-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L9T05RsX1Eye6LnC1dedszwxYjp0RGzRnBD+bSJEwfVStC0FLaS3+gE+eWGyamcf UpM0AaQowAG8pylPHscx9Q== 0000950134-04-013724.txt : 20040916 0000950134-04-013724.hdr.sgml : 20040916 20040915174805 ACCESSION NUMBER: 0000950134-04-013724 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20040703 FILED AS OF DATE: 20040916 DATE AS OF CHANGE: 20040915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: G&K SERVICES INC CENTRAL INDEX KEY: 0000039648 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410449530 STATE OF INCORPORATION: MN FISCAL YEAR END: 0626 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04063 FILM NUMBER: 041032467 BUSINESS ADDRESS: STREET 1: 5995 OPUS PARKWAY STREET 2: SUITE 500 CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129125500 MAIL ADDRESS: STREET 1: 5995 OPUS PARKWAY STREET 2: SUITE 500 CITY: MINNETONKA STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST LINEN CO DATE OF NAME CHANGE: 19681227 10-K 1 c88121e10vk.htm FORM 10-K e10vk
Table of Contents

(G&K SERVICES LOGO)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[x]
  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended July 3, 2004

     
[ ]
  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 0-4063

G&K SERVICES, INC.

(Exact name of registrant as specified in its charter)
     
MINNESOTA   41-0449530

 
 
 
(State of incorporation)   (I.R.S. Employer Identification No.)

5995 OPUS PARKWAY
MINNETONKA, MINNESOTA 55343


(Address of principal executive offices)

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

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

Title of Each Class                      Name of Each Exchange on which Registered
     
 
  None

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (par value $0.50 per share)
Class B Common Stock (par value $0.50 per share)

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

     Yes  [x]  No  [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes  [x]  No  [ ]

The aggregate market value of the voting stock of registrant held by non-affiliates of the registrant on August 30, 2004, computed by reference to the closing sale price of such shares on such date, was approximately $763,316,762. The aggregate market value of the voting stock of registrant held by non-affiliates of the registrant on December 26, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter), computed by reference to the closing sale price of such shares on such date, was approximately $772,018,614.

On August 30, 2004, there were outstanding 19,437,792 and 1,474,996 shares of the registrant’s Class A and Class B Common Stock, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

     
DOCUMENT
  DOCUMENT IS INCORPORATED

 
 
 
Portions of proxy statement for the annual meeting
   
of stockholders
  Part III

 


G&K Services, Inc.
Form 10-K
For the fiscal year ended July 3, 2004

Table of Contents

         
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 1996 Director Stock Optin Plan, as Amended
 Executive Employment Agreement
 Code of Ethics
 Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Power of Attorney
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906
 Report of Ernst & Young LLP

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PART I

ITEM 1. BUSINESS

G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a market leader in providing branded identity apparel and facility services programs that enhance image and safety in the workplace. We serve a wide variety of North American industrial, service and high-technology companies providing them with rented uniforms and facility services 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 $6.5-$7.0 billion, while the portion of the direct sale market targeted by us is approximately $4.5-$5.0 billion in size.

Through internal growth and acquisitions, we have steadily expanded our operations into additional geographic markets. We operate out of over 130 North American locations serving customers in 46 states and 3 Canadian provinces.

We target our marketing efforts on customers, industries and geographic locations that are expanding and are in need of a quality-oriented corporate identity or facility services program that provides high levels of product quality, consistent customer-centric service levels, multi-channel sales, service, reporting and outsourced program management. Our experience with both existing and potential customers, large and small, confirms that a large segment of the market is willing to pay a premium price to a vendor that can consistently supply these features.

Customers, Products and Services

We serve over 160,000 customers, from Fortune 100 companies to fast-growing small and midsize firms. No single customer represents more than 1.0% of our total revenues. We serve customers in virtually all industries including automotive, warehousing, distribution, transportation, energy, manufacturing, pharmaceutical, semi-conductor, restaurants and hospitality, and many others. Over one million people wear our uniforms every day.

Our full-service business apparel and facility services programs provide rental-lease or purchase options to meet varied customer needs including heavy-industrial, light-manufacturing, service businesses, corporate casual and executive apparel markets. In addition, we offer cleanroom garments and process control services to meet the needs of high-technology customers.

We believe that customers use business apparel programs to meet a variety of critical business needs that enhance image and safety in the workplace, including:

    Company identity and security – uniforms help identify employees working for a particular company or department. Uniformed employees are perceived as trained, competent and dependable.

    Brand awareness – uniforms promote a company’s brand identity and employees serve as “walking billboards.”

    Image – uniforms help companies project a professional image through their employees and frame the perception of credibility, knowledge, trust and a commitment to quality to their customers.

    Employee retention – uniforms enhance worker morale and help build a teamwork attitude in addition to being an employee benefit.

    Worker protection – uniforms help protect workers from difficult environments such as heavy soils, heat, flame or chemicals.

    Product protection – uniforms and facility services help protect products against contamination in the food, pharmaceutical, electronics and health care industries.

We provide our apparel-rental customers with a full range of services and solutions. A consultative approach is used to advise and assist our customers in creating tailored solutions including determining garment application and choosing the appropriate fabrics, styles and colors to meet their branding, identity and safety needs. We have a large stock of new and used garments to provide rapid response as customer needs

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change due to increases, decreases or turnover in their work force. Professional cleaning, finishing, repair and replacement of uniforms in use is a normal part of the rental service. Soiled uniforms are picked up at the customer’s location and returned clean and in good condition on a weekly cycle.

We also believe that for most customers, uniform rental programs provide significant advantages over ownership. Renting eliminates investment in uniforms; offers flexibility in styles, colors and quantities as customer requirements change; assures consistent professional cleaning, finishing, repair and replacement of items in use; and provides freedom from the expense and management time necessary to administer a uniform program.

Our facility services programs provide a wide range of dust control, maintenance and hygiene products and services. They include several floor mat offerings (traction control, logo, message, scraper and anti-fatigue), dust and wet mops, wiping towels, fender covers, selected linen items and several restroom hygiene products. These products support customers’ efforts in maintaining a clean, safe and attractive environment within their facilities.

We also offer direct sale and custom-embroidered logo apparel programs to meet customer identity needs. The direct sale programs can be used for departments and/or customers that require highly customized and branded apparel or for workers who don’t start at the same location each day and need uniform apparel they can care for themselves. It can be a more economical approach for high turnover positions and can be used for employee rewards and recognition or customer and vendor appreciation programs.

Acquisitions

We made several small acquisitions in each of the past three fiscal years. All acquisitions were accounted for using the purchase method. The pro forma effect of these acquisitions, had they been acquired at the beginning of each fiscal year, were not material. The total purchase consideration, including related acquisition costs of these transactions, was $24.9 million, $88.7 million and $69.7 million in fiscal 2004, 2003 and 2002, respectively. The total purchase price exceeded the estimated fair values of assets acquired and liabilities assumed by $19.3 million in fiscal 2004, $63.2 million in fiscal 2003 and $52.1 million in fiscal 2002.

Competition

Customers in the corporate identity apparel and facility services industry choose suppliers primarily based upon the quality, price and breadth of products offered and the comprehensive nature of the services provided. While we rank among the nation’s largest garment rental suppliers, we encounter competition from a number of companies in the geographic areas we serve. Major competitors include publicly held companies such as ARAMARK (a division of ARAMARK Corporation), Cintas Corporation and UniFirst Corporation. We also compete with a multitude of regional and local competitors that vary by market. We believe that we compete effectively in our line of business because of the quality and breadth of our product line, the comprehensive customer service levels we provide and our proven ability as an outsource partner. In addition, our competitors generally compete with us for acquisition candidates, which can reduce the number of acquisition candidates available to us.

Manufacturing and Suppliers

We manufactured approximately one-half of the uniform garments placed into service in fiscal 2004. These garments are manufactured in three Company owned facilities located in the Continental U.S. and Dominican Republic. Various outside vendors are used to supplement our additional rental needs, including garments, floor mats, dust mops, wiping towels, linens and related products. We are not aware of any circumstances that would limit our ability to obtain raw materials to support the manufacturing process or to obtain garments or other rental items to meet our customers’ needs.

Environmental Matters

Our operations are subject to various federal, state and/or local laws regulating the discharge of materials into the environment. This includes discharges into wastewater and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. We generate modest amounts of waste in connection with our laundry operations, specifically detergent wastewater, wastewater sludge, waste oil and other residues. Some of these wastes are classified as hazardous wastes under these laws. We have continued to make significant investments in properly handling and disposing of these wastes.

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We have been identified as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), or similar state laws, at a number of waste disposal sites. Under such laws, PRP’s typically are jointly and severally liable for any investigation and remediation costs incurred with respect to such sites. Therefore, there can be no assurance that we will not have to contribute material amounts for future remediation that could be greater than the share of waste contributed by us would otherwise indicate. Additionally, environmental laws may impose liability for cost of removal or remediation of certain hazardous wastes located on or in or emanating from owned or leased real estate, whether or not we knew of or were responsible for the presence of such wastes. While we take appropriate steps when acquiring or leasing new properties, there can be no assurance that this risk has been eliminated.

We have been placed on notice by the owners of a Wayzata, Minnesota shopping center regarding the alleged presence of solvents in the ground water in the vicinity of the shopping center, where certain affiliates of ours formerly operated a dry cleaning establishment in the shopping center. At this time, no demand has been made and no action has been commenced against us. The owners of the shopping center have informed us that they are pursuing cleanup through state funding mechanisms. Since little information is available at this time, we are unable to predict what, if any, liability we may have in this matter.

Although any ultimate liability arising from environmental related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, could be material to our results of operation or financial position, the likelihood of such occurrence is considered remote. Based on information currently available and our best assessment of the ultimate amount and timing of environmental-related events, we believe that the cost of these environmental-related matters are not reasonably likely to have a material adverse effect on our results of operations or financial position.

Employees

Our U.S. operations had a total of 7,235 employees as of July 3, 2004, consisting of 4,078 production employees and 3,157 sales, office, route and management personnel. Unions represent approximately 14.5% of our U.S. employees. Management believes its domestic employee relations are satisfactory.

Our Canadian operations had a total of 1,030 employees as of July 3, 2004, consisting of 541 production employees and 489 sales, office, route and management personnel. Unions represent approximately 69.4% of our Canadian employees. Management believes Canadian employee relations are satisfactory.

Foreign and Domestic Operations

Financial information relating to foreign and domestic operations is set forth in Note 10 of our consolidated financial statements included in Item 8 of this Form 10-K.

Additional Information

We own a portfolio of registered trademarks, trade names and licenses, and certain U.S. and foreign process and manufacturing patents relating to our business as we currently conduct it. These proprietary properties, in the aggregate, constitute a valuable asset. Among these are the trademarks and trade names G&K Services, G&K TeamWear® and G&K First Step® Facility Services brands, various logos and marketing themes and collateral. We do not believe, however, that our business is dependent upon any single proprietary property or any particular group of proprietary properties. We do not consider our business to be seasonal to any extent or subject to any unusual working capital requirements.

Available Information

We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. These reports are available on our website at http://www.gkservices.com. In addition, you may request a copy of these filings, excluding exhibits, by contacting our Investor Relations group at (952) 912-5500 or at G&K Services, Inc., 5995 Opus Parkway, Minnetonka, Minnesota 55343. Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.

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ITEM 2. PROPERTIES

We occupy 155 facilities located in the United States and Canada. These facilities include our processing, branch, garment manufacturing, distribution and administrative support locations. We own approximately 80.0% of our processing facilities, each of which average over 43,000 square feet in size. We clean and supply rental items principally from 57 industrial garment, cleanroom garment, dust control and linen supply plants located in 48 cities in the United States and 6 cities in Canada.

ITEM 3. LEGAL PROCEEDINGS

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 but are not limited to those items set forth in Item 1. Business – Environmental Matters and lawsuits that challenge the practice of charging for certain environmental services on invoices. None of these legal actions are expected to have a material adverse effect on our results of operations or financial position.

We are also involved in a lawsuit in California that alleges G&K violated certain state wage and hour laws applicable to its route sales representatives. Subsequent to July 3, 2004, we reached a tentative settlement of this case for a payment of approximately $1.25 million, subject to court approval. The settlement resulted in the recording of a one-time charge of $1.25 million in the fourth quarter of fiscal 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fourth quarter of fiscal 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

Our Class A Common Stock is quoted on the Nasdaq National Market under the symbol “GKSRA”. Our Class B Common Stock is not registered and no active trading market exists for the Class B Common Stock. The following table sets forth the high and low reported sales prices for the Class A Common Stock as quoted on the Nasdaq National Market for the periods indicated.

                 
    High
  Low
Fiscal 2004
               
1st Quarter
  $ 36.120     $ 28.260  
2nd Quarter
    37.250       30.280  
3rd Quarter
    39.750       34.510  
4th Quarter
    40.960       35.080  
 
   
 
     
 
 
Fiscal 2003
               
1st Quarter
  $ 36.000     $ 27.000  
2nd Quarter
    37.000       29.280  
3rd Quarter
    36.300       21.570  
4th Quarter
    32.200       23.750  
 
   
 
     
 
 

As of August 30, 2004, we had approximately 549 registered holders of record of our common stock.

We have declared cash dividends of $0.0175 per share in each of the quarters for the fiscal years ended July 3, 2004 and June 28, 2003. Our debt agreements contain various restrictive covenants, which, among other things, limit the payment of cash dividends we declare during any fiscal year.

The following table sets forth certain information as of July 3, 2004 with respect to equity compensation plans under which securities are authorized for issuance:

                         
                    Number of
                    Securities
                    Remaining Available
                    for Future Issuance
    Number of           Under Equity
    Securities to be           Compensation Plans
    Issued Upon   Weighted-Average   (Excluding
    Exercise of   Exercise Price of   Securities
    Outstanding Options   Outstanding Options   Reflected in Column
Plan category
  (A)
  (B)
  (A))
Equity compensation plans approved by security holders:
                       
Employee Plans (1)
    1,179,945     $ 33.23       1,546,497  
1996 Directors’ stock option plan
    52,000       32.14       40,000  
 
   
 
     
 
     
 
 
Total:
    1,231,945     $ 33.18       1,586,497  
 
Equity compensation plans not approved by stockholders:
                       
None
                 
 
   
 
     
 
     
 
 
Total
    1,231,945     $ 33.18       1,586,497  
 
   
 
     
 
     
 
 

(1)   Includes our 1989 Stock Option and Compensation Plan and 1998 Stock Option and Compensation Plan.

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The following table includes information about our share repurchases for the year ended July 3, 2004; all transactions took place during the 3rd quarter of fiscal 2004.

                                 
                            Maximum Number (or
                    Total Number of   Approximate Dollar
                    Shares (or Units)   Value) of Shares
                    Purchased as Part   (or Units) that May
    Total Number of           of Publicly   Yet be Purchased
    Shares (or Units)   Average Price Paid   Announced Plans or   Under the Plans or
Period
  Purchased (1)
  per Share (or Unit)
  Programs
  Programs
Month #1
                               
(Fiscal month ending February 5, 2004)
    4,212     $ 0.50              
 
   
 
     
 
     
 
     
 
 
Month #3
                               
(Fiscal month ending April 2, 2004)
    4,574     $ 0.50              
 
   
 
     
 
     
 
     
 
 

(1) All repurchased shares were initially issued under the Employee Plans as restricted stock grants subject to forfeiture upon termination of employment. All repurchases were made upon forfeiture of shares by the recipient of such restricted stock grants. Pursuant to the Restricted Stock Agreements governing such grants, the repurchase price for all shares was $0.50, which represents the per share amount paid by the restricted stock grant recipient on the date of grant.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data. All amounts are in thousands, except per share data.

                                         
    2004
  2003
  2002
  2001
  2000
Revenues
  $ 733,447     $ 705,588     $ 677,591     $ 656,381     $ 625,855  
Net Income
    35,384       33,689       38,267       33,783       37,812  
Per Share Data:
                                       
Basic earnings per share
    1.71       1.64       1.87       1.65       1.85  
Diluted earnings per share
    1.69       1.63       1.85       1.65       1.85  
Dividends per share
    0.07       0.07       0.07       0.07       0.07  
Total Assets
    802,747       778,806       681,699       619,963       594,952  
Long-Term Debt
    184,305       236,731       214,977       148,951       167,345  
Stockholders’ Equity
    425,423       380,269       340,158       301,267       271,522  

See Note 1 of our consolidated financial statements included in Item 8 of this Form 10-K for an explanation of the method employed to determine the number of shares used to compute per share amounts. We utilize a 52-53 week fiscal year ending on the Saturday nearest June 30. Fiscal 2004 and 2000 were 53-week years.

The fiscal 2002 results include the impact of the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” under which goodwill and intangible assets with indefinite lives are no longer amortized. See Note 3 of the consolidated financial statements included in Item 8 of this Form 10-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto which are included herein. We utilize a 52-53 week fiscal year ending on the Saturday nearest June 30. The fiscal year ended July 3, 2004 was a 53-week year with the extra week reported in the fourth quarter.

Overview

G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a market leader in providing branded identity apparel and facility services programs that enhance image and safety in the workplace. We serve a wide variety of North American industrial, service and high-technology companies providing them with rented uniforms and facility services 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 $6.5-$7.0 billion, while the portion of the direct sale market targeted by us is approximately $4.5-$5.0 billion in size.

In fiscal 2004, revenue grew to $733.4 million, up 3.9% over the prior year. Excluding the impact of the 53rd week, full year revenues were up 2.0%. Revenue growth continued to be negatively impacted by weak economic conditions and declining employment levels within our existing customer base. These negative impacts were more than offset by several small acquisitions completed over the past two fiscal years.

