UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 _______________________________
  Form
10-K
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 For the
Fiscal Year Ended January 26, 2008
 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 exchange
                on
      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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  No X
  Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes  No X
  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 a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.   Large
accelerated filerAccelerated
filerX   
Non-accelerated
filer
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  No X
  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.
  $209,206,094
based on the average of the high/low transaction price of the Common Stock on
July 28, 2007.
  Indicate
the number of shares outstanding of each of the registrant’s classes of Common
Stock, as of March 28, 2008.
  Common
Stock, $1.00 par value, 9,528,926 shares outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
 None
  
  
  TABLE
OF CONTENTS
 
 PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              9Item
      1B.
              Unresolved
      Staff Comments
              18Item
      2.
              Properties
              18Item
      3.
              Legal
      Proceedings
              19Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              19PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases ofEquity
      Securities
              19Item
      6.
              Selected
      Financial Data
              20Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              21Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              33Item
      8.
              Financial
      Statements and Supplementary Data
              33Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              34Item
      9A.
              Controls
      and Procedures
              34Item
      9B.
              Other
      Information
              36PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              36Item
      11.
              Executive
      Compensation
              42Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              76Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              79Item
      14.
              Principal
      Accountant Fees and Services
              79PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              80
  
  
  PART I
  Item 1.
Business
  Overview
  Angelica
(the Company) 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
4,200 healthcare providers located in 25 states. To a more limited extent, we
also provide linen management services to customers in the hospitality business.
For the 2007 fiscal year ended January 26, 2008, we processed over 798 million
pounds of linen for our customers.
  Our linen
management services are designed to benefit healthcare providers by enabling
them to:
 
 •
              Improve
      patient satisfaction by providing high-quality linens and linen
      service;•
              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 for
      revenue generating activities that would otherwise be dedicated to
      on-premise laundry facilities; and•
              Focus
      on their core competencies of providing healthcare services to their
      patients.
 
 As of
January 26, 2008, our more than 5,900 service associates delivered our
value-added services to our customers through our network of 28 laundry service
centers, three depots, and fleet of approximately 380 delivery vehicles. The
geographic locations of our service centers give us access to 33 of the 50
largest metropolitan markets in the United States, which approximates 60% of the
country’s healthcare facilities. We seek to concentrate our service centers 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 2007 fiscal year,
we reported revenues of $430.0 million and net income of $3.9 million. As of
January 26, 2008, we had total assets of $320.4 million. See Item 8, “Financial
Statements and Supplementary Data,” for information on revenues, net income and
total assets for our last three fiscal years.
  Our
company is a Missouri corporation founded in 1878 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, we made a
strategic decision to focus on healthcare linen services and retail and sold our
Manufacturing business in the spring of that year. 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 eleven acquisitions and by strategically divesting
certain non-healthcare accounts. For the 2007 fiscal year, approximately 98% of
our revenues related to customers in the healthcare industry.
  In our
fiscal year 2005 annual report we introduced our initiative to increase customer
satisfaction through delightful service to every customer every day. During
fiscal years 2006 and 2007 we continued rolling out this plan by focusing on
three main areas: improving our fill rate by shipping 100% of customer orders
consistently, providing higher quality, defect free linens for increased patient
satisfaction, and developing innovative new products to improve our customers’
and their patients’ experience. In fiscal 2007 our fill rate was 98% of orders
and over 99% of pieces ordered. In fiscal 2005, we engaged a consulting firm to
review operational activities at several of our service centers. As a result of
their review, certain areas of improvement were identified. The best practices
identified and implemented during the initial phase of this operations process
improvement (OPI) project were applied to our remaining service centers in
fiscal 2006. In fiscal 2007, we continued to roll out best practices and invest
in our facilities, including beginning automation of a data collection system
developed as part of the OPI project.
   1
  In
September 2007, our Board of Directors authorized Morgan Joseph & Co., Inc.
as our exclusive financial advisor to evaluate strategic alternatives for the
Company, including a possible sale. The Board reached this decision after taking
into consideration: 1) the challenges we face in executing our strategy as a
public company; 2) the added expense associated with being a relatively small
public company; and 3) the desire of certain significant shareholders that the
Company explore a sale.
 Market
Opportunity
  The U.S.
market for outsourced healthcare linen management services is large and growing.
Based on our knowledge of providing linen management services to the healthcare
industry, we estimate that the U.S. healthcare linen services market represents
approximately a $5.8 billion revenue opportunity annually. Of this $5.8 billion,
we estimate $2.2 billion is attributable to acute-care hospitals, $2.6 billion
to surgical and physician clinics and $1.0 billion to long-term care facilities,
computed as follows:
     Number
                of
      Beds
              X
              
              Average
                Annual
                Revenue/Bed(4)
              =
              
              Estimated
                Market
      Size
                atJanuary
                2008
 Acute-Care Hospitals(1)
              0.90
      million
              
              
              $
              2,450
              
              
              $2.2
      billionSurgical and Physicians
      Clinics(2)
              0.66
      million
              
              
              $
              4,000
              
              
              $2.6
      billionLong-term
      Care Facilities(3)
              1.70
      million
              
              
              $
              560
              
              
              $1.0
      billionTotal
              —
              
              
              
              —
              
              
              $5.8
      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:
      SMG database.(4)
              
              Average
      annual revenue per bed (per facility for clinics) 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:
  Demographic trends—The U.S.
Census forecasts that the U.S. population over the age of 65 will almost 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. In addition, according to government estimates, the number
of people needing long-term care is expected to increase 30% in the next 15
years.
  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. According to Modern Healthcare
magazine, in 2007 there were 167 new acute care hospital projects completed, 187
broke ground and 258 were in the design phase. Furthermore, according to the
AHA, there was a 67% increase in the number of U.S. ambulatory surgery centers
providing outpatient surgical services from 1997 to 2004.
  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  2
  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 115,000 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 require linen
services in the course of their business. For the same reasons hospitals choose
to outsource or use linen versus disposable products, we believe that market
penetration of these sectors
  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.
  Angelica’s delightful service
initiative—One
constraint on expanding outsourcing is the cultural fear of not controlling a
core need and its quality. We believe that as our reputation grows from our
delightful service initiative, with our product quality and service surpassing
most in-house laundries, more health professionals will be open to outsourcing
their linen needs.
  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:
  Commitment to delightful customer
service—In
fiscal 2007, we continued implementing our initiative to provide delightful
service to every customer every day through innovation by focusing on three main
areas. First, we are committed to achieving a 100% order fill rate, meaning that
we target shipping our customers every item they order 100% of the time. In
fiscal 2007 we shipped 98% of all orders 100% complete and shipped over 99% of
pieces ordered. Second, to improve patient satisfaction we have transitioned to
higher quality linen products such as larger and thicker bath towels, higher
thread count bed sheets, and upgraded washcloths and pillowcases. These higher
quality products have been complemented by a zero defect policy in linen
processing. Finally, we are providing innovative new products that benefit our
customers and their patients. Specifically, we have introduced a new product
exclusive to Angelica, Angel SliderTM, a launderable, low friction repositioning
product used to reposition patients in bed, requiring much less strength and
effort from medical personnel than traditional methods; Angel KitsTM, a
launderable, five-piece set of micro-fiber mops and cloths designed to
standardize the cleaning methodology for every room, reducing the chance of
spreading infectious matter among rooms while also streamlining housekeeping
management; as well as new patient gowns designed to increase patient comfort.
We have already begun to see the benefits of these initiatives, as our customer
satisfaction scores for 2007 and 2006 increased significantly from
2005.
  Strong market clusters—We
believe our cluster approach of having a number of service centers in close
proximity enables us to provide superior service to our customers at a lower
cost. Operating service centers near one another enables us to provide more
reliable customer service, better handle customer requests and mitigate the
risks associated with temporary capacity reductions at any given service center.
Furthermore, these clusters allow us to lower costs by optimizing delivery
routes and more effectively utilizing our sales force across service centers.
Our cluster approach has enabled us to establish a strong market position in
several markets in which we operate and provides us the opportunity to grow
business within our market clusters while capturing economies of
scale.
   3
   Significant scale creates
opportunities for cost reduction—We believe our operating scale and
infrastructure provides us with opportunities to realize significant financial
benefits. In fiscal 2007, we purchased over $87.0 million of linens and invested
over $16.0 million in capital improvements. In fiscal 2007 we direct sourced 11%
of our linen purchases, an increase from approximately 3% direct sourced in
fiscal 2006. In the future, as additional price reductions become available
through direct sourcing, we may increase the percentage of linens purchased
directly in order to maximize the benefits of our direct sourcing program. The
OPI project started in fiscal 2005 was partially designed to optimize capital
expenditures by standardizing equipment and centralizing capital equipment
procurement to take advantage of volume purchase discounts. In addition, our 28
service centers allow us to test new technologies and operating techniques on a
limited basis and implement best practices throughout our service center
network. Also during fiscal 2006, we signed an exclusive agreement with one
chemical provider to supply all of our chemical requirements and assist us with
ongoing research and development, both of which have resulted in measurable
expense savings and more consistent high quality performance.
  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 our total
healthcare linen services revenue and our estimates of our competitors’ national
healthcare linen services revenue, we believe that we are more than twice the
size of our nearest competitor providing healthcare linen services.
  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, consisting of
seven Market Vice Presidents and seven Market Sales Directors
  Stable customer base—Our
large customer base, high customer retention rates and long-term contracts
provide us with a stable revenue base. As of January 26, 2008, we served
approximately 800 hospitals, 500 long-term care facilities and 2,900 surgical
and physician clinics in 25 states. In fiscal 2007, no individual customer
represented more than 10% of our total revenues. Our annual customer retention
rate is approximately 95% of total revenues and our typical contract length is
between three and five years.
  Proven management team—We
have a streamlined organization focused on providing outstanding healthcare
linen management services. Our management team, extending to the market vice
president level, is comprised of experienced healthcare services members and is
complemented by additional, seasoned professionals that bring successful
experiences from a cross-section of related industries. Since 2003 they have led
the Company in divesting non-core assets, completing eleven acquisitions that
strengthenedour position
in our core business, and implementing a strategy of becoming a
customer-focused, high quality service provider.
  Business
Strategy
  We
believe that our commitment to high quality standards, passion and creativity
will translate into delightful service for our customers and make us the first
choice for healthcare linen management services in the markets we serve. Our
vision of delightful service through innovation was launched in November 2005
when we implemented our change from a plant-centric operation company to a
customer-focused high quality service provider. We are executing the following
key strategies in support of our vision to provide delightful customer service
to every customer every day.
 
 Delight the customer—We
believe that superior service will lead to stronger customer retention,
increased product sales to existing customers and increased penetration of
existing markets, which is an effective and cost-
   4
  efficient
means of growth as we are able to capitalize on our reputation, brand awareness
and existing infrastructure. Specifically, the following initiatives are being
implemented:
 
 •
              Target
      100% fill rate and on-time deliveries on all
  orders;•
              Install
      higher quality products for patient satisfaction;•
              Deliver
      laundered linens with zero defects; and•
              Develop
      and offer innovative new products to address the needs of our customers
      and their patients.
  By
raising customer satisfaction levels through delightful service we expect to
realize fair pricing and increased opportunities to sell all of our products to
all of our customers.
  People,
family, talent, teams—We recognize that our employees are the key to
delivering delightful service to our customers every day, and are committed to
the creation of a team environment of diverse, talented people working together
toward this goal. We believe the following initiatives will support the
execution of this strategy:
 
 •
              Consistent
      application of rigorous selection criteria to our hiring process which
      will identify high-performing employees with well developed service and
      team orientations;•
              Development
      of employee skills through our company-wide performance program for
      non-bargaining unit employees that guides each of these individual’s
      growth plans, and provides for an on-going succession plan for every
      leading position in the Company;•
              Recognize
      and reward our employees through incentive programs that are aligned with
      our key strategies; and•
              Support
      a safe and diverse work environment through a continual process of
      training, feedback and measurement, and implementation of best
      practices.
  Strengthen base by leveraging
scale—We believe we are well positioned to use our scale to improve our
operating performance. We plan to increase our gross margin through a more
efficient operating model and a number of cost savings initiatives
including:
 
 •
              Reducing
      linen costs through centralized purchasing and the gradual expansion of a
      direct sourcing program;•
              Reducing
      energy cost volatility by negotiating energy matrices into customer
      contracts such that pricing is variable with energy costs, investing in
      energy-saving equipment and continuing to hedge our anticipated natural
      gas requirements in amounts that correspond with existing customer
      contracts when customer contracts do not allow pricing to vary with
      energy;•
              Implementing
      best practices and new technology solutions to improve efficiency while
      reducing labor costs;•
              Reducing
      distribution costs by implementing new software and optimizing routes and
      targeting growth to improve route density; and•
              Optimizing
      capital expenditures by standardizing equipment and centralizing capital
      equipment procurement.
  Pursue complementary and accretive
expansion opportunities—To increase our customer base, expand our
presence in existing markets and enter new markets, we may continue to pursue
strategic acquisitions consistent with Board-approved debt guidelines. The size
of these may vary from small tuck-in pieces of business to multi-site
competitors. We are especially interested in acquiring hospital on-premise
laundries and cooperatives, as well as small tuck-ins. Since November 2003, we
have completed eleven acquisitions for an aggregate consideration of $129.0
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
   5
  earnings
before interest, taxes, depreciation and amortization (EBITDA), impact on
earnings per share, return on net assets and internal rate of return. The
benefits of the completed acquisitions include the strengthening and expansion
of our positions in various markets; access into long-term care facilities and
related best practices; and capacity rationalization of our existing facilities.
We also strive to facilitate hospital conversions from on-premise to outsourced
linen management services by educating hospital administrators about the true
economic and opportunity costs associated with on-premise laundries, and focus
our efforts on acquiring new business from clinics and long-term care facilities
associated or affiliated with our existing hospital customers. Since beginning
the strategic alternative review process we have deferred pursuing most
acquisitions.
  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 our customers’ expenses associated with
these various services. In addition, we offer many of these services utilizing
textiles owned by the customer (customer-owned goods), usually as an
introductory agreement, since we prefer customers use our linens which permits
the highest levels of service and quality.
  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
      management of all aspects of linen distribution ranging from the linen
      room to utilization reports that optimize the ordering, receiving and use
      of linens; and•
              Customized
      surgical packs for use in operating suites, providing a cost-effective
      alternative to disposable surgical
packs.
  Additionally,
we are committed to continually updating and expanding our product line with the
goal of providing innovative new products that delight our customers. Two
examples of this type of product are the Angel SliderTM, a launderable, low
friction repositioning product used to reposition patients in bed, requiring
much less strength and effort from medical personnel than traditional methods,
and Angel KitsTM, a launderable, five-piece set of micro-fiber mops and cloths
designed to standardize the cleaning methodology for every room, reducing the
chance of spreading infectious matter among rooms while also streamlining
housekeeping management. We also introduced a newly designed patient gown that
is more comfortable for the patient while being extremely functional for the
medical providers. We have also begun to provide higher quality linens, such as
bath towels that are both larger and thicker than standard bath towels, higher
thread count sheets and upgraded washcloths and pillowcases.
  Other
services we provide include 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 fewer linen
rental services for bulk items and more services for smaller items, such as lab
coats and scrubs. As a result, hospitals and long-term care
   6
  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
2007 fiscal year ended January 26, 2008, no individual customer represented more
than 10% of our total revenues. Our top ten customers represented less than 23%
of total revenues for fiscal year 2007.
  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 Sodexo Inc. (a subsidiary of
Sodexo Alliance SA); approximately a dozen regional midsize firms; and more than
200 small, independent, privately-owned competitors. In addition, many hospitals
and long-term care facilities have captive on-premise laundries and hospital
cooperative laundries. We also compete indirectly with large facility service
providers, such as ARAMARK Corporation, that provide linen services in
conjunction with other services. Based on our total healthcare linen services
revenue and our estimates of our competitors’ national healthcare linen services
revenue, we believe that we are more than twice the size of our nearest
competitor in healthcare linen services.
  Within
each of our acute-care hospital markets, we typically compete with one or two
larger regional or national competitors and one to three 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, Cintas Corporation, G&K Services, Inc. and UniFirst
Corporation, sometimes compete in the clinic market. In long-term care, we
compete also with service staff providers, such as HCSG, Inc., which facilitate
on-premise laundries.
  Operations
  We
typically provide our services to customers located within a 150-mile radius of
our service centers. As of January 26, 2008, we operated 28 laundry service
centers, all of which are in or near major metropolitan areas, serving customers
in 25 states. Our service centers are concentrated in clusters providing us
access to 33 of the 50 largest metropolitan markets in the United States which
approximates 60% of the country’s healthcare facilities. We currently define
washroom capacity for our service centers as 130 hours per week (based on twenty
hours per day, six days per week and ten hours per day, one day per week). Under
this definition, we are currently operating at approximately 60% of washroom
capacity.
  Our
laundry process involves several steps to ensure effective cleaning. Soiled
linen is delivered to the service center by truck, weighed, and sorted into
appropriately sized loads. The majority of our service centers are equipped with
one or more high-capacity tunnel washers that connect a separate soil sorting
area with the clean laundry finishing operations. Washed linen is automatically
delivered to computer-regulated drying equipment designed to optimize drying
times for efficient utility consumption. Our employees complete the laundry
process using automated ironing and folding equipment prior to arranging the
clean linen on carts by customer order. Our route service representatives
typically pick up and deliver linen daily at hospitals and two to three times
per week at smaller facilities.
  Sales
and Marketing
  We
believe our sales force is the largest in the healthcare linen management
services industry, consisting of seven Market Vice Presidents and seven Market
Sales Directors overseeing 24 Business Development Managers. We also have seven
Market Service Directors and 62 local Customer Relationship Managers who provide
customer service and support, developing new means to better serve a customer,
and enhance revenue opportunities by providing our existing customers with
information about additional services and products we offer.
  7
   Our sales
force compensation typically consists of a fixed base salary, sales commissions
and an annual incentive plan, which includes a variable component based on
achievement of targets.
  Customer
Contracts and Relationships
  We
typically serve our customers pursuant to written service contracts for an
initial term of three or five 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 renew
all contracts for a five-year period. The majority of our contracts have pricing
escalators tied to the Consumer Price Index (CPI) or some derivative of CPI.
Since 2007 the Company has pursued the negotiation of energy matrices into its
contracts such that customer pricing is adjusted up or down based on natural gas
and diesel fuel prices. Our standard contract also has a clause that allows us
to increase prices, in addition to the pricing escalators, if we incur
unforeseen increases in certain costs of performing our services. These
unforeseen increases include increases in the cost of textiles, utilities,
supplies, labor, transportation, waste disposal or other costs not within our
control.
  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. Nevertheless, in
fiscal 2005 and fiscal 2006 we identified ways to improve our service levels,
which we implemented across our service centers. This resulted in a significant
increase in our annual customer satisfaction ratings, as well as in the number
of customers willing to recommend us. 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 workplace
safety and the environment.Maintaining
and improving workplace safety is an important continuing Company initiative.
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 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 26, 2008, we employed approximately 5,900 persons. Approximately 73% of
those employees are represented by unions. 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. We consider our relationship with our employees to be good at both union
and non-union facilities. Production employees at 25 of our 28 service centers
are unionized, as are some route service representatives who provide
transportation and distribution services to our service centers. Collective
bargaining agreements covering production workers at ten service centers and
route service representatives associated with four service centers will expire
during the next fiscal year. We will participate in negotiations in good faith
with the intention of reaching timely agreements in all cases.
  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
 8
 
  waivers
from, provisions of the Code of Conduct and Ethics, we will satisfy the
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.  The
Company timely submitted its annual certification by the Chief Executive Officer
to the New York Stock Exchange (NYSE) within 30 days of its Annual Meeting of
Shareholders in 2007. The certification stated the Company’s compliance with the
NYSE’s
  Item 1A. Risk
Factors
  Some
matters discussed in this Form 10-K or in other documents 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 us, or on our behalf.
Such factors are described in accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, which encourages companies to disclose
such factors.
  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
Sodexo Inc. (a subsidiary of Sodexo 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 Sodexo and Crothall
Services Group have significantly more financial resources, larger professional
staffs, greater brand recognition and broader service offerings than us. In
addition, there are other large providers of outsourced services with
significant resources who do not currently serve the healthcare linen services
market but may enter this market in the future. These competitors may devote
substantial resources to the development and marketing (including discounting)
of products and services that compete with those offered by us. Significant
price competition may seriously harm our revenues, operating margins and market
share.
  Our
continued success depends on our ability to attract new customers, retain our
current customers and renew our existing customer contracts. Our ability to do
so generally depends on a variety of factors, including quality, service,
reliability and price, as well as our ability to market our services effectively
and differentiate ourselves from our competitors. Over the past three years, we
have averaged a 95% retention rate based on total revenues. Approximately 30% of
our customer contracts come up for renewal each year. We may not be able to
renew existing customer contracts at the same or more favorable rates or terms
and our current customers may terminate or not renew contracts with us. The
failure to renew a significant number of our existing contracts may harm our
business and results of operations. In addition, many companies in the
healthcare industry are seeking to consolidate their outsourced services with
one or two vendors, instead of using multiple vendors. Since we 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.
  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 4.1 days in 2005. As these trends
continue, demand for our linen
 
 9
 
 
 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.
  Ineffective
management could cause our business, results of operations and financial
condition to suffer.
  Our
continued success in our business is based upon many factors, including but not
limited to, the expansion of our customer base, the enhancement of the services
we provide to existing customers, aggressive sales and marketing efforts,
effective cost containment and capital investment measures, and a strong
strategic vision. During fiscal 2006 and 2007, we continued the implementation
of an operational reorganization designed to improve customer service and
satisfaction through innovation. Proper execution will require effective
management both in headquarters and in field operations. Our inability to
effectively manage our existing business and our future growth may harm our
business, results of operations, and financial condition. Our management teams
at the corporate and operating levels are small and any unforeseen crises or
loss of one or more of our officers or key employees may place a significant
strain on our remaining management team and our employees, operations, operating
and financial systems, and other resources.
 
 A
small number of existing shareholders have considerable control over our
company, which may lead to conflicts with other shareholders over corporate
governance.
    We
are dependent on the proper functioning and availability of our information
systems.
  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 completing 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.
  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 98% of our revenues from continuing operations in fiscal 2007. 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,
   10
  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.
  We
face considerable pricing pressures from our customers, particularly from large
national, regional or local healthcare organizations and group purchasing
organizations. If we are not able to maintain or improve our operating margins
due to these pressures or otherwise, our results of operations may be
harmed.
  We face
significant pricing pressures arising from our customers’ desire to decrease
their operating costs, from consolidation in the healthcare industry, and from
other competitors operating in our targeted markets. Pricing pressure is
particularly pronounced when we compete for new customers and when we negotiate
for an extension of the term of an agreement with an existing customer. Some of
our customers are part of large national, regional or local healthcare
organizations that require their affiliates to purchase services from a limited
number of preferred vendors or through a group purchasing organization. These
trends have increased pricing pressures on our contracts with these customers.
Pricing pressures may also be more pronounced during periods of economic
uncertainty. Accordingly, improvement, or even maintenance of our operating
margins, depends on our ability to continually improve our capacity utilization
and reduce our operating costs, and provide delightful customer service to
reduce price sensitivity. If we are not able to achieve sufficient improvements
in efficiency to adequately compensate for pressures on our pricing or reduce
price sensitivity via delightful service, our results of operations will be
harmed.
  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; however, some
of our contracts only permit us to raise prices once a year, so inflation may
rise throughout the course of a year and we may not be able to raise our prices
until the end of that year. The terms of these contracts require us to guarantee
the price of the services we provide and assume the risk that our costs to
perform services and provide products will be greater than anticipated. Any cost
increase to us in performing these contracts may expose us to diminished
operating margins or losses. These costs may be affected
by a variety of factors, some of which may be beyond our control.
  Our
contracts may not contain clauses sufficient to cover cost increases. If we are
not able to recoup some or all of the cost increases we may experience, our
results of operations may suffer.
  Our
operations require significant annual purchases of linens and utilize a large
amount of natural gas, electricity, 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 surcharge clauses in our contracts may not permit us
to increase our prices to keep pace with energy or other cost increases we may
experience. While we have increased our direct sourcing of linens to take
advantage of cost savings and instituted operational hedging models that seek to
capture pricing opportunities in the energy markets and lock in natural gas
prices as customer contracts are signed, we may not be fully protected against
substantial changes in the price of cotton or 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.
   11
  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 35% of our revenues in fiscal 2007. Any economic
weakness in this or our other key markets may harm our business.
  In
addition, workers’ compensation costs in California are significantly higher
than they are in most other states and, as a result, account for a
disproportionately large amount of our workers’ compensation expense.
Legislation has been passed in California that has provided some relief to
employers in the state. However, the relief with respect to workers’
compensation claims has resulted in an increase in the number of workers’
compensation-related civil suits that have been brought against employers. If
current legislation is repealed or modified in the future, it may significantly
increase our costs of doing business and harm our results of operations. The
ongoing impact of legislation in California and our other large markets could
adversely affect our cost of doing business.
  Severe
weather conditions or other natural disasters in our primary markets, such as
earthquakes in California, hurricanes in Florida or Texas or drought conditions
such as recently experienced in the Southeast portion of the United States, may
cause significant disruptions to our operations, and result in increased costs
and liabilities and decreased revenues, which may harm our business, operating
results, financial condition and liquidity. We have, in the past, taken
advantage of our clustering strategy to allow our customers to be serviced by
our other facilities in the area in the event of service disruptions at a
particular service center, but we may not be able to do so in the future if a
major disaster struck a number of our facilities within a cluster.
  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 in fiscal 2007, 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. 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.
  Any
increase in the cost of linens and textiles which is not recovered may affect
our operating results.
  During
fiscal 2007 we purchased over $87.0 million of linens and other textiles that we
rent to customers. Although the price of cotton has
increased significantly over the past several years, we have been able to offset
these increases through direct sourcing and price negotiations. While we have
contracted pricing on most of our linen items through fiscal 2008, significant
increases in the price of cotton for non-contracted purchases or purchases
beyond fiscal 2008 may result in higher linen costs and, consequently, have an
adverse effect on our earnings if we are not successful in offsetting such
increases, either through cost reduction efforts or adjustment in prices for our
services.
  We
may face risks resulting from purchasing linens and other textiles from
international sources.
  We
purchase most of the linens and other textiles rented to customers from foreign
sources, primarily Pakistan and Cambodia, either directly from the manufacturer
or through distributors. Sourcing products from foreign
   12
  manufacturers
presents several risks, including volatility in gross domestic production;
credit risk; civil disturbances; unpredictable political climate; economic and
governmental instability; acts of war; changes in regulatory requirements;
nationalization and expropriation of private assets; significant fluctuations in
interest rates, currency exchange rates and inflation; imposition of additional
taxes or other payments by foreign governments or agencies; increases in fuel
and other shipping costs; changes in export or import controls and exchange
controls and other adverse actions or restrictions imposed by foreign
governments. Any of these events may make it significantly more costly or more
difficult to obtain the linens we require and may harm our financial condition
and results of operations.
  A
decrease in the price of natural gas below the fixed prices we have contracted
for may negatively affect our operating results.
  We have
entered into natural gas futures contracts to fix the price for a portion of our
future purchases of natural gas and reduce our exposure to volatility in the
cost of natural gas consumed by our service centers due to fluctuations in the
price on the New York Mercantile Exchange (NYMEX). Long term reductions in
natural gas prices meaningfully below our contracted price levels may negatively
impact our operating results and/or our competitive position.
  Our
operating costs may increase or work stoppages may occur if we are unable to
negotiate collective bargaining agreements with the unions representing our
employees.
  Approximately
73% of our employees, principally at our service centers, are represented by
unions. Collective bargaining agreements with unions representing our employees
are typically three years in duration and have staggered expiration dates over
consecutive years. Any work interruptions or stoppages may significantly harm
our business, results of operations, and financial condition and may have a
material impact on our financial results. In addition, a small number of
customers or potential customers have chosen not to do business with us as a
result of their concerns related to potential or perceived problems that they
attribute to having a predominantly unionized workforce.
  In order
to minimize the potential effect of coordinated or concerted work stoppages,
UNITE HERE agreements, representing approximately 59% of our workforce,
expressly prohibit employees from engaging in sympathy strikes and have
coordinated expiration dates designed to restrict the number of contracts that
can expire during any given month and within the same quarter.
  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 casualty and health 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.
   13
  Our
capital requirements depend on many factors, including:
 
 •
              the
      age and condition of existing facilities and
    equipment;•
              the
      timing of 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 and borrowing capacity under our
bank credit facility and life insurance policies will be sufficient to fund our
working capital and capital expenditure requirements for the foreseeable future;
however, these funds may not be sufficient to fund all of our activities in the
future. As a result, we may need to raise additional funds, and such funds may
not be available on favorable terms, or at all. If we cannot raise funds on
acceptable terms, we may not be able to execute our business plan, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated customer requirements, which may harm our business, results of
operations, and financial condition.
  An
increase in interest rates may negatively impact our operating
results.
  As of
January 26, 2008, the $90.0 million outstanding under our credit facility was
subject to a variable interest rate. Of the $30.3 million in life insurance
policy loans outstanding as of January 26, 2008, a total of $24.8 million of
these loans bore interest at variable rates. An increase in interest rates may
negatively impact our financial condition and results of
operations.
  If
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 26, 2008, our goodwill and other intangible assets, net of accumulated
amortization, was approximately $83.2 million. We acquired the majority of our
goodwill and other intangible assets in our acquisitions. At least once every
year and more often as we deem necessary, we review whether these assets have
been impaired. If these assets become impaired, we will be required to write
down their carrying value to the current fair value of the assets and to incur
charges against our income equal to the amount of the writedown. These charges,
while cash neutral, will decrease our reported net income in the period in which
we take them and may harm our financial condition and results of
operations.
  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 compliance with
applicable regulatory requirements in all material respects, although future
expenditures may be necessary to comply with changes in these laws and to
otherwise improve or enhance our policies and procedures pursuant to those
applicable regulatory requirements.
  We
may be exposed to employment-related claims and costs that could harm our
business, financial condition, or results of operations.
  Our
business is labor intensive. As a result, we are subject to a large number of
federal and state regulations relating to employment. This creates a risk of
potential claims of discrimination and harassment, alleged
 
 14
 
  violations
of health and safety and wage and hour laws, criminal activity and other claims.
For instance, employees working in certain areas of our facilities may be
exposed to blood borne or other pathogens. Although we have implemented training
programs for employees working in the soiled linen sorting areas of our
facilities and have provided our employees with protective clothing and
hepatitis B vaccinations, there may 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. The geographic dispersion and number of facilities we manage
increases the complexity of ensuring that all 5,900 employees comply with our
policies and procedures.
  From time
to time, we are subject to audit by various governmental authorities to
determine our compliance with a variety of occupational health and safety
regulations. We may, from time to time, incur fines and other losses or negative
publicity with respect to any such violation. In addition, some or all of these
claims may also give rise to civil litigation, which could be costly,
time-consuming for our management team, and could harm our business. Our
insurance coverage may not be sufficient in amount or scope to cover all the
types of liabilities that we may incur, which may result in significant costs to
us. If any such incidents occur and we are not able to resolve them favorably,
we may be subject to civil fines or criminal penalties and abatement costs
(including possible business interruption costs).
  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 providing 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 appropriate precautions in an effort 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 injuries or illness to customers or their patients result from
the use of our products. 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
conduct business operations at numerous facilities and deliver our products to
our customers via a fleet of delivery trucks. In connection with our business
operations, there is reason, from time to time, for representatives of
customers, suppliers, service providers and other visitors and business invitees
to be in or about our facilities. Our delivery trucks are on the public roads
and highways throughout most of every week exposed to the general public. We
have in the past experienced claims of injury on the part of visitors or
business invitees to our facilities, and by others relating to accidents
involving our delivery fleet. We may be subject to such claims in the future.
Any such claims may harm our operating results. In addition, we maintain a large
deductible on self-insured retention for our insurance and if we have
underestimated the aggregate amount of claims, or if such claims are found to
not be covered by our insurance, our financial results may be negatively
impacted.
  Environmental
issues, whether arising from our current operations or from 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,
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
 
 15
 
 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 former 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 26,
2008, we are guarantor on 29 remaining leases and our maximum aggregate
potential liability under these leases is approximately $4.5 million. 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 are
currently carrying this note on our balance sheet at $3.8 million, which
reflects a discount of $1.0 million made on the note at the time of the sale
accreted through January 26, 2008. The retail business that was sold
participates in a highly competitive retail segment that is particularly
sensitive to economic conditions. If we were required to make significant
payments under the store leases and were unable to recoup them from the buyer,
or if the buyer of the retail business was unable to make payments under the
promissory note, our results of operations and financial condition may be
harmed.
 
 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 a portion of our non-union employees.
Also, pursuant to provisions of collective bargaining agreements that cover
union workers in many of our facilities, we contribute to union-sponsored
multi-employer pension plans for the benefit of these employees. If future
returns from the stock market and other investments are insufficient and these
pension plans become underfunded, we may be required to increase our
contributions in future years to satisfy any such underfunding. Also, specified
events such as sales or closings of facilities may trigger withdrawal liability
under the multi-employer plans into which we contribute, which may also require
us to make substantial additional payments into such plans.
  Our
bank credit facility requires 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 bank
credit facility contains 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 require such relief. In the event that we do not
comply with the covenants and our lenders do not consent to such non-compliance,
we will be in default of our loan agreement, which may subject us to penalty
rates of interest and acceleration of the maturity of the outstanding balances.
In addition, our credit facility is secured by certain real estate, equipment,
inventory and accounts receivable. A significant
 
 16
 
   If
we fail to maintain an effective system of internal control or discover material
weaknesses in our internal control over financial reporting, we may not be able
to report our financial results accurately or detect fraud, which may harm our
business and the trading price of our stock.
  An
effective system of internal controls is necessary for us to produce reliable
financial reports and is important in our effort to prevent financial fraud. We
are required to periodically evaluate the effectiveness of the design and
operation of our internal controls. These evaluations may result in the
conclusion that enhancements, modifications or changes to our internal controls
are necessary or desirable. While we evaluate the effectiveness of our systems
of internal control on a regular basis, these systems may require modification
from time to time in the future to remain effective. There are inherent
limitations on the effectiveness of internal controls including collusion,
management override, and breakdowns in human judgment. 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.
  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, we may not 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.
  Our
acquisition strategy involves risks relating to integrating acquired
businesses.
  Our
growth plan may include the strategic acquisition of selected business
facilities, customer contracts and other assets. Our inability to integrate
acquired companies, business facilities, customer contracts or other assets
successfully may render us less able to obtain the expected returns from our
acquisitions and harm our results of operations and financial
condition.
  The
process of integrating acquired operations into our existing operations may
result in operating, contract and technology difficulties, including, but not
limited to, the following:
 
 •
              potential
      loss of key employees of acquired businesses;•
              problems
      assimilating the purchased technologies, products or business
      operations;•
              problems
      maintaining uniform standards, procedures, controls and
      policies;•
              unanticipated
      costs associated with the transactions, including accounting charges and
      transaction expenses;
   17
  •
              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 discoveries 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. In addition, our ability to make
acquisitions may be limited.
  Current
activities related to our review of strategic alternatives may negatively impact
our operating results.
  In
September 2007, our Board of Directors authorized Morgan Joseph & Co., Inc.
to pursue strategic alternatives for the Company, including a possible sale. In
addition to the legal and other expenses incurred, management has devoted a
substantial amount of time to the process. If the process continues for a
significant amount of time, the diversion of management attention may affect our
results. Also, the uncertainty of the Company’s future as it relates to this
process may have a negative impact on the negotiation of customer contract
renewals.
 
  Item 1B. Unresolved Staff
Comments
  Not
applicable.
 
