<PAGE>
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 28, 1996 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5995 OPUS PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
(612) 912-5500
(Registrant's telephone number, including zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS A Outstanding January 31, 1997
Common Stock, par value $.50 per share 18,969,737
CLASS B Outstanding January 31, 1997
Common Stock, par value $.50 per share 1,474,996
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G&K SERVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Dec 28 June 29
1996 1996
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 2,230 $ 6,882
Accounts receivable, net 42,466 36,696
Inventories-
New goods 16,771 16,942
Goods in service 40,016 35,135
Prepaid expenses 4,776 3,995
------------ ------------
Total current assets 106,259 99,650
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land 19,769 19,326
Buildings and improvements 65,727 61,756
Machinery and equipment 131,880 118,955
Automobiles and trucks 26,882 25,028
Less accumulated depreciation (101,555) (92,167)
------------ ------------
142,703 132,898
------------ ------------
OTHER ASSETS
Goodwill 33,990 34,642
Restrictive covenants, customer lists,
and other assets arising from acquisitions 6,896 6,860
Other, principally executive retirement
plan assets 7,541 7,939
------------ ------------
Total other assets 48,427 49,441
------------ ------------
$ 297,389 $ 281,989
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,137 $ 13,068
Accrued expenses -
Salaries and employee benefits 10,935 10,265
Other 9,950 7,151
Reserve for income taxes 10,394 10,280
Current maturities of debt 25,055 9,049
------------ ------------
Total current liabilities 68,471 49,813
------------ ------------
LONG TERM DEBT, NET OF CURRENT MATURITIES 58,085 75,143
DEFERRED INCOME TAXES 9,869 10,093
OTHER NONCURRENT LIABILITIES 6,881 6,293
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized,
18,922,846 and 18,915,725 shares issued and
outstanding 9,462 9,458
Class B, 10,000,000 shares authorized,
1,521,121 shares issued and outstanding 761 761
Additional paid-in capital 19,906 19,758
Retained earnings 129,887 116,465
Cumulative translation adjustment (5,933) (5,795)
------------ ------------
Total stockholders' equity 154,083 140,647
------------ ------------
$ 297,389 $ 281,989
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 2
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G&K SERVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
Dec 28 Dec 30 Dec 28 Dec 30
1996 1995 1996 1995
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $83,583 $72,806 $163,596 $141,711
Direct sales 3,855 2,282 7,152 4,331
------------ ------------ ------------ ----------
Total revenues 87,438 75,088 170,748 146,042
------------ ------------ ------------ ----------
EXPENSES
Cost of rental operations 45,748 41,212 89,230 80,125
Cost of direct sales 3,001 1,898 5,582 3,304
Selling and administrative 20,018 15,820 39,425 31,233
Depreciation 4,845 4,393 9,441 8,437
Amortization of intangibles 497 655 1,060 1,275
------------ ------------ ------------ ----------
Total expenses 74,109 63,978 144,738 124,374
------------ ------------ ------------ ----------
INCOME FROM OPERATIONS 13,329 11,110 26,010 21,668
Interest expense 1,545 2,156 3,268 4,337
Other (income) expense, net (57) (173) (503) (327)
------------ ------------ ------------ ----------
INCOME BEFORE INCOME TAXES 11,841 9,127 23,245 17,658
Provision for income taxes 4,655 3,552 9,108 6,896
------------ ------------ ------------ ----------
NET INCOME $7,186 $5,575 $14,137 $10,762
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
Weighted average number of
shares outstanding 20,443 20,408 20,441 20,406
NET INCOME PER SHARE $0.35 $0.27 $0.69 $0.53
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
DIVIDENDS PER SHARE $0.0175 $0.0175 $0.0350 $0.0350
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 3
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G&K SERVICES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------------------------------
Dec 28, '96 Dec 30, '95 Dec 28, '96 Dec 30, '95
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $7,186 $5,048 $14,137 $10,762
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 5,342 5,048 10,501 9,712
Noncurrent deferred income taxes (116) (111) (225) (221)
Change in current operating items-
Inventories (3,164) (1,838) (4,738) (2,504)
Accounts receivable and prepaid expenses (3,185) (1,623) (6,580) (3,820)
Accounts payable and other current liabilities 35 (322) 2,676 (2,017)
Other, net 740 898 1,223 978
