**SECURITIESAND EXCHANGE COMMISSION**

** **

**Washington, D.C.  20549**

** **

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** **

**F O R M 10- Q**

** **

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**ForQuarter Ended December 29, 2001          Commissionfile number 0-4063**

** **

**G&KSERVICES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**5995 OPUS PARKWAY, SUITE 500**

**MINNETONKA, MINNESOTA 55343**

(Address of principal executive offices and zip code)

 

**(952) 912-5500**

(Registrant’s telephone number, including area code)

 

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

 

YES  ý                                   NO  o

 

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

 

| **CLASS  A**                             | ** ** | **Outstanding  February 7, 2002** |
|------------------------------------------|------------|-----------------------------------|
| Common Stock,  par value $0.50 per share |       | 19,207,297                        |
|                                     |       |                              |
| **CLASS  B**                             | ** ** | **Outstanding  February 7, 2002** |
| Common Stock,  par value $0.50 per share |       | 1,474,996                         |

 

 

** **

** **

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**G&KServices, Inc.**

**Form 10-Q**

 

**Table of Contents**

 

 
| **PART I**        |                                                                                                                |
|-------------------|---------------------------------------------------------------------------------------------------------------------|
| Item 1.           | Financial Statements                                                                                                |
|              |                                                                                                                |
|              | Consolidated  Condensed Balance Sheets as of   December 29, 2001 and June 30, 2001                                  |
|              |                                                                                                                |
|              | Consolidated  Statements of Operations for the three and six months ended   December 29, 2001 and December 30, 2000 |
|              |                                                                                                                |
|              | Consolidated  Condensed Statements of Cash Flows for the six   months ended December 29, 2001 and December 30, 2000 |
|              |                                                                                                                |
|              | Notes  to Condensed Consolidated 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                                                          |
|              |                                                                                                                |
| **PART II**       |                                                                                                                |
| Other Information |                                                                                                                |
| Signatures        |                                                                                                                |

 

 

2

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**PART I**

# **FINANCIALINFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

*G&KServices, Inc. and Subsidiaries*

 
|                                                                            |   | **December  29,   2001** |    | **June 30,  2001** |   |
|---------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------|--------|
| **(In  thousands)**                                                             |   | **(Unaudited)**          |    |               |   |
| **ASSETS**                                                                      |   |                     |    |               |   |
| **Current Assets**                                                              |   |                     |    |               |   |
| Cash and cash  equivalents                                                      |   | $                        | 16,023  |               | $      | 15,317 |   |
| Accounts  receivable, less allowance for doubtful accounts of $3,447 and $2,613 |   | 70,380                   |    | 66,911             |   |
| Inventories                                                                     |   | 87,672                   |    | 90,085             |   |
| Prepaid expenses                                                                |   | 9,699                    |    | 16,358             |   |
| Total current  assets                                                           |   | 183,774                  |    | 188,671            |   |
|                                                                            |   |                     |    |               |   |
| **Property, Plant and Equipment, net**                                          |   | 226,735                  |    | 225,965            |   |
| **Goodwill, net**                                                               |   | 168,936                  |    | 148,080            |   |
| **Other Assets**                                                                |   | 59,440                   |    | 57,247             |   |
|                                                                            |   | $                        | 638,885 |               | $      | 619,963 |   |
|                                                                            |   |                     |    |               |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                  |   |                     |    |               |   |
| **Current Liabilities**                                                         |   |                     |    |               |   |
| Accounts payable                                                                |   | $                        | 15,037  |               | $      | 18,622 |   |
| Accrued expenses                                                                |   | 49,170                   |    | 48,266             |   |
| Deferred income  taxes                                                          |   | 12,810                   |    | 12,961             |   |
| Current  maturities of long-term debt                                           |   | 90,797                   |    | 59,220             |   |
| Total current  liabilities                                                      |   | 167,814                  |    | 139,069            |   |
|                                                                            |   |                     |    |               |   |
| **Long-Term Debt, net of current  maturities**                                  |   | 125,372                  |    | 148,951            |   |
| **Deferred Income Taxes**                                                       |   | 15,025                   |    | 16,168             |   |
| **Other Noncurrent Liabilities**                                                |   | 14,830                   |    | 14,508             |   |
| **Stockholders’ Equity**                                                   |   | 315,844                  |    | 301,267            |   |
|                                                                            |   | $                        | 638,885 |               | $      | 619,963 |   |

 

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

 

 

