10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 28, 2002 Commission file number 0-4063

G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)

MINNESOTA	41-0449530
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5995 OPUS PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)

(952) 912-5500
(Registrant’s telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X                      NO

         Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

CLASS A	Outstanding November 7, 2002
Common Stock, par value $0.50 per share	19,253,686

CLASS B	Outstanding November 7, 2002
Common Stock, par value $0.50 per share	1,474,996

TABLE OF CONTENTS

PART I
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED CONDENSED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION
CERTIFICATION
EX-10.1 Promissory Note of Richard L. Marcantonio
EX-10.2 Stock Pledge Agreement
EX-99.1 Certification Pursuant to 18 USC Sec. 1350

G&K Services, Inc.
Form 10-Q

Table of Contents

PART I		PAGE
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets as of September 28, 2002 and June 29, 2002	3
	Consolidated Statements of Operations for the three months ended September 28, 2002 and September 29, 2001	4
	Consolidated Condensed Statements of Cash Flows for the three months ended September 28, 2002 and September 29, 2001	5
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	15
Item 4.	Controls and Procedures	15
PART II
Item 6.	Exhibits and Reports on Form 8-K	16
Signatures		17
Certifications		18

2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries

			September 28,
			2002		June 29,
(In thousands, except share data)			(Unaudited)		2002
ASSETS
Current Assets
	Cash and cash equivalents		$	10,004	$	9,986
	Accounts receivable, less allowance for doubtful accounts of $3,905 and $3,326			72,073		66,555
	Inventories			92,717		91,733
	Prepaid expenses			11,904		17,536
		Total current assets		186,698		185,810
Property, Plant and Equipment, net				231,422		230,530
Goodwill, net				207,011		200,140
Other Assets				64,535		65,219
			$	689,666	$	681,699
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
	Accounts payable		$	18,589	$	17,361
	Accrued expenses			53,975		52,026
	Deferred income taxes			11,093		11,157
	Current maturities of long-term debt			11,450		9,443
		Total current liabilities		95,107		89,987
Long-Term Debt, net of Current Maturities				211,885		214,977
Deferred Income Taxes				21,186		21,570
Other Noncurrent Liabilities				14,152		15,007
Stockholders’ Equity				347,336		340,158
			$	689,666	$	681,699

         The accompanying notes are an integral part of these consolidated condensed financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Unaudited)

			For the Three Months Ended
			September 28,		September 29,
(In thousands, except per share data)			2002		2001
Revenues
	Rental operations		$	151,906	$	151,763
	Direct sales			4,347		5,335
		Total revenues		156,253		157,098
Operating Expenses
	Cost of rental operations			87,925		88,870
	Cost of direct sales			3,501		3,853
	Selling and administrative			36,655		36,544
	Depreciation and amortization			9,019		8,769
		Total operating expenses		137,100		138,036
Income from Operations				19,153		19,062
	Interest expense			3,261		3,830
Income before Income Taxes				15,892		15,232
	Provision for income taxes			6,198		6,017
Net Income			$	9,694	$	9,215
	Basic weighted average number of shares outstanding			20,545		20,481
Basic Earnings per Common Share			$	0.47	$	0.45
	Diluted weighted average number of shares outstanding			20,686		20,504
Diluted Earnings per Common Share			$	0.47	$	0.45

         The accompanying notes are an integral part of these consolidated condensed financial statements.

4

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)

			For the Three Months Ended
			September 28,			September 29,
(In thousands)			2002			2001
Operating Activities:
	Net income		$	9,694		$	9,215
	Adjustments to reconcile net income to net cash provided by operating activities -
		Depreciation and amortization		9,019			8,769
		Deferred income taxes		(410	)		(1,148	)
		Amortization of deferred compensation – restricted stock		272			226
		Changes in current operating items, exclusive of acquisitions		2,635			5,784
	Other, net			(146	)		802
Net cash provided by operating activities				21,064			23,648
Investing Activities:
	Property, plant and equipment additions, net			(8,976	)		(5,564	)
	Acquisition of business assets and other			(10,772	)		(21,015	)
Net cash used for investing activities				(19,748	)		(26,579	)
Financing Activities:
	Proceeds from debt financing			22,105			28,700
	Repayments of debt financing			(23,293	)		(21,755	)
	Cash dividends paid			(363	)		(362	)
	Sale of common stock			192			42
Net cash provided by (used for) financing activities				(1,359	)		6,625
Increase (Decrease) in Cash and Cash Equivalents				(43	)		3,694
Effect of Exchange Rates on Cash				61			(379	)
Cash and Cash Equivalents:
		Beginning of period		9,986			15,317
		End of period	$	10,004		$	18,632

         The accompanying notes are an integral part of these consolidated condensed financial statements.

5

G&K SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
Three-month periods ended September 28, 2002 and September 29, 2001
(Unaudited)

	The consolidated condensed financial statements included herein, except for the June 29, 2002 balance sheet which was extracted from the audited consolidated financial statements for the fiscal year ended June 29, 2002, have been prepared by G&K Services, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 28, 2002, and the results of its operations and its cash flows for the three months ended September 28, 2002 and September 29, 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.
	The results of operations for the three-month periods ended September 28, 2002 and September 29, 2001 are not necessarily indicative of the results to be expected for the full year.
1.	Summary of Significant Accounting Policies
	Accounting policies followed by the Company are set forth in Note 1 in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002.
	Nature of Business
	G&K Services, Inc. is a market leader in providing corporate identity apparel and facility services programs to a wide variety of industrial, service and high-technology companies. The Company’s programs provide rental-lease or purchase options as well as non-apparel items such as floor mats, dustmops and cloths, wiping towels, selected linen items and several restroom products. The Company also manufactures certain uniform garments that it uses to support its garment rental programs.
	Principles of Consolidation
	The accompanying consolidated condensed financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated in consolidation.
	Derivative Financial Instruments
	The Company uses derivative financial instruments principally to manage the risk that changes in interest rates will affect the amount of its future interest payments. Interest rate swap contracts are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swap contracts are reflected at fair value in the consolidated condensed balance sheet and the related gains or losses on these contracts are deferred in stockholders’ equity (as a component of other comprehensive income). Amounts to be paid or received under the contracts are accrued as interest rates change and are recognized over the life of the contracts as an adjustment to interest expense. The net effect of this accounting is that interest expense on the portion of variable rate debt being hedged is generally recorded based on fixed interest rates.

6

The Company may periodically hedge firm cash flow commitments with its foreign subsidiary, generally with foreign currency contracts. These agreements are recorded at current market values and the gains and losses are included in earnings. Gains and losses on such transactions were not significant in the first quarter of fiscal 2003. Notional amounts outstanding under foreign currency contracts at September 28, 2002 were $2,402, all of which will mature during fiscal 2003. No amounts were outstanding under such contracts at September 29, 2001. The fair values of the foreign currency contracts were not materially different as of September 28, 2002.

Per Share Data

Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share was computed similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other dilutive securities, including nonvested restricted stock, using the treasury stock method.

