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)
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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424
South Woods Mill Road
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(Address
of principal executive offices)
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(314)
854-3800
(Registrant’s
telephone number, including area code)
________________
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $1.00 Par Value
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Preferred
Stock Purchase Rights issuable pursuant
to
Registrant’s Shareholder Rights Plan
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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 filer Accelerated
filer X
Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
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
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Unresolved
Staff Comments
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Submission
of Matters to a Vote of Security Holders
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of
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19
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Quantitative
and Qualitative Disclosures About Market Risk
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Financial
Statements and Supplementary Data
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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Directors,
Executive Officers and Corporate Governance
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Certain
Relationships and Related Transactions, and Director
Independence
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Principal
Accountant Fees and Services
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Exhibits
and Financial Statement Schedules
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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:
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Improve
patient satisfaction by providing high-quality linens and linen
service;
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Reduce
their capital expenditures for linen facilities and
equipment;
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Decrease
their operating costs by outsourcing a non-core
process;
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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
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Focus
on their core competencies of providing healthcare services to their
patients.
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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.
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 $1.0 billion to long-term care facilities,
computed as follows:
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of
Beds
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Average
Annual
Revenue/Bed(4)
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2008
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Acute-Care Hospitals(1) |
0.90
million
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$ |
2,450
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$2.2
billion
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Surgical and Physicians
Clinics(2) |
0.66
million
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$ |
4,000
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$2.6
billion
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Long-term
Care Facilities(3)
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1.70
million
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$ |
560
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$1.0
billion
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Total
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$5.8
billion
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Source:
The CDC (Centers for Disease Control/Fed Government) and Company database
from Solutions Marketing Group (SMG).
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Source:
Dun & Bradstreet and InfoUSA. Consists of total clinics rather than
number of beds.
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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.
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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
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 will likely increase.
Aging hospital
facilities—According to the AHA, as of September 2004, 60% of hospitals
in the United States needed to replace aging healthcare facilities. Due to the
significant capital costs associated with laundry equipment replacement, we
believe that many hospitals may outsource their linen needs in order to reduce
costs, free up space dedicated to on-premise laundries and preserve capital for
direct patient care uses.
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 Slider™, 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 Kits™, 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.
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 overseeing
24 Business Development Managers. Furthermore, our sales force is augmented by
seven Market Service Directors and 62 local Customer Relationship Managers who
provide customer service and enhance revenue opportunities.
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
strengthened our 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-
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:
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Target
100% fill rate and on-time deliveries on all
orders;
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Install
higher quality products for patient satisfaction;
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Deliver
laundered linens with zero defects; and
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Develop
and offer innovative new products to address the needs of our customers
and their patients.
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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:
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Consistent
application of rigorous selection criteria to our hiring process which
will identify high-performing employees with well developed service and
team orientations;
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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;
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Recognize
and reward our employees through incentive programs that are aligned with
our key strategies; and
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Support
a safe and diverse work environment through a continual process of
training, feedback and measurement, and implementation of best
practices.
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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:
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Reducing
linen costs through centralized purchasing and the gradual expansion of a
direct sourcing program;
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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;
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Implementing
best practices and new technology solutions to improve efficiency while
reducing labor costs;
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Reducing
distribution costs by implementing new software and optimizing routes and
targeting growth to improve route density; and
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Optimizing
capital expenditures by standardizing equipment and centralizing capital
equipment procurement.
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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
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:
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AngelLink®,
a computerized linen management system, available for either rented or
customer-owned goods, designed to streamline linen tracking and ordering
processes;
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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
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Customized
surgical packs for use in operating suites, providing a cost-effective
alternative to disposable surgical
packs.
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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 Slider™, 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 Kits™, 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
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.
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
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 corporate governance listing standards without
qualification.
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
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.
Steel Partners II, L.P. (Steel) beneficially
owns approximately 18.8% of our outstanding common stock. Two representatives of
Steel were appointed to our Board of Directors in August 2006. In addition, two
other entities individually own between 7% and 9% of our common stock. These
entities, acting alone or together, may be able to significantly influence all
matters requiring stockholder approval, including the election of directors and
the approval of mergers and other business combination transactions, and they
may exercise this ability in a manner that advances their best interests and not
necessarily those of all other stockholders.
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,
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.
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
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.
