##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

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

For Quarter Ended September 27, 2003 Commission file number 0-4063

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

(G&K SERVICES LOGO)

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


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

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

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

YES X          NO

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

YES X          NO

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

CLASS A
    
    Outstanding November 3, 2003Common Stock, par value $0.50 per share
    
    19,283,686CLASS B
    
    Outstanding November 3, 2003Common Stock, par value $0.50 per share
    
    1,474,996






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TABLE OF CONTENTS



|                                           |                                                                                              |                                                                                                                      |  |  |  |  |  | 
|------------------------------------------ | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Financial Statements                                                                
|                                           |                                                                                              | Consolidated Condensed Balance Sheets as of September 27, 2003 and June 28, 2003                                    
|                                           |                                                                                              | Consolidated Statements of Operations for the three months ended September 27, 2003 and September 28, 2002          
|                                           |                                                                                              | Consolidated Condensed Statements of Cash Flows for the three months ended September 27, 2003 and September 28, 2002
|                                           |                                                                                              | Notes to Consolidated Condensed Financial Statements                                                                
|                                           | Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 3.Quantitative and Qualitative Disclosure About Market Risk                            
|                                           | Item 4.Controls and Procedures                                                              
|PART II                                   
|                                           | Item 6. Exhibits and Reports on Form 8-K                                                    
|                                           | Signatures                                                                                  
|EX-31.1 Certification of CEO - Section 302
|EX-31.2 Certification of CFO - Section 302
|EX-32.1 Certification of CEO - Section 906
|EX-32.2 Certification of CFO - Section 906



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##### Table of Contents



G&K Services, Inc.
Form 10-Q

Table of Contents

PART I
    
    
    
    
    
    PAGEItem 1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of
September 27, 2003 and June 28, 2003
    
    
    
    3Consolidated Statements of Operations for the three months ended
September 27, 2003 and September 28, 2002
    
    
    
    4Consolidated Condensed Statements of Cash Flows for the three
months ended September 27, 2003 and September 28, 2002
    
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    
    17PART IIItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    
    18Signatures
    
    
    
    
    
    19


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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETSG&K Services, Inc. and Subsidiaries

September 27,2003
    
    
    June 28,(In thousands)
    
    (Unaudited)
    
    
    2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    14,027
    
    
    $
    11,504Accounts receivable, less allowance for doubtful
accounts of $3,902 and $3,687
    
    
    70,456
    
    
    
    69,839Inventories
    
    
    92,988
    
    
    
    95,853Prepaid expenses
    
    
    10,510
    
    
    
    14,848Total current assets
    
    
    187,981
    
    
    
    192,044Property, Plant and Equipment, net
    
    
    246,483
    
    
    
    250,757Goodwill, net
    
    
    266,629
    
    
    
    266,140Other Assets
    
    
    69,437
    
    
    
    69,865$
    770,530
    
    
    $
    778,806LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    20,177
    
    
    $
    20,228Accrued expenses
    
    
    72,084
    
    
    
    68,679Deferred income taxes
    
    
    13,444
    
    
    
    13,459Current maturities of long-term debt
    
    
    22,337
    
    
    
    14,430Total current liabilities
    
    
    128,042
    
    
    
    116,796Long-Term Debt, net of Current Maturities
    
    
    207,066
    
    
    
    236,731Deferred Income Taxes
    
    
    29,374
    
    
    
    28,667Other Noncurrent Liabilities
    
    
    17,349
    
    
    
    16,343Stockholders Equity
    
    
    388,699
    
    
    
    380,269$
    770,530
    
    
    $
    778,806


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

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

For the Three Months EndedSeptember 27,
    
    
    September 28,(In thousands, except per share data)
    
    2003
    
    
    2002RevenuesRental operations
    
    $
    173,280
    
    
    $
    165,451Direct sales
    
    
    5,323
    
    
    
    4,347Total revenues
    
    
    178,603
    
    
    
    169,798Operating ExpensesCost of rental operations
    
    
    109,845
    
    
    
