UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
For the Fiscal Year Ended June 28, 1997
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
--------------- -------------------------------
(State of incorporation) (I.R.S Employer Identification No.)
5995 OPUS PARKWAY, STE. 500
MINNETONKA, MINNESOTA 55343
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(Address of principal executive offices)
Registrant's telephone number, including area code (612) 912-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (par value $0.50 per share)
Class B Common Stock (par value $0.50 per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes . No X .
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The aggregate market value of the voting stock of registrant held by non-
affiliates of registrant, on September 12, 1997, computed by reference to the
closing sale price of such shares on such date, was approximately $716,296,875.
On September 12, 1997, there were outstanding 18,990,629 and 1,474,996
shares of the registrant's Class A and Class B Common Stock, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
- -------- ------------------------
Portions of proxy statement for the annual
meeting of stockholders to be held
October 30, 1997 Parts I and III
PART I
ITEM 1. BUSINESS
G&K Services, Inc. and its wholly owned subsidiaries (the Company or
G&K) was formed in 1902. G&K and its subsidiaries are full service uniform
rental providers, including the rental of cleanroom garments. The Company also
provides rental of non-uniform items such as floor mats, dust mops and cloths,
wiping towels and selected linen items. In addition, the Company manufactures
uniform garments which it uses to support rental customers and sell on a direct
sale basis.
The Company has been steadily expanding its operations into additional
geographic markets. In the United States, G&K currently operates in 32 states
from over 90 locations. In Canada, the Company serves customers from 15
locations in the provinces of Ontario and Quebec. By comparison, in 1987, G&K
operated from 40 locations in 21 states.
The Company targets its marketing efforts first to focus on those
customers, industries and geographic locations that are expanding and which need
a quality-oriented uniform program; and then to provide high levels of product
quality, customer service and communication. The Company's experience with both
existing and potential customers confirms that a large segment of the market
wants these features built into their uniform programs and are willing to pay a
premium price to a vendor that can supply them consistently.
PRODUCTS
The Company's full-service leasing program supplies a broad range of
work garments, specialized uniforms for corporate identity programs, anti-static
garments, ultra-clean particle-free garments, and dress clothing for
supervisors, sales personnel and others needing upgraded work apparel.
Its products are used in a diversified spectrum of businesses
including: pharmaceutical and electronics manufacturers, transportation and
distribution firms, health care and food service operations, auto dealerships,
equipment repair companies, and schools and office buildings.
The Company believes that Uniform programs may provide customers with
a number of benefits:
- Identification - uniforms help identify employees as working for
a particular company or department.
- Image - uniforms enhance the public appearance of employees and
help create a more professional image for the customer.
- Worker protection - uniforms help protect workers from difficult
environments such as heavy soils, heat, flame or chemicals.
- Product protection - uniforms help protect products against
contamination in the food, pharmaceutical, electronics and health
care industries.
- Employee morale - uniforms can provide a valued benefit to
employees and help improve morale.
The Company provides its uniform leasing customers with a full range
of services. Advice and assistance are offered in choosing fabrics, styles and
colors appropriate to the customer's specific needs. A large stock of new and
used garments is available to provide rapid response as individual customer
needs change due to increases, decreases or turnover in their work force.
Professional cleaning, finishing, repair and replacement of uniforms in use is a
normal part of the rental service. Soiled uniforms are picked up at the
customer's location and returned clean on a weekly cycle.
The Company also believes that uniform leasing may provide customers
with significant advantages over ownership. Leasing eliminates investment in
uniforms; offers flexibility in styles, colors and quantities as customer
requirements change; assures consistent professional cleaning, finishing, repair
and replacement of items in use; and provides freedom from the expense and
management time necessary to administer a uniform program.
Most of the Company's customers also lease items other than uniforms,
primarily floor mats, dust mops and cloths, wiping towels and linens. Floor
mats are used to protect facilities from dust, grease, moisture and other
hazards, and
2
can also enhance decor, provide a corporate identity logo, or improve traffic
safety. Dust mops, cloths and wiping towels are chemically treated to attract
and hold dirt, and are provided in a range of sizes. The Company's wiping
towels are used by its customers for numerous wiping and cleaning tasks in
varied settings. Selected linen items, primarily aprons and towels, are used
for sanitary, or cleaning jobs.
In September, 1994, G&K purchased certain assets of Bauman Carter
Patterson Corporation (BCP) for $8.8 million. BCP manufactures industrial and
commercial garments for the Company's own general inventory and for direct sale
to third parties under contract.
CUSTOMERS
The Company's customer base includes divisions of more than half of
the Fortune 100 companies as well over 90,000 smaller businesses. No one
customer accounts for over 1% of the Company's total revenues.
COMPETITION
The Company's business encounters a high level of competition with a
number of companies in the geographic areas it serves. The Company ranks among
the nation's largest garment rental suppliers. Major competitors include
AraMark (a division of ARA Services, Inc.), and such publicly held companies as
National Service Industries, Inc., Unifirst Corporation, Unitog Company and
Cintas Corporation. Many of the Company's competitors have greater financial
resources than G&K. The Company believes that it competes effectively in its
line of business because of the quality and breadth of its product line, and the
comprehensive customer service programs it offers.
ENVIRONMENTAL MATTERS
The Company generates modest amounts of wastes in connection with its
operations. The Company believes that all of these wastes have been disposed of
properly. Some of these wastes may be classified as hazardous wastes under
recently enacted environmental legislation.
The Company has been identified as a potentially responsible party
(PRP) pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or similar state laws, at a number of waste
disposal sites. Under such laws, PRP's typically are jointly and severally
liable for any investigation and remediation costs incurred with respect to such
sites. The Company's ultimate responsibility, therefore, could be greater than
the share of waste contributed by the Company would otherwise indicate.
The Company has entered into administrative agreements at certain of
these sites to perform remedial actions. At the landfill in Andover, Minnesota,
the cost of remediation is estimated to range from $10 million to $15 million.
As one of numerous PRP's, the Company has entered into a Consent Decree and has
paid $160,000. The Company believes that it has no further responsibility for
site remediation at the Andover Landfill based upon the Consent Decree.
The Company has also entered into a Consent Decree involving the
landfill site in East Bethel, Minnesota as one of 56 PRP's. The Company was
sued by the landfill operator, Sylvester Bros. Development Company, for
contribution to the cost of cleaning up this site pursuant to directives from
the Minnesota Pollution Control Agency (MPCA) or the Environmental Protection
Agency (EPA). Based upon an estimate that the total cleanup of the site will
not exceed $7,095,980, the Company has agreed to pay an initial amount of
$190,500. In addition, the Company has agreed to pay its pro rata share of any
additional amounts by which the actual clean up costs exceed the initial total
cost estimate. Whether this will occur depends upon a number of contingencies,
therefore any potential future liability is uncertain.
The Company has been placed on notice by the owners of a St. Paul,
Minnesota shopping center that certain solvents have been detected in the soils
near the shopping center. The owner of the shopping center has alleged that the
source of the solvents is from a coin operated business that was owned for a
period of time in the mid-1960's by a corporation, the shares of which were
partially owned by the Company. Certain limited discovery has disclosed that at
least one other business in the area used the same solvent which is claimed to
be present in the soil. No action has yet to be commenced against the Company
and the Company has not agreed to participate in any clean-up at the site.
