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 corporate identity apparel programs and facility services industry. The Company rents uniforms (including cleanroom garments) to its customers and offers uniforms and other related products for sale. The corporate identity apparel programs and facility services business also includes the rental of nonapparel 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.
During fiscal year 2000, the Company made three acquisitions. During the first quarter, the assets of 3-D Services, Inc. were purchased, which consisted of one facility in Boston. In the second quarter, the assets of Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During the fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one facility in Ottawa, Canada.
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 has a presence in 31 states, serving customers in over 45 states from approximately 130 locations in the U.S. and Canada. 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 corporate identity 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 rental 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 serves customers of all sizes - from very small to very large - -in all industries. The current trend is towards the service sector; however, G&K's customers also include the industrial sector, hi-technology, automotive services, printing, warehousing, distribution, transportation and many others.
The Company believes that customers use these programs to meet a variety of critical business needs.
- 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.
- Corporate identity - uniforms help identify employees working for a particular company or department. Uniformed employees are perceived as trained, competent and dependable.
- Brand awareness - uniforms promote a company's brand identity and employees serve as a "walking billboard".
- Image - uniforms provide a professional image of employees by enhancing the public appearance of the employee and company.
- Employee retention - uniforms enhance worker morale and help build a teamwork attitude.
The Company provides its apparel-rental 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.
The Company also believes that uniform rental may provide customers with significant advantages over ownership. Renting 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 rent items other than apparel, 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 6,907 employees as of July 1, 2000, consisting of 3,945 production employees and 2,962 sales, office, route and management personnel. 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 1,006 employees as of July 1, 2000, consisting of 578 production employees and 428 sales, office, route and management personnel. Approximately 75% 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.
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ITEM 2.
ITEM 2. PROPERTIES
The Company owns approximately 80% of its processing facilities, which average over 43,000 square feet in size. G&K cleans and supplies rental items principally from forty-five industrial garment, cleanroom garment, dust control and linen supply plants located in the following cities in the United States:
City City - ------------------------------------- ------------------------------------- Albuquerque, New Mexico (two plants) Louisville, Kentucky Atlanta, Georgia (two plants) Memphis, Tennessee Augusta, Georgia Milwaukee, Wisconsin Charlotte, North Carolina Minneapolis, Minnesota (two plants) Chicago, Illinois Mobile, Alabama Dallas, Texas (two plants) Montgomery, Alabama Davenport, Iowa New Orleans, Louisiana Denver, Colorado (two plants) North Attleboro, Massachusetts Des Moines, Iowa Opa Locka, Florida Fort Dodge, Iowa Phoenix, Arizona Fort Worth, Texas Pittsburg, California Fort Lauderdale, Florida Portsmouth, Virginia Graham, North Carolina Rockford, Illinois Green Bay, Wisconsin St. Cloud, Minnesota Houston, Texas Salt Lake City, Utah Indianapolis, Indiana San Antonio, Texas Jonesboro, Arkansas San Jose, California Kansas City, Missouri Seattle, Washington Lakeland, Florida Tampa, Florida Los Angeles, California Tempe, Arizona
The Company also operates principally from five plants located in the following cities in Canada:
City City - ------------------------------------- ------------------------------------- Toronto, Ontario (Metro East) Windsor, Ontario Montreal, Quebec Sault Sainte Marie, Ontario Cambridge, Ontario
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth in Item 1. Business - Environmental Matters, the Company is not a party to any legal proceedings other than routine litigation incidental to the business of the Company, and is not aware of any threatened litigation that would have a material adverse effect on the Company's business.
ITEM 4.
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 2000.
PART II
ITEM 5.
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.
As of September 14, 2000, the Company had approximately 560 registered stockholders.
The Company has declared cash dividends of $0.0175 per share in each of the quarters for the fiscal years ended July 1, 2000 and June 26, 1999. The Company's debt agreements contain various restrictive covenants, which, among other things, limit the payment of cash dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data. All amounts are in thousands, except per share data.
