-----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, MPBLyHV+AA808pSs8jTV6ShVTX+IM7WNW0bLZ5+i6IXxe4VarSSup7GbYc1aGEf1 AOaUVQrI1rCHEpcp99SCLQ== 0001047469-98-019189.txt : 19980512 0001047469-98-019189.hdr.sgml : 19980512 ACCESSION NUMBER: 0001047469-98-019189 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980511 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: 98615555 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 FORM 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 March 28, 1998 Commission file number 0-4063 G&K SERVICES, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0449530 - ------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5995 OPUS PARKWAY, SUITE 500 MINNETONKA, MINNESOTA 55343 (Address of principal executive offices and zip code) (612) 912-5500 (Registrant's telephone number, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS A Outstanding May 7, 1998 Common Stock, par value $.50 per share 19,013,152 CLASS B Outstanding May 7, 1998 Common Stock, par value $.50 per share 1,474,996 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS G & K SERVICES, INC. AND SUBSIDIARIES
March 28, 1998 June 28, ASSETS (In thousands, except share data) (Unaudited) 1997 - --------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 9,155 $ 6,986 Accounts receivable, less allowance for doubtful accounts of $2,262 and $1,324 56,814 41,831 Inventories 78,656 59,799 Prepaid expenses 5,561 4,512 - --------------------------------------------------------------------------------------------- Total current assets 150,186 113,128 - --------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 25,192 19,676 Buildings and improvements 84,109 68,683 Machinery and equipment 178,158 143,475 Automobiles and trucks 34,140 27,434 Less accumulated depreciation (127,541) (109,547) - --------------------------------------------------------------------------------------------- Total property, plant and equipment 194,058 149,721 - --------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill, net 141,388 33,856 Restrictive covenants and customer lists, net 45,843 6,016 Other, principally retirement plan assets 13,393 9,244 Assets held for sale 60,367 - - --------------------------------------------------------------------------------------------- Total other assets 260,991 49,116 - --------------------------------------------------------------------------------------------- $ 605,235 $ 311,965 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 15,655 $ 13,304 Accrued expenses - Salaries and employee benefits 17,206 11,556 Other 20,393 12,133 Deferred income taxes 10,170 10,268 Current maturities of long-term debt 14,583 25,000 - --------------------------------------------------------------------------------------------- Total current liabilities 78,007 72,261 LONG-TERM DEBT, LESS CURRENT MATURITIES 318,901 54,284 DEFERRED INCOME TAXES 9,205 9,504 OTHER NONCURRENT LIABILITIES 8,858 6,929 - --------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 19,013,152 and 18,986,629 shares issued and outstanding 9,507 9,493 Class B, 10,000,000 shares authorized, 1,474,996 and 1,474,996 shares issued and outstanding 738 738 Additional paid-in capital 23,463 22,684 Retained earnings 166,164 144,036 Deferred compensation (2,329) (2,029) Unrealized gain on investments held for sale 399 306 Cumulative translation adjustment (7,678) (6,241) - --------------------------------------------------------------------------------------------- Total stockholders' equity 190,264 168,987 - --------------------------------------------------------------------------------------------- $ 605,235 $ 311,965 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
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 Nine Months Ended ----------------------------------------------------------- March 28, March 29, March 28, March 29, (In thousands, except per share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------- REVENUES Rental operations $123,015 $ 84,427 $360,309 $246,662 Direct sales 4,456 4,038 13,849 12,551 - ------------------------------------------------------------------------------------------------------------- Total revenues 127,471 88,465 374,158 259,213 - ------------------------------------------------------------------------------------------------------------- EXPENSES Cost of rental operations 71,882 45,826 209,059 134,195 Cost of direct sales 3,224 3,030 9,934 9,473 Selling and administrative 25,145 20,753 75,530 60,178 Depreciation 6,871 5,118 19,308 14,559 Amortization of intangibles 2,305 619 7,104 1,679 - ------------------------------------------------------------------------------------------------------------- Total operating expenses 109,427 75,346 320,935 220,084 - ------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 18,044 13,119 53,223 39,129 Interest expense 5,418 1,560 16,299 4,828 Other income, net (500) (491) (1,292) (994) - ------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 13,126 12,050 38,216 35,295 Provision for income taxes 5,155 4,681 15,013 13,789 - ------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,971 $ 7,369 $ 23,203 $ 21,506 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Basic Weighted Average Number of Shares Outstanding 20,367 20,327 20,367 20,327 BASIC EARNINGS PER COMMON SHARE $ 0.39 $ 0.36 $ 1.14 $ 1.06 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Diluted Weighted Average Number of Shares Outstanding 20,446 20,410 20,439 20,405 DILUTED EARNINGS PER COMMON SHARE $ 0.39 $ 0.36 $ 1.14 $ 1.05 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
