-----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, VbPY8Uq71zdtL7UZvx9XCSxMOak1wDLD8hO6tG+P7XeP3ODlAeCtuXaFHU/nhLaT HKs64EWcBQvnkDviJ6fSGQ== 0001047469-99-019154.txt : 19990512 0001047469-99-019154.hdr.sgml : 19990512 ACCESSION NUMBER: 0001047469-99-019154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990327 FILED AS OF DATE: 19990511 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: 99616403 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 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 March 27, 1999 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - -------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5995 OPUS PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55343 (Address of principal executive offices and zip code) (612) 912-5500 (Registrant's telephone number, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS A Outstanding May 6, 1999 Common Stock, par value $.50 per share 19,043,395 CLASS B Outstanding May 6, 1999 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
March 27, 1999 June 27, ASSETS (In thousands, except share data) (Unaudited) 1998 - ----------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 5,643 $ 11,975 Accounts receivable, less allowance for doubtful accounts of $3,335 and $2,392 59,954 56,933 Inventories 82,366 77,210 Prepaid expenses 6,163 7,295 - ----------------------------------------------------------------------------------------------------------------- Total current assets 154,126 153,413 - ----------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 25,844 25,801 Buildings and improvements 91,265 89,683 Machinery and equipment 177,442 154,048 Automobiles and trucks 38,246 36,531 Less accumulated depreciation (135,654) (118,378) - ----------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 197,143 187,685 - ----------------------------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill, net 128,242 131,899 Restrictive covenants and customer lists, net 38,893 42,310 Other, principally retirement plan assets 13,995 16,535 - ----------------------------------------------------------------------------------------------------------------- Total other assets 181,130 190,744 - ----------------------------------------------------------------------------------------------------------------- $ 532,399 $ 531,842 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 15,300 $ 16,103 Accrued expenses Salaries and employee benefits 18,802 18,077 Other 15,724 17,849 Deferred income taxes 12,948 13,036 Current maturities of long-term debt 30,000 15,000 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 92,774 80,065 LONG-TERM DEBT, LESS CURRENT MATURITIES 196,905 234,843 DEFERRED INCOME TAXES 9,308 9,483 OTHER NONCURRENT LIABILITIES 10,252 9,331 - ----------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,043,291 and 19,011,952 shares issued and outstanding 9,522 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 24,648 23,644 Retained earnings 200,930 174,660 Deferred compensation (2,495) (1,973) Accumulated other comprehensive income (10,183) (8,455) - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 223,160 198,120 - ----------------------------------------------------------------------------------------------------------------- $ 532,399 $ 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 (Unaudited)
For the Three Months Ended For the Nine Months Ended - ------------------------------------------------------------------------------------------------- March 27, March 28, March 27, March 28, (In thousands, except per share data) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------- REVENUES Rental operations $ 126,569 $ 123,015 $ 374,388 $ 360,309 Direct sales 4,578 4,456 12,746 13,849 - ------------------------------------------------------------------------------------------------- Total revenues 131,147 127,471 387,134 374,158 - ------------------------------------------------------------------------------------------------- EXPENSES Cost of rental operations 71,531 71,882 210,833 209,059 Cost of direct sales 3,256 3,224 8,830 9,934 Selling and administrative 28,037 25,145 83,144 75,530 Depreciation 7,010 6,871 20,051 19,308 Amortization of intangibles 2,142 2,305 6,424 7,104 - ------------------------------------------------------------------------------------------------- Total operating expenses 111,976 109,427 329,282 320,935 - ------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 19,171 18,044 57,852 53,223 Interest expense 4,180 5,418 13,201 16,299 Other income, net (581) (500) (521) (1,292) - ------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 15,572 13,126 45,172 38,216 Provision for income taxes 6,151 5,155 17,826 15,013 - ------------------------------------------------------------------------------------------------- NET INCOME $ 9,421 $ 7,971 $ 27,346 $ 23,203 - ------------------------------------------------------------------------------------------------- Basic Weighted Average Number of Shares Outstanding 20,412 20,367 20,407 20,367 BASIC EARNINGS PER COMMON SHARE $ 0.46 $ 0.39 $ 1.34 $ 1.14 - ------------------------------------------------------------------------------------------------- Diluted Weighted Average Number of Shares Outstanding 20,527 20,446 20,512 20,439 DILUTED EARNINGS PER COMMON SHARE $ 0.46 $ 0.39 $ 1.33 $ 1.14 - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS G & K SERVICES, INC. AND SUBSIDIARIES (Unaudited)
For the Three Months Ended For the Nine Months Ended --------------------------- ------------------------- March 27, March 28, March 27, March 28, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income $ 9,421 $ 7,971 $ 27,346 $ 23,203 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 9,152 9,176 26,475 26,412 Deferred income taxes 27 463 (263) (320) Changes in current operating items- Inventories (2,411) (74) (5,383) (4,687) Accounts receivable and prepaid expenses 1,620 9,789 (1,934) (6,067) Accounts payable and other current liabilities (4,671) (2,359) (1,707) 15,841 Other, net 317 410 1,421 6,532 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,455 25,376 45,955 60,914 - ---------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment additions, net (9,009) (11,065) (30,075) (28,996) Business acquisitions -- (1,285) (155) (281,842) Net proceeds from sale of assets 2,074 2,433 2,074 2,433 Sales/maturities of investments (208) 9 (567) (403) - ---------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (7,143) (9,908) (28,723) (308,808) - ---------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from debt financing 11,670 9,583 15,598 366,931 Repayments of debt financing (22,055) (25,479) (38,102) (115,893) Cash dividends paid (359) (359) (1,076) (1,075) Sale of common stock 12 98 16 100 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (10,732) (16,157) (23,564) 250,063 - ---------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,420) (689) (6,332) 2,169 CASH AND CASH EQUIVALENTS: Beginning of period 10,063 9,844 11,975 6,986 - ---------------------------------------------------------------------------------------------------------------------- End of period $ 5,643 $ 9,155 $ 5,643 $ 9,155 - ---------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for - Interest $ 3,985 $ 7,030 $ 12,315 $ 16,907 - ---------------------------------------------------------------------------------------------------------------------- Income taxes $ 5,175 $ 3,474 $ 20,883 $ 12,349 - ----------------------------------------------------------------------------------------------------------------------
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 and nine month periods ended March 27, 1999 and March 28, 1998 (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 G&K Services, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 27, 1999, and June 27, 1998, and the results of operations and the changes in financial position for the three and nine month periods ended March 27, 1999 and March 28, 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report. The results of operations for the three and nine month periods ended March 27, 1999, and March 28, 1998, are not necessarily indicative of the results to be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. NATURE OF BUSINESS G&K Services, Inc. is a full service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of 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 Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share was computed similar to the computation of basic earnings per share, except that the denominator is increased 5 for the assumed exercise of dilutive options and other dilutive securities (including nonvested restricted stock) using the treasury stock method.