 Item 2.
Properties
  A list of
our principal facilities as of January 26, 2008, follows. No individual
property, owned or leased, is of material significance to our operations or
total assets, although relocating any facility would create temporary
diseconomies. 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(1)
              
              Holly
      Hill, FL
              
              Rockmart,
      GABallston
      Spa, NY
              
              Houston,
      TX
              
              Sacramento,
      CA (leased)Batavia,
      NY
              
              Lorain,
      OH
              
              San
      Diego, CAChicago,
      IL
              
              Los
      Angeles, CA
              
              San
      Fernando, CAColton,
      CA
              
              Ooltewah,
      TN
              
              Somerville,
      MA (leased)Columbia,
      SC
              
              Orange,
      CA
              
              Stockton,
      CADallas,
      TX
              
              Pawtucket,
      RI
              
              Tampa,
      FLDurham,
      NC
              
              Phoenix,
      AZ
              
              Turlock,
      CA (leased)Fresno,
      CA
              
              Pittsburg,
      CA (leased)(1)
              
              Worcester,
      MA (leased)Hempstead,
      NY (leased)
              
              Pomona,
      CA
  (1)
              –
      The Company’s owned facility in Antioch, California, will be replaced in
      the first half of fiscal 2008 by a leased facility in nearby Pittsburg,
      California.
  As of
January 26, 2008, our operations were located in 15 states, and consisted of 28
laundry service centers, 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 some of our facilities are operating at
near full capacity, output of several of our facilities could be increased with
the installation of additional equipment.
  
 18
   Item 3. Legal
Proceedings
  We are
not a party to, and none of our property is the subject of, 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.
  Item 4. Submission of
Matters to a Vote of Security Holders
  Information
with respect to matters submitted to a vote of security holders in the fourth
quarter of our 2007 fiscal year was previously reported in our Form 10-Q for the
quarter ended October 27, 2007.
   PART II
  Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  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 26, 2008.
  Year
      Ended January 26, 2008
                
                
                Year
      Ended January 27, 2007High
                
                Low
                
                Dividend
                
                
                High
                
                Low
                
                Dividend
 First
      Quarter
                $
                30.25
                $
                25.29
                $
                0.11
                
                $
                21.10
                $
                16.65
                $
                0.11Second
      Quarter
                
                26.96
                
                19.91
                
                0.11
                
                
                20.74
                
                14.90
                
                0.11Third
      Quarter
                
                22.17
                
                15.51
                
                0.11
                
                
                20.45
                
                14.99
                
                0.11Fourth
      Quarter
                
                20.59
                
                13.09
                
                0.11
                
                
                28.25
                
                19.14
                
                0.11
  There
were 1,048 shareholders of record as of March 28, 2008. 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.
  See Item
12 for information related to securities authorized for issuance under equity
compensation plans.
  19
  Item 6. Selected Financial
Data
  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 - 5 YEARS (UNAUDITED)
  Angelica
Corporation and Subsidiaries
  For
      Years Ended
                
                January
      26,
                
                
                January
      27,
                
                
                January
      28,
                
                
                January
      29,
                
                
                January
      31,(Dollars
      in thousands, except per share amounts)
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004OPERATIONSRevenues
                
                $
                429,957
                
                
                $
                425,735
                
                
                $
                418,357
                
                
                $
                308,034
                
                
                $
                283,319Gross
      profit
                
                
                58,405
                
                
                
                61,935
                
                
                
                54,057
                
                
                
                48,769
                
                
                
                53,782Operating
      expenses and other, net, excludinginterest
      expense
                
                
                (49,269
                )
                
                
                (50,176
                )
                
                
                (46,131
                )
                
                
                (34,225
                )
                
                
                (37,549
                )Interest
      expense
                
                
                (9,493
                )
                
                
                (9,412
                )
                
                
                (7,198
                )
                
                
                (1,356
                )
                
                
                (714
                )(Loss)
      income from continuing operationsbefore
      income taxes
                
                
                (357
                )
                
                
                2,347
                
                
                
                728
                
                
                
                13,188
                
                
                
                15,519Income
      tax benefit (provision)
                
                
                4,296
                
                
                
                1,286
                
                
                
                1,591
                
                
                
                (2,440
                )
                
                
                (4,356
                )Income
      from continuing operations
                
                
                3,939
                
                
                
                3,633
                
                
                
                2,319
                
                
                
                10,748
                
                
                
                11,163Loss
      from discontinued operations,net
      of tax
                
                
                -
                
                
                
                -
                
                
                
                (1,286
                )
                
                
                (1,369
                )
                
                
                (1,960
                )Loss
      on disposal of discontinued operations,net
      of tax
                
                
                -
                
                
                
                -
                
                
                
                (785
                )
                
                
                (3,018
                )
                
                
                -Net
      income
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                248
                
                
                $
                6,361
                
                
                $
                9,203PER
      SHARE DATADiluted
      income from continuing operations
                
                $
                0.42
                
                
                $
                0.39
                
                
                $
                0.25
                
                
                $
                1.18
                
                
                $
                1.25Diluted
      loss from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                (0.22
                )
                
                
                (0.48
                )
                
                
                (0.22
                )Diluted
      net income
                
                
                0.42
                
                
                
                0.39
                
                
                
                0.03
                
                
                
                0.70
                
                
                
                1.03Cash
      dividends paid
                
                
                0.44
                
                
                
                0.44
                
                
                
                0.44
                
                
                
                0.44
                
                
                
                0.41Common
      shareholders' equity
                
                $
                16.31
                
                
                $
                16.00
                
                
                $
                16.08
                
                
                $
                16.69
                
                
                $
                16.51RATIOS
      AND PERCENTAGESCurrent
      ratio (current assets to currentliabilities)
                
                2.0 to
      1
                
                
                1.4
      to 1
                
                
                1.4
      to 1
                
                
                1.7
      to 1
                
                
                1.8
      to 1Total
      debt to total debt and equity
                
                
                37.3
                %
                
                
                36.7
                %
                
                
                36.4
                %
                
                
                31.1
                %
                
                
                11.8
                %Gross
      profit margin
                
                
                13.6
                %
                
                
                14.5
                %
                
                
                12.9
                %
                
                
                15.8
                %
                
                
                19.0
                %Effective
      tax rate (continuing operations)
                
                nm
                
                
                
                (54.8
                %)
                
                
                (218.6
                %)
                
                
                18.5
                %
                
                
                28.1
                %Net
      income margin from continuingoperations
                
                
                0.9
                %
                
                
                0.9
                %
                
                
                0.6
                %
                
                
                3.5
                %
                
                
                3.9
                %Return
      on average shareholders' equity
                
                
                2.6
                %
                
                
                2.4
                %
                
                
                0.2
                %
                
                
                4.3
                %
                
                
                6.4
                %Return
      on average total assets
                
                
                1.2
                %
                
                
                1.1
                %
                
                
                0.1
                %
                
                
                2.4
                %
                
                
                4.0
                %OTHER
      SELECTED DATAWorking
      capital
                
                $
                64,897
                
                
                $
                31,781
                
                
                $
                28,497
                
                
                $
                36,525
                
                
                $
                37,849Additions
      to property and equipment
                
                
                16,116
                
                
                
                7,359
                
                
                
                19,434
                
                
                
                14,977
                
                
                
                22,439Depreciation
      and amortization
                
                
                19,927
                
                
                
                19,641
                
                
                
                19,542
                
                
                
                13,194
                
                
                
                10,618Cash
      flows from operating activities ofcontinuing
      operations
                
                
                2,932
                
                
                
                4,169
                
                
                
                20,438
                
                
                
                17,514
                
                
                
                23,861Cash
      flows from investing activities ofcontinuing
      operations
                
                
                (7,554
                )
                
                
                (256
                )
                
                
                (62,874
                )
                
                
                (72,180
                )
                
                
                (37,889
                )Cash
      flows from financing activities ofcontinuing
      operations
                
                
                1,504
                
                
                
                (1,826
                )
                
                
                42,384
                
                
                
                44,836
                
                
                
                (2,847
                )Long-term
      debt, including current maturities
                
                
                90,000
                
                
                
                85,396
                
                
                
                85,415
                
                
                
                68,230
                
                
                
                19,545Total
      assets
                
                $
                320,409
                
                
                $
                336,305
                
                
                $
                331,428
                
                
                $
                288,953
                
                
                $
                235,781Average
      number of shares of common stockoutstanding,
      adjusted for dilutive effects
                
                
                9,319,398
                
                
                
                9,232,046
                
                
                
                9,275,246
                
                
                
                9,124,537
                
                
                
                8,957,996Approximate
      number of associates
                
                
                5,900
                
                
                
                6,400
                
                
                
                6,600
                
                
                
                6,100
                
                
                
                5,700
  20
  Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  FORWARD-LOOKING
STATEMENTS
  Any
forward-looking statements made in this document reflect 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 certain risks and uncertainties that may cause
actual results to differ materially from those set forth in these statements.
These potential risks and uncertainties include, but are not limited to,
competitive and general economic conditions, the ability to retain current
customers and to add new customers in competitive market environments,
competitive pricing in the marketplace, delays in the shipment of orders,
availability of labor at appropriate rates, availability and cost of energy and
water supplies, the cost of workers’ compensation and healthcare benefits, the
ability to attract and retain key personnel, our ability to recover our seller
note and avoid future lease obligations as part of our sale of our former Life
Uniform division, our ability to execute our operational strategies, unusual or
unexpected cash needs for operations or capital transactions, the effectiveness
of our initiatives to reduce key operating costs as a percent of revenues, the
ability to obtain financing in required amounts and at appropriate rates and
terms, the ability to identify, negotiate, fund, consummate and integrate
acquisitions, and other factors which may be identified from time to time in our
filings with the Securities and Exchange Commission.
  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, 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 28 laundry service centers in fifteen states and serve
customers in 25 states.
  In the
fourth quarter of fiscal 2007, we closed and sold our Edison, New Jersey service
center. The service center had been underperforming for some time, and the Board
reached the decision to close or sell the facility after it failed to make the
progress management expected in the first half of fiscal 2007.
  As
previously announced, our Board of Directors has authorized Morgan Joseph &
Co., Inc. to pursue strategic alternatives for the Company, including a possible
sale. The Board reached this decision after taking into consideration: 1) the
challenges we face in executing our strategy as a public company; 2) the added
expense associated with being a relatively small public company; and 3) the
desire of certain significant shareholders that the Company explore a
sale.
  Since
July 2004 our continuing operations have consisted exclusively of linen
management services delivered primarily to the healthcare industry. In fiscal
2007, healthcare linen services represented approximately 98% of our revenues,
with 2% of revenues from other linen service markets.
  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 2007 started on January 28, 2007 and ended on January 26, 2008,
fiscal year 2006 started on January 29, 2006 and ended on January 27, 2007, and
fiscal year 2005 started on January 30, 2005 and ended on January 28,
2006.
  Revenues
are recognized at the time the service is provided to the customer. Our revenues
have grown from $283.3 million in fiscal 2003 to $430.0 million in fiscal 2007,
or 51.9% over the four-year period. While a portion of our growth has been
achieved organically by expanding relationships with existing customers and
adding new customers, we began adding to this growth with acquisitions in fiscal
2003. Going forward, we seek to accelerate our annual organic growth rate
to 7%-10% through the customer-focused programs described herein, and
to
 
 21
 
 Our
acquisition program is focused on healthcare laundry services currently owned
either by hospitals or competitors. Since we seek to concentrate our service
centers 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, especially opportunities to consolidate volume into our
existing facilities. Although we may expand geographically via acquisition, this
will most likely be on the fringes of existing service areas. In evaluating
acquisition opportunities, we consider strategic value, projected earnings
before interest, taxes, depreciation and amortization (EBITDA), impact on
earnings per share, return on net assets and internal rate of
return.
 Cost of
services are recognized and recorded as incurred. Over the last five years, our
cost of services as a percent of revenues have ranged from a low of 81.0% in
fiscal 2003 to a high of 87.1% of revenues in fiscal 2005, primarily due to the
volatility of energy costs. The major components of our cost of services
are:
 
 •
              Linen
      depreciation, which represented 17.9% of revenues in fiscal 2007, versus
      16.5% in fiscal 2006;•
              Direct
      and indirect production labor and fringe benefit costs, which represented
      32.4% of revenues in fiscal 2007 and 33.4% of revenues in fiscal
      2006;•
              Utilities,
      which represented 9.7% of revenues in fiscal 2007, versus 9.8% in fiscal
      2006. This includes natural gas, which was 5.9% of revenues in fiscal 2007
      and 6.0% in fiscal 2006; and•
              Delivery
      expenses, which represented 15.4% of revenues in fiscal 2007 versus 14.6%
      in fiscal 2006. This includes delivery fuel expense which was 2.1% of
      revenues in fiscal 2007 and fiscal
2006.
  In fiscal
2006 and 2007 we continued implementing our operations process improvement
project that was designed to lower our cost of services through more efficient
operations and best practices implementation. We also installed a global
positioning system and delivery planning and routing technology to help control
delivery costs. In addition, we worked to reduce cost of services by continuing
to improve linen and natural gas procurement, continuing to capitalize on the
benefits of our global positioning system and delivery planning and routing
technology, and making capital investment in our facilities to increase labor
productivity and reduce energy utilization. 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.
Since October 2005 we have entered into futures contracts to reduce our exposure
to volatility in natural gas prices. These contracts, combined with existing
fixed price contracts for the physical delivery of natural gas, effectively fix
the cost for approximately 62% of our total natural gas requirements for fiscal
2008, and 35% and 12% for fiscal 2009 and fiscal 2010, respectively. We will
continue to focus our efforts on obtaining customer contract pricing that is
variable with energy costs and supplement this with attractive natural gas
purchasing opportunities with a goal of locking in natural gas prices and
quantities for periods that roughly match up with customer contract expirations
when contracts provide inadequate protection against rising prices.
  Over the
past four years, our gross profit has grown from $53.8 million in fiscal 2003 to
$58.4 million in fiscal 2007. During this period, gross margin has ranged from
12.9% in fiscal 2005 to 19.0% in fiscal 2003. Our goal of reaching a 20% gross
margin will be impacted by a number of factors, including our ability to obtain
price increases equal to the inflationary pressures we experience. While the
majority of our customer contracts have inflation pricing escalator clauses
based on various Consumer Price Indexes, or CPI, 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 hinders 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 current efforts of negotiating
energy matrices in customer contracts, supplemented by our energy hedging
policy, will allow us to lessen our energy cost volatility and take advantage of
pricing opportunities in the energy market in the future.
   22
  Selling,
general and administrative, or SG&A, expenses include all other operating
expenses not included in cost of services, including those related to sales and
marketing, human resources, accounting, information systems, and other
administrative functions not allocable to individual customers. In fiscal 2007,
SG&A expenses were $49.1 million, representing 11.4% of revenues compared
with $51.3 million, or 12.1% of revenues in fiscal 2006. Of the fiscal 2007
SG&A expense, $31.2 million was attributable to our 28 service centers and
$17.9 million was attributable to our Atlanta and St. Louis corporate offices.
We expect SG&A expense to continue to decline as a percent of revenues as we
continue to grow our business organically and through acquisition and spread the
fixed components of these costs over a larger revenue base.
  Our
revenues experience modest seasonality in the fourth quarter of our fiscal year
due to declines in hospital census counts and outpatient procedures around
holiday weeks, as patients typically choose not to schedule elective procedures
and physicians take vacations. We estimate that this typically results in fourth
quarter revenues from existing customers being approximately 2%-3% less than in
the third quarter.
  Our
business is also impacted by some seasonality associated with two major cost
areas – production labor and natural gas costs. Production labor costs typically
rise in the fourth and first quarters as a percentage of revenues, as holiday
pay and overtime associated with holidays increase fourth quarter labor costs
and most of our labor contract wage increases take effect in the first quarter.
Natural gas costs also increase in the winter months included in the fourth and
first quarters, reflecting natural gas pricing and usage in the winter months.
These two costs typically are 1% to 3% of revenues higher in the fourth and
first quarters than in the second or third quarters.
  RESULTS
OF CONTINUING OPERATIONS
  Fiscal
      Year Ended (dollars in thousands)January
      26, 2008
                
                
                January
      27, 2007
                
                
                January
      28, 2006Revenues
                
                $
                429,957
                
                
                
                100.0
                %
                
                $
                425,735
                
                
                
                100.0
                %
                
                $
                418,357
                
                
                
                100.0
                %Cost
      of services
                
                
                371,552
                
                
                
                86.4
                %
                
                
                363,800
                
                
                
                85.5
                %
                
                
                364,300
                
                
                
                87.1
                %Gross
      profit
                
                
                58,405
                
                
                
                13.6
                %
                
                
                61,935
                
                
                
                14.5
                %
                
                
                54,057
                
                
                
                12.9
                %Selling,
      general and administrative expense
                
                
                49,100
                
                
                
                11.4
                %
                
                
                51,306
                
                
                
                12.1
                %
                
                
                50,092
                
                
                
                12.0
                %Amortization
      of other acquired assets
                
                
                4,197
                
                
                
                1.0
                %
                
                
                4,281
                
                
                
                1.0
                %
                
                
                4,036
                
                
                
                1.0
                %Other
      operating income, net
                
                
                2,751
                
                
                
                0.6
                %
                
                
                2,987
                
                
                
                0.7
                %
                
                
                6,384
                
                
                
                1.5
                %Income
      from operations
                
                
                7,859
                
                
                
                1.9
                %
                
                
                9,335
                
                
                
                2.2
                %
                
                
                6,313
                
                
                
                1.5
                %Interest
      expense
                
                
                9,493
                
                
                
                2.2
                %
                
                
                9,412
                
                
                
                2.2
                %
                
                
                7,198
                
                
                
                1.7
                %Non-operating
      income, net
                
                
                1,277
                
                
                
                0.3
                %
                
                
                2,424
                
                
                
                0.6
                %
                
                
                1,613
                
                
                
                0.4
                %(Loss)
      income before income taxes
                
                
                (357
                )
                
                
                0.0
                %
                
                
                2,347
                
                
                
                0.6
                %
                
                
                728
                
                
                
                0.2
                %Income
      taxes
                
                
                (4,296
                )
                
                
                -1.0
                %
                
                
                (1,286
                )
                
                
                -0.3
                %
                
                
                (1,591
                )
                
                
                -0.4
                %Income
      from continuing operations
                
                $
                3,939
                
                
                
                1.0
                %
                
                $
                3,633
                
                
                
                0.9
                %
                
                $
                2,319
                
                
                
                0.6
                %
  ANALYSIS
OF FISCAL 2007 CONTINUING OPERATIONS COMPARED TO 2006
  Revenues
of $430.0 million in fiscal 2007 represented an increase of $4.2 million, or
1.0%, from fiscal 2006. Organic growth from net new business additions and price
increases contributed $5.0 million of the increase, resulting in an organic
growth rate of 1.2%. The organic growth was partially offset by a net reduction
in revenues of $0.8 million related to acquisitions and divestitures, primarily
due to the sale of non-healthcare customer accounts in fiscal 2006. Healthcare
revenues increased by 2.5% in fiscal 2007 to $421.7 million.
   23
  Approximately
$12.4 million and $14.1 million of revenues in fiscal 2007 and 2006,
respectively, were generated from our Edison, New Jersey service center, which
was closed in December 2007.
  Cost of
services of $371.6 million in fiscal 2007 increased $7.8 million or 2.1% from
fiscal 2006 primarily due to increased linen costs. As a percentage of revenues,
linen amortization increased from 16.5% in fiscal 2006 to 17.9% in fiscal 2007.
The variance in linen amortization was a result of increased linen purchases to
satisfy our 100% fill initiative and higher quality linen and our second quarter
fiscal 2006 accounting policy change to increase the useful life of linens.
Total company production and delivery costs increased $1.0 million from $291.2
million in fiscal 2006 to $292.2 million in fiscal 2007; however, the same costs
for the Edison service center increased $2.8 million year over year. The $1.8
million favorable variance in these costs for all other service centers
excluding Edison was a result of lower operating volumes, increased operating
efficiencies, and favorable workers' compensation claims
experience.
  Gross
profit decreased from $61.9 million in fiscal 2006 to $58.4 million in fiscal
2007. Included in these amounts were losses from the Edison service center of
$8.1 million and $3.3 million in fiscal 2007 and 2006, respectively. Gross
margin decreased to 13.6% in 2007 from 14.5% in 2006.
  Selling,
general and administrative (SG&A) expenses of $49.1 million decreased $2.2
million, or 4.3%, from fiscal 2006, or 11.4% of revenues in fiscal 2007 versus
12.1% in fiscal 2006. The decrease in SG&A expenses resulted from the
absence of prior year expenses of $3.1 million associated with our operations
process improvement implementation, the Board of Directors’ Special Committee,
and professional fees related to union contract negotiations, litigation and
financial consulting projects, as well as $1.4 million in reduced compensation
and incentive compensation accruals year over year and a $0.5 million decline in
travel and vehicle costs. These decreases were partially offset by current year
increases of $0.3 million related to the settlement of a federal contract audit,
$0.5 million related to additional retirement benefit accruals and severance
costs due to staffing reductions, and $0.4 million related to the settlement of
civil litigation filed on behalf of former employees at our Long Beach,
California facility which was sold in December 2005, including dismissal of
multiple workers compensation claims that were filed on behalf of the same
individuals. We also incurred $1.0
million in costs related to the shutdown of the Edison service center and $0.4
million in costs related to the potential sale of the Company.
  In fiscal
2007 we reported other operating income of $2.8 million, reflecting a $2.3
million gain from the sale of our Edison real estate, $0.2 million of insurance
proceeds from a property insurance claim, and a $0.3 million gain from the
divestiture of non-healthcare business in California. In fiscal 2006 we reported
other operating income of $3.0 million which included the gains from the sale of
three parcels of real estate and a settlement received from the lawsuit that was
initiated in connection with the Vallejo eminent domain proceedings in fiscal
2005.
  Interest
expense in fiscal 2007 was $9.5 million, a slight increase from the prior year.
At January 26, 2008, we had $90.0 million in total debt outstanding under a
revolving loan agreement with a bank credit facility and $30.3 million of life
insurance policy loans outstanding. A significant portion of our outstanding
debt at January 26, 2008, bore interest at variable rates. We expect interest
expense to decrease over the next fiscal year as we pay down our revolving loan
and interest rates decline on our credit facility.
  In fiscal
2007 we recorded $1.3 million of non-operating income, consisting primarily of
interest income of $0.8 million, a $0.3 million gain from the death benefit of a
Company-owned life insurance policy, and a $0.2 million distribution from the
liquidation of the parent company of the issuer of life insurance policies we
own. Non-operating income of $2.4 million in fiscal 2006 consisted of a $1.7
million gain on the sale of real estate, interest income of $0.9 million, and a
$0.2 million gain from the death benefit of a Company-owned life insurance
policy, partially offset by a $0.3 million loss related to a natural gas
derivative.
  We
recorded an income tax benefit of $4.3 million in fiscal 2007 compared to $1.3
million in fiscal 2006. The income tax benefit in fiscal 2007 was primarily
attributed to a $2.3 million benefit associated with the recognition of
uncertain tax positions for which a reserve had previously been established
under Financial Accounting
   24
  Standards
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109” (FIN 48). Due to the expiration
of the statute of limitations associated with those uncertain tax positions, we
recognized the tax benefit of those positions through the effective tax rate.
During fiscal 2006 we reversed a $0.3 million contingency reserve due to the
expiration of the related tax statute. The benefits in both years reflect the
impact of deductions related to Company-owned life insurance policies and tax
credits from employment programs.
  ANALYSIS
OF FISCAL 2006 CONTINUING OPERATIONS COMPARED TO 2005
  Revenues
of $425.7 million in fiscal 2006 increased $7.4 million, or 1.8%, from fiscal
2005. Organic growth from net new business additions and price increases
contributed $12.6 million of the increase, representing an organic growth rate
of 3.5%. Fiscal 2005 acquisitions contributed $11.4 million of the increase,
which was more than offset by the loss of $16.6 million of revenues due to the
sale of non-healthcare customer accounts in fiscal 2005 and 2006. Healthcare
revenues increased by 6.6% in fiscal 2006 to $411.3 million, while
non-healthcare revenues decreased 55.6% from fiscal 2005, due primarily to the
sales of the non-healthcare accounts in California and Texas.
  Cost of
services of $363.8 million in fiscal 2006 decreased $0.5 million or 0.1% from
fiscal 2005 as inflationary increases for labor and higher natural gas costs
were more than offset by favorable experience in several other cost categories.
The change in the estimated useful life of linens, as discussed below in
Critical Accounting Policies and Judgments – Linen Inventory, offset increased
linen purchases and resulted in a decrease in linen depreciation as a percentage
of revenues, from 17.0% in fiscal 2005 to 16.5% in fiscal 2006. Initiatives put
into place in recent years to create a safer work environment led to favorable
workers’ compensation experience over the prior year, as related expense
decreased from $9.5 million, or 2.3% of revenues, in fiscal 2005 to $7.6
million, or 1.8% of revenues, in fiscal 2006. An increase in delivery fuel
expense of $0.8 million was more than offset by cost savings recognized from
transferring several customer accounts among service centers to increase
efficiency, resulting in a decrease in total delivery expenses as a percent of
revenues from 14.1% in fiscal 2005 to 13.7% in fiscal 2006.
  Current
year organic revenue growth and pricing improvements, along with cost of
services which were essentially flat year over year, allowed gross margin to
increase to 14.5% in fiscal 2006 from 12.9% in the prior year.
  Selling,
general and administrative (SG&A) expenses of $51.3 million increased $1.2
million, or 2.4%, from fiscal 2005, while remaining fairly constant at 12.1% of
revenues in fiscal 2006 as compared to 12.0% of revenues in fiscal 2005. The
increase in SG&A expenses resulted primarily from an increase in
professional fees of $1.3 million related to our operations process improvement
implementation and financial consulting projects, an increase in legal and
shareholder relation expenses of $0.6 million associated with the Board of
Directors’ Special Committee, $0.6 million in higher incentive compensation
accruals, and $0.4 million of higher life insurance expense net of dividends. In
fiscal 2005 SG&A expenses included $0.7 million related to the union
corporate campaign, $0.4 million associated with our evaluation of alternatives
to our then existing debt structure, and $0.4 million due to changes in our senior
management.
  Amortization
expense increased 6.1% from fiscal 2005 to $4.3 million in fiscal 2006,
reflecting the full-year impact of amortization of intangible assets acquired in
the Royal acquisition in March 2005 and the Bob White acquisition in August
2005.
  In fiscal
2006 we reported other operating income of $3.0 million, reflecting gains from
the sale of three parcels of real estate and a settlement received from the
lawsuit that was initiated in connection with the Vallejo eminent domain
proceedings in fiscal 2005. In fiscal 2005 we reported other operating income of
$6.4 million which included the net gain of $5.9 million on the sale of the San
Diego, Stockton, and Long Beach, California non-healthcare
accounts.
   25
  Interest
expense in fiscal 2006 was $9.4 million, an increase of $2.2 million from the
prior year. The increase resulted from a combination of higher interest rates
and higher average borrowings. Interest rates increased from an average 5.7% per
annum in fiscal 2005 to an average 7.5% per annum in fiscal 2006. At January 27,
2007, we had $85.3 million in total debt outstanding under a revolving loan
agreement with a bank credit facility and $30.7 million of life insurance policy
loans outstanding. A significant portion of our outstanding debt at January 27,
2007, bore interest at variable rates.
  In fiscal
2006, we recorded non-operating income of $2.4 million, consisting primarily of
a $1.7 million gain on the sale of real estate, interest income of $0.9 million,
and a $0.2 million gain from the death benefit of a Company-owned life insurance
policy, partially offset by a $0.3 million loss related to a natural gas
derivative. In fiscal 2005, we recorded non-operating income of $1.6 million
which included a $0.4 million distribution from the liquidation of the parent
company of the issuer of life insurance policies we own and $0.4 million death
benefits of Company-owned life insurance policies, along with interest on
invested cash balances and notes receivable, and loss related to our natural gas
hedge.
  We
recorded an income tax benefit of $1.3 million in fiscal 2006 and $1.6 million
in fiscal 2005. Both years reflect the impact of deductions related to
Company-owned life insurance policies and tax credits from employment programs.
In addition, during fiscal 2006, we reversed a $0.3 million tax contingency
reserve due to the expiration of the related tax statute.
  Income
from continuing operations increased $1.3 million, or 56.7%, in fiscal 2006, due
primarily to the increase in gross profit as explained above, partially offset
by the decrease in other operating income and increase in interest
expense.
  DISCONTINUED
OPERATIONS
  Exit from St. Louis Market
and Sale of Columbia, Illinois Facility (Fiscal 2005)
  On
September 2, 2005, we sold the customer contracts serviced by our Columbia,
Illinois facility and certain other assets related to the servicing of those
contracts for $1.4 million in cash. The Columbia facility, which primarily
served the St. Louis market area, had been unprofitable for several periods and
in fiscal 2005 suffered the loss of a major customer. Due to the limited
potential to improve the profitability of the facility, combined with its
relative geographic isolation from our other facilities, the decision was made
to exit the St. Louis market, sell its customer contracts and related assets,
and pursue a sale of the idle facility.
  In the
third quarter of 2005, we recorded both a goodwill writeoff of $0.9 million
associated with the business of the Columbia facility and an asset impairment
charge of $0.8 million related to the facility’s real estate and personal
property. In January 2006, the real estate and personal property were sold for
approximately $1.5 million in cash, resulting in an additional asset impairment
charge of under $0.1 million. In connection with the sale of the facility’s
assets, we recorded an after tax loss on disposal of $0.3 million for the 2005
fiscal year.
  From the
beginning of the 2005 fiscal year until the sale of the customer contracts in
September 2005, the Columbia facility reported a net loss from operations of
$1.3 million, as compared to a net loss from operations of $0.4 million for the
full 2004 fiscal year. The loss from operations in fiscal 2005 includes $0.5
million in employee termination expenses. The net operating loss for each of the
prior fiscal years has been included in net loss from discontinued
operations.
  During
fiscal 2005 we recognized $0.4 million in expense related to additional tax
impact on the sale of our Life Uniform retail business segment in fiscal 2004,
and other discontinued operations. This amount is included in net loss from
disposal of discontinued operations.
    26
  FINANCIAL
CONDITION
  As of
January 26, 2008, working capital totaled $64.9 million as compared with $31.8
million in working capital at the end of fiscal 2006. The
current ratio (i.e.,the ratio of current assets to current liabilities) was 2.0 to 1 at
the end of fiscal 2007 compared to 1.4 to 1 at the end of fiscal 2006. The
increase in working capital is primarily due to a higher balance in accounts
receivable, the reclassification of certain life insurance policy loans from
current to long-term, and the movement of certain deferred tax assets from
long-term to current.
  Accounts
receivable increased by $6.9 million in fiscal 2007 primarily due to increased
revenues and the transition of centralizing our cash applications and
collections process in conjunction with the conversion to a lockbox collections
system. Linen inventory decreased by $2.4 million as a result of better
inventory management. Prepaid expenses and other current assets increased to
$6.5 million in fiscal 2007 from $4.0 million in fiscal 2006, primarily due to
deposits with direct source vendors for future linen purchases and some
remaining equipment from our Edison, New Jersey service center that is being
held in storage until management determines whether it will be sold or
transferred to other service centers. The decrease in total property and
equipment of $4.1 million resulted primarily from the closure and sale of our
Edison, New Jersey facility.
  Cash
surrender value of life insurance at January 26, 2008, is presented net of
approximately $30.3 million of life insurance policy loans outstanding. 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 $3.8 million as of January 26, 2008. Although we believe
the discounted note is fairly valued, this note is not readily marketable and is
subordinate to other outstanding debt of the buyer. Ultimately, the value of the
note is dependent upon the success of the buyer in operating the purchased
business.
    Accrued
wages and compensation decreased $2.8 million from fiscal 2006 as a result of
lower incentive compensation accruals. Other accrued liabilities decreased by
$5.3 million from fiscal 2006 to $24.1 million in fiscal 2007, primarily due to
the release of uncertain tax positions as discussed above and a decrease in
insurance reserves.
  Long-term
debt of $90.0 million as of January 26, 2008, was an increase of $4.7 million
from the previous year end, reflecting additional borrowings from our credit
facility to fund the higher working capital balance discussed above. Deferred
compensation and pension liabilities decreased by $2.5 million from fiscal 2006
to $12.2 million in fiscal 2007, a result of approximately $2.1 million of
contributions to our defined benefit plan. We expect contributions to the
defined benefit plan to be approximately $1.3 million in fiscal 2008. Other
long-term liabilities of $1.0 million were a decrease of $1.6 million from the
prior year primarily due to a reduction in liabilities related to our natural
gas hedges. Our ratio of total debt to total capitalization as of January 26,
2008 was 37.3%, up slightly from 36.7% as of January 27, 2007. Book value per
share increased to $16.31 at the end of fiscal 2007 from $16.00 at the end of
fiscal 2006.
  LIQUIDITY
AND CAPITAL RESOURCES
  Cash
Flows
  Cash
flows provided by operating activities were $2.9 million in fiscal 2007, a
decrease of $1.2 million from the prior year. The decrease resulted from a
higher balance in accounts receivable and a lower balance in accrued wages and
other compensation, as discussed above, and a decrease in the liabilities
related to our natural gas hedges, partially offset by a decreased balance in
linen inventory. For fiscal year 2008, we anticipate that accounts receivable
will return to a normalized level, after considering growth in our business, and
that interest
   27
  payments
will decline from 2007. Our required pension contributions for 2008 are
currently estimated to decrease by approximately $0.8 million from fiscal
2007.
  Cash
flows from investing activities included $14.3 million in capital expenditures
(excluding $2.2 million included in accounts payable at year end), up from $8.0
million in the prior year as our capital expenditures returned to a normalized
level following the implementation of best practices systemwide. During fiscal
2007, we received net proceeds of $7.5 million from the sale of the Edison, New
Jersey real estate and non-healthcare customer accounts and $0.3 million from
the death benefit of a Company-owned life insurance policy. We expect fiscal
2008 capital expenditures to be approximately $15.0 million of new expenditures
plus $3.0-$4.0 million of carryover expenditures, including the new Pittsburg,
California facility begun in 2007, which will be completed in 2008.
  Cash
provided by financing activities was $1.5 million in fiscal 2007 reflecting
additional borrowings from our credit facility as discussed above and $0.8
million proceeds from stock option exercises, partially offset by dividend
payments of $4.2 million.
  Financing
Arrangements
  Our
long-term bank borrowings are financed through a $125.0 million revolving credit
facility under a loan agreement that matures on November 30, 2010. Amounts
borrowed under the credit facility bear interest at a floating rate equal to
either (i) LIBOR plus a margin, or (ii) a Base Rate, defined as the higher of
either (a) the Federal Funds Rate plus 0.50% or (b) the Prime Rate. The margin
for the LIBOR rate option is based on our ratio of “Funded Indebtedness” to
“EBITDA,” as each is defined in the loan agreement, and may range
from 1.5% to 2.0%. The LIBOR interest rate option may be selected for periods of
1 to 3 months, 6 months or 12 months.
  As of
January 26, 2008, there was $90.0 million of outstanding debt under our credit
facility secured by a first lien on all equipment, inventory and accounts
receivable, and certain real estate. Of this amount, $84.5 million bore interest
at rates ranging from 4.92% to 5.17% under LIBOR contracts, plus a margin (2.0%
as of January 26, 2008), and $5.5 million bore interest at 6.5%, the prime rate
as of January 26, 2008. Furthermore, we had $11.5 million outstanding in
irrevocable letters of credit as of January 26, 2008, which reduced the amount
available to borrow under the line of credit to $20.2 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 Indebtedness” to “EBITDA” as the terms are
defined in the credit facility. As of January 26, 2008, the fee on the
outstanding letters of credit and unused funds was 2.50% and 0.25%,
respectively.
  We are
subject to certain financial covenants under our loan agreement. The covenants
require us to maintain a minimum ratio of “EBITDA” to “Fixed Charges” (as
defined in the loan documents) of no less than 1.15 to 1, and a ratio of “Funded
Indebtedness” to “EBITDA” of no more than 3.5. We are also required to maintain
a consolidated net worth of $120.9 million plus an aggregate amount equal to 50%
of quarterly net income beginning with the fourth quarter fiscal 2005 (with no
reductions for net losses), and an asset coverage ratio of no less than 1 to 1.
As of January 26, 2008, we were in compliance with all loan
covenants.
  As of
January 26, 2008, we had approximately $30.3 million of loans outstanding
against $32.6 million cash value of Company-owned life insurance policies. The
loans bore interest at a fixed rate of 8.0% or variable rates ranging from 5.7%
to 6.2%. 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, net of any loans outstanding which we do not expect to
repay prior to the death of the covered individual. 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.
The proceeds upon surrender of the policy would be reduced by the amount of any
loans
   28
  outstanding,
unless repaid by us prior to that time. Redeeming such policies prior to death
would trigger an income tax liability; therefore, we choose to borrow against
the cash value versus redeeming such policies.
  Management
believes that our financial condition, operating cash flow and available sources
of external funds are sufficient to satisfy our requirements for debt service,
capital expenditures, dividends and working capital over the course of the next
12 months. However, if we pursue a large acquisition or are unable to achieve
our forecasted operating results during the next twelve months, our forecasted
cash flows could be negatively impacted requiring that we consider alternative
funding sources in order to avoid violations of our loan covenants.
  CONTRACTUAL
OBLIGATIONS
  Future
payments due under contractual obligations, aggregated by type of obligation, as
of January 26, 2008, are as follows:
  (Dollars
      in thousands)
                