	Three Months Ended
	September 28,		September 29,
	2002		2001
Weighted average number of common shares outstanding		20,545,000		20,481,000
Shares used in computation of basic earnings per share		20,545,000		20,481,000
Weighted average effect of nonvested restricted stock grants and assumed exercise of options		141,000		23,000
Shares used in computation of diluted earnings per share		20,686,000		20,504,000

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company adopted SFAS 143 effective June 30, 2002. The impact of adopting SFAS 143 was not material.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 establishes a single accounting model, based on the framework established in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS 121), for long-lived assets to be disposed of by sale. SFAS 144 also resolves several significant implementation issues related to SFAS 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. The Company adopted SFAS 144 effective June 30, 2002. The impact of adopting SFAS 144 was not material.

7

	In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that SFAS 146 will have a material impact on its consolidated financial statements.
2.	Comprehensive Income
	For the three-month periods ended September 28, 2002 and September 29, 2001, the components of comprehensive income were as follows:

		Three Months Ended
		September 28,			September 29,
		2002			2001
Net income		$	9,694		$	9,215
Other comprehensive income
	Foreign currency translation adjustments, net of tax		(2,552	)		(2,841	)
	Net unrealized holding loss, net of tax		(64	)		(774	)
Comprehensive income		$	7,078		$	5,600

3.	Goodwill and Intangible Assets
	In July 2001, the Company adopted the provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The changes in the carrying amount of goodwill for the period ended September 28, 2002, by operating segment, are as follows:

	United States		Canada			Total
Balance as of June 29, 2002	$	173,707	$	26,433		$	200,140
Goodwill acquired during the period		7,704		—			7,704
Other, primarily foreign currency translation		—		(833	)		(833	)
Balance as of September 28, 2002	$	181,411	$	25,600		$	207,011

Information regarding the Company’s other intangible assets are as follows:

	As of September 28, 2002
	Carrying		Accumulated
	Amount		Amortization		Net
Customer Lists	$	67,571	$	26,237	$	41,334
Restrictive Covenants		8,303		4,337		3,966
Total	$	75,874	$	30,574	$	45,300

	As of June 29, 2002
	Carrying		Accumulated
	Amount		Amortization		Net
Customer Lists	$	66,470	$	24,914	$	41,556
Restrictive Covenants		7,979		4,184		3,795
Total	$	74,449	$	29,098	$	45,351

8

         Amortization expense for the three months ended September 28, 2002 was $1,637. Estimated amortization expense for each of the five succeeding fiscal years based on the intangible assets as of September 28, 2002 is as follows:

2003 remaining	$	4,955
2004		6,610
2005		6,542
2006		6,238
2007		6,116
2008		6,004

4.	Segment Information
	The Company has two operating segments under the guidelines of SFAS No. 131: United States and Canada, which have been identified as components of the Company that are reviewed by the Company’s Chief Executive Officer to determine resource allocation and evaluate performance. Each operating segment derives revenues from the corporate identity apparel and facility services industry, which includes garment rental and non-apparel items such as floor mats, dust mops and cloths, wiping towels, selected linen items and several restroom products. No one customer’s transactions account for 1.0% or more of the Company’s revenues.
	The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). Corporate expenses are allocated to the segments based on segment revenue. The Company evaluates performance based on income from operations. Financial information by geographic location for the three-month periods ended September 28, 2002 and September 29, 2001 is as follows:

		United
		States		Canada		Total
Fiscal Year 2003:
	Revenues	$	137,276	$	18,977	$	156,253
	Income from operations		14,839		4,314		19,153
	Capital expenditures		6,683		2,293		8,976
	Depreciation and amortization expense		8,116		903		9,019
Fiscal Year 2002:
	Revenues	$	138,014	$	19,084	$	157,098
	Income from operations		14,185		4,877		19,062
	Capital expenditures		5,408		156		5,564
	Depreciation and amortization expense		7,880		889		8,769

9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)

Overview

G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a market leader in providing corporate identity apparel and facility services programs to a wide variety of North American industrial, service and high-technology companies. We rent uniforms and other related products such as floor mats, dust mops, wiping towels, restroom supplies and selected linen items. We also sell uniforms and other apparel items to customers in our direct sale programs. The North American rental market is approximately $6.0 billion, while the direct sales market, targeted by us, is approximately $4.5-$5.0 billion in size.

Critical Accounting Policies

The discussion of the financial condition and results of operations are based upon the consolidated condensed financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See Note 1 to the consolidated condensed financial statements for additional discussion of the application of these and other accounting policies.

Revenue Recognition and Allowance for Doubtful Accounts

We recognize revenue from rental operations in the period in which the services are provided. Direct sale revenue is recognized in the period in which the product is shipped. Estimates are used in determining the collectability of billed accounts receivable. Management analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Significant management judgments and estimates are used in connection with establishing the allowance in any accounting period. Material differences may result in the amount and timing of bad debt expense recognition for any given period if management makes different judgments or utilizes different estimates.

Inventories

Our inventories consist of new goods and rental merchandise in service. Estimates are used in determining the likelihood that new goods on hand can be sold to customers or used in rental operations. Historical inventory usage and current revenue trends are considered in estimating both obsolete and excess inventories. New goods are stated at lower of cost or market, net of any reserve for obsolete or excess inventory. Merchandise placed in service to support rental operations is amortized into cost of rental operations over the estimated useful lives of the underlying inventory items, primarily on a straight-line basis. Estimated lives of rental merchandise in service range from nine months to three years. In establishing estimated lives for merchandise in service, management considers manufacturer expectations, historical experience and the intended use of the merchandise. Material differences may result in the amount and timing of operating profit for any period if management makes different judgments or utilizes different estimates.

Goodwill, Intangibles and Other Long-Lived Assets

We adopted SFAS 142 at the beginning of fiscal 2002 and as a result no longer amortize goodwill. SFAS 142 also requires that companies test goodwill for impairment on an annual basis and when events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which goodwill is assigned below its carrying amount. There have been no impairments of

10

goodwill in fiscal 2003 or 2002. Our evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling. Future events could cause management to conclude that impairment indicators exist and that goodwill and other intangibles associated with acquired businesses are impaired. Any resulting impairment loss could have a material impact on our financial condition and results of operations.

Property, plant and equipment and definite-lived intangible assets are depreciated or amortized over their useful lives. Useful lives are based on management estimates of the period that the assets will generate revenue. Long-lived assets are evaluated for impairment whenever events and circumstances indicate an asset may be impaired. There have been no write-downs of any long-lived assets in fiscal 2003 or 2002.

Insurance

We self-insure for certain obligations related to health and workers’ compensation programs. We purchase stop-loss insurance policies to protect us from catastrophic losses. Estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. Management estimates consider historical claims experience, escalating medical cost trends, expected timing of claim payments and actuarial analysis provided by a third party. Changes in the cost of medical care, our ability to settle claims or the estimates and judgment used by management could have a material impact on the amount and timing of expense for any period.

