis B vaccinations, there may be potential
threats to the health and welfare of our employees during the course of their
employment, which may result in workers’ compensation and occupational health
and safety claims being made against us.

From time
to time, we are subject to audit by various state and governmental authorities
to determine our compliance with a variety of occupational health and safety
regulations. We have in the past been found and may in the future be found, to
have violated some of these regulations or other regulatory requirements
applicable to our operations. Specifically, recent OSHA inspections have
resulted in citations that we have completely abated or are in the process of
abating. We may, from time to time, incur fines and other losses or negative
publicity with respect to any such violation. In addition, some or all of these
claims may also give rise to civil litigation, which could be time-consuming for
our management team and costly and could harm our business. Our insurance
coverage may not be sufficient in amount or scope to cover all types of
liabilities that we may incur, which may result in significant costs to us. In
many instances, we have successfully contested the citations or paid a
considerably reduced amount than the fine OSHA initially imposed. Inspections of
two facilities resulted in citations for willful breaches of OSHA regulations,
which we contested and are currently in the process of resolving with OSHA. If
we are not able to resolve these issues favorably, or if we are cited with
additional violations, we may be subject to civil fines or criminal penalties
and abatement costs (including possible business interruption costs) to correct
the violations cited.

If we
are not able to hire and retain qualified employees, our ability to service our
existing customers and retain new customers will be adversely
affected.

Our
success is largely dependent on our ability to recruit, hire, train, and retain
qualified employees. Our business is labor intensive and, as is typical for our
industry, continues to experience relatively high personnel turnover. Increases
in our employee turnover rate could increase our recruiting and training costs
and decrease our operating efficiency and productivity. Also, the addition of
new customers may require us to recruit, hire, and train personnel at
accelerated rates. We may not be able to successfully recruit, hire, train, and
retain sufficient qualified personnel to adequately staff our existing business
or future growth, particularly when we undertake new customer relationships for
which we have not previously provided services. In addition, as labor related
costs represented approximately 42% of revenues from continuing operations in
fiscal 2004, labor shortages or increases in wages (including minimum wages as
mandated by federal and state governments, employee benefit costs, employment
tax rates, and other labor related expenses) may cause our business, results of
operations, and financial condition to suffer. Furthermore, wages may be driven
up with additional unionization of our work force. As wage rates, health
insurance costs and workers’ compensation costs increase, we may not be
able to timely offset these increases with higher prices charged to our
customers.



15


Ineffective
management could cause our business, results of operations and financial
condition to suffer.

Our
continued success in our business is based upon many factors, including but not
limited to, the expansion of our customer base, the enhancement of the services
we provide to existing customers, aggressive sales and marketing efforts,
effective cost containment and capital investment measures, and a strong
strategic vision. Proper execution will require effective management at both the
corporate and the operating subsidiary levels. Our inability to effectively
manage our existing business and our future growth may harm our business,
results of operations, and financial condition. Our management teams at the
corporate and operating levels are small and any unforeseen crises or loss of
one or more of our officers or key employees may place a significant strain on
our remaining management team and our employees, operations, operating and
financial systems, and other resources.

Two of
the locations of our laundry facilities are subject to pending condemnation
actions in conjunction with eminent domain situations. If a number of facilities
were subject to this type of action, our ability to continue operations could be
interrupted.

Our
Vallejo, California plant and a portion of our property adjacent to our Edison,
New Jersey facility are in the process of condemnation actions by local
governing bodies as part of eminent domain actions. We have anticipated the
Vallejo situation and expect no interruption of our operations in shifting this
business to other facilities. In addition, the area being taken in Edison is not
part of our operational space and should not affect production. If, however,
future condemnation actions were to occur at one or more of our facilities
without sufficient notice, our operations may be affected and we may experience
service interruptions to our customers in the market area served by the affected
facility or facilities.

If our
goodwill and other intangible assets become impaired, we will be required to
write down their carrying value and incur a charge against
income.

At
January 29, 2005, our goodwill and other intangible assets from continuing
operations, net of accumulated amortization, was approximately $56.1 million. We
acquired all of our goodwill and other intangible assets in our acquisitions. At
least once every year and more often as we deem necessary, we review whether
these assets have been impaired. If these assets become impaired, we will be
required to write down their carrying value to the current fair value of the
assets and to incur charges against our income equal to the amount of the
writedown. These charges while cash neutral will decrease our reported net
income in the period in which we take them and may harm our financial condition
and results of operations.

We
have contingent liabilities on guarantees of leases for some of our former
retail store locations. We also have received an unsecured junior subordinated
promissory note from the acquiring company of our retail
business.

As
a term of the sale of our retail business in July 2004, we agreed to guarantee
payments due under leases for 103 of the retail stores operated by our former
retail business until the end of the current term of each lease. As of January
29, 2005, we are guarantor on the remaining 96 leases and our maximum aggregate
potential liability under these leases is approximately $16.1 million. If we
were required to make significant payments under these leases and were unable to
recoup them from the buyer of the retail business, our results of operations and
financial condition may be harmed. We also received an unsecured junior
subordinated promissory note for approximately $4.0 million of the purchase
price for our former retail business. The payment of this note is subordinated
to the bank indebtedness which the buyer of the retail business incurred in
connection with its acquisition of that business. We understand that the buyer
has no significant assets other than those purchased from us in the transaction.
We are currently carrying this note on our balance sheet at $3.1 million, which
is our estimate of the current fair market value of the note.



16


We may
be subject to costly and time-consuming product liability or personal injury
actions that would materially harm our business.

One
of the services we offer is to provide sterile linen items to our customers. If
those items or any of our products such as linen, towels, or patient gowns were
cross-contaminated within our facilities we may be exposed to potential product
liability risks. We take every precaution to prevent such occurrences through
quality control procedures we have developed, but it is possible that
contamination may occur through sabotage or human error. We may be held liable
if customers or their patients using our products are injured. Product liability
insurance is generally expensive, if available at all, and our present insurance
coverage may not be adequate. We may not be able to obtain adequate insurance
coverage at a reasonable cost in the future.

We
deliver our products to our customers via a fleet of delivery trucks that are on
the road exposed to the public throughout most of every week. We have in the
past experienced claims of injury relating to accidents involving our delivery
fleet and we may be subject to such claims in the future. Any such claims may
harm our operating results. In addition, we utilize a large deductible for auto
insurance and if we have underestimated the aggregate amount of claims, our
financial results may be negatively impacted.

Our
customer base is concentrated in the healthcare industry and our strategy
partially depends on a trend of healthcare providers to outsource non-core
services, such as linen management services. If the healthcare industry suffers
a downturn or the trend toward outsourcing reverses, our growth may be
hindered.

Our
current customer base primarily consists of healthcare providers, representing
approximately 90% of our revenue from continuing operations in fiscal 2004. Our
business and growth strategy is largely dependent on continued demand for our
services from healthcare providers and other industries we may target in the
future, and on trends in those industries to purchase outsourced services such
as linen management. A slowdown or reversal of the trend in the healthcare
industry to outsource linen management services may harm our business, results
of operations, growth prospects, and financial condition. Government healthcare
reimbursement programs, such as Medicare or Medicaid, and third-party healthcare
insurers have placed increasing pressure on healthcare providers to control
operating costs by changing the basis of the provider’s reimbursement for
medical services from actual cost to fixed reimbursement based upon diagnoses.
This has, in turn, caused our healthcare customers to pursue aggressive cost
containment measures with us and other third-party suppliers of goods and
services. This pricing pressure has resulted in recent consolidation in the
healthcare industry. This consolidation has decreased, and will continue to
decrease, the potential number of customers for our services, thereby providing
customers with additional leverage to negotiate lower pricing from us. Any
future consolidation in the industry may further increase this leverage and harm
our results of operations.

Our
business is dependent on the healthcare industry and will decline if the demand
for healthcare services declines.

Our
business is dependent on the healthcare industry. If the demand for healthcare
services declines, demand for our linen services may decline and our business
will suffer. Due to medical advances and pressure from governmental healthcare
reimbursement programs and private healthcare insurers, the average hospital
stay has decreased from 7.5 days in 1980 to 4.9 days in 2002. As these trends
continue, demand for our linen management services in the healthcare industry
may decline. This decreased demand for our linen management services may harm
our business, operating results, and financial condition.

A
declining stock market and lower interest rates negatively affect the value of
our defined benefit pension assets and the defined benefit pension assets of the
union-sponsored multi-employer plans to which we contribute and may harm our
financial position.

We
have a defined benefit pension plan covering most of our non-union employees.
Also, pursuant to obligations imposed by collective bargaining agreements that
cover union workers in many of our facilities, we contribute into
union-sponsored multi-employer pension plans for the benefit of these employees.
At the end of fiscal 2004, notwithstanding improving conditions in the stock
market and improved investment returns,

17


because
of earlier significant declines in the stock market and low interest rates, the
value of the pension assets decreased in these plans, compared to their value at
the end of fiscal 2003, and the assets held in these plans may not be sufficient
to fund our obligations under these plans. If future returns from the stock
market and other investments are insufficient to remedy this shortfall, we may
be required to increase our contributions to these pension plans in future years
to satisfy this underfunding. Also, specified events such as sales or closings
of facilities at which a significant number of employees covered by the plans
work may trigger withdrawal liability under the multi-employer plans into which
we contribute, which may also require us to make substantial additional payments
into the plan.

While
we have paid dividends regularly in the past, we may not be able to continue to
pay dividends at the same level or at all in the future. If we fail to pay
quarterly dividends to our common stockholders, the market price of our shares
of common stock may decline.

Our
ability to pay quarterly dividends is at the discretion of our board of
directors and the declaration of future dividends will depend on, among other
things, availability of funds, future earnings, capital requirements,
contractual restrictions, financial condition and general business conditions.
Although we have regularly paid quarterly dividends on our common stock, we may
not be able to pay dividends on a regular quarterly basis or, if we are able to
pay dividends, that we will be able to pay them at the same level in the future.
Furthermore, any new shares of common stock that we may issue will substantially
increase the cash required to continue to pay cash dividends at current levels.
Any reduction or discontinuation of quarterly dividends may cause the market
price of our shares of common stock to decline significantly. In addition, in
the event our payment of quarterly dividends is reduced or discontinued, our
failure or inability to resume paying dividends at historical levels may result
in a persistently low market valuation of our shares of common stock.

Available
Information

We
make available free of charge on or through our web site, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC. Our web site is
www.angelica.com.

In
addition, we have adopted a Code of Conduct and Ethics that applies to our
senior executive and financial officers pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002. This code, as well as charters relating to our Audit
Committee, Compensation and Organization Committee and Corporate Governance and
Nominating Committee, are available free of charge on or through our web site.
In the event of any amendments to, or waivers from, provisions of the Code of
Conduct and Ethics, we will satisfy its disclosure requirement under the
Securities and Exchange Act of 1934, as amended, by posting the amendments or
waivers on our web site in lieu of filing a report of such events on Form
8-K.

18





Item 2. Properties


A
list of our principal facilities as of March 31, 2005 follows. No individual
property, owned or leased, is of material significance to our operations or
total assets. In our opinion, all such facilities are maintained in good
condition and are adequate and suitable for the purposes for which they are
used. All properties are owned unless otherwise indicated.

Laundries



Antioch,
      CA
    
    Holly
      Hill, FL
    
    Sacramento,
      CA (leased)Ballston
      Spa, NY
    
    Houston,
      TX
    
    San
      Diego, CABatavia,
      NY
    
    Long
      Beach, CA
    
    San
      Fernando, CAChicago,
      IL
    
    Lorain,
      OH
    
    Somerville,
      MA (leased)Colton,
      CA
    
    Los
      Angeles, CA
    
    St.
      Louis, MOColumbia,
      SC
    
    Ooltewah,
      TN
    
    Stockton,
      CADallas,
      TX
    
    Orange,
      CA
    
    Tampa,
      FLDallas,
      TX (leased)
    
    Pawtucket,
      RI
    
    Turlock,
      CA (leased)Durham,
      NC
    
    Phoenix,
      AZ
    
    Vallejo,
      CA (subleased)Edison,
      NJ
    
    Pomona,
      CA
    
    Wichita
      Falls, TXFresno,
      CA
    
    Rio
      Vista, CA
    
    Worcester,
      MA (leased)Hempstead,
      NY (leased)
    
    Rockmart,
      GA


Our
leased laundry facility in Vallejo, California is owned by the City of Vallejo.
We have been informed that the site will be taken by way of an eminent domain
proceeding. As a result, we will be required to vacate the premises no later
than September 1, 2005. We expect to transfer our business that is currently
being conducted at our Vallejo facility to a number of our other plants in the
area. We anticipate that the City will compensate us for the reasonable cost of
relocating our Vallejo business operations into our surrounding plants.

We also
occupy one of our two Dallas, Texas facilities pursuant to a lease agreement
that will expire in September 2005. We are evaluating alternative sites to which
operations can be moved. We do not anticipate a material impact to our business
should relocation become necessary.

As of
March 31, 2005, our operations were located in 15 states, and consisted of 35
laundry plants, owned and leased, plus warehouse facilities and depots. Our
laundry facilities are generally not fully utilized, although most of them
operate on a multi-shift basis. While we have facilities that are operating at
full capacity, we estimate that, assuming the availability of labor, output of
several of our facilities could be increased by 20% or more with existing
equipment by adding or extending shifts, and by an estimated additional 25% (for
a total of 45%) with the installation of additional equipment.

Item 3. Legal Proceedings


We
are not a party, and none of our property, is subject to any material pending
legal proceeding other than ordinary routine litigation incidental to the
business. Management believes that liabilities, if any, resulting from pending
routine litigation in the ordinary course of our business should not materially
affect our financial condition or results of operations.

We are
currently engaged in defending ourself against a multi-faceted corporate
campaign. In January 2004, UNITE HERE, the union that represents production
employees at 23 of our 35 facilities, announced the campaign with the stated
purpose of attempting to force us to recognize UNITE HERE as the bargaining
representative for production employees at our nonunion facilities. We refuse to
deprive our employees at those locations of their right to choose for themselves
whether they want to be represented by a union.



19


Tactics
of the campaign include maligning us to all of our constituents and filing
multiple charges or complaints with the National Labor Relations Board (NLRB)
and federal and state occupational safety and health agencies, respectively. To
date, UNITE HERE has filed over 70 unfair labor practice charges (ULPs) with the
NLRB against us. Approximately half of these ULPs were subsequently dismissed by
the NLRB, withdrawn by UNITE HERE, or settled without an admission of liability
by us. Three of the ULPs contain factual questions resulting in the NLRB issuing
complaints so that the allegations may be more fully considered at a hearing.
Hearings are scheduled for later this year.

Item 4. Submission of Matters to Vote of Security
Holders


No
matters were submitted to a vote of shareholders during the fourth quarter of
our 2004 fiscal year.

Item 4A. Executive Officers of the
Registrant




Name
    
    Present
      Position (1)(2)
    
    Year
      FirstElected asan Officer
    
    AgeStephen
      M. O’Hara(3)
    
    President
      and Chief Executive Officer
    
    
    2003
    
    
    50Paul
      R. Anderegg(4)
    
    Vice
      President; President, Textile Services
    
    
    2001
    
    
    54Steven
      L. Frey
    
    Vice
      President, General Counsel and Secretary
    
    
    1999
    
    
    55Richard
      M. Fiorillo(5)
    
    Vice
      President Finance & Chief Financial Officer, Textile Services; Chief
      Accounting Officer
    
    
    2004
    *
    
    45James
      W. Shaffer(6)
    
    Vice
      President and Chief Financial Officer
    
    
    1999
    
    
    52


(1)
    
    The
      principal occupations of the officers throughout the past five years are
      set forth below.(2)
    
    All
      officers serve at the pleasure of the Board of Directors.(3)
    
    Stephen
      M. O’Hara joined us as President and Chief Executive Officer on September
      15, 2003. He has served on our Board of Directors since 2000. Mr. O’Hara
      was Chairman and Chief Executive Officer of Rawlings Sporting Goods
      Company, Inc., a seller of athletic equipment and uniforms, from November
      1998 to Rawlings’ sale in March 2003. Mr. O’Hara continued as Chief
      Executive Officer of Rawlings after its sale from March 2003 to September
      2003.(4)
    
    Paul
      R. Anderegg has been our Vice President and President of the Textile
      Services business operations since February 1, 2001. Prior to that time,
      he served in the following capacities with The TruGreen Companies, a
      residential and commercial landscape and lawn care business: Vice
      President, Sales & Marketing from July 2000 to February 2001;
      President/Chief Operating Officer of TruGreen Landcare from July 1999 to
      July 2000.(5)
    
    Richard
      M. Fiorillo was appointed our Chief Accounting Officer on October 19,
      2004. He has served as Vice President Finance and Chief Financial Officer
      of our Textile Services business operations since his initial employment
      by us on June 1, 2001. Prior to that time, he was self-employed as a
      financial consultant from September 1997 to May 2001.(6)
    
    James
      W. Shaffer, our Vice President and Chief Financial Officer, served as Vice
      President and Treasurer from September 1999 to February 29, 2004, at which
      time he was appointed Chief Financial Officer, and as Vice President,
      Treasurer and Chief Financial Officer until March 1, 2005, when he
      relinquished his title as Treasurer.*
    
    While
      Mr. Fiorillo is not a Board-appointed officer of the Company, he was
      designated an “executive officer” when he was appointed Chief Accounting
      Officer.




20


None of
our executive officers are related to any of our other directors or other
executive officers.

There are
no arrangements or understandings between any executive officer of the Company
or any other person pursuant to which such officer was selected.

PART
II

Item 5. Market for Registrant’s Common Equity and Related
Stockholder Matters


Our
common stock trades on the New York Stock Exchange under the symbol “AGL.” The
following table sets forth the high and low sale prices of our common stock and
the dividends per share paid during each of the quarterly periods in the
two-year period ended January 29, 2005.



Year
      Ended January 29, 2005
    
    Year
      Ended January 31, 2004High
    
    Low
    
    Dividend
    
    High
    
    Low
    
    DividendFirst
      quarter
    
    $
    24.69
    
    
    $
    21.30
    
    
    $
    0.11
    
    
    $
    20.73
    
    
    $
    14.91
    
    
    $
    0.10Second
      quarter
    
    
    25.64
    
    
    
    21.10
    
    
    
    0.11
    
    
    
    18.79
    
    
    
    15.00
    
    
    
    0.10Third
      quarter
    
    
    25.78
    
    
    
    23.00
    
    
    
    0.11
    
    
    
    21.10
    
    
    
    17.88
    
    
    
    0.10Fourth
      quarter
    
    
    29.89
    
    
    
    23.49
    
    
    
    0.11
    
    
    
    23.34
    
    
    
    19.30
    
    
    
    0.11


There
were 1,091 shareholders of record as of March 31, 2005. Our Board of Directors
regularly reviews our dividend policy. Dividends to be paid in the future are
dependent on our earnings, financial condition and other factors.