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.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes thereto which are included herein. The Company utilizes a 52-53 week fiscal year ending on the Saturday nearest June 30. The fiscal year ended July 1, 2000 was a 53-week year.
In fiscal 2000, G&K, now the third largest competitor in the estimated $10.7 billion uniform and related services industry, achieved 11.0% revenue growth, 8.9% after excluding the impact of the 53rd week, a 2.1% increase in net income and realized a 14.9% 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.
During fiscal year 2000, the Company made three acquisitions. During the first quarter, the assets of 3-D Services, Inc. were purchased, which consisted of one facility in Boston. In the second quarter, the assets of Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During the fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one facility in Ottawa, Canada. All acquisitions were accounted for using the purchase method. The total purchase price of these acquisitions was approximately $34.9 million in cash. The purchase price and related acquisition costs exceeded the fair values assigned to tangible assets by approximately $26.1 million.
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 17.1%, 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 15.6%, compounded annually. The Company's investments in new technologies have provided increased productivity and reduced labor expenses. Better merchandise control and lower processing costs have contributed to bottom-line growth, while garment manufacturing facilities have enhanced product quality and decreased merchandise costs.
The percentage relationships to net sales of certain income and expense items for the three fiscal years ended July 1, 2000, June 26, 1999 and June 27, 1998, and the percentage changes in these income and expense items between years are presented in the following table:
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues for fiscal 2000 rose 11.0% to $577.4 million from $520.0 million in fiscal 1999 (8.9% after excluding the impact of the 53rd week). Comparable revenues, after adjusting for the acquired and divested operations and adjusting for the additional week, were up 7.0% for fiscal 2000.
Rental revenues rose $53.6 million in fiscal 2000, a 10.7% increase over fiscal 1999 (8.5% after excluding the impact of the 53rd week). The improvement in rental growth rates was 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 22.7% to $20.7 million in fiscal 2000 from $16.9 million in fiscal 1999 (20.4% after excluding the impact of the 53rd week). Cost of direct sales, as a percent of direct sales, increased to 84.0% in fiscal 2000 from 70.6% in fiscal 1999. The increase in cost of direct sales is largely due to the addition of fixed fulfillment and embroidery costs to support the future growth in direct sales and catalog revenues.
Cost of rental operations increased 11.5% to $316.1 million in fiscal 2000 from $283.4 million in fiscal 1999. As a percent of rental revenues, these costs increased to 56.8% in fiscal 2000 compared to 56.3% in fiscal 1999. The increase as a percent of revenue was primarily attributed to the closing of the Portland cleanroom facility, increased cost of employee benefits, specifically the cost of health care and workers' compensation and increases in delivery fuel costs. These increases were partially offset by the Company's success in increasing productivity and reducing labor costs.
Selling and administrative expenses increased 14.6% to $127.5 million in fiscal 2000 from $111.2 million in fiscal 1999. As a percentage of total revenues, selling and administrative expenses increased to 22.1% in fiscal 2000 from 21.4% in fiscal 1999. The increase as a percent of revenue is due to several factors, including expenses related to the direct sale operation including a larger sales force, an expanded catalog and additional administrative personnel, as well as a larger rental sales force and expenses related to new product launches.
Depreciation expense increased 7.6% to $29.5 million in fiscal 2000 from $27.4 million in fiscal 1999. As a percentage of revenues, depreciation expense decreased to 5.1% in fiscal 2000 compared to 5.3% in fiscal 1999. Capital expenditures for fiscal 2000, excluding acquisition of businesses, was $43.7 million compared to $38.0 million in fiscal 1999. The increase in capital expenditures is largely due to the acquisition of software in connection with the Company's strategic
information systems initiatives. Amortization expense increased to $9.3 million for fiscal 2000 from $8.6 million in fiscal 1999. As a percent of revenues, amortization expense remained consistent at 1.6% in fiscal 2000 compared to fiscal 1999.