Our
capital requirements depend on many factors, including:
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the
age and condition of existing facilities and
equipment;
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the
timing of investments in new facilities, equipment and
technology;
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the
need to invest in labor-saving and energy-efficient
equipment;
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the
number and timing of acquisitions and other strategic transactions;
and
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the
costs associated with our expansion, if
any.
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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
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
or which we may acquire, lease or operate in the future may have
been operated in a manner that may not be in compliance with environmental laws
and regulations and these future uses or conditions may result in the imposition
of liability upon us under such laws or expose us to third party actions such as
tort suits. In addition, such regulations may limit our ability to identify
suitable sites for new or expanded service centers. In connection with our
operations, hazardous or toxic substances may migrate from properties on which
we operate, or which were operated by companies we acquired, to other
properties. We may be subject to significant liabilities to the extent that
human health is damaged or the value of such properties is diminished by such
migration. Although we conduct environmental due diligence on properties that we
acquire, lease or operate, including in some cases having Phase I environmental
audits conducted, because of the difficulty in detecting some environmental
conditions, we may not have discovered all environmental conditions on those
properties. In addition, some of our properties contain underground storage
tanks. Although we have been working to remove these tanks from our properties
and are not aware of any material remediation arising from them, the presence of
these tanks on our properties may result in environmental liabilities being
imposed on us.
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
decline in the value of collateralized assets could put us in
default of our loan agreement. In the event of a default under our credit
facility, we may be required to seek additional sources of capital to satisfy
our liquidity needs. These additional sources of financing may not be available
on commercially reasonable terms or at all, particularly given the current
conditions in the credit market. Even if they are available, these financings
may result in the dilution of our stock’s value to our existing
shareholders.
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;
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|
|
|
|
problems
assimilating the purchased technologies, products or business
operations;
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|
problems
maintaining uniform standards, procedures, controls and
policies;
|
| |
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| |
•
|
unanticipated
costs associated with the transactions, including accounting charges and
transaction expenses;
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|
diversion
of management’s attention from our core business;
and
|
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|
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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
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Pittsburg,
CA (leased)(1)
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(1)
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–
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.
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.
|
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Year
Ended January 26, 2008
|
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|
Year
Ended January 27, 2007
|
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|
High
|
|
Low
|
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Dividend
|
|
|
High
|
|
Low
|
|
Dividend
|
|
First
Quarter
|
$
|
30.25
|
$
|
25.29
|
$
|
0.11
|
|
$
|
21.10
|
$
|
16.65
|
$
|
0.11
|
|
|
Second
Quarter
|
|
26.96
|
|
19.91
|
|
0.11
|
|
|
20.74
|
|
14.90
|
|
0.11
|
|
|
Third
Quarter
|
|
22.17
|
|
15.51
|
|
0.11
|
|
|
20.45
|
|
14.99
|
|
0.11
|
|
|
Fourth
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.
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
|
|
|
2004
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
429,957 |
|
|
$ |
425,735 |
|
|
$ |
418,357 |
|
|
$ |
308,034 |
|
|
$ |
283,319 |
|
|
Gross
profit
|
|
|
58,405 |
|
|
|
61,935 |
|
|
|
54,057 |
|
|
|
48,769 |
|
|
|
53,782 |
|
|
Operating
expenses and other, net, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
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 operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
(357 |
) |
|
|
2,347 |
|
|
|
728 |
|
|
|
13,188 |
|
|
|
15,519 |
|
|
Income
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 |
|
|
|
11,163 |
|
|
Loss
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 |
|
|
$ |
9,203 |
|
|
PER
SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income from continuing operations
|
|
$ |
0.42 |
|
|
$ |
0.39 |
|
|
$ |
0.25 |
|
|
$ |
1.18 |
|
|
$ |
1.25 |
|
|
Diluted
loss from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
