-----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, GAJ8Nb7zQkm0z1aj4FowvS+r7YdSgNqaGOwG/SP9++lVJ848k3Xysb5TxEIyY5sU nApVKHObkDvBhbWRA9/sGA== 0001047469-99-038252.txt : 19991018 0001047469-99-038252.hdr.sgml : 19991018 ACCESSION NUMBER: 0001047469-99-038252 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19991008 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-K/A SEC ACT: SEC FILE NUMBER: 000-04063 FILM NUMBER: 99725617 BUSINESS ADDRESS: STREET 1: 5995 OPUS PARKWAY SUITE 500 CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129125500 MAIL ADDRESS: STREET 1: 5995 OPUS PARKWAY SUITE 500 CITY: MINNETONKA STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST LINEN CO DATE OF NAME CHANGE: 19681227 10-K/A 1 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) X Annual Report Pursuant to Section 13 or 15(d) of the Securities - ---------- Exchange Act of 1934 For the Fiscal Year Ended June 26, 1999 - ---------- Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - ----------------- -------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 5995 OPUS PARKWAY, STE. 500 MINNETONKA, MINNESOTA 55343 ------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code (612) 912-5500 ----------------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which Registered None ---- Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock (par value $0.50 per share) Class B Common Stock (par value $0.50 per share) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ---- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes . No X. ---- --- The aggregate market value of the voting stock of registrant held by non-affiliates of registrant, on September 10, 1999, computed by reference to the closing sale price of such shares on such date, was approximately $841,275,351. On September 10, 1999, there were outstanding 19,043,915 and 1,474,996 shares of the registrant's Class A and Class B Common Stock, respectively. DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K INTO WHICH DOCUMENT DOCUMENT IS INCORPORATED - -------- ------------------------ Portions of proxy statement for the annual meeting of stockholders to be held October 28, 1999 Parts I and III PART I ITEM 1. BUSINESS G&K Services, Inc. and its wholly owned subsidiaries (the Company or G&K) was formed in 1902. G&K operates in the uniform industry. The Company rents uniforms (including cleanroom garments) to its customers and offers uniforms and other related products for sale. The uniform rental business also includes the rental of nonuniform items such as floormats, dust mops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniform garments, which it uses to support rental customers and sells on a direct sale basis. On July 14, 1997, the Company purchased the uniform rental assets and selected linen assets of National Linen Service (NLS), consisting of twenty industrial facilities and nine linen facilities. It was G&K's intent to hold for sale the nine linen facilities. During fiscal year 1998, the Company divested eight of these locations, along with three industrial facilities that were not compatible with the Company's strategic goals. During fiscal year 1999, G&K sold one linen location. This transaction completed the sale of the nine linen facilities acquired from NLS that were held for sale. The Company has been steadily expanding its operations into additional geographic markets. G&K currently operates from approximately 125 locations in 36 U.S. states and the Canadian provinces of Quebec and Ontario. By comparison, G&K operated from approximately 40 locations in 21 states in 1988. The Company targets its marketing efforts on those customers, industries and geographic locations that are expanding and are in need of a quality-oriented uniform program that provides high levels of product quality, customer service and communication. The Company's experience with both existing and potential customers confirms that a large segment of the market is willing to pay a premium price to a vendor that can consistently supply these features. PRODUCTS The Company's full-service leasing program supplies a broad range of work garments, specialized uniforms for corporate identity programs, anti-static garments, particle-free garments, and dress clothing for supervisors, sales personnel and others needing upgraded work apparel. G&K's products are used in a diversified spectrum of businesses including: heavy and light manufacturing, construction, pharmaceutical and electronics manufacturers, transportation and distribution firms, health care and food service operations, auto dealerships, equipment repair companies, schools and office buildings. The Company believes that uniform programs provide customers with a number of benefits including: - Identification - uniforms help identify employees as working for a particular company or department. - Image - uniforms enhance the public appearance of employees and help create a more professional image for the customer. - Worker protection - uniforms help protect workers from difficult environments such as heavy soils, heat, flame or chemicals. - Product protection - uniforms help protect products against contamination in the food, pharmaceutical, electronics and health care industries. - Employee morale - uniforms can provide a valued benefit to employees and help improve morale. The Company provides its uniform-leasing customers with a full range of services. Advice and assistance are offered in choosing fabrics, styles and colors appropriate to the customer's specific needs. A large stock of new and used garments are available to provide rapid response as customer needs change due to increases, decreases or turnover in their work force. Professional cleaning, finishing, repairs and replacement of uniforms in use is a normal part of the rental service. Soiled uniforms are picked up at the customer's location and returned clean on a weekly cycle. 2 The Company also believes that uniform leasing may provide customers with significant advantages over ownership. Leasing eliminates investment in uniforms; offers flexibility in styles, colors and quantities as customer requirements change; assures consistent professional cleaning, finishing, repair and replacement of items in use; and provides freedom from the expense and management time necessary to administer a uniform program. Most of the Company's customers also lease items other than uniforms, primarily floormats, dust mops, dust cloths, wiping towels and linens. Floormats are used to protect facilities from dust, grease, moisture and other hazards, and can also enhance decor, provide a corporate identity logo or improve traffic safety. Dust mops, cloths and wiping towels are chemically treated to attract and hold dirt, and are provided in a range of sizes. The Company's wiping towels are used by its customers for numerous wiping and cleaning tasks in varied settings. Selected linen items, primarily aprons and towels, are used for sanitary or cleaning purposes. CUSTOMERS The Company's customer base includes divisions of more than half of the Fortune 100 companies as well as over 100,000 smaller businesses. No one customer accounts for more than 1% of the Company's total revenues. COMPETITION The Company encounters a high level of competition from a number of companies in the geographic areas it serves. The Company ranks among the nation's largest garment rental suppliers. Major competitors include AraMark (a division of ARA Services, Inc.) and such publicly held companies as Unifirst Corporation and Cintas Corporation. The Company also competes with a multitude of regional and local competitors that varies by market. The Company believes that it competes effectively in its line of business because of the quality and breadth of its product line, and the comprehensive customer service programs it offers. ENVIRONMENTAL MATTERS The Company generates modest amounts of wastes in connection with its operations. The Company believes that all of these wastes have been disposed of properly. Some of these wastes may be classified as hazardous wastes under various state and federal environmental legislation. The Company has been identified as a potentially responsible party (PRP) pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or similar state laws, at a number of waste disposal sites. Under such laws, PRPs typically are jointly and severally liable for any investigation and remediation costs incurred with respect to such sites. The Company's ultimate responsibility, therefore, could be greater than the share of waste contributed by the Company would otherwise indicate. The Company has received a letter from the Minnesota Pollution Control Agency (MPCA), which claims that solvents have been detected in the soils near a facility that was owned by the Company from the late 1940s until the early 1970s. Neither the extent of the solvents in the soils nor the source of the solvents is known to the Company. The Company has agreed to participate in a Voluntary Investigation and Cleanup Program through the MPCA, but is unable to provide any estimate of the remediation costs at this time since the investigation has not been completed. The Company expects to reach an agreement with the MPCA with respect to a remediation plan. Therefore, no litigation is expected to be commenced against the Company in connection with this matter. The Company has been placed on notice by the owners of a Wayzata, Minnesota, shopping center regarding the alleged presence of solvents in the ground water in the vicinity of the shopping center, where certain affiliates of the Company formerly operated a dry cleaning establishment in the shopping center. At this time, no demand has been made and no action has been commenced against the Company. The owners of the shopping center have informed the Company that they are pursuing cleanup through state funding mechanisms. Since little information is available at this time, the Company is unable to predict what, if any, liability the Company may have in this matter. EMPLOYEES The Company's U.S. operations had a total of 6,743 employees as of June 26, 1999, consisting of 255 professional sales personnel, 1,269 route personnel, 3,954 production employees, 624 clerical/staff employees and 641 management 3 employees. Approximately 16% of the Company's U.S. employees are represented by unions. Management believes its domestic employee relations are satisfactory. The Company's Canadian operations had a total of 948 employees as of June 26, 1999, consisting of 35 professional sales personnel, 157 route personnel, 551 production employees, 106 clerical/staff employees and 99 management employees. Approximately 74% of the Company's Canadian employees are represented by unions. Management believes Canadian employee relations are satisfactory. FOREIGN AND DOMESTIC OPERATIONS Financial information relating to foreign and domestic operations is set forth in Note 8 of the G&K consolidated financial statements included in Item 8 of this Form 10-K. (THIS SPACE INTENTIONALLY LEFT BLANK) 4 ITEM 2. PROPERTIES The Company cleans and supplies rental items principally from forty-four industrial garment, cleanroom garment, dust control and linen supply plants located in the following cities in the United States:
Building Building City Square Footage City Square Footage - --------------------------------------------- ------------------- ------------------------------------------- ------------------ Albuquerque, New Mexico (two plants) 38,800 Memphis, Tennessee 35,400 10,300 Mesa, Arizona 36,000 Atlanta, Georgia (two plants) 40,000 Milwaukee, Wisconsin 44,220 52,000 Minneapolis, Minnesota (two plants) 70,000 Augusta, Georgia 42,500 93,000 Birmingham, Alabama 30,000 Mobile, Alabama 47,300 Chicago, Illinois 48,700 Monroe, North Carolina 40,700 Dallas, Texas 12,120 Montgomery, Alabama 23,400 Denver, Colorado (two plants) 56,200 New Orleans, Louisiana 29,000 17,630 Opa Locka, Florida 40,000 Fort Worth, Texas (two plants) 38,000 Phoenix, Arizona 55,000 70,700 Pittsburg, California 47,000 Fort Lauderdale, Florida 51,100 Portland, Oregon 16,200 Graham, North Carolina 115,000 Portsmouth, Virginia 36,320 Green Bay, Wisconsin 51,700 Rockford, Illinois 32,000 Houston, Texas 39,820 St. Cloud, Minnesota 45,400 Indianapolis, Indiana 45,400 Salt Lake City, Utah 41,500 Jonesboro, Arkansas 30,000 San Antonio, Texas 40,700 Kansas City, Missouri 44,220 San Jose, California 58,600 Lakeland, Florida 56,000 Seattle, Washington 45,400 Los Angeles, California 48,300 Tampa, Florida 45,400 Louisville, Kentucky 41,330 Tempe, Arizona 13,300
All of these facilities are owned by the Company except those in Albuquerque, New Mexico (10,300 sq. ft.); Dallas, Texas; Denver, Colorado (17,630 sq. ft.); Jonesboro, Arkansas; Lakeland, Florida; Portland, Oregon; Portsmouth, Virginia; and Tempe, Arizona, which are leased. The Company also operates principally from five plants located in the following cities in Canada:
Building Building City Square Footage City Square Footage - --------------------------------------------- ------------------- ------------------------------------------- ------------------ Toronto, Ontario (Metro East) 49,000 Windsor, Ontario 42,900 Montreal, Quebec 56,900 Sault Sainte Marie, Ontario 23,700 Cambridge, Ontario 57,600
All of these facilities are owned by the Company, except the Windsor facility, which is leased. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings other than routine litigation incidental to the business of the Company and as set forth in Item 1. Business - Environmental Matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders of the Company during the fourth quarter of fiscal 1999. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Class A Common Stock is quoted on NASDAQ National Market under the symbol "GKSRA". The Company's Class B Common Stock is not registered. The following table sets forth the high and low reported sales prices for the Class A Common Stock as quoted on the NASDAQ National Market for the periods indicated.