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 Nine Months Ended ----------------------------------------------------------- March 28, March 29 March 28 March 29, (In thousands, except per share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,971 $ 7,369 $ 23,203 $ 21,506 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,176 5,737 26,412 16,238 Deferred income taxes 463 (107) (320) (332) Changes in current operating items: Inventories (74) (1,178) (4,687) (5,916) Accounts receivable and prepaid expenses 9,789 2,813 (6,067) (3,767) Accounts payable and other current liabilities (2,359) (5,645) 15,841 (2,969) Other, net (1,332) (1,137) 989 358 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 23,634 7,852 55,371 25,118 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment additions, net (11,065) (7,623) (28,996) (25,587) Business acquisitions (1,285) - (281,842) (1,948) Change in assets held for sale 1,742 - 5,543 - Sale of business assets 2,433 - 2,433 - (Purchase) sales of investments 9 (207) (403) (479) - ------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (8,166) (7,830) (303,265) (28,014) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt financing 9,583 565 366,931 13,335 Repayments on line of credit and other long-term debt, net (25,479) (1,187) (115,893) (14,980) Cash dividends paid (359) (359) (1,075) (1,074) Sale of common stock 98 8 100 12 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (16,157) (973) 250,063 (2,707) - ------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (689) (951) 2,169 (5,603) CASH AND CASH EQUIVALENTS: Beginning of period 9,844 2,230 6,986 6,882 - ------------------------------------------------------------------------------------------------------------------ End of period $ 9,155 $ 1,279 $ 9,155 $ 1,279 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for - Interest $ 7,030 $ 1,614 $ 16,907 $ 4,757 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Income taxes $ 3,474 $ 3,682 $ 12,349 $ 12,524 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine month periods ended March 28, 1998 and March 29, 1997 (Unaudited) The consolidated financial statements included herein, except for the June 28, 1997 balance sheet, which was extracted from the audited financial statements of June 28, 1997, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 28, 1998 and June 28, 1997, and the results of operations and the changes in financial position for the three and nine months ended March 28, 1998 and March 29, 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report. The results of operations for the three and nine month periods ended March 28, 1998, and March 29, 1997, are not necessarily indicative of the results to be expected for the full year. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. NATURE OF BUSINESS G&K Services, Inc. (the Company) is a full service uniform rental provider, including the rental of cleanroom garments. The Company also provides rental of non-uniform items such as floormats, dustmops and cloths, wiping towels and selected linen items. In addition, the Company manufactures uniforms for rental customers as well as uniforms for direct sale. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany balances and transactions have been eliminated in consolidation. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company in the management of its interest rate exposure. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The related amounts payable to, or receivable from, the counter-parties are included in other accrued expenses. The fair value of the swap agreements is not recognized in the Consolidated Financial Statements, since they are accounted for as hedges. PER SHARE DATA In the second quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share," which is effective for interim periods ending after December 15, 1997. As a result, all prior period earnings per share data has been restated. The adoption of SFAS No. 128 did not have a significant impact on previously reported earnings per share. Basic earnings per common share was computed by 5 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.
