<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 March 28, 1998 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 May 7, 1998
Common Stock, par value $.50 per share 19,013,152
CLASS B Outstanding May 7, 1998
Common Stock, par value $.50 per share 1,474,996
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 28,
1998 June 28,
ASSETS (In thousands, except share data) (Unaudited) 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 9,155 $ 6,986
Accounts receivable, less allowance for doubtful
accounts of $2,262 and $1,324 56,814 41,831
Inventories 78,656 59,799
Prepaid expenses 5,561 4,512
- ---------------------------------------------------------------------------------------------
Total current assets 150,186 113,128
- ---------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 25,192 19,676
Buildings and improvements 84,109 68,683
Machinery and equipment 178,158 143,475
Automobiles and trucks 34,140 27,434
Less accumulated depreciation (127,541) (109,547)
- ---------------------------------------------------------------------------------------------
Total property, plant and equipment 194,058 149,721
- ---------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 141,388 33,856
Restrictive covenants and customer lists, net 45,843 6,016
Other, principally retirement plan assets 13,393 9,244
Assets held for sale 60,367 -
- ---------------------------------------------------------------------------------------------
Total other assets 260,991 49,116
- ---------------------------------------------------------------------------------------------
$ 605,235 $ 311,965
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,655 $ 13,304
Accrued expenses -
Salaries and employee benefits 17,206 11,556
Other 20,393 12,133
Deferred income taxes 10,170 10,268
Current maturities of long-term debt 14,583 25,000
- ---------------------------------------------------------------------------------------------
Total current liabilities 78,007 72,261
LONG-TERM DEBT, LESS CURRENT MATURITIES 318,901 54,284
DEFERRED INCOME TAXES 9,205 9,504
OTHER NONCURRENT LIABILITIES 8,858 6,929
- ---------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,013,152
and 18,986,629 shares issued and outstanding 9,507 9,493
Class B, 10,000,000 shares authorized, 1,474,996
and 1,474,996 shares issued and outstanding 738 738
Additional paid-in capital 23,463 22,684
Retained earnings 166,164 144,036
Deferred compensation (2,329) (2,029)
Unrealized gain on investments held for sale 399 306
Cumulative translation adjustment (7,678) (6,241)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 190,264 168,987
- ---------------------------------------------------------------------------------------------
$ 605,235 $ 311,965
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
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CONSOLIDATED STATEMENTS OF INCOME
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-----------------------------------------------------------
March 28, March 29, March 28, March 29,
(In thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $123,015 $ 84,427 $360,309 $246,662
Direct sales 4,456 4,038 13,849 12,551
- -------------------------------------------------------------------------------------------------------------
Total revenues 127,471 88,465 374,158 259,213
- -------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 71,882 45,826 209,059 134,195
Cost of direct sales 3,224 3,030 9,934 9,473
Selling and administrative 25,145 20,753 75,530 60,178
Depreciation 6,871 5,118 19,308 14,559
Amortization of intangibles 2,305 619 7,104 1,679
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 109,427 75,346 320,935 220,084
- -------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 18,044 13,119 53,223 39,129
Interest expense 5,418 1,560 16,299 4,828
Other income, net (500) (491) (1,292) (994)
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,126 12,050 38,216 35,295
Provision for income taxes 5,155 4,681 15,013 13,789
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,971 $ 7,369 $ 23,203 $ 21,506
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Basic Weighted Average Number
of Shares Outstanding 20,367 20,327 20,367 20,327
BASIC EARNINGS PER COMMON SHARE $ 0.39 $ 0.36 $ 1.14 $ 1.06
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Diluted Weighted Average Number
of Shares Outstanding 20,446 20,410 20,439 20,405
DILUTED EARNINGS PER COMMON SHARE $ 0.39 $ 0.36 $ 1.14 $ 1.05
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-----------------------------------------------------------
March 28, March 29 March 28 March 29,
(In thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,971 $ 7,369 $ 23,203 $ 21,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,176 5,737 26,412 16,238
Deferred income taxes 463 (107) (320) (332)
Changes in current operating items:
Inventories (74) (1,178) (4,687) (5,916)
Accounts receivable and prepaid expenses 9,789 2,813 (6,067) (3,767)
Accounts payable and other current
liabilities (2,359) (5,645) 15,841 (2,969)
Other, net (1,332) (1,137) 989 358
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,634 7,852 55,371 25,118
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions, net (11,065) (7,623) (28,996) (25,587)
