<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 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 February 3, 2000
Common Stock, par value $.50 per share 19,065,821
CLASS B Outstanding February 3, 2000
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 25,
1999 June 26,
ASSETS (In thousands, except share data) (Unaudited) 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $2,956 $6,297
Accounts receivable, less allowance for doubtful
accounts of $3,019 and $2,479 69,417 59,626
Inventories 89,172 83,892
Prepaid expenses and other current assets 11,910 8,974
Prepaid income taxes - 4,017
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 173,455 162,806
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 26,465 26,038
Buildings and improvements 94,770 93,519
Machinery and equipment 203,961 181,968
Automobiles and trucks 39,320 39,447
Less accumulated depreciation (152,811) (142,537)
- --------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 211,705 198,435
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 143,648 128,226
Restrictive covenants and customer lists, net 41,772 37,805
Other, principally retirement plan assets 16,025 14,160
- --------------------------------------------------------------------------------------------------------------------------
Total other assets 201,445 180,191
- --------------------------------------------------------------------------------------------------------------------------
$586,605 $541,432
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $20,997 $15,456
Accrued expenses
Salaries and employee benefits 18,717 18,309
Other 20,802 13,504
Deferred income taxes 13,999 14,007
Current maturities of long-term debt 35,394 28,362
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 109,909 89,638
- --------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 198,554 193,952
DEFERRED INCOME TAXES 11,381 11,520
OTHER NONCURRENT LIABILITIES 13,149 10,689
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,044,111
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 26,213 26,086
Retained earnings 227,749 210,253
Deferred compensation (2,263) (2,601)
Accumulated other comprehensive income (8,347) (8,364)
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 253,612 235,633
- --------------------------------------------------------------------------------------------------------------------------
$586,605 $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 For the Six Months Ended
---------------------------------------------------------------------------
Dec 25, Dec 26, Dec 25, Dec 26,
(In thousands, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $135,879 $125,006 $266,415 $247,820
Direct sales 6,476 4,858 10,900 8,167
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 142,355 129,864 277,315 255,987
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of rental operations 77,571 70,246 150,752 139,302
Cost of direct sales 5,106 3,352 8,819 5,574
Selling and administrative 31,564 27,771 61,280 55,107
Depreciation 7,060 6,482 14,064 13,041
Amortization of intangibles 2,237 2,139 4,377 4,282
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 123,538 109,990 239,292 217,306
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 18,817 19,874 38,023 38,681
Interest expense 4,167 4,291 8,053 9,021
Other (income) expense, net 242 381 (331) 60
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,408 15,202 30,301 29,600
Provision for income taxes 5,777 5,967 12,087 11,675
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,631 $ 9,235 $ 18,214 $ 17,925
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted average number
of shares outstanding 20,357 20,401 20,458 20,399
BASIC EARNINGS PER COMMON SHARE $ 0.42 $ 0.45 $ 0.89 $ 0.88
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average number
of shares outstanding 20,400 20,521 20,517 20,521
DILUTED EARNINGS PER COMMON SHARE $ 0.42 $ 0.45 $ 0.89 $ 0.87
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</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 Six Months Ended
-----------------------------------
Dec 25, Dec 26,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 18,214 $ 17,925
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 18,441 17,323
Deferred income taxes (139) (290)
Changes in current operating items,
exclusive of acquisitions -
Accounts receivable and prepaid expenses (6,529) (3,554)
Inventories (3,481) (2,972)
Accounts payable and other accrued expenses 16,987 2,964
Other, net 1,480 1,104
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,973 32,500
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (22,206) (21,066)
Acquisition of business assets (34,783) (155)
Purchase of investments, net (2,086) (359)
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (59,075) (21,580)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 42,527 3,928
Repayments of debt financing (31,256) (16,047)
Cash dividends paid (717) (717)
Sale of common stock 207 4
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 10,761 (12,832)
- ------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,341) (1,912)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,297 11,975
- ------------------------------------------------------------------------------------------------------------------
End of period $ 2,956 $ 10,063
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 7,450 $ 8,330
- ------------------------------------------------------------------------------------------------------------------