Three Months Ended Nine Months Ended --------------------------------------------------------- March 28, March 29, March 28, March 29, 1998 1997 1998 1997 --------------------------------------------------------- Weighted average number of common shares outstanding 20,367 20,327 20,367 20,327 --------------------------------------------------------- Shares used in computation of basic earnings per share 20,367 20,327 20,367 20,327 Weighted average effect of non-vested restricted stock grants 48 40 41 35 Weighted average common shares issuable upon the exercise of options & other 31 43 31 43 Shares used in computation of --------------------------------------------------------- diluted earnings per share 20,446 20,410 20,439 20,405 --------------------------------------------------------- ---------------------------------------------------------
RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the 1998 presentation. These reclassifications have no effect on net income or total stockholders' equity as previously reported. RECENT ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (Statement No. 130), issued in June 1997 and effective for fiscal years beginning after December 15, 1997, requires the Company to report and display comprehensive income and its components. Comprehensive income is defined as changes in equity of a business enterprise during a period except those resulting from investments by owners and distributions to owners. The Company will adopt this statement in fiscal 1999. 2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS On July 14, 1997 the Company purchased the uniform rental assets and selected linen rental assets of National Linen Service, Inc. (NLS) for approximately $279 million in cash. The Company's acquisition of rental operations was accounted for by using the purchase method. The purchase price was allocated to the acquired assets and assumed liabilities based on the preliminary determination of the fair values of the assets purchased and the liabilities assumed. The purchase price and related acquisition costs exceed the tentative fair values assigned to tangible assets by approximately $153.6 million, which excess may be amortized for the restrictive covenant over the contract life of five years, for the purchased customer lists over eleven years and for goodwill over thirty-five years. In connection with the asset purchase from NLS, it is G&K's intent to hold for sale nine linen rental facilities. As such, the net cash flows from (a) operations of these facilities from the date of acquisition until the date of sale (holding period, not to exceed one year), (b) interest on incremental debt incurred during the holding period to finance the purchase of these facilities, and (c) proceeds from the sale will be considered in the allocation of the purchase price to the assets and liabilities. Accordingly, 6 earnings or losses from these nine facilities are excluded from the earnings reported for the Company. For the three month period ended March 28, 1998, losses excluded from the Company's Statement of Income totaled $412,000, including allocated interest expense of $1,103,000. For the nine month period ended March 28, 1998, losses excluded from the Company's Statement of Income totaled $169,000, including allocated interest expense of $3,134,000. The following unaudited pro forma condensed results of operations for the three and nine month periods ended March 28, 1998 and March 29, 1997 have been prepared as if the NLS transaction occurred on June 29, 1997 and June 30, 1996, respectively (in thousands, except per share amounts),
Nine Months Ended March 28, 1998 March 29, 1997 -------------- -------------- Revenues $379,332 $350,398 Income from Operations 53,678 46,965 Net Income 23,160 20,012 Basic Earnings per common share $ 1.14 $ 0.98 Diluted Earnings per common share $ 1.13 $ 0.98
