##### Table of Contents



(G&K SERVICES LOGO) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended April 2, 2005 Commission file number 0-4063 G&K SERVICES, INC.  MINNESOTA
    
    
    
    41-0449530(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    Identification No.)
 5995 OPUS PARKWAY
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 þ                      NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ                      NO o 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 May 3, 2005Common Stock, par value $0.50 per share
    
    19,611,249CLASS B
    
    Outstanding May 3, 2005Common Stock, par value $0.50 per share
    
    1,474,996




---



##### Table of Contents



G&K Services, Inc.
Form 10-Q Table of Contents  
 PAGEPART IItem 1. Financial StatementsConsolidated Condensed Balance Sheets as of
April 2, 2005 and July 3, 2004
    
    
    3Consolidated Statements of Operations for the three and nine months ended
April 2, 2005 and March 27, 2004
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine
months ended April 2, 2005 and March 27, 2004
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13Item 3.Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 4.Controls and Procedures
    
    
    21PART IIItem 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    22Item 6.Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




---



##### Table of Contents



PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 CONSOLIDATED CONDENSED BALANCE SHEETS  G&K Services, Inc. and Subsidiaries
 April 2,2005
    
    
    July 3,(In thousands)
    
    (Unaudited)
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    10,864
    
    
    $
    26,931Accounts receivable, less allowance for doubtful
accounts of $3,045 and $2,603
    
    
    84,458
    
    
    
    71,058Inventories
    
    
    115,745
    
    
    
    94,476Prepaid expenses
    
    
    12,127
    
    
    
    14,902Total current assets
    
    
    223,194
    
    
    
    207,367Property, Plant and Equipment, net
    
    
    242,228
    
    
    
    240,609Goodwill
    
    
    337,751
    
    
    
    285,892Other Assets
    
    
    87,643
    
    
    
    68,879$
    890,816
    
    
    $
    802,747LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    21,720
    
    
    $
    20,511Accrued expenses
    
    
    80,610
    
    
    
    76,470Deferred income taxes
    
    
    7,836
    
    
    
    7,395Current maturities of long-term debt
    
    
    25,183
    
    
    
    24,018Total current liabilities
    
    
    135,349
    
    
    
    128,394Long-Term Debt, net of Current Maturities
    
    
    215,794
    
    
    
    184,305Deferred Income Taxes
    
    
    40,244
    
    
    
    38,256Other Noncurrent Liabilities
    
    
    29,413
    
    
    
    26,369Stockholders Equity
    
    
    470,016
    
    
    
    425,423$
    890,816
    
    
    $
    802,747
 The accompanying notes are an integral part of these consolidated condensed financial statements. 3




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONSG&K Services, Inc. and Subsidiaries
(Unaudited) For the Three Months Ended
    
    
    For the Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004RevenuesRental operations
    
    $
    188,064
    
    
    $
    173,531
    
    
    $
    547,465
    
    
    $
    521,431Direct sales
    
    
    15,746
    
    
    
    5,494
    
    
    
    33,912
    
    
    
    18,736Total revenues
    
    
    203,810
    
    
    
    179,025
    
    
    
    581,377
    
    
    
    540,167Operating ExpensesCost of rental operations
    
    
    119,139
    
    
    
    110,382
    
    
    
    346,563
    
    
    
    331,289Cost of direct sales
    
    
    12,011
    
    
    
    4,061
    
    
    
    25,348
    
    
    
    14,145Selling and administrative
    
    
    42,518
    
    
    
    37,353
    
    
    
    122,363
    
    
    
    114,677Depreciation and amortization
    
    
    10,407
    
    
    
    9,865
    
    
    
    30,726
    
    
    
    29,328Total operating expenses
    
    
    184,075
    
    
    
    161,661
    
    
    
    525,000
    
    
    
    489,439Income from Operations
    
    
    19,735
    
    
    
    17,364
    
    
    
    56,377
    
    
    
    50,728Interest expense
    
    
    2,891
    
    
    
    2,826
    
    
    
    8,080
    
    
    
    8,914Income before Income Taxes
    
    
    16,844
    
    
    
    14,538
    
    
    
    48,297
    
    
    
    41,814Provision for income taxes
    
    
    6,418
    
    
    
    5,524
    
    
    
    18,174
    
    
    
    15,889Net Income
    
    $
    10,426
    
    
    $
    9,014
    
    
    $
    30,123
    
    
    $
    25,925Basic weighted average number
of shares outstanding
    
    
    20,994
    
    
    
    20,767
    
    
    
    20,910
    
    
    
    20,681Basic Earnings per Common Share
    
    $
    0.50
    
    
    $
    0.43
    
    
    $
    1.44
    
    
    $
    1.25Diluted weighted average number
of shares outstanding
    
    
    21,290
    
    
    
    20,974
    
    
    
    21,186
    
    
    
