UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
(Mark one)
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended July 1, 1995
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
(State of incorporation) (I.R.S. Employer Identification No.)
505 WATERFORD PARK, STE. 455
MINNEAPOLIS, MINNESOTA 55441
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 546-7440
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (par value $0.50 per share)
Class B Common Stock (par value $0.50 per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(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 _____.
The aggregate market value of the voting stock of registrant held by
non-affiliates of registrant, on September 21, 1995, computed by reference to
the closing sale price of such shares on such date, was approximately
$424,463,000.
At September 21, 1995, there were outstanding 18,539,118 and 1,865,089
shares of the registrant's Class A and Class B Common Stock, respectively.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes _X_. No ___.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
Portions of annual report to stockholders
for the fiscal year ended July 1, 1995 Parts II and IV
Portions of proxy statement for the annual meeting
of stockholders to be held November 1, 1995 Parts I and III
PART I
ITEM 1. BUSINESS
G&K Services, Inc. and its wholly owned subsidiaries (the "Company" or
"G&K"), leases and maintains uniforms and related textile products. During
fiscal 1995, approximately 60% of total revenues were derived from uniform
rentals. The balance was principally from rentals of non-uniform items, such as
floor mats, dust mops and cloths, wiping towels and selected linen items, and
the manufacture and sale of garments. The revenue generated from manufacturing
is not a material part of G&K's revenue.
The Company has been expanding its operations steadily into additional
geographic markets. In the United States, G&K currently operates in 27 states
from 22 processing plants and 41 sales and service centers. In Canada, the
Company serves customers from 18 locations, including 8 processing plants in the
provinces of Ontario and Quebec. By comparison, in 1985, G&K operated from 33
locations in 14 states.
The Company targets its marketing efforts first to focus on those
customers, industries and geographic locations that are expanding and which need
a quality-oriented uniform program; and then to provide 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
wants these features built into their uniform programs and are willing to pay a
premium price to a vendor that can supply them consistently.
PRODUCTS
Uniforms
The Company's full-service leasing program supplies a broad range of work
garments, specialized uniforms for corporate identity programs, anti-static
garments, ultraclean particle-free garments, and dress clothing for supervisors,
sales personnel and others needing upgraded work apparel.
Its products are used in a diversified spectrum of businesses including:
pharmaceutical and electronics manufacturers, transportation and distribution
firms, health care and food service operations, auto dealerships and equipment
repair companies, and schools and office buildings. Its customer base includes
divisions of more than half of the Fortune 100 companies as well as tens of
thousands of smaller businesses. No one customer accounts for over one-quarter
of 1% of the Company's total revenues.
Uniform programs provide customers a number of benefits:
* Identification - uniforms help identify employees as working for a
particular company or department.
* Image - uniforms enhance the appearance of employees appearing before
the public and help create a more professional image for the company.
* Worker protection - uniforms help protect workers from difficult
environments such as heavy soils, heat, flame or chemicals.
* Product protection - uniforms help protect products against
contamination in the food, pharmaceutical, electronics and health care
industries.
* Employee morale - uniforms can provide a valued benefit to employees
and help improve morale.
The Company provides its uniform leasing customers with a full range of
services. Advice and assistance are offered in choosing fabrics, styles and
colors appropriate to the customer's specific needs. A large stock of new and
used garments is available to provide rapid response as individual customer
needs change due to increases, decreases or turnover in their work force.
Professional cleaning, finishing, repair 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.
Uniform leasing provides customers with significant advantages over
ownership. Leasing eliminates investment in uniforms; offers flexibility in
styles, colors and quantities as customer requirements change; assures
consistent professional cleaning, finishing, repair and replacement of items in
use; and provides freedom from the expense and management time necessary to
administer a uniform program.
Non-Uniform Items
Most customers also lease items other than uniforms, primarily floor mats,
dust mops and cloths, wiping towels and linens. Such items make up approximately
40% of total rental revenues.
Floor mats are used to protect facilities from dust, grease, moisture and
other hazards. Floor mats 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 jobs.
Competition
The Company's business encounters a high level of competition with a number
of companies in the geographic areas it serves. The Company believes that it
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 National Service Industries, Inc., Unifirst Corporation and Cintas
Corporation. Some of these competitors have greater financial resources than
G&K. 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. G&K's information regarding its competitive
position is based on available public information and trade association data.
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
recently enacted 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, PRP's 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 entered into administrative agreements at certain of these
sites to perform remedial actions. At the landfill in Andover, Minnesota, the
cost of remediation is estimated to range from $10 million to $15 million. As
one of numerous PRP's, the Company has entered into a Consent Decree and has
paid $160,000. The Company believes that it has no further responsibility for
site remediation at the Andover Landfill based upon the Consent Decree.
The Company has also entered into a Consent Decree involving the landfill
site in East Bethel, Minnesota as one of 56 PRP's. The Company was sued by the
landfill operator, Sylvester Bros. Development Company, for contribution to the
cost of cleaning up this site pursuant to directives from the Minnesota
Pollution Control Agency or the Environmental Protection Agency (EPA). Based
upon an estimate that the total cleanup of the site will not exceed $7,095,980,
the Company has agreed to pay an initial amount of $190,500. In addition, the
Company has agreed to pay its pro rata share of any additional amounts by which
the actual clean up costs exceed the initial total cost estimate. Whether this
will occur depends upon a number of contingencies, therefore any potential
future liability is uncertain.
The Company has been notified by the EPA that it is a PRP with respect to
hazardous waste discovered at the MIG Landfill which is located near Belvedere,
Illinois. As a result, the Company has been participating in the investigative
phase of the EPA. The company is now finalizing an agreement with the EPA which,
based on available information, will terminate the Company's liability at this
site. Pursuant to the agreement with the EPA, the Company will be a de minimis
party. The agreement provides that the Company has no further exposure to
liability from the EPA or any other party involved at the MIG Landfill site.
The Company is also resolving its potential liability related to a lawsuit
filed by a local citizens' group in San Francisco, California under the Clean
Water Act. The citizens' group alleged that the Company discharged wastewater
into the local sewer system in violation of the Company's permitted discharge
and that such alleged violation interfered with the local authorities' ability
to process the wastewater. The Company has entered into an agreement with the
citizens' group which resolves the Company's alleged liability for acclaimed
wastewater discharge in excess of its local permit. This agreement has been
approved by the United States District Court for the Northern District of
California.
The Company is resolving its potential liability for the release of
hazardous waste at the Ekotek recycling site in Salt Lake City, Utah. A PRP
group at the Ekotek site claimed that the Company contributed hazardous waste at
the site. The Company is resolving its potential liability through a de minimus
settlement with the EPA. Pursuant to such agreement, the Company should have no
furhter liability to the EPA or any other contributor to the site. The Company
expects to receive an order dismissing it form the lawsuit in the Unted states
District Court for the District of Utah in the very near future.
Employees
The Company's U.S. operations had a total of 4035 employees as of July 1,
1995, consisting of 156 professional sales personnel, 721 route personnel, 2431
production employees, 305 clerical employees, and 422 management and staff
employees. Approximately 16% of the Company's employees are represented by
unions. Management believes employee relations to be satisfactory.
The Company's Canadian operations had a total of 943 employees as of July
1, 1995, consisting of 34 professional sales personnel, 135 route personnel, 560
production employees, 75 clerical employees, and 125 management and staff
employees. Approximately 60% of the Company's Canadian employees are represented
by unions. Management believes employee relations to be satisfactory.
The Company's Canadian operations had a total of 943 employees as of July
1, 1995, consisting of 34 professional sales personnel, 135 route personnel, 560
production employees, 75 clerical employees, and 125 management and staff
employees. Approximately 60% of the Company's Canadian employees are represented
by unions. Management believes employee relations to be satisfactory.
Foreign and Domestic Operations
Financial information relating to foreign and domestic operation is set
forth on page 26 of the Company's 1995 Annual Report to Stockholders.
(THIS SPACE INTENTIONALLY LEFT BLANK)
ITEM 2. PROPERTIES
The Company cleans and supplies rental items principally from twenty-two
industrial garment, dust control and linen supply plants located in the
following cities in the United States:
Building
City Square Footage
Albuquerque, New Mexico 38,800
Atlanta, Georgia 40,000
Chicago, Illinois 48,700
Denver, Colorado 55,000
Fort Worth, Texas 38,000
Green Bay, Wisconsin 51,700
Houston, Texas 42,400
Kansas City, Missouri 45,000
Los Angeles, California 48,300
Mesa, Arizona 36,000
Miami, Florida 42,000
Milwaukee, Wisconsin 41,000
Minneapolis, Minnesota (two plants) 70,000
93,000
Mobile, Alabama 47,300
New Orleans, Louisiana 29,000
Pittsburg, California 47,000
Rockford, Illinois 32,000
Salt Lake City, Utah 41,500
San Antonio, Texas 40,700
San Jose, California 58,600
Seattle, Washington 44,000
All of these facilities are owned by the Company except the Miami,
Florida, facility which is leased. The Seattle plant was opened July
10, 1995. The leased plant prior to July 10, 1995, was 9500 square
feet.
The Company also operates principally from eight plants located in the
following cities in Canada:
Building
City Square Footage
Toronto, Ontario (three plants) 49,000
40,000
39,700
Montreal, Quebec 38,800
Brantford, Ontario 28,800
Ottawa, Ontario 35,000
Windsor, Ontario 42,900
Sault St. Marie, Ontario 16,800
All of these facilities are owned by the Company, except the Ottawa,
Ontario and Windsor, Ontario facilities, which are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation incidental to the business of the Company and as set forth in Item 1.
Business -- Environmental Matters.
Executive Officers of G&K Services, Inc.
Position with Officer
Name the Company Age Since
Richard M. Fink Chairman of the Board 65 1970
and CEO
William M. Hope President 62 1973
Thomas Moberly Vice President 46 1993
Stephen F. LaBelle Secretary and Treasurer 46 1978
The executive officers have, as their principal occupation, been employed
by the Company in the capacities set forth above for more than the last five
years, except for Mr. Moberly who was promoted in 1993. Each of such executive
officers serve in their capacities as officers of the Company at the pleasure of
the Board of Directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Reference is made to the information with respect to the principal markets
on which the Company's Common Stock is being traded and prices for each
quarterly period for the last two years set forth on page 28 of the Company's
1995 Annual Report to Stockholders, and by such reference, such information is
incorporated herein. The Company's debt agreement contain various restrictive
covenants which limit cash dividends, among other things.
