<PAGE>
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 September 26, 1998 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-0449530
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
5995 OPUS PARKWAY, SUITE. 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
(612) 912-5500
(Registrant's telephone number, including zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
<TABLE>
<S> <C>
CLASS A Outstanding November 5, 1998
Common Stock, par value $.50 per share 19,020,035
CLASS B Outstanding November 5, 1998
Common Stock, par value $.50 per share 1,474,996
</TABLE>
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 26,
1998 June 27,
ASSETS (In thousands, except share data) (Unaudited) 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 17,316 $ 11,975
Accounts receivable, less allowance for doubtful
accounts of $3,651 and $2,392 56,979 56,933
Inventories 78,106 77,210
Prepaid expenses 7,650 7,295
- ----------------------------------------------------------------------------------------------
Total current assets 160,051 153,413
- ----------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 25,726 25,801
Buildings and improvements 89,791 89,683
Machinery and equipment 166,608 154,048
Automobiles and trucks 36,665 36,531
Less accumulated depreciation (124,740) (118,378)
- ----------------------------------------------------------------------------------------------
Total property, plant and equipment 194,050 187,685
- ----------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 130,944 131,899
Restrictive covenants and customer lists, net 41,145 42,310
Other, principally retirement plan assets 13,000 16,535
- ----------------------------------------------------------------------------------------------
Total other assets 185,089 190,744
- ----------------------------------------------------------------------------------------------
$ 539,190 $ 531,842
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,832 $ 16,103
Accrued expenses
Salaries and employee benefits 18,473 18,077
Other 18,731 17,849
Deferred income taxes 12,951 13,036
Current maturities of long-term debt 20,000 15,000
- ----------------------------------------------------------------------------------------------
Total current liabilities 93,987 80,065
LONG-TERM DEBT, LESS CURRENT MATURITIES 222,382 234,843
DEFERRED INCOME TAXES 9,188 9,483
OTHER NONCURRENT LIABILITIES 9,214 9,331
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,019,035
and 19,011,952 shares issued and outstanding 9,510 9,506
Class B, 10,000,000 shares authorized, 1,474,996
and 1,474,996 shares issued and outstanding 738 738
Additional paid-in capital 23,668 23,644
Retained earnings 182,991 174,660
Deferred compensation (1,851) (1,973)
Accumulated other comprehensive income (10,637) (8,455)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 204,419 198,120
- ----------------------------------------------------------------------------------------------
$ 539,190 $ 531,842
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
SEPTEMBER 26, SEPTEMBER 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Rental operations $ 122,813 $ 114,728
Direct sales 3,310 3,698
- ------------------------------------------------------------------------------
Total revenues 126,123 118,426
- ------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 69,056 65,705
Cost of direct sales 2,222 2,677
Selling and administrative 27,336 24,896
Depreciation 6,559 5,860
Amortization of intangibles 2,143 2,473
- ------------------------------------------------------------------------------
Total operating expenses 107,316 101,611
- ------------------------------------------------------------------------------
INCOME FROM OPERATIONS 18,807 16,815
Interest expense 4,730 4,767
Other income, net (321) (209)
- ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,398 12,257
Provision for income taxes 5,708 4,812
- ------------------------------------------------------------------------------
NET INCOME $ 8,690 $ 7,445
- ------------------------------------------------------------------------------
Basic weighted average number
of shares outstanding 20,390 20,366
BASIC EARNINGS PER COMMON SHARE $ 0.43 $ 0.37
- ------------------------------------------------------------------------------
Diluted weighted average number
of shares outstanding 20,494 20,445
DILUTED EARNINGS PER COMMON SHARE $ 0.42 $ 0.36
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
SEPTEMBER 26, SEPTEMBER 27,
(IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 8,690 $ 7,445
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 8,703 8,333
Deferred income taxes (381) (37)
Changes in current operating items-
Inventories (878) (1,778)
Accounts receivable and prepaid expenses (407) (8,995)
Accounts payable and other current liabilities 9,918 10,858
Other, net (95) (630)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,550 15,196
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (12,464) (8,323)
Business acquisitions (155) (279,738)
Purchase of investments (159) (193)
- -----------------------------------------------------------------------------------------------------
Net cash used for investing activities (12,778) (288,254)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 1,982 355,843
Repayments on line of credit and other long-term debt, net (9,054) (86,000)
Cash dividends paid (359) (358)
Sale of common stock - 2
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (7,431) 269,487
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,341 (3,571)
CASH AND CASH EQUIVALENTS:
Beginning of year 11,975 6,986
- -----------------------------------------------------------------------------------------------------
End of year $ 17,316 $ 3,415
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 4,261 $ 4,250
- -----------------------------------------------------------------------------------------------------
Income Taxes $ 6,032 $ 7,245
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data.)