                Payments
      due by periodLess
      than
                
                
                1
      - 3
                
                
                3
      - 5
                
                More
      thanContractual
      obligations:
                
                Total
                
                
                1
      year
                
                
                years
                
                
                years
                
                
                5
      yearsLong-term
      debt, including interest
                
                $
                104,436
                
                
                $
                5,121
                
                
                $
                99,315
                
                
                $
                -
                
                
                $
                -Operating
      leases
                
                
                42,421
                
                
                
                9,725
                
                
                
                14,690
                
                
                
                8,684
                
                
                
                9,322Purchase
      obligations:Linen
      contracts
                
                
                2,012
                
                
                
                2,012
                
                
                
                -
                
                
                
                -
                
                
                
                -Natural
      gas contracts
                
                
                31,732
                
                
                
                17,242
                
                
                
                14,490
                
                
                
                -
                
                
                
                -Deferred
      compensation and pension liabilities
                
                
                23,435
                
                
                
                2,997
                
                
                
                3,241
                
                
                
                2,923
                
                
                
                14,274Total
                
                $
                204,036
                
                
                $
                37,097
                
                
                $
                131,736
                
                
                $
                11,607
                
                
                $
                23,596
  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 revenues and expenses during the reporting
period. We evaluate our estimates and judgments on a continuing basis, including
those related to linens in service, self-insurance liabilities, income taxes,
stock-based compensation, impairment of long-lived assets, discontinued
operations, bad debts, property and equipment, derivative financial instruments,
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.
  Linen
Inventory
  Linen
inventory includes linens in service as well as linen inventory not yet placed
into service. Linens in service represent the unamortized cost of textile and
linen products purchased for service to customers and linen inventory is stated
at cost. We review our policy for amortizing linens in service on an ongoing
basis. In order to satisfy our initiative to provide customers with 100% order
fill rates we purchased a significant amount of additional linens in fiscal
2006, which results in linens being washed less often and therefore lasting
longer. As a
   29
  result,
we determined that the actual useful life of our linens was longer than the
estimated useful life previously used for amortization purposes in our financial
statements and, effective April 30, 2006, the first day of our 2006 second
fiscal quarter, changed the estimate of the average useful life from 60 weeks to
63 weeks to reflect the estimated period during which these linens will remain
in service. 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, available
industry data supports the reasonableness of a 63 week useful life. Furthermore,
our amortization policy has produced historical levels of linens in service that
are comparable as a percent of textile service rental revenues. The effect of
the change in useful life was to reduce fiscal 2006 linen amortization expense
by $1.6 million, increase fiscal 2006 net income by $1.0 million, increase
fiscal 2006 basic income per share by $0.11, and increase fiscal 2006 diluted
income per share by $0.10. We believe our amortization policy is 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 26, 2008. 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 of $16.6 million and $1.5 million recorded for casualty and employee
medical claims, respectively, as of January 26, 2008, 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. We believe that adequate provisions for income taxes have
been made for all periods presented, and net deferred tax assets will be fully
recovered, except for $0.1 million for which a valuation allowance has been
recorded. At January 26, 2008, we reported a net deferred tax asset of $13.9
million in federal net operating loss and credit 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 under the provisions of FIN 48 for
adequacy and adjusted based on changing circumstances and the progress of tax
audits. In fiscal 2005 we recorded an increase in the reserve of $0.2 million
related to our discontinued operations. In fiscal 2006 we recognized a $0.3
million adjustment resulting in a reduction to tax expense. In fiscal 2007, we
recognized the tax benefit associated with $2.3 million of previously uncertain
tax positions due to the expiration of related statutes of limitation. As of
January 26, 2008, we have only an immaterial amount of unrecognized tax benefits
remaining that would affect the Company's effective tax rate .
    30
  Share-Based
Payment
  We
account for stock-based compensation in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123(R), “Share-Based Payment.” Under the fair
value recognition provisions of this statement,
  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 26, 2008 are fully
recoverable.
  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.
  Derivative
Financial Instruments
  We enter
into derivative contracts to manage our exposure to cash flow fluctuations
related to changes in the price of natural gas. We do not hold any derivative
financial instruments for trading or speculative purposes. In accordance with
SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging
Activities,” we have elected to apply cash flow hedge accounting for our natural
gas futures contracts, where contract terms match and a perfect hedge is
determined to exist. For these cash flow hedges, changes in the fair value of
the derivatives are measured quarterly and reported in accumulated other
comprehensive income. For the natural gas futures contracts that are not
considered a cash flow hedge for accounting purposes, the quarterly change in
fair value of the derivatives is reported as non-operating income or expense. We
believe the use of hedge accounting for our derivative contracts, where matched
terms exist, provides the best accounting alternative for determining our
quarterly and annual financial results.
  Pension
Benefits
  Defined
benefit plan expense and related obligations are calculated using actuarial
models and are dependent on assumptions such as discount rate, expected return
on plan assets, and rate of compensation increase. While we believe that the
assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect our retirement plan obligations and future expense.
Additional information about our defined benefit pension plan and related
assumptions is included in Note 10 to the Notes to Consolidated Financial
Statements included in Item 15(a) of this Form 10-K.
   31
   NEW
ACCOUNTING PRONOUNCEMENTS
  In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS
No.
  In June
2006, the EITF reached a consensus on Issue No. 06-5, “Accounting for Purchases
of Life Insurance – Determining the Amount that Could Be Realized in Accordance
with FASB Technical Bulletin 85-4.” EITF 06-5 stipulates that the cash surrender
value and any additional amounts provided by the contractual terms of the
insurance policy that are realizable at the balance sheet date should be
considered in determining the amount that could be realized under the life
insurance policy. The consensus also provides additional guidance for
determining the amount to be realized, including the policy level for which the
analysis should be performed, amounts excluded and measurement criteria.
Entities will have the option of applying the provisions of EITF 06-5 as a
cumulative effect adjustment to the opening balance of retained earnings or
retrospectively to all prior periods. EITF 06-5 is effective for our fiscal year
ending January 26, 2008. The adoption of EITF 06-5 had no impact on our
consolidated financial statements.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring the fair value of assets and liabilities.
This framework is intended to provide increased consistency in how fair value
determinations are made under various existing accounting standards which
permit, or in some cases require, estimates of fair market value. SFAS No. 157
also expands financial statement disclosure requirements about a company’s use
of fair value measurements, including the effect of such measures on earnings.
SFAS No. 157, as originally issued, was effective for our fiscal year ending
January 31, 2009. However, on February 12, 2008, the FASB issued Final FASB
Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157,” which
deferred the effective date of SFAS No. 157 for one year, as it relates to
certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We do not expect the adoption of SFAS No. 157 to have
a material impact on our consolidated financial statements.
  In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” which amends SFAS No. 87,
“Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other than Pensions” and SFAS No. 132 (revised 2003), “Employers’
Disclosures about Pension and Other Postretirement Benefits.” SFAS No. 158
requires that employers recognize on a prospective basis the funded status of
their defined benefit pension and other postretirement plans on their
consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost. As of January 27, 2007, we have adopted the recognition provisions
of SFAS No. 158, resulting in a $0.6 million increase in noncurrent liabilities,
and a corresponding increase in accumulated other comprehensive loss before
taxes. The statement also requires that employers measure plan assets and
obligations as of the date of their year-end financial statements beginning with
our fiscal year ending January 31, 2009. We currently measure plan assets and
obligations as of January 1. We have not yet determined the impact that this
portion of SFAS No. 158 will have on our consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities.” SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 is effective for our
fiscal
 32
 
 In June
2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for
Income Tax Benefits on Share-Based Payment Awards.” EITF 06-11 requires
companies to recognize a realized income tax benefit
  In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This
statement amends SFAS No. 141 and provides revised guidance for recognizing and
measuring assets acquired and liabilities assumed in a business combination.
This statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination, and requires that transaction costs in a
business combination be expensed as incurred. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS No. 141R will impact our accounting for business
combinations completed on or after February 1, 2009.
  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
service centers. The total cost of natural gas in fiscal 2007 was $25.3 million.
To reduce the uncertainty of fluctuating energy prices, we have entered into
fixed-price contracts as of January 26, 2008 for approximately 62% 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 2008 would result in a reduction of approximately $0.9
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
2007 was $9.2 million. A hypothetical 10% increase in the cost of delivery fuel
budgeted for fiscal 2008 would result in a decrease of approximately $1.1
million in annual pretax earnings.
  Our
exposure to interest rate risk relates primarily to our variable-rate revolving
loan agreement borrowings and our life insurance policy loans. As of January 26,
2008, there was $90.0 million of outstanding debt under the credit facility
bearing 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 Indebtedness” to
“EBITDA,” as each is defined in the loan agreement and as of January 26, 2008,
was 2.00%. Of the $30.3 million in life insurance policy loans outstanding as of
January 26, 2008, a total of $24.8 million of these loans bore interest at
variable rates ranging from 5.70% to 6.20%. A hypothetical increase of 100 basis
points in short-term interest rates in fiscal 2007 would result in a reduction
of approximately $1.1 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.
     33
  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 as
of the end of the period covered by this report of the effectiveness of our
disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that
evaluation management, including the Chief Executive Officer and the Chief
Financial Officer, concluded that our disclosure controls and procedures as of
January 26, 2008, were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act 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 such item is defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934. 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 internal control over financial reporting as of January 26, 2008. All
internal control systems have inherent limitations, including the possibility of
circumvention and overriding the control. Accordingly, even effective internal
control over financial reporting 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 in Internal 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 26, 2008, is
effective.
  Our
independent registered public accounting firm, Deloitte & Touche LLP, has
audited our evaluation of the effectiveness of our internal control over
financial reporting as of January 26, 2008, as stated in its report included
herein.
  34
   REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Shareholders of
 Angelica
Corporation:
  We have
audited the internal control over financial reporting of Angelica Corporation
and subsidiaries (the “Company”) as of January 26, 2008, based on criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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, included in the accompanying Report of Management on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, 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
opinion.
  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 inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
  In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 26, 2008, based on the criteria
established in Internal
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 26, 2008, of
the Company and our report dated April 9, 2008 expressed an unqualified opinion
on those financial statements and financial statement schedule.
  /s/
Deloitte & Touche LLP
  St.
Louis, Missouri
 April 9,
2008
  35
  Item 9B. Other
Information
  Not
Applicable.
  PART III
  Item 10. Directors,
Executive Officers and Corporate Governance
  Directors:
  Information
concerning each of our directors is presented below.
 
 Director:
              RONALD
      J. KRUSZEWSKIEmployment:
              Mr.
      Kruszewski has been Chairman of Stifel Financial Corp. and its subsidiary
      Stifel, Nicolaus & Company, Incorporated, a full service brokerage
      investment banking firm since April 2001, and has served as President and
      Chief Executive Officer since September 1997.Directorships:
              Chairman
      of Stifel Financial Corp., Stifel, Nicolaus & Company,
      Incorporated.Committees:
              Mr.
      Kruszewski was elected non-executive Chairman of the Board on September
      18, 2007. From September 5, 2006 to September 18, 2007, he served as Lead
      Director. Special Finance Committee (Chairman); Corporate Governance and
      Nominating Committee until February 16, 2007; Compensation and
      Organization Committee effective February 16, 2007.Age:
              49Director
      since:
              2004Director:
              STEPHEN
      M. O’HARAEmployment:
              Mr.
      O’Hara has served as Chief Executive Officer of the Company since
      September 2003 and was Chairman from January 29, 2006 to September 18,
      2007. He also served as President from September 2003 to June 2005 and was
      reappointed as President effective October 2006. 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.Directorships:
              NoneCommittees:
              Special
      Finance CommitteeAge:
              53Director
      since:
              2000
    36
  Director:
              JAMES
      R. HENDERSON(1)Employment:
              Mr.
      Henderson is a Managing Director and operating partner of Steel Partners,
      L.L.C., a global investment managing firm, which is the Investment Manager
      for Steel Partners II Master Fund L.P., Steel Partners II, L.P. and Steel
      Partners II (Onshore) LP. He has been associated with Steel Partners,
      L.L.C. and its affiliates since August 1999. Mr. Henderson has, since
      March 1, 2007, served as an Executive Vice President of SP Acquisition
      Holdings, Inc., a “blank check company” formed for the purpose of
      acquiring, through a merger, capital stock exchange, asset acquisition or
      other similar business combination, one or more businesses or assets. Mr.
      Henderson has served as President and Chief Operating Officer of
      WebFinancial Corporation, which, through its operating subsidiaries,
      operates in niche banking markets, since November 2003, and as Chief
      Executive Officer and a director since June 2005. He has been a director
      (currently Chairman of the Board) of Del Global Technologies Corp., a
      designer and manufacturer of medical imaging and diagnostic systems, since
      November 2003. He has also served as President of Gateway Industries,
      Inc., a provider of database development and website design and
      development services, since December 2001. Mr. Henderson has served as a
      director of SL Industries, Inc., a manufacturer and marketer of power and
      data quality systems and equipment for industrial, medical, aerospace and
      consumer applications since January 2002. He has served as a director of
      BNS Holdings, Inc., a holding company that owns a majority of Collins
      Industries, Inc., a manufacturer of school buses, ambulances, and terminal
      trucks, since June 2004.Directorships:
              Director
      of BNS Holdings, Inc., SL Industries, Inc., WebFinancial Corporation;
      Chairman of Del Global Technologies Corp.Committees:
              Compensation
      and Organization Committee effective September 19, 2006Age:
              50Director
      since:
              2006
 
 Director:
              CHARLES
      W. MUELLEREmployment:
              Mr.
      Mueller is the Retired Chairman and Chief Executive Officer of Ameren
      Corporation and its subsidiaries, Union Electric Company (d/b/a AmerenUE),
      a local electric utility, and Ameren Services Company, positions in which
      he served from 1998 until December 31, 2003. Mr. Mueller also served as
      President of Union Electric Company from 1993 until 2001 and as its Chief
      Executive Officer from 1994 until 2001.Directorships:
              Director
      of Ameren Corporation; former director and Chairman of the Federal Reserve
      Bank of St. Louis.Committees:
              Audit
      Committee (Chairman); Compensation and Organization Committee until
      February 16, 2007; Corporate Governance and Nominating Committee
      (Chairman)Age:
              69Director
      since:
              1996
    37
  Director:
              KELVIN
      R. WESTBROOKEmployment:
              Mr.
      Westbrook has been President and Chief Executive Officer of KRW Advisors,
      LLC since October 2007. He served as Chairman and Chief Strategic Officer
      from October 2006 to October 2007 of Millennium Digital Media Systems,
      L.L.C. (successor to and former affiliate of Millennium Digital Media,
      L.L.C. (MDM)), a broadband services company, which he co-founded in May
      1997. Previously, he served as President and Chief Executive Officer of
      MDM.Directorships:
              Director
      of Archer Daniels Midland Company and Stifel Financial
    Corp.Committees:
              Audit
      Committee; Compensation and Organization Committee
    (Chairman)Age:
              52Director
      since:
              2001
 
 
 Director:
              DON
      W. HUBBLEEmployment:
              Mr.
      Hubble served as our non-executive Chairman of the Board from February
      2004 to January 2006. Mr. Hubble joined Angelica Corporation as Chairman,
      President and Chief Executive Officer in January 1998 and served in that
      capacity until September 2003 when he relinquished the titles of President
      and Chief Executive Officer. In January 2004, Mr. Hubble retired as
      executive Chairman.Directorships:
              Trustee
      of Johnson and Wales University.Committees:
              Corporate
      Governance and Nominating Committee effective February 16, 2007; Special
      Finance CommitteeAge:
              68Director
      since:
              1998
    38
  Director:
              JOHN
      J. QUICKE(1)Employment:
              Mr.
      Quicke is a Managing Director and operating partner of Steel Partners,
      L.L.C., a global investment management firm, which is the Investment
      Manager to Steel Partners II, L.P. He has been associated with Steel
      Partners, L.L.C. and its affiliates since September 2005. Mr. Quicke
      served as Chairman of the Board of NOVT Corporation, a former developer of
      advanced medical treatments for coronary and vascular disease, from April
      2006 to January 2008 and served as President and Chief Executive Officer
      of NOVT from April 2006 to November 2006. He has served as a director of
      WHX Corporation, a holding company, since July 2005, as a Vice President
      since October 2005 and as President and Chief Executive Officer of its
      Bairnco Corporation subsidiary since April 2007. Mr. Quicke currently
      serves as a director of Adaptec, Inc., a storage solutions provider, and
      as a director of Collins Industries, Inc., a manufacturer of school buses,
      ambulances and terminal trucks. He served as a director, President and
      Chief Operating Officer of Sequa Corporation, a diversified industrial
      company, from 1993 to March 2004, and Vice Chairman and Executive Officer
      of Sequa from March 2004 to March 2005. As Vice Chairman and Executive
      Officer of Sequa, Mr. Quicke was responsible for the Automotive, Metal
      Coating, Specialty Chemicals, Industrial Machinery and Other Product
      operating segments of the company. From October 2006 to June 2007, he also
      served as a director of Layne Christensen Company, a provider of products
      and services for the water, mineral, construction and energy markets. From
      March 2005 to August 2005, Mr. Quicke occasionally served as a consultant
      to Steel Partners II and explored other business
      opportunities.Directorships:
              Director
      of Adaptec, Inc., Collins Industries, Inc. and WHX
      Corporation.Committees:
              None;
      Mr. Quicke was elected non-executive Vice Chairman of the Board effective
      September 18, 2007.Age:
              58Director
      since:
              2006Director:
              RONALD
      N. RINER, M.D.Employment:
              Dr.
      Riner is President of The Riner Group, Inc., a healthcare advisory and
      management consulting firm, which he founded in 1980. Clientele includes
      hospitals, health systems and medical groups throughout the United
      States.Directorships:
              NoneCommittees:
              Audit
      Committee; Corporate Governance and Nominating
CommitteeAge:
              59Director
      since:
              2005
 
 (1)
              Directors
      James R. Henderson and John J. Quicke were each appointed to our Board of
      Directors effective August 30, 2006, pursuant to the terms of a settlement
      agreement dated as of the same date, between us, Steel Partners, L.L.C.
      and Steel Partners II, L.P. (Steel). Steel is the largest shareholder of
      our common stock. As part of the settlement agreement we agreed to appoint
      Messrs. Henderson and Quicke as directors, declassify our Board of
      Directors, limit the size of our Board, and make certain other corporate
      governance changes. Steel agreed, among other things, to withdraw its
      slate of nominees for director and
its
    39
  shareholder
      proposals previously submitted for action at our 2006 Annual Meeting of
      Shareholders and to vote all of its shares of our common stock in favor of
      the election of Messrs. Kruszewski and O’Hara as directors at the October,
      2006 annual meeting. Steel also agreed to restrict certain of its actions
      with respect to transactions involving us or our assets or
      stock.
 Executive
Officers:
  The
principal occupations for each executive officer throughout the past five years,
who is not also a director, are set forth below. All officers serve at the
pleasure of the Board of Directors.
 
 Officer:
              Edward
      M. Davis(1)Present
      Position:
              Vice
      PresidentYear
      First Elected as an Officer:
              2007Age:
              43Officer:
              Steven
      L. Frey(2)Present
      Position:
              Vice
      President, General Counsel and SecretaryYear
      First Elected as an Officer:
              1999Age:
              58Officer:
              John
      S. Olbrych(3)Present
      Position:
              Senior
      Vice President and Chief Administrative OfficerYear
      First Elected as an Officer:
              2006Age:
              52Officer:
              Richard
      M. Oliva(4)Present
      Position:
              Senior
      Vice PresidentYear
      First Elected as an Officer:
              2007Age:
              48Officer:
              James
      W. Shaffer(5)Present
      Position:
              Vice
      President and Chief Financial OfficerYear
      First Elected as an Officer:
              1999Age:
              55Officer:
              William
      R. Watson(6)Present
      Position:
              Senior
      Vice PresidentYear
      First Elected as an Officer:
              2007Age:
              44
 
 (1)
              Edward
      M. Davis was elected a Vice President of Angelica on March 13, 2007. He
      has served in the capacity of Vice President of Operations since July
      2006. Mr. Davis previously served as Market Vice President from November
      2005 to July 2006. Prior to that, he was Director of Reverse Logistics for
      Moduslink, a supply chain management company focused on technology
      customers, from April 2004 to November 2005, and General Manager Global
      Accounts of Moduslink from April 2001 to June 2002. He was President of
      Visar Logistics, a supply chain management company that provided
      warehousing and distribution services, from June 2002 to April
      2004.
 
 (2)
              Steven
      L. Frey has been our Vice President, General Counsel and Secretary since
      1999.
  
 40
 (3)
              John
      S. Olbrych has been our Senior Vice President since December 2006, and has
      served as Chief Administrative Officer since November 2006. He was Chief
      Executive Officer of Carus Publishing, a publisher of children’s books and
      magazines, from May 2000 to August
2006.
 
 (4)
              Richard
      M. Oliva was elected a Senior Vice President of Angelica on March 13,
      2007. He has served in the capacity of Senior Vice President, US Sales
      & Service since January 2007. Mr. Oliva previously served as Senior
      Vice President, West Business Unit from October 2005 to January 2007;
      Region Vice President, West Region from October 2003 to October 2005; and
      Region Operations Manager, West Region from September 2002 to October
      2003. Prior to that, he served as Regional Operations Manager, West
      Region, for Ashland, Inc., a chemical, plastics and lubricants company,
      from December 1998 to August
2002.
  (5)
              James
      W. Shaffer, our Vice President, Treasurer and Chief Financial Officer, has
      served as Vice President since September 1999, Chief Financial Officer
      since February 2004, and was Treasurer from September 1999 to March 2005.
      He was reappointed Treasurer in August
2007.
 
 (6)
              William
      R. Watson was elected a Senior Vice President of Angelica on March 13,
      2007. He has served in the capacity of Senior Vice President, Strategy,
      Marketing & Sales Administration since January 2007. He previously
      served as Senior Vice President, East Business Unit from October 2005 to
      January 2007; Vice President of Operations from December 2003 to September
      2005; and Vice President of Business Development from August 2000 to
      December 2003.
 
 None of
the executive officers of the Company are related to any director or other
executive officer of the Company.
 
 Section
16(a) Beneficial Ownership Reporting Compliance:
 
 Based on
our records and other information, we believe that all SEC filing requirements
under Section 16(a) of the Securities Exchange Act of 1934, as amended (1934
Act), applicable to our directors and executive officers were complied with on a
timely basis in fiscal year 2007, except that through clerical error one report
was filed late by Mr. Watson. The transaction involved the withholding of shares
in payment of taxes on restricted matching shares that vested in
2007.
 
 Corporate
Governance:
 
 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 website,
www.angelica.com.
 
 We have
not made any material changes to the procedures by which security holders may
recommend nominees to our Board of Directors since the proxy statement we filed
for our 2007 Annual Meeting of Shareholders.
 
 Our Board
has established an Audit Committee which is composed entirely of independent,
non-employee directors. In compliance with its charter, the Audit Committee
reviews our auditing, accounting, financial reporting and internal control
functions and monitors compliance with our Code of Conduct and Ethics. This
committee is solely responsible for the appointment, compensation, oversight and
termination of our independent public accountants and the pre-approval of audit
and non-audit services. Charles W. Mueller (Chairman), Dr. Ronald N. Riner and
Kelvin R. Westbrook are the current members of the committee. The Board of
Directors has determined that Charles W. Mueller is an “audit committee
financial expert” as defined in Item 407(d)(5) of the Securities and Exchange
Commission (SEC) Regulation S-K.
 
   41
  Item 11. Executive
Compensation
 
 COMPENSATION
DISCUSSION AND ANALYSIS
 
 Introduction
 
 Our
Compensation and Organization Committee, consisting entirely of independent,
non-employee directors, is responsible for establishing and periodically
reviewing our executive compensation philosophy. At least once a year, the
Committee evaluates our existing plans and policies in the context of current
market conditions; emerging competitive practices; and legal and regulatory
developments, including prevailing corporate governance guidelines. The purpose
of this review is to ensure that our executive compensation program is effective
and evolves in a manner that allows us to continue to attract and retain the
talent necessary to execute our established business goals to create and sustain
value for shareholders.
 
 Compensation
Philosophy
 
 Our objective is to create
comprehensive executive compensation packages that motivate management to attain
or exceed our strategic business goals. We strive to identify and maintain an
appropriate balance between both short- and long-term compensation and between
cash- and equity-based compensation to attract and retain top quality
executives. We seek to provide incentives for executives to create value in our
Company that will benefit the shareholders and in turn, reward our executives
appropriately. To ensure that executive compensation is aligned with our
financial performance and the interests of our shareholders, a significant
portion of each executive’s compensation is linked directly to our financial
performance. Except for base salary, the other elements of direct executive
compensation are based upon attaining financial targets and strategic business
objectives established by the Committee as of the beginning of a given fiscal
year or performance period.
 
 The executive compensation program is
intended to provide compensation that is competitive, fair, and reasonable. We
believe that our philosophy of aligning management’s interests with those of our
shareholders is integral to creating a working environment that furthers the
interests of the Company and our shareholders.
 
 Components
of Executive Compensation
 
 Angelica’s
total executive compensation program has two main components: direct
compensation and indirect compensation in the form of various benefit plans and
programs. The current elements of each component and the basis for establishing
overall and individual compensation levels are discussed below.
 
 Direct
Compensation
 
 The
elements of direct executive compensation are: base salary, short-term (annual)
incentive compensation (typically cash), and long-term incentive compensation
(cash and/or equity-based awards).
 
 Base
Salary
 
 We
establish an executive’s initial base salary with our Company based upon a
general knowledge of the base salaries paid to officers in similar positions at
companies that we believe compete with us for executive talent.These companies are
public and private companies of similar size and complexity, but are not
necessarily companies that are also in the linen management industry or that are
included in the Value Line Industrial Services peer group we use to gauge our
stock performance. We also consider the base salaries paid by other linen
management companies, both privately owned or divisions of larger, more
diversified public companies. There is no set group of companies that has
consistently been considered by us in setting initial base salaries nor are
there any formal guidelines as to the relationship that the initial base salary
of a newly hired executive should have to the base salaries of similar
executives in any other company or group of companies.
   
 42
  The
current base salaries of all named executive officers are reviewed on an annual
basis. Pay increases for the chief executive officer are primarily based upon a
performance evaluation by the Committee with participation by the entire Board
of Directors. Pay increases for all other named executive officers are based
upon the performance evaluation and recommendation of the chief executive
officer. We also review the relative base salaries of each of the executive
officers based upon the title, duties and responsibilities of the officer as
compared with the title, duties and responsibilities of our other executive
officers.
 
 Mr.
O’Hara has not yet received a pay increase for fiscal 2008. Messrs. Olbrych,
Frey, Shaffer and Oliva each received base salary increases for fiscal 2008 of
between 2.5% and 5.3% of their fiscal 2007 salaries. Mr. Olbrych received a
$10,000 raise to $265,000 for fiscal 2008 from his fiscal 2007 salary of
$255,000. Mr. Frey received a $10,000 raise to $220,000 for fiscal 2008 from his
fiscal 2007 salary of $210,000. Mr. Shaffer received a $5,000 raise to $205,000
for fiscal 2008 from his fiscal 2007 salary of $200,000. Mr. Oliva received a
$10,000 raise to $200,000 for fiscal 2008 from his fiscal 2007 salary of
$190,000. Each of these increases reflected merit increases for the
individuals.
 
 With
respect to an adjustment of Mr. O’Hara’s base salary for fiscal 2007, Mr. O’Hara
suggested, and the Committee agreed, that in lieu of any increase in his base
salary for fiscal 2007, he be granted two additional weeks of paid vacation per
year, retroactive to the beginning of the 2007 fiscal year. Mr. O’Hara is now
entitled to a total of six weeks of paid vacation annually. Mr. Olbrych’s
employment with us commenced on November 27, 2006, at which time his base salary
was set at $250,000 per year. Mr. Olbrych received an increase in his base
salary of $5,000, or 2.0%, to $255,000 for fiscal 2007. Mr. Frey’s base salary
was increased $5,000, or 2.4%, over his fiscal 2006 base salary, to $210,000 for
fiscal 2007. Mr. Shaffer’s base salary was increased $5,000, or 2.6%, over his
fiscal 2006 base salary to $200,000 for fiscal 2007. Mr. Oliva’s base salary
increased $25,000 or 15.2% over his fiscal 2006 base salary, to $190,000 for
fiscal 2007. Each of these raises reflected merit increases for each of these
individuals, and the raise for Mr. Oliva also reflected an increase in the scope
of his responsibilities.
 
 For
fiscal 2006, Mr. O’Hara received a pay increase of $20,000, or 4.9%, to $425,000
from his base salary of $405,000 for fiscal 2005. Likewise, Messrs. Frey and
Shaffer each received base salary increases for fiscal 2006 of between 4.8% and
5.4% of their fiscal 2005 base salaries. Messrs. Frey and Shaffer each received
$10,000 increases in base salary from their fiscal 2005 base salaries of
$195,000 and $185,000, respectively. Each of these increases reflected merit
raises for the individuals.
  Incentive
Compensation
 
 Short-term
Annual Compensation
 
 Annual
incentive compensation is typically paid in cash to executive officers after the
end of each fiscal year. The actual amount of the annual incentive award made to
each executive officer is determined based upon the achievement of financial and
strategic performance criteria established for the executive officer at the
beginning of the fiscal year, as well as the size of the annual incentive award
pool. The size of the annual incentive award pool is determined by the level of
earnings before interest, taxes, depreciation and amortization (EBITDA) reported
by our Company during the fiscal year.
 
 Each of
the named executive officers is given a number of separate performance criteria
based upon the executive officer’s job description and responsibilities. The
various performance criteria are weighted for each executive officer and
performance points are assigned to various performance levels within each of the
criterion with the total number of performance points that are available to an
executive officer to earn being in excess of 200. Within each performance
criterion, performance points are assigned to levels of achievement of the
performance criterion relative to budgeted, targeted or expected levels of
performance for that criterion. At the end of the fiscal year, actual
achievement of the performance goals relative to the pre-established performance
measurements is analyzed and the executive officer earns a point total, up to a
maximum of 200 points, on the basis of this analysis.
   
 43
  The point
total for each executive officer represents the percentage of the annual
incentive target amount established for the executive officer that the executive
officer has actually achieved. Annual incentive target amounts are expressed as
a percentage of the executive officer’s base salary for the fiscal year with the
target payment for each of the named executive officers being 50% of the
executive officer’s base salary for the fiscal year. Each executive officer can
earn more or less than the target annual incentive percentage based upon the
actual number of performance points achieved by the executive officer as well as
the size of the annual incentive award pool for the fiscal year.
 
 For
example, subject to adjustment based on the annual incentive target pool created
by the EBITDA growth criterion, a point total of 100 points would earn the
executive officer his target annual incentive award payment for the year (i.e.,
50% of the executive officer’s base salary for the fiscal year). Point totals of
more or less than 100 points would compute to percentages of the target payment
that the executive officer was deemed to have earned for the fiscal year.
Subject to the size of the actual annual incentive award pool relative to the
target pool, performance points of greater than 100 would yield an annual
incentive award payment of greater than the executive officer’s target award and
performance points of less than 100 would yield an annual incentive payment of
less than the executive officer’s target award for the fiscal year.
 
 The
actual level of all annual incentive awards is further dependent upon the level
of our EBITDA for the fiscal year measured against pre-established threshold,
target and maximum EBITDA amounts. If we earn more than the target level of
EBITDA for the fiscal year, the executive officer will receive an annual
incentive payment greater than that computed by reference to the executive’s
performance points relative to his target award for the year. If we earn less
than the target level of EBITDA for the fiscal year, the executive officer will
receive an annual incentive payment less than that computed by reference to the
executive’s performance points relative to his target award for the year, or may
earn no annual incentive payment at all.
 
 For
fiscal 2007, the annual incentive award pool was set on the basis of growth in
EBITDA, with the threshold EBITDA required for the payment of any annual
incentive awards at $31.4 million, the EBITDA recorded for fiscal 2006. The
EBITDA to achieve the target annual incentive award pool was $41 million for
fiscal 2007 and EBITDA of $46 million for the fiscal year would have resulted in
a maximum annual incentive award pool. The Company did not achieve the threshold
EBITDA and as a result no annual incentive awards were paid to the named
executive officers for fiscal 2007.
 
 The
annual incentive award that each named executive officer could have earned was
primarily based upon the named executive officer’s achievement of performance
points under certain pre-established criteria tied to the executive officer’s
particular job and responsibilities within our company. If the company had
achieved the threshold EBITDA, subject to adjustment based upon the size of the
annual incentive award pool for fiscal 2007, each executive officer’s
achievement of 100 performance points would entitle the executive officer to a
target award equal to 50% of his fiscal 2007 annual base salary while a
performance point total of 200 or more points would have resulted in a maximum
target award of 100% of the executive officer’s fiscal 2007 base salary. While
the process of earning performance points was the same as that used by the
company for fiscal 2006, in certain cases, the performance criteria for the
named executive officers were changed in fiscal 2007. In addition, even in cases
in which the performance criteria remained the same as the fiscal 2006
performance criteria, the threshold, target and maximum amounts or the weighting
of the performance criteria in the calculation of the executive officer’s annual
incentive award were adjusted from the fiscal 2006 levels.
 
 For
fiscal 2007, earnings per share was a performance criterion used in the
determination of a portion of each of the named executive officer’s annual
incentive award. For fiscal 2007, the target for earnings per share was $0.78.
Messrs. O’Hara and Olbrych could add
or subtract two performance points for each $0.01 increase or decrease, as the
case may be, from the target earnings per share amount. Under this formula, the
threshold earnings per share for Messrs. O’Hara and Olbrych was $0.58 per share
and there was no maximum (except for the fact that not more than 200 total
performance points could be factored into the calculation of any individual’s
annual incentive award). Mr. Frey could increase or decrease his performance
points under this criterion by a single point for each $0.01 per share of
earnings per share above or below the target EPS amount, with his threshold
earnings per share computing to $0.58 and his maximum capped at $0.98. Mr.
Shaffer also
    44
  gained or
lost a performance point for each $0.01 of earnings per share above or below the
target, but his threshold EPS criterion was $0.68 and his maximum was
established at $1.04. Mr. Oliva also gained or lost a performance point for each
$0.01 of earnings per share above or below the target, but his threshold EPS
criterion was $0.63 with no maximum (except for the fact that not more than 200
total performance points could be factored into the calculation of any
individual’s annual incentive award). Actual EPS for fiscal 2007 was $0.42, and
as a result, none of the named executive officers would have met their threshold
EPS for the EPS performance criterion.
 
 For
fiscal 2007, Mr. O’Hara’s and Mr. Olbrych’s annual incentive awards were also
based upon second half gross margin (target: 18%, threshold: 16.5% and maximum
19.0%); return on net assets, which is defined for these purposes as net income
over the difference between total assets and total liabilities (target: 4.9%,
threshold: 3.9% and maximum 6.0%); and revenue growth (achievement of revenue of
$440.7 million and fiscal 2007 fourth quarter revenue increases from fiscal 2006
fourth quarter revenue of 6% for target, 4% for threshold and 8% for
maximum).
 
 In
addition to the EPS criterion, the amount of Mr. Frey’s annual incentive award
would have been determined by a number of other criteria geared to his
responsibilities as general counsel. These other criteria included successful
completion of certain designated or to-be designated transactions; successful
completion of a customer contract template and development of a process for
customer contract management; satisfaction ratings among users of legal services
within our Company; achievement of lower legal expenses as compared with
budgeted expenses; and a discretionary component to be evaluated by the chief
executive officer and the chief administrative officer at the end of the fiscal
year.
 
