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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 30, 2003
Commission File Number 1-8504
UNIFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2103460
(State of Incorporation) (IRS Employer Identification Number)
68 Jonspin Road
Wilmington, Massachusetts 01887
(Address of principal executive offices)(Zip Code)
Registrant's telephone number: (978) 658-8888
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Class which shares are traded
Common Stock,
$.10 par value per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
------ ------
The number of outstanding shares of UniFirst Corporation Common Stock and Class
B Common Stock at November 14, 2003 were 9,010,479 and 10,175,144, respectively.
The aggregate market value of shares held by non-affiliates of the Company as of
the end of the last business day of UniFirst's most recently completed second
fiscal quarter was $163,425,580 (based upon the closing price of the Company's
Common Stock on the New York Stock Exchange on said date and assuming the market
value of a share of Class B Common Stock (which is generally non-transferable,
but is convertible at any time into one share of Common Stock) is identical to
the market value of the Common Stock).
PART I
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders (which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 2003 fiscal year) are incorporated by
reference into Part III hereof.
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
ITEM 1. BUSINESS
GENERAL
UniFirst Corporation (the "Company") is one of the largest providers of
workplace uniforms and protective clothing in the United States. The Company
designs, manufactures, rents, cleans, delivers, and sells a wide range of
uniforms and protective clothing, including shirts, pants, jackets, coveralls,
jumpsuits, lab coats, smocks and aprons, and also rents industrial wiping
products, floormats and other non-garment items, to a variety of manufacturers,
retailers and service companies. The Company serves businesses of all sizes in
numerous industry categories. Typical customers include automobile service
centers and dealers, delivery services, food and general merchandise retailers,
food processors and service operations, light manufacturers, maintenance
facilities, restaurants, service companies, soft and durable goods wholesalers,
transportation companies, and others who require employee clothing for image,
identification, protection or utility purposes. At certain specialized
facilities, the Company also decontaminates and cleans work clothes that may
have been exposed to radioactive materials and services special cleanroom
protective wear. Typical customers for these specialized services include
government agencies, research and development laboratories, high technology
companies and utilities operating nuclear reactors. In fiscal 2003, the Company
generated $596.9 million in revenue, of which approximately 61% was from the
rental of uniforms and protective clothing, 26% was from the rental of
non-garment items, 9% was from garment decontamination services, 2% was from the
direct sale of garments, and 2% was from first aid cabinet services and other
safety supplies.
The Company maintains its website at www.unifirst.com, and makes available free
of charge through our website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished to the Securities Exchange Commission (SEC) pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act, as amended, as soon as
reasonably practicable after such documents are electronically filed, or
furnished, to the SEC.
PRODUCTS AND SERVICES
The Company provides its customers with personalized workplace uniforms and
protective work clothing in a broad range of styles, colors, sizes and fabrics.
The Company's uniform products include shirts, pants, jackets, coveralls,
jumpsuits, smocks, aprons and specialized protective wear, such as garments for
use in radioactive and clean room environments and fire retardant garments. The
Company also offers non-garment items and services, such as industrial wiping
products, floormats, mop dust-control service and other textile products. At
certain specialized facilities, the Company also decontaminates and cleans
clothes which may have been exposed to radioactive materials and services
special cleanroom protective wear.
The Company offers its customers a range of garment service options, including
full-service rental programs in which garments are cleaned and serviced by the
Company and lease programs in which garments are cleaned and maintained by
individual employees, as well as the opportunity to purchase garments and
related items directly. As part of its rental business, the Company picks up a
customer's soiled uniforms or other items on a periodic basis (usually weekly)
and delivers at the same time cleaned and processed replacement items. The
Company's centralized services, specialized equipment and economies of scale
generally allow it to be more cost effective in providing garment services than
customers could be by themselves, particularly those customers with high
employee turnover rates. The Company's uniform program is intended not only to
help its customers foster greater company identity, but to enhance their
corporate image and improve employee safety, productivity and morale. The
Company typically serves its customers pursuant to written service contracts
that range in duration from three to five years.
CUSTOMERS
The Company serves businesses of all sizes in numerous industry categories.
Typical customers include automobile service centers and dealers, delivery
services, food processors and service operations, light manufacturers,
maintenance facilities, restaurants, service companies, soft and durable goods
wholesalers, transportation companies, and others who require employee clothing
for image, identification, protection or utility purposes. The Company currently
services over 150,000 customer locations in 46 of the United States, Canada and
Europe from approximately 158 manufacturing, distribution and customer service
facilities.
MARKETING AND CUSTOMER SERVICE
The Company employs trained sales representatives whose sole function is to
market the Company's services to potential customers and develop new accounts.
The Company also utilizes its route salespeople to maximize sales to existing
customers, such as by offering garment rental customers the opportunity to
purchase non-garment items. Potential customers are contacted by mail, by
telephone and in-person. Sales representatives develop their appointments
through the use of an extensive, proprietary database of pre-screened and
qualified business prospects. This database is built through responses to the
Company's promotional initiatives, through contacts via its World Wide Web site
and trade shows and through the selective use of purchased lists. The Company
also endeavors to elevate its brand identity through certain advertising and
promotional initiatives.