Since relatively little information is available at this time, it is impossible
to predict what, if any, liability may ultimately be assigned to the Company.
3
The Company has also received a letter from the MPCA which claims that
solvents have been detected in the soils near a facility that was owned by the
Company from the late 1940's until the early 1970's. Neither the extent of the
solvents in the soils nor the source of the solvents are known to the Company.
The Company has agreed to participate in a Voluntary Investigation and Cleanup
Program through the MPCA, but is unable to provide any estimate of the
remediation costs at this time since the investigation has not been completed.
The Company expects to reach an agreement with the MPCA with respect to a
remediation plan. Therefore, no litigation is expected to commence against the
Company in connection with this matter.
The Company has been placed on notice by the owners of a Wayzata,
Minnesota shopping center regarding the alleged presence of solvents in the
ground water in the vicinity of the shopping center, where certain affiliates of
the Company formerly operated a dry cleaning establishment in the shopping
center. At this time, no demand has been made and no action has been commenced
against the Company. The owners of the shopping center have informed the
Company that they are pursuing clean-up through State funding mechanisms. Since
little information is available at this time, it is impossible to predict what,
if any, liability the Company may have in this matter.
EMPLOYEES
The Company's U.S. operations had a total of 4,873 employees as of June
28, 1997, consisting of 201 professional sales personnel, 839 route personnel,
2,546 production employees, 654 clerical employees and 633 management and staff
employees. Approximately 15% of the Company's employees are represented by
unions. Management believes its domestic employee relations are satisfactory.
The Company's Canadian operations had a total of 793 employees as of
June 28, 1997 consisting of 29 professional sales personnel, 143 route
personnel, 338 production employees, 154 clerical employees and 129 management
and staff employees. Approximately 75% of the Company's Canadian employees are
represented by unions. Management believes Canadian employee relations are
satisfactory.
FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operation is
set forth in Note 7 of the G&K financial statements included in Item 8 of this
Form 10-K.
ITEM 2. PROPERTIES
The Company cleans and supplies rental items principally from twenty-
four industrial garment, dust control and linen supply plants located in the
following cities in the United States:
Building
City Square Footage
- ---------------------------------------------------------------
Albuquerque, New Mexico (two plants) 38,800
10,300
Atlanta, Georgia 40,000
Chicago, Illinois 48,700
Dallas, Texas 36,000
Denver, Colorado 56,200
Fort Worth, Texas 38,000
Green Bay, Wisconsin 51,700
Houston, Texas 39,820
Indianapolis, Indiana 45,400
Kansas City, Missouri 44,220
Los Angeles, California 48,300
4
Mesa, Arizona 36,000
Ft. Lauderdale, Florida 51,100
Milwaukee, Wisconsin 44,220
Minneapolis, Minnesota (two plants) 70,000
93,000
Mobile, Alabama 47,300
New Orleans, Louisiana 29,000
Pittsburg, California 47,000
Portland, Oregon 16,200
Rockford, Illinois 32,000
St. Cloud, Minnesota 45,400
Salt Lake City, Utah 41,500
San Antonio, Texas 40,700
San Jose, California 58,600
Seattle, Washington 95,400
Tempe, Arizona 13,300
All of these facilities are owned by the Company except Albuquerque, New Mexico
(10,300 sq. ft.); Dallas, Texas; Portland, Oregon; and Tempe, Arizona, which are
leased.
The Company also operates principally from six plants located in the
following cities in Canada:
Building
City Square Footage
- ---------------------------------------------------------------
Toronto, Ontario
(Metro East) 49,000
Montreal, Quebec 25,500
Cambridge, Ontario 57,600
Ottawa, Ontario 35,000
Windsor, Ontario 42,900
Sault St. Marie, Ontario 23,700
All of these facilities are owned by the Company, except the Ottawa and Windsor
facilities, which are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation incidental to the business of the Company and as set forth in Item 1.
Business - Environmental Matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
the Company during the fourth quarter fiscal 1997.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The common stock is quoted on NASDAQ National Market System under the
symbol "GKSRA". The following table sets forth the high and low reported sales
prices for the Common Stock as quoted on the NASDAQ National Market System for
the periods indicated.
HIGH LOW
- --------------------------------------------------
FISCAL 1997
1st Quarter 30 5/8 23 1/2
2nd Quarter 36 3/8 28 1/8
3rd Quarter 37 3/4 30
4th Quarter 37 29
- --------------------------------------------------
FISCAL 1996
1st Quarter 25 18 3/4
2nd Quarter 25 3/4 22 1/4
3rd Quarter 28 23 3/8
4th Quarter 32 26 1/4
- --------------------------------------------------
As of September 12, 1997, the Company had approximately 629 registered
stockholders.
The Company has declared cash dividends of $0.0175 per share in each
of the quarters for the fiscal years ended June 28, 1997 and June 29, 1996. The
Company's debt agreements contain various restricted covenants, among other
things, which limit the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data. All
amounts are in thousands, except per share data.
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
Net Sales $350,914 $305,414 $262,481 $225,229 $207,904
Income from Operations 52,711 45,244 36,103 29,751 24,994
Per Share Data:
Net Sales 17.16 14.96 12.88 11.07 10.25
Income from Operations 1.42 1.11 0.90 0.73 0.55
Dividends 0.07 0.07 0.07 0.07 0.07
Total Assets 311,965 282,520 253,333 205,064 201,822
Long-Term Debt 54,284 75,143 76,519 54,676 59,803
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(THIS SPACE INTENTIONALLY LEFT BLANK)
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In fiscal 1997, G&K, now the third largest competitor in the $4.6
billion uniform leasing industry, achieved 14.9% revenue growth; 27.6% increase
in net income; 28.7% increase in pre-tax margin; and realized an 18.7% return on
average equity. G&K's record of strong financial performance results from an
effective, consistent growth strategy to meet the diverse needs of customers in
the industrial uniform market.
For the latest five year period, revenues grew 12.5%, compounded
annually. This is slightly below the Company's objectives of maintaining a long-
term revenue growth rate of 15%. G&K's performance is attributable to a well-
developed, well-executed strategy for internal growth, which includes
development of start-up facilities, the generation of new business and account
expansion by its professional and route sales force, effective sales staff
recruiting and training, new product introductions, and innovative marketing
programs. The Company's strategies also include attaining increased market
penetration and an expanded customer base through acquisition.
Net income's five year growth rate was 27.6%, compounded annually.
The Company's investments in new technologies are paying off with increased
productivity and reduced labor expenses. Better merchandise control and lower
processing costs are contributing to bottom-line growth, while garment
manufacturing facilities enhanced product quality and decreased merchandise
costs.
The percentage relationships to net sales of certain income and
expense items for the three fiscal years ended June 28, 1997, June 29, 1996 and
July 1, 1995, and the percentage changes in these income and expense items
between years are contained in the following table:
PERCENTAGE OF NET SALES PERCENTAGE CHANGE
YEARS ENDED BETWEEN YEARS
---------------------------------------------------- ---------------------------------
FY 1997 vs. FY 1996 vs.
