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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the Fiscal Year Ended July 1, 2000
Transition Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
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(State of incorporation) (I.R.S. Employer Identification No.)
5995 OPUS PARKWAY, STE. 500
MINNETONKA, MINNESOTA 55343
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(Address of principal executive offices)
Registrant's telephone number, including area code (952) 912-5500
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (par value $0.50 per share)
Class B Common Stock (par value $0.50 per share)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(b) 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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
---
The aggregate market value of the voting stock of registrant held
by non-affiliates of registrant, on September 14, 2000, computed by reference
to the closing sale price of such shares on such date, was approximately
$570,022,962.
On September 14, 2000, there were outstanding 19,066,372 and
1,474,996 shares of the registrant's Class A and Class B Common Stock,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
- -------- ------------------------
Portions of proxy statement for the annual meeting
of stockholders to be held October 26, 2000 Part III
PART I
ITEM 1. BUSINESS
G&K Services, Inc. and its wholly owned subsidiaries (the Company
or G&K) was formed in 1902. G&K operates in the corporate identity apparel
programs and facility services industry. The Company rents uniforms (including
cleanroom garments) to its customers and offers uniforms and other related
products for sale. The corporate identity apparel programs and facility
services business also includes the rental of nonapparel items such as
floormats, dust mops and cloths, wiping towels and selected linen items. In
addition, the Company manufactures uniform garments, which it uses to support
rental customers and sells on a direct sale basis.
During fiscal year 2000, the Company made three acquisitions.
During the first quarter, the assets of 3-D Services, Inc. were purchased,
which consisted of one facility in Boston. In the second quarter, the assets
of Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During
the fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one
facility in Ottawa, Canada.
On July 14, 1997, the Company purchased the uniform rental assets
and selected linen assets of National Linen Service (NLS), consisting of
twenty industrial facilities and nine linen facilities. It was G&K's intent to
hold for sale the nine linen facilities. During fiscal year 1998, the Company
divested eight of these locations, along with three industrial facilities that
were not compatible with the Company's strategic goals. During fiscal year
1999, G&K sold one linen location. This transaction completed the sale of the
nine linen facilities acquired from NLS that were held for sale.
The Company has been steadily expanding its operations into
additional geographic markets. G&K currently has a presence in 31 states,
serving customers in over 45 states from approximately 130 locations in the
U.S. and Canada. By comparison, G&K operated from approximately 40 locations
in 21 states in 1988.
The Company targets its marketing efforts on those customers,
industries and geographic locations that are expanding and are in need of a
quality-oriented corporate identity program that provides high levels of
product quality, customer service and communication. The Company's experience
with both existing and potential customers confirms that a large segment of
the market is willing to pay a premium price to a vendor that can consistently
supply these features.
PRODUCTS
The Company's full-service rental program supplies a broad range of
work garments, specialized uniforms for corporate identity programs,
anti-static garments, particle-free garments, and dress clothing for
supervisors, sales personnel and others needing upgraded work apparel.
G&K serves customers of all sizes - from very small to very large
- -in all industries. The current trend is towards the service sector; however,
G&K's customers also include the industrial sector, hi-technology, automotive
services, printing, warehousing, distribution, transportation and many others.
The Company believes that customers use these programs to meet a
variety of critical business needs.
- Worker protection - uniforms help protect workers from
difficult environments such as heavy soils, heat, flame or
chemicals.
- Product protection - uniforms help protect products against
contamination in the food, pharmaceutical, electronics and
health care industries.
- Corporate identity - uniforms help identify employees working
for a particular company or department. Uniformed employees
are perceived as trained, competent and dependable.
- Brand awareness - uniforms promote a company's brand identity
and employees serve as a "walking billboard".
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- Image - uniforms provide a professional image of employees by
enhancing the public appearance of the employee and company.
- Employee retention - uniforms enhance worker morale and help
build a teamwork attitude.
The Company provides its apparel-rental customers with a full range
of services. Advice and assistance are offered in choosing fabrics, styles and
colors appropriate to the customer's specific needs. A large stock of new and
used garments are available to provide rapid response as customer needs change
due to increases, decreases or turnover in their work force. Professional
cleaning, finishing, repairs and replacement of uniforms in use is a normal
part of the rental service. Soiled uniforms are picked up at the customer's
location and returned clean on a weekly cycle.
The Company also believes that uniform rental may provide customers
with significant advantages over ownership. Renting eliminates investment in
uniforms; offers flexibility in styles, colors and quantities as customer
requirements change; assures consistent professional cleaning, finishing,
repair and replacement of items in use; and provides freedom from the expense
and management time necessary to administer a uniform program.
Most of the Company's customers also rent items other than apparel,
primarily floormats, dust mops, dust cloths, wiping towels and linens.
Floormats are used to protect facilities from dust, grease, moisture and other
hazards, and can also enhance decor, provide a corporate identity logo or
improve traffic safety. Dust mops, cloths and wiping towels are chemically
treated to attract and hold dirt, and are provided in a range of sizes. The
Company's wiping towels are used by its customers for numerous wiping and
cleaning tasks in varied settings. Selected linen items, primarily aprons and
towels, are used for sanitary or cleaning purposes.
CUSTOMERS
The Company's customer base includes divisions of more than half of
the Fortune 100 companies as well as over 100,000 smaller businesses. No one
customer accounts for more than 1% of the Company's total revenues.
COMPETITION
The Company encounters a high level of competition from a number of
companies in the geographic areas it serves. The Company ranks among the
nation's largest garment rental suppliers. Major competitors include AraMark
(a division of ARA Services, Inc.) and such publicly held companies as
Unifirst Corporation and Cintas Corporation. The Company also competes with a
multitude of regional and local competitors that varies by market. The Company
believes that it competes effectively in its line of business because of the
quality and breadth of its product line, and the comprehensive customer
service programs it offers.
ENVIRONMENTAL MATTERS
The Company generates modest amounts of wastes in connection with
its operations. The Company believes that all of these wastes have been
disposed of properly. Some of these wastes may be classified as hazardous
wastes under various state and federal environmental legislation.
The Company has been identified as a potentially responsible party
(PRP) pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or similar state laws, at a number of waste
disposal sites. Under such laws, PRPs typically are jointly and severally
liable for any investigation and remediation costs incurred with respect to
such sites. The Company's ultimate responsibility, therefore, could be greater
than the share of waste contributed by the Company would otherwise indicate.
The Company has received a letter from the Minnesota Pollution
Control Agency (MPCA), which claims that solvents have been detected in the
soils near a facility that was owned by the Company from the late 1940s until
the early 1970s. Neither the extent of the solvents in the soils nor the
source of the solvents is known to the Company. The Company has agreed to
participate in a Voluntary Investigation and Cleanup Program through the MPCA,
but is unable to provide any estimate of the remediation costs at this time
since the investigation has not been completed. The Company expects to reach
an agreement with the MPCA with respect to a remediation plan. Therefore, no
litigation is expected to be commenced against the Company in connection with
this matter.
3
The Company has been placed on notice by the owners of a Wayzata,
Minnesota, shopping center regarding the alleged presence of solvents in the
ground water in the vicinity of the shopping center, where certain affiliates
of the Company formerly operated a dry cleaning establishment in the shopping
center. At this time, no demand has been made and no action has been commenced
against the Company. The owners of the shopping center have informed the
Company that they are pursuing cleanup through state funding mechanisms. Since
little information is available at this time, the Company is unable to predict
what, if any, liability the Company may have in this matter.
EMPLOYEES
The Company's U.S. operations had a total of 6,907 employees as of
July 1, 2000, consisting of 3,945 production employees and 2,962 sales,
office, route and management personnel. Approximately 16% of the Company's
U.S. employees are represented by unions. Management believes its domestic
employee relations are satisfactory.
The Company's Canadian operations had a total of 1,006 employees as
of July 1, 2000, consisting of 578 production employees and 428 sales, office,
route and management personnel. Approximately 75% of the Company's Canadian
employees are represented by unions. Management believes Canadian employee
relations are satisfactory.
FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operations
is set forth in Note 8 of the G&K consolidated financial statements included
in Item 8 of this Form 10-K.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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ITEM 2. PROPERTIES
The Company owns approximately 80% of its processing facilities,
which average over 43,000 square feet in size. G&K cleans and supplies rental
items principally from forty-five industrial garment, cleanroom garment, dust
control and linen supply plants located in the following cities in the United
States:
City City
- ------------------------------------- -------------------------------------
Albuquerque, New Mexico (two plants) Louisville, Kentucky
Atlanta, Georgia (two plants) Memphis, Tennessee
Augusta, Georgia Milwaukee, Wisconsin
Charlotte, North Carolina Minneapolis, Minnesota (two plants)
Chicago, Illinois Mobile, Alabama
Dallas, Texas (two plants) Montgomery, Alabama
Davenport, Iowa New Orleans, Louisiana
Denver, Colorado (two plants) North Attleboro, Massachusetts
Des Moines, Iowa Opa Locka, Florida
Fort Dodge, Iowa Phoenix, Arizona
Fort Worth, Texas Pittsburg, California
Fort Lauderdale, Florida Portsmouth, Virginia
Graham, North Carolina Rockford, Illinois
Green Bay, Wisconsin St. Cloud, Minnesota
Houston, Texas Salt Lake City, Utah
Indianapolis, Indiana San Antonio, Texas
Jonesboro, Arkansas San Jose, California
Kansas City, Missouri Seattle, Washington
Lakeland, Florida Tampa, Florida
Los Angeles, California Tempe, Arizona
The Company also operates principally from five plants located in
the following cities in Canada:
City City
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Toronto, Ontario (Metro East) Windsor, Ontario
Montreal, Quebec Sault Sainte Marie, Ontario
Cambridge, Ontario
ITEM 3. LEGAL PROCEEDINGS
Except as set forth in Item 1. Business - Environmental Matters,
the Company is not a party to any legal proceedings other than routine
litigation incidental to the business of the Company, and is not aware of any
threatened litigation that would have a material adverse effect on the
Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders
of the Company during the fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Class A Common Stock is quoted on Nasdaq National
Market under the symbol "GKSRA". The Company's Class B Common Stock is not
registered. The following table sets forth the high and low reported sales
prices for the Class A Common Stock as quoted on the Nasdaq National Market for
the periods indicated.
HIGH LOW
- ---------------------------------------------------------
FISCAL 2000
1st Quarter 54 37 3/4
2nd Quarter 42 15/16 29
3rd Quarter 33 14 3/4
4th Quarter 30 3/4 17 15/16
- ---------------------------------------------------------
FISCAL 1999
1st Quarter 55 3/4 41 5/8
2nd Quarter 54 5/8 40 1/2
3rd Quarter 56 1/4 45 1/2
4th Quarter 52 5/16 39 3/4
- ---------------------------------------------------------
As of September 14, 2000, the Company had approximately 560
registered stockholders.
The Company has declared cash dividends of $0.0175 per share in each
of the quarters for the fiscal years ended July 1, 2000 and June 26, 1999. The
Company's debt agreements contain various restrictive covenants, which, among
other things, limit the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data. All
amounts are in thousands, except per share data.
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues $577,392 $519,966 $502,593 $350,914 $305,414
Net Income 37,812 37,029 32,058 29,002 22,720
Per Share Data:
Basic earnings per share 1.85 1.81 1.57 1.43 1.12
Diluted earnings per share 1.85 1.81 1.57 1.42 1.11
Dividends per share 0.07 0.07 0.07 0.07 0.07
Total Assets 594,952 541,432 531,842 311,965 282,520
Long-Term Debt 167,345 193,952 234,843 54,284 75,143
Stockholders' Equity 271,522 235,633 198,120 168,987 140,976
- --------------------------------------------------------------------------------
The fiscal 1998 results include the results of operations of
facilities purchased from NLS. See Note 2 of the G&K consolidated financial
statements included in Item 8 of this Form 10-K.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
which are included herein. The Company utilizes a 52-53 week fiscal year ending
on the Saturday nearest June 30. The fiscal year ended July 1, 2000 was a
53-week year.
In fiscal 2000, G&K, now the third largest competitor in the
estimated $10.7 billion uniform and related services industry, achieved 11.0%
revenue growth, 8.9% after excluding the impact of the 53rd week, a 2.1%
increase in net income and realized a 14.9% return on average equity. G&K's
record of strong financial performance results from an effective, consistent
growth strategy designed to meet the diverse needs of customers in the
industrial uniform market.
During fiscal year 2000, the Company made three acquisitions.
During the first quarter, the assets of 3-D Services, Inc. were purchased,
which consisted of one facility in Boston. In the second quarter, the assets
of Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During
the fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one
facility in Ottawa, Canada. All acquisitions were accounted for using the
purchase method. The total purchase price of these acquisitions was
approximately $34.9 million in cash. The purchase price and related
acquisition costs exceeded the fair values assigned to tangible assets by
approximately $26.1 million.
On July 14, 1997, the Company purchased the uniform rental assets
and selected linen assets of NLS. The 20 uniform locations contributed $115.4
million in revenue during the fiscal year. The Company held for sale the nine
linen facilities acquired in the NLS transaction. Losses from these nine
facilities from the date of acquisition to the date of sale (not to exceed
one year) of $659 thousand, including interest on incremental debt incurred
during the holding period to finance the purchase of these facilities
totaling $3.5 million and the proceeds from the sale were excluded from the
earnings reported for fiscal 1998. Amounts excluded from earnings were
included in the allocation to the purchase price of retained assets and
liabilities. During fiscal 1998, the Company divested eight of the nine
locations held for sale and three industrial locations that were not
compatible with the Company's strategic goals. During fiscal 1999, G&K sold
the remaining linen location held for sale.
For the latest five-year period, revenues grew at a rate of 17.1%,
compounded annually. This exceeds the Company's stated goal of maintaining a
long-term growth rate of 15%. These results reflect the Company's strategies
to attain increased market penetration and an expanded customer base through
internal growth and acquisitions.
The Company's five-year growth rate for net income was 15.6%,
compounded annually. The Company's investments in new technologies have
provided increased productivity and reduced labor expenses. Better
merchandise control and lower processing costs have contributed to
bottom-line growth, while garment manufacturing facilities have enhanced
product quality and decreased merchandise costs.
The percentage relationships to net sales of certain income and
expense items for the three fiscal years ended July 1, 2000, June 26, 1999
and June 27, 1998, and the percentage changes in these income and expense
items between years are presented in the following table:
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PERCENTAGE OF NET SALES PERCENTAGE CHANGE
YEARS ENDED BETWEEN YEARS
----------------------------------------- ----------------------------
FY 2000 vs. FY 1999 vs.
Fiscal 2000 Fiscal 1999 Fiscal 1998 FY 1999 FY 1998
----------------------------------------- ----------------------------
Revenues 100.0% 100.0% 100.0% 11.0% 3.5%
Expenses:
Cost of rental and direct sales 57.8 56.8 58.6 12.9 0.3
Selling and administrative 22.1 21.4 19.9 14.6 11.1
Depreciation 5.1 5.3 5.3 7.6 4.0
Amortization of intangibles 1.6 1.6 1.8 7.9 (7.1)
-----------------------------------------
Income from operations 13.4 14.9 14.4 0.3 6.9
Interest expense 2.9 3.3 4.3 (3.0) (21.2)
Other income, net (0.4) (0.2) (0.4) 105.8 (53.8)
-----------------------------------------
Income before income taxes 10.9 11.8 10.5 3.0 16.0
Provision for income taxes 4.4 4.7 4.1 4.3 16.8
-----------------------------------------
Net income 6.5% 7.1% 6.4% 2.1% 15.5%
=========================================
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues for fiscal 2000 rose 11.0% to $577.4 million from $520.0
million in fiscal 1999 (8.9% after excluding the impact of the 53rd week).
Comparable revenues, after adjusting for the acquired and divested operations
and adjusting for the additional week, were up 7.0% for fiscal 2000.
Rental revenues rose $53.6 million in fiscal 2000, a 10.7% increase
over fiscal 1999 (8.5% after excluding the impact of the 53rd week). The
improvement in rental growth rates was 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 22.7% to $20.7
million in fiscal 2000 from $16.9 million in fiscal 1999 (20.4% after excluding
the impact of the 53rd week). Cost of direct sales, as a percent of direct
sales, increased to 84.0% in fiscal 2000 from 70.6% in fiscal 1999. The increase
in cost of direct sales is largely due to the addition of fixed fulfillment and
embroidery costs to support the future growth in direct sales and catalog
revenues.
Cost of rental operations increased 11.5% to $316.1 million in fiscal
2000 from $283.4 million in fiscal 1999. As a percent of rental revenues, these
costs increased to 56.8% in fiscal 2000 compared to 56.3% in fiscal 1999. The
increase as a percent of revenue was primarily attributed to the closing of the
Portland cleanroom facility, increased cost of employee benefits, specifically
the cost of health care and workers' compensation and increases in delivery fuel
costs. These increases were partially offset by the Company's success in
increasing productivity and reducing labor costs.
Selling and administrative expenses increased 14.6% to $127.5 million
in fiscal 2000 from $111.2 million in fiscal 1999. As a percentage of total
revenues, selling and administrative expenses increased to 22.1% in fiscal 2000
from 21.4% in fiscal 1999. The increase as a percent of revenue is due to
several factors, including expenses related to the direct sale operation
including a larger sales force, an expanded catalog and additional
administrative personnel, as well as a larger rental sales force and expenses
related to new product launches.
Depreciation expense increased 7.6% to $29.5 million in fiscal 2000
from $27.4 million in fiscal 1999. As a percentage of revenues, depreciation
expense decreased to 5.1% in fiscal 2000 compared to 5.3% in fiscal 1999.
