SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 30, 1995 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 WATERFORD PARK, STE. 455
MINNEAPOLIS, MINNESOTA 55441
(Address of principal executive offices and zip code)
(612) 546-7440
(Registrant's telephone number, including zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS A Outstanding January 26, 1996
Common Stock, par value $.50 per share 18,543,118
CLASS B Outstanding January 26, 1996
Common Stock, par value $.50 per share 1,865,089
G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 30 July 1
1995 1995
--------- ---------
(UNAUDITED) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 6,118 $ 3,045
Accounts receivable, net 35,093 32,674
Inventories-
New goods 19,010 17,561
Goods in service 32,099 30,986
Prepaid expenses 4,500 3,053
--------- ---------
Total current assets 96,820 87,319
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land 18,167 16,159
Buildings and improvements 59,553 50,852
Machinery and equipment 112,189 106,365
Automobiles and trucks 23,023 20,713
Less accumulated depreciation (87,454) (79,638)
--------- ---------
125,478 114,451
--------- ---------
OTHER ASSETS
Goodwill 35,217 35,577
Restrictive covenants, customer lists,
and other assets arising from acquisitions 7,578 8,366
Other assets 7,699 7,620
--------- ---------
Total other assets 50,494 51,563
--------- ---------
$ 272,792 $ 253,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 7,673 $ 12,086
Accrued expenses -
Salaries and employee benefits 7,438 6,999
Other 7,030 5,773
Reserve for income taxes 10,687 10,146
Current maturities of debt 7,445 7,445
--------- ---------
Total current liabilities 40,273 42,449
--------- ---------
LONG TERM DEBT, NET OF CURRENT MATURITIES 86,891 76,519
DEFERRED INCOME TAXES 10,366 10,582
OTHER NONCURRENT LIABILITIES 5,887 5,254
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares
authorized, 18,543,118
shares issued and outstanding 9,272 9,272
Class B, 10,000,000 shares
authorized, 1,865,089
shares issued and outstanding 933 933
Additional paid-in capital 19,693 19,228
Retained earnings 105,222 95,174
Cumulative translation adjustment (5,745) (6,078)
--------- ---------
Total stockholders' equity 129,375 118,529
--------- ---------
$ 272,792 $ 253,333
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
<TABLE>
<CAPTION>
G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
DECEMBER 30 DECEMBER 31 DECEMBER 30 DECEMBER 31
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $ 72,806 $ 61,973 $ 141,711 $ 120,817
Direct sales 2,282 3,581 4,331 5,270
--------- --------- --------- ---------
Total revenues 75,088 65,554 146,042 126,087
--------- --------- --------- ---------
EXPENSES
Cost of rental operations 41,212 35,200 80,125 68,640
Cost of direct sales 1,898 3,281 3,304 4,434
Selling and administrative 15,820 13,858 31,233 27,521
Depreciation 4,393 3,613 8,437 6,863
Amortization of intangibles 655 657 1,275 1,331
--------- --------- --------- ---------
Total expenses 63,978 56,609 124,374 108,789
--------- --------- --------- ---------
INCOME FROM OPERATIONS 11,110 8,945 21,668 17,298
Interest expense 2,156 1,445 4,337 2,733
Other (income) expense, net (173) (243) (327) (537)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 9,127 7,743 17,658 15,102
Provision for income taxes 3,552 3,095 6,896 6,096
--------- --------- --------- ---------
NET INCOME $ 5,575 $ 4,648 $ 10,762 $ 9,006
========= ========= ========= =========
Weighted average number of
shares outstanding 20,406 20,364 20,406 20,364
NET INCOME PER SHARE $ 0.27 $ 0.23 $ 0.53 $ 0.44
========= ========= ========= =========
Dividends per share $ 0.0175 $ 0.0167 $ 0.0175 $ 0.0167
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
<TABLE>
<CAPTION>
G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
DEC 30, '95 DEC 31, '94 DEC 30, '95 DEC 31, '94
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,575 $ 4,648 $ 10,762 $ 9,006