The approximate number of stockholders of record of the Company's Common
Stock as of September 26, 1995 was 678.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the financial data with respect to the Company set
forth on page 5 of the Company's 1995 Annual Report to Stockholders, and by such
reference, such financial data is incorporated herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the management's discussion and analysis of financial
condition and results of operations presented in the form of the Financial
Review set forth on pages 14 through 16 of the Company's 1995 Annual Report to
Stockholders, and by such reference, such information is incorporated herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplementary data set
forth on pages 16 through 27 of the Company's 1995 Annual Report to
Stockholders, and by such reference, such information is incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
(THIS SPACE INTENTIONALLY LEFT BLANK)
PART III
Reference is made to the definitive proxy statement filed pursuant to
Regulation 14A, which involves the election of directors at the annual meeting
of stockholders to be held November 1, 1995, which will be filed with the
Commission within 120 days after the close of its fiscal year ended July 1,
1995, and by such reference, said proxy statement is incorporated herein in
response to the information called for by Part III (Item 10. Directors and
Executive Officers of Registrant; Item II. Executive Compensation; Item 12.
Security Ownership of Certain Beneficial Owners and Management; and Item 13.
Certain Relationships and Related Transactions.)
(THIS SPACE INTENTIONALLY LEFT BLANK)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements listed below are filed as part of this Annual
Report on Form 10-K:
Data is incorporated by reference from the Annual Report to Stockholders of
G&K Services, Inc. for the fiscal year ended July 1, 1995. With the exception of
the information specifically incorporated herein by reference, the Annual Report
to Stockholders for fiscal 1995 is not to be deemed "filed" as part of the
Annual Report on Form 10-K.
Page In
Annual Report
Report of independent public accountants 27
Consolidated statements of income for each of
the three fiscal years in the period ended
July 1, 1995 16
Consolidated balance sheets as of
July 1, 1995, and July 2, 1994 17
Consolidated statements of cash flows for each
of the three fiscal years in the period ended
July 1, 1995 18
Consolidated statements of stockholders'
equity for each of the three fiscal years
in the period ended July 1, 1995 19
Notes to consolidated financial statements 20-26
Separate financial statements of the subsidiaries of the Registrant have
been omitted because the Registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements are wholly owned.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
(b) Reports on Form 8-K
None filed during the fourth quarter of fiscal 1995.
(c) The following exhibits, as required by Item 601 of Regulation S-K are
filed as a part of this report:
(THIS SPACE INTENTIONALLY LEFT BLANK)
EXHIBIT NO.
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 Registrants' 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) Employment Agreement between the Registrant and Stephen LaBelle,
dated January 25, 1984, and amendments thereto (incorporated herein by
reference to the Registrants's Registration Statement on Form S-1 and
Amendment No. 1 thereto, Registration No. 33-15456).
10(c) 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 Registrants Schedule 13E-4 filing dated May 13, 1985).
10(d) 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(e) Loan Agreement between the Registrant and Metropolitan Life Insurance
Company, dated as of September 28, 1990 (incorporated herein by
reference to the Registrant's Form 8-K dated September 28, 1990, and
Amendment No. 1 thereto dated December 13, 1990).
10(f) Credit Agreement dated as of September 28, 1990, among G&K Services,
Inc., various banks and Norwest Bank, Minnesota, National Association,
as Agent, as amended (incorporated herein by reference to the
Registrant's Form 8-K dated September 28, 1990, and Amendment No. 1
thereto dated December 13, 1990).
10(g) Loan Agreement between Work Wear Acquisition Corporation and Canadian
Imperial Bank of Commerce dated as of September 28, 1990, as amended
(incorporated herein by reference to the Registrant's Form 8-K dated
September 28, 1990, and Amendment No. 1 thereto dated December 13,
1990).
10(h) Credit Agreement dated as of June 21, 1994, among G&K Services, Inc.,
various banks and Norwest Bank, Minneapolis, National Association, as
Agent.
10(i) Employment Agreement between Registrant and Thomas Moberly, dated
February 20, 1990 (incorporated herein by reference to the
Registrant's form 10-K filed September 30, 1993).
13 1995 Annual Report to Stockholders.
22 Subsidiaries of G&K Services, Inc.
24 Consent of Independent Public Accountants
25 Power of Attorney dated as of September 15, 1995.
27 Financial Data Schedule (for SEC use only)
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 25, 1995
G&K SERVICES, INC.
(Registrant)
By: /s/Richard Fink
Richard Fink
Chairman of the Board and Chief
Executive Officer
By: /s/Stephen F. LaBelle
Stephen F. LaBelle
Treasurer and Secretary, and
Principal Accounting and Financial
Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below on the 25th day of September 1995, by
the following persons in the capacity indicated:
G&K SERVICES, INC.
/s/Richard Fink
By: Richard Fink
Chairman of the Board and
Chief Executive Officer
/s/Richard Fink Chairman of the Board, Chief
Richard Fink Executive Officer and Director
* President and Director
William Hope
* Vice President
Thomas Moberly
s/Stephen F. LaBelle Secretary and Treasurer (Principal
Stephen F. LaBelle Financial and Accounting Officer)
* Director
Bruce Allbright
* Director
Donald Goldfus
* Director
Bernard Sweet
* Director
Wayne Fortun
* Director
Paul Baszucki
* By /s/Richard Fink
Richard Fink
Attorney-in-fact
EXHIBIT 13
G&K SERVICES ANNUAL REPORT TO SHAREHOLDERS FOR 1995
S U C C E S S S T O R I E S
G&K LOGO
DEDICATED TO UNIFORM EXCELLENCE
COVER PAGE
<PAGE>
OVERVIEW
G&K is the fourth-largest supplier of uniforms and related textiles in North
America. G&K operates in 28 U.S. states and two Canadian provinces from 30
processing plants and 51 sales and service centers.
G&K designs and implements uniform programs for businesses and
institutions. Investments in people, technology, and operating systems help the
company provide high product quality and personalized service while achieving
continuous productivity improvements.
G&K's superior growth rates are the result of:
* High customer retention levels
* Aggressive marketing to new accounts
* Geographic expansion through acquisitions and start-ups
* Development of niche markets
The Company is committed to delivering the following long-term financial goals:
* 15% annual revenue growth
* 12% pretax margins
* 15% annual net income growth
* 18% return on average equity
G&K's stock is included in the S&P SmallCap 600 Index and traded on the
NASDAQ National Market System under the symbol GKSRA.
[GRAPHIC: Map of the USA and Southern Canada showing G&K locations.]
AN EXPANDING MARKET SHARE
* 4,200 employees
* 690 route salespeople
* 800 service fleet vehicles
* 600,000 garments processed each day
KEY ACCOMPLISHMENTS FOR 1995
* Revenues increased 16.5% to $262.5 million
* Pretax income increased 19.5%
* Net income increased 23.6%
* Earnings per share increased to 90 cents from 73 cents
INSIDE FRONT COVER PAGE
<PAGE>
CONTENTS
OVERVIEW INSIDE FRONT COVER
FINANCIAL HIGHLIGHTS ...................... 1
11-YEAR FINANCIAL SUMMARY ................. 5
G&K SUCCESS STORIES ....................... 6
FINANCIAL REVIEW .......................... 14
FINANCIAL STATEMENTS AND NOTES ............ 16
SELECTED FINANCIAL AND STOCK MARKET DATA .. 28
CORPORATE AND INVESTOR INFORMATION ........ INSIDE BACK COVER
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Years Ended
July 1, July 2, One Year
1995 1994 Change
OPERATING RESULTS
<S> <C> <C> <C>
Revenues $262,481,000 $225,229,000 16.5%
Pretax income 30,264,000 25,318,000 19.5%
Net income 18,286,000 14,791,000 23.6%
PER SHARE DATA
Earnings $ 0.90 $ 0.73 23.3%
Dividends 0.07 0.069 1.4%
Book value 5.82 4.96 17.3%
Average common shares outstanding 20,378,000 20,338,000 0.2%
FINANCIAL POSITION
Working capital $ 44,870,000 $ 29,351,000 52.9%
Total assets 253,333,000 205,064,000 23.5%
Long-term debt 76,519,000 54,676,000 39.9%
Stockholders' equity 118,529,000 100,857,000 17.5%
Cash flows from operating activities 21,733,000 28,054,000 (22.5%)
OPERATING RATIOS
Current ratios 2.1:1 1.9:1
Debt as a percent of total capitalization 41.5% 37.4%
Return on average equity 16.7% 15.5%
Pretax margin 11.5% 11.2%
Effective tax rate 39.6% 41.6%
</TABLE>
[GRAPH]
REVENUES
(in $ Millions)
1991 $176.2
1992 194.7
1993 207.9
1994 225.2
1995 262.5
[GRAPH]
NET INCOME
(in $ Millions)
1991 $ 7.8
1992 8.6
1993 11.1
1994 14.8
1995 18.3
[GRAPH]
STOCKHOLDERS' EQUITY
(in $ Millions)
1991 $76.8
1992 82.4
1993 90.2
1994 100.9
1995 118.5
PAGE 1
<PAGE>
TO OUR SHAREHOLDERS
Fiscal 1995 was a year of continued progress for G&K. Both revenues and net
income continued to expand at strong rates. G&K's U.S. operations again achieved
the highest revenue growth rate, exclusive of acquisitions, of all its major
competitors. The Canadian rental division grew at an accelerated double-digit
pace. Operating income and net income margins rose for the fourth consecutive
year.
REVENUES RISE 16 PERCENT
Consolidated revenues increased by 16 percent to $262.5 million. U.S. rental
revenues were up by 17 percent, and Canadian rental revenues grew by 13 percent
in local and 10 percent in U.S. currency. The Canadian / U.S. exchange rate
stabilized during the year. This helped reduce the dis counting of Canadian
financial results that occurred during the prior two years. Combined revenues
from our Direct Purchase division and the external sales of our manufacturing
operations grew by 51 percent to $10.6 million.
EARNINGS UP 24 PERCENT
Operating income increased 21 percent to $36.1 million, as margins rose from
13.2 percent to 13.8 percent. Net income grew 24 percent to $18.3 million, or 90
cents per share, compared with $14.8 million, or 73 cents in 1994. Over the past
10 years, G&K has achieved a compounded annual growth rate of 19 percent in net
income.