21


Item 6. Selected
Financial Data (Unaudited)
The following selected financial data
are derived from our audited consolidated financial statements. The information
set forth below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our Consolidated
Financial Statements and Notes thereto included elsewhere in the Form 10-K.
FINANCIAL SUMMARY - 6 YEARS
(UNAUDITED)Angelica Corporation and Subsidiaries

For
      Years Ended(Dollars in thousands, except per share amounts)
    
    January
      29,2005
    
    January
      31,2004
    
    January
      25,2003
    
    January
      26,2002
    
    January
      27,2001
    
    January
      29,2000OPERATIONSTextile service
revenues
    
    $
    316,074
    
    
    $
    291,499
    
    
    $
    271,250
    
    
    $
    259,078
    
    
    
    $
    242,623
    
    
    $
    244,891Gross profit
    
    
    48,936
    
    
    
    54,238
    
    
    
    52,392
    
    
    
    46,094
    
    
    
    
    39,581
    
    
    
    37,582Operating expenses and other, net, excluding
      interest expense
    
    
    (35,029
    )
    
    
    (38,234
    )
    
    
    (37,211
    )
    
    
    (31,914
    )
    
    
    
    (29,403
    )
    
    
    (29,033
    )Interest expense
    
    
    (1,356
    )
    
    
    (714
    )
    
    
    (2,780
    )
    
    
    (7,364
    )
    
    
    
    (8,065
    )
    
    
    (8,593
    )Loss on early extinguishment of
      debt
    
    
    —
    
    
    
    —
    
    
    
    (6,783
    )
    
    
    —
    
    
    
    
    —
    
    
    
    —Income (loss) from continuing operations
      before income taxes
    
    
    12,551
    
    
    
    15,290
    
    
    
    5,618
    
    
    
    6,816
    
    
    
    
    2,113
    
    
    
    (44
    )Provision for income
    taxes
    
    
    (2,179
    )
    
    
    (4,261
    )
    
    
    (848
    )
    
    
    (613
    )
    
    
    
    (697
    )
    
    
    16Income (loss) from continuing
      operations
    
    
    10,372
    
    
    
    11,029
    
    
    
    4,770
    
    
    
    6,203
    
    
    
    
    1,416
    
    
    
    (28
    )(Loss) income from operations of discontinued
      segment, net of tax
    
    
    (993
    )
    
    
    (1,826
    )
    
    
    1,827
    
    
    
    (4,914
    )
    
    
    
    5,170
    
    
    
    5,302Loss on disposal of discontinued segment, net
      of tax
    
    
    (3,018
    )
    
    
    —
    
    
    
    (6,662
    )
    
    
    (23,998
    )
    
    
    
    —
    
    
    
    —Net income (loss)
    
    $
    6,361
    
    
    $
    9,203
    
    
    $
    (65
    )
    
    $
    (22,709
    )
    
    
    $
    6,586
    
    
    $
    5,274PER
      SHARE DATADiluted income from continuing
      operations
    
    $
    1.14
    
    
    $
    1.23
    
    
    $
    .54
    
    
    $
    .72
    
    
    
    $
    .16
    
    
    $
    —Diluted (loss) income from discontinued
      operations
    
    
    (.44
    )
    
    
    (.20
    )
    
    
    (.55
    )
    
    
    (3.34
    )
    
    
    
    .60
    
    
    
    .61Diluted net income
    (loss)
    
    
    .70
    
    
    
    1.03
    
    
    
    (.01
    )
    
    
    (2.62
    )
    
    
    
    .76
    
    
    
    .61Cash dividends paid
    
    
    .44
    
    
    
    .41
    
    
    
    .34
    
    
    
    .32
    
    
    
    
    .48
    
    
    
    .96Common shareholders’
    equity
    
    $
    16.69
    
    
    $
    16.51
    
    
    $
    16.00
    
    
    $
    16.44
    
    
    
    $
    19.24
    
    
    $
    18.84RATIOS
      AND PERCENTAGESCurrent ratio (current assets to current
      liabilities)
    
    
    1.7 to
      1
    
    
    
    1.9 to
      1
    
    
    
    2.1 to
      1
    
    
    
    1.4 to
      1
    
    
    
    
    2.5 to
      1
    
    
    
    3.9 to 1Total debt to total debt and
      equity
    
    
    31.1%
    
    
    
    11.8%
    
    
    
    13.0%
    
    
    
    33.9%
    
    
    
    
    35.1%
    
    
    
    35.8%Gross profit margin
    
    
    15.5%
    
    
    
    18.6%
    
    
    
    19.3%
    
    
    
    17.8%
    
    
    
    
    16.3%
    
    
    
    15.3%Effective tax rate (continuing
      operations)
    
    
    17.4%
    
    
    
    27.9%
    
    
    
    15.1%
    
    
    
    9.0%
    
    
    
    
    33.0%
    
    
    
    37.0%Net income margin from continuing
      operations
    
    
    3.3%
    
    
    
    3.8%
    
    
    
    1.8%
    
    
    
    2.4%
    
    
    
    
    0.6%
    
    
    
    0%Return on average shareholders’
      equity
    
    
    4.3%
    
    
    
    6.4%
    
    
    
    (0)%
    
    
    
    (14.9)%
    
    
    
    
    4.0%
    
    
    
    3.2%Return on average total
      assets
    
    
    2.4%
    
    
    
    4.0%
    
    
    
    (0)%
    
    
    
    (7.3)%
    
    
    
    
    2.0%
    
    
    
    1.6%OTHER
      SELECTED DATAWorking capital
    
    $
    37,711
    
    
    $
    45,687
    
    
    $
    59,833
    
    
    $
    46,960
    
    
    
    $
    124,449
    
    
    $
    141,122Additions to property and equipment,
      net
    
    
    15,314
    
    
    
    22,852
    
    
    
    12,135
    
    
    
    10,179
    
    
    
    
    7,004
    
    
    
    4,595Depreciation and
      amortization
    
    
    13,752
    
    
    
    11,098
    
    
    
    10,772
    
    
    
    10,388
    
    
    
    
    10,469
    
    
    
    11,285Cash flow from operating activities of
      continuing operations
    
    
    17,762
    
    
    
    23,815
    
    
    
    18,931
    
    
    
    10,370
    
    
    
    
    23,768
    
    
    
    6,289Long-term debt, including current
      maturities
    
    
    68,230
    
    
    
    19,545
    
    
    
    20,811
    
    
    
    72,414
    
    
    
    
    88,804
    
    
    
    90,942Total assets
    
    $
    288,953
    
    
    $
    235,781
    
    
    $
    228,284
    
    
    $
    290,865
    
    
    
    $
    330,255
    
    
    $
    319,595Average number of shares of common stock
      outstanding
    
    
    9,124,537
    
    
    
    8,957,996
    
    
    
    8,822,785
    
    
    
    8,663,586
    
    
    
    
    8,681,417
    
    
    
    8,686,146Approximate number of
      associates
    
    
    6,100
    
    
    
    5,700
    
    
    
    5,400
    
    
    
    7,100
    
    
    
    
    7,600
    
    
    
    8,100
Results of operations for prior years may
differ from amounts previously reported due to restatement of segment results as
discontinued operations.
22
This information should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this report.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
Angelica is a leading provider of
outsourced linen management services to the healthcare industry in the United
States. We offer comprehensive linen management services to the U.S. healthcare
industry, including hospitals, long-term care facilities, surgery centers,
medical clinics, dental offices, and other medical providers. Among the items
that we clean and provide, on either a rental or customer-owned basis, are bed
linens, towels, gowns, scrubs, surgical linens and surgical packs, as well as
mops, mats and other dust control products. To a more limited extent, we also
provide linen management services to customers in the hospitality business.
Currently, we operate 35 laundry facilities and serve customers in 24 states.
We were founded in 1878 and subsequently
expanded into three operating divisions: uniform manufacturing; uniform retail;
and linen management services. In fiscal 2002, we sold our uniform manufacturing
business. In fiscal 2004, we sold our uniform retail business and decided to
focus our remaining linen management services business on the healthcare
industry. In fiscal 2004, healthcare linen services represented approximately
90% of our revenues, with 10% of revenues from other linen service markets.
We expect healthcare linen management services to increase as a percentage of
total revenues. Except as otherwise noted, the following discussion relates only
to our continuing linen management operations and excludes our previously
discontinued operations.
Although our fiscal year has not changed, we
changed the terminology describing our fiscal year in February 2004. We now, and
retroactively, refer to the fiscal year by the calendar year in which the first
11 months of the fiscal year fall. Fiscal year 2004 started on February 1, 2004
and ended on January 29, 2005, fiscal year 2003 started on January 26, 2003 and
ended on January 31, 2004, and fiscal year 2002 started on January 27, 2002 and
ended on January 25, 2003.
Our fiscal year ends on the last Saturday in
January and the fiscal year usually contains 52 weeks, but occasionally contains
53 weeks. Fiscal 2004 contained 52 weeks with a 13-week fourth quarter. Fiscal
2003 had 53 weeks, with its fourth quarter being comprised of 14 weeks.
Revenues are recognized when the clean linens
are delivered to the customer. Our textile service revenue has grown from $242.6
million in fiscal 2000 to $316.1 million in fiscal 2004, or 30.3% over the
four-year period. Most of our growth has been achieved organically by developing
existing customers and adding new customers although we began adding to this
growth with acquisitions in fiscal 2003. Going forward, we expect to grow by
virtue of acquisition of regional and local competitors and to supplement this
with approximately 5% annual organic growth.
Our acquisition program is focused on
healthcare laundry services currently owned either by hospitals or competitors.
Since we seek to concentrate our plants in clusters enabling us to better
service our customers and providing us with economies of scale, we primarily
look for opportunities within or around our existing markets. Although we may
expand geographically via acquisition, this will most likely be on the fringes
of existing service areas. For example, since beginning this strategy eighteen
months ago, we have completed ten acquisitions; eight of which have been in
existing markets with the remaining two being adjacent to existing markets. We
expect these acquisitions to significantly add to our existing revenues and
earnings. In evaluating acquisition opportunities, we consider strategic value,
projected EBITDA, impact on earnings per share, return on net assets and
internal rate of return. The ten acquisitions over the last eighteen months are
shown in the chart below. In aggregate, we paid $126 million for these ten
acquisitions. All acquisitions were financed from available credit facilities
and cash flow from operations.

23
The following depicts the acquisitions we have
completed during the past 18 months.

DateAcquired
    
    Company
    
    Description
      of Acquisition
    
    Goodwill
      &OtherIntangiblesRecordedMarch
      2005
    
    Royal
      Institutional Services, Inc. and its affiliate, The Surgi-Pack
      Corporation
    
    Purchased
      the stock of the companies and accompanying healthcare linen services
      business in Somerville and Worcester, MA
    
    TBD(1)January
      2005
    
    National
      Service Industriesd/b/a National Linen Services
    
    Purchased
      laundry facilities and linen services business in Dallas and Wichita
      Falls, TX
    
    $9.0MJanuary
      2005
    
    Tartan
      Textile Services
    
    Purchased
      healthcare linen services business and assumed lease for laundry facility
      in Hempstead, NY
    
    $25.8MDecember
      2004
    
    United
      Linen Services d/b/a Golden States Services
    
    Purchased
      healthcare linen services business and assumed leases for laundry
      facilities in Sacramento and Turlock, CA
    
    $8.4MMay
      2004
    
    Tartan
      Textile Services
    
    Purchased
      healthcare linen services contracts from Tartan’s Portland, ME laundry
      facility
    
    $0.3MApril
      2004
    
    Duke
      University Health System
    
    Purchased
      laundry in Durham, NC and signed a long-term supply agreement with Duke
      healthcare facilities
    
    $0.1MApril
      2004
    
    2
      On-premise laundries
    
    Purchased
      inventory and equipment and assumed healthcare linen services contracts at
      two on-premise laundries located at hospitals in TX and GA
    
    $0.1MDecember
      2003
    
    National
      Service Industries
    
    Purchased
      laundry facility and healthcare linen services business in Safety Harbor,
      FL
    
    $7.1MNovember
      2003
    
    Tenney
      Laundry Services
    
    Purchased
      healthcare linen service contracts and selected assets in Batavia,
      NY
    
    $1.5M
(1)
    
    This
      acquisition was completed on March 21, 2005 and as such, we are in the
      process of completing the purchase price allocation
    analysis.
During
fiscal 2004, we recorded $21.7 million in goodwill acquired in transactions
completed during fiscal 2004 versus $6.1 million acquired in fiscal 2003. We
expect this amount will increase over time as a result of our recent
acquisitions of Royal Institutional Services, Inc., and its affiliate, The
Surgi-Pack Corporation, and any subsequent acquisition we make as part of our
acquisition strategy. Annual goodwill impairment testing is performed at the end
of the third quarter of each fiscal year using a fair-value based
analysis.
24
Costs of textile services are recognized and
recorded as incurred. Over the last five years, our cost of textile services has
gone from 83.7% in fiscal 2000 to 84.5% in fiscal 2004 as a percent of revenue.
During this period, however, costs of textile services have ranged from a low of
80.7% in fiscal 2002 to 84.5% of revenues in fiscal 2004, primarily due to the
volatility of energy costs. The major components of our cost of textile services
are:
•
    Direct
      and indirect production labor and fringe benefit costs, which represented
      33.4% of revenues in fiscal 2004 and 32.1% in fiscal
    2003.•
    Linen
      depreciation, which represented 18.7% of revenues in fiscal 2004, versus
      18.8% of revenues in fiscal 2003.•
    Delivery
      expenses, which represented 13.3% of revenues in fiscal 2004 versus 13.2%
      in fiscal 2003. This includes delivery fuel expense which was 1.6% of
      revenues in fiscal 2004 compared with 1.4% in fiscal 2003;
      and•
    Utilities,
      which represented 8.5% of revenues in fiscal 2004 versus 7.4% in fiscal
      2003. This includes natural gas which was 4.3% of revenues in fiscal 2004
      and 3.5% in fiscal 2003.
Over the next three years, we plan to reduce
costs of textile services by improving linen and natural gas procurement,
testing and implementing new delivery planning and routing, and making capital
investment in our facilities to increase labor productivity and reduce energy
utilization. We also intend to expand our clustering strategy of having a number
of facilities in a local market, which we believe creates opportunities to
improve operating efficiencies in many cost areas, including distribution, as
well as to enhance the level of service we can provide to our customers. We have
begun testing route maximization software and other technologies to minimize
inefficient delivery routes. In addition, we have instituted a standardization
process for purchasing linens and changed our energy hedging policy to an
operational model from an economic model allowing us to take advantage of longer
term buying opportunities for natural gas in the future. Finally, we are
planning to invest approximately $25 million per year during the next three
years for capital improvements, the vast majority of which will be invested in
our plants in order to improve productivity and decrease energy usage.
Gross profit is the difference between
revenues and cost of textile services, and gross margin is the relationship of
cost of textile services expressed as a percentage of revenues. Over the past
four years, our gross profit has grown from $39.6 million in fiscal 2000 to
$48.9 million in fiscal 2004. During this period, gross margin has ranged from
19.3% to 15.5% of revenues. Our goal of reaching a 20% gross margin in three
years will be impacted by a number of factors, including our ability to obtain
price increases equal to the inflationary pressures we experience. While our
customer contracts often have inflation pricing escalator clauses based on
various Consumer Price Indexes, or CPI, the aggregate annual price increases are
usually capped and the costs listed above affect us to a greater degree than the
CPI as they comprise a much larger part of our cost structure. In addition,
mounting pressure on our healthcare customers to contain costs has somewhat
curtailed our ability to negotiate price increases in line with inflation. We
cannot predict the degree to which we will be affected by future energy
availability or costs, but we believe our energy hedging policy will allow us to
take advantage of any pricing opportunities in the energy market in the future.
Selling, general and administrative, or
SG&A, expenses include all other operating expenses not included in cost of
textile services, including those related to sales and marketing, human
resources, accounting, information systems, and other administrative functions
not allocable to individual customers. These expenses are expensed as incurred.
With the sale of our manufacturing business in fiscal 2002 and retail business
in fiscal 2004, we have streamlined our corporate offices from 50 people at the
end of fiscal 2003 to 15 people at the end of fiscal 2004. In fiscal 2004,
SG&A was $38.4 million, representing 12.1% of revenues compared with $40.0
million, or 13.7% of revenues in fiscal 2003. Of the fiscal 2004 SG&A, $21.2
million was attributable to our 33 plants and $17.2 million was attributable to
our Atlanta and St. Louis corporate offices. We expect SG&A to continue to
decline as a percent of revenue as we continue to grow our business organically
and through acquisition and the fixed components of these costs are spread over
a larger revenue base. Our information systems upgrade which will continue
through 2006 could increase SG&A in absolute dollars, but during this period
should not have any substantial impact on SG&A as a percent of
revenue.

25
Other operating income or expense includes
amortization of intangibles such as non-compete agreements and customer
contracts acquired, offset by any non-recurring gains or losses. This may vary
significantly year to year due to acquisitions and divestitures of assets. In
fiscal 2004, the sale of our Daytona Beach, Florida hospitality accounts
generated $1.4 million of income and we recorded an additional $0.5 million as a
gain on an insurance settlement that more than offset the $1.0 million of
intangible amortization. Going forward, we may opportunistically dispose of
non-healthcare assets which no longer fit in our strategic plans, and we expect
to incur significantly more amortization expense reflecting our acquisition
program.
Interest expense is recorded as incurred and
includes amortization of any loan fees over the life of the loan. The sale of
our manufacturing business in fiscal 2002 dramatically reduced our overall debt
levels since proceeds from the sale were used to pay off existing debt. In
fiscal 2004, interest expense was $1.4 million. Going forward, we expect
interest expense to rise significantly as we have used debt to finance our
acquisitions.
Non-operating income is recognized as realized
and reflects sales of non-operating properties, life insurance proceeds,
interest on the $4.0 million note received by us from the buyer as part of the
consideration from the sale of the retail business and other non-operating
items. For fiscal 2004, non-operating income included the sale of real estate
owned by us in Miami, Florida, death benefits received on company-owned life
insurance policies and securities received in a bankruptcy settlement of a
receivable from a former business unit.
Our tax rate reflects statutory tax rates
reduced by federal and state tax credits and non-taxable income including the
cash value gains on life insurance policies held. In addition, when there might
be an alternative tax interpretation other than the one we used, we recognize
this possibility via tax reserves. In fiscal 2004, following the completion of
audits in the United States and Canada, we recognized a $0.8 million reversal of
these reserves. In addition, cash taxes paid may differ significantly from
recorded expense due to net operating loss (NOL) carryforwards and changes in
deferred tax items. In fiscal 2004 we recorded a federal NOL of $18.2 million
primarily attributable to the sale of our retail division. In addition, we have
various other state tax NOLs and state and federal tax credits. Since we believe
all deferred tax items will be realized, we have not recorded any valuation
allowances. We do not anticipate recording net operating losses regularly in the
future.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
In preparing our financial statements,
we are required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenue and expenses during the reporting period. We evaluate our estimates and
judgments on a continuing basis, including those related to self-insurance
liabilities, stock-based compensation, bad debts, linens in service, property
and equipment, impairment of long-lived assets, income taxes, discontinued
operations, contingencies and litigation. We base our estimates and judgments on
historical experience and on various other factors that management believes to
be reasonable under the circumstances. We discuss below the more significant
accounting policies, estimates and related assumptions used in the preparation
of our consolidated financial statements. By their nature, these estimates and
assumptions are subject to an inherent degree of uncertainty. Actual results may
differ from these estimates and assumptions.
Our significant accounting policies are more
fully described in Note 1 to the consolidated financial statements. Certain of
these policies as discussed below require the application of significant
judgment by management in selecting appropriate assumptions for calculating
amounts to record in the consolidated financial statements.
Linens in Service
Linens in service represent the
unamortized cost of textile and linen products purchased for service to
customers. Linens in service are amortized on a straight-line basis over their
expected useful lives of one to two years. Specific physical identification and
inventory of linens in service is impractical in our business due to the fact
that the inventory is circulating between our facilities and our customers’
facilities; however, industry data available supports the reasonableness of
these expected useful lives. Furthermore, the consistent application
of