Business acquisitions (1,285) - (281,842) (1,948)
Change in assets held for sale 1,742 - 5,543 -
Sale of business assets 2,433 - 2,433 -
(Purchase) sales of investments 9 (207) (403) (479)
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (8,166) (7,830) (303,265) (28,014)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 9,583 565 366,931 13,335
Repayments on line of credit and other
long-term debt, net (25,479) (1,187) (115,893) (14,980)
Cash dividends paid (359) (359) (1,075) (1,074)
Sale of common stock 98 8 100 12
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (16,157) (973) 250,063 (2,707)
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (689) (951) 2,169 (5,603)
CASH AND CASH EQUIVALENTS:
Beginning of period 9,844 2,230 6,986 6,882
- ------------------------------------------------------------------------------------------------------------------
End of period $ 9,155 $ 1,279 $ 9,155 $ 1,279
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 7,030 $ 1,614 $ 16,907 $ 4,757
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Income taxes $ 3,474 $ 3,682 $ 12,349 $ 12,524
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and nine month periods ended March 28, 1998 and March 29, 1997
(Unaudited)
The consolidated financial statements included herein, except for the
June 28, 1997 balance sheet, which was extracted from the audited financial
statements of June 28, 1997, have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of March 28, 1998 and June 28, 1997, and the results of
operations and the changes in financial position for the three and nine
months ended March 28, 1998 and March 29, 1997. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report.
The results of operations for the three and nine month periods ended
March 28, 1998, and March 29, 1997, are not necessarily indicative of the
results to be expected for the full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies followed by the Company are set forth in Note 1 to
the Company's Annual Consolidated Financial Statements.
NATURE OF BUSINESS
G&K Services, Inc. (the Company) is a full service uniform rental
provider, including the rental of cleanroom garments. The Company also
provides rental of non-uniform items such as floormats, dustmops and
cloths, wiping towels and selected linen items. In addition, the Company
manufactures uniforms for rental customers as well as uniforms for direct
sale.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly
owned. Significant intercompany balances and transactions have been
eliminated in consolidation.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its interest rate exposure. Amounts to be paid or received
under interest rate swap agreements are accrued as interest rates change
and are recognized over the life of the swap agreements as an adjustment to
interest expense. The related amounts payable to, or receivable from, the
counter-parties are included in other accrued expenses. The fair value of
the swap agreements is not recognized in the Consolidated Financial
Statements, since they are accounted for as hedges.
PER SHARE DATA
In the second quarter of fiscal 1998, the Company adopted SFAS No.
128, "Earnings per Share," which is effective for interim periods ending
after December 15, 1997. As a result, all prior period earnings per share
data has been restated. The adoption of SFAS No. 128 did not have a
significant impact on previously reported earnings per share. Basic
earnings per common share was computed by
5
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dividing net income by the weighted average number of shares of common
stock outstanding during the year. Diluted earnings per common share was
computed similar to the computation of basic earnings per share, except
that the denominator is increased for the assumed exercise of dilutive
options and other dilutive securities (including nonvested restricted
stock) using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 20,367 20,327 20,367 20,327
---------------------------------------------------------
Shares used in computation of
basic earnings per share 20,367 20,327 20,367 20,327
Weighted average effect of non-vested
restricted stock grants 48 40 41 35
Weighted average common shares
issuable upon the exercise of
options & other 31 43 31 43
Shares used in computation of ---------------------------------------------------------
diluted earnings per share 20,446 20,410 20,439 20,405
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
1998 presentation. These reclassifications have no effect on net income or
total stockholders' equity as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" (Statement No. 130), issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, requires the
Company to report and display comprehensive income and its components.
Comprehensive income is defined as changes in equity of a business
enterprise during a period except those resulting from investments by
owners and distributions to owners. The Company will adopt this statement
in fiscal 1999.
2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS
On July 14, 1997 the Company purchased the uniform rental assets and
selected linen rental assets of National Linen Service, Inc. (NLS) for
approximately $279 million in cash.