High Low - ------------------------------------------------------------ Fiscal 1999 1st Quarter 55 3/4 41 5/8 2nd Quarter 54 5/8 40 1/2 3rd Quarter 56 1/4 45 1/2 4th Quarter 52 5/16 39 3/4 - ------------------------------------------------------------ Fiscal 1998 1st Quarter 38 1/2 33 2nd Quarter 41 1/4 33 1/4 3rd Quarter 47 5/16 40 4th Quarter 44 3/16 36 - ------------------------------------------------------------
As of September 10, 1999, the Company had approximately 600 registered stockholders. The Company has declared cash dividends of $0.0175 per share in each of the quarters for the fiscal years ended June 26, 1999 and June 27, 1998. The Company's debt agreements contain various restrictive covenants, which, among other things, limit the payment of cash dividends. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected financial data. All amounts are in thousands, except per share data.
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Revenues $519,966 $502,593 $350,914 $305,414 $262,481 Net Income 37,029 32,058 29,002 22,720 18,286 Per Share Data: Basic earnings per share 1.81 1.57 1.43 1.12 0.90 Diluted earnings per share 1.81 1.57 1.42 1.11 0.90 Dividends per share 0.07 0.07 0.07 0.07 0.07 Total Assets 541,432 531,842 311,965 282,520 253,333 Long-Term Debt 193,952 234,843 54,284 75,143 76,519 Stockholders' Equity 235,633 198,120 168,987 140,976 118,529 - --------------------------------------------------------------------------------------------------------------
The fiscal 1998 results include the results of operations of facilities purchased from NLS. See Note 2 of the G&K consolidated financial statements included in Item 8 of this Form 10-K. (THIS SPACE INTENTIONALLY LEFT BLANK) 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In fiscal 1999, G&K, now the third largest competitor in the estimated $5.5 billion uniform leasing industry, achieved 3.5% revenue growth, a 15.5% increase in net income and realized a 17.1% return on average equity. G&K's record of strong financial performance results from an effective, consistent growth strategy designed to meet the diverse needs of customers in the industrial uniform market. On July 14, 1997, the Company purchased the uniform rental assets and selected linen assets of NLS. The 20 uniform locations contributed $115.4 million in revenue during the fiscal year. The Company held for sale the nine linen facilities acquired in the NLS transaction. Losses from these nine facilities from the date of acquisition to the date of sale (not to exceed one year) of $659 thousand, including interest on incremental debt incurred during the holding period to finance the purchase of these facilities totaling $3.5 million and the proceeds from the sale were excluded from the earnings reported for fiscal 1998. Amounts excluded from earnings were included in the allocation to the purchase price of retained assets and liabilities. During fiscal 1998, the Company divested eight of the nine locations held for sale and three industrial locations that were not compatible with the Company's strategic goals. During fiscal 1999, G&K sold the remaining linen location held for sale. For the latest five-year period, revenues grew at a rate of 18.2%, compounded annually. This exceeds the Company's stated goal of maintaining a long-term growth rate of 15%. These results reflect the Company's strategies to attain increased market penetration and an expanded customer base through internal growth and acquisitions. The Company's five-year growth rate for net income was 20.1%, compounded annually. The Company's investments in new technologies provide increased productivity and reduced labor expenses. Better merchandise control and lower processing costs are contributing to bottom-line growth, while garment manufacturing facilities enhance product quality and decrease merchandise costs. The percentage relationships to net sales of certain income and expense items for the three fiscal years ended June 26, 1999, June 27, 1998 and June 28, 1997, and the percentage changes in these income and expense items between years are presented in the following table:
Percentage of Net Sales Percentage Change Years Ended Between Years ------------------------------------------ ----------------------------- FY 1999 vs. FY 1998 vs. Fiscal 1999 Fiscal 1998 Fiscal 1997 FY 1998 FY 1997 ------------------------------------------ ------------------------------ Revenues 100.0% 100.0% 100.0% 3.5% 43.2% Expenses: Cost of rental and direct sales 56.8 58.6 55.9 0.3 50.2 Selling and administrative 21.4 19.9 22.9 11.1 24.8 Depreciation 5.3 5.3 5.6 4.0 33.6 Amortization of intangibles 1.6 1.8 0.6 (7.1) 314.7 ------------------------------------------- Income from operations 14.9 14.4 15.0 6.9 37.4 Interest expense 3.3 4.3 1.9 (21.2) 219.1 Other income, net (0.2) (0.4) (0.6) (53.8) 7.4 ------------------------------------------- Income before income taxes 11.8 10.5 13.7 16.0 10.1 Provision for income taxes 4.7 4.1 5.4 16.8 9.5 ------------------------------------------- Net income 7.1% 6.4% 8.3% 15.5% 10.5% ------------------------------------------- -------------------------------------------
7 FISCAL 1999 COMPARED TO FISCAL 1998 Total revenues for fiscal 1999 rose 3.5% to $520.0 million from $502.6 million in fiscal 1998. The first quarter of fiscal 1998 included only eleven weeks of revenues from assets acquired from NLS on July 14, 1997, including three industrial locations that were later sold in the fourth quarter of fiscal 1998. Adjusting for the timing of the NLS asset purchase and divested operations, total revenue growth was 4.2% for fiscal 1999. Rental revenues rose $19.5 million in fiscal 1999, a 4.0% increase over fiscal 1998. U.S. annual rental revenues increased 4.9% over comparable revenues for the prior year and Canadian rental revenues in U.S. dollars increased 3.9%. The growth in rental revenue, which is below historical patterns, was influenced by several factors, including lower growth rates in the southeastern part of the U.S. that were impacted by continuing NLS acquisition integration activities, a sharp downturn in the semiconductor industry and a decline in the value of the Canadian dollar. Total direct sales to outside customers decreased 11.4% to $16.9 million in fiscal 1999 from $19.1 million in fiscal 1998. This decrease is primarily the result of shifting garment manufacturing capacity from sales to external customers to internal use by the Company for rental customers. Cost of direct sales decreased 13.3% to $11.9 million in fiscal 1999 from $13.8 million in fiscal 1998. As a percent of direct sales, these costs improved to 70.6% compared to 72.2% in the prior year. Cost of rental operations increased 1.0% to $283.4 million in fiscal 1999 from $280.7 million in fiscal 1998. As a percent of rental revenues, these costs decreased to 56.3% in fiscal 1999 compared to 58.0% in fiscal 1998. The Company attributes this decrease as a percent of revenue to improvements in all components of rental operations (merchandise, production and delivery costs), primarily at locations acquired in the NLS transaction. Selling and administrative expenses increased 11.1% to $111.2 million in fiscal 1999 from $100.1 million in fiscal 1998. As a percentage of total revenues, selling and administrative expenses increased to 21.4% in fiscal 1999 from 19.9% in fiscal 1998. The increase as a percent of revenue is due to several factors, including higher selling expenses in the locations acquired in fiscal 1998, increased information technology costs, expenses associated with Year 2000 readiness, additions to corporate senior management and other corporate initiatives. Depreciation expense increased 4.0% to $27.4 million in fiscal 1999 from $26.4 million in fiscal 1998. As a percentage of revenues, depreciation expense remained constant at 5.3% in fiscal 1999 compared to 5.3% in fiscal 1998. Capital expenditures for fiscal 1999, excluding acquisition of businesses, was $38.0 million compared to $37.4 million in fiscal 1998. Amortization expense decreased to $8.6 million for fiscal 1999 from $9.2 million in fiscal 1998. This decrease is attributable to the sale of acquired industrial facilities and the related intangible assets during the third and fourth quarters of fiscal 1998 and third quarter of fiscal 1999. Income from operations increased 6.9% to $77.4 million in fiscal 1999 from $72.4 million in fiscal 1998. Operating margins increased to 14.9% in fiscal 1999 from 14.4% in fiscal 1998. U.S. operating margins increased to 13.1% in fiscal 1999 from 12.9% in fiscal 1998. Interest expense was $17.2 million for fiscal 1999, down from $21.8 million in fiscal 1998. The Company's effective tax rate increased slightly to 39.5% in fiscal 1999 from 39.2% in fiscal 1998. Net income rose 15.5% to $37.0 million in fiscal 1999 from $32.1 million in fiscal 1998. Basic and diluted earnings per share for fiscal 1999 was $1.81 per share compared to basic and diluted earnings per share of $1.57 per share in fiscal 1998. Net income margins increased to 7.1% for fiscal 1999 compared to 6.4% in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 Total revenues for fiscal 1998 rose 43.2% to $502.6 million from $350.9 million in fiscal 1997. Revenue attributable to the acquisition of certain assets of NLS was $115.4 million, including $9.8 million from three plants that were sold in May 1998. Excluding this acquisition and excluding prior year Toronto Linen operations that were sold in fiscal 1997, the total revenue growth was 11.3% for fiscal 1998. Rental revenues rose $149.5 million in fiscal 1998, a 44.7% increase over fiscal 1997. U.S. and Canadian annual rental revenues increased 11.7% and 10.5%, respectively, (excluding revenues from assets acquired from NLS and revenues 8 from Toronto Linen). The improvement is primarily attributed to steady growth in the Company's traditional textile leasing operations as well as national account and cleanroom sales. A 14.6% growth in Canadian rental revenues in Canadian dollars was partially offset by unfavorable changes in the currency exchange rates. Total direct sales revenues increased 13.1% to $19.1 million for fiscal 1998 from $16.9 million in fiscal 1997. This increase is largely attributable to the success of seasonal promotions and increases in catalog sales, partially offset by the Company's continuous shift toward greater utilization of the Company's manufacturing operations for service to G&K rental customers. Cost of direct sales increased 6.7% to $13.8 million in fiscal 1998 from $12.9 million in fiscal 1997. As a percent of direct sales, these costs improved to 72.2% compared to 76.5% in the prior year. Cost of rental operations increased 53.3% to $280.7 million in fiscal 1998 from $183.1 million in fiscal 1997. As a percent of rental revenues, these costs increased to 58.0% for fiscal 1998 compared to 54.8% in fiscal 1997. The Company attributes the increase primarily to merchandise and production costs at new locations acquired from NLS early in the fiscal year. Selling and administrative expenses increased 24.8% to $100.1 million in fiscal 1998 from $80.2 million in fiscal 1997. As a percentage of total revenues, selling and administrative expenses decreased to 19.9% in fiscal 1998 from 22.9% in fiscal 1997. The decline as a percent of revenue is due to several factors, including lower selling expenses in the NLS acquired locations and leveraging of corporate costs following the NLS transaction. Depreciation expense increased 33.6% to $26.4 million in fiscal 1998 from $19.7 million in fiscal 1997. As a percentage of revenues, depreciation expense decreased to 5.3% in fiscal 1998 from 5.6% in fiscal 1997. This decrease is caused by the maturing of start-up operations and depreciation on acquired NLS assets based on fair market valuations. Capital expenditures for fiscal 1998, excluding acquisition of businesses, was $37.4 million compared to $35.5 million in fiscal 1997. Amortization expense increased to $9.2 million for fiscal 1998 from $2.2 million in fiscal 1997. This increase is attributable to the acquisition of certain assets from NLS. Income from operations increased 37.4% to $72.4 million in fiscal 1998 from $52.7 million in fiscal 1997. Operating margins declined slightly to 14.4% in fiscal 1998 from 15.0% in fiscal 1997. U.S. operating margins declined to 12.9% in fiscal 1998 from 13.9% in fiscal 1997, primarily due to lower margins in the newly acquired locations and depreciation and amortization related to the NLS acquisition, offset by leveraging of selling and administrative costs. Operating income benefited from an improvement in Canadian operating margins. Interest expense was $21.8 million for fiscal 1998, up from $6.8 million in fiscal 1997. This was largely due to additional borrowings to finance the acquisition of assets from NLS. The Company's effective tax rate decreased slightly to 39.2% in fiscal 1998 from 39.5% in fiscal 1997. Net income rose 10.5% to $32.1 million in fiscal 1998 from $29.0 million in fiscal 1997. Basic and diluted earnings per share for fiscal 1998 was $1.57 per share compared to basic and diluted earnings per share of $1.43 per share and $1.42 per share, respectively, in fiscal 1997. Net income margins decreased to 6.4% for fiscal 1998 compared to 8.3% in fiscal 1997. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities was $59.4 million in fiscal 1999, $74.5 million in fiscal 1998 and $44.1 million in fiscal 1997. The decrease in fiscal 1999 from fiscal 1998 resulted from the decrease in other current liabilities, primarily income taxes, during fiscal 1999 and the fiscal 1998 increase in accounts payable and other current liabilities in connection with the locations acquired from NLS. Working capital at June 26, 1999 was $73.2 million, down 0.2% from $73.3 million at June 27, 1998. Cash used in investing activities was $36.8 million in fiscal 1999, $236.4 million in fiscal 1998 and $37.9 million in fiscal 1997. The increase in fiscal 1998 was due primarily to the acquisition of assets from NLS. In fiscal 2000, capital expenditures are anticipated to be approximately $44 million to $48 million. Financing activities used cash of $28.3 million in fiscal 1999, provided $166.9 million of cash in fiscal 1998 and used $6.1 million in fiscal 1997. The fiscal 1998 cash provided by financing activities was used in the acquisition of selected assets of NLS. The total long-term debt, including current maturity, decreased to $222.3 million at June 26, 1999 from 9 $249.8 million at June 27, 1998. The Company paid dividends of $1.4 million in each of the fiscal years 1999, 1998 and 1997. The Company's ratio of debt to total capitalization decreased to 48.5% at the end of fiscal 1999 from 55.8% at the end of fiscal 1998. The Company has a $125.0 million line of credit and a $10.0 million discretionary credit facility, of which $13.2 million and $2.0 million, respectively, was outstanding at the end of fiscal 1999. In connection with G&K's acquisition of selected assets of NLS in July 1997, the Company entered into a new $425 million credit facility to fund the purchase price of the assets and refinance existing indebtedness. The unused portion of the revolver may be used for working capital and to provide letters of credit. The credit facility, as amended on December 30, 1998, contains various restrictive covenants that, among other matters, require the Company to maintain a minimum interest coverage ratio, minimum stockholders' equity and maximum leverage ratio, all as defined. The credit facility also limits additional indebtedness, investments, capital expenditures and cash dividends. As of June 26, 1999, the Company was in compliance with all debt covenants. On March 18, 1999 the Company received a full release of collateral based on the Company having met certain financial covenants. Stockholders' equity grew 18.9% to $235.6 million at June 26, 1999, compared with $198.1 million at the end of fiscal 1998. G&K's return on average equity decreased to 17.1% in fiscal 1999, compared with 17.5% and 18.7% for fiscal 1998 and fiscal 1997, respectively. Management believes that cash flows generated from operations and borrowing capability under its credit facilities should provide adequate funding for its current businesses and planned expansion of operations or any future acquisitions. YEAR 2000 READINESS DISCLOSURE The Company utilizes both information technology (IT) and non-IT systems and assets throughout its U.S. and Canadian operations that will be affected by the date change in the year 2000. The Company began an extensive review of its business in January 1998 to determine whether or not its IT and non-IT systems and assets were Year 2000 ready, as well as the remedial action and related costs associated with required modifications or replacements. The Company's goal is to ensure current business operations will continue to function accurately with minimal disruption through the year-end change. The Company is continuing discussions with its significant suppliers to determine the readiness of those suppliers to correct Year 2000 issues where their systems and products interface with the Company's systems or otherwise impact its operations. The Company has assessed the extent to which its operations are vulnerable and has created contingency plans should those suppliers not succeed to properly prepare their systems. The Company believes these actions with key suppliers should minimize the risks. The scope of the Year 2000 readiness effort includes (i) information technology such as software and hardware, (ii) non-information systems or embedded technology such as micro controllers contained in various equipment, safety systems, facilities and utilities and (iii) readiness of key third-party suppliers. The Company has committed resources and leveraged previous investments in existing technologies in an effort to achieve these objectives. The Company has a documented process through which all IT and non-IT systems and assets have been reviewed with reference to Year 2000 date issues. This methodology takes each system and asset through the following lifecycle: - Awareness - Educate employees about Year 2000 issues. - Assessment - Conduct an inventory and impact analysis of the business, operations and systems. Identify priorities and plan. - Analysis - Analyze the asset(s) to determine the tasks, resources and duration required to ensure compliance. - Contingency planning - Identify alternative solutions to maintain operational and financial results. - Conversion - Renovation plan is finalized, approved and implemented. - Testing - Approved validation plans are implemented and testing occurs. - Rollout - Implementation plan is approved, and tested compliance solution is fully implemented into production. The Company's key systems and assets are as follows: - Financial systems software - SAP financial systems were implemented and operational as of June 28, 1998. The Company has completed Year 2000 testing and believes the financial systems are Year 2000 ready. - Revenue recognition system - Renovation, testing and rollout of this internally developed system are complete. 10 - Other IT software, hardware and communications - 90% of our systems have been evaluated as Year 2000 ready; the remaining systems await vendor solutions of updated software or hardware and are scheduled for completion by September 30, 1999. - Non-IT plant and related equipment - All production equipment has been verified for Year 2000 readiness. - Business processes and procedures - All process flows were analyzed for risk with appropriate contingency plans created. Ongoing monitoring throughout the remainder of the calendar year will occur to ensure that contingency plans are implemented as appropriate on a timely basis. - Third parties - The Company's supply chain was assessed to ensure that all significant vendors will have the ability to meet the Company's needs. No disclosures of non-compliant suppliers have been discovered. All appropriate contingency plans are in place. The Company did not defer any significant IT projects to address the Year 2000 issues. Because the Year 2000 issue is of short duration, the Company retained experts and advisors to evaluate Year 2000 readiness; assist in analysis, renovation, and contingency planning; and conduct independent testing when renovations were completed. The Company's core IT staff focused on the Company's business needs, as well as assisted with Year 2000 analysis and renovation. The Company is implementing proposed solutions and began to incur expenses during fiscal 1998 to resolve the Year 2000 issue. These expenses will continue through the fiscal year 2000. Maintenance or modification costs are expensed as incurred, while costs of any new software and equipment are being capitalized over the asset's useful life, consistent with the Company's financial policies. The Company has spent approximately $4.2 million related to the Year 2000 analysis; $2.0 million of these costs were capitalized. The Company has a remaining budget of $2.6 million for expenditures, although there can be no assurance that the Year 2000 related expenditures will not be materially higher. Included in the remaining budget is $1.9 million of computer equipment, which will be leased, and $0.6 million to be expensed as period costs. The Company's current estimates of the amount of time and costs necessary to modify and test its computer systems are based upon assumptions regarding future events, including the continued availability of certain resources, Year 2000 modification plans and other factors. New developments may occur that could affect the Company's estimates of the amount of time and costs necessary to implement its systems for Year 2000 readiness. These developments include, but are not limited to, (i) the availability and cost of personnel trained in this area, (ii) the ability to locate and correct all relevant computer codes and equipment and (iii) the Year 2000 readiness success that key suppliers attain. Contingency plans have been developed for all areas of the business. The Company used a weighted system to evaluate and determine this level of risk in each of five areas: Operational, Facility Safety, Financial Management, Legal Implication and Organizational Implication. Where necessary, the Company is implementing various contingency plans that will include, but are not limited to, the following: - Secondary vendors for garments and other significant nonuniform inventories - Modifying inventory ordering practices during the year-end transition - Manual work-arounds for less critical computerized systems - Staffing of management response teams during critical date changes, such as the calendar year change on January 1, 2000 While the Company has exercised its best efforts to identify and remedy any potential Year 2000 exposures within its control, the largest risks are expected with utilities in the form of water and power which, to a significant extent, are beyond the immediate control of the Company. To date, the Company has not identified any suppliers who will not be Year 2000 compliant; however, the Company has developed appropriate contingency plans. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, the Year 2000 readiness of the Company's suppliers and business partners may lag behind the Company's efforts. Although the Company does not believe the Year 2000 matters discussed above should have a material impact on its business, financial condition and results of operations, it is uncertain as to what extent the Company may be affected by such matters. MARKET RISK SENSITIVITY The Company uses financial instruments, including fixed and variable rate debt, as well as interest rate swaps, to finance operations and to hedge interest rate exposures. The swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes, nor is it a party to any leveraged instrument. The information below summarizes the Company's market risks associated with debt and interest rate swap obligations as of June 26, 1999. For debt obligations, 11 the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
Expected Maturity Date by Fiscal Year -------------------------------------------------------------------------- Fair (In thousands) 2000 2001 2002 2003 2004 Total Value - ------------------------------------------------------------------------------------------------------------------- Long-Term Debt, variable rate $26,362 $41,425 $60,378 $45,192 $48,957 $222,314 $222,314 Average interest rate 6.44% 7.12% 7.41% 7.53% 7.67% 7.32% - Interest Rate Swaps, variable to fixed $50,000 $100,000 - - - $150,000 $149,114 Average pay rate 6.22% 6.24% - - - - - Average receive rate 5.87% 6.55% - - - - -
Statements in this document regarding ongoing trends and expectations constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, but are not limited to, those expectations related to the acquisition of assets from NLS; unforeseen operating risks; the availability of capital to finance planned growth; competition within the uniform leasing industry; and the effects of economic conditions. (THIS SPACE INTENTIONALLY LEFT BLANK) 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Following is a summary of the results of operations for each of the quarters within fiscal years ended June 26, 1999 and June 27, 1998. All amounts are in thousands, except per share data. QUARTERLY FINANCIAL DATA G&K Services, Inc. and Subsidiaries
FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------- 1999 Revenues $126,123 $129,864 $131,147 $132,832 Gross Profit 54,845 56,266 56,360 57,138 Income from Operations 18,807 19,874 19,171 19,550 Net Income 8,690 9,235 9,421 9,683 Basic Earnings per Share 0.43 0.45 0.46 0.47 Diluted Earnings per Share 0.43 0.45 0.46 0.47 Dividends per Share 0.0175 0.0175 0.0175 0.0175 - ------------------------------------------------------------------------------------------------------- 1998 Revenues $118,426 $128,261 $127,471 $128,435 Gross Profit 50,044 52,756 52,365 52,975 Income from Operations 16,815 18,364 18,044 19,188 Net Income 7,445 7,787 7,971 8,855 Basic Earnings per Share 0.37 0.38 0.39 0.43 Diluted Earnings per Share 0.36 0.38 0.39 0.43 Dividends per Share 0.0175 0.0175 0.0175 0.0175 - -------------------------------------------------------------------------------------------------------
Reference is hereby made to the Consolidated Financial Statements and Notes thereto appearing on pages F-1 through F-15 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None (THIS SPACE INTENTIONALLY LEFT BLANK) 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title Since - -------------------------------------------------------------------------------- Richard M. Fink 69 Chairman and Director 1968 Thomas Moberly 51 Chief Executive Officer, 1993 President and Director Joseph L. Rotunda 52 Chief Operating Officer and 1998 Executive Vice President Jeffrey L. Wright 37 Chief Financial Officer, 1999 Treasurer and Secretary Martin S. Reader 43 Vice President of Corporate 1993 Development and Direct Sales Division Michael F. Woodard 42 Controller 1996 Bruce G. Allbright 70 Director 1985 Paul Baszucki 59 Director 1994 Wayne M. Fortun 50 Director 1994 Donald W. Goldfus 65 Director 1989 William Hope 66 Director 1973 Bernard Sweet 75 Director 1975
RICHARD M. FINK has served as Chairman of the Board since 1981. Mr. Fink was also Chief Executive Officer of the Company from 1981 to January 1997. THOMAS MOBERLY has served as Chief Executive Officer since January 1999. President since September 1997. Chief Operating Officer of the Company from September 1997 to January 1999. From 1993 to 1997, Mr. Moberly served as Executive Vice President. Mr. Moberly held various other management positions since joining the Company in 1974. JOSEPH L. ROTUNDA has served as Chief Operating Officer since December 1998. Prior to joining the Company, Mr. Rotunda was Executive Vice President and Chief Operating Officer of Thorn Americas. JEFFREY L. WRIGHT has served as Chief Financial Officer, Treasurer and Secretary since February 1999. Mr. Wright was Controller and Treasurer for BMC Industries prior to joining the Company. MARTIN S. READER was named Vice President of Corporate Development and Direct Sales Division in 1999. He served as Vice President of Marketing since January 1997. From November 1993 to 1997, Mr. Reader served as Director of Marketing. Prior to joining the Company, he was Vice President of Strategic Planning and Business Development for Automatic Data Processing, Inc. MICHAEL F. WOODARD joined the Company in September 1996 as Controller. Mr. Woodard was Treasurer of Dataserv, Inc. from 1993 to the time he joined the Company. BRUCE G. ALLBRIGHT has been a director of the Company since 1985. Retired since January 1990, formerly President of Dayton Hudson Corporation. Prior thereto, Mr. Allbright was Chairman and Chief Executive Officer of Target Stores, a Division of Dayton Hudson Corporation. Mr. Allbright is a director of TCF Financial, Inc. and F.A., Hannaford Brothers Company. PAUL BASZUCKI has been a director of the Company since 1994. Chairman of the Board of Directors of Norstan, Inc. since May 1997. Prior thereto, Mr. Baszucki was Chief Executive Officer of Norstan, Inc. Mr. Baszucki is also a director of Washington Scientific Industries, Inc. WAYNE M. FORTUN has been a director of the Company since 1994. President, Chief Executive Officer, Chief Operating Officer and a director of Hutchinson Technology, Inc. Mr. Fortun is also a director of Excelsior-Henderson Motorcycle Manufacturing Company. DONALD W. GOLDFUS has been a director of the Company since 1989. Retired since June 1999. Formerly the Chairman of the Board of Directors of Apogee Enterprises, Inc. Mr. Goldfus continues as a director of Apogee Enterprises, Inc. and also served as Chief Executive Officer of that company from 1986 until January 1998. 14 WILLIAM HOPE has been a director of the Company since 1983. Retired since January 1999. Formerly Chief Executive Officer of the Company from January 1997 until January 1999. From 1993 to 1997, Mr. Hope served as President and Chief Operating Officer of the Company. Mr. Hope is also a director of Minntech Corporation. BERNARD SWEET has been a director of the Company since 1975. Retired since 1985, formerly President and Chief Executive Officer of Republic Airlines, Inc. Mr. Sweet is a director of US Foodservice. ITEM 11. EXECUTIVE COMPENSATION Reference is made to information with respect to the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to information with respect to the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to information with respect to the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. (THIS SPACE INTENTIONALLY LEFT BLANK) 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Reports filed on Form 8-K during the fourth quarter of fiscal year 1999: None (b) The following exhibits, as required by Item 601 of Regulation S-K are filed as a part of this report: EXHIBIT NO. 2(a) Asset Purchase Agreement, dated as of May 30, 1997, by and among National Service Industries, Inc., a Delaware corporation; National Service Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a California corporation and G&K Services, Inc. (incorporated herein by reference to the Registrant's Form 8-K filing dated July 14, 1997). 2(b) Side Letter dated as of July 14, 1997, by and among National Service Industries, Inc., a Delaware corporation; National Service Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a California corporation and G&K Services, Inc. (incorporated herein by reference to the Registrant's Form 8-K filing dated July 14, 1997). 2(c) Asset Purchase Agreement, dated as of April 25, 1998, by and among G&K Services Linen Co., G&K Services Co., G&K Services, Inc., and TTSI Services Acquisition Sub, Inc. and Tartan Textile Services, Inc. (incorporated herein by reference to the Registrant's Form 8-K filing dated May 14, 1998). 3(a) Restated Articles of Incorporation, as amended, as filed with the Secretary of State of Minnesota (incorporated herein by reference to the Registrant's Registration Statement on Form S-1 and Amendment No. 1 thereto, Registration No. 33-15456). Certificate of Amendment, as filed with the Secretary of State of Minnesota on November 12, 1987. 3(b) Bylaws, as amended, (incorporated herein by reference to the Registrant's Registration Statement on Form S-1 and Amendment No. 1 thereto, Registration No. 33-15456 and incorporated by reference to exhibit 3ii of the Registrant's Form 10-Q filed May 17, 1994). 10(a) Employment Agreement between the Registrant and Richard Fink dated January 6, 1987, (incorporated herein by reference to the Registrant's Registration No. 33-15456). ** 10(b) Stockholder Agreement by and among the Registrant, Richard Fink, William Hope, Stephen LaBelle, Daniel Nielsen, Phillip Oberg and Robert Stotts, dated June 14, 1985 (incorporated herein by reference to the Registrant's Schedule 13E-4 filing dated May 13, 1985). 10(c) 1989 Stock Option and Compensation Plan (incorporated herein by reference to the Registrant's definitive proxy statement for the 1989 Annual Meeting of Shareholders filed August 29, 1989). ** 10(d) 1996 Director Stock Option Plan (incorporated herein by reference to the Registrant's Form 10-K, for the fiscal year ended June 29, 1996). ** 10(e) Employment Agreement between Registrant and Thomas Moberly, dated February 20, 1990 (incorporated herein by reference to the Registrant's Form 10-K filed, for the fiscal year ended July 3, 1993). ** 10(f) Credit Agreement dated as of July 14, 1997, among G&K Services, Inc., Work Wear Corporation of Canada Ltd., as Borrowers, various banks, and Norwest Bank Minnesota, National Association, and NBD Bank and First Chicago NBD Bank, Canada (incorporated herein by reference to the Registrant's Form 8-K filing dated July 14, 1997). 10(g) Employment Agreement between Registrant and Timothy W. Kuck dated May 12, 1997 (incorporated herein by reference to the Registrant's Form 10-K filed, for the fiscal year ended June 28, 1997). ** 16 10(h) 1998 Stock Option and Compensation Plan (incorporated herein by reference to the Registrant's definitive proxy statement for the 1998 Annual Meeting of Shareholders filed October 5, 1998). ** 10(i) Non-Competition and Confidentiality Agreement between Registrant and Joseph L. Rotunda dated December 7, 1998 (incorporated herein by reference to the Registrant's Form 10-Q filed May 11, 1999). ** 10(j) First Amendment, dated December 30, 1998, to Credit Agreement dated July 14, 1997, among G&K Services, Inc., Work Wear Corporation of Canada Ltd., as Borrowers, various banks, and Norwest Bank Minnesota, National Association, and NBD Bank and First Chicago NBD Bank, Canada (incorporated herein by reference to the Registrant's Form 10-Q filed May 11, 1999). 10(k) Non-Competition and Confidentiality Agreement between Registrant and Jeffrey L. Wright dated February 8, 1999 (incorporated herein by reference to the Registrant's Form 10-Q filed May 11, 1999). ** 10(l) Form of Change of Control Agreement between Registrant and each of Richard Fink, Thomas Moberly, Joseph L. Rotunda, Martin S. Reader, Timothy W. Kuck and Jeffrey L. Wright, dated February 24, 1999 (incorporated herein by reference to the Registrant's Form 10-Q filed May 11, 1999). ** 10(m) Credit Agreement dated March 25, 1999 among G&K Services, Inc. and Norwest Bank Minnesota, National Association. * 22 Subsidiaries of G&K Services, Inc. * 23 Consent of Independent Public Accountants * 24 Power of Attorney dated as of August 25, 1999 * 27 Financial Data Schedule (FOR SEC USE ONLY) * Footnotes: - ---------- * Filed herewith ** Compensatory plan or arrangement (THIS SPACE INTENTIONALLY LEFT BLANK) 17 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 8, 1999 G&K SERVICES, INC. (Registrant) By: /s/Thomas Moberly ---------------------------------------- Thomas Moberly, Chief Executive Officer (Principal Executive Officer) (THIS SPACE INTENTIONALLY LEFT BLANK) 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below on the 8th day of October 1999, by the following persons in the capacity indicated: /s/ Richard M. Fink Chairman of the Board and Director - --------------------------- Richard Fink /s/ Thomas Moberly Chief Executive Officer, President and Director - --------------------------- (Principal Executive Officer) Thomas Moberly /s/ Jeffrey L. Wright Chief Financial Officer, Treasurer and Secretary - --------------------------- (Principal Financial Officer) Jeffrey L. Wright /s/ Michael F. Woodard Controller (Principal Accounting Officer) - --------------------------- Michael F. Woodard * Director - --------------------------- Bruce Allbright * Director - --------------------------- Donald Goldfus * Director - --------------------------- William Hope * Director - --------------------------- Bernard Sweet * Director - --------------------------- Wayne Fortun * Director - --------------------------- Paul Baszucki * By /s/ Richard M. Fink ---------------------- Richard M. Fink Attorney-in-fact
(THIS SPACE INTENTIONALLY LEFT BLANK) 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Income for the Fiscal Years Ended June 26, 1999, June 27, 1998 and June 28, 1997................................ F - 2 Consolidated Balance Sheets as of June 26, 1999 and June 27, 1998........................ F - 3 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 26, 1999, June 27, 1998 and June 28, 1997................................ F - 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Fiscal Years Ended June 26, 1999, June 27, 1998 and June 28, 1997............. F - 5 Notes to Consolidated Financial Statements............................................... F - 6 Report of Independent Public Accountants................................................. F - 15
F-1 CONSOLIDATED STATEMENTS OF INCOME G&K Services, Inc. and Subsidiaries
