<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 December 26, 1998 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
CLASS A Outstanding February 4, 1998
Common Stock, par value $.50 per share 19,021,363
CLASS B Outstanding February 4, 1998
Common Stock, par value $.50 per share 1,474,996
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 26,
1998 June 27,
ASSETS (In thousands, except share data) (Unaudited) 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $10,063 $11,975
Accounts receivable, less allowance for doubtful
accounts of $3,920 and $2,392 60,484 56,933
Inventories 79,949 77,210
Prepaid expenses 7,047 7,295
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 157,543 153,413
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PROPERTY, PLANT AND EQUIPMENT
Land 25,625 25,801
Buildings and improvements 89,565 89,683
Machinery and equipment 173,291 154,048
Automobiles and trucks 36,232 36,531
Less accumulated depreciation (129,131) (118,378)
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Total property, plant and equipment 195,582 187,685
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OTHER ASSETS
Goodwill, net 129,348 131,899
Restrictive covenants and customer lists, net 39,988 42,310
Other, principally retirement plan assets 13,745 16,535
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Total other assets 183,081 190,744
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$536,206 $531,842
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $19,648 $16,103
Accrued expenses
Salaries and employee benefits 18,734 18,077
Other 15,653 17,849
Deferred income taxes 12,878 13,036
Current maturities of long-term debt 25,000 15,000
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Total current liabilities 91,913 80,065
LONG-TERM DEBT, LESS CURRENT MATURITIES 212,043 234,843
DEFERRED INCOME TAXES 9,351 9,483
OTHER NONCURRENT LIABILITIES 10,345 9,331
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STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,019,583
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 23,659 23,644
Retained earnings 191,867 174,660
Deferred compensation (1,686) (1,973)
Accumulated other comprehensive income (11,534) (8,455)
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Total stockholders' equity 212,554 198,120
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$536,206 $531,842
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</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 For the Six Months Ended
-----------------------------------------------------------------------------------
Dec 26, Dec 27, Dec 26, Dec 27,
(In thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $ 125,006 $ 122,566 $ 247,820 $ 237,294
Direct sales 4,858 5,695 8,167 9,393
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 129,864 128,261 255,987 246,687
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 70,246 71,472 139,302 137,177
Cost of direct sales 3,352 4,033 5,574 6,710
Selling and administrative 27,771 25,489 55,107 50,385
Depreciation 6,482 6,577 13,041 12,437
Amortization of intangibles 2,139 2,326 4,282 4,799
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 109,990 109,897 217,306 211,508
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 19,874 18,364 38,681 35,179
Interest expense 4,291 6,114 9,021 10,881
Other income, net 381 (583) 60 (792)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,202 12,833 29,600 25,090
Provision for income taxes 5,967 5,046 11,675 9,858
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,235 $ 7,787 $ 17,925 $ 15,232
- -------------------------------------------------------------------------------------------------------------------------------
Basic Weighted Average Number
of Shares Outstanding 20,401 20,369 20,399 20,367
BASIC EARNINGS PER COMMON SHARE $ .45 $ .38 $ 0.88 $ 0.75
- -------------------------------------------------------------------------------------------------------------------------------
Diluted Weighted Average Number
of Shares Outstanding 20,521 20,454 20,521 20,449
DILUTED EARNINGS PER COMMON SHARE $ 0.45 $ 0.38 $ 0.87 $ 0.74
- -------------------------------------------------------------------------------------------------------------------------------
</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 For the Six Months Ended
-------------------------------- -----------------------------------
Dec 26, Dec 27, Dec 26, Dec 27,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 9,235 $ 7,787 $ 17,925 $ 15,232
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 8,620 8,903 17,323 17,236
Deferred income taxes 91 (746) (290) (783)
Changes in current operating items-
Inventories (2,094) (2,835) (2,972) (4,613)
Accounts receivable and prepaid expenses (3,147) (10,356) (3,554) (19,351)
Accounts payable and other current liabilities (6,954) 7,327 2,964 18,200
Other, net 1,199 4,976 1,104 6,122
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Net cash provided by operating activities 6,950 15,056 32,500 32,043
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (8,602) (9,608) (21,066) (17,931)
Business acquisitions - 971 (155) (280,557)
Purchase of investments (200) (218) (359) (412)
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Net cash used for investing activities (8,802) (8,855) (21,580) (298,900)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 1,946 5,000 3,928 360,843
Repayments of debt financing (6,993) (4,414) (16,047) (90,414)
Cash dividends paid (358) (358) (717) (716)
Sale of common stock 4 - 4 2
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (5,401) 228 (12,832) 269,715
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,253) 6,429 (1,912) 2,858
CASH AND CASH EQUIVALENTS:
Beginning of period 17,316 3,415 11,975 6,986
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ 10,063 $ 9,844 $ 10,063 $ 9,844
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 4,069 $ 5,627 $ 8,330 $ 9,877
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Income taxes $ 9,676 $ 1,629 $ 15,708 $ 8,875
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</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 and six month periods ended December 26, 1998 and December 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 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 financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of December 26, 1998, and June 27,
1998, and the results of operations and the changes in financial position
for the three and six month periods ended December 26, 1998 and December
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 consolidated financial statements and the notes
thereto included in the Company's latest annual report.