The Company's acquisition of rental operations was accounted for by
using the purchase method. The purchase price was allocated to the
acquired assets and assumed liabilities based on the preliminary
determination of the fair values of the assets purchased and the
liabilities assumed. The purchase price and related acquisition costs
exceed the tentative fair values assigned to tangible assets by
approximately $153.6 million, which excess may be amortized for the
restrictive covenant over the contract life of five years, for the
purchased customer lists over eleven years and for goodwill over
thirty-five years.
In connection with the asset purchase from NLS, it is G&K's intent to
hold for sale nine linen rental facilities. As such, the net cash flows
from (a) operations of these facilities from the date of acquisition until
the date of sale (holding period, not to exceed one year), (b) interest on
incremental debt incurred during the holding period to finance the purchase
of these facilities, and (c) proceeds from the sale will be considered in
the allocation of the purchase price to the assets and liabilities.
Accordingly,
6
<PAGE>
earnings or losses from these nine facilities are excluded from the
earnings reported for the Company. For the three month period ended March
28, 1998, losses excluded from the Company's Statement of Income totaled
$412,000, including allocated interest expense of $1,103,000. For the nine
month period ended March 28, 1998, losses excluded from the Company's
Statement of Income totaled $169,000, including allocated interest expense
of $3,134,000.
The following unaudited pro forma condensed results of operations for
the three and nine month periods ended March 28, 1998 and March 29, 1997
have been prepared as if the NLS transaction occurred on June 29, 1997 and
June 30, 1996, respectively (in thousands, except per share amounts),
<TABLE>
<CAPTION>
Nine Months Ended
March 28, 1998 March 29, 1997
-------------- --------------
<S> <C> <C>
Revenues $379,332 $350,398
Income from Operations 53,678 46,965
Net Income 23,160 20,012
Basic Earnings per common share $ 1.14 $ 0.98
Diluted Earnings per common share $ 1.13 $ 0.98
</TABLE>
This financial information does not purport to represent results which
would actually have been obtained if the asset acquisition had been in
effect on June 29, 1997 and June 30, 1996 or any future results which may
in fact be realized.
3. DEBT
The Company maintains a $425 million credit facility. The credit
facility includes (a) a $300 million term loan with maturity for years
subsequent to June 28, 1997 of $10,000,000, $15,000,000, $35,000,000,
$55,000,000, $60,000,000, and $125,000,000 thereafter, with final maturity
on June 30, 2004, and (b) a $125 million revolving credit facility expiring
on June 30, 2002. As of March 28, 1998, borrowings outstanding under the
term loan were $290,901,000 and under the revolving credit facility were
$42,584,000. The unused portion of the revolver may be used for working
capital and to provide up to $10,000,000 in letters of credit.
Borrowings under the term loan and revolving credit facility bear
interest at 0.5% to 1.125% over the rate offered to major banks in the
London Interbank Eurodollar market ("Eurodollar Rate"), or Canadian Prime
for Canadian borrowings, based on a leverage ratio calculated on a
quarterly basis. Advances outstanding as of March 28, 1998 bear interest
at the Eurodollar Rate or Canadian Prime Rate plus 0.95%. The Company also
pays a fee of 0.15% to 0.35% on the unused daily balance of the revolver
based on a leverage ratio calculated on a quarterly basis. The fee as of
March 28, 1998 was 0.30%.
As of September 27, 1997, the Company had entered into interest rate
swap agreements with certain lenders providing bank financing. The Company
entered into an agreement for the notional principal amount of $100 million
through September 12, 2000 that effectively fixed the interest rate on
floating rate debt at a rate of 6.24%. The Company also entered into an
agreement for the notional principal amount of $50 million through
September 12, 1999 that effectively fixed the interest rate on floating
rate debt at a rate of 6.065%, unless the Eurodollar Rate increases by more
than 25 basis points within any one quarter, in which the Company retains
the risk in any increase in rates over 25 basis points.
The new credit facility contains various restrictive covenants which
among other matters, require the Company to maintain a minimum EBITDA,
minimum debt service coverage ratio, minimum
7
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stockholder equity and maximum leverage ratio, all as defined. The credit
agreement also limits additional indebtedness, investments, capital
expenditures and cash dividends. The Company's obligations under the
credit facility are collateralized by an interest in the Company's personal
property, 100% of the stock of G&K Services, Co. and other domestic
subsidiaries and 65% of the stock of the Company's Canadian subsidiaries.