3

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

*G&KServices, Inc. and Subsidiaries*

(Unaudited)

 
|                                                   |       | **For the  Three Months Ended** |       | **For the  Six Months Ended** |       |
|--------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In  thousands, except per share data)**             | ** ** | **Dec 29,   2001**              | ** ** | **Dec 30,   2000**            | ** ** | **Dec 29,   2001** | ** ** | **Dec 30,   2000** | ** ** |
| **Revenues**                                           |       |                            |       |                          |       |   |   |   |   |
| Rental  operations                                     |       | $                               | 149,660    |                          | $          | 144,738 |   | $ | 301,423 |   | $ | 286,707 |   |
| Direct sales                                           |       | 6,001                           |       | 6,097                         |       | 11,336 |   | 10,273 |   |
| Total revenues                                         |       | 155,661                         |       | 150,835                       |       | 312,759 |   | 296,980 |   |
| **Operating Expenses**                                 |       |                            |       |                          |       |   |   |   |   |
| Cost of rental  operations                             |       | 87,232                          |       | 85,957                        |       | 176,102 |   | 167,191 |   |
| Cost of direct  sales                                  |       | 4,226                           |       | 4,430                         |       | 8,079 |   | 7,878 |   |
| Selling and  administrative                            |       | 36,314                          |       | 32,964                        |       | 72,858 |   | 64,215 |   |
| Depreciation and  amortization                         |       | 8,832                           |       | 9,740                         |       | 17,601 |   | 19,165 |   |
| Total operating  expenses                              |       | 136,604                         |       | 133,091                       |       | 274,640 |   | 258,449 |   |
| **Income from Operations**                             |       | 19,057                          |       | 17,744                        |       | 38,119 |   | 38,531 |   |
| Interest expense                                       |       | 3,292                           |       | 4,396                         |       | 7,122 |   | 8,795 |   |
| **Income before Income Taxes**                         |       | 15,765                          |       | 13,348                        |       | 30,997 |   | 29,736 |   |
| Provision for  income taxes                            |       | 6,227                           |       | 5,353                         |       | 12,244 |   | 11,924 |   |
| **Net Income**                                         |       | $                               | 9,538      |                          | $          | 7,995 |   | $ | 18,753 |   | $ | 17,812 |   |
| Basic weighted  average number of shares outstanding   |       | 20,483                          |       | 20,480                        |       | 20,482 |   | 20,479 |   |
| **Basic Earnings per Common Share**                    |       | $                               | 0.47       |                          | $          | 0.39 |   | $ | 0.92 |   | $ | 0.87 |   |
| Diluted weighted  average number of shares outstanding |       | 20,566                          |       | 20,495                        |       | 20,535 |   | 20,499 |   |
| **Diluted Earnings per Common Share**                  |       | $                               | 0.46       |                          | $          | 0.39 |   | $ | 0.91 |   | $ | 0.87 |   |

 

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

 

 

4

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**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

*G&KServices, Inc. and Subsidiaries*

(Unaudited)

 
|                                                                                     |       | **For the  Six Months Ended** |       |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(In  thousands)**                                                                      | ** ** | **December  29,   2001**      | ** ** | **December  30,   2000** | ** ** |
| **Operating Activities:**                                                                |       |                          |       |   |   |
| Net income                                                                               |       | $                             | 18,753     |   | $ | 17,812 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities — |       |                          |       |   |   |
| Depreciation and  amortization                                                           |       | 17,601                        |       | 19,165 |   |
| Deferred income  taxes                                                                   |       | (1,294                        | )          | (462 | ) |
| Changes in  current operating items, exclusive of acquisitions                           |       | 5,556                         |       | (289 | ) |
| Other, net                                                                               |       | 1,715                         |       | 466 |   |
| Net cash  provided by operating activities                                               |       | 42,331                        |       | 36,692 |   |
| **Investing Activities:**                                                                |       |                          |       |   |   |
| Property, plant  and equipment additions, net                                            |       | (13,657                       | )          | (16,553 | ) |
| Acquisition of  business assets and other                                                |       | (33,719                       | )          | (12,978 | ) |
| Net cash used  for investing activities                                                  |       | (47,376                       | )          | (29,531 | ) |
| **Financing Activities:**                                                                |       |                          |       |   |   |
| Proceeds from  debt financing                                                            |       | 48,709                        |       | 64,100 |   |
| Repayments of  debt financing                                                            |       | (41,913                       | )          | (72,819 | ) |
| Cash dividends  paid                                                                     |       | (722                          | )          | (718 | ) |
| Sale of common  stock                                                                    |       | 187                           |       | 1 |   |
| Net cash  provided by (used for) financing activities                                    |       | 6,261                         |       | (9,436 | ) |
| **Increase (Decrease) in Cash and  Cash Equivalents**                                    |       | 1,216                         |       | (2,275 | ) |
| **Effect of Exchange Rates on Cash**                                                     |       | (510                          | )          | (45 | ) |
|                                                                                     |       |                          |       |   |   |
| **Cash and Cash Equivalents:**                                                           |       |                          |       |   |   |
| Beginning of  period                                                                     |       | 15,317                        |       | 6,420 |   |
| End of period                                                                            |       | $                             | 16,023     |   | $ | 4,100 |   |
|                                                                                     |       |                          |       |   |   |
| **Supplemental Cash Flow Information:**                                                  |       |                          |       |   |   |
| Cash paid for —                                                                     |       |                          |       |   |   |
| Interest                                                                                 |       | $                             | 6,939      |   | $ | 6,863 |   |
| Income taxes                                                                             |       | $                             | 16,285     |   | $ | 8,963 |   |

 

The accompanyingnotes are an integral part of these consolidated condensed financialstatements.