    20,851Diluted Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.43
    
    
    $
    1.42
    
    
    $
    1.24Dividends per share
    
    $
    0.0175
    
    
    $
    0.0175
    
    
    $
    0.0525
    
    
    $
    0.0525
 The accompanying notes are an integral part of these consolidated condensed financial statements. 4




---



##### Table of Contents



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSG&K Services, Inc. and Subsidiaries
(Unaudited) For the Nine Months EndedApril 2,
    
    
    March 27,(In thousands)
    
    2005
    
    
    2004Operating Activities:Net income
    
    $
    30,123
    
    
    $
    25,925Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    30,726
    
    
    
    29,328Deferred income taxes
    
    
    509
    
    
    
    671Amortization of deferred compensation  restricted stock
    
    
    677
    
    
    
    659Changes in
current operating items, exclusive of acquisitions
    
    
    (19,418
    )
    
    
    24,758Other assets and liabilities
    
    
    1,159
    
    
    
    308Net cash provided by operating activities
    
    
    43,776
    
    
    
    81,649Investing Activities:Property, plant and equipment additions, net
    
    
    (10,194
    )
    
    
    (12,790
    )Acquisitions of business assets and other
    
    
    (74,895
    )
    
    
    (26,082
    )Net cash used for investing activities
    
    
    (85,089
    )
    
    
    (38,872
    )Financing Activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    1,345Repayments of long-term debt
    
    
    (21,317
    )
    
    
    (9,647
    )Proceeds from (repayments of) short-term borrowings, net
    
    
    41,200
    
    
    
    (24,100
    )Cash dividends paid
    
    
    (1,100
    )
    
    
    (1,090
    )Sale of common stock
    
    
    4,855
    
    
    
    3,714Net cash provided by (used for) financing activities
    
    
    23,638
    
    
    
    (29,778
    )(Decrease) Increase in Cash and Cash Equivalents
    
    
    (17,675
    )
    
    
    12,999Effect of Exchange Rates on Cash
    
    
    1,608
    
    
    
    254Cash and Cash Equivalents:Beginning of period
    
    
    26,931
    
    
    
    11,504End of period
    
    $
    10,864
    
    
    $
    24,757Supplemental Cash Flow Information:Non-Cash Transactions -Debt issued in connection with business acquisitions
    
    $
    11,890
    
    
    $
    
 The accompanying notes are an integral part of these consolidated condensed financial statements. 5




---



##### Table of Contents



G&K SERVICES, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Three and nine month periods ended April 2, 2005 and March 27, 2004
(Unaudited)  The consolidated condensed financial statements included herein, except for the July 3, 2004
balance sheet which was derived from the audited consolidated financial statements for the
fiscal year ended July 3, 2004, 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 April
2, 2005, and the results of its operations for the three and nine months ended and its cash
flows for the nine months ended April 2, 2005 and March 27, 2004. 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 and nine month periods ended April 2, 2005 and March
27, 2004 are not necessarily indicative of the results to be expected for the full year.1.
    Summary of Significant Accounting PoliciesAccounting 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 July 3, 2004.Nature of BusinessG&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 ConsolidationThe 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 RecognitionThe 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. 6




---



##### Table of Contents



Derivative Financial InstrumentsThe Company uses derivative financial instruments 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 also uses derivative financial instruments to manage the risk that changes in
gasoline cost will affect the future financial results of the Company. The Company
purchases gasoline futures contracts to effectively hedge a portion of anticipated actual
gasoline purchases. The gasoline futures 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). Upon
settlement of each contract, the actual gain or loss is reflected in gasoline expense.The Company may also 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, if any, on all such transactions were not significant in the third quarter
of fiscal 2005 or fiscal 2004.Per Share DataBasic 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 Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    20,994
    
    
    
    20,767
    
    
    
    20,910
    
    
    
    20,681Weighted average effect of nonvested
restricted stock grants and assumed
exercise of options
    
    
    296
    
    
    
    207
    
    
    
    276
    
    
    
    170Shares used in computation of
diluted earnings per share
    
    
    21,290
    
    
    
    20,974
    
    
    
    21,186
    
    
    
    20,851
 7




---



##### Table of Contents



Stock-Based CompensationThe 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 July 3, 2004. 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 $154 and
$192 for the three month periods and $677 and $659 for the nine month periods ended April 2,
2005 and March 27, 2004, 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 Stock-Based Compensation (SFAS
123), the Companys net income and net income per common share would have been adjusted as
follows: Three Months Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    10,426
    
    
    $
    9,014
    
    
    $
    30,123
    
    
    $
    25,925Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (475
    )
    
    
    (398
    )
    
    
    (1,378
    )
    
    
    (1,348
    )Pro forma net income
    
    $
    9,951
    
    
    $
    8,616
    
    
    $
    28,745
    
    
    $
    24,577Basic net income per share:As reported
    
    $
    0.50
    
    
    $
    0.43
    
    
    $
    1.44
    
    
    $
    1.25Pro forma
    
    
    0.47
    
    
    