RECORD U.S. RESULTS
U.S. rental operations again produced record results, continuing to build
momentum. The 17 percent revenue increase, all internally generated, was well
over the 12 percent rate achieved in 1994. Key factors included a 25 percent
rise in the dollar value of new accounts sold, further improvement in account
retention rates and slightly better pricing. Operating earnings kept pace with
revenues, increasing 18 percent with margins similar to last year. This growth
was achieved despite the losses generated by start-up operations begun during
the past two years. Start-ups generally require several years to reach
breakeven.
CONTINUED IMPROVEMENT IN CANADA
In Canada, we continued the improvement that began two years ago. Revenues from
uniform rentals grew 13 percent in local dollars compared with 6 percent in
1994. The dollar value of new accounts written increased by almost 20 percent,
while account retention rates improved for the third consecutive year. Operating
income jumped by 47 percent as margins rose sharply once again. The combination
of greater operational efficiencies in most areas, further reductions in
overhead, and accelerating revenue growth generated strong earnings gains.
Operating procedures and margins in the U.S. and Canada are now quite similar.
These results, achieved after several years of very hard work to upgrade our
Canadian division, reinforce our confidence in the long-term value of this
investment.
MARKETING PROGRESS
G&K made further progress on several existing marketing projects, as well as
initiating some new ventures. Our Major and National Accounts division, begun
last year, expanded further as we added staff and geographic coverage. Sales
results exceeded our early targets and contributed almost 16 percent of the
total dollar volume of new accounts sold. We created a staff coordinator
position, a central database for prospects, and a specialized reporting system
for cus tomers in this group, most of whom have multiple locations receiving
service but require regional or central
PAGE 2
<PAGE>
[PHOTO]
Left to Right
WILLIAM HOPE, President and Chief Operating Officer
STEPHEN F. LABELLE, Secretary and Treasurer
THOMAS MOBERLY, Vice President
RICHARD FINK, Chairman of the Board and Chief Executive Officer
tracking of results. We now are designing a special sales training program for
the unique needs of the division. Although still in its early stages, we have
high expectations for this venture.
We opened three new markets in 1995 by entering Indianapolis, Las Vegas and
Omaha with start-up opera tions, processing the work in existing plants.
Excellent progress is being made in each location.
The Direct Purchase division, now operating as a separate group, made strong
gains during the year. As sales expanded rapidly, we further refined our target
markets, and introduced new customized software. Customer reactions have been
very encouraging, and we plan to promote this division aggres sively during the
coming year.
Finally, our specialized service to manufacturers of electronic products
continued to expand. These manufacturers produce highly refined products that
can be ruined by tiny particles floating in the air. To prevent this,
manufacturers make the products in chambers called "cleanrooms" that are
equipped with highly filtered air to remove particles introduced by people,
clothing, or other sources of contamination. G&K provides garments made of
special fabrics that are laundered, tested, and packaged in a similar cleanroom
environment. G&K currently operates two cleanroom locations. Our new facility in
San Jose, the most technically advanced on the West Coast, will strengthen our
ability to respond to the needs of this growing market.
Work also continued on a variety of service and product improvements based on
results from our ongoing customer satisfaction surveys. New procedures are being
installed to ensure that customers receive the product quality and service best
suited to their needs. We also have made changes in the ways we communicate with
customers to be certain we are meeting their expectations. Our route service
people, who know their accounts best, are being given greater authority to make
final decisions on quality issues and receive added help through new training
programs and staff support.
INVESTMENTS FOR GROWTH AND PROFITABILITY
G&K's investments in capacity and technology reached a new level in the past
year, as we spent $36.5 million to provide needed support for our planned
growth. We completed new processing plants in Kansas City, San Jose, and
Seattle, and a new service distribution center in St. Paul. We began building
plants in Fort Lauderdale and in Cambridge, Ontario. Both facilities will open
early this fall. We also purchased land for future facilities in several areas.
PAGE 3
<PAGE>
In April we opened a newly designed and automated stock room in Milwaukee to
distribute garments on a regional basis. We believe regional facilities will
help reduce inven tories while increasing productivity through automated
equipment which is made practical by the higher volumes being processed. If this
facility performs well, we will extend the concept to other locations.
The company also invested in other new technologies. We purchased special
software to help us design more efficient delivery routes. With over 650 routes
in our system, the potential for increased productivity is significant. An early
test of the product in one large market was very encouraging.
A new automated garment sorting system was installed in one G&K plant. This
product takes all of one day's garments and sorts them by route, account, and
individual wearer without human intervention. It can be programmed in a variety
of sequences to provide maximum flexibility. We hope this investment will
further improve our shipping accuracy as well as provide significant labor
savings.
An integrated communications system now ties all our com puters into one
network, allowing all of them to "talk" to each other. A sophisticated database
and report writing module facilitates the consolidation, data access, and
customized reporting of information in any configuration, and makes it available
to many levels of management. This provides a powerful analytic tool, and will
eliminate large amounts of paperwork.
In September 1994 we purchased the assets of BCP Corporation, a garment
manufacturing firm operating from two plants in Mississippi and a third in the
Dominican Republic. Our plan is to produce about half our garment requirements
internally. As demand grows to fully utilize our productive capacity, we expect
to achieve significant cost savings. We also will have greater ability to serve
the special needs of large corporate clients.
NEW PEOPLE STRENGTHEN MANAGEMENT
AND BOARD OF DIRECTORS
We continue to emphasize the development of people to staff the company's rapid
growth. A new position, Director of Human Resources, was created to manage and
enhance G&K's programs in recruitment, training, compensation and benefits, and
career development. David Anderson, an experienced and resourceful professional
with extensive background in growth companies, joined G&K to fill this role. We
believe he will add focus and consistency to these critical areas.
Two new members, Paul Baszucki and Wayne Fortun, joined G&K's Board of
Directors in 1995. Paul is Co-Chairman and Chief Executive Officer of Norstan,
Inc., an international marketer of electronic communications equipment. Wayne is
President and Chief Operating Officer of Hutchinson Technology, a leading
manufacturer of suspension systems for disk drives. Their broad experience will
be very helpful in our discussions.
We expect G&K will show continued progress in 1996, and hope the results
achieved will continue to earn the support of our shareholders.
Sincerely,
/s/ Richard Fink
RICHARD FINK
Chairman of the Board and
Chief Executive Officer
/s/ William Hope
WILLIAM HOPE
President and
Chief Operating Officer
PAGE 4
<PAGE>
ELEVEN-YEAR SUMMARY G&K Services, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
PER SHARE
Revenues $ 12.88 $ 11.07 $ 10.25 $ 9.62 $ 8.72 $ 5.89
Assets 12.43 10.08 9.95 9.89 10.19 5.07
Equity 5.82 4.96 4.44 4.07 3.80 3.47
Earnings 0.90 0.73 0.55 0.42 0.38 0.51
Dividends 0.07 0.07 0.07 0.07 0.07 0.07
Price: High 19.50 17.00 13.00 13.33 11.00 10.75
Low 13.00 11.69 8.83 8.67 6.08 7.08
Avg. P/E 18.1 19.7 19.9 25.9 22.2 17.6
Med. Yield 0.43% 0.48% 0.61% 0.61% 0.78% 0.75%
INCOME DATA (000'S)
Revenues $262,481 $225,229 $207,904 $194,716 $176,233 $118,656
Operating Income 36,103 29,751 24,994 21,539 16,632 16,875
Net Other Inc. & Exp. (5,839) (4,433) (7,227) (7,422) (7,541) (412)
Pretax Income 30,264 25,318 19,113 14,117 12,326 16,463
Income Taxes 11,978 10,527 7,990 5,535 5,255 6,255
Net Income 18,286 14,791 11,123 8,582 7,771 10,208
Shares Outstanding 20,378 20,338 20,290 20,238 20,202 20,151
BALANCE SHEET (000'S)
Current Assets $87,319 $63,530 $58,982 $52,302 $56,728 $33,503
Net Fixed Assets 114,450 89,584 85,875 85,435 81,862 57,210
Total Assets 253,333 205,064 201,822 200,084 205,806 102,088
Current Liabilities 42,450 34,179 36,388 33,855 28,703 17,120
Long-term Debt 76,519 54,676 59,803 68,421 85,942 9,088
Stockholders' Equity 118,529 100,857 90,158 82,439 76,835 69,887
FUNDS FLOW DATA (000'S)
From Operating Activities $21,733 $28,054 $23,090 $25,112 $17,833 $15,929
Used for Investment (45,345) (17,541) (13,072) (15,257) (94,063) (21,242)
From Financing 21,526 (8,556) (5,961) (8,616) 78,351 5,309
Change, Cash and Equivalent (2,086) 546 2,704 (111) 774 (1,348)
RATIO ANALYSIS (%)
Operating Margin 13.75% 13.21% 12.02% 11.06% 9.44% 14.22%
Pretax Margin 11.53 11.24 9.19 7.25 6.99 13.87
Effective Tax Rate 39.58 41.58 41.80 39.21 42.63 37.99
Net Margin 6.97 6.57 5.35 4.41 4.41 8.60
Asset Turnover (1) 128.00 111.60 103.91 94.61 172.63 139.30
Return on Assets (1) 8.92 7.33 5.56 4.17 7.61 11.98
Financial Leverage 213.73 203.32 223.85 242.71 267.85 146.08
Return on Average Equity 16.67 15.49 12.89 10.78 10.59 15.60
Retention Rate 92.20 90.46 87.84 84.27 82.67 86.83
Implied Growth Rate 15.37 14.01 11.32 9.08 8.76 13.54
(table continued)
1989 1988 1987 1986 1985
PER SHARE
Revenues $ 5.40 $ 4.78 $ 5.05 $ 4.54 $ 4.14
Assets 4.22 3.95 3.63 3.40 2.83
Equity 3.03 2.74 1.73 1.46 1.28
Earnings 0.41 0.37 0.30 0.25 0.21
Dividends 0.06 0.06 0.06 0.06 0.05
Price: High 8.11 7.78 6.15 3.56 3.24
Low 6.44 4.00 3.00 2.52 2.02
Avg. P/E 17.7 15.7 15.4 12.3 12.6
Med. Yield 0.85% 1.08% 1.28% 1.82% 1.96%
INCOME DATA (000'S)
Revenues $108,817 $94,007 $80,755 $71,586 $63,830
Operating Income 12,996 11,512 9,950 8,060 6,673
Net Other Inc. & Exp. 410 398 (640) (627) (738)
Pretax Income 13,406 11,910 9,310 7,433 5,935
Income Taxes 5,094 4,547 4,569 3,531 2,721
Net Income 8,312 7,363 4,741 3,902 3,214
Shares Outstanding 20,162 19,676 16,002 15,766 15,415
BALANCE SHEET (000'S)
Current Assets $31,999 $35,286 $23,642 $22,848 $19,477
Net Fixed Assets 42,270 33,894 28,941 26,321 20,950
Total Assets 85,181 77,758 58,151 53,559 43,693
Current Liabilities 15,569 15,539 12,376 12,809 11,904
Long-term Debt 3,766 3,414 13,809 14,332 9,435
Stockholders' Equity 61,015 54,009 27,618 22,966 19,701
FUNDS FLOW DATA (000'S)
From Operating Activities $15,537 $12,438 $ 9,674 $ 9,327 $ 6,603
Used for Investment (14,851) (19,543) (8,425) (11,988) (6,382)
From Financing 437 9,497 (1,054) 4,326 1,047
Change, Cash and Equivalent (131) 1,138 (739) 793 474
RATIO ANALYSIS (%)
Operating Margin 11.94% 12.25% 12.32% 11.26% 10.45%
Pretax Margin 12.32 12.67 11.53 10.38 9.30
Effective Tax Rate 38.00 38.18 49.08 47.50 45.85
Net Margin 7.64 7.83 5.87 5.45 5.04
Asset Turnover (1) 139.94 161.66 150.78 163.84 167.24
Return on Assets (1) 10.69 12.66 8.85 8.93 8.42
Financial Leverage 139.61 143.97 210.55 233.21 221.78
Return on Average Equity 14.45 18.04 18.75 18.29 17.55
Retention Rate 84.91 82.97 80.30 77.65 75.30
Implied Growth Rate 12.27 14.97 15.05 14.20 13.21
</TABLE>
TEN-YEAR HIGHLIGHTS
* Compound Annual Revenue Growth of 15.2%
* Compound Annual Net Income Growth of 19.0%
* Compound Annual Returns to Shareholders of 23.3%
(1) Based on beginning amounts
PAGE 5
<PAGE>
BUILDING SUCCESSFUL GROWTH
Today's customers have continually rising expectations. They demand a wider
choice of products and higher standards of quality. They ask for service that is
more personal, more flexible, and more dependable. They want to receive detailed
activity summaries tracking the results achieved in their program. They look for
their supplier to actively solicit their concerns or requests and then to
respond promptly with relevant information and effective solutions. In short,
they are seeking a partner who has the skills, resources, and concern to make
their uniform program achieve its goals while leaving themselves free to focus
on the core activities of their business.
