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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 June 26, 1999
- - ---------- 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
- - ----------------- --------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
5995 OPUS PARKWAY, STE. 500
MINNETONKA, MINNESOTA 55343
------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (612) 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. Yes X . No .
---- ---
The aggregate market value of the voting stock of registrant held
by non-affiliates of registrant, on September 10, 1999, computed by reference
to the closing sale price of such shares on such date, was approximately
$841,275,351.
On September 10, 1999, there were outstanding 19,043,915 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 28, 1999 Parts I and 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 uniform industry. The Company
rents uniforms (including cleanroom garments) to its customers and offers
uniforms and other related products for sale. The uniform rental business
also includes the rental of nonuniform 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.
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 operates from approximately 125
locations in 36 U.S. states and the Canadian provinces of Quebec and Ontario.
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 uniform 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 leasing 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's products are used in a diversified spectrum of businesses
including: heavy and light manufacturing, construction, pharmaceutical and
electronics manufacturers, transportation and distribution firms, health care
and food service operations, auto dealerships, equipment repair companies,
schools and office buildings.
The Company believes that uniform programs provide customers with a
number of benefits including:
- Identification - uniforms help identify employees as working for
a particular company or department.
- Image - uniforms enhance the public appearance of employees and
help create a more professional image for the customer.
- 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.
- Employee morale - uniforms can provide a valued benefit to
employees and help improve morale.
The Company provides its uniform-leasing 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.
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The Company also believes that uniform leasing may provide
customers with significant advantages over ownership. Leasing 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 lease items other than
uniforms, 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.
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 6,743 employees as of
June 26, 1999, consisting of 255 professional sales personnel, 1,269 route
personnel, 3,954 production employees, 624 clerical/staff employees and 641
management
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employees. 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 948 employees as
of June 26, 1999, consisting of 35 professional sales personnel, 157 route
personnel, 551 production employees, 106 clerical/staff employees and 99
management employees. Approximately 74% 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 cleans and supplies rental items principally from
forty-four industrial garment, cleanroom garment, dust control and linen
supply plants located in the following cities in the United States:
Building Building
City Square Footage City Square Footage
- - --------------------------------------------- ------------------- ------------------------------------------- ------------------
Albuquerque, New Mexico (two plants) 38,800 Memphis, Tennessee 35,400
10,300 Mesa, Arizona 36,000
Atlanta, Georgia (two plants) 40,000 Milwaukee, Wisconsin 44,220
52,000 Minneapolis, Minnesota (two plants) 70,000
Augusta, Georgia 42,500 93,000
Birmingham, Alabama 30,000 Mobile, Alabama 47,300
Chicago, Illinois 48,700 Monroe, North Carolina 40,700
Dallas, Texas 12,120 Montgomery, Alabama 23,400
Denver, Colorado (two plants) 56,200 New Orleans, Louisiana 29,000
17,630 Opa Locka, Florida 40,000
Fort Worth, Texas (two plants) 38,000 Phoenix, Arizona 55,000
70,700 Pittsburg, California 47,000
Fort Lauderdale, Florida 51,100 Portland, Oregon 16,200
Graham, North Carolina 115,000 Portsmouth, Virginia 36,320
Green Bay, Wisconsin 51,700 Rockford, Illinois 32,000
Houston, Texas 39,820 St. Cloud, Minnesota 45,400
Indianapolis, Indiana 45,400 Salt Lake City, Utah 41,500
Jonesboro, Arkansas 30,000 San Antonio, Texas 40,700
Kansas City, Missouri 44,220 San Jose, California 58,600
Lakeland, Florida 56,000 Seattle, Washington 45,400
Los Angeles, California 48,300 Tampa, Florida 45,400
Louisville, Kentucky 41,330 Tempe, Arizona 13,300
All of these facilities are owned by the Company except those in Albuquerque,
New Mexico (10,300 sq. ft.); Dallas, Texas; Denver, Colorado (17,630 sq.
ft.); Jonesboro, Arkansas; Lakeland, Florida; Portland, Oregon; Portsmouth,
Virginia; and Tempe, Arizona, which are leased.
The Company also operates principally from five plants located in
the following cities in Canada:
Building Building
City Square Footage City Square Footage
- - --------------------------------------------- ------------------- ------------------------------------------- ------------------
Toronto, Ontario (Metro East) 49,000 Windsor, Ontario 42,900
Montreal, Quebec 56,900 Sault Sainte Marie, Ontario 23,700
Cambridge, Ontario 57,600
All of these facilities are owned by the Company, except the Windsor
facility, which is leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than
routine litigation incidental to the business of the Company and as set forth
in Item 1. Business - Environmental Matters.
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 1999.
5
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 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
- - ------------------------------------------------------------
Fiscal 1998
1st Quarter 38 1/2 33
2nd Quarter 41 1/4 33 1/4
3rd Quarter 47 5/16 40
4th Quarter 44 3/16 36
- - ------------------------------------------------------------
As of September 10, 1999, the Company had approximately 600
registered stockholders.
The Company has declared cash dividends of $0.0175 per share in
each of the quarters for the fiscal years ended June 26, 1999 and June 27,
1998. 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.
1999 1998 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------
Revenues $519,966 $502,593 $350,914 $305,414 $262,481
Net Income 37,029 32,058 29,002 22,720 18,286
Per Share Data:
Basic earnings per share 1.81 1.57 1.43 1.12 0.90
Diluted earnings per share 1.81 1.57 1.42 1.11 0.90
Dividends per share 0.07 0.07 0.07 0.07 0.07
Total Assets 541,432 531,842 311,965 282,520 253,333
Long-Term Debt 193,952 234,843 54,284 75,143 76,519
Stockholders' Equity 235,633 198,120 168,987 140,976 118,529
- - --------------------------------------------------------------------------------------------------------------
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
In fiscal 1999, G&K, now the third largest competitor in the
estimated $5.5 billion uniform leasing industry, achieved 3.5% revenue
growth, a 15.5% increase in net income and realized a 17.1% 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.
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 18.2%,
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 20.1%,
compounded annually. The Company's investments in new technologies provide
increased productivity and reduced labor expenses. Better merchandise control
and lower processing costs are contributing to bottom-line growth, while
garment manufacturing facilities enhance product quality and decrease
merchandise costs.