Three month period ended September 26, 1998 and September 27, 1997
(Unaudited)
The consolidated financial statements included herein, except for
the June 27, 1998, balance sheet which was extracted from the audited
financial statements of June 27, 1998, have been prepared by 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 financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of September 26, 1998, and
June 27, 1998, and the results of operations and the changes in
financial position for the three months ended September 26, 1998 and
September 27, 1997. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles 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
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest
annual report.
The results of operations for the three month period ended
September 26, 1998, and September 27, 1997, are not necessarily
indicative of the results to be expected for the full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies followed by the Company are set forth in Note
1 to the Company's Annual Consolidated Financial Statements.
NATURE OF BUSINESS
G&K Services, Inc. (the Company) is a full service uniform rental
provider, including the rental of cleanroom garments. The Company also
provides rental of non-uniform items such as floormats, dustmops and
cloths, wiping towels and selected linen items. In addition, the
Company manufactures uniforms for rental customers as well as uniforms
for direct sale.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly
owned. Significant intercompany balances and transactions have been
eliminated in consolidation.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its interest rate exposure. Amounts to be paid or
received under interest rate swap agreements are accrued as interest
rates change and are recognized over the life of the swap agreements as
an adjustment to interest expense. The related amounts payable to, or
receivable from, the counter-parties are included in other accrued
expenses. The fair value of the swap agreements is not recognized in
the Consolidated Financial Statements, since they are accounted for as
hedges.
PER SHARE DATA
In the second quarter of fiscal 1998, the Company adopted SFAS No.
128, "Earnings per Share," which is effective for interim periods
ending after December 15, 1997. As a result, all prior period earnings
per share data has been restated. The adoption of SFAS No. 128 did not
have a significant
5
<PAGE>
impact on previously reported earnings per share. Basic earnings per
common share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------------------
<S> <C> <C>
Weighted average number of common
shares outstanding 20,390 20,366
------------------------------
Shares used in computation of
basic earnings per share 20,390 20,366
Weighted average effect of
non-vested restricted stock grants 63 42
Weighted average common shares
issuable upon the exercise of
stock options 41 37
------------------------------
Shares used in computation of
diluted earnings per share 20,494 20,445
------------------------------
------------------------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," will be effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 requires disclosure of business
and geographic segments in the consolidated financial statements of the
Company. The Company will adopt SFAS No. 131 in fiscal 1999 and is
currently analyzing the impact it will have on the disclosures in its
financial statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
the 1999 presentation. These reclassifications have no effect on net
income or total stockholders' equity as previously reported.
2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS
On July 14, 1997, the Company purchased the uniform rental assets
and selected linen rental assets of National Linen Service (NLS) for
approximately $283,400 in cash. The acquisition was accounted for using
the purchase method and the purchase price was allocated to the
acquired assets and assumed liabilities based on the fair values of the
assets purchased and the liabilities assumed. The purchase price and
related acquisition costs exceeded the fair values assigned to tangible
assets by approximately $160,600, which was assigned to restrictive
covenants ($1,100) to be amortized over the contract life of five
years, purchased customer list ($41,600) to be amortized over eleven
years and goodwill ($117,900) to be amortized over thirty-five years.