G&K works hard to be that partner by offering unique programs that cement
long-term relationships with existing customers. The same programs, aggressively
sold, are the basis for our success in attracting new customers, both those
already wearing uniforms and those considering it for the first time. To this
effort, we add continual expansion into new geographic areas, plus the
development of market niches featuring new products, processes or distribution
channels. The result has been a growth rate more than twice that of our
industry, and the highest rate of internal growth among all the major companies.
HIGH CUSTOMER RETENTION LEVELS
High growth rates require high customer retention rates. In today's aggressive
markets, G&K's customers are continually solicited by other suppliers. Yet our
retention rates have improved steadily over the past three years and are now at
an all-time high. During the most recent five-year period, G&K lost less than
two percent of its revenues annually to competitors. We believe this strong
result is based on G&K's unique quality and service programs.
WHEELER MACHINERY
Wheeler sells all types of Caterpillar heavy equipment. Then we service the
equipment - on-site as well as in our shop. When it comes to uniforms, we've got
a variety of needs: everything from coveralls for the guys working in the
radiator shop, to dress pants and shirts for sales and service people like me.
We've worked with G&K for about six years. Their people are always willing to
do what it takes to give us what we need. If we run out of hand towels or shop
rags, they come right out with them. If someone has a problem with a uniform,
they get an answer right back - and they tell us what caused the problem and
what they're doing to correct it.
JOHN BINGHAM
Sales/Service Manager
Wheeler Machinery
PAGE 6
<PAGE>
[PHOTO]
John Bingham, Sales/Service Manager for Wheeler Machinery, with Ryan Hill,
Route Supervisor for G&K in Salt Lake City, Utah
PAGE 7
<PAGE>
G&K's quality systems are designed to deliver products that consistently meet
customer expectations. Training programs for our in-plant people emphasize
knowledge of G&K's quality standards. Multiple inspection checkpoints monitor
our performance against our standards and help isolate problem areas for
remedial work. Employee-based improvement teams continually review progress in
each area and suggest system changes that will produce even more consistent
results. The quality guarantees in our customer contracts express our confidence
in the products our customers receive.
G&K's service procedures are designed to control and track important service
details, and to ensure that inventory changes, billings, repairs, replacements,
and other account activities are performed promptly and recorded accurately. All
service personnel receive intensive continuous training aimed at improving their
problem-solving and interpersonal skills, and increasing their value to each
account. People in contact with customers are empowered to provide quick
responses to all questions and problems, helping to build trust and confidence
in their ability and authority. Finally, customers receive a steady flow of
detailed information about their program. This encourages early discussion of
issues and trends and helps develop a partnering relationship. Underlying all of
this is G&K's culture of total commitment to exceeding customer expectations and
to expanding the business vision and personal development of our people.
STRONG NEW ACCOUNT SALES
In addition to retaining existing accounts, we have been exceptionally
successful in adding new ones.
G&K's rapid growth within existing markets has steadily accelerated. New
account sales in 1995, excluding those from start-up markets begun this year,
increased more than 20 percent over last year. The same program features that
NUMERICAL
PRODUCTIONS
We worked with another company before G&K came to town. I'm in charge of
uniforms, and I used to get lots of complaints about ones that were missing or
torn. I was looking for two things. First, the uniforms had to get here on time.
We use CNC (computer numerical controls) to machine parts from cast iron and bar
stock. That means clothes get dirty - and none of our people want to ruin their
clothes. Second, I wanted to make sure that if something went wrong, someone
would fix it - fast.
We liked G&K's computerized system - which makes it a lot easier to keep
track of uniforms for the 60 people here. G&K has done a couple of things that
surprised me. They came out and measured everybody before the program began. And
they do regular check-up visits, without being asked. The other company only
showed up if there was a problem. We've been happy with how clean our uniforms
are and how well they're wearing. We work with G&K because they live up to what
they promise.
RICK HOLLON
Manufacturing Manager
Numerical Productions
PAGE 8
<PAGE>
[PHOTO]
Rick Hollon, Manufacturing Manager for Numerical Productions, with Fred Padden,
Route Salesperson for G&K in Indianapolis
PAGE 9
<PAGE>
earn the loyalty of existing customers appeal to prospective customers. Using
G&K's quality and service systems as the basis of their approach, our sales
force sets new records each year.
G&K's sales success has been aided by a number of factors. Our marketing
department, greatly expanded in recent years, has provided research to help
focus our sales efforts on more desirable market segments and has developed
improved sales materials. We are placing primary emphasis on adding accounts
from the service, distribution, and light manufacturing sectors. These accounts
generate only light soil, and use uniforms primarily to promote image and
identity. They find G&K's quality-focused programs especially well designed to
meet their needs. Over half the new accounts we add each year are wearing
uniforms for the first time. Our success each year in convincing so many firms
to begin a uniform program is strong evidence of the widening appeal of the
rental uniform concept and of G&K's program in particular.
We have also strengthened our field sales force. Its size was expanded by 30
percent during the past two years. We developed new training programs for both
managers and salespeople, upgrading the contents to emphasize our target
markets, and introducing new teaching methods that utilize the most current
technologies. These changes helped us achieve significant improvements in sales
productivity during each of the last two years, as well as record total sales
increases.
G&K's new account growth is also supported by the efforts of our route
salespeople. A large portion of new account volume is generated by this group.
Both individual productivity and total sales have increased at a rapid pace,
setting records in each of the last three years. Our route people receive
regular sales training and are very effective in presenting the G&K message.
SMARTE CARTE
We have baggage carts and lockers in airports, train and bus stations from
Hawaii to Germany, and baby strollers in retail malls, zoos and amusement parks
around the country. That means we need heavy clothes - like parkas - for cold
climates, and lighter, looser fitting materials for the tropics. The styles need
to reflect local cultures as well as be loose fitting, so our cart associates
can move freely. Since there can be high turnover among our associates, and they
can work odd hours in far flung areas, traditional uniform leasing wouldn't
work. And keeping a stock of uniforms at our Minneapolis headquarters, then
sending them out on request, was a logistical nightmare.
G&K ships directly to our locations. Everything is pre-packaged so general
managers don't have to sort through bundles of clothing anymore. When you think
of how complex our program is, what's three missing shirts? But we never get
that kind of response - no concern is too small. We work with G&K because
customer service is a given. That's the business we're in, too, so we know a
good job when we see it.
KAREN KLEIN
Executive Projects Administrator
Smarte Carte
PAGE 10
<PAGE>
[PHOTO]
Karen Klein, Executive Projects Administrator for Smarte Carte, with Brad
Larson, Direct Purchase Account Manager at G&K in Minneapolis.
PAGE 11
<PAGE>
DEVELOPMENT OF NEW MARKETS
The final source of G&K's record growth is based on our development of new
markets. Geographically we have continued to expand into additional areas. Since
1992 G&K has entered 12 new markets with start-up operations, and plans to
continue this process. We will also continue to seek entry to new markets
through suitable acquisitions. Despite our considerable national presence we
still have reached only a portion of our geographic potential.
Niche markets add further opportunities. Our National Account group,
described earlier, is one example. As G&K's geographic coverage expands, our
ability to service such accounts improves. The potential from this customer
group is very significant. Other special markets include food, electronics, and
pharmaceutical manufacturers; use of flame retardant garments; and the devel
oping use of casual wear garments. These and other new developments all offer
exciting possibilities for extending the use of rental uniform programs.
G&K's direct purchase division, begun two years ago, adds growth
possibilities in a different direction. The uniform purchase market is twice as
large as that for uniform rentals and contains numerous segments. We believe our
new venture will grow rapidly and will add another option for our customers.
AN EXCITING FUTURE
G&K's rapid expansion is built on solid ground. We are confident in our ability
to develop the promising markets we are in, to add others, and to continue
strengthening our position as a growth leader. The future looks very exciting.