------------ ----------- ----------- -----------
Net cash provided by operating activities 6,838 7,627 16,994 12,890
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Property, plant and equipment additions, net (8,885) (10,492) (17,964) (19,369)
Acquisitions of operating assets 0 0 (1,948) 0
------------ ----------- ----------- -----------
Net cash used for investment activities (8,885) (10,492) (19,912) (19,369)
------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2 0 4 0
Proceeds from issuance of long-term debt 5,580 8,080 12,770 17,605
Repayments of long-term debt (2,228) (965) (13,793) (7,339)
Cash dividends paid (715) (714) (715) (714)
------------ ----------- ----------- -----------
Net cash provided by (used for) financing
activities 2,639 6,401 (1,734) 9,552
------------ ----------- ----------- -----------
Increase (decrease) in cash 592 3,536 (4,652) 3,073
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Cash:
Beginning of the period 1,638 2,582 6,882 3,045
------------ ----------- ----------- -----------
End of the period $2,230 $6,118 $2,230 $6,118
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 4
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G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and six month periods ended December 28, 1996 and December 30, 1995
(Unaudited)
1. The consolidated financial statements included herein, except for the
June 29, 1996, balance sheet which was extracted from the audited financial
statements of June 29, 1996, 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 28, 1996, and June 29, 1996, and the results of operations for
the three and six months ended December 28, 1996 and December 30, 1995, 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.
The results of operations for the three and six month periods ended
December 28, 1996, 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.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
REVENUES
Rental revenues from rentals and services totaled $83,583,000 and
$72,806,000 for the second quarter of fiscal 1997 and 1996 respectively, and
$163,596,000 and $141,711,000 for the first six months of fiscal 1997 and 1996
respectively. Revenues for G&K's U.S. rental operations grew at 14.8% rate for
the second quarter and 15.9% for the first six months of fiscal 1997 when
compared with the same periods last year. Increased new account sales,
expansion of existing accounts, selective price increases, new market entries,
and good customer retention rates helped achieve this result. Revenues for
Canadian rental operations increased at a 15.0% rate for the second quarter and
13.1% rate for the first six months of fiscal 1997 compared to the same periods
last year. Revenues in Canadian dollars increased 14.6% for the second quarter
and 13.5% for the first six months when compared to the same periods last year.
There were no significant changes in product mix or selling prices during the
first six months fiscal 1997.
Revenues from direct sales totaled $3,855,000 and $2,282,000 for the second
quarter fiscal 1997 and 1996 respectively. Revenues from direct sales totaled
$7,152,000 and $4,331,000 for the first six months of fiscal 1997 and 1996
respectively. Increase in direct sales is due to higher U.S. manufacturing
division external revenues which utilize our manufacturing capacities above
internal needs.
EXPENSES
Cost of rental operations totaled $45,748,000 and $41,212,000 representing
54.7% and 56.6% of revenues from rental operations for the second quarter fiscal
1997 and 1996 respectively, and $89,230,000 and $80,125,000 representing 54.5%
and 56.5% of revenues for rental operations for the first six months of fiscal
1997 and 1996 respectively. These improvements are a result of decreased
production and merchandise costs that come from efficiencies gained in the
rental operations and manufacturing of rental garments.
Costs of direct sales were $5,582,000 and $3,304,000 representing 78.0%
and 76.3% of direct sales for the first six months of fiscal 1997 and 1996
respectively. The increase in cost of direct sales as a percent of revenues is
due to reduced gross margins on outside sales.
Selling and administrative expenses were $20,018,000 and $15,820,000
representing 22.9% and 21.1% of revenues for the second quarter of fiscal 1997
and 1996 respectively, and $39,425,000 and $31,233,000 representing 23.1% and
21.4% of revenues for six months ended fiscal 1997 and 1996 respectively. The
increase is primarily from sales, marketing and training costs from continued
development and maintenance of projects that maximize our continued internal
sales growth rates, as well as the addition of new locations.