Three Months Ended Nine Months Ended --------------------------------------------- March 27, March 28, March 27, March 28, 1999 1998 1999 1998 --------------------------------------------- Weighted average number of common shares outstanding 20,412 20,367 20,407 20,367 --------------------------------------------- Shares used in computation of basic earnings per share 20,412 20,367 20,407 20,367 Weighted average effect of non-vested restricted stock grants 39 48 37 41 Weighted average common shares issuable upon the exercise of stock options 76 31 68 31 --------------------------------------------- Shares used in computation of diluted earnings per share 20,527 20,446 20,512 20,439 ---------------------------------------------
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. DERIVATIVES SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," will be effective for fiscal years beginning after June 15, 1998. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company is in the process of quantifying the impact of SFAS No. 133 on the consolidated financial statements. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 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. 6 In connection with the asset purchase from NLS, nine of the purchased linen rental facilities 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 the three month period ended March 28, 1998, losses excluded from the Company's consolidated statement of income totaled $412, including allocated interest expense of $1,103. For the nine month period ended March 28, 1998, losses excluded from the Company's consolidated statement of income totaled $169, including allocated interest expense of $3,134. The pro forma results of operations for the three and nine month periods ended March 27, 1999 and March 28, 1998 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 and nine month periods ended March 27, 1999 and March 28, 1998, the components of comprehensive income were as follows:
Three Months Ended Nine Months Ended (In thousands) (In thousands) ------------------------------------------------ March 27, March 28, March 27, March 28, 1999 1998 1999 1998 ------------------------------------------------ Net income $ 9,421 $7,971 $ 27,346 $ 23,203 Other comprehensive income, net of tax Foreign currency translation adjustments 1,296 655 (1,986) (1,437) Unrealized gain (loss) on investments 55 129 258 93 held for sale ------------------------------------------------ Comprehensive income $10,772 $8,755 $ 25,618 $ 21,859 ------------------------------------------------
4. DEBT The Company maintains a $425,000 term loan and revolving credit facility. On December 30, 1998 the credit facility was amended to revise certain restricted covenants. Under the amended credit facility, the Company is required to maintain a minimum interest coverage ratio, minimum stockholders' equity and a maximum leverage ratio, all as defined. The credit facility also limits additional indebtedness, investments, capital expenditures and cash dividends. As of March 27, 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. 5. SALE OF ASSETS On March 27, 1999, the Company sold selected linen assets for approximately $2,100 in cash. These assets, including original purchase goodwill, had a book value of approximately $2,000. This transaction completes the sale of the nine linen facilities acquired from NLS that were held for sale. 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 and nine month periods ended March 27, 1999 and March 28, 1998, and the percentage changes in these income and expense items between periods are contained in the following table:
THREE MONTHS NINE MONTHS PERCENTAGE ENDED ENDED CHANGE ----------------------------------------------------- -------------------------------- Three Months Nine Months March 27, March 28, March 27, March 28, FY 1999 FY 1999 1999 1998 1999 1998 vs. FY 1998 vs. FY 1998 ----------------------------------------------------- -------------------------------- Revenues: Rental 96.5% 96.5% 96.7% 96.3% 2.9% 3.9% Direct 3.5 3.5 3.3 3.7 2.7 (8.0) ------------------------------------------------------ Total Revenues 100.0 100.0 100.0 100.0 2.9 3.5 Expenses: Cost of Rental Sales 56.5 58.4 56.3 58.0 (0.5) 0.8 Cost of Direct Sales 71.1 72.4 69.3 71.7 1.0 (11.1) ------------------------------------------------------ Total Cost of Sales 57.0 58.9 56.7 58.5 (0.4) 0.3 Selling and Administrative 21.4 19.7 21.5 20.2 11.5 10.1 Depreciation 5.3 5.4 5.2 5.2 2.0 3.8 Amortization of Intangibles 1.7 1.8 1.7 1.9 (7.1) (9.6) ------------------------------------------------------ Income from Operations 14.6 14.2 14.9 14.2 6.2 8.7 Interest Expense 3.2 4.3 3.4 4.3 (22.8) (19.0) Other (Income) Expense, net (0.5) (0.4) (0.2) (0.3) 16.2 (59.7) ------------------------------------------------------ Income Before Income Taxes 11.9 10.3 11.7 10.2 18.6 18.2 Provision for Income Taxes 4.7 4.0 4.6 4.0 19.3 18.7 ------------------------------------------------------ Net Income 7.2% 6.3% 7.1% 6.2% 18.2% 17.9% ------------------------------------------------------
Total revenues for the third quarter of fiscal 1999 increased 2.9% to $131.1 million from $127.5 million in the third quarter of fiscal 1998 and increased 3.5% to $387.1 million for the first nine months of fiscal 1999 from $374.2 million in the same period 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 third quarter of fiscal 1999 was 5.3% and 4.7% for the first nine months of fiscal 1999. Rental revenue growth for the third quarter accounted for $3.6 million, or a 2.9% increase and for the first nine months it accounted for $14.1 million, or a 3.9% increase. U.S. rental revenues increased 5.4% (adjusted for the timing of the NLS asset purchase and the sale of three industrial locations) and Canadian rental revenues in U.S. dollars increased 5.0% for the third quarter and increased 5.5% and 2.3% respectively, for the first nine months. 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 a decline in the value of the Canadian dollar. Total direct sales to outside customers increased 2.7% to $4.6 million for the third quarter of fiscal 1999 compared to $4.5 million in the same period of fiscal 1998 and decreased 8.0% to $12.7 million for the first nine months of fiscal 1999 from $13.8 million in the same period of fiscal 1998. This decrease is primarily the result of 8 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 71.1% for the third quarter of fiscal 1999 from 72.4% in the same period of fiscal 1998 and decreased to 69.3% for the first nine months of fiscal 1999 from 71.7% for the same period of fiscal 1998. Cost of rental operations decreased 0.5% to $71.5 million for the third quarter of fiscal 1999 from $71.9 million in the same period of fiscal 1998 and rose 0.8% to $210.8 million for the first nine months of fiscal 1999 from $209.1 million in the same period of fiscal 1998. As a percentage of rental revenues, these costs decreased to 56.5% for the third quarter of fiscal 1999 from 58.4% in the same period of fiscal 1998 and decreased to 56.3% for the first nine months of fiscal 1999 from 58.0% 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 11.5% to $28.0 million in the third quarter of fiscal 1999 from $25.1 million in the same period of fiscal 1998 and increased 10.1% to $83.1 million for the first nine months of fiscal 1999 from $75.5 million in the same period of fiscal 1998. As a percentage of revenues, selling and administrative expenses increased to 21.4% in the third quarter of fiscal 1999 from 19.7% in the same period of fiscal 1998 and increased to 21.5% in the nine month period of fiscal 1999 from 20.2% 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 readiness, additions to corporate senior management and other corporate initiatives. Depreciation expense increased 2.0% to $7.0 million in the third quarter of fiscal 1999 from $6.9 million in the same period of fiscal 1998 and increased 3.8% to $20.1 million for the first