<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 March 25, 2000 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 May 4, 2000
Common Stock, par value $.50 per share 19,058,115
CLASS B Outstanding May 4, 2000
Common Stock, par value $.50 per share 1,474,996
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<TABLE>
<CAPTION>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G&K SERVICES, INC. AND SUBSIDIARIES March 25,
2000 June 26,
ASSETS (In thousands, except share data) (Unaudited) 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,005 $6,297
Accounts receivable, less allowance for doubtful
accounts of $3,035 and $2,479 65,709 59,626
Inventories 87,003 83,892
Prepaid expenses and other current assets 11,728 8,974
Prepaid income taxes - 4,017
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 167,445 162,806
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 26,904 26,038
Buildings and improvements 102,099 93,519
Machinery and equipment 202,204 181,968
Automobiles and trucks 39,328 39,447
Less accumulated depreciation (157,675) (142,537)
- --------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 212,860 198,435
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OTHER ASSETS
Goodwill, net 141,727 128,226
Restrictive covenants and customer lists, net 41,793 37,805
Other, principally retirement plan assets 16,756 14,160
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Total other assets 200,276 180,191
- --------------------------------------------------------------------------------------------------------------------------
$580,581 $541,432
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- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $17,667 $15,456
Accrued expenses
Salaries and employee benefits 17,924 18,309
Other 19,761 13,504
Deferred income taxes 14,016 14,007
Current maturities of long-term debt 37,660 28,362
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Total current liabilities 107,028 89,638
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LONG-TERM DEBT 185,425 193,952
DEFERRED INCOME TAXES 11,339 11,520
OTHER NONCURRENT LIABILITIES 13,844 10,689
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,058,920
and 19,041,852 shares issued and outstanding 9,529 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 26,672 26,086
Retained earnings 236,552 210,253
Deferred compensation (2,581) (2,601)
Accumulated other comprehensive income (7,965) (8,364)
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 262,945 235,633
- --------------------------------------------------------------------------------------------------------------------------
$580,581 $541,432
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
G&K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
For the Three Months Ended For the Nine Months Ended
---------------------------------------------------------------------------
March 25, March 27, March 25, March 27,
(In thousands, except per share data) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $138,792 $126,569 $405,207 $374,388
Direct sales 4,641 4,578 15,541 12,746
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 143,433 131,147 420,748 387,134
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of rental operations 78,729 71,531 229,481 210,833
Cost of direct sales 4,034 3,256 12,853 8,830
Selling and administrative 31,294 28,037 92,574 83,144
Depreciation 7,624 7,010 21,688 20,051
Amortization of intangibles 2,377 2,142 6,754 6,424
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 124,058 111,976 363,350 329,282
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 19,375 19,171 57,398 57,852
Interest expense 4,291 4,180 12,344 13,201
Other income, net (210) (581) (541) (521)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,294 15,572 45,595 45,172
Provision for income taxes 6,133 6,151 18,220 17,826
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,161 $ 9,421 $ 27,375 $ 27,346
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted average number
of shares outstanding 20,452 20,412 20,456 20,407
BASIC EARNINGS PER COMMON SHARE $ 0.45 $ 0.46 $ 1.34 $ 1.34
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average number
of shares outstanding 20,455 20,527 20,497 20,512
DILUTED EARNINGS PER COMMON SHARE $ 0.45 $ 0.46 $ 1.34 $ 1.33
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
For the Nine Months Ended
---------------------------
March 25, March 27,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 27,375 $ 27,346
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 28,442 26,475
Deferred income taxes (181) (263)
Changes in current operating items,
exclusive of acquisitions -
Accounts receivable and prepaid expenses (2,715) (1,934)
Inventories (1,255) (5,383)
Accounts payable and other accrued 11,833 (1,707)
expenses
Other, net 1,933 1,421
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,432 45,955
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (30,860) (30,075)
Acquisition of business assets (35,029) (155)
Net proceeds from sale of assets - 2,074
Purchase of investments, net (2,358) (567)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (68,247) (28,723)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 55,440 15,598
Repayments of debt financing (55,055) (38,102)
Cash dividends paid (1,077) (1,076)
Sale of common stock 215 16
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (477) (23,564)
- ----------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,292) (6,332)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,297 11,975
- ----------------------------------------------------------------------------------------------------------------------
End of period $ 3,005 $ 5,643
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 11,543 $ 12,315
- ----------------------------------------------------------------------------------------------------------------------
Income taxes $ 11,772 $ 20,883
- ----------------------------------------------------------------------------------------------------------------------
</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 nine month periods ended March 25, 2000 and March 27, 1999
(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 March 25, 2000, and the results of its operations
and its cash flows for the three and nine month periods ended March 25,
2000 and March 27, 1999. 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 nine month periods
ended March 25, 2000, and March 27, 1999, 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, dust mops 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 period. Diluted earnings per common share was
computed similar to the computation of basic earnings per share, except
that the denominator is increased for the assumed exercise of dilutive
options and other dilutive securities (including nonvested restricted
stock) using the treasury stock method.