LAMB RESEARCH
AND DEVELOPMENT
We were looking for a one-stop shop with cleanroom clothing, suits, rugs and
other items. We also wanted water washing, because dry cleaning left our
clothing with an un pleasant smell. I visited several vendors. G&K impressed me
because they had very little notice that I was coming, yet their place was
spotless and well organized - definitely not the same experience I had
elsewhere.
Lamb's uniform program has to meet a couple of challenges. We make semi
conductor processing systems that our customers use on silicon wafers. Our
cleanrooms require particulate-free apparel to meet quality control standards.
We also are a fast-growing company: going from one to 10 buildings in the last
two-and-a-half years. With cleanrooms in four of those buildings and about 1,000
employees in uniforms scattered around all of them, we need special help. G&K
provides this through two on-site employ ees who make sure our labs are
well-stocked and, in general, jumping when we make a request. I never have to
tell them to do something twice.
JUDY ELRITE
Senior Buyer
Lamb Research and Development
PAGE 12
<PAGE>
[PHOTO]
Judy Elrite, Senior Buyer for Lamb Research and Development, with G&K's
Cleanroom Division Manager, Winston Hart, at the San Jose cleanroom laundry.
PAGE 13
<PAGE>
FINANCIAL REVIEW
PERFORMANCE AGAINST LONG-TERM
FINANCIAL GOALS
REVIEW OF GOALS VERSUS ACTUAL PERFORMANCE
Financial Fiscal 5-Year 10-Year
Goal 1995 Results Results
Revenue Growth (1) 15% 16.5% 17.2% 15.2%
Pretax Margins 12% 11.5% 9.2% 10.7%
Net Income Growth (1) 15% 23.6% 12.4% 19.0%
Return on Average
Equity 18% 16.7% 13.3% 15.2%
(1) Compound annual growth rate
G&K Services, founded in the 1930s, has grown into one of North America's
leading uniform leasing companies. Since going public in 1969, its revenues have
expanded at a compound annual rate of 15.1%. To maintain and strengthen its
leadership position, the Company established the minimum long-term financial
goals shown above. Over the years, G&K has met or exceeded most of these goals.
G&K exceeded the goal of 15% compound annual revenue increases not only in
fiscal 1995 (at 16.5%) but for the last five- and ten-year periods (17.2% and
15.2%, respectively). This rate of growth surpassed the uniform leasing industry
in general, which has expanded at a 7-8% annual rate during the period. Top-line
growth during the past five years has been driven by the strong demand for G&K's
products and services, the acquisition of Work Wear Canada in September 1990,
and expansion into new U.S. markets.
Pretax margins drew much closer to the 12% goal in fiscal 1995. In 1991,
margins came under pressure from costs associated with the Work Wear acquisition
and costs associated with start-ups in new markets. A combination of continued
strong results from U.S. locations and big improvements in our Canadian
operations allowed the Company to make steady progress during this period.
Pretax margins have moved up from 7.0% in 1991 to 11.5% in 1995.
G&K saw a 23.6% increase in net income in fiscal 1995. G&K's strong revenue
growth, combined with improving margins produced net income of $18.3 million in
1995. Annual net income growth was 12.4% over the last five years, but 19.0%
over the ten- year period since fiscal 1985.
As G&K's margins have continued to expand, so has return on average equity.
The improvement of 1.2 percentage points from last year to 16.7%, brought the
Company much closer to its 18% goal.
FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues rose 16.5% to $262,481,000 in fiscal 1995. Excluding the contribution
by the manufacturing division acquired in September 1994, revenues improved by
15.3%, over 50% greater than the comparable increase of 10% in fiscal 1994 over
1993.
U.S. operations posted a particularly strong year. Internal growth reached
17.2% for fiscal 1995 compared with 13.7% for the prior year. Key contributors
to higher revenues include a 25% rise in the dollar value of new accounts sold,
an improvement in account retention rates, and modest price increases. Including
the sales from the new manufacturing operation, U.S. revenues rose 18.8%.
Canadian operations continued to improve. Revenues were up 10.8% in Canadian
currency compared to a 6% improvement in fiscal 1994 from 1993. In U.S. dollars,
[GRAPH]
REVENUES
(in $ Millions)
1991 $176.2
1992 194.7
1993 207.9
1994 225.2
1995 262.5
[GRAPH]
PRE-TAX MARGIN
(percent)
1991 7.0%
1992 7.3
1993 9.2
1994 11.2
1995 11.5
[GRAPH]
NET INCOME
(in $ Millions)
1991 $ 7.8
1992 8.6
1993 11.1
1994 14.8
1995 18.3
[GRAPH]
RETURN ON
AVERAGE EQUITY
(percent)
1991 10.6%
1992 10.8
1993 12.9
1994 15.5
1995 16.7
PAGE 14
<PAGE>
this translated into a 7.5% increase for the current year compared to a 1%
decline in fiscal 1994. The dollar value of new accounts written grew 17% in
fiscal 1995, and account retention rates again improved.
Operating expenses lagged the rise in revenues, up 15.0% versus the 16.5%
revenue increase. As a percentage of revenues, operating expenses declined to
54.4% for 1995 compared with 55.1% for the prior year and 55.7% in fiscal 1993.
This decline resulted primarily from improvements in Canadian operations and
continued strong performance from U.S. operations. Although the Company has been
identified as a "potentially responsible party" under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, and
similar state laws, at various waste disposal sites, the Company does not
believe that it was a significant generator of environmental waste at any of the
identified sites. Consequently, the Company is of the opinion that any liability
it may ultimately face in connection with these proceedings will not result in
any significant Company expenditures, and should not have a material adverse
effect on the Company's consolidated results of operation, liquidity or
financial position. Reference is made to the Business section of the Company's
Annual Report on Form 10-K for a more detailed discussion of these environmental
proceedings.
Selling and administrative expenses increased 16.4% to $56,909,000. They
represented 21.7% of total revenues, remaining stable with the prior year and
down from 22.5% in fiscal 1993. Selling costs as a percent of revenues increased
from the prior year due to improved new sales results, and from the costs
associated with the three new start-up loca tions. Selling cost increases were
offset as administrative costs expanded at a rate slower than revenues.
Operating income rose 21.3% to $36,103,000 for the year. Operating margins
continued their pattern of improvement, reaching 13.8% in 1995 compared with
13.2% in 1994 and 12.0% in 1993. U.S. operating margins remained strong, at
about 14%, despite losses from the several start-up locations begun during the
past few years and losses associated with the acquisition in September 1994 of a
uniform manufacturing division. For the third consecutive year, Canadian
operating margins increased sharply. Canadian operating margins are now
comparable to those achieved in G&K's U.S. locations.
Net income grew 23.6% to a record $18,286,000 or 90 cents per share, compared
with $14,791,000, or 73 cents per share in fiscal 1994. The gain is larger than
the increase in operating income as higher interest expense, due to increased
debt levels, was offset by lower effective income tax rates (39.6% versus 1994's
41.6%), primarily related to higher Canadian profit levels. Net income margins
increased for the third consecutive year, reaching 7.0% compared with 6.6% in
1994 and 5.3% in fiscal 1993.
FISCAL 1994 COMPARED WITH FISCAL 1993
Total revenues for fiscal 1994, a 52-week period, rose 8% to $225,229,000. There
were 53 weeks in fiscal 1993. On a comparable 52-week basis, 1994 annual
revenues increased 10%. The Company's U.S. business turned in a strong
performance with a revenue gain of nearly 14% due to record new account activity
and high customer retention rates. This growth rate was 3 percentage points
greater than that achieved in 1993, and was achieved without the benefit of
acquisitions. Selling prices remained relatively constant during 1994. Canadian
revenues gained 6% in Canadian dollars. Including the effect of currency
translations, Canadian revenues in U.S. dollars declined 1% for the year.
Net income rose nearly 33% to $14,791,000, or 73 cents per share, in 1994.
Net income benefited from higher oper at ing income and reduced interest due to
lower borrowing levels compared with 1993. Operating income improvement resulted
from a continued strong U.S. performance combined with a dramatic improvement in
Canada. Net income for fiscal 1993 included proceeds from a fire insurance
settle ment which were offset by an increase in the federal income tax rate,
resulting in a net gain of approximately 2.5 cents per share.
Excluding the effects of these items, net income for fiscal 1994 increased by
39% over 1993.
[GRAPH]
CASH FLOWS FROM
OPERATING ACTIVITIES
(in $ Millions)
1991 $17.8
1992 25.1
1993 23.1
1994 28.1
1995 21.7
[GRAPH]
STOCKHOLDERS' EQUITY
(in $ Millions)
1991 $76.8
1992 82.4
1993 90.2
1994 100.9
1995 118.5
[GRAPH]
DEBT AS A PERCENTAGE
OF TOTAL CAPITALIZATION
(percent)
1991 53.5%
1992 48.8
1993 43.8
1994 37.4
1995 41.5
PAGE 15
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities decreased 22.5% to $21,733,000 for fiscal
1995. The decrease despite the strong increase in net income results from the
growth in working capital. This was primarily due to a large increase in new
garment inventory related to the purchase and operations of the new garment
manufacturing division. In fiscal 1994, operating cash flow grew 21.5%,
reflecting the 33.0% increase in net income.
Working capital at July 1, 1995, was $44,870,000, up 52.9% from the July 2,
1994 level of $29,351,000. The greatest change is in new inventory amounts which
resulted from the purchase and operation of the manufacturing divi sion acquired
in September 1994. The increase also reflects higher levels of receivables and
rental merchandise in service inventories to accommodate the 1995 growth in
revenues.
Long-term debt, including current maturities was $83,964,000 at July 1, 1995,
an increase of 39.4% from $60,228,000 at July 2, 1994. The increased borrowings
were utilized to purchase the manufacturing division, fund increased working
capital, and pay for capital spending of $36,545,000. In fiscal 1996, estimated
capital expenditures are antici pated to be approximately $34,000,000. The
Company's ratio of debt to total capital ization increased to 41.5% from 37.4%
at the end of fiscal 1994, but was below the 43.8% reported at the end of fiscal
1993. The Company has a $74 million existing line of credit, of which 56% was
outstanding at the end of fiscal 1995.
Stockholders' equity grew 17.5% to a record $118,529,000, in fiscal 1995,
compared with $100,857,000 at the end of 1994. G&K's return on average equity
increased to 16.7%, compared with 15.5% and 12.9% respectively, for fiscal 1994
and fiscal 1993.
Management believes that cash flows generated from oper ations and existing
lines of credit should provide adequate funding for its current businesses and
expansion program.
