SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- F O R M 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 25, 1999 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - -------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5995 OPUS PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55343 (Address of principal executive offices and zip code) (612) 912-5500 (Registrant's telephone number, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS A Outstanding February 3, 2000 Common Stock, par value $.50 per share 19,065,821 CLASS B Outstanding February 3, 2000 Common Stock, par value $.50 per share 1,474,996 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS G&K SERVICES, INC. AND SUBSIDIARIES December 25, 1999 June 26, ASSETS (In thousands, except share data) (Unaudited) 1999 - -------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $2,956 $6,297 Accounts receivable, less allowance for doubtful accounts of $3,019 and $2,479 69,417 59,626 Inventories 89,172 83,892 Prepaid expenses and other current assets 11,910 8,974 Prepaid income taxes - 4,017 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 173,455 162,806 - -------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 26,465 26,038 Buildings and improvements 94,770 93,519 Machinery and equipment 203,961 181,968 Automobiles and trucks 39,320 39,447 Less accumulated depreciation (152,811) (142,537) - -------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 211,705 198,435 - -------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill, net 143,648 128,226 Restrictive covenants and customer lists, net 41,772 37,805 Other, principally retirement plan assets 16,025 14,160 - -------------------------------------------------------------------------------------------------------------------------- Total other assets 201,445 180,191 - -------------------------------------------------------------------------------------------------------------------------- $586,605 $541,432 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $20,997 $15,456 Accrued expenses Salaries and employee benefits 18,717 18,309 Other 20,802 13,504 Deferred income taxes 13,999 14,007 Current maturities of long-term debt 35,394 28,362 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 109,909 89,638 - -------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 198,554 193,952 DEFERRED INCOME TAXES 11,381 11,520 OTHER NONCURRENT LIABILITIES 13,149 10,689 - -------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,044,111 and 19,041,852 shares issued and outstanding 9,522 9,521 Class B, 10,000,000 shares authorized, 1,474,996 and 1,474,996 shares issued and outstanding 738 738 Additional paid-in capital 26,213 26,086 Retained earnings 227,749 210,253 Deferred compensation (2,263) (2,601) Accumulated other comprehensive income (8,347) (8,364) - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 253,612 235,633 - -------------------------------------------------------------------------------------------------------------------------- $586,605 $541,432 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF INCOME G&K SERVICES, INC. AND SUBSIDIARIES (Unaudited) For the Three Months Ended For the Six Months Ended --------------------------------------------------------------------------- Dec 25, Dec 26, Dec 25, Dec 26, (In thousands, except per share data) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- REVENUES Rental operations $135,879 $125,006 $266,415 $247,820 Direct sales 6,476 4,858 10,900 8,167 - --------------------------------------------------------------------------------------------------------------------- Total revenues 142,355 129,864 277,315 255,987 - --------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of rental operations 77,571 70,246 150,752 139,302 Cost of direct sales 5,106 3,352 8,819 5,574 Selling and administrative 31,564 27,771 61,280 55,107 Depreciation 7,060 6,482 14,064 13,041 Amortization of intangibles 2,237 2,139 4,377 4,282 - --------------------------------------------------------------------------------------------------------------------- Total operating expenses 123,538 109,990 239,292 217,306 - --------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 18,817 19,874 38,023 38,681 Interest expense 4,167 4,291 8,053 9,021 Other (income) expense, net 242 381 (331) 60 - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14,408 15,202 30,301 29,600 Provision for income taxes 5,777 5,967 12,087 11,675 - --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 8,631 $ 9,235 $ 18,214 $ 17,925 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Basic weighted average number of shares outstanding 20,357 20,401 20,458 20,399 BASIC EARNINGS PER COMMON SHARE $ 0.42 $ 0.45 $ 0.89 $ 0.88 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Diluted weighted average number of shares outstanding 20,400 20,521 20,517 20,521 DILUTED EARNINGS PER COMMON SHARE $ 0.42 $ 0.45 $ 0.89 $ 0.87 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS G&K SERVICES, INC. AND SUBSIDIARIES (Unaudited) For the Six Months Ended ----------------------------------- Dec 25, Dec 26, (In thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net