1
EXHIBIT 13
Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
August 29, August 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,330,000 $ 4,054,000
Receivables, less reserves of $1,529,000 in 1998
and $1,299,000 in 1997 42,127,000 39,431,000
Inventories 24,152,000 19,497,000
Rental merchandise in service 42,971,000 40,013,000
Prepaid expenses 188,000 149,000
- -------------------------------------------------------------------------------------------------------------
Total current assets 114,768,000 103,144,000
- -------------------------------------------------------------------------------------------------------------
Property and equipment:
Land, buildings and leasehold improvements 150,853,000 137,281,000
Machinery and equipment 165,762,000 142,242,000
Motor vehicles 41,608,000 37,276,000
- -------------------------------------------------------------------------------------------------------------
358,223,000 316,799,000
Less - accumulated depreciation 147,261,000 128,532,000
- -------------------------------------------------------------------------------------------------------------
210,962,000 188,267,000
- -------------------------------------------------------------------------------------------------------------
Other assets 50,400,000 48,215,000
- -------------------------------------------------------------------------------------------------------------
$ 376,130,000 $ 339,626,000
=============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 1,194,000 $ 1,040,000
Notes payable 2,511,000 3,213,000
Accounts payable 14,109,000 13,085,000
Accrued liabilities 45,101,000 45,637,000
Accrued and deferred income taxes 2,540,000 2,555,000
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 65,455,000 65,530,000
- -------------------------------------------------------------------------------------------------------------
Long-term obligations, net of current maturities 45,955,000 39,797,000
Deferred income taxes 18,346,000 17,107,000
- -------------------------------------------------------------------------------------------------------------
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 and outstanding 10,216,864
shares in 1998 and 7,898,864 shares in 1997 1,022,000 790,000
Class B common stock, $.10 par value; 20,000,000
shares authorized; issued and outstanding 10,293,744
shares in 1998 and 12,611,744 shares in 1997 1,029,000 1,261,000
Capital surplus 7,078,000 7,078,000
Retained earnings 239,952,000 208,949,000
Cumulative translation adjustment (2,707,000) (886,000)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 246,374,000 217,192,000
- -------------------------------------------------------------------------------------------------------------
$ 376,130,000 $ 339,626,000
=============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
1
2
Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
Year Ended August 29, August 30, August 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $ 448,052,000 $ 419,093,000 $ 391,794,000
- ------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Operating costs 269,660,000 256,896,000 240,672,000
Selling and administrative expenses 97,588,000 91,810,000 89,393,000
Depreciation and amortization 26,629,000 23,386,000 20,814,000
- ------------------------------------------------------------------------------------------------------------------------------
393,877,000 372,092,000 350,879,000
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations 54,175,000 47,001,000 40,915,000
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense (income):
Interest expense 2,613,000 2,351,000 2,659,000
Interest income (297,000) (233,000) (261,000)
- ------------------------------------------------------------------------------------------------------------------------------
2,316,000 2,118,000 2,398,000
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 51,859,000 44,883,000 38,517,000
Provision for income taxes 18,669,000 16,160,000 13,855,000
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 33,190,000 $ 28,723,000 $ 24,662,000
==============================================================================================================================
Weighted average number of shares outstanding 20,510,608 20,510,608 20,510,608
==============================================================================================================================
Net income per share - basic & diluted $ 1.62 $ 1.40 $ 1.20
==============================================================================================================================
Dividends per share:
Common stock $ 0.12 $ 0.12 $ 0.11
Class B common stock 0.10 0.10 0.09
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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3
Consolidated Statements of Shareholders' Equity
UniFirst Corporation and Subsidiaries
Class B Class B Cumulative
Common Common Common Common Capital Retained Translation
Shares Shares Stock Stock Surplus Earnings Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 26, 1995 7,886,644 12,623,964 $ 789,000 $ 1,262,000 $ 7,078,000 $ 159,701,000 $ (234,000)