    101,470Cost of direct sales
    
    
    4,301
    
    
    
    3,501Selling and administrative
    
    
    38,533
    
    
    
    36,655Depreciation and amortization
    
    
    9,690
    
    
    
    9,019Total operating expenses
    
    
    162,369
    
    
    
    150,645Income from Operations
    
    
    16,234
    
    
    
    19,153Interest expense
    
    
    3,155
    
    
    
    3,261Income before Income Taxes
    
    
    13,079
    
    
    
    15,892Provision for income taxes
    
    
    4,970
    
    
    
    6,198Net Income
    
    $
    8,109
    
    
    $
    9,694Basic weighted average number
of shares outstanding
    
    
    20,610
    
    
    
    20,545Basic Earnings per Common Share
    
    $
    0.39
    
    
    $
    0.47Diluted weighted average number
of shares outstanding
    
    
    20,728
    
    
    
    20,686Diluted Earnings per Common Share
    
    $
    0.39
    
    
    $
    0.47Dividends per share
    
    $
    0.02
    
    
    $
    0.02


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

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

For the Three Months EndedSeptember 27,
    
    
    September 28,(In thousands)
    
    2003
    
    
    2002Operating Activities:Net income
    
    $
    8,109
    
    
    $
    9,694Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization
    
    
    9,690
    
    
    
    9,019Deferred income taxes
    
    
    465
    
    
    
    (410
    )Amortization of deferred compensation  restricted stock
    
    
    232
    
    
    
    272Changes in current operating items, exclusive of acquisitions
    
    
    9,385
    
    
    
    2,635Other, net
    
    
    (272
    )
    
    
    (146
    )Net cash provided by operating activities
    
    
    27,609
    
    
    
    21,064Investing Activities:Property, plant and equipment additions, net
    
    
    (3,621
    )
    
    
    (8,976
    )Acquisitions of business assets and other
    
    
    (539
    )
    
    
    (10,772
    )Net cash used for investing activities
    
    
    (4,160
    )
    
    
    (19,748
    )Financing Activities:Proceeds from debt financing
    
    
    8,409
    
    
    
    22,105Repayments of debt financing
    
    
    (29,569
    )
    
    
    (23,293
    )Cash dividends paid
    
    
    (363
    )
    
    
    (363
    )Sale of common stock
    
    
    423
    
    
    
    192Net cash used for financing activities
    
    
    (21,100
    )
    
    
    (1,359
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,349
    
    
    
    (43
    )Effect of Exchange Rates on Cash
    
    
    174
    
    
    
    61Cash and Cash Equivalents:Beginning of period
    
    
    11,504
    
    
    
    9,986End of period
    
    $
    14,027
    
    
    $
    10,004


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

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G&K SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Three-month period ended September 27, 2003 and September 28, 2002
(Unaudited)

The consolidated condensed financial statements included herein, except
for the June 28, 2003 balance sheet which was derived from the audited
consolidated financial statements for the fiscal year ended June 28,
2003, have been prepared by G&K Services, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, the accompanying
unaudited consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary
to present fairly the financial position of the Company as of September
27, 2003, and the results of its operations and its cash flows for the
three months ended September 27, 2003 and September 28, 2002. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated condensed financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Companys latest report
on Form 10-K.

The results of operations for the three-month periods ended September 27,
2003 and September 28, 2002 are not necessarily indicative of the results
to be expected for the full year.

1.        Summary of Significant Accounting Policies

Accounting policies followed by the Company are set forth in Note 1 in
the Companys Annual Report on Form 10-K for the fiscal year ended June
28, 2003.

Nature of Business

G&K Services, Inc. is a market leader in providing corporate identity
apparel and facility services programs to a wide variety of industrial,
service and high-technology companies. The Companys apparel programs
provide rental-lease or purchase options as well as non-apparel items
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.