5
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 20,452 20,412 20,456 20,407
------------------------------------------------------------
Shares used in computation of
basic earnings per share 20,452 20,412 20,456 20,407
Weighted average effect of
non-vested restricted stock grants - 39 3 37
Weighted average common shares
issuable upon the exercise of
stock options 3 76 38 68
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Shares used in computation of
diluted earnings per share 20,455 20,527 20,497 20,512
------------------------------------------------------------
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</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 Company has elected to adopt SFAS No. 133 on
March 26, 2000. The impact of adoption will be recognition of income of
approximately $1,600.
2. COMPREHENSIVE INCOME
For the three and nine month periods ended March 25, 2000 and
March 27, 1999, the components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $9,161 $9,421 $27,375 $27,346
Other comprehensive income, net of tax
Foreign currency translation
adjustments 287 1,296 195 (1,986)
Unrealized gain on investments held
for sale 95 55 204 258
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Comprehensive income $9,543 $10,772 $27,774 $25,618
------------------------------------------------------------
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</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 and nine
month periods ended March 25, 2000 and March 27, 1999 is as follows:
<TABLE>
<CAPTION>
For the three months ended UNITED
MAR. 25, 2000 AND MAR. 27, 1999 STATES CANADA TOTAL
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<S> <C> <C> <C>
Fiscal Year 2000:
Revenues $124,977 $18,456 $143,433
Income from operations 14,249 5,126 19,375
Capital expenditures 8,227 427 8,654
Depreciation and amortization
expense 8,896 1,105 10,001
Fiscal Year 1999:
Revenues $115,350 $15,797 $131,147
Income from operations 14,708 4,463 19,171
Capital expenditures 8,240 769 9,009
Depreciation and amortization
expense 8,184 968 9,152
----------------------------------------------------------------------------------------
For the nine months ended UNITED
MAR. 25, 2000 AND MAR. 27, 1999 STATES CANADA TOTAL
----------------------------------------------------------------------------------------
Fiscal Year 2000:
Revenues $367,581 $53,167 $420,748
Income from operations 42,208 15,190 57,398
Capital expenditures 29,242 1,618 30,860
Depreciation and amortization
expense 25,193 3,249 28,442
Fiscal Year 1999:
Revenues $341,348 $45,786 $387,134
Income from operations 44,999 12,853 57,852
Capital expenditures 27,812 2,263 30,075
Depreciation and amortization
expense 23,493 2,982 26,475
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</TABLE>
4. SUBSEQUENT EVENT
The Company is in the process of exploring alternatives for
its Portland cleanroom facility, including potential closure of the
operation. In the event that the facility is shutdown, it would result
in a one-time charge ranging from $1,000-$1,400. This charge primarily
involves the write-off of leasehold improvements and equipment used in
the facility. A course of action is expected to be finalized during the
fourth quarter.