 Mr.
Shaffer, in addition to the earnings per share criterion also had performance
criteria relating to return on net assets identical to Messrs. O’Hara and
Olbrych as well as other criteria involving operational matters relating to the
finance department, the reduction of days sales outstanding, the absence of
significant deficiencies and material weaknesses in our internal control over
financial performance and a discretionary component evaluated by the chief
administrative officer at the end of the fiscal year.
 
 Mr.
Oliva, in addition to the earnings per share criterion also had performance
criteria relating to revenue growth and second half gross margin identical to
Messrs. O’Hara and Olbrych as well as other criteria, including achieving net
yield growth, achieving sales targets for the Company’s products and services
and successful execution of sales initiatives.
 
 EPS was
also one of the financial criterion used for determining a portion of the annual
incentive payments for all of the named executive officers for fiscal year 2006.
Performance points were earned by each executive officer under the earnings per
share criterion if earnings per share reached the budgeted amount of $0.27. To
stimulate performance above budget, each executive officer could have earned an
additional performance point for each additional $0.01 of earnings per share
achieved above that budget amount, up to 100 performance points for Messrs.
O’Hara and Frey and up to 70 performance points under the criterion for Mr.
Shaffer. Target performance points were earned by each executive officer if
earnings per share exceeded the $0.27 budgeted amount by $0.10.
 
 Mr.
O’Hara’s performance criteria for fiscal 2006 also included gross margin for the
second half of fiscal 2006 (target: 16.85%) and bank debt-to-EBITDA ratio
(target: 3.0:1, assuming $30 million of insurance policy debt outstanding). Mr.
O’Hara’s performance criteria also included the non-financial measures of
customer satisfaction and employee satisfaction, as well as a discretionary
evaluation of Mr. O’Hara’s performance by the Committee.
 
 Mr.
Olbrych commenced his employment with us on November 27, 2006, so no specific
fiscal 2006 performance criteria were set for him. In addition to the earnings
per share and discretionary criteria, Mr. Frey’s performance measures for fiscal
2006 included performance with respect to our special committee, labor union
negotiations, and acquisitions and divestitures. Mr. Shaffer’s criteria included
earnings per share, bank debt-to-EBITDA ratio and discretionary criteria, as
well as criteria involving the absence of audit weaknesses and
  45
  For
fiscal 2006, the threshold amount of EBITDA necessary for an incentive award to
accrue was $27.5 million, which was the amount of EBITDA recorded for fiscal
2005 by our company. The target amount of EBITDA for fiscal 2006 was $32.5
million and the amount of EBITDA required to be recorded during fiscal 2006 for
the maximum annual incentive award pool to accrue was $39 million.
 At the
end of fiscal 2006, it was determined that Mr. O’Hara, Mr. Frey and Mr. Shaffer
had achieved 92%, 161% and 124% of their respective target incentive awards for
the fiscal year. Actual EBITDA for fiscal 2006 was $31.4 million versus a target
EBITDA for fiscal 2006 of $32.5 million, which reduced the annual incentive
awards pool (and each individual annual incentive award) to approximately 78% of
the levels that the awards would have been had target EBITDA been achieved. On
this basis, Mr. O’Hara was paid an annual incentive award for fiscal 2006 of
$152,686; Mr. Frey received an annual incentive award of $128,885; and Mr.
Shaffer was paid an annual incentive award of $94,423.
 
 As stated
above, Mr. Olbrych was not provided specific 2006 annual incentive plan criteria
or targets, but the Committee determined to grant him a discretionary bonus
equal to $18,000 for services rendered to our Company during fiscal 2006. The
amount was determined by computing the amount of Mr. Olbrych’s target bonus for
fiscal 2007 of 50% applied to his $250,000 base salary during fiscal 2006,
discounting that amount by approximately 22%, and then prorating the result by
the number of days during the 2006 fiscal year that Mr. Olbrych served as an
executive officer of our Company. Mr. Olbrych was eligible to participate in the
annual incentive awards program commencing in fiscal 2007.
 
 The
performance criteria to be utilized for fiscal 2008 have been finalized for all
of the named executive officers. The annual award pool for fiscal 2008 was set
on the basis of growth in EBITDA. As in the
2007 and 2006 fiscal years, the annual incentive award that each named executive
officer will earn for fiscal 2008 will primarily be based upon the named
executive officer’s achievement of performance points under certain
pre-established criteria tied to the executive officer’s particular job and
responsibilities within our Company. Subject to adjustment based upon the size
of the annual incentive award pool for fiscal 2008, each executive officer’s
achievement of 100 performance points will entitle the executive officer to a
target award equal to 50% of his fiscal 2008 annual base salary while a
performance point total of 200 or more points will result in a maximum target
award of 100% of the executive officer’s fiscal 2008 base salary. While the
process of earning performance points is the same as described above for fiscal
2007 and 2006, in certain cases, the performance criteria for the named
executive officers has been changed in fiscal 2008. In addition, even in cases
in which the performance criteria have remained the same as the fiscal 2007
performance criteria, the threshold, target and maximum amounts or the weighting
of the performance criteria in the calculation of the executive officer’s annual
incentive award may have been adjusted from the fiscal 2007 levels.
 
 For
fiscal 2008, earnings per share is again a performance criterion used in the
determination of a portion of each of the named executive officer’s annual
incentive award. Each of
the named executive officers will add or subtract two performance points for
each $0.01 increase or decrease, as the case may be, from the target earnings
per share amount.
  For
fiscal 2008, Mr. O’Hara’s annual incentive award will also be based upon
achieving organic revenue growth targets for the fiscal year and achieving
targets for the Company’s net debt at fiscal year end.
 
 For
fiscal 2008, Mr. Olbrych’s annual incentive award will also be based upon
reduction of debt criteria identical to those applicable to Mr. O’Hara,
achieving targets for the amount of the Company’s direct source linen, and
achieving monthly average accounts receivable aging targets.
 
 For
fiscal 2008, Mr. Frey’s annual incentive award will also be based upon
successful negotiation of new production labor contracts meeting certain
criteria as well as a discretionary evaluation of Mr. Frey’s performance by the
Chief Executive Officer and Chief Administrative Officer.
  
 46
  For
fiscal 2008, Mr. Shaffer’s annual incentive award will also be based upon
reduction of debt criteria identical to those applicable to Mr. O’Hara as well
as a discretionary evaluation of Mr. Shaffer’s performance by the Chief
Administrative Officer.
 
 For
fiscal 2008, Mr. Oliva’s annual incentive award will also be based upon
reduction of debt criteria identical to those applicable to Mr. O’Hara,
achieving organic revenue growth targets identical to those applicable to Mr.
O’Hara, achieving net yield growth targets for the fiscal year, achieving
customer service targets and achieving monthly average accounts receivable aging
targets identical to those applicable to Mr. Olbrych.
 
 Long-Term
Incentive Compensation
 
 The
purpose of our long-term incentive program is to provide the opportunity for
executive officers to share in the increased operating and stock price
performance of the Company, and to provide further incentive for executive
officers to continue their employment with the Company, through their efforts to
improve the performance of our Company. We may make awards pursuant to our
long-term incentive program in cash, restricted stock, stock options or stock
units. All equity awards granted pursuant to the long-term incentive program are
issued under our 1999 Performance Plan, which was previously approved by the
shareholders.
 
 In order
to encourage meaningful levels of stock ownership by our executive officers and
other key employees and to provide a strong incentive for executives to continue
in the employ of our company, we have awarded in the past, and may award in the
future, restricted stock and stock options.
 
 We have
made annual awards of shares of performance-based restricted stock for the past
several years. We have shifted from service-based equity awards to these
performance-based equity awards because we believe that the performance criteria
more closely aligns the efforts of the executives with our financial performance
and the resulting stock price and, further, because restricted stock allows the
grant of a lesser number of shares than stock options to obtain the same grant
date intrinsic value for the award.
 
 We have
not awarded any stock options to executive officers since the beginning of
fiscal 2006, except with respect to Mr. Olbrych who, upon the initial
commencement of his employment with our Company in November 2006 received a
grant of nonqualified stock options for the purchase of 75,000 shares in the
aggregate. The purchase price for 25,000 of the shares subject to the option was
set at 100% of the average market value of our common stock on the date of the
option’s grant. The purchase price of another 25,000 shares subject to the
option was priced at 110% of the average market value of our common stock on the
date of grant. The final 25,000 shares subject to the option had a purchase
price equal to 120% of the average market value on the date of grant. Provided
that Mr. Olbrych remains employed with our company at such times, the options
will vest as to 25% of the number of shares at each purchase price six months
after the grant date; a second 25% of each tranche will vest eighteen months
after the grant date; the third 25% will vest at thirty months after the grant
date; and the final 25% will vest forty-two months after the grant
date.
 
 Since
2004, we have annually granted contingent long-term incentive awards to be
earned upon the achievement of predetermined financial criteria over a
three-year performance period. Each fiscal year, a new three-year performance
period begins under this long-term incentive program. Prior to the commencement
of each performance period, awards are approved by the Committee based upon a
value equal to a specified percentage of an executive officer’s then-current
base salary. For Mr. O’Hara, the target percentage in setting the amount of the
award or the number of shares of restricted stock subject to the long-term
incentive award is 80% of his then-current base salary. For Messrs. Olbrych,
Frey, Shaffer and Oliva, the target percentage is 50% of their respective base
salaries. For restricted stock awards, the resulting dollar amount is converted
into a specific number of shares of restricted stock based upon the then-current
market price of our common stock.
 
 The same
performance criteria for a three-year performance period are set by the
Committee for each of the named executive officers. Since the commencement of
the current long-term incentive program, the Committee has used either earnings
per share or pre-tax earnings as the performance criteria. For the
    47
  performance
period commencing with fiscal 2006 and ending with fiscal 2008, commencing with
fiscal 2007 and ending with fiscal 2009, and commencing with fiscal 2008 and
ending with fiscal 2010, the Committee elected to use earnings per share as the
performance criterion.
 
 For each
performance period, the Committee establishes threshold, target and maximum
earnings per share levels that determine the vesting of the awards. The actual
portion of the cash or restricted stock award earned at the end of the
performance period depends upon the extent to which we achieve the
pre-established financial criteria during the performance period. One-third of
the award will vest upon achievement of the threshold level, two-thirds upon
achievement of the target level and all of the award upon achievement of the
maximum level. The amount of the cash award or number of shares of restricted
stock that will vest if actual earnings per share amounts fall between the
maximum and the target levels, or between the threshold and the target levels,
will be determined through interpolation between the relevant performance
levels. Any portion of a cash or restricted stock award that has not vested at
the end of the performance period will be forfeited by the executive officer.
Failure to achieve the threshold level will result in forfeiture of all cash or
shares subject to the award.
 
 For the
performance period beginning with fiscal 2007 and ending with fiscal 2009, the
following awards of restricted stock were granted to the following named
executive officers subject to the achievement of the designated financial
criteria: Mr. O’Hara, 12,616 shares; Mr. Olbrych, 4,731 shares; Mr. Frey, 3,896
shares; Mr. Shaffer, 3,711 shares; and Mr. Oliva, 3,525 shares.
  For the
performance period beginning with fiscal 2006 and ending with fiscal 2008, the
following awards of restricted stock were granted to the following named
executive officers subject to the achievement of the designated financial
criteria: Mr. O’Hara, 19,366 shares; Mr. Frey, 6,127 shares; Mr. Shaffer, 5,828
shares; and Mr. Oliva, 4,931 shares. Under the terms of his employment
agreement, Mr. Olbrych did not begin participation in the long-term incentive
program until the fiscal 2007-2009 period.
  The
restricted shares issued under the long-term incentive program for the fiscal
2005-2007 performance period were forfeited effective January 27, 2008, the
first day following the end of our 2007 fiscal year, because the Company did not
achieve the threshold earnings per share level that was required to be achieved
during the fiscal 2005-2007 performance period to vest any of the shares. The
number of shares forfeited by each named executive officer for the fiscal
2005-2007 performance period is as follows: Mr. O’Hara, 17,225 shares; Mr. Frey,
4,375 shares; Mr. Shaffer, 4,060 shares; and Mr. Oliva, 1,570 shares. Mr.
Olbrych did not participate in the long-term incentive program for this
period.
 
 For the
performance period beginning with fiscal 2008 and ending with fiscal 2010, the
Company determined to make cash awards under the long-term incentive program.
The Company chose to change from restricted stock awards to cash awards for this
performance period as a result of the Company’s ongoing effort to pursue
strategic alternatives, including a possible sale of the Company. The Company
determined that the dilutive effect of granting additional shares of restricted
stock could be detrimental to the strategic alternatives process and that cash
awards would not have the same negative effect. In addition to the change in
type of award, the Company added a provision to each award providing that the
award will be forfeited if the officer is not employed by the Company for one
year following a change of control, unless the Company terminated the employee
without cause during such period. However, as with prior awards of restricted
stock, the Committee has established threshold, target and maximum earnings per
share levels that determine the vesting of these cash awards in the absence of a
change of control.
 
 For the
2008-2010 performance period, the following cash awards were granted to the
following named executive officers subject to the achievement of the designated
financial criteria: Mr. O’Hara, $340,000; Mr. Olbrych, $132,500; Mr. Frey,
$110,000; Mr. Shaffer, $102,500; and Mr. Oliva, $100,000.
  The
long-term incentive program is also intended to encourage executive retention
since, in most instances, termination of employment prior to the end of a
performance period will result in the forfeiture of at least a portion of the
cash or restricted share award. Pro-rata awards can be earned in the event of
death, disability or
    48
  retirement
at or after age 65 at any time during the performance period, or, for
performance periods beginning with the fiscal 2006-2008 period, after the first
18 months of the performance period in the event of termination by the Company
without cause. The grants for the 2008-2010 performance period will also vest
if, after a change of control of the Company, the officer is terminated without
reason, the officer resigns with good reason, or is still employed by the
Company one year after the change of control.
 
 Long-term
Special Grant
 
 In
September 2006, we established a special long-term incentive program as an
incentive to our executive officers to remain in their positions while
continuing to strive to attain our financial goals and strategic business
objectives. We believed this program to be advisable in light of our then
untested business strategy and the conflicts with certain large shareholders
occurring during this time period, both of which increase the likelihood of a
change in control which may increase management’s incentive to consider
alternative employment opportunities.
 
 The
special long-term awards consisted of grants of restricted stock that can vest
over a ten-year period. Each year during the ten-year period on the annual
anniversary of the grant date, 10% of the award becomes available for vesting if
the earnings per share performance target of at least $1.67 per share is met for
a single fiscal year beginning with the 2007 fiscal year and ending with the
2016 fiscal year. Upon our achievement of the earnings per share target
established for this special long-term incentive program during any fiscal year
in the ten fiscal-year period, all of the shares that have become available for
vesting up to that time will vest. Once the
earnings per share target has been achieved, an additional 10% of the award will
vest on each subsequent annual anniversary of the grant date. If, by the end of
the ten-year period, we fail to achieve the earnings per share target
established for this special program, all of the shares will be
forfeited.
 
 The
earnings per share target amount was set on the basis of the earnings per share
that would be achieved at the end of the ten-year period if the earnings per
share budgeted by the Company for fiscal year 2006 (the year in which the grants
were made) grows at an annual compounded rate of 20%. Typically, shares that
have not yet vested by the time an executive officer’s employment with the
Company terminates will be forfeited. The number of restricted shares granted to
each of the named executive officers is as follows: Mr. O’Hara, 19,037 shares;
Mr. Frey, 5,739 shares; Mr. Shaffer, 5,459 shares; and Mr. Oliva, 6,841 shares.
Mr. Olbrych did not receive grants of restricted shares under this
program.
 
 Benefit
Plans
 
 The
benefit plan component of our executive compensation program is not tied to our
performance or to an individual executive’s performance. We provide standard
company-sponsored insurance and retirement benefit plans to our employees,
including the named executive officers. In addition, we supplement the standard
benefit package offered to all employees with appropriate executive benefits, as
discussed below.
 
 Insurance
Plans
 
 Our core
insurance package includes health, dental, vision, disability and basic group
life insurance coverage. The named executive officers are eligible to
participate in these benefits on the same basis as our other
employees.
 
 Retirement
Plans
 
 401(k) Plan–Through
our 401(k) Plan all eligible employees, including the named executive officers,
are provided an opportunity to save for retirement on a tax-favored basis.
Participation in the 401(k) Plan is generally available to all non-union Company
employees who have completed six months of service. Employees may contribute up
to 20% of their pay. We match employee contributions at the rate of $0.30 for
every dollar contributed by the employee, up to 6% of their pay. In addition, we
make a discretionary contribution on a quarterly basis of an aggregate annual
amount up to 0.50% of an employee’s earnings, regardless of whether
the
   49
  employee
contributes to the plan. Subject to limitations imposed by the Internal Revenue
Code, the named executive officers participate in this benefit on the same basis
as our other employees. Our matching and profit-sharing contributions for the
named executive officers for fiscal 2007 were as follows: Mr. O’Hara, $6,938;
Mr. Olbrych, $3,433; Mr. Frey, $5,742; Mr. Shaffer, $5,520; and Mr. Oliva,
$3,071.
 
 Qualified Defined Benefit Pension
Plan–Our defined benefit
pension plan was amended effective September 1, 2004, so that no employee who
was not already a participant in the pension plan may become a participant on or
after that date. Provided they were participants prior to September 1, 2004, the
named executive officers participate in this benefit on the same basis as our
other employees who were participants prior to that date. Of the named executive
officers, only Messrs. Frey, Shaffer and Oliva are eligible to participate in
this plan. Information about the pension plan and the anticipated benefits for
the participating named executive officers can be found in the table entitled
“Pension Benefits” on page 62; under the heading “Retirement Plans” on page 62;
and the change in pension value earnings for the named executive officers who
participate in the pension plan may be found under column (h) of the Summary
Compensation Table on page 53.
 
 Supplemental Retirement Plan
– We also maintain a supplemental retirement benefit plan for a limited number
of officers and management personnel selected by the Committee. Any benefit
payable under the supplemental plan is reduced by benefits paid under the
qualified pension plan, if any. Benefits under the supplemental plan are subject
to a vesting requirement that requires a minimum of ten years of credited
service before vesting begins. Benefits become fully vested after 30 years of
service. Pursuant to the terms of his employment agreement, Mr. O’Hara is
credited with service at the rate of one year of service for each four months of
actual service rendered for purposes of determining benefits under the
supplemental plan, so his vesting period began in February 2007. Presently,three of
the named executive officers, Messrs. O’Hara, Frey, and Shaffer, participate in
the supplemental plan. Additional information on the benefits pursuant to the
supplemental plan can be found in the “Pension Benefits” table on page 62.
Information about the supplemental plan can also be found under the heading
“Retirement Plans” on page 62, and the change in pension value earnings for the
named executive officers who participate in the plan may be found under column
(h) of the Summary Compensation Table on page 53.
 
 The
Committee periodically reviews the benefits offered to the named executive
officers to ensure that the benefit programs provided are competitive and
cost-effective for the Company, and support its need for a qualified and
experienced executive team.
 
 Other
Compensation
 
 Perquisites
 
 We
provide minimal perquisites to the named executive officers such that, except
for Mr. Olbrych, the monetary amount of which for any currently employed named
executive officer is insufficient to require disclosure in the Summary
Compensation Table on page 53. A description of the perquisites for Mr. Olbrych
is set forth in the footnote to column (i) of the Summary Compensation Table.
Executives may receive perquisites that we believe are reasonable and consistent
with our overall compensation program. Certain named executive officers have the
use of automobiles leased by the Company and/or receive Company-paid membership
fees at lunch, airline, or business clubs. These perquisites are provided to
enhance a given executive’s ability to perform the duties of his position, and
to afford him a comparable status with similarly situated
executives.
 
 Potential
Severance and Change-in-Control Payments
 
 Severance
Benefits
 
 We have
employment agreements with each of the named executive officers that typically
contain both severance and change-in-control provisions that apply in the event
of certain terminations of an executive’s employment. Mr. Olbrych’s agreement
does not contain change-in-control provisions. We understand that
the
    50
  named
executive officers may be critical to successfully completing certain
transactions and wish to dissuade these individuals from considering alternative
employment during any change-in-control process. In addition, we consider it
likely that it would take more time for an executive to find subsequent
employment than other employees, so the severance offered the named executive
officers is greater than what may be provided to other Company employees. The
material terms for each named executive officer are provided in a table under
the caption “Material Terms of Employment and Other Agreements with Named
Executive Officers” on page 58.
 
 Change-
in- Control
 
 In
recognition of the importance to us and our shareholders of maintaining focus on
the business, and in order to minimize the prospect of losing executives and key
managers that may occur in connection with rumored, threatened, or actual
changes in corporate ownership or control, we have provided all of the named
executive officers, other than Mr. Olbrych, and other key employees with
benefits in the event of a change-in-control. The purpose of these provisions is
to induce and provide incentives for executive officers to remain with the
Company despite the uncertainties associated with an actual or threatened change
in the ownership and control of the Company and to ensure the provision of
severance and benefits for terminated employees in the event that the control
and/or ownership of the Company changes. Change-in-control benefits are further
described under the caption “Material Terms of Employment and Other Arrangements
with Named Executive Officers” on page 58.
 
 Recent
Developments in Executive Compensation Analysis
 
 In
the course of the Committee’s periodic review of our compensation philosophy as
it relates to named executive officers, the Committee recently engaged the
services of the Hay Group, Inc., an independent executive compensation
consulting firm. In January 2007, the Hay Group undertook two projects for the
Committee. The first project entailed reviewing substantive position duties and
conducting market compensation analyses for our executive officers, including
each of the named executive officers. This work was designed to determine the
internal equity among the executive positions and to benchmark the overall
compensation for these positions against comparable executive positions in
companies which compete with us for executive talent. The second project
involved our supplemental retirement benefit plan. The Hay Group submitted its
report to the Committee and the Committee evaluated and used the Hay Group’s
findings in considering changes and alternatives to our present executive
compensation program.
 
 We believe that the Hay Group
engagement was particularly relevant in light of the 2006 reconfiguration of our
executive management. In November of 2006, we hired Mr. Olbrych as Senior Vice
President and Chief Administrative Officer. We had previously implemented a
business strategy that focused management attention on emphasizing our
commitment to external customer service and aligned executive management
accordingly. Mr. Olbrych oversees and is responsible for internal customer
services including accounting, human resources, information technology, legal
and finance. The chief executive officer’s attention is now primarily focused on
overseeing and being responsible for external customer services including
operations, sales and service, and marketing, in addition to having the chief
administrative officer report to him. Because this reporting structure was new
to our organization, the Hay Group engagement to review and determine the
relative relationship of our executive officer positions to each other, and to
comparative positions and duties in the competitive marketplace was helpful to
implement these changes. These changes were announced during the final days of
fiscal year 2006 so that the transition to the new structure would be in place
at the start of fiscal year 2007.
 
 Tax
Treatment of Executive Compensation
 
 Section 162(m) of the Internal Revenue
Code generally disallows a tax deduction to public companies for compensation
exceeding $1,000,000. Although no executive officer currently receives in excess
of $1,000,000 of compensation annually, it is our policy to maximize the tax
deductibility of executive compensation without compromising the fundamental
framework of the existing compensation program. However, we may elect to forego
deductibility for federal income tax purposes if such action is, in our opinion,
necessary or appropriate to further the goals of the executive compensation
program, or is otherwise in the Company’s best interest.
  51
  
 COMPENSATION
AND ORGANIZATION COMMITTEE REPORT
 
 The
responsibilities of the Compensation and Organization Committee are provided in
its Charter, which has been approved by the Board of Directors. In fulfilling
those responsibilities with respect to the Compensation Discussion and Analysis
set forth above and included in this Committee Report, the Committee has, among
other things:
 
 ·
              reviewed
      and discussed the Compensation Discussion and Analysis with management,
      and;
 
 ·
              on
      the basis of that review and discussion, the Committee approved the
      inclusion of the Compensation Discussion and Analysis in the Company’s
      Annual Report on Form 10-K for 2007 and the Company’s 2008 Proxy
      Statement.
 
 
 
 
 Submitted
      by the Compensation and
                Organization
      Committee,Kelvin
      R. Westbrook, Chairman
                James
      R. Henderson
                Ronald
      J. Kruszewski
 
 
 Notwithstanding
anything set forth in any of our previous filings under the Securities Act of
1933 or the Securities Exchange Act of 1934 that might incorporate future
filings, including this Form 10-K or proxy statement as the case may be, in
whole or in part, the preceding report shall not be deemed to be incorporated by
reference in any such filings.
 
 Compensation
Committee Interlocks and Insider Participation
  During
fiscal year 2007, the following individuals served as members of the
Compensation and Organization Committee: James R. Henderson, Ronald J.
Kruszewski and Kelvin R. Westbrook, Chairman. As part of the Settlement
Agreement with Steel Partners, Mr. Henderson was appointed to the Compensation
and Organization Committee, effective September 19, 2006. None of the members of
the Compensation and Organization Committee was an officer or employee of the
Company or any of its subsidiaries during fiscal 2007 or any prior period. None
of our executive officers served as a director or member of a compensation
committee of any other entity, whose executive officers served as a director or
member of our Compensation and Organization Committee. Each member of the
Compensation and Organization Committee listed above is an independent
director.
    52
  Summary
Compensation Table
 
 The
following table reflects compensation paid or payable by the Company and its
subsidiaries for the fiscal year ended January 26, 2008, to the Company’s Chief
Executive Officer, Chief Financial Officer and each of the three next most
highly compensated executive officers.
 
 Name
      and
                Principal
                Position
              
              Year
              
              
              Salary
                ($)
              
              
              Bonus
                ($)
              
              
              Stock
                Awards
                ($)(1)
              
              
              Option
                Awards
      ($)(1)
              
              
              Non-Equity
                Incentive
                Plan
      Compen-sation
                ($)(2)
              
              
              Change
                in
                Pension
      Value
                and
      Nonquali-fied Deferred Compen-
                sation
      Earnings
                ($)(3)
              
              
              All
                Other
                Compen-sation
                ($)(4)
              
              
              Total
                ($)(a)
              
              (b)
              
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)
              
              
              (h)
              
              
              (i)
              
              
              (j)Stephen
      M. O’Hara
                President
      and Chief Executive Officer
              
              2007
                2006
              
              
              $
                $
              425,000
                425,000
              
              
              
              --
                --
              
              
              $
                $
              255,332
                (29,509
              )
              
              $
                $
              646
                2,560
              
              
              $
              --
                152,686
              
              
              
              --
                --
              
              
              $
                $
              36,966
      28,022
              
              
              $
                $
              717,944
      578,759James
      W. Shaffer
                Vice
      President and Chief Financial Officer
              
              2007
                2006
              
              
              $
                $
              200,069
      195,001
              
              
              
              --
                --
              
              
              $
                $
              76,298
                (1,478
              )
              
              $
              --
                2,357
              
              
              $
              --
                94,423
              
              
              $
              --
                27,292
              
              
              $
                $
              14,004
      10,323
              
              
              $
                $
              290,371
      327,918Steven
      L. Frey
                Vice
      President, General Counsel and Secretary
              
              2007
                2006
              
              
              $
                $
              209,919
      205,002
              
              
              
              --
                --
              
              
              $
                $
              80,628
                (2,110
              )
              
              $
              --
                3,772
              
              
              $
              --
      128,885
              
              
              $
              --
                48,702
              
              
              $
                $
              14,770
      10,818
              
              
              $
                $
              305,317
      395,069John
      S. Olbrych Senior Vice President and Chief Administrative
      Officer
              
              2007
                2006
              
              
              $
                $
              255,002
                43,268
              
              
              $
              --
      18,000
              (5)
              
              $
              42,500
                --
              
              
              $
                $
              179,395
      45,867
              
              
              
              --
                --
              
              
              
              --
                --
              
              
              $
                $
              52,832
      22,000
              
              
              $
                $
              529,729
      129,135Richard
      M. Oliva
                Senior
      Vice President
              
              2007
              
              
              $
              189,749
              
              
              
              --
              
              
              $
              70,165
              
              
              
              --
              
              
              
              --
              
              
              $
              2,647
              
              
              $
              10,492
              
              
              $
              273,053
 
 
 (1)
              The
      amounts shown in columns (e) and (f) above represent the dollar amounts
      recognized for financial statement reporting purposes in fiscal 2007 and
      2006 with respect to the stock and option awards included in Angelica’s
      consolidated financial statements for fiscal year 2007 and 2006 per SFAS
      123(R). In accordance with SFAS 123(R), for performance-contingent
      restricted stock, if it is determined that the performance contingency
      will not be satisfied, any previously recognized compensation expense is
      reversed in the period such determination is made, which may result in a
      credit to expense. See Note 2 to the Consolidated Financial Statements
      included in this Form 10-K for a discussion of the relevant assumptions
      used in calculating grant date fair value pursuant to SFAS 123(R), and
      Note 2 in the fiscal 2006 Form 10-K. For further information on these
      awards for fiscal 2007, see the Grants of Plan-Based Awards
      table.
  (2)
              No
      annual short-term incentive compensation was earned by the named executive
      officers for fiscal 2007. The amounts shown in column (g) for fiscal 2006
      represent annual short-term incentive compensation earned by the named
      executive officers for that year. See “Compensation Discussion and
      Analysis,” page 42 for further
details.
  (3)
              The
      amounts for fiscal 2007 shown in column (h) represent the aggregate change
      in the actuarial value of each named executive officer’s accumulated
      benefit, if any, under the Angelica Corporation Pension Plan and the
      Supplemental Plan:  Pension Plan: Mr. Shaffer, ($3,483); Mr.
      Frey, ($2,344); and Mr. Oliva, $2,647. Supplemental Plan: Mr. Shaffer,
      ($1,570); and Mr. Frey, $613. The present value of Mr. Shaffer’s Pension
      Plan and Supplemental Plan benefits decreased a total of $5,053, and Mr.
      Frey’s Pension Plan benefit decreased $2,344, due to the fact that
      projected salary increases to compensation are less than the historical
      increases. The present value of Mr. O’Hara’s Supplemental Plan benefit
      decreased $101,508 due to the fact that there was no increase in his
      compensation from fiscal 2006 to fiscal 2007, and projected increases to
      compensation are less than the historical
  increases.
    53
  (4)
              A
      breakdown of the amounts shown in column (i) for fiscal 2007 for each of
      the named executive officers is set forth in the following table. Amounts
      shown below for 401(k) matching contributions are subject to change when
      the results of nondiscrimination testing for the 401(k) plan year ending
      December 31, 2007 are finalized. The 401(k) contributions on behalf of
      each of the named executive officers match calendar 2007 participant
      deferrals made by each to the Plan.
  O’Hara
              
              
              Shaffer
              
              
              Frey
              
              
              Olbrych
              
              
              Oliva401(k)
      matching contributions
              
              $
              4,050
              
              
              $
              4,050
              
              
              $
              4,050
              
              
              $
              2,648
              
              
              $
              1,936401(k)
      - profit sharing contributions
              
              $
              2,888
              
              
              $
              1,470
              
              
              $
              1,692
              
              
              $
              785
              
              
              $
              1,135Dividend
      distributions on restricted stock
              
              $
              30,028
              
              
              $
              8,484
              
              
              $
              9,028
              
              
              $
              2,081
              
              
              $
              7,421Perquisites
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              47,318
              (a)
              
              
              -Total
              
              $
              36,966
              
              
              $
              14,004
              
              
              $
              14,770
              
              
              $
              52,832
              
              
              $
              10,492
  (a)
                  Represents
      payments by Angelica for certain perquisites for Mr. Olbrych, including
      commercial commuter airfare of $2,078; lease auto payments of $9,783;
      temporary lodging expenses of $470; airline club membership of $350; and a
      relocation payment of $21,250, with an additional “gross-up” payment of
      $13,387 which will allow Mr. Olbrych to retain the full amount of the
      relocation payment after payment by him of all income taxes on the
      relocation payment and the gross-up
payment.
  (5)
              The
      Compensation and Organization Committee determined to grant Mr. Olbrych a
      discretionary bonus equal to $18,000 for services rendered to our Company
      during fiscal 2006.
  
      54
  Grants
of Plan-Based Awards in Fiscal 2007
 
 The
following table sets forth information with respect to grants of awards to any
person named in the Summary Compensation Table under our non-equity and equity
incentive plans during fiscal 2007.
 
 Estimated Future
      Payouts Under
                Non-Equity Incentive
      Plan
                Awards (1)
              
              
              Estimated Future
      Payouts
                Under Equity
      Incentive Plan
                Awards (2)Name
              Grant
                Date
              Action
                Date
              
              Threshold
                ($)
              
              
              Target
                ($)
              
              
              Maximum
                ($)
              
              
              Threshold
                (#)
              
              
              Target
                (#)
              
              
              Maximum
                (#)
              
              
              All
      Other
                Stock
                Awards:
                Number
                of Shares
                of Stock
                or Units
                (#)
              
              
              All
      Other
                Option
                Awards:
                Number
                of
                Securities
                Under-
                lying
                Options
                (#)
              
              
              Exercise
                or Base
                Price of
                Option
                Awards
                ($/Sh)
              
              Grant
                Date
                Fair
                Value
                ($)(a)
              (b)
              
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)
              
              
              (h)
              
              
              (i)
              
              
              (j)
              
              
              (k)Stephen
      M. O’Hara
              --
                2/16/07(2)
              --
                2/14/07
              
              $
              2,125
                --
              
              
              $
              212,500
                --
              
              
              $
              425,000
                --
              
              
              
              --
                4,205
              
              
              
              --
                8,411
              
              
              
              --
                12,616
              
              
              
              --
              
              
              
              --
              
              
              
              --James
      W. Shaffer
              --
                2/16/07(2)
              --
                2/14/07
              
              $
              1,000
                --
              
              
              $
              100,000
                --
              
              
              $
              200,000
                --
              
              
              
              --
                1,237
              
              
              
              --
                2,474
              
              
              
              --
                3,711
              
              
              
              --
              
              
              
              --
              
              
              
              --Steven
      L. Frey
              --
                2/16/07(2)
              --
                2/14/07
              
              $
              1,050
                --
              
              
              $
              105,000
                --
              
              
              $
              210,000
                --
              
              
              
              --
                1,299
              
              
              
              --
                2,597
              
              
              
              --
                3,896
              
              
              
              --
              
              
              
              --
              
              
              
              --John
      S. Olbrych
              --
                2/16/07(2)
              --
                2/14/07
              
              $
              1,275
                --
              
              
              $
              127,500
                --
              
              
              $
              255,000
                --
              
              
              
              --
                1,577
              
              
              
              --
                3,154
              
              
              
              --
                4,731
              
              
              
              --
              
              
              
              --
              
              
              
              --Richard
      M. Oliva
              --
                2/16/07(2)
              --
                2/14/07
              
              $
              950
                --
              
              
              $
              95,000
                --
              
              
              $
              190,000
                --
              
              
              
              --
                1,175
              
              
              
              --
                2,350
              
              
              
              --
                3,525
              
              
              
              --
              
              
              
              --
              
              
              
              --
  
 (1)
              Represents
      annual short-term incentive compensation opportunities for fiscal 2007
      available to named executive officers. For fiscal year 2007, the financial
      criteria used to determine the annual incentive compensation for the
      executive officers included earnings per share, gross margin and
      bank-debt-to-EBITDA ratio. Earnings per share was a common criteria used
      for all of the executive officers and this was combined with one or both
      of the other criteria in the case of some. In addition to these financial
      criteria, a variety of other performance measures, including customer and
      employee satisfaction scores, as well as individual goals specific to each
      executive officer’s position, were also used to determine the amount of an
      executive officer’s annual incentive compensation. No short-term incentive
      compensation was earned by the named executive officers for fiscal 2007.
      See Compensation Discussion and Analysis for further
      details.
  (2)
              Represents
      awards of restricted shares granted in fiscal 2007 to the named executive
      officers under the Long-Term Incentive Program. Awards were granted to the
      named executive officers as follows:  Mr. O’Hara, 12,616 shares;
      Mr. Shaffer, 3,711 shares; Mr. Frey, 3,896 shares; Mr. Olbrych, 4,731
      shares; and Mr. Oliva, 3,525 shares. The restricted shares may be earned,
      in whole or in part, based on achievement of three-year (2007-2009)
      performance goals associated with the awards. If those performance goals,
      based solely on earnings per share, are not achieved, some or all of the
      shares will be forfeited. The number of shares of restricted stock awarded
      was computed based upon the closing market price of the Company’s stock on
      January 26, 2007, the last trading day of the Company’s prior fiscal year.
      Named executive officers receive any dividends paid on shares granted
      under the program at the same dividend rate paid to all shareholders of
      common stock. The restricted stock granted in connection with the
      Long-Term Incentive Program was issued under the 1999 Performance
      Plan.
   55
  Narrative
Disclosure for Summary Compensation Table and Grants of Plan-Based Awards
Table
 
 Bonus vs. Annual Incentive
Compensation; Salary as Percentage of Total Compensation.  The
named executive officers typically receive annual review of their base salaries.
Increases in base salary for the named executive officers during fiscal 2007
ranged from 0% to 15%. Each executive officer is a participant in our annual
incentive compensation plan which is based upon the achievement of financial and
strategic performance criteria points established for each executive officer at
the beginning of the fiscal year as well as overall company financial
goals.
 