nine months of fiscal 1999 from $19.3 million in the same period of fiscal 1998. As a percentage of revenues, depreciation expense decreased to 5.3% in the third quarter of fiscal 1999 from 5.4% in the same period of fiscal 1998 and remained constant at 5.2% for the nine month period of fiscal 1999 compared to 5.2% for the same period in fiscal 1998. Capital expenditures, excluding acquisition of businesses, were $9.0 million in the third quarter of fiscal 1999 compared to $11.1 million in the prior year's quarter, and for the nine month period they were $30.1 million compared to $29.0 million in the prior year. Amortization expense decreased 7.1% to $2.1 million in the third quarter of fiscal 1999 from $2.3 million in the third quarter of fiscal 1998 and decreased 9.6% to $6.4 million in the first nine months of fiscal 1999 from $7.1 million in the same period of 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. Income from operations increased 6.2% to $19.2 million in the third quarter of fiscal 1999 from $18.0 million in the same period of fiscal 1998 and increased 8.7% to $57.9 million for the first nine months of fiscal 1999 from $53.2 million in the same period of fiscal 1998. Operating margins increased to 14.6% for the third quarter of fiscal 1999 from 14.2% in the same period of fiscal 1998 and increased to 14.9% for the nine month period of fiscal 1999 from 14.2% in the same period of fiscal 1998. U.S. operating margins increased to 12.8% for the third quarter of fiscal 1999 from 12.7% in the same period of fiscal 1998 and increased to 13.2% for the nine month period of fiscal 1999 from 12.7% in the same period of fiscal 1998. Interest expense was $4.2 million for the third quarter of fiscal 1999, down from $5.4 million in the same period of fiscal 1998 and was $13.2 million for the first nine months of fiscal 1999, down from $16.3 million in the same period of fiscal 1998. The Company's effective tax rate increased to 39.5% in the third quarter of fiscal 1999 from 39.3% in the same period of fiscal 1998 and it increased to 39.5% in the nine month period of fiscal 1999 from 39.3% in the same period of fiscal 1998. Net income rose 18.2% to $9.4 million in the third quarter of fiscal 1999 from $8.0 million in the same period of fiscal 1998 and rose 17.9% to $27.3 million in the first nine months of fiscal 1999 from $23.2 million in the first nine months of fiscal 1998. Basic and diluted earnings per share for the third quarter of fiscal 1999 were $.46 per share compared with $.39 for third quarter of fiscal 1998. Basic and diluted earnings per share for the first nine months of 1999 increased to $1.34 and $1.33 respectively from $1.14 for the first nine months of fiscal 1998. 9 Net income margins increased to 7.2% for the third quarter of fiscal 1999 compared with 6.3% in the third quarter of fiscal 1998 and increased to 7.1% for the nine month period of fiscal 1999 compared with 6.2% in the nine month period of fiscal 1998. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities was $13.5 million in the third quarter of fiscal 1999 and $25.4 million in the same period of fiscal 1998. Cash flow from operating activities was $46.0 million in the nine month period of fiscal 1999 and $60.9 million in the same period of fiscal 1998. The fiscal 1999 decrease resulted from increases in inventories and decreases in accounts payable, partially offset by increases in net income and decreases in accounts receivable when compared to the third quarter of 1998. Working capital at March 27, 1999 was $61.4 million, down 16.4% from $73.3 million at June 27, 1998. Cash used in investing activities was $7.1 million in the third quarter of fiscal 1999 and $9.9 million in the third quarter of fiscal 1998. Cash used in investing activities was $28.7 million in the nine month period of fiscal 1999 and $308.8 million in the same period of fiscal 1998. The decrease is primarily due to the acquisition of the NLS assets in the first quarter of fiscal 1998. Cash used for financing activities was $10.7 million in the third quarter of fiscal 1999 and $16.2 million in the same period of fiscal 1998. Cash used for financing activities was $23.6 million in the nine month period of fiscal 1999 and cash provided by financing activities was $250.1 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 50.4% at the end of the third quarter of fiscal 1999 from 55.8% at June 27, 1998. Stockholders' equity grew 12.6% to $223.2 million at March 27, 1999, compared with $198.1 million at the end of fiscal 1998. G&K's return on average equity increased to 13.0% in the nine month period of fiscal 1999 compared with 12.9% for the same period of fiscal 1998. 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. 10 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 and testing of this internally developed system are complete. Rollout to all locations will be completed by the end of May 1999. - Other IT software, hardware and communications - Eighty percent (80%) 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 contingency plans are implemented as appropriate on a timely basis. - Third parties - The Company's supply chain was assessed to ensure 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 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 conduct 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 proposed 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 $3.5 million related to the year 2000 analysis; $2.0 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 the 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 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 11 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 - 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 our fiscal year change on June 27, 1999 and 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 swaps, to finance operations and to hedge interest rate exposures. The swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes, nor is it a party to any leveraged instrument. There has been no material change in the Company's market risks associated with debt and interest rate swap obligations during the quarter ended March 27, 1999. Statements in this document regarding ongoing trends and expectations constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, but are not limited to, 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 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. * 10.2 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. 10.3 Non-Competition and Confidentiality Agreement between Registrant and Joseph L. Rotunda dated December 7, 1998. * 10.4 Non-Competition and Confidentiality Agreement between Registrant and Jeffrey L. Wright dated February 8, 1999. * 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: May 11, 1999 s/Jeffrey L. Wright ------------------ ------------------------------- Jeffrey L. Wright Chief Financial Officer (Principal Financial Officer) s/Michael F. Woodard ------------------------------- Michael F. Woodard Controller (Principal Accounting Officer) 14 EXHIBIT INDEX 10.1 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. * 17 10.2 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. 