As of March 28, 1998, the Company was in compliance with all debt
covenants.
4. ASSETS HELD FOR SALE
On January 16, 1998, the Company sold selected linen assets
classified as Assets Held for Sale on the balance sheet for approximately
$2.4 million in cash. These assets, including original purchase goodwill,
had a book value of approximately $2.4 million.
On May 1, 1998, the Company sold selected linen assets and
uniform rental assets for approximately $75.0 million in cash, subject to
certain post-closing purchase price adjustments. This sale included assets
classified as Assets Held for Sale on the balance sheet having a book value
of approximately $53.7 million and other operating assets having a book
value of approximately $21.3 million. Proceeds from the sale will be used
to reduce the Company's outstanding bank debt. This transaction completes
the sale of eight of the nine linen facilities acquired from NLS that were
held for sale.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The percentage relationships to total revenues of certain income and
expense items for the three and nine month periods ended March 28, 1998 and
March 29, 1997, and the percentage changes in these income and expense items
between periods are contained in the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
THREE MONTHS NINE MONTHS PERCENTAGE
ENDED ENDED CHANGE
------------------------------------------------------ ----------------------------
Three Months Nine Months
March 28, March 29, March 28, March 29, FY 1998 FY 1998
1998 1997 1998 1997 vs. FY 1997 vs. FY 1997
------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental 96.5% 95.4% 96.3% 95.2% 45.7% 46.1%
Direct 3.5 4.6 3.7 4.8 10.4 10.3
------------------------------------------------------
Total Revenues 100.0 100.0 100.0 100.0 44.1 44.3
Expenses:
Cost of Rental Sales 58.4 54.3 58.0 54.4 56.9 55.8
Cost of Direct Sales 72.4 75.0 71.7 75.5 6.4 4.9
------------------------------------------------------
Total Cost of Sales 58.9 55.2 58.5 55.4 53.7 52.4
Selling and Administrative 19.7 23.5 20.2 23.2 21.2 25.5
Depreciation 5.4 5.8 5.2 5.6 34.3 32.6
Amortization of Intangibles 1.8 0.7 1.9 0.7 272.4 323.1
------------------------------------------------------
Income from Operations 14.2 14.8 14.2 15.1 37.5 36.0
Interest Expense 4.3 1.8 4.3 1.9 247.3 237.6
Other (Income) Expense, net (0.4 ) (0.6 ) (0.3 ) (0.4 ) 1.8 30.0
------------------------------------------------------
Income Before Income Taxes 10.3 13.6 10.2 13.6 8.9 8.3
Provision for Income Taxes 4.0 5.3 4.0 5.3 10.1 8.9
------------------------------------------------------
Net Income 6.3% 8.3% 6.2% 8.3% 8.2% 7.9%
------------------------------------------------------
------------------------------------------------------
</TABLE>
Total revenues for the third quarter of fiscal 1998 increased 44.1% to
$127.5 million from $88.5 million in the third quarter of fiscal 1997 and
increased 44.3% to $374.2 million for the first nine months of fiscal 1998 from
$259.2 million in the same period of fiscal 1997. Revenue attributable to the
acquisition of certain assets of National Linen Service (NLS) was $30.4 million
for the quarter and $87.4 million for the nine month period. Excluding this
increase and excluding prior year Toronto Linen operations which were sold in
fiscal 1997, the revenue growth was 10.7% for the quarter and 11.7% for the
first nine months of fiscal 1998.
Rental revenue growth for the third quarter accounted for $38.6 million, or
a 45.7% increase and for the first nine months accounted for $113.6 million, or
a 46.1% increase. U.S. and Canadian annual rental revenues increased 11.3% and
10.0%, respectively for the third quarter and increased 12.3% and 11.2%
respectively, for the first nine months (excluding revenues from assets acquired
from NLS and revenues from Toronto Linen). The improvement is primarily
attributable to cleanroom and national account sales as well as steady growth in
the Company's traditional garment leasing operations.