 No named
executive officer received a performance-based annual incentive award for fiscal
2007. The percentage that base salary was of the total compensation amounts
reported in the Summary Compensation Table for each of the executive officers
were 59% for Mr. O’Hara, 69% for Mr. Shaffer, 48% for Mr. Olbrych, 69% for Mr.
Frey, and 69% for Mr. Oliva.
 
 Stock Awards.We
have been granting performance-based restricted stock as part of our long-term
equity-based incentive plan since 2004. Each year, another award of restricted
shares is made to each of the named executive officers for a new three-year
performance period. The dollar value expensed for these is computed in
accordance with SFAS 123(R). The amounts set forth in the Stock Award column of
the Summary Compensation Table for Messrs. O’Hara, Shaffer and Frey are negative
dollar amounts for fiscal 2006. During fiscal 2006, the dollar values of
previously expensed awards for the fiscal 2005-2007 performance period were
reversed due to the fact that it was determined that the performance criteria
for these awards were unlikely to be achieved. The expense amounts reversed
offset the expense accrued during fiscal 2006 for the fiscal 2006-2008
performance period award, resulting in the negative dollar amount. For the
fiscal 2008-2010 performance period, we determined to grant cash awards instead
of granting additional shares of restricted stock.
 
 Stock
Options.  Since fiscal 2004, stock options are typically
granted only upon commencement of an executive officer’s employment with the
Company. The amounts set forth in the Option Awards column of the Summary
Compensation Table are the dollar amounts of the option grants’ grant date fair
value that was expensed under SFAS 123(R) during fiscal 2007 and
2006.
 
 Annual Incentive
Awards.  For purposes of determining annual incentive awards,
each named executive officer is given a number of performance criteria based
upon the executive officer’s individual job description and responsibilities.
The various performance criteria are weighted for each executive officer and
performance points are assigned to various performance levels within each of the
criteria with the total number of performance points that are available to an
executive officer to earn being in excess of 200. Within each performance
criteria, performance points are assigned to levels of achievement of the
performance criteria relative to budgeted,
targeted or expected levels of performance for those criteria. At the end of the
fiscal year, actual achievement of the performance goals relative to the
pre-established performance measurements is analyzed and the executive officer
earns a point total on the basis of this analysis.
 
 The point
total for each executive officer represents the percentage of the annual
incentive target amount established for the executive officer that the executive
officer has actually achieved. Annual incentive target amounts are expressed as
a percentage of the executive officer’s base salary for the fiscal year with the
target payment for each of the named executive officers being 50% of the
executive officer’s base salary for the fiscal year. Each executive officer can,
however, earn more or less than the target annual incentive percentage based
upon the actual number of performance points achieved by the executive officer
as well as based upon the size of the annual incentive award pool for the fiscal
year.
 
 The
actual level of all annual incentive awards is further dependent upon the level
of our earnings before interest, taxes, depreciation and amortization (EBITDA)
for the fiscal year, against pre-established threshold, target and maximum
EBITDA amounts. If we earn more than the target level of EBITDA for the fiscal
year, the executive officer will receive an annual incentive payment greater
than that computed by reference to the executive’s performance points relative
to his target award for the year. If we earn less than the target level
of
   56
  EBITDA
for the fiscal year, the executive officer will receive an annual incentive
payment less than that computed by reference to the executive’s performance
points relative to his target award for the year.
 
 The
dollar amounts of the threshold, target and maximum annual incentive awards, as
set at the beginning of fiscal 2007, are set forth for each of the named
executive officers in the Estimated Future Payouts Under Non-Equity Incentive
Plan Awards columns in the Grants of Plan-Based Awards in Fiscal 2007 Table. The
threshold represents the amount that the named executive officer would have
earned if the executive had earned a single performance point and the EBITDA
target had been met. Likewise, the target and the maximum amounts under this
column of the table set forth the dollar values that the named executive officer
would have received if he had earned 100 and 200 performance points,
respectively, assuming the EBITDA target had been met.
 
 For
fiscal 2007, none of the named executive officers achieved their respective
target incentive awards for the fiscal year. Actual EBITDA for fiscal 2007 was
$29.1 million versus a target EBITDA for fiscal 2007 of $41 million, which
resulted in no annual incentive awards being earned.
 
 Changes in Pension
Value.  For Mr. Oliva, the amount recorded in the column Change
in Pension Value and Non-Qualified Deferred Compensation Earnings of the Summary
Compensation Table is the accretion in the present value of the accrued benefits
at age 65 under our qualified defined benefit plan. The negative amounts
reported for Messrs. Shaffer and Frey in footnote 3 to the Summary Compensation
table result from the decrease in present value of their respective accrued
benefits under our qualified defined benefit plan and our supplemental
retirement plan, as compared with the last day of fiscal 2006 year end. The
negative amount reported for Mr. O’Hara in footnote 3 to the Summary
Compensation Table results from the decrease in present value of his accrued
benefit at age 65 under the supplemental retirement plan as compared with the
last day of fiscal 2006 year end. Mr. O’Hara does not participate in the
qualified defined benefit plan.
 
 Long-Term Equity Incentive
Awards. One grant of restricted stock awards has been reported in the
Estimated Future Payouts Under Equity Incentive Plan Awards column of the Grants
of Plan-Based Awards in Fiscal 2007 Table for Messrs. O’Hara, Shaffer, Frey,
Olbrych and Oliva. The grant is a long-term equity incentive grant for the
three-year performance period commencing with fiscal 2007 and ending with fiscal
2009. The value of the grant is equal to a specified percentage of an executive
officer’s then-current base salary. For Mr. O’Hara, the target percentage in
setting the number of shares of restricted stock subject to the long-term
incentive award is 80% of his base salary. For Messrs. Frey, Shaffer, Olbrych
and Oliva, the target percentage is 50% of their respective base salaries. The
resulting dollar amount is converted into a specific number of shares of
restricted stock based upon the market price of our common stock on the date of
grant.
 
 For the
performance period commencing with fiscal 2007 and ending with fiscal 2009, the
Committee elected to use earnings per share as the performance criterion. The
actual awards of restricted stock that were granted to the named executive
officers for the fiscal 2007-2009 performance period are listed in the Maximum
subcolumn under the Estimated Future Payouts Under the Equity Incentive Plan
Awards column of the Grants of Plan-Based Awards in Fiscal 2007
Table.
 
 The
actual portion of the restricted stock award earned at the end of the
performance period depends upon the extent to which we achieve the
pre-established financial criteria during the performance period. The number of
shares of restricted stock that will vest if actual earnings per share amounts
fall between the maximum and the target levels, or between the threshold and the
target levels, will be determined through interpolation between the relevant
performance levels. All shares that do not vest at the end of the performance
period will be forfeited by the executive officer. Failure to achieve the
minimum target level will result in forfeiture of all shares subject to the
award.
    57
  Material
Terms of Employment and Other Agreements with Named Executive
Officers.
 
 Each of
the named executive officers in the Summary Compensation Table currently has an
employment agreement with Angelica. The following table sets forth the material
terms of each of these agreements. See also the Compensation Discussion and
Analysis on page 42.
  Named
      Executive Officer
              
              Stephen
      M. O’Hara
              
              Steven
      L. Frey
              
              James
      W. Shaffer
              
              John
      S. Olbrych
              
              Richard
      M. OlivaAgreement
      Type
              
              Employment
      including Change in Control (CIC)
              
              Employment
      including CIC
              
              Employment
      including  CIC
              
              Employment
              
              Employment
      including CICTerm
              
              9/15/03-9/15/06,
      subject to automatic annual renewal absent timely notice of
      termination
              
              9/9/04
      - until employment ends
              
              9/9/04
      – until employment ends
              
              11/27/06
      – until employment ends
              
              12/1/05
      – until employment endsSalary
      Continuation If Terminated
                (Non-CIC)
              
              24
      months
              
              12
      months
              
              12
      months
              
              12
      months
              
              12
      monthsLump
      Sum Cash Payment If Terminated (CIC)
              
              2 x
      current annual salary
              
              11⁄2 x
      current annual salary
              
              11⁄2 x
      current annual salary
              
              N/A
              
              1 x
      current annual salaryBonus
      (CIC)
              
              Annual
      target bonus amount
              
              Prorated
      portion of maximum annual bonus amount for CIC year
              
              Prorated
      portion of maximum annual bonus amount for CIC year
              
              N/A
              
              Prorated
      portion of maximum annual bonus amount for CIC yearMedical
      Benefit Continuation*
              
              Cash
      paid sufficient to cover cost for executive to continue coverage, for two
      (2) years, equivalent to coverage at time of termination, for every year
      of service, up to a maximum of ten (10) years, for him and his family,
      without cost to him
              
              Cash
      paid sufficient to cover cost for executive to continue coverage, for two
      (2) years, equivalent to coverage at time of termination for him and his
      family, if related to CIC
              
              Cash
      paid sufficient to cover cost for executive to continue coverage, for two
      (2) years, equivalent to coverage at time of termination for him and his
      family, if related to CIC
              
              Reimbursement
      for one (1) year of continuation for him, upon timely COBRA
      election
              
              N/ARestricted
      Stock And/Or Option Vesting
              
              Unexpired
      options and restricted stock vest if CIC occurs or upon Mr. O’Hara’s
      death, disability or retirement
              
              Unexpired
      options and restricted stock vest if CIC occurs
              
              Unexpired
      options and restricted stock vest if CIC occurs
              
              Upon  termination  of
      employment for any reason, unvested options terminate, except as otherwise
      provided in the Company’s 1999 Performance Plan
              
              Unexpired
      options and restricted stock vest if CIC occursNon-Compete
                AndRelated
                Provisions
              
              Yes,
      non-compete and non-solicitation covenants for two (2) years after
      employment ends; confidentiality obligations in effect
      indefinitely
              
              Yes,
      non-compete & non-solicitation covenants for one (1) year after
      employment ends; confidentiality obligations in effect
      indefinitely
              
              Yes,
      non-compete & non-solicitation covenants for one (1) year after
      employment ends; confidentiality obligations in effect
      indefinitely
              
              Yes,
      non-compete & non-solicitation covenants for one (1) year after
      employment ends; confidentiality obligations in effect
      indefinitely
              
              Yes,
      non-compete & non-solicitation covenants for one (1) year after
      employment ends; confidentiality obligations in effect
      indefinitely
    58
   Named
      Executive Officer
              
              Stephen
      M. O’Hara
              
              Steven
      L. Frey
              
              James
      W. Shaffer
              
              John
      S. Olbrych
              
              Richard
      M. Oliva
 Additional
      Provisions
              
              If
      CIC occurs, we will pay him a gross-up amount equal to the amount of any
      excise tax imposed on payments to him.
              
              If
      CIC occurs, he will be credited with an additional five (5) years of
      service under our Supplemental Retirement Benefit Plan.
              
              If
      CIC occurs, he will be credited with an additional five (5) years of
      service under our Supplemental Retirement Benefit Plan.
              
              Initial
      stock option grant of 75,000 shares subject to staggered vesting schedule
      (see Outstanding Equity Awards at Fiscal Year-End table).
                Temporary
      living expenses to be paid for three (3) months; ten (10) Company-paid
      round trip flights home for personal use; relocation expenses to be paid
      pursuant to Company policy; and upon buying or leasing a residence in
      Atlanta by 11/27/08 while still a Company employee, a payment of 1/12 of
      his annual salary, with subsequent payment of a gross-up amount to
      reimburse him for all income taxes paid on such amount.
                Airline
      club membership and use of leased vehicle through 6/30/08.
   *
              If
      the Executive Officer subsequently becomes employed, our medical benefit
      continuation becomes secondary to the benefits provided by the other
      employer. The medical benefit continuation will be paid by the Company
      directly to the medical benefit provider and will make a gross-up payment
      for taxes due on the benefit directly to the
  executive.
    
 59
 Outstanding
Equity Awards at Fiscal Year-End
 
 The
following table shows outstanding stock option awards classified as exercisable
and unexercisable as of our fiscal year ended January 26, 2008. The vesting
schedule for each option grant is shown following this table, based on the
option grant date. The table also shows unvested and unearned stock awards (both
time-based awards and performance-based) assuming a market value of $16.85 a
share (the closing value of the Company’s stock on January 25,
2008).
  Option
      Awards
              Stock
      AwardsName
              Option
                Grant
                Date
              Numberof
                Securities
                Underlying
                Unexercised
                Options
                (#)
                Exercisable
              Numberof
                Securities
                Underlying
                Unexercised
                Options
                (#)
                Unexercisable
              Option
                Exercise
                Price
                ($)
              Option
                Expiration
                Date
              Number
                of
                shares
                or
      units
                of
      stock that
                have
      not vested
                (#)
              Market
      value of shares or units of stock
                that
      have not
                vested
                ($)
              Equity
                incentive
                plan
                awards:
                Numberof
      unearned
                shares,
                units
      or
                other
                rights
                that
      have
                not
      vested
                (#)
              Equity
      incentive
                plan
      awards:
                Market
      or payout
                value
      of unearned
                shares,
      units or
                other
      rights that
                have
      not vested
                ($)(a)
              
              (b)
              (c)
              (e)
              (f)
              (g)
              (h)
              (i)
              (j)Stephen
      M. O’Hara
              5/30/2001
                5/29/2002
                5/28/2003
                9/15/2003
                9/15/2003
                9/15/2003
              1,600(1)
                2,000(1)
                2,000(1)
                100,000(2)
                50,000(2)
                50,000(2)
              0
                0
                0
                0
                0
                0
              
              $10.935
                $16.675
                $16.82
                $19.66
                $25.00
                $30.00
              5/30/2010
                5/29/2011
                5/28/2012
                9/15/2013
                9/15/2013
                9/15/2013
              -
                -
                -
                -
                -
                -
              -
                -
                -
                -
                -
                -
              5,741(5)
                6,455(5)
                4,205(5)
                1,904(6)
                -
                -
              $  96,736
                $108,767
                $  70,854
                $  32,082James
      W. Shaffer
              5/25/1999
                8/13/1999
                5/23/2000
                8/28/2001
                8/5/2002
                8/27/2003
                1/28/2005
              3,000
                2,000
                10,000
                3,000
                5,000
                8,000
                10,000
              0
                0
                0
                0
                0
                0
                0
              
              $16.8125
                $12.6875
                $7.25
                $10.95
                $16.325
                $19.36
                $32.88
              5/25/2009
                8/13/2009
                5/23/2010
                8/28/2011
                8/5/2012
                8/27/2013
                1/28/2015
              223(4)
                -
                -
                -
                -
                -
                -
              $3,758
                -
                -
                -
                -
                -
                -
              1,353(5)
                1,942(5)
                1,237(5)
                546(6)
                -
                -
                -
              $  22,798
                $  32,723
                $  20,843
                $    9,200Steven
      L. Frey
              3/1/1999
                5/23/2000
                8/28/2001
                8/5/2002
                8/27/2003
                1/28/2005
              10,000
                15,000
                3,000
                8,000
                12,000
                10,000
              0
                0
                0
                0
                0
                0
              
              $16.125
                $7.25
                $10.95
                $16.325
                $19.36
                $32.88
              3/1/2009
                5/23/2010
                8/28/2011
                8/5/2012
                8/27/2013
                1/28/2015
              380(4)
                -
                -
                -
                -
                -
              $6,403
                -
                -
                -
                -
                -
              1,458(5)
                2,042(5)
                1,299(5)
                574(6)
                -
                -
              $  24,567
                $  34,408
                $  21,888
                $    9,672John
      S. Olbrych
              11/27/2006
                11/27/2006
                11/27/2006
              6,250
                6,250
                6,250
              18,750(3)
                18,750(3)
                18,750(3)
              
              $21.305
                $23.4355
                $25.566
              11/27/2016
                11/27/2016
                11/27/2016
              -
                -
                -
              -
                -
                -
              1,577(5)
                -
                -
              $  26,572Richard
      M. Oliva
              9/3/2002
                8/27/2003
                1/28/2005
              2,000
                8,000
                3,000
              0
                0
                0
              
              $16.785
                $19.36
                $32.88
              9/3/2012
                8/27/2013
                1/28/2015
              -
                -
                -
              -
                -
                -
              523(5)
                1,644(5)
                1,175(5)
                684(6)
              $   8,812
                $
      27,701
                $
      19,799
                $
      11,525
  (1)
              Represents
      options granted to Mr. O’Hara during his service as a non-employee
      director on our Board of Directors.
 
 (2)
              Represents
      options granted to Mr. O’Hara as an inducement to accept employment as our
      President and CEO on September 15, 2003. 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. It became one-third
      exercisable one year from the date of grant; two-thirds exercisable two
      years from the date of grant; and was to be fully exercisable three years
      from the date of grant. The Board of Directors on January 17, 2006,
      authorized acceleration of the vesting date (at the same time it
      accelerated the vesting dates for all unvested stock options granted to
      employees in 2003 at option prices above the market price of Angelica’s
      shares on January 17, 2006). By taking that action before fiscal year end,
      Angelica avoided certain expense charges in each of the next two fiscal
      years. 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, and $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 $25.00 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
  60
  the
      options vested and became immediately exercisable at $30.00 per share. No
      other terms of the stock option agreement or the options were
      modified.
 
 (3)
              Pursuant
      to his employment agreement, Mr. Olbrych was granted 25,000 stock options
      at fair market value, which is the average of the high and low trading
      price of our common stock, on the grant date; 25,000 options at 110% of
      the fair market value on the grant date; and 25,000 options at 120% of the
      fair market value on the grant date. Twenty-five (25%) percent of each set
      of options becomes 25% exercisable six months after the grant date; an
      additional 25% becomes exercisable 18 months after the grant date; an
      additional 25% becomes exercisable 30 months after the grant date; and the
      final 25% becomes exercisable 42 months after the grant
    date.
  (4)
              Represents
      restricted shares issued under the Stock Bonus and Incentive Plan in March
      2003 with a five-year transferable period. The Stock Bonus and Incentive
      Plan terminated on April 1, 2003. The shares vested on March 14,
      2008.
  (5)
              Represents
      awards of restricted shares granted to the named executive officers for
      the 2005-2007, 2006-2008, and 2007-2009 Performance Periods under the
      Long-Term Incentive Program. The restricted shares issued in 2005 were
      forfeited effective January 27, 2008, because the performance goals
      associated with those awards were not achieved. The named executive
      officers forfeited shares as follows:  Mr. O’Hara, 17,225
      shares; Mr. Shaffer, 4,060 shares; Mr. Frey, 4,375 shares; and Mr. Oliva,
      1,570 shares. Portions of the respective remaining awards will vest or be
      forfeited effective as of the last day of the 2008 and 2009 fiscal years
      depending on achievement of the performance goals associated with those
      awards. The value of the awards assumes payout at the threshold level of
      performance.
  (6)
              Represents
      a special ten-year grant of restricted stock granted on September 19, 2006
      to Messrs. O’Hara, Frey and Shaffer, and on August 3, 2006 to Mr. Oliva.
      See description in Grants of Plan-Based Awards Table for fiscal 2006 in
      the fiscal 2006 Form 10-K. The value of the award assumes payout at the
      minimum level of performance.
 Option Grant Date
                
                Option Awards Vesting
    Schedule
 5/30/2001
                
                25%
      vests each year for four years from date of grant5/29/2002
                
                25%
      vests each year for four years from date of grant5/28/2003
                
                25%
      vests each year for four years from date of grant9/3/2002
                
                25%
      vests each year for four years from date of grant9/15/2003
                
                See
      Footnote 23/1/1999
                
                25%
      vests each year for four years from date of grant5/25/1999
                
                25%
      vests each year for four years from date of grant8/13/1999
                
                25%
      vests each year for four years from date of grant5/23/2000
                
                25%
      vests each year for four years from date of grant8/28/2001
                
                25%
      vests each year for four years from date of grant8/5/2002
                
                25%
      vests each year for four years from date of grant8/27/2003
                
                25%
      vests each year for four years from date of grant1/28/2005
                
                Vested
      six months from the date of grant11/27/2006
                
                See
      Footnote 3
    
 61
  Option Exercises and Stock Vested
in Fiscal 2007
  There
were no options exercised or restricted stock vested, held by the named
executive officers during the fiscal year ended January 26, 2008.
 
 
 PENSION BENEFITS
 
 Name
              
              Plan
      Name
              Number
                of
      Years
                Credited
                Service
                (#)
              Present
      Value of
                Accumulated
                Benefit
                ($) (1)
              Payments
                During
      Last
                Fiscal
      Year
                ($)Stephen
      M. O’Hara
              
              Defined
      BenefitPension
      Plan(2)
                Supplemental
      Plan
              0
                13(3)
              0
                $2,959,758
              0
                0James
      W. Shaffer
              
              Defined
      BenefitPension
      Plan(4)
                Supplemental
      Plan
              7
                8
              $
        171,770
                $   304,817
              0
                0Steven
      L. Frey
              
              Defined
      BenefitPension
      Plan(4)
                Supplemental
      Plan
              7
                8
              $   133,658
                $   234,643
              0
                0John
      S. Olbrych(5)
              
              Defined
      BenefitPension
      Plan
                Supplemental
      Plan
              0
                0
              0
                0
              0
                0Richard
      M. Oliva (6)
              
              Defined
      Benefit Pension Plan(4)
                Supplemental
      Plan
              4
                0
              $  
      224,830
                0
              0
                0
  
 (1)
                Amounts
      assume that participant will remain employed until normal retirement date
      and will continue to receive compensation increases consistent with
      historical increases.
 (2)
                  Effective
      September 1, 2004, we amended our Defined Benefit Pension Plan so that as
      of that date, no further employees could participate in the plan. To be
      eligible to participate in the plan, an employee had to have completed one
      (1) year of service. Mr. O’Hara became an executive officer of the Company
      on September 15, 2003. Mr. O’Hara is not eligible to participate in the
      Company’s Defined Benefit Pension
Plan.
 (3)
                    Mr.
      O’Hara is credited service at the rate of one (1) year for every four (4)
      months of employment for purposes of the Company’s Supplemental Retirement
      Benefit Plan.
 (4)
                      Amounts and years of credited service
      shown for Messrs. Shaffer, Frey and Oliva for the Defined Benefit Pension
      Plan are as of December 31, 2006, and are derived from the most currently
      available actuarial report for the
plan.
 (5)
                        Mr.
      Olbrych is not eligible to participate in the Company’s Defined Benefit
      Pension Plan. While Mr. Olbrych may otherwise be eligible to participate,
      as three of the other named executive officers do, in the Supplemental
      Retirement Benefit Plan, the Compensation and Organization Committee has
      decided to evaluate the continued use of the plan, and has chosen not
      to include him in the plan at this
time.
 (6)
                          Mr. Oliva does not participate in the
      Supplemental Retirement Benefit
Plan.
 RETIREMENT
PLANS
 
 Under our
defined benefit pension plan, an employee earns benefits in any year equal to
0.25% of total compensation plus an additional 0.25% of that part of
compensation which is in excess of one-half of the social security taxable-wage
base, plus, for each year of employment in excess of 15 years, an additional
0.05% of total compensation. Reduced benefits are payable at early retirement.
Estimated annual benefits under the plan payable upon normal retirement to the
following executive officers are as follows: Mr. Frey, $14,564; Mr. Shaffer,
$18,716; and Mr. Oliva, $24,498. Mr. O’Hara and Mr. Olbrych are not eligible to
participate under the plan. These figures assume that participants will remain
employed until their normal retirement dates and will receive increases to their
current compensation consistent with historical increases in compensation. The
Company’s pension plan was amended effective September 1, 2004, so that no
employee shall become a participant on or after September 1, 2004.
 
  62
  We also
maintain a supplemental retirement benefit plan (the Supplemental Plan) for a
limited number of highly compensated officers and management personnel selected
by the Compensation and Organization Committee (the Committee). The “formula
amount” of supplemental retirement benefit payable under this plan is determined
by the Committee when the participant is invited to join the plan
 
 Trust
Agreements
  A trust
has been established to fund certain benefits payable following a change in
control to named executive officers pursuant to certain employee benefit plans.
In the event of a change in control or a potential change in control that is not
approved by the Board of Directors, we will be required to deposit into the
trust an amount equal to the difference between the maximum amount potentially
payable under the covered plans to all participants and the then-current value
of the trust assets. The trust can be revoked at any time prior to a change in
control. The trust will terminate automatically on the third anniversary of the
occurrence of the change in control. If the trust is revoked or terminated, all
remaining trust assets will be returned to us. If funds are deposited into a
trust in connection with a potential change in control and an actual change in
control does not occur within 90 days, our Board of Directors may direct that
the deposit will be returned by the trust to us. In the event of bankruptcy or
insolvency, the assets of the trust will be subject to the claims of the general
creditors of the Company.
 
 Potential
Payments Upon Termination or Change in Control
 
 We have
entered into Employment Agreements with each named executive officer. These
agreements, which are discussed on page 58, provide for payments at, following
or in connection with the termination of the executive’s employment under
certain circumstances, including resignation, involuntary termination,
retirement, death or disability of the named executive officer, or a change in
control of our Company. The tables on the following pages reflect the
incremental cost to our Company of providing payments and benefits that are
generally not available on a non-discriminatory basis, in connection with each
of those circumstances. The amounts shown in the tables assume that a
termination occurs as of January 26, 2008, the last day of our 2007 fiscal year.
Accordingly, the amounts include only those amounts for which we would be
obligated as of that date. The actual amounts that would be paid to a named
executive officer in each circumstance can only be determined at the time of
termination.
 
 Payments Made Upon
Termination
 
 The
agreements that we have entered into with Messrs. O’Hara, Olbrych, Frey, Shaffer
and Oliva provide for the payment of severance if the named executive officer’s
employment is terminated by us without “Cause” or by the executive officer with
“Good Reason” (as each of those terms is defined in our agreement with each
executive and discussed below). If the executive’s employment is terminated
under either of these circumstances, we are obligated to make severance payments
to the executive. In the case of Mr. O’Hara, his
  63
  employment
agreement provides that we will make a lump sum cash payment equal to two times
his then-current annual base salary within 30 days after his termination. In the
case of Messrs. Frey and Shaffer, we are obligated to make lump sum cash
payments equal to one times their respective then-current annual base salaries
within 30 days after termination. In the case of Messrs. Olbrych and Oliva we
will continue making payments to the terminated executive in amounts equal to
his then current base salary for a period of twelve (12) months. Mr. Oliva’s
salary continuation for the last six months of the period will be reduced by the
amount of income he earns from other sources. For Messrs. Olbrych and Oliva we
have the option of making those payments over the specified period of time,
consistent with our normal payroll practices, or we may elect to pay the total
amount of all payments in a lump sum, without discount. The amounts reflected in
the following tables assume that these payments are made in a lump sum. If
certain conditions apply, these payments may be delayed until six-months
following termination to avoid certain negative consequences under Section 409A
of the Internal Revenue Code of 1986, as amended.
 
 As to
Messrs. O’Hara and Olbrych, if their employment is terminated under either of
these circumstances, we are obligated to make cash payments, including tax
gross-up payments, for a specified period of time, to continue medical and
health benefits for the executive and his family at least equal to those that we
would have provided to them had their employment not been terminated. In the
case of Mr. O’Hara, these benefits are to continue for a period of two (2) years
for each year he has been employed by us (for a maximum continuation period of
ten (10) years). In the case of Mr. Olbrych, such benefits are to continue for a
period of twelve (12) months
following termination. The amount reflected for this continuing benefit for each
of these executives in the following tables is based upon that portion of the
cost of such benefit paid by us as of the assumed date of termination and
assumes no increase or decrease in that cost over the period of the obligation.
If the executive officer subsequently becomes employed, our medical benefit
continuation becomes secondary to the benefits provided by the other employer.
The medical benefit continuation will be paid by the Company directly to the
medical benefit provider and the Company will make a gross-up payment for taxes
due on the benefit directly to the executive officer.
 
 If a
named executive officer is terminated by us for “Cause” or the named executive
officer terminates his employment for any reason other than for “Good Reason”,
we are not obligated to provide the executive officer with any form of
post-termination payments or benefits that are not otherwise available on a
non-discriminatory basis.
 
 In either
of these circumstances, the named executive officer is entitled to all payments
and benefits that have accrued prior to the date his employment terminates under
the benefit plans or programs in which he participated during his employment,
all in accordance with the terms and conditions of any such plan or program. The
named executive officer is also entitled to exercise vested stock options within
the three month period following termination.
 
 Payments and Benefits Upon
Death, Disability or Retirement
 
 In the
event a named executive officer’s employment terminates due to his death or
disability, he or, in the case of his death, his designated beneficiary, is
entitled to receive those payments and benefits to which the executive officer
is entitled under our non-discriminatory disability plan and group life
insurance program, as the case may be, subject to the terms and conditions of
those plans and programs.
 
 If a
named executive officer’s employment terminates due to his death, disability or
retirement, the executive or, in the case of his death, his designated
beneficiary, has the right to exercise, for a period of one year, all stock
options that were vested at the time of the executive’s
termination.
 
 In the
case of Messrs. Frey and Shaffer, each of whom hold matching shares granted
under our Stock Bonus and Incentive Plan, any restrictions that remain on those
shares at the time their employment terminates due to death, disability or
retirement, will terminate and the shares will become immediately transferable
by the executive or, in the case of his death, by his designated
beneficiary.
   64
 
 As
discussed on page 62, we provided a qualified, defined benefit pension plan on a
non-discriminatory basis until September 1, 2004, after which time no employee
who was not already a participant in that plan was admitted to participate.
Having become participants prior to that date, Messrs. Frey, Shaffer and Oliva
participate in that plan. Neither Mr. O’Hara nor Mr. Olbrych had become
participants prior to that date and, therefore, do not participate in that plan.
In order to be retirement eligible so as to be entitled to receive benefits
under that plan, a participant must fulfill the age and service requirements
stipulated in the plan. None of the participants, Mr. Frey, Mr. Shaffer or Mr.
Oliva, was retirement eligible to receive benefits under this plan as of January
26, 2008.
 
 As
discussed on page 63, we provide supplemental retirement benefits to selected
executives and key managers pursuant to our Supplemental Plan. Messrs. O’Hara,
Frey and Shaffer participate in the Supplemental Plan but Mr. Olbrych and Mr.
Oliva do not. Benefits begin to accrue under the Supplemental Plan once a
participant has attained a minimum of ten years of service. Maximum benefits
accrue after thirty years of service. Under our agreement with Mr. O’Hara, he is
credited with service for purposes of the Supplemental Plan at the rate of one
year of service for each four months of actual employment. Thus, as of January
26, 2008, Mr. O’Hara had attained 13 years of service for purposes of the
Supplemental Plan. However, in order to be retirement eligible and entitled to
receive benefits under the Supplemental Plan, a participant must also fulfill
the age requirements stipulated in the plan and, as of that date, Mr. O’Hara had
not yet fulfilled those age requirements and was, therefore, not yet retirement
eligible and entitled to receive benefits.
 
 As of
January 26, 2008, neither Mr. Frey nor Mr. Shaffer had yet attained ten years of
service as required for benefits to accrue under the Supplemental Plan, and
neither had yet fulfilled the age requirement to be retirement
eligible.
 
 Payments Made Upon a Change
in Control
 
 Generally,
the stock options and shares of restricted stock that have been granted to the
named executive officers were granted pursuant to the 1999 Performance Plan. The
1999 Performance Plan provides that, in the event of a change in control of our
Company, any outstanding stock options and restricted shares granted under the
plan shall, in the case of stock options, become immediately exercisable and, in
the case of restricted shares, become immediately transferable. Also, each of
Messrs. Frey, Oliva and Shaffer, is entitled to his maximum bonus for the year
in which he is terminated, pro-rated for the portion of the year he was
employed.
  In
addition, our agreements with Messrs. O’Hara, Frey, Shaffer and Oliva each
provides for certain amounts and benefits to be paid by us if his employment is
terminated by us without Cause or by the executive for Good Reason, within a
specified period of time following or preceding a change in control of our
Company. Our agreement with Mr. Olbrych does not include this provision. In each
case, this provision is operative if the executive officer’s employment is
terminated within three years following, or within six-months preceding, a
change in control. Under these circumstances, these named executive officers are
entitled to the following:
 
 ●
              A
      lump-sum cash payment based upon the executive’s then current base salary
      and short-term incentive compensation. Mr. O’Hara is entitled to a payment
      equal to two times his annual base salary, plus his target bonus for the
      year in which he is terminated. Each of Messrs. Frey and Shaffer is
      entitled to a payment equal to one and one-half times his annual base
      salary. Mr. Oliva is entitled to a payment equal to one times his annual
      base salary.
 
 ●
              To
      the extent not otherwise provided for under the terms of the equity-based
      compensation plan under which they were issued, immediate vesting of all
      outstanding equity-based awards, including stock options and restricted
      shares.
 
 ●
              Continuation
      of medical and health benefits for a specified period of time. In the case
      of Mr. O’Hara, this benefit continues for a period of two years for each
      year he had been employed by us. As to Messrs. Frey and Shaffer, this
      benefit continues for a period of two years. Mr. Oliva is not entitled to
      continuation of his medical benefits. If the executive officer
      subsequently becomes employed, our medical benefit continuation becomes
      secondary to the benefits provided by the other employer. The medical
      benefit
   65
 continuation
      will be paid by the Company directly to the medical benefit provider and
      the Company will make a gross-up payment for taxes due on the benefit
      directly to the executive officer.
 ●
              As
      to Messrs. Frey and Shaffer, each shall be credited with an additional
      five years of service credit, to be aggregated with his actual years of
      service, under the Supplemental Plan discussed
  above.
 
 ●
              In
      the case of Mr. O’Hara, if it is determined that the payments and benefits
      paid by us to him would be subject to the excise tax imposed by Internal
      Revenue Code Section 4999 (or successor provision), then we are obligated
      to also pay him an amount that, after the payment of taxes on that
      additional amount, allows him to retain an amount equal to the excise
      tax.
 
 If
certain conditions apply, these payments may be delayed until six-months
following termination to avoid certain negative consequences under Section 409A
of the Internal Revenue Code of 1986, as amended. Under the terms of the
Supplemental Plan, each of the named executive officers is entitled to an
immediate, lump-sum payment if there is a change in control of our Company, and
the executive’s employment is terminated by us without Cause, or by the
executive with Good Reason, within two years following the change in control.
Under these circumstances, each executive is entitled to immediate payment of a
lump-sum amount equal to 150% of the present value of his then-vested
benefit.
 
 Material Conditions to
Payments
 
 Our
agreement with each of the named executive officers provides that our obligation
to pay the amounts and benefits provided for under those agreements is intended
to be in settlement of all claims that the executive may have against us with
respect to the termination of his employment, and we may require the executive
to execute a separate agreement to that effect. In addition, our obligation for
those amounts and payments is also conditioned upon the following:
 
 ●
              The
      executive agrees that, for a specified period following termination of his
      employment, he will not compete with us and will not solicit for
      employment any of our other employees. In the case of Mr. O’Hara the
      period is specified as two years and in the case of Messrs. Olbrych, Frey,
      Shaffer and Oliva, the period is specified as one
  year.
 
 ●
              The
      executive agrees to maintain the confidentiality of our confidential
      information.
 