    0.42
    
    
    
    1.37
    
    
    
    1.19Diluted net income per share:As reported
    
    $
    0.49
    
    
    $
    0.43
    
    
    $
    1.42
    
    
    $
    1.24Pro forma
    
    
    0.47
    
    
    
    0.41
    
    
    
    1.35
    
    
    
    1.18
  Recent Accounting PronouncementsIn December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS 123(R)), which is
a revision of SFAS 123, Accounting for Stock-Based Compensation. Generally, the approach
in SFAS 123(R) is similar to the approach described in Statement 123 for determining the
fair value of a share-based payment. However, SFAS 123(R) requires the fair value of all
share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement. Pro forma disclosure is no longer an alternative. The
new standard will be effective for public entities (excluding small business issuers) in the
first interim or annual reporting period beginning after June 15, 2005. G&K plans to adopt
this Statement in the first quarter of fiscal 2006. The Company is currently evaluating the
impact of this standard on its consolidated financial statements. 8




---



##### Table of Contents



2.
    Comprehensive IncomeFor the three and nine month periods ended April 2, 2005 and March 27, 2004, the components
of comprehensive income were as follows: Three Months Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    10,426
    
    
    $
    9,014
    
    
    $
    30,123
    
    
    $
    25,925Other comprehensive incomeForeign currency translation adjustments, net of tax
    
    
    (1,205
    )
    
    
    (635
    )
    
    
    9,233
    
    
    
    1,867Net unrealized holding gain on
derivative financial instruments, net of tax
    
    
    575
    
    
    
    9
    
    
    
    804
    
    
    
    335Comprehensive income
    
    $
    9,796
    
    
    $
    8,388
    
    
    $
    40,160
    
    
    $
    28,127
  3.
    AcquisitionsDuring the first nine months of fiscal 2005 the Company made several small acquisitions.
The total purchase consideration, including related acquisition costs of these transactions
was $85,832, which includes $11,890 of debt issued. The total purchase price exceeded the
estimated fair values of assets acquired and liabilities assumed by $48,938. The Company
may be required to pay up to $12,000 of additional cash consideration for these acquisitions
contingent on specific future events.The pro forma effects of these acquisitions, had they been acquired at the beginning of the
fiscal year, were not material, either individually or in the aggregate, to the Company.4.
    Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for the nine months ended April 2, 2005, by
operating segment, are as follows: United States
    
    
    Canada
    
    
    TotalBalance as of July 3, 2004
    
    $
    254,998
    
    
    $
    30,894
    
    
    $
    285,892Goodwill acquired during the period
    
    
    31,481
    
    
    
    17,457
    
    
    
    48,938Other, primarily foreign currency
translation
    
    
    
    
    
    
    2,921
    
    
    
    2,921Balance as of April 2, 2005
    
    $
    286,479
    
    
    $
    51,272
    
    
    $
    337,751
 9




---



##### Table of Contents



Information regarding the Companys other intangible assets, which are included in
other assets on the balance sheet, are as follows: As of April 2, 2005Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    $
    102,516
    
    
    $
    45,528
    
    
    $
    56,988Non-competition agreements
    
    
    10,834
    
    
    
    6,833
    
    
    
    4,001Total
    
    $
    113,350
    
    
    $
    52,361
    
    
    $
    60,989
 As of July 3, 2004Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    $
    80,142
    
    
    $
    38,991
    
    
    $
    41,151Non-competition agreements
    
    
    9,822
    
    
    
    6,013
    
    
    
    3,809Total
    
    $
    89,964
    
    
    $
    45,004
    
    
    $
    44,960
 Amortization expense was $6,803 and $5,891 for the nine months ended April 2, 2005 and
March 27, 2004, respectively. Estimated amortization expense for each of the five
succeeding fiscal years based on the intangible assets as of April 2, 2005 is as follows: 2005 remaining
    
    $
    2,6992006
    
    
    10,7782007
    
    
    10,5762008
    
    
    10,0002009
    
    
    6,2922010
    
    
    6,045
  5.
    Long-Term DebtOn November 17, 2004, the Company entered into a loan agreement expiring on October 23,
2007. Under the loan agreement, the lender will make loans to the Company on a revolving
basis up to $50,000. The Company will be 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 average annual interest rate for such commercial paper. In
connection with the loan agreement, the Company granted a first priority security interest
in certain of its U.S. based receivables. The amount of funds available under the loan
agreement will be based on the amount of eligible receivables and various reserves required.
The loan agreement contains representations, warranties, covenants and indemnifications
customary for facilities of this type. At April 2, 2005, there was $50,000 outstanding
under the agreement. The Company used the net proceeds of this loan to reduce indebtedness
under its unsecured credit facilities. 10