Income taxes $ 6,935 $ 15,708
- ------------------------------------------------------------------------------------------------------------------
</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 25, 1999 and December 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 December 25, 1999, and the results of its operations and
its cash flows for the three and six month periods ended December 25,
1999 and December 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 and six month periods
ended December 25, 1999, and December 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 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
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 20,357 20,401 20,458 20,399
------------------------------------------------------------
Shares used in computation of
basic earnings per share 20,357 20,401 20,458 20,399
Weighted average effect of
non-vested
restricted stock grants 1 57 4 58
Weighted average common shares
issuable upon the exercise of
stock options 42 63 55 64
Shares used in computation of ------------------------------------------------------------
diluted earnings per share 20,400 20,521 20,517 20,521
------------------------------------------------------------
------------------------------------------------------------
</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 and six month periods ended December 25, 1999 and
December 26, 1998, the components of comprehensive income were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------------------------
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $8,631 $9,235 $18,214 $17,925
Other comprehensive income, net of tax
Foreign currency translation
adjustments 358 (1,364) (92) (3,282)
Unrealized gain on
investments held for
sale 322 467 109 203
------------------------------------------------------------
Comprehensive income $9,311 $8,338 $18,231 $14,846
------------------------------------------------------------
------------------------------------------------------------
</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 six
month periods ended December 25, 1999 and December 26, 1998 is as
follows:
<TABLE>
<CAPTION>
For the three months ended United
Dec. 25, 1999 & Dec. 26, 1998 States Canada Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year 2000:
Revenues $124,263 $18,092 $142,355
Income from operations 13,584 5,233 18,817
Capital expenditures 8,844 331 9,175
Depreciation and amortization
expense 8,213 1,084 9,297
Fiscal Year 1999:
Revenues $114,539 $15,325 $129,864
Income from operations 15,497 4,377 19,874
Capital expenditures 7,972 630 8,602
Depreciation and amortization
expense 7,707 914 8,621
--------------------------------------------------------------------------------------
For the six months ended United
Dec. 25, 1999 & Dec. 26, 1998 States Canada Total
-------------------------------------------------------------------------------------
Fiscal Year 2000:
Revenues $242,604 $34,711 $277,315
Income from operations 27,959 10,064 38,023
Capital expenditures 21,015 1,191 22,206
Depreciation and amortization
expense 16,297 2,144 18,441
Fiscal Year 1999:
Revenues $225,998 $29,989 $255,987
Income from operations 30,291 8,390 38,681
Capital expenditures 19,572 1,494 21,066
Depreciation and amortization
expense 15,309 2,014 17,323
- ----------------------------------------------------------------------------------------------
</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 25, 1999 and December
26, 1998, and the percentage changes in these income and expense items between
periods are contained in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS PERCENTAGE
ENDED ENDED CHANGE
----------------------------------------------------- ----------------------------
Three Months Six Months
Dec. 25, Dec. 26, Dec. 25, Dec. 26, FY 2000 FY 2000
1999 1998 1999 1998 vs. FY 1999 vs. FY 1999
----------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental 95.5% 96.3% 96.1% 96.8% 8.7% 7.5%
Direct 4.5 3.7 3.9 3.2 33.3 33.5
-----------------------------------------------------
Total Revenues 100.0 100.0 100.0 100.0 9.6 8.3
Expenses:
Cost of Rental Sales 57.1 56.2 56.6 56.2 10.4 8.2
Cost of Direct Sales 78.8 69.0 80.9 68.3 52.3 58.2
-----------------------------------------------------
Total Cost of Sales 58.1 56.7 57.5 56.6 12.3 10.1
Selling and
Administrative 22.2 21.4 22.1 21.5 13.7 11.2
Depreciation 4.9 5.0 5.1 5.1 8.9 7.8
Amortization of
Intangibles 1.6 1.6 1.6 1.7 4.6 2.2
-----------------------------------------------------
Income from Operations 13.2 15.3 13.7 15.1 (5.3) (1.7)
Interest Expense 2.9 3.3 2.9 3.5 (2.9) (10.7)
Other (Income) Expense, net 0.2 0.3 (0.1) 0.0 36.5 651.7
-----------------------------------------------------
Income Before Income Taxes 10.1 11.7 10.9 11.6 (5.2) 2.4
Provision for Income Taxes 4.0 4.6 4.3 4.6 (3.2) 3.5
-----------------------------------------------------
Net Income 6.1% 7.1% 6.6% 7.0% (6.5)% 1.6%
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Total revenues for the second quarter of fiscal 2000 increased 9.6% to
$142.4 million from $129.9 million in the second quarter of fiscal 1999 and
increased 8.3% to $277.3 million for the first six months of fiscal 2000 from
$256.0 million in the same period of fiscal 1999. Comparable revenues, after
adjusting for the acquired and divested operations, were up 7.9% in the second
quarter of fiscal 2000 and were up 7.5% for the first six months of fiscal 2000.