 Definitions
 
 The
agreement that we have entered into with each of the named executive officers
defines a termination for “Cause” in substantially the same way so as to mean
the termination of the executive’s employment by us based upon: (a) the
executive’s willful and continued failure to substantially perform his duties;
(b) the executive’s commission of an act constituting a criminal offense
involving moral turpitude, dishonesty or breach of trust; or (c) the executive’s
material breach of any provision of the agreement.
  Mr.
O’Hara’s employment agreement defines “Good Reason” to mean: (a) the assignment
to him of duties inconsistent with his position; (b) the failure on our part to
continue any benefit or compensation plan to which he is entitled; (c) the
relocation of him to a location other than that specified in his agreement; (d)
a material breach of the agreement by us; (e) any purported termination of his
employment, other than as permitted by the agreement; and (f) if, within a
specified period following a change in control, the successor has failed to
expressly assume our obligations under the agreement. The agreements we have
with each named executive officer other than Mr. O’Hara define “Good Reason” in
substantially the same way so as to mean: (a) a material reduction in the
executive officer’s compensation; (b) a material reduction in the executive
officer’s authority, duties or responsibilities; (c) a material reduction in the
budget over which the executive officer has authority; (d) the relocation of the
executive to a location other than that specified in his agreement; and (e) a
material breach of the agreement by us.
 
 66
  Stephen
M. O’Hara
  The
following table illustrates the potential payments and benefits that would be
received by Stephen M. O’Hara under various employment termination events as of
the end of the last fiscal year, January 26, 2008.
  Other
Potential Post-Employment Payments
  Type
      of Payment
              
              Involuntary
                Termination
                Without
                Cause
      or
                Voluntary
                Termination
                with
      Good
                Reason
                ($)
              
              
              Involuntary
                Termination
                for
      Cause or
                Voluntary
                Termination
                Without
                Good
      Reason
                ($)
              
              
              Retirement
                ($)
              
              
              
              Death
                ($)
              
              
              Disability
                ($)
              
              
              Change
      in
                Control
                Only
                ($)
              
              
              Change
      in
                Control
      and
                Termination
                Without
                Cause
      or
                with
      Good
                Reason
                ($)Cash
      CompensationCash
      Severance
              
              $
              850,000
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              1,062,500Long-Term
      IncentivesStock
      OptionsUnvested &Accelerated
      Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Restricted
      StockUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              1,149,911
              
              
              $
              1,149,911Retirement
      BenefitsPension
      Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Supplemental
      Retirement Benefit Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              259,180
              
              
              $
              259,180
              
              
              $
              0
              
              
              $
              388,770BenefitsContinuation
      ofHealth &
      WelfareBenefits
              
              $
              284,396
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              284,396Excise
      Tax & Gross-Up
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              962,675Total
              
              $
              1,134,396
              
              
              $
              0
              
              
              $
              0
              
              
              
              $
              259,180
              
              
              $
              259,180
              
              
              $
              1,149,911
              
              
              $
              3,848,252
 
 
 
  67
  Steven
L. Frey
  The
following table illustrates the potential payments and benefits that would be
received by Steven L. Frey under various employment termination events as of the
end of the last fiscal year, January 26, 2008.
  Other
Potential Post-Employment Payments
  Type
      of Payment
              
              Involuntary
                  Termination
                  Without
                  Cause
      or
                  Voluntary
                  Termination
                  with
      Good
                  Reason
                  ($)
              
              
              Involuntary
                  Termination
                  for
      Cause or
                  Voluntary
                  Termination
                  Without
                  Good
      Reason
                  ($)
              
              
              Retirement
                  ($)
              
              
              Death
                  ($)
              
              
              Disability
                  ($)
              
              
              Change
      in
                  Control
                  Only
                  ($)
              
              
              Change
      in
                  Control
      and
                  Termination
                  Without
                  Cause
      or
                  with
      Good
                  Reason
                  ($)Cash
      CompensationCash
      Severance
              
              $
              210,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              210,000
              
              
              $
              525,000Long-Term
      IncentivesStock
      OptionsUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Restricted
      StockUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              345,712
              
              
              $
              345,712Retirement
      BenefitsPension
      Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Supplemental
      Retirement Benefit Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              139,139
              
              
              $
              139,139
              
              
              $
              0
              
              
              $
              208,709BenefitsContinuation
      of Health & Welfare Benefits
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              44,646Excise
      Tax & Gross-Up
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Total
              
              $
              210,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              139,139
              
              
              $
              139,139
              
              
              $
              555,712
              
              
              $
              1,124,067
 
  68
  James
W. Shaffer
  The
following table illustrates the potential payments and benefits that would be
received by James W. Shaffer under various employment termination events as of
the end of the last fiscal year, January 26, 2008.
  Other
Potential Post-Employment Payments
  Type
      of Payment
              
              Involuntary
                    Termination
                    Without
                    Cause
      or
                    Voluntary
                    Termination
                    with
      Good
                    Reason
                    ($)
              
              
              Involuntary
                  Termination
                  for
      Cause or
                  Voluntary
                  Termination
                  Without
                  Good
      Reason
                  ($)
              
              
              Retirement
                    ($)
              
              
              Death
                ($)
              
              
              Disability
                ($)
              
              
              Change
      in
                  Control
                  Only
                  ($)
              
              
              Change
      in
                    Control
      and
                    Termination
                    Without
                    Cause
      or
                    with
      Good
                    Reason
                    ($)Cash
      CompensationCash
      Severance
              
              $
              200,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              200,000
              
              
              $
              500,000Long-Term
      IncentivesStock
      OptionsUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Restricted
      StockUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              324,885
              
              
              $
              324,885Retirement
      BenefitsPension
      Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Supplemental
      Retirement Benefit Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              78,238
              
              
              $
              78,238
              
              
              $
              0
              
              
              $
              117,357BenefitsContinuation
      of Health & Welfare Benefits
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Excise
      Tax & Gross-Up
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Total
              
              $
              200,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              78,238
              
              
              $
              78,238
              
              
              $
              524,885
              
              
              $
              942,242
 
  69
  John
S. Olbrych
  The
following table illustrates the potential payments and benefits that would be
received by John S. Olbrych under various employment termination events as of
the end of the last fiscal year, January 26, 2008.
  Other
Potential Post-Employment Payments
  Type
      of Payment
              
              Involuntary
                    Termination
                    Without
                    Cause
      or
                    Voluntary
                    Termination
                    with
      Good
                    Reason
                    ($)
              
              
              Involuntary
                    Termination
                    for
      Cause or
                    Voluntary
                    Termination
                    Without
                    Good
      Reason
                    ($)
              
              
              Retirement
                ($)
              
              
              Death
                ($)
              
              
              Disability
                ($)
              
              
              Change
      in
                    Control
                        Only
                        ($)
              
              
              Change
      in
                    Control
      and
                    Termination
                    Without
                    Cause
      or
                    with
      Good
                    Reason
                    ($)Cash
      CompensationCash
      Severance
              
              $
              255,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Long-Term
      IncentivesStock
      OptionsUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              415,143
              
              
              $
              415,143Restricted
      StockUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              79,717
              
              
              $
              79,717Retirement
      BenefitsPension
      Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Supplemental
      Retirement Benefit Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0BenefitsContinuation
      of Health & Welfare Benefits
              
              $
              10,900
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Excise
      Tax & Gross-Up
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Total
              
              $
              265,900
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              494,860
              
              
              $
              494,860
 
 
  70
  Richard
M. Oliva
  The
following table illustrates the potential payments and benefits that would be
received by Richard M. Oliva under various employment termination events as of
the end of the last fiscal year, January 26, 2008.
  Other
Potential Post-Employment Payments
  Type
      of Payment
              
              Involuntary
                    Termination
                    Without
                    Cause
      or
                    Voluntary
                    Termination
                    with
      Good
                    Reason
                    ($)
              
              
              Involuntary
                    Termination
                    for
      Cause or
                    Voluntary
                    Termination
                    Without
                    Good
      Reason
                    ($)
              
              
              Retirement
                ($)
              
              
              Death
                ($)
              
              
              Disability
                ($)
              
              
              Change
      in
                    Control
                        Only
                        ($)
              
              
              Change
      in
                    Control
      and
                    Termination
                    Without
                    Cause
      or
                    with
      Good
                    Reason
                    ($)Cash
      CompensationCash
      Severance (1)
              
              $
              190,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              190,000
              
              
              $
              380,000Long-Term
      IncentivesStock
      OptionsUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Restricted
      StockUnvested &
      Accelerated Awards
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              284,209
              
              
              $
              284,209Retirement
      BenefitsPension
      Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Supplemental
      Retirement Benefit Plan
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0BenefitsContinuation
      of Health & Welfare Benefits
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Excise
      Tax & Gross-Up
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0Total
              
              $
              190,000
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              474,209
              
              
              $
              664,209
 
 (1)
                Mr. Oliva’s salary continuation is subject
      to offset by income earned from other sources during the last six months
      of the period. See “Payments Made Upon Termination,” page
    63.  71
 Compensation
of Directors
 
 The
following table summarizes the compensation paid by the Company to non-employee
directors for the fiscal year ended January 26, 2008.
 
 Name
      (1)
              Fees
                Earned
                or
      Paid in
                Cash
      (2)
                ($)
              Stock
                Awards
                (3)(4)(5)
      ($)
              Option
                Awards
                (3)(6)
      ($)
              All
      Other
                Compensation
      (7)
                ($)
              Total
                ($)(a)
              (b)
              (c)
              (d)
              (g)
              (h)James
      R. Henderson
              $35,633
              -
              -
              -
              $35,633Don
      W. Hubble
              $11,700
              $13,764(4)
                $19,981(5)
              -
              $691
              $46,136Ronald
      J. Kruszewski
              $19,000
              $14,003(4)
                $33,847(5)
              -
              $789
              $67,639Charles
      W. Mueller
              $15,650
              $13,764(4)
                $32,359(5)
              $646
              $789
              $63,208John
      J. Quicke
              $35,133
              -
              -
              -
              $35,133Ronald
      N. Riner
              $13,800
              $15,848(4)
                $21,997(5)
              -
              $758
              $52,403Kelvin
      R. Westbrook
              $16,200
              $13,764(4)
                $24,363(5)
              $646
              $723
              $55,696
 
 (1)
                  Stephen M. O’Hara is a “named executive
      officer” and as such, information about the compensation that he received
      for his services to the Company, including services as a director, is
      included under the “Executive Compensation” section of this Form
      10-K.  (2)
                      Cash compensation earned by directors for
      meeting fees during the fiscal year. See footnote 5 for annual board
      retainer fee paid in shares of common stock. Each non-employee director,
      except Messrs. Henderson and Quicke, generally receives 100% of his annual
      board retainer fee in the form of shares of common stock based upon the
      fair market value of the stock on the annual retainer date. Included in
      the amounts for Messrs. Henderson and Quicke are the cash values of
      $23,333 and $25,833, respectively, comprised of quarterly retainer
      payments, and an additional pro-rated retainer of $2,500 to Mr. Quicke
      when he became our non-executive Vice Chairman of the Board in the latter
      part of the year. Mr. Kruszewski also received cash compensation of $5,000
      as an additional net pro-rated retainer when he became our non-executive
      Chairman of the Board in the latter part of the
  year.  (3)
                          The amounts shown in columns (c) and (d)
      above represent the dollar amounts recognized for financial statement
      reporting purposes in fiscal 2007 with respect to the stock and option
      awards included in the Company’s financial statements for fiscal 2007 per
      SFAS 123(R). See Note 2 to the consolidated financial statements included
      in this Form 10-K for a discussion of the relevant assumptions used in
      calculating grant date fair value pursuant to SFAS
  123(R).  (4)
                              Pursuant to the 2004 Equity Incentive Plan
      for Non-Employee Directors, each non-employee director generally receives
      an annual stock grant of 600 shares of restricted stock on the date of the
      annual retainer date, except for Messrs. Henderson and Quicke, who receive
      the value of the grant in cash, as described below in Additional
      Information about Director Compensation. Shares vest at the rate of
      one-third of the shares granted on the first, second and third anniversary
      dates of the grant and are distributable upon vesting. Messrs. Henderson
      and Quicke will each be paid one-third of the cash value of their grant on
      the vesting date. The grant date fair value for each of these grants for
      fiscal 2007 was $14,583. As of January 26, 2008, the aggregate number of
      stock awards outstanding was: Mr. Hubble, 2,400 shares (1,200 unvested;
      1,200 vested); Mr. Kruszewski, 2,800 shares (1,200 unvested; 1,600
      vested); Mr. Mueller, 3,600 shares (1,200 unvested; 2,400 vested); Dr.
      Riner, 2,200 shares (1,333 unvested, 867 vested); and Mr. Westbrook, 3,100
      shares (1,200 unvested; 1,900
vested).
  (5)
                  Pursuant to the 2004 Equity Incentive Plan
      for Non-Employee Directors, generally each non-employee director receives
      100% of his annual board retainer fee in the form of shares of common
      stock, based upon
 72
  the fair market value of the stock on the
      annual retainer date, except for Messrs. Henderson and Quicke, who receive
      the value of the retainer in cash, as described below in Additional
      Information about Director Compensation, and in footnote 2. The retainer
      shares vest at a rate of 10% per month over a ten-month period following
      the annual retainer date. The grant date fair value of shares of
      restricted stock in lieu of annual board retainer fee was: Mr. Hubble,
      $19,978; Mr. Kruszewski, $31,985; Mr. Mueller, $31,985; Dr. Riner,
      $21,996; and Mr. Westbrook, $23,989. As of January 26, 2008, the aggregate
      number of retainer shares outstanding, both vested and unvested, was: Mr.
      Hubble, 4,758 shares; Mr. Kruszewski, 6,147 shares; Mr. Mueller, 13,978
      shares; Dr. Riner, 2,908 shares; and Mr. Westbrook, 8,321
      shares. (6)
                        No stock options have been granted under
      the 2004 Equity Incentive Plan for Non-Employee Directors. The aggregate
      number of stock options outstanding as of January 26, 2008, was: Mr.
      Mueller, 10,000; and Mr. Westbrook, 4,600. The existing options were
      granted under the 1994 Non-Employee Directors Stock Plan which is now
      terminated. (7)
                              Consists of dividends paid in fiscal 2007
      on unvested stock grant and retainer shares (as described in footnotes 4
      and 5 above). Dividends are paid at the same dividend rate paid to all
      shareholders of common stock.
 Additional Information About
Director Compensation
 
 We
structure director compensation to attract and retain non-employee directors and
to further align the interests of directors with the interest of the
shareholders by linking a meaningful portion of their compensation to stock
performance. In setting director compensation, we consider the significant
amount of time that our directors expend in fulfilling their duties to the
Company as well as the skill-level required by the Company of members of the
Board. Due to provisions in the terms of the Settlement Agreement dated August
30, 2006, between us and Steel Partners, Mr. Henderson and Mr. Quicke will
receive all of their director compensation in the form of cash payments. For
those forms of director compensation that are payable in shares of our common
stock, Messrs. Henderson and Quicke will be paid a cash amount computed by
multiplying the number of shares that would otherwise be issued to them as
non-employee directors by the average of the high and low prices per share of
our stock on the New York Stock Exchange on the date that shares are granted to
the other non-employee directors. Mr. O’Hara does not receive compensation for
serving as a director. Effective September 18, 2007, Mr. Kruszewski was elected
our non-executive Chairman of the Board and Mr. Quicke was elected our
non-executive Vice Chairman of the Board. Mr. Kruszewski previously served as
Lead Director. Non-employee directors are compensated as follows:
 
 Basic Retainer –Each
non-employee director receives a base retainer of $20,000 per year.
 
 Additional Retainers –Our
non-executive Chairman receives an additional retainer of $20,000 per year, and
our non-executive Vice Chairman receives an additional retainer of $5,000 per
year, for their respective services. A lead director receives an additional
retainer of $10,000 per year for his services. The chair of the Audit Committee
received an additional retainer of $10,000 per year for his services on such
committee. The chair of each other committee and each Audit Committee member
received an additional retainer of $2,000 per year for their services on such
committees. The additional retainer amounts are added to the base retainer for
each position held.
 
 Meeting Fees – In addition,
such directors also receive $1,250 for each in-person meeting of the Board of
Directors. Fees for telephonic meetings are $450. Directors receive $700 for
each in-person meeting of committees on which the director serves if the
committee meeting is on the same day as a Board meeting and $1,000 for each such
meeting if the meeting is not on the same day as a Board meeting.
 
 Expense Reimbursement – The
Company also pays for the ordinary and necessary out-of-pocket expenses incurred
by the non-employee directors for attendance at Board and committee
meetings.
 
 Total
annual cash compensation received by our non-employee directors, therefore, is
determined by the number of committee and Board meetings conducted and attended
each year.
 
 73
 2004 Equity Incentive Plan for
Non-Employee Directors.The 2004 Equity Incentive Plan for Non-Employee
Directors was approved by the shareholders, and became effective, on May 25,
2004. Under this plan, generally each non-employee director receives 100% of his
or her annual board retainer fee in the form of shares of common stock based
upon the fair market value of the stock on the annual retainer date. A portion
of the shares received as the annual board retainer fee under the plan will be
forfeited if the director serves less than ten months after the annual retainer
date. Generally, new non-employee directors receive, upon initial election to
the Board, 400 shares of common stock. The Compensation and Organization
Committee may award restricted stock and impose whatever conditions to vesting
it determines to be appropriate. The Compensation and Organization Committee
generally awards 600 shares of restricted stock to each non-employee director on
the date of the annual retainer date. Stock granted under the plan,
other than shares granted as the annual board retainer fee, is forfeitable until
earned out. Shares vest at the rate of one-third of the shares granted on the
first, second and third anniversary dates of each grant. As the 2004 Equity
Incentive Plan for Non-Employee Directors expressly states, its purpose is
two-fold: To attract and retain non-employee directors and to solidify the
common interest of the directors and shareholders in enhancing the value of our
common stock. Where the primary purpose of the retainer fees paid to each of our
directors is to attract qualified individuals as directors of the Company, the
annual grant of 600 shares of restricted stock to each director, with vesting
occurring over a three-year period, is intended to not only encourage retention
of those qualified individuals as directors but, also, to increase annually the
degree to which each director’s interests are more fully aligned with those of
our shareholders.
 
 Non-qualified
options to purchase shares of common stock may be granted to non-employee
directors at an exercise price not less than 100% of the fair market value on
the date of grant. Options become exercisable and expire at the times and on the
terms established by the Compensation and Organization Committee. Awards of
stock units may be issued to non-employee directors on the terms and conditions
established by the Compensation and Organization Committee, except that each
restricted stock unit will initially have a value equal to one share of our
common stock on the grant date. Upon vesting of a stock unit, a non-employee
director will be entitled to receive from us an amount equal to the then fair
market value of a share of our common stock. No options or stock units have been
granted under this plan.
 
 The Board
expects to continue to emphasize restricted stock awards to non-employee
directors over non-qualified stock options through the award of 600 shares of
restricted stock annually to each director. This is consistent with our
philosophy to generally emphasize performance-based restricted stock awards for
employees instead of stock options for long-term incentives.
 
 Deferred Compensation Option Plan for
Non-Employee Directors.Three current directors, Messrs. Westbrook,
O’Hara and Kruszewski, have elected to participate in the Deferred Compensation
Option Plan for Non-Employee Directors. Upon election to the Board, a director
may, at his or her election, defer $5,000 to $10,000 of Board meeting and
committee meeting fees annually for a period not to exceed four years. In
exchange, the director is entitled to receive at retirement, a retirement
benefit payment payable over 15 years following his or her retirement. The
amount of the retirement benefit is a function of the amount of compensation
deferred and certain actuarial factors. Mr. Westbrook has completed his
deferrals. A benefit amount payable prior to age 70 is dependent upon Mr.
Westbrook’s age at termination, and his vested percentage at
termination.
 
 During
his service as a non-employee director on the Board, and prior to joining us as
President and Chief Executive Officer on September 15, 2003, Mr. O’Hara elected
to participate in the Deferred Compensation Option Plan for Non-Employee
Directors and defer meeting fees for a four-year period. Upon becoming employed
by us, he was no longer a non-employee director receiving meeting fees, and was
no longer eligible to defer for a fourth and final year. As a consequence, Mr.
O’Hara’s retirement benefit under the plan will be reduced to reflect the fact
that all of his elected deferrals could not be made. His original benefit amount
will be reduced to a pro-rated benefit amount per month of approximately $2,690,
payable at age 70. A benefit amount payable prior to age 70 is dependent upon
Mr. O’Hara’s age at termination, and his vested percentage at
termination.
   74
 
 Mr.
Kruszewski had also elected to participate in the plan and defer meeting fees
for a four-year period. After the first year of deferral, he decided not to
continue to defer meeting fees. As a result, Mr. Kruszewski’s retirement benefit
under the plan will be reduced to reflect that fact. His original benefit amount
will be reduced to a pro-rated benefit amount per month of approximately $1,220,
payable at age 70. A benefit amount payable prior to age 70 is dependent upon
Mr. Kruszewski’s age at termination, and his vested percentage at
termination.
  Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Equity
Compensation Plan Information
  The
following table provides information as of the fiscal year ended January 26,
2008, 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 plansapproved
      by security holders(1)
              
              
              
              
              
              315,100
              
              
              
              
              $20.75
              
              
              300,859Equity
      compensation plansnot
      approved by security holders
              
              
              
              
              
              200,000
              (2)
              
              
              
              23.58
              
              
              —Total
              
              
              
              
              
              515,100
              
              
              
              
              $21.85
              
              
              300,859(1)
              
              Includes
      stock options granted under the 1999 Performance Plan and the following
      plans which have terminated: the 1994 Performance Plan and the 1994
      Non-Employee Directors Stock Plan. No awards may be granted under any of
      these plans following their termination. Of the shares in column (c), the
      1999 Performance Plan (244,478 shares available for issuance at January
      26, 2008) provides that restricted stock and stock units may also be
      issued under the plan; and the 2004 Equity Incentive Plan for Non-Employee
      Directors (56,381 shares available for issuance at January 26, 2008)
      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. All of these plans are
      shareholder-approved plans.(2)
              
              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, and $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
Officer, is eligible to receive awards under the Plan, upon nomination by our
Chief Executive Officer, or the
   75
  President
of any subsidiary or operating division. Our Board of Directors may, in its sole
discretion, terminate or amend the Plan at any time.
 
  STOCK
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
  The table
below lists those persons known by us to own, directly or indirectly, more than
five percent of the outstanding shares of our common stock,
as  reported to the Securities and Exchange Commission by the
beneficial owner(s) in their most recent Schedule 13D, Form 13F, or Schedule 13G
filing as of February 14, 2008.
  Beneficial
Ownership of Our Common Stock
  Name
      and Address of
                Beneficial
      Owner
              Shares
      of
                Common
      Stock
                Beneficially
                Owned
              
              %
      of
                Class(1)Steel
      Partners II, L.P.(2)
              1,792,770
              
              18.81%590
      Madison Avenue, 32nd FloorNew
      York, NY 10022T.
      Rowe Price Associates, Inc.(3)
              846,500
              
              8.88%100
      E. Pratt StreetBaltimore,
      MD 21202Dimensional
      Fund Advisors LP(4)
              756,019
              
              7.93%1299
      Ocean AvenueSanta
      Monica, CA 90401
 
 (1)
              Based
      upon 9,528,926 shares of our common stock outstanding as of March 28,
      2008.
  (2)
              According
      to a Form 13F dated February 14, 2008, filed by Warren G. Lichtenstein,
      and a 13D Amendment No. 15 dated December 28, 2007, filed by Steel
      Partners II, L.P., Steel Partners II GP LLC, Steel Partners, LLC, Steel
      Partners II Master Fund
      L.P., Warren G. Lichtenstein, James R. Henderson, and John J. Quicke,
      Steel Partners II, L.P. beneficially owns 1,792,770 shares and has sole
      voting and dispositive power over such shares. By virtue of their
      relationships with Steel Partners II, L.P., each of Steel GP LLC, Steel
      Master, Partners LLC and Mr. Lichtenstein may be deemed to beneficially
      own the shares owned by Steel Partners II, L.P. and has sole voting and
      dispositive power over all the 1,792,770 shares beneficially owned by
      Steel Partners II, L.P.
  (3)
              According
      to a Schedule 13G Amendment 2 dated February 14, 2008, filed by T. Rowe
      Price Associates, Inc. (Price Associates) and T. Rowe Price Small-Cap
      Stock Fund, Inc., Price Associates and T. Rowe Price Small-Cap Stock Fund,
      Inc. beneficially own 846,500 shares. Price Associates reported that it
      has sole voting power with respect to 76,100 shares, and sole dispositive
      power with respect to all 846,500 shares. Price Associates reported that
      these shares are owned by various individual and institutional investors,
      including the T. Rowe Price Small-Cap Stock Fund, Inc., (which was
      reported to beneficially own 688,400 shares, representing 7.0% of the
      shares outstanding, and have sole voting power with respect to all 688,400
      shares), to which Price Associates serves as investment advisor with power
      to direct investments and/or to vote the shares. Price Associates reported
      that it is deemed to be a beneficial owner of such shares, but expressly
      disclaims that it is, in fact, the beneficial owner of such
      shares.
  (4)
              According
      to a Schedule 13G Amendment 1 dated February 6, 2008, filed by Dimensional
      Fund Advisors LP (Dimensional), Dimensional beneficially owns 756,019
      shares, with sole voting and dispositive power with respect to all 756,019
      shares. Dimensional, formerly Dimensional Fund Advisors, Inc., reported
      that it furnishes investment advice to four investment companies and
      serves as investment manager to certain other commingled group trusts and
      separate accounts, collectively referred to as the “Funds.” Dimensional
      reported that in its role as investment advisor or manager, it may be
      deemed to be the beneficial owner of the shares held by the Funds, but
      that all shares reported are owned by the Funds and Dimensional disclaims
      beneficial ownership of all such
shares.
   76
  STOCK
OWNERSHIP OF MANAGEMENT
  The table
below shows the number of shares of common stock beneficially owned as of March
28, 2008, by each director, each executive officer listed in the Summary
Compensation Table, and all directors and executive officers as a group. As of
March 28, 2008, each director and executive officer named beneficially owned
less than one percent, except for Mr. O’Hara, who owned 2.89%. The directors and
executive officers as a group owned 6.39% of the Company’s common stock. All
percentages include options that are exercisable within 60 days after March 28,
2008.
  
 Amount
      and Nature of
                Beneficial
      OwnershipName of Beneficial
      Owner
              
              Owned(1)(2)
              
              Obtainable
                through
                Stock
      Option
                Exercise(3)
              
              
              TotalSteven
      L. Frey
              
              
              20,108
              (4)
              
              
              58,000
              
              
              
              78,108James
      R. Henderson
              
              
              —
              
              
              
              —
              
              
              
              —Don
      W. Hubble
              
              
              34,133
              (5)
              
              
              —
              
              
              
              34,133Ronald
      J. Kruszewski
              
              
              13,947
              
              
              
              —
              
              
              
              13,947Charles
      W. Mueller
              
              
              24,182
              (6)
              
              
              10,000
              
              
              
              34,182Stephen
      M. O’Hara
              
              
              75,335
              (4)(7)(8)
              
              
              205,600
              
              
              
              280,935John
      J. Quicke
              
              
              —
              
              
              
              —
              
              
              
              —John
      S. Olbrych
              
              
              4,731
              (4)
              
              
              37,500
              
              
              
              42,231Richard
      M. Oliva
              
              
              15,297
              (4)
              
              
              13,000
              
              
              
              28,297Ronald
      N. Riner
              
              
              5,108
              
              
              
              —
              
              
              
              5,108James
      W. Shaffer
              
              
              19,873
              (4)(8)
              
              
              41,000
              
              
              
              60,873Kelvin
      R. Westbrook
              
              
              11,421
              
              
              
              4,600
              
              
              
              16,021All executive officers and directors as a group (14
      persons)
              
              
              245,029
              
              
              
              388,200
              
              
              
              636,229
 
 (1)
              Except
      as otherwise indicated, each individual has sole voting and dispositive
      power over the shares listed beside his
name.
  (2)
              Includes
      2,400 shares for Mr. Hubble, 2,800 shares for Mr. Kruszewski, 3,600 shares
      for Mr. Mueller, 700 shares for Mr.O’Hara,
      2,200 shares for Dr. Riner, and 3,100 shares for Mr. Westbrook which were
      granted pursuant to the 1994 Non-Employee Directors Stock Plan and/or the
      2004 Equity Incentive Plan for Non-Employee Directors. With respect to
      these shares, the named directors have sole voting power and no current
      dispositive power except for 1,200 shares held by Mr. Hubble, 1,600 shares
      held by Mr. Kruszewski, 2,400 shares held by Mr. Mueller, 700 shares held
      by Mr. O’Hara, 867 shares held by Dr. Riner, and 1,900 shares held by Mr.
      Westbrook for which they have sole voting and dispositive
      power.
  (3)
              Includes
      only those stock options exercisable within 60 days after March 28,
      2008.
  (4)
              Includes
      restricted stock awarded under the Company’s long-term incentive program
      through the 2007 awards, as follows: Mr. Frey, 15,762 shares; Mr. O’Hara,
      51,019 shares; Mr. Shaffer, 14,998 shares; Mr. Olbrych, 4,731 shares; and
      Mr. Oliva, 15,297 shares. Such numbers do not include shares issued in
      2004 and 2005 and subsequently forfeited because the performance goals
      associated with those awards were not achieved. All restricted shares may
      be earned in whole or in part based upon performance
    criteria.
  (5)
              Mr.
      Hubble disclaims beneficial ownership of 5,400 shares included above which
      are held by his wife.
  (6)
              Mr.
      Mueller disclaims beneficial ownership of 24,182 shares included above
      which are held by his wife’s living
trust.
  (7)
              Includes
      3,000 restricted shares (all of which have vested) awarded to Mr. O’Hara
      on September 15, 2003, as an inducement to
  employment.
  (8)
              Includes
      10,716 shares held by Mr. O’Hara, and 1,194 shares held by Mr. Shaffer,
      held in the company stock fund of our 401(k)
  plan.
   77
  Item 13. Certain
Relationships and Related Transactions, and Director
Independence
  Review and Approval of Related Party
Transactions.
  We review
all relationships and transactions in which the Company and our directors and
executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest. The
Company’s legal staff is primarily responsible for the development and
implementation of processes and controls to obtain information from the
directors and executive officers with respect to related party transactions and
for determining, based on the particular facts and circumstances, whether the
Company or a related party has a direct or indirect material interest in the
transaction. In addition, our Compensation and Organization Committee is
responsible for reviewing, approving and ratifying all related party
transactions required to be reported in the Company’s proxy statement and/or
Form 10-K, as the case may be. In cases where a member of our Compensation and
Organization Committee participated in a related party transaction, the approval
of the full Board of Directors is required. Our Compensation and Organization
Committee reviews any transaction in which the Company is a participant, and in
which
  ·
              an
      executive officer, director, current nominee for director, or any of any
      such person’s immediate family or household members had or will have a
      direct or indirect material interest;
and
 ·
              in
      which the amount involved exceeds
$120,000.
  Item 14. Principal
Accountant Fees and Services
  Audit
Fees
  The
information set forth below summarizes the fees paid to Deloitte & Touche
LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates, our independent registered public accountants, during the fiscal
years ended January 26, 2008 and January 27, 2007:
  Fiscal
      Year Ended
                January 26, 2008
              
              
              Fiscal
      Year Ended
                January 27, 2007Audit
      Fees(1)
              
              $
              518,633
              
              
              $
              632,909Audit-Related
      Fees(2)
              
              
              4,783
              
              
              
              3,965Tax
      Fees
              
              
              —
              
              
              
              —All
      Other Fees
              
              
              —
              
              
              
              —
 
 (1)
              Audit
      fees consist of professional and service fees billed for the audit of our
      annual consolidated financial statements, the reviews of our interim
      consolidated financial statements included in our quarterly reports on
      Form 10-Q, and the audit of our assessment
      and effectiveness of internal control over financial reporting under
      Section 404 of the Sarbanes-Oxley Act of
  2002.
  (2)
              Audit-related
      fees consist of fees billed for professional services related to various
      other attest services and assistance with and review of documents filed
      with the U.S. Securities and Exchange
  Commission.
   Auditor
Services Preapproval Policy
 
  The Audit
Committee pre-approves all fees and services provided by Deloitte & Touche
LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates. Our Audit Committee has adopted pre-approval policies and procedures
for non-audit services, and 100% of all services disclosed above for the fiscal
years ended January 26, 2008, and January 27, 2007, were pre-approved by our
Audit Committee and were provided pursuant to such policies and
procedures.
  78
  PART IV
  Item 15. Exhibits and
Financial Statement Schedules
 
 (a)
              Document
      List
 1.
              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 26, 2008,
                January
      27, 2007 and January 28, 2006
              
              F-2(iii)
              
              Consolidated
      Balance Sheets - January 26, 2008 and January 27,
    2007
              
              F-3(iv)
              
              Consolidated
      Statements of Shareholders’ Equity - Years ended January 26,
      2008,
                January
      27, 2007 and January 28, 2006
              
              F-4(v)
              
              Consolidated
      Statements of Cash Flows - Years ended January 26,
2008,
                January
      27, 2007 and January 28, 2006
              
              F-5(vi)
              
              Notes
      to Consolidated Financial Statements
              
              F-6
      - F-262.
              Financial Statement
      Schedule(i)
              
              Schedule
      II - Valuation and Qualifying Accounts - For the Three Years Ended January
      26, 2008
              
              F-27All
      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 10.41)
      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.
  