---



##### Table of Contents



6.
    Employee Benefit PlansThe components of net periodic pension cost are as follows for the three months ended April
2, 2005 and March 27, 2004: Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    948
    
    
    $
    987
    
    
    $
    198
    
    
    $
    183Interest cost
    
    
    681
    
    
    
    629
    
    
    
    171
    
    
    
    142Expected return on assets
    
    
    (545
    )
    
    
    (379
    )
    
    
    
    
    
    
    Prior service cost
    
    
    14
    
    
    
    14
    
    
    
    11
    
    
    
    9Loss
    
    
    129
    
    
    
    263
    
    
    
    47
    
    
    
    78Net periodic pension cost
    
    $
    1,227
    
    
    $
    1,514
    
    
    $
    427
    
    
    $
    412
  The components of net periodic pension cost are as follows for the nine months ended
April 2, 2005 and March 27, 2004: Supplemental ExecutivePension Plan
    
    
    Retirement PlanNine Months Ended
    
    
    Nine Months EndedApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    2,843
    
    
    $
    2,969
    
    
    $
    588
    
    
    $
    547Interest cost
    
    
    2,042
    
    
    
    1,890
    
    
    
    509
    
    
    
    428Expected return on assets
    
    
    (1,634
    )
    
    
    (1,139
    )
    
    
    
    
    
    
    Prior service cost
    
    
    42
    
    
    
    42
    
    
    
    32
    
    
    
    27Loss
    
    
    387
    
    
    
    791
    
    
    
    151
    
    
    
    235Net periodic pension cost
    
    $
    3,680
    
    
    $
    4,553
    
    
    $
    1,280
    
    
    $
    1,237
  7.
    Segment InformationThe 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
facility services products such as floor mats, dust mops, wiping towels, selected linen
items and several restroom products. Annually, 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 and
nine month periods ended April 2, 2005 and March 27, 2004 is as follows: 11




---



##### Table of Contents



UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalThird Quarter Fiscal Year 2005:Revenues
    
    $
    170,069
    
    
    $
    33,741
    
    
    $
    203,810Income from operations
    
    
    13,276
    
    
    
    6,459
    
    
    
    19,735Property, plant and equipment
additions, net
    
    
    4,884
    
    
    
    1,215
    
    
    
    6,099Depreciation and amortization
expense
    
    
    8,976
    
    
    
    1,431
    
    
    
    10,407Third Quarter Fiscal Year 2004:Revenues
    
    $
    153,696
    
    
    $
    25,329
    
    
    $
    179,025Income from operations
    
    
    12,442
    
    
    
    4,922
    
    
    
    17,364Property, plant and equipment
additions, net
    
    
    3,807
    
    
    
    611
    
    
    
    4,418Depreciation and amortization
expense
    
    
    8,771
    
    
    
    1,094
    
    
    
    9,865
 UnitedFor the Nine Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2005:Revenues
    
    $
    489,113
    
    
    $
    92,264
    
    
    $
    581,377Income from operations
    
    
    38,477
    
    
    
    17,900
    
    
    
    56,377Property, plant and equipment
additions, net
    
    
    7,119
    
    
    
    3,075
    
    
    
    10,194Depreciation and amortization
expense
    
    
    26,683
    
    
    
    4,043
    
    
    
    30,726Fiscal Year 2004:Revenues
    
    $
    466,662
    
    
    $
    73,505
    
    
    $
    540,167Income from operations
    
    
    36,824
    
    
    
    13,904
    
    
    
    50,728Property, plant and equipment
additions, net
    
    
    11,278
    
    
    
    1,512
    
    
    
    12,790Depreciation and amortization
expense
    
    
    26,069
    
    
    
    3,259
    
    
    
    29,328
 12




---



##### Table of Contents



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 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. We made several small acquisitions during the first nine months of fiscal 2005. In August 2004, we
acquired Keefer Laundry Ltd., a textile laundry company serving the Vancouver and Whistler areas of
British Columbia. The acquisition extends our uniform and textile rental service area to Western
Canada. Nettoyeur Shefford Inc., a uniform and textile service company serving Granby and
Montreal, Quebec was purchased in October 2004. This acquisition enhances our market position
serving customers in the province of Quebec. Also in October 2004, we purchased certain industrial
rental assets and customers of Marathon Linen, Inc., a uniform and textile service company serving
the Detroit metro area. This acquisition expands our geographic coverage to a major North American
market. In December 2004, we acquired the direct sale uniform group and related assets from Lion
Apparel, Inc., a Dayton Ohio based designer, marketer and distributor of customized uniform
programs. This acquisition expands our direct sale business and positions us to pursue greater
direct sale growth. Custom Linen Systems, Ltd. was acquired in February 2005. Custom Linen
Systems is a textile laundry company serving Calgary and Edmonton, Alberta. This acquisition
expands our uniform and textile rental service presence in western Canada. In March 2005, we
acquired certain assets from Coyne Textile Services. We acquired two processing facilities serving
customers in Connecticut, New York, Pennsylvania and New Jersey, and also acquired certain customer
assets in Maryland and Florida. This purchase expands and enhances our uniform and textile rental
business in North America. The pro forma effect of these acquisitions, had they been acquired at the beginning of the fiscal
year, were not material, either individually or in the aggregate. The total purchase
consideration, including related acquisition costs of these transactions was $85.8 million, which
includes $11.9 million of debt issued. The total purchase price exceeded the estimated fair values
of assets acquired and liabilities assumed by $48.9 million. The Company may be required to pay up
to $12.0 million of additional cash consideration for these acquisitions contingent on specific
future events. 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 13




