-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGjv4j4p3FFX+frO8e4zoJs8WkOHgPOOm4Zmo6VZQjDKEO10gKZ6jJsB2w7raxIR FjnJMNa04BoXixGty9shqQ== 0001047469-98-004522.txt : 19980211 0001047469-98-004522.hdr.sgml : 19980211 ACCESSION NUMBER: 0001047469-98-004522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980210 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: G&K SERVICES INC CENTRAL INDEX KEY: 0000039648 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410449530 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04063 FILM NUMBER: 98527782 BUSINESS ADDRESS: STREET 1: 505 WATERFORD PARK STREET 2: STE 455 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125467440 MAIL ADDRESS: STREET 1: 505 WATERFORD PARK STREET 2: STE 455 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 FORMER COMPANY: FORMER CONFORMED NAME: NORTHWEST LINEN CO DATE OF NAME CHANGE: 19681227 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- F O R M 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 27, 1997 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - -------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5995 OPUS PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55343 (Address of principal executive offices and zip code) (612) 912-5500 (Registrant's telephone number, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS A Outstanding February 5, 1998 Common Stock, par value $.50 per share 18,994,298 CLASS B Outstanding February 5, 1998 Common Stock, par value $.50 per share 1,474,996 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS G & K SERVICES, INC. AND SUBSIDIARIES
December 27, 1997 June 28, ASSETS (In thousands, except share data) (Unaudited) 1997 - --------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $9,844 $6,986 Accounts receivable, less allowance for doubtful accounts of $1,532 and $1,324 66,213 41,831 Inventories 78,693 59,799 Prepaid expenses 9,296 4,512 - --------------------------------------------------------------------------- Total current assets 164,046 113,128 - --------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 23,816 19,676 Buildings and improvements 81,557 68,683 Machinery and equipment 171,576 143,475 Automobiles and trucks 33,517 27,434 Less accumulated depreciation (120,698) (109,547) - --------------------------------------------------------------------------- Total property, plant and equipment 189,768 149,721 - --------------------------------------------------------------------------- OTHER ASSETS Goodwill, net 142,207 33,856 Restrictive covenants and customer lists, net 46,732 6,016 Other, principally retirement plan assets 9,529 9,244 Assets held for sale 63,116 - - --------------------------------------------------------------------------- Total other assets 261,584 49,116 - --------------------------------------------------------------------------- $615,398 $311,965 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $20,624 $13,304 Accrued expenses - Salaries and employee benefits 17,573 11,556 Other 18,715 12,133 Deferred income taxes 10,133 10,268 Current maturities of long-term debt 14,167 25,000 - --------------------------------------------------------------------------- Total current liabilities 81,212 72,261 LONG-TERM DEBT, LESS CURRENT MATURITIES 335,051 54,284 DEFERRED INCOME TAXES 9,216 9,504 OTHER NONCURRENT LIABILITIES 8,292 6,929 - --------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 18,990,629 and 18,922,846 shares issued and outstanding 9,495 9,493 Class B, 10,000,000 shares authorized, 1,474,996 and 1,474,996 shares issued and outstanding 738 738 Additional paid-in capital 22,684 22,684 Retained earnings 158,552 144,036 Deferred compensation (1,779) (2,029) Unrealized gain on investments held for sale 270 306 Cumulative translation adjustment (8,333) (6,241) - --------------------------------------------------------------------------- Total stockholders' equity 181,627 168,987 - --------------------------------------------------------------------------- $615,398 $311,965 - --------------------------------------------------------------------------- - ---------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 2 CONSOLIDATED STATEMENTS OF INCOME G & K SERVICES, INC. AND SUBSIDIARIES