This financial information does not purport to represent results which would actually have been obtained if the asset acquisition had been in effect on June 29, 1997 and June 30, 1996 or any future results which may in fact be realized. 3. DEBT The Company maintains a $425 million credit facility. The credit facility includes (a) a $300 million term loan with maturity for years subsequent to June 28, 1997 of $10,000,000, $15,000,000, $35,000,000, $55,000,000, $60,000,000, and $125,000,000 thereafter, with final maturity on June 30, 2004, and (b) a $125 million revolving credit facility expiring on June 30, 2002. As of March 28, 1998, borrowings outstanding under the term loan were $290,901,000 and under the revolving credit facility were $42,584,000. The unused portion of the revolver may be used for working capital and to provide up to $10,000,000 in letters of credit. Borrowings under the term loan and revolving credit facility bear interest at 0.5% to 1.125% over the rate offered to major banks in the London Interbank Eurodollar market ("Eurodollar Rate"), or Canadian Prime for Canadian borrowings, based on a leverage ratio calculated on a quarterly basis. Advances outstanding as of March 28, 1998 bear interest at the Eurodollar Rate or Canadian Prime Rate plus 0.95%. The Company also pays a fee of 0.15% to 0.35% on the unused daily balance of the revolver based on a leverage ratio calculated on a quarterly basis. The fee as of March 28, 1998 was 0.30%. As of September 27, 1997, the Company had entered into interest rate swap agreements with certain lenders providing bank financing. The Company entered into an agreement for the notional principal amount of $100 million through September 12, 2000 that effectively fixed the interest rate on floating rate debt at a rate of 6.24%. The Company also entered into an agreement for the notional principal amount of $50 million through September 12, 1999 that effectively fixed the interest rate on floating rate debt at a rate of 6.065%, unless the Eurodollar Rate increases by more than 25 basis points within any one quarter, in which the Company retains the risk in any increase in rates over 25 basis points. The new credit facility contains various restrictive covenants which among other matters, require the Company to maintain a minimum EBITDA, minimum debt service coverage ratio, minimum 7 stockholder equity and maximum leverage ratio, all as defined. The credit agreement also limits additional indebtedness, investments, capital expenditures and cash dividends. The Company's obligations under the credit facility are collateralized by an interest in the Company's personal property, 100% of the stock of G&K Services, Co. and other domestic subsidiaries and 65% of the stock of the Company's Canadian subsidiaries. As of March 28, 1998, the Company was in compliance with all debt covenants. 4. ASSETS HELD FOR SALE On January 16, 1998, the Company sold selected linen assets classified as Assets Held for Sale on the balance sheet for approximately $2.4 million in cash. These assets, including original purchase goodwill, had a book value of approximately $2.4 million. On May 1, 1998, the Company sold selected linen assets and uniform rental assets for approximately $75.0 million in cash, subject to certain post-closing purchase price adjustments. This sale included assets classified as Assets Held for Sale on the balance sheet having a book value of approximately $53.7 million and other operating assets having a book value of approximately $21.3 million. Proceeds from the sale will be used to reduce the Company's outstanding bank debt. This transaction completes the sale of eight of the nine linen facilities acquired from NLS that were held for sale. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The percentage relationships to total revenues of certain income and expense items for the three and nine month periods ended March 28, 1998 and March 29, 1997, and the percentage changes in these income and expense items between periods are contained in the following table:
PERCENTAGE OF NET SALES THREE MONTHS NINE MONTHS PERCENTAGE ENDED ENDED CHANGE ------------------------------------------------------ ---------------------------- Three Months Nine Months March 28, March 29, March 28, March 29, FY 1998 FY 1998 1998 1997 1998 1997 vs. FY 1997 vs. FY 1997 ------------------------------------------------------ ---------------------------- Revenues: Rental 96.5% 95.4% 96.3% 95.2% 45.7% 46.1% Direct 3.5 4.6 3.7 4.8 10.4 10.3 ------------------------------------------------------ Total Revenues 100.0 100.0 100.0 100.0 44.1 44.3 Expenses: Cost of Rental Sales 58.4 54.3 58.0 54.4 56.9 55.8 Cost of Direct Sales 72.4 75.0 71.7 75.5 6.4 4.9 ------------------------------------------------------ Total Cost of Sales 58.9 55.2 58.5 55.4 53.7 52.4 Selling and Administrative 19.7 23.5 20.2 23.2 21.2 25.5 Depreciation 5.4 5.8 5.2 5.6 34.3 32.6 Amortization of Intangibles 1.8 0.7 1.9 0.7 272.4 323.1 ------------------------------------------------------ Income from Operations 14.2 14.8 14.2 15.1 37.5 36.0 Interest Expense 4.3 1.8 4.3 1.9 247.3 237.6 Other (Income) Expense, net (0.4 ) (0.6 ) (0.3 ) (0.4 ) 1.8 30.0 ------------------------------------------------------ Income Before Income Taxes 10.3 13.6 10.2 13.6 8.9 8.3 Provision for Income Taxes 4.0 5.3 4.0 5.3 10.1 8.9 ------------------------------------------------------ Net Income 6.3% 8.3% 6.2% 8.3% 8.2% 7.9% ------------------------------------------------------ ------------------------------------------------------
Total revenues for the third quarter of fiscal 1998 increased 44.1% to $127.5 million from $88.5 million in the third quarter of fiscal 1997 and increased 44.3% to $374.2 million for the first nine months of fiscal 1998 from $259.2 million in the same period of fiscal 1997. Revenue attributable to the acquisition of certain assets of National Linen Service (NLS) was $30.4 million for the quarter and $87.4 million for the nine month period. Excluding this increase and excluding prior year Toronto Linen operations which were sold in fiscal 1997, the revenue growth was 10.7% for the quarter and 11.7% for the first nine months of fiscal 1998. Rental revenue growth for the third quarter accounted for $38.6 million, or a 45.7% increase and for the first nine months accounted for $113.6 million, or a 46.1% increase. U.S. and Canadian annual rental revenues increased 11.3% and 10.0%, respectively for the third quarter and increased 12.3% and 11.2% respectively, for the first nine months (excluding revenues from assets acquired from NLS and revenues from Toronto Linen). The improvement is primarily attributable to cleanroom and national account sales as well as steady growth in the Company's traditional garment leasing operations. Total direct sales to outside customers increased 10.4% to $4.5 million for the third quarter of fiscal 1998 compared to $4.0 million in the same period of fiscal 1997. Total direct sales to outside customers increased 10.3% to $13.8 million for the first nine months of fiscal 1998 from $12.6 million in the same period of fiscal 1997. This increase is largely attributable to the success of a seasonal promotion and increases in catalog sales. Cost of direct sales, as a percentage of direct sales, decreased to 72.4% for the third quarter of fiscal 1998 from 75.0% for the same period of fiscal 1997 and decreased to 71.7% for the first nine months of fiscal 1998 from 75.5% for the same period of fiscal 1997. 9 Cost of rental operations increased 56.9% to $71.9 million for the third quarter of fiscal 1998 from $45.8 million in the same period of fiscal 1997 and rose 55.8% to $209.1 million for the first nine months of fiscal 1998 from $134.2 million in the same period of fiscal 1997. As a percentage of rental revenues, these costs increased to 58.4% for the third quarter of fiscal 1998 compared to 54.3% for the same period in fiscal 1997 and increased to 58.0% for the first nine months of fiscal 1998 from 54.4% in the same period of fiscal 1997. The Company attributes the increase primarily to merchandise and production costs at the new locations acquired in the NLS transaction. Selling and administrative expenses increased 21.2% to $25.1 million in the third quarter of fiscal 1998 from $20.8 million in the same period in fiscal 1997 and increased 25.5% to $75.5 million for the first nine months of fiscal 1998 from $60.2 million in the same period in fiscal 1997. As a percentage of revenues, selling and administrative expenses decreased to 19.7% in the