Net income -- -- -- -- -- 24,662,000 --
Dividends -- -- -- -- -- (1,979,000) --
Shares converted 20 (20) -- -- -- -- --
Translation adjustment -- -- -- -- -- -- (170,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1996 7,886,664 12,623,944 789,000 1,262,000 7,078,000 182,384,000 (404,000)
Net income -- -- -- -- -- 28,723,000 --
Dividends -- -- -- -- -- (2,158,000) --
Shares converted 12,200 (12,200) 1,000 (1,000) -- -- --
Translation adjustment -- -- -- -- -- -- (482,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 30, 1997 7,898,864 12,611,744 790,000 1,261,000 7,078,000 208,949,000 (886,000)
Net income -- -- -- -- -- 33,190,000 --
Dividends -- -- -- -- -- (2,187,000) --
Shares converted 2,318,000 (2,318,000) 232,000 (232,000) -- -- --
Translation adjustment -- -- -- -- -- -- (1,821,000)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
Balance, August 29, 1998 10,216,864 10,293,744 $ 1,022,000 $ 1,029,000 $ 7,078,000 $ 239,952,000 $ (2,707,000)
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
Year ended August 29, August 30, August 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 33,190,000 $ 28,723,000 $ 24,662,000
Adjustments:
Depreciation 22,074,000 19,512,000 17,339,000
Amortization of other assets 4,555,000 3,874,000 3,475,000
Receivables (2,691,000) (2,455,000) (2,272,000)
Inventories (4,684,000) (2,485,000) (370,000)
Rental merchandise in service (2,627,000) (690,000) (3,523,000)
Prepaid expenses (41,000) (22,000) (9,000)
Accounts payable 1,022,000 1,401,000 (1,331,000)
Accrued liabilities (416,000) 8,284,000 1,906,000
Accrued and deferred income taxes 83,000 (1,102,000) (191,000)
Deferred income taxes 1,302,000 715,000 1,812,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 51,767,000 55,755,000 41,498,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (7,470,000) (7,309,000) (18,245,000)
Capital expenditures (43,052,000) (47,432,000) (27,182,000)
Other assets, net (3,479,000) (112,000) (1,432,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (54,001,000) (54,853,000) (46,859,000)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in debt 7,405,000 3,533,000 12,762,000
Reduction of debt (1,708,000) (1,648,000) (7,886,000)
Cash dividends paid or payable (2,187,000) (2,158,000) (1,979,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,510,000 (273,000) 2,897,000
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,276,000 629,000 (2,464,000)
Cash and cash equivalents at beginning of year 4,054,000 3,425,000 5,889,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,330,000 $ 4,054,000 $ 3,425,000
============================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 2,613,000 $ 2,327,000 $ 2,691,000
Income taxes paid 17,445,000 16,577,000 12,439,000
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
UniFirst Corporation is a leader in the uniform and textile services business.
The Company designs, manufactures, personalizes, rents, cleans, delivers and
sells a variety of high quality occupational garments, career apparel and
imagewear programs to businesses of all kinds. The Company also decontaminates
and cleans, in separate facilities, garments which may have been exposed to
radioactive materials.
Principles of Consolidation and Other
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. The Company recognizes revenues
when the actual services are provided to customers.
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 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 1998 and fiscal 1997 had 52 weeks, while fiscal 1996
had 53 weeks.
Inventories
Inventories are stated at the lower of cost or market value. 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 $1,173,000 and $1,240,000
higher at August 29, 1998 and August 30, 1997, respectively.
Rental Merchandise in Service
Rental merchandise in service, stated at cost less amortization, is being
amortized on a straight-line basis over the estimated service lives (primarily
15 months) of the merchandise. In July 1998 the Company changed the estimated
service lives and related amortization periods for rental merchandise in
service, from primarily 12 months to primarily 15 months. This resulted in
approximately $2.0 million, or 0.4% of revenues, less in garment amortization
expense than if the amortization period had not been changed.
Property and Equipment
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
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Assets
Customer contracts are amortized over periods of up to seventeen years.
Restrictive covenants are amortized over the terms of the respective
non-competition agreements, which range from five to fifteen years. Goodwill is
amortized over periods of up to forty 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.
Net Income Per Share
Net income per share is calculated using the weighted average number of common
and dilutive potential common shares outstanding during the year. There were no
dilutive potential common shares outstanding in 1996, 1997 or 1998.