The percentage relationships to net sales of certain income and
expense items for the three fiscal years ended June 26, 1999, June 27, 1998
and June 28, 1997, and the percentage changes in these income and expense
items between years are presented in the following table:
Percentage of Net Sales Percentage Change
Years Ended Between Years
------------------------------------------ -----------------------------
FY 1999 vs. FY 1998 vs.
Fiscal 1999 Fiscal 1998 Fiscal 1997 FY 1998 FY 1997
------------------------------------------ ------------------------------
Revenues 100.0% 100.0% 100.0% 3.5% 43.2%
Expenses:
Cost of rental and direct sales 56.8 58.6 55.9 0.3 50.2
Selling and administrative 21.4 19.9 22.9 11.1 24.8
Depreciation 5.3 5.3 5.6 4.0 33.6
Amortization of intangibles 1.6 1.8 0.6 (7.1) 314.7
-------------------------------------------
Income from operations 14.9 14.4 15.0 6.9 37.4
Interest expense 3.3 4.3 1.9 (21.2) 219.1
Other income, net (0.2) (0.4) (0.6) (53.8) 7.4
-------------------------------------------
Income before income taxes 11.8 10.5 13.7 16.0 10.1
Provision for income taxes 4.7 4.1 5.4 16.8 9.5
-------------------------------------------
Net income 7.1% 6.4% 8.3% 15.5% 10.5%
-------------------------------------------
-------------------------------------------
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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
eleven weeks of revenues from assets acquired from NLS on July 14, 1997,
including three industrial locations that were later sold in the fourth
quarter of fiscal 1998. Adjusting for 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. U.S. annual rental revenues increased 4.9% over comparable
revenues for the prior year and Canadian rental revenues in U.S. dollars
increased 3.9%. 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. U.S. operating margins increased to
13.1% in fiscal 1999 from 12.9% in fiscal 1998.
Interest expense was $17.2 million for fiscal 1999, down from $21.8
million in fiscal 1998. 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues for fiscal 1998 rose 43.2% to $502.6 million from
$350.9 million in fiscal 1997. Revenue attributable to the acquisition of
certain assets of NLS was $115.4 million, including $9.8 million from three
plants that were sold in May 1998. Excluding this acquisition and excluding
prior year Toronto Linen operations that were sold in fiscal 1997, the total
revenue growth was 11.3% for fiscal 1998.
Rental revenues rose $149.5 million in fiscal 1998, a 44.7%
increase over fiscal 1997. U.S. and Canadian annual rental revenues increased
11.7% and 10.5%, respectively, (excluding revenues from assets acquired from
NLS and revenues
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from Toronto Linen). The improvement is primarily attributed to steady
growth in the Company's traditional textile leasing operations as well as
national account and cleanroom sales. A 14.6% growth in Canadian rental
revenues in Canadian dollars was partially offset by unfavorable changes in
the currency exchange rates.
Total direct sales revenues increased 13.1% to $19.1 million for
fiscal 1998 from $16.9 million in fiscal 1997. This increase is largely
attributable to the success of seasonal promotions and increases in catalog
sales, partially offset by the Company's continuous shift toward greater
utilization of the Company's manufacturing operations for service to G&K
rental customers. Cost of direct sales increased 6.7% to $13.8 million in
fiscal 1998 from $12.9 million in fiscal 1997. As a percent of direct sales,
these costs improved to 72.2% compared to 76.5% in the prior year.
Cost of rental operations increased 53.3% to $280.7 million in
fiscal 1998 from $183.1 million in fiscal 1997. As a percent of rental
revenues, these costs increased to 58.0% for fiscal 1998 compared to 54.8% in
fiscal 1997. The Company attributes the increase primarily to merchandise and
production costs at new locations acquired from NLS early in the fiscal year.
Selling and administrative expenses increased 24.8% to $100.1
million in fiscal 1998 from $80.2 million in fiscal 1997. As a percentage of
total revenues, selling and administrative expenses decreased to 19.9% in
fiscal 1998 from 22.9% in fiscal 1997. The decline as a percent of revenue is
due to several factors, including lower selling expenses in the NLS acquired
locations and leveraging of corporate costs following the NLS transaction.
Depreciation expense increased 33.6% to $26.4 million in fiscal
1998 from $19.7 million in fiscal 1997. As a percentage of revenues,
depreciation expense decreased to 5.3% in fiscal 1998 from 5.6% in fiscal
1997. This decrease is caused by the maturing of start-up operations and
depreciation on acquired NLS assets based on fair market valuations. Capital
expenditures for fiscal 1998, excluding acquisition of businesses, was $37.4
million compared to $35.5 million in fiscal 1997. Amortization expense
increased to $9.2 million for fiscal 1998 from $2.2 million in fiscal 1997.
This increase is attributable to the acquisition of certain assets from NLS.
Income from operations increased 37.4% to $72.4 million in fiscal
1998 from $52.7 million in fiscal 1997. Operating margins declined slightly
to 14.4% in fiscal 1998 from 15.0% in fiscal 1997. U.S. operating margins
declined to 12.9% in fiscal 1998 from 13.9% in fiscal 1997, primarily due to
lower margins in the newly acquired locations and depreciation and
amortization related to the NLS acquisition, offset by leveraging of selling
and administrative costs. Operating income benefited from an improvement in
Canadian operating margins.
Interest expense was $21.8 million for fiscal 1998, up from $6.8
million in fiscal 1997. This was largely due to additional borrowings to
finance the acquisition of assets from NLS. The Company's effective tax rate
decreased slightly to 39.2% in fiscal 1998 from 39.5% in fiscal 1997.
Net income rose 10.5% to $32.1 million in fiscal 1998 from $29.0
million in fiscal 1997. Basic and diluted earnings per share for fiscal 1998
was $1.57 per share compared to basic and diluted earnings per share of $1.43
per share and $1.42 per share, respectively, in fiscal 1997. Net income
margins decreased to 6.4% for fiscal 1998 compared to 8.3% in fiscal 1997.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $59.4 million in fiscal
1999, $74.5 million in fiscal 1998 and $44.1 million in fiscal 1997. 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 June 26,
1999 was $73.2 million, down 0.2% from $73.3 million at June 27, 1998.