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 5,048 4,269 9,712 8,194
Noncurrent deferred income taxes (111) (109) (221) (219)
Change in current operating items-
Inventories (1,838) (5,630) (2,504) (7,383)
Accounts receivable and prepaid expenses (1,623) (3,239) (3,820) (3,170)
Accounts payable and other current liabilities (322) 1,504 (2,017) 2,953
Other, net 898 (292) 978 (121)
-------- -------- -------- --------
Net cash provided by operating activities 7,627 1,151 12,890 9,260
-------- -------- -------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Property, plant and equipment additions, net (10,492) (6,792) (19,369) (14,630)
Acquisitions of operating assets 0 (380) 0 (9,480)
-------- -------- -------- --------
Net cash used for investment activities (10,492) (7,172) (19,369) (24,110)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 14,454 9,652 17,605 15,000
Repayment of debt (7,339) (3,428) (7,339) (2,698)
Acquisition payments refundable from escrow 0 (352) 0 (352)
Cash dividends paid (714) (713) (714) (713)
-------- -------- -------- --------
Net cash provided by (used for) financing activities 6,401 5,159 9,552 11,237
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH 3,536 (862) 3,073 (3,613)
======== ======== ======== ========
Cash:
Beginning of the period 2,582 2,380 3,045 5,131
======== ======== ======== ========
End of the period $ 6,118 $ 1,518 $ 6,118 $ 1,518
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
ITEM 2. Management's Discussion and Analysis of Operations
REVENUES FROM RENTALS AND SERVICES
Revenues from rentals and services totaled $72,806,000 and $61,973,000
for the second quarter of fiscal 1996 and 1995, and $141,711,000 and
$120,817,000 for the first six months. Revenues for G&K's U.S. rental operations
grew at 18.5% rate for the second quarter and 18.1% for the first six months of
fiscal 1996 when compared with the same periods last year. The 18.1% increase
was realized without the benefit of acquisitions. Intensified marketing, strong
sales to new accounts, and good customer retention rates helped us achieve this
result. The 18.5% revenue growth rate is higher than the 15.3% gain reported in
the second quarter last year and the 18.1% revenue growth rate is higher than
the 14.8% gain reported in the first six months of last year. Revenues for
Canadian rental operations increased at a 12.5% rate for the second quarter and
13.5% rate for the first six months of fiscal 1996 compared to the same periods
last year. Revenues in Canadian dollars increased 11.4% for the second quarter
and 12.3% for the first six months as compared to the same periods last year.
There were no significant changes in product mix or selling prices during the
first six months of fiscal 1996.
Revenues from direct sales totaled $2,282,000 and $3,581,000 for the
second quarter fiscal 1996 and 1995. Revenues totaled $4,331,000 and $5,270,000
for the first six months of fiscal 1996 and 1995. Decrease in direct sales is
due to BCP external revenues are down 80.1% for the second quarter and 68.2%
year to date as sales to outside customers have been replaced by production of
garments to meet internal requirements.
EXPENSES
Cost of rental operations were $80,125,000 and $68,640,000 representing
56.5% and 56.8% of revenues from rentals and operations for the first six months
of fiscal 1996 and 1995. As a percentage of revenues, improvements in cost of
merchandise for rental operations were offset by higher delivery costs.
Cost of direct sales were $1,898,000 and $3,281,000 representing 83.2%
and 91.6% of revenues for the second quarter of fiscal 1996 and 1995. Costs of
$3,304,000 and $4,434,000 representing 76.3% and 84.1% of revenues for the first
six months of fiscal 1996 and 1995.
The decrease in cost of direct sales as a percent of revenues is due to
the realization of cost savings resulting from the internal manufacturing of
garments versus purchasing from outside sources.
