Results of Operations
The percentage relationships to revenues of certain income and expense items for
the three-month periods ended September 26, 2009 and September 27, 2008, and the
percentage changes in these income and expense items between periods are
presented in the following table:

                                                                         Percentage
                                         Three Months                      Change
                                             Ended                      Three Months
                                September 26,     September 27,       Fiscal Year 2010
                                    2009              2008          vs. Fiscal Year 2009
  Revenues:
  Rental operations                     94.0 %            93.4 %                 (14.6 )%
  Direct sales                           6.0               6.6                   (22.6 )

  Total revenues                       100.0             100.0                   (15.1 )

  Expenses:
  Cost of rental operations             70.7              70.6                   (14.5 )
  Cost of direct sales                  75.5              75.0                   (22.2 )

  Total cost of sales                   71.0              70.9                   (15.0 )

  Selling and administrative            24.2              25.2                   (18.5 )

  Income from operations                 4.7               3.8                     4.4

  Interest expense                       1.8               1.5                     3.2

  Income before income taxes             2.9               2.4                     5.2
  Provision for income taxes             1.4               1.8                   (34.5 )


  Net income                             1.6 %             0.6 %                 124.1 %

Three months ended September 26, 2009 compared to three months ended September 27, 2008
Revenues. Total revenue in the first quarter of fiscal 2010 decreased 15.1% to $208.1 million from $245.2 million in the first quarter of fiscal 2009. Rental revenue decreased $33.5 million, or 14.6% in the first quarter of fiscal 2010 compared to the same period of the prior fiscal year. Our organic rental revenue was negative 14.0% compared to flat in the same period of the prior fiscal year. Our organic rental growth continues to be negatively impacted by economic-driven customer attrition, significantly reduced employment levels and lower new account sales due to difficult economic conditions. Organic rental revenue is calculated using rental revenue, adjusted for foreign currency exchange rate changes and revenue from newly acquired businesses compared to prior-period results. We believe that the organic rental revenue reflects the growth of our existing rental business and is therefore useful in analyzing our financial condition and results of operations. In addition, rental revenue was negatively impacted by approximately $1.9 million or 0.8% compared to the prior year due to the unfavorable impact of foreign currency translation rates with Canada.
Direct sale revenue decreased 22.6% to $12.5 million in the first quarter of fiscal 2010 compared to $16.1 million in the same period of fiscal 2009. The organic direct sale growth rate during the current period was negative 22.25%. The decrease in direct sale revenue was primarily the result of the loss of a significant customer at our Lion Uniform Group.
Cost of Rental. Cost of rental operations decreased 14.5% to $138.4 million in the first quarter of fiscal 2010 from $161.8 million in the same period of fiscal 2009. As a percentage of rental revenue, our gross margin from rental sales decreased to 29.3% in the first quarter of fiscal 2010 from 29.4% in the same period of fiscal 2009. The decrease in rental gross margin was primarily the result of fixed production and delivery costs absorbed over a lower revenue base. This decrease was mostly