Results of Operations

The percentage relationships to net sales of certain income and expense items for the three-month periods ended September 28, 2002 and September 29, 2001, and the percentage changes in these income and expense items between periods are presented in the following table:

									Percentage
			Three Months Ended						Change
									FY Q1 2003 vs. FY
			September 28, 2002			September 29, 2001			Q1 2002
Revenues:
	Rental			97.2	%		96.6	%		0.1	%
	Direct			2.8			3.4			(18.5	)
		Total revenues		100.0			100.0			(0.5	)
Expenses:
	Cost of rental sales			57.9			58.6			(1.1	)
	Cost of direct sales			80.5			72.2			(9.1	)
		Total cost of sales		58.5			59.0			(1.4	)
		Selling and administrative		23.4			23.3			0.3
		Depreciation and amortization		5.8			5.6			2.9
Income from operations				12.3			12.1			0.5
Interest expense				2.1			2.4			(14.9	)
Income before income taxes				10.2			9.7			4.3
Provision for income taxes				4.0			3.8			3.0
Net income				6.2	%		5.9	%		5.2	%

11

Three months ended September 28, 2002 compared to three months ended September 29, 2001

Revenues. Total revenues in the first quarter of fiscal 2003 decreased 0.5% to $156.3 million from $157.1 million in the first quarter of fiscal 2002. Rental revenue increased $0.1 million in the first quarter, or 0.1%. The net impact of acquisitions and changes in foreign currency exchange rates increased rental revenue 4.6%.

Direct sale revenue decreased 18.5% to $4.3 million in the first quarter of fiscal 2003 compared to $5.3 million in the same period of fiscal 2002. Direct sale revenue is down due to large initial stocking orders in the first quarter of fiscal 2002 and the continued postponement of customer orders in the current year quarter.

Cost of Rental and Direct Sale. Cost of rental operations decreased 1.1% to $87.9 million in the first quarter of fiscal 2003 from $88.9 million in the same period of fiscal 2002. Gross margin from rental sales increased to 42.1% in the first quarter of fiscal 2003 from 41.4% in the first quarter of fiscal 2002. Improved operational productivity and lower merchandise expense contributed to the improved rental gross margin.

Cost of direct sales decreased 9.1% to $3.5 million in the first quarter of fiscal 2003 from $3.9 million in the same period of fiscal 2002. Gross margin from direct sales decreased to 19.5% in the first quarter of fiscal 2003 from 27.8% in the first quarter of fiscal 2002. The decrease in gross margin is due primarily to lower revenue.

Selling and Administrative. Selling and administrative expenses increased 0.3% to $36.7 million in the first quarter of fiscal 2003 from $36.5 million in the same period of fiscal 2002. As a percentage of total revenues, selling and administrative expenses increased to 23.4% in the first quarter of fiscal 2003 from 23.3% in the same period of fiscal 2002. Sales and marketing expenses focused on organic revenue growth and increasing property and casualty insurance costs drove the majority of the increase.

Depreciation and Amortization. Depreciation and amortization expense increased 2.9% to $9.0 million in the first quarter of fiscal 2003 from $8.8 million in the same period of fiscal 2002. As a percentage of total revenues, depreciation and amortization expense increased to 5.8% in the first quarter of fiscal 2003 from 5.6% in the same period of fiscal 2002. Capital expenditures, excluding acquisition of businesses, was $9.0 million in the first quarter of fiscal 2003 compared to $5.6 million in the prior year’s quarter.

Interest Expense. Interest expense was $3.3 million in the first quarter of fiscal 2003, down from $3.8 million in the same period of fiscal 2002. The decrease in interest expense is due primarily to lower effective interest rates.

Provision for Income Taxes. Our effective tax rate decreased to 39.0% in the first quarter of fiscal 2003 from 39.5% in the same period of fiscal 2002 due largely to decreases in Canadian statutory income tax rates.

Liquidity, Capital Resources and Financial Condition

Our primary sources of cash are net cash flows from operations and borrowings under the term loan and revolving credit facilities. Primary uses of this cash are interest payments on indebtedness, capital expenditures, acquisitions and general corporate purposes.

Operating Activities. Net cash provided by operating activities was $21.1 million in the first quarter of fiscal 2003 and $23.6 million in the same period of fiscal 2002.

Working capital at September 28, 2002 was $91.6 million, down 4.4% from $95.8 million at June 29, 2002. The decrease was largely driven by an increase in current maturities of long-term debt associated with debt amortization and acquisitions in the first quarter of fiscal 2003.

Investing Activities. Net cash used in investing activities was $19.7 million in the first quarter of fiscal 2003 and $26.6 million in the first quarter of fiscal 2002. In both fiscal years 2003 and 2002, cash was largely used for acquisitions and property, plant and equipment additions.

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Financing Activities. Cash used for financing activities was $1.4 million in the first quarter of fiscal 2003 and cash provided by financing activities was $6.6 million in the same period of fiscal 2002. Cash used in fiscal 2003 was primarily related to repayment of long-term debt. Cash provided in fiscal 2002 was used primarily in acquisitions of businesses. We paid dividends of $0.4 million during the quarter.

Cash Obligations. Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under the variable rate term loan and revolving credit facility, the fixed rate term loan, capital lease obligations and rent payments required under non-cancelable operating leases with initial or remaining terms in excess of one year.

The following table summarizes our fixed cash obligations as of September 28, 2002 for the fiscal years ending June (in millions):

	2003 Remaining		2004		2005		2006		2007		2008 and Thereafter		Total
Variable rate term loan and revolving credit facility	$	5,625	$	13,125	$	15,000	$	18,750	$	22,500	$	92,100	$	167,100
Fixed rate term loan		—		—		7,143		7,143		7,143		28,571		50,000
Other debt arrangements, including capital leases		1,519		1,183		1,286		66		29		—		4,083
Operating leases		7,069		6,477		4,905		3,485		2,432		1,894		26,262
Total contractual cash obligations	$	14,213	$	20,785	$	28,334	$	29,444	$	32,104	$	122,565	$	247,445

Also, at September 28, 2002, we had stand-by letters of credit totaling $11.1 million that have been issued and are outstanding, primarily in connection with our property and casualty insurance programs. No amounts have been drawn upon these letters of credit.

At September 28, 2002, we had available cash on hand of $10.0 million and approximately $146.8 million of available capacity under our revolving credit facility. We anticipate that we will generate sufficient cash flows from operations to satisfy our cash commitments and capital requirements for fiscal 2003; however, we may utilize borrowings under the revolving credit facility to supplement our cash requirements from time to time. We estimate that capital expenditures in fiscal 2003 will be approximately $30.0 million to $35.0 million.

The amount of cash flow generated from operations is subject to a number of risks and uncertainties. In fiscal 2003, we may actively seek and consider acquisitions of business assets, the consummation of any acquisition could affect our liquidity profile and level of outstanding debt. We believe that available capacity under our revolving credit facility will be adequate to finance any such acquisitions and planned capital expenditures in fiscal 2003.

Impact of Inflation

In general, management believes that our results of operations are not dependent on moderate changes in the inflation rate. Historically, we have been able to manage the impacts of more significant changes in inflation rates through our customer relationships, and continued focus on improvements of operational productivity. Customer agreements generally provide for price increases consistent with the rate of inflation or 5.0%, whichever is greater.

