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(G&K SERVICES LOGO)   SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
____________________
 F O R M 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended January 1, 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
Common Stock, par value $0.50 per share
    
    Outstanding January 31, 2005
19,581,724CLASS B
Common Stock, par value $0.50 per share
    
    Outstanding January 31, 2005
1,474,996




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G&K Services, Inc. Form 10-Q
  
 Table of Contents PAGEPART IItem 1. Financial StatementsConsolidated Condensed Balance Sheets as of
January 1, 2005 and July 3, 2004
    
    
    3Consolidated Statements of Operations for the three and six months ended
January 1, 2005 and December 27, 2003
    
    
    4Consolidated Condensed Statements of Cash Flows for the six
months ended January 1, 2005 and December 27, 2003
    
    
    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
    
    
    20Item 4. Controls and Procedures
    
    
    20PART IIItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Loan AgreementCertification 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




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PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 G&K Services, Inc. and Subsidiaries
 January 1,2005
    
    
    July 3,(In thousands)
    
    (Unaudited)
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    10,958
    
    
    $
    26,931Accounts receivable, less allowance for doubtful
accounts of $3,255 and $2,603
    
    
    83,776
    
    
    
    71,058Inventories
    
    
    112,513
    
    
    
    94,476Prepaid expenses
    
    
    10,726
    
    
    
    14,902Total current assets
    
    
    217,973
    
    
    
    207,367Property, Plant and Equipment, net
    
    
    238,593
    
    
    
    240,609Goodwill
    
    
    311,633
    
    
    
    285,892Other Assets
    
    
    80,056
    
    
    
    68,879$
    848,255
    
    
    $
    802,747LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    26,706
    
    
    $
    20,511Accrued expenses
    
    
    74,744
    
    
    
    76,470Deferred income taxes
    
    
    7,871
    
    
    
    7,395Current maturities of long-term debt
    
    
    24,935
    
    
    
    24,018Total current liabilities
    
    
    134,256
    
    
    
    128,394Long-Term Debt, net of Current Maturities
    
    
    186,840
    
    
    
    184,305Deferred Income Taxes
    
    
    39,874
    
    
    
    38,256Other Noncurrent Liabilities
    
    
    28,074
    
    
    
    26,369Stockholders Equity
    
    
    459,211
    
    
    
    425,423$
    848,255
    
    
    $
    802,747
 The accompanying notes are an integral part of these consolidated condensed financial statements. 3




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CONSOLIDATED STATEMENTS OF OPERATIONSG&K Services, Inc. and Subsidiaries
(Unaudited) For the Three Months Ended
    
    
    For the Six Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,(In thousands, except per share data)
    
    2005
    
    
    2003
    
    
    2005
    
    
    2003RevenuesRental operations
    
    $
    183,110
    
    
    $
    174,620
    
    
    $
    359,401
    
    
    $
    347,900Direct sales
    
    
    12,025
    
    
    
    7,919
    
    
    
    18,166
    
    
    
    13,242Total revenues
    
    
    195,135
    
    
    
    182,539
    
    
    
    377,567
    
    
    
    361,142Operating ExpensesCost of rental operations
    
    
    116,415
    
    
    
    111,062
    
    
    
    227,424
    
    
    
    220,907Cost of direct sales
    
    
    8,441
    
    
    
    5,783
    
    
    
    13,337
    
    
    
    10,084Selling and administrative
    
    
    41,226
    
    
    
    38,791
    
    
    
    79,845
    
    
    
    77,324Depreciation and amortization
    
    
    10,161
    
    
    
    9,773
    
    
    
    20,319
    
    
    
    19,463Total operating expenses
    
    
    176,243
    
    
    
    165,409
    
    
    
    340,925
    
    
    
    327,778Income from Operations
    
    
    18,892
    
    
    
    17,130
    
    
    
    36,642
    
    
    
    33,364Interest expense
    
    
    2,641
    
    
    
    2,933
    
    
    
    5,189
    
    
    
    6,088Income before Income Taxes
    
    
    16,251
    
    
    