Income $ 18,214 $ 17,925 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 18,441 17,323 Deferred income taxes (139) (290) Changes in current operating items, exclusive of acquisitions - Accounts receivable and prepaid expenses (6,529) (3,554) Inventories (3,481) (2,972) Accounts payable and other accrued expenses 16,987 2,964 Other, net 1,480 1,104 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 44,973 32,500 - ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Property, plant and equipment additions, net (22,206) (21,066) Acquisition of business assets (34,783) (155) Purchase of investments, net (2,086) (359) - ------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (59,075) (21,580) - ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from debt financing 42,527 3,928 Repayments of debt financing (31,256) (16,047) Cash dividends paid (717) (717) Sale of common stock 207 4 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities 10,761 (12,832) - ------------------------------------------------------------------------------------------------------------------ DECREASE IN CASH AND CASH EQUIVALENTS (3,341) (1,912) CASH AND CASH EQUIVALENTS: Beginning of period 6,297 11,975 - ------------------------------------------------------------------------------------------------------------------ End of period $ 2,956 $ 10,063 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for - Interest $ 7,450 $ 8,330 - ------------------------------------------------------------------------------------------------------------------ Income taxes $ 6,935 $ 15,708 - ------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements. 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data.) Three and six month periods ended December 25, 1999 and December 26, 1998 (Unaudited) The consolidated financial statements included herein, except for the June 26, 1999 balance sheet which was extracted from the audited financial statements of June 26, 1999, have been prepared by G&K Services, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of December 25, 1999, and the results of its operations and its cash flows for the three and six month periods ended December 25, 1999 and December 26, 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report. The results of operations for the three and six month periods ended December 25, 1999, and December 26, 1998, are not necessarily indicative of the results to be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. NATURE OF BUSINESS G&K Services, Inc. is a full-service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of nonuniform items such as floormats, dustmops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniforms 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. 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. PER SHARE DATA Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share was computed similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other dilutive securities (including nonvested restricted stock) using the treasury stock method. 5 Three Months Ended Six Months Ended ------------------------------ ----------------------------- Dec. 25, Dec. 26, Dec. 25, Dec. 26, 1999 1998 1999 1998 --------------- -------------- -------------- -------------- Weighted average number of common shares outstanding 20,357 20,401 20,458 20,399 ------------------------------------------------------------ Shares used in computation of basic earnings per share 20,357 20,401 20,458 20,399 Weighted average effect of non-vested restricted stock grants 1 57 4 58 Weighted average common shares issuable upon the exercise of stock options 42 63 55 64 Shares used in computation of ------------------------------------------------------------ diluted earnings per share 20,400 20,521 20,517 20,521 ------------------------------------------------------------ ------------------------------------------------------------ RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 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. COMPREHENSIVE INCOME For the three and six month periods ended December 25, 1999 and December 26, 1998, the components of comprehensive income were as follows: Three Months Ended Six Months Ended ------------------------------------------------------------ Dec. 25, Dec. 26, Dec. 25, Dec. 26, 1999 1998 1999 1998 ------------------------------------------------------------ Net income $8,631 $9,235 $18,214 $17,925 Other comprehensive income, net of tax Foreign currency translation adjustments 358 (1,364) (92) (3,282) Unrealized gain on investments held for sale 322 467 109 203 ------------------------------------------------------------ Comprehensive income $9,311 $8,338 $18,231 $14,846 ------------------------------------------------------------ ------------------------------------------------------------ 6 3. SEGMENT INFORMATION The Company has two operating segments under the guidelines of SFAS No. 131: United States and Canada. Each operating segment derives revenues from the uniform rental business which includes garment rental and nonuniform items such as floormats, dust mops and cloths, wiping towels and selected linen items. No one customer's transactions account for 10% or more of the Company's revenues. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). Financial information by geographic location for the three and six month periods ended December 25, 1999 and December 26, 1998 is as follows: For the three months ended United Dec. 25, 1999 & Dec. 26, 1998 States Canada Total ------------------------------------------------------------------------------------- Fiscal Year 2000: Revenues $124,263 $18,092 $142,355 Income from operations 13,584 5,233 18,817 Capital expenditures 8,844 331 9,175 Depreciation and amortization expense 8,213 1,084 9,297 Fiscal Year 1999: Revenues $114,539 $15,325 $129,864 Income from operations 15,497 4,377 19,874 Capital expenditures 7,972 630 8,602 Depreciation and amortization expense 7,707 914 8,621 -------------------------------------------------------------------------------------- For the six months ended United Dec. 25, 1999 & Dec. 26, 1998 States Canada Total ------------------------------------------------------------------------------------- Fiscal Year 2000: Revenues $242,604 $34,711 $277,315 Income from operations 27,959 10,064 38,023 Capital expenditures 21,015 1,191 22,206 Depreciation and amortization expense 16,297 2,144 18,441 Fiscal Year 1999: Revenues $225,998 $29,989 $255,987 Income from operations 30,291 8,390 38,681 Capital expenditures 19,572 1,494 21,066 Depreciation and amortization expense 15,309 2,014 17,323 - ---------------------------------------------------------------------------------------------- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the three and six month periods ended December 25, 1999 and December 26, 1998, and the percentage changes in these income and expense items between periods are contained in the following table: THREE MONTHS SIX MONTHS PERCENTAGE ENDED ENDED CHANGE ----------------------------------------------------- ---------------------------- Three Months Six Months Dec. 25, Dec. 26, Dec. 25, Dec. 26, FY 2000 FY 2000 1999 1998 1999 1998 vs. FY 1999 vs. FY 1999 ----------------------------------------------------- ---------------------------- Revenues: Rental 95.5% 96.3% 96.1% 96.8% 8.7% 7.5% Direct 4.5 3.7 3.9 3.2 33.3 33.5 ----------------------------------------------------- Total Revenues 100.0 100.0 100.0 100.0 9.6 8.3 Expenses: Cost of Rental Sales 57.1 56.2 56.6 56.2 10.4 8.2 Cost of Direct Sales 78.8 69.0 80.9 68.3 52.3 58.2 ----------------------------------------------------- Total Cost of Sales 58.1 56.7 57.5 56.6 12.3 10.1 Selling and Administrative 22.2 21.4 22.1 21.5 13.7 11.2 Depreciation 4.9 5.0 5.1 5.1 8.9 7.8 Amortization of Intangibles 1.6 1.6 1.6 1.7 4.6 2.2 ----------------------------------------------------- Income from Operations 13.2 15.3 13.7 15.1 (5.3) (1.7) Interest Expense 2.9 3.3 2.9 3.5 (2.9) (10.7) Other (Income) Expense, net 0.2 0.3 (0.1) 0.0 36.5 651.7 ----------------------------------------------------- Income Before Income Taxes 10.1 11.7 10.9 11.6 (5.2) 2.4 Provision for Income Taxes 4.0 4.6 4.3 4.6 (3.2) 3.5 ----------------------------------------------------- Net Income 6.1% 7.1% 6.6% 7.0% (6.5)% 1.6% ----------------------------------------------------- ----------------------------------------------------- Total revenues for the second quarter of fiscal 2000 increased 9.6% to $142.4 million from $129.9 million in the second quarter of fiscal 1999 and increased 8.3% to $277.3 million for the first six months of fiscal 2000 from $256.0 million in the same period of fiscal 1999. Comparable revenues, after adjusting for the acquired and divested operations, were up 7.9% in the second quarter of fiscal 2000 and were up 7.5% for the first six months of fiscal 2000. Rental revenue growth for the second quarter accounted for $10.9 million, or a 8.7% increase and for the first six months it accounted for $18.6 million, or a 7.5% increase. The improvement in rental revenue growth rates were influenced by several factors including the Company's focus on internal revenue growth, which includes increased sales and administrative costs designed to support planned growth, acquisitions and a stronger Canadian dollar compared to the U.S. dollar. Total direct sales to outside customers increased 33.3% to $6.5 million for the second quarter of fiscal 2000 compared to $4.9 million in the same period of fiscal 1999 and increased 33.5% to $10.9 million for the first six months of fiscal 2000 from $8.2 million in the same period of fiscal 1999. This increase was driven largely by the direct sale/catalog group. Cost of direct sales, as a percentage of direct sales, increased to 78.8% for the second quarter of fiscal 2000 from 69.0% in the same period of fiscal 1999 and increased to 80.9% for the first six months of fiscal 2000 from 68.3% for the same period of fiscal 1999. The increase as a percent of revenue was related to the continued high costs associated with the recently expanded fulfillment 8 center, additional staffing and implementation of a new information system. Cost of rental operations increased 10.4% to $77.6 million for the second quarter of fiscal 2000 from $70.2 million in the same period of