Exhibit 13
Financial Highlights
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August
(In thousands, except per share data) 2002 2001 % Change
- -------------------------------------------------------------------------------
Revenues $578,898 $556,371 4.0%
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) 90,010 85,133 5.7%
Income from operations 51,979 47,565 9.3%
Net income 26,859 23,224 15.7%
Shareholders' equity 309,740 285,545 8.5%
Net income per share - Basic 1.40 1.20 16.7%
===============================================================================
Net income per share - Diluted 1.39 1.20 15.8%
===============================================================================
===============================================================================
Ten Year Financial Summary
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August
(In thousands, except
Financial Ratios
and per share data) 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Revenues $578,898 $ 556,371 $528,726 $ 487,100 $448,052 $ 419,093 $ 391,794 $355,041 $318,039 $287,728
Earnings before
interest, taxes,
depreciation and
amortization
(EBITDA) 90,010 85,133 73,954 83,471 80,804 70,387 61,729 53,725 50,369 47,199
Depreciation and
amortization 38,031 37,568 34,710 31,724 26,629 23,386 20,814 19,194 17,912 16,454
Income from
operations 51,979 47,565 39,244 51,747 54,175 47,001 40,915 34,531 32,457 30,745
Other expense
(income), net 8,660 10,108 7,200 4,841 2,316 2,118 2,398 2,787 2,513 2,669
Provision for
income taxes 16,460 14,233 12,176 22,800 18,669 16,160 13,855 11,110 11,073 10,387
Net income 26,859 23,224 19,868 24,106 33,190 28,723 24,662 20,634 18,871 17,689
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position
at Year End
Total assets $494,835 $ 491,813 $500,150 $ 465,627 $376,130 $ 339,626 $ 302,378 $272,691 $250,160 $219,064
Long-term obligations 85,096 94,795 126,638 113,105 47,149 40,837 39,365 36,376 41,602 32,231
Shareholders' equity 309,740 285,545 271,172 257,433 246,374 217,192 191,109 168,596 149,472 132,723
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Net income
as a % of revenues 4.6% 4.2% 3.8% 4.9% 7.4% 6.9% 6.3% 5.8% 5.9% 6.1%
Return on average
shareholders' equity 9.0% 8.3% 7.5% 9.6% 14.3% 14.1% 13.7% 13.0% 13.4% 14.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding
-- basic 19,222 19,364 19,670 20,438 20,511 20,511 20,511 20,511 20,506 20,453
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding
-- diluted 19,278 19,378 19,670 20,438 20,511 20,511 20,511 20,511 20,506 20,453
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Revenues $30.12 $28.73 $26.88 $23.83 $21.84 $20.43 $19.10 $17.31 $15.51 $14.07
Earnings before
interest, taxes,
depreciation and
amortization (EBITDA) 4.68 4.40 3.76 4.08 3.94 3.43 3.01 2.62 2.46 2.31
Net Income - basic 1.40 1.20 1.01 1.18 1.62 1.40 1.20 1.01 0.92 0.86
Net Income - diluted 1.39 1.20 1.01 1.18 1.62 1.40 1.20 1.01 0.92 0.86
Shareholders' equity 16.11 14.75 13.79 12.60 12.01 10.59 9.32 8.22 7.29 6.49
Dividends
Common stock .15 .15 .15 .14 .12 .12 .11 .10 .10 .10
Class B common stock .12 .12 .12 .11 .10 .10 .09 .08 .08 .04
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Per share amounts for all years have been restated to reflect a two-for-one stock split declared by the Board of
Directors on November 18, 1993.
Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
Year Ended August 31, August 25, August 26,
(In thousands, except per share data) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 578,898 $ 556,371 $ 528,726
- --------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Operating costs 349,009 349,449 336,324
Selling and administrative expenses 139,879 121,789 118,448
Depreciation and amortization 38,031 37,568 34,710
- --------------------------------------------------------------------------------------------------------------------
526,919 508,806 489,482
- --------------------------------------------------------------------------------------------------------------------
Income from operations 51,979 47,565 39,244
- --------------------------------------------------------------------------------------------------------------------
Other expense (income):
Interest expense 8,843 9,107 7,459
Interest income (1,439) (1,239) (259)
Interest rate swap expense 1,256 2,240 --
- --------------------------------------------------------------------------------------------------------------------
8,660 10,108 7,200
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 43,319 37,457 32,044
Provision for income taxes 16,460 14,233 12,176
- --------------------------------------------------------------------------------------------------------------------
Net income $ 26,859 $ 23,224 $ 19,868
====================================================================================================================
Weighted average number of shares outstanding - basic 19,222 19,364 19,670
====================================================================================================================
Weighted average number of shares outstanding - diluted 19,278 19,378 19,670
====================================================================================================================
Net income per share - basic $1.40 $1.20 $1.01
====================================================================================================================
Net income per share - diluted $1.39 $1.20 $1.01
====================================================================================================================
Cash dividends per share:
Common stock $0.15 $0.15 $0.15
Class B common stock $0.12 $0.12 $0.12
====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
(In thousands, except per share data) August 31, August 25,
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 4,333 $ 5,699
Receivables, less reserves of $2,687 in 2002 and $3,237 in 2001 54,587 55,427
Inventories 24,807 22,320
Rental merchandise in service 56,047 56,677
Prepaid expenses 315 275
- ----------------------------------------------------------------------------------------------------------------
Total current assets 140,089 140,398
- ----------------------------------------------------------------------------------------------------------------
Property and equipment:
Land, buildings and leasehold improvements 208,000 199,084
Machinery and equipment 229,692 224,143
Motor vehicles 60,925 57,620
- ----------------------------------------------------------------------------------------------------------------
498,617 480,847
Less - accumulated depreciation 229,621 215,154
----------------------------------
268,996 265,693
----------------------------------
Goodwill, net 61,539 54,579
Other intangible assets, net 23,155 26,110
Other assets 1,056 5,033
----------------------------------
$ 494,835 $ 491,813
================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 1,406 $ 1,664
Notes payable 1,195 1,344
Accounts payable 17,012 19,334
Accrued liabilities 53,331 55,242
Accrued and deferred income taxes 1,457 11,928
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 74,401 89,512
- ----------------------------------------------------------------------------------------------------------------
Long-term obligations, net of current maturities 83,690 93,131
Deferred income taxes 27,004 23,625
Commitments and Contingencies (Note 9)
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $1.00 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.10 par value; 30,000,000 shares authorized; issued
10,555,109 shares in 2002 and 10,516,634 shares in 2001 1,055 1,052
Class B common stock, $.10 par value; 20,000,000 shares authorized;
Issued and outstanding 10,205,144 shares in 2002 and 10,238,744
shares in 2001 1,021 1,024