Income from operations increased 0.3% to $77.6 million in fiscal 2000 from $77.4 million in fiscal 1999. Operating margins decreased to 13.4% in fiscal 2000 from 14.9% in fiscal 1999.
Interest expense was $16.7 million for fiscal 2000, down from $17.2 million in fiscal 1999. The decrease was driven by lower average debt levels partially offset by an increase in interest rates. Other income increased to $2.1 million in fiscal 2000, up from $1.0 million in fiscal 1999. This increase is largely due to a one-time gain of $1.7 million indirectly related to the adoption of the new Financial Accounting Standards Statement No. 133. Under this accounting standard, the Company changed its characterization of investments held in connection with deferred compensation plans to trading securities and recognized previously unrealized gains. The Company's effective tax rate increased to 40.0% in fiscal 2000 from 39.5% in fiscal 1999.
Net income rose 2.1% to $37.8 million in fiscal 2000 from $37.0 million in fiscal 1999. Basic and diluted earnings per share for fiscal 2000 was $1.85 per share compared to basic and diluted earnings per share of $1.81 per share in fiscal 1999. Net income margins decreased to 6.5% for fiscal 2000 compared to 7.1% in fiscal 1999.
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 11 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. 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.
Interest expense was $17.2 million for fiscal 1999, down from $21.8 million in fiscal 1998, reflecting lower average debt levels and lower all-in borrowing rates. 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.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $83.3 million in fiscal 2000, $59.4 million in fiscal 1999 and $74.5 million in fiscal 1998. The increased cash flow in fiscal 2000 is largely due to increases in earnings before depreciation and amortization and increases in accounts payable and other current liabilities associated with acquired operations. 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 July 1, 2000 was $49.7 million, down 32.1% from $73.2 million at June 26, 1999. The decrease in working capital is largely due to the scheduled payments of long-term debt.
Cash used in investing activities was $84.6 million in fiscal 2000, $36.8 million in fiscal 1999 and $236.4 million in fiscal 1998. The increase in fiscal 2000 was due primarily to two key acquisitions and the increase in fiscal 1998 was due primarily to the acquisition of assets from NLS. In fiscal 2001, capital expenditures are anticipated to be approximately $45 million to $50 million.
Financing activities provided cash of $1.5 million in fiscal 2000, used $28.3 million of cash in fiscal 1999 and provided $166.9 million in fiscal 1998. The fiscal 2000 cash provided by financing activities was used largely for the acquisition of business assets. The fiscal 1999 decrease was used for debt reduction. The fiscal 1998 cash provided by financing activities was used in the acquisition of selected assets of NLS. Total long-term debt, including current maturities, increased to $225.7 million at July 1, 2000 from $222.3 million at June 26, 1999. The Company paid dividends of $1.4 million in each of the fiscal years 2000, 1999 and 1998. The Company's ratio of debt to total capitalization decreased to 45.4% at the end of fiscal 2000 from 48.5% at the end of fiscal 1999. The Company has a $125.0 million line of credit and a $20.0 million discretionary credit facility, of which $21.4 million and $16.4 million, respectively, was outstanding at the end of fiscal 2000.
The Company's 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 facility also limits additional indebtedness, investments, capital expenditures and cash dividends. As of July 1, 2000, the Company was in compliance with all debt covenants. Subsequent to the end of fiscal 2000, the Company completed a $50 million, 8.40% private placement debt transaction with certain institutional investors. The 10-year notes have a seven-year average life. According to the note purchase agreement, an initial take-down of $20.0 million was completed on July 20, 2000. Two additional take-downs of $15.0 million each will be made on or about September 15, 2000 and December 15, 2000. Each subsequent take-down will bear the same coupon of 8.40%.
Stockholders' equity grew 15.2% to $271.5 million at July 1, 2000, compared with $235.6 million at the end of fiscal 1999. G&K's return on average equity decreased to 14.9% in fiscal 2000, compared with 17.1% and 17.5% for fiscal 1999 and fiscal 1998, 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 did not experience any significant system problems at the beginning of calendar year 2000. The Company believes its planning efforts were adequate to address its Year 2000 concerns and, as of the date of this filing, it did not have a material impact on its business, financial condition or its results of operations. Additionally, the Company is not aware of any material problems experienced by its suppliers.