Fiscal 1997 Fiscal 1996 Fiscal 1995 FY 1996 FY 1995
---------------------------------------------------- ---------------------------------
Net Revenues 100.0% 100.0% 100.0% 14.9% 16.4%
Expenses:
Cost of Rental and Direct Sales 55.9 56.3 58.0 14.1 13.0
Selling and Administrative 22.9 22.2 21.7 18.1 19.4
Depreciation 5.6 5.9 5.6 10.2 21.8
Amortization of Intangibles 0.6 0.8 1.0 (11.0) (6.6)
----------------------------------------------------
Income from Operations 15.0 14.8 13.7 16.5 25.3
Interest Expense 1.9 2.6 2.7 (14.0) 12.5
Other (Income) Expense, net (0.6) - (0.5) - -
----------------------------------------------------
Income Before Income Taxes 13.7 12.2 11.5 28.7 23.0
Provision for Income Taxes 5.4 4.8 4.5 30.4 21.0
----------------------------------------------------
Net Income 8.3% 7.4% 7.0% 27.6 24.2
----------------------------------------------------
----------------------------------------------------
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for fiscal 1997 rose 14.9% to $350.9 million from
$305.4 million in fiscal 1996. Rental revenue growth accounted for $41.3
million or 14.0% of the increase. U.S. and Canadian annual rental revenues
increased 14.4% and 11.8%, respectively. The improvement is primarily
attributable to increased new account sales, expansion of existing accounts,
strong retention rates and new market entries.
7
Total direct sales to outside customers increased 40.7% to $14.4
million for fiscal 1997 from $10.2 million in fiscal 1996. The Company intends
to utilize a greater portion of products produced by its manufacturing division
for service to G&K rental customers, which will impact future direct sales.
Cost of rental operations grew slower than rental revenues, increasing
12.8% while rental revenues rose 14.0%. As a percentage of rental revenues,
these costs declined to 54.9% for fiscal 1997 compared to 55.5% in fiscal 1996.
This decrease related primarily to better utilization of rental merchandise and
improved plant efficiency.
Cost of direct sales increased 39.5% to $11.3 million in fiscal 1997,
compared to $8.1 million in fiscal 1996. As a percentage of direct sales, these
costs improved to 78.3% compared 79.0% last year, primarily from operational
improvements made in our manufacturing division.
Selling and administrative expenses increased 18.1% to $80.2 million
in fiscal 1997 from $67.9 million in fiscal 1996. As a percentage of revenues,
selling and administrative expenses increased to 22.9% in fiscal 1997 from 22.2%
in fiscal 1996. These expenses grew at a rate greater than revenue primarily
from additional costs associated with new market start-ups, and additional
marketing and training programs to support operational growth and improvement.
Depreciation and amortization expense increased 7.6% to $22.0 million
in fiscal 1997 from $20.4 million in fiscal 1996. This increase is attributable
to continued investment in property, plant and equipment, including the
construction of six new plants.
Operating income increased 16.5% to $52.7 million in fiscal 1997 from
$45.2 million in fiscal 1996. Operating margins improved to 15.0% in fiscal
1997 from 14.8% in fiscal 1996. U.S. operating margins declined from 14.9% in
fiscal 1996 to 13.9% in fiscal 1997, primarily due to losses from start-up
locations begun during recent years and increases in selling and administrative
expenses. Operating income benefited from significant improvement in the
Canadian operating margin.
Net income rose 27.6% to $29.0 million in fiscal 1997, or $1.42 per
share, from $22.7 million, or $1.11 per share, in fiscal 1996. Net income
margins increased to 8.3% in fiscal 1997 compared with 7.4% in fiscal 1996.
Interest expense was $6.8 million, down from $8.0 million in the prior year, as
a result of lower average borrowings and lower interest rates. In addition, the
Company realized $2.0 million of other income, primarily attributable to the
sale of a linen processing business in Canada and the sale of undeveloped land.
The Company's effective tax rate increased to 39.5% in fiscal 1997 from 39.0% in
fiscal 1996, largely driven by additional profits and higher corporate tax rates
in Canada.
FISCAL 1996 COMPARED WITH FISCAL 1995
Total revenues rose 16.4% to $305.4 million in fiscal 1996 from $262.5
million in fiscal 1995. Rental revenue growth accounted for the entire
increase, rising 17.2% over the prior year. U.S. and Canadian annual rental
revenues increased 18.0% and 12.8%, respectively. The improvement was
attributable to increased new account sales, expansion of existing accounts,
strong retention rates and new market entries.
Total direct sales to outside customers decreased 2.9% to $10.2
million in fiscal 1996 from $10.5 million in fiscal 1995 as a greater portion
of products produced by our manufacturing division were used by G&K to service
rental customers.
Cost of rental operations grew slower than rental revenues, increasing
14.1% while rental revenues rose 17.2%. As a percentage of rental revenues,
these costs declined to 55.5% for fiscal 1996 compared to 57.0% in fiscal 1995.
This decrease related primarily to better utilization of rental merchandise and
improved plant efficiency, in both the U.S. and Canada.
Cost of direct sales decreased 6.0% to $8.1 million in fiscal 1996
from $8.6 million in fiscal 1995. As a percentage of revenues costs improved to
79.0% compared 81.6% in fiscal 1995, primarily from operational improvements at
our manufacturing division.
Selling and administrative expenses increased 19.4% to $67.9 million
in fiscal 1996 from $56.9 million in fiscal 1995. As a percentage of revenues,
selling and administrative expenses increased to 22.2% in fiscal 1996 from 21.7%
in fiscal 1995. These expenses grew at a rate greater than the revenue increase
primarily from additional costs associated with
8
new market start-ups, and additional marketing, training, and data processing
costs to support operational growth and improvement.
Operating income increased 25.3% to $45.2 million in fiscal 1996 from
$36.1 million in fiscal 1995. Operating margins improved to 14.8% for fiscal
1996 from 13.8% in fiscal 1995. U.S. operating margins improved to 14.9% in
fiscal 1996 from 13.9% in fiscal 1995 despite increased losses from start-up
locations commenced during recent years. Operating income benefited from
significant improvement in the Canadian operating margin.
Net income rose 24.2% to $22.7 million in fiscal 1996, or $1.11 per
share, from $18.3 million, or $0.90 per share, in fiscal 1995. Net income
growth was affected by lower effective income tax rates, but higher interest
expense due to larger average borrowing levels when compared to fiscal 1995.
Net income margins increased to 7.4% in fiscal 1996 from 7.0% in fiscal 1995.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $44.1 million in fiscal 1997,
$41.9 million in fiscal 1996, and $21.7 million in fiscal 1995. The fiscal 1997
increase resulted from the gain in net income largely offset by an increase in
the growth of inventory and less growth in accounts payable and other current
liabilities when compared to fiscal 1996. Working capital at June 28,1997 was
$40.9 million, down 17.9% from $49.8 million at June 29, 1996. The decrease
reflects the expected maturity of $25.0 million in senior notes payable.
Cash used in financing activities was $6.1 million in fiscal 1997,
$1.2 million in fiscal 1996, and financing activities provided $21.5 million in
fiscal 1995. Cash flow was used to reduce long-term debt, including current
maturity, to $79.3 million at June 28, 1997 from $84.2 million at June 29, 1996.