Cash Flow Disclosures
Cash and cash equivalents include cash in banks and bank short-term investments
with maturities of less than ninety days.
2. ACQUISITIONS
Information relating to the acquisition of industrial laundry businesses which
were accounted for as purchases is as follows:
Year ended August 29, August 30, August 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Fair market value of assets acquired $ 7,505,000 $ 7,413,000 $ 18,360,000
Liabilities assumed or created 35,000 104,000 115,000
----------------------------------------------------
Acquisition of businesses, net of cash acquired $ 7,470,000 $ 7,309,000 $ 18,245,000
====================================================
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 in relation to the Company's
consolidated financial statements and therefore pro forma financial information
has not been presented.
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
3. INCOME TAXES
The provision for income taxes consists of the following:
Year ended August 29, August 30, August 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Current:
Federal and Foreign $ 18,328,000 $ 14,259,000 $ 8,615,000
State 3,033,000 2,039,000 2,584,000
- ------------------------------------------------------------------------------------------------------
21,361,000 16,298,000 11,199,000
- ------------------------------------------------------------------------------------------------------
Deferred:
Federal and Foreign (1,875,000) (762,000) 2,295,000
State (817,000) 624,000 361,000
- ------------------------------------------------------------------------------------------------------
(2,692,000) (138,000) 2,656,000
- ------------------------------------------------------------------------------------------------------
$ 18,669,000 $ 16,160,000 $ 13,855,000
======================================================================================================
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 29, August 30, August 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Income taxes at the statutory federal
income tax rate $ 18,151,000 $ 15,709,000 $ 13,481,000
Puerto Rico exempt income (1,062,000) (988,000) (877,000)
Corporate-Owned Life Insurance (850,000) (775,000) (770,000)
State income taxes 1,434,000 1,450,000 1,222,000
Foreign income taxes 265,000 567,000 262,000
Other 731,000 197,000 537,000
- ------------------------------------------------------------------------------------------------------
$ 18,669,000 $ 16,160,000 $ 13,855,000
======================================================================================================
The Company's Puerto Rico subsidiary's income is 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 net deferred tax
liabilities are as follows:
August 29, August 30, August 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Rental merchandise in service $ 15,470,000 $ 14,429,000 $ 13,814,000
Tax in excess of book depreciation 15,713,000 15,533,000 14,836,000
Accruals and other (13,274,000) (9,324,000) (7,819,000)
- ------------------------------------------------------------------------------------------------------
$ 17,909,000 $ 20,638,000 $ 20,831,000
======================================================================================================
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
4. LONG-TERM OBLIGATIONS
Long-term obligations outstanding on the accompanying consolidated balance
sheets are as follows:
August 29, August 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
Unsecured revolving credit agreement with two banks,
interest rates of 6.06% and 6.19%, respectively $ 40,275,000 $33,279,000
Notes payable, interest from 5.2% - 8.5%, payable
in various installments through 2005 4,798,000 4,782,000
Amounts due for restrictive covenants and other,
payable in various installments through 2005 2,076,000 2,776,000
- ---------------------------------------------------------------------------------------------------------
47,149,000 40,837,000
- ---------------------------------------------------------------------------------------------------------
Less - current maturities 1,194,000 1,040,000
- ---------------------------------------------------------------------------------------------------------
$ 45,955,000 $39,797,000
=========================================================================================================
Aggregate current maturities of long-term obligations for each of the next five
years are $1,194,000, $41,116,000, $938,000, $891,000, $673,000 and $2,337,000
thereafter.
The Company's unsecured revolving credit agreement runs through December 31,
1999. As of August 29, 1998, the maximum line of credit was $60,000,000.
In 1996 the Company entered into an interest rate swap agreement with a bank,
notional amount $15,000,000, maturing December 12, 1998. The Company pays a
fixed rate of 5.53% and receives a variable rate tied to the LIBOR rate. As of
August 29, 1998 the variable rate was 5.63%.
Certain of the long-term obligations contain 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 $149,952,000 as of August 29, 1998. Certain notes payable are
guaranteed or secured by assets of the Company.
As of August 29, 1998 and August 30, 1997, the fair market values of the
Company's outstanding debt and swap agreement approximate their carrying value.