The Company believes that customer service is the most important element in
developing and maintaining its market position and that its emphasis on customer
service is reflected throughout its business. The Company serves its customers
through approximately 1,100 route salespersons, who generally interact on a
weekly basis with their accounts, and more than 750 service support people, who
are charged with expeditiously handling customer requirements regarding the
outfitting of new customer employees, garment repair and replacement, billing
inquiries and other matters. The Company's policy is to respond to all customer
inquiries and problems within 24 hours.
The Company's customer service function is supported by its fully-networked
management information systems, which provide Company personnel with access to
information on the status of customers' orders, inventory availability and
shipping information, as well as information regarding customers' individual
employees, including names, sizes, uniform styles and colors. The Company has a
national account sales group that targets larger customers with nationwide
operations for which the Company can serve as the primary supplier of garment
services. The Company currently employs twenty persons in its national account
sales organization.
COMPETITION
The uniform rental and sales industry is highly competitive. The Company
believes that the top four companies in the uniform rental segment of the
industry currently generate over half of the industry's volume. The remainder of
the market, however, is divided among more than 600 smaller businesses, many of
which serve one or a limited number of markets or geographic service areas and
generate annual revenues of less than $1.0 million, and a small group of which
have revenues of up to approximately $200 million. Although the Company is one
of the larger companies engaged in the uniform rental and sales business, there
are other firms in the industry which are larger and have greater financial
resources than the Company. The Company's leading competitors include Aramark
Corporation, Cintas Corporation and G&K Services, Inc. In addition to its
traditional rental competitors, the Company may increasingly compete in the
future with businesses that focus on selling uniforms and other related items.
The principal methods of competition in the industry are quality of service and
price. The Company also competes with industry competitors for acquisitions,
which has the effect of increasing the price for acquisitions and reducing the
number of available acquisition candidates. The Company believes that its
ability to compete effectively is enhanced by the superior customer service and
support that it provides its customers.
MANUFACTURING AND SOURCING
The Company manufactured approximately 55% of all garments which it placed in
service during fiscal 2003. These were primarily work pants manufactured at its
plant in Ebano, San Luis Potosi, Mexico and shirts manufactured at its plant in
Valles, San Luis Potosi, Mexico. The balance of the garments used in its
programs are purchased from a variety of industry suppliers. While the Company
currently acquires the raw materials with which it produces its garments from a
limited number of suppliers, the Company believes that such materials are
readily available from other sources. To date, the Company has experienced no
significant difficulty in obtaining any of its raw materials or supplies.
EMPLOYEES
At August 30, 2003, the Company employed approximately 7,900 persons, about 5%
of whom are represented by unions pursuant to two separate collective
bargaining agreements. The Company considers its employee relations to be good.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Ronald D. Croatti 60 Chairman of the Board, President, and Chief
Executive Officer
Cynthia Croatti 48 Executive Vice President and Treasurer
John B. Bartlett 62 Senior Vice President and Chief Financial Officer
Dennis G. Assad 58 Senior Vice President, Sales and
Marketing
Bruce P. Boynton 55 Senior Vice President, Operations
David A. DiFillippo 46 Senior Vice President, Operations
The principal occupation and positions for the past five years of the executive
officers named above are as follows:
Ronald D. Croatti joined the Company in 1965. Mr. Croatti became Chairman of the
Board in fiscal 2002. He has served as Chief Executive Officer since 1991 and
President since August 31, 1995. Mr. Croatti has overall responsibility for the
management of the Company.
Cynthia Croatti joined the Company in 1980. Ms. Croatti has served as Executive
Vice President since January 2001, and as Treasurer since 1982 and has primary
responsibility for overseeing the human resources and purchasing functions of
the Company.
John B. Bartlett joined the Company in 1977. Mr. Bartlett has served as Senior
Vice President and Chief Financial Officer since 1986 and has primary
responsibility for overseeing the financial functions of the Company, as well as
its information systems department.
Dennis G. Assad joined the Company in 1975. Mr. Assad has served as Senior Vice
President, Sales and Marketing since 1995 and has primary responsibility for
overseeing the sales and marketing functions of the Company.
Bruce P. Boynton joined the Company in 1976. Mr. Boynton has served as Senior
Vice President, Operations since January 2001, is the chief operating officer
for the Company's Canadian operations and has primary responsibility for
overseeing the operations of certain regions in the United States. Prior to
January 2001, Mr. Boynton had served as Vice President, Operations since 1986.
David A. DiFillippo joined the Company in 1979. Mr. DiFillippo has served as
Senior Vice President, Operations since January 2002, and has primary
responsibility for overseeing the operations of certain regions in the United
States. Prior to January 2002, Mr. DiFillippo had served as Vice President,
Central Rental Group since January 2000. Prior to January 2000, Mr. DiFillippo
had served as a Regional General Manager.