Treasury stock, 1,535,055 shares in 2002 and 1,535,000 shares in
2001, at cost (24,756) (24,755)
Capital surplus 12,503 12,438
Retained earnings 323,595 299,313
Accumulated other comprehensive loss (3,678) (3,527)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 309,740 285,545
- ----------------------------------------------------------------------------------------------------------------
$ 494,835 $ 491,813
================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Shareholders' Equity
UniFirst Corporation and Subsidiaries
Class B Class B
Common Common Treasury Common Common Treasury Capital Retained
(In thousands) Shares Shares Shares Stock Stock Stock Surplus Earnings
- ----------------------------------------------------------------------------------------------------------------------
Balance, August 28, 1999 10,500 10,256 (858) $1,050 $1,026 $(16,583) $12,438 $261,450
Net income -- -- -- -- -- -- -- 19,868
Dividends -- -- -- -- -- -- -- (2,642)
Shares repurchased -- -- (234) -- -- (3,466) -- --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Balance, August 26, 2000 10,500 10,256 (1,092) 1,050 1,026 (20,049) 12,438 278,676
Net income -- -- -- -- -- -- -- 23,224
Dividends -- -- -- -- -- -- -- (2,587)
Shares converted 17 (17) -- 2 (2) -- -- --
Shares repurchased -- -- (443) -- -- (4,706) -- --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- --
Change in fair value of
derivative instruments,
net of tax -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Balance, August 25, 2001 10,517 10,239 (1,535) $1,052 $1,024 $(24,755) $12,438 $299,313
Net income -- -- -- -- -- -- -- 26,859
Dividends -- -- -- -- -- -- -- (2,577)
Shares converted 34 (34) -- 3 (3) -- -- --
Shares repurchased -- -- -- -- -- (1) -- --
Stock options exercised 4 -- -- -- -- -- 65 --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- --
Change in fair value of
derivative instruments,
net of tax -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ----------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 10,555 10,205 (1,535) $1,055 $1,021 $(24,756) $12,503 $323,595
=====================================================================================================================
Accumulated
Other
Comprehensive Comprehensive
(In thousands) Income (Loss) Income (Loss)
- ------------------------------------------------------------------------
Balance, August 28, 1999 $(1,948) --
Net income -- $19,868
Dividends -- --
Shares repurchased -- --
Foreign Currency
translation adjustments (21) (21)
- ------------------------------------------------------------------------
Comprehensive income $19,847
- ------------------------------------------------------------------------
Balance, August 26, 2000 (1,969) --
Net income -- 23,224
Dividends -- --
Shares converted -- --
Shares repurchased -- --
Foreign Currency
translation adjustments (893) (893)
Change in fair value of
derivative instruments,
net of tax (665) (665)
- ------------------------------------------------------------------------
Comprehensive income $21,666
- ------------------------------------------------------------------------
Balance, August 25, 2001 $(3,527)
Net income -- 26,859
Dividends -- --
Shares converted -- --
Shares repurchased -- --
Stock options exercised -- --
Foreign Currency
translation adjustments (471) (471)
Change in fair value of
derivative instruments,
net of tax 320 320
- ------------------------------------------------------------------------
Comprehensive income $26,708
- ------------------------------------------------------------------------
Balance, August 31, 2002 $(3,678)
========================================================================
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
Year Ended August 31, August 25, August 26,
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 26,859 $ 23,224 $ 19,868
Adjustments:
Depreciation 32,755 30,553 28,042
Amortization of other assets 5,276 7,015 6,668
Interest rate swap expense 1,256 2,240 --
Changes in assets and liabilities, net of acquisitions:
Receivables 1,158 (1,446) (2,220)
Inventories (2,394) 5,161 491
Rental merchandise in service 1,618 2,439 (3,492)
Prepaid expenses (40) 23 (100)
Accounts payable (2,670) (143) 1,981
Accrued liabilities (3,156) 5,856 509
Accrued and deferred income taxes (11,351) (324) 4,537
Deferred income taxes 3,388 1,613 1,352
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,699 76,211 57,636
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (12,342) (1,300) (6,783)
Capital expenditures (33,304) (34,196) (46,714)
Decrease (increase) in other assets 3,940 (3,261) (5,032)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41,706) (38,757) (58,529)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in debt 152 981 15,509
Reduction of debt (9,998) (32,580) (4,283)
Repurchase of common stock (1) (4,706) (3,466)
Proceeds from exercise of common stock options 65 -- --
Cash dividends (2,577) (2,587) (2,642)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (12,359) (38,892) 5,118
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,366) (1,438) 4,225
Cash and cash equivalents at beginning of year 5,699 7,137 2,912
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,333 $ 5,699 $ 7,137
==============================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 8,776 $ 8,588 $ 7,745
Income taxes paid 24,418 13,014 6,282
==============================================================================================================
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
(Amounts in thousands, except per share and common stock options data)
1. Summary Of Critical and Significant Accounting Policies
Business Description
UniFirst Corporation (the "Company") is a leading company in the garment service
business. The Company designs, manufactures, personalizes, rents, cleans,
delivers and sells a variety of superior quality occupational garments, career
apparel and imagewear programs to businesses of all kinds. It also services
industrial wiper towels, floor mats and other non-garment items and provides
first aid cabinet services and other safety supplies. The Company also
decontaminates and cleans, in separate facilities, garments which may have been
exposed to radioactive materials.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany balances and
transactions are eliminated in consolidation. All assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts are
translated at average exchange rates during the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fiscal Year
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2002 had 53 weeks, while fiscal 2001 and 2000 had 52
weeks.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgements and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) accounting method to value a significant portion
of its inventories. Had the Company used the first-in, first-out (FIFO)
accounting method, inventories would have been approximately $1,544 and $1,493
higher at August 31, 2002 and August 25, 2001, respectively. Substantially all
inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise.
Material differences may result in the amount and timing of operating profit for
any period if management makes different judgments or utilizes different
estimates.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method based on the following estimated useful
lives:
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Motor vehicles 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. Expenditures
for renewals and betterments are capitalized.
Amortization of Other Intangible Assets
Customer contracts are amortized over periods of eight to fifteen years.
Restrictive covenants are amortized over the terms of the respective
non-competition agreements, which range from two to fifteen years.