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
5. 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 amount of the
Company's contribution is determined at the discretion of the Company.
Contributions charged to expense under the plan were $5,649,000 in 1998,
$4,882,000 in 1997 and $4,184,000 in 1996.
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 the plans amounted to $389,000 in 1998, $279,000 in 1997 and
$221,000 in 1996. Information is not readily available for the Company to
determine its share of unfunded vested benefits, if any, under these plans.
6. OTHER ASSETS
Other assets on the accompanying consolidated balance sheets are as follows:
August 29, August 30,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Customer contracts, restrictive covenants and other assets
arising from acquisitions, less accumulated amortization
of $23,272,000 and $19,433,000, respectively $24,107,000 $24,804,000
Goodwill, less accumulated amortization
of $4,162,000 and $3,455,000, respectively 24,208,000 21,389,000
Other 2,085,000 2,022,000
- ----------------------------------------------------------------------------------------------------------------------------------
$50,400,000 $48,215,000
==================================================================================================================================
7. ACCRUED LIABILITIES
Accrued liabilities on the accompanying consolidated balance sheets are as
follows:
August 29, August 30,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Insurance $17,921,000 $17,735,000
Payroll related 15,748,000 13,818,000
Other 11,432,000 14,084,000
- ----------------------------------------------------------------------------------------------------------------------------------
$45,101,000 $45,637,000
==================================================================================================================================
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Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain buildings from independent parties. Total rent
expense on all leases was $2,685,000 in 1998, $2,401,000 in 1997 and $2,108,000
in 1996.
Annual minimum lease commitments for all years subsequent to August 29, 1998 are
$2,346,000 in 1999, $1,534,000 in 2000, $1,136,000 in 2001, $610,000 in 2002,
$319,000 in 2003 and $15,000 thereafter.
Contingencies
The Company and its subsidiaries are subject to legal proceedings and claims
arising from the conduct of their business operations, including personal
injury, customer contract, employment claims and environmental matters. In the
opinion of management, such proceedings and claims are not likely to result in
losses which would have a material adverse effect upon the financial position or
results of operations of the Company.
As security for certain agreements, the Company had standby irrevocable bank
commercial letters of credit and mortgages of $15,118,000 and $18,182,000
outstanding as of August 29, 1998 and August 30, 1997, respectively.
9. 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.
The Company adopted an incentive stock option plan in November, 1996 and
reserved 150,000 shares of common stock for issue under the plan. As of August
29, 1998 no options had been granted under the plan.
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Report of Independent Public Accountants
To the Board of Directors and Shareholders of UniFirst Corporation:
We have audited the accompanying consolidated balance sheets of UniFirst
Corporation (a Massachusetts corporation) and subsidiaries as of August 29, 1998
and August 30, 1997 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 29, 1998. 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 UniFirst Corporation and
subsidiaries as of August 29, 1998 and August 30, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
August 29, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 3, 1998
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12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August 29, 1998 Compared with Fiscal Year Ended August 30,
1997
Revenues. In 1998 revenues increased 6.9% to $448.1 million as compared with
$419.1 million for 1997. This increase can be attributed to growth from existing
operations (5.0%), acquisitions (0.9%) and price increases (1.0%). Growth from
existing operations was primarily from the conventional uniform rental business.
The increase in revenues from acquisitions resulted from three acquisitions made
in fiscal 1997 (two in Massachusetts in February and August 1997 and one in
Vancouver, British Columbia in April 1997) and two acquisitions made in fiscal
1998 (one in California in March 1998, and one in Alabama in June 1998).
Operating Costs. Operating costs increased to $269.7 million for 1998 as
compared with $256.9 million for 1997 as a result of costs associated with
increased revenues, but declined to 60.2% from 61.3% as a percentage of revenues
for these periods. The improvement in operating costs as a percentage of
revenues was due primarily to the Company's continued focus on controlling
costs. In July 1998 the Company changed the estimated service lives and related
amortization periods for rental merchandise in service, from primarily 12 months
to primarily 15 months. This resulted in approximately $2.0 million, or 0.4% of
revenues, less in garment amortization expense than if the amortization period
had not been changed.