Total direct sales to outside customers increased 10.4% to $4.5 million for
the third quarter of fiscal 1998 compared to $4.0 million in the same period of
fiscal 1997. Total direct sales to outside customers increased 10.3% to $13.8
million for the first nine months of fiscal 1998 from $12.6 million in the same
period of fiscal 1997. This increase is largely attributable to the success of
a seasonal promotion and increases in catalog sales. Cost of direct sales, as a
percentage of direct sales, decreased to 72.4% for the third quarter of fiscal
1998 from 75.0% for the same period of fiscal 1997 and decreased to 71.7% for
the first nine months of fiscal 1998 from 75.5% for the same period of fiscal
1997.
9
<PAGE>
Cost of rental operations increased 56.9% to $71.9 million for the third
quarter of fiscal 1998 from $45.8 million in the same period of fiscal 1997 and
rose 55.8% to $209.1 million for the first nine months of fiscal 1998 from
$134.2 million in the same period of fiscal 1997. As a percentage of rental
revenues, these costs increased to 58.4% for the third quarter of fiscal 1998
compared to 54.3% for the same period in fiscal 1997 and increased to 58.0% for
the first nine months of fiscal 1998 from 54.4% in the same period of fiscal
1997. The Company attributes the increase primarily to merchandise and
production costs at the new locations acquired in the NLS transaction.
Selling and administrative expenses increased 21.2% to $25.1 million in the
third quarter of fiscal 1998 from $20.8 million in the same period in fiscal
1997 and increased 25.5% to $75.5 million for the first nine months of fiscal
1998 from $60.2 million in the same period in fiscal 1997. As a percentage of
revenues, selling and administrative expenses decreased to 19.7% in the third
quarter of fiscal 1998 from 23.5% in the same period in fiscal 1997 and
decreased to 20.2% in the nine month period of fiscal 1998 from 23.2% in the
same period in fiscal 1997. The decline as a percent of sales is due to several
factors, including lower selling expenses in the newly acquired NLS locations
and leveraging of corporate costs following the NLS transaction.
Depreciation expense increased 34.3% to $6.9 million in the third quarter
of fiscal 1998 from $5.1 million in the same period of fiscal 1997 and increased
32.6% to $19.3 million for the first nine months of fiscal 1998 from $14.6
million in the same period of fiscal 1997. As a percentage of consolidated
revenue, depreciation expense decreased to 5.4% in the third quarter of fiscal
1998 from 5.8% for the same period in fiscal 1997 and decreased to 5.2% for the
nine month period of fiscal 1998 from 5.6% for the same period in fiscal 1997.
This decrease is caused by timing of anticipated current year capital
expenditures, maturing of startup operations and depreciation on acquired NLS
assets based on fair market valuations. Capital expenditures for the quarter,
excluding acquisition of businesses, was $11.1 million compared to $7.6 million
in the prior year's quarter, and for the nine month period they were $29.0
million compared to $25.6 million in the prior year.
Amortization expense increased to $2.3 million in the third quarter of
fiscal 1998 from $.6 million in the second quarter of fiscal 1997 and increased
to $7.1 million in the first nine months of fiscal 1998 from $1.7 million in the
same period of fiscal 1997. This increase is attributable to the acquisition of
NLS assets.
Operating income increased 37.5% to $18.0 million in the third quarter of
fiscal 1998 from $13.1 million in the same period of fiscal 1997 and increased
36.0% to $53.2 million for the first nine months of fiscal 1998 from $39.1
million in the same period of fiscal 1997. Operating margins decreased to 14.2%
for the third quarter of fiscal 1998 from 14.8% in the same period of fiscal
1997 and decreased to 14.2% for the nine month period of fiscal 1998 from 15.1%
in the same period of fiscal 1997. U.S. operating margins declined to 12.7% for
the third quarter of fiscal 1998 from 13.7% in the same period of fiscal 1997
and declined to 12.7% for the nine month period of fiscal 1998 from 14.1% in the
same period of fiscal 1997.
