1
1 EXHIBIT 13
Eleven Year Financial Summary
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August
(in thousands, except ratios
and per share amounts) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Summary of Operations
Revenues $487,100 $448,052 $419,093 $391,794 $355,041 $318,039 $287,728 $268,190 $250,432 $226,682 $212,731
Earnings before
interest, taxes,
depreciation and
amortization(EBITDA) 83,471 80,804 70,387 61,729 53,725 50,369 47,199 42,010 38,562 38,749 35,768
Depreciation and
amortization 31,724 26,629 23,386 20,814 19,194 17,912 16,454 15,999 14,229 12,422 12,309
Income from
operations 51,747 54,175 47,001 40,915 34,531 32,457 30,745 26,011 24,333 26,327 23,459
Interest expense
(income), net 4,841 2,316 2,118 2,398 2,787 2,513 2,669 4,098 4,320 3,513 4,880
Provision for
income taxes 22,800 18,669 16,160 13,855 11,110 11,073 10,387 7,570 6,803 8,516 6,968
Net income 24,106 33,190 28,723 24,662 20,634 18,871 17,689 14,343* 13,210 14,298 11,611
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Financial Position at Year End
Total assets $465,627 $376,130 $339,626 $302,378 $272,691 $250,160 $219,064 $212,097 $204,398 $189,411 $172,389
Long-term obligations 113,105 47,149 40,837 39,365 36,376 41,602 32,231 47,641 52,032 53,134 53,735
Shareholders' equity 257,433 246,374 217,192 191,109 168,596 149,472 132,723 117,329 105,888 93,739 80,249
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Financial Ratios
Net income
as a % of revenues 4.9% 7.4% 6.9% 6.3% 5.8% 5.9% 6.1% 5.3% 5.3% 6.3% 5.5%
Return on average
shareholders' equity 9.6% 14.3% 14.1% 13.7% 13.0% 13.4% 14.1% 12.9% 13.2% 16.4% 15.6%
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Weighted average number
of shares outstanding 20,438 20,511 20,511 20,511 20,511 20,506 20,453 20,451 20,426 20,431 20,353
- ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Per Share Data
Revenues $ 23.83 $ 21.84 $ 20.43 $ 19.10 $ 17.31 $ 15.51 $ 14.07 $ 13.11 $ 12.26 $ 11.09 $ 10.45
Earnings before
interest, taxes,
depreciation and
amortization(EBITDA) 4.08 3.94 3.43 3.01 2.62 2.46 2.31 2.05 1.89 1.90 1.76
Net Income
Basic 1.18 1.62 1.40 1.20 1.01 0.92 0.86 0.70 0.65 0.70 0.57
Diluted 1.18 1.62 1.40 1.20 1.01 0.92 0.86 0.67 0.63 0.67 0.56
Shareholders' equity 12.60 12.01 10.59 9.32 8.22 7.29 6.49 5.74 5.18 4.59 3.94
Dividends
Common stock .14 .12 .12 .11 .10 .10 .10 .06 .06 .06 .05
Class B common stock .11 .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.
