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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ---------- Exchange Act of 1934
For the Fiscal Year Ended June 27, 1998
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ---------- Exchange Act of 1934
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
(State of incorporation) (I.R.S. Employer Identification No.)
5995 OPUS PARKWAY, STE. 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
Registrant's telephone number, including area code (612) 912-5500
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (par value $0.50 per share)
Class B Common Stock (par value $0.50 per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X . No .
--------- ----------
The aggregate market value of the voting stock of registrant held by
non-affiliates of registrant, on September 11, 1998, computed by reference to
the closing sale price of such shares on such date, was approximately
$942,725,426.
On September 11, 1998, there were outstanding 19,019,035 and 1,474,996
shares of the registrant's Class A and Class B Common Stock, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
- -------- ------------------------
Portions of proxy statement for the
annual meeting of stockholders to be
held October 29, 1998 Parts I and III
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PART I
ITEM 1. BUSINESS
G&K Services, Inc. and its wholly owned subsidiaries (the Company or G&K)
was formed in 1902. G&K and its subsidiaries operate in the uniform industry.
The Company rents uniforms to its customers (including cleanroom garments) and
offers uniforms and other related products for sale. The uniform rental
business also includes the rental of non-uniform items such as floor mats, dust
mops and cloths, wiping towels and selected linen items. In addition, the
Company manufactures uniform garments, which it uses to support rental customers
and sells on a direct sale basis.
On July 14, 1997, the Company purchased the uniform rental assets and
selected linen assets of National Linen Service, consisting of twenty industrial
facilities and nine linen facilities. It was G&K's intent to hold for sale the
nine linen facilities. During fiscal year 1998, the Company divested eight of
these locations, along with three industrial facilities that were not compatible
with the Company's strategic goals.
The Company has been steadily expanding its operations into additional
geographic markets. G&K currently operates from approximately 125 locations in
28 U.S. states and the Canadian provinces of Quebec and Ontario. By comparison,
G&K operated from approximately 40 locations in 21 states in 1988.
The Company targets its marketing efforts on those customers, industries
and geographic locations that are expanding and are in need of a
quality-oriented uniform program that provides high levels of product quality,
customer service and communication. The Company's experience with both existing
and potential customers confirms that a large segment of the market is willing
to pay a premium price to a vendor that can consistently supply these features.
PRODUCTS
The Company's full-service leasing program supplies a broad range of work
garments, specialized uniforms for corporate identity programs, anti-static
garments, particle-free garments, and dress clothing for supervisors, sales
personnel and others needing upgraded work apparel.
G&K's products are used in a diversified spectrum of businesses including:
heavy and light manufacturing, construction, pharmaceutical and electronics
manufacturers, transportation and distribution firms, health care and food
service operations, auto dealerships, equipment repair companies, schools and
office buildings.
The Company believes that uniform programs provide customers with a number
of benefits including:
* Identification - uniforms help identify employees as working for a
particular company or department.
* Image - uniforms enhance the public appearance of employees and help
create a more professional image for the customer.
* Worker protection - uniforms help protect workers from difficult
environments such as heavy soils, heat, flame or chemicals.
* Product protection - uniforms help protect products against
contamination in the food, pharmaceutical, electronics and health
care industries.
* Employee morale - uniforms can provide a valued benefit to employees
and help improve morale.
The Company provides its uniform-leasing customers with a full range of
services. Advice and assistance are offered in choosing fabrics, styles and
colors appropriate to the customer's specific needs. A large stock of new and
used garments are available to provide rapid response as customer needs change
due to increases, decreases or turnover in their work force. Professional
cleaning, finishing, repairs and replacement of uniforms in use is a normal part
of the rental service. Soiled uniforms are picked up at the customer's location
and returned clean on a weekly cycle.
The Company also believes that uniform leasing may provide customers with
significant advantages over ownership. Leasing eliminates investment in
uniforms; offers flexibility in styles, colors and quantities as customer
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requirements change; assures consistent professional cleaning, finishing, repair
and replacement of items in use; and provides freedom from the expense and
management time necessary to administer a uniform program.
Most of the Company's customers also lease items other than uniforms,
primarily floor mats, dust mops, dust cloths, wiping towels and linens. Floor
mats are used to protect facilities from dust, grease, moisture and other
hazards, and can also enhance decor, provide a corporate identity logo, or
improve traffic safety. Dust mops, cloths and wiping towels are chemically
treated to attract and hold dirt, and are provided in a range of sizes. The
Company's wiping towels are used by its customers for numerous wiping and
cleaning tasks in varied settings. Selected linen items, primarily aprons and
towels, are used for sanitary, or cleaning purposes.
CUSTOMERS
The Company's customer base includes divisions of more than half of the
Fortune 100 companies as well as over 90,000 smaller businesses. No one
customer accounts for more than 1% of the Company's total revenues.
COMPETITION
The Company's business encounters a high level of competition with a
number of companies in the geographic areas it serves. The Company ranks among
the nation's largest garment rental suppliers. Major competitors include
AraMark (a division of ARA Services, Inc.), and such publicly held companies as
Unifirst Corporation, Unitog Company and Cintas Corporation. The Company also
competes with a multitude of regional and local competitors that varies by
market. The Company believes that it competes effectively in its line of
business because of the quality and breadth of its product line, and the
comprehensive customer service programs it offers.
ENVIRONMENTAL MATTERS
The Company generates modest amounts of wastes in connection with its
operations. The Company believes that all of these wastes have been disposed of
properly. Some of these wastes may be classified as hazardous wastes under
recently enacted environmental legislation.
The Company has been identified as a potentially responsible party (PRP)
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or similar state laws, at a number of waste
disposal sites. Under such laws, PRP's typically are jointly and severally
liable for any investigation and remediation costs incurred with respect to such
sites. The Company's ultimate responsibility, therefore, could be greater than
the share of waste contributed by the Company would otherwise indicate.
The Company has entered into administrative agreements at certain of these
sites to perform remedial actions. At the landfill in Andover, Minnesota, the
aggregate cost of remediation is estimated to range from $10 million to $15
million. As one of numerous PRP's, the Company has entered into a Consent Decree
and has paid $160,000. The Company believes that it has no further
responsibility for site remediation at the Andover Landfill based upon the
Consent Decree.
The Company has also entered into a Consent Decree involving the landfill
site in East Bethel, Minnesota as one of 56 PRP's. The Company was sued by the
landfill operator, Sylvester Bros. Development Company, for contribution to the
cost of cleaning up this site pursuant to directives from the Minnesota
Pollution Control Agency (MPCA) or the Environmental Protection Agency (EPA).
Based upon an estimate that the total cleanup of the site will not exceed
$7,095,980, the Company has paid an initial amount of $190,500. After the matter
was settled, the Company entered into an agreement with the MPCA, which allowed
the PRP group to transfer the site to the State of Minnesota. In connection
with this agreement, the Company believes it has no further liability and may
recoup a substantial portion of the cash incurred in connection with the
settlement and site clean up.
The Company has been named in a suit filed by the owners of a St. Paul,
Minnesota shopping center where certain solvents have been detected in the soils
near the shopping center. The owner of the shopping center has alleged that the
source of the solvents is from a coin operated business that was owned for a
period of time in the mid-1960's by a corporation, the shares of which were
partially owned by the Company. Certain limited discovery has disclosed that at
least one other business in the area used the same solvent that is claimed to be
present in the soil. Since relatively little information is available at this
time, it is impossible to predict what, if any, liability may ultimately be
assigned to the Company.
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The Company has also received a letter from the MPCA, which claims that
solvents have been detected in the soils near a facility that was owned by the
Company from the late 1940's until the early 1970's. Neither the extent of the
solvents in the soils nor the source of the solvents is known to the Company.
The Company has agreed to participate in a Voluntary Investigation and Cleanup
Program through the MPCA, but is unable to provide any estimate of the
remediation costs at this time since the investigation has not been completed.
The Company expects to reach an agreement with the MPCA with respect to a
remediation plan. Therefore, no litigation is expected to be commenced against
the Company in connection with this matter.
The Company has been placed on notice by the owners of a Wayzata,
Minnesota shopping center regarding the alleged presence of solvents in the
ground water in the vicinity of the shopping center, where certain affiliates of
the Company formerly operated a dry cleaning establishment in the shopping
center. At this time, no demand has been made and no action has been commenced
against the Company. The owners of the shopping center have informed the
Company that they are pursuing clean up through State funding mechanisms. Since
little information is available at this time, it is impossible to predict what,
if any, liability the Company may have in this matter.
EMPLOYEES
The Company's U.S. operations had a total of 6,551 employees as of June
27, 1998, consisting of 213 professional sales personnel, 1,269 route personnel,
3,867 production employees, 603 clerical/staff employees and 599 management
employees. Approximately 19% of the Company's U.S. employees are represented by
unions. Management believes its domestic employee relations are satisfactory.