Depreciation expense equaled $4,845,000 and $4,393,000, for the second
quarter of fiscal 1997 and 1996 respectively. Depreciation totaled $9,441,000
and $8,437,000 for six months ended fiscal 1997 and 1996 respectively. The
increase in depreciation of 10.3% and 11.9% respectively, is the result of
investment of capital into new and existing locations.
6
<PAGE>
Interest expense of $3,268,000 decreased 24.6% in the first six months of
fiscal 1997 when compared with the same period last year. The decrease is a
result of lower average borrowing levels and interest rates.
Effective income tax rates were 39.2% and 39.1% in the first six months of
fiscal 1997 and 1996.
NET INCOME
Net income for the second quarter of fiscal 1997 totaled $7,186,000
representing a 28.9% increase compared with the same period in 1996. Net income
for six months of fiscal 1997 totaled $14,137,000 representing a 31.4% increase
compared with the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $16,994,000 in the first six
months of fiscal 1997 compared with $12,890,000 in the same period last year.
The increase is primarily the result of higher net income before depreciation
and amortization, partially off-set by growth in inventory and accounts
receivable.
Net cash used for financing activities of $1,734,000 in the first six
months of fiscal 1997 included the repayment of senior notes payable of
$9,000,000 offset by additional borrowing on the long term line of credit. Net
cash provided in the first six months of fiscal 1996 of $9,552,000 included a
payment on senior notes payable of $6,197,000 and additional borrowing on the
long term line of credit.
Management believes that funds generated from operations and existing lines
of credit should provide adequate funding for current business operations and
debt service requirements.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities, as well as
other capital spending, financial sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect future results and, accordingly,
such results may differ from those expressed in any forward-looking statement
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and business activities,
dependence on existing management, domestic or global economic conditions,
changes in federal or state laws or the administration of such laws, as well as
all other risks and uncertainties described in the Company's filings.
7
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
a. The Company held its Annual Meeting of Stockholders on
October 31, 1996.
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. 1. Each director nominee received the following votes: Allbright,
28,135,386 shares in favor, 0 shares voting against and 20,542
shares abstaining, Baszucki, 28,130,415 shares in favor, 0 shares
voting against and 25,513 shares abstaining, Fink, 28,132,851
shares in favor, 0 shares voting against and 23,077 shares
abstaining, Fortun, 28,128,427 shares in favor, 0 shares voting
against and 27,501 shares abstaining, Goldfus, 28,131,903 shares
in favor, 0 shares against and 24,025 shares abstaining, Hope,
28,134,909 shares in favor, 0 shares voting against and 21,019
shares abstaining and Sweet, 28,131,958 shares in favor, 0 shares
voting against and 23,970 shares abstaining.
2. Stockholders approvel of 1996 Directors Stock Option Plan:
26,544,027 shares in favor, 1,436,327 shares voting against and
110,574 shares abstaining, 65,000 non-vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K.
Not Applicable.
8
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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 11, 1997 s/Richard Fink
-------------------- ------------------------
Richard Fink
Chairman of the Board
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> DEC-28-1996
<CASH> 2,230
<SECURITIES> 0
<RECEIVABLES> 44,296
<ALLOWANCES> (1,831)
<INVENTORY> 56,787
<CURRENT-ASSETS> 106,259
<PP&E> 244,258
<DEPRECIATION> (101,555)
<TOTAL-ASSETS> 297,389
<CURRENT-LIABILITIES> 68,471
<BONDS> 0
0
0
<COMMON> 10,223
<OTHER-SE> 143,860
<TOTAL-LIABILITY-AND-EQUITY> 297,389
<SALES> 7,152
<TOTAL-REVENUES> 170,748
<CGS> 5,582
<TOTAL-COSTS> 144,738
<OTHER-EXPENSES> (503)
<LOSS-PROVISION> 1,243
<INTEREST-EXPENSE> 3,268
<INCOME-PRETAX> 23,245
<INCOME-TAX> 9,108
<INCOME-CONTINUING> 14,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,137
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