For the Three Months Ended For the Six Months Ended ---------------------------------------------------------------------- Dec 27, Dec 28, Dec 27, Dec 28, (In thousands, except per share data) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- REVENUES Rental operations $ 122,566 $ 82,679 $ 237,294 $ 162,235 Direct sales 5,695 4,759 9,393 8,513 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenues 128,261 87,438 246,687 170,748 - ---------------------------------------------------------------------------------------------------------------------------------- EXPENSES Cost of rental operations 71,472 45,188 137,177 88,369 Cost of direct sales 4,033 3,561 6,710 6,443 Selling and administrative 25,489 20,018 50,385 39,425 Depreciation 6,577 4,845 12,437 9,441 Amortization of intangibles 2,326 497 4,799 1,060 - ---------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 109,897 74,109 211,508 144,738 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 18,364 13,329 35,179 26,010 Interest expense 6,114 1,545 10,881 3,268 Other income, net (583) (57) (792) (503) - ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 12,833 11,841 25,090 23,245 Provision for income taxes 5,046 4,655 9,858 9,108 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,787 $ 7,186 $ 15,232 $ 14,137 - ---------------------------------------------------------------------------------------------------------------------------------- Basic Weighted Average Number of Shares Outstanding 20,369 20,334 20,367 20,332 BASIC EARNINGS PER COMMON SHARE $ .38 $ 0.35 $ 0.75 $ 0.70 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Weighted Average Number of Shares Outstanding 20,454 20,433 20,449 20,425 DILUTED EARNINGS PER COMMON SHARE $ 0.38 $ 0.35 $ 0.74 $ 0.69 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS G&K SERVICES, INC. AND SUBSIDIARIES
For the Three Months Ended For the Six Months Ended ------------------------------------------------------------------ Dec 27, Dec 28, Dec 27, Dec 28, 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,787 $ 7,186 $ 15,232 $ 14,137 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,903 5,342 17,236 10,501 Deferred income taxes (746) (117) (783) (225) Changes in current operating items: Inventories (2,835) (3,164) (4,613) (4,738) Accounts receivable and prepaid expenses (10,356) (3,184) (19,351) (6,580) Accounts payable and other current liabilities 7,327 35 18,200 2,676 Other, net 2,965 872 2,321 1,495 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,045 6,970 28,242 17,266 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions, net (9,608) (8,885) (17,931) (17,964) Business acquisitions 971 - (280,557) (1,948) Change in assets held for sale 2,011 - 3,801 - Purchase of investments (218) (132) (412) (272) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (6,844) (9,017) (295,099) (20,184) - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt financing 5,000 5,580 360,843 12,770 Repayments on line of credit and other long-term debt, net (4,414) (2,228) (90,414) (13,793) Cash dividends paid (358) (715) (716) (715) Sale of common stock - 2 2 4 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 228 2,639 269,715 (1,734) - ----------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,429 592 2,858 (4,652) CASH AND CASH EQUIVALENTS: Beginning of period 3,415 1,638 6,986 6,882 - ----------------------------------------------------------------------------------------------------------------------------------- End of period $ 9,844 $ 2,230 $ 9,844 $ 2,230 - ----------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for - Interest $ 5,627 $ 1,466 $ 9,877 $ 3,143 - ----------------------------------------------------------------------------------------------------------------------------------- Income taxes $ 1,629 $ 7,331 $ 8,875 $ 8,842 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and six month periods ended December 27, 1997 and December 28, 1996 (Unaudited) The consolidated financial statements included herein, except for the June 28, 1997 balance sheet, which was extracted from the audited financial statements of June 28, 1997, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of December 27, 1997, and June 28, 1997, and the results of operations and the changes in financial position for the three and six months ended December 27, 1997 and December 28, 1996. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report. The results of operations for the three and six month periods ended December 27, 1997, and December 28, 1996, are not necessarily indicative of the results to be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. NATURE OF BUSINESS G&K Services, Inc. (the Company) is a full service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of non-uniform items such as floormats, dustmops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniforms for rental customers as well as uniforms for direct sale. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated in consolidation. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company in the management of its interest rate exposure. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The related amounts payable to, or receivable from, the counter-parties are included in other accrued expenses. The fair value of the swap agreements is not recognized in the Consolidated Financial Statements, since they are accounted for as hedges. PER SHARE DATA In the second quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share," which is effective for interim periods ending after December 15, 1997. As a result, all prior period earnings per share data has been restated. The adoption of SFAS No. 128 did not have a significant impact on previously reported earnings per share. Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share was computed similar to the computation of basic earnings per share, 5 except that the denominator is increased for the assumed exercise of dilutive options and other dilutive securities ( including nonvested restricted stock) using the treasury stock method. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the 1998 presentation. These reclassifications have no effect on net income or total stockholders' equity as previously reported. RECENT ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (Statement No. 130), issued in June 1997 and effective for fiscal years beginning after December 15, 1997, requires the Company to report and display comprehensive income and its components. Comprehensive income is defined as changes in equity of a business enterprise during a period except those resulting from investments by owners and distributions to owners. 2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS On July 14, 1997 the Company purchased the uniform rental assets and selected linen rental assets of National Linen Service for approximately $279 million in cash. The Company's acquisition of rental operations was accounted for by using the purchase method. The purchase price was allocated to the acquired assets and assumed liabilities based on the preliminary determination of the fair values of the assets purchased and the liabilities assumed. The purchase price and related acquisition costs exceed the tentative fair values assigned to tangible assets by approximately $153.6 million, which excess may be amortized for the restrictive covenant over the contract life of five years, for the purchased customer lists over eleven years and for goodwill over thirty-five years. In connection with the asset purchase from National Linen, it is G&K's intent to hold for sale nine linen rental facilities. As such, the net cash flows from (a) operations of these facilities from the date of acquisition until the date of sale (holding period, not to exceed one year), (b) interest on incremental debt incurred during the holding period to finance the purchase of these facilities, and (c) proceeds from the sale will be considered in the allocation of the purchase price to the assets and liabilities. Accordingly, earnings or losses from these nine facilities are excluded from the earnings reported for the Company. For the three month period ended December 27, 1997, losses excluded from the Company's Statement of Income totaled $7,000, including allocated interest expense of $1,055,000. For the six month period ended December 27, 1997, earnings excluded from the Company's Statement of Income totaled $243,000, including allocated interest expense of $2,031,000. The following unaudited pro forma condensed results of operations for the three and six month periods ended December 27, 1997 and December 28, 1996 have been prepared as if the National Linen transaction occurred on June 29, 1997 and June 30, 1996, respectively (in thousands, except per share amounts),
Six Months Ended December 27, 1997 December 28, 1996 ------------------ ------------------- Revenues $251,861 $231,538 Income from Operations 35,634 31,234 Net Income 15,189 13,141 Basic Earnings per common share $ 0.75 $ 0.65 Diluted Earnings per common share $ 0.74 $ 0.64