third quarter of fiscal 1998 from 23.5% in the same period in fiscal 1997 and decreased to 20.2% in the nine month period of fiscal 1998 from 23.2% in the same period in fiscal 1997. The decline as a percent of sales is due to several factors, including lower selling expenses in the newly acquired NLS locations and leveraging of corporate costs following the NLS transaction. Depreciation expense increased 34.3% to $6.9 million in the third quarter of fiscal 1998 from $5.1 million in the same period of fiscal 1997 and increased 32.6% to $19.3 million for the first nine months of fiscal 1998 from $14.6 million in the same period of fiscal 1997. As a percentage of consolidated revenue, depreciation expense decreased to 5.4% in the third quarter of fiscal 1998 from 5.8% for the same period in fiscal 1997 and decreased to 5.2% for the nine month period of fiscal 1998 from 5.6% for the same period in fiscal 1997. This decrease is caused by timing of anticipated current year capital expenditures, maturing of startup operations and depreciation on acquired NLS assets based on fair market valuations. Capital expenditures for the quarter, excluding acquisition of businesses, was $11.1 million compared to $7.6 million in the prior year's quarter, and for the nine month period they were $29.0 million compared to $25.6 million in the prior year. Amortization expense increased to $2.3 million in the third quarter of fiscal 1998 from $.6 million in the second quarter of fiscal 1997 and increased to $7.1 million in the first nine months of fiscal 1998 from $1.7 million in the same period of fiscal 1997. This increase is attributable to the acquisition of NLS assets. Operating income increased 37.5% to $18.0 million in the third quarter of fiscal 1998 from $13.1 million in the same period of fiscal 1997 and increased 36.0% to $53.2 million for the first nine months of fiscal 1998 from $39.1 million in the same period of fiscal 1997. Operating margins decreased to 14.2% for the third quarter of fiscal 1998 from 14.8% in the same period of fiscal 1997 and decreased to 14.2% for the nine month period of fiscal 1998 from 15.1% in the same period of fiscal 1997. U.S. operating margins declined to 12.7% for the third quarter of fiscal 1998 from 13.7% in the same period of fiscal 1997 and declined to 12.7% for the nine month period of fiscal 1998 from 14.1% in the same period of fiscal 1997. Interest expense was $5.4 million for the third quarter of fiscal 1998, up from $1.6 million in the same period of fiscal 1997 and was $16.3 million for the first nine months of fiscal 1998, up from $4.8 million in the same period of fiscal 1997. This was largely due to additional borrowings to finance the NLS acquisition. The Company's effective tax rate increased to 39.3% in the third quarter of fiscal 1998 from 38.8% in the same period of fiscal 1997 and it increased to 39.3% in the nine month period of fiscal 1998 from 39.1% in the same period of fiscal 1997. Net income rose 8.2% to $8.0 million in the third quarter of fiscal 1998 from $7.4 million in the same period of fiscal 1997 and rose 7.9% to $23.2 million in the first nine months of fiscal 1998 from $21.5 million in the same period of fiscal 1997. Basic and diluted earnings per share for the third quarter were $.39 per share compared with $.36 for the prior year quarter. Basic and diluted earnings per share for the first nine months of fiscal 1998 increased to $1.14 from basic earnings per share of $1.06 and diluted earnings per share of $1.05 in the same period of fiscal 1997. Net income margins decreased to 6.3% for the third quarter of fiscal 1998 compared with 8.3% in the third quarter of fiscal 1997 and decreased to 6.2% for the nine month period of fiscal 1998 compared with 8.3% in the nine month period of fiscal 1997. 