    14,197
    
    
    
    31,453
    
    
    
    27,276Provision for income taxes
    
    
    6,054
    
    
    
    5,395
    
    
    
    11,756
    
    
    
    10,365Net Income
    
    $
    10,197
    
    
    $
    8,802
    
    
    $
    19,697
    
    
    $
    16,911Basic weighted average number
of shares outstanding
    
    
    20,911
    
    
    
    20,666
    
    
    
    20,868
    
    
    
    20,638Basic Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.43
    
    
    $
    0.94
    
    
    $
    0.82Diluted weighted average number
of shares outstanding
    
    
    21,200
    
    
    
    20,850
    
    
    
    21,133
    
    
    
    20,789Diluted Earnings per Common Share
    
    $
    0.48
    
    
    $
    0.42
    
    
    $
    0.93
    
    
    $
    0.81Dividends per share
    
    $
    0.0175
    
    
    $
    0.0175
    
    
    $
    0.0350
    
    
    $
    0.0350
 The accompanying notes are an integral part of these consolidated condensed financial statements. 4




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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSG&K Services, Inc. and Subsidiaries
(Unaudited) For the Six Months EndedJanuary 1,
    
    
    December 27,(In thousands)
    
    2005
    
    
    2003Operating Activities:Net income
    
    $
    19,697
    
    
    $
    16,911Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    20,319
    
    
    
    19,463Deferred income taxes
    
    
    540
    
    
    
    562Amortization of deferred compensation  restricted stock
    
    
    523
    
    
    
    467Changes in current operating items, exclusive of
acquisitions
    
    
    (12,564
    )
    
    
    15,314Other assets and liabilities
    
    
    838
    
    
    
    197Net cash provided by operating activities
    
    
    29,353
    
    
    
    52,914Investing Activities:Property, plant and equipment additions, net
    
    
    (4,095
    )
    
    
    (8,372
    )Acquisitions of business assets and other
    
    
    (36,038
    )
    
    
    (7,137
    )Net cash used for investing activities
    
    
    (40,133
    )
    
    
    (15,509
    )Financing Activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    1,345Repayments of long-term debt
    
    
    (17,114
    )
    
    
    (6,427
    )Proceeds from (repayments of) short-term borrowings, net
    
    
    7,400
    
    
    
    (28,700
    )Cash dividends paid
    
    
    (732
    )
    
    
    (726
    )Sale of common stock
    
    
    3,633
    
    
    
    2,703Net cash used for financing activities
    
    
    (6,813
    )
    
    
    (31,805
    )(Decrease) Increase in Cash and Cash Equivalents
    
    
    (17,593
    )
    
    
    5,600Effect of Exchange Rates on Cash
    
    
    1,620
    
    
    
    375Cash and Cash Equivalents:Beginning of period
    
    
    26,931
    
    
    
    11,504End of period
    
    $
    10,958
    
    
    $
    17,479Supplemental 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




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G&K SERVICES, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Three and six month periods ended January 1, 2005 and December 27, 2003
(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 January
1, 2005, and the results of its operations for the three and six months ended and its cash
flows for the six months ended January 1, 2005 and December 27, 2003. 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 six month periods ended January 1, 2005 and
December 27, 2003 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




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Derivative Financial InstrumentsThe Company uses derivative financial instruments principally to manage the risk that
changes in interest rates will affect the amount of its future interest payments. Interest
rate swap contracts are used to adjust the proportion of total debt that is subject to
variable and fixed interest rates. The interest rate swap contracts are reflected at fair
value in the consolidated condensed balance sheet and the related gains or losses on these
contracts are deferred in stockholders equity (as a component of other comprehensive
income). Amounts to be paid or received under the contracts are accrued as interest rates
change and are recognized over the life of the contracts as an adjustment to interest
expense. The net effect of this accounting is that interest expense on the portion of
variable rate debt being hedged is at a fixed rate during the interest rate swap contract
period.The Company may periodically hedge firm cash flow commitments with its foreign subsidiary,
generally with foreign currency contracts. These agreements are recorded at current market
values and the gains and losses are included in earnings. Gains and losses on such
transactions were not significant in the second 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
    