(0.22 |
) |
|
|
(0.48 |
) |
|
|
(0.22 |
) |
|
Diluted
net income
|
|
|
0.42 |
|
|
|
0.39 |
|
|
|
0.03 |
|
|
|
0.70 |
|
|
|
1.03 |
|
|
Cash
dividends paid
|
|
|
0.44 |
|
|
|
0.44 |
|
|
|
0.44 |
|
|
|
0.44 |
|
|
|
0.41 |
|
|
Common
shareholders' equity
|
|
$ |
16.31 |
|
|
$ |
16.00 |
|
|
$ |
16.08 |
|
|
$ |
16.69 |
|
|
$ |
16.51 |
|
|
RATIOS
AND PERCENTAGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
ratio (current assets to current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities)
|
|
2.0 to
1
|
|
|
1.4
to 1
|
|
|
1.4
to 1
|
|
|
1.7
to 1
|
|
|
1.8
to 1
|
|
|
Total
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 continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
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 DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$ |
64,897 |
|
|
$ |
31,781 |
|
|
$ |
28,497 |
|
|
$ |
36,525 |
|
|
$ |
37,849 |
|
|
Additions
to property and equipment
|
|
|
16,116 |
|
|
|
7,359 |
|
|
|
19,434 |
|
|
|
14,977 |
|
|
|
22,439 |
|
|
Depreciation
and amortization
|
|
|
19,927 |
|
|
|
19,641 |
|
|
|
19,542 |
|
|
|
13,194 |
|
|
|
10,618 |
|
|
Cash
flows from operating activities of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
2,932 |
|
|
|
4,169 |
|
|
|
20,438 |
|
|
|
17,514 |
|
|
|
23,861 |
|
|
Cash
flows from investing activities of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(7,554 |
) |
|
|
(256 |
) |
|
|
(62,874 |
) |
|
|
(72,180 |
) |
|
|
(37,889 |
) |
|
Cash
flows from financing activities of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
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 |
|
|
|
19,545 |
|
|
Total
assets
|
|
$ |
320,409 |
|
|
$ |
336,305 |
|
|
$ |
331,428 |
|
|
$ |
288,953 |
|
|
$ |
235,781 |
|
|
Average
number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding,
adjusted for dilutive effects
|
|
|
9,319,398 |
|
|
|
9,232,046 |
|
|
|
9,275,246 |
|
|
|
9,124,537 |
|
|
|
8,957,996 |
|
|
Approximate
number of associates
|
|
|
5,900 |
|
|
|
6,400 |
|
|
|
6,600 |
|
|
|
6,100 |
|
|
|
5,700 |
|
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
potentially supplement this growth with additional acquisitions
consistent with Board-approved debt guidelines.
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.
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, 2006
|
|
| |
Revenues
|
|
$ |
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.
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
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.
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.
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.
In fiscal 2007 we modified the presentation of deferred tax assets
and liabilities in accordance with the provisions of FIN 48, whereby
unrecognized tax benefits are no longer reflected in the Consolidated Balance
Sheet.
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
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
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 period
|
|
| |
|
|
|
|
|
Less
than
|
|
|
1
- 3 |
|
|
3
- 5 |
|
More
than
|
|
| |
Contractual
obligations:
|
|
Total
|
|
|
1
year
|
|
|
years
|
|
|
years
|
|
|
5
years
|
|
| |
Long-term
debt, including interest
|
|
$ |
104,436 |
|
|
$ |
5,121 |
|
|
$ |
99,315 |
|
|
$ |
- |
|
|
$ |
- |
|
| |
Operating
leases
|
|
|
42,421 |
|
|
|
9,725 |
|
|
|
14,690 |
|
|
|
8,684 |
|
|
|
9,322 |
|
| |
Purchase
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 |
|
|
|
14,274 |
|
| |
Total
|
|
$ |
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
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.
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, share-based compensation
cost is measured at the grant date based on the value of the award and is
recognized as expense over the vesting period of awards expected to vest.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating the expected option life and expected stock price
volatility. Judgment is also required in estimating the amount of share-based
awards that are expected to be forfeited before vesting. The original estimate
of the grant date fair value is not subsequently revised unless the awards are
modified, but the estimate of expected forfeitures is evaluated throughout the
vesting period and revised accordingly, with any necessary adjustments being
recognized to cumulative stock-based compensation cost. If actual experience
differs significantly from these estimates, stock-based compensation expense and
our results of operations could be materially impacted. More information about
share-based payment and our related estimates is included in Note 2 to the Notes
to Consolidated Financial Statements included in Item 15(a) of this Form
10-K.
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.
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 our fiscal year ending January
26, 2008. The adoption of SFAS No. 155 had no impact on our 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 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
year ending January 31, 2009. We do not expect the adoption of
SFAS No. 159 to have a material impact on our 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. We do not expect the adoption of EITF 06-11 to have a material
impact on our 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.
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.
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
Framework issued 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.