Ronald D. Croatti and Cynthia Croatti are siblings.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of hazardous wastes and other
substances. In particular, industrial laundries use and must dispose of
detergent waste water and other residues. The Company is attentive to the
environmental concerns surrounding the disposal of these materials and has
through the years taken measures to avoid their improper disposal. In the past,
the Company has settled, or contributed to the settlement of, actions or claims
brought against the Company relating to the disposal of hazardous materials and
there can be no assurance that the Company will not have to expend material
amounts to remediate the consequences of any such disposal in the future.
Further, under environmental laws, an owner or lessee of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in or emanating from such property, as well as related
costs of investigation and property damage. Such laws often impose liability
without regard to whether the owner or lessee knew of or was responsible for the
presence of such hazardous or toxic substances. There can be no assurances that
acquired or leased locations have been operated in compliance with environmental
laws and regulations or that future uses or conditions will not result in the
imposition of liability upon the Company under such laws or expose the Company
to third-party actions such as tort suits. The Company continues to address
environmental conditions under terms of consent orders negotiated with the
applicable environmental authorities or otherwise
with respect to sites located in or related to Woburn, Massachusetts, Uvalde,
Texas, Williamstown, Vermont, and Springfield, Massachusetts.
The Company's nuclear garment decontamination facilities are licensed by the
Nuclear Regulatory Commission, or in certain cases by the applicable state
agency, and are subject to regulation by federal, state and local authorities.
In recent years, there has been increased scrutiny and, in certain cases,
regulation of nuclear facilities or related services that have resulted in the
suspension of operations at certain nuclear facilities served by the Company or
disruptions of the Company's ability to service such facilities. There can be no
assurance that such increased scrutiny will not lead to the shut-down of such
facilities or otherwise cause material disruptions in the Company's garment
decontamination business.
Subsequent Event - Textilease Corporation Acquisition/Revolving Senior Credit
Facility
On September 2, 2003 ("Closing Date"), the Company completed its acquisition of
100% of Textilease Corporation ("Textilease"). The purchase price of
approximately $175.6 million in cash, net of assumed debt of approximately $2.4
million, was financed as part of a new $285 million unsecured revolving credit
agreement ("Credit Agreement"), with a syndicate of banks. The Credit Agreement,
completed on the Closing Date, replaces the Company's previous $125 million
unsecured revolving credit agreement and is due on the third anniversary of the
Closing Date (September 2, 2006). Availability of credit requires compliance
with financial and other covenants, including maximum leverage, minimum fixed
charge coverage, and minimum tangible net worth, as defined in the Credit
Agreement.
Textilease, headquartered in Beltsville, Maryland, had fiscal year 2002 revenues
of approximately $95 million. It services over 25,000 uniform and textile
products customers from 12 locations in six southeastern states, and also
services a wide range of large and small first-aid service customers from
additional specialized facilities.
ITEM 2. PROPERTIES
At August 30, 2003, the Company owned or occupied 158 facilities containing an
aggregate of approximately 4.4 million square feet located in the United States,
Canada, Mexico, Germany and the Netherlands. These facilities include the
Company's
320,000 square foot Owensboro, Kentucky distribution center (which the Company
believes is one of the largest and most advanced garment distribution facilities
in the industry) and its many customer service locations. The Company owns 94 of
these facilities, containing about 3.8 million square feet. The Company believes
its industrial laundry facilities are among the most modern in the industry.
The Company owns substantially all of the machinery and equipment used in its
operations. In the opinion of the Company, all of its facilities and its
production, cleaning and decontamination equipment have been well maintained,
are in good condition and are adequate for the Company's present needs. The
Company also owns a fleet of approximately 2,000 delivery vans, trucks and other
vehicles. The Company believes that these vehicles are in good repair and are
adequate for the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims arising
from the conduct of its business operations, including personal injury, customer
contract, employment claims and environmental matters as described above. The
Company maintains insurance coverage providing indemnification against the
majority of such claims and management does not expect that any material loss to
the Company will be sustained as a result thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK INFORMATION
Our common stock trades on the New York Stock Exchange under the symbol
"UNF." The following table sets forth, for the periods indicated, the high and
low sales prices of our common stock on the New York Stock Exchange, and the
dividends per share of common stock and class B common stock. These sales
prices represent prices between dealers and do not include retail mark-ups,
markdowns, or commissions and may not necessarily represent actual transactions.
Price Per Share Dividends Per Share
Class B
For the Year Ended August 30, 2003 High Low Common Stock Common Stock
- -----------------------------------------------------------------------------------------------------------------------------
First Quarter $24.690 $18.680 $0.030 $0.0375
Second Quarter 21.400 18.550 0.030 0.0375
Third Quarter 18.830 14.000 0.030 0.0375
Fourth Quarter 26.920 17.990 0.030 0.0375
=============================================================================================================================
Price Per Share Dividends Per Share
Class B
For the Year Ended August 31, 2002 High Low Common Stock Common Stock
- -----------------------------------------------------------------------------------------------------------------------------
First Quarter $19.490 $15.300 $0.030 $0.0375
Second Quarter 24.360 19.370 0.030 0.0375
Third Quarter 28.690 22.190 0.030 0.0375
Fourth Quarter 25.260 21.520 0.030 0.0375
=============================================================================================================================
The approximate number of shareholders of record of the Company's common stock
and Class B common stock as of November 14, 2003 were 125 and 22, respectively.