6 This financial information does not purport to represent results which would actually have been obtained if the asset acquisition had been in effect on June 29, 1997 and June 30, 1996 or any future results which may in fact be realized. 3. DEBT The Company maintains a $425 million credit facility. The credit facility includes (a) a $300 million term loan with maturity for years subsequent to June 28, 1997 of $10,000,000, $15,000,000, $35,000,000, $55,000,000, $60,000,000, and $125,000,000 thereafter, with final maturity on June 30, 2004, and (b) a $125 million revolving credit facility expiring on June 30, 2002. As of December 27, 1997, borrowings outstanding under the term loan were $296,666,667 and under the revolving credit facility were $52,551,333. The unused portion of the revolver may be used for working capital and to provide up to $10,000,000 in letters of credit. Borrowings under the term loan and revolving credit facility bear interest at 0.5% to 1.125% over the rate offered to major banks in the London Interbank Eurodollar market ("Eurodollar Rate"), or Canadian Prime for Canadian borrowings, based on a leverage ratio calculated on a quarterly basis. Advances through December 31, 1997 will bear interest at the Eurodollar Rate or Canadian Prime Rate plus 1.125%. The Company also pays a fee of 0.15% to 0.35% on the unused daily balance of the revolver based on a leverage ratio calculated on a quarterly basis. The fee through December 31, 1997 will be 0.35%. As of September 27, 1997, the Company had entered into interest rate swap agreements with certain lenders providing bank financing. The Company entered into an agreement for the notional principal amount of $100 million through September 12, 2000 that effectively fixed the interest rate on floating rate debt at a rate of 6.24%. The Company also entered into an agreement for the notional principal amount of $50 million through September 12, 1999 that effectively fixed the interest rate on floating rate debt at a rate of 6.065%, unless the Eurodollar Rate increases by more than 25 basis points within any one quarter, in which the Company retains the risk in any increase in rates over 25 basis points. The new credit facility contains various restrictive covenants which among other matters, require the Company to maintain a minimum EBITDA, minimum debt service coverage ratio, minimum stockholder equity and maximum leverage ratio, all as defined. The credit agreement also limits additional indebtedness, investments, capital expenditures and cash dividends. The Company's obligations under the credit facility are collateralized by an interest in the Company's personal property, 100% of the stock of G&K Services, Co. and other domestic subsidiaries and 65% of the stock of the Company's Canadian subsidiaries. As of December 27, 1997, the Company was in compliance with all debt covenants. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the three and six month periods ended December 27, 1997 and December 28, 1996, and the percentage changes in these income and expense items between periods are contained in the following table:
PERCENTAGE OF NET SALES THREE MONTHS SIX MONTHS PERCENTAGE PERCENTAGE ENDED ENDED CHANGE CHANGE ------------------------------------------------------ ---------------------------- Three Months Six Months Dec. 27, Dec. 28, Dec. 27, Dec. 28, FY 1998 FY 1998 1997 1996 1997 1996 vs. FY 1997 vs. FY 1997 ------------------------------------------------------ ---------------------------- Revenues: Rental 95.6% 94.6% 96.2% 95.0% 48.2% 46.3% Direct 4.4 5.4 3.8 5.0 19.7 10.3 ------------------------------------------------------ Total Revenues 100.0 100.0 100.0 100.0 46.7 44.5 Expenses: Cost of Rental Sales 58.3 54.7 57.8 54.5 58.2 55.2 Cost of Direct Sales 70.8 74.8 71.4 75.7 13.3 4.1 ------------------------------------------------------ Total Cost of Sales 58.9 55.8 58.3 55.6 54.9 51.8 Selling and Administrative 19.9 22.9 20.4 23.1 27.3 27.8 Depreciation 5.1 5.5 5.0 5.5 35.7 31.7 Amortization of Intangibles 1.8 0.6 2.0 0.6 368.0 352.7 ------------------------------------------------------ Income from Operations 14.3 15.2 14.3 15.2 37.8 35.3 Interest Expense 4.8 1.8 4.4 1.9 295.7 233.0 Other (Income) Expense, net (0.5) (0.1) (0.3) (0.3) 922.8 57.5 ------------------------------------------------------ Income Before Income Taxes 10.0 13.5 10.2 13.6 8.4 7.9 Provision for Income Taxes 3.9 5.3 4.0 5.3 8.4 8.2 ------------------------------------------------------ Net Income 6.1% 8.2% 6.2% 8.3% 8.4% 7.7% ------------------------------------------------------