19 10.3 Non-Competition and Confidentiality Agreement between Registrant and Joseph L. Rotunda dated December 7, 1998. * 27 10.4 Non-Competition and Confidentiality Agreement between Registrant and Jeffrey L. Wright dated February 8, 1999. * 31 27 Financial Data Schedule (for SEC use only) *Compensatory plan or arrangement 15 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 FORM OF CHANGE OF CONTROL AGREEMENT Change of Control Agreement (the "Agreement") dated as of February 24, 1999, by and between _______________________________ (the "Executive") and G&K Services, Inc., a Minnesota corporation having a place of business at 5995 Opus Parkway, Suite 500, Minnetonka, Minnesota, 55343 (the "Company"). W I T N E S S E T H: WHEREAS, the Company has adopted each of the G&K Services, Inc. 1989 Stock Option and Compensation Plan (the "1989 Plan") and the G&K Services, Inc. 1998 Stock Option and Compensation Plan (the "1998 Plan" together with the 1989 Plan, the "Plans"); WHEREAS, Executive is eligible to receive a variety of economic incentives under either or both of the Plans, including stock options and awards of restricted stock (the "Incentives"); WHEREAS, each of the Plans provides that, unless the Board of Directors of the Company and a majority of the Continuing Directors determine otherwise (such a determination shall hereinafter be referred to as a "Non-Acceleration Determination"), upon the occurrence of a Change of Control (i) the restrictions on all shares of restricted stock awards granted under the Plan will lapse immediately; (ii) all outstanding options and stock appreciation rights granted under the Plan will become exercisable immediately; and (iii) all performance shares granted under the Plans will be deemed to be met and payment made immediately. WHEREAS, the parties hereto have determined that it is in their mutual interests for any and all Incentives now owned or hereafter acquired by Executive under the Plans, to accelerate immediately upon the occurrence of a Change of Control, notwithstanding any Non-Acceleration Determination; NOW, THEREFORE, it is agreed as follows: 1. PLAN TERMS. The terms and conditions of each of the Plans are hereby incorporated by reference as if set forth in full. With the exception of Section 2 hereof, in the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of either of the Plans, the provisions of the Plans shall govern and control. All capitalized terms not defined herein shall have the meaning set forth in the Plans. 2. ACCELERATION OF INCENTIVES. Upon the occurrence of a Change of Control, and regardless of any Non-Acceleration Determination made in connection therewith, the following shall nonetheless occur with respect to any and all Incentives owned by Optionee at the time of such Change of Control: (a) The restrictions on all shares of restricted stock awards shall lapse immediately; (b) All outstanding options and stock appreciation rights shall become exercisable immediately; and (c) All performance shares shall be deemed to be met and payment made immediately. 3. THIRD PARTY BENEFICIARIES. Nothing contained herein is intended or shall be construed as conferring upon or giving to any person, firm or corporation other than the parties hereto any rights or benefits under or by reason of this Agreement. 4. ENTIRE AGREEMENT. This Agreement embodies the entire agreement made between the parties hereto with respect to the matters covered herein and shall not be modified except by a writing signed by the party to be charged. 5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 16 6. GOVERNING LAW. This Agreement, in its interpretation and effect, shall be governed by the laws of the State of Minnesota applicable to contracts executed and to be performed therein. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. EXECUTIVE G&K SERVICES, INC. s/Executive s/Thomas Moberly - ----------------------- -------------------------------------- Executive Thomas Moberly President and Chief Executive Officer 17 EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment is made as of the 30th day of December, 1998, by and among G&K SERVICES, INC., a Minnesota corporation ("G&K Inc.") and WORK WEAR CORPORATION OF CANADA LTD., an Ontario corporation ("Work Wear;" G&K Inc. and Work Wear sometimes individually referred to as a "Borrower" and collectively referred to as the "Borrowers"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest;" and, in its separate capacity as administrative agent for certain Banks (defined below), the "US Agent"), NBD BANK, a bank chartered under the laws of the State of Michigan ("NBD"), FIRST CHICAGO NBD BANK, CANADA, a bank chartered under the laws of Canada ("FCNBD," and, in its separate capacity as administrative agent for certain Banks, the "Canadian Agent") and each of the Banks appearing on the signature pages hereof (collectively the "Banks" and individually each a "Bank"). RECITALS The Borrowers, Norwest, NBD and FCNBD entered into a Credit Agreement dated as of July 14, 1997, (the "Credit Agreement") and the Banks (other than Norwest, NBD and FCNBD) were added as additional "Banks" thereunder pursuant to Assignment Certificates executed thereafter, under which the Banks agreed to make certain revolving credit and term loans available to the Borrowers. The Banks have agreed to make certain amendments to the Credit Agreement, as requested by the Borrowers. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this First Amendment which are defined in the Credit Agreement shall have the same meanings specified therein, unless otherwise defined herein. 2. AMENDED DEFINITIONS. SECTION 1.1 of the Credit Agreement is hereby amended by deleting the definition "Debt Service Coverage Ratio" as it appears therein and by adding, or amending and restating in their entirety, as the case may be, the following definitions: "First Amendment" means the First Amendment to Credit Agreement dated as of December 30, 1998. "Interest Coverage Ratio" of the G&K Group means, with respect to the applicable Covenant Computation Period, the ratio of (a) the G&K Group's Pre-Tax Earnings PLUS Interest Expense to (b) the G&K Group's Interest Expense. "Permitted Business Acquisition" means the acquisition by a G&K Enterprise of (a) not less than fifty-one percent (51%) (in the aggregate) of those classes of securities having ordinary voting power in the acquired Person; provided that the Person acquired is immediately merged into the acquiring G&K Enterprise or becomes a Guarantor hereunder by executing and delivering to the Agent a Guaranty or (b) assets owned by another Person, provided such assets constitute an operating business unit, and, in the case of either (a) or (b) above, the aggregate consideration paid by such G&K Enterprise, in connection with such acquisition, does not exceed $75,000,000. 18 3. COMMITMENT TO ISSUE LETTERS OF CREDIT. SECTION 2.7 of the Credit Agreement is amended by adding the word "Revolving" immediately before the word "Commitment" as it appears in the second line of such Section 2.7. 4. ADJUSTMENT OF MARGINS. The period appearing at the end of SECTION 4.3 of the Credit Agreement is hereby deleted and is replaced with "; and" and new SUBSECTIONS (f) and (g) are hereby added to such SECTION 4.3 which read as follows: "(f) subject to SUBSECTION (g) below, in the event the audited financial statements of the G&K Group delivered under SECTION 7.1(a) result in calculation of different Margins than the Margins calculated upon delivery of the quarterly certificate under SECTION 7.1(b) for the fiscal year then ended, the Margins calculated in reliance on the audited financial statements of the G&K Group shall control and the Margins calculated in reliance thereon shall be effective retroactive to the date of any adjustment of Margins made in reliance upon such quarterly certificate and appropriate payments will be made by (or to) the Borrowers to account for such adjustments; and" "(g) in the event audited financial statements of the G&K Group delivered under SECTION 7.1(a) or the quarterly certificate delivered under SECTION 7.1(b) are restated retroactively as a result of a pooling of interests accounting treatment utilized by a G&K Enterprise in connection with a Permitted Business Acquisition, the Margins calculated in reliance on such audited financial statements or quarterly certificates previously delivered shall not be adjusted retroactively as a result of such restatement." 5. REPORTING REQUIREMENTS. SECTION 7.1(d) of the Credit Agreement is hereby amended by deleting each reference to "month" as it appears therein, and inserting in place thereof the phrase "fiscal quarter". 6. MINIMUM EBITDA. SECTION 7.8 of the Credit Agreement is hereby deleted in its entirety. 7. DEBT SERVICE COVERAGE RATIO. The obligation of the G&K Group to comply with the Debt Service Coverage Ratio as set forth and described in SECTION 7.9 of the Credit Agreement is hereby eliminated. 8. MINIMUM INTEREST COVERAGE RATIO. SECTION 7.9 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.9 MINIMUM INTEREST COVERAGE RATIO. As of each Covenant Computation Date, the G&K Group (on a consolidated basis) will maintain its Interest Coverage Ratio as of each Covenant Computation Date at not less than the ratio set forth opposite such date below:
MINIMUM COVENANT COMPUTATION DATE INTEREST COVERAGE RATIO December 26, 1998 2.75 to 1.00 March 27, 1999 2.75 to 1.00 June 26, 1999 2.75 to 1.00 September 25, 1999 and thereafter 3.00 to 1.00"
9. MAXIMUM LEVERAGE RATIO. SECTION 7.11 of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 7.11 MAXIMUM LEVERAGE RATIO. As of each Covenant Computation Date, the G&K Group (on a consolidated basis) will maintain its Leverage Ratio at not more than 3.00 to 1.00; PROVIDED that in computing EBITDA for purposes of this SECTION 7.11, EBITDA of the G&K Group shall be adjusted, on a pro forma basis, to include for the applicable Covenant Computation Period any historical EBITDA attributable to a Person or assets acquired by a G&K Enterprise as a Permitted Business Acquisition during such Covenant Computation Period." 19 10. INDEBTEDNESS. SECTION 8.2(d) of the Credit Agreement is hereby amended in its entirety to read as follows: "(d) other unsecured indebtedness not permitted in this SECTION 8.2 not to exceed $150,000,000 in the aggregate at any time outstanding for the entire G&K Group;" 11. INVESTMENTS. SECTION 8.4(h) of the Credit Agreement is hereby amended in its entirety to read as follows: "(h) investments (i) to purchase assets, stock or other securities of, or to make any investment or acquire any interest whatsoever in, any other Person, not to exceed five percent (5%) of the book value (as reported in the recently delivered quarterly report) of all assets of the G&K Group in the aggregate during any fiscal year of the G&K Group and (ii) to make Permitted Business Acquisitions; PROVIDED, that (A) the aggregate of all such investments made in reliance on this SECTION 8.4(h) during any fiscal year of the G&K Group shall not exceed $100,000,000 and (B) after giving effect to any investment made in reliance on this SECTION 8.4(h), the aggregate unfunded availability under the Revolving Commitments is not less than $25,000,000; and" 12. RENTAL PAYMENTS. SECTION 8.13 of the Credit Agreement is hereby amended by deleting the number "$7,000,000" as it appears therein and inserting in place thereof the number "$15,000,000." 13. EVENTS OF DEFAULT. SECTIONS 9.1(i) AND (j) of the Credit Agreement are hereby amended by adding the phrase "or Guarantor" after each reference to "Borrower" as it appears therein. 14. AMENDMENT FEE. To induce the Banks to enter into this First Amendment, the Borrowers hereby agree to pay to the US Agent, for the account of such Banks entitled thereto, a non-refundable fee of $2,500 for each Bank executing this First Amendment with Commitments equal to or less than $15,000,000 in the aggregate and $4,000 for each Bank executing this First Amendment with Commitments greater than $15,000,000 in the aggregate, payable on December 29, 1998. 15. CONDITIONS PRECEDENT. This First Amendment shall become effective on the business day on which the US Agent shall have received the following, each in form and substance satisfactory to the US Agent: (a) This First Amendment, duly executed on behalf of each Borrower, each Agent and not less than the Required Banks. (b) An opinion of the Borrowers' counsel as to the due authorization, execution, delivery and enforceability of this First Amendment by Borrowers. (c) An Acknowledgment and Agreement of Guarantors, duly executed by each Guarantor. (d) Evidence satisfactory to the US Agent of payment by the Borrowers of all fees contemplated in paragraph 14 above. 16. REPRESENTATIONS AND WARRANTIES. To induce the Banks to enter into this First Amendment, the Borrowers hereby represent and warrant to the Banks as follows: (a) Each Borrower has all requisite power and authority to execute this First Amendment and to perform all of its obligations hereunder. (b) The execution, delivery and performance by each Borrower of this First Amendment has been duly authorized by all necessary corporate action and does not (i) require any authorization, consent or approval by any governmental department, commissions, board, bureau, agency or instrumentality, domestic or foreign (ii) violate (A) any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to such Borrower or (B) the articles of 20 incorporation or by-laws of such Borrower, or (ii) result in the breach or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Borrower is a party or by which it or its properties may be bound or affected. (c) The representations and warranties contained in ARTICLE VI of the Credit Agreement are true and correct as of the date hereof as though made on and as of this date, except to the extent that such representations and warranties relate solely to an earlier date. (d) No event has occurred and is continuing which constitutes a Default or an Event of Default under the Credit Agreement. 17. NO WAIVER. The execution of this First Amendment shall not be deemed to be a waiver of any Default or Event of Default or breach, default or event of default under any other Loan Document, whether or not known to any Agent or Bank and whether or not existing on the date of this First Amendment. 18. COSTS AND EXPENSES. Each Borrower hereby reaffirms its agreement under SECTION 11.4 of the Credit Agreement to pay or reimburse the Agents, among other costs and expenses, all expenses incurred by the Agents in connection with the negotiation, preparation and execution of this First Amendment, including without limitation, all reasonable fees and disbursements of legal counsel to the Agents. 19. REFERENCES. Except as expressly amended hereby, all provisions of the Loan Documents shall remain in full force and effect. After the effective date hereof, each reference appearing in any Loan Document or any other document executed in connection with the Credit Agreement to the "Credit Agreement" or to "this Agreement", "hereunder" or "hereof" or words of like import referring to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 20. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one in the same instrument. So long as this First Amendment has been executed by the Required Banks, it shall become effective notwithstanding that it has not been executed by all Banks. [SIGNATURE PAGES FOLLOW] 21 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. G&K SERVICES, INC. By s/Timothy W. Kuck ----------------------------- Its CFO --------------------------- WORK WEAR CORPORATION OF CANADA LTD. By s/Timothy W. Kuck ----------------------------- Its CFO --------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as US Agent By s/Michael J. McGroarty ----------------------------- Its Vice President --------------------------- FIRST CHICAGO NBD BANK, CANADA, as Canadian Agent By s/Gary C. Wilson ----------------------------- Its First Vice President --------------------------- AMSOUTH BANK By ----------------------------- Its --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By s/R. Guy Stapelton ----------------------------- Its Managing Director --------------------------- BANQUE PARIBAS By s/Karen E. Coons ----------------------------- Its Vice President --------------------------- 22 THE BANK OF TOKYO-MITSUBISHI, LTD. By ----------------------------- Its --------------------------- COMERICA BANK By s/Timothy H. O'Rourke ----------------------------- Its Vice Predsident --------------------------- CORESTATES BANK, N.A. By s/David C. Hauglid ----------------------------- Its Vice President --------------------------- CAISSE NATIONALE