The results of operations for the three and six month periods ended
December 26, 1998, and December 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. 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
Basic earnings per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per common share was computed similar to the
computation of basic earnings per share, except that the denominator is
increased
5
<PAGE>
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 Six Months Ended
--------------------------------- --------------------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 20,401 20,369 20,399 20,367
-------------------------------------------------------------------
Shares used in computation of
basic earnings per share 20,401 20,369 20,399 20,367
Weighted average effect of non-vested
restricted stock grants 57 48 58 45
Weighted average common shares
issuable upon the exercise of
stock options 63 37 64 37
-------------------------------------------------------------------
Shares used in computation of
diluted earnings per share 20,521 20,454 20,521 20,449
-------------------------------------------------------------------
</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 of the purchased
linen rental facilities 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
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 three month period ended December 26, 1997, losses
excluded from the Company's consolidated statement of income totaled $7,
including allocated interest
6
<PAGE>
expense of $1,055. For the six month period ended December 27, 1997,
earnings excluded from the Company's consolidated statement of income
totaled $243, including allocated interest expense of $2,031.
The pro forma results of operations for the three and six month
periods ended December 26, 1998 and December 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
and six month periods ended December 26, 1998 and December 27, 1997, the
components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) (In thousands)
------------------------------------------------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1998 1997 1998 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $9,235 $7,787 $17,925 $15,232
Other comprehensive income, net of tax
Foreign currency translation
adjustments (1,364) (1,737) (3,282) (2,092)
Unrealized gain (loss) on
investments held for sale 467 (321) 203 (36)
------------------------------------------------------------
Comprehensive income $8,338 $5,729 $14,846 $13,104
------------------------------------------------------------
</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 and six month periods ended December 26, 1998 and
December 27, 1997, and the percentage changes in these income and expense
items between periods are contained in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED PERCENTAGE CHANGE
--------------------------------------------------- ----------------------------
Three Months Six Months
Dec. 26, Dec. 27, Dec. 26, Dec. 27, FY 1999 FY 1999
1998 1997 1998 1997 vs. FY 1998 vs. FY 1998
--------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental 96.3% 95.6% 96.8% 96.2% 2.0% 4.4%
Direct 3.7 4.4 3.2 3.8 (14.7) (13.1)
---------------------------------------------------
Total Revenues 100.0 100.0 100.0 100.0 1.2 3.8
Expenses:
Cost of Rental Sales 56.2 58.3 56.2 57.8 (1.7) 1.5
Cost of Direct Sales 69.0 70.8 68.3 71.4 (16.9) (16.9)
---------------------------------------------------
Total Cost of Sales 56.7 58.9 56.6 58.3 (2.5) 0.7
Selling and
Administrative 21.4 19.9 21.5 20.4 9.0 9.4
Depreciation 5.0 5.1 5.1 5.0 (1.4) 4.9
Amortization of
Intangibles 1.6 1.8 1.7 1.9 (8.0) (10.8)
---------------------------------------------------
Income from Operations 15.3 14.3 15.1 14.3 8.2 10.0
Interest Expense 3.3 4.8 3.5 4.4 (29.8) (17.1)
Other (Income) Expense, net 0.3 (0.5) 0.0 (0.3) (165.4) (107.6)
---------------------------------------------------
Income Before Income Taxes 11.7 10.0 11.6 10.2 18.5 18.0
Provision for Income Taxes 4.6 3.9 4.6 4.0 18.3 18.4
---------------------------------------------------
Net Income 7.1% 6.1% 7.0% 6.2% 18.6% 17.7%
---------------------------------------------------
</TABLE>
Total revenues for the second quarter of fiscal 1999 increased 1.2% to
$129.9 million from $128.3 million in the second quarter of fiscal 1998 and
increased 3.8% to $256.0 million for the first six months of fiscal 1999 from
$246.7 million in the same period 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 second quarter of fiscal 1999 was
3.8% and 4.4% for the first six months of fiscal 1999.
Rental revenue growth for the second quarter accounted for $2.4 million,
or a 2.0% increase and for the first six months it accounted for $10.5
million, or a 4.4% increase. U.S. rental revenues increased 5.3% (adjusted
for the timing of the NLS asset purchase and the sale of three industrial
locations) and Canadian rental revenues in U.S. dollars decreased .2% for the
second quarter and increased 5.6% and .9% resepectively, for the first six
months. 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 a decline in the value of the Canadian dollar.