We have generally declared and paid cash dividends of the Company's common stock
and Class B common stock quarterly. The amounts of future dividends on our
common stock or class B common stock will be at the discretion of our Board of
Directors after taking into account various factors, including our financial
condition, operating results, anticipated cash needs, and plans for expansion.
Each share of common stock is entitled to 125% of any cash dividend paid on each
share of class B common stock
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements included in Item 8.
Ten Year Financial Summary
UniFirst Corporation and Subsidiaries
Fiscal Year Ended August
(In thousands, except Financial Ratios
and per share data) 2003 2002 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
- ---------------------
Revenues $596,936 $578,898 $556,371 $528,726 $487,100 $448,052 $419,093 $391,794
Depreciation and amortization 39,659 38,031 37,568 34,710 31,724 26,629 23,386 20,814
Income from operations 48,838 51,979 47,565 39,244 51,747 54,175 47,001 40,915
Other expense (income), net 1,266 8,660 10,108 7,200 4,841 2,316 2,118 2,398
Provision for income taxes 18,310 16,460 14,233 12,176 22,800 18,669 16,160 13,855
Income before cumulative effect of
accounting change, net 29,262 26,859 23,224 19,868 24,106 33,190 28,723 24,662
Net income 27,020 26,859 23,224 19,868 24,106 33,190 28,723 24,662
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position at Year End
- ------------------------------
Total assets $514,587 $494,835 $491,813 $500,150 $465,627 $376,130 $339,626 $302,378
Long-term obligations 69,812 85,096 94,795 126,638 113,105 47,149 40,837 39,365
Shareholders' equity 335,380 309,740 285,545 271,172 257,433 246,374 217,192 191,109
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
- ----------------
Income before cumulative effect of
accounting change, net as a % of revenues 4.9% 4.6% 4.2% 3.8% 4.9% 7.4% 6.9% 6.3%
Return on average
shareholders' equity 8.4% 9.0% 8.3% 7.5% 9.6% 14.3% 14.1% 13.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding -- basic 19,182 19,222 19,364 19,670 20,438 20,511 20,511 20,511
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding -- diluted 19,222 19,278 19,378 19,670 20,438 20,511 20,511 20,511
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
- --------------
Revenues $ 31.12 $ 30.12 $ 28.73 $ 26.88 $ 23.83 $ 21.84 $ 20.43 $ 19.10
Income before cumulative effect of
accounting change, net $ 1.53 $ 1.40 $ 1.20 $ 1.01 $ 1.18 $ 1.62 $ 1.40 $ 1.20
Cumulative effect of accounting change, net (0.12) -- -- -- -- -- -- --
Net Income - basic 1.41 1.40 1.20 1.01 1.18 1.62 1.40 1.20
Income before cumulative effect of
accounting change, net $ 1.52 $ 1.40 $ 1.20 $ 1.01 $ 1.18 $ 1.62 $ 1.40 $ 1.20
Cumulative effect of accounting change, net (0.12) -- -- -- -- -- -- --
Net Income - diluted 1.40 1.39 1.20 1.01 1.18 1.62 1.40 1.20
Shareholders' equity 17.48 16.11 14.75 13.79 12.60 12.01 10.59 9.32
Dividends
Common stock .15 .15 .15 .15 .14 .12 .12 .11
Class B common stock .12 .12 .12 .12 .11 .10 .10 .09
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended August
(In thousands, except Financial Ratios
and per share data) 1995 1994
- -----------------------------------------------------------------
Summary of Operations
- ---------------------
Revenues $355,041 $318,039
Depreciation and amortization 19,194 17,912
Income from operations 34,531 32,457
Other expense (income), net 2,787 2,513
Provision for income taxes 11,110 11,073
Income before cumulative effect of
accounting change, net 20,634 18,871
Net income 20,634 18,871
- -----------------------------------------------------------------
Financial Position at Year End
- ------------------------------
Total assets $272,691 $250,160
Long-term obligations 36,376 41,602
Shareholders' equity 168,596 149,472
- -----------------------------------------------------------------
Financial Ratios
- ----------------
Income before cumulative effect of
accounting change, net as a % of revenues 5.8% 5.9%
Return on average
shareholders' equity 13.0% 13.4%
- -----------------------------------------------------------------
Weighted average number
of shares outstanding -- basic 20,511 20,506
- -----------------------------------------------------------------
Weighted average number
of shares outstanding -- diluted 20,511 20,506
- -----------------------------------------------------------------
Per Share Data
- --------------
Revenues $ 17.31 $ 15.51
Income before cumulative effect of
accounting change, net $ 1.01 $ 0.92
Cumulative effect of accounting change, net -- --
Net Income - basic 1.01 0.92
Income before cumulative effect of
accounting change, net $ 1.01 $ 0.92
Cumulative effect of accounting change, net -- --
Net Income - diluted 1.01 0.92
Shareholders' equity 8.22 7.29
Dividends
Common stock .10 .10
Class B common stock .08 .08
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies and Estimates
The Company believes the following critical accounting policies reflect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or estimates that had a material effect on our
condensed consolidated financial statements for the periods presented.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Substantially all inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claim experience and other
factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, employment claims. Accounting principles generally
accepted in the United States require that a liability for contingencies be
recorded when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is required to
determine the existence of a liability, as well as the amount to be recorded.