---



##### Table of Contents



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. 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 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 follows the
two step impairment test prescribed by SFAS 142. First we assess whether the fair value of the
reporting units exceeds the carrying amount of the unit including goodwill. Our evaluation
considers changes in the operating environment, competitive position, market trends, operating
performance, quoted market prices for our equity securities and fair value models and research
prepared by independent analysts. If the carrying amount of a reporting unit exceeded its fair
value, we would perform a second test to measure the amount of impairment loss, if any. Management
completes its annual impairment tests in the fourth quarter of each fiscal year. There have been
no impairments of goodwill or definite-lived intangible assets in fiscal 2004 and there have been
no events or circumstances through the first nine months of fiscal 2005 that would more likely than
not indicate that there has been any impairment of goodwill or definite-lived assets. 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 add value. 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 or through the first nine months of fiscal 2005. Insurance We self-insure for certain obligations related to health, workers compensation and auto and
general liability 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 14




---



##### Table of Contents



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 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. 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 and circumstances. 15




---



##### Table of Contents



Results of Operations The percentage relationships to net sales of certain income and expense items for the three and
nine month periods ended April 2, 2005 and March 27, 2004, and the percentage changes in these
income and expense items between periods are presented in the following table: PercentageThree Months
    
    
    Nine Months
    
    
    ChangeEnded
    
    
    Ended
    
    
    Three Months
    
    
    Nine MonthsApril 2,
    
    
    March 27,
    
    
    April 2,
    
    
    March 27,
    
    
    FY 2005
    
    
    FY 20052005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    vs. FY 2004
    
    
    vs. FY 2004Revenues:Rental
    
    
    92.3
    %
    
    
    96.9
    %
    
    
    94.2
    %
    
    
    96.5
    %
    
    
    8.4
    %
    
    
    5.0
    %Direct
    
    
    7.7
    
    
    
    3.1
    
    
    
    5.8
    
    
    
    3.5
    
    
    
    186.6
    
    
    
    81.0Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    13.8
    
    
    
    7.6Expenses:Cost of rental sales
    
    
    63.4
    
    
    
    63.6
    
    
    
    63.3
    
    
    
    63.5
    
    
    
    7.9
    
    
    
    4.6Cost of direct sales
    
    
    76.3
    
    
    
    73.9
    
    
    
    74.7
    
    
    
    75.5
    
    
    
    195.8
    
    
    
    79.2Total cost of sales
    
    
    64.3
    
    
    
    63.9
    
    
    
    64.0
    
    
    
    63.9
    
    
    
    14.6
    
    
    
    7.7Selling and administrative
    
    
    20.9
    
    
    
    20.9
    
    
    
    21.0
    
    
    
    21.2
    
    
    
    13.8
    
    
    
    6.7Depreciation and
amortization
    
    
    5.1
    
    
    
    5.5
    
    
    
    5.3
    
    
    
    5.5
    
    
    
    5.5
    
    
    
    4.8Income from operations
    
    
    9.7
    
    
    
    9.7
    
    
    
    9.7
    
    
    
    9.4
    
    
    
    13.7
    
    
    
    11.1Interest expense
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.4
    
    
    
    1.7
    
    
    
    2.3
    
    
    
    (9.4
    )Income before income taxes
    
    
    8.3
    
    
    
    8.1
    
    
    
    8.3
    
    
    
    7.7

    
    
    
    15.9
    
    
    
    15.5Provision for income taxes
    
    
    3.2
    
    
    
    3.1
    
    
    
    3.1
    
    
    
    2.9
    
    
    
    16.2
    
    
    