DE CREDIT AGRICOLE By ----------------------------- Its --------------------------- DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, NEW YORK BRANCH By s/Linda J. O'Connell ----------------------------- Its Vice President --------------------------- FIRST AMERICAN NATIONAL BANK By s/ Illegible ----------------------------- Its Bank Officer --------------------------- FIRST UNION NATIONAL BANK By s/David C. Hauglid ----------------------------- Its Vice President --------------------------- 23 FLEET NATIONAL BANK By ----------------------------- Its --------------------------- HARRIS TRUST AND SAVINGS BANK By s/Illegible ----------------------------- Its Vice President --------------------------- HIBERNIA NATIONAL BANK By s/Illegible ----------------------------- Its Portfolio Manager --------------------------- THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By s/Armund J. Schoen, Jr. ----------------------------- Its Senior Vice President --------------------------- M&I MARSHALL AND ILSLEY BANK By s/Illegible ----------------------------- Its Assistant Vice President --------------------------- THE MITSUBISHI TRUST AND BANKING CORPORATION By ----------------------------- Its --------------------------- NATIONAL CITY BANK By s/Diego Tobon ----------------------------- Its Vice President --------------------------- 24 NBD BANK By s/Marguerite C. Gordy ----------------------------- Its Vice President --------------------------- REGIONS BANK By s/James E. Schmalz ----------------------------- Its Vice President --------------------------- THE SANWA BANK, LIMITED By s/Gordon R. Holtby ----------------------------- Its Vice President & Manager --------------------------- SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION By s/Illegible ----------------------------- Its Vice President --------------------------- WACHOVIA BANK, N.A. By s/Illegible ----------------------------- Its Vice President --------------------------- 25 EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 NON-COMPETITION AND CONFIDENTIALITY AGREEMENT THIS AGREEMENT, made and executed as of the 7th day of December , 1998, by and between G&K SERVICES, INC. , a Minnesota corporation (hereinafter referred to as "Employer"). and Joseph L. Rotunda (hereinafter referred to as "Employee"), WITNESSETH: WHEREAS, Employer is a member of a group of affiliated corporations which includes G&K Services, Inc., a Minnesota corporation, and all its subsidiaries whether now existing or hereafter formed or acquired, which group is hereinafter referred to as the "G&K Group"; WHEREAS, Employee either [cross out (a) or (b) as applicable]: (a) desires to enter the employ of Employer, and may hereafter be employed from time-to-time by other members of the G&K Group; or Chief Operating Officer ---------------------------------- (Position) (b) is and has for some time been a valuable and a key employee of one or more members of the G&K Group; and Employer desires to increase the Employee's compensation, employee fringe benefits, level of responsibility and authority or otherwise improve the terms of Employee's employment in the following manner [fill in changed employment arrangements]: -------------------------------------------------------------------- -------------------------------------------------------------------- which change in employment terms shall be hereinafter referred to as the Employee's "Increased Benefits"; WHEREAS, Employer and Employee have mutually rescinded and cancelled all prior agreements between them with respect to Employee's employment, except those agreements applicable to all employees similarly situated with Employee; and WHEREAS, Employer desires to assure Employee's dedication by rewarding faithful and important contributions to Employer's business, and that of the G&K Group as a whole, and to preserve the value of such contributions by securing from Employee reasonable restriction against certain competitive activities; NOW, THEREFORE, in consideration of the foregoing, the mutual promises set forth in this Agreement and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Employee agree as follows: 1. EMPLOYMENT. Employer agrees to and does employ the Employee for an indefinite term, for such duties, compensation and other terms and conditions as shall be mutually agreed upon from time to time between Employer and Employee, including any Increased Benefits described above. Such employment may be terminated 26 at any time by Employer or Employee for any reason and shall also terminate on death, disability or retirement of Employee. In connection with such employment, Employer agrees to acquaint Employee with any customers and accounts of Employer (or other members of the G&K Group) upon whom the Employee may be asked to call, solicit or otherwise serve. If Employee is or becomes a sales or service representative of Employer including a route driver, selling is a key duty which will require Employee to have extensive sales contacts with Employer's customers and potential customers. Employee agrees to solicit orders for, or assist in (or both) the delivery of towels, garments, mats, cleaning supplies, and other laundry and linen services provided by the Employer, and perform such other duties as the Employer may require of Employee from time to time. If so employed, Employee also agrees (1) to use his or her best efforts to obtain and retain trade for the Employer and (2) to faithfully work for the Employer in the performance of any assigned duties as a sales or service representative of the Employer. 2. EMPLOYEE BENEFITS. Employee shall receive medical and hospitalization insurance, pension and other benefits, to the extent such benefits are consistent with Employer's general practices and policies, or as otherwise agreed between Employer and Employee. 3. RESTRICTIVE COVENANTS. In consideration of the Employee's employment by Employer, or Employer's willingness to grant to Employee any Increased Benefits defined earlier in this Agreement, as the case may be, and the continued employment of Employee by Employer, Employee hereby covenants and agrees as follows: A. PROTECTION OF CONFIDENTIAL INFORMATION. While in the employ of any member of the G&K Group or at any time after termination of such employment, Employee shall not (1) directly or indirectly use for Employee's own benefit, or (2) disclose, provide any person or entity with, or permit any person or entity access to, any information concerning the G&K Group's customer lists or routes, pricing, purchasing, inventory, business methods, training manuals or other materials developed for G&K's employee training programs, or any other non-public material information, relating to the business of the G&K Group, except in the usual course of Employee's duties for a member of the G&K Group. Furthermore, except in the usual course of Employee's duties for a member of the G&K Group, Employee shall not at any time (1) remove any data or material from the offices of any member of the G&K Group, (2) record any of the contents of said data or material or (3) use for Employee's own benefit or disclose to any one directly or indirectly competing with a member of the G&K Group any information, data or materials obtained from the files of the G&K Group. Upon termination of employment, Employee shall collect and return, to the member (or its authorized representative) of the G&K Group last employing Employee all original copies and all photocopies of customer lists, prospective customer lists, contracts, books, records, training manuals, correspondence, business and financial records, operations reports or any part thereof acquired by Employee in the course of employment by any member of the G&K Group. B. CONFLICTS DURING EMPLOYMENT. While in the employ of any member of the G&K Group, Employee shall not: (1) solicit, induce or encourage any other G&K Group Employee to violate any term of their employment contract. (2) be at the same time