Our primary goal in fiscal 2004 was to restore earnings momentum in the business. Fiscal 2004 net income grew by 5.0% to $35.4 million. This improvement in earnings was the result of the attention we placed on internal operating initiatives such as plant consolidations, labor efficiency, merchandise cost controls and general and administrative cost reductions. In addition, we placed a large emphasis on working capital management during the fiscal year, resulting in significant levels of cash flows from operations and reductions in interest expense. These improvements, along with the impact of the extra week of operations, were partially offset by higher energy and employee benefit costs, lost margin from lower employment levels within our customer base, expenses associated with a transfer of production within our manufacturing facilities and costs accrued in connection with a tentative settlement of a wage and hour dispute.

We made several small acquisitions in each of the past three fiscal years. All acquisitions were accounted for using the purchase method. The pro forma effect of these acquisitions, had they been acquired at the beginning of each fiscal year, were not material. The total purchase consideration, including related acquisition costs of these transactions, was $24.9 million, $88.7 million and $69.7 million in fiscal 2004, 2003 and 2002, respectively. The total purchase price exceeded the estimated fair values of assets acquired and liabilities assumed by $19.3 million in fiscal 2004, $63.2 million in fiscal 2003 and $52.1 million in fiscal 2002.

Critical Accounting Policies

The discussion of the financial condition and results of operations are based upon the consolidated 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 could potentially result in materially different results under different assumptions and conditions. See Note 1 to the consolidated financial statements for additional discussion of the application of these and other accounting policies.

Revenue Recognition and Allowance for Doubtful Accounts

Our rental operations business is largely based on written service agreements whereby we agree to collect, launder and deliver uniforms and other related products. The service agreements provide for weekly billing upon completion of the laundering process and delivery to the customer. Accordingly, we recognize revenue from rental operations in the period in which the services are provided. Revenue from rental operations also includes billings to customers for lost or abused merchandise. Direct sale revenue is recognized in the period in which the product is shipped.

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Estimates are used in determining the collectibility 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. While we have been consistent in applying our judgments and in making our estimates over the past three fiscal years, 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, which results in a matching of the cost of the merchandise with the weekly rental revenue generated by merchandise. Estimated lives of rental merchandise in service range from nine months to three years. In establishing estimated lives for merchandise in service, management considers 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 Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“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. Our evaluation considers changes in the operating environment, competitive information, market trends, operating performance and cash flow modeling. Management completes its annual impairment test in the fourth quarter of each fiscal year and there have been no impairments of goodwill or definite-lived intangible assets in fiscal 2004, 2003 or 2002. 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 2004, 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 liability 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 an actuarial analysis provided by a third party. During fiscal 2002, we changed certain assumptions utilized in evaluating our workers’ compensation self-insurance liability and began to apply a discounting factor to estimated future payments. The impact of these changes was not material to our consolidated balance sheets or statements of operations for any period presented. Changes in the cost of medical care, our ability to settle claims and the estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

Income Taxes

In the normal course of business, we are subject to audits from federal, state, Canadian provincial and other tax authorities regarding various tax liabilities. These audits may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The amount ultimately paid upon resolution of issues raised may differ from the amount accrued. We believe that taxes accrued on our consolidated balance sheets fairly represent the amount of future tax liability due.

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We utilize income tax planning to reduce our overall cost of income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. We believe that the provision for liabilities resulting from the implementation of income tax planning is appropriate. To date, we have not experienced an examination by governmental revenue authorities that would lead management to believe that our past provisions for exposures related to income tax planning are not appropriate.

Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. We record valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the asset may not be realized. As such, we have established a valuation allowance for all foreign tax credit carryforwards due to the uncertainty of the use of the tax benefit in future periods. We evaluate our deferred tax assets and liabilities on a periodic basis. We believe that we have adequately provided for our future tax consequences based upon current facts, circumstances and tax law.

Results of Operations

The percentage relationships to revenues of certain income and expense items for the three fiscal years ended July 3, 2004, June 28, 2003 and June 29, 2002, and the percentage changes in these income and expense items between years are presented in the following table:

                                         
    Percentage of Revenues   Percentage Change
    Years Ended
  Between Years
                            FY 2004 vs.   FY 2003 vs.
    Fiscal 2004
  Fiscal 2003
  Fiscal 2002
  FY 2003
  FY 2002
Revenues:
                                       
Rental operations
    96.6 %     96.6 %     96.8 %     4.0 %     3.9 %
Direct sales
    3.4       3.4       3.2       3.5       11.3  
 
   
 
     
 
     
 
     
 
     
 
 
Total revenues
    100.0       100.0       100.0       3.9       4.1  
 
Operating expenses:
                                       
Cost of rental operations
    63.2       62.6       61.4       5.1       5.8  
Cost of direct sales
    76.4       75.1       73.0       5.4       14.5  
 
   
 
     
 
     
 
     
 
     
 
 
Total cost of sales
    63.7       63.0       61.8       5.1       6.1  
 
Selling and administrative
    21.5       21.9       21.6       2.3       5.6  
Depreciation
    4.3       4.3       4.4       3.3       2.7  
Amortization of intangibles
    1.1       1.0       0.9       8.8       20.3  
 
   
 
     
 
     
 
     
 
     
 
 
Income from operations
    9.4       9.8       11.3       0.2       (10.3 )
 
Interest expense
    1.6       2.0       2.0       (12.6 )     0.6  
 
   
 
     
 
     
 
     
 
     
 
 
Income before income taxes
    7.8       7.8       9.3       3.3       (12.7 )
 
Provision for income taxes
    3.0       3.0       3.7       0.7       (13.8 )
 
   
 
     
 
     
 
     
 
     
 
 
Net income
    4.8 %     4.8 %     5.6 %     5.0 %     (12.0 )%
 
   
 
     
 
     
 
     
 
     
 
 

Fiscal 2004 Compared to Fiscal 2003

Fiscal Years. We operate on a fiscal year ending on the Saturday closest to June 30. As a result, periodically we will have a fiscal year with 53 weeks of results. Fiscal 2004 was a 53-week year. We estimate that the extra week of operation generated incremental earnings of approximately $0.07 – $0.08 per share.

Revenues. Total revenues in fiscal 2004 rose 3.9% to $733.4 million from $705.6 million in fiscal 2003. Excluding the extra week, revenues were up 2.0% over fiscal 2003. Rental revenue was up $27.0 million in fiscal 2004, a 4.0% increase over fiscal 2003. Rental revenue increased 2.1% when excluding the impact of the extra week recorded in the current year. The organic industrial rental growth rate, which is calculated

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using industrial rental revenue adjusted for foreign currency exchange rate differences, revenue from newly acquired business and an extra week recorded in the current year compared to prior year results, was approximately negative 2.0%. We believe that the organic industrial rental growth rate better reflects the growth of our existing business and is therefore useful in analyzing our financial condition and results of operations. Organic industrial rental revenue continues to be negatively impacted by lost uniform wearers due to reduced employment levels within our existing customer base.

Direct sale revenue was $24.7 million in fiscal 2004, a 3.5% increase over $23.9 million in fiscal 2003. The increase in direct sale revenue was driven by a focused effort to provide direct sale garments to our existing rental customers.

Cost of Rental and Direct Sale. Cost of rental operations increased 5.1% to $448.1 million in fiscal 2004 from $426.6 million in fiscal 2003. Gross margin from rental sales decreased to 36.8% in fiscal 2004 from 37.4% in the prior year. The decrease in rental gross margins was due to employee benefit costs (including pension), higher energy costs and lost margin from lower employment levels within our existing customer base.

Cost of direct sales increased to $18.9 million in fiscal 2004 from $17.9 million in fiscal 2003. Gross margin from direct sales decreased in fiscal 2004 to 23.6% from 24.9% in fiscal 2003. The decrease in gross margin was due primarily to product mix and merchandise cost increases.

Selling and Administrative. Selling and administrative expenses increased 2.3% to $158.0 million in fiscal 2004 from $154.5 million in fiscal 2003. As a percentage of total revenues, selling and administrative expenses decreased to 21.5% in fiscal 2004 from 21.9% in fiscal 2003. The decrease as a percent of revenue was due to reduced expenses related to uncollectible accounts receivable and reduced selling expenses, which were partially offset by increased employee benefit costs. Also offsetting this improvement was the tentative settlement of a wage and hour dispute in California, which represented one-time costs of $1.25 million in the current year.

Depreciation. Depreciation expense increased 3.3% to $31.4 million in fiscal 2004 from $30.4 million in fiscal 2003. As a percentage of total revenues, depreciation expense remained constant at 4.3% in both fiscal 2004 and fiscal 2003. Capital expenditures for fiscal 2004, excluding acquisition of businesses, were $17.3 million compared to $31.4 million in fiscal 2003 as we continued to prudently manage our strategic investments.

Amortization. Amortization expense increased to $7.9 million in fiscal 2004 from $7.3 million in fiscal 2003. As a percent of total revenues, amortization expense increased to 1.1% in fiscal 2004 compared to 1.0% in fiscal 2003.

Interest Expense. Interest expense was $12.0 million in fiscal 2004 as compared to $13.7 million in fiscal 2003. The decrease was due primarily to lower debt levels associated with significant levels of cash flow.

Provision for Income Taxes. Our effective tax rate for fiscal 2004 decreased to 38.0% from 39.0% in fiscal 2003 largely due to decreases in Canadian statutory income tax rates.

Fiscal 2003 Compared to Fiscal 2002

Revenues. Total revenues in fiscal 2003 rose 4.1% to $705.6 million from $677.6 million in fiscal 2002. Rental revenue rose $25.6 million in fiscal 2003, a 3.9% increase over fiscal 2002. The organic industrial rental growth rate, which is calculated using industrial rental revenue adjusted for foreign currency exchange rate differences and revenue from newly acquired business compared to prior year results, was approximately negative 2.5%. Rental revenue continues to be negatively impacted by lost uniform wearers due to reduced employment levels within our existing customer base.

Direct sale revenue was $23.9 million in fiscal 2003, an 11.3% increase over $21.5 million in fiscal 2002. Direct sale revenue increased as a result of initiatives to penetrate direct sale opportunities with existing customers such as our annual winter outerwear promotion.

Cost of Rental and Direct Sale. Cost of rental operations increased 5.8% to $426.6 million in fiscal 2003 from $403.1 million in fiscal 2002. Gross margin from rental sales decreased to 37.4% in fiscal 2003 from 38.6% in the prior year. Both rental and direct sale margins were impacted during the year by the closing of a Canadian manufacturing facility. Total one-time expenses related to closing the facility reduced the overall combined margin by approximately $1.0 million and had minimal impact on future results of operations. Rental gross margins were also impacted by increasing energy and employee benefit costs as well as continued lost margin from lower employment levels within our existing customer base.

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Cost of direct sales increased to $17.9 million in fiscal 2003 from $15.7 million in fiscal 2002. Gross margin from direct sales decreased in fiscal 2003 to 24.9% from 27.0% in fiscal 2002. The decrease in gross margin was due primarily to product mix and pricing pressures, partially offset by increased volume in conjunction with the successful winter outerwear promotion in the second quarter of fiscal 2003.

Selling and Administrative. Selling and administrative expenses increased 5.6% to $154.5 million in fiscal 2003 from $146.3 million in fiscal 2002. As a percentage of total revenues, selling and administrative expenses increased to 21.9% in fiscal 2003 from 21.6% in fiscal 2002. During fiscal 2003 we took actions to reduce certain selling and administrative costs, including the closing of the Canadian manufacturing facility, and incurred severance and other employee-related costs. These actions had an impact of increasing selling and administrative expenses by $0.9 million and did not have a significant impact on results of operations in subsequent periods. Selling and administrative expenses also increased due to higher expenses related to uncollectible accounts receivable and increasing property and casualty insurance costs.

Depreciation. Depreciation expense increased 2.7% to $30.4 million in fiscal 2003 from $29.6 million in fiscal 2002. As a percentage of total revenues, depreciation expense decreased to 4.3% in fiscal 2003 compared to 4.4% in fiscal 2002. Capital expenditures for fiscal 2003, excluding acquisition of businesses, was $31.4 million compared to $29.2 million in fiscal 2002.

Amortization. Amortization expense increased to $7.3 million in fiscal 2003 from $6.1 million in fiscal 2002. As a percent of total revenues, amortization expense increased to 1.0% in fiscal 2003 compared to 0.9% in fiscal 2002.

Interest Expense. Interest expense was $13.7 million in fiscal 2003 as compared to $13.6 million in fiscal 2002. The increase in interest expense was primarily due to higher debt levels in connection with our acquisition activities throughout fiscal 2003, partially offset by lower effective interest rates.

Provision for Income Taxes. Our effective tax rate for fiscal 2003 decreased to 39.0% from 39.5% in fiscal 2002 largely due 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 our credit facilities. Primary uses of cash are interest payments on indebtedness, capital expenditures, acquisitions and general corporate purposes.

Operating Activities. Net cash provided by operating activities was $96.3 million in fiscal 2004, $96.9 million in fiscal 2003 and $79.7 million in fiscal 2002. Solid earnings along with effective working capital management have been a large contributor to the high levels of operating cash flow over each of the past three fiscal years. We have paid particular attention to management of new and in-service inventories, a continued focus on timely collection of accounts receivable and enhancing payment terms related to trade and accrued payables.

Working capital at July 3, 2004 was $79.0 million, a $6.1 million decrease from $85.1 million at June 28, 2003. This decrease is due to an increase in the current maturities of long-term debt associated with scheduled debt payments and an increase in income tax payable due to timing of payments.

Investing Activities. Net cash used for investing activities was $43.9 million in fiscal 2004, $121.5 million in fiscal 2003 and $100.1 million in fiscal 2002. In fiscal 2004, 2003 and 2002 cash was largely used for acquisitions and property, plant and equipment additions.

Financing Activities. Financing activities used cash of $37.3 million in fiscal 2004, provided cash of $26.0 million in fiscal 2003 and $15.2 million in fiscal 2002. Cash used in fiscal 2004 was primarily related to the repayment of long-term debt. Cash provided in both fiscal 2003 and 2002 was from debt proceeds used primarily for acquisitions of businesses. We paid dividends of $1.5 million in both fiscal 2004 and fiscal 2003 and $1.4 million in fiscal 2002.

We maintain a $325.0 million term loan and revolving credit facility expiring July 2, 2007. The facility provides for a $75.0 million term loan and a $250.0 million revolving credit facility. As of July 3, 2004, borrowings outstanding under the term loan were $56.3 million and under the revolving credit facility were $99.6 million at rates ranging from 2.40% to 2.86%. Borrowings under this facility are unsecured. The unused portion of the revolver may be used for general corporate purposes, acquisitions, working capital needs and to provide up to $30.0 million in letters of credit. As of July 3, 2004, letters of credit outstanding against the revolver were $17.0 million.

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We have a $50.0 million, 8.4% private debt placement with certain institutional investors. The 10-year notes have a seven-year average life with a final maturity on July 20, 2010. Beginning on July 20, 2004, and annually thereafter to maturity, we will repay $7.1 million of the principal amount at par. We used the net proceeds from the sale of the notes to reduce other indebtedness and for general corporate purposes.

The credit facilities and the fixed rate notes contain various restrictive covenants that among other matters require us to maintain a minimum fixed charge coverage ratio, minimum stockholders’ equity and a maximum leverage ratio, all as defined. These debt arrangements also provide for certain limits related to additional indebtedness, investments and dividends. At July 3, 2004, we were in compliance with all debt covenants and only a material adverse change in our financial performance and condition could result in a potential event of default. In the unlikely event that an event of default would be imminent, management believes that we would be able to successfully negotiate amended covenants or obtain waivers; however, certain financial concessions might be required. Our results of operations and financial condition could be adversely affected if amended covenants or waivers in acceptable terms could not be successfully negotiated.

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 July 3, 2004 for the next five fiscal years and thereafter (in thousands):

                                                         
                                            2010 and    
                                            There-    
    2005
  2006
  2007
  2008
  2009
  after
  Total
Variable rate term loan and revolving credit facility
  $ 15,000     $ 18,750     $ 22,500     $ 99,600     $     $     $ 155,850  
Fixed rate term loan
    7,143       7,143       7,143       7,143       7,143       14,285       50,000  
Other debt arrangements, including capital leases
    1,875       531       67                         2,473  
Operating leases
    13,619       11,296       9,083       6,992       4,461       4,467       49,918  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total contractual cash obligations
  $ 37,637     $ 37,720     $ 38,793     $ 113,735     $ 11,604     $ 18,752     $ 258,241  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 

Also, at July 3, 2004, we had stand-by letters of credit totaling $17.0 million issued and outstanding, primarily in connection with our property and casualty insurance programs. No amounts have been drawn upon these letters of credit.

At July 3, 2004, we had available cash on hand of $26.9 million and approximately $130.0 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 2005 and to significantly reduce the amounts outstanding under the revolving credit facility; 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 2005 will be approximately $25.0 million to $30.0 million.

The amount of cash flow generated from operations is subject to a number of risks and uncertainties. In fiscal 2005, 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 our earnings and cash flow from operations, existing credit facilities and our ability to obtain additional debt or equity capital, if necessary, will be adequate to finance acquisition opportunities.

Pension Obligations

We account for our defined benefit pension plan using SFAS No. 87 “Employer’s Accounting for Pensions” (“SFAS 87”). Under SFAS 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. Pension expense calculated under SFAS 87 is generally independent of funding decisions or requirements. We recognized expense for our defined benefit pension plan of $6.1 million, $3.1 million and $2.0 million in fiscal 2004, 2003 and 2002, respectively. At July 3, 2004, the fair value of our pension plan assets totaled $26.7 million. We anticipate making a cash contribution of approximately $1.3 million in fiscal 2005.