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 Framework issued 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 Framework issued 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
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. KRUSZEWSKI
|
|
Employment:
|
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:
|
49
|
|
Director
since:
|
2004
|
|
|
|
|
Director:
|
STEPHEN
M. O’HARA
|
|
Employment:
|
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:
|
None
|
|
Committees:
|
Special
Finance Committee
|
|
Age:
|
53
|
|
Director
since:
|
2000
|
|
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, 2006
|
|
Age:
|
50
|
|
Director
since:
|
2006
|
|
Director:
|
CHARLES
W. MUELLER
|
|
Employment:
|
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:
|
69
|
|
Director
since:
|
1996
|
|
Director:
|
KELVIN
R. WESTBROOK
|
|
Employment:
|
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:
|
52
|
|
Director
since:
|
2001
|
|
Director:
|
DON
W. HUBBLE
|
|
Employment:
|
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 Committee
|
|
Age:
|
68
|
|
Director
since:
|
1998
|
|
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:
|
58
|
|
Director
since:
|
2006
|
|
|
|
|
Director:
|
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:
|
None
|
|
Committees:
|
Audit
Committee; Corporate Governance and Nominating
Committee
|
|
Age:
|
59
|
|
Director
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
|
|
|
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
President
|
|
Year
First Elected as an Officer:
|
2007
|
|
Age:
|
43
|
|
Officer:
|
Steven
L. Frey(2)
|
|
Present
Position:
|
Vice
President, General Counsel and Secretary
|
|
Year
First Elected as an Officer:
|
1999
|
|
Age:
|
58
|
|
Officer:
|
John
S. Olbrych(3)
|
|
Present
Position:
|
Senior
Vice President and Chief Administrative Officer
|
|
Year
First Elected as an Officer:
|
2006
|
|
Age:
|
52
|
|
Officer:
|
Richard
M. Oliva(4)
|
|
Present
Position:
|
Senior
Vice President
|
|
Year
First Elected as an Officer:
|
2007
|
|
Age:
|
48
|
|
Officer:
|
James
W. Shaffer(5)
|
|
Present
Position:
|
Vice
President and Chief Financial Officer
|
|
Year
First Elected as an Officer:
|
1999
|
|
Age:
|
55
|
|
Officer:
|
William
R. Watson(6)
|
|
Present
Position:
|
Senior
Vice President
|
|
Year
First Elected as an Officer:
|
2007
|
|
Age:
|
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.
|
|
(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.
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.
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.
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
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
deficiencies,
employee satisfaction, prompt reporting of financial data, and implementation of
a new executive information system.
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.
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
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
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
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
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.
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:
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reviewed
and discussed the Compensation Discussion and Analysis with management,
and;
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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.
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Submitted
by the Compensation and
Organization
Committee,
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Kelvin
R. Westbrook, Chairman
James
R. Henderson
Ronald
J. Kruszewski
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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.
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.
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Name
and
Principal
Position
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Year
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Salary
($)
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Bonus
($)
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Stock
Awards
($)(1)
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Option
Awards
($)(1)
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Non-Equity
Incentive
Plan
Compen-sation
($)(2)
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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
578,759 |
|
| |
James
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
327,918 |
|
| |
Steven
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
395,069 |
|
| |
John
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
129,135 |
|
| |
Richard
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.
|
|
(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
|
|
|
Oliva
|
|
| |
401(k)
matching contributions
|
|
$ |
4,050 |
|
|
$ |
4,050 |
|
|
$ |
4,050 |
|
|
$ |
2,648 |
|
|
$ |
1,936 |
|
| |
401(k)
- profit sharing contributions
|
|
$ |
2,888 |
|
|
$ |
1,470 |
|
|
$ |
1,692 |
|
|
$ |
785 |
|
|
$ |
1,135 |
|
| |
Dividend
distributions on restricted stock
|
|
$ |
30,028 |
|
|
$ |
8,484 |
|
|
$ |
9,028 |
|
|
$ |
2,081 |
|
|
$ |
7,421 |
|
| |
Perquisites
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
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 $18,000 for services rendered to our Company
during fiscal 2006.
|
Grants
of Plan-Based Awards in Fiscal 2007
The
following table sets forth information with respect to grants of awards to any
person named in the Summary Compensation Table under our non-equity and equity
incentive plans during fiscal 2007.
| |
|
|
|
|
|
Estimated Future
Payouts Under
Non-Equity Incentive
Plan
Awards (1)
|
|
|
Estimated Future
Payouts
Under Equity
Incentive Plan
Awards (2)
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
|
Grant
Date
|
Action
Date
|
|
Threshold
($)
|
|
|
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
|