The Company regularly consults with attorneys and outside consultants to ensure
that all of the relevant facts and circumstances are considered, before a
contingent liability is recorded. The Company records accruals for environmental
and other contingencies based on enacted laws, regulatory orders or decrees, the
Company's estimates of costs, insurance proceeds, participation by other parties
and the timing of payments, and the input of outside consultants and attorneys.
The estimated liability for environmental contingencies has been discounted
using credit-adjusted risk-free rates of interest that range from approximately
4.0% to 5.0% over periods ranging from fifteen to thirty years. The estimated
current costs, net of legal settlements with insurance carriers, have been
adjusted for the estimated impact of inflation at 3% per year. Changes in
enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures, in
accordance with SFAS No. 5 - "Accounting for Contingencies". Based on the
Company's evaluation of current tax positions, the Company believes it has
appropriately accrued for probable exposures.
Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement
Obligations." SFAS No. 143 generally applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Under the new accounting method, the Company now recognizes asset retirement
obligations in the period in which they are incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company will
depreciate, on a straight-line basis, the amount added to property and equipment
and recognize accretion expense in connection with the discounted liability over
the various remaining lives which range from approximately one to thirty years.
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
Fiscal Year Ended August 30, 2003 Compared with Fiscal Year Ended August 31,
2002
Revenues. In 2003, revenues increased 3.1% to $596.9 million as compared with
$578.9 million for 2002, which had fifty-three weeks. On a comparative 52-week
basis, revenues increased by 5.1%. The 3.1% increase can be attributed to growth
from existing operations, acquisitions, and price increases in the core uniform
rental business (1.9%) and increased revenue from the UniTech garment services
business (1.2%).
Operating costs. Operating costs increased to $370.6 million for 2003 as
compared with $349.0 million for 2002. As a percentage of revenues, operating
costs increased to 62.1% from 60.3% for these periods, primarily due to
increased non-garment merchandise costs, primarily mats and facility service
products, as well as higher energy costs, offset by a reduction in merchandise
costs resulting from improved garment utilization and the Company's continuing
transition of its manufacturing operations to Mexico.
Selling and administrative expenses. The Company's selling and administrative
expenses decreased to $137.9 million, or 23.1% of revenues, for 2003 as compared
with $139.9 million, or 24.2% of revenues, for 2002. Certain amounts included in
2002 selling and administrative expenses have been classified as operating costs
in 2003. Had these costs of approximately $3 million in 2002 been reclassified
to operating costs in 2002, selling and administrative expenses would have been
approximately $136.9 million, or 23.6% of revenues in 2002. On a comparable
basis, selling and administrative expenses increased approximately $1.0 million
from 2002 to 2003, primarily due to increased sales and marketing costs driven
by sales force expansion, partially offset by reduced legal costs.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $39.7 million, or 6.6% of revenues, for 2003, as compared
with $38.0 million, or 6.6% of revenues, for 2002. The increase was due to an
increase in
depreciation related to additional capital expenditures, offset by a decrease in
amortization due to certain intangible assets becoming fully amortized during
fiscal 2003.
Other expense (income). Net other expense (interest expense, interest rate swap
expense (income) and interest income) was $1.3 million, or 0.21% of revenues,
for 2003 as compared with $8.7 million, or 1.5% of revenues, for 2002. During
the second quarter of fiscal 2002 the Company recorded a $2.3 million interest
charge which was an estimate of the interest due from settling a revenue agent
review with the IRS. Excluding this charge, net other expense would have been
$6.4 million, or 1.1% of revenues, for 2002. The decrease in net other expense
was also a result of lower interest rates and continued debt reduction, as well
as changes in the fair value of the $40,000 SWAP, which was $1.3 million of
income for 2003 as compared with $1.3 million of expense for 2002.
Provision for Income Taxes. The Company's effective income tax rate was 38.5%
for 2003 as compared to 38.0% for 2002. The primary reason for the increase is
higher state income taxes.
Fiscal Year Ended August 31, 2002 Compared with Fiscal Year Ended August 25,
2001
Revenues. In 2002, revenues increased 4.0% to $578.9 million as compared with
$556.4 million for 2001. This increase can be attributed to an extra week of
revenue in fiscal 2002 (1.9%), increased revenue from the nuclear garment
services business (1.7%), and price increases in the core uniform rental and
first aid business (0.4%).
Operating costs. Operating costs decreased to $349.0 million for 2002 as
compared with $349.4 million for 2001. As a percentage of revenues, operating
costs decreased to 60.3% from 62.8% for these periods, primarily due to lower
merchandise costs resulting from transitioning manufacturing operations to
Mexico, better control of garment usage through the use of in-plant stockrooms,
and reduced energy related costs such as natural gas, electricity and fuel.