Selling and administrative expenses were $31,233,000 and $27,521,000 in
the first six months of fiscal 1996 and 1995, representing a 13.5% increase over
fiscal 1995. As a percentage of revenues, these expenses were 21.4% and 21.8% in
the first six months of fiscal 1996 and 1995.
Depreciation expense equaled $15,820,000 and $13,858,000, and
$31,233,000 and $27,521,000 for the three and six month periods in fiscal 1996
and 1995, respectively. The increase in depreciation of 14.2% and 13.5% are the
result of the additions of seven new locations in the first (and second)
quarter(s) of fiscal 1996
Interest expense of $4,337,000 increased 58.7% in the first six months
of fiscal 1996 because of higher average borrowing levels. Additional borrowing
occurred after the first quarter of 1995 and was used to fund the acquisition of
a manufacturing division, capital expenditures and increases in working capital
requirements.
Other income was $327,000 and $537,000 in the first six months of
fiscal 1996 and 1995. This decrease resulted from the recognition of losses in
invested funds in the first quarter.
Effective income tax rates were 39.0% and 40.4% in the first six months
of fiscal 1996 and 1995. The decrease resulted from lower effective rates in the
U.S. and offset by improved profitability in Canada.
NET INCOME
Net income for the first six months of fiscal 1996 totaled
$10,762,000 representing a 19.5% increase compared with the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $12,533,000 in the first six
months of fiscal 1996 compared with $9,260,000 in the same period last year. The
increase is the result of fiscal 1995's increase in inventory relating to the
B.C.P. acquisition, while no such increase in inventory occurred in 1996.
Management believes that funds generated from operations and existing
lines of credit should provide adequate funding for current business operations
and should enable G&K to service its debt related to the Work Wear Corporation
of Canada acquisition in a timely manner.
G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and six month periods ended December 30, 1995 and December 31,
1994
(Unaudited)
1. The consolidated financial statements included herein, except for the
July 1, 1995, balance sheet which was extracted from the audited
financial statements of July 1, 1995, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest annual report.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of December 30, 1995, December 31, 1994, and July 1, 1995, and the
results of operations for the three and six months ended December 30,
1995 and December 31, 1994, and the changes in financial position for
the three and six month periods then ended.
The accounting policies followed by the Company are set forth in Note 1
to the Company's Annual Consolidated Financial Statements. In addition,
the Company's policy regarding foreign currency translation is to
translate balance sheet accounts at the current period-end exchange
rate and income statement items at the average exchange rate for the
period for its foreign operations. Resulting translation adjustments
are made directly to a separate component of stockholders' equity.
The results of operations for the six month period ended December 30,
1995, and December 31, 1994, are not necessarily indicative of the
results to be expected for the full year.
3. Net income per share is based on the weighted average number of shares
of common stock outstanding.
4. Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock- Based Compensation" ("Statement No. 123"), issued in October
1995 and effective for fiscal years beginning after December 15, 1995,
encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity investments. It
also allows an entity to elect to continue to measure compensation cost
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25"), but requires pro forma disclosures
of net income and earnings per share as if the fair value based method
of accounting had been applied
The Company expects to adopt Statement No. 123 in fiscal 1997. While
the Company is still evaluating Statement No. 123, it currently expects
to elect to continue to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements. If the Company makes
this election, this statement will have no impact on the Company's
results of operations of financial position because the Company plans
are fixed stock option and restricted stock plans which have no
intrinsic value at the grant date under APB No. 25.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
a. The Company held its Annual Meeting of Stockholders on
November 1, 1995.
b. The following seven persons were elected directors: Bruce G.