Principles of Consolidation

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

Revenue Recognition

The Company recognizes revenue from rental operations in the period in
which the services are provided. Direct sale revenue is recognized in
the period in which the product is shipped. Beginning in the third
quarter of fiscal 2003, the Company made a change in the classification
of billings to customers for lost or abused merchandise to a preferred
classification of including such billings in revenue. Accordingly, all
prior period billings for lost or abused garments have been reclassified
from a reduction of cost of rental operations to rental operations
revenue.

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Derivative Financial Instruments

The Company uses derivative financial instruments principally to manage
the risk that changes in interest rates will affect the amount of its
future interest payments. Interest rate swap contracts are used to
adjust the proportion of total debt that is subject to variable and fixed
interest rates. The interest rate swap contracts are reflected at fair
value in the consolidated condensed balance sheet and the related gains
or losses on these contracts are deferred in stockholders equity (as a
component of other comprehensive income). Amounts to be paid or received
under the contracts are accrued as interest rates change and are
recognized over the life of the contracts as an adjustment to interest
expense. The net effect of this accounting is that interest expense on
the portion of variable rate debt being hedged is at a fixed rate during
the interest rate swap contract period.

The Company may periodically hedge firm cash flow commitments with its
foreign subsidiary, generally with foreign currency contracts. These
agreements are recorded at current market values and the gains and losses
are included in earnings. Gains and losses on such transactions were not
significant in the first quarter of fiscal 2004 or fiscal 2003. Notional
amounts outstanding under foreign currency contracts at September 27,
2003 were $393, all of which will mature during fiscal 2004. Notional
amounts outstanding under foreign currency contracts at September 28,
2002 were $2,402, all of which matured during fiscal 2003. Foreign
currency contracts were recorded at fair value as of September 27, 2003.

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 period. Diluted earnings per common share was computed similar to
the computation of basic earnings per share, except that the denominator
is increased for the assumed exercise of dilutive options and other
dilutive securities, including nonvested restricted stock, using the
treasury stock method.

Three Months EndedSeptember 27,
    
    
    September 28,2003
    
    
    2002Weighted average number of common
shares outstanding used in
computation of basic earning per
share
    
    
    20,610
    
    
    
    20,545Weighted average effect of nonvested
restricted stock grants and assumed
exercise of options
    
    
    118
    
    
    
    141Shares used in computation of diluted earnings per share
    
    
    20,728
    
    
    
    20,686


Stock-Based Compensation

The Company maintains Stock Option and Compensation Plans (the Employee
Plans), which are more fully described in Note 6 in the Companys Annual
Report on Form 10-K for the fiscal year ended June 28, 2003. The Company
applies Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, 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 $232 and $272 for the
three-month periods ended September 27, 2003 and September 28, 2002,
respectively. Had compensation cost been recognized based on the fair
values of options at the grant dates consistent with the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for

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Stock-Based Compensation (SFAS 123), the Companys net income and net
income per common share would have been adjusted as follows:

Three Months EndedSeptember 27,
    
    
    September 28,2003
    
    
    2002Net income, as reported
    
    $
    8,109
    
    
    $
    9,694Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (444
    )
    
    
    (419
    )Pro forma net income
    
    $
    7,665
    
    
    $
    9,275Basic net income per share:As reported
    
    $
    0.39
    
    
    $
    0.47Pro forma
    
    
    0.37
    
    
    
    0.45Diluted net income per share:As reported
    
    $
    0.39
    
    
    $
    0.47Pro forma
    
    
    0.37
    
    
    
    0.45


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.

2.        Comprehensive Income

For the three-month periods ended September 27, 2003 and September 28,
2002, the components of comprehensive income were as follows:

Three Months EndedSeptember 27,
    
    
    September 28,2003
    
    
    2002Net income
    
    $
    8,109
    
    
    $
    9,694Other comprehensive incomeForeign currency translation
adjustments, net of tax
    
    
    (343
    )
    
    
    (2,552
    )Net unrealized gain (loss) on
derivative financial
instruments, net of tax
    
    
    371
    
    
    
    (64
    )Comprehensive income
    
    $
    8,137
    
    
    $
    7,078


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3.        Goodwill and Intangible Assets