The Company's Canadian operations had a total of 839 employees as of June
27, 1998 consisting of 31 professional sales personnel, 146 route personnel, 503
production employees, 77 clerical/staff employees and 82 management employees.
Approximately 75% of the Company's Canadian employees are represented by unions.
Management believes Canadian employee relations are satisfactory.
FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operations is set
forth in Note 8 of the G&K consolidated financial statements included in Item 8
of this Form 10-K.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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ITEM 2. PROPERTIES
The Company cleans and supplies rental items principally from fifty-three
industrial garment, cleanroom garment, dust control and linen supply plants
located in the following cities in the United States:
<TABLE>
<CAPTION>
City Building City Building
Square Footage Square Footage
- ----------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C>
Albuquerque, New Mexico (two plants) 38,800 Memphis, Tennessee 35,400
10,300 Mesa, Arizona 36,000
Atlanta, Georgia (three plants) 40,000 Milwaukee, Wisconsin 44,220
45,600 Minneapolis, Minnesota (two plants) 70,000
52,000 93,000
Augusta, Georgia 42,500 Mobile, Alabama 47,300
Birmingham, Alabama 30,000 Monroe, North Carolina 40,700
Chicago, Illinois 48,700 Montgomery, Alabama 23,400
Columbus, Indiana 32,000 New Orleans, Louisiana 29,000
Dallas, Texas 36,000 Opa Locka, Florida 40,000
Denver, Colorado 56,200 Phoenix, Arizona 55,000
Fort Worth, Texas (two plants) 38,000 Pittsburg, California 47,000
70,700 Portland, Oregon 16,200
Ft. Lauderdale, Florida 51,100 Portsmouth, Virginia 30,500
Graham, North Carolina 115,000 Rockford, Illinois 32,000
Green Bay, Wisconsin 51,700 St. Cloud, Minnesota 45,400
Houston, Texas 39,820 Salt Lake City, Utah 41,500
Indianapolis, Indiana 45,400 San Antonio, Texas 40,700
Jonesboro, Arkansas 30,000 San Jose, California 58,600
Kansas City, Missouri 44,220 Seattle, Washington 45,400
Lakeland, Florida 45,000 Tampa, Florida 45,400
Los Angeles, California 48,300 Tempe, Arizona 13,300
Louisville, Kentucky 36,300
</TABLE>
All of these facilities are owned by the Company except Albuquerque, New Mexico
(10,300 sq. ft.); Dallas, Texas; Portland, Oregon; Jonesboro, Arkansas;
Portsmouth, Virginia; Lakeland, Florida; and Tempe, Arizona, which are leased.
The Company also operates principally from six plants located in the
following cities in Canada:
<TABLE>
<CAPTION>
City Building City Building
Square Footage Square Footage
- ----------------------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C>
Toronto, Ontario (Metro East) 49,000 Ottawa, Ontario 35,000
Montreal, Quebec 56,900 Windsor, Ontario 42,900
Cambridge, Ontario 57,600 Sault St. Marie, Ontario 23,700
</TABLE>
All of these facilities are owned by the Company, except the Ottawa and Windsor
facilities, which are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation incidental to the business of the Company and as set forth in Item 1.
Business - Environmental Matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company during the fourth quarter of fiscal 1998.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Class A Common Stock is quoted on NASDAQ National Market
under the symbol "GKSRA". The Company's Class B Common Stock is not registered.
The following table sets forth the high and low reported sales prices for the
Class A Common Stock as quoted on the NASDAQ National Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
FISCAL 1998
1st Quarter 38 1/2 33
2nd Quarter 41 1/4 33 1/4
3rd Quarter 47 5/16 40
4th Quarter 44 3/16 36
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FISCAL 1997
1st Quarter 30 5/8 23 1/2
2nd Quarter 36 3/8 28 1/8
3rd Quarter 37 3/4 30
4th Quarter 37 29
</TABLE>
As of September 11, 1998, the Company had approximately 600 registered
stockholders.
The Company has declared cash dividends of $0.0175 per share in each of the
quarters for the fiscal years ended June 27, 1998 and June 28, 1997. The
Company's debt agreements contain various restrictive covenants, which, among
other things, limit the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data. All
amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $502,593 $350,914 $305,414 $262,481 $225,229
Net Income 32,058 29,002 22,720 18,286 14,791
Per Share Data:
Basic earnings per share 1.57 1.43 1.12 0.90 0.73
Diluted earnings per share 1.57 1.42 1.11 0.90 0.73
Dividends per share 0.07 0.07 0.07 0.07 0.07
Total Assets 531,842 311,965 282,520 253,333 205,064
Long-Term Debt 214,553 54,284 75,143 76,519 54,676
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The fiscal 1998 results include the results of operations of facilities
purchased from National Linen Service. See Note 2 of the G&K consolidated
financial statements included in Item 8 of this Form 10-K.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In fiscal 1998, G&K, now the third largest competitor in the estimated $5.5
billion uniform leasing industry, achieved 43.2% revenue growth; a 10.5%
increase in net income; and realized a 17.5% return on average equity. G&K's
record of strong financial performance results from an effective, consistent
growth strategy designed to meet the diverse needs of customers in the
industrial uniform market.
On July 14, 1997, the Company purchased the uniform rental assets and
selected linen assets of National Linen Service (NLS). The 20 uniform locations
contributed $115.4 million in revenue during the fiscal year. The Company held
for sale the nine linen facilities acquired in the NLS transaction. Losses from
these nine facilities from the date of acquisition to the date of sale (not to
exceed one year) of $659 thousand, including interest on incremental debt
incurred during the holding period to finance the purchase of these facilities
totaling $3.5 million and the proceeds from the sale were excluded from the
earnings reported for fiscal 1998. Amounts excluded from earnings were included
in the allocation to the purchase price of retained assets and liabilities.
During fiscal 1998, the Company divested eight of the nine locations held for
sale and three industrial locations that were not compatible with the Company's
strategic goals.
For the latest five-year period, revenues grew at a rate of 19.3%,
compounded annually. This exceeds the Company's stated goal of maintaining a
long-term growth rate of 15%. These results reflect the Company's strategies to
attain increased market penetration and an expanded customer base through
internal growth and acquisitions.
The Company's five-year growth rate for net income was 23.6%, compounded
annually. The Company's investments in new technologies provide increased
productivity and reduced labor expenses. Better merchandise control and lower
processing costs are contributing to bottom-line growth, while garment
manufacturing facilities enhance product quality and decrease merchandise costs.
The percentage relationships to net sales of certain income and expense
items for the three fiscal years ended June 27, 1998, June 28, 1997, and June
29, 1996, and the percentage changes in these income and expense items
between years are contained in the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE CHANGE
YEARS ENDED BETWEEN YEARS
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FY 1998 vs. FY 1997 vs.
Fiscal 1998 Fiscal 1997 Fiscal 1996 FY 1997 FY 1996
<S> <C> <C> <C> <C> <C>
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Revenues 100.0% 100.0% 100.0% 43.2% 14.9%
Expenses:
Cost of rental and direct sales 58.6 55.9 56.3 50.2 14.1
Selling and administrative 19.9 22.9 22.2 24.8 18.1
Depreciation 5.3 5.6 5.9 33.6 10.2
Amortization of intangibles 1.8 0.6 0.8 314.7 (11.0)
----------------------------------------
Income from operations 14.4 15.0 14.8 37.4 16.5
Interest expense 4.3 1.9 2.6 219.1 (14.0)
Other (income) expense, net (0.4) (0.6) - 7.4 -
----------------------------------------
Income before income taxes 10.5 13.7 12.2
10.1 28.7
Provision for income taxes 4.1 5.4 4.8 9.5 30.4
----------------------------------------
Net Income 6.4% 8.3% 7.4% 10.5% 27.6%
----------------------------------------
</TABLE>
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FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues for fiscal 1998 rose 43.2% to $502.6 million from $350.9
million in fiscal 1997. Revenue attributable to the acquisition of certain
assets of National Linen Service (NLS) was $115.4 million, including $9.8
million from three plants that were sold in May 1998. Excluding this
acquisition and excluding prior year Toronto Linen operations that were sold in
fiscal 1997, the total revenue growth was 11.3% for fiscal 1998.
Rental revenues rose $149.5 million in fiscal 1998, or a 44.7% increase
over fiscal 1997. U.S. and Canadian annual rental revenues increased 11.7% and
10.5% respectively (excluding revenues from assets acquired from NLS and
revenues from Toronto Linen). The improvement is primarily attributed to steady
growth in the Company's traditional textile leasing operations as well as
national account and cleanroom sales. A 14.6% growth in Canadian rental
revenues in Canadian dollars was partially offset by unfavorable changes in the
currency exchange rates.