Allbright, Paul Baszucki, Richard Fink, Wayne Fortun, Donald
W. Goldfus, William Hope and Bernard Sweet.
c. Each director nominee received the following votes: Allbright,
31,700,701 shares in favor, 0 shares voting against and 33,721
shares abstaining, Baszucki, 31,700,260 shares in favor, 0
shares voting against and 34,162 shares abstaining, Fink,
31,701,046 shares in favor, 0 shares voting against and 33,376
shares abstaining, Fortun, 31,695,975 shares in favor, 0
shares voting against and 38,447 shares abstaining, Goldfus,
31,700,586 shares in favor, 0 shares against and 33,836 shares
abstaining, Hope, 31,701,046 shares in favor, 0 shares voting
against and 33,376 shares abstaining and Sweet, 31,700,551
shares in favor, 0 shares voting against and 33,871 shares
abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10 - Third Amendment to Credit Agreement
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K.
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: February 13, 1996 /s/Stephen F. LaBelle
Stephen F. LaBelle
Secretary and Treasurer
(Chief Financial Officer)
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment is made as of the 4th day of January,
1996, by and among G&K SERVICES, INC. ("G&K"), WORK WEAR CORPORATION OF CANADA
LTD. ("Work Wear"; G&K and Work Wear, as the context requires, may be
hereinafter referred to collectively as the "Companies" and individually as a
"Company"), NBD BANK (formerly known as NBD Bank, N.A.) ("NBD USA"), NBD BANK,
CANADA ("NBD Canada"), CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION ("Norwest") and HARRIS TRUST AND SAVINGS BANK
("Harris"; NBD USA, NBD Canada, CIBC and Norwest and Harris, as the context
requires, may be hereinafter referred to collectively as the "Banks" and
individually as a "Bank").
RECITALS
The Companies and the Banks have entered into a Credit
Agreement dated as of June 21, 1994, as amended by a First Amendment dated
November 28, 1994, and a Second Amendment dated May 18, 1995 (as amended, the
"Credit Agreement") under which NBD USA, Norwest and Harris have agreed to make
certain revolving credit loans to and issue letters of credit for the account of
G&K (the "Tranche A Facility") and NBD Canada and CIBC have agreed to make
certain revolving credit loans to and issue banker's acceptances for the account
of Work Wear (the "Tranche B Facility").
G&K and Work Wear have requested that certain covenants in the
Credit Agreement be amended and the Banks have agreed to such request, all
pursuant to the terms and subject to the conditions set forth in this Third
Amendment.
ACCORDINGLY, in consideration of the premises, the Companies
and the Banks hereby agree as follows:
1. Definitions. Except as otherwise expressly set forth
herein, all capitalized terms in this Third Amendment which are defined in the
Credit Agreement shall have the same meanings assigned to them in the Credit
Agreement.
2. Representations and Warranties. To induce the Banks to
enter into this Third Amendment, the Companies hereby represent and warrant as
follows:
(a) The Loan Documents constitute the legal, valid and
binding agreements of each Company (to the extent a Company is a party
thereto), are subject to no defenses, counterclaims, rights of offset
or recoupment and are enforceable in accordance with their respective
terms.
(b) The Guaranties of G&K to NBD Canada and CIBC constitute
the legal, valid and binding obligations of G&K, are subject to no
defenses, counterclaims, rights of offset or recoupment and are
enforceable in accordance with their respective terms.
(c) The representations and warranties contained in Section 9
of the Credit Agreement are true and correct as of the date hereof as
though made on and as of this date, except to the extent that such
representations and warranties relate solely to an earlier date.
(d) No event has occurred and is continuing or would result
from the execution and delivery of this Third Amendment and the
ancillary documents contemplated hereby which constitutes or would
constitute a default or an event of default under the Credit Agreement,
the Met Life Loan Agreement or any other agreement, indenture, evidence
of indebtedness or other obligation of either of the Companies.
3. Reduction in Interest on Eurodollar Loans. Section 4.4.2
of the Credit Agreement is hereby amended by deleting the reference to "one and
one-half percent (1 1/2%)" as it appears in clause (ii) thereof and inserting in
place thereof the clause "one and one-quarter percent (1 1/4%)".
4. Reduction in Acceptance Fee. Section 3.7(c) of the Credit
Agreement is hereby amended by deleting the reference to "one and one-half
percent (1.50%)" as it appears therein and inserting in place thereof the clause
"one and one-quarter percent (1.25%)".