Interest expense was $5.4 million for the third quarter of fiscal 1998, up
from $1.6 million in the same period of fiscal 1997 and was $16.3 million for
the first nine months of fiscal 1998, up from $4.8 million in the same period of
fiscal 1997. This was largely due to additional borrowings to finance the NLS
acquisition. The Company's effective tax rate increased to 39.3% in the third
quarter of fiscal 1998 from 38.8% in the same period of fiscal 1997 and it
increased to 39.3% in the nine month period of fiscal 1998 from 39.1% in the
same period of fiscal 1997.
Net income rose 8.2% to $8.0 million in the third quarter of fiscal 1998
from $7.4 million in the same period of fiscal 1997 and rose 7.9% to $23.2
million in the first nine months of fiscal 1998 from $21.5 million in the same
period of fiscal 1997. Basic and diluted earnings per share for the third
quarter were $.39 per share compared with $.36 for the prior year quarter.
Basic and diluted earnings per share for the first nine months of fiscal 1998
increased to $1.14 from basic earnings per share of $1.06 and diluted earnings
per share of $1.05 in the same period of fiscal 1997. Net income margins
decreased to 6.3% for the third quarter of fiscal 1998 compared with 8.3% in the
third quarter of fiscal 1997 and decreased to 6.2% for the nine month period of
fiscal 1998 compared with 8.3% in the nine month period of fiscal 1997.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities increased to $23.6 million in the third
quarter of fiscal 1998 from $7.9 million in the same period of fiscal 1997 and
increased to $55.4 million in the first nine months of fiscal 1998 from $25.1
million in fiscal 1997. The fiscal 1998 increase resulted from increases in net
income and depreciation and amortization while the decrease in accounts
receivable and prepaid expenses was greater in the third quarter of fiscal 1998
when compared to the third quarter of 1997. Working capital at March 28, 1998
was $72.2 million, up 92.3% from $37.5 million at March 29, 1997. The increase
reflects the acquisition of NLS assets.
Cash used in financing activities was $16.2 million in the third quarter of
fiscal 1998 and $1.0 million in the same period of fiscal 1997. Cash provided by
financing activities was $250.1 million in the nine month period of fiscal 1998
and cash used for financing activities was $2.7 million in the same period of
fiscal 1997. $355.8 million of cash was obtained by issuing debt in the first
quarter of fiscal 1998 primarily for the acquisition of selected assets of NLS.
The Company's ratio of debt to total capitalization increased from 31.9% at June
28, 1997 to 63.7% at the end of March 1998.
Cash used in investing activities was $8.2 million in the third quarter of
fiscal 1998 and $7.8 million in the same period of fiscal 1997. Cash used in
investing activities was $303.3 million in the nine month period of fiscal 1998
and $28.0 million in the same period of fiscal 1997. The increase is primarily
due to the acquisition of the NLS assets.
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. G&K is
completing an extensive review of its business to determine whether or not its
software and related technologies are year 2000 compliant, as well as the
remedial action and related costs associated with required modifications or
replacements. A significant amount of information has been collected and
analyzed as a part of this review; however, the process will not be completed
until the end of the first quarter of fiscal year 1999. The Company has begun
to implement solutions and to incur expenses in fiscal 1998 to resolve this
issue. These expenses may be significant and continue through the year 1999.
Maintenance or modification costs will be expensed as incurred, while the costs
of any new software will be capitalized over the software's useful life. G&K is
also contacting critical suppliers of products and services to determine that
the suppliers' operations and the products and services they provide are year
2000 capable or to monitor their progress toward year 2000 capability. There
can be no assurance that another company's failure to ensure year 2000
capability would not have an adverse effect on the Company.
In connection with G&K's acquisition of selected assets of NLS in July
1997, the Company entered into a new $425 million credit facility to fund the
purchase price of the assets and refinance then existing indebtedness. The
unused portion of the revolver may be used for working capital and to provide
letters of credit. The new credit facility contains various restrictive
covenants which, among other matters, require the Company to maintain a minimum
EBITDA, minimum debt service coverage ratio, minimum stockholder equity and
maximum leverage ratio, all as defined. The agreement also limits additional
indebtedness, investments, capital expenditures and cash dividends. G&K's
obligations under the credit facility are secured by an interest in the
Company's personal property, 100% of the stock of G&K Services, Co. and other
domestic subsidiaries and 65% of the stock of Canadian subsidiaries.