In connection with the asset purchase from NLS, nine linen rental
facilities purchased were identified as assets held for sale. The net
cash flows from (i) operations of these facilities from the date of
acquisition until the date of sale (holding period, not to exceed one
year), (ii) interest on incremental debt incurred during the holding
period to finance the purchase of these facilities, and (iii) proceeds
from the
6
<PAGE>
sale were considered in the allocation of the purchase price to the
acquired assets and liabilities. Accordingly, earnings or losses from
these nine facilities have been excluded from the consolidated
statement of income. For the period ended September 27, 1997, earnings
excluded from the Company's consolidated statement of income totaled
$447, including allocated interest expense of $976.
The pro forma results of operations for the periods ended
September 26, 1998 and September 27, 1997 are not materially different
from the actual results of operations.
3. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires the Company to
report and display comprehensive income and its components. For the three
month periods ended September 26, 1998 and September 27, 1997, the
components of comprehensive income were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS)
------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------------------------
<S> <C> <C>
Net income $ 8,690 $ 7,445
Other comprehensive income, net of tax
Foreign currency translation adjustments (1,918) (355)
Unrealized gain (loss) on
investments held for sale (264) 285
------------------------------
Comprehensive income $ 6,508 $ 7,375
------------------------------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three month periods ended September 26, 1998 and September 27,
1997, and the percentage changes in these income and expense items between
periods are contained in the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE
THREE MONTHS ENDED CHANGE
-----------------------------------------------------------------------
FY Q1 1999 vs. FY
September 26, 1998 September 27, 1997 Q1 1998
-----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental 97.4% 96.9% 7.0%
Direct 2.6 3.1 (10.5)
----------------------------------------------
Total Revenues 100.0 100.0 6.5
Expenses:
Cost of Rental Sales 56.2 57.3 5.1
Cost of Direct Sales 67.1 72.4 (17.0)
----------------------------------------------
Total Cost of Sales 56.5 57.7 4.3
Selling and Administrative 21.7 21.0 9.8
Depreciation 5.2 5.0 11.9
Amortization of Intangibles 1.7 2.1 (13.3)
----------------------------------------------
Income from Operations 14.9 14.2 11.8
Interest Expense 3.8 4.0 (0.8)
Other (Income) Expense, net (0.3) (0.2) 53.6
----------------------------------------------
Income Before Income Taxes 11.4 10.4 17.5
Provision for Income Taxes 4.5 4.1 18.6
----------------------------------------------
Net Income 6.9% 6.3% 16.7
----------------------------------------------
----------------------------------------------
</TABLE>
Total revenues for the first quarter of fiscal 1999 increased 6.5% to
$126.1 million from $118.4 million in the first quarter of fiscal 1998. The
first quarter of fiscal 1998 included only eleven weeks of revenues from
assets acquired from NLS on July 14, 1997, including three industrial
locations that were later sold in the fourth quarter of fiscal 1998.
Adjusting for these two transactions, total revenue growth for the first
quarter of fiscal 1999 was 5.0%.
Rental revenue growth for the first quarter accounted for $8.1 million,
or a 7.0% increase. U.S. and Canadian rental revenues increased 5.9%
(adjusted for the NLS asset purchase and the sale of industrial plants) and
2.1%, respectively. The growth in rental revenue, which is below historical
growth patterns, was influenced by several factors, including lower growth
rates in the southeastern part of the U.S. that were impacted by continuing
NLS acquisition integration activities, a sharp downturn in the
semi-conductor industry and an accelerated decline in the value of the
Canadian dollar.
Total direct sales to outside customers decreased 10.5% to $3.3 million
for the first quarter of fiscal 1999 compared to $3.7 million in the same
period of fiscal 1998. This decrease is primarily the result of shifting
garment manufacturing capacity from sales to external customers to internal
use by the Company for rental customers. Cost of direct sales, as a
percentage of direct sales, decreased to 67.1% from 72.4% in the same period
of fiscal 1998.
Cost of rental operations increased 5.1% to $69.1 million for the first
quarter of fiscal 1999 from $65.7 million in the same period of fiscal 1998.