    
    Six Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,2005
    
    
    2003
    
    
    2005
    
    
    2003Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    20,911
    
    
    
    20,666
    
    
    
    20,868
    
    
    
    20,638Weighted average effect of nonvested
restricted stock grants and assumed
exercise of options
    
    
    289
    
    
    
    184
    
    
    
    265
    
    
    
    151Shares used in computation of
diluted earnings per share
    
    
    21,200
    
    
    
    20,850
    
    
    
    21,133
    
    
    
    20,789
  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 $246 and
$235 for the three month periods and $523 and $467 for the six month periods ended January
1, 2005 and December 27, 2003, 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 7




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##### Table of Contents



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
    
    
    Six Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,2005
    
    
    2003
    
    
    2005
    
    
    2003Net income, as reported
    
    $
    10,197
    
    
    $
    8,802
    
    
    $
    19,697
    
    
    $
    16,911Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (469
    )
    
    
    (506
    )
    
    
    (902
    )
    
    
    (950
    )Pro forma net income
    
    $
    9,728
    
    
    $
    8,296
    
    
    $
    18,795
    
    
    $
    15,961Basic net income per share:As reported
    
    $
    0.49
    
    
    $
    0.43
    
    
    $
    0.94
    
    
    $
    0.82Pro forma
    
    
    0.46
    
    
    
    0.40
    
    
    
    0.90
    
    
    
    0.77Diluted net income per share:As reported
    
    $
    0.48
    
    
    $
    0.42
    
    
    $
    0.93
    
    
    $
    0.81Pro forma
    
    
    0.45
    
    
    
    0.40
    
    
    
    0.88
    
    
    
    0.77
  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.2.
    Comprehensive IncomeFor the three and six month periods ended January 1, 2005 and December 27, 2003, the
components of comprehensive income were as follows: Three Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,2005
    
    
    2003
    
    
    2005
    
    
    2003Net income
    
    $
    10,197
    
    
    $
    8,802
    
    
    $
    19,697
    
    
    $
    16,911Other comprehensive incomeForeign currency translation
adjustments, net of tax
    
    
    5,480
    
    
    
    2,845
    
    
    
    10,438
    
    
    
    2,502Net unrealized holding gain (loss) on
derivative financial instruments,
net of tax
    
    
    227
    
    
    
    (45
    )
    
    
    229
    
    
    
    326Comprehensive income
    
    $
    15,904
    
    
    $
    11,602
    
    
    $
    30,364
    
    
    $
    19,739
 8




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3.
    AcquisitionsDuring the first six months of fiscal 2005 the Company made several small acquisitions. All
acquisitions were accounted for using the purchase method. The total purchase
consideration, including related acquisition costs of these transactions was $47,081, which
includes $11,890 of debt issued. The total purchase price exceeded the estimated fair
values of assets acquired and liabilities assumed by $22,393. 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 six months ended January 1, 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
    
    
    9,727
    
    
    
    12,666
    
    
    
    22,393Other, primarily foreign currency
translation
    
    
    
    
    
    
    3,348
    
    
    
    3,348Balance as of January 1, 2005
    
    $
    264,725
    
    
    $
    46,908
    
    
    $
    311,633
  Information regarding the Companys other intangible assets, which are included in
other assets on the balance sheet, are as follows: As of January 1, 2005Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    $
    92,393
    
    
    $
    43,369
    
    
    $
    49,024Non-competition agreements
    
    
    11,972
    
    
    
    6,564
    
    
    
    5,408Total
    
    $
    104,365
    
    
    $
    49,933
    
    
    $
    54,432
 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
 9




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Amortization expense was $4,306 and $3,917 for the six months ended January 1, 2005 and
December 27, 2003, respectively. Estimated amortization expense for each of the five
succeeding fiscal years based on the intangible assets as of January 1, 2005 is as follows: 2005 remaining
    