fiscal 1999 and rose 8.2% to $150.8 million for the first six months of fiscal 2000 from $139.3 million in the same period of fiscal 1999. As a percentage of rental revenues, these costs increased to 57.1% for the second quarter of fiscal 2000 from 56.2% in the same period of fiscal 1999 and increased to 56.6% for the first six months of fiscal 2000 from 56.2% in the same period of fiscal 1999. The increase as a percent of revenue was largely due to higher than usual health insurance costs for the current quarter. Selling and administrative expenses increased 13.7% to $31.6 million in the second quarter of fiscal 2000 from $27.8 million in the same period of fiscal 1999 and increased 11.2% to $61.3 million for the first six months of fiscal 2000 from $55.1 million in the same period of fiscal 1999. As a percentage of revenues, selling and administrative expenses increased to 22.2% in the second quarter of fiscal 2000 from 21.4% in the same period of fiscal 1999 and increased to 22.1% in the six month period of fiscal 2000 from 21.5% in the same period of fiscal 1999. The increase as a percent of revenue was driven by the direct sale/catalog group, which incurred expenses related to a larger sales force, an expanded catalog and additional administrative personnel. Depreciation expense increased 8.9% to $7.1 million in the second quarter of fiscal 2000 from $6.5 million in the same period of fiscal 1999 and increased 7.8% to $14.1 million for the first six months of fiscal 2000 from $13.0 million in the same period of fiscal 1999. As a percentage of revenues, depreciation expense decreased to 4.9% in the second quarter of fiscal 2000 from 5.0% in the same period of fiscal 1999 and was 5.1% for the six month period of fiscal 2000, unchanged from the same period of fiscal 1999. Capital expenditures, excluding acquisition of businesses, was $9.2 million in the second quarter of fiscal 2000 compared to $8.6 million in the prior year's quarter, and for the six month period they were $22.2 million compared to $21.1 million in the prior year. Amortization expense increased 4.6% to $2.2 million in the second quarter of fiscal 2000 from $2.1 million in the second quarter of fiscal 1999 and increased 2.2% to $4.4 million in the first six months of fiscal 2000 from $4.3 million in the same period of fiscal 1999. Income from operations decreased 5.3% to $18.8 million in the second quarter of fiscal 2000 from $19.9 million in the same period of fiscal 1999 and decreased 1.7% to $38.0 million for the first six months of fiscal 2000 from $38.7 million in the same period of fiscal 1999. Operating margins decreased to 13.2% for the second quarter of fiscal 2000 from 15.3% in the same period of fiscal 1999 and decreased to 13.7% for the six month period of fiscal 2000 from 15.1% in the same period of fiscal 1999. U.S. operating margins decreased to 10.9% for the second quarter of fiscal 2000 from 13.5% in the same period of fiscal 1999 and decreased to 11.5% for the six month period of fiscal 2000 from 13.4% in the same period of fiscal 1999. Interest expense was $4.2 million for the second quarter of fiscal 2000, down from $4.3 million in the same period of fiscal 1999 and was $8.1 million for the first six months of fiscal 2000, down from $9.0 million in the same period of fiscal 1999. The Company's effective tax rate increased to 40.1% in the second quarter of fiscal 2000 from 39.3% in the same period of fiscal 1999 and it increased to 39.9% in the six month period of fiscal 2000 from 39.4% in the same period of fiscal 1999. Net income decreased 6.5% to $8.6 million in the second quarter of fiscal 2000 from $9.2 million in the same period of fiscal 1999 and rose 1.6% to $18.2 million in the first six months of fiscal 2000 from $17.9 million in the first six months of fiscal 1999. Basic and diluted earnings per share for the second quarter of fiscal 2000 were $.42 per share compared with $.45 for the prior year quarter. Basic and diluted earnings per share for the first six months of 2000 increased to $.89 from $.88 and $.87, respectively. Net income margins decreased to 6.1% for the second quarter of fiscal 2000 compared with 7.1% in the second quarter of fiscal 1999 and decreased to 6.6% for the six month period of fiscal 2000 compared with 7.0% in the six month period of fiscal 1999. 9 LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities was $45.0 million in the six month period of fiscal 2000 and $32.5 million in the same period of fiscal 1999. The fiscal 2000 increase resulted primarily from increases in accounts payable and other current liabilities in connection with acquired operations, partially offset by increases in accounts receivable, prepaid expenses and inventories. Working capital at December 25, 1999 was $63.5 million, down 13.2% from $73.2 million at June 26, 1999. The decrease is primarily the result of the use of cash and other working capital to acquire business assets and to make repayments of long-term debt. Cash used in investing activities was $59.1 million in the six month period of fiscal 2000 and $21.6 million in the same period of fiscal 1999. The increase is primarily due to the acquisition