offset by cost reduction efforts and lower energy costs. In addition, the prior year included $3.3 million of expense associated with a change in a compensation law.
Cost of Direct Sales. Cost of direct sales decreased to $9.4 million in the first quarter of fiscal 2010 from $12.1 million in the same period of fiscal 2009. Gross margin from direct sales decreased to 24.5% in the first quarter of fiscal 2010 from 25.0% in the first quarter of fiscal 2009. The decrease in gross margin is primarily the result of fixed costs spread over a lower direct sale volume, partially offset by cost reduction efforts.
Selling and Administrative. Selling and administrative expenses decreased 18.5% to $50.5 million in the first quarter of fiscal 2010 from $61.9 million in the same period of fiscal 2009. As a percentage of total revenues, selling and administrative expenses decreased to 24.2% in the first quarter of fiscal 2010 from 25.2% in the first quarter of fiscal 2009. The prior year period included $4.5 million of expense associated with certain environmental reserves and approximately $1.6 million related to severance and other expense reduction initiatives. The current year includes approximately $1.4 million of severance associated with our workforce realignment during the quarter. Adjusting for these items in both years, selling and administrative expenses as a percent of revenue increased from 22.8% to 23.6%, which is primarily due to fixed costs absorbed over a smaller revenue base.
Interest Expense. Interest expense was $3.7 million in the first quarter of fiscal 2010, up from $3.6 million in the same period of fiscal 2009. The increase in interest expense is primarily the result of higher effective interest rates primarily due to the terms of the new revolver, which increased the spread over LIBOR from 87.5 basis points to 275 basis points. The increase in rates was mostly offset by lower average debt balances and a lower LIBOR rate.
Provision for Income Taxes. Our effective tax rate decreased to 46.7% in the first quarter of fiscal 2010 from 75.0% in the same period of fiscal 2009. The current year tax rate was higher than our statutory rate primarily due to the write-off of deferred tax assets associated with equity compensation. The prior year tax rate was higher than our statutory rate primarily due to the non-deductibility of certain environmental related charges and the write-off of deferred tax assets associated with the expiration of certain stock options. Liquidity, Capital Resources and Financial Condition Our primary sources of cash are net cash flows from operations and borrowings under our debt arrangements. Primary uses of cash are interest payments on indebtedness, capital expenditures, acquisitions, share repurchases and general corporate purposes.
Working capital at September 26, 2009 was $137.2 million, up approximately 1.0% from $135.8 million at June 27, 2009.
Operating Activities. Net cash provided by operating activities was $10.2 million in the first three months of fiscal 2010 and $11.7 million in the same period of fiscal 2009. Cash generated from operating activities decreased primarily due to increased payments related to accounts payable partially offset by higher net income.
Investing Activities. Net cash used by investing activities was $2.1 million in the first three months of fiscal 2010 and $6.4 million in the same period of fiscal 2009. In fiscal 2010 and 2009, cash was used primarily for purchases of property, plant and equipment. The decrease in fiscal year 2010 from the prior fiscal year reflects reduced capital expenditures.
Financing Activities. Cash used by financing activities was $12.0 million in the first three months of fiscal 2010 and cash provided by financing activities was $3.5 million in the same period of fiscal 2009. Cash used by financing activities in fiscal 2010 decreased compared to fiscal year 2009 due to efforts to reduce debt. We paid dividends of $1.4 million during the first three months of fiscal 2010, compared to $1.3 million for the same period in fiscal 2009. On July 1, 2009, we completed a new $300.0 million, three-year unsecured revolving credit facility with a syndicate of banks, which expires on July 1, 2012. This facility replaces our $325.0 million unsecured revolving credit facility, which was scheduled to mature in August 2010. Borrowings in U.S. dollars under the new credit facility will, at our election, bear interest at
(a) the adjusted London Interbank Offered Rate ("LIBOR") for specified interest periods plus a margin, which can range from 2.25% to 3.25%, determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greatest of (i) JPMorgan's prime rate, (ii) the federal funds rate plus 0.5% and
(iii) the adjusted LIBOR for a one month interest period plus 1%, plus, in each case, a margin determined with reference to our consolidated leverage ratio. Swingline loans will, at our election, bear interest at (i) the rate described in clause (b) above or (ii) a rate to be agreed upon by us and JPMorgan.

Borrowings in Canadian dollars under the credit facility will bear interest at the greater of (a) the Canadian Prime Rate and (b) the Adjusted LIBOR for a one month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1%. Effective July 1, 2009, the interest rate spread on this new facility is 1.875% higher than the previous facility. We also pay a fee on the unused daily balance of the revolving credit facility based on a leverage ratio calculated on a quarterly basis. As of September 26, 2009, borrowings outstanding under the revolving credit facility were $118.1 million. The unused portion of the revolver may be used for general corporate purposes, acquisitions, share repurchases, working capital needs and to provide up to $50.0 million in letters of credit. As of September 26, 2009, letters of credit outstanding against the revolver totaled $20.7 million and primarily relate to our property and casualty insurance programs. No amounts have been drawn upon these letters of credit. Availability of credit under this new facility requires that we maintain compliance with certain customary covenants. In addition, there are certain restricted payment limitations on dividends or other distributions, including share repurchases. The covenants under this agreement are the most restrictive when compared to our other credit facilities. The following table illustrates compliance with regard to the material covenants required by the terms of this facility as of September 26, 2009:

                                                                Required      Actual

  Maximum Leverage Ratio (Debt/EBITDA)                              3.50        2.46
  Minimum Interest Coverage Ratio (EBITDA/Interest Expense)         3.00        7.12
  Minimum Net Worth                                           $    313.1     $ 446.9