 

 

5

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G&K SERVICES,INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per sharedata)

Three and six month periods ended December 29, 2001and December 30, 2000

(Unaudited)

 

                The consolidated condensedfinancial statements included herein, except for the June 30, 2001 balancesheet which was extracted from the audited consolidated financial statementsfor the fiscal year ended June 30, 2001, have been prepared by G&KServices, Inc. (the Company), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. In the opinion of theCompany, the accompanying unaudited consolidated condensed financial statementscontain all adjustments (consisting of only normal recurring adjustments)necessary to present fairly the financial position of the Company as ofDecember 29, 2001, the results of its operations for the three and six monthsended and its cash flows for the six months ended December 29, 2001 and December30, 2000.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures herein are adequate to make theinformation presented not misleading. It is suggested that these consolidated condensed financial statementsbe read in conjunction with the consolidated financial statements and the notesthereto included in the Company’s latest annual report.

 

                The results of operations forthe three and six month periods ended December 29, 2001 and December 30, 2000are 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 setforth in Note 1 to the Company’s Annual Consolidated Financial Statements.

 

**Nature of Business**

                G&K Services, Inc. is amarket leader in providing corporate identity apparel and facility servicesprograms to a wide variety of industrial, service and high-technologycompanies.  The Company’s programsprovide rental-lease or purchase options as well as non-apparel items such asfloormats, dustmops and cloths, wiping towels, selected linen items and severalrestroom products.  The Company alsomanufactures certain uniform garments that it uses to support its garmentrental programs.

 

**Principles of Consolidation**

                The accompanying consolidatedcondensed financial statements include the accounts of the Company and itssubsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated inconsolidation.

 

**Derivative Financial Instruments**

                The Company uses derivative financialinstruments principally to manage the risk that changes in interest rates willaffect the amount of its future interest payments.  Interest rate swap contracts are used to adjust the proportion oftotal debt that is subject to variable and fixed interest rates.  The interest rate swap contracts arereflected at fair value in the consolidated balance sheet and the related gainsor losses on these contracts are deferred in stockholders’ equity (as acomponent of other comprehensive income). Amounts to be paid or received under the contracts are accrued asinterest rates change and are recognized over the life of the contracts as anadjustment to interest expense.  The neteffect of this accounting is that interest expense on the portion of variable ratedebt being hedged is generally recorded based on fixed interest rates.

 

**Per Share Data**

                Basic earnings per common sharewas computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per common share was 

 

 

6

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computed similarto the computation of basic earnings per share, except that the denominator isincreased for the assumed exercise of dilutive options and other dilutivesecurities (including nonvested restricted stock) using the treasury stockmethod.

 
|                                                                                   |       | **Three  Months Ended** |       | **Six Months  Ended** |       |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **Dec 29,   2001**      | ** ** | **Dec 30,   2000**    | ** ** | **Dec 29,   2001** | ** ** | **Dec 30,   2000** | ** ** |
| Weighted average number  of common shares outstanding                                  |       | 20,483,000              |       | 20,480,000            |       | 20,482,000 |   | 20,479,000 |   |
|                                                                                   |       |                    |       |                  |       |   |   |   |   |
| Shares used in  computation of basic earnings per share                                |       | 20,483,000              |       | 20,480,000            |       | 20,482,000 |   | 20,479,000 |   |
|                                                                                   |       |                    |       |                  |       |   |   |   |   |
| Weighted average effect  of non-vested restricted stock grants and exercise of options |       | 83,000                  |       | 15,000                |       | 53,000 |   | 20,000 |   |
|                                                                                   |       |                    |       |                  |       |   |   |   |   |
| Shares used in  computation of diluted earnings per share                              |       | 20,566,000              |       | 20,495,000            |       | 20,535,000 |   | 20,499,000 |   |

 

 

 

**2.             ComprehensiveIncome**

 