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The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions. Pension expense increases as the expected rate of return on pension plan assets decreases. At July 3, 2004, we estimate that the pension plan assets will generate a long-term rate of return of 8.0%. This rate is consistent with the assumed rate used at both June 28, 2003 and June 29, 2002 and was developed by evaluating input from our actuary as well as long-term inflation assumptions. The expected long-term rate of return on plan assets at July 3, 2004 is based on an allocation of U.S. equities and U.S. fixed income securities. Decreasing the expected long-term rate of return by 0.5% (from 8.0% to 7.5%) would increase our estimated 2005 pension expense by approximately $0.1 million. Pension liability and future pension expense increase as the discount rate is reduced. We discounted future pension obligations using a rate of 6.25% at July 3, 2004, 6.0% at June 28, 2003 and 7.5% at June 29, 2002. The discount rate is determined based on the current rates earned on high quality long-term bonds. Decreasing the discount rate by 0.5% (from 6.25% to 5.75%) would increase our accumulated benefit obligation at July 3, 2004 by approximately $3.8 million and increase the estimated fiscal 2005 pension expense by approximately $0.9 million.

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our pension plan will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

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, customer agreements that generally provide for price increases consistent with the rate of inflation or 5.0%, whichever is greater, and continued focus on improvements of operational productivity.

Significant increases in energy costs, specifically natural gas and gasoline, can materially affect our results of operations and financial condition. Currently, energy costs represent between 3-4% of our total revenue.

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. None of these legal actions are expected to have a material adverse effect on our results of operations or financial position.

We are also involved in a lawsuit in California that alleges G&K violated certain state wage and hour laws applicable to its route sales representatives. Subsequent to July 3, 2004, we reached a tentative settlement of this case for a payment of approximately $1.25 million, subject to court approval. The settlement resulted in the recording of a one-time charge of $1.25 million in the fourth quarter of fiscal 2004.

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 132, “Employer’s Disclosures About Pensions and Other Postretirement Benefits” (“SFAS 132”). The FASB’s revision of Statement No. 132 requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. We adopted the disclosure requirements of SFAS 132 (revised) beginning with the third quarter ended March 27, 2004.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the financial reporting guidance associated with the consolidation of another entity. In December 2003, the FASB revised and superceded FIN 46 with the issuance of FIN 46R in order to address certain implementation issues. We have adopted FIN 46R effective March 31, 2004. The impact of adopting FIN 46R was not material.

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Cautionary Statement 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 and employment levels; 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 branded identity apparel and facility services industry; and the availability of capital to finance planned growth.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risks. Market risk is the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We do not enter into derivative or other financial instruments for speculative purposes.

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 one percentage point increase in interest rates under these borrowings would have increased our interest expense for fiscal 2004 by approximately $0.9 million. This estimated exposure considers the mitigating effects of interest rate swap agreements outstanding at July 3, 2004 on the change in the cost of variable rate debt.

The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. The fair values were estimated by discounting the projected cash flows using the current rate applicable to similar transactions. For debt obligations, the following table presents principal cash flow and related weighted average interest rates by expected maturity dates by fiscal year.

                                 
    Fixed Rate
  Variable Rate
Maturity Date
  Amount
  Rate
  Amount
  Rate
2005
  $ 7,143       8.40 %   $ 15,000       3.54 %
2006
    7,143       8.40       18,750       4.04  
2007
    7,143       8.40       22,500       4.35  
2008
    7,143       8.40       99,600       4.61  
2009
    7,143       8.40              
Thereafter
    14,285       8.40              
 
   
 
     
 
     
 
     
 
 
Total
  $ 50,000       8.40 %   $ 155,850       4.40 %
 
   
 
     
 
     
 
     
 
 
Fair Value
  $ 56,745           $ 155,850        
 
   
 
     
 
     
 
     
 
 

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For interest rate swaps, the following table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates by fiscal year. Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

                         
    Notional Principal   Average Interest   Average Interest
Maturity Date
  Amount
  Pay Rate
  Receive Rate
2005
  $ 25,000       2.92 %     2.29 %
2006
    30,000       2.84       2.73  
Thereafter
    10,000       2.81       2.88  
 
   
 
     
 
     
 
 
Total
  $ 65,000       2.85 %     2.65 %
 
   
 
     
 
     
 
 
Fair Value
  $ 65,177              
 
   
 
     
 
     
 
 

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 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 fiscal 2004. Notional amounts outstanding under foreign currency contracts at July 3, 2004 were $0.4 million, all of which will mature during fiscal 2005. Notional amounts outstanding under foreign currency contracts at June 28, 2003 were $2.7 million, all of which matured during fiscal 2004. Notional amounts outstanding under foreign currency contracts at June 29, 2002 were $4.8 million, all of which matured during fiscal 2003. Foreign currency contracts were recorded at fair value as of July 3, 2004.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Consolidated Financial Statements and Notes beginning on page F-1.

Following is a summary of the results of operations for each of the quarters within fiscal years ended July 3, 2004 and June 28, 2003. All amounts are in thousands, except per share data.

QUARTERLY FINANCIAL DATA

G&K Services, Inc. and Subsidiaries
                                 
(Unaudited)
  First
  Second
  Third
  Fourth
2004
                               
Revenues
  $ 178,603     $ 182,539     $ 179,025     $ 193,280  
Gross Profit
    64,457       65,694       64,582       71,684  
Income from Operations
    16,234       17,130       17,364       18,309  
Net Income
    8,109       8,802       9,014       9,459  
Basic Earnings per Share
    0.39       0.43       0.43       0.45  
Diluted Earnings per Share
    0.39       0.42       0.43       0.45  
Dividends per Share
    0.0175       0.0175       0.0175       0.0175  
 
   
 
     
 
     
 
     
 
 
2003
                               
Revenues
  $ 169,798     $ 179,653     $ 176,520     $ 179,617  
Gross Profit
    64,827       68,136       63,430       64,692  
Income from Operations
    19,153       19,855       13,849       16,062  
Net Income
    9,694       9,958       6,370       7,667  
Basic Earnings per Share
    0.47       0.48       0.31       0.37  
Diluted Earnings per Share
    0.47       0.48       0.31       0.37  
Dividends per Share
    0.0175       0.0175       0.0175       0.0175  
 
   
 
     
 
     
 
     
 
 

We utilize a 52-53 week fiscal year ending on the Saturday nearest June 30. The fiscal year ended July 3, 2004 was 53-week year with the extra week reported in the fourth quarter.

18


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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

              ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2004. Based on that evaluation, the president and chief executive officer, and the chief financial officer concluded that our disclosure controls and procedures are effective in recording, processing, summarizing and timely reporting information required to be disclosed in our reports to the Securities and Exchange Commission.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2004 that have materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

19


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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to information with respect to the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Reference is made to information with respect to the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reference is made to information with respect to the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to information with respect to the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Reference is made to information with respect to the Company’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.

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PART IV, ITEM 15

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   The following documents are filed as a part of this report:

  (1)   Financial Statements
The following consolidated financial statements of G&K are part of this report and are submitted in a separate section of this report.

     
Consolidated Statements of Operations
  F-2
Consolidated Balance Sheets
  F-3
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
  F-4
Consolidated Statements of Cash Flows
  F-5
Notes to Consolidated Financial Statements
  F-6
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
  F-20

  (2)   Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted as not required or not applicable, or the information has been included elsewhere by reference in the financial statements and related notes, except for Schedule II, which is included as Exhibit 99.1 to this Form 10-K, as filed with the SEC.
 
  (3)   Exhibits
The following exhibits, as required by Item 601 of Regulation S-K are filed as a part of this report:
 
      3(a) Articles of Amendment and Restatement of the Registrant, as filed with the Secretary of State of Minnesota (incorporated herein by reference to Exhibit 3(i) to the Registrant’s Form 10-Q filed November 13, 2001).
 
      3(b) Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3 (ii) to the Registrant’s Form 10-Q filed November 13, 2001).
 
      4(a) Rights Agreement, dated as of September 17, 2001, by and between G&K Services, Inc. and Wells Fargo Bank Minnesota, National Association (incorporated by reference to the Registrant’s Form 8-K filing dated September 19, 2001).
 
      10(a) Stockholder Agreement by and among the Registrant, Richard Fink, William Hope, Stephen LaBelle, Daniel Nielsen, Phillip Oberg and Robert Stotts, dated June 14, 1985 (incorporated herein by reference to the Registrant’s Schedule 13E-4 filing dated May 13, 1985).
 
      10(b) 1989 Stock Option and Compensation Plan, as amended on October 30, 1997. **
 
      10(c) 1996 Director Stock Option Plan, as amended March 10, 2004. *, **
 
      10(d) Asset Purchase Agreement, dated as of May 30, 1997, by and among National Service Industries, Inc., a Delaware corporation; National Service Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a California corporation and G&K Services, Inc. (incorporated herein by reference to the Registrant’s Form 8-K filing dated July 14, 1997).
 
      10(e) Side Letter dated as of July 14, 1997, by and among National Service Industries, Inc., a Delaware corporation; National Service Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a California corporation and G&K Services, Inc. (incorporated herein by reference to the Registrant’s Form 8-K filing dated July 14, 1997).

21


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      10(f) Asset Purchase Agreement, dated as of April 25, 1998, by and among G&K Services Linen Co., G&K Services Co., G&K Services, Inc., and TTSI Services Acquisition Sub, Inc. and Tartan Textile Services, Inc. (incorporated herein by reference to the Registrant’s Form 8-K filing dated May 14, 1998).
 
      10(g) 1998 Stock Option and Compensation Plan, as amended November 7, 2002. **
 
      10(h) Form of Change of Control Agreement between Registrant and each of Robert G. Wood and Jeffrey L. Wright, dated February 24, 1999 (incorporated herein by reference to the Registrant’s Form 10-Q filed May 11, 1999). **
 
      10(i) Note Purchase Agreement dated July 20, 2000 among G&K Services, Inc. and seven institutional investors (incorporated herein by reference to the Registrant’s Form 10-K filed September 28, 2000).
 
      10(j) Form of Executive Employment Agreement between Registrant and each of Robert G. Wood and Jeffrey L. Wright, dated January 1, 2001 (incorporated herein by reference to the Registrant’s Form 10-K filed September 27, 2001). **
 
      10(k) Credit Agreement, dated June 25, 2002, by and among the Registrant, G&K Services Canada, Inc., Bank One N.A., Wachovia Bank, National Association, Wachovia Securities, Inc (f/k/a First Union Securities, Inc.), Banc One Capital Markets, Inc. and various lenders (incorporated herein by reference to Exhibit 10(m) to the Registrant’s Form 10-K filed September 26, 2002).
 
      10(l) Executive Employment Agreement between Registrant and Richard L. Marcantonio, dated June 25, 2002 (incorporated herein by reference to Exhibit 10(n) to the Registrant’s Form 10-K filed September 26, 2002). **
 
      10(m) Promissory Note of Richard L. Marcantonio dated July 26, 2002 and payable to the Registrant (incorporated herein by reference to Registrant’s Form 10-Q filed November 12, 2002). **
 
      10(n) Stock Pledge Agreement dated as of July 26, 2002, by and between the Registrant and Richard L. Marcantonio (incorporated herein by reference to Registrant’s Form 10-Q filed November 12, 2002). **
 
      10(o) Change of Control Agreement between Registrant and Richard L. Marcantonio dated November 12, 2002 (incorporated herein by reference to Registrant’s Form 10-Q filed May 13, 2003). **
 
      10(p) Executive Employment Agreement between Registrant and Jeffrey R. Kiesel, dated July 14, 2003 (incorporated herein by reference to Registrant’s Form 10-Q filed February 5, 2004). **
 
      10(q) First Amendment, dated December 17, 2003 to Credit Agreement dated June 25, 2002, among the Registrant, G&K Services Canada, Inc., Bank One, N.A., Wachovia Bank, National Association, Wachovia Securities, Inc, Banc One Capital Markets, Inc. and various lenders (incorporated herein by reference to Registrant’s Form 10-Q filed February 5, 2004).
 
      10(r) Executive Employment Agreement between Registrant and David F. Fisher, dated May 10, 2004. *, **

  14   Code of Ethics *
 
  21   Subsidiaries of G&K Services, Inc. *
 
  23   Consent of Independent Registered Public Accounting Firm *
 
  24   Power of Attorney dated as of September 1, 2004 *
 
  31.1   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
  31.2   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
  32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
  32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

22


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  99.1   Report of Ernst & Young LLP, Independent Registered Public Accounting Firm and Schedule II *

      Footnotes:

*    Filed herewith

** Compensatory plan or arrangement

(b)   Reports filed on Form 8-K

      None

(c)   Exhibits

      See exhibits listed under Item 15(a)(3).

(d)   Financial Statement Schedules

      See the financial statement schedules listed under Item 15(a)(2).

23


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SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
Date: September 16, 2004   G&K SERVICES, INC.
    (Registrant)
 
       
  By:      /s/ Richard L. Marcantonio
     
      Richard L. Marcantonio, President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By:      /s/ Jeffrey L. Wright
     
      Jeffrey L. Wright, Senior Vice President and Chief Financial Officer
      (Principal Financial Officer)
 
       
  By:      /s/ Michael F. Woodard
     
      Michael F. Woodard, Vice President and Controller
      (Principal Accounting Officer)

24


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below on the 16th day of September 2004, by the following persons in the capacity indicated:

     
/s/ Richard M. Fink
Richard M. Fink
  Chairman of the Board and Director
 
   
/s/ Richard L. Marcantonio
  President and Chief Executive Officer (Principal Executive Officer)

Richard L. Marcantonio
   
 
   
*
  Director

Michael G. Allen
   
 
   
*
  Director

Paul Baszucki
   
 
   
*
  Director

John S. Bronson
   
 
   
*
  Director

Wayne M. Fortun
   
 
   
*
  Director

Donald W. Goldfus
   
 
   
*
  Director

Thomas R. Moberly
   
 
   
*
  Director

M. Lenny Pippin
   
 
   
*
  Director

Alice M. Richter
   
     
*By:
     /s/ Richard L. Marcantonio
 
       Richard L. Marcantonio
         Attorney-in-fact

25



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

                         
    For the Fiscal Years Ended
    July 3,   June 28,   June 29,
    2004   2003   2002
(In thousands, except per share data)
  (53 weeks)
  (52 weeks)
  (52 weeks)
Revenues
                       
Rental operations
  $ 708,708     $ 681,693     $ 656,121  
Direct sales
    24,739       23,895       21,470  
 
   
 
     
 
     
 
 
Total revenues
    733,447       705,588       677,591  
 
   
 
     
 
     
 
 
Operating Expenses
                       
Cost of rental operations
    448,131       426,564       403,110  
Cost of direct sales
    18,899       17,939       15,672  
Selling and administrative
    158,034       154,471       146,295  
Depreciation
    31,417       30,406       29,596  
Amortization of intangibles
    7,929       7,289       6,057  
 
   
 
     
 
     
 
 
Total operating expenses
    664,410       636,669       600,730  
 
   
 
     
 
     
 
 
Income from Operations
    69,037       68,919       76,861  
Interest expense
    11,966       13,691       13,609  
 
   
 
     
 
     
 
 
Income before Income Taxes
    57,071       55,228       63,252  
Provision for income taxes
    21,687       21,539       24,985  
 
   
 
     
 
     
 
 
Net Income
  $ 35,384     $ 33,689     $ 38,267  
 
   
 
     
 
     
 
 
Basic weighted average number of shares outstanding
    20,710       20,585       20,505  
Basic Earnings per Common Share
  $ 1.71     $ 1.64     $ 1.87  
 
   
 
     
 
     
 
 
Diluted weighted average number of shares outstanding
    20,900       20,691       20,660  
Diluted Earnings per Common Share
  $ 1.69     $ 1.63     $ 1.85  
 
   
 
     
 
     
 
 
Dividends per Share
  $ 0.07     $ 0.07     $ 0.07  
 
   
 
     
 
     
 
 

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

F-2


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

                 
    July 3,   June 28,
(In thousands, except share data)
  2004
  2003
ASSETS
               
Current Assets
               
Cash and cash equivalents
  $ 26,931     $ 11,504  
Accounts receivable, less allowance for doubtful accounts of $2,603 and $3,687
    71,058       69,839  
Inventories
    94,476       95,853  
Prepaid expenses
    14,902       14,848  
 
   
 
     
 
 
Total current assets
    207,367       192,044  
 
   
 
     
 
 
Property, Plant and Equipment
               
Land
    35,789       35,543  
Buildings and improvements
    140,290       133,078  
Machinery and equipment
    257,266       258,319  
Automobiles and trucks
    39,300       39,888  
Less accumulated depreciation
    (232,036 )     (216,071 )
 
   
 
     
 
 
Total property, plant and equipment
    240,609       250,757  
 
   
 
     
 
 
Other Assets
               
Goodwill, net
    285,892       266,140  
Customer contracts and related customer relationships, net
    41,151       44,934  
Non-competition agreements, net
    3,809       4,666  
Other, principally retirement plan assets
    23,919       20,265  
 
   
 
     
 
 
Total other assets
    354,771       336,005  
 
   
 
     
 
 
 
  $ 802,747     $ 778,806  
 
   
 
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable
  $ 20,511     $ 20,228  
Accrued expenses
               
Salaries and employee benefits
    32,953       35,107  
Other
    43,517       27,220  
Deferred income taxes
    7,395       9,941  
Current maturities of long-term debt
    24,018       14,430  
 
   
 
     
 
 
Total current liabilities
    128,394       106,926  
 
   
 
     
 
 
Long-Term Debt, net of Current Maturities
    184,305       236,731  
Deferred Income Taxes
    38,256       32,185  
Other Noncurrent Liabilities
    26,369       22,695  
 
   
 
     
 
 
Commitments and Contingencies (Notes 8 and 9)
               
Stockholders’ Equity
               
Common stock, $0.50 par value
               
Class A, 400,000,000 shares authorized, 19,432,106 and 19,253,986 shares issued and outstanding
    9,716       9,627  
Class B, 30,000,000 shares authorized, 1,474,996 and 1,474,996 shares issued and outstanding
    738       738  
Additional paid-in capital
    37,370       31,768  
Retained earnings
    381,953       348,028  
Deferred compensation
    (2,270 )     (3,226 )
Accumulated other comprehensive loss
    (2,084 )     (6,666 )
 
