<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 25, 1999 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 November 4, 1999
Common Stock, par value $.50 per share 19,045,050
CLASS B Outstanding November 4, 1999
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>
September 25,
1999 June 26,
ASSETS (In thousands, except per share data) (Unaudited) 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 911 $ 6,297
Accounts receivable, less allowance for
doubtful accounts of $2,613 and $2,479 64,003 59,626
Inventories 83,769 83,892
Prepaid expenses 7,309 8,974
Prepaid income taxes - 4,017
- ------------------------------------------------------------------------------
Total current assets 155,992 162,806
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 26,533 26,038
Buildings and improvements 94,949 93,519
Machinery and equipment 193,003 181,968
Automobiles and trucks 39,135 39,447
Less accumulated depreciation (148,233) (142,537)
- ------------------------------------------------------------------------------
Total property, plant and equipment 205,387 198,435
- ------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 133,709 128,226
Restrictive covenants and customer lists, net 37,599 37,805
Other, principally retirement plan assets 13,826 14,160
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Total other assets 185,134 180,191
- ------------------------------------------------------------------------------
$ 546,513 $ 541,432
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,048 $ 15,456
Accrued expenses
Salaries and employee benefits 17,436 18,309
Other 18,831 13,504
Deferred income taxes 13,992 14,007
Current maturities of long-term debt 31,128 28,362
- ------------------------------------------------------------------------------
Total current liabilities 96,435 89,638
- ------------------------------------------------------------------------------
LONG-TERM DEBT 183,219 193,952
DEFERRED INCOME TAXES 11,656 11,520
OTHER NONCURRENT LIABILITIES 10,669 10,689
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized,
19,043,915 and 19,041,852 shares issued
and outstanding 9,522 9,521
Class B, 10,000,000 shares authorized,
1,474,996 and 1,474,996 shares issued
and outstanding 738 738
Additional paid-in capital 26,204 26,086
Retained earnings 219,478 210,253
Deferred compensation (2,381) (2,601)
Accumulated other comprehensive income (9,027) (8,364)
- ------------------------------------------------------------------------------
Total stockholders' equity 244,534 235,633
- ------------------------------------------------------------------------------
$ 546,513 $ 541,432
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</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
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
September 25, September 26,
(In thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Rental operations $130,536 $122,813
Direct sales 4,424 3,310
- -----------------------------------------------------------------------
Total revenues 134,960 126,123
- -----------------------------------------------------------------------
OPERATING EXPENSES
Cost of rental operations 73,181 69,056
Cost of direct sales 3,713 2,222
Selling and administrative 29,716 27,336
Depreciation 7,004 6,559
Amortization of intangibles 2,140 2,143
- -----------------------------------------------------------------------
Total operating expenses 115,754 107,316
- -----------------------------------------------------------------------
INCOME FROM OPERATIONS 19,206 18,807
Interest expense 3,886 4,730
Other income, net (573) (321)
- -----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,893 14,398
Provision for income taxes 6,310 5,708
- -----------------------------------------------------------------------
NET INCOME $ 9,583 $ 8,690
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Basic weighted average number
of shares outstanding 20,459 20,390
BASIC EARNINGS PER COMMON SHARE $ 0.47 $ 0.43
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Diluted weighted average number
of shares outstanding 20,535 20,494
DILUTED EARNINGS PER COMMON SHARE $ 0.47 $ 0.42
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</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
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------
September 25, September 26,
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,583 $ 8,690
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 9,144 8,703
Deferred income taxes 121 (381)
Changes in current operating items,
exclusive of acquisitions --
Inventories 798 (878)
Accounts receivable and prepaid expenses (2,269) (407)
Accounts payable and other accrued expenses 7,922 9,918
Other, net 168 (95)
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 25,467 25,550
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (13,031) (12,464)
Acquisition of business assets (9,462) (155)
Purchase of investments (282) (159)
- -------------------------------------------------------------------------------------
Net cash used for investing activities (22,775) (12,778)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 10,018 1,982
Repayments of debt financing (17,944) (9,054)
Cash dividends paid (359) (359)
Sale of common stock 207 -
- -------------------------------------------------------------------------------------
Net cash used for financing activities (8,078) (7,431)
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,386) 5,341
CASH AND CASH EQUIVALENTS:
Beginning of period 6,297 11,975
- -------------------------------------------------------------------------------------
End of period $ 911 $ 17,316
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest $ 3,698 $ 4,261
- -------------------------------------------------------------------------------------
Income taxes $ 2,020 $ 6,032
- -------------------------------------------------------------------------------------
</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 25, 1999 and September 26, 1998
(Unaudited)
The consolidated financial statements included herein, except for
the June 26, 1999 balance sheet which was extracted from the audited
financial statements of June 26, 1999, 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 of the
Company as of September 25, 1999, and the results of its operations and
its cash flows for the three months ended September 25, 1999 and
September 26, 1998. 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 periods ended
September 25, 1999, and September 26, 1998, 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 nonuniform items such as floormats, dustmops and cloths,
wiping towels and selected linen items. In addition, the Company
manufactures uniforms for 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 counterparties 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 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.