As a percentage of rental revenues, these costs decreased to 56.2% for
8
<PAGE>
the first quarter of fiscal 1999 from 57.3% in the same period of fiscal
1998. The Company attributes this decrease as a percent of revenue to
improvements in all components of rental operations (merchandise, production
and delivery costs), primarily at locations acquired in the NLS transaction.
Selling and administrative expenses increased 9.8% to $27.3 million in
the first quarter of fiscal 1999 from $24.9 million in the same period of
fiscal 1998. As a percentage of revenues, selling and administrative expenses
increased to 21.7% in the first quarter of fiscal 1999 from 21.0% in the same
period of fiscal 1998. The increase as a percent of revenue is due to several
factors, including higher selling expenses in the locations acquired in
fiscal 1998, increased information technology costs, expenses associated with
Year 2000 solutions and other corporate initiatives.
Depreciation expense increased 11.9% to $6.6 million in the first
quarter of fiscal 1999 from $5.9 million in the same period of fiscal 1998.
As a percentage of revenues, depreciation expense increased to 5.2% in the
first quarter of fiscal 1999 from 5.0% in the same period of 1998. This
increase is primarily the result of continued investment in locations
acquired in fiscal 1998 and the construction of new locations. Capital
expenditures, excluding acquisition of businesses, was $12.5 million in the
first quarter of fiscal 1999 compared to $8.3 million in the prior year's
quarter.
Amortization expense decreased 13.3% to $2.1 million in the first
quarter of fiscal 1999 from $2.5 million in the first quarter of fiscal 1998.
This decrease is attributable to the sale of eleven linen and industrial
facilities and the related intangible assets during the third and fourth
quarters of fiscal 1998.
Income from operations increased 11.8% to $18.8 million in the first
quarter of fiscal 1999 from $16.8 million in the same period of fiscal 1998.
Operating margins increased to 14.9% in fiscal 1999 from 14.2% in fiscal
1998. U.S. operating margins increased to 13.3% in fiscal 1999 from 12.7% in
the same period of fiscal 1998.
Interest expense was $4.7 million for the first quarter of fiscal 1999,
down from $4.8 million in the same period of fiscal 1998. The Company's
effective tax rate increased to 39.6% in the first quarter of fiscal 1999
from 39.3% in the same period of fiscal 1998.
Net income rose 16.7% to $8.7 million in the first quarter of fiscal
1999 from $7.4 million in the same period of fiscal 1998. Basic and diluted
earnings per share for the first quarter of fiscal 1999 were $.43 per share
and $.42 per share, respectively, compared to $.37 and $.36, respectively,
for the prior year quarter. Net income margins increased to 6.9% for the
first quarter of fiscal 1999 compared with 6.3% in the first quarter of
fiscal 1998.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $25.6 million in the first
quarter of fiscal 1999 and $15.2 million in the same period of fiscal 1998.
The fiscal 1999 increase resulted from increases in net income and accounts
payable when compared to the first quarter of 1998, which included the impact
of the NLS asset acquisition. Working capital at September 26, 1998 was $66.1
million, down 9.9% from $73.3 million at June 27, 1998.
Cash used for financing activities was $7.4 million in the first quarter
of fiscal 1999 and cash provided by financing activities was $269.5 million
in the same period of fiscal 1998. $355.8 million of cash was obtained by
issuing debt primarily for the acquisition of selected assets of NLS in the
first quarter of fiscal 1998. The Company's ratio of debt to total
capitalization decreased to 54.2% at the end of the first quarter of fiscal
1999 from 55.8% at June 27, 1998.
Cash used in investing activities was $12.8 million in the first quarter
of fiscal 1999 and $288.3 million in the first quarter of fiscal 1998. The
decrease is primarily due to the acquisition of the NLS assets in the first
quarter of fiscal 1998.
9
<PAGE>
Stockholders' equity grew 3.2% to $204.4 million at September 26, 1998,
compared with $198.1 million at the end of fiscal 1998. G&K's return on
average equity remained at 4.3% for the first quarters of both fiscal 1999
and fiscal 1998.
Management believes that cash flows generated from operations and its
credit facilities should provide adequate funding for its current businesses
and planned expansion of operations or any future acquisitions.