26
these lives has produced historical levels of
linens in service that are comparable as a percent of textile service rental
revenues. Management believes the expected useful lives are appropriate for the
valuation of linens in service.
Self-Insurance Liabilities
We self-insure liabilities for
non-union employee medical coverage and liabilities for casualty insurance
claims, including workers’ compensation, general liability and vehicle
liability, up to certain levels. We purchase insurance coverage for large claims
over the self-insured retention levels. In fiscal 1999, we sold all casualty
claims occurring prior to February 1, 1999 to an insurance company. We maintain
the liability for casualty claims that have occurred since February 1, 1999 and
these amounts are set forth on our consolidated balance sheet as of January 29,
2005. Self-insurance liabilities are estimated using actuarial methods and
historical data for payment patterns, cost trends and other relevant factors.
While we believe that the estimated liabilities recorded for casualty and
employee medical claims as of January 29, 2005 are adequate, and that
appropriate judgment has been applied in determining the estimates, such
estimated liabilities could differ materially from actual liabilities resulting
from the ultimate disposition of the claims.
Income Taxes
We recognize deferred income tax assets
and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of the assets and liabilities. Balances in
the deferred income tax accounts are regularly reviewed for adequacy and
recoverability by analyzing the expected income necessary to realize the
deferred assets, the anticipated tax rates applicable when the deferred items
are expected to be recognized and the ability to utilize carryforward items. At
January 29, 2005, we reported an aggregate of $18,194,000 in federal net
operating loss carryforward and various state net operating loss and tax credit
carryforwards. We do not provide for deferred tax liabilities related to the
cash surrender value of our company-owned life insurance policies under the
assumption that these policies will be held by us until death of the
insured.
Despite our belief that our tax return
positions are consistent with applicable tax laws, we believe certain positions
could be challenged by tax authorities. Settlement of any challenge can result
in no change, a complete disallowance or a partial adjustment. Significant
judgment is required in the evaluation of our reserves. Our reserves are
regularly reviewed for adequacy and adjusted based on changing circumstances and
the progress of tax audits. In fiscal 2004 we recognized a $0.8 million
adjustment in these reserves which resulted in a reduction in our tax expense.
We believe that adequate provisions for income taxes have been made for all
periods presented, and all net deferred tax assets will be fully
recovered.
Stock-Based Compensation
We currently apply APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” in accounting for our stock-based
compensation plans. Accordingly, no compensation expense has been recognized for
the issuance of stock options to employees and directors. Under SFAS No. 123,
“Accounting for Stock-Based Compensation,” companies are encouraged but not
required to adopt a fair-value based method to recognize compensation expense of
equity instruments awarded to employees.
In December 2004, the FASB issued SFAS No.
123R, “Share-Based Payment,” which revises SFAS No. 123 and supersedes APB No.
25. Upon adoption of SFAS No. 123R, beginning in the third quarter of fiscal
2005, we will be required to recognize compensation expense in the consolidated
financial statements for the fair value of stock option awards on the grant date
over the required service or vesting period. The impact of adoption of SFAS No.
123R on our net income in future periods will include the remaining amortization
of the fair value of existing unamortized stock options in the amount of
$186,000, $253,000 and $55,000 in fiscal years 2005, 2006 and 2007,
respectively. Any new grants of stock options will increase the amount of
amortization expense by the fair value of the newly granted options on the date
of grant and this amount will be amortized over the vesting period of these new
options.
27
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, we
consider the possible impairment of our long-lived assets, excluding goodwill,
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Indications of possible impairment include, but
are not limited to, operating or cash flow losses associated with the use of a
long-lived asset, or a current expectation that, more likely than not, a
long-lived asset will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life. To determine the potential
impairment of long-lived assets, we are required to make estimates of the
projected future cash flows associated with the use of the assets, as well as
their fair values. We believe that the carrying values of our long-lived assets
as of January 29, 2005 are fully recoverable.
Under SFAS No. 42, “Goodwill and Other
Intangible Assets”, goodwill recorded as of June 30, 2001 was no longer
amortized effective in fiscal 2002. Instead, goodwill is tested for impairment
using a fair-value based analysis at least annually as of the end of the third
quarter.
Discontinued Operations
During the first quarter of fiscal
2004, we announced our decision to exit and discontinue our retail business
segment and actively market the segment for sale. We completed the sale of our
retail business to Healthcare Uniform Company, Inc., an affiliate of Sun Capital
Partners, Inc., at the end of the second quarter. The segment’s financial
position, cash flows and results of operations are shown as discontinued
operations for all periods presented in this report. Our continuing operations
reflect the results of our remaining Textile Services healthcare laundry and
linen management business.
RECENT DEVELOPMENTS
During March 2005, we completed the
acquisition of all of the capital stock and warrants of Royal Institutional
Services and, its affiliate, The Surgi-Pack Corporation for cash consideration.
In connection with this transaction a portion of the purchase price was paid
into an escrow account as of the closing of the transaction pending the
resolution of certain contingencies set forth in the stock purchase agreement.
These contingencies include the attainment of an agreed-upon level of
performance of certain newly installed equipment, the renewal or assignment of
specified customer contracts and the compliance of specified individuals with an
agreement not to compete with the acquired business in its current market area
for a period of time after the closing. Our consolidated balance sheet will
include the financial condition of Royal Institutional and Surgi-Pack as of the
end of the first quarter of fiscal 2005 and our income statement and statement
of cash flows for the first quarter of fiscal 2005 will include the results of
operations of Royal Institutional and Surgi-Pack from March 21, 2005, the date
of the acquisition.

28
RESULTS OF CONTINUING
OPERATIONS

Fiscal
      Year Ended (dollars in thousands)January
      29, 2005
    
    January
      31, 2004
    
    January
      25, 2003Revenue
    
    $
    316,074
    
    
    100.0
    %
    
    $
    291,499
    
    
    100.0
    %
    
    $
    271,250
    
    
    100.0
    %Cost
      of services
    
    
    267,138
    
    
    84.5
    %
    
    
    237,261
    
    
    81.4
    %
    
    
    218,858
    
    
    80.7
    %Gross
      profit
    
    
    48,936
    
    
    15.5
    %
    
    
    54,238
    
    
    18.6
    %
    
    
    52,392
    
    
    19.3
    %Selling,
      general and administrative expense
    
    
    38,366
    
    
    12.1
    %
    
    
    39,955
    
    
    13.7
    %
    
    
    37,862
    
    
    14.0
    %Other
      operating income (expense)
    
    
    678
    
    
    0.2
    %
    
    
    (523
    )
    
    (0.2)%
    
    
    149
    
    
    0.1
    %Income
      from operations
    
    
    11,248
    
    
    3.6
    %
    
    
    13,760
    
    
    4.7
    %
    
    
    14,679
    
    
    5.4
    %Interest
      expense
    
    
    1,356
    
    
    0.4
    %
    
    
    714
    
    
    0.3
    %
    
    
    2,780
    
    
    1.0
    %Non-operating
      income
    
    
    2,659
    
    
    0.8
    %
    
    
    2,244
    
    
    0.8
    %
    
    
    502
    
    
    0.2
    %Loss
      on early extinguishment of debt
    
    
    —
    
    
    0.0
    %
    
    
    —
    
    
    0.0
    %
    
    
    6,783
    
    
    2.5
    %Income
      before income taxes
    
    
    12,551
    
    
    4.0
    %
    
    
    15,290
    
    
    5.2
    %
    
    
    5,618
    
    
    2.1
    %Income
      taxes
    
    
    2,179
    
    
    0.7
    %
    
    
    4,261
    
    
    1.4
    %
    
    
    848
    
    
    0.3
    %Net
      income
    
    $
    10,372
    
    
    3.3
    %
    
    $
    11,029
    
    
    3.8
    %
    
    $
    4,770
    
    
    1.8
    %
ANALYSIS OF FISCAL 2004 CONTINUING
OPERATIONS COMPARED TO 2003
Textile service revenues of $316.1
million in fiscal 2004 increased $24.6 million, or 8.4%, from fiscal 2003.
Acquisitions during fiscal 2004 contributed $9.4 million of the revenue
increase, offset in part by the loss of $3.5 million of revenues due to the sale
of non-healthcare customer accounts from our Daytona Beach, Florida facility in
the second quarter of fiscal 2004. Fiscal 2004 benefited from a full year of
revenue from acquisitions completed in fiscal 2003, which accounted for another
$14.1 million of the revenue increase in fiscal 2004. After adjusting fiscal
2003 revenues downward by approximately $5.5 million for the extra week in the
2003 fiscal year, organic growth in revenue was $10.1 million, or 3.5 percent,
due to an average 2.4% price increase, plus a 1.1% volume increase. Consistent
with our strategic plan to concentrate marketing and acquisition efforts on
customers in the healthcare industry, healthcare revenues increased 11.9% in
fiscal 2004 to $283.7 million. Non-healthcare revenues decreased 14.7% from
fiscal 2003, primarily due to the sale of the non-healthcare accounts in Daytona
Beach. As an integral part of our long-term strategy, we anticipate a continued
decline in non-healthcare revenues as a percent of total revenues in future
periods.
Cost of textile services of $267.1 million in
fiscal 2004 increased $29.9 million or 12.6% from fiscal 2003. After adjusting
for the increase in volume, utilities increased $3.4 million in fiscal 2004 due
primarily to higher natural gas costs, and delivery fuel increased by $0.6
million compared with fiscal 2003. Direct labor expense increased $1.8 million
due to higher wage rates, and production fringe benefit cost, including workers’
compensation, increased $1.7 million year over year. Competitive pressures in
the marketplace limited our ability to offset these cost increases through
higher customer pricing, as average prices on contract renewals declined
slightly year to year. In addition, annual CPI price increases on many existing
contracts were not reflective of our underlying cost increases since the CPI
indexes used in those contracts do not weight utilities costs and workers’
compensation and healthcare insurance expense in the same manner as these items
are weighted in our actual cost of services. Due to the aforementioned factors,
gross margin declined to 15.5% in fiscal 2004 from 18.6% in fiscal 2003.

29
Selling, general and administrative expenses
of $38.4 million decreased $1.6 million or 4.0% in fiscal 2004 to 12.1% of
revenues from 13.7% in fiscal 2003. Reductions in these expenses were primarily
comprised of $3.4 million, or 42.5% of fiscal 2003 expenses, due to the
downsizing of the corporate office and staff and $0.5 million, or 37.9% of
fiscal 2003 expenses, due to lower bonus amounts accrued. Bad debt expenses were
negligible in fiscal 2004. These reductions were somewhat offset by $1.0 million
of additional professional fees incurred in connection with our response to a
corporate campaign by union activists who sought to disrupt our business
operations in order to pressure us into recognizing the union in our
non-unionized facilities.
Other operating income of $0.7 million in
fiscal 2004 benefited from the net gain of $1.4 million on the sale of the
Daytona Beach non-healthcare accounts and a gain of $0.5 million on the
settlement of a property insurance claim. Offsetting these fiscal 2004 operating
income gains was increased amortization expense of $0.4 million in fiscal 2004,
reflecting the impact of intangible assets acquired in fiscal 2003 and, to a
lesser extent, in fiscal 2004. We reported other operating expense in fiscal
2003 of $0.5 million reflecting amortization of intangible assets of $0.6
million and miscellaneous income of $0.1 million. We expect a more significant
increase in amortization expense in fiscal 2005 due to the full-year impact of
amortization of intangible assets acquired in the fourth quarter of fiscal 2004
and the 10-month impact of amortization of intangible assets acquired in the
Royal transaction in March 2005.
Interest expense in fiscal 2004 was $1.4
million, an increase of $0.6 million or 89.9% over the $0.7 million of interest
expense incurred in fiscal 2003. The increase in interest expense reflects the
increase in indebtedness due to the acquisitions closed in the fourth quarter of
fiscal 2003 and in fiscal 2004. At January 29, 2005, we had $67.4 million in
total debt outstanding under a revolving loan agreement with a bank credit
facility. On March 21, 2005, we borrowed the entire amount of the $50.0 million
term loan included in the facility. The proceeds of the term loan were used to
fund the acquisition of Royal Institutional Services and Surgi-Pack and reduce
the amount outstanding on the revolving loan agreement.
Of the amount of debt outstanding on January
29, 2005, $10.0 million bore interest at a fixed rate of 3.58% pursuant to an
interest rate swap agreement plus the margin under the credit facility. The
LIBOR margin as of January 29, 2005, was 1.5% under the credit facility. The
remaining debt of $57.4 million bore interest at 5.25%, the Prime Rate as of
January 29, 2005. On February 3, 2005, we entered into LIBOR contracts for $30.0
million and $25.0 million which currently bear interest at 2.87% plus the margin
and 2.75% plus the margin, respectively. On April 5, 2005 we entered into a
LIBOR contract on the $50.0 million outstanding under the term loan which bears
interest at the rate of 2.87% plus the margin. We anticipate that interest
expense will increase in fiscal 2005 with the full year of interest paid on the
debt incurred in connection with the fourth quarter fiscal 2004 acquisitions and
the first quarter fiscal 2005 acquisition of Royal Institutional Services and
Surgi-Pack as well as the general upward trend in interest rates.
In fiscal 2004, we recorded non-operating
income of $2.7 million due primarily to gains of $1.5 million from the sale of
real estate we owned in Miami, Florida from a facility that was closed in fiscal
2000, $0.6 million from death benefits on company-owned life insurance policies,
and $0.2 million received in a bankruptcy settlement of a receivable related to
a former business. We recorded non-operating income of $2.2 million in fiscal
2003, resulting mainly from a $1.9 million cash payment received in conjunction
with the demutualization of a life insurance company that had issued policies
owned by us.
Our provision for income taxes for fiscal 2004
was $2.2 million, a decrease of $2.1 million, or 48.9%, from the $4.3 million of
income taxes recorded in fiscal 2003. Lower income tax expense in fiscal 2004 as
compared with the prior year was primarily due to lower pretax income and a tax
contingency adjustment. Based on the completion of tax audits in the United
States and Canada, we reevaluated our tax reserves and adjusted our tax
liability accordingly.
Net income from continuing operations declined
$0.7 million, or 6.0%, in fiscal 2004. Lower operating income and an increase of
$0.6 million in interest expense due to higher debt levels in fiscal 2004 more
than offset the $0.5 million increase in non-operating income and the lower
provision for income taxes for the year.

30
ANALYSIS OF FISCAL 2003 CONTINUING
OPERATIONS COMPARED TO 2002
Textile service revenues of $291.5
million in fiscal 2003 increased $20.2 million, or 7.5%, from fiscal 2002.
Revenues from our existing facilities contributed $17.8 million of the increase,
$5.5 million of which was due to the extra week. The remaining $2.4 million of
the increase was due to fiscal 2003 acquisitions. In December 2003, we acquired
a healthcare linen services facility and business located in Tampa, Florida with
annual revenues of approximately $13.0 million, and in early fourth quarter
2003, we acquired customer contracts and selected assets of a linen services
business in Batavia, New York with annual revenues of approximately $2.6
million.
Cost of textile services of $237.3 million in
fiscal 2003 increased $18.4 million, or 8.4% from fiscal 2002. The majority of
this increase was due to higher revenues and significant increases in utilities
and delivery fuel costs. Utilities increased $2.3 million and delivery fuel
increased $0.6 million compared with fiscal 2002 after adjusting for the volume
increase. Due to the above-described factors, gross margin declined to 18.6% in
fiscal 2003 from 19.3% in fiscal 2002.
Selling, general and administrative expenses
of $40.0 million increased $2.1 million, or 5.5%, in fiscal 2003 due primarily
to costs related to our search for, and transition to, a new Chief Executive
Officer, but declined as a percent of revenues, from 14.0% in fiscal 2002 to
13.7% in fiscal 2003.
Fiscal 2003 other operating expense of $0.5
million reflected intangible amortization of $0.6 million partial offset by $0.1
million other miscellaneous income.
The reduction in interest expense of $2.1
million or 74.3% in fiscal 2003 reflects the lower debt level and lower interest
rates following the sale of our manufacturing division and subsequent
refinancing of our debt in the second quarter of fiscal 2002.
Fiscal 2003 non-operating income of $2.2
million consisted primarily of a $1.9 million cash payment received in
connection with the demutualization of a life insurance company that had issued
policies owned by us.
As discussed in Note 5, we incurred a $6.8
million pretax loss on early extinguishment of debt in the second quarter of
fiscal 2002 as a result of a prepayment penalty paid to lenders in connection
with the refinancing of our debt. The loss was originally shown as an
extraordinary item, net of tax, in fiscal 2002. However, under a new accounting
pronouncement adopted in fiscal 2003, the loss is treated as an ordinary rather
than extraordinary item, and accordingly, fiscal 2002 results of continuing
operations were restated in fiscal 2003 to reflect this change in accounting
treatment.
Our provision for income taxes for fiscal 2003
was $4.3 million, a $3.4 million increase over the $0.8 million provided in
fiscal 2002. Income taxes were provided for at an effective tax rate of 27.9% in
fiscal 2003 and 15.1% in fiscal 2002. The lower tax rate in fiscal 2002 was
primarily due to the effect of the aforementioned loss on early extinguishment
of debt.
Net income from continuing operations
increased $6.3 million in fiscal 2003 to $11.0 million from $4.8 million in
fiscal 2002. The loss on the early extinguishment of our credit facility of $6.8
million and a $2.1 million higher interest expense in fiscal 2002 more than
offset the higher operating income and lower provision for income taxes for the
2002 fiscal year compared with fiscal 2003.
FINANCIAL CONDITION
As of January 29, 2005, working capital
totaled $37.7 million as compared with $39.0 million in working capital at the
end of fiscal 2003, excluding assets and liabilities of discontinued segment.
The current ratio (i.e.,the ratio of current assets to current liabilities) was 1.7 to 1
at the end of fiscal 2004 and 1.9 to 1 at fiscal 2003 year end. The decline in
our working capital and current ratio is due to the various installment payments
and holdbacks
31
negotiated in the acquisitions during fiscal
2004 which are primarily being recorded as other current liabilities on our
consolidated balance sheet as of January 29, 2005.
Receivables and linens in service increased
$7.5 million and $3.4 million, respectively, in fiscal 2004 due to businesses
acquired during the year and the increase in operating revenues. Accounts
receivable days outstanding of 42 at January 29, 2005 was unchanged from the end
of fiscal 2003. Increases in total property and equipment of $19.4 million and
goodwill and other acquired assets of $42.8 million reflect mainly the cost of
businesses acquired in fiscal 2004. Other long-term assets include the value of
the note receivable in the principal amount of $4.0 million from the sale of our
retail business which we carried at a discounted value of $3.1 million as of
January 29, 2005. Although we believe the discounted note is fairly valued, this
note is not readily marketable and is subordinate to other outstanding debt of
the issuer. Ultimately, the value of the note is dependent upon the success of
the buyer in operating the purchased business.
The increase in other accrued liabilities of
$7.3 million in fiscal 2004 is due primarily to installment payments and
holdbacks of a portion of the purchase price for certain business acquisitions
during the year. The installment payments will be paid to the sellers upon the
scheduled payment date and the holdbacks will be paid to the sellers based
primarily upon the renewal or retention of the customer contracts purchased in
the acquisitions during designated periods after the closing date of the
particular transaction.
Long-term debt of $67.8 million as of January
29, 2005 was $48.3 million higher than a year ago, reflecting the financing of
the business acquisitions completed in the fourth quarter of fiscal 2004. Our
ratio of total debt to total capitalization as of January 29, 2005 was 31.1%, up
from 11.8% as of January 31, 2004. Book value per share increased 1.1% to $16.69
at the end of fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating
activities of continuing operations decreased $6.1 million or 25.4% in fiscal
2004, due in part to the increase in receivables discussed above. Additionally,
in fiscal 2003 we received a federal income tax refund of $4.1 million due
mainly to the loss on the sale of our former manufacturing segment recorded in
prior fiscal years. Cash flows from investing activities reflect the cash paid
for businesses and assets acquired in fiscal 2004, which were funded from
borrowings against our long-term revolving credit facility. During fiscal 2004,
we received proceeds of $3.2 million from the sale of non-healthcare customer
accounts and $1.5 million from the sale of real estate owned by us in Miami,
Florida, as well as death benefits on company-owned life insurance policies
totaling $1.2 million. Capital expenditures decreased $7.5 million in fiscal
2004 from the level in fiscal 2003 due to the inclusion in capital expenditures
for fiscal 2003 of the construction costs associated with the Phoenix, Arizona
and Columbia, South Carolina plants. We expect capital expenditures to be
approximately $25.0 million in fiscal 2005 which will be used primarily for
replacement, repair and improvement of our facilities and equipment.
Net cash provided by discontinued operations
of $8.7 million in fiscal 2004 included the cash proceeds of $12.0 million from
the sale of our retail business which were used to pay down long-term debt.
In the first quarter of fiscal 2004, we
amended the terms of our long-term revolving credit facility to increase the
maximum borrowing capacity by $30.0 million to $100.0 million. We utilize the
revolving credit line, coupled with cash flow from operations, to fund our
short-term liquidity needs. We pay down or borrow against the revolving credit
line on a daily basis based on cash flow from operations and forecasted cash
requirements. We borrowed against the revolving credit line to pay for the
acquisitions of three healthcare laundry businesses completed in the fourth
quarter of fiscal 2004 totaling $54.9 million.
As of January 29, 2005, there was $67.4
million of outstanding debt under the credit facility, of which $10.0 million
bore interest at a fixed rate of 3.58% pursuant to an interest rate swap
agreement plus the LIBOR margin under the credit facility. The LIBOR margin as
of January 29, 2005 was 1.5% under the credit facility. The remaining debt of
$57.4 million bore interest at 5.25%, the prime rate as of January 29, 2005. On
February 2, 2005, we entered into LIBOR contracts for $30.0 million and $25.0
million which currently bear interest at