In July 2001, the Company adopted the provisions of SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. The changes in the carrying amount of goodwill for the three
months ended September 27, 2003, by operating segment, are as follows:

United States
    
    
    Canada
    
    
    TotalBalance as of June 28, 2003
    
    $
    236,913
    
    
    $
    29,227
    
    
    $
    266,140Goodwill acquired during the period
    
    
    594
    
    
    
    
    
    
    
    594Other, primarily foreign currency
translation
    
    
    
    
    
    
    (105
    )
    
    
    (105
    )Balance as of September 27, 2003
    
    $
    237,507
    
    
    $
    29,122
    
    
    $
    266,629


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

As of September 27, 2003Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts and
related customer
relationships
    
    $
    76,824
    
    
    $
    33,609
    
    
    $
    43,215Non-competition agreements
    
    
    9,721
    
    
    
    5,290
    
    
    
    4,431Total
    
    $
    86,545
    
    
    $
    38,899
    
    
    $
    47,646


As of June 28, 2003Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts and
related customer
relationships
    
    $
    76,853
    
    
    $
    31,919
    
    
    $
    44,934Non-competition agreements
    
    
    9,721
    
    
    
    5,055
    
    
    
    4,666Total
    
    $
    86,574
    
    
    $
    36,974
    
    
    $
    49,600


Amortization expense was $1,945 and $1,637 for the three months ended
September 27, 2003 and September 28, 2002, respectively. Estimated
amortization expense for each of the five succeeding fiscal years based
on the intangible assets as of September 27, 2003 is as follows:

2004 remaining
    
    $
    5,7842005
    
    
    7,6612006
    
    
    7,3572007
    
    
    7,2352008
    
    
    6,8632009
    
    
    3,194


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4.        Segment Information

The Company has two operating segments under the guidelines of SFAS
No. 131: United States and Canada, which have been identified as
components of the Company that are reviewed by the Companys Chief
Executive Officer to determine resource allocation and evaluate
performance. Each operating segment derives revenues from the
corporate identity apparel and facility services industry, which
includes garment rental and non-apparel items such as floor mats,
dust mops, wiping towels, selected linen items and several restroom
products. No one customers transactions account for 1.0% or more of
the Companys revenues.

The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note
1). Corporate expenses are allocated to the segments based on
segment revenue. The Company evaluates performance based on income
from operations. Financial information by geographic location for
the three-month periods ended September 27, 2003 and September 28,
2002 is as follows:

UnitedStates
    
    
    Canada
    
    
    TotalFirst Quarter Fiscal Year 2004:Revenues
    
    $
    155,758
    
    
    $
    22,845
    
    
    $
    178,603Income from operations
    
    
    12,297
    
    
    
    3,937
    
    
    
    16,234Property, plant and equipment
additions, net
    
    
    3,677
    
    
    
    (56
    )
    
    
    3,621Depreciation and amortization
expense
    
    
    8,627
    
    
    
    1,063
    
    
    
    9,690First Quarter Fiscal Year 2003:Revenues
    
    $
    149,358
    
    
    $
    20,440
    
    
    $
    169,798Income from operations
    
    
    14,839
    
    
    
    4,314
    
    
    
    19,153Property, plant and equipment
additions, net
    
    
    6,683
    
    
    
    2,293
    
    
    
    8,976Depreciation and amortization
expense
    
    
    8,116
    
    
    
    903
    
    
    
    9,019


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

Overview

G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota,
is a market leader in providing corporate identity apparel and facility
services programs to a wide variety of North American industrial, service and
high-technology companies. We rent uniforms and other related products such as
floor mats, dust mops, wiping towels, restroom supplies and selected linen
items. We also sell uniforms and other apparel items to customers in our
direct sale programs. The North American rental market is approximately $6.3
billion, while the direct sales market, targeted by us, is approximately
$4.5-$5.0 billion in size.