2
2
Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
August 28, August 29,
1999 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 2,912,000 $ 5,330,000
Receivables, less reserves of $2,979,000
in 1999 and $1,529,000 in 1998 51,786,000 42,127,000
Inventories 27,194,000 24,152,000
Rental merchandise in service 55,631,000 42,971,000
Prepaid expenses 199,000 188,000
------------ ------------
Total current assets 137,722,000 114,768,000
------------ ------------
Property and equipment:
Land, buildings and leasehold improvements 174,979,000 150,853,000
Machinery and equipment 190,722,000 165,762,000
Motor vehicles 49,396,000 41,608,000
------------ ------------
415,097,000 358,223,000
Less - accumulated depreciation 172,912,000 147,261,000
------------ ------------
242,185,000 210,962,000
------------ ------------
Other assets, net 85,720,000 50,400,000
------------ ------------
$465,627,000 $376,130,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 1,911,000 $ 1,194,000
Notes payable 2,331,000 2,511,000
Accounts payable 17,659,000 14,109,000
Accrued liabilities 46,659,000 45,101,000
Accrued and deferred income taxes 7,754,000 2,540,000
------------ ------------
Total current liabilities 76,314,000 65,455,000
------------ ------------
Long-term obligations, net of current maturities 111,194,000 45,955,000
Deferred income taxes 20,686,000 18,346,000
Commitments and Contingencies (Note 8) -- --
------------ ------------
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 10,499,634 shares in 1999
and 10,216,864 shares in 1998 1,050,000 1,022,000
Class B common stock, $.10 par value; 20,000,000
shares authorized; issued and outstanding
10,255,744 shares in 1999 and 10,293,744
shares in 1998 1,026,000 1,029,000
Treasury stock, 857,500 shares, at cost (16,583,000) --
Capital surplus 12,438,000 7,078,000
Retained earnings 261,450,000 239,952,000
Accumulated other comprehensive income (1,948,000) (2,707,000)
------------ ------------
Total shareholders' equity 257,433,000 246,374,000
------------ ------------
$465,627,000 $376,130,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
3
Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
Year Ended August 28, August 29, August 30,
1999 1998 1997
------------ ------------ ------------
Revenues $487,100,000 $448,052,000 $419,093,000
------------ ------------ ------------
Cost and expenses:
Operating costs 294,517,000 269,660,000 256,896,000
Selling and administrative expenses 109,112,000 97,588,000 91,810,000
Depreciation and amortization 31,724,000 26,629,000 23,386,000
------------ ------------ ------------
435,353,000 393,877,000 372,092,000
------------ ------------ ------------
Income from operations 51,747,000 54,175,000 47,001,000
------------ ------------ ------------
Interest expense (income):
Interest expense 4,990,000 2,613,000 2,351,000
Interest income (149,000) (297,000) (233,000)
------------ ------------ ------------
4,841,000 2,316,000 2,118,000
------------ ------------ ------------
Income before income taxes 46,906,000 51,859,000 44,883,000
Provision for income taxes 22,800,000 18,669,000 16,160,000
------------ ------------ ------------
Net income $ 24,106,000 $ 33,190,000 $ 28,723,000
============ ============ ============
Weighted average number of shares
outstanding 20,438,355 20,510,608 20,510,608
============ ============ ============
Net income per share - basic & diluted $ 1.18 $ 1.62 $ 1.40
============ ============ ============
Dividends per share:
Common stock $ 0.14 $ 0.12 $ 0.12
Class B common stock 0.11 0.10 0.10
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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4
Consolidated Statements of Shareholders' Equity
UniFirst Corporation and Subsidiaries
Accumulated
Class B Class B Other
Common Common Treasury Common Common Treasury Capital Retained Comprehensive
Shares Shares Shares Stock Stock Stock Surplus Earnings Income
---------- ---------- -------- ---------- ---------- ----------- ----------- ------------ -----------
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) -- -- -- --
Foreign currency
translation
adjustments -- -- -- -- -- -- -- -- (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) -- -- -- --
Foreign currency
translation
adjustments -- -- -- -- -- -- -- -- (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)
Net income -- -- -- -- -- -- -- 24,106,000 --
Dividends -- -- -- -- -- -- -- (2,608,000) --
Shares issued in
connection with
an acquisition 244,770 -- -- 25,000 -- -- 5,360,000 -- --
Shares converted 38,000 (38,000) -- 3,000 (3,000) -- -- -- --
Shares repurchased -- -- (857,500) -- -- (16,583,000) -- -- --
Foreign currency
translation
adjustments -- -- -- -- -- -- -- -- 759,000