32
2.87% plus the margin and 2.75% plus the
margin, respectively. Furthermore, we had $16.9 million outstanding in
irrevocable letters of credit as of January 29, 2005, which reduced the amount
available to borrow under the line of credit to $29.1 million. These letters of
credit are primarily issued to insurance carriers to secure our ability to
pay our self-insured workers’ compensation liabilities. They automatically renew
annually and may be amended from time to time based on collateral requirements
of the carriers. We pay a fee on the outstanding letters of credit and unused
funds based on the ratio of “Funded Debt” to “EBITDA” as the terms are defined
in the credit facility. As of January 29, 2005, the fee on the outstanding
letters of credit and unused funds was 1.5% and .35%, respectively.
We are subject to certain financial covenants
under our loan agreement. One of these covenants requires that we maintain a
minimum consolidated net worth of $126.0 plus an aggregate amount equal to 50%
of quarterly net income beginning with the fourth quarter of fiscal 2004 (with
no reduction for net losses). In addition we are required to maintain a minimum
ratio of “EBITDA” to fixed charges of not less than 1.2 to 1.0. We are also
required to maintain a ratio of funded debt to “EBITDA” of not more than 2.75 to
1.00. This ratio will be reduced to a maximum of 2.50 to 1.00 effective April
30, 2006. As of January 29, 2005 we were in compliance with all loan covenants.
On January 27, 2005 we amended and restated
the terms of the credit facility to add a $50.0 million term loan commitment and
a feature that allows us to seek an increase of $25.0 million in the revolving
credit line in the future. On March 21, 2005, we borrowed the entire amount of
the $50.0 million term loan. The proceeds of the term loan were used to fund the
acquisition of Royal Institutional and Surgi-Pack and reduce the amount
outstanding on the revolving credit facility. On April 5, 2005 we entered into a
LIBOR contract on the $50.0 million outstanding under the term loan which bears
interest at 2.87% plus the margin.
In addition to the bank credit, we have
approximately $25.0 million of borrowing capacity against the $30.9 million of
cash value of our company-owned life insurance policies at January 29, 2005.
These life insurance policies were purchased by us on the lives of a number of
officers and directors, both past and present. We pay the premium and own the
policy and carry the policy on our consolidated balance sheet at the cash value
of the policy. Upon the death of any of the covered individuals, we receive the
designated death benefit on the policy and may realize a gain to the extent that
the death benefit exceeds the cash value.
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 for which we pay cash as consideration for the
assets purchased, we may require alternative funding sources to finance the
purchase price.
CONTRACTUAL OBLIGATIONS
Future payments due under contractual
obligations, aggregated by type of obligation, as of the end of fiscal 2004 are
as follows:

(Dollars
      in thousands)
    
    Payments
      due by periodContractual
      obligations:
    
    Total
    
    Less than    1 year
    
    1 - 3        years
    
    3 - 5        years
    
    More than  5 yearsLong-term
      debt, including interest
    
    $    
      144,098
    
    $
    10,583
    
    
    $    
      31,102
    
    $    
      102,413
    
    $
    —Capital
      lease obligations, including interest
    
    880
    
    
    430
    
    
    450
    
    —
    
    
    —Operating
      leases
    
    22,384
    
    
    6,758
    
    
    8,676
    
    4,517
    
    
    2,433Purchase
      obligations:        Linen
      contracts
    
    26,449
    
    
    26,449
    
    
    —
    
    —
    
    
    —Natural
      gas contracts
    
    3,610
    
    
    2,271
    
    
    1,339
    
    —
    
    
    —Deferred
      compensation and pension liabilities
    
    29,602
    
    
    2,102
    
    
    3,187
    
    3,019
    
    
    21,294Total
    
    $    
      227,023
    
    $
    48,593
    
    
    $    
      44,754
    
    $    
      109,949
    
    $
    23,727

33
Future payments of long-term debt include the
$50.0 million term loan borrowed on March 21, 2005, as discussed above and in
Note 10.
DISCONTINUED OPERATIONS
In February 2004, our Board of
Directors approved a plan to exit and discontinue our retail segment.
Accordingly, the assets and liabilities of our retail business were segregated,
and its results of operations were reported in discontinued operations,
effective in the first quarter of fiscal 2004. We continued to operate the
segment while it was being actively marketed for sale. We completed the sale of
our retail business at the end of the second quarter of fiscal 2004 and recorded
a loss on disposal of the discontinued segment of $3.0 million net of tax in
fiscal 2004. As part of the consideration for the sale, we received an
unsecured, long-term note from the buyer with a face value of $4.0 million,
which we discounted to its estimated fair value of approximately 75% of face
value. Although we believe that the discounted note is fairly valued, this note
is not readily marketable and is subordinate to other outstanding debt of the
issuer. Ultimately, the value of the note is dependent upon the success of the
buyer in operating the purchased business.
There were 17 retail stores that were not
included in the sale of our retail segment, although the buyer did acquire the
working capital related to those stores. We immediately closed these 17 stores
and incurred $1.5 million of costs in fiscal 2004 to terminate the leases.
From the beginning of the 2004 fiscal year
until its ultimate sale in July 2004, we operated the retail division as a
discontinued operation. During this period, we reported net loss from operations
of our retail business of $1.0 million. This compares with a net operating loss
of $1.8 million for full 2003 fiscal year and net operating income of $1.8
million for the full 2002 fiscal year. The net operating loss and income for
each of these prior years were reclassified as net loss or income from
discontinued operations after the board’s decision to exit the retail segment in
the first quarter of fiscal 2004.
Net retail sales in the retail segment totaled
$82.8 million in fiscal 2003, down $9.4 million or 10.2% from $92.2 million in
fiscal 2002. A same-store sales decline of 7.4% for the fiscal 2003 accounted
for $5.8 million of the decrease, partially offset by $1.6 million of sales in
the extra week of fiscal 2003. Sales also decreased $5.6 million in fiscal 2003
due to the closing of 59 stores during fiscal years 2003 and 2002. Gross margin
of the retail segment of 53.5% in fiscal 2003 was lower than the 54.2% in fiscal
2002. Fiscal 2002 gross margin included a gain of $0.8 million, or 0.8% of
retail sales, from the reversal of an intercompany profit deferral due to the
sale of the manufacturing segment. As discussed in Note 7, a pretax charge of
$1.3 million was recorded in the fourth quarter of fiscal 2003 to write down the
carrying amounts of long-lived assets in certain underperforming stores to their
fair values. Including the asset impairment charge, the retail business posted a
pretax operating loss of $2.7 million in fiscal 2003 compared with pretax
operating income of $2.9 million in fiscal 2002.
We have agreed pursuant to the terms of the
retail transaction to retain our guaranty on those real estate leases for retail
stores that were supported with our guaranty on the date of the closing of the
acquisition. Under the terms of our agreement with the buyer of the retail
segment, our guaranty on each of these leases will remain until the end of the
current term of the particular lease at which time it must be released. We do
not believe that we will incur any additional losses from these guarantees or
any other issue arising from these discontinued operations in future periods.
In January 2002, our Board of Directors
approved a plan to discontinue our manufacturing segment and the assets of the
segment were written down and a loss on disposal net of tax was recorded at year
end of fiscal 2001 based on the estimated net realizable value from the pending
sale of the business, as well as estimates of the costs of disposal and
transition. During fiscal 2002, the sale and transition of the business to the
buyers was completed and the assets of the segment were substantially
liquidated. An additional loss on disposal of $6.7 million net of tax was
recorded in fiscal 2002 to reflect the actual value received upon ultimate
disposition of the segment’s assets, including actual costs of disposition and
transition. Of this amount, $6.1 million was due to a reduction in the value of
the inventories realized. The remaining assets of the segment valued at $2.2
million as

34
of January 25, 2003 primarily consisting of
accounts receivable and inventory, were disposed of in fiscal 2003 for amounts
approximating their carrying values.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No.
145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.” This statement rescinds, updates,
clarifies and simplifies existing accounting pronouncements. Among other things,
the statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under SFAS No. 145, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 145 is effective for financial statements issued for years beginning after
May 15, 2002. We adopted the provisions of SFAS No. 145 in fiscal 2003. See Note
5.
In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” This
statement requires the recording of costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management’s commitment
to an exit plan, which is generally before an actual liability has been
incurred. The requirements of SFAS No. 146 are effective prospectively for exit
or disposal activities initiated after December 31, 2002. Previously issued
financial statements were not restated.
In December 2004, the FASB issued SFAS No.
153, “Exchanges of Nonmonetary Assets.” SFAS No. 153 amends APB No. 29 to
eliminate the exception to fair value measurement for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
this statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No.
123R, “Share-Based Payment,” which revises SFAS No. 123, “Accounting for
Stock-Based Compensation” 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. Historically, we have elected to follow the guidance
of APB No. 25 which allowed companies to use the intrinsic value method of
accounting to value their share-based payment transactions with employees. Based
on this method, we did not recognize compensation expense in its consolidated
financial statements for stock options granted as the exercise price of the
stock options granted was equal to or greater than the fair market value of the
underlying common stock on the date of the grant. SFAS No. 123R requires
measurement of the cost of share-based payment transactions with employees at
the fair value of the award on the grant date and recognition of expense over
the required service or vesting period. The provisions of this statement are
required to be adopted by us beginning in the third quarter of fiscal 2005. The
impact of adoption of this statement on our 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 in Note 2, and is
contingent upon the number of future options granted, the selected transition
method and the selection between acceptable valuation methodologies for valuing
options.
In December 2004, the FASB issued FASB Staff
Position No. 109-1, “Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004,” which provides guidance on applying
SFAS No. 109, “Accounting for Income Taxes,” to the tax deduction on qualified
production activities provided under the American Jobs Creation Act of 2004. We
are currently assessing the impact, if any, of the provisions of FSP No. 109-1
on its consolidated financial statements in future periods.

35
FORWARD-LOOKING STATEMENTS
Any forward-looking statement made in
this document reflects our 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
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 a
competitive market environment, 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 to recover our seller note and avoid future lease
obligations as part of the sale of the retail segment, the ability to accomplish
our strategy of redirecting our resources to our healthcare linen management
business in a timely and financially advantageous manner, unusual or unexpected
cash needs for operations or capital expenditures; the effectiveness of expense
reduction initiatives, the ability to obtain financing in the 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 this and other of our filings of with the Securities and Exchange
Commission.

36


Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
We are exposed to commodity price risk
related to the use of natural gas in our laundry plants. The total cost of
natural gas in fiscal 2004 was $13.6 million. To reduce the uncertainty of
fluctuating energy prices, we have entered into fixed-price contracts as of
January 29, 2005 for approximately 19% of our 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 in fiscal 2005 would result in a
reduction of approximately $1.6 million in annual pretax earnings.
We are 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 fiscal 2004 was $5.1 million. A hypothetical
10% increase in the cost of delivery fuel in fiscal 2005 would result in a
decrease of approximately $0.7 million in annual pretax earnings.
Our exposure to interest rate risk relates
primarily to our variable-rate revolving debt agreement entered into in the
second quarter of fiscal 2002. As of January 29, 2005, there was $67.4 million
of outstanding debt under the credit facility, of which $10.0 million bears
interest at a fixed rate of 3.58% (plus a margin) under an interest-rate swap
agreement entered into by us with one of our 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% or (b) the Prime Rate. The margin is based
on our ratio of “Funded Debt” to “EBITDA,” as each is defined in the Loan
Agreement. As of January 29, 2005, the margin was 1.5%. A hypothetical increase
of 100 basis points in short-term interest rates applicable to the outstanding
debt not covered by the interest-rate swap agreement in fiscal 2005 would result
in a reduction of approximately $0.6 million in annual pretax
earnings.
Item 8. Financial
Statements and Supplementary Data
The financial statements and financial
schedule listed in Item 15(a) of this Form 10-K, are incorporated herein by
reference.
Item 9. Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure
Not Applicable.
Item 9A. Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with
the participation of our management, including the Chief Executive Officer and
the Chief Financial Officer, we conducted an evaluation of the effectiveness of
our disclosure controls and procedures, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that our disclosure
controls and procedures as of January 29, 2005 were effective to ensure that
information required to be disclosed by us in reports that we file or submit
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.
Report of Management on Internal Control
Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Under the supervision and with

37
the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of January 29, 2005. All internal control systems have inherent limitations,
including the possibility of circumvention and overriding the control.
Accordingly, even effective internal control can provide only reasonable
assurance as to the reliability of financial statement preparation and
presentation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
In making
our evaluation, we used the criteria set forth inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon this evaluation, we have concluded that
our internal control over financial reporting as of January 29, 2005 is
effective.
In our
evaluation of the effectiveness of our internal control over financial
reporting, we have excluded the acquisitions completed during the fiscal year
ended January 29, 2005. These acquisitions include the acquisition of the
laundry facility located in Durham, North Carolina and the healthcare linen
services business of Duke University Health System in April 2004; the assumption
of the leases of the laundry facilities located in Sacramento and Turlock,
California and the acquisition of the healthcare linen services business of
United Linen Services, Inc., d/b/a Golden State Services, in December 2004; the
assumption of the lease of the laundry facility located in Hempstead, New York
and the acquisition of the healthcare linen services business of TTSI III, Inc.,
an affiliate of Tartan Textile Services, Inc., in January 2005; and the
acquisition of two laundry facilities located in Dallas and Wichita Falls, Texas
and the healthcare linen services business of National Linen and Uniform
Service, LLC in January 2005. The tangible assets of the acquired businesses
were $27 million at January 29, 2005, which represents 9% of our consolidated
total assets at January 29, 2005. Revenues and operating income of the
acquisitions during fiscal 2004 represent 3% and 8%, respectively, of our
consolidated revenues and operating income for fiscal 2004.
Our
independent registered public accounting firm, Deloitte & Touche LLP, has
audited our evaluation of the effectiveness of our internal control over
financial reporting, as stated in its report which is included
herein.

38
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and
ShareholdersAngelica Corporation
We have audited management’s assessment,
included in the accompanying Report of Management on Internal Control Over
Financial Reporting, that Angelica Corporation and subsidiaries (the “Company”)
maintained effective internal control over financial reporting as of January 29,
2005, based on criteria established inInternal
Control—Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described
in Report of Management on Internal Control Over Financial Reporting, management
excluded from its assessment the internal control over financial reporting for
the acquisitions completed during the fiscal year ended January 29, 2005. These
acquisitions include the acquisition of the laundry facility located in Durham,
North Carolina and the healthcare linen services business of Duke University
Health System in April 2004; the assumption of the leases of the laundry
facilities located in Sacramento and Turlock, California and the acquisition of
the healthcare linen services business of United Linen Services, Inc., d/b/a
Golden State Services, in December 2004; the assumption of the lease of the
laundry facility located in Hempstead, New York and the acquisition of the
healthcare linen services business of TTSI III, Inc., an affiliate of Tartan
Textile Services, Inc., in January 2005; and the acquisition of two laundry
facilities located in Dallas and Wichita Falls, Texas and the healthcare linen
services business of National Linen and Uniform Service, LLC in January 2005.
The tangible assets of the acquired businesses were $27 million at January 29,
2005, which represents 9% of consolidated total assets at January 29, 2005.
Revenues and operating income of the acquisitions during 2004 represent 3% and
8%, respectively, of the consolidated revenues and operating income of the
Company for 2004. Accordingly, our audit did not include the internal control
over financial reporting at these locations. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial
reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become

39
inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that
the Company maintained effective internal control over financial reporting as of
January 29, 2005, is fairly stated, in all material respects, based on the
criteria established inInternal
Control—Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 29, 2005, based on the criteria
established inInternal Control—Integrated
Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule as of and for
the year ended January 29, 2005, of the Company and our report dated April 14,
2005 expressed an unqualified opinion on those financial statements and
financial statement schedule.
/s/ Deloitte & Touche LLP
St. Louis, MissouriApril 14,
2005
40
Item 9B. Other
Information
Not Applicable.
PART III
Item 10. Directors and
Executive Officers of the Registrant
Information with respect to our
directors under the captions “Election of Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” and “Compensation Committee Interlocks and
Insider Participation” in our proxy statement is incorporated herein by
reference. Information with respect to our executive officers appears in Item 4A
of this Form 10-K.
We have adopted a Code of Conduct and Ethics
for our senior executive and financial officers pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002. We have posted this Code, as well as any waivers or
changes to the Code, on our web site, www.angelica.com.
Item 11. Executive
Compensation
Information with respect to executive
compensation under the captions “Director Compensation,” “Compensation and
Organization Committee Report on Executive Compensation,” “Summary Compensation
Table,” “Employment Contracts and Termination of Employment and
Change-In-Control Arrangements,” “Retirement Plans,” and “Stock Options” in our
proxy statement is incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information with respect to security
ownership of certain beneficial owners and management under the caption “Stock
Ownership of Certain Beneficial Owners” and “Stock Ownership of Management” in
our proxy statement is incorporated herein by reference.