CONSOLIDATED STATEMENTS OF INCOME G&K Services, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Fiscal Years Ended
July 1, July 2, July 3,
1995 1994 1993
<S> <C> <C> <C>
REVENUES $ 262,481,000 $ 225,229,000 $ 207,904,000
EXPENSES
Operating 142,756,000 124,141,000 115,718,000
Cost of merchandise sold 9,335,000 6,689,000 5,944,000
Selling and administrative 56,909,000 48,886,000 46,750,000
Depreciation 14,703,000 12,631,000 11,454,000
Amortization of intangibles 2,675,000 3,131,000 3,044,000
Total operating expenses 226,378,000 195,478,000 182,910,000
INCOME FROM OPERATIONS 36,103,000 29,751,000 24,994,000
Interest expense 7,076,000 5,814,000 7,249,000
Interest income (235,000) (254,000) (399,000)
Other (income) expense, net (1,002,000) (1,127,000) 377,000
INCOME BEFORE INCOME TAXES AND FIRE GAIN 30,264,000 25,318,000 17,767,000
Gain from fire insurance settlement -- -- 1,346,000
30,264,000 25,318,000 19,113,000
Provision for income taxes 11,978,000 10,527,000 7,990,000
NET INCOME $ 18,286,000 $ 14,791,000 $ 11,123,000
Weighted average number of shares outstanding (1) 20,378,000 20,338,000 20,290,000
NET INCOME PER SHARE (1) $ 0.90 $ 0.73 $ 0.55
</TABLE>
(1) Adjusted for effect of 3-for-2 stock split, effected in the form of a
dividend, during 1994.
The accompanying notes are an integral part of these statements.
PAGE 16
<PAGE>
CONSOLIDATED BALANCE SHEETS G&K Services, Inc. and Subsidiaries
<TABLE>
<CAPTION>
July 1, July 2,
ASSET 1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash $ 3,045,000 $ 5,131,000
Accounts receivable, less allowance for doubtful
accounts of $824,000 and $722,000 32,674,000 26,326,000
Inventories 48,547,000 29,678,000
Prepaid expenses 3,053,000 2,395,000
Total current assets 87,319,000 63,530,000
PROPERTY, PLANT AND EQUIPMENT
Land 16,159,000 14,495,000
Buildings and improvements 50,852,000 40,984,000
Machinery and equipment 106,365,000 93,440,000
Automobiles and trucks 20,713,000 15,812,000
Less accumulated depreciation (79,638,000) (75,147,000)
Total property, plant and equipment 114,451,000 89,584,000
OTHER ASSETS
Goodwill, net 35,577,000 35,188,000
Restrictive covenants and customer lists, net 8,366,000 9,408,000
Other, principally prepaid pensions 7,620,000 7,354,000
Total other assets 51,563,000 51,950,000
$ 253,333,000 $ 205,064,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,086,000 $ 8,879,000
Accrued expenses -
Salaries and employee benefits 6,999,000 6,257,000
Other 5,773,000 4,744,000
Reserve for income taxes 10,146,000 8,747,000
Current maturities of long-term debt 7,445,000 5,552,000
Total current liabilities 42,449,000 34,179,000
LONG-TERM DEBT, NET OF CURRENT MATURITIES 76,519,000 54,676,000
DEFERRED INCOME TAXES 10,582,000 11,014,000
OTHER NONCURRENT LIABILITIES 5,254,000 4,338,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized,
and 18,543,360 shares issued and outstanding 9,272,000 9,249,000
Class B, 20,000,000 shares authorized,
and 1,865,089 shares issued and outstanding 933,000 933,000
Additional paid-in capital 19,228,000 18,853,000
Retained earnings 95,174,000 78,237,000
Cumulative translation adjustment (6,078,000) (6,415,000)
Total stockholders' equity 118,529,000 100,857,000
$ 253,333,000 $ 205,064,000
</TABLE>
The accompanying notes are an integral part of these statements.
PAGE 17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Fiscal Years Ended
July 1, July 2, July 3,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,286,000 $ 14,791,000 $ 11,123,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,378,000 15,762,000 14,498,000
Noncurrent deferred income taxes (436,000) (998,000) (231,000)
Changes in current operating items:
Inventories (15,671,000) (2,977,000) (2,264,000)
Accounts receivable and prepaid expenses (5,322,000) (2,071,000) (2,803,000)
Accounts payable and other current liabilities 6,328,000 3,012,000 2,054,000
Other, net 1,170,000 535,000 713,000
Net cash provided by operating activities 21,733,000 28,054,000 23,090,000
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions, net (36,545,000) (17,541,000) (13,252,000)
Acquisition of business assets (8,800,000) -- --
Sale of short-term investments -- -- 180,000
Net cash used for investing activities (45,345,000) (17,541,000) (13,072,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt financing 15,000,000 19,683,000 --
Proceeds (repayments) on line of credit, net 8,583,000 (28,239,000) (5,984,000)
Cash dividends paid (1,427,000) (1,411,000) (1,353,000)
Escrow receivable (653,000) -- --
Sale of common stock 23,000 -- 23,000
Net cash provided by (used for) financing activities 21,526,000 (9,967,000) (7,314,000)
INCREASE (DECREASE) IN CASH (2,086,000) 546,000 2,704,000
CASH:
Beginning of year 5,131,000 4,585,000 1,881,000
End of year $ 3,045,000 $ 5,131,000 $ 4,585,000
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest $ 6,917,000 $ 5,683,000 $ 6,877,000
Income taxes $ 10,578,000 $ 9,878,000 $ 5,649,000
</TABLE>
The accompanying notes are an integral part of these statements.
PAGE 18
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY G&K Services, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Common Stock
Class A Class B
Number of Number of
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance June 27, 1992 12,258,914 $ 6,129,000 1,243,394 $ 622,000
Net income -- -- -- --
Cash dividend
$.10 per share -- -- -- --
Sale of restricted stock
to employees, net 46,008 23,000 -- --
Excess of additional pension
liability over unrecognized
prior service cost related
to SERP -- -- -- --
Change in cumulative
translation adjustment -- -- -- --
Balance July 3, 1993 12,304,922 6,152,000 1,243,394 622,000
Net income -- -- -- --
Cash dividend
$.025 per share, pre-split -- -- -- --
Common stock split
of 3-for-2 6,152,267 3,076,000 621,695 311,000
Cash dividend
$.0525 per share -- -- -- --
Sale of restricted stock
to employees, net 41,315 21,000 -- --
Excess of additional pension
liability over unrecognized
prior service cost related
to SERP -- -- -- --
Change in cumulative
translation adjustment -- -- -- --
Balance July 2, 1994 18,498,504 9,249,000 1,865,089 933,000
Net income -- -- -- --
Cash dividend
$.07 per share -- -- -- --
Sale of restricted stock
to employees, net 44,856 23,000 -- --
Decrease in excess of additional
pension liability over
unrecognized prior service
cost related to SERP -- -- -- --
Change in cumulative
translation adjustment -- -- -- --
Balance July 1, 1995 18,543,360 $ 9,272,000 1,865,089 $ 933,000
(table continued)
Additional Cumulative
Paid-In Retained Translation
Capital Earnings Adjustment
Balance June 27, 1992 $ 21,572,000 $ 55,382,000 ($ 1,266,000)
Net income -- 11,123,000 --
Cash dividend
$.10 per share -- (1,353,000) --
Sale of restricted stock
to employees, net 450,000 -- --
Excess of additional pension
liability over unrecognized
prior service cost related
to SERP -- (224,000) --
Change in cumulative
translation adjustment -- -- (2,300,000)
Balance July 3, 1993 22,022,000 64,928,000 (3,566,000)
Net income -- 14,791,000 --
Cash dividend
$.025 per share, pre-split -- (339,000) --
Common stock split
of 3-for-2 (3,387,000) -- --
Cash dividend
$.0525 per share -- (1,072,000) --
Sale of restricted stock
to employees, net 218,000 -- --
Excess of additional pension
liability over unrecognized
prior service cost related
to SERP -- (71,000) --
Change in cumulative
translation adjustment -- -- (2,849,000)
Balance July 2, 1994 18,853,000 78,237,000 (6,415,000)
Net income -- 18,286,000 --
Cash dividend
$.07 per share -- (1,427,000) --
Sale of restricted stock
to employees, net 375,000 -- --
Decrease in excess of additional
pension liability over
unrecognized prior service
cost related to SERP -- 78,000 --
Change in cumulative
translation adjustment -- -- 337,000
Balance July 1, 1995 $ 19,228,000 $ 95,174,000 ($ 6,078,000)
</TABLE>
The accompanying notes are an integral part of these statements.
PAGE 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS G&K Services, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of G&K Services, Inc. (the Company) and its
subsidiaries, all of which are wholly owned. Significant intercompany balances
and transactions have been eliminated in consolidation.
Inventory - New goods inventory is stated at the lower of first-in, first-out
cost or market. Rental merchandise in service is stated at cost less
amortization, which is not in excess of market, and is amortized over the
service lives for financial reporting purposes while substantially all items are
charged to expense when placed into service for income tax reporting purposes.
In 1995 the Company changed the amortization of certain garment categories to
more accurately match their estimated service lives. The effect of these changes
was to increase annual net income $993,000 or $.05 per share. The Company
provides deferred income taxes for the resulting timing difference, and related
amounts aggregating $11,989,000 and $9,102,000 are included in the reserve for
income taxes in the accompanying consolidated balance sheets as of July 1, 1995,
and July 2, 1994.
The components of inventory as of July 1, 1995, and July 2, 1994 are as
follows:
1995 1994
New goods $17,561,000 $ 6,904,000
Rental merchandise in service 30,986,000 22,774,000
$48,547,000 $29,678,000
Property, Plant and Equipment - The Company provides for depreciation on
accelerated methods for income tax purposes and principally on the straight-line
method for financial reporting purposes over their estimated useful lives:
Costs of significant additions, renewals and betterments, including outside
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 disposi tion is reflected
in earnings. Maintenance and repairs are charged to expense when incurred.
Per Share Data - Net income per share is based on the weighted average number
of shares of common stock out standing during each year. All per share values
have been restated to reflect a 3-for-2 stock split effected in the form of a
dividend during 1994. Dividends per share increased 5% to $.0175 per share per
quarter coinciding with the stock split.
Intangible Assets Arising From Acquisitions - The cost of investment in
subsidiaries and divisions in excess of underlying net assets (goodwill) is
amortized over periods ranging 15 to 40 years. As of July 1, 1995, and July 2,
1994, accumulated amortization of goodwill was $6,369,000 and $5,429,000.