----------- ---------- -------- ---------- ---------- ----------- ----------- ------------ -----------
Balance, August 28,
1999 10,499,634 10,255,744 (857,500) $1,050,000 $1,026,000 $(16,583,000) $12,438,000 $261,450,000 $(1,948,000)
========== ========== ======== ========== ========== ============ =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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5
Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
Year ended August 28, August 29, August 30,
1999 1998 1997
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 24,106,000 $ 33,190,000 $ 28,723,000
Adjustments, net of acquisitions
Depreciation 25,923,000 22,074,000 19,512,000
Amortization of intangible assets 5,801,000 4,555,000 3,874,000
Receivables (5,639,000) (2,691,000) (2,455,000)
Inventories 3,717,000 (4,684,000) (2,485,000)
Rental merchandise in service (7,957,000) (2,627,000) (690,000)
Prepaid expenses 41,000 (41,000) (22,000)
Accounts payable 2,290,000 1,022,000 1,401,000
Accrued liabilities 1,235,000 (416,000) 8,284,000
Accrued and deferred income taxes 5,134,000 83,000 (1,102,000)
Deferred income taxes 2,257,000 1,302,000 715,000
------------- ------------ ------------
Net cash provided by operating
activities 56,908,000 51,767,000 55,755,000
------------- ------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of
cash acquired (53,782,000) (7,470,000) (7,309,000)
Capital expenditures (45,083,000) (43,052,000) (47,432,000)
Other assets, net (4,928,000) (3,479,000) (112,000)
------------- ------------ ------------
Net cash used in investing
activities (103,793,000) (54,001,000) (54,853,000)
------------- ------------ ------------
Cash flows from financing activities:
Increase in debt 67,284,000 7,405,000 3,533,000
Reduction of debt (3,626,000) (1,708,000) (1,648,000)
Repurchase of common stock (16,583,000) -- --
Cash dividends (2,608,000) (2,187,000) (2,158,000)
------------- ------------ ------------
Net cash provided by (used in)
financing activities 44,467,000 3,510,000 (273,000)
------------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents (2,418,000) 1,276,000 629,000
Cash and cash equivalents at
beginning of year 5,330,000 4,054,000 3,425,000
------------- ------------ ------------
Cash and cash equivalents at
end of year $ 2,912,000 $ 5,330,000 $ 4,054,000
============= ============ ============
Supplemental disclosure of cash flow
information:
Interest paid $ 4,355,000 $ 2,613,000 $ 2,327,000
Income taxes paid 15,246,000 17,445,000 16,577,000
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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6
Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
UniFirst Corporation 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. 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 1999, 1998 and 1997 all had a 52-week year.
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 $1,356,000 and $1,173,000
higher at August 28, 1999 and August 29, 1998, 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, which is more
consistent with their respective useful lives (although the Company believes its
principal publicly-held competitors amortize their garments over an average of
15 to 18 months). In 1999 and 1998, this resulted in approximately $5.0 million
and $2.0 million, or 1.0% and 0.4% of revenues, respectively, less in garment
amortization expense than if the amortization period had not been changed.
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7
Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
Amortization of Intangible Assets
Customer contracts are amortized over periods of eight 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 thirty 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 Common 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 1997, 1998 or 1999.
Cash and Cash Equivalents
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 acquisitions of industrial laundry businesses which
were accounted for as purchases is as follows:
Year ended August 28, August 29, August 30,
1999 1998 1997
----------- ---------- ----------
Fair value of tangible assets acquired $26,927,000 $3,715,000 $2,199,000
Value of intangible assets acquired 35,990,000 3,790,000 5,214,000
Liabilities assumed or created (3,750,000) (35,000) (104,000)
Common stock issued (244,770 shares) (5,385,000) -- --
----------- ---------- ----------
Acquisition of businesses, net of cash
acquired $53,782,000 $7,470,000 $7,309,000
=========== ========== ==========
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, individually or in the
aggregate, in relation to the Company's consolidated financial statements and
therefore pro forma financial information has not been presented.