YEAR 2000 COMPLIANCE
The Company utilizes both information technology ("IT") and non-IT
systems and assets throughout its U.S. and Canadian operations that will be
affected by the date change in the year 2000. The Company began an extensive
review of its business in January, 1998, to determine whether or not its IT
and non-IT systems and assets were year 2000 compliant, as well as the
remedial action and related costs associated with required modifications or
replacements. The Company's goal is to ensure current business operations
will continue to function accurately with minimal disruption through the
millennium change. The Company has also had discussions with its significant
suppliers to determine the readiness of those suppliers to correct year 2000
issues where their systems and products interface with the Company's systems
or otherwise impact its operations. The Company is assessing the extent to
which its operations are vulnerable should those suppliers not succeed to
properly remedy their computer systems. The Company believes that its actions
with key suppliers will minimize these risks. The scope of the year 2000
readiness effort includes (i) information technology such as software and
hardware, (ii) non-information systems or embedded technology such as micro
controllers contained in various equipment, safety systems, facilities and
utilities and (iii) readiness of key third-party suppliers. If needed
modifications and conversions are not made on a timely basis, the year 2000
issue could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company hopes to achieve
these objectives by committing resources and leveraging previous investments
in existing technologies.
The Company has a documented process through which all IT and non-IT
systems and assets are being reviewed with reference to year 2000 date
issues. This methodology takes each system and asset through the following
lifecycle:
- Awareness - Educate employees about year 2000 issues.
- Assessment - Conduct an inventory and impact analysis of the business,
operations, and systems. Identify priorities and plan.
- Analysis - Analyze the asset(s) to determine the tasks, resources and
duration required to ensure compliance.
- Contingency Planning - Identify alternative solutions to the
recommended solution.
- Conversion - Renovation plan is finalized, approved and implemented.
- Testing - Approved validation plans are implemented and testing
occurs.
- Rollout - Implementation plan is approved, and tested compliance
solution is fully implemented into production.
The Company's key systems and assets are as follows:
- Financial systems software - SAP financial systems were implemented
and operational as of June 28, 1998. The Company will be completing
year 2000 testing of this system by January 1, 1999.
- Revenue recognition system - Renovation of this internally developed
system is completed. Testing is in process and rollout will be
completed by March 31, 1999.
- Other IT software, hardware and communications - Other vendor software
and G&K applications have been assessed and are currently being
renovated and tested. Expected completion date is March 31, 1999, for
all IT systems and assets, except for vendor supplied solutions, which
have an anticipated completion date of July 1, 1999.
- Non-IT plant and related equipment - The Company has completed the
assessment phase. Anticipated completion date for all non-IT systems
and assets is March 31, 1999.
- Business processes and procedures - All process flows are being
analyzed for risk with appropriate contingency plans put into place.
The anticipated completion date is March 31, 1999.
10
<PAGE>
- Third Parties - The Company's supply chain is being assessed to ensure
all significant vendors will have the ability to meet the Company's
needs. This assessment and contingency planning will be completed by
December 31, 1998. Currently, no disclosures of non-compliant
suppliers have been discovered.
The Company will not be deferring any other significant IT projects to
address the year 2000 issues. Because the year 2000 issue is of short
duration, the Company has retained experts and advisors to evaluate year 2000
readiness; assist in analysis, renovation, and contingency planning; and
complete independent testing when renovations are completed. The Company's
core IT staff will continue to stay focused on the Company's business needs,
as well as assist with year 2000 analysis and renovation.
