SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- F O R M 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 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 November 4, 1999 Common Stock, par value $.50 per share 19,045,050 CLASS B Outstanding November 4, 1999 Common Stock, par value $.50 per share 1,474,996 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS G&K SERVICES, INC. AND SUBSIDIARIES September 25, 1999 June 26, ASSETS (In thousands, except per share data) (Unaudited) 1999 - ------------------------------------------------------------------------------ CURRENT ASSETS Cash and cash equivalents $ 911 $ 6,297 Accounts receivable, less allowance for doubtful accounts of $2,613 and $2,479 64,003 59,626 Inventories 83,769 83,892 Prepaid expenses 7,309 8,974 Prepaid income taxes - 4,017 - ------------------------------------------------------------------------------ Total current assets 155,992 162,806 - ------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT Land 26,533 26,038 Buildings and improvements 94,949 93,519 Machinery and equipment 193,003 181,968 Automobiles and trucks 39,135 39,447 Less accumulated depreciation (148,233) (142,537) - ------------------------------------------------------------------------------ Total property, plant and equipment 205,387 198,435 - ------------------------------------------------------------------------------ OTHER ASSETS Goodwill, net 133,709 128,226 Restrictive covenants and customer lists, net 37,599 37,805 Other, principally retirement plan assets 13,826 14,160 - ------------------------------------------------------------------------------ Total other assets 185,134 180,191 - ------------------------------------------------------------------------------ $ 546,513 $ 541,432 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 15,048 $ 15,456 Accrued expenses Salaries and employee benefits 17,436 18,309 Other 18,831 13,504 Deferred income taxes 13,992 14,007 Current maturities of long-term debt 31,128 28,362 - ------------------------------------------------------------------------------ Total current liabilities 96,435 89,638 - ------------------------------------------------------------------------------ LONG-TERM DEBT 183,219 193,952 DEFERRED INCOME TAXES 11,656 11,520 OTHER NONCURRENT LIABILITIES 10,669 10,689 - ------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,043,915 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 26,204 26,086 Retained earnings 219,478 210,253 Deferred compensation (2,381) (2,601) Accumulated other comprehensive income (9,027) (8,364) - ------------------------------------------------------------------------------ Total stockholders' equity 244,534 235,633 - ------------------------------------------------------------------------------ $ 546,513 $ 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 ------------------------------ September 25, September 26, (In thousands, except per share data) 1999 1998 - -------------------------------------------------------------------------- REVENUES Rental operations $130,536 $122,813 Direct sales 4,424 3,310 - ----------------------------------------------------------------------- Total revenues 134,960 126,123 - ----------------------------------------------------------------------- OPERATING EXPENSES Cost of rental operations 73,181 69,056 Cost of direct sales 3,713 2,222 Selling and administrative 29,716 27,336 Depreciation 7,004 6,559 Amortization of intangibles 2,140 2,143 - ----------------------------------------------------------------------- Total operating expenses 115,754 107,316 - ----------------------------------------------------------------------- INCOME FROM OPERATIONS 19,206 18,807 Interest expense 3,886 4,730 Other income, net (573) (321) - ----------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 15,893 14,398 Provision for income taxes 6,310 5,708 - ----------------------------------------------------------------------- NET INCOME $ 9,583 $ 8,690 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Basic weighted average number of shares outstanding 20,459 20,390 BASIC EARNINGS PER COMMON SHARE $ 0.47 $ 0.43 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Diluted weighted average number of shares outstanding 20,535 20,494 DILUTED EARNINGS PER COMMON SHARE $ 0.47 $ 0.42 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS G&K SERVICES, INC. AND SUBSIDIARIES (Unaudited) For the Three Months Ended ------------------------------- September 25, September 26, (In thousands) 1999 1998 - ------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 9,583 $ 8,690 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization 9,144 8,703 Deferred income taxes 121 (381) Changes in current operating items, exclusive of acquisitions -- Inventories 798 (878) Accounts receivable and prepaid expenses (2,269) (407) Accounts payable and other accrued expenses 7,922 9,918 Other, net 168 (95) - ------------------------------------------------------------------------------------- Net cash provided by operating activities 25,467 25,550 - ------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment additions, net (13,031) (12,464) Acquisition of business assets (9,462) (155) Purchase of investments (282) (159) - ------------------------------------------------------------------------------------- Net cash used for investing activities (22,775) (12,778) - ------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from debt financing 10,018 1,982 Repayments of debt financing (17,944) (9,054) Cash dividends paid (359) (359) Sale of common stock 207 - - ------------------------------------------------------------------------------------- Net cash used for financing activities (8,078) (7,431) - ------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,386) 5,341 