Cash used in investing activities was $36.8 million in fiscal 1999,
$236.4 million in fiscal 1998 and $37.9 million in fiscal 1997. The increase
in fiscal 1998 was due primarily to the acquisition of assets from NLS. In
fiscal 2000, capital expenditures are anticipated to be approximately $44
million to $48 million.
Financing activities used cash of $28.3 million in fiscal 1999,
provided $166.9 million of cash in fiscal 1998 and used $6.1 million in
fiscal 1997. The fiscal 1998 cash provided by financing activities was used
in the acquisition of selected assets of NLS. The total long-term debt,
including current maturity, decreased to $222.3 million at June 26, 1999 from
9
$249.8 million at June 27, 1998. The Company paid dividends of $1.4 million
in each of the fiscal years 1999, 1998 and 1997. The Company's ratio of debt
to total capitalization decreased to 48.5% at the end of fiscal 1999 from
55.8% at the end of fiscal 1998. The Company has a $125.0 million line of
credit and a $10.0 million discretionary credit facility, of which $13.2
million and $2.0 million, respectively, was outstanding at the end of fiscal
1999.
In connection with G&K's acquisition of selected assets of NLS in
July 1997, the Company entered into a new $425 million credit facility to
fund the purchase price of the assets and refinance existing indebtedness.
The unused portion of the revolver may be used for working capital and to
provide letters of credit. The credit facility, as amended on December 30,
1998, 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 June 26, 1999, the Company was in
compliance with all debt covenants. On March 18, 1999 the Company received a
full release of collateral based on the Company having met certain financial
covenants.
Stockholders' equity grew 18.9% to $235.6 million at June 26, 1999,
compared with $198.1 million at the end of fiscal 1998. G&K's return on
average equity decreased to 17.1% in fiscal 1999, compared with 17.5% and
18.7% for fiscal 1998 and fiscal 1997, 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 utilizes both information technology (IT) and non-IT
systems and assets throughout its U.S. and Canadian operations that will be
affected by the date change in the year 2000. The Company began an extensive
review of its business in January 1998 to determine whether or not its IT and
non-IT systems and assets were Year 2000 ready, as well as the remedial
action and related costs associated with required modifications or
replacements. The Company's goal is to ensure current business operations
will continue to function accurately with minimal disruption through the
year-end change. The Company is continuing discussions with its significant
suppliers to determine the readiness of those suppliers to correct Year 2000
issues where their systems and products interface with the Company's systems
or otherwise impact its operations. The Company has assessed the extent to
which its operations are vulnerable and has created contingency plans should
those suppliers not succeed to properly prepare their systems. The Company
believes these actions with key suppliers should minimize the risks. The
scope of the Year 2000 readiness effort includes (i) information technology
such as software and hardware, (ii) non-information systems or embedded
technology such as micro controllers contained in various equipment, safety
systems, facilities and utilities and (iii) readiness of key third-party
suppliers. The Company has committed resources and leveraged previous
investments in existing technologies in an effort to achieve these objectives.
The Company has a documented process through which all IT and
non-IT systems and assets have been reviewed with reference to Year 2000 date
issues. This methodology takes each system and asset through the following
lifecycle:
- Awareness - Educate employees about Year 2000 issues.
- Assessment - Conduct an inventory and impact analysis of the
business, operations and systems. Identify priorities and plan.
- Analysis - Analyze the asset(s) to determine the tasks,
resources and duration required to ensure compliance.
- Contingency planning - Identify alternative solutions to
maintain operational and financial results.
- Conversion - Renovation plan is finalized, approved and
implemented.
- Testing - Approved validation plans are implemented and testing
occurs.
- Rollout - Implementation plan is approved, and tested compliance
solution is fully implemented into production.
The Company's key systems and assets are as follows:
- Financial systems software - SAP financial systems were
implemented and operational as of June 28, 1998. The Company has
completed Year 2000 testing and believes the financial systems
are Year 2000 ready.
- Revenue recognition system - Renovation, testing and rollout of
this internally developed system are complete.
10
- Other IT software, hardware and communications - 90% of our
systems have been evaluated as Year 2000 ready; the remaining
systems await vendor solutions of updated software or hardware
and are scheduled for completion by September 30, 1999.
- Non-IT plant and related equipment - All production equipment
has been verified for Year 2000 readiness.
- Business processes and procedures - All process flows were
analyzed for risk with appropriate contingency plans created.
Ongoing monitoring throughout the remainder of the calendar year
will occur to ensure that contingency plans are implemented as
appropriate on a timely basis.
- Third parties - The Company's supply chain was assessed to
ensure that all significant vendors will have the ability to
meet the Company's needs. No disclosures of non-compliant
suppliers have been discovered. All appropriate contingency
plans are in place.
The Company did not defer any significant IT projects to address
the Year 2000 issues. Because the Year 2000 issue is of short duration, the
Company retained experts and advisors to evaluate Year 2000 readiness;
assist in analysis, renovation, and contingency planning; and conduct
independent testing when renovations were completed. The Company's core IT
staff focused on the Company's business needs, as well as assisted with Year
2000 analysis and renovation.
The Company is implementing proposed solutions and began to incur
expenses during fiscal 1998 to resolve the Year 2000 issue. These expenses
will continue through the fiscal year 2000. Maintenance or modification costs
are expensed as incurred, while costs of any new software and equipment are
being capitalized over the asset's useful life, consistent with the Company's
financial policies. The Company has spent approximately $4.2 million related
to the Year 2000 analysis; $2.0 million of these costs were capitalized. The
Company has a remaining budget of $2.6 million for expenditures, although
there can be no assurance that the Year 2000 related expenditures will not be
materially higher. Included in the remaining budget is $1.9 million of
computer equipment, which will be leased, and $0.6 million to be expensed as
period costs. The Company's current estimates of the amount of time and costs
necessary to modify and test its computer systems are based upon assumptions
regarding future events, including the continued availability of certain
resources, Year 2000 modification plans and other factors. New developments
may occur that could affect the Company's estimates of the amount of time and
costs necessary to implement its systems for Year 2000 readiness. These
developments include, but are not limited to, (i) the availability and cost
of personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the Year 2000 readiness
success that key suppliers attain.