                For the three and six monthperiods ended December 29, 2001 and December 30, 2000, the components ofcomprehensive income were as follows:

 
|                                                  |   | **Three  Months Ended**   |   | **Six Months  Ended**     |   |
|-------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|
|                                                  |   | **Dec  29,    2001** |   | **Dec  30,    2000** |   | **Dec  29,    2001** |   | **Dec  30,    2000** |   |
| Net  income                                           |   | $                         | 9,538  |                      | $      | 7,995 |   | $ | 18,753 |   | $ | 17,812 |   |
| Other  comprehensive income                           |   |                      |   |                      |   |   |   |   |   |
| Foreign currency  translation adjustments, net of tax |   | (767                      | )      | (75                       | )      | (3,608 | ) | (1,313 | ) |
| Net unrealized  holding gain (loss), net of tax       |   | 293                       |   | (656                      | )      | (481 | ) | (1,089 | ) |
| Comprehensive  income                                 |   | $                         | 9,064  |                      | $      | 7,264 |   | $ | 14,664 |   | $ | 15,410 |   |

 

 

**3.****                                     ****Goodwill and Intangible Assets**

 

                In July 2001, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards(SFAS) No. 141, “Business Combinations” and No. 142, “Goodwill and OtherIntangible Assets.”  SFAS No. 141requires all business combinations initiated after June 30, 2001 to beaccounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite liveswill no longer be amortized but are reviewed annually (or more frequently ifimpairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite liveswill continue to be amortized over their useful lives (but with no maximumlife).  The Company has adopted theprovisions of SFAS No. 141 and SFAS No. 142 effective July 1, 2001.

 

 

7

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                Upon adoption of SFAS No. 142,the Company discontinued the amortization of goodwill.  The following table presents areconciliation of net income and earnings per share adjusted for the exclusionof goodwill, net of tax:

 

 
|                                    |       | **Three  Months Ended** |       | **Six Months  Ended** |   |
|-----------------------------------------|------------|-------------------------|------------|-----------------------|--------|
| ** **                              | ** ** | **Dec 29,   2001**      | ** ** | **Dec 30,   2000**    |   | **Dec 29,   2001** | ** ** | **Dec 30,   2000** | ** ** |
| Reported  net income                    |       | $                       | 9,538      |                  | $      | 7,995 |   | $ | 18,753 |   | $ | 17,812 |   |
| Add:  Goodwill amortization, net of tax |       | —                  |       | 731                   |   | — |   | 1,437 |   |
| Adjusted  net income                    |       | $                       | 9,538      |                  | $      | 8,726 |   | $ | 18,753 |   | $ | 19,249 |   |
|                                    |       |                    |       |                  |   |   |   |   |   |
| Reported  basic earnings per share      |       | $                       | 0.47       |                  | $      | 0.39 |   | $ | 0.92 |   | $ | 0.87 |   |
| Add:  Goodwill amortization, net of tax |       | —                  |       | 0.04                  |   | — |   | 0.07 |   |
| Adjusted  basic earnings per share      |       | $                       | 0.47       |                  | $      | 0.43 |   | $ | 0.92 |   | $ | 0.94 |   |
|                                    |       |                    |       |                  |   |   |   |   |   |
| Reported  diluted earnings per share    |       | $                       | 0.46       |                  | $      | 0.39 |   | $ | 0.91 |   | $ | 0.87 |   |
| Add:  Goodwill amortization, net of tax |       | —                  |       | 0.04                  |   | — |   | 0.07 |   |
| Adjusted  diluted earnings per share    |       | $                       | 0.46       |                  | $      | 0.43 |   | $ | 0.91 |   | $ | 0.94 |   |

 

                The changes in the carryingamount of goodwill for the six months ended December 29, 2001, by operatingsegment, are as follows:

 

 
|                                 |   | **United  States** |    | **Canada** |   | **Total** |   |
|--------------------------------------|--------|--------------------|---------|------------|--------|-----------|--------|
| Balance  as of June 30, 2001         |   | $                  | 122,080 |       | $      | 26,000    |   | $ | 148,080 |   |
| Goodwill  acquired during the period |   | 21,504             |    | 416        |   | 21,920    |   |
| Other                                |   | —             |    | (1,064     | )      | (1,064    | )      |
| Balance  as of December 29, 2001     |   | $                  | 143,584 |       | $      | 25,352    |   | $ | 168,936 |   |

 

 

                Information regarding theCompany’s other intangible assets are as follows:

 
|                   |       | **As of  December 29, 2001** |       |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **Carrying   Amount**        | ** ** | **Accumulated    Amortization** | ** ** | **Net** | ** ** |
| Restrictive  Covenants |       | $                            | 7,816      |   | $ | 3,828 |   | $ | 3,988 |   |
| Customer  Lists        |       | 59,694                       |       | 21,890 |   | 37,804 |   |
| Total                  |       | $                            | 67,510     |   | $ | 25,718 |   | $ | 41,792 |   |
|                   |       |                         |       |   |   |   |   |
|                   |       |                         |       |   |   |   |   |
|                   |       | **As of June 30, 2001**      |       |
| ** **             | ** ** | **Carrying   Amount**        | ** ** | **Accumulated   Amortization** | ** ** | **Net** | ** ** |
| Restrictive  Covenants |       | $                            | 7,693      |   | $ | 3,479 |   | $ | 4,214 |   |
| Customer  Lists        |       | 55,226                       |       | 19,550 |   | 35,676 |   |
| Total                  |       | $                            | 62,919     |   | $ | 23,029 |   | $ | 39,890 |   |