  79
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Shareholders of
 Angelica
Corporation:
  We have
audited the accompanying consolidated balance sheets of Angelica Corporation and
subsidiaries (the “Company”) as of January 26, 2008 and January 27, 2007, and
the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended January 26, 2008. 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 consolidated financial statements and financial statement
schedule 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 26, 2008 and January 27, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended January 26,
2008, 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, presents 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 26, 2008, based on the criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 9, 2008
expressed an unqualified opinion on the Company’s internal control over
financial reporting.
  /s/
Deloitte & Touche LLP
  St.
Louis, Missouri
 April 9,
2008
  
  F-1
  CONSOLIDATED
STATEMENTS OF INCOME
  Angelica
Corporation and Subsidiaries
 
 For
      Years Ended
                
                January
      26,
                
                
                January
      27,
                
                
                January
      28,(Dollars
      in thousands, except per share amounts)
                
                2008
                
                
                2007
                
                
                2006Continuing
      operations:Revenues
                
                $
                429,957
                
                
                $
                425,735
                
                
                $
                418,357Cost
      of services
                
                
                (371,552
                )
                
                
                (363,800
                )
                
                
                (364,300
                )Gross
      profit
                
                
                58,405
                
                
                
                61,935
                
                
                
                54,057Selling,
      general and administrative expenses
                
                
                (49,100
                )
                
                
                (51,306
                )
                
                
                (50,092
                )Amortization
      of other acquired assets
                
                
                (4,197
                )
                
                
                (4,281
                )
                
                
                (4,036
                )Other
      operating income, net
                
                
                2,751
                
                
                
                2,987
                
                
                
                6,384Income
      from operations
                
                
                7,859
                
                
                
                9,335
                
                
                
                6,313Interest
      expense
                
                
                (9,493
                )
                
                
                (9,412
                )
                
                
                (7,198
                )Non-operating
      income, net
                
                
                1,277
                
                
                
                2,424
                
                
                
                1,613(Loss)
      income from continuing operations before income taxes
                
                
                (357
                )
                
                
                2,347
                
                
                
                728Income
      tax benefit
                
                
                4,296
                
                
                
                1,286
                
                
                
                1,591Income
      from continuing operations
                
                
                3,939
                
                
                
                3,633
                
                
                
                2,319Discontinued
      operations:Loss from discontinued operations, net of tax benefit of $0,$0, and $835
                
                
                -
                
                
                
                -
                
                
                
                (1,286
                )Loss on disposal of discontinued operations, net of taxprovision of $0, $0, and $218
                
                
                -
                
                
                
                -
                
                
                
                (785
                )Loss
      from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                (2,071
                )Net
      income
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                248Basic
      earnings (loss) per share:Income
      from continuing operations
                
                $
                0.42
                
                
                $
                0.40
                
                
                $
                0.26Loss
      from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                (0.23
                )Net
      income
                
                $
                0.42
                
                
                $
                0.40
                
                
                $
                0.03Diluted
      earnings (loss) per share:Income
      from continuing operations
                
                $
                0.42
                
                
                $
                0.39
                
                
                $
                0.25Loss
      from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                (0.22
                )Net
      income
                
                $
                0.42
                
                
                $
                0.39
                
                
                $
                0.03
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-2
  CONSOLIDATED
BALANCE SHEETS
  Angelica
Corporation and Subsidiaries
 
 January
      26,
                
                
                January
      27,(Dollars
      in thousands)
                
                2008
                
                
                2007ASSETSCurrent
      Assets:Cash
                
                $
                3,258
                
                
                $
                6,254Receivables,
      net
                
                
                63,803
                
                
                
                56,874Linen
      inventory
                
                
                48,547
                
                
                
                50,902Deferred
      income taxes
                
                
                8,539
                
                
                
                -Prepaid
      expenses and other current assets
                
                
                6,540
                
                
                
                4,019Total
      Current Assets
                
                
                130,687
                
                
                
                118,049Property
      and Equipment:Land
                
                
                6,102
                
                
                
                7,187Buildings
      and leasehold improvements
                
                
                51,993
                
                
                
                54,322Machinery
      and equipment
                
                
                139,953
                
                
                
                141,074Capitalized
      leased equipment
                
                
                -
                
                
                
                653198,048
                
                
                
                203,236Less
      – accumulated depreciation
                
                
                105,705
                
                
                
                106,780Total
      Property and Equipment
                
                
                92,343
                
                
                
                96,456Other:Goodwill
                
                
                49,259
                
                
                
                49,259Other
      acquired assets, net
                
                
                33,929
                
                
                
                38,108Cash
      surrender value of life insurance
                
                
                2,308
                
                
                
                9,664Deferred
      income taxes
                
                
                5,962
                
                
                
                19,035Miscellaneous
                
                
                5,921
                
                
                
                5,734Total
      Other Assets
                
                
                97,379
                
                
                
                121,800Total
      Assets
                
                $
                320,409
                
                
                $
                336,305LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Current
      maturities of long-term debt
                
                $
                -
                
                
                $
                96Life
      insurance policy loans
                
                
                -
                
                
                
                8,298Accounts
      payable
                
                
                33,902
                
                
                
                32,867Accrued
      wages and other compensation
                
                
                6,186
                
                
                
                8,961Deferred
      compensation and pension liabilities
                
                
                1,650
                
                
                
                1,693Deferred
      income taxes
                
                
                -
                
                
                
                4,961Other
      accrued liabilities
                
                
                24,052
                
                
                
                29,392Total
      Current Liabilities
                
                
                65,790
                
                
                
                86,268Long-Term
      Debt, less current maturities
                
                
                90,000
                
                
                
                85,300Other:Deferred
      compensation and pension liabilities
                
                
                12,154
                
                
                
                14,623Other
      long-term liabilities
                
                
                1,002
                
                
                
                2,568Total
      Other Liabilities
                
                
                13,156
                
                
                
                17,191Shareholders'
      Equity:Common
      Stock, $1 par value, authorized 20,000,000 shares, issued:
      9,572,938and
      9,518,688 shares
                
                
                9,573
                
                
                
                9,519Capital
      surplus
                
                
                9,230
                
                
                
                7,174Retained
      earnings
                
                
                140,053
                
                
                
                140,277Accumulated
      other comprehensive loss
                
                
                (2,947
                )
                
                
                (4,839
                )Common
      Stock in treasury, at cost: 287,987 and 296,419 shares
                
                
                (4,446
                )
                
                
                (4,585
                )Total
      Shareholders' Equity
                
                
                151,463
                
                
                
                147,546Total
      Liabilities and Shareholders' Equity
                
                $
                320,409
                
                
                $
                336,305
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-3
  CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
  Angelica
Corporation and Subsidiaries
 
 For
      Years Ended
                
                January
      26,
                
                
                January
      27,
                
                
                January
      28,(Dollars
      in thousands, except per share amounts)
                
                2008
                
                
                2007
                
                
                2006COMMON
      STOCK ($1 PAR VALUE)Balance
      at beginning of year
                
                $
                9,519
                
                
                $
                9,472
                
                
                $
                9,472Common
      stock issued
                
                
                54
                
                
                
                47
                
                
                
                -Balance
      at end of year
                
                $
                9,573
                
                
                $
                9,519
                
                
                $
                9,472CAPITAL
      SURPLUSBalance
      at beginning of year
                
                $
                7,174
                
                
                $
                7,189
                
                
                $
                5,336SFAS
      123(R) cumulative effect adjustment
                
                
                -
                
                
                
                (533
                )
                
                
                -Tax
      benefit of stock options exercised
                
                
                -
                
                
                
                -
                
                
                
                1,031Stock-based
      compensation expense
                
                
                1,414
                
                
                
                217
                
                
                
                -Common
      stock issued
                
                
                793
                
                
                
                573
                
                
                
                -Treasury
      stock reissued
                
                
                (151
                )
                
                
                (272
                )
                
                
                822Balance
      at end of year
                
                $
                9,230
                
                
                $
                7,174
                
                
                $
                7,189RETAINED
      EARNINGSBalance
      at beginning of year
                
                $
                140,277
                
                
                $
                140,805
                
                
                $
                144,621Net
      income
                
                
                3,939
                
                
                
                3,633
                
                
                
                248Cash
      dividends (per share: 2007-$.44; 2006-$.44; 2005-$.44)
                
                
                (4,163
                )
                
                
                (4,161
                )
                
                
                (4,064
                )Balance
      at end of year
                
                $
                140,053
                
                
                $
                140,277
                
                
                $
                140,805ACCUMULATED
      OTHER COMPREHENSIVE LOSSBalance
      at beginning of year
                
                $
                (4,839
                )
                
                $
                (2,553
                )
                
                $
                (1,337
                )Change
      in fair value of interest rate swap
                
                
                (40
                )
                
                
                (61
                )
                
                
                110Change
      in fair value of natural gas derivative
                
                
                1,929
                
                
                
                (2,301
                )
                
                
                (607
                )SFAS
      158 transition adjustment
                
                
                -
                
                
                
                (345
                )
                
                
                -Pension
      liability adjustment
                
                
                3
                
                
                
                421
                
                
                
                (719
                )Balance
      at end of year
                
                $
                (2,947
                )
                
                $
                (4,839
                )
                
                $
                (2,553
                )UNAMORTIZED
      RESTRICTED STOCKBalance
      at beginning of year
                
                $
                -
                
                
                $
                (2,841
                )
                
                $
                (1,007
                )SFAS
      123(R) cumulative effect adjustment
                
                
                -
                
                
                
                2,841
                
                
                
                -Treasury
      stock reissued
                
                
                -
                
                
                
                -
                
                
                
                (2,474
                )Amortization
      expense
                
                
                -
                
                
                
                -
                
                
                
                640Balance
      at end of year
                
                $
                -
                
                
                $
                -
                
                
                $
                (2,841
                )COMMON
      STOCK IN TREASURY, AT COSTBalance
      at beginning of year
                
                $
                (4,585
                )
                
                $
                (2,524
                )
                
                $
                (5,729
                )SFAS
      123(R) cumulative effect adjustment
                
                
                -
                
                
                
                (2,308
                )
                
                
                -Treasury
      stock reissued
                
                
                139
                
                
                
                247
                
                
                
                3,205Balance
      at end of year
                
                $
                (4,446
                )
                
                $
                (4,585
                )
                
                $
                (2,524
                )SHAREHOLDERS'
      EQUITY, END OF YEAR
                
                $
                151,463
                
                
                $
                147,499
                
                
                $
                149,548Comprehensive
      Income (Loss)Net
      income
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                248Change
      in fair value of interest rate swap, net of tax:Unrealized
      (losses) gains deferred during year
                
                
                (5
                )
                
                
                32
                
                
                
                96Realized
      (gains) losses reclassified to net income during year
                
                
                (35
                )
                
                
                (93
                )
                
                
                14Change
      in fair value of natural gas derivative,  net of
      tax:Unrealized
      losses deferred during year
                
                
                (384
                )
                
                
                (4,660
                )
                
                
                (607
                )Realized
      losses reclassified to net income during year
                
                
                2,313
                
                
                
                2,359
                
                
                
                -Pension
      liability adjustment, net of tax
                
                
                3
                
                
                
                421
                
                
                
                (719
                )Other
      changes
                
                
                -
                
                
                
                -
                
                
                
                -Total
      Comprehensive Income (Loss)
                
                $
                5,831
                
                
                $
                1,692
                
                
                $
                (968
                )
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Angelica
Corporation and Subsidiaries
 
 For
      Years Ended
                
                January
      26,
                
                
                January
      27,
                
                
                January
      28,(Dollars
      in thousands)
                
                2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIESIncome
      from continuing operations
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                2,319Non-cash
      items included in income from continuing operations:Depreciation
                
                
                14,315
                
                
                
                15,143
                
                
                
                14,865Amortization
                
                
                5,612
                
                
                
                4,498
                
                
                
                4,677Deferred
      income taxes
                
                
                (1,955
                )
                
                
                (406
                )
                
                
                (1,591
                )Recognition
      of uncertain tax positions
                
                
                (2,330
                )
                
                
                -
                
                
                
                -Cash
      surrender value of life insurance
                
                
                (1,474
                )
                
                
                (1,423
                )
                
                
                (693
                )Gain
      on sale of assets
                
                
                (2,438
                )
                
                
                (3,409
                )
                
                
                (6,190
                )Change
      in working capital components of continuing operations,
netof
      businesses acquired/disposed of:Receivables,
      net
                
                
                (6,991
                )
                
                
                (551
                )
                
                
                (8,874
                )Linen
      inventory
                
                
                2,217
                
                
                
                (7,520
                )
                
                
                (3,952
                )Prepaid
      expenses and other current assets
                
                
                (114
                )
                
                
                (754
                )
                
                
                1,763Accounts
      payable
                
                
                (720
                )
                
                
                (2,353
                )
                
                
                16,311Compensation
      and other accruals
                
                
                (4,059
                )
                
                
                (907
                )
                
                
                2,209Income
      taxes
                
                
                (393
                )
                
                
                (990
                )
                
                
                1,126Other,
      net
                
                
                (2,677
                )
                
                
                (792
                )
                
                
                (1,532
                )Net
      cash provided by operating activities of continuing
    operations
                
                
                2,932
                
                
                
                4,169
                
                
                
                20,438CASH
      FLOWS FROM INVESTING ACTIVITIESExpenditures
      for property and equipment
                
                
                (14,361
                )
                
                
                (8,001
                )
                
                
                (18,377
                )Cost
      of businesses and assets acquired
                
                
                -
                
                
                
                -
                
                
                
                (52,930
                )Disposals
      of assets
                
                
                7,478
                
                
                
                8,010
                
                
                
                9,481Life
      insurance premiums paid, net
                
                
                (671
                )
                
                
                (265
                )
                
                
                (1,048
                )Net
      cash used in investing activities of continuing operations
                
                
                (7,554
                )
                
                
                (256
                )
                
                
                (62,874
                )CASH
      FLOWS FROM FINANCING ACTIVITIESRepayments
      of long-term debt
                
                
                (115,996
                )
                
                
                (115,019
                )
                
                
                (223,015
                )Borrowings
      of long-term debt
                
                
                120,600
                
                
                
                115,000
                
                
                
                240,200Repayments
      of life insurance policy loans
                
                
                (8,298
                )
                
                
                (7,801
                )
                
                
                (24,040
                )Borrowings
      from life insurance policy loans
                
                
                8,514
                
                
                
                9,580
                
                
                
                53,216Debt
      issuance costs
                
                
                -
                
                
                
                (48
                )
                
                
                (1,466
                )Dividends
      paid
                
                
                (4,163
                )
                
                
                (4,161
                )
                
                
                (4,064
                )Stock
      options exercised
                
                
                847
                
                
                
                623
                
                
                
                1,553Net
      cash provided by (used in) financing activities of continuing
      operations
                
                
                1,504
                
                
                
                (1,826
                )
                
                
                42,384CASH
      FLOWS FROM DISCONTINUED OPERATIONSOperating
      cash flows
                
                
                122
                
                
                
                (210
                )
                
                
                915Investing
      cash flows
                
                
                -
                
                
                
                -
                
                
                
                2,588Financing
      cash flows
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (decrease) increase in cash
                
                
                (2,996
                )
                
                
                1,877
                
                
                
                3,451Cash
      at beginning of year
                
                
                6,254
                
                
                
                4,377
                
                
                
                926Cash
      at end of year
                
                $
                3,258
                
                
                $
                6,254
                
                
                $
                4,377Supplemental
      cash flow information:Income
      taxes paid (refunded)
                
                $
                103
                
                
                $
                109
                
                
                $
                (606
                )Interest
      paid
                
                $
                8,122
                
                
                $
                8,974
                
                
                $
                6,246Supplemental
      disclosures of noncash investing and financing activities:Holdback
      of cost of businesses and assets acquired
                
                $
                -
                
                
                $
                -
                
                
                $
                106Purchases
      of property and equipment included in accounts payable
                
                $
                2,170
                
                
                $
                415
                
                
                $
                1,057Life
      insurance death benefit proceeds used to repay life insurance policy
      loans
                
                $
                542
                
                
                $
                306
                
                
                $
                1,052Escrow
      related to assets disposed
                
                $
                -
                
                
                $
                -
                
                
                $
                1,100
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-5
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Angelica
Corporation and Subsidiaries
  1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Nature
of Operations
 Angelica
Corporation (the Company) has one reportable segment that 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.
 
 Fiscal
Year
 The
Company’s fiscal year ends on the last Saturday in January. Fiscal years 2007,
2006 and 2005 ended January 26, 2008, January 27, 2007 and January 28, 2006,
respectively.
 
 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
 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 revenues at the time
the related revenue is earned. The Company excludes sales, use, value-added and
excise taxes from revenues on a net reporting basis.
 
 Use
of Estimates
 These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of certain estimates by management in determining the Company’s
assets, liabilities, revenues and expenses. Actual results may vary from these
estimates.
 
 Receivables,
net
 Receivables
are stated at their net realizable value. The Company provides a reserve for
doubtful accounts that is based upon historical collection information, specific
reserves for known troubled accounts, and other currently available information.
At January 26, 2008 and January 27, 2007, the reserve for doubtful accounts was
$926,000 and $848,000, respectively.
 
 Linen
Inventory
 Linen
inventory includes linens in service as well as linen inventory not yet placed
into service. Linens in service are stated at depreciated cost and linen
inventory is stated at cost. The Company reviews the amortization period of its
linens in service on an ongoing basis. In order to satisfy its initiative to
provide customers with 100% order fill rates the Company purchased a significant
amount of additional linens in fiscal 2006, which results in linens being washed
less often and therefore lasting longer. As a result, the Company determined
that the actual useful life of its linens was longer than the estimated useful
life previously used for amortization purposes in its financial statements.
Effective April 30, 2006, the first day of its 2006 second fiscal quarter, the
Company changed its estimate of the average useful life from 60 weeks to 63
weeks to reflect the estimated period during which these linens will remain in
service. The effect of this change was to reduce fiscal 2006 linen amortization
expense by $1,605,000, increase fiscal 2006 net income by $966,000, increase
fiscal 2006 basic income per share by $0.11, and increase fiscal 2006 diluted
income per share by $0.10.
 
 Property
and Equipment
 Property
and equipment are stated at cost. Renewals and betterments are capitalized,
while maintenance and repairs that do not improve efficiency or extend economic
life are expensed as incurred. Property and equipment are depreciated over their
expected useful lives (buildings and improvements – 10 to 40 years; machinery
and equipment – three to 20 years). Depreciation is computed on the
straight-line method. Leasehold
  F-6
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
    Long-Lived
Assets
 The
Company considers the possible impairment of long-lived assets, excluding
goodwill, in its laundry service centers 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 current and projected cash flows, and
recognizes impairment losses if it is determined that the carrying values are
not recoverable.
 
 Goodwill
 Goodwill
represents the excess purchase price over the fair market value of net
identifiable assets acquired. In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” goodwill is not amortized, but is tested for
impairment annually as of the end of the third quarter using a fair-value based
analysis.
 
 Other
Acquired Assets, net
 Other
acquired assets, net, 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 coverage 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 $16,640,000 and $19,678,000 at
January 26, 2008 and January 27, 2007, 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 26, 2008 and January 27, 2007 were $1,517,000 and
$1,364,000, 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.
 
 Share-Based
Payments
 The
Company has various stock-based compensation plans, which are described more
fully in Note 2, “Share-Based Payments.” Effective January 29, 2006, the first
day of its 2006 fiscal year, the Company adopted SFAS No. 123(R), “Share-Based
Payment,” which requires recognition of compensation expense for awards of
equity instruments based on the grant date fair value of those
awards.
 
 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
 Derivative
Financial Instruments
 The
Company accounts for derivative instruments in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended. This
statement generally requires recognition of all derivatives on the balance sheet
at fair value and recognition of the resulting gains or losses as adjustments to
earnings or other comprehensive income, and establishes criteria for designation
and effectiveness of hedging relationships. The Company enters into derivative
contracts to manage its exposure to interest rate risk and natural gas price
fluctuations. The Company does not hold any derivative financial instruments for
trading or speculative purposes.
  New
Accounting Pronouncements
 In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for the Company’s fiscal year ended
January 26, 2008. The adoption of SFAS No. 155 had no impact on the
Company’s consolidated financial statements.
  In June
2006, the EITF reached a consensus on Issue No. 06-5, “Accounting for Purchases
of Life Insurance – Determining the Amount that Could Be Realized in Accordance
with FASB Technical Bulletin 85-4.” EITF 06-5 stipulates that the cash surrender
value and any additional amounts provided by the contractual terms of the
insurance policy that are realizable at the balance sheet date should be
considered in determining the amount that could be realized under the life
insurance policy. The consensus also provides additional guidance for
determining the amount to be realized, including the policy level for which the
analysis should be performed, amounts excluded and measurement criteria.
Entities will have the option of applying the provisions of EITF 06-5 as a
cumulative effect adjustment to the opening balance of retained earnings or
retrospectively to all prior periods. EITF 06-5 is effective for the Company’s
fiscal year ended January 26, 2008. The adoption of EITF 06-5 had no impact on
the Company’s consolidated financial statements.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring the fair value of assets and liabilities.
This framework is intended to provide increased consistency in how fair value
determinations are made under various existing accounting standards which
permit, or in some cases require, estimates of fair value. SFAS No. 157 also
expands financial statement disclosure requirements about a company’s use of
fair value measurements, including the effect of such measures on earnings. SFAS
No. 157, as originally issued, was to be effective for the Company’s fiscal year
ending January 31, 2009. However, on February 12, 2008, the FASB issued FASB
Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157,” which
deferred the effective date of SFAS No. 157 for one year, as it relates to
certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company does not expect the adoption of SFAS No.
157 to have a material impact on its consolidated financial
statements.
  In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” which amends SFAS No. 87,
“Employers’ Accounting for Pension,” SFAS No. 88, “Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other than Pension” and SFAS No. 132 (revised 2003), “Employers’
Disclosures about Pension and Other Postretirement Benefits.” SFAS No. 158
requires that employers recognize on a prospective basis the funded status of
their defined benefit pension and other postretirement plans on their
consolidated balance sheet and recognize as a component of accumulated other
comprehensive income, net of tax, the gains or losses and prior service costs
or
  F-8
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 credits
that arise during the period but are not recognized as components of net
periodic benefit cost. On January 27, 2007, the Company adopted the recognition
and disclosure provisions of SFAS No. 158, and has included the related
cumulative effect adjustment in the accompanying consolidated balance sheet for
fiscal 2006. See Note 10 for further discussion of the effect of adopting SFAS
No. 158 on the Company’s consolidated financial statements. This statement also
requires that employers measure plan assets and obligations as of the date of
their year-end financial statements beginning with the Company’s fiscal year
ending January 31, 2009. The Company currently measures its plan assets and
obligations as of January 1. The Company has not yet determined the impact that
this portion of SFAS No. 158 will have on its consolidated balance
sheets.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities.” SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 is effective for the Company’s fiscal
year ending January 31, 2009. The Company does not expect the adoption of SFAS
No. 159 to have a material impact on its consolidated financial
statements.
  In June
2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for
Income Tax Benefits on Share-Based Payment Awards.” EITF 06-11 requires
companies to recognize a realized income tax benefit associated with dividends
or dividend equivalents paid on nonvested, equity-classified employee
share-based payment awards that are charged to retained earnings as an increase
to additional paid-in capital. EITF 06-11 will be applied prospectively to any
income tax benefits that result from dividends that are declared on or after
January 27, 2008. The Company does not expect the adoption of EITF 06-11 to have
a material impact on its consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This
statement amends SFAS No. 141 and provides revised guidance for recognizing and
measuring assets acquired and liabilities assumed in a business combination.
This statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination, and requires that transaction costs in a
business combination be expensed as incurred. SFAS No. 141R applies
prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS No. 141R will
impact our accounting for business combinations completed on or after February
1, 2009.
  2.
SHARE-BASED PAYMENTS
  The
Company has various stock option and stock bonus plans that provide for the
granting of incentive stock options, non-qualified stock options, restricted
stock and performance awards to certain employees and directors. A total of
2,125,000 shares have been authorized to be issued under all such plans. Options
and awards have been granted at or above the market price of the Company’s stock
at the date of grant, although certain plans allow for awards to be granted at a
price below fair market value. Options vest over periods ranging from six months
to four years, and are exercisable not less than six months nor more than 10
years after the date of grant. Restricted shares granted to non-employee
directors generally vest over one to three years. Restricted shares granted to
employees generally represent performance-contingent awards that vest at the end
of three years upon the attainment of certain earnings performance goals, with
the exception of certain retainer awards granted in the third quarter of fiscal
2006 that vest over a ten year period upon the attainment of certain earnings
performance goals.
  Effective
January 29, 2006, the first day of fiscal 2006, the Company adopted SFAS No. 123
(revised 2004) “Share-Based Payment” (SFAS 123(R)) using the modified
prospective method of adoption, which does not
  F-9
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 require
restatement of prior periods. Under the modified prospective method, the Company
is required to record compensation expense for all awards granted after the date
of adoption and for the unvested portion of previously granted awards that
remain outstanding at the date of adoption, net of an estimate of expected
forfeitures. Under SFAS 123(R), compensation expense is based on the estimated
fair values of stock options and restricted stock determined on the date of
grant and is recognized over the related vesting period, net of an estimate of
expected forfeitures. For service only awards with graded vesting, the Company
has elected to recognize compensation cost on a straight-line basis over the
requisite service period. For performance-contingent restricted stock, if it is
determined that the performance contingency will not be satisfied, any
previously recognized compensation expense is reversed in the period such
determination is made. As of January 17, 2006, the Board of Directors approved
the accelerated vesting of 64,334 unvested stock options. The exercise price of
these options was greater than the market price of the underlying stock on the
date of modification. By accelerating the vesting of these options,
approximately $173,000 of compensation expense was not incurred in fiscal year
2006, and $43,000 of compensation expense was not incurred in fiscal year 2007.
Upon adoption of SFAS No. 123(R), the remaining balances of unamortized
restricted stock were netted against common stock, treasury stock, and capital
surplus. The adoption of SFAS No. 123(R) did not have a material impact on the
consolidated financial statements.
  There
were no stock options granted during fiscal year 2007. The weighted-average
grant-date fair value of options granted during fiscal years 2006 and 2005 was
$7.34 and $6.94, respectively. The Company estimates the fair value of its
option awards on the date of grant using the Black-Scholes option pricing model.
The risk-free interest rate is based on external data while all other
assumptions are determined based on the Company’s historical experience with
stock options. The following weighted-average assumptions were used for grants
in fiscal years 2006 and 2005:
  2006
                
                
                2005Expected
      volatility
                
                
                32.9
                %
                
                
                31.4
                %Expected
      dividend yield
                
                
                2.2
                %
                
                
                3.8
                %Expected
      term (in years)
                
                
                9 -
      10
                
                
                
                9 -
      10Risk-free
      interest rate
                
                
                4.5
                %
                
                
                4.0
                %
  A summary
of the status of the Company’s stock option plans as of January 26, 2008, and
changes during the fiscal year then ended is presented in the table
below:
 
 WeightedWeighted
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Term
      (Years)
                
                
                ValueOutstanding
      at beginning of year
                
                
                581,850
                
                
                $
                21.49
                
                
                
                6.4Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (54,250
                )
                
                
                15.62Forfeited
                
                
                (12,500
                )
                
                
                32.02Expired
                
                
                -
                
                
                
                -Options
      outstanding at end of year
                
                
                515,100
                
                
                $
                21.85
                
                
                
                5.6
                
                
                $
                455,000Options
      exercisable at end of year
                
                
                458,850
                
                
                $
                21.65
                
                
                
                5.1
                
                
                $
                455,000
  The
Company expects all stock options outstanding at January 26, 2008, to
vest.
  F-10
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 Cash
proceeds, tax benefits and intrinsic value related to total stock options
exercised during fiscal years 2007, 2006, and 2005 were as follows:
  2007
                
                
                2006
                
                
                2005Proceeds
      from stock options exercised
                
                $
                847,000
                
                
                $
                624,000
                
                
                $
                1,733,000Tax
      benefits related to stock options exercised
                
                $
                -
                
                
                $
                -
                
                
                $
                1,031,000Intrinsic
      value of stock options exercised
                
                $
                575,000
                
                
                $
                487,000
                
                
                $
                2,120,000
  The
Company did not realize a tax benefit related to the exercise of stock options
in fiscal 2007 or 2006 as there was no taxable income for the benefit to offset
due to net operating loss and tax credit carryovers.
  The
Company determines the fair value of its restricted stock awards based on the
market price of its common stock on the date of grant. Restricted stock activity
for the year ended January 26, 2008 was as follows:
  WeightedAverageGrant
      DateShares
                
                
                Fair
      ValueNonvested
      at beginning of year
                
                
                296,269
                
                
                $
                19.70Granted
                
                
                79,157
                
                
                
                26.67Vested
                
                
                (8,881
                )
                
                
                22.81Forfeited
                
                
                (65,500
                )
                
                
                21.28Nonvested
      at end of year
                
                
                301,045
                
                
                $
                21.09
  The total
fair value of restricted stock awards vested during 2007, 2006 and 2005 was
$203,000, $338,000 and $216,000, respectively. The total fair value of stock
options vested during 2007, 2006 and 2005 was $138,000, $75,000, and $2,085,000,
respectively. The Company generally issues shares from treasury stock to satisfy
restricted stock awards and stock option exercises. The Company will issue new
shares to satisfy such awards and exercises if sufficient treasury shares are
not available.
  Total
compensation expense charged to income for all stock option and stock bonus
plans during fiscal 2007, 2006 and 2005 was $903,000, $131,000 and $411,000,
respectively (net of $511,000, $86,000 and $256,000 related income taxes). The
total compensation expense related to nonvested stock options and awards not yet
recognized is currently expected to be a combined total of
approximately $2,878,000. This cost is expected to be recognized over a weighted
average period of 4.1 years. Restricted stock awards comprise approximately
$2,553,000 of the Company’s expected future stock-based compensation expense,
with the remainder related to stock option awards.
  F-11
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
  Prior to
the adoption of SFAS 123(R), the Company measured compensation expense for
stock-based compensation plans using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (APB 25), and followed the disclosure-only
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition
and Disclosure.” Accordingly, no compensation expense was recognized for
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation expense for stock-based compensation
plans for 2005 been determined consistent with SFAS No. 123, the Company’s net
income and earnings per share would approximate the following pro forma
amounts:
 
 (Dollars
      in thousands, except per share amounts)
                
                2005Net
      income:As
      reported
                
                $
                248Add:
      stock-based employee compensation expense included in netincome,
      net of tax
                
                
                411Deduct:
      stock-based employee compensation expense determinedunder
      fair-value based method for all awards, net of tax
                
                
                (1,603
                )Pro
      forma net loss
                
                $
                (944
                )Basic
      earnings (loss) per share:As
      reported
                
                $
                0.03Pro
      forma
                
                
                (0.10
                )Diluted
      earnings (loss) per share:As
      reported
                
                $
                0.03Pro
      forma
                
                
                (0.10
                )
  3.
ACQUISITIONS
  On March
21, 2005, the Company acquired one hundred percent of the issued and outstanding
shares of common stock and warrants of Royal Institutional Services, Inc. and
its affiliate, The Surgi-Pack Corporation (together, “Royal”). The total
purchase price of $45,179,000, plus an additional $713,000 of related
acquisition costs, was paid in cash and was funded through long-term borrowings
(see Note 9).
  The
assets acquired in the Royal acquisition included linens in service, accounts
receivable, prepaid expenses and deposits, and property and equipment. The
intangible assets acquired totaled $38,883,000 for customer contracts,
restrictive covenants, and goodwill. Customer contracts and restrictive
covenants are being amortized over 15 years and 10 years, respectively. The
excess of the purchase price over the fair value of the net assets acquired
increased goodwill by $18,808,000 of which the entire amount is expected to
provide an income tax benefit. The results of operations of Royal have been
included in the Company’s consolidated financial statements since the date of
acquisition.
  The
unaudited pro forma consolidated revenues for fiscal year 2005 as though the
Royal acquisition had occurred at the beginning of the year totaled
$425,148,000. The unaudited pro forma consolidated income from continuing
operations would have been $2,168,000 or $0.23 per diluted share. These pro
forma amounts are not necessarily indicative of the results of operations that
would have occurred had the purchase been made at the beginning of the
year.
  F-12
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 4.
OTHER OPERATING INCOME, NET AND NON-OPERATING INCOME, NET
  Other
operating income, net includes gains on disposals of assets. For the fiscal
years ended January 26, 2008, January 27, 2007, and January 28, 2006, these
gains totaled $2,438,000, $3,409,000, and $6,190,000, respectively.
  Non-operating
income, net consisted of the following:
   (Dollars
      in thousands)
                
                2007
                
                
                2006
                
                
                2005Interest
      income
                
                $
                852
                
                
                $
                884
                
                
                $
                769Gains
      on death benefits of Company-owned life insurance policies
                
                
                287
                
                
                
                184
                
                
                
                432Distribution
      related to liquidation of parent company of an issuer of Company-owned
      life insurance policies
                
                
                269
                
                
                
                -
                
                
                
                360Gain
      on sale of real estate
                
                
                -
                
                
                
                1,666
                
                
                
                -Loss
      related to natural gas derivative (see Note 11)
                
                
                -
                
                
                
                (281
                )
                
                
                -Other
                
                
                (131
                )
                
                
                (29
                )
                
                
                521,277
                
                
                
                2,424
                
                
                
                1,613
  5.
INCOME TAXES
  The
provision for income taxes from continuing operations consisted of the
following:
 
 (Dollars
      in thousands)
                
                2007
                
                
                2006
                
                
                2005Current:Federal
                
                $
                (2,323
                )
                
                $
                (870
                )
                
                $
                -State
                
                
                17
                
                
                
                (19
                )
                
                
                -Foreign
                
                
                (306
                )
                
                
                8
                
                
                
                -Deferred:Federal
                
                
                (528
                )
                
                
                706
                
                
                
                (360
                )State
                
                
                (1,028
                )
                
                
                (1,111
                )
                
                
                (1,231
                )Foreign
                
                
                (128
                )
                
                
                -
                
                
                
                -$
                (4,296
                )
                
                $
                (1,286
                )
                
                $
                (1,591
                )
  Reconciliation
between the statutory income tax rate and effective tax rate from continuing
operations is summarized below:
 
 2007
                
                
                2006
                
                
                2005Income
      tax (benefit) provision at statutory rate
                
                $
                (121
                )
                
                $
                798
                
                
                $
                248State
      tax, net of federal benefit
                
                
                (251
                )
                
                
                (22
                )
                
                
                (279
                )Effect
      of permanent items:Cash
      surrender value and insurance benefits, net of expense
                
                
                (369
                )
                
                
                (308
                )
                
                
                (624
                )Meals
      and entertainment
                
                
                110
                
                
                
                113
                
                
                
                87Tax
      contingency adjustment and audit settlement
                
                
                (2,753
                )
                
                
                (309
                )
                
                
                -Valuation
      allowance
                
                
                -
                
                
                
                -
                
                
                
                120Adjustment
      to deferred taxes for reassessment of stateeffective
      tax rate
                
                
                17
                
                
                
                (638
                )
                
                
                -Other
                
                
                (14
                )
                
                
                (184
                )
                
                
                26Effect
      of tax credits from employment programs
                
                
                (915
                )
                
                
                (736
                )
                
                
                (1,169
                )$
                (4,296
                )
                
                $
                (1,286
                )
                
                $
                (1,591
                )
  F-13
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 The
“adjustment to deferred taxes for reassessment of state effective tax rate”
includes the impact of reversing deferred tax assets and liabilities due to
changes in expected state apportionment ratios and statutory rates in
jurisdictions where the Company files tax returns.
  Significant
components of deferred tax assets and liabilities were as follows:
  January
      26,
              
              
              January
      27,(Dollars
      in thousands)
              
              2008
              
              
              2007Deferred
      tax assets:Deferred
      compensation
              
              $
              4,268
              
              
              $
              4,386Insurance
      reserves not yet deductible
              
              
              6,337
              
              
              
              7,515Customer
      contracts
              
              
              1,767
              
              
              
              1,793Net
      operating loss and tax credit carryforwards
              
              
              13,914
              
              
              
              24,382Valuation
      allowance
              
              
              (120
              )
              
              
              (120
              )Other
              
              
              5,304
              
              
              
              6,31231,470
              
              
              
              44,268Deferred
      tax liabilities:Property
      and equipment
              
              
              (12,741
              )
              
              
              (11,835
              )Linens
      in service
              
              
              -
              
              
              
              (15,263
              )Other
              
              
              (4,228
              )
              
              
              (3,096
              )(16,969
              )
              
              
              (30,194
              )Net
      deferred tax assets
              
              $
              14,501
              
              
              $
              14,074
  On July
13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109” (FIN 48). The Company adopted the provisions of FIN 48 on
January 28, 2007, the first day of its 2007 fiscal year. The implementation of
FIN 48 did not result in a cumulative adjustment to the Company’s previously
recorded liability for gross unrecognized tax benefits, which amounted to
$2,333,000 as of the date of adoption. In the third quarter of fiscal 2007, the
statute of limitations on certain tax return years expired. The expiration of
those statutes of limitation resulted in the recognition of uncertain tax
positions in the amount of $2,330,000 through the effective tax
rate.
 
 The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in its tax provision (benefit). Due to its net operating loss and tax
credit carryforward position, the Company recognized no penalties or interest
during the years ended January 26, 2008, January 27, 2007, or January 28, 2006,
and had no interest or penalties accrued as of January 26, 2008 or January 27,
2007. Because both permanent and temporary items can be considered uncertain tax
positions, the Company has reflected its deferred tax assets and liabilities on
the basis of the more likely than not standard required by FIN 48.
 
 A
reconciliation of the total amount of unrecognized tax benefits is as
follows:
  (Dollars
      in thousands)Balance
      at January 28, 2007
                
                $
                2,333Increases
      resulting from positions taken during prior periods
                
                
                15,617Decreases
      resulting from the lapse of applicable statutes of
    limitation
                
                
                (2,333
                )Balance
      at January 26, 2008
                
                $
                15,617
  F-14
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 If
recognized, $11,000 of unrecognized tax benefits remaining at January 26, 2008,
would affect the effective tax rate. An estimate of changes to the unrecognized
tax benefits within 12 months of January 26, 2008 cannot be made at this
point.
 