Critical Accounting Policies

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

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

Revenue Recognition and Allowance for Doubtful Accounts

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. Direct sale revenue is recognized in the period in which the product
is shipped. Beginning in the third quarter of fiscal 2003, we made a change in
the classification of billings to customers for lost or abused merchandise to a
preferred classification of including such billings in revenue. Accordingly,
all prior period billings for lost or abused garments have been reclassified
from a reduction of cost of rental operations to rental operations revenue.

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.
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

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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 2003 or through the first three months of fiscal
2004. Future events could cause management to conclude that impairment
indicators exist and that goodwill and other intangibles associated with
acquired businesses are impaired. Any resulting impairment loss could have a
material impact on our financial condition and results of operations.

Property, plant and equipment and definite-lived intangible assets are
depreciated or amortized over their useful lives. Useful lives are based on
management estimates of the period that the assets will generate revenue.
Long-lived assets are evaluated for impairment whenever events and
circumstances indicate an asset may be impaired. There have been no
write-downs of any long-lived assets in fiscal 2003 or through the first three
months of fiscal 2004.

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. Changes in the cost of
medical care, our ability to settle claims and the estimates and judgment used
by management could have a material impact on the amount and timing of expense
for any period.

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Results of Operations

The percentage relationships to net sales of certain income and expense items
for the three-month periods ended September 27, 2003 and September 28, 2002,
and the percentage changes in these income and expense items between periods
are presented in the following table:

Three Months
    
    
    PercentageEnded
    
    
    ChangeThree MonthsSept 27,
    
    
    Sept 28,
    
    
    FY 20042003
    
    
    2002
    
    
    vs. FY 2003Revenues:Rental
    
    
    97.0
    %
    
    
    97.4
    %
    
    
    4.7
    %Direct
    
    
    3.0
    
    
    
    2.6
    
    
    
    22.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    5.2Expenses:Cost of rental sales
    
    
    63.4
    
    
    
    61.3
    
    
    
    8.3Cost of direct sales
    
    
    80.8
    
    
    
    80.5
    
    
    
    22.9Total cost of sales
    
    
    63.9
    
    
    
    61.8
    
    
    
    8.7Selling and administrative
    
    
    21.6
    
    
    
    21.6
    
    
    
    5.1Depreciation and amortization
    
    
    5.4
    
    
    
    5.3
    
    
    
    7.4Income from operations
    
    
    9.1
    
    
    
    11.3
    
    
    
    (15.2
    )Interest expense
    
    
    1.8
    
    
    
    1.9
    
    
    
    (3.3
    )Income before income taxes
    
    
    7.3
    
    
    
    9.4
    
    
    
    (17.7
    )Provision for income taxes
    
    
    2.8
    
    
    
    3.7
    
    
    
    (19.8
    )Net income
    
    
    4.5
    %
    
    
    5.7
    %
    
    
    (16.4
    )%


Three months ended September 27, 2003 compared to three months ended September
28, 2002

Revenues.Total revenues in the first quarter of fiscal 2004 increased 5.2% to
$178.6 million from $169.8 million in the first quarter of fiscal 2003. Rental
revenue increased $7.8 million in the first quarter, or 4.7%. 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-period results, was
approximately negative 1.5%. We believe that the organic industrial rental
growth rate better reflects the growth of our existing industrial business and
is therefore useful in analyzing our financial condition and results of
operations.

Direct sale revenue increased 22.5% to $5.3 million in the first quarter of
fiscal 2004 compared to $4.3 million in the same period of fiscal 2003. The
increase in revenue was driven by a focused effort to provide direct sale
garment solutions to our existing rental customers.

Cost of Rental and Direct Sale.Cost of rental operations increased 8.3% to
$109.8 million in the first quarter of fiscal 2004 from $101.5 million in the
same period of fiscal 2003. Gross margin from rental sales decreased to 36.6%
in the first quarter of fiscal 2004 from 38.7% in the first quarter of fiscal
2003. The decrease in rental gross margins was due to higher energy costs,
acquisition integration and plant consolidation costs, employee benefit costs
(including pension) and lost margin from lower employment levels within our
existing customer base.

