<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 27, 1997 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
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(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 February 5, 1998
Common Stock, par value $.50 per share 18,994,298
CLASS B Outstanding February 5, 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>
December 27,
1997 June 28,
ASSETS (In thousands, except share data) (Unaudited) 1997
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $9,844 $6,986
Accounts receivable, less allowance
for doubtful
accounts of $1,532 and $1,324 66,213 41,831
Inventories 78,693 59,799
Prepaid expenses 9,296 4,512
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Total current assets 164,046 113,128
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PROPERTY, PLANT AND EQUIPMENT
Land 23,816 19,676
Buildings and improvements 81,557 68,683
Machinery and equipment 171,576 143,475
Automobiles and trucks 33,517 27,434
Less accumulated depreciation (120,698) (109,547)
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Total property, plant and equipment 189,768 149,721
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OTHER ASSETS
Goodwill, net 142,207 33,856
Restrictive covenants and customer lists, net 46,732 6,016
Other, principally retirement plan assets 9,529 9,244
Assets held for sale 63,116 -
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Total other assets 261,584 49,116
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$615,398 $311,965
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $20,624 $13,304
Accrued expenses -
Salaries and employee benefits 17,573 11,556
Other 18,715 12,133
Deferred income taxes 10,133 10,268
Current maturities of long-term debt 14,167 25,000
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Total current liabilities 81,212 72,261
LONG-TERM DEBT, LESS CURRENT MATURITIES 335,051 54,284
DEFERRED INCOME TAXES 9,216 9,504
OTHER NONCURRENT LIABILITIES 8,292 6,929
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STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized,
18,990,629 and 18,922,846 shares issued
and outstanding 9,495 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 22,684 22,684
Retained earnings 158,552 144,036
Deferred compensation (1,779) (2,029)
Unrealized gain on investments held for sale 270 306
Cumulative translation adjustment (8,333) (6,241)
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Total stockholders' equity 181,627 168,987
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$615,398 $311,965
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</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 Six Months Ended
----------------------------------------------------------------------
Dec 27, Dec 28, Dec 27, Dec 28,
(In thousands, except per share data) 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES
Rental operations $ 122,566 $ 82,679 $ 237,294 $ 162,235
Direct sales 5,695 4,759 9,393 8,513
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Total revenues 128,261 87,438 246,687 170,748
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EXPENSES
Cost of rental operations 71,472 45,188 137,177 88,369
Cost of direct sales 4,033 3,561 6,710 6,443
Selling and administrative 25,489 20,018 50,385 39,425
Depreciation 6,577 4,845 12,437 9,441
Amortization of intangibles 2,326 497 4,799 1,060
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Total operating expenses 109,897 74,109 211,508 144,738
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INCOME FROM OPERATIONS 18,364 13,329 35,179 26,010
Interest expense 6,114 1,545 10,881 3,268
Other income, net (583) (57) (792) (503)
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INCOME BEFORE INCOME TAXES 12,833 11,841 25,090 23,245
Provision for income taxes 5,046 4,655 9,858 9,108
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NET INCOME $ 7,787 $ 7,186 $ 15,232 $ 14,137
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Basic Weighted Average Number
of Shares Outstanding 20,369 20,334 20,367 20,332
BASIC EARNINGS PER COMMON SHARE $ .38 $ 0.35 $ 0.75 $ 0.70
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Diluted Weighted Average Number
of Shares Outstanding 20,454 20,433 20,449 20,425
DILUTED EARNINGS PER COMMON SHARE $ 0.38 $ 0.35 $ 0.74 $ 0.69