CASH AND CASH EQUIVALENTS: Beginning of period 6,297 11,975 - ------------------------------------------------------------------------------------- End of period $ 911 $ 17,316 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for -- Interest $ 3,698 $ 4,261 - ------------------------------------------------------------------------------------- Income taxes $ 2,020 $ 6,032 - ------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data.) Three month period ended September 25, 1999 and September 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 September 25, 1999, and the results of its operations and its cash flows for the three months ended September 25, 1999 and September 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 month periods ended September 25, 1999, and September 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 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. 5 Three Months Ended ----------------------------- September 25, September 26, 1999 1998 ------------- ------------- Weighted average number of common shares outstanding 20,459 20,390 ----------------------------- Shares used in computation of basic earnings per share 20,459 20,390 Weighted average effect of non-vested restricted stock grants 8 63 Weighted average common shares issuable upon the exercise of stock options 68 41 ----------------------------- Shares used in computation of diluted earnings per share 20,535 20,494 ----------------------------- ----------------------------- 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 month periods ended September 25, 1999 and September 26, 1998, the components of comprehensive income were as follows: Three Months Ended (In thousands) ------------------------------ September 25, September 26, 1999 1998 ------------------------------ Net income $9,583 $8,690 Other comprehensive income, net of tax Foreign currency translation (450) (1,918) adjustments Unrealized loss on investments held (213) (264) for sale ------------------------------ Comprehensive income $8,920 $6,508 ------------------------------ ------------------------------ 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 month periods ended September 25, 1999 and September 26, 1998 is as follows: United States Canada Elimination Total -------------------------------------------------------------------------------------- Fiscal Year 2000: Revenues $118,341 $16,619 $ - $134,960 Income from operations 14,375 4,831 - 19,206 Interest income 472 - (352) 120 Interest expense 3,704 534 (352) 3,886 Total assets 531,667 71,113 (56,267) 546,513 Capital expenditures 12,171 860 - 13,031 Depreciation and amortization expense 8,084 1,060 - 9,144 Income tax expense 4,411 1,899 - 6,310 Fiscal Year 1999: Revenues $111,459 $14,664 $ - $126,123 Income from operations 14,794 4,013 - 18,807 Interest income 550 - (356) 194 Interest expense 4,453 633 (356) 4,730 Total assets 521,849 65,528 (48,187) 539,190 Capital expenditures 11,600 864 - 12,464 Depreciation and amortization expense 7,602 1,100 - 8,702 Income tax expense 4,228 1,480 - 5,708 -------------------------------------------------------------------------------------- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the three month periods ended September 25, 1999 and September 26, 1998, and the percentage changes in these income and expense items between periods are presented in the following table: THREE MONTHS ENDED PERCENTAGE CHANGE ---------------------------------------- ------------------- FY Q1 2000 vs. FY September 25, 1999 September 26, 1998 Q1 1999 ---------------------------------------- ------------------- Revenues: Rental 96.7% 97.4% 6.3% Direct 3.3 2.6 33.7 ---------------------------------------- Total revenues 100.0 100.0 7.0 Expenses: Cost of rental sales 56.1 56.2 6.0 Cost of direct sales 83.9 67.1 67.1 ---------------------------------------- Total cost of sales 57.0 56.5 7.9 Selling and administrative 22.0 21.7 8.7 Depreciation 5.2 5.2 6.8 Amortization of intangibles 1.6 1.7 (0.1) ---------------------------------------- Income from operations 14.2 14.9 2.1 Interest expense 2.8 3.8 (17.8) Other income, net (0.4) (0.3) 78.5 ---------------------------------------- Income before income taxes 11.8 11.4 10.4 Provision for income taxes 4.7 4.5 10.5 ---------------------------------------- Net income 7.1% 6.9% 10.3 ---------------------------------------- ---------------------------------------- Total revenues for the first quarter of fiscal 2000 increased 7.0% to $135.0 million from $126.1 million in the first quarter of fiscal 1999. Comparable revenues, after adjusting for the acquired and divested operations, were up 7.1% in the first quarter of fiscal 2000. Rental revenue growth for the first quarter accounted for $7.7 million, or a 6.3% increase. U.S. rental revenues increased 5.4% over comparable revenues for the prior year quarter and Canadian rental revenues in U.S. dollars increased 14.1%. The growth in rental revenue, which is below historical growth patterns, is up from fiscal year 1999 annual rental revenue growth rates in the U.S. of 4.9% and in Canada, in U.S. dollars, of 3.9%. 