    14.4Net income
    
    
    5.1
    %
    
    
    5.0
    %
    
    
    5.2
    %
    
    
    4.8
    %
    
    
    15.7
    %
    
    
    16.2
    %
 Three months ended April 2, 2005 compared to three months ended March 27, 2004 Revenues.Total revenues in the third quarter of fiscal 2005 increased 13.8% to $203.8 million
from $179.0 million in the third quarter of fiscal 2004. Rental revenue increased $14.5 million in
the third quarter, or 8.4%. The organic industrial rental growth rate was approximately 1.5%, an
improvement from negative 2.0% in the same period of fiscal 2004. Organic industrial rental revenue
has improved due to growth initiatives and improving economic conditions. Direct sale revenue increased 186.6% to $15.7 million in the third quarter of fiscal 2005 compared
to $5.5 million in the same period of fiscal 2004. The organic direct sale growth rate was
approximately 65.0%. The increase in organic direct sale revenue was due primarily to large
shipments at our direct sale unit to one customer. Organic growth rates are calculated using industrial rental and direct sale revenue, respectively,
adjusted for foreign currency exchange rate differences and revenue from newly acquired business
compared to prior-period results. We believe that the organic growth rates better reflect the
growth of our existing industrial rental and direct sale business and are therefore useful in
analyzing our financial condition and results of operations. Cost of Rental and Direct Sale.Cost of rental operations increased 7.9% to $119.1 million in the
third quarter of fiscal 2005 from $110.4 million in the same period of fiscal 2004. Gross margin
from rental sales increased to 36.6% in the third quarter of fiscal 2005 from 36.4% in the same
period of fiscal 2004. Rental gross margins continue to be impacted by operational initiatives
focused on lower merchandise and production costs. Results from these initiatives were partially
offset by higher energy costs. 16




---



##### Table of Contents



Cost of direct sales increased 195.8% to $12.0 million in the third quarter of fiscal 2005 from
$4.1 million in the same period of fiscal 2004. Gross margin from direct sales decreased to 23.7%
in the third quarter of fiscal 2005 from 26.1% in the third quarter of fiscal 2004. The decrease
in gross margin was primarily due to changes in product mix and lower gross margin in the Lion
Uniform Group. Historically, Lions revenues are seasonally lower in the first calendar quarter
and their fixed distribution and warehousing costs are spread over a smaller revenue base. Selling and Administrative.Selling and administrative expenses increased to $42.5 million in the
third quarter of fiscal 2005 from $37.4 million in the same period of fiscal 2004. As a percentage
of total revenues, selling and administrative expenses were 20.9% in the third quarter of both
fiscal 2005 and fiscal 2004. Total selling and administrative expenses increased with continued
investment in growth oriented initiatives and additional spending related to acquired businesses. Depreciation and Amortization. Depreciation and amortization expense increased 5.5% to $10.4
million in the third quarter of fiscal 2005 from $9.9 million in the same period of fiscal 2004.
As a percentage of total revenues, depreciation and amortization expense decreased to 5.1% in the
third quarter of fiscal 2005 from 5.5% in the third quarter of fiscal 2004. Capital expenditures,
excluding acquisition of businesses, were $6.1 million in the third quarter of fiscal 2005 compared
to $4.4 million in the prior years quarter. Interest Expense. Interest expense was $2.9 million in the third quarter of fiscal 2005, up from
$2.8 million in the same period of fiscal 2004. The increase was due to increased debt levels in
conjunction with the acquisition of business assets in the current fiscal year. Provision for Income Taxes. Our effective tax rate increased to 38.1% in the third quarter of
fiscal 2005 from 38.0% in the same period of fiscal 2004. Nine months ended April 2, 2005 compared to nine months ended March 27, 2004 Revenues.Total revenues for the first nine months of fiscal 2005 increased 7.6% to $581.4 million
from $540.2 million for the same period of fiscal 2004. Rental revenue increased $26.0 million in
the first nine months, or 5.0%. The organic industrial rental growth rate was approximately
negative 0.5%. Organic industrial rental revenue continues to be negatively impacted by lost
uniform wearers due to reduced employment levels within our existing customer base, partially
offset by a better pricing environment and improved customer retention. Direct sale revenue increased 81.0% to $33.9 million in the first nine months of fiscal 2005
compared to $18.7 million in the same period of fiscal 2004. The organic direct sale growth rate
was approximately 30.0%. The increase in organic direct sale revenue is largely due to garment
sales through our rental operations including our annual outerwear promotion and shipments to large
customers at our direct sales unit. Organic growth rates are calculated using industrial rental and direct sale revenue, respectively,
adjusted for foreign currency exchange rate differences and revenue from newly acquired business
compared to prior-period results. We believe that the organic growth rates better reflect the
growth of our existing industrial rental and direct sale business and are therefore useful in
analyzing our financial condition and results of operations. Cost of Rental and Direct Sale.Cost of rental operations increased 4.6% to $346.6 million in the
first nine months of fiscal 2005 from $331.3 million in the same period of fiscal 2004. Gross
margin from rental sales increased to 36.7% in the first nine months of fiscal 2005 from 36.5% in
the same period of fiscal 2004. The benefit of numerous operational initiatives focused on lower
merchandise and production costs were partially offset by higher energy costs. Cost of direct sales increased 79.2% to $25.3 million in the first nine months of fiscal 2005 from
$14.1 million in the same period of fiscal 2004. Gross margin from direct sales increased to 25.3%
in the first nine months of fiscal 2005 from 24.5% in the same period of fiscal 2004. The increase
in margins was primarily due to improved cost leverage resulting from greater sales volume. 17