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
September 25, September 26,
1999 1998
------------- -------------
<S> <C> <C>
Weighted average number of common
shares outstanding 20,459 20,390
-----------------------------
Shares used in computation of
basic earnings per share 20,459 20,390
Weighted average effect of
non-vested restricted stock grants 8 63
Weighted average common shares
issuable upon the exercise of
stock options 68 41
-----------------------------
Shares used in computation of
diluted earnings per share 20,535 20,494
-----------------------------
-----------------------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The
FASB has delayed the effective date of this statement by one year with
the issuance of SFAS No. 137. The standard is now effective for fiscal
years beginning after June 15, 2000. The Company is in the process of
quantifying the impact of SFAS No. 133 on the consolidated financial
statements.
2. COMPREHENSIVE INCOME
For the three month periods ended September 25, 1999 and September
26, 1998, the components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended
(In thousands)
------------------------------
September 25, September 26,
1999 1998
------------------------------
<S> <C> <C>
Net income $9,583 $8,690
Other comprehensive income, net of tax
Foreign currency translation (450) (1,918)
adjustments
Unrealized loss on investments held (213) (264)
for sale
------------------------------
Comprehensive income $8,920 $6,508
------------------------------
------------------------------
</TABLE>
6
<PAGE>
3. SEGMENT INFORMATION
The Company has two operating segments under the guidelines of SFAS
No. 131: United States and Canada. Each operating segment derives
revenues from the uniform rental business which includes garment rental
and nonuniform items such as floormats, dust mops and cloths, wiping
towels and selected linen items. No one customer's transactions account
for 10% 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). Financial information by geographic location for the three month
periods ended September 25, 1999 and September 26, 1998 is as follows:
<TABLE>
<CAPTION>
United
States Canada Elimination Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 2000:
Revenues $118,341 $16,619 $ - $134,960
Income from operations 14,375 4,831 - 19,206
Interest income 472 - (352) 120
Interest expense 3,704 534 (352) 3,886
Total assets 531,667 71,113 (56,267) 546,513
Capital expenditures 12,171 860 - 13,031
Depreciation and amortization
expense 8,084 1,060 - 9,144
Income tax expense 4,411 1,899 - 6,310
Fiscal Year 1999:
Revenues $111,459 $14,664 $ - $126,123
Income from operations 14,794 4,013 - 18,807
Interest income 550 - (356) 194
Interest expense 4,453 633 (356) 4,730
Total assets 521,849 65,528 (48,187) 539,190
Capital expenditures 11,600 864 - 12,464
Depreciation and amortization
expense 7,602 1,100 - 8,702
Income tax expense 4,228 1,480 - 5,708
--------------------------------------------------------------------------------------
</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 25, 1999 and September 26,
1998, and the percentage changes in these income and expense items between
periods are presented in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE CHANGE
---------------------------------------- -------------------
FY Q1 2000 vs. FY
September 25, 1999 September 26, 1998 Q1 1999
---------------------------------------- -------------------
<S> <C> <C> <C>
Revenues:
Rental 96.7% 97.4% 6.3%
Direct 3.3 2.6 33.7
----------------------------------------
Total revenues 100.0 100.0 7.0
Expenses:
Cost of rental sales 56.1 56.2 6.0
Cost of direct sales 83.9 67.1 67.1
----------------------------------------
Total cost of sales 57.0 56.5 7.9
Selling and administrative 22.0 21.7 8.7
Depreciation 5.2 5.2 6.8
Amortization of intangibles 1.6 1.7 (0.1)
----------------------------------------
Income from operations 14.2 14.9 2.1
Interest expense 2.8 3.8 (17.8)
Other income, net (0.4) (0.3) 78.5
----------------------------------------
Income before income taxes 11.8 11.4 10.4
Provision for income taxes 4.7 4.5 10.5
----------------------------------------
Net income 7.1% 6.9% 10.3
----------------------------------------
----------------------------------------
</TABLE>
Total revenues for the first quarter of fiscal 2000 increased 7.0% to
$135.0 million from $126.1 million in the first quarter of fiscal 1999.
Comparable revenues, after adjusting for the acquired and divested
operations, were up 7.1% in the first quarter of fiscal 2000.