8
8
Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
3. INCOME TAXES
The provision for income taxes consists of the following:
Year ended August 28, August 29, August 30,
1999 1998 1997
----------- ----------- -----------
Current:
Federal and Foreign $12,463,000 $18,328,000 $14,259,000
State (102,000) 3,033,000 2,039,000
----------- ----------- -----------
12,361,000 21,361,000 16,298,000
----------- ----------- -----------
Deferred:
Federal and Foreign 8,777,000 (1,875,000) (762,000)
State 1,662,000 (817,000) 624,000
----------- ----------- -----------
10,439,000 (2,692,000) (138,000)
----------- ----------- -----------
$22,800,000 $18,669,000 $16,160,000
=========== =========== ===========
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 28, August 29, August 30,
1999 1998 1997
----------- ----------- -----------
Income taxes at the statutory federal
income tax rate $16,417,000 $18,151,000 $15,709,000
Puerto Rico exempt income (652,000) (1,062,000) (988,000)
Corporate-Owned Life Insurance 5,500,000 (850,000) (775,000)
State income taxes 798,000 1,434,000 1,450,000
Foreign income taxes 176,000 265,000 567,000
Other 561,000 731,000 197,000
----------- ----------- -----------
$22,800,000 $18,669,000 $16,160,000
=========== =========== ===========
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 28, August 29, August 30,
1999 1998 1997
----------- ----------- -----------
Rental merchandise in service $20,234,000 $15,470,000 $14,429,000
Tax in excess of book depreciation 16,662,000 15,713,000 15,533,000
Accruals and other (15,637,000) (13,274,000) (9,324,000)
----------- ----------- -----------
$21,259,000 $17,909,000 $20,638,000
=========== =========== ===========
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9
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 28, August 29,
1999 1998
------------ -----------
Unsecured revolving credit agreement with three
banks, interest rates of 5.82% and 6.06%,
respectively $105,500,000 $40,275,000
Notes payable, interest from 4.0% - 8.0%, payable
in various installments through 2007 4,963,000 4,798,000
Amounts due for restrictive covenants and other,
payable in various installments through 2005 2,642,000 2,076,000
------------ -----------
113,105,000 47,149,000
------------ -----------
Less - current maturities 1,911,000 1,194,000
============ ===========
$111,194,000 $45,955,000
============ ===========
Aggregate current maturities of long-term obligations for each of the next five
years are $1,911,000, $1,328,000, $106,481,000, $761,000, $716,000 and
$1,908,000 thereafter.
The Company's unsecured revolving credit agreement runs through December 31,
2001. As of August 28, 1999, the maximum line of credit was $120,000,000.
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 $177,053,000 as of August 28, 1999. Certain notes payable are
guaranteed or secured by assets of the Company.
As of August 28, 1999 and August 29, 1998, the fair market value of the
Company's outstanding debt approximates its carrying value.
10
10
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 $4,100,000 in 1999,
$5,649,000 in 1998 and $4,882,000 in 1997.
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 $404,000 in 1999, $389,000 in 1998 and
$279,000 in 1997. 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 28, August 29,
1999 1998
----------- -----------
Customer contracts, restrictive covenants and
other assets arising from acquisitions, less
accumulated amortization of $27,807,000 and
$23,272,000, respectively $30,104,000 $24,107,000
Goodwill, less accumulated amortization
of $5,496,000 and $4,162,000, respectively 50,246,000 24,208,000
Other 5,370,000 2,085,000
----------- -----------
$85,720,000 $50,400,000
=========== ===========
7. ACCRUED LIABILITIES
Accrued liabilities on the accompanying consolidated balance sheets are as
follows:
August 28, August 29,
1999 1998
----------- -----------
Insurance $18,245,000 $17,921,000
Payroll related 15,090,000 15,748,000
Other 13,324,000 11,432,000
----------- -----------
$46,659,000 $45,101,000
=========== ===========
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8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain buildings from independent parties. Total rent
expense on all leases was $3,027,000 in 1999, $2,685,000 in 1998 and $2,401,000
in 1997.
Annual minimum lease commitments for all years subsequent to August 28, 1999 are
$2,304,000 in 2000, $1,967,000 in 2001, $1,331,000 in 2002, $876,000 in 2003,
$237,000 in 2004 and $20,000 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 $16,326,000 and $15,118,000
outstanding as of August 28, 1999 and August 29, 1998, 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. After fiscal
year end, on August 31, 1999, options to purchase 57,000 shares of common stock
were granted at an exercise price of $15.125.
10. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS 130
established new rules for the reporting and display of comprehensive income and
its components. The adoption of this SFAS 130 had no impact on the Company's net
income or shareholders' equity, but it requires the Company's foreign currency
translation adjustment, which prior to adoption was reported separately in
shareholders' equity, to be included in accumulated other comprehensive income.