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</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 Six Months Ended
------------------------------------------------------------------
Dec 27, Dec 28, Dec 27, Dec 28,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,787 $ 7,186 $ 15,232 $ 14,137
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,903 5,342 17,236 10,501
Deferred income taxes (746) (117) (783) (225)
Changes in current operating items:
Inventories (2,835) (3,164) (4,613) (4,738)
Accounts receivable and prepaid expenses (10,356) (3,184) (19,351) (6,580)
Accounts payable and other current liabilities 7,327 35 18,200 2,676
Other, net 2,965 872 2,321 1,495
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Net cash provided by operating activities 13,045 6,970 28,242 17,266
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions, net (9,608) (8,885) (17,931) (17,964)
Business acquisitions 971 - (280,557) (1,948)
Change in assets held for sale 2,011 - 3,801 -
Purchase of investments (218) (132) (412) (272)
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Net cash used for investing activities (6,844) (9,017) (295,099) (20,184)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 5,000 5,580 360,843 12,770
Repayments on line of credit and other long-term debt, net (4,414) (2,228) (90,414) (13,793)
Cash dividends paid (358) (715) (716) (715)
Sale of common stock - 2 2 4
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Net cash provided by (used for) financing activities 228 2,639 269,715 (1,734)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,429 592 2,858 (4,652)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,415 1,638 6,986 6,882
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End of period $ 9,844 $ 2,230 $ 9,844 $ 2,230
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 5,627 $ 1,466 $ 9,877 $ 3,143
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Income taxes $ 1,629 $ 7,331 $ 8,875 $ 8,842
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</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 six month periods ended December 27, 1997 and December 28, 1996
(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 December 27, 1997, and June 28, 1997, and the
results of operations and the changes in financial position for the three and
six months ended December 27, 1997 and December 28, 1996. 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 six month periods ended
December 27, 1997, and December 28, 1996, 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 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,
5
<PAGE>
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.
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.
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 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 National Linen, 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, earnings or losses from these nine facilities are
excluded from the earnings reported for the Company. For the three month
period ended December 27, 1997, losses excluded from the Company's Statement
of Income totaled $7,000, including allocated interest expense of $1,055,000.
For the six month period ended December 27, 1997, earnings excluded from the
Company's Statement of Income totaled $243,000, including allocated interest
expense of $2,031,000.
The following unaudited pro forma condensed results of operations
for the three and six month periods ended December 27, 1997 and December 28,
1996 have been prepared as if the National Linen transaction occurred on
June 29, 1997 and June 30, 1996, respectively (in thousands, except per share
amounts),
<TABLE>
<CAPTION>
Six Months Ended
December 27, 1997 December 28, 1996
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<S> <C> <C>
Revenues $251,861 $231,538
Income from Operations 35,634 31,234
Net Income 15,189 13,141
Basic Earnings per common share $ 0.75 $ 0.65
Diluted Earnings per common share $ 0.74 $ 0.64
</TABLE>
6
<PAGE>
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 December 27, 1997, borrowings outstanding under the
term loan were $296,666,667 and under the revolving credit facility were
$52,551,333. 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 through December 31, 1997 will bear interest at the
Eurodollar Rate or Canadian Prime Rate plus 1.125%. 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 through December 31,
1997 will be 0.35%.