    $
    4,7142006
    
    
    9,3242007
    
    
    9,1222008
    
    
    8,7522009
    
    
    5,0762010
    
    
    4,816
  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 January 1, 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.6.
    Employee Benefit PlansThe components of net periodic pension cost are as follows for the three months ended
January 1, 2005 and December 27, 2003: Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,2005
    
    
    2003
    
    
    2005
    
    
    2003Service cost
    
    $
    741
    
    
    $
    991
    
    
    $
    164
    
    
    $
    182Interest cost
    
    
    532
    
    
    
    631
    
    
    
    142
    
    
    
    143Expected return on assets
    
    
    (426
    )
    
    
    (380
    )
    
    
    
    
    
    
    Prior service cost
    
    
    11
    
    
    
    14
    
    
    
    9
    
    
    
    9Loss
    
    
    101
    
    
    
    264
    
    
    
    38
    
    
    
    79Net periodic pension cost
    
    $
    959
    
    
    $
    1,520
    
    
    $
    353
    
    
    $
    413
 10




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The components of net periodic pension cost are as follows for the six months ended
January 1, 2005 and December 27, 2003: Supplemental ExecutivePension Plan
    
    
    Retirement PlanSix Months Ended
    
    
    Six Months EndedJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,2005
    
    
    2003
    
    
    2005
    
    
    2003Service cost
    
    $
    1,895
    
    
    $
    1,982
    
    
    $
    390
    
    
    $
    364Interest cost
    
    
    1,361
    
    
    
    1,261
    
    
    
    338
    
    
    
    286Expected return on assets
    
    
    (1,089
    )
    
    
    (760
    )
    
    
    
    
    
    
    Prior service cost
    
    
    28
    
    
    
    28
    
    
    
    21
    
    
    
    18Loss
    
    
    258
    
    
    
    528
    
    
    
    104
    
    
    
    157Net periodic pension cost
    
    $
    2,453
    
    
    $
    3,039
    
    
    $
    853
    
    
    $
    825
  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. 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
six month periods ended January 1, 2005 and December 27, 2003 is as follows: UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalSecond Quarter Fiscal Year 2005:Revenues
    
    $
    163,175
    
    
    $
    31,960
    
    
    $
    195,135Income from operations
    
    
    12,348
    
    
    
    6,544
    
    
    
    18,892Property, plant and equipment
additions, net
    
    
    3,355
    
    
    
    1,326
    
    
    
    4,681Depreciation and amortization
expense
    
    
    8,806
    
    
    
    1,355
    
    
    
    10,161Second Quarter Fiscal Year 2004:Revenues
    
    $
    157,209
    
    
    $
    25,330
    
    
    $
    182,539Income from operations
    
    
    12,085
    
    
    
    5,045
    
    
    
    17,130Property, plant and equipment
additions, net
    
    
    3,794
    
    
    
    957
    
    
    
    4,751Depreciation and amortization
expense
    
    
    8,671
    
    
    
    1,102
    
    
    
    9,773
 11




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UnitedFor the Six Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2005:Revenues
    
    $
    319,044
    
    
    $
    58,523
    
    
    $
    377,567Income from operations
    
    
    25,201
    
    
    
    11,441
    
    
    
    36,642Property, plant and equipment
additions, net
    
    
    2,235
    
    
    
    1,860
    
    
    
    4,095Depreciation and amortization
expense
    
    
    17,707
    
    
    
    2,612
    
    
    
    20,319Fiscal Year 2004:Revenues
    
    $
    312,967
    
    
    $
    48,175
    
    
    $
    361,142Income from operations
    
    
    24,382
    
    
    
    8,982
    
    
    
    33,364Property, plant and equipment
additions, net
    
    
    7,471
    
    
    
    901
    
    
    
    8,372Depreciation and amortization
expense
    
    
    17,298
    
    
    
    2,165
    
    
    
    19,463
 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Unaudited) Overview G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a market leader
in providing 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 six months of fiscal 2005. All acquisitions
were accounted for using the purchase method. 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 $47.1 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 $22.4
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 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 13