5. Increase in Expenditures for Fixed Assets. Section 11.9 of
the Credit Agreement is hereby amended by deleting the reference to "U.S.
$33,000,000" as it appears therein across from the fiscal year 1996 and
inserting in place thereof the term "U.S. $38,000,000".
6. Miscellaneous.
(a) The Companies hereby release and forever discharge the
Banks and each of their respective former and present directors,
officers, employees, agents and representatives of and from every and
all claims, demands, causes of action (at law or in equity) and
liabilities of any kind or nature, whether known or unknown, liquidated
or unliquidated, absolute or contingent, which the Companies ever had,
presently have or claim to have against a Bank or any of its respective
directors, officers, employees, agents or representatives of or
relating to events, occurrences, actions, inactions or other matters of
or relating to the Credit Agreement, any Loan Document or the
Guaranties or any actions or inactions hereunder or thereunder which
occurred prior to the date of this Third Amendment.
(b) The Companies hereby reaffirm their agreement under
Section 16.6 of the Credit Agreement to pay or reimburse Norwest, among
other costs and expenses, for all expenses incurred by Norwest in
connection with the amendment, performance or enforcement of the Loan
Documents, including without limitation, all reasonable fees and
disbursements of legal counsel to Norwest in connection with the
preparation of this Third Amendment.
(c) Except as expressly amended hereby, all provisions of the
Loan Documents and the Guaranties shall remain in full force and
effect. After the effective date hereof, each reference in any Loan
Document, the Guaranties or any other document executed in connection
with the Credit Agreement to "this Agreement", "hereunder" or "hereof"
or words of like import referring to the Credit Agreement or the
Guaranties, respectively, shall be deemed and refer to the Credit
Agreement or the Guaranties, as the case may be, as amended hereby.
(d) This Third Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which counterparts, taken together,
shall constitute but one in the same one and the same instrument.
(e) The execution of this Third Amendment and acceptance of
any documents related hereto shall not be deemed a waiver of any
Default or Event of Default under any Loan Document, whether or not
existing on the date of this Third Amendment.
(f) This Third Amendment shall be governed by, and construed
in accordance with, the internal laws of the State of Minnesota.
IN WITNESS WHEREOF, the undersigned have executed this Third
Amendment as of the day and year first above mentioned.
G&K SERVICES, INC.
By (Illegible Signature)
Its Secretary/Treasurer
WORK WEAR CORPORATION
OF CANADA LTD.
By (Illegible Signature)
Its Secretary/Treasurer
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By (Illegible Signature)
Its Vice President
NBD BANK
By (Illegible Signature)
Its Second Vice President
HARRIS TRUST AND SAVINGS BANK
By (Illegible Signature)
Its Vice President
NBD BANK, CANADA
By (Illegible Signature)
Its Assistant Vice President
CANADIAN IMPERIAL BANK
OF COMMERCE
By (Illegible Signature)
Its Credit Designer
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> DEC-30-1995
<CASH> 6,118
<SECURITIES> 0
<RECEIVABLES> 33,734
<ALLOWANCES> (1,359)
<INVENTORY> 51,109
<CURRENT-ASSETS> 98,820
<PP&E> 212,932
<DEPRECIATION> 87,454
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<CURRENT-LIABILITIES> 39,917
<BONDS> 0
0
0
<COMMON> 10,205
<OTHER-SE> 119,527
<TOTAL-LIABILITY-AND-EQUITY> 272,792
<SALES> 141,711
<TOTAL-REVENUES> 141,711
<CGS> 3,304
<TOTAL-COSTS> 124,374
<OTHER-EXPENSES> (327)
<LOSS-PROVISION> 1,049
<INTEREST-EXPENSE> 4,337
<INCOME-PRETAX> 17,658
<INCOME-TAX> 6,896
<INCOME-CONTINUING> 10,762
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