Selling and administrative expenses. The Company's selling and administrative
expenses increased to $139.9 million, or 24.2% of revenues, for 2002 as compared
with $121.8 million, or 21.9% of revenues, for 2001. Fiscal 2001 reflects a
credit to selling and administrative expenses of $1.1 million for a favorable
settlement of a lawsuit related to the Company's nuclear garment service
business. Excluding this settlement, selling and administrative expenses would
have been $122.9 million, or 22.1% of revenues. The increase from 2001 to 2002
is attributable to significant increases in healthcare costs, increased
marketing costs due to salesforce expansion and legal expenses.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $38.0 million, or 6.6% of revenues, for 2002, as compared
with $37.6 million, or 6.8% of revenues, for 2001. This increase was due
primarily to increased depreciation expense during fiscal 2002 related to new
capital expenditures and the completion and placement into service of the
Company's second manufacturing plant in Mexico, offset by the elimination of
goodwill amortization of $2.0 million, which was recorded in 2001. See Note 7
for further discussion.
Interest expense. Interest expense was $8.8 million, or 1.5% of revenues, for
2002 as compared with $9.1 million, or 1.6% of revenues, for 2001. During the
second quarter of fiscal 2002, the Company recorded a $2.3 million interest
charge as an estimated amount due for settlement of a revenue agent review with
the IRS. Excluding this charge, interest expense would have been $6.5 million
for 2002, or 1.1% of revenues. The decrease from fiscal 2001 to fiscal 2002 is
related to lower interest rates in 2002, as well as continued debt reduction in
2002.
Interest income. Interest income, which is primarily amounts charged to
customers for overdue accounts, increased to $1.4 million for fiscal 2002, as
compared to $1.2 million for fiscal 2001. The amounts recorded in each year were
0.2% of revenue.
Interest rate swap expense. Interest rate swap expense was $1.3 million, or 0.2%
of revenues, for 2002, as compared to $2.2 million, or 0.4% of revenues, for
2001. The lower interest rate swap expense in 2002 is due to a change in the
fair value of the Company's $40 million notional amount interest rate swap
agreement. See Note 5 for a further discussion of the impact of this change.
Provision for income taxes. The Company's effective income tax rate was 38.0% in
both 2002 and 2001.
Liquidity and Capital Resources
Shareholders' equity at August 30, 2003 was $335.4 million, or 82.7% of the
Company's total capitalization.
Net cash provided by operating activities was $60.8 million in fiscal 2003 and
totaled $189.7 million for the three years ended August 30, 2003. These cash
flows were used primarily to fund $105.4 million in capital expenditures to
expand and update Company facilities, and reduce debt by a net amount of $58.1
million for the three years ended August 30, 2003. Additionally, during this
three year period, $16.4 million was used for acquisitions, net of cash
acquired, $6.0 million was used to repurchase 503,000 shares of the Company's
common stock, and $7.7 million was used to pay cash dividends to Common and
Class B Common shareholders.
As of August 30, 2003, the Company had $6.1 million in cash and cash equivalents
and $39.2 million available under its $125.0 million unsecured line of credit
with a syndicate of banks. As of August 30, 2003, the Company had standby
irrevocable bank commercial letters of credit and mortgages outstanding of $20.1
million. In connection with its acquisition of Textilease Corporation on
September 2, 2003 ("Closing Date") (see Note 15 to the Consolidated Financial
Statements), the Company entered into a $285 million unsecured revolving credit
agreement ("Credit Agreement"), with a syndicate of banks. The Credit Agreement,
entered into on the Closing Date, replaces the Company's previous $125 million
unsecured revolving credit agreement. As of November 26, 2003, approximately
$30.1 million was available on the Credit Agreement, net of outstanding
borrowings of $235.2 million and letters of credit of $19.7 million.
The Company believes its cash generated from operations and its borrowing
capacity will adequately cover its foreseeable capital requirements.
Contractual Obligations and Commercial Commitments
The following information is presented as of August 30, 2003.
Payments Due by Fiscal Period
Contractual Obligations Total 2004 2005 2006 2007 Thereafter
- -------------------------------------------------------------------------------------------------
Long Term Debt $69,812 $ 2,493 $ 505 $65,992 $ 208 $ 614
Operating Leases 9,975 3,441 2,685 1,774 1,118 982
-------------------------------------------------------------------
Total Contractual Cash
Obligations $79,787 $ 5,934 $ 3,190 $67,766 $1,326 $1,596
===================================================================
Commitment Expiration
Other Commercial Total Amounts
Commitments Committed 2004 2005 2006 2007 Thereafter
- -------------------------------------------------------------------------------------------------
Unused Lines of Credit $39,229 $ -- $ -- $39,229 $ -- $ --
Standby Letters of Credit 20,061 20,061
----------------------------------------------------------------------
Total Commercial
Commitments $ 59,290 $ -- $ -- $ 59,290 $ -- $ --
======================================================================
Seasonality
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing of acquisitions and of
commencing start-up operations and related costs; the effectiveness of
integrating acquired businesses and start-up operations; the timing of nuclear
plant outages; capital expenditures; seasonal rental and purchasing patterns of
the Company's customers; and price changes in response to competitive factors.