Litigation

We are involved in a variety of legal actions relating to personal injury, customer contracts, employment, trade practices, environmental and other legal matters that arise in the normal course of business. These legal actions include lawsuits that challenge the practice of charging for certain environmental services on invoices, and being named, along with other defendants, as a potentially responsible party at certain waste disposal sites where ground water contamination has been detected or is suspected. While we are unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

13

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. We adopted SFAS 143 effective June 30, 2002. The impact of adopting SFAS 143 was not material.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 establishes a single accounting model, based on the framework established in SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS 121), for long-lived assets to be disposed of by sale. SFAS 144 also resolves several significant implementation issues related to SFAS 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. We adopted SFAS 144 effective June 30, 2002. The impact of adopting SFAS 144 was not material.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. It nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not believe that SFAS 146 will have a material impact on our consolidated financial statements.

Cautionary Statements Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides companies with a “safe harbor” when making forward-looking statements as a way of encouraging them to furnish their shareholders with information regarding expected trends in their operating results, anticipated business developments and other prospective information. Statements made in this report concerning our intentions, expectations or predictions about future results or events are “forward-looking statements” within the meaning of the Act. These statements reflect our current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which could be material and adverse. Given that circumstances may change, and new risks to the business may emerge from time to time, having the potential to negatively impact our business in ways we could not anticipate at the time of making a forward-looking statement, you are cautioned not to place undue reliance on these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Some of the factors that could cause actual results or events to vary from stated expectations include, but are not limited to, the following: unforeseen operating risks; the effects of overall economic conditions; fluctuations in costs of insurance and energy; acquisition integration costs; the performance of acquired businesses; preservation of positive labor relationships; competition, including pricing, within the corporate identity apparel and facility services industry; and the availability of capital to finance planned growth. Additional information concerning potential factors that could effect future financial results is included in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended June 29, 2002.

14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates. We use financial instruments, including fixed and variable rate debt, as well as interest rate swaps to manage interest rate risk. Interest rate swap agreements are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. Assuming the current level of borrowings, a 100 basis point increase in interest rates under these borrowings would have increased our interest expense for the first quarter of fiscal 2003 by approximately $1.3 million. This estimated exposure considers the mitigating effects of interest rate swap agreements outstanding at September 28, 2002 on the change in the cost of variable rate debt.

Foreign Currency Exchange Risk

We have a significant foreign subsidiary located in Canada. The assets and liabilities of this subsidiary are denominated in the Canadian dollar and as such are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities are recorded as a component of stockholders’ equity. Gains and losses from foreign currency transactions are included in results of operations.

We may periodically hedge firm cash flow commitments with our foreign subsidiary, generally with foreign currency contracts. These agreements are recorded at current market values and the gains and losses are included in earnings. Gains and losses on such transactions were not significant in the first quarter of fiscal 2003. Notional amounts outstanding under foreign currency contracts at September 28, 2002 were $2.4 million, all of which will mature during fiscal 2003. No amounts were outstanding under such contracts at September 29, 2001. The fair values of the foreign currency contracts were not materially different as of September 28, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of disclosure controls and procedures within 90 days of filing this quarterly report (the “Evaluation Date”). After evaluating the effectiveness of disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer, along with other key management, have determined that disclosure controls and procedures were effective and designed to ensure that material information relating to G&K Services and its consolidated subsidiaries would be made known to them on a timely basis. There were no significant changes in internal controls or other factors that could significantly affect these controls subsequent to the Evaluation Date.

15

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         a.     Exhibits

10.1 Promissory Note of Richard L. Marcantonio dated July 26, 2002 and payable to the Registrant

10.2 Stock Pledge Agreement dated as of July 26, 2002, by and between the Registrant and Richard L. Marcantonio

99.1 Certification of the Company’s Chief Executive Officer, Thomas R. Moberly, and Chief Financial Officer, Jeffrey L. Wright, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

         b.     Reports on Form 8-K

             A Form 8-K, Item 5. Other Events was filed on October 4, 2002.

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 12, 2002	G&K SERVICES, INC. (Registrant)
	By:	/s/ Jeffrey L. Wright
		Jeffrey L. Wright Chief Financial Officer and Secretary (Principal Financial Officer)
	By:	/s/ Michael F. Woodard
		Michael F. Woodard Controller (Principal Accounting Officer)

17

CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas R. Moberly, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of G&K Services, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002
	By:	/s/ Thomas R. Moberly
		Thomas R. Moberly Chief Executive Officer (Principal Executive Officer)

18

CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jeffrey L. Wright, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of G&K Services, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002
	By:	/s/ Jeffrey L. Wright
		Jeffrey L. Wright Chief Financial Officer and Secretary (Principal Financial Officer)

19 EX-10.1 3 c72852exv10w1.txt EX-10.1 PROMISSORY NOTE OF RICHARD L. MARCANTONIO EXHIBIT 10.1 PROMISSORY NOTE $400,000 Minneapolis, Minnesota July 26, 2002 FOR VALUE RECEIVED, Richard L. Marcantonio ("MAKER"), promises to pay to G&K Services, Inc., a Minnesota corporation (the "COMPANY" or "HOLDER") at its office at 5995 Opus Parkway, Suite 500, Minnetonka, Minnesota 55343, or at such other place as the holder hereof may from time to time designate in writing, in lawful money of the United States of America, the principal sum equal to Four Hundred Thousand Dollars ($400,000) (the "PRINCIPAL SUM"), upon the terms and subject to the conditions set forth herein. No interest shall accrue on the unpaid Principal Sum during the term of this Note. Subject to the forgiveness of certain amounts of the Principal Sum, as provided below, the Principal Sum shall be payable in five (5) annual installments, each in the amount set forth under the caption "Amount Payable" in the table below, commencing on the one-year anniversary of the date hereof and continuing on each of the next four (4) successive anniversaries thereof (each a "PAYMENT DATE"). For so long as Maker continues to be employed by Holder, the amount of the Principal Sum set forth under the caption "Amount Subject To Forgiveness" in the table below shall be forgiven by Holder on the applicable anniversary of the date hereof.