   
 
     
 
 
Total stockholders’ equity
    425,423       380,269  
 
   
 
     
 
 
 
  $ 802,747     $ 778,806  
 
   
 
     
 
 

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

F-3


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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
G&K Services, Inc. and Subsidiaries

(In thousands, except per share data)

                                         
                                         
                                         
                                         
                    Additional                
    Class A   Class B   Paid-In   Retained   Deferred
    Common Stock
  Common Stock
  Capital
  Earnings
  Compensation
Balance June 30, 2001
  $ 9,582     $ 738     $ 29,117     $ 278,972     $ (4,402 )
Net income
                      38,267        
Foreign currency translation
                             
Unrealized holding gains, net of income tax
                             
 
                                       
Comprehensive income
                                       
Issuance of common stock under stock plans, net (67 shares)
    34             1,813             (807 )
Tax benefit of employee stock options
                190              
Amortization of deferred compensation
                            937  
Cash dividends ($0.07 per share)
                      (1,445 )      
 
   
 
     
 
     
 
     
 
     
 
 
Balance June 29, 2002
    9,616       738       31,120       315,794       (4,272 )
Net income
                      33,689        
Foreign currency translation
                             
Unrealized holding gains, net of income tax
                             
Mininum pension liability, net of income tax
                             
Comprehensive income
                                       
Issuance of common stock under stock plans, net (22 shares)
    11             588             56  
Tax benefit of employee stock options
                60              
Amortization of deferred compensation
                            990  
Cash dividends ($0.07 per share)
                      (1,455 )      
 
   
 
     
 
     
 
     
 
     
 
 
Balance June 28, 2003
    9,627       738       31,768       348,028       (3,226 )
Net income
                      35,384        
Foreign currency translation
                             
Unrealized holding gains, net of income tax
                             
Mininum pension liability, net of income tax
                             
 
                                       
Comprehensive income
                                       
Issuance of common stock under stock plans, net (178 shares)
    89             5,110             19  
Tax benefit of employee stock options
                492              
Amortization of deferred compensation
                            937  
Cash dividends ($0.07 per share)
                      (1,459 )      
 
   
 
     
 
     
 
     
 
     
 
 
Balance July 3, 2004
  $ 9,716     $ 738     $ 37,370     $ 381,953     $ (2,270 )
 
   
 
     
 
     
 
     
 
     
 
 

     

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                 
    Accumulated Other    
    Comprehensive Income (Loss)
   
    Net Unrealized            
    Gain/(Loss) on   Pension   Cumulative    
    Financial   Pension   Translation   Stockholders’
    Instruments
  Liability
  Adjustments
  Equity
Balance June 30, 2001
  $ (1,388 )   $     $ (11,352 )   $ 301,267  
Net income
                      38,267  
Foreign currency translation
                (221 )     (221 )
Unrealized holding gains, net of income tax
    123                   123  
 
                           
 
 
Comprehensive income
                            38,169  
Issuance of common stock under stock plans, net (67 shares)
                      1,040  
Tax benefit of employee stock options
                      190  
Amortization of deferred compensation
                      937  
Cash dividends ($0.07 per share)
                      (1,445 )
 
   
 
     
 
     
 
     
 
 
Balance June 29, 2002
    (1,265 )           (11,573 )     340,158  
Net income
                      33,689  
Foreign currency translation
                9,368       9,368  
Unrealized holding gains, net of income tax
    34                   34  
Mininum pension liability, net of income tax
          (3,230 )           (3,230 )
 
                           
 
 
Comprehensive income
                            39,861  
Issuance of common stock under stock plans, net (22 shares)
                      655  
Tax benefit of employee stock options
                      60  
Amortization of deferred compensation
                      990  
Cash dividends ($0.07 per share)
                      (1,455 )
 
   
 
     
 
     
 
     
 
 
Balance June 28, 2003
    (1,231 )     (3,230 )     (2,205 )     380,269  
Net income
                      35,384  
Foreign currency translation
                1,594       1,594  
Unrealized holding gains, net of income tax
    1,121                   1,121  
Mininum pension liability, net of income tax
          1,867             1,867  
 
                           
 
 
Comprehensive income
                            39,966  
Issuance of common stock under stock plans, net (178 shares)
                      5,218  
Tax benefit of employee stock options
                      492  
Amortization of deferred compensation
                      937  
Cash dividends ($0.07 per share)
                      (1,459 )
 
   
 
     
 
     
 
     
 
 
Balance July 3, 2004
  $ (110 )   $ (1,363 )   $ (611 )   $ 425,423  
 
   
 
     
 
     
 
     
 
 

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

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries

                         
    For the Fiscal Years Ended
    July 3,   June 28,   June 29,
    2004   2003   2002
(In thousands)
  (53 weeks)
  (52 weeks)
  (52 weeks)
Operating Activities:
                       
Net income
  $ 35,384     $ 33,689     $ 38,267  
Adjustments to reconcile net income to net cash provided by operating activities -
                       
Depreciation and amortization
    39,346       37,695       35,653  
Deferred income taxes
    1,300       4,636       (312 )
Amortization of deferred compensation – restricted stock
    937       990       937  
Changes in current operating items, exclusive of acquisitions -
                       
Accounts receivable and prepaid expenses
    129       4,105       2,153  
Inventories
    2,474       1,692       2,798  
Accounts payable and other accrued expenses
    11,640       10,838       (1,066 )
Other assets and liabilities
    5,057       3,268       1,249  
 
   
 
     
 
     
 
 
Net cash provided by operating activities
    96,267       96,913       79,679  
 
   
 
     
 
     
 
 
Investing Activities:
                       
Property, plant and equipment additions, net
    (17,349 )     (31,403 )     (29,156 )
Acquisition of business assets
    (24,940 )     (88,744 )     (69,730 )
Purchases of investments, net
    (1,587 )     (1,395 )     (1,203 )
 
   
 
     
 
     
 
 
Net cash used for investing activities
    (43,876 )     (121,542 )     (100,089 )
 
   
 
     
 
     
 
 
Financing Activities:
                       
Proceeds from debt financing
    195,569       178,464       125,918  
Repayments of debt financing
    (236,598 )     (151,667 )     (110,322 )
Cash dividends paid
    (1,459 )     (1,455 )     (1,445 )
Sale of common stock
    5,218       655       1,040  
 
   
 
     
 
     
 
 
Net cash (used for) provided by financing activities
    (37,270 )     25,997       15,191  
 
   
 
     
 
     
 
 
Increase (Decrease) in Cash and Cash Equivalents
    15,121       1,368       (5,219 )
Effect of Exchange Rates on Cash
    306       150       (112 )
Cash and Cash Equivalents:
                       
Beginning of year
    11,504       9,986       15,317  
 
   
 
     
 
     
 
 
End of year
  $ 26,931     $ 11,504     $ 9,986  
 
   
 
     
 
     
 
 
Supplemental Cash Flow Information:
                       
Cash paid for -
                       
Interest
  $ 11,825     $ 12,641     $ 12,965  
 
   
 
     
 
     
 
 
Income taxes
  $ 9,619     $ 15,267     $ 32,681  
 
   
 
     
 
     
 
 

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)

1. Summary of Significant Accounting Policies

Nature of Business

G&K Services, Inc. (the “Company”) is a market leader in providing branded identity apparel and facility services programs that enhance image and safety in the workplace. The Company serves a wide variety of industrial, service and high-technology companies providing them with rented uniforms or purchase options as well as facility services products such as floor mats, dust mops, 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. The Company has two operating segments, 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

The Company operates on a fiscal year ending on the Saturday closest to June 30. Fiscal years for the consolidated financial statements included herein ended on July 3, 2004 (53 weeks), June 28, 2003 (52 weeks) and June 29, 2002 (52 weeks).

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with a maturity of three months or less, at the date of acquisition, to be cash equivalents.

Accounts Receivable

Accounts receivable is recorded net of an allowance for expected losses. The allowance, recognized as an amount equal to the anticipated future write-offs, is based on age of outstanding balances, analysis of specific accounts and historical bad debt expense and current economic trends.

Inventories

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 first-in, first-out (FIFO) 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, which results in a matching of the cost of the merchandise with the weekly rental revenue generated by merchandise. Estimated lives of rental merchandise in service range from nine months to three years. In establishing estimated lives for merchandise in service, management considers historical experience and the intended use of the merchandise. The components of inventories as of July 3, 2004 and June 28, 2003 are as follows:

                 
    2004
  2003
New goods
  $ 28,092     $ 27,123  
Rental merchandise in service
    66,384       68,730  
 
   
 
     
 
 
 
  $ 94,476     $ 95,853  
 
   
 
     
 
 

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Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated for financial reporting purposes generally using the straight-line method over the estimated useful lives as follows:

         
    Life
    (Years)
Automobiles and trucks
    3 to 8  
Machinery and equipment
    3 to 10  
Buildings
    20 to 33  
Building improvements
    10  
 
   
 
 

Costs of significant additions, renewals and betterments, including external and certain internal computer software development costs, are capitalized. When an asset is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss on disposition is reflected in earnings. Maintenance and repairs are charged to expense when incurred.

Goodwill, Intangible and Long-Lived Assets

The cost of acquisitions in excess of the fair value of the underlying net assets is recorded as goodwill. Non-competition agreements that limit the seller from competing with the Company for a fixed period of time and acquired customer contracts and related customer relationships are stated at cost less accumulated amortization and are amortized over the terms of the respective agreements or estimated average life of an account, primarily five to 11 years.

The carrying value of goodwill is evaluated 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. When evaluating whether goodwill is impaired, the fair value of the reporting unit to which goodwill is assigned is compared to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the goodwill with its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. Management completes its annual goodwill impairment test in the fourth quarter of each fiscal year and there have been no impairments of goodwill in fiscal 2004, 2003 or 2002.

The Company reviews all other long-lived assets, including definite-lived intangible assets, for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets” (“SFAS 144”). Under SFAS 144, impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The Company also performs a periodic assessment of the useful lives assigned to intangible assets. All of the Company’s intangibles are subject to amortization.

Retirement Plan Assets

Retirement plan assets consist primarily of mutual funds and cash equivalents, which are stated at their fair value as determined by quoted market prices and the cash surrender values of life insurance policies.

Foreign Currency

Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates 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 and were not material in fiscal 2004, 2003 or 2002.

Revenue Recognition

The Company’s rental operations business is largely based on written service agreements whereby it agrees to collect, launder and deliver uniforms and other related products. The service agreements provide for weekly billing upon completion of the laundering process and delivery to the customer. Accordingly, the Company recognizes revenue from rental operations in the period in which the services are provided. Revenue from rental operations also includes billings to customers for lost or abused merchandise. Direct sale revenue is recognized in the period in which the product is shipped.

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Insurance

The Company self-insures for certain obligations related to health and workers’ compensation programs. The Company purchases stop-loss insurance policies to protect it from catastrophic losses. The Company periodically evaluates its liabilities under such programs based on a third party actuarial analysis. Management’s estimates consider historical claims experience, escalating medical cost trends and the expected timing of claim payments. During fiscal 2002, the Company changed certain assumptions utilized in evaluating its workers’ compensation self-insurance liability and began to apply a discount factor to estimated future payments. The impact of these changes was not material to the Company’s consolidated balance sheets and statements of operations.

Income Taxes

Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the asset may not be realized and as such, has established a valuation allowance for all foreign tax credit carryforwards due to the uncertainty of the use of the tax benefit in future periods.

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 similarly 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.

                         
For the Fiscal Years Ended   July 3,   June 28,   June 29,
(In thousands)
  2004
  2003
  2002
Weighted average number of common shares outstanding used in computation of basic earnings per share
    20,710       20,585       20,505  
Weighted average effect of nonvested restricted stock grants and assumed exercise of options
    190       106       155  
 
   
 
     
 
     
 
 
Shares used in computation of diluted earnings per share
    20,900       20,691       20,660  
 
   
 
     
 
     
 
 

Potential common shares of 335,000, 562,000 and 464,000 related to the Company’s outstanding stock options and restricted stock grants were excluded from the computation of diluted earnings per share for fiscal 2004, 2003 and 2002, respectively. Inclusion of these shares would have been anti-dilutive as the exercise price of these shares exceeded market value.

Stock-Based Compensation

The Company maintains Stock Option and Compensation Plans (the “Employee Plans”), which are more fully described in Note 6. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its stock option plans. Accordingly, only compensation cost related to restricted stock issued under the Employee Plans has been recognized in the accompanying consolidated statements of operations. Compensation cost related to the restricted shares was $937, $990 and $937 in fiscal 2004, 2003 and 2002, respectively. Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company’s net income and net income per common share would have been adjusted as follows:

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Fiscal Years
  2004
  2003
  2002
Net income, as reported
  $ 35,384     $ 33,689     $ 38,267  
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects
    (1,746 )     (1,843 )     (2,128 )
 
   
 
     
 
     
 
 
Pro forma net income
  $ 33,638     $ 31,846     $ 36,139  
 
   
 
     
 
     
 
 
Basic net income per share:
                       
As reported
  $ 1.71     $ 1.64     $ 1.87  
Pro forma
    1.62       1.55       1.76  
Diluted net income per share:
                       
As reported
  $ 1.69     $ 1.63     $ 1.85  
Pro forma
    1.61       1.54       1.75  
 
   
 
     
 
     
 
 

The weighted average fair value of options granted in fiscal 2004, 2003 and 2002 was $10.83, $12.28 and $11.73, respectively. The weighted average exercise price was $32.81, $33.66 and $28.02 for fiscal 2004, 2003 and 2002, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used: risk-free interest rates of 3.48% for fiscal 2004, 3.27% for fiscal 2003 and 4.45% for fiscal 2002; expected dividends of $0.07 per share; expected lives of five years for fiscal 2004, 2003 and 2002; and expected volatility of 30.93% for fiscal 2004 grants, 36.56% for fiscal 2003 grants and 41.42% for fiscal 2002 grants.

Comprehensive Income

The Company has chosen to disclose comprehensive income, which consists of net income, foreign currency translation adjustment, unrealized gains/losses on interest rate swap agreements and minimum pension liability adjustments, in the consolidated statements of stockholders’ equity and comprehensive income.

Financial Instruments

The Company accounts for financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and related authoritative guidance. The statement requires that all derivative financial instruments that qualify for hedge accounting, such as interest rate swap contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of other comprehensive income).

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 132, “Employer’s Disclosures About Pensions and Other Postretirement Benefits” (“SFAS 132”). The FASB’s revision of Statement No. 132 requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. The Company adopted the disclosure requirements of SFAS 132 (revised) beginning with the third quarter ended March 27, 2004.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the financial reporting guidance associated with the consolidation of another entity. In December 2003, the FASB revised and superceded FIN 46 with the issuance of FIN 46R in order to address certain implementation issues. The Company has adopted FIN 46R effective March 31, 2004. The impact of adopting FIN 46R was not material.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current year presentation. These reclassifications did not impact current or historical net income or stockholders’ equity.

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Acquisitions

During each of fiscal 2004, 2003 and 2002, the Company made several small acquisitions. All acquisitions were accounted for using the purchase method. The total purchase consideration, including related acquisition costs, as well as the amounts exceeding the estimated fair values of assets acquired and liabilities assumed were as follows:

                         
Fiscal Years
  2004
  2003
  2002
Total purchase price and related acquisition costs
  $ 24,940     $ 88,744     $ 69,730  
Goodwill
    19,304       63,206       52,073  
 
   
 
     
 
     
 
 

The pro forma effects of these acquisitions, had they been acquired at the beginning of the fiscal year, were not material to the Company.

3. Goodwill and Intangible Assets

The Company adopted SFAS No. 141, “Business Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) effective July 1, 2001. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill is no longer amortized but reviewed annually, or more frequently if certain indicators arise, for impairment. The Company periodically evaluates the carrying value and remaining useful lives of amortizable intangible assets. There have been no impairments of goodwill and useful lives were deemed appropriate on amortizable intangible assets in fiscal 2004, 2003 and 2002.

