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 September 28, 1996 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 November 8, 1996 Common Stock, par value $.50 per share 18,922,846 CLASS B Outstanding November 8, 1996 Common Stock, par value $.50 per share 1,521,121 G&K SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) SEPT 28 June 29 1996 1996 ----------- --------- (UNAUDITED) (Audited) ASSETS CURRENT ASSETS Cash $ 1,638 $ 6,882 Accounts receivable, net 39,698 36,696 Inventories- New goods 17,494 16,942 Goods in service 36,157 35,135 Prepaid expenses 4,389 3,995 ----------- --------- Total current assets 99,376 99,650 ----------- --------- PROPERTY, PLANT AND EQUIPMENT Land 19,692 19,326 Buildings and improvements 65,420 61,756 Machinery and equipment 125,090 118,955 Automobiles and trucks 25,701 25,028 Less accumulated depreciation (97,161) (92,167) ----------- --------- 138,742 132,898 ----------- --------- OTHER ASSETS Goodwill 34,370 34,642 Restrictive covenants, customer lists, and other assets arising from acquisitions 7,147 6,860 Other assets 7,926 7,939 ----------- --------- Total other assets 49,443 49,441 ----------- --------- $ 287,561 $ 281,989 ----------- --------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 10,467 $ 13,068 Accrued expenses - Salaries and employee benefits 10,903 10,265 Other 9,053 7,151 Reserve for income taxes 12,982 10,280 Current maturities of debt 9,049 9,049 ----------- --------- Total current liabilities 52,454 49,813 ----------- --------- LONG TERM DEBT, NET OF CURRENT MATURITIES 70,770 75,143 DEFERRED INCOME TAXES 9,985 10,093 OTHER NONCURRENT LIABILITIES 6,581 6,293 ----------- --------- STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 18,919,725 and 18,915,725 shares issued and outstanding 9,460 9,458 Class B, 10,000,000 shares authorized, 1,521,121 shares issued and outstanding 761 761 Additional paid-in capital 19,870 19,758 Retained earnings 123,416 116,465 Cumulative translation adjustment (5,736) (5,795) ----------- --------- Total stockholders' equity 147,771 140,647 ----------- --------- $ 287,561 $ 281,989 ----------- --------- ----------- --------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS Page 2 G&K SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data) (Unaudited) For the Three Months Ended -------------------------- SEPT 28 SEPT 30 1996 1995 ----------- ----------- REVENUES Rental operations $ 80,013 $ 68,905 Direct sales 3,297 2,049 ----------- ----------- Total revenues 83,310 70,954 ----------- ----------- EXPENSES Cost of rental operations 43,482 38,913 Cost of direct sales 2,581 1,406 Selling and administrative 19,407 15,413 Depreciation 4,596 4,044 Amortization of intangibles 563 620 ----------- ----------- Total expenses 70,629 60,396 ----------- ----------- INCOME FROM OPERATIONS 12,681 10,558 Interest expense 1,723 2,181 Other (income) expense, net (446) (154) ----------- ----------- INCOME BEFORE INCOME TAXES 11,404 8,531 Provision for income taxes 4,453 3,344 ----------- ----------- NET INCOME $ 6,951 $ 5,187 ----------- ----------- ----------- ----------- Weighted average number of shares outstanding 20,439 20,405 NET INCOME PER SHARE $ 0.34 $ 0.25 ----------- ----------- ----------- ----------- Dividends per share $ 0.0175 $ 0.0175 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS Page 3 G&K SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) For the Three Months Ended -------------------------- SEPT 28, '96 SEPT 30, '95 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $6,951 $5,187 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 5,158 4,663 Noncurrent deferred income taxes (108) (110) Change in current operating items- Inventories (1,574) (666) Accounts receivable and prepaid expenses (3,396) (2,197) Accounts payable and other current liabilities 2,641 (1,695) Other, net 484 81 ----------- ------ Net cash provided by operating activities 10,156 5,263 ----------- ------ CASH FLOWS FROM INVESTMENT ACTIVITIES: Property, plant and equipment additions, net (9,079) (8,877) Acquisitions of operating assets (1,948) 0 ----------- ------ Net cash used for investment activities (11,027) (8,877) ----------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 2 0 Proceeds from issuance of long-term debt 7,190 9,525 Repayments of long-term debt (11,565) (6,374) ----------- ------ Net cash provided by (used for) financing activities (4,373) 3,151 ----------- ------ DECREASE IN CASH (5,244) (463) ----------- ------ ----------- ------ Cash: Beginning of the period 6,882 3,045 ----------- ------ End of the period $ 1,638 $ 2,582 ----------- ------ ----------- ------ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS Page 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three month period ended September 28, 1996 and September 30, 1995 (Unaudited) 1. The consolidated financial statements included herein, except for the June 29, 1996, balance sheet which was extracted from the audited financial statements of June 29, 1996, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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. 2. 