Contingency plans have been developed for all areas of the
business. The Company used a weighted system to evaluate and determine this
level of risk in each of five areas: Operational, Facility Safety, Financial
Management, Legal Implication and Organizational Implication. Where
necessary, the Company is implementing various contingency plans that will
include, but are not limited to, the following:
- Secondary vendors for garments and other significant nonuniform
inventories
- Modifying inventory ordering practices during the year-end
transition
- Manual work-arounds for less critical computerized systems
- Staffing of management response teams during critical date
changes, such as the calendar year change on January 1, 2000
While the Company has exercised its best efforts to identify and
remedy any potential Year 2000 exposures within its control, the largest
risks are expected with utilities in the form of water and power which, to a
significant extent, are beyond the immediate control of the Company. To date,
the Company has not identified any suppliers who will not be Year 2000
compliant; however, the Company has developed appropriate contingency plans.
While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, the Year 2000 readiness of the Company's
suppliers and business partners may lag behind the Company's efforts.
Although the Company does not believe the Year 2000 matters discussed above
should have a material impact on its business, financial condition and
results of operations, it is uncertain as to what extent the Company may be
affected by such matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and
variable rate debt, as well as interest rate swaps, to finance operations and
to hedge interest rate exposures. The swap contracts are entered into for
periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. The Company does not enter into
contracts for speculative purposes, nor is it a party to any leveraged
instrument. The information below summarizes the Company's market risks
associated with debt and interest rate swap obligations as of June 26, 1999.
For debt obligations,
11
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
--------------------------------------------------------------------------
Fair
(In thousands) 2000 2001 2002 2003 2004 Total Value
- - -------------------------------------------------------------------------------------------------------------------
Long-Term Debt, variable rate $26,362 $41,425 $60,378 $45,192 $48,957 $222,314 $222,314
Average interest rate 6.44% 7.12% 7.41% 7.53% 7.67% 7.32% -
Interest Rate Swaps, variable to fixed $50,000 $100,000 - - - $150,000 $149,114
Average pay rate 6.22% 6.24% - - - - -
Average receive rate 5.87% 6.55% - - - - -
Statements in this document regarding ongoing trends and
expectations constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks, which may cause the Company's actual results
in the future to differ materially from expected results. These risks and
uncertainties include, but are not limited to, those expectations related to
the acquisition of assets from NLS; unforeseen operating risks; the
availability of capital to finance planned growth; competition within the
uniform leasing industry; and the effects of economic conditions.
(THIS SPACE INTENTIONALLY LEFT BLANK)
12
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 June 26, 1999 and June 27, 1998. All
amounts are in thousands, except per share data.
QUARTERLY FINANCIAL DATA
G&K Services, Inc. and Subsidiaries
FIRST SECOND THIRD FOURTH
- - -------------------------------------------------------------------------------------------------------
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 0.43 0.45 0.46 0.47
Dividends per Share 0.0175 0.0175 0.0175 0.0175
- - -------------------------------------------------------------------------------------------------------
1998
Revenues $118,426 $128,261 $127,471 $128,435
Gross Profit 50,044 52,756 52,365 52,975
Income from Operations 16,815 18,364 18,044 19,188
Net Income 7,445 7,787 7,971 8,855
Basic Earnings per Share 0.37 0.38 0.39 0.43
Diluted Earnings per Share 0.36 0.38 0.39 0.43
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)
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title Since
- - --------------------------------------------------------------------------------
Richard M. Fink 69 Chairman and Director 1968
Thomas Moberly 51 Chief Executive Officer, 1993
President and Director
Joseph L. Rotunda 52 Chief Operating Officer and 1998
Executive Vice President
Jeffrey L. Wright 37 Chief Financial Officer, 1999
Treasurer and Secretary
Martin S. Reader 43 Vice President of Corporate 1993
Development and Direct
Sales Division
Michael F. Woodard 42 Controller 1996
Bruce G. Allbright 70 Director 1985
Paul Baszucki 59 Director 1994
Wayne M. Fortun 50 Director 1994
Donald W. Goldfus 65 Director 1989
William Hope 66 Director 1973
Bernard Sweet 75 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.
JOSEPH L. ROTUNDA has served as Chief Operating Officer since December 1998.
Prior to joining the Company, Mr. Rotunda was Executive Vice President and
Chief Operating Officer of Thorn Americas.
JEFFREY L. WRIGHT has served as Chief Financial Officer, Treasurer and
Secretary since February 1999. Mr. Wright was Controller and Treasurer for
BMC Industries prior to joining the Company.
MARTIN S. READER was named Vice President of Corporate Development and Direct
Sales Division in 1999. He served as Vice President of Marketing since January
1997. From November 1993 to 1997, Mr. Reader served as Director of Marketing.
Prior to joining the Company, he was Vice President of Strategic Planning and
Business Development for Automatic Data Processing, 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. Mr. Allbright is a director of TCF
Financial, Inc. and F.A., Hannaford Brothers Company.
PAUL BASZUCKI has been a director of the Company since 1994. Chairman of the
Board of Directors of Norstan, Inc. since May 1997. Prior thereto, Mr. Baszucki
was Chief Executive Officer of Norstan, Inc. Mr. Baszucki is also a director 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. Mr. Fortun is also a director of Excelsior-Henderson Motorcycle
Manufacturing Company.
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.
14
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.
BERNARD SWEET has been a director of the Company since 1975. Retired since 1985,
formerly President and Chief Executive Officer of Republic Airlines, Inc. Mr.
Sweet is a director of US Foodservice.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
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 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information with respect to the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
(THIS SPACE INTENTIONALLY LEFT BLANK)
15
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
1999:
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) Employment Agreement between Registrant and Thomas Moberly,
dated February 20, 1990 (incorporated herein by reference to the
Registrant's Form 10-K filed, for the fiscal year ended July 3,
1993). **
10(f) 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(g) Employment Agreement between Registrant and Timothy W. Kuck
dated May 12, 1997 (incorporated herein by reference to the
Registrant's Form 10-K filed, for the fiscal year ended June 28,
1997). **
16
10(h) 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(i) Non-Competition and Confidentiality Agreement between
Registrant and Joseph L. Rotunda dated December 7, 1998 (incorporated
herein by reference to the Registrant's Form 10-Q filed May 11,
1999). **
10(j) 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).