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 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 December 27, 1997, the Company was in
compliance with all debt covenants.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three and six month periods ended December 27, 1997 and December
28, 1996, 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 SIX MONTHS PERCENTAGE PERCENTAGE
ENDED ENDED CHANGE CHANGE
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Three Months Six Months
Dec. 27, Dec. 28, Dec. 27, Dec. 28, FY 1998 FY 1998
1997 1996 1997 1996 vs. FY 1997 vs. FY 1997
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<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental 95.6% 94.6% 96.2% 95.0% 48.2% 46.3%
Direct 4.4 5.4 3.8 5.0 19.7 10.3
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Total Revenues 100.0 100.0 100.0 100.0 46.7 44.5
Expenses:
Cost of Rental Sales 58.3 54.7 57.8 54.5 58.2 55.2
Cost of Direct Sales 70.8 74.8 71.4 75.7 13.3 4.1
------------------------------------------------------
Total Cost of Sales 58.9 55.8 58.3 55.6 54.9 51.8
Selling and Administrative 19.9 22.9 20.4 23.1 27.3 27.8
Depreciation 5.1 5.5 5.0 5.5 35.7 31.7
Amortization of Intangibles 1.8 0.6 2.0 0.6 368.0 352.7
------------------------------------------------------
Income from Operations 14.3 15.2 14.3 15.2 37.8 35.3
Interest Expense 4.8 1.8 4.4 1.9 295.7 233.0
Other (Income) Expense, net (0.5) (0.1) (0.3) (0.3) 922.8 57.5
------------------------------------------------------
Income Before Income Taxes 10.0 13.5 10.2 13.6 8.4 7.9
Provision for Income Taxes 3.9 5.3 4.0 5.3 8.4 8.2
------------------------------------------------------
Net Income 6.1% 8.2% 6.2% 8.3% 8.4% 7.7%
------------------------------------------------------
</TABLE>
Total revenues for the second quarter of fiscal 1998 increased 46.7%
to $128.3 million from $87.4 million in the second quarter of fiscal 1997 and
they increased 44.5% to $246.7 million for the first six months of fiscal
1998 from $170.7 million in the same period of fiscal 1997. Revenue
attributable to the acquisition of certain assets of National Linen Service
(NLS) was $30.8 million for the quarter and $57.0 million for the six month
period. Excluding this increase and excluding prior year Toronto Linen
operations which were sold in fiscal 1997, the revenue growth was 12.6% for
the quarter and 12.2% for the first six months of fiscal 1998.
Rental revenue growth for the second quarter accounted for $39.9
million, or a 48.2% increase and for the first six months it accounted for
$75.1 million, or a 46.3% increase. U.S. and Canadian annual rental revenues
increased 13.1% and 10.5%, respectively for the second quarter and increased
12.9% and 11.7% respectively, for the first six 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 traditional garment leasing operations.
Total direct sales to outside customers increased 19.7% to $5.7 million
for the second quarter of fiscal 1998 from $4.8 million in the same period
of fiscal 1997 and increased 10.3% to $9.4 million for the first six months
of fiscal 1998 from $8.5 million in the same period of fiscal 1997, helped by
the success of a seasonal promotion and increases in catalog sales. Cost of
direct sales, as a percentage of direct sales, decreased to 70.8% for the
second quarter of fiscal 1998 from 74.8% for the same period of fiscal 1997
and decreased to 71.4% for the first six months of fiscal 1998 from 75.7% for
the same period of fiscal 1997.
Cost of rental operations increased 58.2% to $71.5 million for the
second quarter of fiscal 1998 from $45.2 million in the same period of fiscal
1997 and rose 55.2 % to $ 137.2 million for the first six months of fiscal
1998 from $88.4 million in the same period of fiscal 1997. As a percentage
of rental revenues, these costs increased to
8
<PAGE>
58.3% for the second quarter of fiscal 1998 compared to 54.7% for the same
period in fiscal 1997 and increased to 57.8% for the first six months of
fiscal 1998 from 54.5% 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 27.3% to $25.5 million in
the second quarter of fiscal 1998 from $20.0 million in the same period in
fiscal 1997 and increased 27.8% to $50.4 million for the first six months of
fiscal 1998 from $39.4 million in the same period in fiscal 1997. As a
percentage of revenues, selling and administrative expenses decreased to
19.9% in the second quarter of fiscal 1998 from 22.9% in the same period in
fiscal 1997 and decreased to 20.4% in the six month period of fiscal 1998
from 23.1% 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 35.7% to $6.6 million in the second
quarter of fiscal 1998 from $4.8 million in the same period of fiscal 1997
and increased 31.7% to $12.4 million for the first six months of fiscal 1998
from $9.4 million in the same period of fiscal 1997. As a percentage of
consolidated revenue, depreciation expense decreased to 5.1% in the second
quarter of fiscal 1998 from 5.5% for the same period in fiscal 1997 and
decreased to 5.0% for the six month period of fiscal 1998 from 5.5% 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 $9.6
million compared to $8.9 million in the prior year's quarter, and for the six
month period they were $17.9 million compared to $18.0 million in the prior
year.
