-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hk3ETg0T2Jx/ytYC7kmXzoNHVqZtuEX0IgG3eK26LcE2TSNoeTVQmokEAJfoXWpF W3Xyn82RPhlNr/ANNwLZPg== 0001047469-98-039677.txt : 19981111 0001047469-98-039677.hdr.sgml : 19981111 ACCESSION NUMBER: 0001047469-98-039677 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: G&K SERVICES INC CENTRAL INDEX KEY: 0000039648 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410449530 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04063 FILM NUMBER: 98741171 BUSINESS ADDRESS: STREET 1: 505 WATERFORD PARK STREET 2: STE 455 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125467440 MAIL ADDRESS: STREET 1: 505 WATERFORD PARK STREET 2: STE 455 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST LINEN CO DATE OF NAME CHANGE: 19681227 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- F O R M 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 26, 1998 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
5995 OPUS PARKWAY, SUITE. 500 MINNETONKA, MINNESOTA 55343 (Address of principal executive offices and zip code) (612) 912-5500 (Registrant's telephone number, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS A Outstanding November 5, 1998 Common Stock, par value $.50 per share 19,020,035 CLASS B Outstanding November 5, 1998 Common Stock, par value $.50 per share 1,474,996
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS G & K SERVICES, INC. AND SUBSIDIARIES
September 26, 1998 June 27, ASSETS (In thousands, except share data) (Unaudited) 1998 - ---------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 17,316 $ 11,975 Accounts receivable, less allowance for doubtful accounts of $3,651 and $2,392 56,979 56,933 Inventories 78,106 77,210 Prepaid expenses 7,650 7,295 - ---------------------------------------------------------------------------------------------- Total current assets 160,051 153,413 - ---------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 25,726 25,801 Buildings and improvements 89,791 89,683 Machinery and equipment 166,608 154,048 Automobiles and trucks 36,665 36,531 Less accumulated depreciation (124,740) (118,378) - ---------------------------------------------------------------------------------------------- Total property, plant and equipment 194,050 187,685 - ---------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill, net 130,944 131,899 Restrictive covenants and customer lists, net 41,145 42,310 Other, principally retirement plan assets 13,000 16,535 - ---------------------------------------------------------------------------------------------- Total other assets 185,089 190,744 - ---------------------------------------------------------------------------------------------- $ 539,190 $ 531,842 - ---------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 23,832 $ 16,103 Accrued expenses Salaries and employee benefits 18,473 18,077 Other 18,731 17,849 Deferred income taxes 12,951 13,036 Current maturities of long-term debt 20,000 15,000 - ---------------------------------------------------------------------------------------------- Total current liabilities 93,987 80,065 LONG-TERM DEBT, LESS CURRENT MATURITIES 222,382 234,843 DEFERRED INCOME TAXES 9,188 9,483 OTHER NONCURRENT LIABILITIES 9,214 9,331 - ---------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,019,035 and 19,011,952 shares issued and outstanding 9,510 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 23,668 23,644 Retained earnings 182,991 174,660 Deferred compensation (1,851) (1,973) Accumulated other comprehensive income (10,637) (8,455) - ---------------------------------------------------------------------------------------------- Total stockholders' equity 204,419 198,120 - ---------------------------------------------------------------------------------------------- $ 539,190 $ 531,842 - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF INCOME G & K SERVICES, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED --------------------------------- SEPTEMBER 26, SEPTEMBER 27, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 - ------------------------------------------------------------------------------ REVENUES Rental operations $ 122,813 $ 114,728 Direct sales 3,310 3,698 - ------------------------------------------------------------------------------ Total revenues 126,123 118,426 - ------------------------------------------------------------------------------ EXPENSES Cost of rental operations 69,056 65,705 Cost of direct sales 2,222 2,677 Selling and administrative 27,336 24,896 Depreciation 6,559 5,860 Amortization of intangibles 2,143 2,473 - ------------------------------------------------------------------------------ Total operating expenses 107,316 101,611 - ------------------------------------------------------------------------------ INCOME FROM OPERATIONS 18,807 16,815 Interest expense 4,730 4,767 Other income, net (321) (209) - ------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 14,398 12,257 Provision for income taxes 5,708 4,812 - ------------------------------------------------------------------------------ NET INCOME $ 8,690 $ 7,445 - ------------------------------------------------------------------------------ Basic weighted average number of shares outstanding 20,390 20,366 BASIC EARNINGS PER COMMON SHARE $ 0.43 $ 0.37 - ------------------------------------------------------------------------------ Diluted weighted average number of shares outstanding 20,494 20,445 DILUTED EARNINGS PER COMMON SHARE $ 0.42 $ 0.36 - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS G & K SERVICES, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED --------------------------------- SEPTEMBER 26, SEPTEMBER 27, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 8,690 $ 7,445 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 8,703 8,333 Deferred income taxes (381) (37) Changes in current operating items- Inventories (878) (1,778) Accounts receivable