10(k) 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(l) Form of Change of Control Agreement between Registrant and each
of Richard Fink, Thomas Moberly, Joseph L. Rotunda, Martin S. Reader,
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(m) Credit Agreement dated March 25, 1999 among G&K Services, Inc.
and Norwest Bank Minnesota, National Association. *
22 Subsidiaries of G&K Services, Inc. *
23 Consent of Independent Public Accountants *
24 Power of Attorney dated as of August 25, 1999 *
27 Financial Data Schedule (FOR SEC USE ONLY) *
Footnotes:
- - ----------
* Filed herewith
** Compensatory plan or arrangement
(THIS SPACE INTENTIONALLY LEFT BLANK)
17
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 23, 1999 G&K SERVICES, INC.
(Registrant)
By: /s/Thomas Moberly
----------------------------------------
Thomas Moberly, Chief Executive Officer
(Principal Executive Officer)
(THIS SPACE INTENTIONALLY LEFT BLANK)
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report on Form 10-K has been signed below on the 23rd day of
September 1999, by the following persons in the capacity indicated:
/s/ Richard M. Fink Chairman of the Board and Director
- - ---------------------------
Richard Fink
/s/ Thomas Moberly Chief Executive Officer, President and Director
- - --------------------------- (Principal Executive Officer)
Thomas Moberly
/s/ Jeffrey L. Wright Chief Financial Officer, Treasurer and Secretary
- - --------------------------- (Principal Financial Officer)
Jeffrey L. Wright
/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)
19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the Fiscal Years Ended
June 26, 1999, June 27, 1998 and June 28, 1997................................ F - 2
Consolidated Balance Sheets as of June 26, 1999 and June 27, 1998........................ F - 3
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 26, 1999, June 27, 1998 and June 28, 1997................................ F - 4
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the
Fiscal Years Ended June 26, 1999, June 27, 1998 and June 28, 1997............. 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
----------------------------------------------------------
June 26, June 27, June 28,
(In thousands, except per share data) 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
Revenues
Rental operations $503,062 $483,516 $334,042
Direct sales 16,904 19,077 16,872
- - ----------------------------------------------------------------------------------------------------------------------------
Total revenues 519,966 502,593 350,914
- - ----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Cost of rental operations 283,419 280,680 183,101
Cost of direct sales 11,938 13,773 12,908
Selling and administrative 111,228 100,136 80,235
Depreciation 27,410 26,365 19,734
Amortization of intangibles 8,569 9,228 2,225
- - ----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 442,564 430,182 298,203
- - ----------------------------------------------------------------------------------------------------------------------------
Income from Operations 77,402 72,411 52,711
Interest expense 17,213 21,848 6,846
Other income, net (1,009) (2,184) (2,034)
- - ----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 61,198 52,747 47,899
Provision for income taxes 24,169 20,689 18,897
- - ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 37,029 $ 32,058 $ 29,002
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding 20,414 20,380 20,323
Basic Earnings Per Common Share $ 1.81 $ 1.57 $ 1.43
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Diluted weighted average number of shares outstanding 20,509 20,454 20,426
Diluted Earnings Per Common Share $ 1.81 $ 1.57 $ 1.42
- - ----------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
June 26, June 27,
ASSETS (In thousands, except share data) 1999 1998
- - -----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 6,297 $ 11,975
Accounts receivable, less allowance for doubtful
accounts of $2,479 and $2,392 59,626 56,933
Inventories 83,892 77,210
Prepaid expenses 8,974 7,295
Prepaid income taxes 4,017 -
- - -----------------------------------------------------------------------------------------------------------------------
Total current assets 162,806 153,413
- - -----------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 26,038 25,801
Buildings and improvements 93,519 89,683
Machinery and equipment 181,968 154,048
Automobiles and trucks 39,447 36,531
Less accumulated depreciation (142,537) (118,378)
- - -----------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 198,435 187,685
- - -----------------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net 128,226 131,899
Restrictive covenants and customer lists, net 37,805 42,310
Other, principally retirement plan assets 14,160 16,535
- - -----------------------------------------------------------------------------------------------------------------------
Total other assets 180,191 190,744
- - -----------------------------------------------------------------------------------------------------------------------
$541,432 $531,842
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,456 $ 16,103
Accrued expenses
Salaries and employee benefits 18,309 18,077
Other 13,504 17,849
Deferred income taxes 14,007 13,036
Current maturities of long-term debt 28,362 15,000
- - -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 89,638 80,065
- - -----------------------------------------------------------------------------------------------------------------------
Long-Term Debt 193,952 234,843
Deferred Income Taxes 11,520 9,483
Other Noncurrent Liabilities 10,689 9,331
- - -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 6 and 7)
Stockholders' Equity
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,041,852
and 19,011,952 shares issued and outstanding 9,521 9,506
Class B, 10,000,000 shares authorized, 1,474,996
and 1,474,996 shares issued and outstanding 738 738
Additional paid-in capital 26,086 23,644
Retained earnings 210,253 174,660
Deferred compensation (2,601) (1,973)
Accumulated other comprehensive income (8,364) (8,455)
- - -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 235,633 198,120
- - -----------------------------------------------------------------------------------------------------------------------
$541,432 $531,842
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------
June 26, June 27, June 28,
(In thousands) 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $37,029 $32,058 $29,002
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 35,979 35,593 21,959
Deferred income taxes 3,008 2,747 (255)
Changes in current operating items,
exclusive of acquisitions -
Inventories (6,577) (4,778) (7,840)
Accounts receivable and prepaid expenses (8,043) (8,585) (5,648)
Accounts payable and other accrued expenses (5,055) 16,413 4,430
Other, net 3,105 1,004 2,444
- - --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,446 74,452 44,092
- - --------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property, plant and equipment additions, net (37,974) (37,398) (35,536)
Acquisition of business assets (155) (283,361) (3,679)
Cash generated from assets held for sale - 7,693 -
Net proceeds from sale of assets 2,074 77,107 1,102
(Purchases) sales of investments (770) (438) 207
- - --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (36,825) (236,397) (37,906)
- - --------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from debt financing 22,635 376,246 13,335
Repayments of debt financing (50,032) (208,132) (18,072)
Cash dividends paid (1,436) (1,434) (1,431)
Sale of common stock 534 254 86
- - --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (28,299) 166,934 (6,082)
- - --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (5,678) 4,989 104
Cash and Cash Equivalents:
Beginning of year 11,975 6,986 6,882
- - --------------------------------------------------------------------------------------------------------------------------------
End of year $ 6,297 $11,975 $ 6,986
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid for -
Interest $16,052 $22,395 $10,066
- - --------------------------------------------------------------------------------------------------------------------------------
Income taxes $27,403 $19,025 $17,094
- - --------------------------------------------------------------------------------------------------------------------------------