Total revenues for the second quarter of fiscal 1998 increased 46.7% to $128.3 million from $87.4 million in the second quarter of fiscal 1997 and they increased 44.5% to $246.7 million for the first six months of fiscal 1998 from $170.7 million in the same period of fiscal 1997. Revenue attributable to the acquisition of certain assets of National Linen Service (NLS) was $30.8 million for the quarter and $57.0 million for the six month period. Excluding this increase and excluding prior year Toronto Linen operations which were sold in fiscal 1997, the revenue growth was 12.6% for the quarter and 12.2% for the first six months of fiscal 1998. Rental revenue growth for the second quarter accounted for $39.9 million, or a 48.2% increase and for the first six months it accounted for $75.1 million, or a 46.3% increase. U.S. and Canadian annual rental revenues increased 13.1% and 10.5%, respectively for the second quarter and increased 12.9% and 11.7% respectively, for the first six months (excluding revenues from assets acquired from NLS and revenues from Toronto Linen). The improvement is primarily attributable to cleanroom and national account sales as well as steady growth in the traditional garment leasing operations. Total direct sales to outside customers increased 19.7% to $5.7 million for the second quarter of fiscal 1998 from $4.8 million in the same period of fiscal 1997 and increased 10.3% to $9.4 million for the first six months of fiscal 1998 from $8.5 million in the same period of fiscal 1997, helped by the success of a seasonal promotion and increases in catalog sales. Cost of direct sales, as a percentage of direct sales, decreased to 70.8% for the second quarter of fiscal 1998 from 74.8% for the same period of fiscal 1997 and decreased to 71.4% for the first six months of fiscal 1998 from 75.7% for the same period of fiscal 1997. Cost of rental operations increased 58.2% to $71.5 million for the second quarter of fiscal 1998 from $45.2 million in the same period of fiscal 1997 and rose 55.2 % to $ 137.2 million for the first six months of fiscal 1998 from $88.4 million in the same period of fiscal 1997. As a percentage of rental revenues, these costs increased to 8 58.3% for the second quarter of fiscal 1998 compared to 54.7% for the same period in fiscal 1997 and increased to 57.8% for the first six months of fiscal 1998 from 54.5% in the same period of fiscal 1997. The Company attributes the increase primarily to merchandise and production costs at the new locations acquired in the NLS transaction. Selling and administrative expenses increased 27.3% to $25.5 million in the second quarter of fiscal 1998 from $20.0 million in the same period in fiscal 1997 and increased 27.8% to $50.4 million for the first six months of fiscal 1998 from $39.4 million in the same period in fiscal 1997. As a percentage of revenues, selling and administrative expenses decreased to 19.9% in the second quarter of fiscal 1998 from 22.9% in the same period in fiscal 1997 and decreased to 20.4% in the six month period of fiscal 1998 from 23.1% in the same period in fiscal 1997. The decline as a percent of sales is due to several factors, including lower selling expenses in the newly acquired NLS locations and leveraging of corporate costs following the NLS transaction. Depreciation expense increased 35.7% to $6.6 million in the second quarter of fiscal 1998 from $4.8 million in the same period of fiscal 1997 and increased 31.7% to $12.4 million for the first six months of fiscal 1998 from $9.4 million in the same period of fiscal 1997. As a percentage of consolidated revenue, depreciation expense decreased to 5.1% in the second quarter of fiscal 1998 from 5.5% for the same period in fiscal 1997 and decreased to 5.0% for the six month period of fiscal 1998 from 5.5% for the same period in fiscal 1997. This decrease is caused by timing of anticipated current year capital expenditures, maturing of startup operations and depreciation on acquired NLS assets based on fair market valuations. Capital expenditures for the quarter, excluding acquisition of businesses, was $9.6 million compared to $8.9 million in the prior year's quarter, and for the six month period they were $17.9 million compared to $18.0 million in the prior year. Amortization expense increased to $2.3 million in the second quarter of fiscal 1998 from $.5 million in the second quarter of fiscal 1997 and increased to $4.8 million in the first six months of fiscal 1998 from $1.1 million in the same period of fiscal 1997. This increase is attributable to the acquisition of NLS assets. Operating income increased 37.8% to $18.4 million in the second quarter of fiscal 1998 from $13.3 million in the same period of fiscal 1997 and increased 35.3% to $35.2 million for the first six months of fiscal 1998 from $26.0 million in the same period of fiscal 1997. Operating margins decreased to 14.3% for the second quarter of fiscal 1998 from 15.2% in the same period of fiscal 1997 and decreased to 14.3% for the six month period of fiscal 1998 from 15.2% in the same period of fiscal 1997. U.S. operating margins