Amortization expense increased to $2.3 million in the second quarter of
fiscal 1998 from $.5 million in the second quarter of fiscal 1997 and
increased to $4.8 million in the first six months of fiscal 1998 from $1.1
million in the same period of fiscal 1997. This increase is attributable to
the acquisition of NLS assets.
Operating income increased 37.8% to $18.4 million in the second quarter
of fiscal 1998 from $13.3 million in the same period of fiscal 1997 and
increased 35.3% to $35.2 million for the first six months of fiscal 1998 from
$26.0 million in the same period of fiscal 1997. Operating margins decreased
to 14.3% for the second quarter of fiscal 1998 from 15.2% in the same period
of fiscal 1997 and decreased to 14.3% for the six month period of fiscal 1998
from 15.2% in the same period of fiscal 1997. U.S. operating margins
declined to 12.6% for the second quarter of fiscal 1998 from 14.0% in the
same period of fiscal 1997 and declined to 12.6% for the six month period of
fiscal 1998 from 14.3% in the same period of fiscal 1997.
Interest expense was $6.1 million for the second quarter of fiscal
1998, up from $1.5 million in the same period of fiscal 1997 and was $10.9
million for the first six months of fiscal 1998, up from $3.3 million in the
same period of fiscal 1997. This was largely due to additional borrowings
to finance the acquisition of selected assets from National Linen Service.
The Company's effective tax rate was 39.3% in the second quarter of fiscal
1998, unchanged from the same period of fiscal 1997 and it increased to
39.3% in the six month period of fiscal 1998 from 39.2% in the same period
of fiscal 1997.
Net income rose 8.4% to $7.8 million in the second quarter of fiscal
1998 from $7.2 million in the second quarter of fiscal 1997 and rose 7.7% to
$15.2 million in the first six months of fiscal 1998 from $14.1 million in
the first six months of fiscal 1997. Diluted and basic earnings per share
for the second quarter were $.38 per share compared with $.35 for the prior
year quarter. Diluted and basic earnings per share for the first six months
of 1998 increased to $.74 and $.75 from $.69 and $.70, respectively. Net
income margins decreased to 6.1% for the second quarter of fiscal 1998
compared with 8.2% in the second quarter of fiscal 1997 and decreased to 6.2%
for the six month period of fiscal 1998 compared with 8.3% in the six month
period of fiscal 1997.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities increased to $13.0 million in the
second quarter of fiscal 1998 from $7.0 million in the same period of
fiscal 1997 and increased to $ 28.2 million in the first six months of
fiscal 1998 from $17.3 million in fiscal 1997. The fiscal 1998 increase
resulted from increases in net income, accounts payable and other current
liabilities, and depreciation and amortization when compared to the first
quarter of 1997. Working capital at December 27, 1997 was $82.8 million, up
119.2% from $37.8 million at December 28, 1996. The increase reflects the
acquisition of NLS assets.
9
<PAGE>
Cash provided by financing activities was $.2 million in the second
quarter of fiscal 1998 and $2.6 million in the same period of fiscal 1997.
Cash provided by financing activities was $269.7 million in the six month
period of fiscal 1998 and cash used for financing activities was $1.7
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 65.8% at the
end of December 1997.
Cash used in investing activities was $6.8 million in the second
quarter of fiscal 1998 and $9.0 million in the second quarter of fiscal
1997. Cash used in investing activities was $295.0 million in the six
month period of fiscal 1998 and $20.2 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. An
internal study is currently under way to determine the full scope and related
costs to insure that the Company's systems continue to meet its internal
needs and those of its customers. The Company has begun 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 new software will be capitalized and
amortized over the software's useful life.