and prepaid expenses (407) (8,995) Accounts payable and other current liabilities 9,918 10,858 Other, net (95) (630) - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 25,550 15,196 - ----------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment additions, net (12,464) (8,323) Business acquisitions (155) (279,738) Purchase of investments (159) (193) - ----------------------------------------------------------------------------------------------------- Net cash used for investing activities (12,778) (288,254) - ----------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from debt financing 1,982 355,843 Repayments on line of credit and other long-term debt, net (9,054) (86,000) Cash dividends paid (359) (358) Sale of common stock - 2 - ----------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (7,431) 269,487 - ----------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,341 (3,571) CASH AND CASH EQUIVALENTS: Beginning of year 11,975 6,986 - ----------------------------------------------------------------------------------------------------- End of year $ 17,316 $ 3,415 - ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for - Interest $ 4,261 $ 4,250 - ----------------------------------------------------------------------------------------------------- Income Taxes $ 6,032 $ 7,245 - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data.) Three month period ended September 26, 1998 and September 27, 1997 (Unaudited) The consolidated financial statements included herein, except for the June 27, 1998, balance sheet which was extracted from the audited financial statements of June 27, 1998, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 26, 1998, and June 27, 1998, and the results of operations and the changes in financial position for the three months ended September 26, 1998 and September 27, 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report. The results of operations for the three month period ended September 26, 1998, and September 27, 1997, are not necessarily indicative of the results to be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. NATURE OF BUSINESS G&K Services, Inc. (the Company) is a full service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of non-uniform items such as floormats, dustmops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniforms for rental customers as well as uniforms for direct sale. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated in consolidation. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company in the management of its interest rate exposure. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The related amounts payable to, or receivable from, the counter-parties are included in other accrued expenses. The fair value of the swap agreements is not recognized in the Consolidated Financial Statements, since they are accounted for as hedges. PER SHARE DATA In the second quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share," which is effective for interim periods ending after December 15, 1997. As a result, all prior period earnings per share data has been restated. The adoption of SFAS No. 128 did not have a significant 5 impact on previously reported earnings per share. 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.
THREE MONTHS ENDED ------------------------------ SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------------------------ Weighted average number of common shares outstanding 20,390 20,366 ------------------------------ Shares used in computation of basic earnings per share 20,390 20,366 Weighted average effect of non-vested restricted stock grants 63 42 Weighted average common shares issuable upon the exercise of stock options 41 37 ------------------------------ Shares used in computation of diluted earnings per share 20,494 20,445 ------------------------------ ------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," will be effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires disclosure of business and geographic segments in the consolidated financial statements of the Company. The Company will adopt SFAS No. 131 in fiscal 1999 and is currently analyzing the impact it will have on the disclosures in its financial statements. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the 1999 presentation. These reclassifications have no effect on net income or total stockholders' equity as previously reported. 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 6 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 the period ended September 27, 1997, earnings excluded from the Company's consolidated statement of income totaled $447, including allocated interest expense of $976. The pro forma results of operations for the periods ended September 26, 1998 and September 27, 1997 are not materially different from the actual results of operations. 3. COMPREHENSIVE INCOME In the first quarter of fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires the Company to report and display comprehensive income and its components. For the three month periods ended September 26, 1998 and September 27, 1997, the components of comprehensive income were as follows:
THREE MONTHS ENDED (IN THOUSANDS) ------------------------------ SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------------------------ Net income $ 8,690 $ 7,445 Other comprehensive income, net of tax Foreign currency translation adjustments (1,918) (355) Unrealized gain (loss) on investments held for sale (264) 285 ------------------------------ Comprehensive income $ 6,508 $ 7,375 ------------------------------
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the three month periods ended September 26, 1998 and September 27, 1997, and the percentage changes in these income and expense items between periods are contained in the following table:
PERCENTAGE OF NET SALES PERCENTAGE THREE MONTHS ENDED CHANGE ----------------------------------------------------------------------- FY Q1 1999 vs. FY September 26, 1998 September 27, 1997 Q1 1998 ----------------------------------------------------------------------- Revenues: Rental 97.4% 96.9% 7.0% Direct 2.6 3.1 (10.5) ---------------------------------------------- Total Revenues 100.0 100.0 6.5 Expenses: Cost of Rental Sales 56.2 57.3 5.1 Cost of Direct Sales 67.1 72.4 (17.0) ---------------------------------------------- Total Cost of Sales 56.5 57.7 4.3 Selling and Administrative 21.7 21.0 9.8 Depreciation 5.2 5.0 11.9 Amortization of Intangibles 1.7 2.1 (13.3) ---------------------------------------------- Income from Operations 14.9 14.2 11.8 Interest Expense 3.8 4.0 (0.8) Other (Income) Expense, net (0.3) (0.2) 53.6 ---------------------------------------------- Income Before Income Taxes 11.4 10.4 17.5 Provision for Income Taxes 4.5 4.1 18.6 ---------------------------------------------- Net Income 6.9% 6.3% 16.7 ---------------------------------------------- ----------------------------------------------
Total revenues for the first quarter of fiscal 1999 increased 6.5% to $126.1 million from $118.4 million in the first quarter of 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 these two transactions, total revenue growth for the first quarter of fiscal 1999 was 5.0%. Rental revenue growth for the first quarter accounted for $8.1 million, or a 7.0% increase. U.S. and Canadian rental revenues increased 5.9% (adjusted for the NLS asset purchase and the sale of industrial plants) and 2.1%, respectively. The growth in rental revenue, which is below historical growth 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 semi-conductor industry and an accelerated decline in the value of the Canadian dollar. Total direct sales to outside customers decreased 10.5% to $3.3 million for the first quarter of fiscal 1999 compared to $3.7 million in the same period of 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, as a percentage of direct sales, decreased to 67.1% from 72.4% in the same period of fiscal 1998. Cost of rental operations increased 5.1% to $69.1 million for the first quarter of fiscal 1999 from $65.7 million in the same period of fiscal 1998. As a percentage of rental revenues, these costs decreased to 56.2% for 8 the first quarter of fiscal 1999 from 57.3% in the same period of 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 9.8% to $27.3 million in the first quarter of fiscal 1999 from $24.9 million in the same period of fiscal 1998. As a percentage of revenues, selling and administrative expenses increased to 21.7% in the first quarter of fiscal 1999 from 21.0% in the same period of 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 solutions and other corporate initiatives. Depreciation expense increased 11.9% to $6.6 million in the first quarter of fiscal 1999 from $5.9 million in the same period of fiscal 1998. As a percentage of revenues, depreciation expense increased to 5.2% in the first quarter of fiscal 1999 from 5.0% in the same period of 1998. This increase is primarily the result of continued investment in locations acquired in fiscal 1998 and the construction of new locations. Capital expenditures, excluding acquisition of businesses, was $12.5 million in the first quarter of fiscal 1999 compared to $8.3 million in the prior year's quarter. Amortization expense decreased 13.3% to $2.1 million in the first quarter of fiscal 1999 from $2.5 million in the first quarter of fiscal 1998. This decrease is attributable to the sale of eleven linen and industrial facilities and the related intangible assets during the third and fourth quarters of fiscal 1998. Income from operations increased 11.8% to $18.8 million in the first quarter of fiscal 1999 from $16.8 million in the same period of fiscal 1998. Operating margins increased to 14.9% in fiscal 1999 from 14.2% in fiscal 1998. U.S. operating margins increased to 13.3% in fiscal 1999 from 12.7% in the same period of fiscal 1998. Interest expense was $4.7 million for the first quarter of fiscal 1999, down from $4.8 million in the same period of fiscal 1998. The Company's effective tax rate increased to 39.6% in the first quarter of fiscal 1999 from 39.3% in the same period of fiscal 1998. Net income rose 16.7% to $8.7 million in the first quarter of fiscal 1999 from $7.4 million in the same period of fiscal 1998. Basic and diluted earnings per share for the first quarter of fiscal 1999 were $.43 per share and $.42 per share, respectively, compared to $.37 and $.36, respectively, for the prior year quarter. Net income margins increased to 6.9% for the first quarter of fiscal 1999 compared with 6.3% in the first quarter of fiscal 1998. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities was $25.6 million in the first quarter of fiscal 1999 and $15.2 million in the same period of fiscal 1998. The fiscal 1999 increase resulted from increases in net income and accounts payable when compared to the first quarter of 1998, which included the impact of the NLS asset acquisition. Working capital at September 26, 1998 was $66.1 million, down 9.9% from $73.3 million at June 27, 1998. Cash used for financing activities was $7.4 million in the first quarter of fiscal 1999 and cash provided by financing activities was $269.5 million in the same period of fiscal 1998. $355.8 million of cash was obtained by issuing debt primarily for the acquisition of selected assets of NLS in the first quarter of fiscal 1998. The Company's ratio of debt to total capitalization decreased to 54.2% at the end of the first quarter of fiscal 1999 from 55.8% at June 27, 1998. Cash used in investing activities was $12.8 million in the first quarter of fiscal 1999 and $288.3 million in the first quarter of fiscal 1998. The decrease is primarily due to the acquisition of the NLS assets in the first quarter of fiscal 1998. 