Income Taxes
Deferred income taxes are provided for temporary differences between amounts
recognized for income tax and financial reporting purposes at currently enacted
tax rates.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures. Based
on the Company's evaluation of current tax positions, the Company believes they
have appropriately accrued for probable exposures.
Net Income Per Share
Basic and diluted net income per share is calculated using the weighted average
number of common and dilutive potential common shares outstanding during the
year. Presented below is a reconciliation between basic and diluted weighted
average shares (in thousands):
Year Ended August 31, 2002 August 25, 2001 August 26, 2000
- --------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding
- - basic 19,222 19,364 19,670
Add: effect of dilutive potential
common shares - employee common stock
options 56 14 --
---------------------------------------------------------
Weighted average number of shares outstanding
- - diluted 19,278 19,378 19,670
---------------------------------------------------------
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and bank short-term investments
with maturities of less than ninety days.
Financial Instruments
The Company's financial instruments, which may expose the Company to
concentrations of credit risk, include cash and cash equivalents, receivables,
accounts payable and accrued liabilities. Each of these financial instruments is
recorded at cost, which approximates its fair value.
Insurance
The Company self-insures for certain obligations related to health and workers'
compensation programs. The Company also purchases stop-loss insurance policies
to protect it from catastrophic losses. Judgments and estimates are used in
determining
the potential value associated with reported claims and for losses that have
occurred, but have not been reported. The Company's estimates consider
historical claim experience and other factors. The Company's liabilities are
based on estimates, and, while the Company believes that the accrual for loss is
adequate, the ultimate liability may be in excess of or less than the amounts
recorded. Changes in claim experience, the Company's ability to settle claims or
other estimates and judgments used by management could have a material impact on
the amount and timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims related to environmental
matters arising from the conduct of their business operations, including
personal injury claims, customer contract matters, employment claims, and
environmental matters. Accounting principles generally accepted in the United
States require that a liability for contingencies be recorded when it is
probable that a liability has occurred and the amount of the liability can be
reasonably estimated. Significant judgment is required to determine the
existence of a liability, as well as the amount to be recorded. The Company
regularly consults with attorneys and outside consultants to ensure that all of
the relevant facts and circumstances are considered, before a contingent
liability is recorded. The Company records accruals for environmental and other
contingencies based on enacted laws, regulatory orders or decrees, the Company's
estimates of costs, insurance proceeds, participation by other parties and the
timing of payments, and the input of outside consultants and attorneys. Changes
in enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. Acquisitions
Aggregate information relating to the acquisition of businesses which were
accounted for as purchases is as follows:
August 31, August 25, August 26,
Year ended 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Fair value of tangible assets acquired $ 4,371 $ 300 $ 2,310
Fair value of intangible assets and goodwill acquired 9,008 1,000 5,568
Fair value of liabilities assumed or created (1,037) -- (1,095)
--------------------------------------------------------
Acquisition of businesses, net of cash acquired $ 12,342 $ 1,300 $ 6,783
========================================================
The results of operations of these acquisitions have been included on the
Company's consolidated financial statements since their respective acquisition
dates. None of these acquisitions were significant, individually or in the
aggregate, in relation to the Company's consolidated financial statements and,
therefore, pro forma financial information has not been presented.
3. Income Taxes
The provision for income taxes consists of the following:
Year ended August 31, August 25, August 26,
2002 2001 2000
---------------------------------------------------------
Current:
Federal and Foreign $ 13,383 $ 14,466 $ 8,020
State 1,624 1,873 1,151
---------------------------------------------------------
15,007 16,339 9,171
---------------------------------------------------------
Deferred:
Federal and Foreign 1,354 (1,208) 2,584
State 99 (898) 421
---------------------------------------------------------
1,453 (2,106) 3,005
---------------------------------------------------------
$ 16,460 $ 14,233 $ 12,176
==========================================================
The following table reconciles the provision for income taxes using the
statutory federal income tax rate to the actual provision for income taxes:
Year ended August 31, August 25, August 26,
2002 2001 2000
---------------------------------------------------------
Income taxes at the statutory federal
income tax rate $ 15,160 $ 13,110 $ 11,215
Puerto Rico exempt income -- (183) (680)
State income taxes 1,120 385 986
Foreign income taxes 148 481 289
Other 32 440 366
---------------------------------------------------------
$ 16,460 $ 14,233 $ 12,176
=========================================================
The Company's Puerto Rico subsidiary's income was 90% exempt from Puerto Rico
income taxes through 2001. The Company provides for anticipated tollgate taxes
on the repatriation of the subsidiary's accumulated earnings.
The tax effect of items giving rise to the Company's deferred tax (assets)
liabilities are as follows:
August 31, August 25, August 26,
2002 2001 2000
---------------------------------------------------------
Rental merchandise in service $ 12,765 $ 20,061 $ 21,599
Tax in excess of book depreciation 23,630 20,151 19,244
Accruals and other (11,547) (13,991) (12,516)
---------------------------------------------------------
Net deferred tax liabilities $ 24,848 $ 26,221 $ 28,327
=========================================================
4. Long-Term Obligations
Long-term obligations outstanding on the accompanying consolidated balance
sheets are as follows:
August 31, August 25,
2002 2001
- -----------------------------------------------------------------------------------------------------
Unsecured revolving credit agreement with a syndicate of banks,
interest rates of 2.84% and 5.03%, respectively $ 80,000 $ 88,275
Notes payable, interest rates from 4.9% - 7.5%, payable
in various installments through 2007 4,431 4,924
Amounts due for restrictive covenants and other,
payable in various installments through 2005 665 1,596
- -----------------------------------------------------------------------------------------------------
85,096 94,795
Less - current maturities 1,406 1,664
- -----------------------------------------------------------------------------------------------------
$ 83,690 $ 93,131
=====================================================================================================
Aggregate current maturities of long-term obligations for years subsequent to
August 31, 2002 are $1,406 in 2003, $2,251 in 2004, $478 in 2005, $80,409 in
2006, $179 in 2007 and $373 thereafter.
The Company's unsecured revolving credit agreement runs through August 30, 2005.
As of August 31, 2002, the maximum line of credit was $125,000. Under this line
of credit, the Company may borrow funds at variable interest rates based on the
Eurodollar rate or the bank's money market rate, as selected by the Company.
This agreement contains, among other things, provisions regarding net worth and
debt coverage. Under the most restrictive of these provisions, the Company was
required to maintain minimum consolidated tangible net worth of $182,377 as of
August 31, 2002. The Company was in compliance with these provisions as of
August 31, 2002.
5. Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended,
in 2001. SFAS No. 133 established standards for accounting and reporting
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The swap
agreements are cash flow hedges and are used to manage exposure to interest rate
movement by effectively changing the variable rate to a fixed rate. Such
instruments are matched with the underlying borrowings. SFAS No. 133 eliminates
special hedge accounting if a swap agreement does not meet certain criteria,
thus requiring the Company to reflect all changes in the fair value of the swap
agreement in earnings in the period of change.
In October 1999, the Company entered into an interest rate swap agreement with a
bank, notional amount $40,000, maturing October 13, 2004. The Company pays a
fixed rate of 6.38% and receives a variable rate tied to the three month LIBOR
rate. As of August 31, 2002 the applicable variable rate was 1.86%. On October
15, 2002, the bank had the option to terminate the swap agreement without
further obligation to make payments to the Company. The bank did not exercise
this option. This swap agreement does not meet the required criteria as defined
in SFAS No. 133 to use special hedge accounting. Accordingly, the Company has
recorded, in the interest rate swap expense line item of its consolidated
statement of income, charges of $1,256 in 2002 and $2,240 in 2001 for the
changes in the fair value of the swap agreement.
In June 2001, the Company entered into a second interest rate swap agreement
with a bank, notional amount $20,000, maturing June 5, 2003. The Company pays a
fixed rate of 4.69% and receives a variable rate tied to the three month LIBOR
rate. As of August 31, 2002 the applicable variable rate was 1.90%. This swap
agreement meets the required criteria as defined in SFAS No. 133 to use special
hedge accounting. Accordingly, the Company has recorded, in the accumulated
other comprehensive income (loss) line item of its consolidated statement of
shareholders' equity, a charge of $195, net of tax of $130 in 2002 and a charge
of $150, net of tax of $100 in 2001, for the change in the fair value of the
swap agreement.
During 2001, the Company entered into natural gas swap agreements to mitigate
the commodity price risk associated with the natural gas used at certain laundry
facilities. During the third quarter of fiscal 2002, the Company liquidated
these swap agreements. The impact of this liquidation was not material to the
Company's financial condition or results of operations. These swap agreements
met the required criteria as defined in SFAS No. 133 to use special hedge
accounting. Accordingly, the Company recorded, in accumulated other
comprehensive income (loss), income of $515, net of tax of $343 in 2002 and a
loss of $515, net of tax of $343 in 2001, related to the change in the fair
value of the swap agreements.
6. Employee Benefit Plans
The Company has a profit sharing plan with a 401(k) feature for all eligible
employees not under collective bargaining agreements. The Company matches a
portion of the employee's contribution and can make an additional contribution
at its discretion. Contributions charged to expense under the plan were $6,176
in 2002, $5,744 in 2001 and $4,404 in 2000.
Some employees under collective bargaining agreements are covered by
union-sponsored multi-employer pension plans. Company contributions, generally
based upon hours worked, are in accordance with negotiated labor contracts.
Payments to these plans amounted to $402 in 2002, $282 in 2001 and $419 in 2000.
Information is not readily available for the Company to determine its share of
unfunded vested benefits, if any, under these plans.
7. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets ("SFAS No. 142")". SFAS No. 142
addresses financial accounting and reporting for goodwill and other intangible
assets. SFAS No. 142 supersedes Accounting Principles Board ("APB") Opinion No.
17, "Intangible Assets". The Company adopted SFAS No. 142 effective August 26,
2001. Under SFAS No. 142, goodwill is no longer amortized, but reviewed
annually, or more frequently if certain indicators arise, for impairment. There
were no impairment losses related to goodwill and indefinite-lived intangible
assets due to the application of SFAS No. 142. In addition, the remaining useful
lives of amortizable intangible assets were reviewed and deemed appropriate.
Upon adoption of SFAS No. 142, the Company discontinued the amortization of
goodwill. The following table presents a reconciliation of net income and
earnings per share, adjusted for the exclusion of goodwill, net of tax:
August 31, August 25, August 26,
Year ended (in thousands) 2002 2001 2000
--------------------------------------------------------
Reported net income $26,859 $23,224 $19,868
Add: Goodwill amortization, net of tax -- 1,178 1,057
--------------------------------------------------------
Adjusted net income $26,859 $24,402 $20,925
========================================================
Reported basic earnings per share $1.40 $1.20 $1.01
Add: Goodwill amortization, net of tax -- .06 .05
--------------------------------------------------------
Adjusted basic earnings per share $1.40 $1.26 $1.06
========================================================
Reported diluted earnings per share $1.39 $1.20 $1.01
Add: Goodwill amortization, net of tax -- .06 .05
--------------------------------------------------------
Adjusted diluted earnings per share $1.39 $1.26 $1.06
========================================================
The changes in the carrying amount of goodwill are as follows:
Balance as of August 25, 2001 $ 54,579
Goodwill acquired during the period 6,960
Amortization --
-------------
Balance as of August 31, 2002 $ 61,539
=============
Other intangible assets, net on the Company's accompanying consolidated balance
sheets are as follows:
August 31, August 25,
2002 2001
-----------------------------
Customer contracts, net of accumulated amortization of $30,586
and $27,396, respectively $ 18,170 $ 19,534
Restrictive covenants, net of accumulated amortization of
$11,745 and $9,841, respectively 4,073 5,775
Other intangible assets, net of accumulated amortization of
$811 and $579, respectively 912 801
-----------------------------
$ 23,155 $ 26,110
=============================
Estimated amortization expense for the five fiscal years subsequent to August
31, 2002, based on other intangible assets, net as of August 31, 2002 is as
follows:
2003 $4,227
2004 3,157
2005 2,495
2006 2,113
2007 1,945
8. Accrued Liabilities
Accrued liabilities on the accompanying consolidated balance sheets are as
follows:
August 31, August 25,
2002 2001
-------------------------------
Insurance related $18,372 $20,212
Payroll related 13,537 13,216
Environmental related 5,377 5,047
Other 16,045 16,767
-------------------------------
$53,331 $55,242
===============================
9. Commitments and Contingencies
Lease Commitments
The Company leases certain buildings from independent parties. Total rent
expense on all leases was $3,436 in 2002, $3,564 in 2001, and $3,542 in 2000.
Annual minimum lease commitments for all years subsequent to August 31, 2002 are
$2,759 in 2003, $1,997 in 2004, $1,238 in 2005, $648 in 2006 and $441
thereafter.