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 nine month periods ended March 25, 2000 and March 27,
1999, and the percentage changes in these income and expense items between
periods are contained in the following table:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS PERCENTAGE
ENDED ENDED CHANGE
----------------------------------------------------- ---------------------------
Three Months Nine Months
March 25, March 27, March 25, March 27, FY 2000 FY 2000
2000 1999 2000 1999 vs. FY 1999 vs. FY 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Rental 96.8% 96.5% 96.3% 96.7% 9.7% 8.2%
Direct 3.2 3.5 3.7 3.3 1.4 21.9
--------------------------- --------------------------
Total Revenues 100.0 100.0 100.0 100.0 9.4 8.7
Expenses
Cost of Rental Sales 56.7 56.5 56.6 56.3 10.1 8.8
Cost of Direct Sales 86.9 71.1 82.7 69.3 23.9 45.6
-----------------------------------------------------
Total Cost of Sales 57.7 57.0 57.6 56.7 10.7 10.3
Selling and Administrative 21.8 21.4 22.0 21.5 11.6 11.3
Depreciation 5.3 5.3 5.2 5.2 8.8 8.2
Amortization of Intangibles 1.7 1.7 1.6 1.7 11.0 5.1
-----------------------------------------------------
Income from Operations 13.5 14.6 13.6 14.9 1.1 (0.8)
Interest Expense 2.9 3.2 2.9 3.4 2.7 (6.5)
Other Income, net (0.1) (0.5) (0.1) (0.2) (63.9) 3.8
-----------------------------------------------------
Income Before Income Taxes 10.7 11.9 10.8 11.7 (1.8) 0.9
Provision for Income Taxes 4.3 4.7 4.3 4.6 (0.3) 2.2
-----------------------------------------------------
Net Income 6.4% 7.2% 6.5% 7.1% (2.8)% 0.1%
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Total revenues for the third quarter of fiscal 2000 increased 9.4% to
$143.4 million from $131.1 million in the third quarter of fiscal 1999 and
increased 8.7% to $420.7 million for the first nine months of fiscal 2000 from
$387.1 million in the same period of fiscal 1999. Comparable revenues, after
adjusting for the acquired and divested operations, were up 6.6% in the third
quarter of fiscal 2000 and were up 7.2% for the first nine months of fiscal
2000.
Rental revenue growth for the third quarter accounted for $12.2
million, or a 9.7% increase over the prior year quarter and for the first nine
months it accounted for $30.8 million, or an 8.2% increase. 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, acquisitions and a
stronger Canadian dollar compared to the U.S. dollar.
Total direct sales to outside customers increased 1.4% to $4.6 million
for the third quarter of fiscal 2000 compared to $4.6 million in the same period
of fiscal 1999 and increased 21.9% to $15.5 million for the first nine months of
fiscal 2000 from $12.7 million in the same period of fiscal 1999. This increase
over the first nine months was driven largely by the direct sale/catalog group.
Cost of direct sales, as a percentage of direct sales, increased to 86.9% for
the third quarter of fiscal 2000 from 71.1% in the same period of fiscal 1999
and increased to 82.7% for the first nine months of fiscal 2000 from 69.3% for
the same period of fiscal 1999. The increase in costs of direct sales is largely
due to the addition of fixed fulfillment and embroidery costs to support future
growth in direct sales and catalog revenues.
8
<PAGE>
Cost of rental operations increased 10.1% to $78.7 million for the
third quarter of fiscal 2000 from $71.5 million in the same period of fiscal
1999 and rose 8.8% to $229.5 million for the first nine months of fiscal 2000
from $210.8 million in the same period of fiscal 1999. As a percentage of rental
revenues, these costs increased to 56.7% for the third quarter of fiscal 2000
from 56.5% in the same period of fiscal 1999 and increased to 56.6% for the
first nine months of fiscal 2000 from 56.3% in the same period of fiscal 1999.