Rental revenue growth for the first quarter accounted for $7.7 million,
or a 6.3% increase. U.S. rental revenues increased 5.4% over comparable
revenues for the prior year quarter and Canadian rental revenues in U.S.
dollars increased 14.1%. The growth in rental revenue, which is below
historical growth patterns, is up from fiscal year 1999 annual rental revenue
growth rates in the U.S. of 4.9% and in Canada, in U.S. dollars, of 3.9%. The
improvement in rental revenue growth rates were influenced by several factors
including the Company's focus on internal revenue growth, which includes
increased sales and administrative costs designed to support planned growth
and an improvement in the value of the Canadian dollar.
Total direct sales to outside customers increased 33.7% to $4.4 million
for the first quarter of fiscal 2000 compared to $3.3 million in the same
period of fiscal 1999. This increase was driven largely by the direct
sale/catalog group. Cost of direct sales, as a percentage of direct sales,
increased to 83.9% from 67.1% in the same period of fiscal 1999. Increased
expenses were related to the opening of an expanded fulfillment center and
the implementation of a new information system.
Cost of rental operations increased 6.0% to $73.2 million for the first
quarter of fiscal 2000 from $69.1 million in the same period of fiscal 1999.
As a percentage of rental revenues, these costs decreased to 56.1% for the
8
<PAGE>
first quarter of fiscal 2000 from 56.2% in the same period of fiscal 1999.
Improvements in production costs were largely offset by increases in delivery
and merchandise costs.
Selling and administrative expenses increased 8.7% to $29.7 million in
the first quarter of fiscal 2000 from $27.3 million in the same period of
fiscal 1999. As a percentage of revenues, selling and administrative expenses
increased to 22.0% in the first quarter of fiscal 2000 from 21.7% in the same
period of fiscal 1999. The increase as a percent of revenue is due to several
factors including increased sales and administrative costs designed to
support planned revenue growth.
Depreciation expense increased 6.8% to $7.0 million in the first quarter
of fiscal 2000 from $6.6 million in the same period of fiscal 1999. As a
percentage of revenues, depreciation expense was 5.2% in the first quarter of
fiscal 2000, unchanged from the same period of fiscal 1999. The Company has
continued to invest in locations acquired in fiscal 1998 and construct new
locations. Capital expenditures, excluding acquisition of businesses, was
$13.0 million in the first quarter of fiscal 2000 compared to $12.5 million
in the prior year's quarter.
Amortization expense decreased 0.1% to $2.1 million in the first quarter
of fiscal 2000 from $2.1 million in the first quarter of fiscal 1999.
Income from operations increased 2.1% to $19.2 million in the first
quarter of fiscal 2000 from $18.8 million in the same period of fiscal 1999.
Operating margins decreased to 14.2% in fiscal 2000 from 14.9% in fiscal
1999. U.S. operating margins decreased to 12.1% in fiscal 2000 from 13.3% in
the same period of fiscal 1999.
Interest expense was $3.9 million for the first quarter of fiscal 2000,
down from $4.7 million in the same period of fiscal 1999. The Company's
effective tax rate increased to 39.7% in the first quarter of fiscal 2000
from 39.6% in the same period of fiscal 1999.
Net income rose 10.3% to $9.6 million in the first quarter of fiscal
2000 from $8.7 million in the same period of fiscal 1999. Basic and diluted
earnings per share for the first quarter of fiscal 2000 were $.47 per share,
compared to $.43 and $.42, respectively, for the prior year quarter. Net
income margins increased to 7.1% for the first quarter of fiscal 2000
compared with 6.9% in the first quarter of fiscal 1999.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $25.5 million in the first
quarter of fiscal 2000 and $25.6 million in the same period of fiscal 1999.
The fiscal 2000 increases from operations were largely offset by increases in
accounts receivable and decreases in accounts payable and other accrued
expenses. Working capital at September 25, 1999 was $59.6 million, down 18.6%
from $73.2 million at June 26, 1999. The decrease is primarily the result of
the use of cash and other working capital to acquire business assets and to
reduce long-term debt.
Cash used in investing activities was $22.8 million in the first quarter
of fiscal 2000 and $12.8 million in the first quarter of fiscal 1999. The
increase is primarily due to the acquisition of business assets in the first
quarter of fiscal 2000.
Cash used for financing activities was $8.1 million in the first quarter
of fiscal 2000 and $7.4 million in the same period of fiscal 1999. The
long-term debt, including current maturity, decreased to $214.3 million at
September 25, 1999 from $222.3 million at June 26, 1999. The Company paid
dividends of $0.4 million during the quarter. The Company's ratio of debt to
total capitalization decreased to 46.7% at the end of the first quarter of
fiscal 2000 from 48.5% at June 26, 1999.