Contingencies
The Company and its operations are subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of hazardous wastes and other
substances. In particular, industrial laundries use and must dispose of
detergent waste water and other residues. The Company is attentive to the
environmental concerns surrounding the disposal of these materials and has
through the years taken measures to avoid their improper disposal. In the past,
the Company has settled, or contributed to the settlement of, actions or claims
brought against the Company relating to the disposal of hazardous materials and
there can be no assurance that the Company will not have to expend material
amounts to remediate the consequences of any such disposal in the future.
Further, under environmental laws, an owner or lessee of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in or emanating from such property, as well as related
costs of investigation and property damage. Such laws often impose liability
without regard to whether the owner or lessee knew of or was responsible for the
presence of such hazardous or toxic substances. There can be no assurances that
acquired or leased locations have been operated in compliance with environmental
laws and regulations or that future uses or conditions will not result in the
imposition of liability upon the Company under such laws or expose the Company
to third-party actions such as tort suits. The Company continues to address
environmental conditions under terms of consent orders negotiated with the
applicable environmental authorities or otherwise with respect to sites located
in or related to Woburn, Massachusetts, Uvalde, Texas, Williamstown, Vermont,
and Springfield, Massachusetts.
The Company's nuclear garment decontamination facilities are licensed by the
Nuclear Regulatory Commission, or in certain cases by the applicable state
agency, and are subject to regulation by federal, state and local authorities.
In recent years, there has been increased scrutiny and, in certain cases,
regulation of nuclear facilities or related services that have resulted in the
suspension of operations at certain nuclear facilities served by the Company or
disruptions of the Company's ability to service such facilities. There can be no
assurance that such increased scrutiny will not lead to the shut-down of such
facilities or otherwise cause material disruptions in the Company's garment
decontamination business.
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations, including litigation
related to charges for certain ancillary services, personal injury claims,
customer contract matters, employment claims and environmental matters as
described above.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company believes
that the aggregate amount of such liabilities, if any, in excess of amounts
accrued or covered by insurance, will not have a material adverse effect on the
consolidated financial position or results of operation of the Company. It is
possible, however, that future results of operations for any particular future
period could be materially affected by changes in our assumptions or strategies
related to these contingencies or changes out of the Company's control.
As security for certain agreements, the Company had standby irrevocable bank
commercial letters of credit and mortgages of $14,927 and $13,327 outstanding as
of August 31, 2002 and August 25, 2001, respectively.
10. Common Stock Options
The Company adopted an incentive stock option plan (the "Plan") in November,
1996 and reserved 150,000 shares of common stock for issue under the Plan. In
January of 2002, the Company increased to 450,000, the number of shares of
common stock reserved for issuance under the Plan. Options granted under the
Plan, through August 31, 2002, are at a price equal to the fair market value of
the Company's common stock on the date of grant and expire eight years after the
grant date. Each such option is subject to a proportional four-year vesting
schedule with no options generally being vested or exercisable until one year
from date of grant. The following table summarizes the common stock option
activity for the fiscal years ended August 31, 2002, August 25, 2001, and August
26, 2000:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Outstanding, August 28, 1999 0 $ --
Granted 58,000 15.07
Exercised 0 0.00
Forfeited (2,200) 15.13
- -----------------------------------------------------------------
Outstanding, August 26, 2000 55,800 15.07
Granted 57,700 10.06
Exercised 0 0.00
Forfeited (5,700) 12.60
- -----------------------------------------------------------------
Outstanding, August 25, 2001 107,800 12.52
Granted 55,700 17.55
Exercised (4,875) 13.44
Forfeited (11,375) 13.71
- -----------------------------------------------------------------
Outstanding, August 31, 2002 147,250 $ 14.30
=================================================================
Exercisable, August 26, 2000 0 $ --
Exercisable, August 25, 2001 13,075 15.13
Exercisable, August 31, 2002 46,288 13.78
The following table summarizes information relating to currently
outstanding and exercisable stock options as of August 31, 2002:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- --------------------------------------------------------------------------------
REMAINING
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (IN YEARS) PRICES EXERCISABLE PRICES
- --------------------------------------------------------------------------------
45,300 5.0 $ 15.13 33,975 $ 15.13
49,250 6.2 10.06 12,313 10.06
52,700 7.2 17.55 0 17.55
- ----------- -----------
147,250 46,288
=========== ===========
The Company accounts for the stock option plan under APB No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost has been recognized
related to stock option grants. Had compensation cost for this plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would have been
reduced to the following pro forma amounts for the fiscal years ended August 31,
2002, August 25, 2001, and August 26, 2000:
2002 2001 2000
---------------------------------------------------------------------------
Net income:
As reported $ 26,859 $ 23,224 $ 19,868
Pro forma $ 26,733 $ 23,078 $ 19,782
Net income per share - basic:
As reported $ 1.40 $ 1.20 $ 1.01
Pro forma $ 1.39 $ 1.19 $ 1.01
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model as prescribed by SFAS No. 123, based upon the
date of grant, with the following assumptions used for grants each year:
2002 2001 2000
---------------------------------------------------------------------------
Risk-free interest rate 4.03% 5.78% 6.34%
Expected dividend yield 1.00% 1.00% 1.00%
Expected life in years 8 8 8
Expected volatility 30% 30% 30%
The weighted average fair values of options granted during fiscal years 2002,
2001 and 2000 were $6.67, $4.28, and $6.63, respectively.
11. Shareholders' Equity
The significant attributes of each type of stock are as follows:
Common stock -- Each share is entitled to one vote and is freely transferable.
Each share of common stock is entitled to a cash dividend equal to 125% of any
cash dividend paid on each share of Class B common stock.
Class B common stock -- Each share is entitled to ten votes and can be converted
to common stock on a share-for-share basis. Until converted to common stock,
however, Class B shares are not freely transferable.
12. Other Comprehensive Income (Loss)
The components of accumulated other comprehensive loss are as follows:
Change in
Fair Value of
Derivative Total Accumulated
Foreign Currency Instruments, Other
Translation net of tax Comprehensive Loss
-------------------------------------------------------------------------
Balance, August 28, 1999 $ (1,948) $ -- $ (1,948)
Change during the period (21) -- (21)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, August 26, 2000 (1,969) -- (1,969)
Change during the period (893) (665) (1,558)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, August 25, 2001 (2,862) (665) (3,527)
Change during the period (471) 320 (151)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 $ (3,333) $ (345) $ (3,678)
==================================================================================================================================
13 . Segment Reporting
The Company operates as a single reportable segment, that being the design,
rental, cleaning and delivery of occupational garments, industrial wiper towels,
floor mats and other non-garment items, which represents more than 90% of
consolidated net sales. The Company also has activities in Canada, Mexico and
Europe, which do not meet the thresholds outlined in SFAS 131.
14. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15, 2002.
The Statement requires obligations associated with the retirement of long-lived
assets to be recognized at fair value at the time that the obligations are
incurred. Upon initial recognition of the liability, the cost should be
capitalized as part of the related long-lived asset and allocated to expense
over the useful life of the asset. The Company will adopt SFAS No. 143 effective
September 1, 2002. Due to the number of operating facilities that the Company
maintains, the extensive amount of information that must be reviewed and
estimates that must be made to assess the effects of the Statement, the Company
has not yet quantified the impact of adopting SFAS No. 143 on its consolidated
financial statements. However, the Company expects the impact of adopting SFAS
No. 143 will increase property and equipment, net, result in the recognition of
an asset retirement obligation, and require the Company to record a material
charge to its consolidated statement of income in the first quarter of fiscal
2003 representing the cumulative effect of a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not believe that SFAS 144
will have a material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe that SFAS 146
will have a material impact on its consolidated financial statements.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
UniFirst Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of UniFirst
Corporation and subsidiaries as of August 31, 2002 and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. 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 audit. The consolidated financial statements of UniFirst
Corporation and subsidiaries as of August 25, 2001 and August 26, 2000, and for
the two years then ended, were audited by other auditors who have ceased
operations and whose report dated October 31, 2001, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of UniFirst
Corporation and subsidiaries at August 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 7 to the financial statements, effective August 26, 2001,
the Company adopted Statement of Financial Accounting Standards (Statement) No.
142, "Goodwill and Other Intangible Assets." As discussed above, the
consolidated financial statements of UniFirst Corporation and subsidiaries as of
August 25, 2001 and August 26, 2000, and for the two years then ended, were
audited by other auditors who have ceased operations. As described in Note
7, these consolidated financial statements have been revised to include the
transitional disclosures required by Statement No. 142 which was adopted as of
August 26, 2001. We have audited the disclosures in Note 7 and, in our opinion,
the disclosures for the years ended August 25, 2001 and August 26, 2000 in Note
7 are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the consolidated financial statements of UniFirst Corporation and
subsidiaries as of August 25, 2001 and August 26, 2000, and for the two years
then ended, other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the consolidated
financial statements as of August 25, 2001 and August 26, 2000, and for the two
years then ended, taken as a whole.
/s/ ERNST & YOUNG LLP
- --------------------------------------
Boston, Massachusetts
November 11, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
UniFirst Corporation and Subsidiaries:
To UniFirst Corporation:
We have audited the accompanying consolidated balance sheets of UniFirst
Corporation (a Massachusetts corporation) and subsidiaries as of August 25, 2001
and August 26, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 25, 2001. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
UniFirst Corporation and subsidiaries as of August 25, 2001 and August 26, 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended August 25, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
- --------------------------------------
Boston, Massachusetts
October 31, 2001
NOTE:
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with UniFirst Corporation's filing on Form 10-K for the year ended
August 25, 2001. This audit report has not been reissued by Arthur Andersen LLP
in connection with this filing on Form 10-K. See Exhibit 23.2 for further
discussion.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company believes the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgements and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Had the Company used the first-in, first-out (FIFO) accounting
method, inventories would have been approximately $1,544 and $1,493 higher at
August 31, 2002 and August 25, 2001, respectively. Substantially all inventories
represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise.
Material differences may result in the amount and timing of operating profit for
any period if management makes different judgments or utilizes different
estimates.
Insurance
The Company self-insures for certain obligations related to health and workers'
compensation programs. The Company also purchases stop-loss insurance policies
to protect it from catastrophic losses. Judgments and estimates are used in
determining the potential value associated with reported claims and for losses
that have occurred, but have not been reported. The Company's estimates consider
historical claim experience and other factors. The Company's liabilities are
based on estimates, and, while the Company believes that the accrual for loss is
adequate, the ultimate liability may be in excess of or less than the amounts
recorded. Changes in claim experience, the Company's ability to settle claims or
other estimates and judgments used by management could have a material impact on
the amount and timing of expense for any period.
Environmental and Other Contingencies The Company is subject to legal
proceedings and claims related to environmental matters arising from the
conduct of their business operations, including personal injury claims,
customer contract matters, employment claims, and environmental matters.
Accounting principles generally accepted in the United States require that a
liability for contingencies be recorded when it is probable that a
liability has occurred and the amount of the liability can be reasonably
estimated. Significant judgment is required to determine the existence of a
liability, as well as the amount to be recorded. The Company regularly consults
with attorneys and outside consultants to ensure that all of the relevant facts
and circumstances are considered, before a contingent liability is recorded. The
Company records accruals for environmental and other contingencies based on
enacted laws, regulatory orders or decrees, the Company's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys. Changes in enacted laws,
regulatory orders or decrees, management's estimates of costs, insurance
proceeds, participation by other parties and the timing of payments, and the
input of outside consultants and attorneys could have a material impact on the
amounts recorded for environmental and other contingent liabilities.
Income Taxes
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records reserves for probable exposures. Based on the
Company's evaluation of current tax positions, the Company believes they have
appropriately accrued for probable exposures.
Fiscal Year Ended August 31, 2002 Compared with Fiscal Year Ended August 25,
2001
Revenues. In 2002, revenues increased 4.0% to $578.9 million as compared with
$556.4 million for 2001. This increase can be attributed to an extra week of
revenue in fiscal 2002 (1.9%), increased revenue from the nuclear garment
services business (1.7%), and price increases in the core uniform rental and
first aid business (0.4%).
Operating costs. Operating costs decreased to $349.0 million for 2002 as
compared with $349.4 million for 2001. As a percentage of revenues, operating
costs decreased to 60.3% from 62.8% for these periods, primarily due to lower
merchandise costs resulting from transitioning manufacturing operations to
Mexico, better control of garment usage through the use of in-plant stockrooms,
and reduced energy related costs such as natural gas, electricity and fuel.