Selling and Administrative Expenses. The Company's selling and administrative
expenses increased to $97.6 million for 1998 as compared with $91.8 million for
1997, primarily due to increased sales personnel and other costs to support the
Company's increased revenues. The Company's selling and administrative expenses
as a percentage of revenues decreased slightly to 21.8% in 1998 from 21.9% in
1997.
Depreciation and Amortization. The Company's depreciation and amortization
expense increased to $26.6 million, or 5.9% of revenues, for 1998 as compared
with $23.4 million, or 5.6% of revenues, for 1997. This increase was due
primarily to increased capital expenditures for the Company's new distribution
center in Owensboro, KY and information systems hardware and software to upgrade
certain Company-wide systems.
Net Interest Expense. Net interest expense was $2.3 million for 1998 as compared
to $2.1 million in 1997. The increase was attributable primarily to higher debt
levels, offset by lower interest rates, during 1998. Net interest expense was
0.5% of revenues for each period.
Income Taxes. The Company's effective income tax rate was 36.0% in both 1998
and 1997.
12
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August 30, 1997 Compared with Fiscal Year Ended August 31,
1996
Revenues. In 1997 revenues increased 7.0% to $419.1 million as compared with
$391.8 million for 1996. This increase can be attributed to growth from existing
operations (5.5%), acquisitions (2.4%) and price increases (1.0%), offset by one
week less of revenue in 1997 (1.9%). Growth from existing operations was
primarily from the conventional rental business. The increase in revenues
attributable to acquisitions primarily resulted from three 1996 acquisitions
made in California, Michigan and Oklahoma.
Operating Costs. Operating costs increased to $256.9 million for 1997 as
compared with $240.7 million for 1996 as a result of costs associated with
increased revenues. The Company's operating costs as a percentage of revenues
decreased slightly to 61.3% in 1997 from 61.5% in 1996.
Selling and Administrative Expenses. The Company's selling and administrative
expenses increased to $91.8 million for 1997 as compared with $89.4 million in
1996, but declined to 21.9% of revenues in 1997 from 22.8% of revenues in 1996.
The increase in selling and administrative expense was primarily attributable to
commissions and other costs associated with increased staffing levels to support
the expansion of the Company's business throughout the period. The decrease in
selling and administrative expense as a percentage of revenues was primarily due
to reduced professional services and consulting fees.
Depreciation and Amortization. The Company's depreciation and amortization
expense increased to $23.4 million, or 5.6% of revenues, for 1997 as compared
with $20.8 million, or 5.3% of revenues, for 1996. This increase in depreciation
and amortization expense as a percentage of revenues was due primarily to
increased capital expenditures to expand and update Company facilities in 1997.
Net Interest Expense. Net interest expense declined to $2.1 million, or 0.5% of
revenues, in 1997 as compared to $2.4 million, or 0.6% of revenues, in 1996. The
decrease was attributable to lower interest rates.
Income Taxes. The Company's effective income tax rate was 36.0% in both 1997 and
1996.
Liquidity and Capital Resources
Shareholders' equity at August 29, 1998 was $246.4 million, or 83.9% of total
capitalization.
Net cash provided by operating activities was $51.8 million in fiscal 1998 and
totaled $149.0 million for the three years ended August 29, 1998. These cash
flows were used primarily to fund $117.7 million in capital expenditures to
expand and update Company facilities, including construction of new facilities
in Owensboro, Kentucky; Atlanta, Georgia; Pompano Beach, Florida; and Corpus
Christi, Texas. Additionally, $33.0 million was used for acquisitions during
this three year period.
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14
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
UniFirst Corporation and Subsidiaries
Liquidity and Capital Resources (continued)
The Company had $5.3 million in cash and $19.7 million available on its $60
million unsecured line of credit with two banks as of August 29, 1998. The
Company believes its generated cash from operations and the Company's borrowing
capacity will adequately cover its foreseeable capital requirements.
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.
Information Systems; Year 2000
The Company has made a substantial investment in its information systems and
intends to spend significant amounts on its information systems in the future.
The Company has been evaluating Year 2000 (Y2K) issues concerning the ability of
systems to properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause complete system failures.