Capital expenditures for fiscal 2000, excluding acquisition of businesses, was
$43.7 million compared to $38.0 million in fiscal 1999. The increase in capital
expenditures is largely due to the acquisition of software in connection with
the Company's strategic
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information systems initiatives. Amortization expense increased to $9.3
million for fiscal 2000 from $8.6 million in fiscal 1999. As a percent of
revenues, amortization expense remained consistent at 1.6% in fiscal 2000
compared to fiscal 1999.
Income from operations increased 0.3% to $77.6 million in fiscal 2000
from $77.4 million in fiscal 1999. Operating margins decreased to 13.4% in
fiscal 2000 from 14.9% in fiscal 1999.
Interest expense was $16.7 million for fiscal 2000, down from $17.2
million in fiscal 1999. The decrease was driven by lower average debt levels
partially offset by an increase in interest rates. Other income increased to
$2.1 million in fiscal 2000, up from $1.0 million in fiscal 1999. This increase
is largely due to a one-time gain of $1.7 million indirectly related to the
adoption of the new Financial Accounting Standards Statement No. 133. Under this
accounting standard, the Company changed its characterization of investments
held in connection with deferred compensation plans to trading securities and
recognized previously unrealized gains. The Company's effective tax rate
increased to 40.0% in fiscal 2000 from 39.5% in fiscal 1999.
Net income rose 2.1% to $37.8 million in fiscal 2000 from $37.0 million
in fiscal 1999. Basic and diluted earnings per share for fiscal 2000 was $1.85
per share compared to basic and diluted earnings per share of $1.81 per share in
fiscal 1999. Net income margins decreased to 6.5% for fiscal 2000 compared to
7.1% in fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues for fiscal 1999 rose 3.5% to $520.0 million from $502.6
million in fiscal 1998. The first quarter of fiscal 1998 included only 11 weeks
of revenues from assets acquired from NLS on July 14, 1997, including three
industrial locations that were later sold in the fourth quarter of fiscal 1998.
Adjusting for the timing of the NLS asset purchase and divested operations,
total revenue growth was 4.2% for fiscal 1999.
Rental revenues rose $19.5 million in fiscal 1999, a 4.0% increase over
fiscal 1998. The growth in rental revenue, which is below historical patterns,
was influenced by several factors, including lower growth rates in the
southeastern part of the U.S. that were impacted by continuing NLS acquisition
integration activities, a sharp downturn in the semiconductor industry and a
decline in the value of the Canadian dollar.
Total direct sales to outside customers decreased 11.4% to $16.9
million in fiscal 1999 from $19.1 million in fiscal 1998. This decrease is
primarily the result of shifting garment manufacturing capacity from sales to
external customers to internal use by the Company for rental customers. Cost of
direct sales decreased 13.3% to $11.9 million in fiscal 1999 from $13.8 million
in fiscal 1998. As a percent of direct sales, these costs improved to 70.6%
compared to 72.2% in the prior year.
Cost of rental operations increased 1.0% to $283.4 million in fiscal
1999 from $280.7 million in fiscal 1998. As a percent of rental revenues, these
costs decreased to 56.3% in fiscal 1999 compared to 58.0% in fiscal 1998. The
Company attributes this decrease as a percent of revenue to improvements in all
components of rental operations (merchandise, production and delivery costs),
primarily at locations acquired in the NLS transaction.
Selling and administrative expenses increased 11.1% to $111.2 million
in fiscal 1999 from $100.1 million in fiscal 1998. As a percentage of total
revenues, selling and administrative expenses increased to 21.4% in fiscal 1999
from 19.9% in fiscal 1998. The increase as a percent of revenue is due to
several factors, including higher selling expenses in the locations acquired in
fiscal 1998, increased information technology costs, expenses associated with
Year 2000 readiness, additions to corporate senior management and other
corporate initiatives.
Depreciation expense increased 4.0% to $27.4 million in fiscal 1999
from $26.4 million in fiscal 1998. As a percentage of revenues, depreciation
expense remained constant at 5.3% in fiscal 1999 compared to 5.3% in fiscal
1998. Capital expenditures for fiscal 1999, excluding acquisition of businesses,
was $38.0 million compared to $37.4 million in fiscal 1998. Amortization expense
decreased to $8.6 million for fiscal 1999 from $9.2 million in fiscal 1998. This
decrease is attributable to the sale of acquired industrial facilities and the
related intangible assets during the third and fourth quarters of fiscal 1998
and third quarter of fiscal 1999.
Income from operations increased 6.9% to $77.4 million in fiscal 1999
from $72.4 million in fiscal 1998. Operating margins increased to 14.9% in
fiscal 1999 from 14.4% in fiscal 1998.
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Interest expense was $17.2 million for fiscal 1999, down from $21.8
million in fiscal 1998, reflecting lower average debt levels and lower all-in
borrowing rates. The Company's effective tax rate increased slightly to 39.5% in
fiscal 1999 from 39.2% in fiscal 1998.
Net income rose 15.5% to $37.0 million in fiscal 1999 from $32.1
million in fiscal 1998. Basic and diluted earnings per share for fiscal 1999 was
$1.81 per share compared to basic and diluted earnings per share of $1.57 per
share in fiscal 1998. Net income margins increased to 7.1% for fiscal 1999
compared to 6.4% in fiscal 1998.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $83.3 million in fiscal 2000,
$59.4 million in fiscal 1999 and $74.5 million in fiscal 1998. The increased
cash flow in fiscal 2000 is largely due to increases in earnings before
depreciation and amortization and increases in accounts payable and other
current liabilities associated with acquired operations. The decrease in fiscal
1999 from fiscal 1998 resulted from the decrease in other current liabilities,
primarily income taxes, during fiscal 1999 and the fiscal 1998 increase in
accounts payable and other current liabilities in connection with the locations
acquired from NLS. Working capital at July 1, 2000 was $49.7 million, down 32.1%
from $73.2 million at June 26, 1999. The decrease in working capital is largely
due to the scheduled payments of long-term debt.
Cash used in investing activities was $84.6 million in fiscal 2000,
$36.8 million in fiscal 1999 and $236.4 million in fiscal 1998. The increase in
fiscal 2000 was due primarily to two key acquisitions and the increase in fiscal
1998 was due primarily to the acquisition of assets from NLS. In fiscal 2001,
capital expenditures are anticipated to be approximately $45 million to $50
million.
Financing activities provided cash of $1.5 million in fiscal 2000, used
$28.3 million of cash in fiscal 1999 and provided $166.9 million in fiscal 1998.
The fiscal 2000 cash provided by financing activities was used largely for the
acquisition of business assets. The fiscal 1999 decrease was used for debt
reduction. The fiscal 1998 cash provided by financing activities was used in the
acquisition of selected assets of NLS. Total long-term debt, including current
maturities, increased to $225.7 million at July 1, 2000 from $222.3 million at
June 26, 1999. The Company paid dividends of $1.4 million in each of the fiscal
years 2000, 1999 and 1998. The Company's ratio of debt to total capitalization
decreased to 45.4% at the end of fiscal 2000 from 48.5% at the end of fiscal
1999. The Company has a $125.0 million line of credit and a $20.0 million
discretionary credit facility, of which $21.4 million and $16.4 million,
respectively, was outstanding at the end of fiscal 2000.
The Company's credit facility contains various restrictive covenants
that, among other matters, require the Company to maintain a minimum interest
coverage ratio, minimum stockholders' equity and maximum leverage ratio, all as
defined. The credit facility also limits additional indebtedness, investments,
capital expenditures and cash dividends. As of July 1, 2000, the Company was in
compliance with all debt covenants. Subsequent to the end of fiscal 2000, the
Company completed a $50 million, 8.40% private placement debt transaction with
certain institutional investors. The 10-year notes have a seven-year average
life. According to the note purchase agreement, an initial take-down of $20.0
million was completed on July 20, 2000. Two additional take-downs of $15.0
million each will be made on or about September 15, 2000 and December 15, 2000.
Each subsequent take-down will bear the same coupon of 8.40%.
Stockholders' equity grew 15.2% to $271.5 million at July 1, 2000,
compared with $235.6 million at the end of fiscal 1999. G&K's return on average
equity decreased to 14.9% in fiscal 2000, compared with 17.1% and 17.5% for
fiscal 1999 and fiscal 1998, respectively.
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 did not experience any significant system problems at the
beginning of calendar year 2000. The Company believes its planning efforts were
adequate to address its Year 2000 concerns and, as of the date of this filing,
it did not have a material impact on its business, financial condition or its
results of operations. Additionally, the Company is not aware of any material
problems experienced by its suppliers.