The Company began to incur expenses during fiscal 1998 as it began to implement proposed solutions to resolve the Year 2000 issue. These expenses continued through fiscal year 2000. The Company has spent approximately $6.1 million related to the Year 2000 analysis; $2.1 million of these costs were capitalized. The Company continues to monitor its systems' performance and does not anticipate future issues related to Year 2000 matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable rate debt, as well as interest rate swaps, to manage interest rate risk. The Company's earnings are affected by changes in short-term interest rates due to the use of variable rate notes and revolving credit facilities amounting to approximately $219 million. This exposure is limited by the use of interest rate swap agreements as a hedge against variability in short-term rates. The interest rate swap agreements 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. If short-term rates increase by one-half percent (or 50 basis points), the Company's interest expense would increase, and income before taxes would decrease, by approximately $0.6 million. Conversely, if short-term rates decrease by one-half percent (or 50 basis points), the Company's interest expense would decrease, and income before taxes would increase, by approximately $0.6 million. This estimated exposure considers the mitigating effects of interest rate swap agreements on the change in the cost of variable rate debt. This analysis does not consider the effects of a change in economic activity or a change in the Company's capital structure.
The information below summarizes the Company's market risks associated with debt and interest rate swap obligations as of July 1, 2000. For debt obligations, 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.
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 and related services industry; and the effects of economic conditions.
ITEM 8.
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 July 1, 2000 and June 26, 1999. All amounts are in thousands, except per share data.
Reference is hereby made to the Consolidated Financial Statements and Notes thereto appearing on pages through hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
ROBERT G. WOOD has served as Executive Vice President since May 2000. He served as Canadian Operations President since 1998 and Regional Vice President since 1997. Mr. Wood joined the Company in 1995 as a General Manager. Prior to joining the Company, he was Vice President of Marketing and Director of Sales with Livingston International, Inc., where he spent 23 years in a variety of operating, sales, service and marketing positions.
JEFFREY L. WRIGHT has served as Chief Financial Officer, Treasurer and Secretary since February 1999. Mr. Wright was Controller and Treasurer for BMC Industries, Inc. from 1996 to the time he joined the Company. From 1993 to 1996 Mr. Wright was Treasurer for Employee Benefit Plans, 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.
PAUL BASZUCKI has been a director of the Company since 1994. Chief Executive Officer of Norstan, Inc. since December 1999, and Chairman of the Board of Directors of Norstan, Inc. since May 1997. Mr. Baszucki also served as Chief Executive Officer of that company from 1986 until May 1997. Mr. Baszucki is also a director and a member of the Compensation Committee 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.
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.
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 and is serving as the Chairman and Interim Chief Executive Officer of such company.
BERNARD SWEET has been a director of the Company since 1975. Retired since 1985, formerly President and Chief Executive Officer of Republic Airlines, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12.
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 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information with respect to the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-K.
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PART IV
ITEM 14.