Stockholders' equity grew 3.8% to $244.5 million at September 25, 1999,
compared with $235.6 million at the end of fiscal 1999. G&K's return on
average equity decreased to 4.0% for the first quarter of fiscal 2000
compared with 4.3% for the first quarter of fiscal 1999.
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.
9
<PAGE>
YEAR 2000 READINESS DISCLOSURE
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 ready, 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 year-end change. The
Company has continued 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 has assessed the extent to which its operations
are vulnerable and has created contingency plans should those suppliers not
succeed to properly prepare their systems. The Company believes these actions
with key suppliers should minimize the risks. The scope of the Year 2000
readiness effort included (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. The Company has
committed resources and leveraged previous investments in existing
technologies in an effort to achieve these objectives.
The Company has a documented process through which all IT and non-IT
systems and assets have been 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 maintain
operational and financial results.
- 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 has completed Year 2000
testing and believes the financial systems are Year 2000 ready.
- Revenue recognition system - Renovation, testing and rollout of this
internally developed system are complete.
- Other IT software, hardware and communications - 98% of our systems
have been evaluated as Year 2000 ready; the remaining system awaits
final rollout of updated software or hardware and is scheduled for
completion by November 15, 1999.
- Non-IT plant and related equipment - All production equipment has been
verified for Year 2000 readiness.
- Business processes and procedures - All process flows were analyzed for
risk with appropriate contingency plans created. Ongoing monitoring
throughout the remainder of the calendar year will occur to ensure that
contingency plans are implemented as appropriate on a timely basis.
- Third parties - The Company's supply chain was assessed to ensure that
all significant vendors will have the ability to meet the Company's
needs. No disclosures of non-compliant suppliers have been discovered.
All appropriate contingency plans are in place.
- The Company has acquired two additional businesses that are currently
being evaluated and tested for Year 2000 readiness. This evaluation and
any remediation is scheduled to be complete by November 30, 1999.
The Company did not defer any significant IT projects to address the
Year 2000 issues. Because the Year 2000 issue is of short duration, the
Company retained experts and advisors to evaluate Year 2000 readiness; assist
in analysis, renovation, and contingency planning; and conduct independent
testing when renovations were completed. The Company's core IT staff focused
on the Company's business needs, as well as assisted with Year 2000 analysis
and renovation.
10
<PAGE>
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 fiscal 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 $5.7 million related
to the Year 2000 analysis; $2.1 million of these costs were capitalized. The
Company has a remaining budget of $0.8 million for expenditures, although
there can be no assurance that the Year 2000 related expenditures will not be
materially higher. Included in the remaining budget is $0.3 million of
computer equipment, which will be leased, and $0.5 million to be expensed as
period costs. 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 implement its systems for Year 2000 readiness. 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 readiness
success that key suppliers attain.
Contingency plans have been developed for all areas of the business. The
Company used 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 nonuniform
inventories
- Modifying inventory ordering practices during the year-end transition
- Manual work-arounds for less critical computerized systems
- Staffing of management response teams during critical date changes,
such as 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, the Company has developed 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 the Year 2000 matters discussed above should 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 interest rate 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 September
25, 1999.
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, unforeseen operating risks; the availability
of capital to finance planned growth; competition within the uniform leasing
industry; and the effects of economic conditions.
11
<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
27 Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K.
None
12
<PAGE>
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)
<TABLE>
<S> <C> <C>
Date: November 9, 1999 /s/Jeffrey L. Wright
---------------- --------------------
Jeffrey L. Wright
Chief Financial Officer
(Principal Financial Officer)
/s/Michael F. Woodard
---------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
</TABLE>
13
<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> JUL-01-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> SEP-25-1999
<CASH> 911
<SECURITIES> 0
<RECEIVABLES> 66,616
<ALLOWANCES> 2,613
<INVENTORY> 83,769
<CURRENT-ASSETS> 155,992
<PP&E> 353,620
<DEPRECIATION> 148,233
<TOTAL-ASSETS> 546,513
<CURRENT-LIABILITIES> 96,435
<BONDS> 0
0
0
<COMMON> 10,260
<OTHER-SE> 234,274
<TOTAL-LIABILITY-AND-EQUITY> 546,513
<SALES> 134,960
<TOTAL-REVENUES> 134,960
<CGS> 76,894
<TOTAL-COSTS> 115,754
<OTHER-EXPENSES> (573)
<LOSS-PROVISION> 766
<INTEREST-EXPENSE> 3,886
<INCOME-PRETAX> 15,893
<INCOME-TAX> 6,310
<INCOME-CONTINUING> 9,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,583
<EPS-BASIC> .47
<EPS-DILUTED> .47
</TABLE>