10
The Company began to incur expenses during fiscal 1998 as it began to
implement proposed solutions to resolve the Year 2000 issue. These expenses
continued through fiscal year 2000. The Company has spent approximately $6.1
million related to the Year 2000 analysis; $2.1 million of these costs were
capitalized. The Company continues to monitor its systems' performance and does
not anticipate future issues related to Year 2000 matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable
rate debt, as well as interest rate swaps, to manage interest rate risk. The
Company's earnings are affected by changes in short-term interest rates due to
the use of variable rate notes and revolving credit facilities amounting to
approximately $219 million. This exposure is limited by the use of interest rate
swap agreements as a hedge against variability in short-term rates. The interest
rate swap agreements 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. If short-term rates increase by
one-half percent (or 50 basis points), the Company's interest expense would
increase, and income before taxes would decrease, by approximately $0.6 million.
Conversely, if short-term rates decrease by one-half percent (or 50 basis
points), the Company's interest expense would decrease, and income before taxes
would increase, by approximately $0.6 million. This estimated exposure considers
the mitigating effects of interest rate swap agreements on the change in the
cost of variable rate debt. This analysis does not consider the effects of a
change in economic activity or a change in the Company's capital structure.
The information below summarizes the Company's market risks associated
with debt and interest rate swap obligations as of July 1, 2000. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
EXPECTED MATURITY DATE BY FISCAL YEAR
-----------------------------------------------------------------------
There- Fair
(In thousands) 2001 2002 2003 2004 2005 after Total Value
- --------------------------------------- -----------------------------------------------------------------------
Long-Term Debt, variable rate $ 58,355 $68,396 $47,189 $50,378 $1,286 $ 96 $225,700 $225,700
Average interest rate 7.28% 7.37% 7.40% 7.46% 7.54% 7.64% 7.41% --
Interest Rate Swaps, variable to fixed $100,000 -- -- -- -- -- $100,000 $100,171
Average pay rate 6.24% -- -- -- -- -- -- --
Average receive rate 6.78% -- -- -- -- -- -- --
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 and related services
industry; and the effects of economic conditions.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Following is a summary of the results of operations for each of the
quarters within fiscal years ended July 1, 2000 and June 26, 1999. All amounts
are in thousands, except per share data.
QUARTERLY FINANCIAL DATA
G&K SERVICES, INC. AND SUBSIDIARIES
(Unaudited) FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------
2000
Revenues $134,960 $142,355 $143,433 $156,644
Gross Profit 58,066 59,678 60,670 65,412
Income from Operations 19,206 18,817 19,375 20,246
Net Income 9,583 8,631 9,161 10,437
Basic Earnings per Share 0.47 0.42 0.45 0.51
Diluted Earnings per Share 0.47 0.42 0.45 0.51
Dividends per Share 0.0175 0.0175 0.0175 0.0175
- -------------------------------------------------------------------------------------
1999
Revenues $126,123 $129,864 $131,147 $132,832
Gross Profit 54,845 56,266 56,360 57,138
Income from Operations 18,807 19,874 19,171 19,550
Net Income 8,690 9,235 9,421 9,683
Basic Earnings per Share 0.43 0.45 0.46 0.47
Diluted Earnings per Share 0.42 0.45 0.46 0.47
Dividends per Share 0.0175 0.0175 0.0175 0.0175
- -------------------------------------------------------------------------------------
Reference is hereby made to the Consolidated Financial Statements and
Notes thereto appearing on pages F-1 through F-15 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
(THIS SPACE INTENTIONALLY LEFT BLANK)
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title Since
- -----------------------------------------------------------------------------------------------------------
Richard M. Fink 70 Chairman and Director 1968
Thomas Moberly 52 Chief Executive Officer, President and Director 1993
Robert G. Wood 52 Executive Vice President 2000
Jeffrey L. Wright 38 Chief Financial Officer, Treasurer and Secretary 1999
Michael F. Woodard 43 Controller 1996
Bruce G. Allbright 71 Director 1985
Paul Baszucki 60 Director 1994
Wayne M. Fortun 51 Director 1994
Donald W. Goldfus 66 Director 1989
William Hope 67 Director 1983
Bernard Sweet 76 Director 1975
RICHARD M. FINK has served as Chairman of the Board since 1981. Mr. Fink was
also Chief Executive Officer of the Company from 1981 to January 1997.
THOMAS MOBERLY has served as Chief Executive Officer since January 1999.
President since September 1997. Chief Operating Officer of the Company from
September 1997 to January 1999. From 1993 to 1997, Mr. Moberly served as
Executive Vice President. Mr. Moberly held various other management positions
since joining the Company in 1974.
ROBERT G. WOOD has served as Executive Vice President since May 2000. He
served as Canadian Operations President since 1998 and Regional Vice President
since 1997. Mr. Wood joined the Company in 1995 as a General Manager. Prior to
joining the Company, he was Vice President of Marketing and Director of Sales
with Livingston International, Inc., where he spent 23 years in a variety of
operating, sales, service and marketing positions.
JEFFREY L. WRIGHT has served as Chief Financial Officer, Treasurer and
Secretary since February 1999. Mr. Wright was Controller and Treasurer for BMC
Industries, Inc. from 1996 to the time he joined the Company. From 1993 to
1996 Mr. Wright was Treasurer for Employee Benefit Plans, Inc.
MICHAEL F. WOODARD joined the Company in September 1996 as Controller. Mr.
Woodard was Treasurer of Dataserv, Inc. from 1993 to the time he joined the
Company.
BRUCE G. ALLBRIGHT has been a director of the Company since 1985. Retired
since January 1990, formerly President of Dayton Hudson Corporation. Prior
thereto, Mr. Allbright was Chairman and Chief Executive Officer of Target
Stores, a Division of Dayton Hudson Corporation.
PAUL BASZUCKI has been a director of the Company since 1994. Chief Executive
Officer of Norstan, Inc. since December 1999, and Chairman of the Board of
Directors of Norstan, Inc. since May 1997. Mr. Baszucki also served as Chief
Executive Officer of that company from 1986 until May 1997. Mr. Baszucki is
also a director and a member of the Compensation Committee of Washington
Scientific Industries, Inc.
WAYNE M. FORTUN has been a director of the Company since 1994. President,
Chief Executive Officer, Chief Operating Officer and a director of Hutchinson
Technology, Inc.
DONALD W. GOLDFUS has been a director of the Company since 1989. Retired since
June 1999. Formerly the Chairman of the Board of Directors of Apogee
Enterprises, Inc. Mr. Goldfus continues as a director of Apogee Enterprises,
Inc. and also served as Chief Executive Officer of that company from 1986
until January 1998.
WILLIAM HOPE has been a director of the Company since 1983. Retired since
January 1999. Formerly Chief Executive Officer of the Company from January
1997 until January 1999. From 1993 to 1997, Mr. Hope served as President and
Chief Operating Officer of the Company. Mr. Hope is also a director of
Minntech Corporation and is serving as the Chairman and Interim Chief
Executive Officer of such company.
13
BERNARD SWEET has been a director of the Company since 1975. Retired since
1985, formerly President and Chief Executive Officer of Republic Airlines, Inc.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to information with respect to the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information with respect to the Company's
Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this Form 10-K.
(THIS SPACE INTENTIONALLY LEFT BLANK)
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Reports filed on Form 8-K during the fourth quarter of fiscal
year 2000:
None
(b) The following exhibits, as required by Item 601 of Regulation S-K
are filed as a part of this report:
EXHIBIT NO.
2(a) Asset Purchase Agreement, dated as of May 30, 1997, by and among
National Service Industries, Inc., a Delaware corporation; National
Service Industries, Inc., a Georgia corporation; NSI Enterprises,
Inc., a California corporation and G&K Services, Inc. (incorporated
herein by reference to the Registrant's Form 8-K filing dated July
14, 1997).
2(b) Side Letter dated as of July 14, 1997, by and among National
Service Industries, Inc., a Delaware corporation; National Service
Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a
California corporation and G&K Services, Inc. (incorporated herein by
reference to the Registrant's Form 8-K filing dated July 14, 1997).
2(c) Asset Purchase Agreement, dated as of April 25, 1998, by and
among G&K Services Linen Co., G&K Services Co., G&K Services, Inc.,
and TTSI Services Acquisition Sub, Inc. and Tartan Textile Services,
Inc. (incorporated herein by reference to the Registrant's Form 8-K
filing dated May 14, 1998).
3(a) Restated Articles of Incorporation, as amended, as filed with
the Secretary of State of Minnesota (incorporated herein by reference
to the Registrant's Registration Statement on Form S-1 and Amendment
No. 1 thereto, Registration No. 33-15456). Certificate of Amendment,
as filed with the Secretary of State of Minnesota on November 12,
1987.
3(b) Bylaws, as amended, (incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 and Amendment No. 1
thereto, Registration No. 33-15456 and incorporated by reference to
exhibit 3ii of the Registrant's Form 10-Q filed May 17, 1994).