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 2000:
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) 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(f) 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(g) 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(h) 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(i) Form of Change of Control Agreement between Registrant and each of Richard Fink, Thomas Moberly, Robert G. Wood, 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(j) Employment Agreement between Registrant and Thomas Moberly, dated January 2, 1998. *,**
10(k) Credit Agreement dated March 28, 2000 among G&K Services, Inc. and Norwest Bank Minnesota, National Association. *
10(l) Note Purchase Agreement dated July 20, 2000 among G&K Services, Inc. and seven institutional investors. *
21 Subsidiaries of G&K Services, Inc. *
23 Consent of Independent Public Accountants *
24 Power of Attorney dated as of August 31, 2000 *
27 Financial Data Schedule (FOR SEC USE ONLY) *
Footnotes: - ---------- * Filed herewith ** Compensatory plan or arrangement
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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: September 28, 2000 G&K SERVICES, INC. (Registrant)
By: /s/ Thomas Moberly --------------------------------------- Thomas Moberly, Chief Executive Officer (Principal Executive Officer)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below on the 28th day of September 2000, by the following persons in the capacity indicated:
/s/ Richard M. Fink Chairman of the Board and Director - ---------------------------- Richard M. Fink
/s/ Thomas Moberly Chief Executive Officer, President - ---------------------------- and Director (Principal Executive Thomas Moberly Officer)
/s/ Jeffrey L. Wright Chief Financial Officer, Treasurer - ---------------------------- and Secretary (Principal Financial Jeffrey L. Wright Officer)
/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
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CONSOLIDATED BALANCE SHEETS G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME G&K SERVICES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
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 July 1, 2000 and June 26, 1999 are as follows:
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:
Costs of significant additions, renewals and betterments, including external and certain internal 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 $19,655 as of July 1, 2000 and $15,209 as of June 26, 1999. Restrictive covenants and acquired customer lists, stated at cost less accumulated amortization of $17,926 and $13,217 as of July 1, 2000 and June 26, 1999, are being amortized over the terms of the respective agreements and the estimated average life of an account, respectively.
Impairment losses are recorded on goodwill and other long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Impairment losses are measured by comparing the fair value of the assets as determined by discounting the future cash flows at a market rate of interest to their carrying amounts. There were no impairments recognized during fiscal 2000, 1999 or 1998.
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.
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.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
COMPREHENSIVE INCOME 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 and comprehensive income.
RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was adopted by the Company in the fourth quarter of fiscal 2000. The statement requires the fair value of all derivatives, including swap agreements, to be recognized in the consolidated financial statements. The Company holds an interest rate swap agreement which has been designated as a highly effective cash flow hedge. Initial adoption resulted in the recording of a contra-liability of $138, with the offset recorded in equity as a component of accumulated other comprehensive income on the consolidated balance sheet. The Company uses an interest rate swap contract, which expires in September of 2000, to hedge against the effect of interest rate fluctuations on its variable rate term loan facility. The interest rate swap had a notional amount of $100,000 at July 1, 2000. 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.
Also, concurrently with the adoption of SFAS No. 133, the Company changed its designation of the investments associated with its deferred compensation plan to trading securities and recognized $1,725 in previously unrealized gains.
2. ACQUISITIONS
During fiscal year 2000, the Company made three acquisitions. During the first quarter, the assets of 3-D Services, Inc. were purchased, which consisted of one facility in Boston. In the second quarter, the assets of Aladdin, Inc. were purchased, which included 4 facilities in Iowa. During the fourth quarter, Whistle Kleen Enterprises Ltd. was purchased with one facility in Ottawa, Canada. All acquisitions were accounted for using the purchase method. The total purchase price of
these acquisitions was approximately $34,929 in cash. The purchase price and related acquisition costs exceeded the fair values assigned to tangible assets by approximately $26,055. The pro forma effects of these acquisitions are not deemed material to the Company.
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. Earnings or losses from these nine facilities have been excluded from the consolidated statement of income. During fiscal 1998, the Company sold selected linen assets and uniform rental assets of eight facilities for approximately $76,700 in cash. During fiscal 1999, the Company sold the remaining linen facility classified as held for sale for approximately $2,100 in cash.
3. LONG-TERM DEBT
Debt as of July 1, 2000 and June 26, 1999 includes the following:
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 of the remaining balance for the four years subsequent to July 1, 2000 of $41,425, $45,192, $45,192, $48,957, and (ii) a $125,000 revolving credit facility expiring on June 30, 2002. As of July 1, 2000, borrowings outstanding under the term loan were $180,766, and borrowings under the revolving credit facility were $21,352. 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 July 1, 2000 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 July 1, 2000 was 0.15%.
The Company also maintains a $20,000 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 July 1, 2000 bear interest at the Eurodollar Rate plus 0.65%.