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
-------------------------------
Unrealized
Number Number Additional Gain on Cumulative
of of Paid-In Retained Deferred Investments, Translation Comprehensive
Shares Amount Shares Amount Capital Earnings Compensation Net Adjustment Income
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1996 18,916 $9,458 1,521 $761 $22,203 $116,465 $(2,445) $329 $(5,795)
- - --------------------------------------------------------------------------------------------------------------
Net income - - - - - 29,002 - - - $29,002
Cash dividend
$.07 per share - - - - - (1,431) - - - -
Stock issued for
employee benefit
plans 25 12 - - 481 - (299) - - -
B stock converted to
A stock 46 23 (46) (23) - - - - - -
Amortization
of deferred
compensation - - - - - - 715 - - -
Unrealized holding
gains arising
during the period,
net of tax - - - - - - - 264 - 264
Less:
reclassification
adjustment for
gains included in
net income, net
of tax - - - - - - - (287) - (287)
Translation
adjustment - - - - - - - - (446) (446)
--------
Comprehensive income - - - - - - - - - $28,533
- - ----------------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 18,987 9,493 1,475 738 22,684 144,036 (2,029) 306 (6,241) --------
- - ----------------------------------------------------------------------------------------------------------------
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 arising
during the period, - - - - - - - 507 - 507
net of tax
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) 457 (8,912) ---------
- - ----------------------------------------------------------------------------------------------------------------
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 arising
during the period, - - - - - - - 548 - 548
net of tax
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) $865 $(9,229) --------
- - ----------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------
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 June 26, 1999 and June 27, 1998 are as follows:
1999 1998
- - ---------------------------------------- ------------------------- --------------------
New goods $20,081 $18,834
Rental merchandise in service 63,811 58,376
- - ---------------------------------------- ------------------------- --------------------
$83,892 $77,210
- - ---------------------------------------- ------------------------- --------------------
- - ---------------------------------------- ------------------------- --------------------
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 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 $14,120 as of
June 26, 1999 and $11,420 as of June 27, 1998. Restrictive covenants and
acquired customer lists, stated at cost less accumulated amortization of
$13,217 and $8,208 as of June 26, 1999 and June 27, 1998, are being amortized
over the terms of the respective agreements and the estimated average life of
an account, respectively.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its interest rate exposure. Amounts to be paid or received
under interest rate swap agreements are accrued as interest rates change and
are recognized over the life of the swap agreements as an adjustment to
interest expense. The related amounts payable to, or receivable from, the
counterparties are included in other accrued expenses. The fair value of the
swap agreements is not recognized in the consolidated financial statements,
since they are accounted for as hedges.
F-6
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.
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
---------------------------------------------------------------------
June 26, June 27, June 28,
1999 1998 1997
------------------------- --------------------- ---------------------
Weighted average number of common shares
outstanding used in computation of basic
earnings per share 20,414,000 20,380,000 20,323,000
Weighted average effect of nonvested restricted
stock grants, exercise of options and other 95,000 74,000 103,000
------------------------- --------------------- ---------------------
Shares used in computation of diluted earnings
per share 20,509,000 20,454,000 20,426,000
------------------------- --------------------- ---------------------
------------------------- --------------------- ---------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," was adopted by the Company in the first
quarter of fiscal 1999. SFAS No. 130 requires the Company to report and
display comprehensive income and its components. Comprehensive income is
defined as changes in equity of a business enterprise during a period except
those resulting from investments by owners and distributions to owners. 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. Prior
years have been restated to conform to the requirements of SFAS No. 130. The
following table represents the changes in accumulated other comprehensive
income:
1999 1998 1997
------------- ------------- -------------
Accumulated other comprehensive income, beginning balance $(8,455) $(5,935) $(5,466)
Unrealized gain (loss) on investments 408 151 (23)
Cumulative translation adjustment (317) (2,671) (446)
------------- ------------- -------------
Accumulated other comprehensive income, ending balance $(8,364) $(8,455) $(5,935)
------------- ------------- -------------
------------- ------------- -------------
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), was also adopted
by the Company in fiscal 1999. SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use. The
adoption of SOP 98-1 did not have a material impact on its financial
condition or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance
F-7
sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The FASB has
delayed the effective date of this statement by one year with the issuance of
SFAS No. 137. The standard is now effective for fiscal years beginning after
June 15, 2000. The Company is in the process of quantifying the impact of
SFAS No. 133 on the consolidated financial statements.
2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS
On July 14, 1997, the Company purchased the uniform rental assets
and selected linen rental assets of National Linen Service (NLS) for
approximately $283,400 in cash. The acquisition was accounted for using the
purchase method and the purchase price was allocated to the acquired assets
and assumed liabilities based on the fair values of the assets purchased and
the liabilities assumed. The purchase price and related acquisition costs
exceeded the fair values assigned to tangible assets by approximately
$160,600, which was assigned to restrictive covenants ($1,100) to be
amortized over the contract life of five years, purchased customer list
($41,600) to be amortized over eleven years and goodwill ($117,900) to be
amortized over thirty-five years.
In connection with the asset purchase from NLS, nine linen rental
facilities purchased were identified as assets held for sale. The net cash
flows from (i) operations of these facilities from the date of acquisition
until the date of sale (holding period, not to exceed one year), (ii)
interest on incremental debt incurred during the holding period to finance
the purchase of these facilities, and (iii) proceeds from the sale were
considered in the allocation of the purchase price to the acquired assets and
liabilities. Accordingly, earnings or losses from these nine facilities have
been excluded from the consolidated statement of income. For fiscal 1998,
losses excluded from the Company's consolidated statement of income totaled
$659, including allocated interest expense of $3,538.
During fiscal 1998, the Company sold selected linen assets and
uniform rental assets for approximately $76,700 in cash. This sale included
assets classified as assets held for sale having a book value of
approximately $55,300 and other operating assets acquired from NLS having a
book value of approximately $21,000. Proceeds from the sale were used to
reduce the Company's outstanding bank debt. This transaction completed the
sale of eight of the nine linen facilities acquired from NLS that were held
for sale. During fiscal 1999, the Company sold selected linen assets for
approximately $2,100 in cash. This transaction completes the sale of the nine
linen facilities acquired from NLS that were held for sale.