---



##### Table of Contents



Selling and Administrative.Selling and administrative expenses increased 6.7% to $122.4 million
in the first nine months of fiscal 2005 from $114.7 million in the same period of fiscal 2004. As
a percentage of total revenues, selling and administrative expenses decreased to 21.0% in the first
nine months of fiscal 2005 from 21.2% in the same period of fiscal 2004. The improvement as a
percent of revenue was largely due to additional leverage on incremental revenue growth and a $0.3
million gain on sale of property, partially offset by continued investment in growth initiatives. Depreciation and Amortization. Depreciation and amortization expense increased 4.8% to $30.7
million in the first nine months of fiscal 2005 from $29.3 million in the same period of fiscal
2004. As a percentage of total revenues, depreciation and amortization expense decreased to 5.3%
in the first nine months of fiscal 2005 from 5.5% in the same period of fiscal 2004. Capital
expenditures, excluding acquisition of businesses, were $10.2 million in the first nine months of
fiscal 2005 compared to $12.8 million in the same period of fiscal 2004. The decreased level of
spending in the current year was driven by proceeds from the sale of selected plant assets,
partially offset by investments in information technology and revenue growth initiatives. Interest Expense. Interest expense was $8.1 million in the first nine months of fiscal 2005, down
from $8.9 million in the same period of fiscal 2004. The decrease was due to lower debt levels
resulting from strong operating cash flows and slightly lower interest rates. Provision for Income Taxes. Our effective tax rate decreased to 37.6% in the first nine months of
fiscal 2005 from 38.0% in the same period of fiscal 2004 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 $43.8 million in the first
nine months of fiscal 2005 and $81.6 million in the same period of fiscal 2004. In fiscal 2005,
cash provided by operations was negatively impacted by the timing of payments of taxes as well as
growth in new inventories in connection with the expansion of our manufacturing operation. These
uses of cash were partially offset by continued emphasis to control in-service inventory
expenditures. Fiscal 2004 cash provided by operations was positively impacted by one-time
improvements related to a focus on timely collection of accounts receivable as well as several
initiatives focused on controlling the usage of in-service inventory. Working capital at April 2, 2005 was $87.8 million, up 11.2% from $79.0 million at July 3, 2004.
The increase in working capital is largely due to the proceeds recorded from the sale of selected
plant assets. Investing Activities.Net cash used in investing activities was $85.1 million in the first nine
months of fiscal 2005 and $38.9 million in the same period of fiscal 2004. In fiscal 2005, cash
was largely used for acquisition of business assets and investments made in information technology
and revenue growth initiatives, partially offset by proceeds from the sale of selected plant
assets. The sale of these assets is the result of our continued focus on improving asset
utilization. Proceeds on these sales totaled $5.6 million. In fiscal 2004, cash was primarily
used for acquisitions of business assets and property, plant and equipment additions. Financing Activities.Cash provided by financing activities was $23.6 million in the first nine
months of fiscal 2005 and cash used for financing activities was $29.8 million in the same period
of fiscal 2004. Cash provided in fiscal 2005 was largely the result of short term borrowings in
connection with the acquisition of business assets. Cash used in fiscal 2004 was related to the
repayment of both short-term and long-term debt. The Company paid dividends of $1.1 million during
the first nine months of fiscal 2005. On November 17, 2004, we entered into a loan agreement expiring on October 23, 2007. Under the
loan agreement, the lender will make loans to us on a revolving basis up to $50.0 million. We will
be 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 average 18




---



##### Table of Contents



annual interest rate for such commercial paper. In connection with the loan agreement, we granted
a first priority security interest in certain of our U.S. based receivables. The amount of funds
available under the loan agreement will be based on the amount of eligible receivables and various
reserves required. The loan agreement contains representations, warranties, covenants and
indemnifications customary for facilities of this type. At April 2, 2005, there was $50.0 million
outstanding under the agreement. We used the net proceeds of this loan to reduce indebtedness
under our unsecured credit facilities. 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 April 2, 2005 for the fiscal years
ending June (in thousands): 2010 and2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There-Remaining
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    after
    
    
    TotalVariable rate term loan and
revolving
credit facility
    
    $
    3,750
    
    
    $
    18,750
    
    
    $
    22,500
    
    
    $
    140,800
    
    
    $
    
    
    
    $
    
    
    
    $
    185,800Fixed rate term loan
    
    
    
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    14,285
    
    
    
    42,857Other debt arrangements, including
capital leases
    
    
    (289
    )
    
    
    641
    
    
    
    11,968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,320Operating leases
    
    
    3,895
    
    
    
    14,134
    
    
    
    11,574
    
    
    
    8,836
    
    
    