The components of comprehensive income for the years ended August 28, 1999 and
August 29, 1998 were as follows:
August 28, August 29,
1999 1998
----------- -----------
Net income $24,106,000 $33,190,000
Other comprehensive income:
Foreign currency translation adjustments 759,000 (1,821,000)
----------- -----------
Comprehensive income $24,865,000 $31,369,000
=========== ===========
12
12
11. SEGMENT REPORTING
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 established new rules for public companies relating to
the reporting of financial and descriptive information about their operating
segments in financial statements. Since the Company operates as a single
business segment, that being the design, rental, cleaning and delivery of
occupational garments, industrial wiper towels, floor-mats and other non-garment
items, which represent more than 90% of consolidated net sales, the disclosure
of segment information is reflected in the financial statements contained
herein. UniFirst also has activities in Canada, which do not meet the thresholds
outlined in SFAS 131.
12. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts and for hedging
activities) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedging accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 2000. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS 133 cannot be applied retroactively. The Company has not
determined the timing of adoption, but does not anticipate the adoption of this
new standard to have a material impact on the Company's fiscal position or
results of operations.
13
13
Report of Independent Public Accountants
To UniFirst Corporation:
We have audited the accompanying consolidated balance sheets of UniFirst
Corporation (a Massachusetts corporation) and subsidiaries as of August 28, 1999
and August 29, 1998 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 28, 1999. 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 28, 1999 and August 29, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
August 28, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 2, 1999
14
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August 28, 1999 Compared with Fiscal Year Ended August 29,
1998
Revenues. In 1999 revenues increased 8.7% to $487.1 million as compared with
$448.1 million for 1998. This increase can be attributed to growth from existing
operations (3.7%), acquisitions (4.0%) and price increases (1.0%). Growth from
existing operations was primarily from the conventional uniform rental business
(3.4%), and from the nuclear garment services business (0.3%). The increase in
revenues from acquisitions resulted from one acquisition made in fiscal 1998 (in
Alabama in June 1998) and seven acquisitions made in fiscal 1999 (one in
Wisconsin and one in Mississippi, both in October 1998, one in New England and
North Carolina in December 1998, one in Nevada in January 1999, another in
Wisconsin in April 1999, and one in Massachusetts and one in Missouri, both in
July 1999).
Operating Costs. Operating costs increased to $294.5 million for 1999 as
compared with $269.7 million for 1998 as a result of costs associated with
increased revenues. As a percentage of revenues, operating costs increased to
60.5% from 60.2% for these periods. The increase in operating costs as a
percentage of revenues was primarily due to increased labor costs and other
operating margin pressures, due primarily to acquisitions. These increases were
offset somewhat by the benefit resulting from the change in estimated service
lives and related amortization periods for rental merchandise in service, as
explained in note one and in the 1998 compared to 1997 section below.
Selling and Administrative Expenses. The Company's selling and administrative
expenses increased to $109.1 million, or 22.4% or revenues, for 1999 as compared
with $97.6 million, or 21.8% of revenues for 1998. This increase was due
primarily to increased costs for professional sales training, national, catalog
and internet sales to support the Company's current and future revenue growth.
The Company also incurred increased costs to upgrade its Information Systems.
Depreciation and Amortization. The Company's depreciation and amortization
expense increased to $31.7 million, or 6.5% of revenues, for 1999 as compared
with $26.6 million, or 5.9% of revenues, for 1998. This increase was due
primarily to increased capital expenditures for the Company's new distribution
center in Owensboro, KY, information systems hardware and software to upgrade
certain Company-wide systems and increased amortization costs due to
acquisitions.
Net Interest Expense. Net interest expense was $4.8 million, or 1.0% of
revenues, for 1999 as compared to $2.3 million, or 0.5% of revenues, for 1998.
The increase is primarily attributable to higher debt levels in 1999.