For the Fiscal Years Ended ---------------------------------------------------------- June 26, June 27, June 28, (In thousands, except per share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Revenues Rental operations $503,062 $483,516 $334,042 Direct sales 16,904 19,077 16,872 - ---------------------------------------------------------------------------------------------------------------------------- Total revenues 519,966 502,593 350,914 - ---------------------------------------------------------------------------------------------------------------------------- Operating Expenses Cost of rental operations 283,419 280,680 183,101 Cost of direct sales 11,938 13,773 12,908 Selling and administrative 111,228 100,136 80,235 Depreciation 27,410 26,365 19,734 Amortization of intangibles 8,569 9,228 2,225 - ---------------------------------------------------------------------------------------------------------------------------- Total operating expenses 442,564 430,182 298,203 - ---------------------------------------------------------------------------------------------------------------------------- Income from Operations 77,402 72,411 52,711 Interest expense 17,213 21,848 6,846 Other income, net (1,009) (2,184) (2,034) - ---------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 61,198 52,747 47,899 Provision for income taxes 24,169 20,689 18,897 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 37,029 $ 32,058 $ 29,002 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Basic weighted average number of shares outstanding 20,414 20,380 20,323 Basic Earnings Per Common Share $ 1.81 $ 1.57 $ 1.43 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Diluted weighted average number of shares outstanding 20,509 20,454 20,426 Diluted Earnings Per Common Share $ 1.81 $ 1.57 $ 1.42 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-2 CONSOLIDATED BALANCE SHEETS G&K Services, Inc. and Subsidiaries
June 26, June 27, ASSETS (In thousands, except share data) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 6,297 $ 11,975 Accounts receivable, less allowance for doubtful accounts of $2,479 and $2,392 59,626 56,933 Inventories 83,892 77,210 Prepaid expenses 8,974 7,295 Prepaid income taxes 4,017 - - ----------------------------------------------------------------------------------------------------------------------- Total current assets 162,806 153,413 - ----------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment Land 26,038 25,801 Buildings and improvements 93,519 89,683 Machinery and equipment 181,968 154,048 Automobiles and trucks 39,447 36,531 Less accumulated depreciation (142,537) (118,378) - ----------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 198,435 187,685 - ----------------------------------------------------------------------------------------------------------------------- Other Assets Goodwill, net 128,226 131,899 Restrictive covenants and customer lists, net 37,805 42,310 Other, principally retirement plan assets 14,160 16,535 - ----------------------------------------------------------------------------------------------------------------------- Total other assets 180,191 190,744 - ----------------------------------------------------------------------------------------------------------------------- $541,432 $531,842 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 15,456 $ 16,103 Accrued expenses Salaries and employee benefits 18,309 18,077 Other 13,504 17,849 Deferred income taxes 14,007 13,036 Current maturities of long-term debt 28,362 15,000 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 89,638 80,065 - ----------------------------------------------------------------------------------------------------------------------- Long-Term Debt 193,952 234,843 Deferred Income Taxes 11,520 9,483 Other Noncurrent Liabilities 10,689 9,331 - ----------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 6 and 7) Stockholders' Equity Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,041,852 and 19,011,952 shares issued and outstanding 9,521 9,506 Class B, 10,000,000 shares authorized, 1,474,996 and 1,474,996 shares issued and outstanding 738 738 Additional paid-in capital 26,086 23,644 Retained earnings 210,253 174,660 Deferred compensation (2,601) (1,973) Accumulated other comprehensive income (8,364) (8,455) - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 235,633 198,120 - ----------------------------------------------------------------------------------------------------------------------- $541,432 $531,842 - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries
For the Fiscal Years Ended ----------------------------------------------------- June 26, June 27, June 28, (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $37,029 $32,058 $29,002 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 35,979 35,593 21,959 Deferred income taxes 3,008 2,747 (255) Changes in current operating items, exclusive of acquisitions - Inventories (6,577) (4,778) (7,840) Accounts receivable and prepaid expenses (8,043) (8,585) (5,648) Accounts payable and other accrued expenses (5,055) 16,413 4,430 Other, net 3,105 1,004 2,444 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 59,446 74,452 44,092 - -------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (37,974) (37,398) (35,536) Acquisition of business assets (155) (283,361) (3,679) Cash generated from assets held for sale - 7,693 - Net proceeds from sale of assets 2,074 77,107 1,102 (Purchases) sales of investments (770) (438) 207 - -------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (36,825) (236,397) (37,906) - -------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from debt financing 22,635 376,246 13,335 Repayments of debt financing (50,032) (208,132) (18,072) Cash dividends paid (1,436) (1,434) (1,431) Sale of common stock 534 254 86 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (28,299) 166,934 (6,082) - -------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (5,678) 4,989 104 Cash and Cash Equivalents: Beginning of year 11,975 6,986 6,882 - -------------------------------------------------------------------------------------------------------------------------------- End of year $ 6,297 $11,975 $ 6,986 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information: Cash paid for - Interest $16,052 $22,395 $10,066 - -------------------------------------------------------------------------------------------------------------------------------- Income taxes $27,403 $19,025 $17,094 - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME G&K Services, Inc. and Subsidiaries
(In thousands, except per share data) Common Stock ------------------------------- Class A Class B ------------------------------- Unrealized Number Number Additional Gain on Cumulative of of Paid-In Retained Deferred Investments, Translation Comprehensive Shares Amount Shares Amount Capital Earnings Compensation Net Adjustment Income - --------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1996 18,916 $9,458 1,521 $761 $22,203 $116,465 $(2,445) $329 $(5,795) - -------------------------------------------------------------------------------------------------------------- Net income - - - - - 29,002 - - - $29,002 Cash dividend $.07 per share - - - - - (1,431) - - - - Stock issued for employee benefit plans 25 12 - - 481 - (299) - - - B stock converted to A stock 46 23 (46) (23) - - - - - - Amortization of deferred compensation - - - - - - 715 - - - Unrealized holding gains arising during the period, net of tax - - - - - - - 264 - 264 Less: reclassification adjustment for gains included in net income, net of tax - - - - - - - (287) - (287) Translation adjustment - - - - - - - - (446) (446) -------- Comprehensive income - - - - - - - - - $28,533 - ---------------------------------------------------------------------------------------------------------------------------- Balance June 28, 1997 18,987 9,493 1,475 738 22,684 144,036 (2,029) 306 (6,241) -------- - ---------------------------------------------------------------------------------------------------------------- Net income - - - - - 32,058 - - - $32,058 Cash dividend $.07 per share - - - - - (1,434) - - - - Stock issued for employee benefit plans 25 13 - - 960 - (468) - - - Amortization of deferred compensation - - - - - - 524 - - - Unrealized holding gains arising during the period, - - - - - - - 507 - 507 net of tax Less: reclassification adjustment for gains included in net income, net of tax - - - - - - - (356) - (356) Translation adjustment - - - - - - - - (2,671) (2,671) --------- Comprehensive income - - - - - - - - - $29,538 - ----------------------------------------------------------------------------------------------------------------------------- Balance June 27, 1998 19,012 9,506 1,475 738 23,644 174,660 (1,973) 457 (8,912) --------- - ---------------------------------------------------------------------------------------------------------------- Net income - - - - - 37,029 - - - $37,029 Cash dividend $.07 per share - - - - - (1,436) - - - - Stock issued for employee benefit plans 30 15 - - 2,442 - (1,533) - - - Amortization of deferred compensation - - - - - - 905 - - - Unrealized holding gains arising during the period, - - - - - - - 548 - 548 net of tax Less: reclassification adjustment for gains included in net income, net of tax - - - - - - - (140) - (140) Translation adjustment - - - - - - - - (317) (317) -------- Comprehensive income - - - - - - - - - $37,120 - ----------------------------------------------------------------------------------------------------------------------------- Balance June 26, 1999 19,042 $9,521 1,475 $738 $26,086 $210,253 $(2,601) $865 $(9,229) -------- - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS G&K Services, Inc. (the Company) is a full-service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of nonuniform items such as floormats, dust mops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniform garments for customers as well as uniforms for direct sale. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated in consolidation. INVENTORIES New goods inventories are stated at the lower of first-in, first-out (FIFO) cost or market. Rental merchandise in service is stated at cost less amortization, which is not in excess of market. The components of inventories as of June 26, 1999 and June 27, 1998 are as follows:
1999 1998 - ---------------------------------------- ------------------------- -------------------- New goods $20,081 $18,834 Rental merchandise in service 63,811 58,376 - ---------------------------------------- ------------------------- -------------------- $83,892 $77,210 - ---------------------------------------- ------------------------- -------------------- - ---------------------------------------- ------------------------- --------------------
PROPERTY, PLANT AND EQUIPMENT The Company provides for depreciation for financial reporting purposes over the estimated useful lives of property, plant and equipment as follows:
Life (Years) - ------------------------------------------------------ ------------------------ Automobiles and trucks 3 to 8 Machinery and equipment 3 to 10 Buildings 20 to 33 1/3 Building improvements 10 - ------------------------------------------------------ ------------------------
Costs of significant additions, renewals and betterments, including external computer software development costs, are capitalized. When an asset is sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the gain or loss on disposition is reflected in earnings. Maintenance and repairs are charged to expense when incurred. INTANGIBLE ASSETS ARISING FROM ACQUISITIONS The cost of acquisitions in excess of the fair value of the underlying net assets acquired (goodwill) is amortized over periods ranging from 8 to 40 years. Accumulated amortization of goodwill was $14,120 as of June 26, 1999 and $11,420 as of June 27, 1998. Restrictive covenants and acquired customer lists, stated at cost less accumulated amortization of $13,217 and $8,208 as of June 26, 1999 and June 27, 1998, are being amortized over the terms of the respective agreements and the estimated average life of an account, respectively. RETIREMENT PLAN ASSETS Retirement plan assets consist primarily of mutual funds and cash equivalents, which are stated at their fair value as determined by quoted market prices and the cash surrender values of life insurance policies. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company in the management of its interest rate exposure. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The related amounts payable to, or receivable from, the counterparties are included in other accrued expenses. The fair value of the swap agreements is not recognized in the consolidated financial statements, since they are accounted for as hedges. F-6 FOREIGN CURRENCY Assets and liabilities of the Company's foreign operations are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments are recorded as a separate component of stockholders' equity. INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return and separate state and foreign returns. The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at currently enacted tax rates. PER SHARE DATA Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share was computed similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other dilutive securities (including nonvested restricted stock) using the treasury stock method.