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 17.9% to $181.6 million at December 27, 1997,
compared with $154.1 million at the end of the second quarter of 1997.
G&K's return on average equity decreased to 8.7% in the second quarter of
fiscal 1998 compared with 9.6% 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 the recent
acquisition of assets from National Linen Service; unforeseen operating
risks; the availability of capital to finance planned growth; competition
within the uniform leasing industry; and the effects of economic conditions.
10
<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
30, 1997.
b. The following seven persons were elected directors: Bruce G.
Allbright, Paul Baszucki, Richard Fink, Wayne M. Fortun, Donald
W. Goldfus, William Hope and Bernard Sweet.
c. 1. Each director nominee received the following votes:
<TABLE>
<CAPTION>
SHARES
-------------------------------------------
IN FAVOR WITHHOLD AUTHORITY
-------------------------------------------
<S> <C> <C>
Allbright 30,029,581 432,437
Baszucki 27,814,418 2,647,600
Fink 30,029,381 432,637
Fortun 30,029,381 432,637
Goldfus 30,028,790 433,228
Hope 30,030,196 431,822
Sweet 30,026,810 435,208
</TABLE>
2. Stockholders ratified the appointment of Arthur Andersen
LLP, Certified Public Accountants, as independent auditors of the
Company for 1998: 30,154,322 shares in favor, 84,234 shares voting
against and 223,462 shares abstaining.
3. Stockholders approved an amendment to the Company's 1989
Stock Option and Compensation Plan to increase the number of shares
of Common Stock reserved for issuance thereunder by 1,500,000 shares:
22,727,202 shares in favor, 5,062,840 shares against, 274,430 shares
abstaining and 2,397,546 shares broker non-vote.
ITEM 6. Exhibits and Reports on Form 8-K
a. EXHIBITS
Exhibit 11 - Calculation of earnings per share
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K.
None.
11
<PAGE>
Exhibit 11
G & K Services, Inc. and Subsidiaries
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------------------------
December 27, December 28, December 27, December 28,
1997 1996 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 7,787 $ 7,186 $ 15,232 $ 14,137
----------------------------------------------------------
----------------------------------------------------------
Weighted average number of common
shares outstanding 20,369 20,334 20,367 20,332
----------------------------------------------------------
Shares used in computation of
basic earnings per share 20,369 20,334 20,367 20,332
Weighted average effect of non-vested
restricted stock grants 48 57 45 51
Weighted average common shares
issuable upon the exercise of
options & other 37 42 37 42
Shares used in computation of ----------------------------------------------------------
diluted earnings per share 20,454 20,433 20,449 20,425
----------------------------------------------------------
----------------------------------------------------------
Net Income per common share
Basic $ 0.38 $ 0.35 $ 0.75 $ 0.70
----------------------------------------------------------
----------------------------------------------------------
Diluted $ 0.38 $ 0.35 $ 0.74 $ 0.69
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
12
<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: February 10, 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)
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: February 10, 1998
------------------------ ----------------------
Timothy W. Kuck
Chief Financial Officer
(Principal Financial Officer)
----------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> DEC-27-1997
<CASH> 9,844
<SECURITIES> 0
<RECEIVABLES> 66,213
<ALLOWANCES> 1,532
<INVENTORY> 78,693
<CURRENT-ASSETS> 164,046
<PP&E> 189,678
<DEPRECIATION> 120,698
<TOTAL-ASSETS> 615,398
<CURRENT-LIABILITIES> 81,212
<BONDS> 0
0
0
<COMMON> 10,233
<OTHER-SE> 171,394
<TOTAL-LIABILITY-AND-EQUITY> 615,398
<SALES> 0
<TOTAL-REVENUES> 246,687
<CGS> 143,887
<TOTAL-COSTS> 211,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,881
<INCOME-PRETAX> 25,090
<INCOME-TAX> 9,858
<INCOME-CONTINUING> 15,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,232
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.74
</TABLE>