Restrictive covenants, stated at cost less accumulated amortization balances of
$8,001,000 and $6,967,000 as of July 1, 1995, and July 2, 1994, are being
amortized over the terms of the respective agreements. Customer lists are
amortized over the average life of an account.
Prepaid Pensions - Prepaid pensions consist primarily of cash surrender
values of life insurance policies and common stock and cash equivalents which
are stated at their fair value as determined by quoted market prices.
PAGE 20
<PAGE>
Pre-Opening Costs - Operating costs incurred prior to the opening of a new
branch or during construction of a new plant are capitalized and amortized on a
straight-line basis over a 12-month period when operations commence.
Foreign Currency - For the Company's foreign operations, assets and
liabilities 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. 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.
Recent Accounting Pronouncement - Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"),
effective for fiscal years beginning after December 15, 1993, requires accrual
of the expected cost of benefits provided to former or inactive employees after
employment but before retire ment either over the period of employment or as an
expense at the date of the event giving rise to the benefits. Any such
postemployment benefits provided by the Company have not been material and,
accordingly, the adoption of SFAS 112 in fiscal 1995 did not have a material
impact on the Company.
LONG-TERM DEBT
[2] Debt as of July 1, 1995, and July 2, 1994, includes the following:
1995 1994
Borrowings
under revolving credit agreements
(Revolvers) with interest approximating
prime rate (8.75% to 9.0% at July 1, 1995
and 7.25% to 8.0% at July 2, 1994) $41,735,000 $27,927,000
Senior notes payable to insurance
company at rates of 10.62%
and 8.46% due in varying
amounts through 1998,
interest payable semi-annually 40,197,000 30,394,000
Industrial development revenue bonds,
interest at 65% of the prime rate
(5.85% at July 1, 1995, and 4.7% at July 2,
1994), to 9.25%, payable in varying amounts
through 2006, collateralized by land,
facilities and irrevocable bank letter
of credit totaling $1,037,000 1,355,000 1,505,000
Restrictive covenants and other notes payable
due in varying amounts through 2007 677,000 402,000
83,964,000 60,228,000
Less current maturities (7,445,000) (5,552,000)
Total long-term debt $76,519,000 $54,676,000
During 1995, the Company increased its U.S. credit line and concurrently
borrowed $15,000,000 under a senior note payable in 1998.
PAGE 21
<PAGE>
Under the terms of the Revolvers, the Company may borrow up to U.S. $50
million and Canadian (C.) $33.5 million. The Canadian amount decreases by C.
$375,000 per quarter, expiring June 30, 1997. All borrowings under the Revolvers
are due in June 1997. The Revolvers also allow the Company to issue up to U.S.
$10 million, within the U.S. $50 million borrowing limit, in standby letters of
credit. As of July 1, 1995, there were approximately $6,257,000 in outstanding
letters of credit.
Aggregate maturities of long-term debt for each of the five years subsequent
to July 1, 1995, excluding amounts related to the Revolvers, are $7,445,000,
$9,049,000, $25,055,000, $59,000, $67,000, and $554,000 thereafter.
The Company's debt agreements contain various restrictive covenants which,
among other matters, require the Company to maintain minimum consolidated net
worth levels, as defined, and certain financial ratios. The agree ments also
limit additional indebtedness, capital expenditures and cash dividends. As of
July 1, 1995, the Company was in compliance with all such covenants.
The fair value of the Company's long-term debt is estimated 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 and
approximates its carrying value.
STOCKHOLDERS' EQUITY
[3] The significant attributes of each class of common stock are as follows:
Class A - Each share is entitled to one vote and is freely transferable.
Class B - Each share 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 officers and employees of
the Company.
Sale of Common Stock to Employees - Prior to 1990 the Company sold shares of
restricted stock to key employees at amounts approximating fair value through
the issuance of interest bearing notes. These notes were paid in full at July 1,
1995, and totaled $23,000 at July 2, 1994. Shares of restricted common stock of
the Company are pledged as collateral for these notes. The restricted stock may
not be sold or transferred for periods ranging to 1999.
During 1995 and 1994 the Company sold, net of cancellations, 44,856 and
41,315 shares of restricted stock to key employees at par value. The Company
records compen sation expense as the restrictions are removed from the stock for
the difference between the par value and fair market value. The Company has
issued options to purchase 39,411 shares of Class A common stock at exercise
prices ranging from $7.17 to $16.50 per share vesting through the year 2001.
Options expire after a 10-year holding period. As of July 1, 1995, 12,329
options were exercisable.
In fiscal 1994, the Company issued a 3-for-2 stock split effected in the form
of a dividend. All per share values have been restated to reflect this stock
split.
PAGE 22
<PAGE>
INCOME TAXES
[4] The Company accounts for income taxes using the liability method. The
components of the provision for income taxes are as follows:
Fiscal Years
1995 1994 1993
Federal:
Current $ 7,813,000 $ 8,005,000 $ 6,172,000
Deferred 623,000 (287,000) 785,000
8,436,000 7,718,000 6,957,000
State:
Current 1,053,000 976,000 686,000
Deferred 128,000 196,000 132,000
1,181,000 1,172,000 818,000
Foreign 2,361,000 1,637,000 215,000
$11,978,000 $10,527,000 $7,990,000
The reconciliation between income taxes using the statutory federal income
tax rate and the recorded income tax provision is as follows:
Fiscal Years
1995 1994 1993
Federal taxes computed
by applying the
statutory rate
of 35%, 35%,
and 34.5% $10,593,000 $ 8,861,000 $6,594,000
State taxes, net of
federal tax benefit 768,000 762,000 535,000
Effect of foreign
tax rates 702,000 493,000 270,000
Effect of permanent
differences, tax
rate changes and
other, net (85,000) 411,000 591,000
Total provision $11,978,000 $10,527,000 $7,990,000
Effective rate 39.6% 41.6% 41.8%
The provision for income taxes includes a noncurrent deferred provision of
$1,526,000, $1,420,000, and $1,631,000 for 1995, 1994, and 1993, as a result of
providing for timing differences principally relating to depreciation and
amortization of property, plant and equipment, and the method used in accounting
for employee benefit plans (see Note 5).
Deferred tax assets and liabilities were adjusted during fiscal 1993 for the
increase in Federal income tax rates under The Revenue Reconciliation Act of
1993, which was effective beginning January 1, 1993.
Significant components of the Company's deferred tax assets and deferred tax
liabilities as of July 1, 1995 and July 2, 1994, are as follows:
1995 1994
Deferred tax liabilities:
Inventory amortization
differences $(12,337,000) $ (9,102,000)
Depreciation and property basis
differences (10,039,000) (10,045,000)
Other (4,618,000) (6,403,000)
Total deferred tax liabilities (26,994,000) (25,550,000)
Deferred tax assets:
Net operating loss
carryforwards - Work Wear 1,911,000 2,916,000
Accruals, reserves and other 4,355,000 2,873,000
Total deferred tax assets 6,266,000 5,789,000
Net deferred tax liability $(20,728,000) $(19,761,000)
EMPLOYEE BENEFIT PLANS
[5] PENSION PLAN
The Company has a noncontributory pension plan (the Plan) covering substantially
all employees, except certain employees who are covered by union administered
plans. Benefits are based on number of years of service and each employee's
compensation near retirement. The Company makes an annual contribution to the
Plan consistent with the funding requirements of Federal laws and regulations.
PAGE 23
<PAGE>
The net pension cost in 1995, 1994 and 1993 includes the following
components:
1995 1994 1993
Service cost - benefits earned
during the period $ 767,000 $ 727,000 $626,000
Interest cost on projected
benefit obligation 753,000 677,000 583,000
Expected return on assets (1,074,000) (1,050,000) (947,000)
Amortization of
unrecognized net gain
at June 30, 1985 (97,000) (120,000) (116,000)
Net pension cost $ 349,000 $ 234,000 $146,000
The funded status of the Plan at July 1, 1995, and July 2, 1994, was as
follows:
1995 1994
Actuarial present value of:
Vested benefit obligation $ 6,672,000 $ 5,792,000
Accumulated benefit obligation $ 7,034,000 $ 6,130,000
Projected benefit obligation $11,203,000 $ 9,612,000
Plan assets at fair value 13,903,000 12,043,000
Assets in excess of projected
benefit obligation 2,700,000 2,431,000
Unrecognized transition net asset (667,000) (801,000)
Unrecognized net gain (2,100,000) (1,402,000)
Unrecognized prior service cost 741,000 794,000
Prepaid pension cost at year-end $ 674,000 $ 1,022,000
The projected benefit obligation was determined using an assumed discount
rate of 8% and an assumed long-term rate of compensation increase of 5%. The
assumed long-term rate of return on plan assets is 9%. 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 $338,000, $241,000, and $351,000 in 1995, 1994, and 1993
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.
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.
SERP
Annual benefits under the SERP are based on years of service and individual
compensation near retirement. Expense under the SERP for 1995, 1994, and 1993
was $557,000, $398,000, and $336,000. The accumulated benefit obligation,
$2,736,000 as of July 1, 1995, and $2,423,000 as of July 2, 1994, is included in
other noncurrent liabilities in the accompanying consolidated balance sheets. In
addition, the difference between the additional pension liability and the
unrecognized prior service cost resulted in an increase of $78,000 and a
decrease of $71,000, respectively, to retained earnings in the accompanying 1995
and 1994 consolidated balance sheets. The Company has purchased life insurance
contracts which may be used to fund the retirement benefits. The net cash
surrender value of the contracts as of July 1, 1995, and July 2, 1994, was
$1,608,000 and $1,216,000 and is included in other assets in the accompanying
consolidated balance sheets.
DEFCO PLAN
Under the DEFCO Plan, the Company matches a portion of the employees' salary
reduction contributions and provides a guaranteed investment return which is
adjusted annually. The Company's matching contributions under the DEFCO Plan
were $162,000 in 1995, $130,000 in 1994, and $105,000 in 1993. The accumulated
benefit obligation, $2,413,000 as of July 1, 1995, and $1,741,000 as of July 2,
1994, is included in other noncurrent liabilities in the accompanying
consolidated balance sheets. The Company has purchased investments, including
common stock and cash equivalents, which may be used to fund the retire ment
benefits. As of July 1, 1995, and July 2, 1994, the investments had an aggregate
market value of $2,348,000 and $1,785,000. These amounts approximate cost and
are included in other assets in the accompanying consolidated balance sheets.