For the Fiscal Years Ended --------------------------------------------------------------------- June 26, June 27, June 28, 1999 1998 1997 ------------------------- --------------------- --------------------- Weighted average number of common shares outstanding used in computation of basic earnings per share 20,414,000 20,380,000 20,323,000 Weighted average effect of nonvested restricted stock grants, exercise of options and other 95,000 74,000 103,000 ------------------------- --------------------- --------------------- Shares used in computation of diluted earnings per share 20,509,000 20,454,000 20,426,000 ------------------------- --------------------- --------------------- ------------------------- --------------------- ---------------------
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," was adopted by the Company in the first quarter of fiscal 1999. SFAS No. 130 requires the Company to report and display comprehensive income and its components. Comprehensive income is defined as changes in equity of a business enterprise during a period except those resulting from investments by owners and distributions to owners. The Company has chosen to disclose comprehensive income, which consists of net income, foreign currency translation adjustment and unrealized gain on investments, in the consolidated statements of stockholders' equity. Prior years have been restated to conform to the requirements of SFAS No. 130. The following table represents the changes in accumulated other comprehensive income:
1999 1998 1997 ------------- ------------- ------------- Accumulated other comprehensive income, beginning balance $(8,455) $(5,935) $(5,466) Unrealized gain (loss) on investments 408 151 (23) Cumulative translation adjustment (317) (2,671) (446) ------------- ------------- ------------- Accumulated other comprehensive income, ending balance $(8,364) $(8,455) $(5,935) ------------- ------------- ------------- ------------- ------------- -------------
Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), was also adopted by the Company in fiscal 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The adoption of SOP 98-1 did not have a material impact on its financial condition or results of operations. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance F-7 sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The FASB has delayed the effective date of this statement by one year with the issuance of SFAS No. 137. The standard is now effective for fiscal years beginning after June 15, 2000. The Company is in the process of quantifying the impact of SFAS No. 133 on the consolidated financial statements. 2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS On July 14, 1997, the Company purchased the uniform rental assets and selected linen rental assets of National Linen Service (NLS) for approximately $283,400 in cash. The acquisition was accounted for using the purchase method and the purchase price was allocated to the acquired assets and assumed liabilities based on the fair values of the assets purchased and the liabilities assumed. The purchase price and related acquisition costs exceeded the fair values assigned to tangible assets by approximately $160,600, which was assigned to restrictive covenants ($1,100) to be amortized over the contract life of five years, purchased customer list ($41,600) to be amortized over eleven years and goodwill ($117,900) to be amortized over thirty-five years. In connection with the asset purchase from NLS, nine linen rental facilities purchased were identified as assets held for sale. The net cash flows from (i) operations of these facilities from the date of acquisition until the date of sale (holding period, not to exceed one year), (ii) interest on incremental debt incurred during the holding period to finance the purchase of these facilities, and (iii) proceeds from the sale were considered in the allocation of the purchase price to the acquired assets and liabilities. Accordingly, earnings or losses from these nine facilities have been excluded from the consolidated statement of income. For fiscal 1998, losses excluded from the Company's consolidated statement of income totaled $659, including allocated interest expense of $3,538. During fiscal 1998, the Company sold selected linen assets and uniform rental assets for approximately $76,700 in cash. This sale included assets classified as assets held for sale having a book value of approximately $55,300 and other operating assets acquired from NLS having a book value of approximately $21,000. Proceeds from the sale were used to reduce the Company's outstanding bank debt. This transaction completed the sale of eight of the nine linen facilities acquired from NLS that were held for sale. During fiscal 1999, the Company sold selected linen assets for approximately $2,100 in cash. This transaction completes the sale of the nine linen facilities acquired from NLS that were held for sale. The following unaudited pro forma condensed results of operations for the years ended June 27, 1998 and June 28, 1997 have been prepared as if the NLS transaction occurred on June 29, 1997 and June 30, 1996, respectively:
1998 1997 - ------------------------------------------------------------- ----------------------- ----------------------- Revenues $ 507,767 $ 472,494 Income from operations 72,866 63,159 Net income 32,015 27,010 Basic earnings per common share $ 1.57 $ 1.33 Diluted earnings per common share $ 1.57 $ 1.32
This financial information does not purport to represent results that would actually have been obtained if the asset acquisition had occurred on June 30, 1996, or any future results which may in fact be realized. F-8 3. LONG-TERM DEBT Debt as of June 26, 1999 and June 27, 1998 includes the following:
1999 1998 - ------------------------------------------------------------------------ ----------------- ----------------- Borrowings under term loan and revolving credit facility at rates ranging from 5.50% to 6.74% at June 26, 1999 and 6.41% to 7.25% at June 27, 1998 $220,314 $249,843 Borrowings under discretionary credit facility at a rate of 5.75% at June 26, 1999 2,000 -- - ------------------------------------------------------------------------ ----------------- ----------------- 222,314 249,843 Less current maturities (28,362) (15,000) - ------------------------------------------------------------------------ ----------------- ----------------- Total long-term debt $193,952 $234,843 - ------------------------------------------------------------------------ ----------------- ----------------- - ------------------------------------------------------------------------ ----------------- -----------------
The Company maintains a $425,000 term loan and revolving credit facility. The credit facility includes (i) a $300,000 term loan facility with maturities for the five years subsequent to June 26, 1999 of $26,362, $41,425, $45,192, $45,192, $48,957, and (ii) a $125,000 revolving credit facility expiring on June 30, 2002. As of June 26, 1999, borrowings outstanding under the term loan were $207,128, and borrowings under the revolving credit facility were $13,186. The unused portion of the revolver may be used for working capital and to provide up to $10,000 in letters of credit. Borrowings under the term loan and revolving credit facility bear interest at 0.5% to 1.125% over the rate offered to major banks in the London Interbank Eurodollar market (Eurodollar Rate), or Canadian Prime for Canadian borrowings, based on a leverage ratio calculated on a quarterly basis. Advances outstanding as of June 26, 1999 bear interest at the Eurodollar Rate or Canadian Prime Rate plus 0.50%. The Company also pays a fee of 0.15% to 0.35% on the unused daily balance of the revolver based on a leverage ratio calculated on a quarterly basis. The fee as of June 26, 1999 was 0.15%. The Company also maintains a $10,000 discretionary credit facility. Borrowings under the discretionary credit facility bear interest at 0.65% to 1.275% over the Eurodollar Rate. Advances outstanding as of June 26, 1999 bear interest at the Eurodollar Rate plus 0.65%. On September 27, 1997, the Company entered into interest rate swap agreements with certain lenders. The Company entered into an agreement for the notional principal amount of $100,000 through September 12, 2000, that effectively fixed the interest rate on floating rate debt at a rate of 6.24%. The Company also entered into an agreement for the notional principal amount of $50,000 through September 12, 1999, that effectively fixed the interest rate on floating rate debt at a rate of 6.065%, unless the Eurodollar Rate increases by more than 25 basis points within any one quarter, in which case the Company retains the risk of any increase of rates over 25 basis points. If these swap agreements were to be terminated as of June 26, 1999, the Company would have incurred a loss on the contracts of $886. The credit facility contains various restrictive covenants that among other matters require the Company to maintain a minimum interest coverage ratio, minimum stockholders' equity and maximum leverage ratio, all as defined. The credit agreement also limits additional indebtedness, investments, capital expenditures and cash dividends. As of June 26, 1999, the Company was in compliance with all debt covenants. The fair value of the Company's long-term debt, based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities, approximates carrying value as of June 26, 1999 and June 27, 1998. 4. STOCKHOLDERS' EQUITY Each share of Class A common stock is entitled to one vote and is freely transferable. Each share of Class B is entitled to ten votes and can be converted to Class A common stock on a share-for-share basis. Until converted to Class A common stock, however, Class B shares are not freely transferable. No cash dividends can be paid on Class B common stock unless dividends of at least an equal amount per share are paid on Class A shares. Substantially all Class B shares are held by an officer of the Company. STOCK AWARD PLANS The Company maintains a 1989 and 1998 Stock Option and Compensation Plan (the Employee Plans) to grant certain stock awards, including stock options at fair market value and restricted shares, to key employees of the Company. The Company records compensation expense as the restrictions are removed from the stock for the difference between the F-9 par value and fair market value as of the grant date. A maximum of 2,400,014 and 1,500,000 stock awards can be granted under the 1989 and 1998 plans, respectively; 1,775,467 and 1,459,493 awards were available for grant as of June 26, 1999. In August 1996, the Company adopted the 1996 Director Stock Option Plan (the Directors' Plan). The Directors' Plan provides for automatic grants of 3,000 nonqualified stock options to nonemployee directors of the Company as of the initial adoption of the Plan or as of the date such individuals became directors of the Company and 1,000 nonqualified stock options on each subsequent annual shareholder meeting date. The Company has reserved 50,000 shares of Class A common stock for issuance under the Directors' Plan. These options expire within ten years of grant and are exercisable one year from the date of grant, except for the initial grants, of which, one-third of the total options are exercisable each year beginning with the first anniversary of the date of grant. The option price will be the average market price of the Class A common stock during the ten business days preceding the Company's annual shareholder meeting. The following schedule summarizes activity in the plans:
Stock Options ------------------------------- Employee Directors' Restricted Grant Plans Plan Stock Price - ---------------------------------------- --------------- --------------- --------------- ------------------- Outstanding at June 30, 1996 42,789 - 308,539 $7.17 - 25.75 Granted 29,330 15,000 20,566 30.33 - 37.00 Exercised (6,264) - - 11.17 - 16.50 Canceled (5,504) - (6,051) 11.17 - ---------------------------------------- --------------- --------------- --------------- ------------------- Outstanding at June 28, 1997 60,351 15,000 323,054 7.17 - 37.00 Granted 24,651 5,000 21,403 32.00 - 41.88 Exercised (11,917) - - 7.17 - 37.00 Canceled (4,632) - (14,554) 37.00 - ---------------------------------------- --------------- --------------- --------------- ------------------- Outstanding at June 27, 1998 68,453 20,000 329,903 11.33 - 41.88 Granted 234,103 5,000 24,322 44.77 - 53.34 Exercised (7,013) - - 11.33 - 41.88 Canceled (36,868) - (7,881) 46.00 - ---------------------------------------- --------------- --------------- --------------- ------------------- Outstanding at June 26, 1999 258,675 25,000 346,344 16.00 - 53.34 - ---------------------------------------- --------------- --------------- --------------- ------------------- - ---------------------------------------- --------------- --------------- --------------- ------------------- Exercisable at June 26, 1999 15,716 15,000 - 16.00 - 41.88 - ---------------------------------------- --------------- --------------- --------------- ------------------- - ---------------------------------------- --------------- --------------- --------------- -------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the accompanying consolidated statements of income except for shares issued under the Restricted Stock Plan. Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per common share would have been adjusted to the following pro forma amounts:
Fiscal Years - ------------------------------------------ ----------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------ --------------------- --------------------- --------------------- Net income: As reported $37,029 $32,058 $29,002 Pro forma 36,035 31,968 28,987 Basic net income per share: As reported $1.81 $1.57 $1.43 Pro forma 1.77 1.57 1.43 Diluted net income per share: As reported $1.81 $1.57 $1.42 Pro forma 1.76 1.56 1.42
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value of options granted in 1999, 1998 and 1997 was $17.38, $17.61 and $14.80, respectively. The weighted average exercise price was $46.46, $41.88 and $33.53, respectively. F-10 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used: risk-free interest rates of 4.83% for 1999, 5.68% for 1998 and 6.42% for 1997; expected dividends of $.07 per share; expected lives of seven years for 1999, 1998 and 1997; and expected volatility of 23.90% for 1999 grants, 27.53% for 1998 grants and 28.13% for 1997 grants. 5. INCOME TAXES The components of the provision for income taxes are as follows:
Fiscal Years - ------------------------------------------ ----------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------ --------------------- --------------------- --------------------- Current: Federal $11,625 $11,261 $12,989 State and local 1,118 1,211 1,608 Foreign 8,418 5,470 4,555 - ------------------------------------------ --------------------- --------------------- --------------------- 21,161 17,942 19,152 Deferred 3,008 2,747 (255) - ------------------------------------------ --------------------- --------------------- --------------------- $24,169 $20,689 $18,897 - ------------------------------------------ --------------------- --------------------- --------------------- - ------------------------------------------ --------------------- --------------------- ---------------------
The reconciliation between income taxes using the statutory federal income tax rate and the recorded income tax provision is as follows:
Fiscal Years - ------------------------------------------ ----------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------ --------------------- --------------------- --------------------- Federal taxes at the statutory rate $21,419 $18,462 $16,764 State taxes, net of federal tax benefit 944 988 1,072 Foreign taxes 1,155 884 98 Permanent differences and other, net 651 355 963 - ------------------------------------------ --------------------- --------------------- --------------------- Total provision $24,169 $20,689 $18,897 - ------------------------------------------ --------------------- --------------------- --------------------- - ------------------------------------------ --------------------- --------------------- --------------------- Effective rate 39.5% 39.2% 39.5% - ------------------------------------------ --------------------- --------------------- --------------------- - ------------------------------------------ --------------------- --------------------- ---------------------
Significant components of the Company's deferred tax assets and deferred tax liabilities as of June 26, 1999 and June 27, 1998 are as follows:
1999 1998 - ------------------------------------------------------------- ----------------------- ----------------------- Deferred tax liabilities: Inventory amortization differences $(18,435) $(17,666) Depreciation and property basis differences (9,920) (7,222) Other (4,729) (5,735) - ------------------------------------------------------------- ----------------------- ----------------------- Total deferred tax liabilities (33,084) (30,623) Deferred tax assets: Accruals, reserves and other 7,557 8,104 - ------------------------------------------------------------- ----------------------- ----------------------- Net deferred tax liability $(25,527) $(22,519) - ------------------------------------------------------------- ----------------------- ----------------------- - ------------------------------------------------------------- ----------------------- -----------------------
6. EMPLOYEE BENEFIT PLANS PENSION PLAN The Company has a noncontributory pension plan (the Plan) covering substantially all employees, except certain employees who are covered by union-administered plans. Benefits are based on number of years of service and each employee's compensation near retirement. The Company makes annual contributions to the Plan consistent with federal funding requirements. Plan assets consist primarily of common stocks and U.S. government and corporate obligations. UNION PENSION PLANS Certain employees of the Company are covered by union-sponsored, collectively bargained, multiemployer pension plans (Union Plans). The Company contributed and charged to expense $939 in 1999, $851 in 1998 and $657 in F-11 1997 for such plans. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked. The Company may be liable for its share of unfunded vested benefits, if any, related to the Union Plans. Information from the Union Plans' administrators is not available to permit the Company to determine its share, if any, of unfunded vested benefits. 401(k) PLAN All full-time nonunion employees are eligible to participate in a 401(k) plan. The Company matches a portion of the employee's salary reduction contributions and provides investment choices for the employee. The matching contributions under the 401(k) plan, which vest over a seven-year employment period, were $534 in 1999, $466 in 1998 and $394 in 1997. EXECUTIVE RETIREMENT PLANS The Company has a nonqualified Supplemental Executive Retirement Plan (SERP) and a nonqualified Executive Deferred Compensation Plan (DEFCO) to provide designated executives and professional employees with retirement, death and disability benefits. Annual benefits under the SERP are based on years of service and individual compensation near retirement. The Company has purchased life insurance contracts that may be used to fund the retirement benefits. The net cash surrender value of the contracts as of June 26, 1999 and June 27, 1998 was $3,834 and $3,012, respectively, and is included in other assets in the accompanying consolidated balance sheets. Under the DEFCO plan, the Company matches a portion of the designated employees' contributions and provides a guaranteed investment return that is adjusted annually. The Company's matching contributions under the DEFCO plan were $265 in 1999, $240 in 1998 and $216 in 1997. The accumulated benefit obligation of $6,423 as of June 26, 1999 and $5,504 as of June 27, 1998, is included in other noncurrent liabilities in the accompanying consolidated balance sheets. The Company has purchased investments, including stable income and stock index managed funds, which may be used to fund the retirement benefits. The investments had an aggregate market value of $6,439 as of June 26, 1999 and $5,492 as of June 27, 1998, and are included in other assets in the accompanying consolidated balance sheets at these values. The change in benefit obligation and plan assets consisted of the following for the years ended June 26, 1999 and June 27, 1998:
Supplemental Executive Pension Plan Retirement Plan 1999 1998 1999 1998 --------------- --------------- --------------- --------------- Change in benefit obligation: Projected benefit obligation, beginning of year $15,836 $14,572 $5,241 $3,804 Service cost 1,312 1,287 258 158 Interest cost 1,137 1,154 377 301 Actuarial (gain) loss 669 (812) (663) 1,053 Benefits paid (490) (365) (121) (75) --------------- --------------- --------------- --------------- Projected benefit obligation, end of year $18,464 $15,836 $5,092 $5,241 --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- Change in plan assets: Fair value of plan assets, beginning of year $19,534 $17,270 $ -- $ -- Actual return on plan assets 4,342 2,629 -- -- Employer contributions -- -- 121 75 Benefits paid (490) (365) (121) (75) --------------- --------------- --------------- --------------- Fair value of plan assets, end of year $23,386 $19,534 $ -- $ -- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
F-12 The funded status of the Company's plans were as follows as of June 26, 1999 and June 27, 1998:
Supplemental Executive Pension Plan Retirement Plan 1999 1998 1999 1998 --------------- --------------- --------------- --------------- Funded status $4,922 $3,699 $(5,092) $(5,241) Unrecognized transition amount (133) (267) -- -- Unrecognized actuarial (gain) loss (7,064) (5,167) 627 1,569 Unrecognized prior service cost 528 582 846 692 Additional minimum liability -- -- -- 109 Intangible asset -- -- (495) (692) --------------- --------------- --------------- --------------- Accrued pension liability $(1,747) $(1,153) $(4,114) $(3,563) --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
The following average assumptions were used to account for the plans for the years ended June 26, 1999 and June 27, 1998:
Supplemental Executive Pension Plan Retirement Plan 1999 1998 1999 1998 --------------- --------------- --------------- --------------- Discount rate 7.50% 7.25% 7.50% 7.25% Expected return on plan assets 7.50% 9.00% N/A N/A Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
The components of net periodic pension cost are as follows for the years ended June 26, 1999, June 27, 1998 and June 28, 1997:
Supplemental Executive Pension Plan Retirement Plan ------------------------------------ ----------------------------------- 1999 1998 1997 1999 1998 1997 ----------- ------------ ----------- ----------- ----------- ----------- Service cost $ 1,312 $ 1,287 $ 1,117 $258 $158 $146 Interest cost 1,137 1,154 1,018 377 301 314 Expected return on assets (1,454) (2,629) (1,376) -- -- -- Net transition asset (133) -- (134) -- -- -- Prior service cost 53 -- 53 65 65 65 (Gain) loss (321) 916 (56) 60 8 39 ----------- ----------- ------------ ------------ ----------- ----------- Net periodic pension cost $ 594 $ 728 $ 622 $760 $532 $564 ----------- ----------- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
7. COMMITMENTS AND CONTINGENCIES LITIGATION The Company is a defendant in litigation arising in the ordinary course of business, including being named, along with other defendants, as a potentially responsible party at certain waste disposal sites where groundwater contamination has been detected, or is suspected. In the opinion of management, resolution of the litigation will not have a material effect on the Company's results of operations or financial position. LEASES The Company has noncancellable operating lease commitments for certain production and other equipment and delivery facilities that expire on various dates through 2006. Minimum annual rental commitments at June 26, 1999 for the fiscal years 2000 through 2004 and thereafter are $4,693, $3,026, $2,583, $2,220, $900 and $1,162. In accordance with the terms of the lease agreements, the Company is required to pay real estate taxes and maintenance costs. Total lease expense was $6,744 in 1999, $5,900 in 1998 and $4,234 in 1997. 8. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in fiscal year 1999. SFAS No. 131 established standards for disclosure of financial information related to operating segments of the Company as well as disclosure requirements for customer and geographic information. SFAS No. 131 defines an operating segment as a component of a company for which operating results are reviewed regularly by the chief operating decision-maker to determine resource allocation and assess performance. The Company has two operating segments under the guidelines of SFAS No. 131: United States and Canada. Each operating segment derives F-13 revenues from the uniform rental business which includes garment rental and nonuniform items such as floormats, dust mops and cloths, wiping towels and selected linen items. No one customer's transactions account for 10% or more of the Company's revenues. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). Financial information by geographic location is as follows:
United States Canada Elimination Total - ------------------------------------------------------------------------------------------------------------------- 1999: Revenues $457,462 $62,504 $ - $519,966 Income from operations 60,029 17,373 - 77,402 Interest income 2,283 45 (1,430) 898 Interest expense 16,164 2,479 (1,430) 17,213 Total assets 525,973 69,656 (54,197) 541,432 Capital expenditures 35,091 2,883 - 37,974 Depreciation and amortization expense 31,903 4,076 - 35,979 Income tax expense 17,617 6,552 - 24,169 1998: Revenues $441,421 $61,172 $ - $502,593 Income from operations 56,892 15,519 - 72,411 Interest income 2,960 36 (1,211) 1,785 Interest expense 20,916 2,143 (1,211) 21,848 Total assets 509,423 68,726 (46,307) 531,842 Capital expenditures 31,589 5,809 - 37,398 Depreciation and amortization expense 31,552 4,041 - 35,593 Income tax expense 15,299 5,390 - 20,689 1997: Revenues $292,407 $58,507 $ - $350,914 Income from operations 40,592 12,119 - 52,711 Interest income 2,148 29 (1,581) 596 Interest expense 5,844 2,583 (1,581) 6,846 Total assets 285,501 67,449 (40,985) 311,965 Capital expenditures 33,732 1,804 - 35,536 Depreciation and amortization expense 17,639 4,320 - 21,959 Income tax expense 14,509 4,388 - 18,897 - -------------------------------------------------------------------------------------------------------------------
(THIS SPACE INTENTIONALLY LEFT BLANK) F-14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO G&K SERVICES, INC.: We have audited the accompanying consolidated balance sheets of G&K Services, Inc. (a Minnesota corporation) and Subsidiaries as of June 26, 1999 and June 27, 1998, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended June 26, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of G&K Services, Inc. and Subsidiaries as of June 26, 1999 and June 27, 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 26, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, August 13, 1999 (THIS SPACE INTENTIONALLY LEFT BLANK) F-15 EX-10.M 2 EXHIBIT 10(M) EXHIBIT 10(m) March 25, 1999 G&K Services, Inc. 5995 Opus Parkway, Suite 500 Minnetonka, MN 55343 Attention: Jeffrey L. Wright Dear Mr. Wright: Norwest Bank Minnesota, National Association (the "Bank") is pleased to offer G&K Services, Inc., a Minnesota corporation (the "Borrower"), a $10,000,000 discretionary credit facility, under which the Bank may (in its sole discretion) make loans on a revolving basis not to exceed $10,000,000 at any one time outstanding. This letter (the "Letter Agreement") outlines the terms and conditions upon which the Bank may extend credit to the Borrower. 1. DEFINITIONS. As used herein, "Multibank Credit Agreement" means the Credit Agreement dated July 14, 1997 among the Borrower, Work Wear Corporation of Canada Ltd., the Bank, as US Agent and as a Bank, and various other financial institutions, together with all amendments, modifications and restatements thereof, but without regard to whether such Credit Agreement has been terminated or the obligations arising thereunder have been paid. Capitalized terms defined in the Multibank Credit Agreement and not otherwise defined herein shall have the meanings given them in the Multibank Credit Agreement. 2. DIRECT ADVANCES. The Bank shall consider making advances (each, an "Advance") to the Borrower from the date hereof through March 23, 2000 (the "Facility Termination Date") in an amount at any time outstanding not to exceed $10,000,000. Each advance shall be in an amount equal to an integral multiple of $100,000 greater than or equal to $1,000,000. The Borrower may borrow such amount, repay and reborrow, always in the Bank's discretion, so long as no Advance causes that dollar limit to be exceeded. Each individual Advance hereunder will always be at the sole discretion of the Bank. Nothing herein should be interpreted as a promise to make any one or more Advances. The proceeds of each Advance shall be used by the Borrower for the Borrower's general corporate purposes. The Borrower's obligation to repay Advances will be evidenced by and payable on demand with interest in accordance with the Borrower's promissory note in the form of Exhibit A hereto (the "Note"). 3. PAYMENT. All payments of principal and interest under the Note shall be made in immediately available funds. The Borrower authorizes the Bank at any time and from time to time to charge against the Borrower's deposit accounts with the Bank any amount due and payable under the Note or this Letter Agreement. 4. DETERMINATION OF MARGIN. As used in the Note, "Margin" means an incremental amount used in determining certain interest rates under the Note. The initial Margin shall be 77.5 basis points. The Margin shall be adjusted each fiscal quarter of the Borrower on the basis of the Leverage Ratio of the G&K Group as at the end of the previous fiscal quarter, in accordance with the following table:
Leverage Ratio Margin (basis points) -------------- --------------------- 3.50 to 1 or more 127.5 3.00 to 1 or more, but less than 3.50 to 1 110 2.50 to 1 or more, but less than 3.00 to 1 90 2.00 to 1 or more, but less than 2.50 to 1 77.5 Less than 2.00 to 1 65
Reductions and increases in the Margin will be made quarterly within five business days following receipt of the Borrower's financial statements and quarterly certificates required under the Multibank Credit Agreement. Notwithstanding the foregoing, (i) if the Borrower fails to deliver any such financial statements or certificates when required under the Multibank Credit Agreement, the Bank may, by notice to the Borrower, increase the Margin to the highest rates set forth above until such time as the Bank has received all such financial statements and certificates, and (ii) no reduction in the Margin will be made if a Default or Event of Default has occurred and is continuing at the time that such reduction would otherwise be made. 20 5. ADDITIONAL COVENANTS. The Borrower shall at all times abide by each covenant set forth in the Multibank Credit Agreement, the provisions of which are hereby incorporated by reference as fully as if set forth at length herein. For purposes of this Agreement, such covenants shall survive termination of the Multibank Credit Agreement and payment of the obligations described therein. 6. COSTS AND EXPENSES. The Borrower shall pay on demand all reasonable costs and expenses incurred by the Bank in connection with the preparation, execution, administration and enforcement of this Letter Agreement, the Note and the other instruments and documents delivered in connection herewith, including the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto. 7. OTHER AGREEMENTS. This Letter Agreement and the Note set forth the entire agreement of the Bank and the Borrower with respect to the matters treated herein and therein. This Letter Agreement cannot be modified except by a future amendment in writing. This Letter Agreement takes the place of any preliminary discussions between the Bank and the Borrower and supersedes any previous written agreements or understandings between the Bank and the Borrower with respect to the credit facility established hereunder. 8. DISCRETION OF BANK. THE BORROWER ACKNOWLEDGES THAT THE BANK IS NOT OBLIGATED HEREUNDER TO MAKE ANY ADVANCE, AND THAT THE BANK MAY REFUSE TO MAKE ANY ADVANCE REQUESTED BY THE BORROWER, AND MAY DEMAND PAYMENT OF THE NOTE IN FULL, AT ANY TIME AND FOR ANY REASON, WHETHER ARISING BEFORE, ON OR AFTER THE DATE HEREOF AND WHETHER OR NOT THE BORROWER IS IN COMPLIANCE WITH THE OTHER TERMS OF THIS LETTER AGREEMENT AND THE MULTIBANK CREDIT AGREEMENT, OR FOR NO REASON AT ALL. The Borrower's signature below indicates its approval of all of the terms of this Letter Agreement and its agreement to abide by those terms. Very truly yours, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Lynn S. Hultstrand ---------------------------------- Its Vice President ------------------------------ Accepted and agreed to as of the 25th day of March, 1999 G&K SERVICES, INC. By /s/ Jeffrey L. Wright ---------------------------------- Its Chief Financial Officer ----------------------------- 21 EXHIBIT A PROMISSORY NOTE $10,000,000 Minneapolis, Minnesota March 25, 1999 For value received, G&K Services, Inc., a Minnesota corporation (the "Borrower"), promises to pay to the order of Norwest Bank Minnesota, National Association, a national banking association (the "Bank"), at its main office in Minneapolis, Minnesota, or at such other place as the holder hereof may hereafter from time to time designate in writing, ON DEMAND, or, if demand is not sooner made, on the Facility Termination Date (as defined in the Letter Agreement described below), in lawful money of the United States of America, the principal sum of Ten Million Dollars ($10,000,000), or, if less, the aggregate unpaid principal amount of all advances made by the Bank to the Borrower pursuant to the letter agreement of even date herewith between the Borrower and the Bank (the "Letter Agreement"), and to pay interest on the principal balance of this Note outstanding from time to time (computed on the basis of the actual number of days elapsed in a 360-day year) from the date hereof until this Note is fully paid, at the Floating Rate, as defined below; provided, however, that any Eurodollar Rate Amount selected by the Borrower in accordance with the following paragraph shall bear interest at the applicable Eurodollar Rate for the Interest Period determined pursuant to the following paragraph, subject to fluctuations in the Margin, but after the Interest Period such Eurodollar Rate Amount shall bear interest at the Floating Rate. On any bank business day before 1:00 p.m., the Borrower may request telephonically that the Bank quote the Eurodollar Rate that would be applicable to the Eurodollar Rate Amount and for the Interest Period specified in such request. Immediately upon receipt of such quotation from the Bank, the Borrower may telephonically accept the Eurodollar Rate, whereupon the Eurodollar Rate Amount shall from the date the quotation is made bear interest at the Eurodollar Rate so selected. Acceptance of any Eurodollar Rate quotation shall be irrevocable. Failure immediately to accept such a quotation shall be deemed to be a rejection of such quotation. Absent manifest error, the records of the Bank shall be conclusive as to any Eurodollar Rate Amount and the Eurodollar Rate and Interest Period applicable thereto. As used herein, the following terms have the meaning set forth below: "Eurodollar Rate" means the annual rate equal to the sum of (i) the rate obtained by dividing (a) the rate (rounded up to the nearest 1/8 of 1%) determined by the Bank to be the average rate at which U.S. dollar deposits are offered to the Bank by major banks in the London interbank market for funds to be made available on the first day of any Interest Period in an amount approximately equal to the amount for which a Eurodollar Rate quotation has been requested and maturing at the end of such Interest Period, by (b) a percentage equal to 100% minus the Federal Reserve System requirement (expressed as a percentage) applicable to such deposits, and (ii) the then-applicable Margin. "Eurodollar Rate Amount" means any portion of the principal balance of this Note bearing interest at a Eurodollar Rate. Each Eurodollar Rate Amount must be equal to an integral multiple of $100,000 greater than or equal to $1,000,000. "Floating Rate" means, at any time, the rate of interest publicly announced from time to time by the Bank as its "prime" or "base" rate or, if the Bank ceases to announce a rate so designated, any similar successor rate designated by the Bank. The Floating Rate shall change when and as such prime, base or successor rate changes. "Interest Period" means a period of not less than 5 days and not more than 30 days that corresponds to the maturity of U.S. dollar deposits then offered to the Bank by major banks in the London interbank market. "Margin" has the meaning set forth in the Letter Agreement. Interest accruing on the principal balance of this Note each month at the Floating Rate shall be due and payable on the last day of that month, commencing on the last day of the month hereof, and on demand. Interest accruing on any Eurodollar Rate Amount shall be due and payable on the last day of the Interest Period applicable thereto. This Note is issued pursuant to, and is subject to, the Letter Agreement. 22 This Note may be prepaid at any time and from time without penalty or premium; provided, however, that the Borrower may not prepay any Eurodollar Rate Amount except upon payment of any compensation as required by the following paragraph. In addition to any interest payable hereunder and any fees or other amounts payable under this Note or the Letter Agreement, the Borrower shall compensate the Bank, upon written request by the Bank (which request shall set forth the basis for requesting such amounts), for all losses and expenses in respect of any interest or other consideration paid by the Bank to lenders of funds borrowed by it or deposited with it to maintain any Eurodollar Rate Amount at a Eurodollar Rate which the Bank may sustain to the extent not otherwise compensated for hereunder and not mitigated by the reemployment of such funds if any prepayment of any such Eurodollar Rate Amount occurs on a date that is not the expiration date of the applicable Interest Period. A certificate as to any such loss or expense (including calculations, in reasonable detail, showing how the Bank computed such loss or expense) shall be promptly submitted by the Bank to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. Any determination under this paragraph may be made as if the Bank had actually funded and maintained each Eurodollar Rate Amount during the Interest Period for such Eurodollar Rate Amount through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the appropriate Eurodollar Rate for such Interest Period, whether or not the Bank in fact purchased such deposits. The Borrower shall pay all costs of collection, including reasonable attorneys' fees and legal expenses, if this Note is not paid on demand, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. THE BORROWER ACKNOWLEDGES THAT IN ACCEPTING THIS NOTE THE BANK HAS NOT UNDERTAKEN ANY OBLIGATION TO MAKE ANY ADVANCE TO THE BORROWER AND THAT THE BANK MAY REFUSE TO MAKE ANY ADVANCE REQUESTED BY THE BORROWER AND MAY DEMAND PAYMENT OF ADVANCES THAT IT HAS MADE UNDER THIS NOTE AT ANY TIME, WITH OR WITHOUT NOTICE AND FOR ANY REASON, WHETHER ARISING BEFORE, ON OR AFTER THE DATE HEREOF, WHETHER OR NOT THE BORROWER IS IN COMPLIANCE WITH THE TERMS OF THIS NOTE AND THE LETTER AGREEMENT, OR FOR NO REASON AT ALL. This Note has been executed as of the date and year first above-written, but actually on the date set forth under the Borrower's signatures below. G&K SERVICES, INC. By /s/ Jeffrey L. Wright ------------------------------------ Its Chief Financial Officer ------------------------------- (THIS SPACE INTENTIONALLY LEFT BLANK) 23 EX-22 3 EXHIBIT 22 EXHIBIT 22 SUBSIDIARIES OF G&K SERVICES, INC. G&K Services, Co. (incorporated in Minnesota, U.S.A.) G&K Services Linen, Co. (incorporated in Minnesota, U.S.A.) Northwest Linen Co. (incorporated in Minnesota, U.S.A.) Gross Industrial Towel & Garment Service, Inc. (incorporated in Minnesota, U.S.A.) G&K Services of Canada, Inc. (incorporated in Ontario, Canada) 912489 Ontario Limited (incorporated in Ontario, Canada) Work Wear Corporation of Canada, Ltd. (incorporated in Ontario, Canada) La Corporation Work Wear du Quebec (incorporated in Quebec, Canada) (THIS SPACE INTENTIONALLY LEFT BLANK) 24 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement File Nos. 33-63359, 333-64977 and 333-66419. /s/Arthur Andersen LLP -------------------------- ARTHUR ANDERSEN LLP Minneapolis, Minnesota, October 8, 1999 (THIS SPACE INTENTIONALLY LEFT BLANK) 25 EX-24 5 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of G&K SERVICES, INC., a Minnesota corporation (the Company), hereby constitute and appoint RICHARD M. FINK and JEFFREY L. WRIGHT, and each or any of them, his true and lawful attorneys-in-fact and agents, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file the Annual Report of the Company and Form 10-K for the year ended June 26, 1999, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 including any amendment or amendments, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority, granting unto said attorneys full power and authority to do and perform each and every thing, requisite and necessary to be done in and about the premises in order to execute the same as fully to all intents and purposes as he, himself, might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or could cause to be done by virtue hereof. IN WITNESS WHEREOF, G&K SERVICES, INC. has caused this Power of Attorney to be executed in its name by its directors this 25th day of August 1999. /s/ Richard Fink /s/ Donald Goldfus - ------------------- -------------------- Richard Fink Donald Goldfus /s/ Bruce Allbright /s/ William Hope - ------------------- -------------------- Bruce Allbright William Hope /s/ Paul Baszucki /s/ Bernard Sweet - ------------------- -------------------- Paul Baszucki Bernard Sweet /s/ Wayne Fortun - ------------------- Wayne Fortun (THIS SPACE INTENTIONALLY LEFT BLANK) 26 EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-26-1999 JUN-28-1998 JUN-26-1999 6,297 0 62,105 2,479 83,892 162,806 340,972 142,537 541,432 89,638 0 0 0 10,259 225,374 541,432 519,966 519,966 295,357 442,564 (1,009) 3,045 17,213 61,198 24,169 37,029 0 0 0 37,029 1.81 1.81
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