In addition, the Company's operating results historically have been lower during
the second and fourth fiscal quarters than during the other quarters of the
fiscal year. The operating results for any historical quarter are not
necessarily indicative of the results to be expected for an entire fiscal year
or any other interim periods.
Effects of Inflation
Inflation has had the effect of increasing the reported amounts of the Company's
revenues and costs. The Company uses the last-in, first-out (LIFO) method to
value a significant portion of inventories. This method tends to reduce the
amount of income due to inflation included in the Company's results of
operations. The Company believes that, through increases in its prices and
productivity improvements, it has been able to recover increases in costs and
expenses attributable to inflation.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward looking statements contained in this quarterly report are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward looking
statements. Such factors include uncertainties regarding the Company's ability
to consummate and successfully integrate acquired businesses, uncertainties
regarding any existing or newly-discovered expenses and liabilities related to
environmental compliance and remediation, the Company's ability to compete
successfully without any significant degradation in its margin rates, seasonal
fluctuations in business levels, uncertainties regarding the price levels of
natural gas, electricity, fuel, and labor, the impact of negative economic
conditions on the Company's customers and such customer's workforce, the
continuing increase in domestic healthcare costs, demand and prices for the
Company's products and services, the impact of interest rate variability upon
the Company's interest rate swap arrangements, additional professional and
internal costs necessary for compliance with recent and proposed future changes
in Securities and Exchange Commission (including the Sarbanes-Oxley Act of
2002), New York Stock Exchange, and accounting rules, strikes and unemployment
levels, the Company's efforts to evaluate and potentially reduce internal costs,
economic and other developments associated with the war on terrorism and its
impact on the economy and general economic conditions. When used in this
quarterly 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies that represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
foreign countries, as a result of the Company's transactions in these foreign
markets. The Company does not operate a hedging program to mitigate the effect
of a significant rapid change in the value of the Canadian Dollar, Euro or
Mexican Peso as compared to the U.S. dollar. If such a change did occur, the
Company would have to take into account a currency exchange gain or loss in the
amount of the change in the U.S. dollar denominated balance of the amounts
outstanding at the time of such change. While the Company does not believe such
a gain or loss is likely, and would not likely be material, there can be no
assurance that such a loss would not have an adverse material effect on the
Company's results of operations or financial condition.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company is exposed to interest rate risk primarily through its borrowings under
its $125 million unsecured line of credit with a syndicate of banks. Under the
line of credit, the Company may borrow funds at variable interest rates based on
the Eurodollar rate or the bank's money market rate, as selected by the Company.
As of August 30, 2003, the Company's outstanding debt approximates its carrying
value.
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The swap
agreements are cash flow hedges and are used to manage exposure to interest rate
movement by effectively changing the variable rate to a fixed rate. Such
instruments are matched with the underlying borrowings. The effective portion of
the cash flow hedge is recorded within the other comprehensive loss section of
shareholders' equity in the period of change in fair value. The ineffective
portion of the cash flow hedge is charged to the Company's consolidated
statement of income in the period of change in fair value.
In connection with its acquisition of Textilease Corporation on September 2,
2003 ("Closing Date") (see Note 15 to the Consolidated Financial Statements),
the Company entered into a $285 million unsecured revolving credit agreement
("Credit Agreement"), with a syndicate of banks. The Credit Agreement, entered
into on the Closing Date, replaces the Company's previous $125 million unsecured
revolving credit agreement. Under the line of credit, the Company may borrow
funds at variable interest rates based on the Eurodollar rate or the bank's
money market rate, as selected by the Company. As of August 30, 2003, the
Company's outstanding debt approximates its carrying value.