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##### Table of Contents



both obsolete and excess inventories. New goods are stated at lower of cost or market, net of any
reserve for obsolete or excess inventory.
Merchandise placed in service to support rental operations is amortized into cost of rental
operations over the estimated useful lives of the underlying inventory items, primarily on a
straight-line basis, which results in a matching of the cost of the merchandise with the weekly
rental revenue generated by merchandise. Estimated lives of rental merchandise in service range
from nine months to three years. In establishing estimated lives for merchandise in service,
management considers historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any period if management
makes different judgments or utilizes different estimates. Goodwill, Intangibles and Other Long-Lived Assets We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142) at the beginning of fiscal 2002 and as a result no longer amortize goodwill.
SFAS 142 also requires that companies test goodwill for impairment on an annual basis and when
events occur or circumstances change that would more likely than not reduce the fair value of the
reporting unit to which goodwill is assigned below its carrying amount. Our evaluation considers
changes in the operating environment, competitive information, market trends, operating performance
and cash flow modeling. Management completes its annual impairment test in the fourth quarter of
each fiscal year and there have been no impairments of goodwill or definite-lived intangible assets
in fiscal 2004 or through the first six months of fiscal 2005. Future events could cause
management to conclude that impairment indicators exist and that goodwill and other intangibles
associated with acquired businesses are impaired. Any resulting impairment loss could have a
material impact on our financial condition and results of operations. Property, plant and equipment and definite-lived intangible assets are depreciated or amortized
over their useful lives. Useful lives are based on management estimates of the period that the
assets will generate revenue. Long-lived assets are evaluated for impairment whenever events and
circumstances indicate an asset may be impaired. There have been no write-downs of any long-lived
assets in fiscal 2004 or through the first six 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 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 14




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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. Results of Operations The percentage relationships to net sales of certain income and expense items for the three and six
month periods ended January 1, 2005 and December 27, 2003, and the percentage changes in these
income and expense items between periods are presented in the following table: Three Months
    
    
    Six Months
    
    
    PercentageEnded
    
    
    Ended
    
    
    ChangeThree Months
    
    
    Six MonthsJanuary 1,
    
    
    December 27,
    
    
    January 1,
    
    
    December 27,
    
    
    FY 2005
    
    
    FY 20052005
    
    
    2003
    
    
    2005
    
    
    2003
    
    
    vs. FY 2004
    
    
    vs. FY 2004Revenues:Rental
    
    
    93.8
    %
    
    
    95.7
    %
    
    
    95.2
    %
    
    
    96.3
    %
    
    
    4.9
    %
    
    
    3.3
    %Direct
    
    
    6.2
    
    
    
    4.3
    
    
    
    4.8
    
    
    
    3.7
    
    
    
    51.9
    
    
    
    37.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    6.9
    
    
    
    4.5Expenses:Cost of rental sales
    
    
    63.6
    
    
    
    63.6
    
    
    
    63.3
    
    
    
    63.5
    
    
    
    4.8
    
    
    
    3.0Cost of direct sales
    
    
    70.2
    
    
    
    73.0
    
    
    
    73.4
    
    
    
    76.2
    
    
    
    46.0
    
    
    
    32.3Total cost of sales
    
    
    64.0
    
    
    
    64.0
    
    
    
    63.8
    
    
    
    64.0
    
    
    
    6.9
    
    
    
    4.2Selling and administrative
    
    
    21.1
    
    
    
    21.3
    
    
    
    21.1
    
    
    
    21.4
    
    
    
    6.3
    
    
    
    3.3Depreciation and
amortization
    
    
    5.2
    
    
    
    5.3
    
    
    
    5.4
    
    
    
    5.4
    
    
    
    4.0
    
    
    
    4.4Income from operations
    
    
    9.7
    
    
    
    9.4
    
    
    
    9.7
    
    
    
    9.2
    
    
    
    10.3
    
    
    
    9.8Interest expense
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.4
    
    
    
    1.6
    
    
    
    (10.0
    )
    
    
    (14.8
    )Income before income taxes
    
    
    8.3
    
    
    
    7.8
    
    
    
    8.3
    
    
    
    7.6
    
    
    