The Company paid dividends of $1.4 million in each of the fiscal years 1997,
1996 and 1995. The Company's ratio of debt to total capitalization decreased to
31.9% from 37.4% at the end of fiscal 1996. The Company has a $ 72.1 million
existing line of credit, of which 75% was outstanding at the end of fiscal 1997.
Cash used in investing activities was $37.9 million in fiscal 1997,
$36.8 million in fiscal 1996, and $45.3 million in fiscal 1995. In fiscal 1998
estimated capital expenditures are anticipated to be approximately $55 to $65
million.
In connection with G&K's acquisition of selected assets of National
Linen Service in July 1997, the Company entered into a new $425 million credit
facility to fund the purchase price of the assets and refinance existing
indebtedness. The unused portion of the revolver may be used for working
capital and to provide letters of credit. The new credit facility contains
various restrictive 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,
Inc. and domestic subsidiaries and 65% of the stock of Canadian subsidiaries.
Stockholders' equity grew 19.9% to $169.0 million at June 28, 1997,
compared with $141 million at the end of 1996. G&K's return on average equity
increased to 18.7% in fiscal 1997 compared with 17.5% and 16.7% respectively,
for fiscal 1996 and fiscal 1995.
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. 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.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Following is a summary of the results of operations for each of the
quarters within fiscal years ended June 28, 1997 and June 29, 1996. All
amounts are in thousands, except per share data.
QUARTERLY FINANCIAL DATA
G&K SERVICES, INC. AND SUBSIDIARIES
FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
1997
Revenues $83,310 $87,438 $88,465 $91,701
Operating Income 12,681 13,329 13,119 13,582
Gross Profit 37,247 38,689 39,609 39,360
Net Income 6,951 7,186 7,369 7,496
Net Income per Share 0.34 0.35 0.36 0.37
Dividends per Share 0.0175 0.0175 0.0175 0.0175
- --------------------------------------------------------------------------------
1996
Revenues $70,954 $75,088 $77,478 $81,894
Operating Income 10,558 11,110 11,491 12,085
Gross Profit 30,635 31,978 34,304 36,666
Net Income 5,187 5,575 5,712 6,246
Net Income per Share 0.25 0.27 0.28 0.31
Dividends per Share 0.0175 0.0175 0.0175 0.0175
- --------------------------------------------------------------------------------
Reference is hereby made to the Consolidated Financial Statements and Notes
thereto appearing on pages F-1 through F-12 here of.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
(THIS SPACE INTENTIONALLY LEFT BLANK)
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title Since
- --------------------------------------------------------------------------------
Richard M. Fink 67 Chairman and Director 1970
William Hope 64 Chief Executive Officer and Director 1973
Thomas Moberly 49 President and Chief Operating Officer 1993
Timothy W. Kuck 40 Chief Financial Officer,
Treasurer and Secretary 1997
Bruce G. Allbright 69 Director 1985
Paul Baszucki 58 Director 1994
Wayne M. Fortun 49 Director 1994
Donald W. Goldfus 64 Director 1989
Bernard Sweet 74 Director 1975
RICHARD M. FINK has served as Chairman of the Board since 1981 and was Chief
Executive Officer of the Company from 1981 to January 1997. He is also a
director of Rykoff-Sexton, Inc.
WILLIAM HOPE has served as Chief Executive Officer of the Company since January
1997. From 1993 to 1997, Mr. Hope also served as President and Chief Operating
Officer of the Company. Prior thereto Mr. Hope was Vice President of the
Company.
THOMAS MOBERLY has served as President and Chief Operating Officer since
September 1997 and became Executive Vice President in January 1997. From 1993
to 1997 Mr. Moberly served as a Regional Vice President. Mr. Moberly held
various other management positions since joining the Company in 1974.
TIMOTHY W. KUCK joined the Company in May 1997 as Chief Financial Officer,
Treasurer and Secretary. Mr. Kuck was President of EBP Life Insurance Company
and Senior Vice President of First Health, both divisions of First Data
Corporation, from 1995 to the time he joined the Company. From 1993 to 1995 he
was Chief Financial Officer, Executive Vice President and Secretary for Employee
Benefits Plan, Inc.
BRUCE G. ALLBRIGHT has been a director of the Company since 1985. Retired since
January 1990, he was formerly President of Dayton Hudson Corporation. Prior
thereto, Mr. Allbright was Chairman and Chief Executive Officer of Target
Stores, a division of Dayton Hudson Corporation. Mr. Allbright is a director of
TCF Financial, Inc. and F.A., Hannaford Brothers Company.
PAUL BASZUCKI has been a director of the Company since 1994. He is Co-Chairman
of the Board of Directors and Chief Executive Officer of Norstan, Inc. Mr.
Baszucki is also a director of Washington Scientific Industries, Inc.
WAYNE M. FORTUN has been a director of the Company since 1994. He is the
President, Chief Executive Officer, Chief Operating Officer and a director of
Hutchinson Technology, Inc.
DONALD W. GOLDFUS has been a director of the Company since 1989. He is the
Chairman of the Board and Chief Executive Officer of Apogee Enterprises, Inc.
BERNARD SWEET has been a director of the Company since 1975. Retired since
1985, he was formerly President and Chief Executive Officer of Republic
Airlines, Inc. Mr. Sweet is a director of Rykoff-Sexton, Inc.
11
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to information with respect to the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information with respect to the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders.
(THIS SPACE INTENTIONALLY LEFT BLANK)
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Reports filed on Form 8-K during the fourth quarter of fiscal year
1997:
A Form 8-K, Item 5. Other Events, was filed on June 2, 1997.
(b) The following exhibits, as required by Item 601 of Regulation S-K are
filed as a part of this report:
EXHIBIT NO.
2(a) Asset Purchase Agreement, dated as of May 30, 1997, by and among
National Service Industries, Inc., a Delaware corporation; National
Service Industries, Inc., a Georgia corporation; NSI Enterprises,
Inc., a California corporation and G&K Services, Inc. (incorporated
herein by reference to the Registrant's Form 8-K filing dated July 14,
1997).
2(b) Side Letter dated as of July 14, 1997 by and among National
Service Industries, Inc., a Delaware corporation; National Service
Industries, Inc., a Georgia corporation; NSI Enterprises, Inc., a
California corporation and G&K Services, Inc. (incorporated herein by
reference to the Registrant's Form 8-K filing dated July 14, 1997).
3(a) Restated Articles of Incorporation, as amended, as filed with the
Secretary of State of Minnesota (incorporated herein by reference to
the Registrant's Registration Statement on Form S-1 and Amendment No.
1 thereto, Registration No. 33-15456). Certificate of Amendment, as
filed with the Secretary of State of Minnesota on November 12, 1987.
3(b) Bylaws, as amended, (incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 and Amendment No. 1
thereto, Registration No. 33-15456 and incorporated by reference to
exhibit 3ii of the Registrant's 10-Q filed May 17, 1994).