41
Equity Compensation Plan Information
The following table provides
information as of fiscal year ended January 29, 2005 with respect to the shares
of common stock that may be issued under our existing equity compensation
plans:

Number
      of securities
      to
      be issued upon
      exercise
      of
      outstanding
      options,
      warrants
      and rights
      (a)
    
    Weighted-average
      exercise
      price of
      outstanding
      options,
      warrants
      and rights(b)
    
    Number
      of securities
      remaining
      available for
      future
      issuance under equity compensation plans
      (excluding
      securities
      reflected
      in column (a))(c)Equity
      compensation plans approved by security
    holders(1)
    
    
    
    
    
    577,225
    
    
    
    
    
    $17.01
    
    
    404,161Equity
      compensation plans not approved by security holders
    
    
    
    
    
    300,000
    (2)
    
    
    
    
    23.03
    
    
    —Total
    
    
    
    
    
    877,225
    
    
    
    
    
    $19.07
    
    
    404,161
(1)
    
    Includes
      stock options granted under the 1999 Performance Plan, which is a
      shareholder-approved plan, and the following shareholder-approved plans
      which have terminated: the 1994 Performance Plan, the 1994 Non-Employee
      Directors Stock Plan, and the Angelica Corporation Stock Option Plan. No
      awards may be granted under any of the terminated plans following their
      termination. Of the shares in column (c), the 1999 Performance Plan
      (314,189 shares available for issuance at January 29, 2005) provides that
      restricted stock and stock units may also be issued under the plan; and
      the 2004 Equity Incentive Plan for Non-Employee Directors (89,972 shares
      available for issuance at January 29, 2005) provides that restricted
      stock, stock units, and stock purchased in lieu of retainer may also be
      issued under the plan, in addition to stock options. No stock options have
      been granted under the 2004 Equity Incentive Plan for Non-Employee
      Directors.(2)
    
    On
      January 2, 1998, we made a one-time grant of 100,000 stock options to Don
      W. Hubble at an exercise price of $21.9375 in order to induce Mr. Hubble
      to become our Chairman, President and Chief Executive Officer. These
      options were granted under a non-qualified stock option agreement upon
      substantially similar terms to grants made to other officers and employees
      under the Angelica Corporation 1999 Performance Plan, which plan was
      approved by the shareholders. Mr. Hubble has since become fully vested in
      each of these options. Mr. Hubble relinquished the titles of President and
      Chief Executive Officer on September 15, 2003 and became non-executive
      Chairman of the Board on February 1, 2004.
      On
      September 15, 2003, we made three one-time grants of stock options to
      Stephen M. O’Hara for a total of 200,000 shares as an inducement to accept
      employment as our President and Chief Executive Officer. One grant for
      100,000 stock options at an exercise price of $19.66 was granted under
      substantially similar terms to the 1999 Performance Plan. Two additional
      employment-inducement stock option grants of 50,000 shares each were to
      vest and become exercisable only upon the closing price of our common
      stock on the New York Stock Exchange being at least, for the respective
      options, $25.00 per share, or $30.00 per share, during any period of five
      consecutive trading days during Mr. O’Hara’s term of employment. The
      second stock option grant of 50,000 shares vested and became exercisable
      on July 7, 2004, following a period of five consecutive trading days when
      our common stock on the New York Stock Exchange closed at $25 or more per
      share. The third stock option grant of 50,000 shares was amended by the
      Compensation and Organization Committee on January 27, 2005, so that the
      options vested and became immediately exercisable at $30 per share. No
      other terms of the stock option agreement or the options were modified.
      The amendment was reported on a Form 8-K filed February 2, 2005. Each
      option has a term of ten years from the date of grant. The option grants
      were filed as exhibits 10.3, 10.4 and 10.5 to the Form 10-Q for fiscal
      quarter ended October 25, 2003.
On January 1, 1991, we established the
Angelica Corporation Stock Award Plan in order to recognize key employees. Our
Chief Executive Officer administers the Stock Award Plan and may award up to an
aggregate of 3,000 shares of our common stock per fiscal year under the Plan.
Any employee, except our Chief Executive

42
Officer, is eligible to receive awards under
the Plan, upon nomination by our Chief Executive Officer, or the President of
any subsidiary or operating division. Our Board of Directors may, in its sole
discretion, terminate or amend the Plan at any time.
Item 13. Certain
Relationships and Related Transactions
Not Applicable.
Item 14. Principal
Accountant Fees and Services
Information with respect to principal
accountant fees and services under the caption “Independent Public Accountants”
in our proxy statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial
Statement Schedules

(a)
    Document
      List1.
    Financial
      Statements
    
    PageThe
      following financial statements are attached hereto and incorporated by
      reference in Item 8 above:(i)
    
    Report
      of Independent Registered Public Accounting Firm
    
    F-1(ii)
    
    Consolidated
      Statements of Income - Years ended January 29, 2005, January 31, 2004 and
      January 25, 2003
    
    F-2(iii)
    
    Consolidated
      Balance Sheets - January 29, 2005 and January 31, 2004
    
    F-3(iv)
    
    Consolidated
      Statements of Shareholders’ Equity - Years ended January 29, 2005, January
      31, 2004 and January 25, 2003
    
    F-4(v)
    
    Consolidated
      Statements of Cash Flows - Years ended January 29, 2005, January 31,
      2004 and January 25, 2003
    
    F-5(vi)
    
    Notes
      to Consolidated Financial Statements
    
    F-6
      - F-242.
    Financial
      Statement Schedule(i)
    
    Schedule
      II - Valuation and Qualifying Accounts - For the Three Years Ended January
      29, 2005
    
    F-25All
      other schedules are not submitted because they are not applicable or not
      required or because the information is included in the financial
      statements or notes thereto.3.
    Exhibits
      
      See
      Exhibit Index for a list of all management contracts, compensatory plans
      and arrangements required by this item (Exhibit Nos. 10.1 through 10.33)
      and all other exhibits filed or incorporated by reference as a part of
      this report.(b)
    See
      Exhibit Index.(c)
    See
      Item 15(a) 2 above.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and
ShareholdersAngelica Corporation
We have audited the accompanying consolidated
balance sheets of Angelica Corporation and subsidiaries (the “Company”) as of
January 29, 2005 and January 31, 2004, and the related consolidated statements
of income, shareholders’ equity, and cash flows for each of the three years in
the period ended January 29, 2005. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of
Angelica Corporation and subsidiaries as of January 29, 2005 and January 31,
2004, and the results of their operations and their cash flows for each of the
three years in the period ended January 29, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over financial reporting as of
January 29, 2005, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 14, 2005 expressed an unqualified
opinion on management’s assessment of the effectiveness of the Company’s
internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
St. Louis, MissouriApril 14,
2005
F-1
CONSOLIDATED
STATEMENTS OF INCOME
Angelica Corporation and
Subsidiaries

For
      Years Ended(Dollars in thousands, except per share
    amounts)
    
    January
      29,2005
    
    January
      31,2004
    
    January
      25,2003Continuing
      operations:Textile
      service revenues
    
    $
    316,074
    
    
    $
    291,499
    
    
    $
    271,250Cost
      of textile services
    
    
    (267,138
    )
    
    
    (237,261
    )
    
    
    (218,858
    )Gross
      profit
    
    
    48,936
    
    
    
    54,238
    
    
    
    52,392Selling,
      general and administrative expenses
    
    
    (38,366
    )
    
    
    (39,955
    )
    
    
    (37,862
    )Other
      operating income (expense), net
    
    
    678
    
    
    
    (523
    )
    
    
    149Income
      from operations
    
    
    11,248
    
    
    
    13,760
    
    
    
    14,679Interest
      expense
    
    
    (1,356
    )
    
    
    (714
    )
    
    
    (2,780
    )Non-operating
      income, net (Note 4)
    
    
    2,659
    
    
    
    2,244
    
    
    
    502Loss
      on early extinguishment of debt (Note 5)
    
    
    —
    
    
    
    —
    
    
    
    (6,783
    )Income
      from continuing operations before income taxes
    
    
    12,551
    
    
    
    15,290
    
    
    
    5,618Provision
      for income taxes (Note 6)
    
    
    (2,179
    )
    
    
    (4,261
    )
    
    
    (848
    )Income
      from continuing operations
    
    
    10,372
    
    
    
    11,029
    
    
    
    4,770Discontinued
      operations (Note 7):(Loss)
      income from operations of discontinued segment, net of tax
    
    
    (993
    )
    
    
    (1,826
    )
    
    
    1,827Loss
      on disposal of discontinued segment, net of tax
    
    
    (3,018
    )
    
    
    —
    
    
    
    (6,662
    )Loss
      from discontinued operations
    
    
    (4,011
    )
    
    
    (1,826
    )
    
    
    (4,835
    )Net
      income (loss)
    
    $
    6,361
    
    
    $
    9,203
    
    
    $
    (65
    )Basic
      earnings (loss) per share (Note 8):Income
      from continuing operations
    
    $
    1.16
    
    
    $
    1.25
    
    
    $
    0.55Loss
      from discontinued operations
    
    
    (0.45
    )
    
    
    (0.21
    )
    
    
    (0.56
    )Net
      income (loss)
    
    $
    0.71
    
    
    $
    1.04
    
    
    $
    (0.01
    )Diluted
      earnings (loss) per share (Note 8):Income
      from continuing operations
    
    $
    1.14
    
    
    $
    1.23
    
    
    $
    0.54Loss
      from discontinued operations
    
    
    (0.44
    )
    
    
    (0.20
    )
    
    
    (0.55
    )Net
      income (loss)
    
    $
    0.70
    
    
    $
    1.03
    
    
    $
    (0.01
    )
The
accompanying notes are an integral part of the consolidated financial
statements.
F-2CONSOLIDATED
BALANCE SHEETS
Angelica Corporation and
Subsidiaries

(Dollars
      in thousands)
    
    January
      29,2005
    
    January
      31,2004ASSETSCurrent
      Assets:Cash
      and short-term investments
    
    $
    926
    
    
    $
    2,188Receivables,
      less reserves of $510 and $843
    
    
    44,454
    
    
    
    36,978Linens
      in service
    
    
    38,846
    
    
    
    35,464Prepaid
      expenses and other current assets
    
    
    3,817
    
    
    
    4,513Deferred
      income taxes
    
    
    5,386
    
    
    
    5,036Assets
      of discontinued segment held for sale (Note 7)
    
    
    —
    
    
    
    24,498Total
      Current Assets
    
    
    93,429
    
    
    
    108,677Property
      and Equipment:Land
    
    
    7,766
    
    
    
    6,844Buildings
      and leasehold improvements
    
    
    58,353
    
    
    
    51,308Machinery
      and equipment
    
    
    126,886
    
    
    
    118,567Capitalized
      leased equipment
    
    
    830
    
    
    
    —193,835
    
    
    
    176,719Less
      - accumulated depreciation
    
    
    92,170
    
    
    
    94,467Total
      Property and Equipment
    
    
    101,665
    
    
    
    82,252Other:Goodwill
      (Note 9)
    
    
    31,272
    
    
    
    9,610Other
      acquired assets (Note 9)
    
    
    24,860
    
    
    
    3,768Cash
      surrender value of life insurance
    
    
    30,942
    
    
    
    30,194Deferred
      income taxes
    
    
    2,040
    
    
    
    —Miscellaneous
    
    
    4,745
    
    
    
    1,280Total
      Other Assets
    
    
    93,859
    
    
    
    44,852Total
      Assets
    
    $
    288,953
    
    
    $
    235,781LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Current
      maturities of long-term debt (Note 10)
    
    $
    419
    
    
    $
    3Accounts
      payable
    
    
    16,865
    
    
    
    14,600Accrued
      wages and other compensation
    
    
    5,145
    
    
    
    5,092Deferred
      compensation and pension liabilities (Note 11)
    
    
    4,226
    
    
    
    3,743Other
      accrued liabilities
    
    
    29,063
    
    
    
    21,729Liabilities
      of discontinued segment held for sale (Note 7)
    
    
    —
    
    
    
    7,783Total
      Current Liabilities
    
    
    55,718
    
    
    
    52,950Long-Term
      Debt, less current maturities (Note 10)
    
    
    67,811
    
    
    
    19,542Other:Deferred
      compensation and pension liabilities (Note 11)
    
    
    13,594
    
    
    
    14,016Deferred
      income taxes
    
    
    —
    
    
    
    2,218Other
      long-term liabilities
    
    
    474
    
    
    
    395Total
      Other Liabilities
    
    
    14,068
    
    
    
    16,629Shareholders’
      Equity:Common
      Stock, $1 par value, authorized 20,000,000 shares, issued: 9,471,538
      shares
    
    
    9,472
    
    
    
    9,472Capital
      surplus
    
    
    5,336
    
    
    
    4,748Retained
      earnings
    
    
    144,621
    
    
    
    142,341Accumulated
      other comprehensive loss
    
    
    (1,337
    )
    
    
    (1,062
    )Unamortized
      restricted stock
    
    
    (1,007
    )
    
    
    (210
    )Common
      Stock in treasury, at cost: 405,304 and 587,141 shares
    
    
    (5,729
    )
    
    
    (8,629
    )Total
      Shareholders’ Equity
    
    
    151,356
    
    
    
    146,660Total
      Liabilities and Shareholders’ Equity
    
    $
    288,953
    
    
    $
    235,781
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Angelica Corporation and
Subsidiaries

For
      Years Ended(Dollars in thousands, except per share
    amounts)
    
    January
      29,2005
    
    January
      31,2004
    
    January
      25,2003COMMON
      STOCK ($1 PAR VALUE)Balance
      beginning of year
    
    $
    9,472
    
    
    $
    9,472
    
    
    $
    9,472Balance
      end of year
    
    $
    9,472
    
    
    $
    9,472
    
    
    $
    9,472CAPITAL
      SURPLUSBalance
      beginning of year
    
    $
    4,748
    
    
    $
    4,481
    
    
    $
    4,200Tax
      benefit of stock options exercised
    
    
    536
    
    
    
    267
    
    
    
    281Stock-based
      compensation expense
    
    
    52
    
    
    
    —
    
    
    
    —Balance
      end of year
    
    $
    5,336
    
    
    $
    4,748
    
    
    $
    4,481RETAINED
      EARNINGSBalance
      beginning of year
    
    $
    142,341
    
    
    $
    137,548
    
    
    $
    142,188Net
      income (loss)
    
    
    6,361
    
    
    
    9,203
    
    
    
    (65
    )Cash
      dividends (per share: 2004-$.44; 2003-$.41; 2002-$.34)
    
    
    (3,950
    )
    
    
    (3,619
    )
    
    
    (2,947
    )Treasury
      stock reissued
    
    
    (131
    )
    
    
    (791
    )
    
    
    (1,628
    )Balance
      end of year
    
    $
    144,621
    
    
    $
    142,341
    
    
    $
    137,548ACCUMULATED
      OTHER COMPREHENSIVE LOSSBalance
      beginning of year
    
    $
    (1,062
    )
    
    $
    (511
    )
    
    $
    —Change
      in fair value of interest-rate swap (Note 12)
    
    
    156
    
    
    
    5
    
    
    
    (170
    )Other
      changes during year
    
    
    (431
    )
    
    
    (556
    )
    
    
    (341
    )Balance
      end of year
    
    $
    (1,337
    )
    
    $
    (1,062
    )
    
    $
    (511
    )UNAMORTIZED
      RESTRICTED STOCKBalance
      beginning of year
    
    $
    (210
    )
    
    $
    —
    
    
    $
    —Treasury
      stock reissued
    
    
    (1,422
    )
    
    
    (768
    )
    
    
    —Amortization
      expense
    
    
    625
    
    
    
    558
    
    
    
    —Balance
      end of year
    
    $
    (1,007
    )
    
    $
    (210
    )
    
    $
    —COMMON
      STOCK IN TREASURY, AT COSTBalance
      beginning of year
    
    $
    (8,629
    )
    
    $
    (11,330
    )
    
    $
    (14,356
    )Treasury
      stock reissued
    
    
    2,900
    
    
    
    2,701
    
    
    
    3,026Balance
      end of year
    
    $
    (5,729
    )
    
    $
    (8,629
    )
    
    $
    (11,330
    )SHAREHOLDERS’
      EQUITY, END OF YEAR
    
    $
    151,356
    
    
    $
    146,660
    
    
    $
    139,660Comprehensive
      Income (Loss)Net
      income (loss)
    
    $
    6,361
    
    
    $
    9,203
    
    
    $
    (65
    )Change
      in fair value of interest-rate swap, net of tax:Unrealized
      losses deferred during year
    
    
    (61
    )
    
    
    (154
    )
    
    
    (220
    )Realized
      losses reclassified to net income (loss) during year
    
    
    217
    
    
    
    159
    
    
    
    50Minimum
      pension liability adjustment, net of tax
    
    
    (427
    )
    
    
    (560
    )
    
    
    (341
    )Other
      changes
    
    
    (4
    )
    
    
    4
    
    
    
    —Total
      Comprehensive Income (Loss)
    
    $
    6,086
    
    
    $
    8,652
    
    
    $
    (576
    )
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4CONSOLIDATED
STATEMENTS OF CASH FLOWS
Angelica Corporation and
Subsidiaries

For
      Years Ended(Dollars in thousands)
    
    January
      29,2005
    
    January
      31,2004
    
    January
      25,2003CASH
      FLOWS FROM OPERATING ACTIVITIESIncome
      from continuing operations
    
    $
    10,372
    
    
    $
    11,029
    
    
    $
    4,770Non-cash
      items included in income from continuing operations:Depreciation
    
    
    12,171
    
    
    
    9,954
    
    
    
    10,335Amortization
    
    
    1,581
    
    
    
    1,144
    
    
    
    437Deferred
      income taxes
    
    
    (4,608
    )
    
    
    3,455
    
    
    
    (1,877
    )Cash
      surrender value of life insurance
    
    
    (849
    )
    
    
    (1,504
    )
    
    
    (1,097
    )Gain
      on sale of assets
    
    
    (2,912
    )
    
    
    —
    
    
    
    —Change
      in working capital components of continuing operations, net of businesses
      acquired/disposed of:Receivables,
      net
    
    
    (4,807
    )
    
    
    (1,075
    )
    
    
    (2,830
    )Linens
      in service
    
    
    10
    
    
    
    (1,360
    )
    
    
    75Prepaid
      expenses and other current assets
    
    
    (266
    )
    
    
    (702
    )
    
    
    818Accounts
      payable
    
    
    2,306
    
    
    
    1,132
    
    
    
    2,029Compensation
      and other accruals
    
    
    515
    
    
    
    439
    
    
    
    99Income
      taxes
    
    
    4,333
    
    
    
    2,062
    
    
    
    3,403Other,
      net
    
    
    (84
    )
    
    
    (759
    )
    
    
    2,769Net
      cash provided by operating activities of continuing operations
    
    
    17,762
    
    
    
    23,815
    
    
    
    18,931CASH
      FLOWS FROM INVESTING ACTIVITIESExpenditures
      for property and equipment, net
    
    
    (15,314
    )
    
    
    (22,852
    )
    
    
    (12,135
    )Cost
      of businesses and assets acquired
    
    
    (62,431
    )
    
    
    (14,372
    )
    
    
    (3,279
    )Disposals
      of assets
    
    
    5,127
    
    
    
    —
    
    
    
    1,971Life
      insurance premiums paid, net
    
    
    101
    
    
    
    (1,114
    )
    
    
    (1,130
    )Net
      cash used in investing activities of continuing operations
    
    
    (72,517
    )
    
    
    (38,338
    )
    
    
    (14,573
    )CASH
      FLOWS FROM FINANCING ACTIVITIESRepayments
      of long-term revolving debt
    
    
    (99,745
    )
    
    
    (44,537
    )
    
    
    (139,932
    )Borrowings
      of long-term revolving debt
    
    
    147,600
    
    
    
    43,900
    
    
    
    88,500Debt
      issuance costs
    
    
    (416
    )
    
    
    —
    
    
    
    (794
    )Dividends
      paid
    
    
    (3,950
    )
    
    
    (3,619
    )
    
    
    (2,947
    )Treasury
      stock reissued
    
    
    1,347
    
    
    
    1,409
    
    
    
    1,679Net
      cash provided by (used in) financing activities of continuing
      operations
    
    
    44,836
    
    
    
    (2,847
    )
    
    
    (53,494
    )CASH
      FLOWS FROM DISCONTINUED OPERATIONSNet
      cash provided by discontinued operations
    
    
    8,657
    
    
    
    2,144
    
    
    
    48,490Net
      decrease in cash and short-term investments
    
    
    (1,262
    )
    
    
    (15,226
    )
    
    
    (646
    )Cash
      and short-term investments at beginning of year
    
    
    2,188
    
    
    
    17,414
    
    
    
    18,060Cash
      and short-term investments at end of year
    
    $
    926
    
    
    $
    2,188
    
    
    $
    17,414Supplemental
      cash flow information:Income
      taxes (refunded) paid
    
    $
    (741
    )
    
    $
    (3,314
    )
    
    $
    (3,500
    )Interest
      paid, net of amounts capitalized
    
    $
    1,135
    
    
    $
    454
    
    
    $
    3,850Supplemental
      disclosures of noncash investing and financing activities:Holdback
      of cost of businesses and assets acquired
    
    $
    4,565
    
    
    $
    —
    
    
    $
    —Long-term
      note receivable from sale of Life Uniform
    
    $
    3,014
    
    
    $
    —
    
    
    $
    —Capital
      lease obligations for new equipment
    
    $
    830
    
    
    $
    —
    
    
    $
    —
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Angelica
Corporation and Subsidiaries


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
****
Fiscal
Year
In February 2004, the Company changed the
terminology of how it refers to its fiscal year, although the actual fiscal year
did not change. Instead of referring to the 52- or 53-week period ending the
last Saturday in January by the calendar year in which it ends, the fiscal
period is now called by the calendar year containing the first 11 months of the
fiscal year. This change in terminology has been applied retroactively to all
periods presented in this report.
Fiscal years 2004, 2003 and 2002 ended January
29, 2005, January 31, 2004 and January 25, 2003, respectively. Fiscal years 2004
and 2002 consisted of 52 weeks with 13 weeks in each quarter; fiscal year 2003
consisted of 53 weeks with 14 weeks in the fourth quarter.
Nature of Operations
The Company provides textile rental and
linen management services principally to healthcare institutions, and to a
limited extent to hotels, motels and restaurants, in or near major metropolitan
areas in the United States. Until July 31, 2004, the Company also operated the
Life Uniform national chain of retail healthcare uniform and shoe stores
primarily for nurses and other healthcare professionals with a fully-integrated
catalogue and e-commerce operation. As discussed in Note 7, the Life Uniform
segment is reported as discontinued operations for all periods presented in this
report.