10 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities increased to $23.6 million in the third quarter of fiscal 1998 from $7.9 million in the same period of fiscal 1997 and increased to $55.4 million in the first nine months of fiscal 1998 from $25.1 million in fiscal 1997. The fiscal 1998 increase resulted from increases in net income and depreciation and amortization while the decrease in accounts receivable and prepaid expenses was greater in the third quarter of fiscal 1998 when compared to the third quarter of 1997. Working capital at March 28, 1998 was $72.2 million, up 92.3% from $37.5 million at March 29, 1997. The increase reflects the acquisition of NLS assets. Cash used in financing activities was $16.2 million in the third quarter of fiscal 1998 and $1.0 million in the same period of fiscal 1997. Cash provided by financing activities was $250.1 million in the nine month period of fiscal 1998 and cash used for financing activities was $2.7 million in the same period of fiscal 1997. $355.8 million of cash was obtained by issuing debt in the first quarter of fiscal 1998 primarily for the acquisition of selected assets of NLS. The Company's ratio of debt to total capitalization increased from 31.9% at June 28, 1997 to 63.7% at the end of March 1998. Cash used in investing activities was $8.2 million in the third quarter of fiscal 1998 and $7.8 million in the same period of fiscal 1997. Cash used in investing activities was $303.3 million in the nine month period of fiscal 1998 and $28.0 million in the same period of fiscal 1997. The increase is primarily due to the acquisition of the NLS assets. The Company utilizes software and related technologies throughout its businesses that will be affected by the date change in the year 2000. G&K is completing an extensive review of its business to determine whether or not its software and related technologies are year 2000 compliant, as well as the remedial action and related costs associated with required modifications or replacements. A significant amount of information has been collected and analyzed as a part of this review; however, the process will not be completed until the end of the first quarter of fiscal year 1999. The Company has begun to implement solutions and to incur expenses in fiscal 1998 to resolve this issue. These expenses may be significant and continue through the year 1999. Maintenance or modification costs will be expensed as incurred, while the costs of any new software will be capitalized over the software's useful life. G&K is also contacting critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 capable or to monitor their progress toward year 2000 capability. There can be no assurance that another company's failure to ensure year 2000 capability would not have an adverse effect on the Company. In connection with G&K's acquisition of selected assets of NLS in July 1997, the Company entered into a new $425 million credit facility to fund the purchase price of the assets and refinance then existing indebtedness. The unused portion of the revolver may be used for working capital and to provide letters of credit. The new credit facility contains various restrictive covenants which, among other matters, require the Company to maintain a minimum EBITDA, minimum debt service coverage ratio, minimum stockholder equity and maximum leverage ratio, all as defined. The agreement also limits additional indebtedness, investments, capital expenditures and cash dividends. G&K's obligations under the credit facility are secured by an interest in the Company's personal property, 100% of the stock of G&K Services, Co. and other domestic subsidiaries and 65% of the stock of Canadian subsidiaries. Stockholders' equity grew 18.4% to $190.3 million at March 28, 1998, compared with $160.7 million at the end of the third quarter of 1997. G&K's return on average equity decreased to 12.9% in the nine month period of fiscal 1998 compared with 14.3% for the same period of fiscal 1997. Management believes that cash flows generated from operations and its credit facilities should provide adequate funding for its current businesses and planned expansion of operations or any future acquisitions. Statements in this document regarding ongoing trends and expectations constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, but are not limited to, those expectations related to 11 the acquisition of assets from NLS; unforeseen operating risks; the availability of capital to finance planned growth; competition within the uniform leasing industry; and the effects of economic conditions. 