10(a) Employment Agreement between the Registrant and Richard Fink,
dated January 6, 1987, (incorporated herein by reference to the
Registrant's Registration No. 33-15456). **
10(b) Employment Agreement between the Registrant and Stephen LaBelle,
dated January 2, 1991 (incorporated herein by reference to the
Registrant's Form 10-K, for the fiscal year ended June 29, 1996). **
10(c) Stockholder Agreement by and among the Registrant, Richard Fink,
William Hope, Stephen LaBelle, Daniel Nielsen, Phillip Oberg and
Robert Stotts, dated June 14, 1985, (incorporated herein by reference
to the Registrant's Schedule 13E-4 filing dated May 13, 1985).
10(d) 1989 Stock Option and Compensation Plan (incorporated herein by
reference to the Registrant's definitive proxy statement for the 1989
Annual Meeting of Shareholders filed August 29, 1989).
10(e) 1996 Director Stock Option Plan (incorporated herein by
reference to the Registrant's Form 10-K, for the fiscal year ended
June 29, 1996).**
10(f)(i) Loan Agreement between the Registrant and Metropolitan Life
Insurance Company dated as of September 28, 1990 (incorporated herein
by reference to the Registrant's Form 8-K dated September 28, 1990,
and Amendment No. 1 thereto dated December 13, 1990).
10(f)(ii) Second Amendment to Loan Agreement, dated June 21, 1994,
between G&K Services, Inc., and Metropolitan Life Insurance Company
(incorporated herein by reference to the Registrant's Form 10-Q for
the quarter ended April 1, 1995).
10(f)(iii) Third Amendment to Loan Agreement, dated as of November 23,
1994, between G&K Services, Inc., and Metropolitan Life Insurance
Company (incorporated herein by reference to the Registrant's Form 10-
Q for the quarter ended April 1, 1995).
13
10(f)(iv) Fourth Amendment to Loan Agreement, dated as of May 18,
1995, between G&K Services, Inc., and Metropolitan Life Insurance
Company (incorporated herein by reference to the Registrant's Form 10-
K, for the fiscal year ended June 29, 1996).
10(g)(i) Credit Agreement dated as of June 21, 1994, among G&K
Services, Inc., Work Wear Corporation of Canada, Ltd., various banks
and Norwest Bank, Minnesota, National Association, as Agent
(incorporated by reference to the Registrant's Form 10-Q, for the
quarter ended April 1, 1995).
10(g)(ii) First Amendment, dated November 28, 1994, to Credit
Agreement dated June 21, 1994, G&K Services, Inc., various banks, and
Norwest Bank Minnesota, National Association, as Agent (incorporated
by reference to the Registrant's Form 10-Q for the quarter ended April
1, 1995).
10(g)(iii) Second Amendment, dated May 18, 1995, to Credit Agreement
dated June 21, 1994, among G&K Services, Inc., Work Wear Corporation
of Canada, Ltd., various banks, and Norwest Bank Minnesota, National
Association, as Agent (incorporated herein by reference to the
Registrant's Form 10-K, for the fiscal year ended June 29, 1996).
10(g)(iv) Third Amendment, dated January 4, 1996, to Credit Agreement
dated June 21, 1994, among G&K Services, Inc., Work Wear Corporation
of Canada, Ltd., various banks, and Norwest Bank Minnesota, National
Association, as Agent (incorporated herein by reference to the
Registrant's Form 10-K, for the fiscal year ended June 29, 1996).
10(g)(v) Fourth Amendment, dated August 5, 1996, to Credit Agreement
dated June 21, 1994, among G&K Services, Inc., Work Wear Corporation
of Canada, Ltd., various banks, and Norwest Bank Minnesota, National
Association, as Agent (incorporated herein by reference to the
Registrant's Form 10-K, for the fiscal year ended June 29, 1996).
10(h) Loan Agreement, dated November 23, 1994, between G&K Services,
Inc., and Metropolitan Life Insurance Company (incorporated herein by
reference to the Registrant's Form 10-K, for the fiscal year ended
June 29, 1996).
10(i) Employment Agreement between Registrant and Thomas Moberly,
dated February 20, 1990 (incorporated herein by reference to the
Registrant's form 10-K filed, for the fiscal year ended July 3, 1993).
**
10(j) Credit Agreement dated as of July 14, 1997 among G&K Services,
Inc., Work Wear Corporation of Canada Ltd., as Borrowers, various
banks, and Norwest Bank Minnesota, National Association, and NBD Bank
and First Chicago NBD Bank, Canada (incorporated herein by reference
to the Registrant's Form 8-K filing dated July 14, 1997).
10(k) Employment Agreement between Registrant and Timothy W. Kuck,
dated May 12, 1997. *,**
22 Subsidiaries of G&K Services, Inc. *
23 Consent of Independent Public Accountants *
24 Power of Attorney dated as of September 12, 1997 *
27 Financial Data Schedule (FOR SEC USE ONLY) *
FOOTNOTE:
* Filed herewith
** Compensatory plan or arrangement
14
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 25, 1997 G&K SERVICES, INC.
(Registrant)
By: /s/William Hope
----------------------------------------
William Hope, Chief Executive Officer
(Principal Executive Officer)
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below on the 25th day of September
1997, by the following persons in the capacity indicated:
/s/Richard M. Fink Chairman of the Board and Director
- -----------------------------
Richard Fink
* Chief Executive Officer and Director
- ----------------------------- (Principal Executive Officer)
William Hope
/s/Timothy W. Kuck Chief Financial Officer, Treasurer and
- ----------------------------- Secretary (Principal Financial Officer)
Timothy W. Kuck
/s/Michael F. Woodard Controller (Principal Accounting Officer)
- -----------------------------
Michael F. Woodard
* Director
- -----------------------------
Bruce Allbright
* Director
- -----------------------------
Donald Goldfus
* Director
- -----------------------------
Bernard Sweet
* Director
- -----------------------------
Wayne Fortun
* Director
- -----------------------------
Paul Baszucki
* By /s/Richard M. Fink
-------------------------
Richard M. Fink
Attorney-in-fact
16
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income for the Fiscal Years Ended
June 28, 1997, June 29, 1996 and July 1, 1995. . . . . . . . F - 2
Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996. . . F - 3
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 28, 1997, June 29, 1996 and July 1, 1995. . . . . . . . F - 4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended June 28, 1997, June 29, 1996 and July 1, 1995. . . . . F - 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F - 6
Report of Independent Public Accountants . . . . . . . . . . . . . . . F - 12
F-1
CONSOLIDATED STATEMENTS OF INCOME
G & K SERVICES, INC. AND SUBSIDIARIES
For the Fiscal Years Ended
--------------------------------------
June 28, June 29, July 1,
(In thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------
REVENUES
Rental operations $336,526 $295,188 $251,948
Direct sales 14,388 10,226 10,533
- ------------------------------------------------------------------------------------------
Total revenues 350,914 305,414 262,481
- ------------------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 184,740 163,752 143,499
Cost of direct sales 11,269 8,079 8,592
Selling and administrative 80,235 67,934 56,909
Depreciation 19,734 17,906 14,703
Amortization of intangibles 2,225 2,499 2,675
- ------------------------------------------------------------------------------------------
Total operating expenses 298,203 260,170 226,378
- ------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 52,711 45,244 36,103
Interest expense 6,846 7,964 7,076
Other (income) expense, net (2,034) 64 (1,237)
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 47,899 37,216 30,264
Provision for income taxes 18,897 14,496 11,978
- ------------------------------------------------------------------------------------------
NET INCOME $ 29,002 $ 22,720 $ 18,286
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding 20,447 20,413 20,378
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.42 $ 1.11 $ 0.90
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-2
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
June 28, June 29,
ASSETS (In thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 6,986 $ 6,882
Accounts receivable, less allowance for doubtful
accounts of $1,324 and $1,276 41,831 36,696
Inventories 59,799 52,077
Prepaid expenses 4,512 3,995
- --------------------------------------------------------------------------------
Total current assets 113,128 99,650