10(a) Employment Agreement between the Registrant and Richard Fink
dated January 6, 1987, (incorporated herein by reference to the
Registrant's Registration No. 33-15456). **
10(b) Stockholder Agreement by and among the Registrant, Richard
Fink, William Hope, Stephen LaBelle, Daniel Nielsen, Phillip Oberg
and Robert Stotts, dated June 14, 1985 (incorporated herein by
reference to the Registrant's Schedule 13E-4 filing dated May 13,
1985).
10(c) 1989 Stock Option and Compensation Plan (incorporated herein by
reference to the Registrant's definitive proxy statement for the 1989
Annual Meeting of Shareholders filed August 29, 1989). **
10(d) 1996 Director Stock Option Plan (incorporated herein by
reference to the Registrant's Form 10-K, for the fiscal year ended
June 29, 1996). **
10(e) Credit Agreement dated as of July 14, 1997, among G&K Services,
Inc., Work Wear Corporation of Canada Ltd., as Borrowers, various
banks, and Norwest Bank Minnesota, National Association, and NBD Bank
and First Chicago NBD Bank, Canada (incorporated herein by reference
to the Registrant's Form 8-K filing dated July 14, 1997).
10(f) 1998 Stock Option and Compensation Plan (incorporated herein by
reference to the Registrant's definitive proxy statement for the 1998
Annual Meeting of Shareholders filed October 5, 1998). **
10(g) First Amendment, dated December 30, 1998, to Credit Agreement
dated July 14, 1997, among G&K Services, Inc., Work Wear Corporation
of Canada Ltd., as Borrowers, various banks, and Norwest Bank
Minnesota, National Association, and NBD Bank and First Chicago NBD
Bank, Canada (incorporated herein by reference to the Registrant's
Form 10-Q filed May 11, 1999).
15
10(h) Non-Competition and Confidentiality Agreement between
Registrant and Jeffrey L. Wright dated February 8, 1999 (incorporated
herein by reference to the Registrant's Form 10-Q filed May 11,
1999). **
10(i) Form of Change of Control Agreement between Registrant and each
of Richard Fink, Thomas Moberly, Robert G. Wood, Timothy W. Kuck and
Jeffrey L. Wright, dated February 24, 1999 (incorporated herein by
reference to the Registrant's Form 10-Q filed May 11, 1999). **
10(j) Employment Agreement between Registrant and Thomas Moberly,
dated January 2, 1998. *,**
10(k) Credit Agreement dated March 28, 2000 among G&K Services, Inc.
and Norwest Bank Minnesota, National Association. *
10(l) Note Purchase Agreement dated July 20, 2000 among G&K Services,
Inc. and seven institutional investors. *
21 Subsidiaries of G&K Services, Inc. *
23 Consent of Independent Public Accountants *
24 Power of Attorney dated as of August 31, 2000 *
27 Financial Data Schedule (FOR SEC USE ONLY) *
Footnotes:
- ----------
* Filed herewith
** Compensatory plan or arrangement
(THIS SPACE INTENTIONALLY LEFT BLANK)
16
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
Date: September 28, 2000 G&K SERVICES, INC.
(Registrant)
By: /s/ Thomas Moberly
---------------------------------------
Thomas Moberly, Chief Executive Officer
(Principal Executive Officer)
(THIS SPACE INTENTIONALLY LEFT BLANK)
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below on the 28th day of September
2000, by the following persons in the capacity indicated:
/s/ Richard M. Fink Chairman of the Board and Director
- ----------------------------
Richard M. Fink
/s/ Thomas Moberly Chief Executive Officer, President
- ---------------------------- and Director (Principal Executive
Thomas Moberly Officer)
/s/ Jeffrey L. Wright Chief Financial Officer, Treasurer
- ---------------------------- and Secretary (Principal Financial
Jeffrey L. Wright Officer)
/s/ Michael F. Woodard Controller (Principal Accounting
- ---------------------------- Officer)
Michael F. Woodard
* Director
- ----------------------------
Bruce Allbright
* Director
- ----------------------------
Donald Goldfus
* Director
- ----------------------------
William Hope
* Director
- ----------------------------
Bernard Sweet
* Director
- ----------------------------
Wayne Fortun
* Director
- ----------------------------
Paul Baszucki
* By /s/ Richard M. Fink
------------------------
Richard M. Fink
Attorney-in-fact
(THIS SPACE INTENTIONALLY LEFT BLANK)
18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the Fiscal Years Ended
July 1, 2000, June 26, 1999 and June 27, 1998................................. F-2
Consolidated Balance Sheets as of July 1, 2000 and June 26, 1999......................... F-3
Consolidated Statements of Cash Flows for the Fiscal Years Ended
July 1, 2000, June 26, 1999 and June 27, 1998................................. F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
Fiscal Years Ended July 1, 2000, June 26, 1999 and June 27, 1998.............. F-5
Notes to Consolidated Financial Statements............................................... F-6
Report of Independent Public Accountants................................................. F-15
F-1
CONSOLIDATED STATEMENTS OF INCOME
G&K SERVICES, INC. AND SUBSIDIARIES
For the Fiscal Years Ended
---------------------------------------
July 1, June 26, June 27,
(In thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
REVENUES
Rental operations $556,646 $503,062 $483,516
Direct sales 20,746 16,904 19,077
- --------------------------------------------------------------------------------------------------------
Total revenues 577,392 519,966 502,593
- --------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of rental operations 316,131 283,419 280,680
Cost of direct sales 17,435 11,938 13,773
Selling and administrative 127,451 111,228 100,136
Depreciation 29,481 27,410 26,365
Amortization of intangibles 9,250 8,569 9,228
- --------------------------------------------------------------------------------------------------------
Total operating expenses 499,748 442,564 430,182
- --------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 77,644 77,402 72,411
Interest expense 16,702 17,213 21,848
Other income, net (2,077) (1,009) (2,184)
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 63,019 61,198 52,747
Provision for income taxes 25,207 24,169 20,689
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 37,812 $ 37,029 $ 32,058
========================================================================================================
Basic weighted average number of shares outstanding 20,456 20,414 20,380
BASIC EARNINGS PER COMMON SHARE $ 1.85 $ 1.81 $ 1.57
========================================================================================================
Diluted weighted average number of shares outstanding 20,487 20,509 20,454
DILUTED EARNINGS PER COMMON SHARE $ 1.85 $ 1.81 $ 1.57
========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CONSOLIDATED BALANCE SHEETS
G&K SERVICES, INC. AND SUBSIDIARIES
July 1, June 26,
ASSETS (In thousands, except share data) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 6,420 $ 6,297
Accounts receivable, less allowance for doubtful
accounts of $3,138 and $2,479 63,970 59,626
Inventories 89,975 83,892
Prepaid expenses 15,496 8,974
Prepaid income taxes 441 4,017
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 176,302 162,806
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 25,845 26,038
Buildings and improvements 101,636 93,519
Machinery and equipment 206,033 181,968
Automobiles and trucks 39,208 39,447
Less accumulated depreciation (156,288) (142,537)
- -----------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 216,434 198,435
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 144,229 128,226
Restrictive covenants and customer lists, net 40,911 37,805
Other, principally retirement plan assets 17,076 14,160
- -----------------------------------------------------------------------------------------------------------------------
Total other assets 202,216 180,191
- -----------------------------------------------------------------------------------------------------------------------
$ 594,952 $ 541,432
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,892 $ 15,456
Accrued expenses
Salaries and employee benefits 19,678 18,309
Other 18,300 13,504
Deferred income taxes 14,406 14,007
Current maturities of long-term debt 58,355 28,362
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 126,631 89,638
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 167,345 193,952
DEFERRED INCOME TAXES 15,243 11,520
OTHER NONCURRENT LIABILITIES 14,211 10,689
- -----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,061,299
and 19,041,852 shares issued and outstanding 9,531 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 26,679 26,086
Retained earnings 246,629 210,253
Deferred compensation (2,464) (2,601)
Accumulated other comprehensive income (9,591) (8,364)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 271,522 235,633
- -----------------------------------------------------------------------------------------------------------------------
$ 594,952 $ 541,432
=======================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K SERVICES, INC. AND SUBSIDIARIES
For the Fiscal Years Ended
------------------------------------------------------
July 1, June 26, June 27,
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 37,812 $ 37,029 $ 32,058
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 38,731 35,979 35,593
Deferred income taxes 3,995 3,008 2,747
Changes in current operating items,
exclusive of acquisitions -
Accounts receivable and prepaid expenses (4,450) (8,043) (8,585)
Inventories (4,174) (6,577) (4,778)
Accounts payable and other accrued expenses 10,485 (5,055) 16,413
Other, net 884 3,105 1,004
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 83,283 59,446 74,452
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (43,699) (37,974) (37,398)
Acquisition of business assets (38,304) (155) (283,361)
Cash generated from assets held for sale - - 7,693
Net proceeds from sale of assets - 2,074 77,107
Purchases of investments, net (2,611) (770) (438)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (84,614) (36,825) (236,397)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 90,433 22,635 376,246
Repayments of debt financing (87,760) (50,032) (208,132)
Cash dividends paid (1,436) (1,436) (1,434)
Sale of common stock 217 534 254
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 1,454 (28,299) 166,934
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 123 (5,678) 4,989
CASH AND CASH EQUIVALENTS:
Beginning of year 6,297 11,975 6,986
- ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 6,420 $ 6,297 $ 11,975
=================================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 15,521 $ 16,052 $ 22,395
=================================================================================================================================