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Cost of direct sales increased 22.9% to $4.3 million in the first quarter of
fiscal 2004 from $3.5 million in the same period of fiscal 2003. Gross margin
from direct sales decreased to 19.2% in the first quarter of fiscal 2004 from
19.5% in the first quarter of fiscal 2003.

Selling and Administrative.Selling and administrative expenses increased 5.1%
to $38.5 million in the first quarter of fiscal 2004 from $36.7 million in the
same period of fiscal 2003. As a percentage of total revenues, selling and
administrative expenses remained constant at 21.6% in both the first quarter of
fiscal 2004 and the same period of fiscal 2003. Increased employee benefit
costs, including pension, were largely offset by improvements in expense
related to uncollectible accounts receivable.

Depreciation and Amortization. Depreciation and amortization expense increased
7.4% to $9.7 million in the first quarter of fiscal 2004 from $9.0 million in
the same period of fiscal 2003. As a percentage of total revenues,
depreciation and amortization expense increased to 5.4% in the first quarter of
fiscal 2004 from 5.3% in the first quarter of fiscal 2003. Capital
expenditures, excluding acquisition of businesses, were $3.6 million in the
first quarter of fiscal 2004 compared to $9.0 million in the prior years
quarter. The lower level of capital expenditures was primarily due to timing
of new plant construction and a continued focus on asset utilization.

Interest Expense. Interest expense was $3.2 million in the first quarter of
fiscal 2004, down from $3.3 million in the same period of fiscal 2003.

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

Liquidity, Capital Resources and Financial Condition

Our primary sources of cash are net cash flows from operations and borrowings
under 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 $27.6
million in the first three months of fiscal 2004 and $21.1 million in the same
period of fiscal 2003. Operating cash flow was up over the prior year due to
effective working capital management including a continued focus on accounts
receivable and new inventories.

Working capital at September 27, 2003 was $59.9 million, down 20.3% from $75.2
million at June 28, 2003. The 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 in investing activities was $4.2 million
in the first three months of fiscal 2004 and $19.7 million in the same period
of fiscal 2003. In fiscal 2004, cash was primarily used for property, plant
and equipment additions. In fiscal 2003, cash was largely used for acquisition
of business assets and property, plant and equipment additions.

Financing Activities.Cash used for financing activities was $21.1 million in
the first three months of fiscal 2004 and $1.4 million in the same period of
fiscal 2003. Cash used in fiscal 2004 was primarily related to the repayment
of long-term debt. The Company paid dividends of $0.4 million during the first
three months of fiscal 2004.

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.

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The following table summarizes our fixed cash obligations as of September 27,
2003 for the fiscal years ending June (in thousands):

2004 Remaining
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009 and Thereafter
    
    
    TotalVariable rate term loan and
revolving credit facility
    
    $
    8,438
    
    
    $
    15,000
    
    
    $
    18,750
    
    
    $
    22,500
    
    
    $
    109,800
    
    
    $
    
    
    
    $
    174,488Fixed rate term loan
    
    
    
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    21,428
    
    
    
    50,000Other debt arrangements, including
capital leases
    
    
    2,621
    
    
    
    1,734
    
    
    
    531
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    4,915Operating leases
    
    
    9,223
    
    
    
    11,114
    
    
    
    8,771
    
    
    
    7,114
    
    
    
    5,693
    
    
    
    2,631
    
    
    
    44,546Total contractual cash obligations
    
    $
    20,282
    
    
    $
    34,991
    
    
    $
    35,195
    
    
    $
    36,786
    
    
    $
    122,636
    
    
    $
    24,059
    
    
    $
    273,949


Also, at September 27, 2003, we had stand-by letters of credit totaling $15.4
million that have been issued and are outstanding, primarily in connection with
our property and casualty insurance programs. No amounts have been drawn upon
these letters of credit.

At September 27, 2003, we had available cash on hand of $14.0 million and over
$100.0 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 2004; however,
we may utilize borrowings under the revolving credit facility to supplement our
cash requirements from time to time.