Our maximum leverage ratio and minimum coverage ratio covenants are calculated after adding back non-cash charges.
Advances outstanding as of September 26, 2009 bear interest at a weighted average all-in rate of 3.18% (LIBOR plus 2.75%) for the Eurocurrency rate loans and an all-in rate of 5.0% (Lender Prime Rate) for overnight Swingline Base Rate loans. We also pay a fee on the unused daily balance of the revolving credit facility based on a leverage ratio calculated on a quarterly basis. We have $75.0 million of variable rate unsecured private placement notes. The notes bear interest at 0.60% over LIBOR and are scheduled to mature on June 30, 2015. The notes do not require principal payments until maturity. Interest payments are reset and paid on a quarterly basis. As of September 26, 2009, the outstanding balance of the notes was $75.0 million at an all-in rate of 1.20% (LIBOR plus 0.60%).
We maintain a receivable securitization facility whereby the lender will make loans to us on a revolving basis up to a maximum of $60.0 million. The amount of funds available under the loan agreement as of September 26, 2009 was $45.9 million, which was the amount of eligible receivables less a reserve requirement. The agreement will expire on September 27, 2011. We are required to pay interest on outstanding loan balances at a rate per annum of one month LIBOR plus a margin or, if the lender is funding the loan through the issuance of commercial paper to third parties, at a rate per annum equal to a margin plus the commercial paper rate. In connection with the loan agreement, we granted a first priority security interest in certain of our U.S. based receivables. As of September 26, 2009, there was $25.0 million outstanding under this loan agreement at an all-in interest rate of 1.98% (commercial paper plus 0.85%). We are also required to pay a fee on the unused balance of the facility. On September 30, 2009, we entered into an amendment to our receivable securitization facility discussed above. The agreement was scheduled to expire on September 27, 2011 and has been extended to expire on September 26, 2012. This amendment lowered the facility limit from $60.0 million to $50.0 million, increased the default ratio by 0.25% to 2.00%, increased the delinquency ratio by 0.25% to 2.75% and allows for the termination of the facility in the event the Lender or Administrator is downgraded by any Rating Agency.
We have $50.0 million, 8.4% unsecured fixed rate private placement notes with certain institutional investors. The 10-year notes have a nine-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. As of September 26, 2009, there was $7.1 million outstanding under the notes.
See Note 5 to the consolidated condensed financial statements for details of our interest rate swap and hedging activities related to our outstanding debt.

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.
At September 26, 2009, we had available cash on hand of $9.4 million, approximately $161.2 million of available capacity under our revolving credit facility and an additional $20.9 million available under our asset securitization facility. We anticipate that we will generate sufficient cash flows from operations to satisfy our cash commitments and capital requirements for fiscal 2010 and to 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 2010 will be approximately $20-$30 million. Cash generated from operations could be affected by a number of risks and uncertainties. In fiscal 2010 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 flows from operations, existing credit facilities and our ability to obtain additional debt or equity capital, if necessary, will be adequate to finance acquisition opportunities.
We rely upon access to the capital markets, including bank financing, to provide sources of liquidity for general corporate purposes, including share repurchases. Although we believe that we will be able to maintain sufficient access to the capital markets, changes in current market conditions, deterioration in our business performance, or adverse changes in the economy could limit our access to these markets. Although we cannot predict the availability of future funding, we do not believe that the overall credit concerns in the markets will impede our ability to access the capital markets because of our financial position.
Off Balance Sheet Arrangements
At September 26, 2009, we had $20.7 million of stand-by letters of credit that were issued and outstanding, primarily in connection with our property and casualty insurance programs. No amounts have been drawn upon these letters of credit.
Pension Obligations
Pension expense is recognized on an accrual basis over an employees' approximate service periods. Pension expense is generally independent of funding decisions or requirements. The expense recognized for our defined benefit pension plan in the first quarter of fiscal 2010 was $0.4 million and the income recognized in fiscal year 2009 was not significant. At June 27, 2009, the fair value of our pension plan assets totaled $36.9 million.
Our defined benefit pension plan and related supplemental executive retirement plan were frozen as of January 1, 2007 and, as a result, there will be no future growth in benefits after December 31, 2006.
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 June 27, 2009, we estimated that the pension plan assets will generate a long-term rate of return of 8.0%. This rate was developed by evaluating input from our outside actuary as well as long-term inflation assumptions. The expected long-term rate of return on plan assets at June 27, 2009 is based on an allocation of equity and fixed income securities. Decreasing the expected long-term rate of return by 0.5% (from 8.0% to 7.5%) would increase our estimated 2010 pension expense by approximately $0.2 million. Pension liability and future pension expense increase as the discount rate is reduced. We discounted future pension obligations using a rate of 6.90% at June 27, 2009. Our outside actuary determines the discount rate by creating a yield curve based on high quality bonds. Decreasing the discount rate by 0.5% (from 6.90% to 6.40%) would increase our accumulated benefit obligation at June 27, 2009 by approximately $4.3 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. As part of our assessment of the expected return on plan assets, we considered the recent decline in the global markets and concluded that an 8% long term rate was still appropriate.