Income taxes $ 16,921 $ 27,403 $ 19,025
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
G&K SERVICES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Common Stock
-------------------------------
Class A Class B
-------------------------------
Accumulated
Number Number Additional Other
of of Paid-In Retained Deferred Comprehensive Comprehensive
Shares Amount Shares Amount Capital Earnings Compensation Income Income
- ------------------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 18,987 $9,493 1,475 $738 $22,684 $144,036 $(2,029) $(5,935)
- ----------------------------------------------------------------------------------------------------------------
Net income - - - - - 32,058 - - $32,058
Cash dividend
$.07 per share - - - - - (1,434) - - -
Stock issued for employee
benefit plans 25 13 - - 960 - (468) - -
Amortization of deferred
compensation - - - - - - 524 - -
Unrealized holding gains,
net of tax - - - - - - - 507 507
Less: reclassification
adjustment for
gains included in
net income, net
of tax - - - - - - - (356) (356)
Translation adjustment - - - - - - - (2,671) (2,671)
-----------
Comprehensive income - - - - - - - - $29,538
- ----------------------------------------------------------------------------------------------------------------===========
Balance June 27, 1998 19,012 9,506 1,475 738 23,644 174,660 (1,973) (8,455)
- ----------------------------------------------------------------------------------------------------------------
Net income - - - - - 37,029 - - $37,029
Cash dividend
$.07 per share - - - - - (1,436) - - -
Stock issued for employee
benefit plans 30 15 - - 2,442 - (1,533) - -
Amortization of deferred
compensation - - - - - - 905 - -
Unrealized holding gains,
net of tax - - - - - - - 548 548
Less: reclassification
adjustment for
gains included in
net income, net
of tax - - - - - - - (140) (140)
Translation adjustment - - - - - - - (317) (317)
-----------
Comprehensive income - - - - - - - - $37,120
- ----------------------------------------------------------------------------------------------------------------===========
Balance June 26, 1999 19,042 9,521 1,475 738 26,086 210,253 (2,601) (8,364)
- ----------------------------------------------------------------------------------------------------------------
Net income - - - - - 37,812 - - $37,812
Cash dividend
$.07 per share - - - - - (1,436) - - -
Stock issued for employee
benefit plans 19 10 - - 593 - (386) - -
Amortization of deferred
compensation - - - - - - 523 - -
Unrealized holding gains - - - - - - - 171 171
Less: reclassification
adjustment for
gains included in
net income, net
of tax - - - - - - - (865) (865)
Translation adjustment - - - - - - - (533) (533)
-----------
Comprehensive income - - - - - - - - $36,585
- ----------------------------------------------------------------------------------------------------------------===========
Balance July 1, 2000 19,061 $9,531 1,475 $738 $26,679 $246,629 $(2,464) $(9,591)
================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
G&K Services, Inc. (the Company) is a full-service uniform rental
provider, including the rental of cleanroom garments. The Company also
provides rental of nonuniform items such as floormats, dust mops and cloths,
wiping towels and selected linen items. In addition, the Company manufactures
uniform garments 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.
INVENTORIES
New goods inventories are stated at the lower of first-in, first-out
(FIFO) cost or market. Rental merchandise in service is stated at cost less
amortization, which is not in excess of market. The components of inventories as
of July 1, 2000 and June 26, 1999 are as follows:
2000 1999
- --------------------------------------------------------------------------------------
New goods $21,206 $20,081
Rental merchandise in service 68,769 63,811
- --------------------------------------------------------------------------------------
$89,975 $83,892
======================================================================================
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation for financial reporting purposes
over the estimated useful lives of property, plant and equipment as follows:
Life
(Years)
- ----------------------------------------------------------------------------
Automobiles and trucks 3 to 8
Machinery and equipment 3 to 10
Buildings 20 to 33 1/3
Building improvements 10
============================================================================
Costs of significant additions, renewals and betterments, including
external and certain internal computer software development costs, are
capitalized. When an asset is sold or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts and the
gain or loss on disposition is reflected in earnings. Maintenance and repairs
are charged to expense when incurred.
INTANGIBLE ASSETS ARISING FROM ACQUISITIONS
The cost of acquisitions in excess of the fair value of the underlying
net assets acquired (goodwill) is amortized over periods ranging from 8 to 40
years. Accumulated amortization of goodwill was $19,655 as of July 1, 2000 and
$15,209 as of June 26, 1999. Restrictive covenants and acquired customer lists,
stated at cost less accumulated amortization of $17,926 and $13,217 as of July
1, 2000 and June 26, 1999, are being amortized over the terms of the respective
agreements and the estimated average life of an account, respectively.
Impairment losses are recorded on goodwill and other long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Impairment losses are measured by comparing the
fair value of the assets as determined by discounting the future cash flows at a
market rate of interest to their carrying amounts. There were no impairments
recognized during fiscal 2000, 1999 or 1998.
RETIREMENT PLAN ASSETS
Retirement plan assets consist primarily of mutual funds and cash
equivalents, which are stated at their fair value as determined by quoted market
prices and the cash surrender values of life insurance policies.
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign operations are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates prevailing during the year. Translation adjustments
are recorded as a separate component of stockholders' equity.
F-6
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return and separate state and foreign returns. The Company accounts for income
taxes using the liability method. Deferred income taxes are provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at currently enacted tax rates.
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.
For the Fiscal Years Ended
----------------------------------------------------------
July 1, June 26, June 27,
2000 1999 1998
----------------------------------------------------------
Weighted average number of common shares
outstanding used in computation of
basic earnings per share 20,456,000 20,414,000 20,380,000
Weighted average effect of nonvested restricted
stock grants, exercise of options and other 31,000 95,000 74,000
----------------------------------------------------------
Shares used in computation of diluted earnings
per share 20,487,000 20,509,000 20,454,000
==========================================================
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Ultimate results could differ from those estimates.
COMPREHENSIVE INCOME
The Company has chosen to disclose comprehensive income, which consists
of net income, foreign currency translation adjustment and unrealized gain on
investments, in the consolidated statements of stockholders' equity and
comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was adopted by the Company
in the fourth quarter of fiscal 2000. The statement requires the fair value of
all derivatives, including swap agreements, to be recognized in the consolidated
financial statements. The Company holds an interest rate swap agreement which
has been designated as a highly effective cash flow hedge. Initial adoption
resulted in the recording of a contra-liability of $138, with the offset
recorded in equity as a component of accumulated other comprehensive income on
the consolidated balance sheet. The Company uses an interest rate swap contract,
which expires in September of 2000, to hedge against the effect of interest rate
fluctuations on its variable rate term loan facility. The interest rate swap had
a notional amount of $100,000 at July 1, 2000. 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.
Also, concurrently with the adoption of SFAS No. 133, the Company
changed its designation of the investments associated with its deferred
compensation plan to trading securities and recognized $1,725 in previously
unrealized gains.
2. ACQUISITIONS
During fiscal year 2000, the Company made three acquisitions. During
the first quarter, the assets of 3-D Services, Inc. were purchased, which
consisted of one facility in Boston. In the second quarter, the assets of
Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During the
fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one facility
in Ottawa, Canada. All acquisitions were accounted for using the purchase
method. The total purchase price of
F-7
these acquisitions was approximately $34,929 in cash. The purchase price and
related acquisition costs exceeded the fair values assigned to tangible
assets by approximately $26,055. The pro forma effects of these acquisitions
are not deemed material to the Company.
On July 14, 1997, the Company purchased the uniform rental assets
and selected linen rental assets of National Linen Service (NLS) for
approximately $283,400 in cash. The acquisition was accounted for using the
purchase method and the purchase price was allocated to the acquired assets
and assumed liabilities based on the fair values of the assets purchased and
the liabilities assumed. The purchase price and related acquisition costs
exceeded the fair values assigned to tangible assets by approximately
$160,600, which was assigned to restrictive covenants ($1,100) to be
amortized over the contract life of five years, purchased customer list
($41,600) to be amortized over eleven years and goodwill ($117,900) to be
amortized over thirty-five years.
In connection with the asset purchase from NLS, nine linen rental
facilities purchased were identified as assets held for sale. Earnings or losses
from these nine facilities have been excluded from the consolidated statement of
income. During fiscal 1998, the Company sold selected linen assets and uniform
rental assets of eight facilities for approximately $76,700 in cash. During
fiscal 1999, the Company sold the remaining linen facility classified as held
for sale for approximately $2,100 in cash.