Rental revenue growth for the second quarter accounted for $10.9
million, or a 8.7% increase and for the first six months it accounted for $18.6
million, or a 7.5% 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 33.3% to $6.5 million
for the second quarter of fiscal 2000 compared to $4.9 million in the same
period of fiscal 1999 and increased 33.5% to $10.9 million for the first six
months of fiscal 2000 from $8.2 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 78.8% for the second
quarter of fiscal 2000 from 69.0% in the same period of fiscal 1999 and
increased to 80.9% for the first six months of fiscal 2000 from 68.3% for the
same period of fiscal 1999. The increase as a percent of revenue was related to
the continued high costs associated with the recently expanded fulfillment
8
<PAGE>
center, additional staffing and implementation of a new information system.
Cost of rental operations increased 10.4% to $77.6 million for the
second quarter of fiscal 2000 from $70.2 million in the same period of fiscal
1999 and rose 8.2% to $150.8 million for the first six months of fiscal 2000
from $139.3 million in the same period of fiscal 1999. As a percentage of rental
revenues, these costs increased to 57.1% for the second quarter of fiscal 2000
from 56.2% in the same period of fiscal 1999 and increased to 56.6% for the
first six months of fiscal 2000 from 56.2% in the same period of fiscal 1999.
The increase as a percent of revenue was largely due to higher than usual health
insurance costs for the current quarter.
Selling and administrative expenses increased 13.7% to $31.6 million in
the second quarter of fiscal 2000 from $27.8 million in the same period of
fiscal 1999 and increased 11.2% to $61.3 million for the first six months of
fiscal 2000 from $55.1 million in the same period of fiscal 1999. As a
percentage of revenues, selling and administrative expenses increased to 22.2%
in the second quarter of fiscal 2000 from 21.4% in the same period of fiscal
1999 and increased to 22.1% in the six 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 the direct sale/catalog group, which incurred expenses related to a larger
sales force, an expanded catalog and additional administrative personnel.
Depreciation expense increased 8.9% to $7.1 million in the second
quarter of fiscal 2000 from $6.5 million in the same period of fiscal 1999 and
increased 7.8% to $14.1 million for the first six months of fiscal 2000 from
$13.0 million in the same period of fiscal 1999. As a percentage of revenues,
depreciation expense decreased to 4.9% in the second quarter of fiscal 2000 from
5.0% in the same period of fiscal 1999 and was 5.1% for the six month period of
fiscal 2000, unchanged from the same period of fiscal 1999. Capital
expenditures, excluding acquisition of businesses, was $9.2 million in the
second quarter of fiscal 2000 compared to $8.6 million in the prior year's
quarter, and for the six month period they were $22.2 million compared to $21.1
million in the prior year.
Amortization expense increased 4.6% to $2.2 million in the second
quarter of fiscal 2000 from $2.1 million in the second quarter of fiscal 1999
and increased 2.2% to $4.4 million in the first six months of fiscal 2000 from
$4.3 million in the same period of fiscal 1999.
Income from operations decreased 5.3% to $18.8 million in the second
quarter of fiscal 2000 from $19.9 million in the same period of fiscal 1999 and
decreased 1.7% to $38.0 million for the first six months of fiscal 2000 from
$38.7 million in the same period of fiscal 1999. Operating margins decreased to
13.2% for the second quarter of fiscal 2000 from 15.3% in the same period of
fiscal 1999 and decreased to 13.7% for the six month period of fiscal 2000 from
15.1% in the same period of fiscal 1999. U.S. operating margins decreased to
10.9% for the second quarter of fiscal 2000 from 13.5% in the same period of
fiscal 1999 and decreased to 11.5% for the six month period of fiscal 2000 from
13.4% in the same period of fiscal 1999.