The Company is implementing solutions and began to incur expenses
during fiscal 1998 to resolve the year 2000 issue. These expenses will
continue through the year 2000. Maintenance or modification costs are
expensed as incurred, while costs of any new software and equipment are being
capitalized over the asset's useful life, consistent with the Company's
financial policies. The Company has spent approximately $2.6
million related to the year 2000 analysis; $1.7 million of these costs were
capitalized. The Company has budgeted $7.3 million of total expenditures for
the year 2000 compliance activities, of which $4.1 million will be
capitalized, although there can be no assurance that year 2000 related
expenditures will not be materially higher. The Company's current estimates
of the amount of time and costs necessary to modify and test its computer
systems are based upon assumptions regarding future events, including the
continued availability of certain resources, year 2000 modification plans and
other factors. New developments may occur that could affect the Company's
estimates of the amount of time and costs necessary to modify and test its
systems for year 2000 compliance. These developments include, but are not
limited to (i) the availability and cost of personnel trained in this area,
(ii) the ability to locate and correct all relevant computer codes and
equipment and (iii) the year 2000 compliance success that key suppliers
attain.
Contingency plans are being developed and implemented where the level of
risk has been determined to be unsatisfactory. The Company is using a
weighted system to evaluate and determine this level of risk in each of five
areas: Operational, Facility Safety, Financial Management, Legal Implication
and Organizational Implication. Where necessary, the Company is implementing
various contingency plans that will include, but are not limited to, the
following:
- Secondary vendors for garments and other significant non-uniform
inventories
- Stockpile of certain other inventories, soap, thread, etc.
- Manual work-around for less critical computerized systems
While the Company has exercised its best efforts to identify and remedy
any potential year 2000 exposures within its control, the largest risks are
expected with utilities in the form of water and power which, to a
significant extent, are beyond the immediate control of the Company. To date,
the Company has not identified any suppliers who will not be year 2000
compliant; however, this analysis is still in process. If non-compliant
vendors are identified, the Company intends to develop appropriate
contingency plans.
While the Company believes its planning efforts are adequate to address
its year 2000 concerns, the year 2000 readiness of the Company's suppliers
and business partners may lag behind the Company's efforts. Although the
Company does not believe that the year 2000 matters discussed above will have
a material impact on its business, financial condition and results of
operations, it is uncertain as to what extent the Company may be affected by
such matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable
rate debt, as well as swaps, to finance operations and to hedge interest rate
exposures. The swap contracts are entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. The Company does not enter into contracts for speculative
purposes, nor is it a party to any leveraged instrument. There has been
11
<PAGE>
no material change in the Company's market risks associated with debt and
interest rate swap obligations during the quarter ended September 26, 1998.
Statements in this document regarding ongoing trends and expectations
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks, which may cause the Company's actual results in the future to
differ materially from expected results. These risks and uncertainties
include, but are not limited to, those expectations related to the
acquisition of assets from NLS; unforeseen operating risks; the availability
of capital to finance planned growth; competition within the uniform leasing
industry; and the effects of economic conditions.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<S> <C>
10.1 1998 Stock Option and Compensation Plan (incorporated herein
by reference to Exhibit A of the Registrant's definitive
proxy statement for the 1998 Annual Meeting of Shareholders
filed October 5, 1998) *
27 Financial Data Schedule (for SEC use only)
* Compensatory plan or arrangement
</TABLE>
b. Reports on Form 8-K.
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: November 10, 1998 /s/Timothy W. Kuck
-----------------------------
Timothy W. Kuck
Chief Financial Officer
(Principal Financial Officer)
/s/Michael F. Woodard
-----------------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 17,316
<SECURITIES> 0
<RECEIVABLES> 60,630
<ALLOWANCES> 3,651
<INVENTORY> 78,106
<CURRENT-ASSETS> 160,051
<PP&E> 318,790
<DEPRECIATION> 124,740
<TOTAL-ASSETS> 539,190
<CURRENT-LIABILITIES> 93,987
<BONDS> 0
0
0
<COMMON> 10,244
<OTHER-SE> 194,175
<TOTAL-LIABILITY-AND-EQUITY> 539,190
<SALES> 126,123
<TOTAL-REVENUES> 126,123
<CGS> 71,278
<TOTAL-COSTS> 107,316
<OTHER-EXPENSES> (321)
<LOSS-PROVISION> 1,116
<INTEREST-EXPENSE> 4,730
<INCOME-PRETAX> 14,398
<INCOME-TAX> 5,708
<INCOME-CONTINUING> 8,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,690
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