Total direct sales revenues increased 13.1% to $19.1 million for fiscal
1998 from $16.9 million in fiscal 1997. This increase is largely attributable
to the success of seasonal promotions and increases in catalog sales, partially
offset by the Company's continuous shift toward greater utilization of the
Company's manufacturing operations for service to G&K rental customers. Cost of
direct sales increased 6.7% to $13.8 million in fiscal 1998 from $12.9 million
in fiscal 1997. As a percent of direct sales, these costs improved to 72.2%
compared to 76.5% in the prior year.
Cost of rental operations increased 53.3% to $280.7 million in fiscal 1998
from $183.1 million in fiscal 1997. As a percent of rental revenues, these
costs increased to 58.0% for fiscal 1998 compared to 54.8% in fiscal 1997. The
Company attributes the increase primarily to merchandise and production costs at
new locations acquired from NLS early in the fiscal year.
Selling and administrative expenses increased 24.8% to $100.1 million in
fiscal 1998 from $80.2 million in fiscal 1997. As a percentage of total
revenues, selling and administrative expenses decreased to 19.9% in fiscal 1998
from 22.9% in fiscal 1997. The decline as a percent of revenue is due to
several factors, including lower selling expenses in the NLS acquired locations
and leveraging of corporate costs following the NLS transaction.
Depreciation expense increased 33.6% to $26.4 million in fiscal 1998 from
$19.7 million in fiscal 1997. As a percentage of revenues, depreciation expense
decreased to 5.3% in fiscal 1998 from 5.6% in fiscal 1997. This decrease is
caused by the maturing of startup operations and depreciation on acquired NLS
assets based on fair market valuations. Capital expenditures for fiscal 1998,
excluding acquisition of businesses, was $37.4 million compared to $35.5 million
in fiscal 1997. Amortization expense increased to $9.2 million for fiscal 1998
from $2.2 million in fiscal 1997. This increase is attributable to the
acquisition of certain assets from NLS.
Income from operations increased 37.4% to $72.4 million in fiscal 1998 from
$52.7 million in fiscal 1997. Operating margins declined slightly to 14.4% in
fiscal 1998 from 15.0% in fiscal 1997. U.S. operating margins declined to 12.9%
in fiscal 1998 from 13.9% in fiscal 1997, primarily due to lower margins in the
newly acquired locations and depreciation and amortization related to the NLS
acquisition, offset by leveraging of selling and administrative costs.
Operating income benefited from an improvement in Canadian operating margins.
Interest expense was $21.8 million for fiscal 1998, up from $6.8 million in
fiscal 1997. This was largely due to additional borrowings to finance the
acquisition of assets from NLS. The Company's effective tax rate decreased
slightly to 39.2% in fiscal 1998 from 39.5% in fiscal 1997.
Net income rose 10.5% to $32.1 million in fiscal 1998 from $29.0 million in
fiscal 1997. Basic and diluted earnings per share for fiscal 1998 was $1.57 per
share compared to basic and diluted earnings per share of $1.43 per share and
$1.42 per share, respectively, in fiscal 1997. Net income margins decreased to
6.4% for fiscal 1998 compared to 8.3% in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for fiscal 1997 rose 14.9% to $350.9 million from $305.4
million in fiscal 1996. Rental revenue growth for fiscal 1997 accounted for
$41.7 million or a 14.3% increase. U.S. and Canadian annual rental revenues
increased 14.7% and 12.2%, respectively. The improvement is primarily
attributable to the increase in new account sales, expansion of existing
accounts, strong retention rates and new market entries.
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Total direct sales revenues increased 29.1% to $16.9 million in fiscal 1997
from $13.1 million in fiscal 1996. Cost of direct sales increased 30.6% to
$12.9 million in fiscal 1997, compared to $9.9 million in fiscal 1996. As a
percentage of direct sales, these costs remained relatively constant at 76.5%
compared to 75.6% last year.
Cost of rental operations increased 13.1% to $183.1 million in fiscal 1997
from $161.9 million in fiscal 1996. As a percentage of rental revenues, these
costs declined to 54.8% for fiscal 1997 compared to 55.4% in fiscal 1996. This
decrease related primarily to better utilization of rental merchandise and
improved plant efficiency.
Selling and administrative expenses increased 18.1% to $80.2 million in
fiscal 1997 from $67.9 million in fiscal 1996. As a percentage of revenues,
selling and administrative expenses increased to 22.9% in fiscal 1997 from 22.2%
in fiscal 1996. These expenses grew at a rate greater than revenue primarily
from additional costs associated with new market start-ups, and additional
marketing and training programs to support operational growth and improvement.
Depreciation expense increased 10.2% to $19.7 million in fiscal 1997 from
$17.9 million in fiscal 1996. As a percentage of revenues, depreciation expense
decreased to 5.6% in fiscal 1997 from 5.9% in fiscal 1996. This decrease is
caused by the maturing of startup operations. Capital expenditures for fiscal
1997, excluding acquisitions of businesses, were $35.5 million compared to $36.2
million in fiscal 1996. Amortization expense decreased to $2.2 million for
fiscal 1997 from $2.5 million for fiscal 1996.
Income from operations increased 16.5% to $52.7 million in fiscal 1997 from
$45.2 million in fiscal 1996. Operating margins improved to 15.0% in fiscal
1997 from 14.8% in fiscal 1996. U.S. operating margins declined from 14.9% in
fiscal 1996 to 13.9% in fiscal 1997, primarily due to losses from start-up
locations begun during recent years and increases in selling and administrative
expenses. Operating income benefited from significant improvement in the
Canadian operating margin.
Interest expense was $6.8 million for fiscal 1997, down from $8.0 million
in fiscal 1996. This was largely due to lower average borrowings and lower
interest rates. The Company's effective tax rate increased to 39.5% in fiscal
1997 from 39.0% in fiscal 1996, largely driven by additional profits and higher
corporate tax rates in Canada.
Net income rose 27.6% to $29.0 million in fiscal 1997 from $22.7 million in
fiscal 1996. Basic and diluted earnings per share for fiscal 1997 were $1.43
per share and $1.42 per share, respectively, compared to basic and diluted
earnings per share of $1.12 per share and $1.11 per share, respectively, in
fiscal 1997. Net income margins increased to 8.3% in fiscal 1997 compared with
7.4% in fiscal 1996.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $74.5 million in fiscal 1998, $44.1
million in fiscal 1997, and $41.9 million in fiscal 1996. The fiscal 1998
increase resulted from the gain in net income as well as increases in accounts
payable and other current liabilities in connection with the locations acquired
from NLS. Working capital at June 27, 1998 was $73.3 million, up 79.5% from
$40.9 million at June 28, 1997.
Cash used in investing activities was $236.4 million in fiscal 1998, $37.9
million in fiscal 1997, and $36.8 million in fiscal 1996. The increase in
fiscal 1998 was due primarily to the acquisition of assets from NLS. In fiscal
1999, estimated capital expenditures are anticipated to be approximately $48 to
$52 million.
Financing activities provided cash of $166.9 million in fiscal 1998, used
$6.1 million of cash in fiscal 1997, and provided $1.2 million in fiscal 1996.
The cash provided by financing activities was used in the acquisition of
selected assets of NLS and to pay off existing debt. The total long-term debt,
including current maturity, increased to $249.8 million at June 27, 1998 from
$79.3 million at June 28, 1997. The Company paid dividends of $1.4 million in
each of the fiscal years 1998, 1997 and 1996. The Company's ratio of debt to
total capitalization increased to 55.8% from 31.9% at the end of fiscal 1997.
The Company has a $125.0 million existing line of credit, of which $25.6 million
was outstanding at the end of fiscal 1998.
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 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
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covenants that, among other matters, require the Company to maintain a minimum
EBITDA, minimum debt service coverage ratio, minimum stockholders' equity and
maximum leverage ratio, all as defined. The credit facility 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 domestic
subsidiaries and 65% of the stock of Canadian subsidiaries. As of June 27,
1998, the Company was in compliance with all debt covenants.
Stockholders' equity grew 17.2% to $198.1 million at June 27, 1998,
compared with $169.0 million at the end of fiscal 1997. G&K's return on average
equity decreased to 17.5% in fiscal 1998 compared with 18.7% and 17.5%
respectively, for fiscal 1997 and fiscal 1996.
YEAR 2000 COMPLIANCE
The Company utilizes both information technology ("IT") and non-IT systems
and assets throughout its U.S. and Canadian operations that will be affected by
the date change in the year 2000. The Company began an extensive review of its
business in January, 1998, to determine whether or not its IT and non-IT systems
and assets were year 2000 compliant, as well as the remedial action and related
costs associated with required modifications or replacements. The Company's
goal is to ensure current business operations will continue to function
accurately with minimal disruption through the millennium change. The Company
has also had discussions with its significant suppliers to determine the
readiness of those suppliers to correct year 2000 issues where their systems and
products interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those suppliers try to properly remedy their computer systems.