Principles of Consolidation
All subsidiaries are wholly-owned and are
included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated.

Revenue Recognition
Textile service revenues are recognized
at the time the service is provided to the customer. Volume-based rebates paid
to customers are recorded as a reduction of textile service revenues at the time
the related revenue is earned.

Reclassifications
Certain amounts in prior years have been
reclassified to conform to current year presentation.

Use of Estimates
These consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America, which required the use of certain estimates by
Management in determining the Company’s assets, liabilities, revenues and
expenses. Actual results may vary from these estimates.

Cash Equivalents
The Company considers short-term, highly-liquid
investments (securities with an original maturity date of less than three
months) as cash equivalents.

Linens in Service
Linens in service are stated at depreciated cost
and amortized over their expected useful lives of one to two years.

Property and Equipment
Property and equipment are stated at
cost. Renewals and betterments are capitalized. Property and equipment are
depreciated over their expected useful lives (buildings and improvements – 10 to
40 years; machinery and


F-6

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries

equipment – three to 20 years). Depreciation
is computed on the straight-line method. Leasehold improvements are amortized
using the straight-line method over the lesser of their useful lives or lease
terms.

Long-Lived Assets
The Company considers the possible impairment
of long-lived assets, excluding goodwill, in its laundry plants whenever events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,’’ the Company periodically (no less
than annually) assesses the carrying value of its long-lived assets by reviewing
the current and projected cash flows of the laundry plants and recognizes
impairment losses if it is determined that the carrying values are not
recoverable.

Goodwill
Under SFAS No. 142, “Goodwill and Other Intangible Assets,’’ goodwill
recorded as of June 30, 2001 was no longer amortized effective in fiscal 2002.
Instead, goodwill is tested for impairment using a fair-value based analysis at
least annually as of the end of the third quarter.

Other Acquired Assets
Other acquired assets, consisting of
customer contracts and non-competition agreements, are being amortized on the
straight-line basis generally over periods of three to fifteen years.

Self-Insurance Programs
The Company is self-insured up to
certain levels for workers’ compensation, general liability and vehicle
liability coverages after February 1, 1999. Provision for losses relating to
these programs are recorded based on estimates for claims incurred using
actuarial analyses. The estimated liabilities for these programs recorded in
other accrued liabilities were $15,749,000 and $13,800,000 at January 29, 2005
and January 31, 2004, respectively. In addition, the Company is primarily
self-insured for non-union employee medical coverage. The liability is
determined actuarially based on claims filed and an estimate of claims incurred
but not yet reported. The amounts included in other accrued liabilities for this
liability at January 29, 2005 and January 31, 2004 were $846,000 and $1,046,000,
respectively.

Income Taxes
The Company accounts for income taxes
in accordance with SFAS No. 109, “Accounting
for Income Taxes,’’ which utilizes the asset and liability method. Under this
method, deferred taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.

Stock-Based Compensation Plans
The Company applies the provisions of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,’’ and
the related interpretations to account for its employee stock option plans. As a
consequence, compensation expense is not recorded by the Company for the
issuance of stock options. Effective in the third quarter of fiscal 2005, the
Company will be required to recognize compensation expense associated with its
stock options issued, in accordance with new accounting pronouncement SFAS No.
123 (revised 2004) discussed below.

Earnings Per Share
Basic earnings per share is computed by
dividing net income available to Common shareholders by the weighted average
number of shares of Common Stock outstanding during the year. Diluted earnings
per share is computed by dividing net income available to Common shareholders by
the weighted average number of Common and Common equivalent shares outstanding
using the treasury stock method.

F-7

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries

New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145,
“Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections.’’ This
statement rescinds, updates, clarifies and simplifies existing accounting
pronouncements. Among other things, the statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. Under SFAS No. 145, the criteria in APB No. 30 will now be used to
classify those gains and losses. SFAS No. 145 is effective for financial
statements issued for years beginning after May 15, 2002. The Company adopted
the provisions of SFAS No. 145 in fiscal 2003. See Note 5.

In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit
or Disposal Activities.’’ This statement requires the recording of costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management’s commitment to an exit plan, which is generally before
an actual liability has been incurred. The requirements of SFAS No. 146 are
effective prospectively for exit or disposal activities initiated after December
31, 2002. Previously issued financial statements were not restated.
In December 2004, the FASB issued SFAS No.
153, “Exchanges of Nonmonetary Assets.’’
SFAS No. 153 amends APB No. 29 to eliminate the exception to fair value
measurement for nonmonetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,’’
which revises SFAS No. 123, “Accounting for
Stock-Based Compensation’’ and supersedes APB No. 25 and its related
implementation guidance. SFAS No. 123 (revised 2004) 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. Historically, the Company has
elected to follow the guidance of APB No. 25 which allowed companies to use the
intrinsic value method of accounting to value their share-based payment
transactions with employees. Based on this method, the Company did not recognize
compensation expense in its consolidated financial statements for stock options
granted as the exercise price of the stock options granted was equal to or
greater than the fair market value of the underlying common stock on the date of
the grant. SFAS No. 123 (revised 2004) requires measurement of the cost of
share-based payment transactions with employees at the fair value of the award
on the grant date and recognition of expense over the required service or
vesting period. The provisions of this statement are required to be adopted by
the Company beginning in the third quarter of fiscal 2005. 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 in Note 2, and is
contingent upon the number of future options granted, the selected transition
method and the selection between acceptable valuation methodologies for valuing
options.
In December 2004, the FASB issued FASB Staff
Position No. 109-1, “Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004,’’ which provides guidance on applying SFAS No. 109, “Accounting for Income Taxes,’’ to the tax
deduction on qualified production activities provided under the American Jobs
Creation Act of 2004. The Company is currently assessing the impact, if any, of
the provisions of FSP No. 109-1 on its consolidated financial statements in
future periods.

F-8NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
2. STOCK-BASED COMPENSATION PLANS
In December 2002, the FASB issued SFAS
No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure.’’ SFAS No. 148 amends 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 amends 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. A total of 2,375,000 shares have been authorized to be
issued under all such plans. Options and awards have been granted at or above
the fair market value at the date of grant, although certain plans allow for
awards to be granted at a price below fair market value. Options vest over four
years except for those granted in fiscal 2004 which vest in six months, and are
exercisable not less than six months nor more than 10 years after the date of
grant.
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 charged to continuing operations in fiscal years 2004, 2003 and 2002
totaled $664,000, $733,000 and $282,000, respectively. During the year ended
January 29, 2005, 65,000 shares of restricted stock were granted with a
weighted-average share price of $22.14.
A summary of the status of the Company’s stock
option plans for fiscal years 2004, 2003 and 2002 and changes during the years
then ended is presented in the table below:

2004
    
    2003
    
    2002Shares
    
    WeightedAverageExercisePrice
    
    Shares
    
    WeightedAverageExercisePrice
    
    Shares
    
    WeightedAverageExercisePriceOutstanding
      at beginning of year
    
    
    977,625
    
    
    $
    16.92
    
    
    
    861,300
    
    
    $
    14.35
    
    
    
    975,025
    
    
    $
    13.78Granted
    
    
    97,500
    
    
    
    32.88
    
    
    
    301,000
    
    
    
    22.05
    
    
    
    134,900
    
    
    
    16.52Exercised
    
    
    (141,275
    )
    
    
    13.73
    
    
    
    (112,675
    )
    
    
    10.94
    
    
    
    (111,425
    )
    
    
    11.04Lapsed
    
    
    (56,625
    )
    
    
    19.01
    
    
    
    (72,000
    )
    
    
    16.98
    
    
    
    (137,200
    )
    
    
    15.19Outstanding
      at end of year
    
    
    877,225
    
    
    $
    19.07
    
    
    
    977,625
    
    
    $
    16.92
    
    
    
    861,300
    
    
    $
    14.35Options
      exercisable at year end
    
    
    581,283
    
    
    $
    17.28
    
    
    
    489,350
    
    
    $
    15.42
    
    
    
    477,030
    
    
    $
    16.17Options
      available for future grants
    
    
    404,161
    
    
    
    
    
    
    
    198,245
    
    
    
    
    
    
    
    255,819Weighted
      average fair value for options granted during the year
    
    $
    6.66
    
    
    
    
    
    
    $
    4.71
    
    
    
    
    
    
    $
    3.66
The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in fiscal 2004, 2003 and 2002,
respectively: risk-free interest rates of 4.3%, 4.1% and 3.3%; expected dividend
yields of 3.9%, 4.2% and 4.3%; volatilities of 31.3%, 31.0% and 30.7%; and
expected lives of nine to 10 years in all periods. The range of exercise prices
for the

F-9NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
877,225 options outstanding at year end was
$7.25 to $32.88, and the weighted-average remaining contractual life was 6.4
years.
Had compensation expense for stock-based
compensation plans for 2004, 2003 and 2002 been determined consistent with SFAS
No. 123, the Company’s net income (loss) and earnings (loss) per share would
approximate the following pro forma amounts:

(Dollars
      in thousands, except per share amounts)
    
    2004
    
    2003
    
    2002Net
      income (loss):As
      reported
    
    $
    6,361
    
    
    $
    9,203
    
    
    $
    (65
    )Add:
      stock-based employee compensation expense included in net income (loss),
      net of tax
    
    
    581
    
    
    
    528
    
    
    
    239Deduct:
      stock-based employee compensation expense determined under fair-value
      based method for all awards,
      netof tax
    
    
    (1,376
    )
    
    
    (1,065
    )
    
    
    (737
    )Pro
      forma net income (loss)
    
    $
    5,566
    
    
    $
    8,666
    
    
    $
    (563
    )Basic
      earnings (loss) per share:As
      reported
    
    $
    0.71
    
    
    $
    1.04
    
    
    $
    (0.01
    )Pro
      forma
    
    
    0.62
    
    
    
    0.98
    
    
    
    (0.06
    )Diluted
      earnings (loss) per share:As
      reported
    
    $
    0.70
    
    
    $
    1.03
    
    
    $
    (0.01
    )Pro
      forma
    
    
    0.61
    
    
    
    0.97
    
    
    
    (0.06
    )
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 years.
3. ACQUISITIONS
During fiscal 2004, the Company
acquired the following businesses for a total cost of $66,237,000 which was paid
primarily in cash:
•
    Duke
      University Health System laundry in Durham, North Carolina, an on-premise
      laundry facility providing linen management services to the Duke
      University Health System (April 2004),•
    the
      operations of United Linen Services d/b/a Golden State Services, a
      healthcare laundry services company based in Sacramento and Turlock,
      California (December 2004),•
    the
      operations of two National Service Industries d/b/a National Linen laundry
      services facilities based in Dallas and Wichita Falls, Texas (January
      2005), and•
    the
      Hempstead, New York operations of Tartan Textile Services, a
      healthcare laundry services company (January 2005).
These acquired businesses are primarily
engaged in providing linen management services to the healthcare industry in a
manner consistent with the Company’s core business. Each entity strengthens the
Company’s market position in the respective region of the country. The results
of operations of the above acquired

F-10NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
companies have been included in the Company’s
consolidated financial statements since the dates of acquisition. Aggregate
assets acquired and liabilities assumed was as follows:

Condensed
      Balance SheetLinens
      in Service
    
    $
    4,627,000Accounts
      Receivable
    
    
    2,669,000Prepaid
      Expenses and Deposits
    
    
    125,000Property
      and Equipment
    
    
    16,399,000Customer
      Contracts
    
    
    19,243,000Restrictive
      Covenants
    
    
    2,373,000Goodwill
    
    
    21,646,000Accrued
      Expenses
    
    
    (845,000
    )Net
      Assets Acquired
    
    $
    66,237,000Cash paid at closing for
these acquisitions amounted to $61,672,000 including $8,855,000 placed into
escrow accounts to cover renewals or retention of purchased contracts or
indemnity claims by us. Unless payments are refunded from the escrow accounts to
us under the terms of the purchase agreements, the escrowed amounts will be paid
to the sellers upon the scheduled release dates, or upon the renewal or
retention of the customer contracts purchased. The difference of $4,565,000
represents installment payments and holdbacks of a portion of the purchase price
that will be paid to the sellers upon the scheduled payment date, or upon the
renewal or retention of the customer contracts purchased.
As shown above, the acquired intangible assets
totaled $43,262,000. Approximately $19,243,000 was assigned to customer
contracts and will be amortized over 15 years. The restrictive covenants related
to these transactions totaled $2,373,000 and were for either a three or five
year term. The weighted average useful life assigned to these intangible assets
was 13.9 years. The excess of the purchase price over the fair value of the net
assets acquired increased goodwill by $21,646,000 of which the entire amount is
expected to provide an income tax benefit.
During fiscal year 2003, the Company acquired
the operations of the National Linen laundry plant based in Safety Harbor,
Florida for $12,335,000. The assets acquired included accounts receivable,
linens in service, and property and equipment. The intangible assets acquired
totaled $7,130,000. Approximately $1,244,000 was assigned to customer contracts
and will be amortized over 10 years. The restrictive covenants totaled $200,000
and will be amortized over five years. The weighted average useful life of these
intangible assets was 9.3 years. The excess of the purchase price over the fair
value of the net assets acquired increased goodwill by $5,686,000, all of which
is expected to provide an income tax benefit. The acquired business services the
Florida market with healthcare linen management services. The results of
operations of this acquisition have been included in the Company’s consolidated
financial statements since the date of acquisition (December 2003).
The unaudited pro forma consolidated textile
service revenues for fiscal years 2004 and 2003 as though the fiscal 2004
acquisitions and the fiscal 2003 acquisition had occurred at the beginning of
each year totaled $382,055,000 and $378,363,000, respectively. The unaudited pro
forma consolidated net income from continuing operations would have been
$12,679,000 or $1.39 per diluted share for fiscal 2004 and $14,448,000 or $1.61
per diluted share in fiscal 2003. These pro forma amounts are not necessarily
indicative of the results of operations that would have occurred had the
purchases been made at the beginning of each year.
Subsequent to the end of fiscal 2004, the
Company acquired the stock of Royal Institutional Services, Inc. and its
affiliate, The Surgi-Pak Corporation (together “Royal’’). Royal is the largest healthcare linen
services company

F-11NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
in New England, providing full linen
management services to the healthcare industry with annual revenues of
approximately $45,000,000. Royal’s assets consisted primarily of customer
contracts and equipment related to the provision of healthcare linen services.
The transaction was completed on March 21, 2005 and as such, the Company has not
yet obtained all information required to complete the purchase price allocation
for this acquisition.
4. NON-OPERATING INCOME, NET
In fiscal 2004, the Company recorded
non-operating income of $2,659,000, which included a gain of $1,469,000 from the
sale of real estate of its former Miami, FL laundry facility that closed in
January 2000, and gains totaling $610,000 for the excess of death benefits from
Company-owned life insurance policies surrendered over the cash value of the
policies. In addition, the Company realized $202,000 from the liquidation of
securities received in a bankruptcy settlement of a receivable related to a
former business.
In fiscal 2003, the Company recorded
non-operating income of $2,244,000, which included a cash distribution of
$1,857,000 received in connection with the demutualization of the parent company
of an issuer of life insurance policies owned by the Company. This distribution
did not affect the life insurance policies owned by the Company or their cash
surrender value.
Non-operating income, net, also includes
interest earned on invested cash balances and notes receivable, and foreign
currency exchange gains and losses.
5. LOSS ON EARLY EXTINGUISHMENT OF
DEBT
In the second quarter of fiscal 2002,
the Company incurred a loss on early extinguishment of debt of $6,783,000. The
loss was due to a prepayment penalty of $6,684,000 paid to lenders in connection
with the complete refinancing of the Company’s debt following the sale of the
Manufacturing and Marketing segment (plus the writeoff of unamortized loan fees
of $99,000). In accordance with SFAS No. 145, adopted in fiscal 2003, the loss
on early extinguishment of debt is reported in income from continuing
operations.
6. INCOME TAXES
The provision for income taxes from
continuing operations consisted of the following:

(Dollars
      in thousands)
    
    2004
    
    2003
    
    2002Current:Federal
    
    $
    388
    
    
    $
    761
    
    
    $
    1,568State
    
    
    293
    
    
    
    (174
    )
    
    
    (377
    )Foreign
    
    
    0
    
    
    
    (63
    )
    
    
    43Deferred:Federal
    
    
    2,114
    
    
    
    3,725
    
    
    
    (314
    )State
    
    
    (616
    )
    
    
    12
    
    
    
    (72
    )$
    2,179
    
    
    $
    4,261
    
    
    $
    848

F-12NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
Reconciliation between the statutory income
tax rate and effective tax rate from continuing operations is summarized
below:

2004
    
    2003
    
    2002Statutory
      rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State
      tax, net of federal benefit
    
    
    1.9
    
    
    
    2.8
    
    
    
    2.7Effect
      of permanent items:Cash
      surrender value and insurance benefits, net of expense
    
    
    (5.4
    )
    
    
    (3.3
    )
    
    
    (8.6
    )Meals
      and entertainment
    
    
    0.5
    
    
    
    0.4
    
    
    
    1.4Tax
      contingency adjustment
    
    
    (6.5
    )
    
    
    0.0
    
    
    
    0.0Other
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    (0.3
    )Effect
      of tax credits from employment programs
    
    
    (6.2
    )
    
    
    (5.2
    )
    
    
    (14.1
    )17.4
    %
    
    
    27.9
    %
    
    
    15.1
    %
Significant components of deferred tax assets
and liabilities were as follows:

(Dollars
      in thousands)
    
    January
      29,2005
    
    January
      31,2004Deferred
      tax assets:Deferred
      compensation
    
    $
    5,188
    
    
    $
    4,897Insurance
      reserves not yet deductible
    
    
    6,611
    
    
    
    5,252Customer
      contracts
    
    
    1,745
    
    
    
    1,693Net
      operating loss and tax credit carryforwards
    
    
    13,326
    
    
    
    6,422Other
    
    
    4,070
    
    
    
    1,164$
    30,940
    
    
    $
    19,428Deferred
      tax liabilities:Property
      and equipment
    
    
    (11,305
    )
    
    
    (9,286
    )Linens
      in service
    
    
    (11,527
    )
    
    
    (7,105
    )Other
    
    
    (682
    )
    
    
    (219
    )(23,514
    )
    