The changes in the carrying amount of goodwill for the fiscal years ended July 3, 2004 and June 28, 2003, by operating segment, are as follows:

                         
    United States
  Canada
  Total
Balance as of June 28, 2003
  $ 236,913     $ 29,227     $ 266,140  
Goodwill acquired during the period
    18,085       1,219       19,304  
Other, primarily foreign currency translation
          448       448  
 
   
 
     
 
     
 
 
Balance as of July 3, 2004
  $ 254,998     $ 30,894     $ 285,892  
 
   
 
     
 
     
 
 
                         
    United States
  Canada
  Total
Balance as of June 29, 2002
  $ 173,707     $ 26,433     $ 200,140  
Goodwill acquired during the period
    63,206             63,206  
Other, primarily foreign currency translation
          2,794       2,794  
 
   
 
     
 
     
 
 
Balance as of June 28, 2003
  $ 236,913     $ 29,227     $ 266,140  
 
   
 
     
 
     
 
 

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

                         
    Carrying   Accumulated    
As of July 3, 2004
  Amount
  Amortization
  Net
Customer contracts and related customer relationships
  $ 80,142     $ 38,991     $ 41,151  
Non-competition agreements
    9,822       6,013       3,809  
 
   
 
     
 
     
 
 
Total
  $ 89,964     $ 45,004     $ 44,960  
 
   
 
     
 
     
 
 
                         
    Carrying   Accumulated    
As of June 28, 2003
  Amount
  Amortization
  Net
Customer contracts and related customer relationships
  $ 76,853     $ 31,919     $ 44,934  
Non-competition agreements
    9,721       5,055       4,666  
 
   
 
     
 
     
 
 
Total
  $ 86,574     $ 36,974     $ 49,600  
 
   
 
     
 
     
 
 

Total amortization expense was $7,929 in fiscal 2004, $7,289 in fiscal 2003 and $6,057 in fiscal 2002. Estimated amortization expense for each of the five succeeding fiscal years based on intangible assets as of July 3, 2004 is as follows:

         
2005
  $ 8,034  
2006
    7,706  
2007
    7,581  
2008
    7,208  
2009
    3,532  

 
   
 
 

4. Long-Term Debt

Debt as of July 3, 2004 and June 28, 2003 includes the following:

                 
    2004
  2003
Borrowings under unsecured term loan and unsecured revolving credit facility at rates ranging from 2.40% to 2.86% at July 3, 2004 and from 2.48% to 4.25% at June 28, 2003
  $ 155,850     $ 196,600  
Borrowings under unsecured fixed rate term loan at 8.40%
    50,000       50,000  
Other debt arrangements including capital leases
    2,473       4,561  
 
   
 
     
 
 
 
    208,323       251,161  
Less current maturities
    (24,018 )     (14,430 )
 
   
 
     
 
 
Total long-term debt
  $ 184,305     $ 236,731  
 
   
 
     
 
 

The Company maintains a $325,000 term loan and revolving credit facility. The credit facility includes (i) a $75,000 term loan facility with maturities of the remaining balance in fiscal years 2005 through 2007 of $15,000, $18,750 and $22,500, respectively, and (ii) a $250,000 revolving credit facility expiring on July 2, 2007. As of July 3, 2004, borrowings outstanding under the term loan were $56,250 and under the revolving credit facility were $99,600. The unused portion of the revolver may be used for general corporate purposes, acquisitions, working capital needs and to provide up to $30,000 in letters of credit. As of July 3, 2004, letters of credit outstanding against the revolver were $17,040.

Borrowings under the term loan and revolving credit facility bear interest at 1.00% to 1.75% over the rate offered to major banks in the London Interbank Eurodollar market (“Eurodollar Rate”), or the Canadian prime rate for Canadian borrowings, based on a leverage ratio calculated on a quarterly basis. Advances outstanding as of July 3, 2004 bear interest at the Eurodollar Rate or Canadian prime rate plus 1.25%. The Company also pays a fee on the unused daily balance of the revolver based on a leverage ratio calculated on a quarterly basis.

The Company has a $50,000, 8.4% private debt placement with certain institutional investors. The 10-year notes have a seven-year average life with a final maturity on July 20, 2010. Beginning on July 20, 2004, and annually thereafter to maturity, the Company will repay $7,143 of the principal amount at par. The Company used the net proceeds from the sale of the notes to reduce other indebtedness and for general corporate purposes.

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The credit facilities and the fixed rate notes contain various restrictive covenants that among other matters require the Company to maintain a minimum fixed charge coverage ratio, minimum stockholders’ equity and a maximum leverage ratio, all as defined. These debt arrangements also provide for certain limits related to additional indebtedness, investments and dividends. As of July 3, 2004, the Company was in compliance with all financial debt covenants.

The fair value of the Company’s long-term debt is determined using quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the long-term debt under the term loan and revolving credit facility approximates the carrying value as of July 3, 2004 and June 28, 2003. The fair value of the fixed rate term loan is $56,745 as of July 3, 2004.

The following table summarizes payments due on long-term debt, including capital leases, as of July 3, 2004 for the next five fiscal years and thereafter:

         
2005
  $ 24,018  
2006
    26,424  
2007
    29,710  
2008
    106,743  
2009
    7,143  
2010 and thereafter
    14,285  
 
   
 
 

5. 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 balance 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 balance sheets 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.

At July 3, 2004, the Company had interest rate swap contracts to pay fixed rates of interest (average rate of 2.85%) and receive variable rates of interest based on three-month London Interbank Offered Rate (“LIBOR”) on $65,000 notional amount of indebtedness. The $65,000 notional amount of outstanding contracts will mature $25,000 during fiscal 2005 and $40,000 thereafter. At June 28, 2003, the Company had interest rate swap contracts on $85,000 notional amount of indebtedness. These swap contracts have been designated as highly effective cash flow hedges and accordingly, gains or losses on any ineffectiveness was not material to any period. If these swap agreements were to be terminated, the Company would have incurred an after-tax loss on the contracts of $110 and $1,231 at July 3, 2004 and June 28, 2003, respectively.

The Company may periodically hedge firm 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 fiscal 2004 or 2003. Notional amounts outstanding under foreign currency contracts at July 3, 2004 were $409, all of which will mature during fiscal 2005. Notional amounts outstanding under foreign currency contracts at June 28, 2003 were $2,742, all of which matured during fiscal 2004. Foreign currency contracts were recorded at fair value as of July 3, 2004.

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6. Stockholders’ Equity

Each share of Class A common stock is entitled to one vote and is freely transferable. Each share of Class B is entitled to 10 votes and can be converted to Class A common stock on a share-for-share basis. Until converted to Class A common stock, however, Class B shares are not freely transferable. No cash dividends can be paid on Class B common stock unless dividends of at least an equal amount per share are paid on Class A shares. A majority of the Class B shares are held by an officer of the Company.

Stock Award Plans

The Company maintains Stock Option and Compensation Plans (the “Employee Plans”) to grant certain stock awards, including stock options at fair market value and restricted shares, to key employees of the Company. Exercise periods for stock options are limited to a maximum of 10 years and a minimum of one year. A maximum of 3,000,000 stock awards can be granted under the Employee Plans and 1,546,497 awards were available for grant as of July 3, 2004.

The Company also maintains the 1996 Director Stock Option Plan (the “Directors’ Plan”). The Directors’ Plan provides for automatic grants of 3,000 nonqualified stock options (initial grants) to nonemployee directors of the Company as of the later of August 1996 or the date such individuals became directors of the Company and 1,000 nonqualified stock options on each subsequent annual shareholder meeting date. The Company has reserved 100,000 shares of Class A common stock for issuance under the Directors’ Plan. These options expire within 10 years of grant and are exercisable one year from the date of grant, except for the initial grants, of which, one-third of the total options are exercisable each year beginning with the first anniversary of the date of grant. The option price will be the average market price of the Class A common stock during the 10 business days preceding the date of grant.

The following schedule summarizes activity in the plans:

                                 
    Stock Options
                            Weighted
    Employee   Directors’   Grant   Average
    Plans
  Plan
  Price
  Exercise Price
Outstanding at June 30, 2001
    885,984       39,000     $ 16.00 – 53.34     $ 33.43  
Granted
    427,495       11,000       25.87 – 40.85       28.16  
Exercised
    (36,750 )     (5,000 )     16.00 – 34.48       24.60  
Canceled
    (144,809 )     (6,000 )     21.50 – 46.00       31.79  
 
   
 
     
 
     
 
     
 
 
Outstanding at June 29, 2002
    1,131,920       39,000     $ 16.50 – 53.34     $ 31.98  
Granted
    364,308       7,000       29.23 – 35.69       33.49  
Exercised
    (26,700 )           16.50 – 28.06       24.64  
Canceled
    (184,032 )     (2,000 )     25.00 – 46.00       32.07  
 
   
 
     
 
     
 
     
 
 
Outstanding at June 28, 2003
    1,285,496       44,000     $ 16.50 – 53.34     $ 32.53  
Granted
    303,629       11,000       31.18 – 39.19       32.78  
Exercised
    (178,191 )     (3,000 )     25.00 – 35.69       28.85  
Canceled
    (230,989 )           27.95 – 46.00       32.30  
 
   
 
     
 
     
 
     
 
 
Outstanding at July 3, 2004
    1,179,945       52,000     $ 16.50 – 53.34     $ 33.18  
 
   
 
     
 
     
 
     
 
 
Exercisable at July 3, 2004
    485,225       39,000     $ 16.50 – 53.34     $ 35.55  
 
   
 
     
 
     
 
     
 
 

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Table of Contents

The following schedule summarizes the information related to stock options outstanding at July 3, 2004:

                                         
    Options Outstanding
  Options Exercisable
Range of Exercise           Average Remaining   Weighted Average           Weighted Average
Price
  Number Outstanding
  Option Life (Years)
  Exercise Price
  Number Exercisable
  Exercise Price
$ 16.50 – 25.00
    79,563       5.7     $ 24.67       79,563     $ 24.67  
25.01 – 37.00
    913,428       8.0       31.22       211,545       30.78  
37.01 – 53.34
    238,954       5.6       43.52       233,117       43.59  
 
   
 
     
 
     
 
     
 
     
 
 
 
    1,231,945       7.4     $ 33.18       524,225     $ 35.55  
 
   
 
     
 
     
 
     
 
     
 
 

Under the Employee Plans, the Company grants restricted stock to key employees for nominal consideration. The restrictions lapse over periods up to seven years. During fiscal 2004, 2003 and 2002 the Company granted 5,000, 25,000 and 33,580 shares of restricted stock, respectively. The weighted average grant date fair value per share of restricted stock granted during fiscal 2004, 2003 and 2002 was $31.18, $33.07 and $32.67, respectively. The Company records deferred compensation to stockholders’ equity at the time of grant for the difference between the par value and fair market value as of the grant date. Compensation expense is recognized as the restrictions are removed from the stock for the difference between the par value and fair market value as of the grant date. Total compensation expense related to restricted stock was $937, $990 and $937 in fiscal 2004, 2003 and 2002, respectively.

7. Income Taxes

     The components of the provision for income taxes are as follows:

                         
Fiscal Years
  2004
  2003
  2002
Current:
                       
Federal
  $ 15,794     $ 10,668     $ 11,437  
State and local
    1,897       1,396       2,075  
Foreign
    4,581       6,025       8,495  

 
   
 
     
 
     
 
 
 
    22,272       18,089       22,007  
Deferred
    (585 )     3,450       2,978  
 
   
 
     
 
     
 
 
 
  $ 21,687     $ 21,539     $ 24,985  
 
   
 
     
 
     
 
 

The reconciliation between income taxes using the statutory federal income tax rate and the recorded income tax provision is as follows:

                         
Fiscal Years
  2004
  2003
  2002
Federal taxes at the statutory rate
  $ 19,975     $ 19,330     $ 22,138  
State taxes, net of federal tax benefit
    1,514       1,447       1,495  
Foreign taxes
    (838 )     (15 )     1,001  
Permanent differences and other, net
    1,036       777       351  
 
   
 
     
 
     
 
 
Total provision
  $ 21,687     $ 21,539     $ 24,985  
 
   
 
     
 
     
 
 
Effective rate
    38.0 %     39.0 %     39.5 %
 
   
 
     
 
     
 
 

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Table of Contents

Significant components of the Company’s deferred tax assets and deferred tax liabilities as of July 3, 2004 and June 28, 2003 are as follows:

                 
    2004
  2003
Deferred tax liabilities:
               
Inventory
  $ (21,027 )   $ (22,095 )
Depreciation
    (28,821 )     (26,712 )
Intangibles
    (21,275 )     (17,457 )
Other
          (1,811 )
 
   
 
     
 
 
Total deferred tax liabilities
    (71,123 )     (68,075 )
Deferred tax assets:
               
Accruals, reserves and other
    25,472       25,949  
 
   
 
     
 
 
Net deferred tax liabilities
  $ (45,651 )   $ (42,126 )
 
   
 
     
 
 

The Company has foreign tax credit carryforwards of $1,436, which expire in fiscal 2008. A valuation allowance has been established for all foreign tax credit carryforwards due to the uncertainty of the use of the tax benefit in future periods.

8. Employee Benefit Plans

Pension Plan

The Company has a noncontributory defined benefit pension plan (the “Plan”) covering substantially all employees, except certain employees who are covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. The Company makes annual contributions to the Plan consistent with federal funding requirements.

Supplemental Executive Retirement Plan

Annual benefits under the Supplemental Executive Retirement Plan (“SERP”) are based on years of service and individual compensation near retirement. The Company has purchased life insurance contracts that may be used to fund the retirement benefits. The net cash surrender value of the contracts as of July 3, 2004 and June 28, 2003 was $10,603 and $8,139, respectively, and is included in other assets in the accompanying consolidated balance sheets.

Obligations and Funded Status at July 3, 2004 and June 28, 2003

                                 
                    Supplemental Executive
    Pension Plan
  Retirement Plan
    2004
  2003
  2004
  2003
Change in benefit obligation:
                               
Projected benefit obligation, beginning of year
  $ 40,629     $ 25,535     $ 10,066     $ 6,545  
Service cost
    3,949       2,541       857       369  
Interest cost
    2,514       1,962       671       531  
Plan amendments
                (80 )      
Actuarial (gain) loss
    (1,957 )     11,686       (90 )     2,859  
Benefits paid
    (1,236 )     (1,095 )     (265 )     (238 )
 
   
 
     
 
     
 
     
 
 
Projected benefit obligation, end of year
  $ 43,899     $ 40,629     $ 11,159     $ 10,066  
 
   
 
     
 
     
 
     
 
 
Change in plan assets:
                               
Fair value of plan assets, beginning of year
  $ 16,839     $ 18,651     $     $  
Actual return on plan assets
    3,303       (717 )            
Employer contributions
    7,768             265       238  
Benefits paid
    (1,236 )     (1,095 )     (265 )     (238 )
 
   
 
     
 
     
 
     
 
 
Fair value of plan assets, end of year
  $ 26,674     $ 16,839     $     $  
 
   
 
     
 
     
 
     
 
 
Funded status
  $ (17,225 )   $ (23,790 )   $ (11,159 )   $ (10,066 )
Unrecognized prior service cost
    276       331       245       368  
Unrecognized actuarial loss
    9,516       14,315       2,981       3,440  
 
   
 
     
 
     
 
     
 
 
Net amount recognized
  $ (7,433 )   $ (9,144 )   $ (7,933 )   $ (6,258 )
 
   
 
     
 
     
 
     
 
 

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Table of Contents

Amounts recognized in the statements of financial position consist of:

                                 
                    Supplemental Executive
    Pension Plan
  Retirement Plan
    2004
  2003
  2004
  2003
Accrued benefit liability
  $ (9,820 )   $ (14,037 )   $ (7,933 )   $ (7,150 )
Intangible assets
    276       331             368  
Accumulated other comprehensive income
    2,111       4,562             524  
 
   
 
     
 
     
 
     
 
 
Net amount recognized
  $ (7,433 )   $ (9,144 )   $ (7,933 )   $ (6,258 )
 
   
 
     
 
     
 
     
 
 

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with an accumulated benefit obligation in excess of plans assets were $43,899, $36,494 and $26,674, respectively, as of July 3, 2004 and $40,629, $30,876 and $16,839, respectively as of June 28, 2003. No pension plans had plan assets in excess of accumulated benefit obligations at July 3, 2004 or June 28, 2003.

Components of Net Periodic Benefit Cost

                                                 
                            Supplemental Executive
    Pension Plan
  Retirement Plan
    2004
  2003
  2002
  2004
  2003
  2002
Service cost
  $ 3,949     $ 2,541     $ 2,141     $ 857     $ 369     $ 259  
Interest cost
    2,514       1,962       1,653       671       531       441  
Expected return on assets
    (1,514 )     (1,468 )     (1,711 )                  
Prior service cost
    55       55       53       43       65       65  
(Gain) loss
    1,053             (161 )     369       63       4  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net periodic benefit cost
  $ 6,057     $ 3,090     $ 1,975     $ 1,940     $ 1,028     $ 769  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

Assumptions

The following weighted average assumptions were used to determine benefit obligations for the plans at July 3, 2004 and June 28, 2003:

                                 
                    Supplemental Executive
    Pension Plan
  Retirement Plan
    2004
  2003
  2004
  2003
Discount rate
    6.25 %     6.00 %     6.25 %     6.00 %
Rate of compensation increase
    4.25       5.00       5.00       5.00  
 
   
 
     
 
     
 
     
 
 

The following weighted average assumptions were used to determine net periodic benefit cost for the plans for the years ended July 3, 2004 and June 28, 2003:

                                 
                    Supplemental Executive
    Pension Plan
  Retirement Plan
    2004
  2003
  2004
  2003
Discount rate
    6.00 %     7.50 %     6.00 %     7.50 %
Expected return on plan assets
    8.00       8.00       N/A       N/A  
Rate of compensation increase
    5.00       5.00       5.00       5.00  
 
   
 
     
 
     
 
     
 
 

To develop the expected long-term rate of return on asset assumptions, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 8.00% long-term rate of return on assets assumption.

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Table of Contents

Additional Information

The pension plan weighted average asset allocations at July 3, 2004 and June 28, 2003 are as follows:

                 
    Pension Plan
    2004
  2003
International equity
    15 %     10 %
Value equity
    25       25  
Small cap equity
    10       5  
Core growth equity
    20       25  
Fixed income
    30       35  
 
   
 
     
 
 
Total
    100 %     100 %
 
   
 
     
 
 

The asset allocation strategy for 2004 targets 25.0%-30.0% in high-quality fixed income instruments with the balance of the portfolio to be invested in a diversified and complimentary portfolio of equity vehicles. The objective is to achieve a long-term rate of return of 7.0%-9.5%. In determining investment options, all classes or categories of investments allowed by the Employee Retirement Income Security Act of 1974 (“ERISA”) are acceptable investment choices. As directed by ERISA, no single investment will comprise more than 10.0% of assets, except for certain government backed securities.

Pension assets consist primarily of listed common stocks and U.S. government and corporate obligations. The plan held approximately 67,500 shares of the Company’s Class B common stock at July 3, 2004 and June 28, 2003, with market values of $2,697 and $2,007, respectively. The plan received $5 in dividends on the Company’s Class B common stock during each of fiscal 2004 and 2003.