    14.5
    
    
    
    15.3Provision for income taxes
    
    
    3.1
    
    
    
    3.0
    
    
    
    3.1
    
    
    
    2.9
    
    
    
    12.2
    
    
    
    13.4Net income
    
    
    5.2
    %
    
    
    4.8
    %
    
    
    5.2
    %
    
    
    4.7
    %
    
    
    15.8
    %
    
    
    16.5
    %
 Three months ended January 1, 2005 compared to three months ended December 27, 2003 Revenues.Total revenues in the second quarter of fiscal 2005 increased 6.9% to $195.1 million
from $182.5 million in the second quarter of fiscal 2004. Rental revenue increased $8.5 million in
the second quarter, or 4.9%. The organic industrial rental growth rate was approximately negative
1.0%, an improvement from negative 2.0% in the same period of fiscal 2004. Organic industrial
rental revenue has improved due to improved economic conditions related to more stable employment
levels, a better pricing environment and improvements in customer retention. Direct sale revenue increased 51.9% to $12.0 million in the second quarter of fiscal 2005 compared
to $7.9 million in the same period of fiscal 2004. The organic direct sale growth rate was
approximately 17.0%. The increase in organic direct sale revenue was due primarily to the success
of our annual outerwear promotion. 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. 15




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Cost of Rental and Direct Sale.Cost of rental operations increased 4.8% to $116.4 million in the
second quarter of fiscal 2005 from $111.1 million in the same period of fiscal 2004. Gross margin
from rental sales was 36.4% in the second quarter of both fiscal 2005 and fiscal 2004. Rental
gross margins continue to be impacted by operational initiatives that resulted in lower merchandise
costs, which were largely offset by higher energy costs. Cost of direct sales increased 46.0% to $8.4 million in the second quarter of fiscal 2005 from $5.8
million in the same period of fiscal 2004. Gross margin from direct sales increased to 29.8% in
the second quarter of fiscal 2005 from 27.0% in the second quarter of fiscal 2004. The increase in
gross margin was primarily due to additional volume and margin associated with a recently acquired
business. Selling and Administrative.Selling and administrative expenses increased to $41.2 million in the
second quarter of fiscal 2005 from $38.8 million in the same period of fiscal 2004. As a
percentage of total revenues, selling and administrative expenses decreased to 21.1% in the second
quarter of fiscal 2005 from 21.3% in the second quarter of fiscal 2004. The decrease as a percent
of revenue is largely attributed to leverage on incremental revenue growth. Depreciation and Amortization. Depreciation and amortization expense increased 4.0% to $10.2
million in the second quarter of fiscal 2005 from $9.8 million in the same period of fiscal 2004.
As a percentage of total revenues, depreciation and amortization expense decreased to 5.2% in the
second quarter of fiscal 2005 from 5.3% in the second quarter of fiscal 2004. Capital
expenditures, excluding acquisition of businesses, were $4.7 million in the second quarter of
fiscal 2005 compared to $4.8 million in the prior years quarter. Interest Expense. Interest expense was $2.6 million in the second quarter of fiscal 2005, down
from $2.9 million in the same period of fiscal 2004. The decrease was due to lower debt levels
associated with significant levels of cash flows and slightly lower interest rates. Provision for Income Taxes. Our effective tax rate decreased to 37.3% in the second quarter of
fiscal 2005 from 38.0% in the same period of fiscal 2004 largely due to decreases in Canadian
statutory income tax rates. Six months ended January 1, 2005 compared to six months ended December 27, 2003 Revenues.Total revenues for the first six months of fiscal 2005 increased 4.5% to $377.6 million
from $361.1 million for the same period of fiscal 2004. Rental revenue increased $11.5 million in
the first six months, or 3.3%. The organic industrial rental growth rate was approximately negative
1.5%. Organic industrial rental revenue continues to be negatively impacted by lost uniform
wearers due to reduced employment levels within our existing customer base and more competitive
pricing on both new accounts and account renewals. Direct sale revenue increased 37.2% to $18.2 million in the first six months of fiscal 2005
compared to $13.2 million in the same period of fiscal 2004. The organic direct sale growth rate
was approximately 16.0%. The increase is largely due to garment sales through our rental
operations including our annual outerwear promotion. 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 3.0% to $227.4 million in the
first six months of fiscal 2005 from $220.9 million in the same period of fiscal 2004. Gross
margin from rental sales increased to 36.7% in the first six months of fiscal 2005 from 36.5% in
the same period of fiscal 2004. The benefit of numerous operational initiatives that resulted in
lower merchandise and processing costs were partially offset by higher energy costs. Cost of direct sales increased 32.3% to $13.3 million in the first six months of fiscal 2005 from
$10.1 million in the same period of fiscal 2004. Gross margin from direct sales increased to 26.6%
in the first six months of fiscal 2005 from 23.8% in the same period of fiscal 2004. The increase
in margins was primarily due to the increase in sales volume. 16