    
    (16,610
    )Net
      deferred tax assets
    
    $
    7,426
    
    
    $
    2,818
The Company has a federal net operating loss
carryforward of $18,194,000 which will expire in 2025; $2,031,000 in federal tax
credit carryforwards which expire at various dates beginning in 2022; $5,500,000
of state tax credit carryforwards which expire at various dates beginning in
2012 or have no expiration date; and various other tax credit and state net
operating loss carryforwards.
The Company believes all deferred tax items
will be realized and therefore no valuation allowances have been recorded.
A tax contingency adjustment was made to
reflect the favorable resolution of certain tax issues. Based on the completion
of tax audits in the United States and Canada, the Company reevaluated its tax
reserves and adjusted the tax liability accordingly. Once established, reserves
are adjusted as information becomes available

F-13NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
or when an event requiring a change in the
reserve 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.
7. DISCONTINUED OPERATIONS
In February 2004, the Company announced
its decision to exit and discontinue its Life Uniform retail business segment
and actively market the segment for sale. The Company continued to operate the
segment during the period of negotiations with potential buyers. The Company
completed the sale of Life Uniform to Healthcare Uniform Company, Inc., an
affiliate of Sun Capital Partners, effective July 31, 2004. The total sales
price amounted to $16,052,000, principally cash of $12,019,000 and an unsecured,
long-term note receivable from Healthcare Uniform Company with a face value of
$4,019,000, plus the assumption of $5,732,000 of liabilities. The note
receivable was discounted to its estimated fair value of 75% of face value,
reflecting the note’s illiquidity and its subordinated status in the capital
structure of Healthcare Uniform Company. Net assets of the segment totaling
$19,336,000 were sold, including 196 retail uniform and shoe stores, catalogue
and e-commerce operations and associated inventory, as well as working capital
of 17 other stores that were not acquired. These 17 stores were immediately
closed by the Company. The Company recorded a pretax loss on disposal of the
discontinued Life Uniform segment of $5,275,000 in fiscal 2004, reflecting the
loss of $4,289,000 on the sale of net assets of the segment and $986,000 of
sale-related expenses.
In accordance with SFAS No. 144, the financial
position, cash flows, results of operations and loss on disposal of the Life
Uniform segment are segregated and reported as discontinued operations for all
periods presented in this report. As of January 31, 2004, total assets of Life
Uniform held for sale were $24,498,000, consisting mainly of inventories of
$11,491,000 and net property and equipment of $9,237,000, and total liabilities
held for sale were $7,783,000, of which $6,021,000 was for accounts payable.
Operating results for the Life Uniform segment are included in the Consolidated
Statements of Income as net (loss) income from operations of discontinued
segment for all periods presented. Results for the discontinued Life Uniform
segment are as follows:

(Dollars
      in thousands)
    
    2004
    
    2003
    
    2002Net
      retail sales
    
    $
    38,786
    
    
    $
    82,777
    
    
    $
    92,169(Loss)
      income before income taxes
    
    $
    (1,735
    )
    
    $
    (2,683
    )
    
    $
    2,885Income
      tax benefit (provision)
    
    
    742
    
    
    
    857
    
    
    
    (1,058
    )Net
      (loss) income
    
    $
    (993
    )
    
    $
    (1,826
    )
    
    $
    1,827
The pretax loss from operations of the
discontinued segment in fiscal 2004 includes $1,499,000 of lease termination
costs related to the retail stores retained and closed by the Company.
Due to continuing same-store sales declines
and operating losses of certain retail stores in the Life Uniform segment, the
Company performed a review of the recoverability of long-lived assets of these
stores in the fourth quarter of fiscal 2003, in accordance with SFAS No. 144. As
a result of that review, the Company recorded an impairment loss of $1,320,000
included in pretax loss from operations of discontinued segment in fiscal 2003
to write down the carrying values of long-lived assets, consisting of leasehold
improvements and store fixtures, to their estimated fair values for these
underperforming retail stores. In estimating future cash flows used to test the
recoverability of these long-lived assets, the Company considered the likelihood
of possible outcomes associated with alternative courses of action, including
the sale or closing of these stores. Fair value of the long-lived assets was
determined based on the present value of the projected future cash flows for
each store.
In the fourth quarter of fiscal 2001, the
Company recorded restructuring and other charges of $4,180,000 related primarily
to the closing of 27 retail stores and the liquidation of non-healthcare
inventory in the Life Uniform

F-14NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
segment. These charges consisted of inventory
writedowns of $1,198,000, an accrual for lease termination costs of $2,263,000,
and writedowns of fixed assets and other assets totaling $719,000. In fiscal
2002, a total of $1,450,000 was charged to the restructuring reserve,
representing $803,000 of lease termination costs and $647,000 to write off the
net book value of the assets in closed stores. In the fourth quarter of fiscal
2002, the Company reversed $269,000 of the restructuring charge related to two
stores that were not closed, representing $204,000 of lease termination accruals
and $65,000 to write down the net book value of assets. In fiscal 2003, a total
of $419,000 was charged to the restructuring reserve, including $412,000 for
lease termination costs paid. In fiscal 2004, the amount of the reserve utilized
for lease termination costs paid was $371,000. In addition, the Company reversed
$434,000 and $39,000 of the original restructuring charge in fiscal 2003 and
2004, respectively, due to favorable terminations of store leases. As of January
29, 2005, all lease termination costs for the closed stores have been paid and
there is no reserve remaining. Activities related to the fiscal 2001
restructuring charge are reflected in results of discontinued operations for all
periods presented in this report.
In January 2002, the Company announced plans
to dispose of its Manufacturing and Marketing business. Consequently, the
Manufacturing and Marketing segment was accounted for as a discontinued
operation and a loss on disposal recorded as of January 26, 2002 (fiscal 2001).
The sale of certain assets of this segment’s non-healthcare business to Cintas
Corporation closed on April 19, 2002, and the sale of certain assets of the
healthcare business to Medline Industries closed on May 17, 2002. An additional
pretax loss on disposal of the Manufacturing and Marketing segment of
$10,250,000 was recorded in fiscal 2002 due primarily to a reduction in the
value of inventories realized through transition and disposition of the
business.

F-15NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
8. EARNINGS PER SHARE
The following table reconciles weighted
average shares outstanding to amounts used to calculate basic and diluted
earnings per share for fiscal years 2004, 2003 and 2002:

(Dollars
      in thousands)
    
    2004
    
    2003
    
    2002Net
      income available to Common shareholders:Income
      from continuing operations
    
    $
    10,372
    
    
    $
    11,029
    
    
    $
    4,770(Loss)
      income from operations of discontinued segment, net of tax
    
    
    (993
    )
    
    
    (1,826
    )
    
    
    1,827Loss
      on disposal of discontinued segment, net of tax
    
    
    (3,018
    )
    
    
    —
    
    
    
    (6,662
    )Net
      income (loss)
    
    $
    6,361
    
    
    $
    9,203
    
    
    $
    (65
    )Weighted
      average shares:Average
      shares outstanding
    
    
    8,919
    
    
    
    8,823
    
    
    
    8,669Effect
      of dilutive securities
    
    
    206
    
    
    
    135
    
    
    
    154Average
      shares outstanding, adjusted for dilutive effects
    
    
    9,125
    
    
    
    8,958
    
    
    
    8,823Earnings
      (loss) per share - basic:Income
      from continuing operations
    
    $
    1.16
    
    
    $
    1.25
    
    
    $
    0.55(Loss)
      income from operations of discontinued segment
    
    
    (0.11
    )
    
    
    (0.21
    )
    
    
    0.21Loss
      on disposal of discontinued segment
    
    
    (0.34
    )
    
    
    —
    
    
    
    (0.77
    )Net
      income (loss)
    
    $
    0.71
    
    
    $
    1.04
    
    
    $
    (0.01
    )Earnings
      (loss) per share - diluted:Income
      from continuing operations
    
    $
    1.14
    
    
    $
    1.23
    
    
    $
    0.54(Loss)
      income from operations of discontinued segment
    
    
    (0.11
    )
    
    
    (0.20
    )
    
    
    0.21Loss
      on disposal of discontinued segment
    
    
    (0.33
    )
    
    
    —
    
    
    
    (0.76
    )Net
      income (loss)
    
    $
    0.70
    
    
    $
    1.03
    
    
    $
    (0.01
    )
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 2004, 2003 and 2002 which resulted in no indication of
impairment. The Company acquired goodwill from business combinations in fiscal
2004 and fiscal 2003 of $21,662,000 and $6,145,000, respectively.

F-16NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
During fiscal 2004, the Company acquired
customer contracts of various laundry businesses valued at $19,637,000, with
amortization periods of five to 15 years, and non-compete covenants with a value
of $2,410,000 to be amortized over three to five years. During fiscal 2003, the
Company acquired customer contracts and non-compete covenants totaling
$2,075,000 and $600,000, respectively, with amortization periods of five to 10
years. Other acquired assets consisted of the following (dollars in
thousands):

January
      29, 2005
    
    January
      31, 2004GrossCarryingAmount
    
    AccumulatedAmortization
    
    OtherAcquiredAssets,
      net
    
    GrossCarryingAmount
    
    AccumulatedAmortization
    
    OtherAcquiredAssets,
      netCustomer
      contracts
    
    $
    27,635
    
    
    $
    (5,619
    )
    
    $
    22,016
    
    
    $
    7,998
    
    
    $
    (4,876
    )
    
    $
    3,122Non-compete
      covenants
    
    
    4,010
    
    
    
    (1,166
    )
    
    
    2,844
    
    
    
    1,600
    
    
    
    (954
    )
    
    
    646Other
      acquired assets
    
    $
    31,645
    
    
    $
    (6,785
    )
    
    $
    24,860
    
    
    $
    9,598
    
    
    $
    (5,830
    )
    
    $
    3,768
Aggregate amortization expense for fiscal
years 2004, 2003 and 2002 amounted to $955,000, $586,000 and $429,000,
respectively. Other acquired assets are scheduled to be fully amortized by
fiscal year 2019 with corresponding annual amortization expense estimated for
each of the next five fiscal years as follows (dollars in thousands):
2005
    $2,6192006
    2,5662007
    2,4842008
    2,1002009
    1,819
10. LONG-TERM DEBT
The following table summarizes
information with respect to long-term debt for fiscal 2004 and 2003:

(Dollars
      in thousands)
    
    January
      29,2005
    
    January
      31,2004Note
      to banks due January 27, 2010
    
    $
    67,400
    
    
    $
    19,500Other
      long-term debt including obligations under capital leases
    
    
    830
    
    
    
    4568,230
    
    
    
    19,545Less
      - current maturities
    
    
    419
    
    
    
    3$
    67,811
    
    
    $
    19,542
As discussed in Note 5, the Company refinanced
its existing debt in the second quarter of fiscal 2002 with a $70,000,000
revolving credit facility. The term of the credit facility was three years with
two optional one-year extensions. Amounts borrowed under the credit facility in
excess of the $10,000,000 covered by the interest-rate swap, discussed in Note
12, 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 Debt’’ to “EBITDA,’’ as each is defined in the loan
agreement. As of January 29, 2005, the margin was 1.5%. In connection with the
refinancing, the Company paid debt issuance costs totaling $794,000 that are
being amortized over the term of the loan.
On March 8, 2004, the Company amended the
terms of the credit facility. Under the terms of the amendment, the maximum
amount which may be borrowed under the credit facility was increased to
$100,000,000, and the

F-17NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
due date of the credit facility was extended
until May 30, 2007 with two optional one-year extensions. In connection with
this amendment, the Company incurred fees of $157,000 in fiscal 2004 which are
being amortized over the term of the loan.
On January 27, 2005, the Company amended and
restated the terms of the credit facility. Under the terms of the amendment, a
$50,000,000 term loan and an accordion feature which allows the Company to seek
an increase in the facility of an additional $25,000,000 were added to the
facility. The due date of the credit facility was extended until January 27,
2010. As of January 29, 2005, no amounts had been drawn under the term loan and
the accordion feature had not been exercised. In connection with the January 27,
2005 amendment, the Company incurred fees of $259,000 in fiscal 2004 which are
being amortized over the term of the loan.
As of January 29, 2005, there was $67,400,000
of outstanding debt under the credit facility, of which $10,000,000 bears
interest at a fixed rate of 3.58% pursuant to the interest rate swap agreement
plus the LIBOR margin under the credit facility. The remaining debt of
$57,400,000 bore interest at 5.25%, the Prime Rate, as of January 29, 2005. On
February 2, 2005, the Company entered into LIBOR contracts for $30,000,000 and
$25,000,000 which currently bear interest at 2.87% plus the margin and 2.75%
plus the margin, respectively. Furthermore, the Company had $16,881,000
outstanding in irrevocable letters of credit as of January 29, 2005, which
reduced the amount available to borrow under the line of credit to $29,069,000.
These letters of credit are primarily issued to insurance carriers to secure the
Company’s ability to pay its self-insured workers’ compensation liabilities.
They automatically renew annually and may be amended from time to time based on
collateral requirements of the carriers. The Company pays a fee on the
outstanding letters of credit and unused funds based on the ratio of “Funded Debt’’ to “EBITDA’’ described above. As of January 29, 2005,
the fee on the outstanding letters of credit and unused funds was 1.5% and .35%,
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 $126,023,000 plus an
aggregate amount equal to 50% 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. The Company
is in compliance with these loan covenants.
The estimated fair value of the Company’s debt
at January 29, 2005 and January 31, 2004 approximates book value since the
interest rates on nearly all of the outstanding borrowings approximate current
market rates.
Future minimum payments under long-term
capital leases as of January 29, 2005 are $430,000, $351,000 and $99,000 in
fiscal years 2005, 2006 and 2007, respectively, including imputed interest
payments of $11,000, $27,000 and $12,000, respectively. All of the note to banks
outstanding as of January 29, 2005 matures in fiscal 2009.
On March 21, 2005, the Company borrowed the
entire amount of the term loan of $50,000,000. The proceeds of the term loan
were used to fund the acquisition of Royal Institutional Services, Inc. and its
affiliate (see Note 3), and reduce the amount outstanding on the revolving
credit facility. On April 5, 2005, the Company entered into a LIBOR contract for
the $50,000,000 outstanding under the term loan which bears interest at 2.87%
plus the margin. As a result of the acquisition, the margin on amounts borrowed
under the revolving credit facility and term loan increased to 2.0%. The term
loan is payable in quarterly installments beginning September 30, 2005, with the
final payment due on January 27, 2010.
11. RETIREMENT BENEFITS
The Company has a non-contributory
defined benefit pension plan covering primarily all salaried and hourly
administrative non-union personnel. The benefit formula is based on years of
service and compensation during

F-18NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
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 Company expects to contribute $623,000 to
the pension plan in fiscal 2005. The funded status of the plan, the net pension
liability at January 1, 2005 and January 1, 2004, and the net pension expense
for 2004, 2003 and 2002 were as follows:

(Dollars
      in thousands)
    
    January
      1,2005
    
    January
      1,2004Change
      in benefit obligation:Benefit
      obligation at beginning of year
    
    $
    22,792
    
    
    $
    20,701Service
      cost
    
    
    526
    
    
    
    539Interest
      cost
    
    
    1,269
    
    
    
    1,247Actuarial
      loss
    
    
    110
    
    
    
    1,815Effect
      of curtailment - Life Uniform participants (Note 7)
    
    
    (387
    )
    
    
    —Benefits
      paid
    
    
    (1,667
    )
    
    
    (1,510
    )Benefit
      obligation at end of year
    
    $
    22,643
    
    
    $
    22,792Change
      in plan assets:Fair
      value of plan assets at beginning of year
    
    $
    16,856
    
    
    $
    15,298Contributions
    
    
    510
    
    
    
    979Actual
      gain on plan assets
    
    
    949
    
    
    
    2,089Benefits
      paid
    
    
    (1,667
    )
    
    
    (1,510
    )Fair
      value of plan assets at end of year
    
    $
    16,648
    
    
    $
    16,856Net
      pension liability:Funded
      status
    
    $
    (5,995
    )
    
    $
    (5,936
    )Unrecognized
      actuarial loss
    
    
    3,298
    
    
    
    3,118Unrecognized
      prior service cost
    
    
    19
    
    
    
    57Unrecognized
      initial obligation
    
    
    —
    
    
    
    115Net
      pension liability at end of year
    
    $
    (2,678
    )
    
    $
    (2,646
    )Minimum
      pension liability:Accumulated
      benefit obligation
    
    $
    (21,387
    )
    
    $
    (21,060
    )Fair
      value of plan assets
    
    
    16,648
    
    
    
    16,856Minimum
      pension liability at end of year
    
    $
    (4,739
    )
    
    $
    (4,204
    )Amounts
      recognized in the Consolidated Balance Sheets:Accrued
      benefit liability
    
    $
    (4,739
    )
    
    $
    (4,204
    )Intangible
      asset
    
    
    19
    
    
    
    172Accumulated
      other comprehensive loss
    
    
    2,042
    
    
    
    1,386Net
      liability recognized
    
    $
    (2,678
    )
    
    $
    (2,646
    )

F-19

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries

(Dollars
      in thousands)
    
    2004
    
    2003
    
    2002Pension
      expense:Service
      cost
    
    $
    526
    
    
    $
    539
    
    
    $
    612Interest
      cost
    
    
    1,269
    
    
    
    1,247
    
    
    
    1,269Expected
      return on plan assets
    
    
    (1,406
    )
    
    
    (1,423
    )
    
    
    (1,471
    )Plan
      curtailment (Note 7)
    
    
    38
    
    
    
    —
    
    
    
    175Amortization
      of prior service cost
    
    
    20
    
    
    
    20
    
    
    
    20Recognized
      actuarial loss (gain)
    
    
    95
    
    
    
    132
    
    
    
    (33
    )Net
      pension expense
    
    $
    542
    
    
    $
    515
    
    
    $
    5722004
    
    2003
    
    2002Actuarial
      assumptions used in determining projected benefit obligation:Discount
      rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.25
    %Rate
      of compensation increase
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Actuarial
      assumptions used in determining net pension expense:Discount
      rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    6.75
    %Expected
      return on plan assets
    
    
    7.50
    %
    
    
    7.50
    %
    
    
    7.50
    %Rate
      of compensation increase
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %
The discount rate is determined annually as of
the measurement date based upon a review of interest rates associated with
long-term, high quality corporate bonds, U.S. Treasury securities and a
corporate adjusted duration-matched yield calculated by the Company’s pension
plan actuary. The assumed rate of compensation increase reflects historical
salary growth information and the Company’s general expectation of future salary
growth.
The Company’s pension fund investment policy
is to be actively invested in high quality, marketable securities consisting of
a balanced portfolio of stocks, bonds and short-term assets and utilizing a
long-term value-oriented process with a moderate risk level and an objective of
achieving a competitive investment return. The investment portfolio consists of
equity and fixed-income components with equities being not more than 55% of the
portfolio nor less than 30%. The policy includes investment quality standards
and portfolio concentration limitations to lower risk and provide for
diversification. It also enumerates prohibited transactions (such as short sales
and margin transactions) and prohibited investments (such as commodities,
derivatives and restricted stock).
The allocation of plan assets held as of
January 1, 2005 and 2004, by asset category, was as follows:

January
      1,2005
    
    January
      1,2004Cash
      and cash
      equivalents
    
    
    2%
    
    
    
    4%Equity
      securities
    
    
    56%
    
    
    
    54%Fixed-income
      securities
    
    
    42%
    
    
    
    42%100%
    
    
    
    100%

F-20NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
Due to short-term market fluctuations, the
Company’s allocation of plan assets in equity securities as of January 1, 2005
was temporarily not in compliance with the investment policy. This situation was
subsequently corrected and as of January 31, 2005, the percentage of plan assets
held in equity securities was 55%.
The Company’s long-term, annual
rate-of-return-on-assets assumption is determined based upon a combination of
review of historical returns on pension plan assets, and advice from the
Company’s plan actuary and investment manager as to general expectations of
long-term prospective returns on plan assets.
The estimated benefits expected to be paid in
future years for the defined benefit plan, reflective of expected future
employee service, are as follows (dollars in thousands):