of business assets in the first and second quarters of fiscal 2000. Cash provided by financing activities was $10.8 million in the six month period of fiscal 2000 and cash used for financing activities was $12.8 million in the same period of fiscal 1999. The cash provided by financing activities was largely used in the acquisition of business assets. The long-term debt, including current maturity, increased to $233.9 million at December 25, 1999 from $222.3 million at June 26, 1999. The Company's ratio of debt to total capitalization decreased to 48.0% at the end of the second quarter of fiscal 2000 from 48.5% at June 26, 1999. Stockholders' equity grew 7.6% to $253.6 million at December 25, 1999, compared with $235.6 million at the end of fiscal 1999. G&K's return on average equity decreased to 7.4% for the six month period of fiscal 2000 compared with 8.7% for the same period of fiscal 1999. 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 would have been 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 was to ensure current business operations would continue to function accurately with minimal disruption through the year-end change. The Company continued 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 assessed the extent to which its operations were vulnerable and created contingency plans should those suppliers not succeed to properly prepare their systems. The scope of the Year 2000 readiness effort included (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 committed resources and leveraged previous investments in existing technologies in an effort to achieve these objectives. 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 implemented 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. 10 The Company has spent approximately $6.1 million related to the Year 2000 analysis; $2.1 million of these costs were capitalized. Contingency plans were developed for all areas of the business. The Company used a weighted system to evaluate and determine the level of risk in each of five areas: Operational, Facility Safety, Financial Management, Legal Implication and Organizational Implication. Where necessary, the Company implemented various contingency plans that included, but were 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 exercised its best efforts to identify and remedy any potential Year 2000 exposures within its control, the largest risks were expected with utilities in the form of water and power which, to a significant extent, were beyond the immediate control of the Company. To date, the Company has not identified any suppliers who were not Year 2000 compliant. While the Company believes its planning efforts were adequate to address its Year 2000 concerns, the Year 2000 readiness of the Company's suppliers and business partners may have lagged behind the Company's efforts. As of the date of this filing, the Company's business, financial condition and results of operations have not been adversely affected by Year 2000 issues. While the Company does not believe it will be materially impacted by the Year 2000 matters discussed above, it is uncertain as to what extent, if any, the Company may be affected by such matters in the future. 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. There has been no material change in the Company's market risks associated with debt and interest rate swap obligations during the quarter ended December 25, 1999. Statements in this document regarding ongoing trends and expectations constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, but are not limited to, unforeseen operating risks; the availability of capital to finance planned growth; competition within the uniform leasing industry; and the effects of economic conditions. 11 PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders a. The Company held its Annual Meeting of Stockholders on October 28, 1999. b. The following eight persons were elected directors: Bruce G. Allbright, Paul Baszucki, Richard Fink, Wayne M. Fortun, Donald W. Goldfus, William Hope, Thomas Moberly and Bernard Sweet. c. 1. Each director nominee received the following votes: SHARES ---------------------------------------------------------- IN FAVOR WITHHOLD AUTHORITY ---------------------------------------------------------- Allbright 26,057,960 111,927 Baszucki 26,058,005 111,882 Fink 26,058,005 111,882 Fortun 26,057,977 111,910 Goldfus 26,058,005 111,882 Hope 26,058,005 111,882 Moberly 26,059,674 110,213 Sweet 26,059,424 110,463 2. Stockholders ratified the appointment of Arthur Andersen LLP, Certified Public Accountants, as independent auditors of the Company for 2000: 26,124,543 shares in favor, 34,857 shares voting against and 10,487 shares abstaining. ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits 27 Financial Data Schedule (for SEC use only) b. Reports on Form 8-K. None 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: February 8, 2000 /s/Jeffrey L. Wright ------------------ --------------------- Jeffrey L. Wright Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) /s/Michael F. Woodard --------------------- Michael F. Woodard Controller (Principal Accounting Officer) 13