State of Readiness: The Company has used a five-step process to manage its Y2K
program: 1. Inventory (identify items to be assessed for Y2K readiness); 2.
Assessment (prioritize the inventoried items, assess and document their Y2K
readiness and plan corrective actions); 3. Renovation/Upgrade (apply corrective
actions); 4. Testing (verify corrective actions); 5. Implementation (implement
new system). The Company believes that its recently developed account management
system, which is used primarily for customer billing, accounts receivable and
sales taxes, and the materials management and catalog sales systems which were
installed at its Owensboro, KY facility are Y2K compliant. Additionally, as part
of an ongoing IS initiative, the Company is in the process of installing a new
third party payroll and human resources system which has been represented to be
Y2K compliant -- implementation is planned for February, 1999. The Company has
grouped the rest of its information systems and technology into 3 categories for
its Y2K program: 1. Information Technology (computer hardware and software,
including financial systems and electronic data interchange (EDI) interfaces);
2. Physical Plant (production equipment and facilities); 3. Extended Enterprise
(suppliers and customers). The Company has, at a minimum, reached the
renovation/upgrade step on all projects. Some projects are currently being
tested and a number of projects have been implemented.
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15
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
UniFirst Corporation and Subsidiaries
Information Systems; Year 2000 (continued)
Costs: The Company expects that the total cost of its Y2K program will range
from $1.0 to $1.5 million. As of August 29, 1998 the Company had spent
approximately $0.5 million. These costs do not include the account management,
Owensboro, KY and new payroll and human resources systems discussed above.
Risks of Y2K issues and Contingency Plans: Since the beginning of its Y2K
program, the Company has focused its resources on the systems which are critical
to its business operations. While the Company has addressed the Y2K risks within
its control, there are other risks, such as utilities and other suppliers, which
are beyond the immediate control of the Company. Based on current information,
the Company believes that the Y2K problem will not have a material adverse
effect on the results of operations of the Company. There can, however, be no
assurances that Y2K remediation by others, including suppliers, will be properly
completed, and failure to do so could have a material adverse effect on the
results of operations of the Company. Contingency plans are in the process of
being developed for all Y2K projects which are critical to the Company's
business operations.
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.
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 those indicated in the section entitled "Risk
Factors" in the Company's Prospectus, dated March 18, 1998, as well as the risks
and uncertainties relating to the centralization of certain of the Company's
operations at its Owensboro, KY distribution facility, the Company's handling of
the Year 2000 issue, and the Company's ability to control manufacturing and
operating costs. 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.
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16
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 29, 1998 and August 30, 1997.
(In thousands, except per share amounts)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $112,402 $109,344 $114,066 $112,240
Income before income taxes 13,791 9,779 13,597 14,692
Net income 8,826 6,259 8,702 9,403
Weighted average shares outstanding 20,511 20,511 20,511 20,511
Net income per share $ 0.43 $ 0.31 $ 0.42 $ 0.46
================================================================================================================================
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $103,976 $102,064 $107,124 $105,929
Income before income taxes 12,274 8,638 11,535 12,436
Net income 7,855 5,529 7,382 7,957
Weighted average shares outstanding 20,511 20,511 20,511 20,511
Net income per share $ 0.38 $ 0.27 $ 0.36 $ 0.39
================================================================================================================================
Common Stock Prices and Dividends Per Share
For the Years Ended August 29, 1998 and August 30, 1997:
Price Per Share Dividends Per Share
Class B
1998 High Low Common Stock Common Stock
- ---------------------------------------------------------------------------------------------------------------------------------
First Quarter $25 13/16 $22 1/4 $0.024 $0.030
Second Quarter 28 1/16 24 9/16 0.024 0.030
Third Quarter 29 25 1/2 0.024 0.030
Fourth Quarter 29 1/2 22 0.024 0.030
=================================================================================================================================
Price Per Share Dividends Per Share
Class B
1997 High Low Common Stock Common Stock
- ---------------------------------------------------------------------------------------------------------------------------------
First Quarter $21 3/4 $18 1/4 $0.024 $0.030
Second Quarter 23 20 1/8 0.024 0.030
Third Quarter 21 1/8 18 3/4 0.024 0.030
Fourth Quarter 25 1/2 18 7/8 0.024 0.030
=================================================================================================================================
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 3, 1998 were 156 and 19 respectively.