Year
    
    ExpectedBenefit
      Payments2005
    
    $
    1,3772006
    
    
    1,9642007
    
    
    1,8142008
    
    
    2,1252009
    
    
    2,4192010-2014
    
    
    12,439
The Company’s 401(k) retirement savings plan
provides retirement benefits to eligible employees in addition to those provided
by the defined benefit pension plan. The plan permits participants to
voluntarily defer up to 12% of their compensation, subject to Internal Revenue
Code limitations. The Company contributes a percentage of the employee’s
deferrals to the account of each eligible employee. The cost to the Company for
this plan was $386,000, $555,000 and $533,000, for fiscal years 2004, 2003 and
2002, respectively. On January 1, 2005, the Company also began contributing 0.5%
of the employee’s annual earnings to the 401(k) account of each eligible
employee.
The Company maintains a voluntary deferred
compensation plan providing retirement benefits to certain employees and
directors in return for deferral of compensation payments. The amount of the
retirement benefit is determined based on the amount of compensation deferred
and is payable over 15 years following retirement. In addition, the Company
maintains a supplemental retirement benefit plan for selected employees. The
benefit amount is determined as a percentage of final average compensation, as
defined, and is generally payable over 10 years beginning at age 65. The
liability recorded in deferred compensation and pension liabilities for
retirement obligations related to the deferred compensation and supplemental
retirement plans as of January 29, 2005 and January 31, 2004 was $12,593,000 and
$13,607,000, respectively. The Company has funded these liabilities through the
purchase of company-owned life insurance policies on plan participants.
The Company generally does not provide
retirees with post-retirement benefits other than pensions.
12. DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company entered into an
interest-rate swap agreement with one of its lenders effective September 9,
2002. The swap agreement fixes the variable portion of the interest rate
(excluding a margin) at 3.58% on $10,000,000 of the outstanding debt under the
revolving line of credit until termination on May 30, 2007. The Company has
elected to apply cash flow hedge accounting for the interest-rate swap agreement
in accordance with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.’’ Accordingly, the derivative
is recorded as an asset or liability at its fair value. 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

F-21NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries

comprehensive loss in the years ended January 29, 2005, January
31, 2004 and January 25, 2003 amounted to $156,000, $5,000 and $(170,000),
respectively, net of tax. The Company has recorded a long-term liability of
$9,000 and $254,000 for the fair value of the derivative as of January 29, 2005
and January 31, 2004, respectively.
To moderate price risk due to market
fluctuations, the Company has entered into fixed-price contracts as of January
29, 2005 for approximately 19% 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.
13. PREFERRED STOCK
The Company has two classes of
authorized Preferred Stock: Class A, $1 stated value per share, authorized in
the amount of 100,000 shares; and Class B, authorized in the amount of 2,500,000
shares. As of January 29, 2005 and January 31, 2004, no shares of Class A or
Class B were outstanding.
14. SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights
Plan, under which a Right is attached to each share of the Company’s Common
Stock. The Rights may only become exercisable under certain circumstances
involving actual or potential acquisitions of 20% or more of the Company’s
Common Stock by a person or group of affiliated or associated persons. Depending
upon the circumstances, if the Rights become exercisable, the holders thereof
may be entitled to purchase units of the Company’s Class B Series 2 Junior
Participating Preferred Stock, shares of the Company’s Common Stock or shares of
common stock of the surviving or acquiring company. The Rights will remain in
existence until September 7, 2008, unless they are earlier exercised, redeemed
or exchanged.
15. COMMITMENTS AND CONTINGENCIES
Future minimum payments by year and in
the aggregate under operating leases with initial or remaining terms of one year
or more, consisted of the following at January 29, 2005:

(Dollars
      in thousands)
    
    MinimumPayments2005
    
    $
    6,7582006
    
    
    4,8272007
    
    
    3,8492008
    
    
    2,8402009
    
    
    1,677Later
      years
    
    
    2,433Total
      minimum lease
      payments
    
    $
    22,384
Rental expense of continuing operations for
all operating leases for fiscal years 2004, 2003 and 2002 was $7,219,000,
$7,036,000 and $6,965,000, respectively.
Prior to the sale of Life Uniform, 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

F-22NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
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 January 29, 2005, the
Company is secondarily obligated as a guarantor for 96 store lease agreements
and the estimated maximum potential amount of future payments the Company could
be required to make under these guarantees is $16,100,000. Although these
guarantees expire at various dates through fiscal year 2014, approximately 79
percent of the estimated maximum potential future payments expires by the end of
fiscal year 2008.
The Company has provided certain indemnities
to the buyer in connection with the sale of Life Uniform. Although
indemnification claims are generally subject to an aggregate limit of
$6,000,000, the Company believes the likelihood of making any payments for
indemnification claims is remote and has reserved accordingly.
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 exposure from these outstanding claims and deposits to
be approximately $1,700,000 as of January 29, 2005.
The Company faces significant risks and
uncertainties to its business operations resulting from certain of its
collective bargaining agreements that have expired without any extensions in
place, and from certain others that are scheduled to expire in fiscal 2005. The
Company believes the renewal of these contracts is being delayed due, in large
part, to the corporate campaign undertaken by a labor union that currently
represents many of the Company’s employees. Any work interruptions or stoppages
that result from this labor unrest could have a material unfavorable impact on
the Company’s results of operations and financial condition. Approximately
two-thirds of our employees are covered by collective bargaining agreements. Of
those employees, approximately 37% are covered by collective bargaining
agreements that have expired or will expire within the next year.
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.

F-23NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Angelica
Corporation and Subsidiaries
16. UNAUDITED QUARTERLY FINANCIAL
DATA
Unaudited quarterly results for 2004
and 2003 are shown below:

Fiscal
      2004 Quarter Ended(Dollars in thousands, except per share
      amounts)
    
    May
      1
    
    July
      31
    
    October
      30
    
    January
      29Textile
      service revenues
    
    $
    77,730
    
    
    $
    77,864
    
    
    $
    78,737
    
    
    $
    81,743Gross
      profit
    
    $
    12,167
    
    
    $
    12,510
    
    
    $
    13,121
    
    
    $
    11,138Income
      from operations
    
    $
    1,733
    
    
    $
    3,731
    
    
    $
    3,142
    
    
    $
    2,642Income
      from continuing operations
    
    $
    2,523
    
    
    $
    2,771
    
    
    $
    2,675
    
    
    $
    2,403(Loss)
      income from discontinued operations
    
    
    (2,392
    )
    
    
    (1,251
    )
    
    
    (1,069
    )
    
    
    701Net
      income
    
    $
    131
    
    
    $
    1,520
    
    
    $
    1,606
    
    
    $
    3,104Income
      from continuing operationsBasic
      earnings per share*
    
    $
    .28
    
    
    $
    .31
    
    
    $
    .30
    
    
    $
    .27Diluted
      earnings per share*
    
    $
    .27
    
    
    $
    .30
    
    
    $
    .29
    
    
    $
    .26Fiscal
      2003 Quarter Ended(Dollars in thousands, except per share
      amounts)
    
    April
      26
    
    July
      26
    
    October
      25
    
    January
      31Textile
      service revenues
    
    $
    71,383
    
    
    $
    70,963
    
    
    $
    70,576
    
    
    $
    78,577Gross
      profit
    
    $
    13,588
    
    
    $
    13,868
    
    
    $
    12,877
    
    
    $
    13,905Income
      from operations
    
    $
    3,532
    
    
    $
    3,450
    
    
    $
    3,035
    
    
    $
    3,743Income
      from continuing operations
    
    $
    2,257
    
    
    $
    3,578
    
    
    $
    2,195
    
    
    $
    2,999Income
      (loss) from discontinued operations
    
    
    83
    
    
    
    (598
    )
    
    
    (11
    )
    
    
    (1,300
    )Net
      income
    
    $
    2,340
    
    
    $
    2,980
    
    
    $
    2,184
    
    
    $
    1,699Income
      from continuing operationsBasic
      earnings per share*
    
    $
    .26
    
    
    $
    .41
    
    
    $
    .25
    
    
    $
    .34Diluted
      earnings per share*
    
    $
    .25
    
    
    $
    .40
    
    
    $
    .24
    
    
    $
    .33
*
    
    Earnings
      per share are computed independently for each of the quarters presented.
      Therefore, the sum of the quarterly earnings per share may not equal the
      total earnings per share for the year.
F-24
Schedule II

ANGELICA CORPORATION AND
SUBSIDIARIESSCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS
**For the Three Years Ended January 29,
2005**


Reserve for doubtful accounts – deducted from
receivables in the balance sheet (dollars in thousands):

Year
    
    Balance
      atBeginning ofPeriod
    
    Charged
      to Costsand Expenses
    
    Deductions(1)
    
    Balance
      atEnd of PeriodYear
      Ended January 29, 2005
    
    $
    843
    
    
    $
    2
    
    
    $
    335
    
    
    $
    510Year
      Ended January 31, 2004
    
    
    674
    
    
    
    370
    
    
    
    201
    
    
    
    843Year
      Ended January 25, 2003
    
    
    1,232
    
    
    
    545
    
    
    
    1,103
    
    
    
    674

(1)
    
    Doubtful
      accounts written off against reserve provided, net of recoveries.
F-25
SIGNATURE
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this annual report to be signed on its behalf by the undersigned
thereunto duly authorized.

ANGELICA
      CORPORATION(Registrant)By:
    /s/ Stephen M. O’HaraStephen M. O’Hara
      President and
      Chief Executive
      Officer
Date: April 14, 2005
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date
indicated.

By:
    /s/ Stephen M. O’Hara
    
    By:
    /s/ James W. ShafferStephen M. O’Hara
      President and
      Chief Executive
      Officer
      (Principal Executive
      Officer)
    
    
    James
      W. Shaffer
      Vice
      President and Chief
      Financial
      Officer
      (Principal Financial
      Officer)

By:
    /s/ Richard M. FiorilloRichard
      M. Fiorillo
      (Principal Accounting
      Officer)
Don W.
      Hubble                                      
      *
    
    
    Susan S.
      Elliott                                        *(Don W. Hubble)
      Director
    
    
    (Susan
      S. Elliott)
      Director
Ronald J.
      Kruszewski                             *
    
    
    Charles W.
      Mueller                                *(Ronald J.
      Kruszewski)
      Director
    
    
    (Charles
      W. Mueller)
      Director

Kelvin R.
      Westbrook                              *
    
    
    William A.
      Peck                                     *(Kelvin R.
Westbrook)
      Director
    
    
    (William
      A. Peck  )
      Director
*
    By
      his signature below, Stephen M. O’Hara has signed this Form 10-K on behalf
      of each person named above whose name is followed by an asterisk, pursuant
      to power of attorney filed with this Form
10-K.
/s/ Stephen M. O’HaraStephen M. O’Hara, as
      attorney-in-fact
Date: April 14, 2005
EXHIBIT INDEX

ExhibitNumber
    
    Description* Asterisk indicates exhibits filed herewith.** Incorporated by reference from the document listed.3
    .1
    
    Restated
      Articles of Incorporation of the Company, as currently in effect. Filed as
      Exhibit 3.1 to the Form 10-K for the fiscal year ended January 26, 1991.**3
    .2
    
    Current
      By-Laws of the Company, as 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
    
    Amended
      and Restated Loan Agreement with LaSalle Bank N.A. et al, effective
      January 27, 2005. Filed as Exhibit 10 to a Form 8-K filed February 2,
      2005.**10
    .2
    
    Angelica
      Corporation 2004 Equity Incentive Plan for Non-Employee Directors. Filed
      as Appendix C to the Proxy Statement for the Annual Meeting of
      Shareholders held on May 25, 2004.**10
    .3
    
    Form
      of Restricted Stock Agreement under the 1999 Performance Plan. Filed as
      Exhibit 10.3 to the Form 10-Q for fiscal quarter ended July 31, 2004.**10
    .4
    
    Form
      of Restricted Stock Agreement under the 2004 Equity Incentive Plan for
      Non-Employee Directors. Filed as Exhibit 10.4 to the Form 10-Q for fiscal
      quarter ended July 31, 2004.**10
    .5
    
    Angelica
      Corporation 1994 Performance Plan (as amended 1/31/95). Filed as Exhibit
      10.1 to the Form 10-K for fiscal year ended January 28, 1995.**10
    .6
    
    Angelica
      Corporation Stock Award Plan. Filed as Exhibit 10 to the Form 10-K for
      fiscal year ended February 1, 1992.**10
    .7
    
    Angelica
      Corporation Supplemental Plan restated as of September 1, 2000. Filed as
      Exhibit 10.6 to the Form 10-Q for fiscal quarter ended October 28, 2000.
      Amendment dated August 27, 2003 filed as Exhibit 10.9 to the Form 10-Q for
      fiscal quarter ended October 25, 2003.**10
    .8
    
    Deferred
      Compensation Option Plan for Selected Management Employees, filed as
      Exhibit 19.9 to the Form 10-K for fiscal year ended January 26, 1991.
      Amendment dated October 25, 1994 filed as Exhibit 10.27 to the Form 10-K
      for fiscal year ended January 28, 1995; and amendment dated February 25,
      1997 filed as Exhibit 10.34 to the Form 10-K for fiscal year ended January
      25, 1997.**10
    .9
    
    Deferred
      Compensation Option Plan for Directors, filed as Exhibit 19.8 to the Form
      10-K for fiscal year ended January 26, 1991. Amendment dated July 28, 1992
      filed as Exhibit 19.3 to the Form 10-K for fiscal year ended January 30,
      1993; and amendment dated November 29, 1994 filed as Exhibit 10.24 to the
      Form 10-K for fiscal year ended January 28, 1995.**10
    .10
    
    Supplemental
      and Deferred Compensation Trust. Filed as Exhibit 19.5 to the Form 10-K
      for fiscal year ended February 1, 1992.**10
    .11
    
    Restated
      Deferred Compensation Plan for Non-Employee Directors, filed as Exhibit
      10(v) to the Form 10-K for fiscal year ended January 28, 1984. Amendment
      No. 1 dated November 29, 1994 was filed as Exhibit 10.25 to the Form 10-K
      for fiscal year ended January 28, 1995.**




10
    .12
    
    Angelica
      Corporation 1994 Non-Employee Directors Stock Plan. Filed as Appendix A to
      the Proxy Statement for the Annual Meeting of Shareholders held on May 23,
      1995. First amendment dated January 27, 1998 was filed as Exhibit 10.35 to
      the Form 10-K for fiscal year ended January 31, 1998.**10
    .13
    
    Second
      Amendment to Angelica Corporation 1994 Non-Employee Directors Stock Plan,
      dated January 27, 2004. Filed as Exhibit 10.13 to the Form 10-K for fiscal
      year ended January 31, 2004.**10
    .14
    
    Amended
      specimen form of Stock Option Agreement under the Angelica Corporation
      1994 Performance Plan. Filed as Exhibit 10.7 to the Form 10-Q for fiscal
      quarter ended October 25, 2003.**10
    .15
    
    Amended
      specimen form of Stock Option Agreement under the Angelica Corporation
      1999 Performance Plan. Filed as Exhibit 10.8 to the Form 10-Q for fiscal
      quarter ended October 25, 2003.**10
    .16
    
    Form
      of Indemnification Agreement between the Company and each of its directors
      and executive officers. Filed as Exhibit 10.22 to the Form 10-K for fiscal
      year ended January 30, 1999.**10
    .17
    
    Retirement
      Benefit Agreement between the Company and Don W. Hubble dated January 1,
      1998. Filed as Exhibit 10.31 to the Form 10-K for fiscal year ended
      January 31, 1998.**10
    .18
    
    Non-Qualified
      Stock Option Agreement between the Company and Don W. Hubble dated January
      2, 1998. Filed as Exhibit 10.32 to the Form 10-K for fiscal year ended
      January 31, 1998.**10
    .19
    
    First
      Amendment to Non-Qualified Stock Option Agreements between the Company and
      Don W. Hubble, dated February 5, 2003. Filed as Exhibit 10.22 to the Form
      10-K for fiscal year ended January 25, 2003.**10
    .20
    
    Retirement
      Transition Agreement between the Company and Don W. Hubble, dated January
      28, 2004. Filed as Exhibit 10.23 to the Form 10-K for fiscal year ended
      January 31, 2004.**10
    .21
    
    Employment
      Agreement between the Company and Steven L. Frey, dated September 9, 2004.
      Filed as Exhibit 99.2 to a Form 8-K filed September 9, 2004.**10
    .22
    
    Amended
      and Restated Angelica Corporation 1999 Performance Plan. Filed as Appendix
      B to the Proxy Statement for the Annual Meeting of Shareholders held May
      25, 2004.**10
    .23
    
    Employment
      Agreement between the Company and James W. Shaffer, dated September 9,
      2004. Filed as Exhibit 99.3 to a Form 8-K filed September 9, 2004.**10
    .24
    
    Employment
      Agreement between the Company and Paul R. Anderegg, dated September 9,
      2004. Filed as Exhibit 99.1 to a Form 8-K filed September 9, 2004.**10
    .25
    
    Employment
      Agreement between the Company and Richard M. Fiorillo, dated September 30,
      2004. Filed as Exhibit 10.1 to a Form 8-K filed October 20, 2004.**10
    .26
    
    Employment
      Agreement between the Company and Stephen M. O’Hara, dated September 15,
      2003. Filed as Exhibit 10.1 to the Form 10-Q for fiscal quarter ended
      October 25, 2003.**10
    .27
    
    Restricted
      Stock Agreement between the Company and Stephen M. O’Hara, dated September
      15, 2003. Filed as Exhibit 10.2 to the Form 10-Q for fiscal quarter ended
      October 25, 2003.**10
    .28
    
    Non-Qualified
      Stock Option Agreement between the Company and Stephen M. O’Hara, dated
      September 15, 2003 (100,000 shares at $19.66 exercise price). Filed as
      Exhibit 10.3 to the Form 10-Q for fiscal quarter ended October 25, 2003.**




10
    .29
    
    Non-Qualified
      Stock Option Agreement between the Company and Stephen M. O’Hara, dated
      September 15, 2003 (50,000 shares at $25.00 exercise price). Filed as
      Exhibit 10.4 to the Form 10-Q for fiscal quarter ended October 25, 2003.**10
    .30
    
    Non-Qualified
      Stock Option Agreement between the Company and Stephen M. O’Hara, dated
      September 15, 2003 (50,000 shares at $30.00 exercise price). Filed as
      Exhibit 10.5 to the Form 10-Q for fiscal quarter ended October 25, 2003.**10
    .31
    
    Amended
      and Restated Non-Qualified Stock Option Agreement between the Company and
      Stephen M. O’Hara dated January 27, 2005 (50,000 shares at $30.00 exercise
      price).*10
    .32
    
    Angelica
      Corporation Mirror 401(k) and Deferred Compensation Plan, dated November
      1, 2003. Filed as Exhibit 10.36 to the Form 10-K for fiscal year ended
      January 31, 2004.**10
    .33
    
    Trust
      under Angelica Corporation Mirror 401(k) and Deferred Compensation Plan,
      dated November 1, 2003. Filed as Exhibit 10.37 to the Form 10-K for fiscal
      year ended January 31, 2004.**21
    
    
    Subsidiaries
      of the Company.*23
    
    
    Consent
      of Independent Registered Public Accounting Firm.*24
    .1
    
    Power
      of Attorney submitted by Susan S. Elliott, Don W. Hubble, Ronald J.
      Kruszewski, Charles W. Mueller, William A. Peck and Kelvin R. Westbrook.*24
    .2
    
    Certified
      copy of Board Resolution authorizing Form 10-K filing utilizing power of
      attorney.*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.*
The Company will furnish to any record or
beneficial shareholder requesting a copy of this Annual Report on Form 10-K a
copy of any exhibit indicated in the above list as filed with this Annual Report
on Form 10-K upon payment to it of its reasonable expenses in furnishing such
exhibit.