The following unaudited pro forma condensed results of operations
for the years ended June 27, 1998 and June 28, 1997 have been prepared as if
the NLS transaction occurred on June 29, 1997 and June 30, 1996, respectively:
1998 1997
- - ------------------------------------------------------------- ----------------------- -----------------------
Revenues $ 507,767 $ 472,494
Income from operations 72,866 63,159
Net income 32,015 27,010
Basic earnings per common share $ 1.57 $ 1.33
Diluted earnings per common share $ 1.57 $ 1.32
This financial information does not purport to represent results
that would actually have been obtained if the asset acquisition had occurred
on June 30, 1996, or any future results which may in fact be realized.
F-8
3. LONG-TERM DEBT
Debt as of June 26, 1999 and June 27, 1998 includes the following:
1999 1998
- - ------------------------------------------------------------------------ ----------------- -----------------
Borrowings under term loan and revolving credit facility at
rates ranging from 5.50% to 6.74% at June 26, 1999 and
6.41% to 7.25% at June 27, 1998 $220,314 $249,843
Borrowings under discretionary credit facility at a
rate of 5.75% at June 26, 1999 2,000 --
- - ------------------------------------------------------------------------ ----------------- -----------------
222,314 249,843
Less current maturities (28,362) (15,000)
- - ------------------------------------------------------------------------ ----------------- -----------------
Total long-term debt $193,952 $234,843
- - ------------------------------------------------------------------------ ----------------- -----------------
- - ------------------------------------------------------------------------ ----------------- -----------------
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 for the five years subsequent to June 26, 1999 of $26,362,
$41,425, $45,192, $45,192, $48,957, and (ii) a $125,000 revolving credit
facility expiring on June 30, 2002. As of June 26, 1999, borrowings
outstanding under the term loan were $207,128, and borrowings under the
revolving credit facility were $13,186. 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 June 26, 1999 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 June 26, 1999 was 0.15%.
The Company also maintains a $10,000 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 June 26, 1999
bear interest at the Eurodollar Rate plus 0.65%.
On September 27, 1997, the Company entered into interest rate swap
agreements with certain lenders. The Company entered into an 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 6.24%.
The Company also entered into an agreement for the notional principal amount
of $50,000 through September 12, 1999, that effectively fixed the interest
rate on floating rate debt at a rate of 6.065%, unless the Eurodollar Rate
increases by more than 25 basis points within any one quarter, in which case
the Company retains the risk of any increase of rates over 25 basis points.
If these swap agreements were to be terminated as of June 26, 1999, the
Company would have incurred a loss on the contracts of $886.
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 June 26, 1999,
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 the current rates offered
to the Company for debt of the same remaining maturities, approximates
carrying value as of June 26, 1999 and June 27, 1998.
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
F-9
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; 1,775,467 and 1,459,493 awards were available for grant as of
June 26, 1999.
In August 1996, the Company adopted 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 initial adoption of the Plan or as of 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 initial 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 Company's
annual shareholder meeting.
The following schedule summarizes activity in the plans:
Stock Options
-------------------------------
Employee Directors' Restricted Grant
Plans Plan Stock Price
- - ---------------------------------------- --------------- --------------- --------------- -------------------
Outstanding at June 30, 1996 42,789 - 308,539 $7.17 - 25.75
Granted 29,330 15,000 20,566 30.33 - 37.00
Exercised (6,264) - - 11.17 - 16.50
Canceled (5,504) - (6,051) 11.17
- - ---------------------------------------- --------------- --------------- --------------- -------------------
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
- - ---------------------------------------- --------------- --------------- --------------- -------------------
- - ---------------------------------------- --------------- --------------- --------------- -------------------
Exercisable at June 26, 1999 15,716 15,000 - 16.00 - 41.88
- - ---------------------------------------- --------------- --------------- --------------- -------------------
- - ---------------------------------------- --------------- --------------- --------------- -------------------
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 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
- - ------------------------------------------ -----------------------------------------------------------------
1999 1998 1997
- - ------------------------------------------ --------------------- --------------------- ---------------------
Net income:
As reported $37,029 $32,058 $29,002
Pro forma 36,035 31,968 28,987
Basic net income per share:
As reported $1.81 $1.57 $1.43
Pro forma 1.77 1.57 1.43
Diluted net income per share:
As reported $1.81 $1.57 $1.42
Pro forma 1.76 1.56 1.42
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 1999, 1998 and
1997 was $17.38, $17.61 and $14.80, respectively. The weighted average
exercise price was $46.46, $41.88 and $33.53, respectively.
F-10
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 4.83% for
1999, 5.68% for 1998 and 6.42% for 1997; expected dividends of $.07 per
share; expected lives of seven years for 1999, 1998 and 1997; and expected
volatility of 23.90% for 1999 grants, 27.53% for 1998 grants and 28.13% for
1997 grants.