 

 

8

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                Amortization expense for the sixmonths ended December 29, 2001 was $2,880. Estimated amortization expense for each of the five succeeding fiscalyears based on the intangible assets as of December 29, 2001 is as follows:

 
| 2002 |   | $     | 5,958  |   |
|------|--------|-------|--------|--------|
| 2003 |   | 5,892 |   |
| 2004 |   | 5,892 |   |
| 2005 |   | 5,822 |   |
| 2006 |   | 5,661 |   |

 

 

 

**4.****                                     ****Segment Information**

 

                The Company has two operating segments under theguidelines of SFAS No. 131: United States and Canada. Each operating segmentderives revenues from the corporate identity apparel and facility servicesindustry, which includes garment rental and non-apparel items such asfloormats, dust mops and cloths, wiping towels and selected linen items.  No one customer’s transactions account for1% or more of the Company’s revenues.

 

                The accounting policies of the segments are the sameas those described in the summary of significant accounting policies (see Note1).  Financial information by geographiclocation for the three and six month periods ended December 29, 2001 andDecember 30, 2000 is as follows:

 
| **For the  Three Months Ended**        | ** ** | **United   States** |    | **Canada** |   | **Total** | ** ** |
|----------------------------------------|------------|---------------------|---------|------------|--------|-----------|------------|
| Dec  29, 2001                          |       |                |    |       |   |      |       |
| Revenues                               |       | $                   | 136,674 |       | $      | 18,987    |       | $ | 155,661 |   |
| Income  from operations                |       | 14,391              |    | 4,666      |   | 19,057    |       |
| Capital  expenditures                  |       | 7,827               |    | 266        |   | 8,093     |       |
| Depreciation  and amortization expense |       | 7,985               |    | 847        |   | 8,832     |       |
| Dec  30, 2000                          |       |                |    |       |   |      |       |
| Revenues                               |       | $                   | 131,656 |       | $      | 19,179    |       | $ | 150,835 |   |
| Income  from operations                |       | 13,018              |    | 4,726      |   | 17,744    |       |
| Capital  expenditures                  |       | 7,779               |    | 555        |   | 8,334     |       |
| Depreciation  and amortization expense |       | 8,606               |    | 1,134      |   | 9,740     |       |
|                                   |       |                |    |       |   |      |       |
|                                   |       |                |    |       |   |      |       |
| **For the  Six Months Ended**          | ** ** | **United   States** |    | **Canada** |   | **Total** | ** ** |
| Dec 29, 2001                           |       |                |    |       |   |      |       |
| Revenues                               |       | $                   | 274,688 |       | $      | 38,071    |       | $ | 312,759 |   |
| Income  from operations                |       | 28,576              |    | 9,543      |   | 38,119    |       |
| Capital  expenditures                  |       | 13,235              |    | 422        |   | 13,657    |       |
| Depreciation  and amortization expense |       | 15,865              |    | 1,736      |   | 17,601    |       |
| Dec  30, 2000                          |       |                |    |       |   |      |       |
| Revenues                               |       | $                   | 258,920 |       | $      | 38,060    |       | $ | 296,980 |   |
| Income  from operations                |       | 29,302              |    | 9,229      |   | 38,531    |       |
| Capital  expenditures                  |       | 15,455              |    | 1,098      |   | 16,553    |       |
| Depreciation  and amortization expense |       | 16,869              |    | 2,296      |   | 19,165    |       |

 

 

9

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

(Unaudited)

 

The percentage relationships to net sales of certainincome and expense items for the three and six month periods ended December 29,2001 and December 30, 2000, and the percentage changes in these income andexpense items between periods are presented in the following table:

 
|                           |   | **Three  Months   Ended** |   | **Six Months    Ended** |   | **Percentage    Change** |   |
|--------------------------------|--------|---------------------------|--------|-------------------------|--------|--------------------------|--------|
|                           |   | **Dec 29,   2001**        |   | **Dec 30,   2000**      |   | **Dec 29,   2001**       |   | **Dec 30,   2000** |   | **Three  Months   FY 2002   vs. FY 2001** |   | **Six Months    FY 2002   vs. FY 2001** |   |
| Revenues:                      |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Rental                         |   | 96.1                      | %      | 96.0                    | %      | 96.4                     | %      | 96.5 | % | 3.4 | % | 5.1 | % |
| Direct                         |   | 3.9                       |   | 4.0                     |   | 3.6                      |   | 3.5 |   | (1.6 | ) | 10.3 |   |
| Total revenues                 |   | 100.0                     |   | 100.0                   |   | 100.0                    |   | 100.0 |   | 3.2 |   | 5.3 |   |
|                           |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Expenses:                      |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Cost of rental  sales          |   | 58.3                      |   | 59.4                    |   | 58.4                     |   | 58.3 |   | 1.5 |   | 5.3 |   |
| Cost of direct  sales          |   | 70.4                      |   | 72.7                    |   | 71.3                     |   | 76.7 |   | (4.6 | ) | 2.6 |   |
| Total cost of  sales           |   | 58.8                      |   | 59.9                    |   | 58.9                     |   | 58.9 |   | 1.2 |   | 5.2 |   |
|                           |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Selling and  administrative    |   | 23.3                      |   | 21.9                    |   | 23.3                     |   | 21.6 |   | 10.2 |   | 13.5 |   |
| Depreciation and  amortization |   | 5.7                       |   | 6.4                     |   | 5.6                      |   | 6.5 |   | (9.3 | ) | (8.2 | ) |
| Income from  operations        |   | 12.2                      |   | 11.8                    |   | 12.2                     |   | 13.0 |   | 7.4 |   | (1.1 | ) |
|                           |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Interest expense               |   | 2.1                       |   | 3.0                     |   | 2.3                      |   | 3.0 |   | (25.1 | ) | (19.0 | ) |
| Income before  income taxes    |   | 10.1                      |   | 8.8                     |   | 9.9                      |   | 10.0 |   | 18.1 |   | 4.2 |   |
| Provision for  income taxes    |   | 4.0                       |   | 3.5                     |   | 3.9                      |   | 4.0 |   | 16.3 |   | 2.7 |   |
|                           |   |                      |   |                    |   |                     |   |   |   |   |   |   |   |
| Net income                     |   | 6.1                       | %      | 5.3                     | %      | 6.0                      | %      | 6.0 | % | 19.3 | % | 5.3 | % |

 

 

Total revenues for the second quarter of fiscal 2002increased 3.2% to $155.7 million from $150.8 million in the second quarter offiscal 2001 and increased 5.3% to $312.8 million for the first six months offiscal 2002 from $297.0 million in the same period of fiscal 2001.  Rental revenue growth for the second quarteraccounted for $4.9 million, or a 3.4% increase and for the first six months offiscal 2002 it accounted for $14.7 million or a 5.1% increase.  The rental growth was influenced by severalfactors including the Company’s focus on new product promotions and programs toaddress rising operating costs, continued success in signing national accountsand acquisitions.

 

Total direct sales decreased 1.6% to $6.0 million forthe second quarter of fiscal 2002 compared to $6.1 million in the same periodof fiscal 2001 and increased 10.3% to $11.3 million for the first six months offiscal 2002 from $10.3 million in the same period of fiscal 2001.  Direct sale revenue is up for the six-monthperiod due to large shipments to a number of large customers during the firstquarter.  Cost of direct sales, as apercentage of direct sales, decreased to 70.4% for the second quarter of fiscal2002 from 72.7% in the same period of fiscal 2001 and decreased to 71.3% forthe first six months of fiscal 2002 from 76.7% in the same period of fiscal2001.  The improvement in gross marginwas due to improvements in merchandise costs and in the fulfillment operation.

 

Cost of rental operations increased 1.5% to $87.2million for the second quarter of fiscal 2002 from $86.0 million in the sameperiod of fiscal 2001 and increased 5.3% to $176.1 million for the first sixmonths of fiscal 2002 from $167.2 million in the same period of fiscal2001.  As a percentage of rentalrevenues, these costs decreased to 58.3% for the second quarter of fiscal 2002from 59.4% in the same period of fiscal 2001 and increased to 58.4% for 

 

 

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the first six months of fiscal 2002 from 58.3% in the same period offiscal 2001.  The margin impact of lostrevenue from reduced customer employment levels was largely offset by improvedplant productivity and lower merchandise and energy costs.

 

Selling and administrative expenses increased 10.2% to$36.3 million in the second quarter of fiscal 2002 from $33.0 million in thesame period of fiscal 2001 and increased 13.5% to $72.9 million for the firstsix months of fiscal 2002 from $64.2 million in the same period of fiscal2001.  As a percentage of revenues,selling and administrative expenses increased to 23.3% in the second quarter offiscal 2002 from 21.9% in the same period of fiscal 2001 and increased to 23.3%for the first six months of fiscal 2002 from 21.6% in the same period of fiscal2001.  The increase as a percent ofrevenue was driven by sales and marketing programs focused on enhancing revenuegrowth and information systems initiatives. Also contributing to the increase were additional bad debt expensesassociated with the slow economy.