Interest expense was $4.2 million for the second quarter of fiscal
2000, down from $4.3 million in the same period of fiscal 1999 and was $8.1
million for the first six months of fiscal 2000, down from $9.0 million in the
same period of fiscal 1999. The Company's effective tax rate increased to 40.1%
in the second quarter of fiscal 2000 from 39.3% in the same period of fiscal
1999 and it increased to 39.9% in the six month period of fiscal 2000 from 39.4%
in the same period of fiscal 1999.
Net income decreased 6.5% to $8.6 million in the second quarter of
fiscal 2000 from $9.2 million in the same period of fiscal 1999 and rose 1.6% to
$18.2 million in the first six months of fiscal 2000 from $17.9 million in the
first six months of fiscal 1999. Basic and diluted earnings per share for the
second quarter of fiscal 2000 were $.42 per share compared with $.45 for the
prior year quarter. Basic and diluted earnings per share for the first six
months of 2000 increased to $.89 from $.88 and $.87, respectively. Net income
margins decreased to 6.1% for the second quarter of fiscal 2000 compared with
7.1% in the second quarter of fiscal 1999 and decreased to 6.6% for the six
month period of fiscal 2000 compared with 7.0% in the six month period of fiscal
1999.
9
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $45.0 million in the six month
period of fiscal 2000 and $32.5 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.
Working capital at December 25, 1999 was $63.5 million, down 13.2% 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 make repayments
of long-term debt.
Cash used in investing activities was $59.1 million in the six month
period of fiscal 2000 and $21.6 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 provided by financing activities was $10.8 million in the six
month period of fiscal 2000 and cash used for financing activities was $12.8
million in the same period of fiscal 1999. The cash provided by financing
activities was largely used in the acquisition of business assets. The long-term
debt, including current maturity, increased to $233.9 million at December 25,
1999 from $222.3 million at June 26, 1999. The Company's ratio of debt to total
capitalization decreased to 48.0% at the end of the second quarter of fiscal
2000 from 48.5% at June 26, 1999.
Stockholders' equity grew 7.6% to $253.6 million at December 25, 1999,
compared with $235.6 million at the end of fiscal 1999. G&K's return on average
equity decreased to 7.4% for the six month period of fiscal 2000 compared with
8.7% 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.
10
<PAGE>
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
- 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 December 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
a. The Company held its Annual Meeting of Stockholders on October 28,
1999.
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 26,057,960 111,927
Baszucki 26,058,005 111,882
Fink 26,058,005 111,882
Fortun 26,057,977 111,910
Goldfus 26,058,005 111,882
Hope 26,058,005 111,882
Moberly 26,059,674 110,213
Sweet 26,059,424 110,463
</TABLE>
2. Stockholders ratified the appointment of Arthur Andersen LLP,
Certified Public Accountants, as independent auditors of
the Company for 2000: 26,124,543 shares in favor, 34,857
shares voting against and 10,487 shares abstaining.
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: February 8, 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> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> DEC-25-1999
<CASH> 2,956
<SECURITIES> 0
<RECEIVABLES> 72,436
<ALLOWANCES> 3,019
<INVENTORY> 89,172
<CURRENT-ASSETS> 173,455
<PP&E> 364,516
<DEPRECIATION> 152,811
<TOTAL-ASSETS> 586,605
<CURRENT-LIABILITIES> 109,909
<BONDS> 0
0
0
<COMMON> 10,260
<OTHER-SE> 243,352
<TOTAL-LIABILITY-AND-EQUITY> 586,605
<SALES> 277,315
<TOTAL-REVENUES> 277,315
<CGS> 159,571
<TOTAL-COSTS> 239,292
<OTHER-EXPENSES> (331)
<LOSS-PROVISION> 1,539
<INTEREST-EXPENSE> 8,053
<INCOME-PRETAX> 30,301
<INCOME-TAX> 12,087
<INCOME-CONTINUING> 18,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,214
<EPS-BASIC> .89
<EPS-DILUTED> .89
</TABLE>