5. INCOME TAXES
The components of the provision for income taxes are as follows:
Fiscal Years
- - ------------------------------------------ -----------------------------------------------------------------
1999 1998 1997
- - ------------------------------------------ --------------------- --------------------- ---------------------
Current:
Federal $11,625 $11,261 $12,989
State and local 1,118 1,211 1,608
Foreign 8,418 5,470 4,555
- - ------------------------------------------ --------------------- --------------------- ---------------------
21,161 17,942 19,152
Deferred 3,008 2,747 (255)
- - ------------------------------------------ --------------------- --------------------- ---------------------
$24,169 $20,689 $18,897
- - ------------------------------------------ --------------------- --------------------- ---------------------
- - ------------------------------------------ --------------------- --------------------- ---------------------
The reconciliation between income taxes using the statutory federal
income tax rate and the recorded income tax provision is as follows:
Fiscal Years
- - ------------------------------------------ -----------------------------------------------------------------
1999 1998 1997
- - ------------------------------------------ --------------------- --------------------- ---------------------
Federal taxes at the statutory
rate $21,419 $18,462 $16,764
State taxes, net of federal
tax benefit 944 988 1,072
Foreign taxes 1,155 884 98
Permanent differences
and other, net 651 355 963
- - ------------------------------------------ --------------------- --------------------- ---------------------
Total provision $24,169 $20,689 $18,897
- - ------------------------------------------ --------------------- --------------------- ---------------------
- - ------------------------------------------ --------------------- --------------------- ---------------------
Effective rate 39.5% 39.2% 39.5%
- - ------------------------------------------ --------------------- --------------------- ---------------------
- - ------------------------------------------ --------------------- --------------------- ---------------------
Significant components of the Company's deferred tax assets and
deferred tax liabilities as of June 26, 1999 and June 27, 1998 are as follows:
1999 1998
- - ------------------------------------------------------------- ----------------------- -----------------------
Deferred tax liabilities:
Inventory amortization differences $(18,435) $(17,666)
Depreciation and property basis differences (9,920) (7,222)
Other (4,729) (5,735)
- - ------------------------------------------------------------- ----------------------- -----------------------
Total deferred tax liabilities (33,084) (30,623)
Deferred tax assets:
Accruals, reserves and other 7,557 8,104
- - ------------------------------------------------------------- ----------------------- -----------------------
Net deferred tax liability $(25,527) $(22,519)
- - ------------------------------------------------------------- ----------------------- -----------------------
- - ------------------------------------------------------------- ----------------------- -----------------------
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a noncontributory 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 $939 in 1999, $851 in 1998 and
$657 in
F-11
1997 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 seven-year employment
period, were $534 in 1999, $466 in 1998 and $394 in 1997.
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 June 26, 1999 and June 27, 1998
was $3,834 and $3,012, 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 $265 in 1999, $240 in 1998 and $216 in 1997. The
accumulated benefit obligation of $6,423 as of June 26, 1999 and $5,504 as of
June 27, 1998, 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 $6,439 as of June 26, 1999 and $5,492 as of June 27, 1998,
and are included in other assets in the accompanying consolidated balance
sheets at these values.
The change in benefit obligation and plan assets consisted of the
following for the years ended June 26, 1999 and June 27, 1998:
Supplemental Executive
Pension Plan Retirement Plan
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Change in benefit obligation:
Projected benefit obligation, beginning of year $15,836 $14,572 $5,241 $3,804
Service cost 1,312 1,287 258 158
Interest cost 1,137 1,154 377 301
Actuarial (gain) loss 669 (812) (663) 1,053
Benefits paid (490) (365) (121) (75)
--------------- --------------- --------------- ---------------
Projected benefit obligation, end of year $18,464 $15,836 $5,092 $5,241
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Change in plan assets:
Fair value of plan assets, beginning of year $19,534 $17,270 $ -- $ --
Actual return on plan assets 4,342 2,629 -- --
Employer contributions -- -- 121 75
Benefits paid (490) (365) (121) (75)
--------------- --------------- --------------- ---------------
Fair value of plan assets, end of year $23,386 $19,534 $ -- $ --
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
F-12
The funded status of the Company's plans were as follows as of June
26, 1999 and June 27, 1998:
Supplemental Executive
Pension Plan Retirement Plan
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Funded status $4,922 $3,699 $(5,092) $(5,241)
Unrecognized transition amount (133) (267) -- --
Unrecognized actuarial (gain) loss (7,064) (5,167) 627 1,569
Unrecognized prior service cost 528 582 846 692
Additional minimum liability -- -- -- 109
Intangible asset -- -- (495) (692)
--------------- --------------- --------------- ---------------
Accrued pension liability $(1,747) $(1,153) $(4,114) $(3,563)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
The following average assumptions were used to account for the
plans for the years ended June 26, 1999 and June 27, 1998:
Supplemental Executive
Pension Plan Retirement Plan
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Discount rate 7.50% 7.25% 7.50% 7.25%
Expected return on plan assets 7.50% 9.00% 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 June 26, 1999, June 27, 1998 and June 28, 1997:
Supplemental Executive
Pension Plan Retirement Plan
------------------------------------ -----------------------------------
1999 1998 1997 1999 1998 1997
----------- ------------ ----------- ----------- ----------- -----------
Service cost $ 1,312 $ 1,287 $ 1,117 $258 $158 $146
Interest cost 1,137 1,154 1,018 377 301 314
Expected return on assets (1,454) (2,629) (1,376) -- -- --
Net transition asset (133) -- (134) -- -- --
Prior service cost 53 -- 53 65 65 65
(Gain) loss (321) 916 (56) 60 8 39
----------- ----------- ------------ ------------ ----------- -----------
Net periodic pension cost $ 594 $ 728 $ 622 $760 $532 $564
----------- ----------- ------------ ------------ ----------- -----------
----------- ----------- ------------ ------------ ----------- -----------
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 and delivery facilities that expire on
various dates through 2006. Minimum annual rental commitments at June 26,
1999 for the fiscal years 2000 through 2004 and thereafter are $4,693,
$3,026, $2,583, $2,220, $900 and $1,162. In accordance with the terms of the
lease agreements, the Company is required to pay real estate taxes and
maintenance costs. Total lease expense was $6,744 in 1999, $5,900 in 1998 and
$4,234 in 1997.
8. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in fiscal year 1999. SFAS No. 131
established standards for disclosure of financial information related to
operating segments of the Company as well as disclosure requirements for
customer and geographic information. SFAS No. 131 defines an operating
segment as a component of a company for which operating results are reviewed
regularly by the chief operating decision-maker to determine resource
allocation and assess performance. The Company has two operating segments
under the guidelines of SFAS No. 131: United States and Canada. Each
operating segment derives
F-13
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
- - -------------------------------------------------------------------------------------------------------------------
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
1997:
Revenues $292,407 $58,507 $ - $350,914
Income from operations 40,592 12,119 - 52,711
Interest income 2,148 29 (1,581) 596
Interest expense 5,844 2,583 (1,581) 6,846
Total assets 285,501 67,449 (40,985) 311,965
Capital expenditures 33,732 1,804 - 35,536
Depreciation and amortization
expense 17,639 4,320 - 21,959
Income tax expense 14,509 4,388 - 18,897
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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 June 26, 1999
and June 27, 1998, 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 June 26, 1999. 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 generally accepted
auditing standards. 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 June 26, 1999 and June 27, 1998, and the results
of its operations and its cash flows for each of the three years in the
period ended June 26, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 13, 1999
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F-15