The Company expects to contribute $1,332 to its pension plan and $361 to the SERP in fiscal year 2005.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

                 
            Supplemental Executive Retirement
    Pension Plan
  Plan
2005
  $ 722     $ 361  
2006
    804       361  
2007
    884       350  
2008
    964       334  
2009
    1,057       323  
2010 and thereafter
    7,271       2,138  
 
   
 
     
 
 

Union Pension Plans

Certain employees of the Company are covered by union-sponsored, collectively bargained, multiemployer pension plans (“Union Plans”). The Company contributed and charged to expense $1,460 in fiscal 2004, $1,189 in fiscal 2003 and $1,062 in fiscal 2002 for such plans. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked. The Company may be liable for its share of unfunded vested benefits, if any, related to the Union Plans. Information from the Union Plans’ administrators is not available to permit the Company to determine its share, if any, of unfunded vested benefits.

401(k) Plan

All full-time nonunion employees are eligible to participate in a 401(k) plan. The Company matches a portion of the employee’s salary reduction contributions and provides investment choices for the employee. The matching contributions under the 401(k) plan, which vest over a five-year employment period, were $1,712 in fiscal 2004, $1,663 in fiscal 2003 and $1,229 in fiscal 2002.

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Table of Contents

Executive Deferred Compensation Plan

Under the Executive Deferred Compensation Plan (“DEFCO”) plan, the Company matches a portion of the designated employees’ contributions. The Company’s matching contributions under the DEFCO plan were $528 in fiscal 2004, $476 in fiscal 2003 and $397 in fiscal 2002. The accumulated benefit obligation of $9,492 as of July 3, 2004 and $7,532 as of June 28, 2003 is included in other noncurrent liabilities in the accompanying consolidated balance sheets. The Company has purchased investments, including stable income and stock index managed funds, based on investment elections made by the employees, which may be used to fund the retirement benefits. The investments are recorded at estimated fair value based on quoted market prices and are included in other assets in the accompanying consolidated balance sheets. Unrealized gains and losses are included in income on a current basis. At July 3, 2004 and June 28, 2003, the estimated fair value of the investments was $9,492 and $7,532, and the cost of the investments was $9,305 and $8,576, respectively.

9. Commitments and Contingencies

Litigation

The Company is 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. None of these legal actions are expected to have a material adverse effect on the Company’s results of operations or financial position.

Leases

The Company leases certain facilities and equipment for varying periods. Most facility leases contain renewal options from one to five years. Management expects that in the normal course of business, leases will be renewed or replaced by other leases.

The following is a schedule of future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of July 3, 2004:

         
    Operating Leases
2005
  $ 13,619  
2006
    11,296  
2007
    9,083  
2008
    6,992  
2009
    4,461  
2010 and thereafter
    4,467  
 
   
 
 
Total minimum lease payments
  $ 49,918  
 
   
 
 

Total rent expense for operating leases, including those with terms of less than one year was $18,547 in fiscal 2004, $17,780 in fiscal 2003 and $15,462 in fiscal 2002.

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Table of Contents

10. Segment Information

The Company has two operating segments, 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 branded identity apparel and facility services industry, which includes garment rental and non-apparel items such as floor mats, dust mops, 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 is as follows:

                                     
        United            
        States
  Canada
  Elimination
  Total
2004 (53 weeks):
                                   
  Revenues   $ 633,715     $ 99,732     $     $ 733,447  
  Income from operations     50,282       18,755             69,037  
  Interest expense     12,029       (63 )           11,966  
  Total assets     771,338       115,167       (83,758 )     802,747  
  Capital expenditures     15,375       1,974             17,349  
  Depreciation and amortization expense     35,029       4,317             39,346  
  Income tax expense     17,927       3,760             21,687  
2003 (52 weeks):
                                   
  Revenues   $ 618,798     $ 86,790     $     $ 705,588  
  Income from operations     52,823       16,933       (837 )     68,919  
  Interest expense     13,330       1,198       (837 )     13,691  
  Total assets     752,469       96,706       (70,369 )     778,806  
  Capital expenditures     22,521       8,882             31,403  
  Depreciation and amortization expense     34,136       3,559             37,695  
  Income tax expense     14,720       6,819             21,539  
2002 (52 weeks):
                                   
  Revenues   $ 595,365     $ 82,226     $     $ 677,591  
  Income from operations     58,224       19,973       (1,336 )     76,861  
  Interest expense     13,343       1,602       (1,336 )     13,609  
  Total assets     677,029       77,859       (73,189 )     681,699  
  Capital expenditures     26,060       3,096             29,156  
  Depreciation and amortization expense     32,219       3,434             35,653  
  Income tax expense     17,218       7,767             24,985  

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Table of Contents

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of G&K Services, Inc.:

We have audited the accompanying consolidated balance sheets of G&K Services, Inc. as of July 3, 2004 and June 28, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended July 3, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of G&K Services, Inc. as of July 3, 2004 and June 28, 2003, and the results of its operations and its cash flows for each of the three fiscal years in the period ended July 3, 2004 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards (Statement) No. 142, “Goodwill and Other Intangible Assets.”