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 19,676 19,326
Buildings and improvements 68,683 61,756
Machinery and equipment 143,475 118,955
Automobiles and trucks 27,434 25,028
Less accumulated depreciation (109,547) (92,167)
- --------------------------------------------------------------------------------
Total property, plant and equipment 149,721 132,898
- --------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 33,856 34,642
Restrictive covenants and customer lists, net 6,016 6,860
Other, principally retirement plan assets 9,244 8,470
- --------------------------------------------------------------------------------
Total other assets 49,116 49,972
- --------------------------------------------------------------------------------
$311,965 $282,520
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,304 $ 13,068
Accrued expenses -
Salaries and employee benefits 11,556 10,265
Other 12,133 7,699
Deferred income taxes 10,268 9,732
Current maturities of long-term debt 25,000 9,049
- --------------------------------------------------------------------------------
Total current liabilities 72,261 49,813
LONG-TERM DEBT, LESS CURRENT MATURITIES 54,284 75,143
DEFERRED INCOME TAXES 9,504 10,295
OTHER NONCURRENT LIABILITIES 6,929 6,293
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 6)
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 18,986,629
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 22,684 22,203
Retained earnings 144,036 116,465
Deferred compensation (2,029) (2,445)
Unrealized gain on investments held for sale,
net of tax 306 329
Cumulative translation adjustment (6,241) (5,795)
- --------------------------------------------------------------------------------
Total stockholders' equity 168,987 140,976
- --------------------------------------------------------------------------------
$311,965 $282,520
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
G & K SERVICES, INC. AND SUBSIDIARIES
For the Fiscal Years Ended
---------------------------------------
June 28, June 29, July 1,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $29,002 $22,720 $18,286
Adjustments to reconcile net income to net cash
provided by operating activities-
Gain on sale of asset (439) - -
Gain on sale of investments (452) (132) -
Depreciation and amortization 21,959 20,405 17,378
Deferred income taxes (255) (495) (436)
Changes in current operating items-
Inventories (7,840) (3,469) (15,671)
Accounts receivable and prepaid expenses (5,648) (4,903) (5,322)
Accounts payable and other current liabilities 4,430 5,718 6,328
Other, net 3,335 2,040 1,170
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,092 41,884 21,733
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Property, plant and equipment additions, net (35,536) (36,237) (36,545)
Acquisition of business assets (3,679) (595) (8,800)
Net proceeds from sale of assets 1,102 - -
Sales/Maturities of investments available for sale 207 30 -
- ------------------------------------------------------------------------------------------------
Net cash used for investing activities (37,906) (36,802) (45,345)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 12,000 7,552 28,656
Proceeds (repayments) on line of credit, net (16,737) (7,445) (5,073)
Cash dividends paid (1,431) (1,429) (1,427)
Change in escrow receivable - - (653)
Sale of common stock 86 77 23
- ------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (6,082) (1,245) 21,526
- ------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 104 3,837 (2,086)
CASH AND CASH EQUIVALENTS:
Beginning of year 6,882 3,045 5,131
- ------------------------------------------------------------------------------------------------
End of year $ 6,986 $ 6,882 $ 3,045
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $10,066 $ 8,162 $ 6,917
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Income taxes $17,094 $14,415 $10,578
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
G & K SERVICES, INC. AND SUBSIDIARIES
(In thousands, except share data)
Common Stock
------------------------------------
Class A Class B
------------------------------------
Unrealized
Gain on
Additional Investments Cumulative
Number Number Paid-In Retained Deferred Held for Sale, Translation
of Shares Amount of Shares Amount Capital Earnings Compensation Net of Tax Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
Balance July 2, 1994 18,498 $9,249 1,865 $933 $20,876 $ 78,237 ($2,023) $ - ($6,415)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income - - - - - 18,286 - - -
Cash dividend
$.07 per share - - - - - (1,427) - - -
Sale of restricted stock
to employees, net 45 23 - - 718 - (718) - -
Decrease in excess of additional
pension liability over
unrecognized prior service
cost related to SERP - - - - - 78 - - -
Amortization of deferred
compensation - - - - - - 375 - -
Translation adjustment - - - - - - - - 337
- ------------------------------------------------------------------------------------------------------------------------------------
Balance July 1, 1995 18,543 9,272 1,865 933 21,594 95,174 (2,366) - (6,078)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income - - - - - 22,720 - - -
Cash dividend
$.07 per share - - - - - (1,429) - - -
Stock issued for employee
benefit plans 29 14 - - 609 - (460) - -
B Stock converted to
A Stock 344 172 (344) (172) - - - - -
Amortization of deferred
compensation - - - - - - 381 - -
Unrealized gain on
investments available
for sale, net of tax - - - - - - - 329 -
Translation adjustment - - - - - - - - 283
- ------------------------------------------------------------------------------------------------------------------------------------
Balance June 29, 1996 18,916 9,458 1,521 761 22,203 116,465 (2,445) 329 (5,795)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income - - - - - 29,002 - - -
Cash dividend
$.07 per share - - - - - (1,431) - - -
Stock issued for employee
benefit plans 25 12 - - 481 - (299) - -
B Stock converted to
A Stock 46 23 (46) (23) - - - - -
Amortization of deferred
compensation - - - - - - 715 - -
Unrealized loss on
investments available
for sale, net of tax - - - - - - - (23) -
Translation adjustment - - - - - - - - (446)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance June 28, 1997 18,987 $9,493 1,475 $738 $22,684 $144,036 ($2,029) $306 ($6,241)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share data and share data.)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
G&K Services, Inc. (the Company) is a full service uniform rental
provider, including the rental of cleanroom garments. The Company also provides
rental of non-uniform items such as floormats, dust mops and cloths, wiping
towels and selected linen items. In addition, the Company manufactures uniform
garments for customers as well as uniforms for direct sale.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned.
Significant intercompany balances and transactions have been eliminated in
consolidation.
INVENTORIES
New goods inventories are stated at the lower of first-in, first-out
(FIFO) cost or market. Rental merchandise in service is stated at cost less
amortization, which is not in excess of market. The components of inventories
as of June 28, 1997 and June 29, 1996 are as follows:
1997 1996
- ------------------------------------------------------------
New goods $16,328 $16,941
Rental merchandise in service 43,471 35,136
- ------------------------------------------------------------
$59,799 $52,077
- ------------------------------------------------------------
- ------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation for financial reporting purposes
over the estimated useful lives of property, plant and equipment as follows:
Life
(Years)
- ------------------------------------------------------------
Automobiles and Trucks 3 to 8
Machinery and Equipment 5 to 10
Buildings 20 to 33 1/3
Building Improvements 10
- ------------------------------------------------------------
- ------------------------------------------------------------
Costs of significant additions, renewals and betterments, including
outside computer software development costs, are capitalized. When an asset is
sold or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the gain or loss on disposition is
reflected in earnings. Maintenance and repairs are charged to expense when
incurred.