Selling and administrative expenses increased 11.6% to $31.3 million in
the third quarter of fiscal 2000 from $28.0 million in the same period of fiscal
1999 and increased 11.3% to $92.6 million for the first nine months of fiscal
2000 from $83.1 million in the same period of fiscal 1999. As a percentage of
revenues, selling and administrative expenses increased to 21.8% in the third
quarter of fiscal 2000 from 21.4% in the same period of fiscal 1999 and
increased to 22.0% in the nine month period of fiscal 2000 from 21.5% in the
same period of fiscal 1999. The increase as a percent of revenue was driven by
expenses related to a larger rental sales force and increases in the direct
sale/catalog group including a larger sales force, an expanded catalog and
additional administrative personnel.
Depreciation expense increased 8.8% to $7.6 million in the third
quarter of fiscal 2000 from $7.0 million in the same period of fiscal 1999 and
increased 8.2% to $21.7 million for the first nine months of fiscal 2000 from
$20.1 million in the same period of fiscal 1999. As a percentage of revenues,
depreciation expense was 5.3% in the third quarter of fiscal 2000 and 5.2% for
the nine month period of fiscal 2000, unchanged from the same periods of fiscal
1999. Capital expenditures, excluding acquisition of businesses, were $8.7
million in the third quarter of fiscal 2000 compared to $9.0 million in the
prior year's quarter, and for the nine month period they were $30.9 million
compared to $30.1 million in the prior year.
Amortization expense increased 11.0% to $2.4 million in the third
quarter of fiscal 2000 from $2.1 million in the third quarter of fiscal 1999 and
increased 5.1% to $6.8 million in the first nine months of fiscal 2000 from $6.4
million in the same period of fiscal 1999.
Income from operations increased 1.1% to $19.4 million in the third
quarter of fiscal 2000 from $19.2 million in the same period of fiscal 1999 and
decreased 0.8% to $57.4 million for the first nine months of fiscal 2000 from
$57.9 million in the same period of fiscal 1999. Operating margins decreased to
13.5% for the third quarter of fiscal 2000 from 14.6% in the same period of
fiscal 1999 and decreased to 13.6% for the nine month period of fiscal 2000 from
14.9% in the same period of fiscal 1999. U.S. operating margins decreased to
11.4% for the third quarter of fiscal 2000 from 12.8% in the same period of
fiscal 1999 and decreased to 11.5% for the nine month period of fiscal 2000 from
13.2% in the same period of fiscal 1999.
Interest expense was $4.3 million for the third quarter of fiscal 2000,
up from $4.2 million in the same period of fiscal 1999 and was $12.3 million for
the first nine months of fiscal 2000, down from $13.2 million in the same period
of fiscal 1999. The Company's effective tax rate increased to 40.1% in the third
quarter of fiscal 2000 from 39.5% in the same period of fiscal 1999 and it
increased to 40.0% in the nine month period of fiscal 2000 from 39.5% in the
same period of fiscal 1999.
Net income decreased 2.8% to $9.2 million in the third quarter of
fiscal 2000 from $9.4 million in the same period of fiscal 1999 and rose 0.1% to
$27.4 million in the first nine months of fiscal 2000 from $27.3 million in the
first nine months of fiscal 1999. Basic and diluted earnings per share for the
third quarter of fiscal 2000 were $.45 per share compared with $.46 for third
quarter of fiscal 1999. Basic and diluted earnings per share for the first nine
months of 2000 increased to $1.34 from $1.34 and $1.33, respectively. Net income
margins decreased to 6.4% for the third quarter of fiscal 2000 compared with
7.2% in the third quarter of fiscal 1999 and decreased to 6.5% for the nine
month period of fiscal 2000 compared with 7.1% in the nine month period of
fiscal 1999.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $65.4 million in the nine month
period of fiscal 2000 and $46.0 million in the same period of fiscal 1999. The
fiscal 2000 increase resulted primarily from increases in accounts payable and
other current liabilities in connection with acquired operations, partially
offset by increases in accounts receivable, prepaid expenses and inventories.