Total direct sales to outside customers decreased 14.7% to $4.9 million
for the second quarter of fiscal 1999 compared to $5.7 million in the same
period of fiscal 1998 and decreased 13.1% to $8.2 million for the first six
months of fiscal 1999 from $9.4 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 69.0% for the second quarter of
8
<PAGE>
fiscal 1999 from 70.8% in the same period of fiscal 1998 and decreased to
68.3% for the first six months of fiscal 1999 from 71.4% for the same period
of fiscal 1998.
Cost of rental operations decreased 1.7% to $70.2 million for the second
quarter of fiscal 1999 from $71.5 million in the same period of fiscal 1998
and rose 1.5% to $139.3 million for the first six months of fiscal 1999 from
$137.2 million in the same period of fiscal 1998. As a percentage of rental
revenues, these costs decreased to 56.2% for the second quarter of fiscal
1999 from 58.3% in the same period of fiscal 1998 and decreased to 56.2% for
the first six months of fiscal 1999 from 57.8% 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 9.0% to $27.8 million in
the second quarter of fiscal 1999 from $25.5 million in the same period of
fiscal 1998 and increased 9.4% to $55.1 million for the first six months of
fiscal 1999 from $50.4 million in the same period of fiscal 1998. As a
percentage of revenues, selling and administrative expenses increased to
21.4% in the second quarter of fiscal 1999 from 19.9% in the same period of
fiscal 1998 and increased to 21.5% in the six month period of fiscal 1999
from 20.4% 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 readiness and other corporate initiatives.
Depreciation expense decreased 1.4% to $6.5 million in the second
quarter of fiscal 1999 from $6.6 million in the same period of fiscal 1998
and increased 4.9% to $13.0 million for the first six months of fiscal 1999
from $12.4 million in the same period of fiscal 1998. As a percentage of
revenues, depreciation expense decreased to 5.0% in the second quarter of
fiscal 1999 from 5.1% in the same period of fiscal 1998 and increased to 5.1%
for the six month period of fiscal 1999 from 5.0% for the same period in
fiscal 1998. Capital expenditures, excluding acquisition of businesses, was
$8.6 million in the second quarter of fiscal 1999 compared to $9.6 million in
the prior year's quarter, and for the six month period they were $21.1
million compared to $17.9 million in the prior year.
Amortization expense decreased 8.0% to $2.1 million in the second
quarter of fiscal 1999 from $2.3 million in the second quarter of fiscal 1998
and decreased 10.8% to $4.3 million in the first six months of fiscal 1999
from $4.8 million in the same period of fiscal 1998. This decrease is
attributable to the sale of acquired industrial facilities and the related
intangible assets during the third and fourth quarters of fiscal 1998.
Income from operations increased 8.2% to $19.9 million in the second
quarter of fiscal 1999 from $18.4 million in the same period of fiscal 1998
and increased 10.0% to $38.7 million for the first six months of fiscal 1999
from $35.2 million in the same period of fiscal 1998. Operating margins
increased to 15.3% for the second quarter of fiscal 1999 from 14.3% in the
same period of fiscal 1998 and increased to 15.1% for the six month period of
fiscal 1999 from 14.3% in the same period of fiscal 1998. U.S. operating
margins increased to 13.5% for the second quarter of fiscal 1999 from 12.6%
in the same period of fiscal 1998 and increased to 13.4% for the six month
period of fiscal 1999 from 12.6% in the same period of fiscal 1998.
Interest expense was $4.3 million for the second quarter of fiscal 1999,
down from $6.1 million in the same period of fiscal 1998 and was $9.0 million
for the first six months of fiscal 1999, down from $10.9 million in the same
period of fiscal 1998. The Company's effective tax rate was 39.3% in the
second quarter of fiscal 1999, unchanged from the same period of fiscal 1998
and it increased to 39.4% in the six month period of fiscal 1999 from 39.3%
in the same period of fiscal 1998.
Net income rose 18.6% to $9.2 million in the second quarter of fiscal
1999 from $7.8 million in the same period of fiscal 1998 and rose 17.7% to
$17.9 million in the first six months of fiscal 1999 from $15.2 million in
the first six months of fiscal 1998. Basic and diluted earnings per share
for the second quarter of fiscal 1999 were $.45 per share compared with $.38
for the prior year quarter. Basic and diluted earnings per share for the
first six months of 1999 increased to $.88 and $.87 from $.75 and $.74,
respectively. Net income margins increased to 7.1% for the second quarter of
fiscal 1999 compared with 6.1% in the second quarter of fiscal 1998 and
increased to 7.0% for the six month period of fiscal 1999 compared with 6.2%
in the six month period of fiscal 1998.
9
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $7.0 million in the second
quarter of fiscal 1999 and $15.1 million in the same period of fiscal 1998.