PAGE 24
<PAGE>
Effective July 3, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). SFAS 115 requires certain investments to be categorized
as either Trading, Available-for-Sale, or Held-to-Maturity. The Company's
investments which will be used to fund the DEFCO plan are classified as
Available-for-Sale. Under SFAS 115, such securities must be recorded at their
fair market value, with unrealized appreciation (depreciation) reflected as a
component of stockholders' equity. The impact of adopting SFAS 115 did not have
a material impact on the Company's financial position or results of operations.
401(k) PLAN
All full-time non-union employees are eligible to participate in a 401(k)
plan after one year of service. The Company matches a portion of the employee's
salary reduc tion contributions and provides investment choices for the
employee. The matching contributions under the 401(k) plan, vested over a
seven-year employment period, were $268,000 in 1995, $225,000 in 1994, and
$203,000 in 1993.
EMPLOYEE RETIREMENT BENEFITS
Employees retiring from the Company on or after attaining age 57 who have
rendered at least ten years of service to the Company are entitled to continue
health care and dental benefit coverage at the COBRA premium rate, which is less
than incremental group costs. These benefits are subject to deductibles,
copayment provisions and other limitations. The Company reserves the right to
change or terminate the benefits at any time. The expected cost of these
benefits is recognized as expense during the years that employees render
service. The total cost of these postretirement benefits charged to expense was
not significant for the years ended 1995, 1994, and 1993.
COMMITMENTS AND CONTINGENCIES
[6] 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 ground water
contamination has been detected, or is suspected. In the opinion of management,
settlement of the litigation will not have a material effect on the Company's
annual results of operations or financial position.
LEASE COMMITMENTS
[7] The Company has noncancellable operating lease commitments for certain
production and other equipment and delivery facilities which expire on various
dates through 2000. Minimum annual rental commitments at July 1, 1995, for the
fiscal years 1996 through 2000 are $1,709,000, $941,000, $509,000, $289,000, and
$150,000. In accordance with the terms of the lease agreements, the Company is
required to pay real estate taxes and maintenance costs. Total lease expense for
fiscal years 1995, 1994, and 1993 was $3,051,000, $2,812,000, and $2,613,000,
respectively.
GAIN FROM INSURANCE SETTLEMENT
[8] In 1993, the Company realized a gain of $1,346,000 from an insurance
settlement related to the destruction of its Albuquerque, New Mexico plant.
ACQUISITION
[9] In September 1994, the Company purchased certain assets of Bauman Carter
Patterson Corporation (BCP) for $8,800,000. BCP manufactures industrial and
commercial garments for the Company's own general inventory and for sale to
third parties under contract. The acquisition was accounted for as a purchase.
The purchase price was allocated as follows:
Current assets $4,039,000
Property, plant, and equipment 2,878,000
Other noncurrent assets 1,883,000
$8,800,000
PAGE 25
<PAGE>
GEOGRAPHIC INFORMATION
[10] Geographic financial information is as follows:
United
(in thousands) States Canada Total
1995:
Revenue $214,679 $ 47,802 $262,481
Income from operations 29,755 6,348 36,103
Total assets 188,776 64,557 253,333
Capital expenditures 33,679 2,868 36,547
Depreciation and amortization expense 13,656 3,722 17,378
1994:
Revenue $180,776 $ 44,453 $225,229
Income from operations 25,321 4,430 29,751
Total assets 132,123 72,941 205,064
Capital expenditures 14,869 2,672 17,541
Depreciation and amortization expense 11,846 3,916 15,762
1993:
Revenue $162,000 $ 45,904 $207,904
Income from operations 22,623 2,371 24,994
Total assets 124,165 77,657 201,822
Capital expenditures 12,025 1,227 13,252
Depreciation and amortization expense 11,061 3,437 14,498
PAGE 26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS G&K Services, Inc. and Subsidiaries
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, 1995, and July 2,
1994, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended July 1,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of G&K Services, Inc. and
Subsidiaries as of July 1, 1995, and July 2, 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended July 1, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 29, 1995
PAGE 27
<PAGE>
QUARTERLY FINANCIAL DATA (unaudited)
Following is a summary of the results of operations for each of the quarters
within fiscal years ended July 1, 1995, and July 2, 1994.
(In thousands, except per share data)
First Second Third Fourth
1995
Revenues 60,533 65,554 66,718 69,676
Net income 4,357 4,648 4,420 4,861
Net income per share (1) $ 0.21 $ 0.23 $ 0.22 $ 0.24
Dividends per share (1) $ 0.0175 $ 0.0175 $ 0.0175 $ 0.0175
1994
Revenues $ 53,354 $ 55,525 $ 57,132 $ 59,218
Net income 3,385 3,690 $ 3,661 4,055
Net income per share (1) $ 0.17 $ 0.18 $ 0.18 $ 0.20
Dividends per share (1) $ 0.0167 $ 0.0175 $ 0.0175 $ 0.0175
RANGE OF STOCK PRICES
The Class A common shares of G&K Services, Inc., are traded on the NASDAQ
National Market System. The trading symbol is GKSRA. High and low sale prices
are shown by quarter for the last two fiscal years.
Fiscal 1995 High Low
1st Quarter 16 1/4 13
2nd Quarter 17 14 3/4
3rd Quarter 18 1/2 15 1/2
4th Quarter 19 1/2 17 3/4
Fiscal 1994
1st Quarter (1) 15 1/8 11 5/8
2nd Quarter (1) 15 5/8 12 7/8
3rd Quarter 17 13
4th Quarter 15 1/2 13 1/8
(1) Adjusted for effect of 3-for-2 stock split, effected in the form of a
dividend.
RETURN TO G&K INVESTORS VERSUS S&P 500
The chart below shows the total value generated by an initial investment of $100
in G&K Services, including stock price appreciation and the reinvestment of
dividend payments, compared to an equivalent investment in the Standard & Poor's
500 common stock index.
During fiscal 1995, an investment in G&K's stock produced a total return
of 26.3% compared with 25.5% for the Standard & Poor's 500. Over the ten-year
period ended July 1, 1995, G&K generated a compound annual rate of return of
23.3% compared with 14.6% for the Standard & Poor's 500.
[GRAPH]
G&K SERVICES
(value of $100 investment over 10 years)
S&P 500 $329.47
G&K $812.27
PAGE 28
<PAGE>
OFFICERS
RICHARD FINK
Chairman of the Board and Chief Executive Officer
WILLIAM HOPE
President and Chief Operating Officer
THOMAS MOBERLY
Vice President
STEPHEN F. LABELLE
Secretary and Treasurer
DIRECTORS
BRUCE ALLBRIGHT**
Retired, former President and Director
of Dayton Hudson Corporation
Minneapolis, Minnesota
PAUL BASZUCKI**
Co-Chairman of the Board and Chief Executive Officer
Norstan, Inc
Maple Grove, Minnesota
RICHARD FINK
WAYNE FORTUN*
President and Chief Operating Officer
Hutchinson Technology, Inc.
Hutchinson, Minnesota
DONALD GOLDFUS*
Chairman of the Board and Chief Executive Officer
Apogee Enterprises, Inc.
Minneapolis, Minnesota
WILLIAM HOPE
BERNARD SWEET**
Retired, former President and Chief Executive Officer
Republic Airlines
Minneapolis, Minnesota
* Audit Committee Member
** Compensation Committee Member
CORPORATE ADDRESS
G&K Services, Inc.
505 Waterford Park
Minneapolis, Minnesota 55441
(612) 546-7440
ANNUAL MEETING
Our annual shareholders' meeting will be held at 10:00 a.m., Wednesday, November
1, 1995, at the The Marquette Hotel, 710 Marquette Avenue, Minneapolis,
Minnesota. All shareholders and members of the investment community are invited
to attend and take part in the discussion of Company affairs.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Minneapolis, Minnesota
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
CORPORATE COUNSEL
Maslon Edelman Borman & Brand
A Professional Limited Liability Partnership
Minneapolis, Minnesota
10-K REPORT
Stockholders who wish to obtain a copy of our annual report 10-K, filed with the
Securities and Exchange Commission for the fiscal year ended July 1, 1995, may
do so by writing Stephen F. LaBelle, at the Corporate address.
INSIDE BACK PAGE
<PAGE>
G&K SERVICES, INC.
505 Waterford Park
Minneapolis, MN 55441
(612) 546-7440
BACK PAGE
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF G&K SERVICES, INC.
G&K Services, Co. (incorporated in Minnesota, U.S.A.)
Northwest Linen Co. (incorporated in Minnesota, U.S.A.)
Gross Industrial Towel & Garment Service, Inc.
(incorporated in Minnesota, U.S.A.)
G&K Services of Canada, Inc. (incorporated in Ontario, Canada)
912489 Ontario Limited (incorporated in Ontario, Canada)
Work Wear Corporation of Canada, Ltd. (incorporated in Ontario, Canada)
La Corporation Work Wear du Quebec (incorporated in Quebec, Canada)
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated August 29, 1995. It should be
noted that we have not audited any financial statements of the Company
Subsequent to July 1, 1995 or performed any audit procedures subsequent to the
date of our report.
/s/Arthur Andersen, LLP
Arthur Andersen, LLP
Minneapolis, Minnesota
September 26, 1995
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of
G&K SERVICES, INC., a Minnesota corporation (the "Company"), hereby constitute
and appoint RICHARD FINK and STEPHEN LaBELLE, and each or any of them, his true
and lawful attorneys-in-fact and agents, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file the
Annual Report of the Company on Form 10-K for the year ended July 1, 1995, to be
filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
including any amendment or amendments, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys full power and authority to do and
perform each and every thing, requisite and necessary to be done in and about
the premises in order to execute the same as fully to all intents and purposes
as he, himself, might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or could
cause to be done by virtue hereof.
IN WITNESS WHEREOF, G&K SERVICES, INC. has caused this Power of Attorney to
be executed in its name by its directors this 26 day of September, 1995.
/s/ Richard Fink /s/ Donald Goldfus
Richard Fink Donald Goldfus
/s/ Bruce Albright /s/ William Hope
Bruce Albright William Hope
/s/ Paul Baszucki /s/ Bernard Sweet
Paul Baszucki Bernard Sweet
/s/ Wayne Fortun
Wayne Fortun
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<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-START> JUL-03-1994
<PERIOD-END> JUL-01-1995
<CASH> 3,045
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