 The
Company is subject to taxation in the United States, and its tax years for 2004
through 2006 are subject to examination by the tax authorities. With few
exceptions, the Company is no longer subject to U.S. federal, state or local
examinations by tax authorities for years before 2004.
  The
Company has a federal net operating loss carryover of $43,674,000 which will
expire beginning in 2025; $3,401,000 in federal tax credit carryovers which
expire at various dates beginning in 2021 or have no expiration date;
$10,223,000 of state tax credit carryovers which expire at various dates
beginning in 2012 or have no expiration date; and various other charitable
contribution carryovers, tax credits and state net operating loss carryovers.
After adjustment for uncertain tax positions identified in accordance with the
provisions of FIN 48, the Company's net operating loss carryover for financial
reporting purposes was reduced in fiscal 2007 from $43,674,000 to $6,694,000.
This adjustment had no impact on the Company's effective tax rate.
  In
assessing the adequacy of the deferred tax assets, the Company considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The Company considers projected future taxable income and
tax planning strategies in making this assessment. A valuation allowance of
$120,000 was recorded in fiscal 2005 as management believes that it is more
likely than not that the benefit will not be realized.
  In fiscal
2005, the Company recorded a tax benefit from discontinued operations of
$617,000, or 22.9% of pretax income. This consists of a federal benefit of
34.0%; a state benefit of 6.5%; tax expense from other items of 1.2%, related to
current year discontinued operations plus tax expense at 16.4% related to
additional tax impact of prior year discontinued operations.
  6.
DISCONTINUED OPERATIONS
  On
September 2, 2005, the Company sold customer contracts serviced by its Columbia,
Illinois facility and certain other assets related to the servicing of those
contracts for $1,392,000 in cash. The Columbia facility, which primarily served
the St. Louis market area, had been unprofitable for several periods and in
fiscal 2005 suffered the loss of a major customer. Due to the limited potential
to improve the profitability of the facility, combined with its relative
geographic isolation from the Company’s other facilities, the decision was made
to exit the St. Louis market, sell its customer contracts and related assets,
and pursue a sale of the idle facility.
  In the
third quarter of 2005, the Company recorded both a goodwill writeoff of $860,000
associated with the business of the Columbia facility and an asset impairment
charge of $751,000 related to the facility’s real estate and personal property.
In January 2006, the real estate and personal property were sold for
approximately $1,480,000 in cash, resulting in an additional asset impairment
charge of $38,000. In connection with the sale of the Columbia facility’s
assets, the Company recorded an after tax loss on disposal of $344,000 for the
full year of 2005.
  In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the assets held for sale, cash flows, results of operations
and loss on disposal of the Columbia facility are segregated and reported as
discontinued operations for all periods presented in this report. As of January
28, 2006, there were no remaining assets of the Columbia facility that were held
for sale. Operating results for the Columbia facility are included in the
Consolidated Statements of Income in net loss from discontinued operations for
all
 F-15
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 periods
presented. The loss from operations in fiscal 2005 includes $543,000 in employee
termination expenses. Results for the Columbia facility are as
follows:
  (Dollars
      in thousands)
                
                2005Revenues
                
                $
                5,058Loss
      before income taxes
                
                $
                (2,121
                )Income
      tax benefit
                
                
                835Net
      loss
                
                $
                (1,286
                )
  During
fiscal 2005, the Company recognized $441,000 in expense related to additional
tax impact for the sale of its Life Uniform retail business segment, which
occurred in fiscal 2004, and other discontinued operations. This amount is
included in the Consolidated Statements of Income as net loss from disposal of
discontinued operations.
   7.
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 2007, 2006
and 2005:
 
 (Dollars
      and shares in thousands)
                
                2007
                
                
                2006
                
                
                2005Net
      income available to Common shareholders:Income
      from continuing operations
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                2,319Loss
      from operations of discontinued segment, net of tax
                
                
                -
                
                
                
                -
                
                
                
                (1,286
                )Loss
      on disposal of discontinued segment, net of tax
                
                
                -
                
                
                
                -
                
                
                
                (785
                )Net
      income
                
                $
                3,939
                
                
                $
                3,633
                
                
                $
                248Weighted
      average shares:Average
      shares outstanding
                
                
                9,270
                
                
                
                9,186
                
                
                
                9,096Effect
      of dilutive securities
                
                
                49
                
                
                
                46
                
                
                
                179Average
      shares outstanding, adjusted for dilutive effects
                
                
                9,319
                
                
                
                9,232
                
                
                
                9,275Earnings
      (loss) per share - basic:Income
      from continuing operations
                
                $
                0.42
                
                
                $
                0.40
                
                
                $
                0.26Loss
      from operations of discontinued segment
                
                
                -
                
                
                
                -
                
                
                
                (0.14
                )Loss
      on disposal of discontinued segment
                
                
                -
                
                
                
                -
                
                
                
                (0.09
                )Net
      income
                
                $
                0.42
                
                
                $
                0.40
                
                
                $
                0.03Earnings
      (loss) per share - diluted:Income
      from continuing operations
                
                $
                0.42
                
                
                $
                0.39
                
                
                $
                0.25Loss
      from operations of discontinued segment
                
                
                -
                
                
                
                -
                
                
                
                (0.14
                )Loss
      on disposal of discontinued segment
                
                
                -
                
                
                
                -
                
                
                
                (0.08
                )Net
      income
                
                $
                0.42
                
                
                $
                0.39
                
                
                $
                0.03
  F-16
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 8.
GOODWILL AND OTHER ACQUIRED ASSETS, NET
  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
quarters of fiscal 2007, 2006 and 2005 which resulted in no indication of
impairment. Other acquired assets, net consisted of the following (dollars
in thousands):
 
 January
      26, 2008
                
                
                January
      27, 2007Gross
                
                
                
                
                
                Other
                
                
                Gross
                
                
                
                
                
                OtherCarrying
                
                
                Accumulated
                
                
                Acquired
                
                
                Carrying
                
                
                Accumulated
                
                
                AcquiredAmount
                
                
                Amortization
                
                
                Assets,
      net
                
                
                Amount
                
                
                Amortization
                
                
                Assets,
      netCustomer
      contracts
                
                $
                41,831
                
                
                $
                (13,792
                )
                
                $
                28,039
                
                
                $
                41,813
                
                
                $
                (10,984
                )
                
                $
                30,829Non-compete
      covenants
                
                
                9,718
                
                
                
                (3,828
                )
                
                
                5,890
                
                
                
                11,089
                
                
                
                (3,810
                )
                
                
                7,279Other
      acquired assets
                
                $
                51,549
                
                
                $
                (17,620
                )
                
                $
                33,929
                
                
                $
                52,902
                
                
                $
                (14,794
                )
                
                $
                38,108
  Aggregate
amortization expense for fiscal years 2007, 2006 and 2005 amounted to
$4,197,000, $4,281,000 and $4,036,000, respectively. Other acquired assets are
scheduled to be fully amortized by fiscal year 2021 with corresponding annual
amortization expense estimated for each of the next five fiscal years as follows
(dollars in thousands):
 
 2008
                
                $
                3,8172009
                
                
                3,5062010
                
                
                3,0512011
                
                
                3,0412012
                
                
                3,040
  9.
LONG-TERM DEBT
  The
following table summarizes information with respect to long-term debt for fiscal
2007 and 2006:
 
 January
      26,
                
                
                January
      27,(Dollars
      in thousands)
                
                2008
                
                
                2007Note
      to banks due November 30, 2010
                
                $
                90,000
                
                
                $
                85,300Other
      long-term debt including obligations under capital leases
                
                
                -
                
                
                
                9690,000
                
                
                
                85,396Less
      - current maturities
                
                
                -
                
                
                
                96$
                90,000
                
                
                $
                85,300
  The
Company’s long-term bank borrowings are financed through a $125,000,000
revolving credit facility under a loan agreement that matures on November 30,
2010. Amounts borrowed under the credit facility bear interest at a floating
rate equal to either (i) LIBOR plus a margin, or (ii) a Base Rate, defined as
the higher of either (a) the Federal Funds Rate plus 0.50% or (b) the Prime
Rate. The margin for the LIBOR rate option is based on the Company’s ratio of
“Funded Indebtedness” to “EBITDA,” as each is defined in the loan agreement, and
may range from 1.5% to 2.0%. The LIBOR interest rate option may be selected for
periods of 1 to 3 months, 6 months or 12 months.
  As of
January 26, 2008, there was $90,000,000 of outstanding debt under the credit
facility, secured by a first lien on equipment, inventory, accounts receivable,
and certain real estate. Of this amount, $84,500,000 bore interest at rates
ranging from 4.92% to 5.17% under LIBOR contracts, plus a margin (2.0% as of
January 26, 2008), and
  F-17
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 $5,500,000
bore interest at 6.50%, the Prime Rate, as of January 26, 2008. Furthermore, the
Company had $11,506,000 outstanding in irrevocable letters of credit as of
January 26, 2008,which
reduced the amount available to borrow under the line of credit to $20,222,000.
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
Indebtedness” to “EBITDA” described above. As of January 26, 2008, the fee on
the outstanding letters of credit and unused funds was 2.50% and 0.25%,
respectively.
  The
Company is subject to certain financial covenants under its loan agreement. One
of these covenants requires that the Company maintain a minimum consolidated net
worth of $120,920,000 plus an aggregate amount equal to 50% of quarterly net
income beginning with the fourth quarter of fiscal 2005 (with no reduction for
net losses), and an asset coverage ratio of no less than 1 to 1. Other covenants
require the Company to maintain a minimum ratio of “EBITDA” to “Fixed Charges”
of no less than 1.15 to 1 and a maximum ratio of “Funded Indebtedness” to
“EBITDA” of no more than 3.5 to 1. The Company is in compliance with these loan
covenants as of January 26, 2008.
  In
connection with the original execution and subsequent amendment of the loan
agreement, the Company incurred fees which are being amortized over the term of
the loan. As of January 26, 2008, the remaining unamortized balance included in
other assets in the Consolidated Balance Sheet was $1,135,000.
  As of
January 26, 2008, there was $30,325,000 of life insurance policy loans
outstanding. The loans bore interest at a fixed rate of 8% or variable rates
ranging from 5.7% to 6.2%. The proceeds upon surrender of the policies will be
reduced by the amount of any loans outstanding, unless repaid by the Company
prior to that time. The total amount borrowed is netted against cash surrender
value of life insurance in the Consolidated Balance Sheet as of January 26,
2008.
  The
estimated fair value of the Company’s debt at January 26, 2008 and January 27,
2007 approximates book value since the interest rates on nearly all of the
outstanding borrowings approximate current market rates.The entire
balance of the note to banks outstanding as of January 26, 2008 matures in
fiscal 2010.
  10.
RETIREMENT BENEFITS
  The
Company has a non-contributory defined benefit pension plan covering primarily
all salaried and hourly administrative non-union personnel who had met
participation requirements prior to September 1, 2004. The benefit formula is
based on years of service and compensation during employment. The funding policy
of the pension plan is in accordance with the requirements of the Employee
Retirement Income Security Act of 1974. The Company amended the pension plan,
effective September 1, 2004, to freeze participation in the plan. No employee
shall become a participant in the pension plan on or after that date. The
Company expects to contribute $1,352,000 to the pension plan in fiscal
2008.
  On
January 27, 2007, the Company adopted the recognition and disclosure provisions
of SFAS No. 158. This Statement requires the Company to recognize the funded
status (i.e., the difference between the fair value of plan assets and the
projected benefit obligations) of its pension plan in the Company’s Consolidated
Balance Sheet, with a corresponding adjustment to accumulated other
comprehensive income, net of tax. The charge of $573,000 to adjust accumulated
other comprehensive income at adoption represents the net unrecognized actuarial
loss, which was previously netted against the plan’s funded status in the
Company’s Consolidated Balance Sheet as required by SFAS No. 87. The actuarial
loss will be subsequently recognized as net periodic pension cost based on the
Company’s historical accounting policy for amortizing such amounts. In addition,
actuarial gains and losses that arise in subsequent periods and are not
recognized as net periodic pension cost in
  F-18
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 the same
periods will be recognized as a component of other comprehensive income. These
future gains and losses will be subsequently recognized as net periodic pension
cost on the same basis as the amounts recognized in accumulated other
comprehensive income at adoption of SFAS No. 158.
  The
Company expects to contribute $1,352,000 to the pension plan in fiscal 2008. The
Company uses a January 1 measurement date for the plan. Information about the
plan’s funded status and pension cost follows:
  January
      1,
                
                
                January
      1,(Dollars
      in thousands)
                
                2008
                
                
                2007Change
      in benefit obligation:Benefit
      obligation at beginning of year
                
                $
                22,259
                
                
                $
                23,214Service
      cost
                
                
                228
                
                
                
                300Interest
      cost
                
                
                1,283
                
                
                
                1,239Actuarial
      gain
                
                
                (397
                )
                
                
                (1,101
                )Benefits
      paid
                
                
                (1,416
                )
                
                
                (1,393
                )Benefit
      obligation at end of year
                
                
                21,957
                
                
                
                22,259Change
      in plan assets:Fair
      value of plan assets at beginning of year
                
                
                17,315
                
                
                
                16,117Contributions
                
                
                1,891
                
                
                
                1,195Actual
      gain on plan assets
                
                
                1,104
                
                
                
                1,396Benefits
      paid
                
                
                (1,416
                )
                
                
                (1,393
                )Fair
      value of plan assets at end of year
                
                
                18,894
                
                
                
                17,315Funded
      status at end of year
                
                $
                (3,063
                )
                
                $
                (4,944
                )Amounts
      recognized in the Consolidated Balance Sheets:Funded
      status at measurement date
                
                $
                (3,063
                )
                
                $
                (4,944
                )Less
      contribution made after measurement date
                
                
                255
                
                
                
                -Noncurrent
      liabilities
                
                $
                (2,808
                )
                
                $
                (4,944
                )
  Accumulated
other comprehensive income (loss) at January 26, 2008 and January 27, 2007,
included unrecognized actuarial losses of $3,083,000 ($1,968,000 net of
tax) and $3,274,000 ($1,971,000 net of tax), respectively, that had not yet
been recognized in net periodic pension cost. The actuarial loss included in
accumulated other comprehensive income (loss) and expected to be recognized in
net periodic pension cost during the fiscal year ending January 31, 2009 is
$68,000 ($43,000 net of tax). The accumulated benefit obligation for the pension
plan was $21,295,000 and $21,686,000 as of January 1, 2008 and January 1, 2007,
respectively.
  F-19
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:
  January
      1,
                
                
                January
      1,(Dollars
      in thousands)
                
                2008
                
                
                2007Projected
      benefit obligation
                
                $
                21,957
                
                
                $
                22,259Accumulated
      benefit obligation
                
                $
                21,295
                
                
                $
                21,686Fair
      value of plan assets
                
                $
                18,894
                
                
                $
                17,315
  (Dollars
      in thousands)
                
                2007
                
                
                2006Components
      of net periodic benefit cost:Service
      cost
                
                $
                223
                
                
                $
                300Interest
      cost
                
                
                1,283
                
                
                
                1,239Expected
      return on plan assets
                
                
                (1,378
                )
                
                
                (1,288
                )Recognized
      actuarial loss
                
                
                68
                
                
                
                67Net
      periodic benefit cost
                
                $
                196
                
                
                $
                318
  Other
changes in plan assets and benefit obligations recognized in other comprehensive
income:
  (Dollars
      in thousands)
                
                2007
                
                
                2006Adjustment
      to reflect adoption of FAS 158
                
                $
                -
                
                
                $
                573Net
      gain
                
                
                (123
                )
                
                
                -Amortization
      of net loss
                
                
                (68
                )
                
                
                -Total
      recognized in other comprehensive income
                
                $
                (191
                )
                
                $
                573Total
      recognized in net periodic benefit cost and other comprehensive
      income
                
                $
                5
                
                
                $
                573
  The
estimated net loss for the plan that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal year is
$37,000.
 
 Significant
assumptions for the Company’s pension plan for 2007 and 2006 were as
follows:
  2007
                
                
                2006Weighted-average
      assumptions used to determine benefit obligation:Discount
      rate
                
                
                6.50
                %
                
                
                5.95
                %Rate
      of compensation increase
                
                
                4.75
                %
                
                
                4.75
                %Weighted-average
      assumptions used to determine benefit cost:Discount
      rate
                
                
                5.95
                %
                
                
                5.50
                %Expected
      return on plan assets
                
                
                7.50
                %
                
                
                7.50
                %Rate
      of compensation increase
                
                
                4.75
                %
                
                
                4.75
                %
  The
Company’s discount rate assumption is determined annually as of the measurement
date based upon interest rates associated with long-term, high quality corporate
bonds and U.S. Treasury securities and the timing and amounts of estimated
future benefit payments under the Company’s pension plan. The discount rate
assumption as of January 1, 2008 and January 1, 2007, was calculated by the
Company’s pension plan actuary using a yield curve approach. Discount rate
assumptions for all earlier dates presented herein were calculated using a
corporate adjusted duration-matched yield approach. The assumed rate of
compensation increase
  F-20
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
  reflects
historical salary growth information and the Company’s general expectation of
future salary growth. The Company’s long-term, annual rate-of- return-on-assets
assumption is determined based on 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
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, 2008 and 2007, by asset
category, was as follows:
  January
      1,
                
                
                January
      1,2008
                
                
                2007Cash
      and cash equivalents
                
                
                11
                %
                
                
                6
                %Equity
      securities
                
                
                51
                %
                
                
                53
                %Fixed
      income securities
                
                
                38
                %
                
                
                41
                %100
                %
                
                
                100
                %
 
  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):
 
 ExpectedYear
                
                Benefit
      Payments2008
                
                $
                1,5222009
                
                
                1,6582010
                
                
                1,7932011
                
                
                1,7002012
                
                
                1,8652013-2017
                
                
                9,258
  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 20% 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. 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 cost to the Company for this plan was $787,000, $783,000 and
$908,000, for fiscal years 2007, 2006 and 2005, respectively. The Company also
participates in various multi-employer union administered pension plans.
Contributions to these plans result from contractual provisions of labor
contracts and were $2,342,000, $1,909,000 and $1,824,000 for fiscal years 2007,
2006 and 2005, respectively.
  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
  F-21
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 retirement
obligations related to the deferred compensation and supplemental retirement
plans as of January 26, 2008 and January 27, 2007 was $10,997,000 and
$11,372,000, respectively. The Company has informally 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.
  11.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  The
Company entered into an interest rate swap agreement with one of its lenders
effective September 9, 2002. The swap agreement fixed the variable portion of
the interest rate (excluding a margin) at 3.58% on $10,000,000 of the
outstanding debt under the Company’s revolving credit facility until the swap’s
termination on May 30, 2007. The Company 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 was recorded as an asset or liability at its fair value and the
effective portion of changes in the fair value of the derivative, as measured
quarterly, was reported in other comprehensive income. The (loss) gain on the
derivative included in other comprehensive loss in the
years ended January 26, 2008, January 27, 2007, and January 28, 2006 amounted to
$(40,000), $(61,000), and $110,000, respectively, net of tax. The Company
recorded a short-term asset of $67,000 for the fair value of the derivative as
of January 27, 2007.
  Since
October 2005, the Company has entered into natural gas futures contracts to fix
the price for a portion of its future purchases of natural gas and reduce its
exposure to volatility in the cost of natural gas consumed by its service
centers due to fluctuations in the price on the New York Mercantile Exchange
(NYMEX). For fiscal years 2008, 2009 and 2010, these futures contracts are
expected to hedge approximately 58%, 32% and 12%, respectively, of the Company’s
total requirements for natural gas (measured at current usage rates). As of
January 26, 2008, the weighted-average cost of natural gas under these contracts
is $8.94 per decatherm. The Company has elected to apply cash flow hedge
accounting for these derivatives in accordance with SFAS No. 133. Accordingly,
the net gain (loss) on the derivatives included in other comprehensive loss for
the years ended January 26, 2008 and January 27, 2007 amounted to $1,929,000 and
$(2,301,000), respectively, net of tax. Prior to the second quarter of fiscal
2006, a portion of the Company’s natural gas derivatives were not considered a
cash flow hedge for accounting purposes. The change in fair value for these
derivatives was included in non-operating income, net for the years ended
January 27, 2007 and January 28, 2006, and amounted to a loss of $281,000 and
$120,000, respectively. The Company has recorded a current liability of
$1,174,000 and $2,863,000 as of January 26, 2008 and January 27, 2007,
respectively, and a long-term liability of $361,000 and $1,968,000 as of January
26, 2008 and January 27, 2007, respectively, for the fair value of the
derivatives. The Company estimates that $1,174,000 of unrealized losses included
in accumulated other comprehensive loss before taxes as of January 26, 2008 will
be reclassified to cost of services within the next 12 months as natural gas is
purchased for consumption in its service centers.
  In
addition to the futures contracts, the Company has existing contracts as of
January 26, 2008 for the physical delivery of natural gas that fix the NYMEX
cost of gas for approximately 4% of its estimated natural gas purchase
requirements in the next 12 months, and that fix the basis cost of gas for
approximately 78% of its estimated natural gas purchase requirements in the next
12 months. Although these contracts are considered derivative instruments, they
meet the normal purchases exclusion contained in SFAS No. 133, as amended by
SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities,” and are therefore exempted from the related
accounting requirements.
  F-22
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 12.
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 27, 2007 and January 28, 2006,
no shares of Class A or Class B were outstanding.
  13.
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.
  14.
ACCUMULATED OTHER COMPREHENSIVE LOSS
  The
components of accumulated other comprehensive loss are as follows:
  Fair
      Value of Interest Rate Swap
                
                
                Fair
      Value of Natural Gas Derivatives
                
                
                Pension
                  Liability
                
                
                Accumulated
      Other Comprehensive LossBalance,
      January 29, 2005
                
                $
                (9
                )
                
                $
                -
                
                
                $
                (1,328
                )
                
                $
                (1,337
                )Minimum
      pension liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                (1,287
                )
                
                
                (1,287
                )Unrealized
      gains (losses) deferred during the year
                
                
                156
                
                
                
                (988
                )
                
                
                -
                
                
                
                (832
                )Realized
      losses reclassified to net incomeduring
      the year
                
                
                23
                
                
                
                -
                
                
                
                -
                
                
                
                23Tax
      (provision) benefit
                
                
                (69
                )
                
                
                381
                
                
                
                568
                
                
                
                880Balance,
      January 28, 2006
                
                
                101
                
                
                
                (607
                )
                
                
                (2,047
                )
                
                
                (2,553
                )Minimum
      pension liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                628
                
                
                
                628SFAS
      158 transition adjustment
                
                
                -
                
                
                
                -
                
                
                
                (573
                )
                
                
                (573
                )Unrealized
      gains (losses) deferred during the year
                
                
                57
                
                
                
                (7,762
                )
                
                
                -
                
                
                
                (7,705
                )Realized
      (gains) losses reclassified to netincome
      during the year
                
                
                (155
                )
                
                
                3,919
                
                
                
                -
                
                
                
                3,764Tax
      benefit
                
                
                37
                
                
                
                1,542
                
                
                
                21
                
                
                
                1,600Balance,
      January 27, 2007
                
                
                40
                
                
                
                (2,908
                )
                
                
                (1,971
                )
                
                
                (4,839
                )Pension
      liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                191
                
                
                
                191Unrealized
      losses deferred during the year
                
                
                (8
                )
                
                
                (602
                )
                
                
                -
                
                
                
                (610
                )Realized
      (gains) losses reclassified to net incomeduring
      the year
                
                
                (59
                )
                
                
                3,899
                
                
                
                -
                
                
                
                3,840Tax
      benefit (provision)
                
                
                27
                
                
                
                (1,368
                )
                
                
                (188
                )
                
                
                (1,529
                )Balance,
      January 26, 2008
                
                $
                -
                
                
                $
                (979
                )
                
                $
                (1,968
                )
                
                $
                (2,947
                )
  F-23
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 15.
COMMITMENTS AND CONTINGENCIES
  The
Company leases certain of its equipment, laundry service centers, and corporate
office space under operating leases. Most of the Company’s building and office
leases contain renewal options for periods of five to ten years. The lease
agreements provide for increases in rentals based on increases in Consumer Price
Indexes or other predetermined factors. Leasehold improvements, if any, are
taken into consideration when computing minimum lease payments. The Company
expects that in the normal course of business, leases will be renewed or
replaced by other leases. Rental expense of continuing operations for all
operating leases for fiscal years 2007, 2006 and 2005 was $13,118,000,
$12,902,000 and $11,612,000, respectively.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 26, 2008:
 
 Minimum(Dollars
      in thousands)
                
                Payments2008
                
                $
                9,7252009
                
                
                8,1672010
                
                
                6,5232011
                
                
                4,9102012
                
                
                3,774Later
      years
                
                
                9,322Total
      minimum lease payments
                
                $
                42,421
  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 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 26, 2008, the Company
is secondarily obligated as a guarantor for 29 store lease agreements and the
estimated maximum potential amount of future payments the Company could be
required to make under these guarantees is $4,504,000. Although these guarantees
expire at various dates through fiscal year 2014, approximately 83% of the
estimated maximum potential future payments expires by the end of fiscal year
2010. Also in connection with the sale of Life Uniform the Company received an
unsecured junior subordinated promissory note for approximately $4,000,000 of
the purchase price of its former retail business. The payment of this note is
subordinated to the bank indebtedness which Healthcare Uniform Company incurred
in connection with its acquisition of Life Uniform. The Company is currently
carrying the note on its balance sheet at $3,802,000.
  The
Company has provided certain indemnities to the buyer in connection with the
sale of Life Uniform. Although indemnification claims are generally subject to
an aggregate limit of $6,000,000, the Company believes the likelihood of making
any payments for indemnification claims is remote and has reserved
accordingly.
  In
connection with the March 2005 Royal acquisition (see Note 3), a portion of the
purchase price was placed into escrow, with payment to the sellers contingent
upon the occurrence of certain events as specified in the purchase agreement. As
of January 26, 2008, $1,000,000 remained in escrow, due the sellers in March
2015 upon compliance with the restrictive covenants.
  F-24
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 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 an unfavorable impact on the
Company’s results of operations and financial condition if it is forced to
assume these liabilities. The Company had deemed its possible exposure from
these outstanding claims and deposits to be immaterial as of January 26,
2008.
  A
significant portion of the Company’s revenues is derived from operations in a
limited number of markets. Revenues generated from operations in California
accounted for approximately 35% of revenues for the fiscal year ended January
26, 2008. The Company also faces some risk and uncertainty to its business
operations related to the status of labor relations at its service centers.
Approximately 73% of the Company’s workforce is represented by one of several
unions. Collective bargaining agreements covering production workers at ten
service centers and drivers associated with four service centers will expire
within the next year. Any work interruptions or stoppages that may result from
the inability to reach ratified agreements at any, some or all of these
locations could have a material adverse impact on the Company’s results of
operations and financial condition.
  The
Company is a party to various claims and legal proceedings which arose in the
ordinary course of its business. Although the ultimate disposition of these
proceedings is not presently determinable, management does not believe that an
adverse determination in any or all of such proceedings will have a material
adverse effect upon the consolidated financial condition or operating results of
the Company.
  F-25
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Angelica
Corporation and Subsidiaries
 16.
UNAUDITED QUARTERLY FINANCIAL DATA
  Unaudited
quarterly results for 2007 and 2006 are shown below:
  Fiscal
      2007 Quarter Ended(Dollars
      in thousands, except per share amounts)
                
                April
      28
                
                
                July
      28
                
                
                October
      27
                
                
                January
      26Revenues
                
                $
                107,777
                
                
                $
                107,576
                
                
                $
                108,814
                
                
                $
                105,790Gross
      profit
                
                $
                14,281
                
                
                $
                13,959
                
                
                $
                16,275
                
                
                $
                13,890Income
      (loss) from operations
                
                $
                18
                
                
                $
                (845
                )
                
                $
                4,808
                
                
                $
                3,878Net
      (loss) income
                
                $
                (1,141
                )
                
                $
                (1,447
                )
                
                $
                4,626
                
                
                $
                1,901Net
      (loss) incomeBasic
      (loss) earnings per share*
                
                $
                (0.12
                )
                
                $
                (0.16
                )
                
                $
                0.50
                
                
                $
                0.20Diluted
      (loss) earnings per share*
                
                $
                (0.12
                )
                
                $
                (0.16
                )
                
                $
                0.50
                
                
                $
                0.20Fiscal
      2006 Quarter Ended(Dollars
      in thousands, except per share amounts)
                
                April
      29
                
                
                July
      29
                
                
                October
      28
                
                
                January
      27Revenues
                
                $
                107,006
                
                
                $
                105,286
                
                
                $
                107,768
                
                
                $
                105,675Gross
      profit
                
                $
                14,741
                
                
                $
                15,125
                
                
                $
                17,301
                
                
                $
                14,768(Loss)
      income from operations
                
                $
                (200
                )
                
                $
                558
                
                
                $
                5,263
                
                
                $
                3,714Net
      (loss) income
                
                $
                (1,499
                )
                
                $
                (715
                )
                
                $
                2,575
                
                
                $
                3,272Net
      (loss) incomeBasic (loss)
      earnings per share*
                
                $
                (0.16
                )
                
                $
                (0.08
                )
                
                $
                0.28
                
                
                $
                0.36Diluted
      (loss) earnings per share*
                
                $
                (0.16
                )
                
                $
                (0.08
                )
                
                $
                0.28
                
                
                $
                0.35
  *
                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-26
 
  Schedule
II
  ANGELICA
CORPORATION AND SUBSIDIARIES
  SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
  For
the Three Years Ended January 26, 2008
 
 Reserve
for doubtful accounts – deducted from receivables in the consolidated balance
sheets (dollars in thousands):
 
 Year
                
                Balance
      at
                  Beginning
      of
                  Period
                
                Charged
      to Costs
                  and
      Expenses
                Deductions(1)
                Balance
      at
                  End
      of PeriodYear
      ended January 26, 2008
                
                $            848
                
                $     880
                
                $     802
                
                $              926Year
      ended January 27, 2007
                
                994
                
                970
                
                1,116
                
                848Year
      ended January 28, 2006
                
                510
                
                1,107
                
                623
                
                994__________(1)         Doubtful
      accounts written off against reserve provided, net of
      recoveries.
  F-27
 
  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 10, 2008
  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)(Principal
      Accounting Officer)
 
 Ronald
      J.
      Kruszewski                     *
              
              
              James
      R.
      Henderson                        *(Ronald
      J. Kruszewski)
                Director
              
              
              (James
      R. Henderson)
                Director
 
 Don
      W.
      Hubble                              *
              
              
              Charles
      W.
      Mueller                        *(Don
      W. Hubble)
                Director
              
              
              (Charles
      W. Mueller)
                Director
 
 John
      J.
      Quicke                                *
              
              
              Ronald
      N.
      Riner                               *(John
      J. Quicke)
                Director
              
              
              (Ronald
      N. Riner)
                Director
 
 Kelvin
      R.
      Westbrook                       *(Kelvin
      R. Westbrook)
                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 10, 2008
  II-1
  EXHIBIT
INDEX
 
 Exhibit
                Number
              
              Description* Asterisk indicates exhibits filed
herewith.**
      Incorporated by reference from the document
  listed.3
              .1
              
              Restated
      Articles of Incorporation of the Company, as currently in effect. Filed as
      Exhibit 3.1 to the Form 10-K for the fiscal year ended January 26,
      1991.**3
              .2
              
              Current
      By-Laws of the Company, as amended and restated. Filed as Exhibit 3.2 to
      the Form 10-K for the fiscal year ended January 27,
      2007.**4
              .1
              
              Shareholder
      Rights Plan dated August 25, 1998. Filed as Exhibit 1 to Registration
      Statement on Form 8-A on August 28, 1998.**4
              .2
              
              Amendment
      No. 1 to Rights Agreement dated August 29, 2006. Filed as Exhibit 4.1 to
      the Company’s Current Report on Form 8-K filed on September 5,
      2006.**4
              .3
              
              Amendment
      No. 2 to Rights Agreement dated September 19, 2006. Filed as Exhibit 4.1
      to the Company’s Current Report on Form 8-K filed on September 22, 2006.
      **4
              .4
              
              Letter
      agreement between Computershare Trust Company, N.A., UMB Bank, N.A. and
      Angelica Corporation, dated as of November 20, 2007, acknowledging
      acceptance of Computershare Trust Company, N.A. as successor Rights Agent
      under the Shareholder Rights Plan. Filed as Exhibit 4.4 to the Form 10-Q
      for the fiscal quarter ended October 27, 2007.**10
              .1
              
              Second
      Amended and Restated Loan Agreement dated November 30, 2005, among
      Angelica Corporation, LaSalle Bank National Association, as Administrative
      Agent, and LaSalle and other Lenders. Filed as Exhibit 99 to a Form 8-K
      filed on December 5, 2005.**10
              .2
              
              Angelica
      Corporation 2004 Equity Incentive Plan for Non-Employee Directors as
      amended April 4, 2006. Filed as Exhibit 10.2 to the Form 10-K for the
      fiscal year ended January 28, 2006. **10
              .3
              
              Amended
      form of Restricted Stock Agreement under the 1999 Performance Plan. Filed
      as Exhibit 10.3 to the Form 10-K for the fiscal year ended January 28,
      2006. **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
      and 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 and
      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 and Amendment dated July 28,
      1992 filed as Exhibit 19.3 to the
Form
 II-2
   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 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 filed as Exhibit 10.35 to the
      Form 10-K for fiscal year ended January 31, 1998. Second Amendment dated
      January 27, 2004 filed as Exhibit 10.13 to the Form 10-K for fiscal year
      ended January 31, 2004.**10
              .13
              
              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
              .14
              
              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
              .15
              
              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
              .16
              
              Amended
      and Restated Angelica Corporation 1999 Performance Plan. Filed as Appendix
      B to the Proxy Statement for the Annual Meeting of Shareholders held
      October 31, 2006.**10
              .17
              
              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
              .18
              
              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
              .19
              
              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
              .20
              
              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
              .21
              
              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
              .22
              
              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
              .23
              
              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
              .24
              
              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). Filed as Exhibit 10.31 to the Form 10-K for fiscal year ended
      January 29, 2005.**
  II-3
  10
              .25
              
              Three
      order agreements for natural gas with Sempra Energy Solutions entered into
      on October 21 and October 25, 2005. Reported on a Form 8-K filed on
      October 26, 2005.**10
              .26
              
              Memorandum
      of Settlement dated June 14, 2005, including the related Employee Free
      Choice Agreement and National Labor Peace Agreement, of even date
      therewith filed as Exhibits A and B thereto, by and between the Company
      and UNITE HERE. Filed as Exhibit 10.1 to a Form 8-K filed on June 15,
      2005.**10
              .27
              
              Product
      and Services Supply Agreement, effective June 1, 2006, by and between
      Ecolab Inc. and Angelica Corporation. Filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on May 30, 2006.
      **10
              .28
              
              First
      Amendment to Second Amended and Restated Loan Agreement, effective July
      28, 2006, among Angelica Corporation, LaSalle Bank National Association,
      as Administrative Agent, and LaSalle and the Other Lenders listed on the
      signature page thereto. Filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on August 2, 2006.**10
              .29
              
              Settlement
      Agreement dated August 30, 2006, by and between the Company, Steel
      Partners L.L.C., and Steel Partners II, L.P. Filed as Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed on September 5, 2006.
      **10
              .30
              
              Settlement
      Agreement dated August 30, 2006, by and between the Company, Pirate
      Capital LLC, Jolly Roger Fund LP and Jolly Roger Fund Offshore Ltd. Filed
      as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
      September 5, 2006. **10
              .31
              
              Form
      of Special Restricted Stock Agreement under the 1999 Performance Plan.
      Filed as Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended
      October 28, 2006.**10
              .32
              
              Employment
      Agreement between the Company and John S. Olbrych, dated November 27, 2006
      as amended December 17, 2007.*10
              .33
              
              Employment
      Agreement between the Company and W. Russell Watson, dated November 23,
      2005 as amended December 17, 2007.*10
              .34
              
              Employment
      Agreement between the Company and Richard M. Oliva, dated December 1, 2005
      as amended December 17, 2007.*10
              .35
              
              Employment
      Agreement between the Company and Edward M. Davis, dated July 1, 2006 as
      amended December 17, 2007.*10
              .36
              
              Second
      Amendment to Second Amended and Restated Loan Agreement, effective April
      5, 2007, among Angelica Corporation, LaSalle Bank National Association, as
      Administrative Agent, and LaSalle and the Other Lenders listed on the
      signature page thereto. Filed as Exhibit 10.1 to the Company’s Current
      Report on Form 8-K filed on April 6, 2007.**10
              .37
              
              Letter
      agreements dated May 23, 2007 relating to cash compensation for retainer
      and other director compensation for Steel directors. Filed as Exhibit 10.1
      to the Form 10-Q for the fiscal quarter ended July 28,
      2007.**10
              .38
              
              Form
      of Long-Term Incentive Program Cash Award Agreement. Filed as Exhibit 10.1
      to the Company’s Current Report on Form 8-K filed on February 5, 2008.
      **10
              .39
              
              Amendment
      to Employment Agreement between the Company and Stephen M. O’Hara, dated
      December 17, 2007.*
  II-4
  10
              .40
              
              Amendment
      to Employment Agreement between the Company and James W. Shaffer, dated
      December 17, 2007.*10
              .41
              
              Amendment
      to Employment Agreement between the Company and Steven L. Frey, dated
      December 17, 2007.*21
              
              
              Subsidiaries
      of the Company.*23
              
              
              Consent
      of Independent Registered Public Accounting
Firm.*24
              .1
              
              Power
      of Attorney submitted by James R. Henderson, Don W. Hubble, Ronald J.
      Kruszewski, Charles W. Mueller, John J. Quicke, Ronald N. Riner 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.