3. LONG-TERM DEBT
Debt as of July 1, 2000 and June 26, 1999 includes the following:
2000 1999
- -----------------------------------------------------------------------------------------------------------
Borrowings under term loan and revolving credit facility at rates ranging from
7.19% to 9.5% at July 1, 2000 and
5.50% to 6.74% at June 26, 1999 $202,118 $220,314
Borrowings under discretionary credit facility at rates
of 7.41% at July 1, 2000 and 5.75% at June 26, 1999 16,400 2,000
Other debt arrangements including capital leases 7,182 -
- -----------------------------------------------------------------------------------------------------------
225,700 222,314
Less current maturities (58,355) (28,362)
- -----------------------------------------------------------------------------------------------------------
Total long-term debt $167,345 $193,952
===========================================================================================================
The Company maintains a $425,000 term loan and revolving credit
facility. The credit facility includes (i) a $300,000 term loan facility with
maturities of the remaining balance for the four years subsequent to July 1,
2000 of $41,425, $45,192, $45,192, $48,957, and (ii) a $125,000 revolving
credit facility expiring on June 30, 2002. As of July 1, 2000, borrowings
outstanding under the term loan were $180,766, and borrowings under the
revolving credit facility were $21,352. The unused portion of the revolver
may be used for working capital and to provide up to $10,000 in letters of
credit.
Borrowings under the term loan and revolving credit facility bear
interest at 0.5% to 1.125% over the rate offered to major banks in the London
Interbank Eurodollar market (Eurodollar Rate), or Canadian Prime for Canadian
borrowings, based on a leverage ratio calculated on a quarterly basis.
Advances outstanding as of July 1, 2000 bear interest at the Eurodollar Rate
or Canadian Prime Rate plus 0.50%. The Company also pays a fee of 0.15% to
0.35% on the unused daily balance of the revolver based on a leverage ratio
calculated on a quarterly basis. The fee as of July 1, 2000 was 0.15%.
The Company also maintains a $20,000 discretionary credit facility.
Borrowings under the discretionary credit facility bear interest at 0.65% to
1.275% over the Eurodollar Rate. Advances outstanding as of July 1, 2000 bear
interest at the Eurodollar Rate plus 0.65%.
On September 27, 1997, the Company entered into an interest rate
swap agreement for the notional principal amount of $100,000 through
September 12, 2000, that effectively fixed the interest rate on floating rate
debt at a rate of 6.74%. If this swap agreement were to be terminated as of
July 1, 2000, the Company would have incurred a gain on the contract of $171.
The credit facility contains various restrictive covenants that
among other matters require the Company to maintain a minimum interest
coverage ratio, minimum stockholders' equity and maximum leverage ratio, all
as defined. The credit agreement also limits additional indebtedness,
investments, capital expenditures and cash dividends. As of July 1, 2000, the
Company was in compliance with all debt covenants.
The fair value of the Company's long-term debt, based on the quoted
market prices for the same or similar issues or on
F-5
the current rates offered to the Company for debt of the same remaining
maturities, approximates carrying value as of July 1, 2000 and June 26, 1999.
The Company entered into capital lease agreements in fiscal 2000.
Future minimum lease payments under capital leases for fiscal years 2001
through 2005 are $1,122, $2,244, $2,244, $1,522 and $1,282. The present value
of net minimum lease payments is $6,979 after excluding the amount
representing interest of $1,435.
4. STOCKHOLDERS' EQUITY
Each share of Class A common stock is entitled to one vote and is
freely transferable. Each share of Class B is entitled to ten votes and can be
converted to Class A common stock on a share-for-share basis. Until converted to
Class A common stock, however, Class B shares are not freely transferable. No
cash dividends can be paid on Class B common stock unless dividends of at least
an equal amount per share are paid on Class A shares. Substantially all Class B
shares are held by an officer of the Company.
STOCK AWARD PLANS
The Company maintains a 1989 and 1998 Stock Option and Compensation
Plan (the Employee Plans) to grant certain stock awards, including stock options
at fair market value and restricted shares, to key employees of the Company. The
Company records compensation expense as the restrictions are removed from the
stock for the difference between the par value and fair market value as of the
grant date. A maximum of 2,400,014 and 1,500,000 stock awards can be granted
under the 1989 and 1998 plans, respectively; 1,833,245 and 1,028,951 awards were
available for grant as of July 1, 2000.
The Company also maintains the 1996 Director Stock Option Plan (the
Directors' Plan). The Directors' Plan provides for automatic grants of 3,000
nonqualified stock options to nonemployee directors of the Company as of the
later of August 1996 or the date such individuals became directors of the
Company and 1,000 nonqualified stock options on each subsequent annual
shareholder meeting date. The Company has reserved 50,000 shares of Class A
common stock for issuance under the Directors' Plan. These options expire within
ten years of grant and are exercisable one year from the date of grant, except
for the August 1996 grants, of which, one-third of the total options are
exercisable each year beginning with the first anniversary of the date of grant.
The option price will be the average market price of the Class A common stock
during the ten business days preceding the date of grant.
The following schedule summarizes activity in the plans:
Stock Options
--------------------------
Employee Directors' Restricted Grant
Plans Plan Stock Price
- -----------------------------------------------------------------------------------------------------------
Outstanding at June 28, 1997 60,351 15,000 323,054 $7.17 - 37.00
Granted 24,651 5,000 21,403 32.00 - 41.88
Exercised (11,917) - - 7.17 - 37.00
Canceled (4,632) - (14,554) 37.00
- -----------------------------------------------------------------------------------------------------------
Outstanding at June 27, 1998 68,453 20,000 329,903 11.33 - 41.88
Granted 234,103 5,000 24,322 44.77 - 53.34
Exercised (7,013) - - 11.33 - 41.88
Canceled (36,868) - (7,881) 46.00
- -----------------------------------------------------------------------------------------------------------
Outstanding at June 26, 1999 258,675 25,000 346,344 16.00 - 53.34
Granted 452,183 6,000 28,388 25.00 - 45.50
Exercised - - - -
Canceled (66,985) - (14,256) 41.56 - 49.63
- -----------------------------------------------------------------------------------------------------------
Outstanding at July 1, 2000 643,873 31,000 360,476 16.00 - 53.34
===========================================================================================================
Exercisable at July 1, 2000 28,710 25,000 - 16.00 - 53.34
===========================================================================================================
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the
F-9
accompanying consolidated statements of income except for shares issued under
the Restricted Stock Plan. Had compensation cost been recognized based on the
fair values of options at the grant dates consistent with the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per common share would have been adjusted to the
following pro forma amounts:
Fiscal Years
- -----------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Net income:
As reported $37,812 $37,029 $32,058
Pro forma 35,574 36,035 31,968
Basic net income per share:
As reported $ 1.85 $ 1.81 $ 1.57
Pro forma 1.74 1.77 1.57
Diluted net income per share:
As reported $ 1.85 $ 1.81 $ 1.57
Pro forma 1.74 1.76 1.56
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The weighted average fair value of options granted in 2000, 1999 and
1998 was $15.96, $17.38 and $17.61, respectively. The weighted average
exercise price was $33.74, $46.46 and $41.88, respectively.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used: risk-free interest rates of 6.43% for
2000, 4.83% for 1999 and 5.68% for 1998; expected dividends of $.07 per
share; expected lives of seven years for 2000, 1999 and 1998; and expected
volatility of 34.48% for 2000 grants, 23.90% for 1999 grants and 27.53% for
1998 grants.
5. INCOME TAXES
The components of the provision for income taxes are as follows:
Fiscal Years
- -----------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Current:
Federal $11,366 $11,625 $11,261
State and local 1,310 1,118 1,211
Foreign 8,409 8,418 5,470
- -----------------------------------------------------------------------------------------------------------
21,085 21,161 17,942
Deferred 4,122 3,008 2,747
- -----------------------------------------------------------------------------------------------------------
$25,207 $24,169 $20,689
===========================================================================================================
The reconciliation between income taxes using the statutory federal
income tax rate and the recorded income tax provision is as follows:
Fiscal Years
- -----------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Federal taxes at the statutory
rate $22,057 $21,419 $18,462
State taxes, net of federal
tax benefit 1,071 944 988
Foreign taxes 1,332 1,155 884
Permanent differences
and other, net 747 651 355
- -----------------------------------------------------------------------------------------------------------
Total provision $25,207 $24,169 $20,689
===========================================================================================================
Effective rate 40.0% 39.5% 39.2%
===========================================================================================================
F-10
Significant components of the Company's deferred tax assets and
deferred tax liabilities as of July 1, 2000 and June 26, 1999 are as follows:
2000 1999
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Inventory amortization differences $(20,064) $(18,435)
Depreciation and property basis differences (12,849) (9,920)
Other (4,653) (4,729)
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (37,566) (33,084)
Deferred tax assets:
Accruals, reserves and other 7,917 7,557
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(29,649) $(25,527)
============================================================================================================
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a noncontributory defined benefit pension plan (the
Plan) covering substantially all employees, except certain employees who are
covered by union-administered plans. Benefits are based on number of years of
service and each employee's compensation near retirement. The Company makes
annual contributions to the Plan consistent with federal funding requirements.