Union Pension Plans
We participate in a number of union sponsored, collectively bargained multi-employer pension plans ("Union Plans"). We are responsible for our proportional share of any unfunded vested benefits related to the Union Plans. Under the pertinent accounting rules, we are not required to record a liability for our portion of the withdrawal liability until we exit the plan. In fiscal year 2009, we exited a multi-employer pension plan and recorded an associated liability of approximately $1.0 million. If a future decision to exit a plan is made, we will record our proportional share of the unfunded vested benefits, which could have a material adverse impact on our future results of operations. Based upon the most recent information available from the trustees managing the Union Plans, our share of the unfunded vested benefits for these plans is estimated to be approximately $18.0 to $24.0 million. Exit, Disposal and Related Activities
We continuously monitor our operations and related cost structure to ensure that our resources match our revenue levels and from time to time make adjustments to ensure that we utilize our resources in an efficient manner. These adjustments may consist of facility closures, divestitures, expansions and increases or decreases in staffing levels. During the three months ended September 27, 2008 and September 26, 2009 we made a number of adjustments to our business, the most significant of which are discussed below.
In the first quarter of fiscal year 2009, we closed three processing plants, two branch locations, reduced selected headcount and outsourced our fleet maintenance function. As a result or of these actions, we recorded approximately $2.6 million of expense in the consolidated condensed statements of operations during fiscal year 2009. These charges principally impacted our United States operating segment. Of these amounts, approximately $1.0 million was recorded in the cost of rental operations line item and the remaining $1.6 million was recorded in the selling and administrative line item. All severance associated with this action was paid by September 26, 2009.
During the first quarter of fiscal year 2010, we continued to align our operations and workforce to better match our cost structure with our revenue levels. As a result, we reduced selected headcount of certain administrative, regional and corporate personnel and divested ourselves of an unprofitable business. We recorded approximately $1.4 million in associated severance costs on the selling and administrative line in the first quarter of fiscal year 2010. Of the $1.4 million in severance, $0.6 million was paid by September 26, 2009, with the remaining $0.8 million to be paid over the next twelve months. These actions primarily impacted our United States operating segment. Litigation
We are involved in a variety of legal actions relating to personal injury, employment, 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. This lawsuit was settled in fiscal year 2006 and is presently being administered. We are party to certain additional legal matters described in "Part II Item 1. Legal Proceedings" of this report.
While we cannot predict the outcome of these matters, currently, none of these actions are expected to have a material adverse effect on our results of operations or financial position. While we believe the possibility is remote, there is the potential that we may incur additional losses in excess of established reserves.
Environmental Matters
We are currently involved in several environmental-related proceedings by certain governmental agencies which relate primarily to whether we operated certain facilities in compliance with required permits. In addition to these proceedings, in the normal course of our business, we are subject to, among other things, periodic inspections by regulatory agencies. We continue to dedicate substantial operational and financial resources to environmental compliance, and we remain fully committed to operating in compliance with all environmental laws and regulations. As of September 26, 2009, we had reserves of approximately $4.4 million related to various pending environmental-related matters. There was no expense for these matters for the three months ended September 26, 2009. During the three months ended September 27, 2008, a $4.5 million charge was recorded related to environmental matters, which is recorded in the selling and administrative line of the consolidated condensed statements of operations.

While we cannot predict the ultimate outcome of any of these matters, currently, none of them are expected to have a material adverse effect on our results of operations or financial position. While we believe the possibility is remote, there is the potential that we may incur additional losses in excess of established reserves, and these losses could be material. Share-Based Compensation
We grant share-based awards, including restricted stock and options to purchase our common stock. Stock option grants are for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. Share-based compensation is recognized in the consolidated condensed statements of operations on a straight-line basis over the requisite service period. The amortization of share-based compensation reflects estimated forfeitures adjusted for actual forfeiture experiences. We review our estimated forfeiture rates on an annual basis. As share-based compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from the exercise of stock options or release of restrictions on the restricted stock. At the time share-based awards are exercised, cancelled, expire or restrictions lapse, we . . .