/s/Ernst & Young LLP


Ernst & Young LLP

Minneapolis, Minnesota
August 13, 2004

F-20

EX-10.(C) 2 c88121exv10wxcy.txt 1996 DIRECTOR STOCK OPTIN PLAN, AS AMENDED EXHIBIT 10(c) G&K SERVICES, INC. 1996 DIRECTOR STOCK OPTION PLAN (AS AMENDED ON MARCH 10, 2004) 1. PURPOSE. The purpose of the G&K Services, Inc. 1996 Director Stock Option Plan (the "Plan") is to advance the interests of G&K Services, Inc. (the "Company") and its shareholders by encouraging increased share ownership by members of the Board of Directors of the Company (the "Board") who are not employees of the Company or any of its subsidiaries, in order to promote long-term shareholder value through continuing ownership of the Company's common stock. 2. ADMINISTRATION. The Plan shall be administered by the Board. The Board shall have all the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreement embodying awards of nonqualified stock options made under the Plan ("Options"). The Board shall, subject to the provisions of the Plan, grant Options under the Plan and shall have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. Any decisions of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Board may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their number or any other officer of the Company to execute and deliver documents on behalf of the Board. No member of the Board shall be liable for anything done or omitted to be done by him or by any other member of the Board in connection with the Plan, except for his own willful misconduct or as expressly provided by statute. 3. PARTICIPATION. Each member of the Board who is not an employee of the Company or any of its subsidiaries (a "Non-Employee Director") shall be eligible to receive an Option in accordance with Paragraph 5 below. 4. AWARDS UNDER THE PLAN. (a) Awards under the Plan shall include only Options, which are rights to purchase Class A common stock of the Company having a par value of $0.50 per share (the "Common Stock"). Such Options are subject to the terms, conditions and restrictions specified in Paragraph 5 below. (b) There may be issued under the Plan pursuant to the exercise of Options an aggregate of not more than 100,000 shares of Common Stock, subject to adjustment as provided in Paragraph 6 below. If any Option is cancelled, terminates or expires unexercised, in whole or in part, any shares of Common Stock that would otherwise have been issuable pursuant thereto will be available for issuance under new Options. (c) A Non-Employee Director to whom an Option is granted (and any person succeeding to such a Non-Employee Director's rights pursuant to the Plan) shall have no rights as a shareholder with respect to any Common Stock issuable pursuant to any such Option until the date of the issuance of a stock certificate to him for such shares. Except as provided in Paragraph 6 below, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 5. NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan shall be evidenced by an agreement in such form as the Board shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions: (a) The Option exercise price shall be the Average Market Value (as herein defined) of the Common Stock subject to such Option on the date the Option is granted. For purposes hereof, "Average Market Value" shall be defined as the average of the closing prices of the Company's Common Stock, as reported on the Nasdaq National Market, during the ten business days preceding the date on which the Option is granted. (b) Each Non-Employee Director shall receive, as of the date of initial adoption of the Plan by the shareholders, or upon such Non-Employee Director=s initial election or appointment to the Board, a one-time only Option for 3,000 shares of Common Stock (the "One-Time Option"). In addition, for each year beginning in 1996, on the date of the annual meeting of shareholders of the Company, each Non-Employee Director shall automatically receive an Option for 1,000 shares of Common Stock (the "Annual Option"), subject to adjustment as set forth in Section 6 below. (c) The Option shall not be transferable by the optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. (d) Options shall not be exercisable: (i) before the expiration of one year from the date it is granted and after the expiration of ten years from the date it is granted, and (A) the One-Time Option may be exercised during such period as follows: one-third (33-1/3 %) of the total number of shares covered by the One-Time Option shall become exercisable each year beginning with the first anniversary of the date it is granted, and (B) the Annual Option shall become exercisable in full upon the first anniversary of the date it is granted; provided that a Non-Employee Director who does not stand for re-election to the Board may exercise any otherwise unexercisable Annual Options beginning on the date such director's successor is elected and qualified, subject to all of the other terms and conditions of such Annual Options. Notwithstanding anything to the contrary herein, an Option shall automatically become immediately exercisable in full upon the death of a Non-Employee Director; (ii) unless payment in full is made for the shares of Common Stock being acquired thereunder at the time of exercise; such payment shall be made in United States dollars by cash or check, or in lieu thereof, by tendering to the Company -2- Common Stock owned by the person exercising the Option and having a fair market value (as evidenced by the closing sales price of a share of Common Stock on the Nasdaq National Market or, if the Nasdaq National Market is closed on that date, on the last preceding date on which the Nasdaq National Market was open for trading) equal to the cash exercise price applicable to such Option, or by a combination of United States dollars and Common Stock as aforesaid; and (iii) unless the person exercising the Option has been at all times during the period beginning with the date of grant of the Option and ending on the date of such exercise, a Non-Employee Director of the Company, except that if such person shall cease to be such a Non-Employee Director for any reason, including death, while holding an Option that has not expired and has not been fully exercised, such person may, at any time within one year of the date he ceased to be a Non-Employee Director (but in no event after the Option has expired under the provisions of subparagraph 5(d)(i) above), exercise the Option with respect to any Common Stock as to which he could have exercised on the date he ceased to be such a Non-Employee Director. (e) If, on any date on which Options are automatically granted, the number of shares of Common Stock remaining available under the Plan is insufficient for the grant to each Non-Employee Director of Options to purchase 1,000 shares of Common Stock, then Options to purchase a proportionate amount of such available number of shares of Common Stock (rounded to the nearest whole share) shall be granted to each Non-Employee Director. 6. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, split-up, split-off, spin-off, recapitalization, merger, consolidation, rights offering, reorganization, combination or exchange of shares, a sale by the Company of all or part of its assets, any distribution to shareholders other than a normal cash dividend, or other extraordinary or unusual event, the number or kind of shares that may be issued under the Plan pursuant to subparagraph 4(b) above (specifically including the number of shares thereafter subject to the One-Time and Annual Options), the number or kind of shares subject to, and the Option price per share under, all outstanding Options shall be automatically adjusted so that the proportionate interest of the participant shall be maintained as before the occurrence of such event; such adjustment in outstanding Options shall be made without change in the total Option exercise price applicable to the unexercised portion of such Options and with a corresponding adjustment in the Option exercise price per share, and such adjustment shall be conclusive and binding for all purposes of the Plan. 7. MISCELLANEOUS PROVISIONS. (a) Except as expressly provided for in the Plan, no Non-Employee Director or other person shall have any claim or right to be granted an Option under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be retained in the service of the Company. -3- (b) A participant's rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a participant's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant. (c) Common Stock shall not be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign securities, securities exchange and other applicable laws and requirements. (d) It shall be a condition to the obligation of the Company to issue Common Stock upon exercise of an Option, that the participant (or any beneficiary or person entitled to act under subparagraph 5(d)(iii)(B) above) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, the Company may refuse to issue such Common Stock. (e) The expenses of the Plan shall be borne by the Company. (f) By accepting any Option or other benefit under the Plan, each participant and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company or the Board. (g) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Options hereunder or any Common Stock issued pursuant hereto as may be required by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or any other applicable statute, rule or regulation. 8. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable; provided, however, that no amendment shall become effective without shareholder approval if such shareholder approval is required by law, rule or regulation. No amendment of the Plan shall materially and adversely affect any right of any participant with respect to any Option theretofore granted without such participant's written consent. 9. TERMINATION. This Plan shall terminate upon the earlier of the following dates or events to occur: (a) upon the adoption of a resolution of the Board terminating the Plan; or -4- (b) ten years from the date the Plan is initially approved and adopted by the shareholders of the Company. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his consent, under any Option theretofore granted under the Plan. 10. IMMEDIATE ACCELERATION OF OPTIONS. Notwithstanding any provision in this Plan to the contrary, all outstanding options will become exercisable immediately if any of the following events occur unless otherwise determined by the Board of Directors and a majority of the Continuing Directors (as defined below): (a) any person or group of persons becomes the beneficial owner of 30% or more of any equity security of the Company entitled to vote for the election of directors; (b) a majority of the members of the Board of Directors of is replaced within the period of less than two years by directors not nominated and approved by the Board of Directors; or (c) the stockholders of the Company approve an agreement to merge or consolidate with or into another corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including a plan of liquidation). For purposes of this Section 10, beneficial ownership by a person or group of persons shall be determined in accordance with Regulation 13D (or any similar successor regulation) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. Beneficial ownership of more than 30% of an equity security may be established by any reasonable method, but shall be presumed conclusively as to any person who files a Schedule 13D report with the Securities and Exchange Commission reporting such ownership. For purposes of this Section 10 "Continuing Directors" are directors (i) who were in office prior to the time any of provisions (a), (b) or (c) occurred or any person publicly announced an intention to acquire 20% or more of any equity security of the Company, (ii) directors in office for a period of more than two years, and (iii) directors nominated and approved by the Continuing Directors. 11. EFFECTIVE DATE OF PLAN. The Plan will become effective on the date that it is approved by the affirmative vote of the holders of a majority of the shares of Common Stock entitled to notice of and to vote at the Company's 1996 Annual Meeting of Stockholders. -5- EX-10.(R) 3 c88121exv10wxry.txt EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10(r) EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT (herinafter the "Agreement") is made and entered into on this 29th day of June, 2004, but effective as of the 10th day of May, 2004 (the "Effective Date"), by and between G&K SERVICES, INC., a Minnesota corporation with its principal business office in the State of Minnesota (hereinafter "Employer", as such term is further defined in Section 1.7 below); and David F. Fisher, a Minnesota resident (hereinafter "Executive"). INTRODUCTION A. Employment and Protection of Employer. Executive was recently employed as Vice President General Counsel and Secretary of Employer, reporting to Employer's Chief Executive Officer and Employer desires to outline certain terms related to Executive's employment; and obtain Executive's promises to protect and not to harm Employer (as set forth in Article 7). In Executive's employment with Employer, Executive will have access to and control over certain of Employer's Confidential Information as described in Article 7 of this Agreement, which Employer has developed at great expense, time and effort. Use or disclosure of any such Confidential Information to a competitor and certain othe activities would cause irreparable harm to Employer, and Employer is not willing to offer Executive this Agreement which includes new, additional benefits, unless Executive signs this Agreement to provide Employer with reasonable protection for its Confidential Information, and to protect Employer in other ways set forth in Article 7. B. New Benefits. For those purposes, Employer is willing to grant to Executive benefits to which Executive is not otherwise entitled, including the right to receive certain restricted stock benefits as described in Article 4. C. Other Intentions. Executive has accepted Employer's offer and wishes to accept the additional benefits set forth in this Agreement, to which Executive is not otherwise entitled. Executive agrees, as a condition of Employer's offer of employment and additional benefits set forth in this Agreement, to sign this Agreement in order that Employer may have reasonable protections against the disclosure of its Confidential Information and other conduct of Executive prohibited by Article 7 of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the facts recited above, which are a part of this Agreement, and the parties' mutual promises contained in this Agreement, Employer and Executive agree as follows: ARTICLE 1 DEFINITIONS Capitalized terms used generally in this Agreement shall have their defined meaning throughout the Agreement. The following terms shall have the meanings set forth below; unless the context clearly requires otherwise. 1.1 "Agreement" means this Agreement, as it may be amended from time to time. 1.2 "Base Salary" means the total annual cash compensation payable to Executive on a regular periodic basis under Section 3.1, without regard to any voluntary salary deferrals or reductions to fund employee benefits. 1.3 "Board" means the Board of Directors of Employer. 1.4 "Cause" has the meaning set forth in Section 5.2. 1.5 "Date of Termination" has the meaning set forth in Section 5.4. 1.6 "Disability" means, to the extent permitted by applicable law, the unwillingness or inability of Executive to perform the essential functions of Executive's position (with or without reasonable accommodation) under this Agreement for a period of ninety (90) days (consecutive or otherwise) within any period of six (6) consecutive months because of Executive's incapacity due to physical or mental illness, bodily injury or disease, if within ten (10) days after a Notice of Termination is thereafter given by Employer, Executive shall not have returned to the full-time performance of the Executive's duties; provided, however, that if Executive (or Executive's legal representative, if applicable) does not agree with a determination of the existence of a Disability (or the existence of a physical or mental illness or bodily injury or disease), Executive may, within 10 days of receipt of a Notice of Termination, submit additional information from a qualified medical provider concerning such determination. The final determination, however, will be made by the Board in its sole judgement, based on the exercise of good faith and reasonable judegment after consideration of competent medical advice from qualified individuals. 1.7 "Employer" means all of the following, jointly and severally: (a) G&K Services, Inc., (b) any Subsidiary thereof and (c) any Successor thereto. 1.8 "Executive" means the individual named in the first paragraph of this Agreement. 1.9 "Notice of Termination" has the meaning set forth in Section 5.4. 1.10 "Plan" means any bonus or incentive compensation agreement, plan, program, policy or arrangement sponsored, maintained or contributed to by Employer, to which Employer is a party or under which employees of Employer are covered, including, without limitation, (a) any stock option or any other equity-based compensation plan; (b) any annual or long-term incentive (bonus) plan; (c) any employee benefit plan, such as a thrift, pension, profit sharing, 2 deferred compensation, medical, dental, disability income, accident, life insurance, automobile allowance, perquisite, fringe benefit, vacation, sick or parental leave, severance or relocation plan or policy and (d) any other agreement, plan, program, policy or arrangement intended to benefit employees or executive officers of Employer. 1.11 "Subsidiary" means any corporation or other business entity that is controlled by Employer. 1.12 "Successor" has the meaning set forth in Section 8.1(a). ARTICLE 2 EMPLOYMENT AND DUTIES 2.1 Employment. Upon the terms and conditions set forth in this Agreement, Employer hereby employs Executive for an indefinite term, and Executive accepts such employment. This Agreement and Executive's employment by Employer may be terminated at any time subject to the provisions of Article 5. 2.2 Duties. While Executive is employed hereunder, and excluding any periods of vacation, sick, disability or other leave to which Executive is entitled, Executive agrees to devote substantially all of Executive's attention and time during normal business hours to the business and affairs of Employer and, to the extent necessary to discharge the responsibilities assigned to Executive hereunder and, under Employer's bylaws as amended from lime to time, to use Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. Executive shall comply with Employer's policies and procedures; provided, however, that to the extent such policies and procedures are inconsistent with this Agreement, the provisions of this Agreement shall control. ARTICLE 3 COMPENSATION AND BENEFITS 3.1 Base Salary. Commencing as of the Effective Date, Employer shall pay Executive a Base Salary at an annualized rate of $215,000, or such other annual rate as may from time to time be approved by the Board. Such Base Salary to be paid in substantially equal regular periodic payments in accordance with Employer's regular payroll practices. If Executive's Base Salary is changed at any time during Executive's employment by Employer, the changed amount shall become the Base Salary under this Agreement, subject to any subsequent changes. 3.2 Other Compensation and Benefits. While Executive is employed by Employer under this Agreement: (a) Executive shall be permitted to participate in all Plans for which Executive is or becomes eligible under their respective terms. (b) Employer may, in its sole discretion, amend or terminate any Plan that provides benefits generally to its employees or its executive officers. 3 (c) Executive shall also be entitled to participate in or receive benefits under such Plans provided by Employer as to which he may be eligible while a key executive and key management employee, subject to and on a basis consistent with the terms, conditions and overall administration of such Plans and the preceding provisions of this Section 3.2. 3.3 Limitation on Right to Deferred Compensation. The rights of Executive, or Executive's beneficiaries or estate, to any deferred compensation under this Agreement shall be solely those of an unsecured creditor of Employer. Neither Executive nor any of Executive's beneficiaries or estate shall be entitled to assign or transfer (except to Employer) any right to receive any part of any deferred compensation amounts hereunder and, in the event of any attempt to assign or transfer any of such amounts, Employer shall have no further liability hereunder for such amounts, ARTICLE 4 RESTRICTED STOCK GRANT 4.1 Restricted Stock Agreement. As of September August 31, 2004, Employer will grant Executive the right to purchase Employer Stock (as defined below) in the amount, at the price and on the terms set forth in the Restricted Stock Agreement which will be provided to Executive prior to that date. Executive affirmatively acknowledges and agrees that this grant of Restricted Stock is consideration to which Executive is not otherwise entitled, constitutes significant additional consideration to Executive, and is good and sufficient consideration for Executive's obligations and agreements in this Agreement, including specifically those contained in Article 7. 4.2 Employer Stock. "Employer Stock" means the voting common stock of Employer described in the Restricted Stock Agreement to be provided to Executive. ARTICLE 5 TERMINATION 5.1 Termination. This Article 5 sets forth the terms for termination of Executive's employment under this Agreement for so long as Executive remains in an executive position with Employer. Should Executive be removed from an executive position but remain employed in a non-executive position with Employer, the terms of Article 5 will remain in effect for a 12 month period after such removal, after which such terms will expire and Executive's employment may be terminated without regard to the provisions of Article 5 (including those regarding separation pay or requiring notice). The terms of Article 5 are subject to the respective continuing rights and obligations of the parties under this Agreement. In general, this Agreement and Executive's employment with the Employer may be terminated by either Employer or Executive at will upon thirty (30) days notice, for any reason or no reason, or any time by mutual written agreement of the parties. This Agreement and Executive's employment under this Agreement shall terminate in the event of Executive's death or Disability, as of the applicable Date of Termination. 4 In any such case, this Agreement shall terminate as of the applicable Date of Termination, except for the rights and obligations of the parties under this Agreement that survive beyond Executive's termination of employment. 5.2 Termination by Employer for Cause. Employer may terminate this Agreement at any time for Cause, with or without advance notice (except as otherwise provided in this Section 5.2). For purposes of this Agreement, "Cause" means any of the following, with respect to Executive's position of employment with Employer and to the extent permitted by applicable law: (a) Executive's failure or refusal to perform the duties and responsibilities set forth in Section 2.2, if such failure or refusal (i) is not due to absence caused by a Disability or a physical or mental illness or bodily injury or disease; and (ii) is not cured within five (5) days after written notice of such failure or refusal is received by Executive from Employer; (b) any drunkenness or use of drugs that interferes with the performance of Executive's obligations under this Agreement; and continues for more than five (5) days after a written notice to Executive; provided, however, that Employer shall have the right to prevent Executive from performing any duties hereunder and from entering the premises of Employer during any such period; (c) Executive's indictment for or conviction of (including entering a guilty plea or plea of no contest to) a felony or any crime involving moral turpitude, fraud, dishonesty or theft; (d) any material dishonesty of Executive involving or affecting Employer (e) any gross negligence or other willful or intentional act or omission of Executive having the effect or reasonably likely to have the effect of injuring the reputation, business or business relationships of Employer in a material way; (f) any willful or intentional breach by Executive of a fiduciary duty to Employer; (g) Executive's material nonconformance with Employer's standard business practices and policies, including, without limitation, policies against racial or sexual discrimination or harassment; and (h) any material breach (not covered by any of the above clauses (a) through (g)) of any material term, provision or condition of this Agreement, if such breach is not cured (to the extent curable) within five (5) days after written notice thereof is received by Executive from Employer. 5 For purposes of this Section 5.2, no act, or failure to act, on Executive's part shall be considered "dishonest," "willful" or "intentional" unless done, or omitted to be done, by Executive in bad faith and without reasonable belief that Executive's action or omission was in or not opposed to, the best interest of Employer. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for Employer shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of Employer. Furthermore, the term "Cause" shall not include ordinary negligence or failure to act, whether due to an error in judgment or otherwise, if Executive has exercised substantial efforts in good faith to perform the duties reasonably assigned or appropriate to the position. 5.3 Termination by Executive for Good Reason. After a Change in Control (as defined in Article 6), Executive may voluntarily resign from employment under this Agreement for Good Reason in accordance with the applicable provisions of Article 6. 5.4 Notice of Termination and Date of Termination. (a) For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific termination provisions in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for such termination. Any termination by Employer or by Executive pursuant to this Agreement (other than Executive's death or a termination by mutual agreement) shall be communicated by written Notice of Termination to the other party hereto. (b) For purposes of this Agreement, "Date of Termination" shall mean: (i) if Executive's employment is terminated due to death, the date of Executive's death; (ii) if Executive's employment is terminated for Disability, thirty (30) calendar days after the Notice of Termination is given; (iii) if Executive's employment is terminated by Employer for Cause or by Executive for Good Reason as provided in Article 6, the date specified in the Notice of Termination; (iv) if Executive's employment is terminated by mutual agreement of the parties, the termination date specified in such agreement; or (v) if Executive's employment is terminated for any other reason, the date specified in the Notice of Termination, which in such event shall be a date no earlier than thirty (30) calendar days after the date on which the Notice of Termination is given, unless an earlier date has been expressly agreed to by Executive in writing either before or after receiving such Notice of Termination, and provided, however, that at Employer's discretion, Executive may be instructed not to perform further work for Employer during such 30 day period. 5.5 Compensation During Disability and Upon Termination. (a) During any period in which Executive fails to perform Executive's duties hereunder as a result of Executive's incapacity due to physical or mental illness or bodily injury or disease, Executive shall continue to receive an amount which, when coupled with any payments provided to Executive through Employer's disability and other benefit plans, is equivalent to Executive's Base Salary, and other compensation and benefits to which Executive is otherwise entitled under this Agreement and any Plan through Executive's Date of Termination. 6 (b) Except as otherwise provided in Article 6 or a mutual agreement of the parties, if Executive's employment under this Agreement is terminated (i) by Executive's death, (ii) voluntarily by Executive, (iii) by Employer for Cause, or (iv) by mutual agreement of the parties, then Employer shall pay Executive the Base Salary through the Date of Termination, plus any amounts to which the Executive is entitled as a terminated employee under any Plan (in accordance with the terms of such Plan). Employer shall also pay any retirement benefits to which Executive is or becomes entitled under any Plan, except to the extent any such benefits are forfeited under the terms of such Plan. (c) Except in the case of a termination for Disability, if Employer terminates Executive's employment hereunder without Cause, and if Executive executes a written release substantially in the form attached hereto as EXHIBIT B (a "General Release") and has not exercised his or her rights to revoke or rescind the release of claims pursuant to such Release Agreement, and subject to the provisions of 5.5(c)(iii) below, then: (i) Employer shall pay Executive, as separation pay, which Executive has not earned and to which Executive is not otherwise entitled, an amount equal to eleven (11) months of Executive's monthly Base Salary in effect as of the Date of Termination (less any severance pay amounts due Executive under any written Plan generally applicable to management employees of Employer), such payment to be made in the same manner as if Executive had remained continuously employed, for a period of eleven (11) months after the Date of Termination. (ii) If Executive (or any individual eligible for group health plan benefits through Executive) is eligible under the Plan or applicable law to continue participation in Employer's group health Plan during such eleven (11) month period, and does elect to continue such benefits, Executive will be responsible for paying the entire cost or premium amount for such continued coverage. However, Employer will pay to Executive an amount equal to the amount Employer would have paid for the Employer's share of the cost of such group health benefits, had Executive remained employed with Employer. Employer will pay such amount to Executive until the earliest of: a) the end of such eleven (11) month period; b) Executive stops paying the cost or premium for such continued coverage; or c) Executive becomes eligible for comparable health insurance coverage through any reemployment as defined below. (iii) The payments set forth in Sections 5.5(c)(i) and (ii) are conditioned on and subject to the following terms: (a) Executive agrees to make good faith efforts to become reemployed throughout the 11 month severance period ("employed" or "reemployed" for the purposes of this section will include all forms of work whether through employment, self-employment, consulting, independent contracting, or other forms of compensated work); 7 (b) If Executive becomes reemployed with monthly compensation from reemployment which equals or exceeds his monthly Base Salary from Employer in effect at the Date of Termination (hereinafter "Employer monthly Base Salary"), then all payments under Section 5.5(c)(i) will immediately cease and Employer will have no further obligation to pay any further amounts. If Executive receives monthly compensation from reemployment which is less than the Employer monthly Base Salary, then Employer will pay only the difference between the Employer monthly Base Salary and Executive's monthly compensation from reemployment during the remainder of the 11 month severance period; ("Monthly compensation from reemployment" will be gross compensation, before taxes and withholdings, and will include all compensation, including base pay plus all commissions, bonuses, and the fair market value of any equity interest in an entity employing Executive's services. To the extent that such compensation is not actually paid on a monthly basis, any compensation to be received by Executive attributable to reemployment during the remaining portion of the 11 month period will be accumulated; divided by number of months remaining, and the product added to monthly compensation actually paid); and (c) Executive agrees to provide to Employer, immediate notice in writing of any offers or opportunities for reemployment he has, whether or not he accepts them. Executive will also provide such documentation of his new compensation and benefits as Employer reasonably requests. Executive also agrees that during the 11 month severance period, he will provide to Employer on a monthly basis, no later than the 15th of each month, written documentation regarding efforts he has made to become reemployed, the results of such efforts, and any agreements, plans or other documents describing wages, benefits, stock or options or other forms of compensation or benefits offered to him, whether or not they are accepted. (iv) Employer will pay for outplacement services for Executive through a reputable provider selected by Employer at a cost not to exceed $12,000 in the aggregate. Such payments will cease at such time as Executive becomes reemployed during the 11 month severance period. ARTICLE 6 CHANGE IN CONTROL 6.1 Definitions Relating to a Change in Control. The following terms shall have the meanings set forth below; unless the context clearly requires otherwise: (a) "1934 Act" shall mean the Securities Exchange Act of 1934, as amended (or any successor provision), and the regulations promulgated thereunder. 