The Company believes that its actions with key suppliers will minimize these
risks. The scope of the year 2000 readiness effort includes (i) information
technology such as software and hardware, (ii) non-information systems or
embedded technology such as micro controllers contained in various equipment,
safety systems, facilities and utilities and (iii) readiness of key third-party
suppliers. If needed modifications and conversions are not made on a timely
basis, the year 2000 issue could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company hopes to
achieve these objectives by committing resources and leveraging previous
investments in existing technologies.
The Company has a documented process through which all IT and non-IT
systems and assets are being reviewed with reference to year 2000 date issues.
This methodology takes each system and asset through the following lifecycle:
* Awareness - Educate employees about year 2000 issues.
* Assessment - Conduct an inventory and impact analysis of the business,
operations, and systems. Identify priorities and plan.
* Analysis - Analyze the asset(s) to determine the tasks, resources and
duration required to ensure compliance.
* Contingency Planning - Identify alternative solutions to the
recommended solution.
* Conversion - Renovation plan is finalized, approved and implemented.
* Testing - Approved validation plans are implemented and testing
occurs.
* Rollout - Implementation plan is approved, and tested compliance
solution is fully implemented into production.
The Company's key systems and assets are as follows:
* Financial systems software - SAP financial systems were implemented
and operational as of June 28, 1998. The Company will be completing
year 2000 testing of this system by October 31, 1998.
* Revenue recognition system - Renovation of this internally developed
system is 50% completed. Testing and rollout are estimated to be
completed by October 31, 1998.
* Other IT software, hardware and communications - Other vendor software
and G&K applications are 90% assessed. Expected completion date is
March 31, 1999, for all IT systems and assets, except for vendor
supplied solutions, which have an anticipated completion date of July
1, 1999.
* Non-IT plant and related equipment - The Company is 50% complete in
the assessment phase. Anticipated completion date for all non-IT
systems and assets is March 31, 1999.
* Business processes and procedures - All process flows are being
analyzed for risk with appropriate contingency plans put into place.
The anticipated completion date is March 31, 1999.
* Third Parties - The Company's supply chain is being assessed to ensure
all significant vendors will have the ability to meet the Company's
needs. This assessment and contingency planning will be completed by
December 31, 1998. Currently, no disclosures of non-compliant
suppliers have been discovered.
10
<PAGE>
The Company will not be deferring any other significant IT projects to
address the year 2000 issues. Because the year 2000 issue is of short duration,
the Company has retained experts and advisors to evaluate year 2000 readiness;
assist in analysis, renovation, and contingency planning; and complete
independent testing when renovations are completed. The Company's core IT staff
will continue to stay focused on the Company's business needs, as well as assist
with year 2000 analysis and renovation.
The Company is implementing solutions and has begun to incur expenses
during fiscal 1998 to resolve the year 2000 issue. These expenses will continue
through the year 2000. Maintenance or modification costs are expensed as
incurred, while costs of any new software and equipment are being capitalized
over the asset's useful life, consistent with the Company's financial policies.
During fiscal 1998, the Company spent approximately $4.2 million related to the
year 2000 analysis; $1.5 million of these costs were capitalized. The Company
has budgeted $8.8 million of total expenditures for the year 2000 compliance
activities, of which $3.6 million will be capitalized, although there can be no
assurance that year 2000 related expenditures will not be materially higher.
The Company's current estimates of the amount of time and costs necessary to
modify and test its computer systems are based upon assumptions regarding future
events, including the continued availability of certain resources, year 2000
modification plans and other factors. New developments may occur that could
affect the Company's estimates of the amount of time and costs necessary to
modify and test its systems for year 2000 compliance. These developments
include, but are not limited to (i) the availability and cost of personnel
trained in this area, (ii) the ability to locate and correct all relevant
computer codes and equipment and (iii) the year 2000 compliance success that key
suppliers attain.
Contingency plans are being developed and implemented where the level of
risk has been determined to be unsatisfactory. The Company is using a weighted
system to evaluate and determine this level of risk in each of five areas:
Operational, Facility Safety, Financial Management, Legal Implication and
Organizational Implication. Where necessary, the Company is implementing
various contingency plans that will include, but are not limited to, the
following:
* Secondary vendors for garments and other significant non-uniform
inventories
* Stockpile of certain other inventories, soap, thread, etc.
* Manual work-around for less critical computerized systems
While the Company has exercised its best efforts to identify and remedy any
potential year 2000 exposures within its control, the largest risks are expected
with utilities in the form of water and power which, to a significant extent,
are beyond the immediate control of the Company. To date, the Company has not
identified any suppliers who will not be year 2000 compliant; however, this
analysis is still in process. If non-compliant vendors are identified, the
Company intends to develop appropriate contingency plans.
While the Company believes its planning efforts are adequate to address its
year 2000 concerns, the year 2000 readiness of the Company's suppliers and
business partners may lag behind the Company's efforts. Although the Company
does not believe that the year 2000 matters discussed above will have a material
impact on its business, financial condition and results of operations, it is
uncertain as to what extent the Company may be affected by such matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable rate
debt, as well as swaps, to finance operations and to hedge interest rate
exposures. The swap contracts are entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. The Company does not enter into contracts for speculative
purposes, nor is it a party to any leveraged instrument. The information below
summarizes the Company's market risks associated with debt and interest rate
swap obligations as of June 27, 1998. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. For interest rate swaps, the table presents notional amounts
and weighted average interest rates by expected (contractual) maturity dates.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average variable rates are based on implied
forward rates in the yield curve at the reporting date.
11
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE BY FISCAL YEAR
--------------------------------------------------------------------------------
There- Fair
(In thousands) 1999 2000 2001 2002 2003 After Total Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt, variable rate $15,000 $26,629 $41,846 $71,266 $45,650 $49,452 $249,843 $249,843
Average interest rate 6.09% 6.03% 6.24% 6.46% 6.56% 6.69% 6.39% -
Interest Rate Swaps, variable to fixed $50,000 $100,000 - - - - $150,000 $148,755
Average pay rate 6.18% 6.24% - - - - - -
Average receive rate 6.09% 6.03% - - - - - -
</TABLE>
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 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Following is a summary of the results of operations for each of the
quarters within fiscal years ended June 27, 1998 and June 28, 1997. All amounts
are in thousands, except per share data.
QUARTERLY FINANCIAL DATA
G&K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $118,426 $128,261 $127,471 $128,435
Gross Profit 50,044 52,756 52,365 52,975
Operating Income 16,815 18,364 18,044 19,188
Net Income 7,445 7,787 7,971 8,855
Basic Earnings per Share 0.37 0.38 0.39 0.43
Diluted Earnings per Share 0.36 0.38 0.39 0.43
Basic and Diluted Dividends per Share 0.0175 0.0175 0.0175 0.0175
- -------------------------------------------------------------------------------------
1997
Revenues $83,310 $87,438 $88,465 $91,701
Gross Profit 37,247 38,689 39,609 39,360
Operating Income 12,681 13,329 13,119 13,582
Net Income 6,951 7,186 7,369 7,496
Basic and Diluted Earnings per Share 0.34 0.35 0.36 0.37
Basic and Diluted Dividends per Share 0.0175 0.0175 0.0175 0.0175
- -------------------------------------------------------------------------------------
</TABLE>
Reference is hereby made to the Consolidated Financial Statements and Notes
thereto appearing on pages F-1 through F-14 here of.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
(THIS SPACE INTENTIONALLY LEFT BLANK)
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Title Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard M. Fink 68 Chairman and Director 1970
William Hope 65 Chief Executive Officer and Director 1973
Thomas Moberly 50 President and Chief Operating Officer 1993
Timothy W. Kuck 41 Chief Financial Officer, Treasurer and Secretary 1997
Martin S. Reader 42 Vice President of Marketing 1993
Michael F. Woodard 41 Controller 1996
Bruce G. Allbright 70 Director 1985
Paul Baszucki 59 Director 1994
Wayne M. Fortun 50 Director 1994
Donald W. Goldfus 65 Director 1989
Bernard Sweet 75 Director 1975
</TABLE>
RICHARD M. FINK has served as Chairman of the Board since 1981 and was Chief
Executive Officer of the Company from 1981 to January 1997.
WILLIAM HOPE has served as Chief Executive Officer of the Company since January
1997. From 1993 to 1997, Mr. Hope also served as President and Chief Operating
Officer of the Company. Prior thereto Mr. Hope was Vice President of the
Company. He is also a director of Minntech Corporation.
THOMAS MOBERLY has served as President and Chief Operating Officer since
September 1997 and became Executive Vice President in January 1997. From 1993
to 1997 Mr. Moberly served as a Executive Vice President. Mr. Moberly held
various other management positions since joining the Company in 1974.
TIMOTHY W. KUCK joined the Company in May 1997 as Chief Financial Officer,
Treasurer and Secretary. Mr. Kuck was President of EBP Life Insurance Company
and Senior Vice President of First Health, both divisions of First Data
Corporation, from 1995 to the time he joined the Company. From 1993 to 1995 he
was Chief Financial Officer, Executive Vice President and Secretary for Employee
Benefits Plan, Inc., the parent company of EBP Life Insurance Company.