 

Depreciation and amortization expense decreased 9.3%to $8.8 million in the second quarter of fiscal 2002 from $9.7 million in thesame period of fiscal 2001 and decreased 8.2% to $17.6 million for the firstsix months of fiscal 2002 from $19.2 million in the same period of fiscal2001.  As a percentage of revenues, depreciationand amortization expense decreased to 5.7% in the second quarter of fiscal 2002from 6.4% in the same period of fiscal 2001 and decreased to 5.6% for the firstsix months of fiscal 2002 from 6.5% in the same period of fiscal 2001.  The reduction was driven largely by theCompany’s adoption of SFAS No. 142, under which goodwill and intangible assetswith indefinite lives will no longer be amortized.  The adoption of SFAS No. 142 reduced amortization expense by 0.8%of a percent of revenue for the three and six month periods.  Capital expenditures, excluding acquisitionof businesses, were $8.1 million in the second quarter of fiscal 2002 comparedto $8.3 million in the prior year’s quarter and for the six month period were$13.7 million compared to $16.6 million in the prior year.

 

Income from operations increased 7.4% to $19.1 millionin the second quarter of fiscal 2002 from $17.7 million in the same period offiscal 2001 and decreased 1.1% to $38.1 million for the first six months offiscal 2002 from $38.5 million in the same period of fiscal 2001.  Operating margins increased to 12.2% for thesecond quarter of fiscal 2002 from 11.8% in the same period of fiscal 2001 anddecreased to 12.2% for the first six months of fiscal 2002 from 13.0% in the sameperiod of fiscal 2001.

 

Interest expense was $3.3 million for the secondquarter of fiscal 2002, down from $4.4 million in the same period of fiscal2001 and was $7.1 million for the first six months of fiscal 2002, down from$8.8 million in the same period of fiscal 2001.  The decrease in interest expense is due primarily to lowereffective interest rates.  The Company’seffective tax rate decreased to 39.5% in the second quarter of fiscal 2002 from40.1% in the same period of fiscal 2001 and decreased to 39.5% in the six monthperiod of fiscal 2002 from 40.1% in the same period of fiscal 2001.  The decrease was due largely to decreases inCanadian statutory income tax rates.

 

Net income increased 19.3% to $9.5 million in thesecond quarter of fiscal 2002 from $8.0 million in the same period of fiscal2001 and increased 5.3% to $18.8 million for the first six months of fiscal2002 from $17.8 million in the same period of fiscal 2001.  Basic and diluted earnings per share for thesecond quarter of fiscal 2002 were $0.47 and $0.46 per share, respectively,compared to $0.39 per share for the prior year quarter.  Basic and diluted earnings per share for thefirst six months of fiscal 2002 were $0.92 and $0.91 per share, respectively,compared to $0.87 per share in the prior year. Net income margins increased to 6.1% for the second quarter of fiscal2002 compared with 5.3% in the second quarter of fiscal 2001 and remainedconstant at 6.0% for the six month period of fiscal 2002, unchanged from thesame period of fiscal 2001.

 

LIQUIDITY AND FINANCIAL RESOURCES

 

Cash flow from operating activities was $42.3 millionin the six-month period of fiscal 2002 and $36.7 million in the same period offiscal 2001.  Working capital atDecember 29, 2001 was $16.0 million, down 67.8% from $49.6 million at June 30,2001.  The decrease was largely drivenby an increase in current maturities of long-term debt associated with debtamortization and acquisitions in the first and second quarters of fiscal 2002.

 

 

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Cash used in investing activities was $47.4 million inthe six-month period of fiscal 2002 and $29.5 million in the same period offiscal 2001.  The increase is primarilydue to the acquisition of business assets in the first and second quarters offiscal 2002.

 

Cash provided by financing activities was $6.3 millionin the six-month period of fiscal 2002 and cash used for financing activitieswas $9.4 million in the same period of fiscal 2001.  The long-term debt, including current maturities, increased to$216.2 million at December 29, 2001 from $208.2 million at June 30, 2001.  The Company paid dividends of $0.4 millionduring the quarter.  The Company’s ratioof total debt to total capitalization increased to 40.6% at the end of thesecond quarter of fiscal 2002 from 40.9% at June 30, 2001.

 

Stockholders’ equity grew 4.8% to $315.8 million atDecember 29, 2001, compared with $301.3 million at the end of fiscal 2001.  G&K’s return on average equity decreasedto 11.5% for the six-month period of fiscal 2002 compared with 13.6% for thesame period of fiscal 2001.

 

Management believes that cash flows generated fromoperations and its credit facilities should provide adequate funding for itscurrent businesses and planned expansion of operations or any futureacquisitions.