INTANGIBLE ASSETS ARISING FROM ACQUISITIONS
The cost of acquisitions in excess of the fair value of underlying
net assets acquired (goodwill) is amortized over periods ranging from 8 to 40
years. Accumulated amortization of goodwill was $8,361 as of June 28, 1997 and
$7,345 as of June 29, 1996. Restrictive covenants, stated at cost less
accumulated amortization of $10,352 and $9,295 as of June 28, 1997 and June 29,
1996, are being amortized over the terms of the respective agreements. Acquired
customer lists are amortized over the estimated average life of an account.
RETIREMENT PLAN ASSETS
Retirement plan assets consist primarily of common stock and cash
equivalents, which are stated at their fair value as determined by quoted market
prices and the cash surrender values of life insurance policies.
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign operations are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates prevailing during the year. Translation adjustments
are recorded as a separate component of stockholders' equity.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income
tax return and separate state and foreign returns. The Company accounts for
income taxes using the liability method. Deferred income taxes are provided for
F-6
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at currently enacted tax rates.
PER SHARE DATA
Net income per share is based on the weighted average number of shares
of both Class A and B common stock outstanding during each year. The effect of
common stock equivalents was not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" (Statement No. 128), issued in February 1997 and effective for interim
periods ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share (EPS). Implementation of Statement
No. 128 is not expected to have a material impact on the Company's computation
or presentation of EPS.
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 LONG-TERM DEBT
Debt as of June 28, 1997 and June 29, 1996, includes the following:
1997 1996
- --------------------------------------------------------------------------------
Borrowings under revolving credit agreements
(the Revolvers) with interest approximating
LIBOR and Canadian prime rate, unsecured
(4.75% to 6.5% at June 28, 1997 and 6.75%
to 8.25% at June 29, 1996), due in September, 1998 $54,284 $49,409
Senior notes payable to insurance company at
rates ranging from 8.46% to 10.62% due in
1998, interest payable semi-annually, unsecured 25,000 34,000
Other - 783
- --------------------------------------------------------------------------------
79,284 84,192
Less current maturities (25,000) (9,049)
- --------------------------------------------------------------------------------
Total long-term debt $54,284 $75,143
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Under the terms of the Revolvers, as of June 28, 1997, the Company may
borrow up to $72.1 million. The Revolvers also allow the Company to issue up to
$10 million in standby letters of credit. As of June 28, 1997, there were no
outstanding letters of credit.
The Company's debt agreements contain various restrictive covenants
which, among other matters, require the Company to maintain minimum consolidated
net worth levels, as defined, and certain financial ratios. The agreements also
limit additional indebtedness, capital expenditures and cash dividends. The
Company was in compliance with all such covenants as of June 28, 1997.
The fair value of the Company's long-term debt, based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities, approximates carrying
value as of June 28, 1997 and June 29, 1996.
3 STOCKHOLDERS' EQUITY
Each share of Class A common stock is entitled to one vote and is
freely transferable. Each share of Class B is entitled to ten votes and can be
converted to Class A common stock on a share-for-share basis. Until converted
to Class A common stock, however, Class B shares are not freely transferable.
No cash dividends can be paid on Class B common
F-7
stock unless dividends of at least an equal amount per share are paid on Class
A shares. Substantially all Class B shares are held by an officer of the
Company.
STOCK AWARD PLANS
The Company maintains a 1989 Stock Option and Compensation Plan (the
Employee Plan) to grant certain stock awards, including stock options at fair
market value and restricted shares, to key employees of the Company. The
Company records compensation expense as the restrictions are removed from the
stock for the difference between the par value and fair market value as of the
grant date. A maximum of 900,014 stock awards can be granted under this plan;
471,504 awards were available for grant as of June 28, 1997.
In August 1996, the Company adopted the 1996 Director Stock Option
Plan (the Directors' Plan). The Directors' Plan provides for automatic grants
of 3,000 nonqualified stock options to nonemployee directors of the Company as
of the initial adoption of the Plan or as of the date such individuals became
directors of the Company and 1,000 nonqualified stock options on each subsequent
annual shareholder meeting date. The Company has reserved 50,000 shares of
common stock for issuance under the Directors' Plan. These options expire
within ten years of grant and are exercisable one year from the date of grant,
except for the initial grants, of which one third of the total options are
exercisable each year beginning with the first anniversary of the date of grant.
The option price will be the average market price of the common stock during the
ten business days preceding the Company's annual shareholder meeting.
The following schedule summarizes activity in the plans:
Stock Options
-------------------------
Employee Directors' Restricted Grant
Plan Plan Stock Price
- ------------------------------------------------------------------------------------------
Outstanding at July 1, 1995 50,289 - 222,994 $ 7.17 - 16.50
Granted 1,939 - 24,444 25.75
Exercised (6,841) - - 8.92 - 16.50
Canceled - - (2,646) 17.00
- ------------------------------------------------------------------------------------------
Outstanding at June 29, 1996 45,387 - 244,792 7.17 - 25.75
Granted 6,755 15,000 20,566 30.33 - 37.00
Exercised (6,264) - - 11.17 - 16.50
Canceled (5,504) - (6,051) 11.17
- ------------------------------------------------------------------------------------------
Outstanding at June 28, 1997 40,374 15,000 259,307 $ 7.17 - 37.00
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Exercisable at June 28, 1997 15,209 - - $ 7.17 - 25.75
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of income except for
shares issued under the Restricted stock plan. Had compensation cost been
recognized based on the fair values of options at the grant dates consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and net income per common share would have been
comparable to reported amounts.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to July 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The weighted
average fair value of options granted in 1997 and 1996 was $16.37 and $10.89,
respectively. The weighted average exercise price was $37.00 and $25.75,
respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 6.42% for 1997 and 5.55% for 1996;
expected dividends of $.07 per share; expected lives of 7 years for both 1997
and 1996; and expected volatility of 28.13% for 1997 grants and 29.17% for 1996
grants.