9
<PAGE>
Working capital at March 25, 2000 was $60.4 million, down 17.4% from $73.2
million at June 26, 1999.
Cash used in investing activities was $68.2 million in the nine month
period of fiscal 2000 and $28.7 million in the same period of fiscal 1999. The
increase is primarily due to the acquisition of business assets in the first and
second quarters of fiscal 2000.
Cash used for financing activities was $0.5 million in the nine month
period of fiscal 2000 and $23.6 million in the same period of fiscal 1999. The
long-term debt, including current maturity, increased to $223.1 million at March
25, 2000 from $222.3 million at June 26, 1999. The Company's ratio of debt to
total capitalization decreased to 45.9% at the end of the third quarter of
fiscal 2000 from 48.5% at June 26, 1999.
Stockholders' equity grew 11.6% to $262.9 million at March 25, 2000,
compared with $235.6 million at the end of fiscal 1999. G&K's return on average
equity increased to 11.0% in the nine month period of fiscal 2000 compared with
13.0% for the same period of fiscal 1999.
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
The Company utilizes both information technology (IT) and non-IT
systems and assets throughout its U.S. and Canadian operations that would have
been 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 was to ensure current business operations would continue to
function accurately with minimal disruption through the year-end change. The
Company 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 assessed the extent to which its operations were
vulnerable and created contingency plans should those suppliers not succeed to
properly prepare their systems. 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 committed resources
and leveraged previous investments in existing technologies in an effort to
achieve these objectives.
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.
The Company implemented 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 $6.1 million related to the Year 2000
analysis; $2.1 million of these costs were capitalized.
Contingency plans were developed for all areas of the business. The
Company used a weighted system to evaluate and determine the level of risk in
each of five areas: Operational, Facility Safety, Financial Management, Legal
Implication and Organizational Implication. Where necessary, the Company
implemented various contingency plans that included, but were not limited to,
the following:
- Secondary vendors for garments and other significant nonuniform
inventories
- Modifying inventory ordering practices during the year-end
transition
10
<PAGE>
- 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 exercised its best efforts to identify and remedy any
potential Year 2000 exposures within its control, the largest risks were
expected with utilities in the form of water and power which, to a significant
extent, were beyond the immediate control of the Company. To date, the Company
has not identified any suppliers who were not Year 2000 compliant.
While the Company believes its planning efforts were adequate to
address its Year 2000 concerns, the Year 2000 readiness of the Company's
suppliers and business partners may have lagged behind the Company's efforts. As
of the date of this filing, the Company's business, financial condition and
results of operations have not been adversely affected by Year 2000 issues.
While the Company does not believe it will be materially impacted by the Year
2000 matters discussed above, it is uncertain as to what extent, if any, the
Company may be affected by such matters in the future.
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 March 25, 2000.
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 duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: May 9, 2000 /s/Jeffrey L. Wright
------------------- ------------------------
Jeffrey L. Wright
Chief Financial Officer, Treasurer and
Secretary
(Principal Financial Officer)
/s/Michael F. Woodard
------------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
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> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> MAR-25-2000
<CASH> 3,005
<SECURITIES> 0
<RECEIVABLES> 68,744
<ALLOWANCES> 3,035
<INVENTORY> 87,003
<CURRENT-ASSETS> 167,445
<PP&E> 370,535
<DEPRECIATION> 157,675
<TOTAL-ASSETS> 580,581
<CURRENT-LIABILITIES> 107,028
<BONDS> 0
0
0
<COMMON> 10,267
<OTHER-SE> 252,678
<TOTAL-LIABILITY-AND-EQUITY> 580,581
<SALES> 420,748
<TOTAL-REVENUES> 420,748
<CGS> 242,334
<TOTAL-COSTS> 363,350
<OTHER-EXPENSES> (541)
<LOSS-PROVISION> 2,195
<INTEREST-EXPENSE> 12,344
<INCOME-PRETAX> 45,595
<INCOME-TAX> 18,220
<INCOME-CONTINUING> 27,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,375
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.34
</TABLE>