MARTIN S. READER has served as Vice President of Marketing since January 1997.
From November 1993 to 1997, Mr. Reader served as Director of Marketing. Prior
to joining the Company, he was Vice President of Strategic Planning and Business
Development for Automatic Data Processing, Inc.
MICHAEL F. WOODARD joined the Company in September 1996 as Controller. Mr.
Woodard was Treasurer of Dataserv, Inc. from 1993 to the time he joined the
Company.
BRUCE G. ALLBRIGHT has been a director of the Company since 1985. Retired since
January 1990, he was formerly President of Dayton Hudson Corporation. Prior
thereto, Mr. Allbright was Chairman and Chief Executive Officer of Target
Stores, a division of Dayton Hudson Corporation. Mr. Allbright is a director of
TCF Financial, Inc. and F.A., Hannaford Brothers Company.
PAUL BASZUCKI has been a director of the Company since 1994. He is Chairman of
the Board of Directors of Norstan, Inc. Prior to May 1997, he was Chief
Executive Officer of Norstan, Inc. Mr. Baszucki is also a director of
Washington Scientific Industries, Inc.
WAYNE M. FORTUN has been a director of the Company since 1994. He is the
President, Chief Executive Officer, Chief Operating Officer and a director of
Hutchinson Technology, Inc. Mr. Fortun is also a director of
Excelsior-Henderson Motorcycle Manufacturing Company.
DONALD W. GOLDFUS has been a director of the Company since 1989. He is the
Chairman of the Board of Apogee Enterprises, Inc. Mr. Goldfus was Chief
Executive Officer of Apogee Enterprises, Inc. from 1986 to January 1998.
BERNARD SWEET has been a director of the Company since 1975. Retired since
1985, he was formerly President and Chief Executive Officer of Republic
Airlines, Inc. Mr. Sweet is a director of US Foodservice.
14
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to information with respect to the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information with respect to the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(THIS SPACE INTENTIONALLY LEFT BLANK)
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Reports filed on Form 8-K during the fourth quarter of fiscal year
1998:
A Form 8-K, Item 5. Other Events was filed on April 29, 1998.
A Form 8-K, Item 2. Acquisition or Disposition of Assets was filed on
May 14, 1998.
(b) The following exhibits, as required by Item 601 of Regulation S-K are
filed as a part of this report:
EXHIBIT NO.
2(a) Asset Purchase Agreement, dated as of May 30, 1997, by and among
National Service Industries, Inc., a Delaware corporation; National
Service Industries, Inc., a Georgia corporation; NSI Enterprises,
Inc., a California corporation and G&K Services, Inc. (incorporated
herein by reference to the Registrant's Form 8-K filing dated July 14,
1997).
2(b) Side Letter dated as of July 14, 1997 by and among National
Service Industries, Inc., a Delaware corporation; National Service
Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a
California corporation and G&K Services, Inc. (incorporated herein by
reference to the Registrant's Form 8-K filing dated July 14, 1997).
2(c) Asset Purchase Agreement, dated as of April 25, 1998, by and
among G&K Services Linen Co., G&K Services Co., G&K Services, Inc.,
and TTSI Services Acquisition Sub, Inc. and Tartan Textile Services,
Inc. (incorporated herein by reference to the Registrant's Form 8-K
filing dated May 14, 1998).
3(a) Restated Articles of Incorporation, as amended, as filed with the
Secretary of State of Minnesota (incorporated herein by reference to
the Registrant's Registration Statement on Form S-1 and Amendment No.
1 thereto, Registration No. 33-15456). Certificate of Amendment, as
filed with the Secretary of State of Minnesota on November 12, 1987.
3(b) Bylaws, as amended, (incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 and Amendment No. 1
thereto, Registration No. 33-15456 and incorporated by reference to
exhibit 3ii of the Registrant's 10-Q filed May 17, 1994).
10(a) Employment Agreement between the Registrant and Richard Fink
dated January 6, 1987, (incorporated herein by reference to the
Registrant's Registration No. 33-15456). **
10(b) Stockholder Agreement by and among the Registrant, Richard Fink,
William Hope, Stephen LaBelle, Daniel Nielsen, Phillip Oberg and
Robert Stotts, dated June 14, 1985, (incorporated herein by reference
to the Registrant's Schedule 13E-4 filing dated May 13, 1985).
10(c) 1989 Stock Option and Compensation Plan (incorporated herein by
reference to the Registrant's definitive proxy statement for the 1989
Annual Meeting of Shareholders filed August 29, 1989).
10(d) 1996 Director Stock Option Plan (incorporated herein by
reference to the Registrant's Form 10-K, for the fiscal year ended
June 29, 1996). **
10(e) Employment Agreement between Registrant and Thomas Moberly,
dated February 20, 1990 (incorporated herein by reference to the
Registrant's form 10-K filed, for the fiscal year ended July 3,
1993). **
10(f) Credit Agreement dated as of July 14, 1997 among G&K Services,
Inc., Work Wear Corporation of Canada Ltd., as Borrowers, various
banks, and Norwest Bank Minnesota, National Association, and NBD Bank
and First Chicago NBD Bank, Canada (incorporated herein by reference
to the Registrant's Form 8-K filing dated July 14, 1997).
10(g) Employment Agreement between Registrant and Timothy W. Kuck
dated May 12, 1997 (incorporated herein by reference to the
Registrant's form 10-K filed, for the fiscal year ended June 28,
1997). **
16
<PAGE>
22 Subsidiaries of G&K Services, Inc. *
23 Consent of Independent Public Accountants *
24 Power of Attorney dated as of August 27, 1998 *
27 Financial Data Schedule (FOR SEC USE ONLY) *
FOOTNOTES:
* Filed herewith
** Compensatory plan or arrangement
(THIS SPACE INTENTIONALLY LEFT BLANK)
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: September 24, 1998 G&K SERVICES, INC.
(Registrant)
By: /s/ William Hope
-------------------------------------
William Hope, Chief Executive Officer
(Principal Executive Officer)
(THIS SPACE INTENTIONALLY LEFT BLANK)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below on the 24th day of September 1998, by
the following persons in the capacity indicated:
/s/ Richard M. Fink Chairman of the Board and Director
- -------------------------
Richard Fink
/s/ William Hope Chief Executive Officer and Director (Principal
- ------------------------- Executive Officer)
William Hope
/s/ Timothy W. Kuck Chief Financial Officer, Treasurer and Secretary
- ------------------------- (Principal Financial Officer)
Timothy W. Kuck
/s/ Michael F. Woodard Controller (Principal Accounting Officer)
- -------------------------
Michael F. Woodard
* Director
- -------------------------
Bruce Allbright
* Director
- -------------------------
Donald Goldfus
* Director
- -------------------------
Bernard Sweet
* Director
- -------------------------
Wayne Fortun
* Director
- -------------------------
Paul Baszucki
* By /s/ Richard M. Fink
--------------------------
Richard M. Fink
Attorney-in-fact
(THIS SPACE INTENTIONALLY LEFT BLANK)
19
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Income for the Fiscal Years Ended
June 27, 1998, June 28, 1997 and June 29, 1996 . . . . . . . F - 2
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997. . . F - 3
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 27, 1998, June 28, 1997 and June 29, 1996 . . . . . . . F - 4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended June 27, 1998, June 28, 1997 and June 29, 1996 . . . . F - 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F - 6
Report of Independent Public Accountants . . . . . . . . . . . . . . . F - 14
</TABLE>
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Fiscal Years Ended
-----------------------------------------
June 27, June 28, June 29,
(In thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Rental operations $483,516 $334,042 $292,342
Direct sales 19,077 16,872 13,072
- ---------------------------------------------------------------------------------------------------------
Total revenues 502,593 350,914 305,414
- ---------------------------------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 280,680 183,101 161,948
Cost of direct sales 13,773 12,908 9,883
Selling and administrative 100,136 80,235 67,934
Depreciation 26,365 19,734 17,906
Amortization of intangibles 9,228 2,225 2,499
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 430,182 298,203 260,170
- ---------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 72,411 52,711 45,244
Interest expense 21,848 6,846 7,964
Other (income) expense, net (2,184) (2,034) 64
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 52,747 47,899 37,216
Provision for income taxes 20,689 18,897 14,496
- ---------------------------------------------------------------------------------------------------------
NET INCOME $32,058 $29,002 $22,720
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding 20,380 20,323 20,284
BASIC EARNINGS PER COMMON SHARE $1.57 $1.43 $1.12
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Diluted weighted average number of shares outstanding 20,454 20,426 20,394
DILUTED EARNINGS PER COMMON SHARE $1.57 $1.42 $1.11
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 27, June 28,
ASSETS (In thousands, except share data) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $11,975 $6,986
Accounts receivable, less allowance for doubtful
accounts of $2,392 and $1,324 56,933 41,831
Inventories 77,210 59,799
Prepaid expenses 7,295 4,512
- --------------------------------------------------------------------------------
Total current assets 153,413 113,128
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 25,801 19,676
Buildings and improvements 89,683 68,683
Machinery and equipment 154,048 143,475
Automobiles and trucks 36,531 27,434
Less accumulated depreciation (118,378) (109,547)
- --------------------------------------------------------------------------------
Total property, plant and equipment 187,685 149,721
- --------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 131,899 33,856
Restrictive covenants and customer lists, net 42,310 6,016
Other, principally retirement plan assets 16,535 9,244
- --------------------------------------------------------------------------------
Total other assets 190,744 49,116
- --------------------------------------------------------------------------------
$531,842 $311,965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $16,103 $13,304
Accrued expenses
Salaries and employee benefits 18,077 11,556