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 and an improvement in the value of the Canadian dollar. Total direct sales to outside customers increased 33.7% to $4.4 million for the first quarter of fiscal 2000 compared to $3.3 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 83.9% from 67.1% in the same period of fiscal 1999. Increased expenses were related to the opening of an expanded fulfillment center and the implementation of a new information system. Cost of rental operations increased 6.0% to $73.2 million for the first quarter of fiscal 2000 from $69.1 million in the same period of fiscal 1999. As a percentage of rental revenues, these costs decreased to 56.1% for the 8 first quarter of fiscal 2000 from 56.2% in the same period of fiscal 1999. Improvements in production costs were largely offset by increases in delivery and merchandise costs. Selling and administrative expenses increased 8.7% to $29.7 million in the first quarter of fiscal 2000 from $27.3 million in the same period of fiscal 1999. As a percentage of revenues, selling and administrative expenses increased to 22.0% in the first quarter of fiscal 2000 from 21.7% in the same period of fiscal 1999. The increase as a percent of revenue is due to several factors including increased sales and administrative costs designed to support planned revenue growth. Depreciation expense increased 6.8% to $7.0 million in the first quarter of fiscal 2000 from $6.6 million in the same period of fiscal 1999. As a percentage of revenues, depreciation expense was 5.2% in the first quarter of fiscal 2000, unchanged from the same period of fiscal 1999. The Company has continued to invest in locations acquired in fiscal 1998 and construct new locations. Capital expenditures, excluding acquisition of businesses, was $13.0 million in the first quarter of fiscal 2000 compared to $12.5 million in the prior year's quarter. Amortization expense decreased 0.1% to $2.1 million in the first quarter of fiscal 2000 from $2.1 million in the first quarter of fiscal 1999. Income from operations increased 2.1% to $19.2 million in the first quarter of fiscal 2000 from $18.8 million in the same period of fiscal 1999. Operating margins decreased to 14.2% in fiscal 2000 from 14.9% in fiscal 1999. U.S. operating margins decreased to 12.1% in fiscal 2000 from 13.3% in the same period of fiscal 1999. Interest expense was $3.9 million for the first quarter of fiscal 2000, down from $4.7 million in the same period of fiscal 1999. The Company's effective tax rate increased to 39.7% in the first quarter of fiscal 2000 from 39.6% in the same period of fiscal 1999. Net income rose 10.3% to $9.6 million in the first quarter of fiscal 2000 from $8.7 million in the same period of fiscal 1999. Basic and diluted earnings per share for the first quarter of fiscal 2000 were $.47 per share, compared to $.43 and $.42, respectively, for the prior year quarter. Net income margins increased to 7.1% for the first quarter of fiscal 2000 compared with 6.9% in the first quarter of fiscal 1999. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities was $25.5 million in the first quarter of fiscal 2000 and $25.6 million in the same period of fiscal 1999. The fiscal 2000 increases from operations were largely offset by increases in accounts receivable and decreases in accounts payable and other accrued expenses. Working capital at September 25, 1999 was $59.6 million, down 18.6% 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 reduce long-term debt. Cash used in investing activities was $22.8 million in the first quarter of fiscal 2000 and $12.8 million in the first quarter of fiscal 1999. The increase is primarily due to the acquisition of business assets in the first quarter of fiscal 2000. Cash used for financing activities was $8.1 million in the first quarter of fiscal 2000 and $7.4 million in the same period of fiscal 1999. The long-term debt, including current maturity, decreased to $214.3 million at September 25, 1999 from $222.3 million at June 26, 1999. The Company paid dividends of $0.4 million during the quarter. The Company's ratio of debt to total capitalization decreased to 46.7% at the end of the first quarter of fiscal 2000 from 48.5% at June 26, 1999. Stockholders' equity grew 3.8% to $244.5 million at September 25, 1999, compared with $235.6 million at the end of fiscal 1999. G&K's return on average equity decreased to 4.0% for the first quarter of fiscal 2000 compared with 4.3% for the first quarter of fiscal 1999. Management believes that cash flows generated from operations and its credit facilities should provide adequate funding for its current businesses and planned expansion of operations or any future acquisitions. 9 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 has 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 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 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 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. - Other IT software, hardware and communications - 98% of our systems have been evaluated as Year 2000 ready; the remaining system awaits final rollout of updated software or hardware and is scheduled for completion by November 15, 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 has acquired two additional businesses that are currently being evaluated and tested for Year 2000 readiness. This evaluation and any remediation is scheduled to be complete by November 30, 1999. 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. 10 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 $5.7 million related to the Year 2000 analysis; $2.1 million of these costs were capitalized. The Company has a remaining budget of $0.8 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 $0.3 million of computer equipment, which will be leased, and $0.5 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. There has been no material change in the Company's market risks associated with debt and interest rate swap obligations during the quarter ended September 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 None 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 caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: November 9, 1999 /s/Jeffrey L. Wright ---------------- -------------------- Jeffrey L. Wright Chief Financial Officer (Principal Financial Officer) /s/Michael F. Woodard --------------------- Michael F. Woodard Controller (Principal Accounting Officer) 13