9 Stockholders' equity grew 3.2% to $204.4 million at September 26, 1998, compared with $198.1 million at the end of fiscal 1998. G&K's return on average equity remained at 4.3% for the first quarters of both fiscal 1999 and fiscal 1998. Management believes that cash flows generated from operations and its credit facilities should provide adequate funding for its current businesses and planned expansion of operations or any future acquisitions. YEAR 2000 COMPLIANCE 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 compliant, 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 millennium change. The Company has also had 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 is assessing the extent to which its operations are vulnerable should those suppliers not succeed to properly remedy their computer systems. The Company believes that its actions with key suppliers will minimize these 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. If needed modifications and conversions are not made on a timely basis, the year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations. The Company hopes to achieve these objectives by committing resources and leveraging previous investments in existing technologies. The Company has a documented process through which all IT and non-IT systems and assets are being 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 the recommended solution. - 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 will be completing year 2000 testing of this system by January 1, 1999. - Revenue recognition system - Renovation of this internally developed system is completed. Testing is in process and rollout will be completed by March 31, 1999. - Other IT software, hardware and communications - Other vendor software and G&K applications have been assessed and are currently being renovated and tested. Expected completion date is March 31, 1999, for all IT systems and assets, except for vendor supplied solutions, which have an anticipated completion date of July 1, 1999. - Non-IT plant and related equipment - The Company has completed the assessment phase. Anticipated completion date for all non-IT systems and assets is March 31, 1999. - Business processes and procedures - All process flows are being analyzed for risk with appropriate contingency plans put into place. The anticipated completion date is March 31, 1999. 10 - Third Parties - The Company's supply chain is being assessed to ensure all significant vendors will have the ability to meet the Company's needs. This assessment and contingency planning will be completed by December 31, 1998. Currently, no disclosures of non-compliant suppliers have been discovered. The Company will not be deferring any other significant IT projects to address the year 2000 issues. Because the year 2000 issue is of short duration, the Company has retained experts and advisors to evaluate year 2000 readiness; assist in analysis, renovation, and contingency planning; and complete independent testing when renovations are completed. The Company's core IT staff will continue to stay focused on the Company's business needs, as well as assist with year 2000 analysis and renovation. The Company is implementing solutions and began to incur expenses during fiscal 1998 to resolve the year 2000 issue. These expenses will continue through the 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 $2.6 million related to the year 2000 analysis; $1.7 million of these costs were capitalized. The Company has budgeted $7.3 million of total expenditures for the year 2000 compliance activities, of which $4.1 million will be capitalized, although there can be no assurance that year 2000 related expenditures will not be materially higher. 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 modify and test its systems for year 2000 compliance. 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 compliance success that key suppliers attain. Contingency plans are being developed and implemented where the level of risk has been determined to be unsatisfactory. The Company is using 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 non-uniform inventories - Stockpile of certain other inventories, soap, thread, etc. - Manual work-around for less critical computerized systems 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, this analysis is still in process. If non-compliant vendors are identified, the Company intends to develop 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 that the year 2000 matters discussed above will 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 swaps, to finance operations and to hedge interest rate exposures. The swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes, nor is it a party to any leveraged instrument. There has been 11 no material change in the Company's market risks associated with debt and interest rate swap obligations during the quarter ended September 26, 1998. 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. 12 PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits 10.1 1998 Stock Option and Compensation Plan (incorporated herein by reference to Exhibit A of the Registrant's definitive proxy statement for the 1998 Annual Meeting of Shareholders filed October 5, 1998) * 27 Financial Data Schedule (for SEC use only) * Compensatory plan or arrangement
b. Reports on Form 8-K. None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: November 10, 1998 /s/Timothy W. Kuck ----------------------------- Timothy W. Kuck Chief Financial Officer (Principal Financial Officer) /s/Michael F. Woodard ----------------------------- Michael F. Woodard Controller (Principal Accounting Officer) 14 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-26-1999 JUN-28-1998 SEP-26-1998 17,316 0 60,630 3,651 78,106 160,051 318,790 124,740 539,190 93,987 0 0 0 10,244 194,175 539,190 126,123 126,123 71,278 107,316 (321) 1,116 4,730 14,398 5,708 8,690 0 0 0 8,690 0.43 0.42
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