employed by a competing company. The foregoing restrictions shall survive both termination of this Agreement and termination of Employee's employment by any member of the G&K Group. C. COVENANT NOT TO COMPETE. During a period of eighteen (18) months from and after the date of termination of Employee's employment with the G&K Group for any reason, Employee shall not, anywhere within the geographic area in which Employer (or any other member of the G&K Group which employed Employee within three (3) years prior to such date) is conducting its businesses as of such date (the "Restricted Area"), directly or indirectly: 27 (1) have any ownership interest in, financial participation in, or become employed by any competitor of any member of the G&K Group in the Restricted Area; or (2) call upon, solicit, or attempt to take away any customers or accounts of the G&K Group, with whom the Employee became acquainted as a result of employment of any member of the G&K Group; or (3) solicit, induce or encourage any employee of the G&K Group to violate any term of their employment contract with the G&K Group, or to assist any other person or entity to do so. The foregoing competitive restrictions shall survive termination of this Agreement and shall be effective and enforceable for eighteen (18) months following termination of Employee's employment with the member of the G&K Group last employing Employee, unless such period is extended for an additional length of time pursuant to this Agreement. D. REMEDIES. Employee acknowledges that irreparable harm will result to the G&K Group, its business and property, in the event of a breach of this Agreement by Employee, and that any remedy at law would be inadequate; and therefore, in the event this Agreement is breached by Employee, the affected members of the G&K Group shall be entitled, in addition to all other remedies or damages at law or in equity, to temporary and permanent injunctions and orders to restrain the violation hereof by Employee and all persons or entities acting for or with Employee. In the event of any breach of the foregoing restrictions, Employee agrees to pay the reasonable attorneys' fees incurred by Employer in pursuing any of its rights and remedies with respect to such breach, in addition to the actual damages sustained by Employer as a result thereof. Furthermore, in the event of a breach of Employee's covenant not to compete, the eighteen (18) month period stated therein shall be automatically extended and shall remain in full force during the period of time such breach continues. 4. SEVERABILITY. It is agreed that each of the provisions contained herein is severable and, if any provision hereof shall to any extent be invalid or unenforceable, the remainder of this Agreement, including such provision in circumstances other than those in which it is held invalid or unenforceable, shall not be affected thereby and shall be valid or enforceable to the fullest extent permitted by law; provided, however, that if any provision hereof is held to be invalid or unenforceable because of its duration or the territory covered, Employee and Employer agree to be bound by any reasonable period of time or reasonable territory, or both, as the case may be, determined by a court of competent jurisdiction. 5. WAIVER. Any waiver by Employer, or any other member of the G&K Group, of one or more breaches of this Agreement by Employee shall not prevent subsequent enforcement of the Agreement by any of them or be deemed a waiver by any of them of any subsequent breach of this Agreement. 6. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties hereto and may not be modified orally, but only by an agreement in writing signed by both parties. 7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Employer and Employee and shall inure to the benefit of Employee, the legal representatives of Employee and the successors and assigns of Employer and each member of the G&K Group, but shall not be assignable by Employee. In the event Employee's employment is transferred between members of the G&K Group, this Agreement shall be deemed to have been assigned to the member currently employing Employee. 8. GOVERNING LAW. This Agreement will be governed by and interpreted under the laws of the State of Minnesota. 28 9. VOLUNTARY AGREEMENT. Employee enters into this Agreement voluntarily and after having had the opportunity to consult with an advisor of his/her choice. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. G&K SERVICES, INC. a member of the G&K Group By s/Joseph L. Rotunda By s/Thomas Moberly ------------------------------- ------------------------- Joseph L. Rotunda Its Thomas Moberly ------------------------------- ------------------------- (Print Name) MANAGER EMPLOYEE 29 EX-10.4 5 EXHIBIT 10.4 Exhibit 10.4 NON-COMPETITION AND CONFIDENTIALITY AGREEMENT THIS AGREEMENT, made and executed as of the 8th day of February , 1999, by and between G&K SERVICES, INC. , a Minnesota corporation (hereinafter referred to as "Employer"). and Jeffrey L. Wright (hereinafter referred to as "Employee"), WITNESSETH: WHEREAS, Employer is a member of a group of affiliated corporations which includes G&K Services, Inc., a Minnesota corporation, and all its subsidiaries whether now existing or hereafter formed or acquired, which group is hereinafter referred to as the "G&K Group"; WHEREAS, Employee either [cross out (a) or (b) as applicable]: (a) desires to enter the employ of Employer, and may hereafter be employed from time-to-time by other members of the G&K Group; or Chief Financial Officer --------------------------------------- (Position) (b) is and has for some time been a valuable and a key employee of one or more members of the G&K Group; and Employer desires to increase the Employee's compensation, employee fringe benefits, level of responsibility and authority or otherwise improve the terms of Employee's employment in the following manner [fill in changed employment arrangements]: -------------------------------------------------------------------- -------------------------------------------------------------------- which change in employment terms shall be hereinafter referred to as the Employee's "Increased Benefits"; WHEREAS, Employer and Employee have mutually rescinded and cancelled all prior agreements between them with respect to Employee's employment, except those agreements applicable to all employees similarly situated with Employee; and WHEREAS, Employer desires to assure Employee's dedication by rewarding faithful and important contributions to Employer's business, and that of the G&K Group as a whole, and to preserve the value of such contributions by securing from Employee reasonable restriction against certain competitive activities; NOW, THEREFORE, in consideration of the foregoing, the mutual promises set forth in this Agreement and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Employee agree as follows: 1. EMPLOYMENT. Employer agrees to and does employ the Employee for an indefinite term, for such duties, compensation and other terms and conditions as shall be mutually agreed upon from time to time between Employer and Employee, including any Increased Benefits described above. Such employment may be terminated 30 at any time by Employer or Employee for any reason and shall also terminate on death, disability or retirement of Employee. In connection with such employment, Employer agrees to acquaint Employee with any customers and accounts of Employer (or other members of the G&K Group) upon whom the Employee may be asked to call, solicit or otherwise serve. If Employee is or becomes a sales or service representative of Employer including a route driver, selling is a key duty which will require Employee to have extensive sales contacts with Employer's customers and potential customers. Employee agrees to solicit orders for, or assist in (or both) the delivery of towels, garments, mats, cleaning supplies, and other laundry and linen services provided by the Employer, and perform such other duties as the Employer may require of Employee from time to time. If so employed, Employee also agrees (1) to use his or her best efforts to obtain and retain trade for the Employer and (2) to faithfully work for the Employer in the performance of any assigned duties as a sales or service representative of the Employer. 