8 (b) "Beneficial Ownership" by a person or group of persons shall be determined in accordance with Regulation 13D (or any similar successor regulation) promulgated by the Securities and Exchange Commission pursuant to the 1934 Act. Beneficial Ownership of an equity security may be established by any reasonable method, but shall be presumed conclusively as to any person who files a Schedule 13D report with the Securities and Exchange Commission reporting such ownership. (c) "Change of Control" means the occurrence of any of the following events: (i) any person or group of persons attains Beneficial Ownership (as defined below) of 30% or more of any equity security of Employer entitled to vote for the election of directors; (ii) a majority of the members of the Board is replaced within the period of less than two years by directors not nominated and approved by the Board; or (iii) the stockholders of Employer approve an agreement to merge or consolidate with or into another corporation, or an agreement to sell or otherwise dispose of all or substantially all of Employer's assets (including a plan of liquidation). (d) "Continuing Directors" are (i) directors who were in office prior to the time any events described in paragraphs (c)(i), (c)(ii) or (c)(iii) of this Section 6.1 occurred, or any person publicly announced an intention to acquire 20% or more of any equity security of Employer; (ii) directors in office for a period of more than two years; and (iii) directors nominated and approved by the Continuing Directors. (e) "Change in Control Termination" shall mean that a Change in Control of Employer has occurred, and either of the following events also occurs within one (1) year after such Change in Control: (i) Employer terminates the Executive's employment or this Agreement for any reason other than for Cause, Executive's death or Executive's Disability; or (ii) Executive terminates Executive's employment for Good Reason. (f) "Good Reason" shall mean, with respect to a voluntary termination of employment by Executive after a Change in Control, any of the following: (i) an adverse involuntary change in Executive's status or position as an executive officer of Employer, including, without limitation, (A) any adverse change in Executive's status or position as a result of a material diminution in Executive's duties, responsibilities or authority as of the day before the Change in Control; (B) the assignment to Executive of any duties or responsibilities that, in Executive's reasonable judgment, are significantly inconsistent with Executive's status or position; or (C) any removal of Executive from, or any failure to reappoint or reelect Executive to, such position (except in connection with a termination of Executive's employment for Cause in accordance with Article 5, or as a result of Executive's Disability or death); 9 (ii) a reduction by Employer in Executive's Base Salary as in effect on the day before the Change in Control; (iii) the taking of any action by Employer that would materially and adversely affect the physical conditions existing, as of the day before the Change in Control, under which Executive performs employment duties for Employer; (iv) Employer's requiring Executive to be based anywhere other than where Executive's office is located as of the day before the Change in Control, except for required travel on Employer's business to an extent substantially consistent with business travel obligations that Executive undertook on behalf of Employer as of the day before the Change in Control; (v) any failure by Employer to obtain from any Successor an assumption of this Agreement as contemplated by Section 8.1; or (vi) any purported termination by Employer of this Agreement or the employment of the Executive at any time after a Change in Control, that is not expressly authorized by this Agreement; or any breach of this Agreement by Employer at any time after a Change in Control, other than an isolated, insubstantial and inadvertent failure that does not occur in bad faith and is remedied by Employer within a reasonable period after Employer's receipt of notice thereof from Executive. 6.2 Benefits Upon a Change in Control Termination. If a Change in Control Termination occurs with respect to Executive, Executive shall be entitled to the following benefits; provided, however, that to the extent Executive has already received the same type of benefits under Article 5 as a result of Executive's Change in Control Termination, Executive's benefits under this Section shall be offset by such other benefits, to the extent necessary to prevent duplication of benefits hereunder: (a) all of the payments and benefits that Executive would have been entitled to receive if the Change in Control Termination were described in Section 5.5(c), and (b) for a period of not less than six (6) months following Executive's Date of Termination, Employer will reimburse Executive for all reasonable expenses incurred by Executive (excluding any arrangement by which Executive prepays expenses for a period of greater than thirty (30) days) in seeking employment with another employer, including the fees of a reputable outplacement organization selected by Employer, but not to exceed $12,000.00 in the aggregate; Payments will be subject to discontinuance and/or reduction, and all other obligations of Executive to obtain reemployment as are set forth in Section 5.5(c)(iii) above. 6.3 Acceleration of Incentives. If upon the occurrence of a Change of Control, the Board and a majority of the Continuing Directors (as such term is defined in the G&K Services, Inc. 1998 Stock Option and Compensation Plan (the "1998 Plan")) determine that the economic incentives (including without limitation stock options and awards of restricted stock) (the 10 "Incentives") granted under the 1998 Plan shall not accelerate immediately in accordance with Section 11.12 of the 1998 Plan (or any successor provision), then the following shall nonetheless occur with respect to any and all Incentives that are owned by Executive at the time of such Change of Control: (a) the restrictions set forth in the 1998 Plan on all shares of restricted stock awards shall lapse immediately; (b) all outstanding options and stock appreciation rights shall become exercisable immediately; and (c) All performance shares shall be deemed to be met and payment made immediately. 6.4 Limitation on Severance Payment. Notwithstanding any provision contained herein to the contrary, if any amount or benefit to be paid or provided under this Article 6, or any other plan or agreement between Executive and Employer would be an "Excess Parachute Payment," within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided under this Article 6 shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided to Executive, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes). If requested by Executive or Employer, the determination of whether any reduction in such payments or benefits to be provided under this Article 6 or otherwise is required pursuant to the preceding sentence shall be made by an independent accounting firm that is a "Big-4 Accounting Firm" (or other accounting firm mutually acceptable to Executive and Employer) not then-engaged as Employer's independent public auditor, at the expense of Employer, and the determination of such independent accounting firm shall be final and binding on all parties. In making its determination, the independent accountant shall allocate a reasonable portion of the severance payment to the value of any personal services rendered following the Change in Control and the value of any non-competition agreement or similar agreements to the extent that such items reduce the amount of the parachute payment. In the event that any payment or benefit intended to be provided under this Article 6 or otherwise is required to be reduced pursuant to this Section 6.3, Executive (in his sole discretion) shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section. Employer shall provide Executive with all information reasonably requested by Executive to permit Executive to make such designation. In the event that Executive fails to make such designation within ten (10) business days of receiving such information, Employer may effect such reduction in any manner it deems appropriate. 11 ARTICLE 7 PROTECTION OF EMPLOYER 7.1 Confidential Information. For purposes of this Article 7, "Confidential Information" means information that is proprietary to Employer or proprietary to others and entrusted to Employer; whether or not such information includes trade secrets. Confidential Information includes, but is not limited to, information relating to Employer's business plans and to its business as conducted or anticipated to be conducted, and to its past or current or anticipated products and services. Confidential Information also includes, without limitation, information concerning Employer's customer lists or routes, pricing, purchasing, inventory, business methods, training manuals or other materials developed for Employer's employee training, employee compensation, research, development, accounting, marketing and selling. All information that Executive has a reasonable basis to consider as confidential shall be Confidential Information, whether or not originated by Executive and without regard to the manner in which Executive obtains access to this and any other proprietary information of Employer. Executive shall not, during or after the termination of Executive's employment under this Agreement, (a) directly or indirectly use for the benefit of anyone other than Employer; or (b) disclose any Confidential Information to, or otherwise permit access to Confidential Information by, any person or entity not employed by Employer or not authorized by Employer to receive such Confidential Information, without the prior written consent of Employer. Executive will use reasonable and prudent care to safeguard and protect and prevent the unauthorized use and disclosure of Confidential Information. Furthermore, except in the usual course of Executive's duties for Employer, Executive shall not at any time remove any Confidential Information from the offices of Employer, record or copy any Confidential Information or use for Executive's own benefit or disclose to any person or entity directly or indirectly competing with Employer any information, data or materials obtained from the files of customers of Employer, whether or not such information, data or materials are Confidential Information. Upon any termination of Executive's employment, Executive shall collect and return to Employer (or its authorized representative) all original copies and all other copies of any Confidential Information acquired by Executive while employed by Employer. The obligations contained in this Section 7.1 will survive for as long as Employer in its sole judgment considers the information to be Confidential Information. The obligations under this Section 7.1 will not apply to any Confidential Information that is now or becomes generally available to the public through no fault of Executive or to Executive's disclosure of any Confidential Information required by law or judicial or administrative process. 7.2 Non-Competition. Executive agrees that, while employed by Employer and for a period of eighteen (18) months following the date of Executive's termination of employment for any reason, Executive shall not, directly or indirectly, alone or as an officer, director, shareholder, partner, member, employee or consultant of any other corporation or any partnership, limited liability company, firm or other business entity: (a) engage in, have any ownership interest in, financial participation in, or become employed by, any business or commercial activity in competition (i) with any part of Employer's business, as conducted anywhere within the geographic area in which Employer has conducted its business within the three (3) years before such date, or (ii) 12 with any part of Employer's contemplated business with respect to which Executive has Confidential Information governed by Section 7.1. For purposes of this paragraph, "ownership interest" shall not include beneficial ownership of less than one percent (1%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange or quoted on NASDAQ; (b) call upon, solicit or attempt to take away any customers or accounts of Employer; (c) solicit, induce or encourage any supplier of goods or services to Employer to cease its business relationship with Employer, or violate any term of any contract with Employer; or (d) solicit, induce or encourage any other employee of Employer to cease employment with Employer, or otherwise violate any term of such employee's contract of employment with Employer. The restrictions set forth in this Section 7.2 shall survive any termination of this Agreement or other termination of Executive's employment with Employer, and shall remain effective and enforceable for such 18-month period; provided, however, that such period shall be automatically extended and shall remain in full force for an additional period equal to any period in which Executive is proven to have violated any such restriction. 7.3 Protection of Reputation. Executive shall, both during and after the termination of Executive's employment under this Agreement, refrain from communicating to any person, including without limitation any employee of Employer, any statements or opinions that are negative in any way about Employer or any of its past, present or future officials. In return, whenever Employer sends or receives any Notice of Termination of Executive's employment under this Agreement, Employer shall advise the members of its operating committee and executive committee (or any successors to such committees), to refrain from negative communications about Executive to third parties. 7.4 Remedies. The parties declare and agree that it is impossible to accurately measure in money the damages that will accrue to Employer by reason of Executive's failure to perform any of Executive's obligations under this Article 7; and that any such breach will result in irreparable harm to Employer, for which any remedy at law would be inadequate. Therefore, if Employer institutes any action or proceeding to enforce the provisions of this Article 7, Executive hereby waives the claim or defense that such party has an adequate remedy at law, Executive shall not assert in any such action or proceeding the claim or defense that such party has an adequate remedy at law, and Employer shall be entitled, in addition to all other remedies or damages at law or in equity, to temporary and permanent injunctions and orders to restrain any violations of this Article 7 by Executive and all persons or entities acting for or with Executive. 7.5 Survival. The provisions of Article 7 of this Agreement shall survive the termination of this Agreement, the termination of Executive's employment with Employer, or 13 any change in Executive's position with Employer, and shall remain in full force and affect thereafter. ARTICLE 8 GENERAL PROVISIONS 8.1 Successors and Assigns: Beneficiary. (a) For purposes of this Agreement, "Successor" shall mean any corporation, individual, group, association, partnership, limited liability company, firm, venture or other entity or person that, subsequent to the Effective Date, succeeds to the actual or practical ability to control (either immediately or with the passage of time) substantially all of Employer and/or Employer's business and/or assets, directly or indirectly, by merger, consolidation, recapitalization, purchase, liquidation, redemption, assignment, similar corporate transaction, operation of law or otherwise. (b) This Agreement shall be binding upon and inure to the benefit of any Successor of Employer and each Subsidiary, and any such Successor shall absolutely and unconditionally assume all of Employer's and any Subsidiary's obligations hereunder. Upon Executive's written request, Employer shall seek to have any Successor, by agreement in form and substance satisfactory to Executive, assent to the fulfillment by Employer of their obligations under this Agreement. Failure to obtain such assent prior to the time a person or entity becomes a Successor (or where Employer does not have advance notice that a person or, entity may become a Successor, within one (1) business day after having notice that such person or entity may become or has become a Successor) shall constitute Good Reason for termination of employment by Executive pursuant to Article 6. (c) This Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees and any assignees permitted hereunder. If Executive dies while any amounts would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's Beneficiary. Executive may not assign this Agreement, in whole or in any part, without the prior written consent of Employer. (d) For purposes of this Section 8.1, "Beneficiary" means the person or persons designated by Executive (in writing to Employer) to receive benefits payable after Executive's death pursuant to Section 8.1(c). In the absence of any such designation or in the event that all of the persons so designated predecease Executive, Beneficiary means the executor, administrator or personal representative of Executive's estate. 8.2 Litigation Expense. If any party is made or shall become a party to any litigation (including arbitration) commenced by or against the other party involving the enforcement of any of the rights or remedies of such party, or arising on account of a default of the other party in its performance of any of the other party's obligations hereunder, then the prevailing party in 14 such litigation shall receive from the other party all costs incurred by the prevailing party in such litigation, plus reasonable attorneys' fees to be fixed by the court or arbitrator (as applicable), with interest thereon from the date of judgment or arbitrator's decision at the rate of eight percent (8%) or, if less, the maximum rate permitted by law. 8.3 No Offsets. In no event shall any amount payable to Executive pursuant to this Agreement be reduced for purposes of offsetting, either directly or indirectly, any indebtedness or liability of Executive to Employer. 8.4 Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be personally delivered or mailed postage prepaid, registered or certified U. S. mail, to any party as its address set forth on the last page of this Agreement. Either party may, by notice hereunder, designate a changed address. Any notice hereunder shall be deemed effectively given and received: (a) if personally delivered, upon delivery, or (b) if mailed, on the registered date or the date stamped on the certified mail receipt 8.5 Captions. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. When used herein, the terms "Article" and "Section" mean an Article or Section of this Agreement, except as otherwise stated. 8.6 Governing Law/Venue. The validity, interpretation, construction, performance, enforcement and remedies of or relating to this Agreement, and the rights and obligations of the parties hereunder, shall be governed by the substantive laws of the State of Minnesota (without regard to the conflict of laws rules or statutes of any jurisdiction), and any and every legal proceeding arising out of or in connection with this Agreement shall be brought in the appropriate courts of the State of Minnesota, each of the parties hereby consenting to the exclusive jurisdiction of said courts for this purpose. 8.7 Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 8.8 Waiver. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law 8.9 Modification. This Agreement may not be modified or amended except by written instrument signed by the parties hereto. 8.10 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces in full all prior employment agreements or understandings of the parties 15 hereto, and any and all such prior agreements or understandings are hereby rescinded by mutual agreement. 8.11 Survival. The parties expressly acknowledge and agree that the provisions of this Agreement which by their express or implied terms extend beyond the termination of Executive's employment or position, or beyond the termination of this Agreement (including, without limitation the provisions in Article 7 relating to confidential information, noncompetition and non-solicitation), shall continue in full force and effect notwithstanding Executive's termination of employment or position, hereunder or the termination of this Agreement, respectively. 8.12 Voluntary Agreement. Executive has entered into this Agreement voluntarily, after having the opportunity to consult with an advisor chosen freely by Executive. [Signature Page Follows] IN WITNESS WHEREOF, the parties hereto have caused this Executive Employment Agreement to be duly executed and delivered on the day and year first above written, but effective retroactively as of the Effective Date. EMPLOYER: G&K SERVICES, INC. BY /s/ SALLY J. BREDEHOFT ----------------------------------------- SALLY J. BREDEHOFT ITS SENIOR VICE PRESIDENT HUMAN RESOURCES EXECUTIVE: /s/ DAVID F. FISHER ----------------------------------------- DAVID F. FISHER EXECUTIVE'S ADDRESS: 5047 GLADSTONE AVENUE SOUTH MINNEAPOLIS, MN 55419 16 EX-14 4 c88121exv14.txt CODE OF ETHICS EXHIBIT 14 G&K CODE OF ETHICAL CONDUCT FOR SENIOR EXECUTIVES AND FINANCIAL MANAGERS I, (Name) , in my role as (Position) of G&K Services, I recognize that senior executives and financial managers hold an important and elevated role in corporate governance. As a part of the Corporate Leadership Team, I understand that I am vested with both the responsibility and authority to protect, balance, and preserve the interests of all of the enterprise's stakeholders, including shareholders, clients, employees, suppliers, and citizens of the communities in which business is conducted. Accordingly, this Code provides principles to which senior executives and financial managers are expected to adhere and advocate. The Code embodies rules regarding individual and peer responsibilities, as well as responsibilities to the company, the public, and other stakeholders. I certify to you that I adhere to and advocate the following principles and responsibilities governing my professional and ethical conduct. To the best of my knowledge and ability: 1. I act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. 2. I provide stakeholders with information that is accurate, complete, objective, relevant, timely and understandable. 3. I comply with all applicable rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies. 4. I act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing my independent judgment to be subordinated. 5. I respect the confidentiality of information acquired in the course of my work, except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of my work is not used for personal advantage. 6. I share knowledge and maintain skills important and relevant to my stakeholders' needs. 7. I proactively promote ethical behavior as a responsible partner among peers in my work environment and community. 8. I achieve responsible use of and control over all assets and resources employed or entrusted to me. 9. I adhere to all other aspects of G&K Services' primary Code of Ethical Conduct. 10. I promote prompt internal reporting of code violations to the company hotline. 11. I understand any waiver of any provision of this Code of Ethical Conduct for Senior Executives and Financial Managers must be approved in writing by G&K's Board of Directors and promptly disclosed. Date: (Add in current date) By: (Name) ------------------------------ Printed Name Title EX-21 5 c88121exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF G&K SERVICES, INC. G&K Services, Co. (incorporated in Minnesota, U.S.A.) G&K Services Canada Inc. (incorporated in Ontario, Canada) Les Services G&K (Quebec) Inc. (incorporated in Quebec, Canada) 26 EX-23 6 c88121exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement Form S-8 Nos. 033-63359, 333-64977, 333-66419, 333-73188, 333-101282 and 333-109892 of G&K Services, Inc. and in the related Prospectus of our reports dated August 13, 2004, with respect to the consolidated financial statements and schedule of G&K Services, Inc. included in this Form 10-K for the year ended July 3, 2004. /s/Ernst & Young LLP - --------------------- Ernst & Young LLP Minneapolis, Minnesota September 14, 2004 27 EX-24 7 c88121exv24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of G&K SERVICES, INC., a Minnesota corporation (the "Company"), hereby constitute and appoint RICHARD L. MARCANTONIO and JEFFREY L. WRIGHT, and each or any of them, his true and lawful attorneys-in-fact and agents, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file the Annual Report of the Company and Form 10-K for the fiscal year ended July 3, 2004, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 including any amendment or amendments, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority, granting unto said attorneys full power and authority to do and perform each and every thing, requisite and necessary to be done in and about the premises in order to execute the same as fully to all intents and purposes as he, himself, might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or could cause to be done by virtue hereof. IN WITNESS WHEREOF, G&K SERVICES, INC. has caused this Power of Attorney to be executed in its name by its directors this 1st day of September 2004. /s/ Richard M. Fink /s/ Wayne M. Fortun - ------------------- ------------------- Richard M. Fink Wayne M. Fortun /s/ Richard L. Marcantonio /s/ Donald W. Goldfus - -------------------------- ---------------------- Richard L. Marcantonio Donald W. Goldfus /s/ Michael G. Allen /s/ Thomas R. Moberly - -------------------- --------------------- Michael G. Allen Thomas R. Moberly /s/ Paul Baszucki /s/ M. Lenny Pippin - ----------------- ------------------- Paul Baszucki M. Lenny Pippin /s/ John S. Bronson /s/ Alice M. Richter - ------------------- -------------------- John S. Bronson Alice M. Richter 28 EX-31.1 8 c88121exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-15(e)/15d-15(e) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard L. Marcantonio, certify that: 1. I have reviewed this annual report on Form 10-K of G&K Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. G&K Services, Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for G&K Services, Inc., and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to G&K Services, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of G&K Services, Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in G&K Services, Inc.'s internal control over financial reporting that occurred during G&K Services, Inc.'s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, G&K Services, Inc.'s internal control over financial reporting; 5. G&K Services, Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to G&K Services, Inc.'s auditors and the audit committee of G&K Services, Inc.'s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect G&K Services, Inc.'s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in G&K Services, Inc.'s internal control over financial reporting. Date: September 16, 2004 By: /s/ Richard L. Marcantonio ---------------------------------- Richard L. Marcantonio, President and Chief Executive Officer (Principal Executive Officer) 29 EX-31.2 9 c88121exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-15(e)/15d-15(e) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey L. Wright, certify that: 1. I have reviewed this annual report on Form 10-K of G&K Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. G&K Services, Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for G&K Services, Inc., and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to G&K Services, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of G&K Services, Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in G&K Services, Inc.'s internal control over financial reporting that occurred during G&K Services, Inc.'s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, G&K Services, Inc.'s internal control over financial reporting; 5. G&K Services, Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to G&K Services, Inc.'s auditors and the audit committee of G&K Services, Inc.'s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect G&K Services, Inc.'s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in G&K Services, Inc.'s internal control over financial reporting. Date: September 16, 2004 By: /s/ Jeffrey L. Wright --------------------------------------- Jeffrey L. Wright, Senior Vice President and Chief Financial Officer (Principal Financial Officer) 30 EX-32.1 10 c88121exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard L. Marcantonio, certify that: 1. I have reviewed this annual report on Form 10-K of G&K Services, Inc.; 2. Based on my knowledge, this annual 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 circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 16, 2004 By: /s/ Richard L. Marcantonio ---------------------------------- Richard L. Marcantonio, President and Chief Executive Officer (Principal Executive Officer) 31 EX-32.2 11 c88121exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey L. Wright, certify that: 1. I have reviewed this annual report on Form 10-K of G&K Services, Inc.; 2. Based on my knowledge, this annual 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 circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 16, 2004 By: /s/ Jeffrey L. Wright ------------------------------------- Jeffrey L. Wright, Senior Vice President and Chief Financial Officer (Principal Financial Officer) 32 EX-99.1 12 c88121exv99w1.txt REPORT OF ERNST & YOUNG LLP EXHIBIT 99.1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF G&K SERVICES, INC.: We have audited the consolidated financial statements of G&K Services, Inc. as of July 3, 2004 and June 28, 2003, and for each of the three years in the period ended July 3, 2004, and have issued our report thereon dated August 13, 2004 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP --------------------- Ernst & Young LLP Minneapolis, Minnesota August 13, 2004 G&K SERVICES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
Additions -------------------------- Balance at Charged to Charged to Beginning of Costs and Other Balance at Description Year Expenses Accounts Deductions End of Year ----------- -------------- ---------- ----------- ---------- ----------- Allowance for Doubtful Accounts July 3, 2004 $ 3,687 $ 2,171 $ - $ 3,255 $ 2,603 ======= ======= === ======= ======= June 28, 2003 $ 3,326 $ 4,123 $ - $ 3,762 $ 3,687 ======= ======= === ======= ======= June 29, 2002 $ 2,613 $ 3,477 $ - $ 2,764 $ 3,326 ======= ======= === ======= =======
33
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