declined to 12.6% for the second quarter of fiscal 1998 from 14.0% in the same period of fiscal 1997 and declined to 12.6% for the six month period of fiscal 1998 from 14.3% in the same period of fiscal 1997. Interest expense was $6.1 million for the second quarter of fiscal 1998, up from $1.5 million in the same period of fiscal 1997 and was $10.9 million for the first six months of fiscal 1998, up from $3.3 million in the same period of fiscal 1997. This was largely due to additional borrowings to finance the acquisition of selected assets from National Linen Service. The Company's effective tax rate was 39.3% in the second quarter of fiscal 1998, unchanged from the same period of fiscal 1997 and it increased to 39.3% in the six month period of fiscal 1998 from 39.2% in the same period of fiscal 1997. Net income rose 8.4% to $7.8 million in the second quarter of fiscal 1998 from $7.2 million in the second quarter of fiscal 1997 and rose 7.7% to $15.2 million in the first six months of fiscal 1998 from $14.1 million in the first six months of fiscal 1997. Diluted and basic earnings per share for the second quarter were $.38 per share compared with $.35 for the prior year quarter. Diluted and basic earnings per share for the first six months of 1998 increased to $.74 and $.75 from $.69 and $.70, respectively. Net income margins decreased to 6.1% for the second quarter of fiscal 1998 compared with 8.2% in the second quarter of fiscal 1997 and decreased to 6.2% for the six month period of fiscal 1998 compared with 8.3% in the six month period of fiscal 1997. LIQUIDITY AND FINANCIAL RESOURCES Cash flow from operating activities increased to $13.0 million in the second quarter of fiscal 1998 from $7.0 million in the same period of fiscal 1997 and increased to $ 28.2 million in the first six months of fiscal 1998 from $17.3 million in fiscal 1997. The fiscal 1998 increase resulted from increases in net income, accounts payable and other current liabilities, and depreciation and amortization when compared to the first quarter of 1997. Working capital at December 27, 1997 was $82.8 million, up 119.2% from $37.8 million at December 28, 1996. The increase reflects the acquisition of NLS assets. 9 Cash provided by financing activities was $.2 million in the second quarter of fiscal 1998 and $2.6 million in the same period of fiscal 1997. Cash provided by financing activities was $269.7 million in the six month period of fiscal 1998 and cash used for financing activities was $1.7 million in the same period of fiscal 1997. $355.8 million of cash was obtained by issuing debt in the first quarter of fiscal 1998 primarily for the acquisition of selected assets of NLS. The Company's ratio of debt to total capitalization increased from 31.9% at June 28, 1997 to 65.8% at the end of December 1997. Cash used in investing activities was $6.8 million in the second quarter of fiscal 1998 and $9.0 million in the second quarter of fiscal 1997. Cash used in investing activities was $295.0 million in the six month period of fiscal 1998 and $20.2 million in the same period of fiscal 1997. The increase is primarily due to the acquisition of the NLS assets. The Company utilizes software and related technologies throughout its businesses that will be affected by the date change in the year 2000. An internal study is currently under way to determine the full scope and related costs to insure that the Company's systems continue to meet its internal needs and those of its customers. The Company has begun to incur expenses in fiscal 1998 to resolve this issue. These expenses may be significant and continue through the year 1999. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. In connection with G&K's acquisition of selected assets of NLS in July 1997, the Company entered into a new $425 million credit facility to fund the purchase price of the assets and refinance then existing indebtedness. The unused portion of the revolver may be used for working capital and to provide letters of credit. The new credit facility contains various restrictive covenants which, among other matters, require the Company to maintain a minimum EBITDA, minimum debt service coverage ratio, minimum stockholder equity and maximum leverage ratio, all as defined. The agreement also limits additional indebtedness, investments, capital expenditures and cash dividends. G&K's obligations under the credit facility are secured by an interest in the Company's personal property, 100% of the stock of G&K Services, Co. and other domestic subsidiaries and 65% of the stock of Canadian subsidiaries. Stockholders' equity