Other 17,849 12,133
Deferred income taxes 13,036 10,268
Current maturities of long-term debt 15,000 25,000
- --------------------------------------------------------------------------------
Total current liabilities 80,065 72,261
LONG-TERM DEBT 234,843 54,284
DEFERRED INCOME TAXES 9,483 9,504
OTHER NONCURRENT LIABILITIES 9,331 6,929
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,011,952
and 18,986,629 shares issued and outstanding 9,506 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 23,644 22,684
Retained earnings 174,660 144,036
Deferred compensation (1,973) (2,029)
Unrealized gain on investments, net 457 306
Cumulative translation adjustment (8,912) (6,241)
- --------------------------------------------------------------------------------
Total stockholders' equity 198,120 168,987
- --------------------------------------------------------------------------------
$531,842 $311,965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
G & K SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------------
June 27, June 28, June 29,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $32,058 $29,002 $22,720
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 35,593 21,959 20,405
Deferred income taxes 2,747 (255) (495)
Changes in current operating items,
exclusive of acquisitions-
Inventories (4,778) (7,840) (3,469)
Accounts receivable and prepaid expenses (8,585) (5,648) (4,903)
Accounts payable and other accrued expenses 16,413 4,430 5,718
Other, net 1,004 2,444 1,908
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 74,452 44,092 41,884
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (37,398) (35,536) (36,237)
Acquisition of business assets (283,361) (3,679) (595)
Cash generated from assets held for sale 7,693 - -
Net proceeds from sale of assets 77,107 1,102 -
Sales/maturities of investments (438) 207 30
- -----------------------------------------------------------------------------------------------
Net cash used for investing activities (236,397) (37,906) (36,802)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 376,246 13,335 7,552
Repayments of debt financing (208,132) (18,072) (7,445)
Cash dividends paid (1,434) (1,431) (1,429)
Sale of common stock 254 86 77
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 166,934 (6,082) (1,245)
- -----------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,989 104 3,837
CASH AND CASH EQUIVALENTS:
Beginning of year 6,986 6,882 3,045
- -----------------------------------------------------------------------------------------------
End of year $11,975 $6,986 $6,882
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $22,395 $10,066 $ 8,162
- -----------------------------------------------------------------------------------------------
Income taxes $19,025 $17,094 $14,415
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
G & K SERVICES, INC. AND SUBSIDIARIES
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
Class A Class B
----------------------------------------
Unrealized
Additional Gain on Cumulative
Number Number Paid-In Retained Deferred Investments, Translation
of Shares Amount of Shares Amount Capital Earnings Compensation Net Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1995 18,543 $9,272 1,865 $933 $21,594 $95,174 ($2,366) - ($6,078)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - - 22,720 - - -
Cash dividend
$.07 per share - - - - - (1,429) - - -
Stock issued for employee
benefit plans 29 14 - - 609 - (460) - -
B stock converted to
A stock 344 172 (344) (172) - - - - -
Amortization of deferred
compensation - - - - - - 381 - -
Unrealized gain on
investments, net - - - - - - - 329 -
Translation adjustment - - - - - - - - 283
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 29, 1996 18,916 9,458 1,521 761 22,203 116,465 (2,445) 329 (5,795)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - - 29,002 - - -
Cash dividend
$.07 per share - - - - - (1,431) - - -
Stock issued for employee
benefit plans 25 12 - - 481 - (299) - -
B stock converted to
A stock 46 23 (46) (23) - - - - -
Amortization of deferred
compensation - - - - - - 715 - -
Unrealized (loss) on
investments, net - - - - - - - (23) -
Translation adjustment - - - - - - - - (446)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 18,987 9,493 1,475 738 22,684 144,036 (2,029) 306 (6,241)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - - 32,058 - - -
Cash dividend
$.07 per share - - - - - (1,434) - - -
Stock issued for employee
benefit plans 25 13 - - 960 - (468) - -
Amortization of deferred
compensation - - - - - - 524 - -
Unrealized gain on
investments, net - - - - - - - 151 -
Translation adjustment - - - - - - - - (2,671)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 27, 1998 19,012 $9,506 1,475 $738 $23,644 $174,660 ($1,973) $457 ($8,912)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data and share data.)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, dust mops and cloths, wiping
towels and selected linen items. In addition, the Company manufactures uniform
garments for 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.
INVENTORIES
New goods inventories are stated at the lower of first-in, first-out
(FIFO) cost or market. Rental merchandise in service is stated at cost less
amortization, which is not in excess of market. The components of inventories as
of June 27, 1998 and June 28, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
New goods $18,834 $16,328
Rental merchandise in service 58,376 43,471
- --------------------------------------------------------------------------------
$77,210 $59,799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation for financial reporting purposes
over the estimated useful lives of property, plant and equipment as follows:
<TABLE>
<CAPTION>
Life
(Years)
- --------------------------------------------------------------------------------
<S> <C>
Automobiles and trucks 3 to 8
Machinery and equipment 3 to 10
Buildings 20 to 33 1/3
Building improvements 10
- --------------------------------------------------------------------------------
</TABLE>
Costs of significant additions, renewals and betterments, including
outside computer software development costs, are capitalized. When an asset is
sold or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the gain or loss on disposition is
reflected in earnings. Maintenance and repairs are charged to expense when
incurred.
INTANGIBLE ASSETS ARISING FROM ACQUISITIONS
The cost of acquisitions in excess of the fair value of the underlying
net assets acquired (goodwill) is amortized over periods ranging from 8 to 40
years. Accumulated amortization of goodwill was $11,420 as of June 27, 1998 and
$8,361 as of June 28, 1997. Restrictive covenants and acquired customer lists,
stated at cost less accumulated amortization of $8,208 and $10,352 as of June
27, 1998 and June 28, 1997, are being amortized over the terms of the respective
agreements and the estimated average life of an account, respectively.
RETIREMENT PLAN ASSETS
Retirement plan assets consist primarily of mutual funds and cash
equivalents, which are stated at their fair value as determined by quoted market
prices and the cash surrender values of life insurance policies.
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.
F-6
<PAGE>
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign operations are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates prevailing during the year. Translation adjustments
are recorded as a separate component of stockholders' equity.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return and separate state and foreign returns. The Company accounts for income
taxes using the liability method. Deferred income taxes are provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at currently enacted tax rates.
PER SHARE DATA
In fiscal 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," and as a result,
all prior period earnings per share data have 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, 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>
For the Fiscal Years Ended
----------------------------------------
June 27, June 28, June 29,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used in
computation of basic earnings per share 20,380,000 20,323,000 20,284,000
Weighted average effect of
nonvested restricted stock grants, exercise of
options and other 74,000 103,000 110,000
----------------------------------------
Shares used in computation of
diluted earnings per share 20,454,000 20,426,000 20,394,000
----------------------------------------
----------------------------------------
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
fiscal 1998 presentation. These reclassifications had no effect on net income or
total stockholders' equity as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," 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 SFAS No. 130 in the first
quarter of fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will be effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires disclosure of business and geographic segments in
the consolidated financial statements of the Company. The Company will adopt
SFAS No. 131 in fiscal 1999 and is currently analyzing the impact it will have
on the disclosures in its financial statements.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
F-7
<PAGE>
Obtained for Internal Use" (SOP 98-1), which is effective for fiscal years
beginning after December 15, 1998. SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use. The
Company believes that the adoption of SOP 98-1 will not have a material impact
on its financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company is in the process of quantifying
the impact of SFAS No. 133 on the consolidated financial statements. However,
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
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 (NLS) for
approximately $283,400 in cash. The acquisition was accounted for using the
purchase method and the purchase price was allocated to the acquired assets
and assumed liabilities based on the fair values of the assets purchased and
the liabilities assumed. The purchase price and related acquisition costs
exceeded the fair values assigned to tangible assets by approximately
$160,600, which was assigned to restrictive covenants ($1,100) to be
amortized over the contract life of five years, purchased customer list
($41,600) to be amortized over eleven years and goodwill ($117,900) to be
amortized over thirty-five years.