F-8
4 INCOME TAXES
The components of the provision for income taxes are as follows:
Fiscal Years
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Current:
Federal $12,989 $12,671 $ 7,813
State & Local 1,608 1,576 1,053
Foreign 4,555 1,348 2,361
- ---------------------------------------------------------------------------
19,152 15,595 11,227
Deferred: (255) (1,099) 751
- ---------------------------------------------------------------------------
$18,897 $14,496 $11,978
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The reconciliation between income taxes using the statutory federal
income tax rate and the recorded income tax provision is as follows:
Fiscal Years
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Federal taxes at the statutory
rate $16,764 $13,027 $10,593
State taxes, net of federal
tax benefit 1,072 924 768
Foreign taxes 98 252 702
Permanent differences
and other, net 963 293 (85)
- ---------------------------------------------------------------------------
Total provision $18,897 $14,496 $11,978
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Effective rate 39.5% 39.0% 39.6%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
deferred tax liabilities as of June 28, 1997 and June 29, 1996, are as follows:
1997 1996
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Inventory amortization differences $(13,037) $(11,141)
Depreciation and property basis differences (6,840) (8,349)
Other (6,710) (4,735)
- ----------------------------------------------------------------------------
Total deferred tax liabilities (26,587) (24,225)
Deferred tax assets:
Accruals, reserves and other 6,815 4,198
- ----------------------------------------------------------------------------
Net deferred tax liability $(19,772) $(20,027)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
5 EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a noncontributory pension plan (the Plan) covering
substantially all employees, except certain employees who are covered by union
administered plans. Benefits are based on number of years of service and each
employee's compensation near retirement. The Company makes annual contributions
to the Plan consistent with Federal funding requirements.
The net pension cost in 1997, 1996 and 1995 includes the following
components:
1997 1996 1995
- ----------------------------------------------------------------------------
Service cost - benefits earned
during the period $1,117 $952 $767
Interest cost on projected
benefit obligation 1,018 887 753
Actual return on assets (2,234) (1,241) (1,074)
Amortization of unrecognized
net gain 721 (121) (97)
- ----------------------------------------------------------------------------
Net pension cost $622 $477 $349
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
F-9
The funded status of the Plan at June 28, 1997 and June 29, 1996, was
as follows:
1997 1996
- ----------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 8,476 $ 7,526
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Accumulated benefit obligation $ 8,966 $ 7,930
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Projected benefit obligation $14,572 $12,846
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Plan assets at fair value $17,270 $15,412
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Assets in excess of projected
benefit obligation $ 2,698 $ 2,566
Unrecognized transition net asset (400) (534)
Unrecognized net gain (3,358) (2,523)
Unrecognized prior service cost 635 688
- ----------------------------------------------------------------------------
Prepaid (accrued) pension cost at year end $ (425) $ 197
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The projected benefit obligation was determined using an assumed
discount rate of 8% and an assumed long-term rate of compensation increase of
5%. The assumed long-term rate of return on Plan assets is 9%. Plan assets
consist primarily of common stocks and U.S. Government and corporate
obligations.
UNION PENSION PLANS
Certain employees of the Company are covered by union sponsored,
collectively bargained, multiemployer pension plans (Union Plans). The Company
contributed and charged to expense $424 in 1997, $328 in 1996 and $338 in 1995
for such plans. These contributions are determined in accordance with the
provisions of negotiated labor contracts and generally are based on the number
of hours worked. The Company may be liable for its share of unfunded vested
benefits, if any, related to the Union Plans. Information from the Union Plans'
administrators is not available to permit the Company to determine its share, if
any, of unfunded vested benefits.
401(k) PLAN
All full-time non-union employees are eligible to participate in a
401(k) plan after one year of service. The Company matches a portion of the
employee's salary reduction contributions and provides investment choices for
the employee. The matching contributions under the 401(k) plan, which vest over
a seven-year employment period, were $394 in 1997, $385 in 1996 and $268 in
1995.
EXECUTIVE RETIREMENT PLANS
The Company has a nonqualified Supplemental Executive Retirement Plan
(SERP) and a nonqualified Executive Deferred Compensation Plan (DEFCO) to
provide designated executives and professional employees with retirement, death
and disability benefits.
SERP
Annual benefits under the SERP are based on years of service and
individual compensation near retirement. Expense under the SERP was $564 in
1997, $600 in 1996 and $557 in 1995. The accumulated benefit obligation, $2,951
as of June 28, 1997 and $3,082 as of June 29, 1996, is included in other
noncurrent liabilities in the accompanying consolidated balance sheets. The
Company has purchased life insurance contracts which may be used to fund the
retirement benefits. The net cash surrender value of the contracts as of June
28, 1997 and June 29, 1996, was $2,522 and $2,081 and is included in other
assets in the accompanying consolidated balance sheets.
DEFCO PLAN
Under the DEFCO plan, the Company matches a portion of the employees'
contributions and provides a guaranteed investment return which is adjusted
annually. The Company's matching contributions under the DEFCO plan were $216
in 1997, $200 in 1996 and $162 in 1995. The accumulated benefit obligation,
$3,906 as of June 28, 1997 and $3,114 as of June 29, 1996, is included in other
noncurrent liabilities in the accompanying consolidated balance sheets. The
Company has purchased investments, including common stock and cash equivalents,
which may be used to fund the retirement benefits. The investments had an
aggregate market value of $4,213 as of June 28, 1997 and $3,351 as of June 29,
1996 and are included in other assets in the accompanying consolidated balance
sheets at these values.
F-10
6 COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in litigation arising in the ordinary
course of business, including being named, along with other defendants, as a
potentially responsible party at certain waste disposal sites where groundwater
contamination has been detected, or is suspected. In the opinion of management,
settlement of the litigation will not have a material effect on the Company's
results of operations or financial position.
LEASES
The Company has noncancellable operating lease commitments for certain
production and other equipment and delivery facilities which expire on various
dates through 2003. Minimum annual rental commitments at June 28, 1997 for the
fiscal years 1998 through 2002 and thereafter are $2,714, $2,268, $1,856,
$1,584, $1,327 and $1,640. In accordance with the terms of the lease
agreements, the Company is required to pay real estate taxes and maintenance
costs. Total lease expense was $4,234 in 1997, $3,565 in 1996 and $3,051 in
1995.
7 GEOGRAPHIC INFORMATION
Geographic financial information is as follows:
United
States Canada Total
- -------------------------------------------------------------------------------------
1997:
Revenues $292,407 $58,507 $350,914
Income from operations 40,592 12,119 52,711
Total assets 234,798 77,167 311,965
Capital expenditures 33,732 1,804 35,536
Depreciation and amortization
expense 17,639 4,320 21,959
1996:
Revenues $252,659 $52,755 $305,414
Income from operations 37,532 7,712 45,244
Total assets 201,174 81,346 282,520
Capital expenditures 29,207 7,030 36,237
Depreciation and amortization
expense 16,231 4,174 20,405
1995:
Revenues $214,679 $47,802 $262,481
Income from operations 29,755 6,348 36,103
Total assets 177,364 75,969 253,333
Capital expenditures 33,679 2,868 36,547
Depreciation and amortization
expense 13,656 3,722 17,378
- -------------------------------------------------------------------------------------
8 ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS
On July 14, 1997 the Company purchased the uniform rental assets and
selected linen assets of National Linen Service for approximately $280 million
in cash, subject to certain post-closing purchase price adjustments.
In connection with this transaction, the Company entered into a bank
credit facility providing for loans and other extensions of credit up to $425
million. The initial net proceeds of the new facility were used to refinance
Revolvers and senior notes, finance the acquisition and pay related fees and
expenses.
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F-11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF G&K SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of G&K
SERVICES, INC. (a Minnesota corporation) AND SUBSIDIARIES as of June 28, 1997,
and June 29, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended June 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of G&K Services, Inc.
and Subsidiaries as of June 28, 1997, and June 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
August 26, 1997
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F-12