The amount of cash flow generated from operations is subject to a number of
risks and uncertainties. In fiscal 2004, we may actively seek and consider
acquisitions of business assets, the consummation of any acquisition could
affect our liquidity profile and level of outstanding debt. We believe that
available capacity under our revolving credit facility will be adequate to
finance any such acquisitions and planned capital expenditures in fiscal 2004.

On October 22, 2003, we filed a registration statement with the Securities and
Exchange Commission to issue, at an indeterminate date, debt securities, Class
A Common Stock and securities warrants with an aggregate initial offering price
not to exceed $200 million. The SEC declared this registration
statement effective on November 5, 2003. The securities covered by
the registration statement, which may be offered in one or
more offerings and in any combination, would in each case be offered pursuant
to a prospectus supplement that will describe the specific types, amounts,
price and other terms of the offered securities. Unless the applicable
prospectus supplement states otherwise, the net proceeds from any sale of the
offered securities would be used for working capital, the repayment of
indebtedness, the funding of certain expenditures in connection with
acquisitions and for general corporate purposes. Currently, we have no specific
plans to issue any securities under the registration statement.

Pension Obligations

We account for our defined benefit pension plan using Statement of Financial
Accounting Standards 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 $1.5 million in the first
quarter of fiscal 2004 and $0.7 million in the same period of fiscal 2003. At
June 28, 2003, the fair value of our pension plan assets totaled $16.8 million.
Lower investment returns, benefit payments and declining discount rates
resulted in additional minimum pension liability of $2.9 million (net of tax of
$1.7 million) as of June 28, 2003. We made a cash contribution of approximately
$2.8 million in the first quarter of fiscal 2004.

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 28,
2003, we estimated that the pension plan assets will generate a long-term rate
of return of 8.0%. This rate

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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
June 28, 2003 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 fiscal 2004 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 6.0% at June 28, 2003. 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 6.0% to 5.5%) would have increased
our accumulated benefit obligation at June 28, 2003 by approximately $3.4
million and increased the estimated fiscal 2004 pension expense by
approximately $1.0 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 impact 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, 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 and a lawsuit in
California that alleges G&K violated certain state wage and hour laws
applicable to its route representatives. While we are unable to predict the
ultimate outcome of these legal actions, it is the opinion of management that
the disposition of these matters will not have a material adverse effect on our
consolidated financial statements taken as a whole.

Cautionary Statements Regarding Forward-Looking Statements

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

Some of the factors that could cause actual results or events to vary from
stated expectations include, but are not limited to, the following: unforeseen
operating risks; the effects of overall economic conditions; fluctuations in
costs of insurance and energy; acquisition integration costs; the performance
of acquired businesses; preservation of positive labor relationships;
competition, including pricing, within the corporate identity apparel and
facility services industry; and the availability of capital to finance planned
growth. Additional information concerning potential

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factors that could effect future financial results is included in the Companys
Annual Report on Form 10-K for the fiscal year ended June 28, 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates.
We use financial instruments, including fixed and variable rate debt, as well
as interest rate swaps to manage interest rate risk. Interest rate swap
agreements are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures.
Assuming the current level of borrowings, a one percentage point increase in
interest rates under these borrowings would have increased our interest expense
for the first quarter of fiscal 2004 by approximately $0.3 million. This
estimated exposure considers the mitigating effects of interest rate swap
agreements outstanding at September 27, 2003 on the change in the cost of
variable rate debt.

Foreign Currency Exchange Risk

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

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Form 10-Q. Based on their evaluation, our chief executive officer and chief
financial officer concluded that the Companys disclosure controls and
procedures are effective.

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above.

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PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

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.

b. Reports on Form 8-K

A Form 8-K, Item 5. Other Events was filed on August 27, 2003.

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SIGNATURES

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

G&K SERVICES, INC(Registrant)Date:
    
    November 6, 2003
    
    By:
    
    /s/ Jeffrey L. WrightJeffrey L. WrightChief Financial Officer andSecretary(Principal Financial Officer)By:
    
    /s/ Michael F. WoodardMichael F. WoodardController(Principal Accounting Officer)


19