SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 29, 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 April 20, 1997 Common Stock, par value $.50 per share 18,985,592 CLASS B Outstanding April 20, 1997 Common Stock, par value $.50 per share 1,474,996 G&K SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) MARCH 29 June 29 1997 1996 ------------- ------------- (UNAUDITED) (Audited) ASSETS CURRENT ASSETS Cash $ 1,279 $ 6,882 Accounts receivable, net 40,413 36,696 Inventories- New goods 16,489 16,942 Goods in service 41,398 35,135 Prepaid expenses 3,941 3,995 ------------- ------------ Total current assets 103,520 99,650 ------------- ------------ PROPERTY, PLANT AND EQUIPMENT Land 19,494 19,326 Buildings and improvements 66,474 61,756 Machinery and equipment 137,374 118,955 Automobiles and trucks 27,553 25,028 Less accumulated depreciation (105,872) (92,167) ------------- ------------ 145,023 132,898 ------------- ------------ OTHER ASSETS Goodwill 34,421 34,642 Restrictive covenants, customer lists, and other assets arising from acquisitions 6,566 6,860 Other, principally executive retirement plan assets 8,047 7,939 ------------- ------------ Total other assets 49,034 49,441 ------------- ------------ $ 297,577 $ 281,989 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 8,514 $ 13,068 Accrued expenses - Salaries and employee benefits 10,591 10,265 Other 10,368 7,151 Reserve for income taxes 8,274 10,280 Current maturities of debt 28,242 9,049 ------------- ------------ Total current liabilities 65,989 49,813 ------------- ------------ LONG TERM DEBT, NET OF CURRENT MATURITIES 54,164 75,143 DEFERRED INCOME TAXES 9,747 10,093 OTHER NONCURRENT LIABILITIES 7,009 6,293 ------------- ------------ STOCKHOLDERS' EQUITY Common stock, $.50 par Class A, 50,000,000 shares authorized, 18,985,159 and 18,915,725 shares issued and outstanding 9,493 9,458 Class B, 10,000,000 shares authorized, 1,474,996 and 1,521,121 shares issued and outstanding 738 761 Additional paid-in capital 19,881 19,758 Retained earnings 136,898 116,465 Cumulative translation adjustment (6,342) (5,795) ------------- ------------ Total stockholders' equity 160,668 140,647 ------------- ------------ $ 297,577 $ 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 For the Nine Months Ended -------------------------- ----------------------------- MARCH 29 MARCH 30 MARCH 29 MARCH 30 1997 1996 1997 1996 --------- ---------- --------- --------- REVENUES Rental operations $85,032 $75,117 $248,628 $216,828 Direct sales 3,433 2,361 10,585 6,692 --------- -------- --------- -------- Total revenues 88,465 77,478 259,213 223,520 --------- -------- --------- -------- EXPENSES Cost of rental operations 46,221 41,339 135,451 121,464 Cost of direct sales 2,635 1,835 8,217 5,139 Selling and administrative 20,753 17,507 60,178 48,740 Depreciation 5,118 4,679 14,559 13,116 Amortization of intangibles 619 627 1,679 1,902 --------- -------- --------- -------- Total expenses 75,346 65,987 220,084 190,361 --------- -------- --------- -------- INCOME FROM OPERATIONS 13,119 11,491 39,129 33,159 Interest expense 1,560 1,909 4,828 6,246 Other (income) expense, net (491) 310 (994) (17) --------- -------- --------- -------- INCOME BEFORE INCOME TAXES 12,050 9,272 35,295 26,930 Provision for income taxes 4,681 3,560 13,789 10,456 --------- -------- --------- -------- NET INCOME $7,369 $5,712 $21,506 $16,474 --------- -------- --------- -------- --------- -------- --------- -------- Weighted average number of shares outstanding 20,449 20,406 20,444 20,406 NET INCOME PER SHARE $0.36 $0.28 $1.05 $0.81 --------- -------- --------- -------- --------- -------- --------- -------- DIVIDENDS PER SHARE $0.0175 $0.0175 $0.0525 $0.0525 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 For the Nine Months Ended --------------------------- ------------------------- MAR 29, '97 MAR 30, '96 MAR 29, '97 MAR 30, '96 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,369 $ 5,712 $ 21,506 $ 16,474 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 5,736 5,306 16,237 15,018 Noncurrent deferred income taxes (106) (110) (331) (331) Change in current operating items- Inventories (1,178) 404 (5,916) (2,100) Accounts receivable and prepaid expenses 2,813 127 (3,767) (3,693) Accounts payable and other current liabilities (5,645) 722 (2,969) (1,295) Other, net (1,344) 552 (121) 1,530 ---------- ---------- ----------- ----------- Net cash provided by operating activities 7,645 12,713 24,639 25,603 ---------- ---------- ----------- ----------- CASH FLOWS FROM INVESTMENT ACTIVITIES: Property, plant and equipment additions, net (7,623) (7,639) (25,587) (27,008) Acquisitions of operating assets 0 0 (1,948) 0 ---------- ---------- ----------- ----------- Net cash used for investment activities (7,623) (7,639) (27,535) (27,008) ---------- ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 8 11 12 11 Proceeds from issuance of long-term debt 565 0 13,335 17,605 Repayments of long-term debt (1,187) (9,835) (14,980) (17,174) Cash dividends paid (359) (358) (1,074) (1,072) ---------- ---------- ----------- ----------- Net cash provided by (used for) financing activities (973) (10,182) (2,707) (630) ---------- ---------- ----------- ----------- INCREASE (DECREASE) IN CASH (951) (5,108) (5,603) (2,035) ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Cash: Beginning of the period 2,230 6,118 6,882 3,045 ---------- ---------- ----------- ----------- End of the period $ 1,279 $ 1,010 $ 1,279 $ 1,010 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS Page 4 G&K SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine month periods ended March 29, 1997 and March 30, 1996 (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 are adequate to make the information presented not misleading. It is suggested that these condensed 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 March 29, 1997, and June 29, 1996, and the results of operations for the three and nine months ended March 29, 1997 and March 30, 1996, and the changes in financial position for the three and nine month periods then ended. 