    5,705
    
    
    
    6,474
    
    
    
    50,618Total contractual cash obligations
    
    $
    7,356
    
    
    $
    40,668
    
    
    $
    53,185
    
    
    $
    156,779
    
    
    $
    12,848
    
    
    $
    20,759
    
    
    $
    291,595
 Also, at April 2, 2005, we had stand-by letters of credit totaling $28.6 million that have been
issued and are outstanding, primarily in connection with our property and casualty insurance
programs and to provide security in connection with a promissory note. No amounts have been drawn
upon these letters of credit. At April 2, 2005, we had available cash on hand of $10.9 million and approximately $130 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; 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 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 available capacity under our revolving credit facility will be adequate to
finance any such acquisitions and planned capital expenditures in fiscal 2005. 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 $1.2 million in the third quarter of
fiscal 2005 and $1.5 million in the same period of fiscal 2004. At July 3, 2004, the fair value of
our pension plan assets totaled $26.7 million. 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. 19




---



##### Table of Contents



At July 3, 2004, 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 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 fiscal 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. 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 have
increased our accumulated benefit obligation at July 3, 2004 by approximately $3.8 million and
increased 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 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, 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. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS 123(R)), which is a
revision of SFAS 123, Accounting for Stock-Based Compensation. Generally, the approach in SFAS
123(R) is similar to the approach described in Statement 123 for determining the fair value of a
share-based payment. However, SFAS 123(R) requires the fair value of all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement.
Pro forma disclosure is no longer an alternative. The new standard will be effective for public
entities (excluding small business issuers) in the first interim or annual reporting period
beginning after June 15, 2005. We plan to adopt this Statement in the first quarter of fiscal 2006.
We are currently evaluating the impact of this standard on our consolidated financial statements. Cautionary Statements Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the Act) provides companies with a safe
harbor when making forward-looking statements as a way of encouraging them to furnish their
shareholders with information regarding expected trends in their operating results, anticipated
business developments and other prospective information. Statements made in this report concerning
our intentions, expectations or predictions about future results or events are forward-looking
statements within the meaning of the Act. These statements reflect our current expectations or
beliefs, and are subject to risks and uncertainties that could cause actual results or events to
vary from stated expectations, which could be material and adverse. Given that circumstances may
change, and new 20




---



##### Table of Contents



risks to the business may emerge from time to time, having the potential to negatively impact our
business in ways we could not anticipate at the time of making a forward-looking statement, you are
cautioned not to place undue reliance on these statements, and we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Some of the factors that could cause actual results or events to vary from stated expectations
include, but are not limited to, the following: unforeseen operating risks; the effects of overall
economic conditions; fluctuations in costs of insurance and energy; acquisition integration costs;
the performance of acquired businesses; preservation of positive labor relationships; competition,
including pricing, within the corporate identity apparel and facility services industry; and the
availability of capital to finance planned growth. Additional information concerning potential
factors that could effect future financial results is included in the Companys Annual Report on
Form 10-K for the fiscal year ended July 3, 2004. 
 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 third quarter of fiscal 2005 by
approximately $0.3 million. This estimated exposure considers the mitigating effects of interest
rate swap agreements outstanding at April 2, 2005 on the change in the cost of variable rate debt. Energy Cost Risk We use derivative financial instruments to manage the risk that changes in gasoline cost will
affect the future financial results of the Company. We purchase gasoline futures contracts to
effectively hedge a portion of anticipated actual gasoline purchases. The gasoline futures
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). Upon settlement of each contract, the actual gain or loss is reflected in
gasoline expense. 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. 21




---



##### Table of Contents



PART II OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table includes information about our share repurchases for the quarter ended April 2,
2005. Maximum Number(or ApproximateTotal Number of
    
    
    
    Dollar Value) ofShares (or Units)
    
    
    
    Shares (or Units) thatTotal Number of
    
    
    
    Average Price
    
    
    
    Purchased as Part of
    
    
    
    May Yet beShares (or Units)
    
    
    
    Paid per Share
    
    
    
    Publicly Announced
    
    
    
    Purchased Under thePeriod
    
    
    Purchased (1)
    
    
    
    (or Unit)
    
    
    
    Plans or Programs
    
    
    
    Plans or ProgramsMonth #1
(Fiscal month
ending February 5,
2004)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #2
(Fiscal month
ending March 5,
2004)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3
(Fiscal month
ending April 2,
2005)
    
    
    
    4,000
    
    
    
    $
    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. 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 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers as filed on February 25, 2005. A Form 8-K, Item 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers as filed on March 22, 2005. 22




---



##### Table of Contents



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: May 6, 2005
    
    
    
    By:
    
    /s/ Jeffrey L. WrightJeffrey L. Wright
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)By:
    
    /s/ Michael F. WoodardMichael F. Woodard
Vice President and Controller
(Principal Accounting Officer)
 23