Cash flow from operating activities was $32.5 million in the six month period
of fiscal 1999 and $32.0 million in the same period of fiscal 1998. The
fiscal 1999 increase resulted from decreases in accounts payable, partially
offset by increases in net income and accounts receivable when compared to
the second quarter of 1998. Working capital at December 26, 1998 was $65.6
million, down 10.5% from $73.3 million at June 27, 1998.
Cash used in investing activities was $8.8 million in the second quarter
of fiscal 1999 and $8.9 million in the second quarter of fiscal 1998. Cash
used in investing activities was $21.6 million in the six month period of
fiscal 1999 and $298.9 million in the same period of fiscal 1998. The
decrease is primarily due to the acquisition of the NLS assets in the first
quarter of fiscal 1998.
Cash used for financing activities was $5.4 million in the second
quarter of fiscal 1999 and cash provided by financing activities was $0.2
million in the same period of fiscal 1998. Cash used for financing activities
was $12.8 million in the six month period of fiscal 1999 and cash provided by
financing activities was $269.7 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 52.7% at the
end of the second quarter of fiscal 1999 from 55.8% at June 27, 1998.
Stockholders' equity grew 7.3% to $212.6 million at December 26, 1998,
compared with $198.1 million at the end of fiscal 1998. G&K's return on
average equity remained at 8.7% for the second quarters of both fiscal 1999
and fiscal 1998.
Management believes that cash flows generated from operations and
borrowing capability under its credit facilities should provide adequate
funding for its current businesses and planned expansion of operations or any
future acquisitions.
YEAR 2000 READINESS DISCLOSURE STATEMENT
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 is continuing 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 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.
10
<PAGE>
- 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
March 31, 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 three
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.
Ongoing monitoring throughout the remainder of the calendar
year will be taking place to ensure contingency plans are
implemented as appropriate on a timely basis.
- 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 was completed December
31, 1998. No disclosures of non-compliant suppliers were
discovered. All contingency plans will be put in place by
March 31, 1999.
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 proposed 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 $3.1 million related
to the year 2000 analysis; $1.9 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
- Stockpiling of certain other inventories, soap, thread, etc.
- Manual work-arounds for less critical computerized systems
11
<PAGE>
- Staffing crisis management teams during critical date changes,
such as our fiscal year change on June 27, 1999 and the
calendar year change on January 1, 2000.
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 no
material change in the Company's market risks associated with debt and
interest rate swap obligations during the quarter ended December 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
a. The Company held its Annual Meeting of Stockholders on October 29,
1998.
b. The following eight persons were elected directors: Bruce G.
Allbright, Paul Baszucki, Richard Fink, Wayne M. Fortun, Donald W.
Goldfus, William Hope, Thomas Moberly and Bernard Sweet.
c. 1. Each director nominee received the following votes:
<TABLE>
<CAPTION>
SHARES
----------------------------------------------------------
IN FAVOR WITHHOLD AUTHORITY
------------------------------ ---------------------------
<S> <C> <C>
Allbright 29,642,499 45,763
Baszucki 29,641,911 46,351
Fink 29,642,495 45,767
Fortun 29,642,310 45,952
Goldfus 29,641,923 46,339
Hope 29,642,695 45,567
Moberly 29,643,053 45,209
Sweet 29,640,296 47,966
</TABLE>
2. Stockholders ratified the appointment of Arthur Andersen LLP,
Certified Public Accountants, as independent auditors of the
Company for 1999: 29,636,939 shares in favor, 39,143 shares
voting against and 12,180 shares abstaining.
3. Stockholders approved the Company's 1998 Stock Option and
Compensation Plan: 20,788,691 shares in favor, 5,584,951 shares
against, 112,511 shares abstaining and 3,202,109 shares broker
non-vote.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule (for SEC use only)
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: February 9, 1999 /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> 6-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 10,063
<SECURITIES> 0
<RECEIVABLES> 64,404
<ALLOWANCES> 3,920
<INVENTORY> 79,949
<CURRENT-ASSETS> 157,543
<PP&E> 324,713
<DEPRECIATION> 129,131
<TOTAL-ASSETS> 536,206
<CURRENT-LIABILITIES> 91,913
<BONDS> 0
0
0
<COMMON> 10,248
<OTHER-SE> 202,306
<TOTAL-LIABILITY-AND-EQUITY> 536,206
<SALES> 255,987
<TOTAL-REVENUES> 255,987
<CGS> 144,876
<TOTAL-COSTS> 217,306
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 2,030
<INTEREST-EXPENSE> 9,021
<INCOME-PRETAX> 29,600
<INCOME-TAX> 11,675
<INCOME-CONTINUING> 17,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,925
<EPS-PRIMARY> .88
<EPS-DILUTED> .87
</TABLE>