On September 27, 1997, the Company entered into an interest rate swap 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 6.74%. If this swap agreement were to be terminated as of July 1, 2000, the Company would have incurred a gain on the contract of $171.
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 July 1, 2000, 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 July 1, 2000 and June 26, 1999.
The Company entered into capital lease agreements in fiscal 2000. Future minimum lease payments under capital leases for fiscal years 2001 through 2005 are $1,122, $2,244, $2,244, $1,522 and $1,282. The present value of net minimum lease payments is $6,979 after excluding the amount representing interest of $1,435.
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 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; 1,833,245 and 1,028,951 awards were available for grant as of July 1, 2000.
The Company also maintains 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 later of August 1996 or 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 August 1996 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 date of grant.
The following schedule summarizes activity in the plans:
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:
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 2000, 1999 and 1998 was $15.96, $17.38 and $17.61, respectively. The weighted average exercise price was $33.74, $46.46 and $41.88, respectively.
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 6.43% for 2000, 4.83% for 1999 and 5.68% for 1998; expected dividends of $.07 per share; expected lives of seven years for 2000, 1999 and 1998; and expected volatility of 34.48% for 2000 grants, 23.90% for 1999 grants and 27.53% for 1998 grants.
5. INCOME TAXES
The components of the provision for income taxes are as follows:
The reconciliation between income taxes using the statutory federal income tax rate and the recorded income tax provision is as follows:
Significant components of the Company's deferred tax assets and deferred tax liabilities as of July 1, 2000 and June 26, 1999 are as follows:
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN The Company has a noncontributory defined benefit 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 $909 in 2000, $939 in 1999 and $851 in 1998 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 five-year employment period, were $608 in 2000, $534 in 1999 and $466 in 1998.
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 July 1, 2000 and June 26, 1999 was $4,849 and $3,834, 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 $327 in 2000, $265 in 1999 and $240 in 1998. The accumulated benefit obligation of $7,622 as of July 1, 2000 and $6,423 as of June 26, 1999, 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 $7,648 as of July 1, 2000 and $6,439 as of June 26, 1999, and are included in other assets in the accompanying consolidated balance sheets at these values.
The changes in benefit obligation and plan assets consisted of the following for the years ended July 1, 2000 and June 26, 1999:
The funded status of the Company's plans were as follows as of July 1, 2000 and June 26, 1999:
The following average assumptions were used to account for the plans for the years ended July 1, 2000 and June 26, 1999:
The components of net periodic pension cost are as follows for the years ended July 1, 2000, June 26, 1999 and June 27, 1998:
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, vehicles, and delivery facilities that expire on various dates through 2008. Minimum annual rental commitments at July 1, 2000 for the fiscal years 2001 through 2005 and thereafter are $6,145, $5,475, $3,901, $1,970, $1,678 and $1,596. In accordance with the terms of certain lease agreements, the Company is required to pay real estate taxes and maintenance costs. Total lease expense was $10,786 in 2000, $7,896 in 1999 and $6,798 in 1998.
8. 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 is as follows:
9. SUBSEQUENT EVENT
Subsequent to July 1, 2000, the Company completed a $50,000, 8.40% private placement debt transaction with certain institutional investors. The 10-year notes have a seven-year average life. According to the note purchase agreement, an initial take-down of $20,000 was completed on July 20, 2000. Two additional take-downs of $15,000 each will be made on or about September 15, 2000 and December 15, 2000. Each subsequent take-down will bear the same coupon of 8.40%. The Company intends to use the net proceeds from the sale of the notes to repay existing indebtedness under its term loan and revolving credit facility and for general corporate expenses.
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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 July 1, 2000 and June 26, 1999, 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 July 1, 2000. 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 auditing standards generally accepted in the United States. 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 July 1, 2000 and June 26, 1999, and the results of its operations and its cash flows for each of the three years in the period ended July 1, 2000, in conformity with accounting principles generally accepted in the United States.
As explained in Note 1 to the financial statements, effective March 26, 2000, the Company adopted the new requirements of Statements of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities."
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota, August 11, 2000
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