Selling and administrative expenses. The Company's selling and administrative
expenses increased to $139.9 million, or 24.2% of revenues, for 2002 as
compared with $121.8 million, or 21.9% of revenues, for 2001. Fiscal 2001
reflects a credit to selling and administrative expenses of $1.1 million for a
favorable settlement of a lawsuit related to the Company's nuclear garment
service business. Excluding this settlement, selling and administrative expenses
would have been $122.9 million, or 22.1% of revenues. The increase from 2001 to
2002 is attributable to significant increases in healthcare costs, increased
marketing costs due to salesforce expansion and legal expenses.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $38.0 million, or 6.6% of revenues, for 2002, as compared
with $37.6 million, or 6.8% of revenues, for 2001. This increase was due
primarily to increased depreciation expense during fiscal 2002 related to new
capital expenditures and the completion and placement into service of the
Company's second manufacturing plant in Mexico, offset by the elimination of
goodwill amortization of $2.0 million, which was recorded in 2001. See Note 7
for further discussion.
Interest expense. Interest expense was $8.8 million, or 1.5% of revenues, for
2002 as compared with $9.1 million, or 1.6% of revenues, for 2001. During the
second quarter of fiscal 2002, the Company recorded a $2.3 million interest
charge as an estimated amount due for settlement of a revenue agent review with
the IRS. Excluding this charge, interest expense would have been $6.5 million
for 2002, or 1.1% of revenues. The decrease from fiscal 2001 to fiscal 2002 is
related to lower interest rates in 2002, as well as continued debt reduction in
2002.
Interest income. Interest income, which is primarily amounts charged to
customers for overdue accounts, increased to $1.4 million for fiscal 2002, as
compared to $1.2 million for fiscal 2001. The amounts recorded in each year were
0.2% of revenue.
Interest rate swap expense. Interest rate swap expense was $1.3 million, or 0.2%
of revenues, for 2002, as compared to $2.2 million, or 0.4% of revenues, for
2001. The lower interest rate swap expense in 2002 is due to a change in the
fair value of the Company's $40 million notional amount interest rate swap
agreement. See Note 5 for a further discussion of the impact of this change.
Provision for income taxes. The Company's effective income tax rate was 38.0% in
both 2002 and 2001.
Fiscal Year Ended August 25, 2001 Compared with Fiscal Year Ended August 26,
2000
Revenues. In 2001, revenues increased 5.2% to $556.4 million as compared with
$528.7 million for 2000. This increase can be attributed to growth from existing
operations (4.0%), price increases (1.0%) and acquisitions (0.2%). Growth from
existing operations was primarily from the conventional uniform rental business
(3.1%), and from the nuclear garment services business (0.9%).
Operating costs. Operating costs increased to $349.4 million for 2001 as
compared with $336.3 million for 2000 as a result of costs associated with
increased revenues. As a percentage of revenues, operating costs decreased to
62.8% from 63.6% for these periods, primarily due to lower merchandise costs
resulting from improved product utilization, offset somewhat by significant
increases in energy related costs such as natural gas, electricity and fuel.
Selling and administrative expenses. The Company's selling and administrative
expenses increased to $121.8 million, or 21.9% of revenues, for 2001 as compared
with $118.4 million, or 22.4% of revenues, for 2000. These costs were favorably
impacted by a $1.1 million settlement received in the first quarter of 2001 from
a lawsuit related to the Company's nuclear garment services business. Excluding
this settlement, these expenses would have been $122.9 million, or 22.1% of
revenues, for 2001.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $37.6 million, or 6.8% of revenues, for 2001, as compared
with $34.7 million, or 6.6% of revenues, for 2000. This increase was due
primarily tohigher depreciation expense in 2001.
Other expense (income). Net interest expense (interest expense less interest
income) was $7.9 million, or 1.4% of revenues, for 2001 as compared with $7.2
million, or 1.4% of revenues, for 2000. The increase is primarily attributable
to higher interest rates during 2001, offset somewhat by higher interest income
resulting from charges to customers for overdue receivable balances. Interest
rate swap expense was $2.2 million, or 0.4% or revenues, for 2001 due to the
implementation of SFAS No. 133. See Note 5 for a further discussion of the
impact of this change.
Provision for income taxes. The Company's effective income tax rate was 38.0% in
both 2001 and 2000.
Liquidity and Capital Resources
Shareholders' equity at August 31, 2002 was $309.7 million, or 78.4% of the
Company's total capitalization.
Net cash provided by operating activities was $52.7 million in fiscal 2002 and
totaled $186.5 million for the three years ended August 31, 2002. These cash
flows were used primarily to fund $114.2 million in capital expenditures to
expand and update Company facilities, and reduce debt by a net amount of $30.2
million for the three years ended August 31, 2002. Additionally, during this
three year period, $20.4 million was used for acquisitions, net of cash
acquired, $4.4 million was used to purchase other assets, $8.2 million was used
to repurchase 677,000 shares of the Company's common stock, and $7.8 million was
used to pay cash dividends to Common and Class B Common shareholders.
As of August 31, 2002, the Company had $4.3 million in cash and cash equivalents
and $31.1 million available under its $125.0 million unsecured line of credit
with a syndicate of banks. As of August 31, 2002, the Company had outstanding
$13.9 million of standby irrevocable bank commercial letters of credit. The
Company believes its cash generated from operations and its borrowing capacity
will adequately cover its foreseeable capital requirements.
Contractual Obligations and Commercial Commitments
Payments Due by Fiscal Period
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------------
Long Term Debt $ 85,096 $ 1,406 $ 2,251 $ 478 $ 80,409 $ 552
Operating Leases 7,083 2,759 1,997 1,238 648 441
----------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 92,179 $ 4,165 $ 4,248 $ 1,716 $ 81,057 $ 993
==============================================================================================
Commitment Expiration
Total
Amounts
Other Commercial Commitments Committed 2003 2004 2005 2006 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------------
Unused Lines of Credit $31,073 $-- $-- $-- $ 31,073 $ --
Standby Letters of Credit 13,927 -- -- -- 13,927 --
Other Commercial Commitments 1,000 -- -- -- -- 1,000
----------------------------------------------------------------------------------------------
Total Commercial Commitments $46,000 $-- $-- $-- $ 45,000 $ 1,000
==============================================================================================
Seasonality
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing of acquisitions and of
commencing start-up operations and related costs; the effectiveness of
integrating acquired businesses and start-up operations; the timing of nuclear
plant outages; capital expenditures; seasonal rental and purchasing patterns of
the Company's customers; and price changes in response to competitive factors.
In addition, the Company's operating results historically have been lower during
the second and fourth fiscal quarters than during the other quarters of the
fiscal year. The operating results for any historical quarter are not
necessarily indicative of the results to be expected for an entire fiscal year
or any other interim periods.