Plan assets consist primarily of common stocks and U.S. government and corporate
obligations.
UNION PENSION PLANS
Certain employees of the Company are covered by union-sponsored,
collectively bargained, multiemployer pension plans (Union Plans). The Company
contributed and charged to expense $909 in 2000, $939 in 1999 and $851 in 1998
for such plans. These contributions are determined in accordance with the
provisions of negotiated labor contracts and generally are based on the number
of hours worked. The Company may be liable for its share of unfunded vested
benefits, if any, related to the Union Plans. Information from the Union Plans'
administrators is not available to permit the Company to determine its share, if
any, of unfunded vested benefits.
401(K) PLAN
All full-time nonunion employees are eligible to participate in a
401(k) plan. The Company matches a portion of the employee's salary reduction
contributions and provides investment choices for the employee. The matching
contributions under the 401(k) plan, which vest over a five-year employment
period, were $608 in 2000, $534 in 1999 and $466 in 1998.
EXECUTIVE RETIREMENT PLANS
The Company has a nonqualified Supplemental Executive Retirement Plan
(SERP) and a nonqualified Executive Deferred Compensation Plan (DEFCO) to
provide designated executives and professional employees with retirement, death
and disability benefits.
Annual benefits under the SERP are based on years of service and
individual compensation near retirement. The Company has purchased life
insurance contracts that may be used to fund the retirement benefits. The net
cash surrender value of the contracts as of July 1, 2000 and June 26, 1999 was
$4,849 and $3,834, respectively, and is included in other assets in the
accompanying consolidated balance sheets.
Under the DEFCO plan, the Company matches a portion of the designated
employees' contributions and provides a guaranteed investment return that is
adjusted annually. The Company's matching contributions under the DEFCO plan
were $327 in 2000, $265 in 1999 and $240 in 1998. The accumulated benefit
obligation of $7,622 as of July 1, 2000 and $6,423 as of June 26, 1999, is
included in other noncurrent liabilities in the accompanying consolidated
balance sheets. The Company has purchased investments, including stable income
and stock index managed funds, which may be used to fund the retirement
benefits. The investments had an aggregate market value of $7,648 as of July 1,
2000 and $6,439 as of June 26, 1999, and are included in other assets in the
accompanying consolidated balance sheets at these values.
F-11
The changes in benefit obligation and plan assets consisted of the
following for the years ended July 1, 2000 and June 26, 1999:
Supplemental Executive
Pension Plan Retirement Plan
2000 1999 2000 1999
------------------------------ ----------------------------
Change in benefit obligation:
Projected benefit obligation, beginning of year $18,464 $15,836 $5,092 $5,241
Service cost 1,753 1,312 177 258
Interest cost 1,373 1,137 377 377
Actuarial (gain) loss (362) 669 1,241 (663)
Benefits paid (537) (490) (193) (121)
------------------------------ ----------------------------
Projected benefit obligation, end of year $20,691 $18,464 $6,694 $5,092
============================== ============================
Change in plan assets:
Fair value of plan assets, beginning of year $23,386 $19,534 $ -- $ --
Actual return on plan assets 365 4,342 -- --
Employer contributions -- -- 193 121
Benefits paid (537) (490) (193) (121)
------------------------------ ----------------------------
Fair value of plan assets, end of year $23,214 $23,386 $ -- $ --
============================== ============================
Net cash surrender value of life insurance contracts $4,849 $3,834
============================
The funded status of the Company's plans were as follows as of July 1,
2000 and June 26, 1999:
Supplemental Executive
Pension Plan Retirement Plan
2000 1999 2000 1999
------------------------------ ----------------------------
Funded status $ 2,523 $ 4,922 $(6,694) $(5,092)
Unrecognized transition amount -- (133) -- --
Unrecognized actuarial (gain) loss (5,576) (7,064) 2,054 627
Unrecognized prior service cost 475 528 562 846
Intangible asset -- -- 562 (495)
------------------------------ ----------------------------
Accrued pension liability $(2,578) $(1,747) $(3,516) $(4,114)
============================== ============================
The following average assumptions were used to account for the plans
for the years ended July 1, 2000 and June 26, 1999:
Supplemental Executive
Pension Plan Retirement Plan
2000 1999 2000 1999
----------------------------- -----------------------------
Discount rate 7.75% 7.50% 7.75% 7.50%
Expected return on plan assets 7.50% 7.50% N/A N/A
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
The components of net periodic pension cost are as follows for the
years ended July 1, 2000, June 26, 1999 and June 27, 1998:
Supplemental Executive
Pension Plan Retirement Plan
2000 1999 1998 2000 1999 1998
------------------------------------- ---------------------------------
Service cost $ 1,753 $ 1,312 $ 1,287 $ 177 $ 258 $ 158
Interest cost 1,373 1,137 1,154 377 377 301
Expected return on assets (1,742) (1,454) (2,629) -- -- --
Net transition asset (133) (133) -- -- -- --
Prior service cost 53 53 -- 65 65 65
(Gain) loss (473) (321) 916 34 60 8
------------------------------------- ---------------------------------
Net periodic pension cost $ 831 $ 594 $ 728 $ 653 $ 760 $ 532
===================================== =================================
F-12
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in litigation arising in the ordinary
course of business, including being named, along with other defendants, as a
potentially responsible party at certain waste disposal sites where
groundwater contamination has been detected, or is suspected. In the opinion
of management, resolution of the litigation will not have a material effect
on the Company's results of operations or financial position.
LEASES
The Company has noncancellable operating lease commitments for
certain production and other equipment, vehicles, and delivery facilities
that expire on various dates through 2008. Minimum annual rental commitments
at July 1, 2000 for the fiscal years 2001 through 2005 and thereafter are
$6,145, $5,475, $3,901, $1,970, $1,678 and $1,596. In accordance with the
terms of certain lease agreements, the Company is required to pay real estate
taxes and maintenance costs. Total lease expense was $10,786 in 2000, $7,896
in 1999 and $6,798 in 1998.
8. 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 is as follows:
United
States Canada Elimination Total
- ----------------------------------------------------------------------------------------------------------------------
2000:
Revenues $504,234 $73,158 $ - $577,392
Income from operations 56,570 21,074 - 77,644
Interest income 3,601 64 (1,423) 2,242
Interest expense 16,130 1,995 (1,423) 16,702
Total assets 586,875 72,385 (64,308) 594,952
Capital expenditures 41,886 1,813 - 43,699
Depreciation and amortization
expense 34,352 4,379 - 38,731
Income tax expense 17,786 7,421 - 25,207
1999:
Revenues $457,462 $62,504 $ - $519,966
Income from operations 60,029 17,373 - 77,402
Interest income 2,283 45 (1,430) 898
Interest expense 16,164 2,479 (1,430) 17,213
Total assets 525,973 69,656 (54,197) 541,432
Capital expenditures 35,091 2,883 - 37,974
Depreciation and amortization
expense 31,903 4,076 - 35,979
Income tax expense 17,617 6,552 - 24,169
1998:
Revenues $441,421 $61,172 $ - $502,593
Income from operations 56,892 15,519 - 72,411
Interest income 2,960 36 (1,211) 1,785
Interest expense 20,916 2,143 (1,211) 21,848
Total assets 509,423 68,726 (46,307) 531,842
Capital expenditures 31,589 5,809 - 37,398
Depreciation and amortization
expense 31,552 4,041 - 35,593
Income tax expense 15,299 5,390 - 20,689
- ----------------------------------------------------------------------------------------------------------------------
F-13
9. SUBSEQUENT EVENT
Subsequent to July 1, 2000, the Company completed a $50,000, 8.40%
private placement debt transaction with certain institutional investors. The
10-year notes have a seven-year average life. According to the note purchase
agreement, an initial take-down of $20,000 was completed on July 20, 2000.
Two additional take-downs of $15,000 each will be made on or about September
15, 2000 and December 15, 2000. Each subsequent take-down will bear the same
coupon of 8.40%. The Company intends to use the net proceeds from the sale of
the notes to repay existing indebtedness under its term loan and revolving
credit facility and for general corporate expenses.
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F-14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO G&K SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of G&K
Services, Inc. (a Minnesota corporation) and Subsidiaries as of July 1, 2000
and June 26, 1999, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended July 1, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of G&K Services,
Inc. and Subsidiaries as of July 1, 2000 and June 26, 1999, and the results
of its operations and its cash flows for each of the three years in the
period ended July 1, 2000, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 1 to the financial statements, effective March
26, 2000, the Company adopted the new requirements of Statements of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities."
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 11, 2000
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F-15