 

 

 

**Forward-LookingStatements**

This document contains“forward-looking statements” within the meaning of the federal securities laws,including statements concerning business strategies and their intended results,and similar statements concerning anticipated future events and expectationsthat are not historical facts.  Theseforward-looking statements are made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995.  The forward-looking statements in this document reflectmanagement’s best judgment at the time they are made, but all such statementsare subject to numerous risks and uncertainties, which could cause actualresults to differ materially from those expressed in or implied by thestatements herein.  Additionalinformation concerning potential factors that could affect future financialresults is included in the Company’s Annual Report on Form 10-K for the FiscalYear Ended June 30, 2001.

 

 

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

                The Company usesfinancial instruments, including fixed and variable rate debt, as well asinterest rate swaps, to finance operations and to hedge interest rateexposures.  The swap contracts areentered into for periods consistent with related underlying exposures and donot constitute positions independent of those exposures.  The Company does not enter into contractsfor speculative purposes, nor is it a party to any leveraged instrument.  There has been no material change in theCompany’s market risks associated with debt and interest rate swap obligationsduring the quarter ended December 29, 2001.

 

                The Company isexposed to foreign currency rate risk and substantially all foreign exchangeexposure is the Canadian dollar.  TheCompany’s investments in its foreign subsidiary with a functional currencyother than the U.S. dollar are not hedged. Any gains or losses in fair value associated with the Canadian dollarare reflected in the consolidated balance sheet as a component of othercomprehensive income.

 

 

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**PART II**

 

## **OTHERINFORMATION**

 

ITEM 4.  Submission of Matters to a Vote of SecurityHolders

 

a.                                     The Company held its Annual Meeting ofStockholders on November 8, 2001.

 

b.                                    The following nine persons were electeddirectors: Michael G. Allen, Paul Baszucki, Richard Fink, Wayne M. Fortun,Donald W. Goldfus, William Hope, Thomas Moberly, M. Lenny Pippin and D.R.Verdoorn.

 

c.                                     1.                                       Each director nominee received the following votes:

                                
|     |   | **Shares**   |
|----------|--------|--------------|
|     |   | **In Favor** |   | **Withhold  Authority** |
| Allen    |   | 31,391,873   |   |   549,556 |
| Baszucki |   | 30,384,510   |   | 1,556,919 |
| Fink     |   | 28,579,769   |   | 3,361,660 |
| Fortun   |   | 31,394,056   |   |   547,373 |
| Goldfus  |   | 31,391,206   |   |   550,223 |
| Hope     |   | 30,483,326   |   | 1,458,103 |
| Moberly  |   | 28,574,350   |   | 3,367,079 |
| Pippin   |   | 31,391,513   |   |   549,916 |
| Verdoorn |   | 26,709,732   |   | 5,231,697 |

 

2.                   Stockholders approved an amendment to theCompany’s Articles of Incorporation to increase the authorized shares ofcapital stock of the Company from 60 million to 430 million shares with23,457,335 shares in favor, 8,460,269 shares voting against and 23,825 sharesabstaining.

3.                   Stockholders approved amendments to theCompany’s Articles of Incorporation and Bylaws to classify the Board ofDirectors of the Company and modify the removal requirements for director with19,339,777 shares in favor, 8,887,175 shares voting against, 84,987 sharesabstaining and 3,629,490 broker non-vote.

4.                   Stockholders approved an amendment to theCompany’s 1996 Director Stock Option Plan to increase the number of shares ofCommon Stock reserved for issuance thereunder from 50,000 to 100,000 shareswith 30,584,691 shares in favor, 1,304,268 shares voting against and 52,470shares abstaining.

5.                   Stockholders ratified the appointment ofArthur Andersen LLP, Certified Public Accountants, as independent auditors ofthe Company for 2002: 30,983,220 shares in favor, 952,900 shares voting againstand 5,309 shares abstaining.

 

 

ITEM 6.  Exhibits and Reports on Form 8–K

 

 

                                                a. Exhibits

 

                None

 

 

                                                b.  Reports on Form 8-K

 

                None

 

 

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SIGNATURES

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

 
| G&K SERVICES, INC. |
|------------------------|
| (Registrant)           |

 

 
| Date:  | February 12, 2002 |   | /s/ Jeffrey L. Wright                  |
|--------|-------------------|--------|----------------------------------------|
|   |              |   | Jeffrey L. Wright                      |
|   |              |   | Chief Financial Officer  and Secretary |
|   |              |   | (Principal Financial  Officer)         |
|   |              |   |                                   |
|   |              |   |                                   |
|   |              |   | /s/ Michael F. Woodard                 |
|   |              |   | Michael F. Woodard                     |
|   |              |   | Controller                             |
|   |              |   | (Principal Accounting  Officer)        |

 

 

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