In connection with the asset purchase from NLS, nine linen rental
facilities purchased were identified as assets held for sale. The net cash
flows from (i) operations of these facilities from the date of acquisition
until the date of sale (holding period, not to exceed one year), (ii)
interest on incremental debt incurred during the holding period to finance
the purchase of these facilities, and (iii) proceeds from the sale were
considered in the allocation of the purchase price to the acquired assets and
liabilities. Accordingly, earnings or losses from these nine facilities have
been excluded from the consolidated statement of income. For fiscal 1998,
losses excluded from the Company's consolidated statement of income totaled
$659, including allocated interest expense of $3,538.
During fiscal 1998, the Company sold selected linen assets and uniform
rental assets for approximately $76,700 in cash. This sale included assets
classified as assets held for sale having a book value of approximately $55,300
and other operating assets acquired from NLS having a book value of
approximately $21,000. Proceeds from the sale were 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.
The following unaudited pro forma condensed results of operations for
the years ended June 27, 1998 and June 28, 1997 have been prepared as if the NLS
transaction occurred on June 29, 1997 and June 30, 1996, respectively:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $507,767 $472,494
Income from operations 72,866 63,159
Net income 32,015 27,010
Basic earnings per common share $ 1.57 $ 1.33
Diluted earnings per common share $ 1.57 $ 1.32
</TABLE>
This financial information does not purport to represent results that
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.
F-8
<PAGE>
3 LONG-TERM DEBT
Debt as of June 27, 1998 and June 28, 1997 includes the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Borrowings under term loan and revolving credit facility
at rates ranging from 6.41% to 7.25% at June 27, 1998 $249,843 $ --
Borrowings under revolving credit agreements with interest
approximating LIBOR and Canadian prime rate, unsecured
(4.75% to 6.5% at June 28, 1997), repaid during 1998 -- 54,284
Senior notes payable to insurance company at rates ranging
from 8.46% to 10.62%, repaid during 1998 -- 25,000
- ---------------------------------------------------------------------------------
249,843 79,284
Less current maturities (15,000) (25,000)
- ---------------------------------------------------------------------------------
Total long-term debt $234,843 $54,284
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
The Company maintains a $425,000 term loan and revolving credit
facility. The credit facility includes (i) a $300,000 term loan facility with
maturities for years subsequent to June 27, 1998 of $15,000, $26,629,
$41,846, $45,650, $45,650 and $49,452 thereafter, and (ii) a $125,000
revolving credit facility expiring on June 30, 2002. As of June 27, 1998,
borrowings outstanding under the term loan were $224,227 and borrowings under
the revolving credit facility were $25,616. The unused portion of the
revolver may be used for working capital and to provide up to $10,000 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 June 27, 1998 bear interest at the Eurodollar Rate or Canadian
Prime Rate plus 0.75%. 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 June 27, 1998 was 0.25%.
On September 27, 1997, the Company entered into interest rate swap
agreements with certain lenders. The Company entered into an agreement for
the notional principal amount of $100,000 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 $50,000 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 case
the Company retains the risk of any increase of rates over 25 basis points.
If these swap agreements were to be terminated as of June 27, 1998, the
Company would have incurred a loss on the contracts of $1,245.
The credit facility contains various restrictive covenants that among
other matters require the Company to maintain a minimum earnings before
interest, taxes, depreciation and amortization (EBITDA), minimum debt service
coverage ratio, minimum stockholders' 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 June 27,
1998, the Company was in compliance with all debt covenants.
The fair value of the Company's long-term debt, based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities, approximates carrying
value as of June 27, 1998 and June 28, 1997.
4 STOCKHOLDERS' EQUITY
Each share of Class A common stock is entitled to one vote and is
freely transferable. Each share of Class B is entitled to ten votes and can be
converted to Class A common stock on a share-for-share basis. Until converted to
Class A common stock, however, Class B shares are not freely transferable. No
cash dividends can be paid on Class B common stock unless dividends of at least
an equal amount per share are paid on Class A shares. Substantially all Class B
shares are held by an officer of the Company.
F-9
<PAGE>
STOCK AWARD PLANS
The Company maintains a 1989 Stock Option and Compensation Plan
(the Employee Plan) to grant certain stock awards, including stock options at
fair market value and restricted shares, to key employees of the Company. The
Company records compensation expense as the restrictions are removed from the
stock for the difference between the par value and fair market value as of the
grant date. A maximum of 2,400,014 stock awards can be granted under this plan;
1,948,636 awards were available for grant as of June 27, 1998.
In August 1996, the Company adopted the 1996 Director Stock Option Plan
(the Directors' Plan). The Directors' Plan provides for automatic grants of
3,000 nonqualified stock options to nonemployee directors of the Company as of
the initial adoption of the Plan or as of the date such individuals became
directors of the Company and 1,000 nonqualified stock options on each subsequent
annual shareholder meeting date. The Company has reserved 50,000 shares of
common stock for issuance under the Directors' Plan. These options expire within
ten years of grant and are exercisable one year from the date of grant, except
for the initial grants, of which one third of the total options are exercisable
each year beginning with the first anniversary of the date of grant. The option
price will be the average market price of the common stock during the ten
business days preceding the Company's annual shareholder meeting.
The following schedule summarizes activity in the plans:
<TABLE>
<CAPTION>
Stock Options
------------------------
Employee Directors' Restricted Grant
Plan Plan Stock Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at July 1, 1995 47,691 -- 286,741 $7.17 - 16.50
Granted 1,939 -- 24,444 25.75
Exercised (6,841) -- -- 8.92 - 16.50
Canceled -- -- (2,646) 17.00
- --------------------------------------------------------------------------------
Outstanding at June 29, 1996 42,789 -- 308,539 7.17 - 25.75
Granted 29,330 15,000 20,566 30.33 - 37.00
Exercised (6,264) -- -- 11.17 - 16.50
Canceled (5,504) -- (6,051) 11.17
- --------------------------------------------------------------------------------
Outstanding at June 28, 1997 60,351 15,000 323,054 7.17 - 37.00
Granted 24,651 5,000 21,403 32.00 - 41.88
Exercised (11,917) -- -- 7.17 - 37.00
Canceled (4,632) -- (14,554) 37.00
- --------------------------------------------------------------------------------
Outstanding at June 27, 1998 68,453 20,000 329,903 $11.33 - 41.88
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exercisable at June 27, 1998 11,947 5,000 -- $11.33 - 37.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of income except for
shares issued under the Restricted Stock Plan. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and net income per common share would have been
adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
Fiscal Years
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 32,058 $ 29,002 $ 22,720
Pro forma 31,954 28,987 22,718
Basic net income per share:
As reported $ 1.57 $ 1.43 $ 1.12
Pro forma 1.57 1.43 1.12
Diluted net income per share:
As reported $ 1.57 $ 1.42 $ 1.11
Pro forma 1.56 1.42 1.11
</TABLE>
F-10
<PAGE>
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The weighted average fair value of options granted in 1998, 1997 and 1996
was $17.61, $14.80 and $10.89, respectively. The weighted average exercise price
was $41.88, $33.53 and $25.75, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used: risk-free interest rates of 5.68% for 1998, 6.42% for 1997 and
5.55% for 1996; expected dividends of $.07 per share; expected lives of seven
years for 1998, 1997 and 1996; and expected volatility of 27.53% for 1998
grants, 28.13% for 1997 grants and 29.17% for 1996 grants.
5 INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal Years
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 11,261 $ 12,989 $ 12,671
State and local 1,211 1,608 1,576
Foreign 5,470 4,555 1,348
- -------------------------------------------------------------------------------------
17,942 19,152 15,595
Deferred 2,747 (255) (1,099)
- -------------------------------------------------------------------------------------
$ 20,689 $ 18,897 $ 14,496
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
The reconciliation between income taxes using the statutory federal
income tax rate and the recorded income tax provision is as follows:
<TABLE>
<CAPTION>
Fiscal Years
- -------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes at the statutory
rate $ 18,462 $ 16,764 $ 13,027
State taxes, net of federal
tax benefit 988 1,072 924
Foreign taxes 884 98 252
Permanent differences
and other, net 355 963 293
- -------------------------------------------------------------------------------------
Total provision $ 20,689 $ 18,897 $ 14,496
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Effective rate 39.2% 39.5% 39.0%
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and
deferred tax liabilities as of June 27, 1998 and June 28, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Inventory amortization differences $(17,666) $(13,037)
Depreciation and property basis differences (7,222) (6,840)
Other (5,735) (6,710)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (30,623) (26,587)
Deferred tax assets:
Accruals, reserves and other 8,104 6,815
- --------------------------------------------------------------------------------
Net deferred tax liability $(22,519) $(19,772)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
6 EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a noncontributory pension plan (the Plan) covering
substantially all employees, except certain employees who are covered by union
administered plans. Benefits are based on number of years of service and each
F-11
<PAGE>
employee's compensation near retirement. The Company makes annual contributions
to the Plan consistent with federal funding requirements.