Effects of Inflation
Inflation has had the effect of increasing the reported amounts of the Company's
revenues and costs. The Company uses the last-in, first-out (LIFO) method to
value a significant portion of inventories. This method tends to reduce the
amount of income due to inflation included in the Company's results of
operations. The Company believes that, through increases in its prices and
productivity improvements, it has been able to recover increases in costs and
expenses attributable to inflation.
Potential Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15, 2002.
The Statement requires obligations associated with the retirement of long-lived
assets to be recognized at fair value at the time that the obligations are
incurred. Upon initial recognition of the liability, the cost should be
capitalized as part of the related long-lived asset and allocated to expense
over the useful life of the asset. The Company
will adopt SFAS No. 143 effective September 1, 2002. Due to the number of
operating facilities that the Company maintains, the extensive amount of
information that must be reviewed and estimates that must be made to assess the
effects of the Statement, the Company has not yet quantified the impact of
adopting SFAS No. 143 on its consolidated financial statements. However, the
Company expects the impact of adopting SFAS No. 143 will increase property and
equipment, net, result in the recognition of an asset retirement obligation, and
require the Company to record a material charge to its consolidated statement of
income in the first quarter of fiscal 2003 representing the cumulative effect of
a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not believe that SFAS 144
will have a material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe that SFAS 146
will have a material impact on its consolidated financial statements.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward looking statements contained in this annual report are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward looking
statements. Such factors include uncertainties regarding the Company's ability
to consummate and successfully integrate acquired businesses, uncertainties
regarding any existing or newly-discovered expenses and liabilities related to
environmental compliance and remediation, the Company's ability to compete
successfully without any significant degradation in its margin rates, seasonal
fluctuations in business levels, uncertainties regarding the price levels of
natural gas, electricity and fuel, improvement in under performing rental
operations, uncertainties arising from the war on terrorism, including the
instability created by the escalating conflict in the Middle East, and its
impact on the economy and general economic conditions. When used in this annual
report, the words "intend," "anticipate," "believe," "estimate," and "expect"
and similar expressions as they relate to the Company are included to identify
such forward looking statements.
Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Risk
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies that represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
foreign countries, as a result of the Company's transactions in these foreign
markets. The Company does not operate a hedging program to mitigate the effect
of a significant rapid change in the value of the Canadian Dollar, Euro or
Mexican Peso as compared to the U.S. dollar. If such a change did occur, the
Company would have to take into account a currency exchange gain or loss in the
amount of the change in the U.S. dollar denominated balance of the amounts
outstanding at the time of such change. While the Company does not believe such
a gain or loss is likely, and would not likely be material, there can be no
assurance that such a loss would not have an adverse material effect on the
Company's results of operations or financial condition.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures
through its regular operating and financing activities. In fiscal 2000, the
Company entered into an interest rate swap agreement with a bank, notional
amount $40,000, maturing October 13, 2004. The Company pays a fixed rate of
6.38% and receives a variable rate tied to the three month LIBOR rate. As of
August 31, 2002 the applicable variable rate was 1.86%. On October 15, 2002,
the bank had the option to terminate the swap agreement without further
obligation to make payments to the Company. The bank did not exercise this
option. In fiscal 2001, the Company entered into a second interest rate swap
agreement with a bank, notional amount $20,000, maturing June 5, 2003. The
Company pays a fixed rate of 4.69% and receives a variable rate tied to the
three month LIBOR rate. As of August 31, 2002 the applicable variable rate was
1.90%. See Note 5 for more details on the Company's derivate instruments and
hedging activities.
The Company is exposed to interest rate risk primarily through its borrowings
under its $125,000 unsecured line of credit with a syndicate of banks. Under the
line of credit, the Company may borrow funds at variable interest rates based on
the Eurodollar rate or the bank's money market rate, as selected by the Company.
As of August 31, 2002, the fair value of the Company's outstanding debt
approximates its carrying value.
Other
During 2001, the Company entered into natural gas swap agreements to mitigate
the commodity price risk associated with the natural gas used at certain laundry
facilities. During the third quarter of fiscal 2002, the Company liquidated
these swap agreements. The impact of this liquidation was not material to the
Company's financial condition or results of operations.
Quarterly Financial Data (Unaudited)
UniFirst Corporation and Subsidiaries
The following is a summary of the results of operations for each of the quarters
within the years ended August 31, 2002 and August 25, 2001.
(In thousands, except per share data)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
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Revenues $142,625 $151,523 $144,259 $140,491
Income before income taxes 12,313 8,321 12,149 10,536
Net income 7,634 5,159 7,532 6,534
Weighted average shares outstanding - basic 19,220 19,221 19,223 19,225
Weighted average shares outstanding - diluted 19,250 19,276 19,293 19,288
Net income per share - basic $0.40 $0.27 $0.39 $0.34
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Net income per share - diluted $0.39 $0.27 $0.39 $0.34
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First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
Revenues $141,009 $136,562 $140,625 $138,175
Income before income taxes 11,010 6,941 10,251 9,255
Net income 6,826 4,303 6,356 5,739
Weighted average shares outstanding - basic 19,620 19,362 19,256 19,220
Weighted average shares outstanding - diluted 19,620 19,362 19,274 19,243
Net income per share - basic $0.35 $0.22 $0.33 $0.30
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Net income per share - diluted $0.35 $0.22 $0.33 $0.30
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Common Stock Prices and Cash Dividends Per Share
For the Years Ended August 31, 2002 and August 25, 2001:
Cash Dividends Cash Dividends
Price Per Share Price Per Share Per Share Per Share
Class B
2002 High Low Common Stock Common Stock
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First Quarter $19.490 $15.300 $0.030 $0.0375
Second Quarter 24.360 19.370 0.030 0.0375
Third Quarter 28.690 22.190 0.030 0.0375
Fourth Quarter 25.260 21.520 0.030 0.0375
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Cash Dividends Cash Dividends
Price Per Share Price Per Share Per Share Per Share
Class B
2001 High Low Common Stock Common Stock
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First Quarter $10.625 $8.875 $0.0300 $0.0375
Second Quarter 13.938 9.063 0.0300 0.0375
Third Quarter 19.700 12.350 0.0300 0.0375
Fourth Quarter 19.250 15.600 0.0300 0.0375
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The Company's common shares are traded on the New York Stock Exchange (NYSE
Symbol: UNF).
The approximate number of shareholders of record of the Company's common stock
and Class B common stock as of November 15, 2002 were 128 and 22, respectively.