grew 17.9% to $181.6 million at December 27, 1997, compared with $154.1 million at the end of the second quarter of 1997. G&K's return on average equity decreased to 8.7% in the second quarter of fiscal 1998 compared with 9.6% for the same period of fiscal 1997. Management believes that cash flows generated from operations and its credit facilities should provide adequate funding for its current businesses and planned expansion of operations or any future acquisitions. Statements in this document regarding ongoing trends and expectations constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, but are not limited to, those expectations related to the recent acquisition of assets from National Linen Service; unforeseen operating risks; the availability of capital to finance planned growth; competition within the uniform leasing industry; and the effects of economic conditions. 10 PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders a. The Company held its Annual Meeting of Stockholders on October 30, 1997. b. The following seven persons were elected directors: Bruce G. Allbright, Paul Baszucki, Richard Fink, Wayne M. Fortun, Donald W. Goldfus, William Hope and Bernard Sweet. c. 1. Each director nominee received the following votes:
SHARES ------------------------------------------- IN FAVOR WITHHOLD AUTHORITY ------------------------------------------- Allbright 30,029,581 432,437 Baszucki 27,814,418 2,647,600 Fink 30,029,381 432,637 Fortun 30,029,381 432,637 Goldfus 30,028,790 433,228 Hope 30,030,196 431,822 Sweet 30,026,810 435,208
2. Stockholders ratified the appointment of Arthur Andersen LLP, Certified Public Accountants, as independent auditors of the Company for 1998: 30,154,322 shares in favor, 84,234 shares voting against and 223,462 shares abstaining. 3. Stockholders approved an amendment to the Company's 1989 Stock Option and Compensation Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 1,500,000 shares: 22,727,202 shares in favor, 5,062,840 shares against, 274,430 shares abstaining and 2,397,546 shares broker non-vote. ITEM 6. Exhibits and Reports on Form 8-K a. EXHIBITS Exhibit 11 - Calculation of earnings per share Exhibit 27 - Financial Data Schedule (for SEC use only) b. Reports on Form 8-K. None. 11 Exhibit 11 G & K Services, Inc. and Subsidiaries CALCULATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended ---------------------------------------------------------- December 27, December 28, December 27, December 28, 1997 1996 1997 1996 ---------------------------------------------------------- Net Income $ 7,787 $ 7,186 $ 15,232 $ 14,137 ---------------------------------------------------------- ---------------------------------------------------------- Weighted average number of common shares outstanding 20,369 20,334 20,367 20,332 ---------------------------------------------------------- Shares used in computation of basic earnings per share 20,369 20,334 20,367 20,332 Weighted average effect of non-vested restricted stock grants 48 57 45 51 Weighted average common shares issuable upon the exercise of options & other 37 42 37 42 Shares used in computation of ---------------------------------------------------------- diluted earnings per share 20,454 20,433 20,449 20,425 ---------------------------------------------------------- ---------------------------------------------------------- Net Income per common share Basic $ 0.38 $ 0.35 $ 0.75 $ 0.70 ---------------------------------------------------------- ---------------------------------------------------------- Diluted $ 0.38 $ 0.35 $ 0.74 $ 0.69 ---------------------------------------------------------- ----------------------------------------------------------
12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: February 10, 1998 s/Timothy W. Kuck ------------------------ ---------------------- Timothy W. Kuck Chief Financial Officer (Principal Financial Officer) s/Michael F. Woodard ---------------------- Michael F. Woodard Controller (Principal Accounting Officer) 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: February 10, 1998 ------------------------ ---------------------- Timothy W. Kuck Chief Financial Officer (Principal Financial Officer) ---------------------- Michael F. Woodard Controller (Principal Accounting Officer) 14 EX-27 2 EXHIBIT 27 (FDS)
5 1,000 6-MOS JUN-27-1998 JUN-29-1997 DEC-27-1997 9,844 0 66,213 1,532 78,693 164,046 189,678 120,698 615,398 81,212 0 0 0 10,233 171,394 615,398 0 246,687 143,887 211,508 0 0 10,881 25,090 9,858 15,232 0 0 0 15,232 0.75 0.74
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