Amount Subject Anniversary Amount Payable ($) to Forgiveness ($) ----------- ------------------ ------------------ 1st Year 80,000 40,000 2nd Year 80,000 40,000 3rd Year 80,000 40,000 4th Year 80,000 40,000 5th Year 80,000 40,000

In addition to any amounts forgiven pursuant to the terms hereof, the amount payable by Maker to Holder on each Payment Date shall be further reduced by an amount (the "GROSS-UP AMOUNT") equal to any federal, state and local income imposed on Maker as a result of the forgiveness of portions of the Principal Sum hereunder or the interest-free nature of this Note. For purposes of determining the Gross-Up Amount, Maker shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year of the applicable Payment Date and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Maker's residence in the calendar year of the applicable Payment Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. 1 This Note may be prepaid in whole or in part at any time without payment of any prepayment penalty or fee. Any prepayment shall not accelerate forgiveness of the Amounts Subject to Forgiveness as detailed above. The Maker shall remain liable for the payment of this Note, and any other charges payable hereunder, notwithstanding any extension or extensions of time for payment or any indulgence of any kind that Holder may grant to Maker. The occurrence of either of the following events shall constitute an event of default under this Note (each such event is hereinafter referred to as an "EVENT OF DEFAULT"): (a) Voluntary termination not for "Good Reason" (as defined in Maker's employment agreement with Holder) by Maker of his employment with Holder at any time prior to the five-year anniversary of the commencement of Maker's employment with Holder; or (b) Termination for "Cause" (as defined in Maker's employment agreement with Holder) by Holder of Maker's employment with Holder at any time prior to the five-year anniversary of the commencement of Maker's employment with Holder. Upon the occurrence of an Event of Default, Holder may, at its sole and absolute discretion declare the outstanding amount of the Principal Sum to be immediately due and payable in full without demand. Upon the occurrence of an Event of Default hereunder Holder may, at its sole and absolute discretion, deduct any amounts then due hereunder from any money due or to become to Maker from Holder. The Maker agrees to pay on demand the costs of collection, including, without limitation, reasonable attorneys' fees incurred by Holder in collecting or attempting to collect any amount under this Note that is not paid when due or to enforce its rights under this Note. All such costs of collection shall bear interest, payable on demand, from the date of payment thereof by Holder until paid in full by Maker at the lesser of (i) the highest rate permitted by law or (ii) eight (8%) percent. Holder shall not by any act of omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver is in writing and signed by an authorized officer of Holder and then only to the extent specifically set forth therein. A waiver on one occasion shall not be construed to be a continuing waiver of such right or remedy on any other occasion. Every person who is at any time liable for the payment of the debt evidenced by this Note hereby waives presentment for payment, demand, notice of nonpayment of this Note, protest and notice of protest, and the right to trial by jury in any litigation arising out of, relating to, or connected with this Note or with any instrument given as security herefor, and hereby agrees that Holder may extend, without affecting their liability hereon, the time for payment of any part of or the whole of the debt evidenced by this Note, at any time, at the request of any other person or entity liable for said debt. 2 This Note is given and accepted as evidence of indebtedness only and not in payment of or in satisfaction of any indebtedness or obligation. The form and essential validity of this Note shall be governed by the laws of the State of Minnesota applicable to contracts made and to be performed wholly within Minnesota, without giving effect to conflicts of laws principles. All lawsuits and judicial proceedings regarding the interpretation of this Note, any dispute arising hereunder or the collection of any amount due under this Note shall be brought and heard in the District Court, State of Minnesota, Fourth Judicial District, and Maker hereby consents to such jurisdiction. If any portion of this Note is unenforceable, the remainder of this Note shall continue in full force and effect. Time is of the essence with respect to all of Maker's obligations and agreements under this Note. This Note and all the provisions, conditions, promises and covenants hereof shall inure to the benefit of Holder, its successors and assigns, and shall be binding upon the Maker, his personal representatives, heirs, successors and assigns. This Note is not an employment contract for a definite term. This Note is not intended to modify the at-will employment relationship between Maker and Holder. IN WITNESS WHEREOF, the Maker has caused this Note to be signed on his behalf on the day and year first above written. /s/ Richard L. Marcantonio ------------------------------- Richard L. Marcantonio Subscribed and sworn to before me this 26 day of July, 2002. /s/ Karla M. Gessell - ------------------------- Notary Public G&K SERVICES, INC. By: /s/ Sally J. Bredehoft ------------------------------------ Its Vice President, Human Resources 3 EX-10.2 4 c72852exv10w2.txt EX-10.2 STOCK PLEDGE AGREEMENT EXHIBIT 10.2 STOCK PLEDGE AGREEMENT This STOCK PLEDGE AGREEMENT is made and entered into as of the 26th day of July, 2002, by and between Richard L. Marcantonio, a resident of the State of Minnesota (the "PLEDGOR") and G&K Services, Inc., a Minnesota corporation ("PLEDGEE"). INTRODUCTION A. PROMISSORY NOTE. Pledgor has issued a Promissory Note in the original principal amount of Four Hundred Thousand Dollars ($400,000) (the "PRINCIPAL SUM"). B. SECURITY. To induce Pledgee to enter into the transactions described above, and as security for payments due under the Note, Pledgor has agreed to pledge shares of Ecolab Inc., a Delaware corporation (the "Shares"), which Shares have a value of at least 130% of the Principal Sum. AGREEMENT NOW, THEREFORE, in order to secure payment of all amounts due and owing Pledgee under the Note (collectively, the "OBLIGATIONS"), and in consideration of the facts recited above (which are a part of this Agreement) and the promises set forth below, it is agreed: 1. PLEDGE. As collateral for the payment of the Obligations, Pledgor hereby grants a security interest to Pledgee and deposits with Pledgee (accompanied by a stock power in blank) the Shares (which Shares, as adjusted from time to time as provided herein, shall hereinafter to be referred to as the "PLEDGED STOCK"), and Pledgor agrees to perform the obligations set forth herein. Pledgor hereby appoints Pledgee as attorney-in-fact to arrange for the transfer of the Pledged Stock on the books of the Company into the name of Pledgee if an Event of Default (as defined below) occurs as set forth herein. The Pledged Stock shall be held and disposed of pursuant to the terms of this Agreement. 2. FURTHER ASSURANCES. Pledgor agrees at any time, and from time to time, to execute such other instruments as Pledgee may reasonably request to establish, maintain and perfect the security interest in the Pledged Stock conveyed by this Agreement. 3. RIGHTS OF PLEDGOR. Prior to the occurrence of an Event of Default: (a) Pledgor shall have the right to exercise all voting and other powers pertaining to the Pledged Stock for all purposes; and (b) All dividends or other distributions with respect to the Pledged Stock shall be payable to Pledgor; provided, however, that following an Event of Default, all dividends or other distributions with respect to the Pledged Stock shall be payable to Pledgee. 1 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows: (a) Pledgor will not sell or otherwise dispose of any Pledged Stock or any interest therein without the prior written consent of the Pledgee; and (b) Throughout the term of this Agreement, Pledgor will keep the Pledged Stock free and clear of all security interests, liens, and encumbrances, except the security interest granted hereunder. 5. ADJUSTMENT. If during the term of this Agreement any share dividend, reclassification, readjustment or other change is declared or made in the capital structure of the Company, then all new, substituted, and additional shares, or other securities issued by reason of original issuance of the Pledged Stock shall be subject to the terms of this Agreement in the same manner as, and as a part of, the Pledged Stock. 6. RELEASE OF SHARES; TERMINATION. On each Payment Date (as such term is defined in the Note), Pledgee agrees to release Shares of Pledged Stock to the extent that the remaining Shares have an aggregate value of 130% of the Obligations, and Pledgee shall transfer to Pledgor such released Shares and deliver any assignments separate from certificate for cancellation relating thereto. Upon full performance of all of the Obligations, Pledgee shall transfer to Pledgor all of the Pledged Stock and deliver any assignments separate from certificate for cancellation, and all rights received by Pledgee under this Agreement shall terminate. 7. EVENTS OF DEFAULT. An event of default under this Agreement ("EVENT OF DEFAULT") shall occur when an Event of Default occurs under the Note, and remains uncured for thirty (30) days after written notice of such default is given by Pledgee to Pledgor. 8. REMEDIES. Upon the occurrence of an Event of Default and at any time thereafter, Pledgee may exercise any one or more of the following rights or remedies: (a) exercise all voting rights, rights to receive dividends and other distributions, and other rights as a holder of the Pledged Stock; (b) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including (i) the right to offer and sell the Pledged Stock privately to purchasers who will agree to take the Pledged Stock for investment and not with a view to distribution, and who will agree to the imposition of restrictive legends on any certificates representing the Pledged Stock, and (ii) the right to arrange for a sale that would otherwise qualify as exempt from registration under the Securities Act of 1933, as amended; and, if notice to Pledgor of any intended disposition of the Pledged Stock or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least twenty (20) calendar days prior to the date of intended disposition or other action; and (c) exercise or enforce any or all other rights or remedies available to Pledgee by law or agreement against the Pledged Stock, against Pledgor or against any other person or property. 2 9. APPLICATION OF PROCEEDS. The proceeds of any sale of all or a part of the Pledged Stock shall be applied as follows: (a) First, to the payment of all costs and expenses incurred by Pledgee in enforcing its rights under this Agreement, including without limitation, the reasonable fees of attorneys or other agents employed by Pledgee in connection therewith; (b) Second, to the payment of all of the Obligations then due and owing; and (c) Third, any surplus remaining after application of the proceeds pursuant to subparagraphs (a) and (b) above shall be paid to Pledgor or the successors or assigns thereof. Pledgor shall remain liable to Pledgee for any deficiency. 10. MISCELLANEOUS. The parties agree as follows: (a) No waiver of any of the provisions or conditions of this Agreement shall be effective unless such waiver is in writing and signed by the party claimed to have given, or consented to, such waiver. (b) No failure on the part of Pledgee to exercise, and no delay on the part of Pledgee in exercising, any right, power, or remedy pursuant to this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by Pledgee of any right, power, or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or remedy. The remedies herein provided are cumulative and shall not be exclusive of any other remedies provided by law or agreement. (c) The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective legal representatives, successors and permitted assigns of the parties; provided, however, that neither party may assign this Agreement or its obligations, duties, or liabilities hereunder without the express prior written consent of the other party. (d) This Agreement is delivered and is intended to be performed in the State of Minnesota and should be construed and enforced in accordance with the laws of such State, without regard to conflict of law principles. (e) All notices, requests, demands, and other communications hereunder shall be in writing, and shall be deemed to have been duly given three days after mailed if sent by registered mail, return receipt requested, postage prepaid, to the parties at the following addresses (or to any other address given to the other party pursuant to the provisions of this subsection): If to Pledgor: If to Pledgee: ______________________ G&K Services, Inc. ______________________ 5995 Opus Parkway, Suite 5500 ______________________ Minnetonka, MN 55343 ______________________ Attention: Chief Financial Officer 3 (f) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) This Agreement may not be amended except by written agreement executed by all parties hereto. (h) If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. (i) All representations and warranties contained in this Agreement shall survive the execution, delivery, and performance of this Agreement and any other documents or instruments executed or delivered in connection with or pursuant to any of the foregoing. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. PLEDGOR: /s/ Richard L. Marcantonio ----------------------------------------- Richard L. Marcantonio PLEDGEE: G&K SERVICES, INC. By: /s/ Sally J. Bredehoft ----------------------------------------- Name: Sally J. Bredehoft ----------------------------------------- Its: Vice President, Human Resources ----------------------------------------- 4 EX-99.1 5 c72852exv99w1.txt EX-99.1 CERTIFICATION PURSUANT TO 18 USC SEC. 1350 EXHIBIT 99.1 G&K SERVICES, INC. CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of G&K Services, Inc. (the "Company") for the quarterly period ended September 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Thomas R. Moberly, as Chief Executive Officer of the Company, and Jeffrey L. Wright, as Chief Financial Officer of the Company, each hereby certifies, that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition of the Company. Date: November 12, 2002 By: /s/ Thomas R. Moberly ------------------------------------- Thomas R. Moberly Chief Executive Officer (Principal Executive Officer) By: /s/ Jeffrey L. Wright ------------------------------------- Jeffrey L. Wright Chief Financial Officer and Secretary (Principal Financial Officer) GRAPHIC 6 c72852gklogo.jpg GRAPHIC begin 644 c72852gklogo.jpg M_]C_X``02D9)1@`!`0$`8`!@``#__@`<4V]F='=AO'YT%??N,PDRITA\GCUCJE?>:(HLMQ'^CY(_Z*ORIY-E MN'.!)_L5?E23I9'75Z/"X.$<-/)`?@1W4ZRB3&.8\AUD][:RG[J,N6Y^/L]? 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EX-10.1