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17
Eleven Year Financial Summary
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August
(in thousands, except ratios
and per share amounts) 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Revenues $ 448,052 $ 419,093 $ 391,794 $ 355,041 $ 318,039 $ 287,728 $ 268,190 $ 250,432
Income from
operations, before
depreciation and
amortization 80,804 70,387 61,729 53,725 50,369 47,199 42,010 38,562
Depreciation and
amortization 26,629 23,386 20,814 19,194 17,912 16,454 15,999 14,229
Income from
operations 54,175 47,001 40,915 34,531 32,457 30,745 26,011 24,333
Interest expense
(income), net 2,316 2,118 2,398 2,787 2,513 2,669 4,098 4,320
Provision for
income taxes 18,669 16,160 13,855 11,110 11,073 10,387 7,570 6,803
Net income 33,190 28,723 24,662 20,634 18,871 17,689 14,343 * 13,210
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position at Year End
Total assets $ 376,130 $ 339,626 $ 302,378 $ 272,691 $ 250,160 $ 219,064 $ 212,097 $ 204,398
Long-term obligations 47,149 40,837 39,365 36,376 41,602 32,231 47,641 52,032
Shareholders' equity 246,374 217,192 191,109 168,596 149,472 132,723 117,329 105,888
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Net income
as a % of revenues 7.4% 6.9% 6.3% 5.8% 5.9% 6.1% 5.3% 5.3%
Return on average
shareholders' equity 14.3% 14.1% 13.7% 13.0% 13.4% 14.1% 12.9% 13.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding 20,511 20,511 20,511 20,511 20,506 20,453 20,451 20,426
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Revenues $ 21.84 $ 20.43 $ 19.10 $ 17.31 $ 15.51 $ 14.07 $ 13.11 $ 12.26
Income from
operations, before
depreciation and
amortization 3.94 3.43 3.01 2.62 2.46 2.31 2.05 1.89
Net Income
Basic 1.62 1.40 1.20 1.01 0.92 0.86 0.70 0.65
Diluted 1.62 1.40 1.20 1.01 0.92 0.86 0.67 0.63
Shareholders' equity 12.01 10.59 9.32 8.22 7.29 6.49 5.74 5.18
Dividends
Common stock .12 .12 .11 .10 .10 .10 .06 .06
Class B common stock .10 .10 .09 .08 .08 .04 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
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.
* Amount reflects income before extraordinary item and accounting change. Net
income was $12,923.
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18
Fiscal Year Ended August
(in thousands, except ratios
and per share amounts) 1990 1989 1988
- ----------------------------------------------------------------------
Summary of Operations
Revenues $ 226,682 $ 212,731 $ 196,296
Income from
operations, before
depreciation and
amortization 38,749 35,768 32,207
Depreciation and
amortization 12,422 12,309 12,298
Income from
operations 26,327 23,459 19,909
Interest expense
(income), net 3,513 4,880 5,965
Provision for
income taxes 8,516 6,968 5,289
Net income 14,298 11,611 8,655
- ----------------------------------------------------------------------
Financial Position at Year End
Total assets $ 189,411 $ 172,389 $ 171,010
Long-term obligations 53,134 53,735 66,476
Shareholders' equity 93,739 80,249 69,127
- ----------------------------------------------------------------------
Financial Ratios
Net income
as a % of revenues 6.3% 5.5% 4.4%
Return on average
shareholders' equity 16.4% 15.6% 13.3%
- ----------------------------------------------------------------------
Weighted average number
of shares outstanding 20,431 20,353 20,168
- ----------------------------------------------------------------------
Per Share Data
Revenues $ 11.09 $ 10.45 $ 9.73
Income from
operations, before
depreciation and
amortization 1.90 1.76 1.60
Net Income
Basic 0.70 0.57 0.43
Diluted 0.67 0.56 0.43
Shareholders' equity 4.59 3.94 3.43
Dividends
Common stock .06 .05 .05
Class B common stock -- -- --
- ---------------------------------------------------------------------
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.
18