2. EMPLOYEE BENEFITS. Employee shall receive medical and hospitalization insurance, pension and other benefits, to the extent such benefits are consistent with Employer's general practices and policies, or as otherwise agreed between Employer and Employee. 3. RESTRICTIVE COVENANTS. In consideration of the Employee's employment by Employer, or Employer's willingness to grant to Employee any Increased Benefits defined earlier in this Agreement, as the case may be, and the continued employment of Employee by Employer, Employee hereby covenants and agrees as follows: A. PROTECTION OF CONFIDENTIAL INFORMATION. While in the employ of any member of the G&K Group or at any time after termination of such employment, Employee shall not (1) directly or indirectly use for Employee's own benefit, or (2) disclose, provide any person or entity with, or permit any person or entity access to, any information concerning the G&K Group's customer lists or routes, pricing, purchasing, inventory, business methods, training manuals or other materials developed for G&K's employee training programs, or any other non-public material information, relating to the business of the G&K Group, except in the usual course of Employee's duties for a member of the G&K Group. Furthermore, except in the usual course of Employee's duties for a member of the G&K Group, Employee shall not at any time (1) remove any data or material from the offices of any member of the G&K Group, (2) record any of the contents of said data or material or (3) use for Employee's own benefit or disclose to any one directly or indirectly competing with a member of the G&K Group any information, data or materials obtained from the files of the G&K Group. Upon termination of employment, Employee shall collect and return, to the member (or its authorized representative) of the G&K Group last employing Employee all original copies and all photocopies of customer lists, prospective customer lists, contracts, books, records, training manuals, correspondence, business and financial records, operations reports or any part thereof acquired by Employee in the course of employment by any member of the G&K Group. B. CONFLICTS DURING EMPLOYMENT. While in the employ of any member of the G&K Group, Employee shall not: (1) solicit, induce or encourage any other G&K Group Employee to violate any term of their employment contract. (2) be at the same time employed by a competing company. The foregoing restrictions shall survive both termination of this Agreement and termination of Employee's employment by any member of the G&K Group. C. COVENANT NOT TO COMPETE. During a period of eighteen (18) months from and after the date of termination of Employee's employment with the G&K Group for any reason, Employee shall not, anywhere within the geographic area in which Employer (or any other member of the G&K Group which employed Employee within three (3) years prior to such date) is conducting its businesses as of such date (the "Restricted Area"), directly or indirectly: 31 (1) have any ownership interest in, financial participation in, or become employed by any competitor of any member of the G&K Group in the Restricted Area; or (2) call upon, solicit, or attempt to take away any customers or accounts of the G&K Group, with whom the Employee became acquainted as a result of employment of any member of the G&K Group; or (3) solicit, induce or encourage any employee of the G&K Group to violate any term of their employment contract with the G&K Group, or to assist any other person or entity to do so. The foregoing competitive restrictions shall survive termination of this Agreement and shall be effective and enforceable for eighteen (18) months following termination of Employee's employment with the member of the G&K Group last employing Employee, unless such period is extended for an additional length of time pursuant to this Agreement. D. REMEDIES. Employee acknowledges that irreparable harm will result to the G&K Group, its business and property, in the event of a breach of this Agreement by Employee, and that any remedy at law would be inadequate; and therefore, in the event this Agreement is breached by Employee, the affected members of the G&K Group shall be entitled, in addition to all other remedies or damages at law or in equity, to temporary and permanent injunctions and orders to restrain the violation hereof by Employee and all persons or entities acting for or with Employee. In the event of any breach of the foregoing restrictions, Employee agrees to pay the reasonable attorneys' fees incurred by Employer in pursuing any of its rights and remedies with respect to such breach, in addition to the actual damages sustained by Employer as a result thereof. Furthermore, in the event of a breach of Employee's covenant not to compete, the eighteen (18) month period stated therein shall be automatically extended and shall remain in full force during the period of time such breach continues. 4. SEVERABILITY. It is agreed that each of the provisions contained herein is severable and, if any provision hereof shall to any extent be invalid or unenforceable, the remainder of this Agreement, including such provision in circumstances other than those in which it is held invalid or unenforceable, shall not be affected thereby and shall be valid or enforceable to the fullest extent permitted by law; provided, however, that if any provision hereof is held to be invalid or unenforceable because of its duration or the territory covered, Employee and Employer agree to be bound by any reasonable period of time or reasonable territory, or both, as the case may be, determined by a court of competent jurisdiction. 5. WAIVER. Any waiver by Employer, or any other member of the G&K Group, of one or more breaches of this Agreement by Employee shall not prevent subsequent enforcement of the Agreement by any of them or be deemed a waiver by any of them of any subsequent breach of this Agreement. 6. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties hereto and may not be modified orally, but only by an agreement in writing signed by both parties. 7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Employer and Employee and shall inure to the benefit of Employee, the legal representatives of Employee and the successors and assigns of Employer and each member of the G&K Group, but shall not be assignable by Employee. In the event Employee's employment is transferred between members of the G&K Group, this Agreement shall be deemed to have been assigned to the member currently employing Employee. 8. GOVERNING LAW. This Agreement will be governed by and interpreted under the laws of the State of Minnesota. 32 9. VOLUNTARY AGREEMENT. Employee enters into this Agreement voluntarily and after having had the opportunity to consult with an advisor of his/her choice. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement as of the day and year first above written. G&K SERVICES, INC. a member of the G&K Group By s/Jeffrey L. Wright By s/Thomas Moberly --------------------------- ---------------------------- Jeffrey L. Wright Its Thomas Moberly --------------------------- ---------------------------- (Print Name) MANAGER EMPLOYEE 33 EX-27 6 EXHIBIT 27 FDS
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 STATEMENTS. 1,000 9-MOS JUN-26-1999 JUN-28-1998 MAR-27-1999 5,643 0 63,289 3,335 82,366 154,126 332,797 135,654 532,399 92,774 0 0 0 10,260 212,900 532,399 387,134 387,134 219,663 329,282 (521) 2,621 13,201 45,172 17,826 27,346 0 0 0 27,346 1.34 1.33
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