                                                                    EXHIBIT 10.1

                                 PROMISSORY NOTE

$400,000                                                  Minneapolis, Minnesota
                                                                   July 26, 2002


FOR VALUE RECEIVED, Richard L. Marcantonio ("MAKER"), promises to pay to G&K
Services, Inc., a Minnesota corporation (the "COMPANY" or "HOLDER") at its
office at 5995 Opus Parkway, Suite 500, Minnetonka, Minnesota 55343, or at such
other place as the holder hereof may from time to time designate in writing, in
lawful money of the United States of America, the principal sum equal to Four
Hundred Thousand Dollars ($400,000) (the "PRINCIPAL SUM"), upon the terms and
subject to the conditions set forth herein.

No interest shall accrue on the unpaid Principal Sum during the term of this
Note.

      Subject to the forgiveness of certain amounts of the Principal Sum, as
provided below, the Principal Sum shall be payable in five (5) annual
installments, each in the amount set forth under the caption "Amount Payable" in
the table below, commencing on the one-year anniversary of the date hereof and
continuing on each of the next four (4) successive anniversaries thereof (each a
"PAYMENT DATE"). For so long as Maker continues to be employed by Holder, the
amount of the Principal Sum set forth under the caption "Amount Subject To
Forgiveness" in the table below shall be forgiven by Holder on the applicable
anniversary of the date hereof.



                                                                Amount Subject
           Anniversary          Amount Payable ($)            to Forgiveness ($)
           -----------          ------------------            ------------------
                                                        
            1st Year                  80,000                        40,000
            2nd Year                  80,000                        40,000
            3rd Year                  80,000                        40,000
            4th Year                  80,000                        40,000
            5th Year                  80,000                        40,000


      In addition to any amounts forgiven pursuant to the terms hereof, the
amount payable by Maker to Holder on each Payment Date shall be further reduced
by an amount (the "GROSS-UP AMOUNT") equal to any federal, state and local
income imposed on Maker as a result of the forgiveness of portions of the
Principal Sum hereunder or the interest-free nature of this Note. For purposes
of determining the Gross-Up Amount, Maker shall be deemed to pay federal income
tax at the highest marginal rate of federal income taxation in the calendar year
of the applicable Payment Date and state and local income taxes at the highest
marginal rate of taxation in the state and locality of the Maker's residence in
the calendar year of the applicable Payment Date, net of the maximum reduction
in federal income taxes that may be obtained from the deduction of such state
and local taxes.