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 and nine month periods ended March 29, 1997, 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 during the applicable period. 4. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," (SFAS 128), which changes the way companies calculate their earnings per share (EPS). SFAS 128 replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding, excluding potentially dilutive securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be disclosed. The Company is required to adopt SFAS 128 in the second quarter of fiscal 1998 at which time all prior period EPS are to be restated in accordance with SFAS 128. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS REVENUES Rental revenues from rentals and services totaled $85,032,000 and $75,117,000 for the third quarter of fiscal 1997 and 1996 respectively, and $248,628,000 and $216,828,000 for the first nine months of fiscal 1997 and 1996 respectively. Revenues for G&K's U.S. rental operations grew at 13.3% rate for the third quarter and 15% for the first nine months of fiscal 1997 when compared with the same periods last year. Increased new account sales, expansion of existing accounts, selective price increases, new market entries, and good customer retention rates helped achieve this result. Revenues for Canadian rental operations increased at a 12.7% rate for the third quarter and 13.0% rate for the first nine months of fiscal 1997 compared to the same periods last year. Revenues in Canadian dollars increased 11.9% for the third quarter and 12.8% for the first nine months when compared to the same periods last year. There were no significant changes in product mix or selling prices during the first nine months fiscal 1997. Revenues from direct sales totaled $3,433,000 and $2,361,000 for the third quarter fiscal 1997 and 1996 respectively. Revenues from direct sales totaled $10,585,000 and $6,692,000 for the first nine months of fiscal 1997 and 1996 respectively. Increase in direct sales is due to higher U.S. manufacturing division external revenues which utilize our manufacturing capacities above internal needs. . EXPENSES Cost of rental operations totaled $46,221,000 and $41,339,000 representing 54.4% and 55.0% of revenues from rental operations for the third quarter fiscal 1997 and 1996 respectively, and $135,451,000 and $121,464,000 representing 54.5% and 56.0% of revenues for rental operations for the first nine months of fiscal 1997 and 1996 respectively. These improvements are a result of decreased production and merchandise costs that come from efficiencies gained in the rental operations and manufacturing of rental garments. Costs of direct sales were $8,217,000 and $5,139,000 representing 77.6% and 76.8% of direct sales for the first nine months of fiscal 1997 and 1996 respectively. 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 $20,753,000 and $17,507,000 representing 23.5% and 22.6% of revenues for the third quarter of fiscal 1997 and 1996 respectively, and $60,178,000 and $48,740,000 representing 23.2% and 21.8% of revenues for nine months ended fiscal 1997 and 1996 respectively. The increase is primarily from the addition of new locations along with sales, marketing and training costs from continued development and maintenance of projects that maximize our continued internal sales growth rates. Depreciation expense equaled $5,118,000 and $4,679,000, for the third quarter of fiscal 1997 and 1996 respectively. Depreciation totaled $14,559,000 and $13,116,000 for nine months ended fiscal 1997 and 1996 respectively. The increase in depreciation of 9.4% and 11.0% respectively, is the result of investment of capital into new and existing locations. 6 Interest expense of $4,828,000 decreased 22.7% in the first nine months of fiscal 1997 when compared with the same period last year. The decrease is a result of lower average interest rates. Effective income tax rates were 39.3% and 38.9% in the first nine months of fiscal 1997 and 1996. NET INCOME Net income for the third quarter of fiscal 1997 totaled $7,369,000 representing a 29.0% increase compared with the same period in 1996. Net income for nine months of fiscal 1997 totaled $21,506,000 representing a 30.5% increase compared with the same period in 1996. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities were $24,639,000 in the first nine months of fiscal 1997 compared with $25,603,000 in the same period last year. The slight decrease is primarily the result of higher net income before depreciation and amortization, off-set by growth in inventory and accounts payable and other current liabilities. Net cash used for financing activities of $2,707,000 in the first nine 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 used in the first nine months of fiscal 1996 of $630,000 included a payment on senior notes payable of $6,197,000 and additional borrowing on the long term line of credit. 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: May 13, 1997 /s/ Richard Fink ------------------ --------------------------- Richard Fink Chairman of the Board 9 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 13, 1997 ------------------ --------------------------- Richard Fink Chairman of the Board 10