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 September 28, 1996, and June 29, 1996, and the results of operations and the changes in financial position for the three months ended September 28, 1996 and September 30, 1995. The accounting policies followed by the Company are set forth in Note 1 to the Company's Annual Consolidated Financial Statements. The results of operations for the three month period ended September 28, 1996, and September 30, 1995, are not necessarily indicative of the results to be expected for the full year. 3. Net income per share is based on the weighted average number of shares of common stock outstanding. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS REVENUES FROM RENTALS AND SERVICES Revenues from rentals and services totaled $80,013,000 and $68,905,000 for the first three months fiscal 1997 and 1996. Revenues for G&K's U.S. rental operations grew at a 17.1% rate for the first three months of fiscal 1997 when compared with the same period last year. The 17.1% increase was realized with no material benefit of acquisitions. Increased new account sales, expansion of existing accounts, selective price increases, new market entries, and good customer retention rates helped us achieve this result. The 17.1% revenue growth rate is lower than the 17.6% increase reported in the first three months last year. Revenues for Canadian rental operations increased at a 11.1% rate for the first three months of fiscal 1997 compared to the same periods last year. Revenues in Canadian dollars increased 12.3% for the first three months when compared to the same period last year. There were no significant changes in rental product mix or selling prices during the first three months of fiscal 1997. Revenues from direct sales totaled $3,297,000 and $2,049,000 for the first three months of fiscal 1997 and 1996. Increase in direct sales is due to higher U.S. Manufacturing division external revenues. EXPENSES Cost of rental operations were $43,482,000 and $38,913,000 representing 54.3% and 56.5% of revenues from rentals and operations for the first three months of fiscal 1997 and 1996. These improvements are a result of decreased production and merchandise costs within the rental operations. Cost of direct sales were $2,581,000 and $1,406,000 representing 78.3% and 68.6% of direct sales revenues for the first three months of fiscal 1997 and 1996. The increase in cost of direct sales as a percent of revenues is due to reduced gross margins on outside sales. Selling and administrative expenses were $19,407,000 and $15,413,000 in the first three months of fiscal 1997 and 1996. As a percentage of revenues, these expenses were 23.3% and 21.7% in 1997 and 1996 respectively. The primary increase in Sales, Marketing and training costs are due to the continued development and maintenance of projects that maximize our continued internal sales growth rates. Depreciation expense equaled $4,596,000 and $4,044,000, for the three months in fiscal 1997 and 1996, respectively. The increase in depreciation of 13.6% is the result of increased capital spending. Interest expense of $1,723,000 decreased 21% in the first three months of fiscal 1997 when compared to the same period last year. The decrease is from lower average borrowing levels and lower average interest rates. 6 Effective income tax rates were 39% and 39.2% in the first three months of fiscal 1997 and 1996. The decrease resulted from a lower effective rate in Canada offset by a slightly higher U.S. effective rate. NET INCOME Net income for the first three months of fiscal 1997 totaled $6,951,000 representing a 34% increase compared with the same period in 1996. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities were $10,154,000 in the first three months of fiscal 1997 compared with $5,263,000 in the same period last year. The increase is primarily the result of higher net income before depreciation and amortization expense along with favorable changes in certain current operating items. Net cash used for financing activities of $4,371,000 in the first three months of fiscal 1997 included the repayment of Senior notes payable of $9,000,000 offset by additional borrowing on the long term line of credit. Net cash provided in the first three months of fiscal 1996 of $3,151,000 included payments on Senior notes payable of $6,197,000. Management believes that funds generated from operations and existing lines of credit should provide adequate funding for current business operations and debt service requirements. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending, financial sources and the effects of regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect future results and, accordingly, such results may differ from those expressed in any forward-looking statement made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and business activities, dependence on existing management, domestic or global economic conditions, changes in federal or state laws or the administration of such laws, as well as all other risks and uncertainties described in the Company's filings. 7 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS Exhibit 27 - Financial Data Schedule (for SEC use only) b. Reports on Form 8-K. Not Applicable. 8 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: November 11, 1996 s/ Stephen F. LaBelle ------------------------- ------------------------ Stephen F. LaBelle Secretary and Treasurer (Chief Financial Officer) 9