                                       1

      This Note may be prepaid in whole or in part at any time without payment
of any prepayment penalty or fee. Any prepayment shall not accelerate
forgiveness of the Amounts Subject to Forgiveness as detailed above.

      The Maker shall remain liable for the payment of this Note, and any other
charges payable hereunder, notwithstanding any extension or extensions of time
for payment or any indulgence of any kind that Holder may grant to Maker.

      The occurrence of either of the following events shall constitute an event
of default under this Note (each such event is hereinafter referred to as an
"EVENT OF DEFAULT"):

      (a)   Voluntary termination not for "Good Reason" (as defined in Maker's
            employment agreement with Holder) by Maker of his employment with
            Holder at any time prior to the five-year anniversary of the
            commencement of Maker's employment with Holder; or

      (b)   Termination for "Cause" (as defined in Maker's employment agreement
            with Holder) by Holder of Maker's employment with Holder at any time
            prior to the five-year anniversary of the commencement of Maker's
            employment with Holder.

      Upon the occurrence of an Event of Default, Holder may, at its sole and
absolute discretion declare the outstanding amount of the Principal Sum to be
immediately due and payable in full without demand. Upon the occurrence of an
Event of Default hereunder Holder may, at its sole and absolute discretion,
deduct any amounts then due hereunder from any money due or to become to Maker
from Holder.

      The Maker agrees to pay on demand the costs of collection, including,
without limitation, reasonable attorneys' fees incurred by Holder in collecting
or attempting to collect any amount under this Note that is not paid when due or
to enforce its rights under this Note. All such costs of collection shall bear
interest, payable on demand, from the date of payment thereof by Holder until
paid in full by Maker at the lesser of (i) the highest rate permitted by law or
(ii) eight (8%) percent.

      Holder shall not by any act of omission or commission be deemed to waive
any of its rights or remedies hereunder unless such waiver is in writing and
signed by an authorized officer of Holder and then only to the extent
specifically set forth therein. A waiver on one occasion shall not be construed
to be a continuing waiver of such right or remedy on any other occasion.

      Every person who is at any time liable for the payment of the debt
evidenced by this Note hereby waives presentment for payment, demand, notice of
nonpayment of this Note, protest and notice of protest, and the right to trial
by jury in any litigation arising out of, relating to, or connected with this
Note or with any instrument given as security herefor, and hereby agrees that
Holder may extend, without affecting their liability hereon, the time for
payment of any part of or the whole of the debt evidenced by this Note, at any
time, at the request of any other person or entity liable for said debt.



                                       2

      This Note is given and accepted as evidence of indebtedness only and not
in payment of or in satisfaction of any indebtedness or obligation.

      The form and essential validity of this Note shall be governed by the laws
of the State of Minnesota applicable to contracts made and to be performed
wholly within Minnesota, without giving effect to conflicts of laws principles.
All lawsuits and judicial proceedings regarding the interpretation of this Note,
any dispute arising hereunder or the collection of any amount due under this
Note shall be brought and heard in the District Court, State of Minnesota,
Fourth Judicial District, and Maker hereby consents to such jurisdiction. If any
portion of this Note is unenforceable, the remainder of this Note shall continue
in full force and effect.

      Time is of the essence with respect to all of Maker's obligations and
agreements under this Note.

      This Note and all the provisions, conditions, promises and covenants
hereof shall inure to the benefit of Holder, its successors and assigns, and
shall be binding upon the Maker, his personal representatives, heirs, successors
and assigns.

      This Note is not an employment contract for a definite term. This Note is
not intended to modify the at-will employment relationship between Maker and
Holder.

      IN WITNESS WHEREOF, the Maker has caused this Note to be signed on his
behalf on the day and year first above written.

                                                 /s/ Richard L. Marcantonio
                                                 -------------------------------
                                                 Richard L. Marcantonio

Subscribed and sworn to
before me this 26 day
of July, 2002.

/s/ Karla M. Gessell
- -------------------------
Notary Public

                                            G&K SERVICES, INC.




                                            By:  /s/ Sally J. Bredehoft
                                            ------------------------------------
                                            Its  Vice President, Human Resources




                                       3

EX-10.2

                                                                    EXHIBIT 10.2

                             STOCK PLEDGE AGREEMENT

      This STOCK PLEDGE AGREEMENT is made and entered into as of the 26th day of
July, 2002, by and between Richard L. Marcantonio, a resident of the State of
Minnesota (the "PLEDGOR") and G&K Services, Inc., a Minnesota corporation
("PLEDGEE").

                                  INTRODUCTION

      A.    PROMISSORY NOTE. Pledgor has issued a Promissory Note in the
original principal amount of Four Hundred Thousand Dollars ($400,000) (the
"PRINCIPAL SUM").

      B.    SECURITY. To induce Pledgee to enter into the transactions described
above, and as security for payments due under the Note, Pledgor has agreed to
pledge shares of Ecolab Inc., a Delaware corporation (the "Shares"), which
Shares have a value of at least 130% of the Principal Sum.

                                    AGREEMENT

      NOW, THEREFORE, in order to secure payment of all amounts due and owing
Pledgee under the Note (collectively, the "OBLIGATIONS"), and in consideration
of the facts recited above (which are a part of this Agreement) and the promises
set forth below, it is agreed:

      1.    PLEDGE. As collateral for the payment of the Obligations, Pledgor
hereby grants a security interest to Pledgee and deposits with Pledgee
(accompanied by a stock power in blank) the Shares (which Shares, as adjusted
from time to time as provided herein, shall hereinafter to be referred to as the
"PLEDGED STOCK"), and Pledgor agrees to perform the obligations set forth
herein. Pledgor hereby appoints Pledgee as attorney-in-fact to arrange for the
transfer of the Pledged Stock on the books of the Company into the name of
Pledgee if an Event of Default (as defined below) occurs as set forth herein.
The Pledged Stock shall be held and disposed of pursuant to the terms of this
Agreement.

      2.    FURTHER ASSURANCES. Pledgor agrees at any time, and from time to
time, to execute such other instruments as Pledgee may reasonably request to
establish, maintain and perfect the security interest in the Pledged Stock
conveyed by this Agreement.

      3.    RIGHTS OF PLEDGOR. Prior to the occurrence of an Event of Default:

            (a)   Pledgor shall have the right to exercise all voting and other
      powers pertaining to the Pledged Stock for all purposes; and

            (b)   All dividends or other distributions with respect to the
      Pledged Stock shall be payable to Pledgor; provided, however, that
      following an Event of Default, all dividends or other distributions with
      respect to the Pledged Stock shall be payable to Pledgee.



                                       1

      4.    REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as
follows:

            (a)   Pledgor will not sell or otherwise dispose of any Pledged
      Stock or any interest therein without the prior written consent of the
      Pledgee; and

            (b)   Throughout the term of this Agreement, Pledgor will keep the
      Pledged Stock free and clear of all security interests, liens, and
      encumbrances, except the security interest granted hereunder.