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Selling and Administrative.Selling and administrative expenses increased 3.3% to $79.8 million in
the first six months of fiscal 2005 from $77.3 million in the same period of fiscal 2004. As a
percentage of total revenues, selling and administrative expenses decreased to 21.1% in the first
six months of fiscal 2005 from 21.4% in the same period of fiscal 2004. The decrease as a percent
of revenue was due to leverage on incremental revenue growth and a $0.3 million gain on sale of
property, partially offset by increased costs in connection with the expansion of our new account
sales team. Depreciation and Amortization. Depreciation and amortization expense increased 4.4% to $20.3
million in the first six months of fiscal 2005 from $19.5 million in the same period of fiscal
2004. As a percentage of total revenues, depreciation and amortization expense remained constant
at 5.4% in the first six months of both fiscal 2005 and fiscal 2004. Capital expenditures,
excluding acquisition of businesses, were $4.1 million in the first six months of fiscal 2005
compared to $8.4 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 during the first quarter
of fiscal 2005. Interest Expense. Interest expense was $5.2 million in the first six months of fiscal 2005, down
from $6.1 million in the same period of fiscal 2004. The decrease was due to lower debt levels
associated with significant levels of cash flows and slightly lower interest rates. Provision for Income Taxes. Our effective tax rate decreased to 37.4% in the first six 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 $29.4 million in the first six
months of fiscal 2005 and $52.9 million in the same period of fiscal 2004. Operating cash flow was
down from the prior year primarily due to the timing of cash payments for income taxes, an increase
in new inventory in connection with our expansion of our manufacturing operation and one-time
improvements in the prior year related to a focus on timely collection of accounts receivable. Working capital at January 1, 2005 was $83.7 million, up 5.9% 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 $40.1 million in the first six
months of fiscal 2005 and $15.5 million in the same period of fiscal 2004. In fiscal 2005, cash
was largely used for acquisitions of business assets with capital expenditures being largely 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 property, plant and equipment additions. Financing Activities.Cash used for financing activities was $6.8 million in the first six months
of fiscal 2005 and $31.8 million in the same period of fiscal 2004. Cash used in both fiscal 2005
and 2004 was primarily related to the repayment of long-term debt. The Company paid dividends of
$0.7 million during the first six 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 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 January 1, 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. 17




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##### Table of Contents



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 January 1, 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
    
    $
    7,500
    
    
    $
    18,750
    
    
    $
    22,500
    
    
    $
    107,000
    
    
    $
    
    
    
    $
    
    
    
    $
    155,750Fixed rate term loan
    
    
    
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    14,285
    
    
    
    42,857Other debt arrangements, including
capital leases
    
    
    680
    
    
    
    530
    
    
    
    11,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,168Operating leases
    
    
    7,501
    
    
    
    10,814
    
    
    
    9,537
    
    
    
    7,284
    
    
    
    4,612
    
    
    
    5,282
    
    
    
    45,030Total contractual cash obligations
    
    $
    15,681
    
    
    $
    37,237
    
    
    $
    51,138
    
    
    $
    121,427
    
    
    $
    11,755
    
    
    $
    19,567
    
    
    $
    256,805
 Also, at January 1, 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 January 1, 2005, we had available cash on hand of $11.0 million and over $164.4 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 $1.0 million in the second 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. 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 18