Stockholders' equity grew 18.4% to $190.3 million at March 28, 1998,
compared with $160.7 million at the end of the third quarter of 1997. G&K's
return on average equity decreased to 12.9% in the nine month period of fiscal
1998 compared with 14.3% for the same period of fiscal 1997.
Management believes that cash flows generated from operations and its
credit facilities should provide adequate funding for its current businesses and
planned expansion of operations or any future acquisitions.
Statements in this document regarding ongoing trends and expectations
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks, which may cause the Company's actual results in the future to
differ materially from expected results. These risks and uncertainties include,
but are not limited to, those expectations related to
11
<PAGE>
the acquisition of assets from NLS; unforeseen operating risks; the availability
of capital to finance planned growth; competition within the uniform leasing
industry; and the effects of economic conditions.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports on Form 8-K
a. EXHIBITS
Exhibit 27.1 - Financial Data Schedule, (for SEC use only)
Exhibit 27.2 - Financial Data Schedule, Fiscal year ends 1995,
1996 and 1997, All Restated (for SEC use only)
Exhibit 27.3 - Financial Data Schedule, Quarter 1 and 2 of Fiscal
year 1998, Quarters 1, 2 and 3 of
Fiscal year 1997, All Restated (for SEC use only)
Exhibit 27.4 - Financial Data Schedule, Quarters 1, 2 and 3 of
Fiscal year 1996, All Restated (for SEC
use only)
b. Reports on Form 8-K.
None.
13
<PAGE>
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: May 12, 1998 s/Timothy W. Kuck
-------------------------------- ------------------------------
Timothy W. Kuck
Chief Financial Officer
(Principal Financial
Officer)
s/Michael F. Woodard
------------------------------
Michael F. Woodard
Controller
(Principal Accounting
Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 9,155
<SECURITIES> 0
<RECEIVABLES> 59,076
<ALLOWANCES> (2,262)
<INVENTORY> 78,656
<CURRENT-ASSETS> 150,186
<PP&E> 321,599
<DEPRECIATION> (127,541)
<TOTAL-ASSETS> 605,235
<CURRENT-LIABILITIES> 78,007
<BONDS> 0
0
0
<COMMON> 10,245
<OTHER-SE> 180,019
<TOTAL-LIABILITY-AND-EQUITY> 605,235
<SALES> 374,158
<TOTAL-REVENUES> 374,158
<CGS> 218,993
<TOTAL-COSTS> 320,935
<OTHER-EXPENSES> (1,292)
<LOSS-PROVISION> 2,457
<INTEREST-EXPENSE> 5,418
<INCOME-PRETAX> 13,126
<INCOME-TAX> 5,155
<INCOME-CONTINUING> 7,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,971
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUL-01-1995 JUN-29-1996 JUN-28-1997
<PERIOD-START> JUL-03-1994 JUL-02-1995 JUN-30-1996
<PERIOD-END> JUL-01-1995 JUN-29-1996 JUN-28-1997
<CASH> 3,045 6,882 6,986
<SECURITIES> 0 0 0
<RECEIVABLES> 33,498 37,972 43,155
<ALLOWANCES> (824) (1,276) (1,324)
<INVENTORY> 48,547 52,077 59,799
<CURRENT-ASSETS> 87,319 99,650 113,128
<PP&E> 194,089 225,065 259,268
<DEPRECIATION> (79,638) (92,167) 109,547
<TOTAL-ASSETS> 253,333 281,989 311,965
<CURRENT-LIABILITIES> 42,449 49,813 72,261
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 10,205 10,219 10,231
<OTHER-SE> 108,324 130,427 158,756
<TOTAL-LIABILITY-AND-EQUITY> 253,333 281,989 311,965
<SALES> 262,481 305,414 350,914