      5.    ADJUSTMENT. If during the term of this Agreement any share dividend,
reclassification, readjustment or other change is declared or made in the
capital structure of the Company, then all new, substituted, and additional
shares, or other securities issued by reason of original issuance of the Pledged
Stock shall be subject to the terms of this Agreement in the same manner as, and
as a part of, the Pledged Stock.

      6.    RELEASE OF SHARES; TERMINATION. On each Payment Date (as such term
is defined in the Note), Pledgee agrees to release Shares of Pledged Stock to
the extent that the remaining Shares have an aggregate value of 130% of the
Obligations, and Pledgee shall transfer to Pledgor such released Shares and
deliver any assignments separate from certificate for cancellation relating
thereto. Upon full performance of all of the Obligations, Pledgee shall transfer
to Pledgor all of the Pledged Stock and deliver any assignments separate from
certificate for cancellation, and all rights received by Pledgee under this
Agreement shall terminate.

      7.    EVENTS OF DEFAULT. An event of default under this Agreement ("EVENT
OF DEFAULT") shall occur when an Event of Default occurs under the Note, and
remains uncured for thirty (30) days after written notice of such default is
given by Pledgee to Pledgor.

      8.    REMEDIES. Upon the occurrence of an Event of Default and at any time
thereafter, Pledgee may exercise any one or more of the following rights or
remedies:

            (a)   exercise all voting rights, rights to receive dividends and
      other distributions, and other rights as a holder of the Pledged Stock;

            (b)   exercise and enforce any or all rights and remedies available
      upon default to a secured party under the Uniform Commercial Code,
      including (i) the right to offer and sell the Pledged Stock privately to
      purchasers who will agree to take the Pledged Stock for investment and not
      with a view to distribution, and who will agree to the imposition of
      restrictive legends on any certificates representing the Pledged Stock,
      and (ii) the right to arrange for a sale that would otherwise qualify as
      exempt from registration under the Securities Act of 1933, as amended;
      and, if notice to Pledgor of any intended disposition of the Pledged Stock
      or any other intended action is required by law in a particular instance,
      such notice shall be deemed commercially reasonable if given at least
      twenty (20) calendar days prior to the date of intended disposition or
      other action; and

            (c)   exercise or enforce any or all other rights or remedies
      available to Pledgee by law or agreement against the Pledged Stock,
      against Pledgor or against any other person or property.


                                       2

      9.    APPLICATION OF PROCEEDS. The proceeds of any sale of all or a part
of the Pledged Stock shall be applied as follows:

            (a)   First, to the payment of all costs and expenses incurred by
      Pledgee in enforcing its rights under this Agreement, including without
      limitation, the reasonable fees of attorneys or other agents employed by
      Pledgee in connection therewith;

            (b)   Second, to the payment of all of the Obligations then due and
      owing; and

            (c)   Third, any surplus remaining after application of the proceeds
      pursuant to subparagraphs (a) and (b) above shall be paid to Pledgor or
      the successors or assigns thereof.

Pledgor shall remain liable to Pledgee for any deficiency.

      10.   MISCELLANEOUS. The parties agree as follows:

            (a)   No waiver of any of the provisions or conditions of this
      Agreement shall be effective unless such waiver is in writing and signed
      by the party claimed to have given, or consented to, such waiver.

            (b)   No failure on the part of Pledgee to exercise, and no delay on
      the part of Pledgee in exercising, any right, power, or remedy pursuant to
      this Agreement shall operate as a waiver thereof, nor shall any single or
      partial exercise by Pledgee of any right, power, or remedy hereunder
      preclude any other or further exercise thereof or the exercise of any
      other right, power, or remedy. The remedies herein provided are cumulative
      and shall not be exclusive of any other remedies provided by law or
      agreement.

            (c)   The terms and conditions of this Agreement shall inure to the
      benefit of, and be binding upon, the respective legal representatives,
      successors and permitted assigns of the parties; provided, however, that
      neither party may assign this Agreement or its obligations, duties, or
      liabilities hereunder without the express prior written consent of the
      other party.

            (d)   This Agreement is delivered and is intended to be performed in
      the State of Minnesota and should be construed and enforced in accordance
      with the laws of such State, without regard to conflict of law principles.

            (e)   All notices, requests, demands, and other communications
      hereunder shall be in writing, and shall be deemed to have been duly given
      three days after mailed if sent by registered mail, return receipt
      requested, postage prepaid, to the parties at the following addresses (or
      to any other address given to the other party pursuant to the provisions
      of this subsection):

            If to Pledgor:                    If to Pledgee:

            ______________________            G&K Services, Inc.
            ______________________            5995 Opus Parkway, Suite 5500
            ______________________            Minnetonka, MN  55343
            ______________________            Attention: Chief Financial Officer




                                       3

            (f)   This Agreement may be executed in any number of counterparts,
      each of which shall be deemed an original, but all of which together shall
      constitute one and the same instrument.

            (g)   This Agreement may not be amended except by written agreement
      executed by all parties hereto.

            (h)   If any provision or application of this Agreement is held
      unlawful or unenforceable in any respect, such illegality or
      unenforceability shall not affect other provisions or applications which
      can be given effect, and this Agreement shall be construed as if the
      unlawful or unenforceable provision or application had never been
      contained herein or prescribed hereby.

            (i)   All representations and warranties contained in this Agreement
      shall survive the execution, delivery, and performance of this Agreement
      and any other documents or instruments executed or delivered in connection
      with or pursuant to any of the foregoing.

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.

                                       PLEDGOR:



                                       /s/ Richard L. Marcantonio
                                       -----------------------------------------
                                       Richard L. Marcantonio



                                       PLEDGEE:

                                       G&K SERVICES, INC.

                                       By:     /s/ Sally J. Bredehoft
                                       -----------------------------------------
                                       Name:   Sally J. Bredehoft
                                       -----------------------------------------
                                       Its:    Vice President, Human Resources
                                       -----------------------------------------



                                       4

EX-99.1

                                                                    EXHIBIT 99.1

                               G&K SERVICES, INC.

                    CERTIFICATION OF CEO AND CFO PURSUANT TO
                 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of G&K Services, Inc. (the
"Company") for the quarterly period ended September 28, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Thomas R.
Moberly, as Chief Executive Officer of the Company, and Jeffrey L. Wright, as
Chief Financial Officer of the Company, each hereby certifies, that, to the best
of his knowledge:

1.    The Report fully complies with the requirements of Section 13(a) of the
      Securities Exchange Act of 1934; and

2.    The information contained in the Report fairly presents, in all material
      respects, the financial condition of the Company.


Date: November 12, 2002
                                     By:   /s/ Thomas R. Moberly
                                           -------------------------------------
                                           Thomas R. Moberly
                                           Chief Executive Officer
                                           (Principal Executive Officer)

                                     By:   /s/ Jeffrey L. Wright
                                           -------------------------------------
                                           Jeffrey L. Wright
                                           Chief Financial Officer and Secretary
                                           (Principal Financial Officer)