15
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
Income Taxes. The Company's effective income tax rate was 48.6% in 1999 and
36.0% in 1998. The increase is due primarily to a $5.5 million tax reserve
provided in the fourth quarter of 1999 due to a decision by a tax court in the
case of a national business regarding the deductibility of interest on its
leveraged corporate owned life insurance (COLI) program. Although this ruling
will be appealed, the Company has a similar program and provided a reserve for
this potential liability. Without this $5.5 million reserve, the Company's
effective income tax rate would have been 36.9% in 1999.
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 is 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.
16
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
Liquidity and Capital Resources
Shareholders' equity at August 28, 1999 was $257.4 million, or 69.5% of total
capitalization.
Net cash provided by operating activities was $56.9 million in fiscal 1999 and
totaled $164.4 million for the three years ended August 28, 1999. These cash
flows were used primarily to fund $135.6 million in capital expenditures to
expand and update Company facilities, including construction of new facilities
in 1999 in Chicago, Illinois; Newark, New Jersey; Lethbridge, Alberta and
Hyannis, Massachusetts. Additionally, $68.6 million was used for acquisitions
during this three year period.
The Company had $2.9 million in cash and $14.5 million available on its $120
million unsecured line of credit with three banks as of August 28, 1999. The
Company believes its generated cash from operations and its 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 statements in this section include "Year 2000 readiness disclosures" within
the meaning of S2392 RS, Year 2000 Information and Readiness Disclosure Act
(September 17, 1998).
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 evaluated 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.
Based on an assessment conducted in early 1998, a Year 2000 project leader was
appointed on April 15, 1998. Utilizing internal resources and consultants, the
project leader manages the projects and reports weekly to the information
systems director and Y2K project team.
17
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
State of Readiness: The Company regularly reviews the status of its active Year
2000 projects. The Company believes that its 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, testing and review to
verify Y2K compliance of these systems has been successful and is nearing
completion. In February 1999, the Company installed a new third party payroll
and human resources system which has been represented to be Y2K compliant. 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 uses 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 has, at a minimum, reached
the testing step on all projects and has completed the implementation stage on
all systems which are critical to its business operations as well as the
majority of all other systems.
Costs: The Company expects that the total cost of its Y2K program will range
from $1.0 to $1.5 million. As of August 28, 1999, the Company had spent
approximately $1.25 million. These costs do not include the account management,
materials management, catalog sales 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 believes it is addressing the Y2K
risks within its control, there are other risks, such as the effect that the Y2K
issue may have on 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.
To date our Extended Enterprise survey and review of key customers and suppliers
has not revealed any significant Y2K risk. Contingency plans for all Y2K
projects which are critical to the Company's business operations have been
completed. These plans put procedures in place which maintain our key business
processes should any failures occur.
18
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
UniFirst Corporation and Subsidiaries
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.
19
19
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 28, 1999 and August 29, 1998.
(In thousands, except per share amounts)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues $116,335 $120,066 $125,661 $125,038
Income before income taxes 14,946 10,887 12,264 8,809
Net income 9,416 6,859 7,726 105
Weighted average shares outstanding 20,511 20,691 20,320 20,098
Net income per share $ 0.46 $ 0.33 $ 0.38 $ 0.01
======== ======== ======== ========
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
======== ======== ======== ========
Common Stock Prices and Dividends Per Share
For the Years Ended August 28, 1999 and August 29, 1998:
Price Per Share Dividends Per Share
Class B
1999 High Low Common Stock Common Stock
------- ------- ------------ ------------
First Quarter $28.750 $20.000 $0.024 $0.0300
Second Quarter 26.625 21.188 0.030 0.0375
Third Quarter 22.625 16.563 0.030 0.0375
Fourth Quarter 18.500 15.500 0.030 0.0375
======= ======= ====== =======
Price Per Share Dividends Per Share
Class B
1998 High Low Common Stock Common Stock
------- ------- ------------ ------------
First Quarter $25.813 $22.250 $0.024 $0.030
Second Quarter 28.063 24.563 0.024 0.030
Third Quarter 29.000 25.500 0.024 0.030
Fourth Quarter 29.500 22.000 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 2, 1999 were 161 and 19 respectively.