<TOTAL-REVENUES> 262,481 305,414 350,914
<CGS> 152,091 171,831 196,009
<TOTAL-COSTS> 226,378 260,170 298,203
<OTHER-EXPENSES> (1,237) 64 (2,034)
<LOSS-PROVISION> 734 2,117 1,760
<INTEREST-EXPENSE> 7,076 7,964 6,846
<INCOME-PRETAX> 30,264 37,216 47,899
<INCOME-TAX> 11,978 14,496 18,897
<INCOME-CONTINUING> 18,286 22,720 29,002
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 18,286 22,720 29,002
<EPS-PRIMARY> .89 1.11 1.43
<EPS-DILUTED> .89 1.11 1.42
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> JUN-27-1998 JUN-27-1998 JUN-28-1997 JUN-28-1997
JUN-28-1997
<PERIOD-START> JUN-29-1997 JUN-29-1997 JUN-30-1996 JUN-30-1996
JUN-30-1996
<PERIOD-END> SEP-27-1997 DEC-27-1997 SEP-28-1996 DEC-28-1996
MAR-29-1997
<CASH> 3,415 9,844 1,638 2,230
1,279
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 57,508 67,745 41,218 44,296
42,475
<ALLOWANCES> (1,532) (1,532) (1,521) (1,831)
(2,062)
<INVENTORY> 75,831 78,693 53,651 56,787
57,887
<CURRENT-ASSETS> 143,706 164,046 99,375 106,259
103,520
<PP&E> 188,831 310,466 235,903 244,258
250,895
<DEPRECIATION> (114,986) (120,698) (97,161) (101,555)
(105,872)
<TOTAL-ASSETS> 597,268 615,398 287,561 297,389
297,577
<CURRENT-LIABILITIES> 68,971 81,212 52,454 68,471
65,989
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 10,233 10,233 10,220 10,223
10,231
<OTHER-SE> 165,897 171,394 137,550 143,860
150,432
<TOTAL-LIABILITY-AND-EQUITY> 597,268 615,398 287,561 297,389
297,577
<SALES> 118,426 246,687 83,310 170,748
259,213
<TOTAL-REVENUES> 118,426 246,687 83,310 170,748
259,213
<CGS> 68,382 143,887 46,063 94,812
143,668
<TOTAL-COSTS> 101,611 211,508 70,629 144,738
220,084
<OTHER-EXPENSES> (209) (792) (446) (503)
(994)
<LOSS-PROVISION> 795 1,501 526 1,243
1,810
<INTEREST-EXPENSE> 4,767 10,881 1,723 3,268
4,828
<INCOME-PRETAX> 12,257 25,090 11,404 23,245
35,295
<INCOME-TAX> 4,812 9,858 4,453 9,108
13,789
<INCOME-CONTINUING> 7,445 15,232 6,951 14,137
21,506
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 7,445 15,232 6,951 14,137
21,506
<EPS-PRIMARY> .37 .75 .34 .70
1.06
<EPS-DILUTED> .36 .74 .34 .69
1.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-29-1996 JUN-29-1996 JUN-29-1996
<PERIOD-START> JUL-02-1995 JUL-02-1995 JUL-02-1995
<PERIOD-END> SEP-30-1995 DEC-30-1995 MAR-30-1996
<CASH> 2,583 6,118 1,010
<SECURITIES> 0 0 0
<RECEIVABLES> 33,430 33,734 36,289
<ALLOWANCES> (1,028) (1,359) (1,456)
<INVENTORY> 49,434 51,109 50,743
<CURRENT-ASSETS> 90,126 98,820 91,253
<PP&E> 203,522 212,932 219,988
<DEPRECIATION> (83,774) 87,454 91,449
<TOTAL-ASSETS> 261,514 272,792 269,542
<CURRENT-LIABILITIES> 40,915 39,917 41,225
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 10,205 10,205 10,215
<OTHER-SE> 114,264 119,527 124,585
<TOTAL-LIABILITY-AND-EQUITY> 261,514 272,792 269,542
<SALES> 70,954 141,711 223,520
<TOTAL-REVENUES> 70,954 141,711 223,520
<CGS> 40,319 83,429 126,603
<TOTAL-COSTS> 60,396 124,374 190,361
<OTHER-EXPENSES> (154) (327) (16)
<LOSS-PROVISION> 552 1,049 1,629
<INTEREST-EXPENSE> 2,181 4,337 6,246
<INCOME-PRETAX> 8,531 17,658 26,930
<INCOME-TAX> 3,344 6,896 10,456
<INCOME-CONTINUING> 5,187 10,762 16,474
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,187 10,762 16,474
<EPS-PRIMARY> .25 .52 .80
<EPS-DILUTED> .25 .52 .80
</TABLE>