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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 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. 19




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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 second quarter of fiscal 2005 by
approximately $0.2 million. This estimated exposure considers the mitigating effects of interest
rate swap agreements outstanding at January 1, 2005 on the change in the cost of variable rate
debt. Foreign Currency Exchange Risk We have a significant foreign subsidiary located in Canada. The assets and liabilities of this
subsidiary are denominated in the Canadian dollar and as such are translated into U.S. dollars at
the exchange rate in effect at the balance sheet date. Results of operations are translated using
the average exchange rates throughout the period. The effect of exchange rate fluctuations on
translation of assets and liabilities are recorded as a component of stockholders equity. Gains
and losses from foreign currency transactions are included in results of operations. 
 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our chief executive
officer and chief financial officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) or Rule 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Form 10-Q.
Based on their evaluation, our chief executive officer and chief financial officer concluded that
the Companys disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation referenced above. 20




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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 January
1, 2005. Maximum Number (orTotal Number of
    
    
    
    Approximate DollarShares (or Units)
    
    
    
    Value) of SharesPurchased as Part
    
    
    
    (or Units) that MayTotal Number of
    
    
    
    
    
    
    
    
    of Publicly
    
    
    
    Yet be PurchasedShares (or Units)
    
    
    
    Average Price Paid
    
    
    
    Announced Plans or
    
    
    
    Under the Plans orPeriod
    
    
    Purchased (1)
    
    
    
    per Share (or Unit)
    
    
    
    Programs
    
    
    
    ProgramsMonth #1
(Fiscal month
ending November 6,
2004)
    
    
    
    324
    
    
    
    $
    0.50
    
    
    
    
    
    
    
    
    
    Month #2
(Fiscal month
ending December 4,
2004)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Month #3
(Fiscal month
ending January 1,
2005)
    
    
    
    2,574
    
    
    
    $
    0.50
    
    
    
    
    
    
    
    
    
    
   (1)
    All repurchased shares were initially issued under the Employee Plans as restricted
stock grants subject to forfeiture upon termination of employment. All repurchases were
made upon forfeiture of shares by the recipient of such restricted stock grants. Pursuant
to the Restricted Stock Agreements governing such grants, the repurchase price for all shares was $0.50, which represents the per share amount paid by the restricted stock grant
recipient on the date of grant. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  a.
    The Company held its Annual Meeting of Shareholders on November 11, 2004.b.
    The following two persons were elected as Class III directors: John S. Bronson
and Wayne M. Fortun. The following six persons comprise the other directors whose
terms of office continued after the Annual Meeting of Shareholders: Michael G. Allen,
Paul Baszucki, Richard M. Fink, Richard L. Marcantonio, M. Lenny Pippin and Alice M.
Richter.c.
    1. Each director nominee received the following votes: SharesIn Favor
    
    Withhold AuthorityMr. Bronson
    
    31,861,254
    
    300,390Mr. Fortun
    
    30,865,637
    
    1,296,007
  2.
    Shareholders ratified the appointment of Ernst & Young LLP,
Independent Registered Public Accounting Firm, as independent auditors of the Company for 2005: 30,739,115
shares in favor, 1,412,985 shares voting against and 9,544 shares abstaining. 21




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a.
    Exhibits 10.1 Loan Agreement dated November 17, 2004 among G&K Services, Inc., and its
subsidiaries, Three Pillars Funding LLC and SunTrust Capital Markets, Inc. 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 November 12, 2004. A Form 8-K, Item 1.01 Entry Into a Material Definitive Agreement and Item 2.03
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant was filed on November 19, 2004. 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC.
(Registrant)Date: February 8, 2005
    By:
    /s/ Jeffrey L. WrightJeffrey L. WrightSenior Vice President and Chief
Financial Officer
(Principal Financial Officer) By:
    /s/ Michael F. WoodardMichael F. WoodardVice President and Controller
(Principal Accounting Officer) 23