The net pension cost in 1998, 1997 and 1996 includes the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 1,287 $ 1,117 $ 952
Interest cost on projected
benefit obligation 1,154 1,018 887
Actual return on assets (2,629) (2,234) (1,241)
Amortization of unrecognized
net gain 916 721 (121)
- -------------------------------------------------------------------------------------
Net pension cost $ 728 $ 622 $ 477
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
The funded status of the Plan at June 27, 1998 and June 28, 1997, was
as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $10,791 $ 8,476
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Accumulated benefit obligation $11,460 $ 8,966
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Projected benefit obligation $18,967 $14,572
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Plan assets at fair value $19,534 $17,270
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assets in excess of projected
benefit obligation $ 568 $ 2,698
Unrecognized transition net asset (267) (400)
Unrecognized net gain (2,036) (3,358)
Unrecognized prior service cost 582 635
- --------------------------------------------------------------------------------
Accrued pension cost at year-end $(1,153) $ (425)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation was determined using an assumed
discount rate of 7.25% and an assumed long-term rate of compensation increase of
5%. The assumed long-term rate of return on Plan assets is 9%. Plan assets
consist primarily of common stocks and U.S. Government and corporate
obligations.
UNION PENSION PLANS
Certain employees of the Company are covered by union sponsored,
collectively bargained, multiemployer pension plans (Union Plans). The Company
contributed and charged to expense $587 in 1998, $424 in 1997 and $328 in 1996
for such plans. These contributions are determined in accordance with the
provisions of negotiated labor contracts and generally are based on the number
of hours worked. The Company may be liable for its share of unfunded vested
benefits, if any, related to the Union Plans. Information from the Union Plans'
administrators is not available to permit the Company to determine its share, if
any, of unfunded vested benefits.
401(k) PLAN
All full-time non-union employees are eligible to participate in a
401(k) plan after one year of service. The Company matches a portion of the
employee's salary reduction contributions and provides investment choices for
the employee. The matching contributions under the 401(k) plan, which vest over
a seven-year employment period, were $466 in 1998, $394 in 1997 and $385 in
1996.
EXECUTIVE RETIREMENT PLANS
The Company has a nonqualified Supplemental Executive Retirement Plan
(SERP) and a nonqualified Executive Deferred Compensation Plan (DEFCO) to
provide designated executives and professional employees with retirement, death
and disability benefits.
Annual benefits under the SERP are based on years of service and
individual compensation near retirement. Expense under the SERP was $563 in
1998, $564 in 1997 and $600 in 1996. The accumulated benefit obligation of
$3,781 as of June 27, 1998 and $2,951 as of June 28, 1997, is included in other
noncurrent liabilities in the accompanying consolidated balance sheets. The
Company has purchased life insurance contracts that may be used to fund the
retirement benefits. The net cash surrender value of the contracts as of June
27, 1998 and June 28, 1997 was $3,012 and $2,522, respectively, and is included
in other assets in the accompanying consolidated balance sheets.
F-12
<PAGE>
Under the DEFCO plan, the Company matches a portion of the employees'
contributions and provides a guaranteed investment return that is adjusted
annually. The Company's matching contributions under the DEFCO plan were $240 in
1998, $216 in 1997 and $200 in 1996. The accumulated benefit obligation of
$5,504 as of June 27, 1998 and $3,906 as of June 28, 1997, is included in other
noncurrent liabilities in the accompanying consolidated balance sheets. The
Company has purchased investments, including stable income and stock index
managed funds, which may be used to fund the retirement benefits. The
investments had an aggregate market value of $5,492 as of June 27, 1998 and
$4,213 as of June 28, 1997, and are included in other assets in the accompanying
consolidated balance sheets at these values.
7 COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in litigation arising in the ordinary course
of business, including being named, along with other defendants, as a
potentially responsible party at certain waste disposal sites where groundwater
contamination has been detected, or is suspected. In the opinion of management,
settlement of the litigation will not have a material effect on the Company's
results of operations or financial position.
LEASES
The Company has noncancellable operating lease commitments for certain
production and other equipment and delivery facilities that expire on various
dates through 2003. Minimum annual rental commitments at June 27, 1998 for the
fiscal years 1999 through 2003 and thereafter are $2,602, $2,243, $1,904,
$1,609, $991 and $359. In accordance with the terms of the lease agreements, the
Company is required to pay real estate taxes and maintenance costs. Total lease
expense was $5,337 in 1998, $4,234 in 1997 and $3,565 in 1996.
8 GEOGRAPHIC INFORMATION
Geographic financial information is as follows:
<TABLE>
<CAPTION>
United
States Canada Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenues $441,421 $ 61,172 $502,593
Income from operations 56,892 15,519 72,411
Total assets 458,096 73,746 531,842
Capital expenditures 31,589 5,809 37,398
Depreciation and amortization
expense 31,552 4,041 35,593
1997:
Revenues $292,407 $ 58,507 $350,914
Income from operations 40,592 12,119 52,711
Total assets 234,798 77,167 311,965
Capital expenditures 33,732 1,804 35,536
Depreciation and amortization
expense 17,639 4,320 21,959
1996:
Revenues $252,659 $ 52,755 $305,414
Income from operations 37,532 7,712 45,244
Total assets 201,174 81,346 282,520
Capital expenditures 29,207 7,030 36,237
Depreciation and amortization
expense 16,231 4,174 20,405
- --------------------------------------------------------------------------------
</TABLE>
(THIS SPACE INTENTIONALLY LEFT BLANK)
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO G&K SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of G&K
SERVICES, INC. (a Minnesota corporation) AND SUBSIDIARIES as of June 27, 1998
and June 28, 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 27, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of G&K Services,
Inc. and Subsidiaries as of June 27, 1998, and June 28, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended June 27, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
August 21, 1998
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F-14
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF G&K SERVICES, INC.
G&K Services, Co. (incorporated in Minnesota, U.S.A.)
G&K Services Linen, Co. (incorporated in Minnesota, U.S.A.)
Northwest Linen Co. (incorporated in Minnesota, U.S.A.)
Gross Industrial Towel & Garment Service, Inc. (incorporated in Minnesota,
U.S.A.)
G&K Services of Canada, Inc. (incorporated in Ontario, Canada)
912489 Ontario Limited (incorporated in Ontario, Canada)
Work Wear Corporation of Canada, Ltd. (incorporated in Ontario, Canada)
La Corporation Work Wear du Quebec (incorporated in Quebec, Canada)
(THIS SPACE INTENTIONALLY LEFT BLANK)
20
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-63359.
/s/Arthur Andersen LLP
------------------------------
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 24, 1998
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23
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of
G&K SERVICES, INC., a Minnesota corporation (the Company), hereby constitute and
appoint RICHARD M. FINK and TIMOTHY W. KUCK, and each or any of them, his true
and lawful attorneys-in-fact and agents, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file the
Annual Report of the Company and Form 10-K for the year ended June 27, 1998, to
be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
including any amendment or amendments, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys full power and authority to do and
perform each and every thing, requisite and necessary to be done in and about
the premises in order to execute the same as fully to all intents and purposes
as he, himself, might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents may lawfully do or could
cause to be done by virtue hereof.
IN WITNESS WHEREOF, G&K SERVICES, INC. has caused this Power of Attorney to
be executed in its name by its directors this 27th day of August 1998.
/s/ Richard Fink /s/ Donald Goldfus
- ------------------------------- ---------------------------
Richard Fink Donald Goldfus
/s/ Bruce Allbright /s/ William Hope
- ------------------------------- ---------------------------
Bruce Allbright William Hope
/s/ Paul Baszucki /s/ Bernard Sweet
- ------------------------------- ---------------------------
Paul Baszucki Bernard Sweet
/s/ Wayne Fortun
- ------------------------------
Wayne Fortun
(THIS SPACE INTENTIONALLY LEFT BLANK)
22
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 11,975
<SECURITIES> 0
<RECEIVABLES> 59,325
<ALLOWANCES> 2,392
<INVENTORY> 77,210
<CURRENT-ASSETS> 153,413
<PP&E> 306,063
<DEPRECIATION> 118,378
<TOTAL-ASSETS> 531,842
<CURRENT-LIABILITIES> 80,065
<BONDS> 0
0
0
<COMMON> 10,244
<OTHER-SE> 187,876
<TOTAL-LIABILITY-AND-EQUITY> 531,842
<SALES> 502,593
<TOTAL-REVENUES> 502,593
<CGS> 294,453
<TOTAL-COSTS> 430,182
<OTHER-EXPENSES> (2,184)
<LOSS-PROVISION> 2,684
<INTEREST-EXPENSE> 21,848
<INCOME-PRETAX> 52,747
<INCOME-TAX> 20,689
<INCOME-CONTINUING> 32,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,058
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