12 PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 6. Exhibits and Reports on Form 8-K a. EXHIBITS Exhibit 27.1 - Financial Data Schedule, (for SEC use only) Exhibit 27.2 - Financial Data Schedule, Fiscal year ends 1995, 1996 and 1997, All Restated (for SEC use only) Exhibit 27.3 - Financial Data Schedule, Quarter 1 and 2 of Fiscal year 1998, Quarters 1, 2 and 3 of Fiscal year 1997, All Restated (for SEC use only) Exhibit 27.4 - Financial Data Schedule, Quarters 1, 2 and 3 of Fiscal year 1996, All Restated (for SEC use only) b. Reports on Form 8-K. None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G&K SERVICES, INC. (Registrant) Date: May 12, 1998 s/Timothy W. Kuck -------------------------------- ------------------------------ Timothy W. Kuck Chief Financial Officer (Principal Financial Officer) s/Michael F. Woodard ------------------------------ Michael F. Woodard Controller (Principal Accounting Officer) 14 EX-27.1 2 EXHIBIT 27-1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-27-1998 JUN-29-1997 MAR-28-1998 9,155 0 59,076 (2,262) 78,656 150,186 321,599 (127,541) 605,235 78,007 0 0 0 10,245 180,019 605,235 374,158 374,158 218,993 320,935 (1,292) 2,457 5,418 13,126 5,155 7,971 0 0 0 7,971 1.14 1.14
EX-27.2 3 EXHIBIT 27-2
5 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. 1,000 YEAR YEAR YEAR JUL-01-1995 JUN-29-1996 JUN-28-1997 JUL-03-1994 JUL-02-1995 JUN-30-1996 JUL-01-1995 JUN-29-1996 JUN-28-1997 3,045 6,882 6,986 0 0 0 33,498 37,972 43,155 (824) (1,276) (1,324) 48,547 52,077 59,799 87,319 99,650 113,128 194,089 225,065 259,268 (79,638) (92,167) 109,547 253,333 281,989 311,965 42,449 49,813 72,261 0 0 0 0 0 0 0 0 0 10,205 10,219 10,231 108,324 130,427 158,756 253,333 281,989 311,965 262,481 305,414 350,914 262,481 305,414 350,914 152,091 171,831 196,009 226,378 260,170 298,203 (1,237) 64 (2,034) 734 2,117 1,760 7,076 7,964 6,846 30,264 37,216 47,899 11,978 14,496 18,897 18,286 22,720 29,002 0 0 0 0 0 0 0 0 0 18,286 22,720 29,002 .89 1.11 1.43 .89 1.11 1.42
EX-27.3 4 EXHIBIT 27-3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 3-MOS 6-MOS 9-MOS JUN-27-1998 JUN-27-1998 JUN-28-1997 JUN-28-1997 JUN-28-1997 JUN-29-1997 JUN-29-1997 JUN-30-1996 JUN-30-1996 JUN-30-1996 SEP-27-1997 DEC-27-1997 SEP-28-1996 DEC-28-1996 MAR-29-1997 3,415 9,844 1,638 2,230 1,279 0 0 0 0 0 57,508 67,745 41,218 44,296 42,475 (1,532) (1,532) (1,521) (1,831) (2,062) 75,831 78,693 53,651 56,787 57,887 143,706 164,046 99,375 106,259 103,520 188,831 310,466 235,903 244,258 250,895 (114,986) (120,698) (97,161) (101,555) (105,872) 597,268 615,398 287,561 297,389 297,577 68,971 81,212 52,454 68,471 65,989 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,233 10,233 10,220 10,223 10,231 165,897 171,394 137,550 143,860 150,432 597,268 615,398 287,561 297,389 297,577 118,426 246,687 83,310 170,748 259,213 118,426 246,687 83,310 170,748 259,213 68,382 143,887 46,063 94,812 143,668 101,611 211,508 70,629 144,738 220,084 (209) (792) (446) (503) (994) 795 1,501 526 1,243 1,810 4,767 10,881 1,723 3,268 4,828 12,257 25,090 11,404 23,245 35,295 4,812 9,858 4,453 9,108 13,789 7,445 15,232 6,951 14,137 21,506 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7,445 15,232 6,951 14,137 21,506 .37 .75 .34 .70 1.06 .36 .74 .34 .69 1.05
EX-27.4 5 EXHIBIT 27-4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS JUN-29-1996 JUN-29-1996 JUN-29-1996 JUL-02-1995 JUL-02-1995 JUL-02-1995 SEP-30-1995 DEC-30-1995 MAR-30-1996 2,583 6,118 1,010 0 0 0 33,430 33,734 36,289 (1,028) (1,359) (1,456) 49,434 51,109 50,743 90,126 98,820 91,253 203,522 212,932 219,988 (83,774) 87,454 91,449 261,514 272,792 269,542 40,915 39,917 41,225 0 0 0 0 0 0 0 0 0 10,205 10,205 10,215 114,264 119,527 124,585 261,514 272,792 269,542 70,954 141,711 223,520 70,954 141,711 223,520 40,319 83,429 126,603 60,396 124,374 190,361 (154) (327) (16) 552 1,049 1,629 2,181 4,337 6,246 8,531 17,658 26,930 3,344 6,896 10,456 5,187 10,762 16,474 0 0 0 0 0 0 0 0 0 5,187 10,762 16,474 .25 .52 .80 .25 .52 .80
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