The Company is evaluating alternatives to manage its exposure to movements in
interest rates on its variable rate debt related to the Credit Agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Income
UniFirst Corporation and Subsidiaries
Year Ended August 30, August 31, August 25,
(In thousands, except per share data) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Revenues $ 596,936 $ 578,898 $ 556,371
----------------------------------------
Cost and expenses:
Operating costs 370,555 349,009 349,449
Selling and administrative expenses 137,884 139,879 121,789
Depreciation and amortization 39,659 38,031 37,568
----------------------------------------
548,098 526,919 508,806
----------------------------------------
Income from operations 48,838 51,979 47,565
----------------------------------------
Other expense (income):
Interest expense 4,010 8,843 9,107
Interest income (1,452) (1,439) (1,239)
Interest rate swap expense (income) (1,292) 1,256 2,240
----------------------------------------
1,266 8,660 10,108
----------------------------------------
Income before income taxes 47,572 43,319 37,457
Provision for income taxes 18,310 16,460 14,233
----------------------------------------
Income before cumulative effect of accounting change 29,262 26,859 23,224
Cumulative effect of accounting change (net of income tax
benefit of $1,404 in fiscal 2003) 2,242 -- --
----------------------------------------
Net income $ 27,020 $ 26,859 $ 23,224
========================================
Weighted average number of shares outstanding : basic 19,182 19,222 19,364
----------------------------------------
Weighted average number of shares outstanding : diluted 19,222 19,278 19,378
----------------------------------------
Income per share - basic
Before cumulative effect of accounting change, net $ 1.53 $ 1.40 $ 1.20
Cumulative effect of accounting change, net (0.12) -- --
----------------------------------------
Net income $ 1.41 $ 1.40 $ 1.20
========================================
Income per share - diluted
Before cumulative effect of accounting change, net $ 1.52 $ 1.39 $ 1.20
Cumulative effect of accounting change, net (0.12) -- --
----------------------------------------
Net income per share $ 1.40 $ 1.39 $ 1.20
========================================
Cash dividends per share:
Common stock $ 0.15 $ 0.15 $ 0.15
========================================
Class B common stock $ 0.12 $ 0.12 $ 0.12
========================================
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Balance Sheets
UniFirst Corporation and Subsidiaries
Year Ended
August 30, August 31,
(In thousands, except per share data) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 6,053 $ 4,333
Receivables, less reserves of $2,611 for 2003 and $2,687 for 2002 57,941 54,587
Inventories 25,355 24,807
Rental merchandise in service 60,490 56,047
Prepaid and deferred tax assets 5,591 --
Prepaid expenses 407 315
-------------------------
Total current assets 155,837 140,089
-------------------------
Property and equipment:
Land, buildings and leasehold improvements 221,487 208,000
Machinery and equipment 238,820 229,692
Motor vehicles 66,081 60,925
-------------------------
526,388 498,617
Less - accumulated depreciation 251,806 229,621
-------------------------
274,582 268,996
-------------------------
Goodwill 62,608 61,539
Intangible assets, net 20,524 23,155
Other assets 1,036 1,056
-------------------------
$ 514,587 $ 494,835
=========================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 2,493 $ 1,406
Notes payable 104 1,195
Accounts payable 30,678 17,012
Accrued liabilities 53,670 53,331
Accrued and deferred income taxes -- 1,457
-------------------------
Total current liabilities 86,945 74,401
-------------------------
Long-term obligations, net of current maturities 67,319 83,690
Deferred income taxes 24,943 27,004
-------------------------
Commitments and Contingencies (Note 9)
Shareholders' equity:
Preferred stock, $1.00 par value; 2,000,000 shares authorized; none issued -- --
Common stock, $.10 par value; 30,000,000 shares authorized; issued
10,599,359 shares in 2003 and 10,555,109 shares in 2002 1,060 1,055
Class B common stock, $.10 par value; 20,000,000 shares authorized;
Issued and outstanding 10,175,144 shares in 2003 and 10,205,144 shares in 2002 1,018 1,021
Treasury stock, 1,595,055 shares in 2003 and 1,535,055 shares in 2002, at cost (26,005) (24,756)
Capital surplus 12,693 12,503
Retained earnings 348,043 323,595
Accumulated other comprehensive loss (1,429) (3,678)
-------------------------
Total shareholders' equity 335,380 309,740
-------------------------
$ 514,587 $ 494,835
=========================
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statements of Shareholders' Equity
UniFirst Corporation and Subsidiaries
Accumulated
Class B Class B Other
Common Common Treasury Common Common Treasury Capital Retained Comprehensive Comprehensive
(In thousands) Shares Shares Shares Stock Stock Stock Surplus Earnings Income (Loss) Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 26, 2000 10,500 10,256 (1,092) $1,050 $ 1,026 $(20,049) $12,438 $ 278,676 $(1,969) --
Net income -- -- -- -- -- -- -- 23,224 -- 23,224
Dividends -- -- -- -- -- -- -- (2,587) -- --
Shares converted 17 (17) -- 2 (2) -- -- -- -- --
Shares repurchased -- -- (443) -- -- (4,706) -- -- -- --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- -- (893) (893)
Change in fair value of
derivative instruments,
net of tax -- -- -- -- -- -- -- -- (665) (665)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $21,666
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 25, 2001 10,517 10,239 (1,535) 1,052 1,024 (24,755) 12,438 299,313 (3,527)
Net income -- -- -- -- -- -- -- 26,859 -- 26,859
Dividends -- -- -- -- -- -- -- (2,577) -- --
Shares converted 34 (34) -- 3 (3) -- -- -- -- --
Shares repurchased -- -- -- -- -- (1) -- -- -- --
Stock options exercised 4 -- -- -- -- -- 65 -- -- --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- -- (471) (471)
Change in fair value of
derivative instruments,
net of tax -- -- -- -- -- -- -- -- 320 320
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $26,708
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2002 10,555 10,205 (1,535) 1,055 1,021 (24,756) 12,503 323,595 (3,678)
Net income -- -- -- -- -- -- -- 27,020 -- 27,020
Dividends -- -- -- -- -- -- -- (2,572) -- --
Shares converted 30 (30) -- 3 (3) -- -- -- -- --
Shares repurchased -- -- (60) -- -- (1,249) -- -- -- --
Stock options exercised 14 -- -- 2 -- -- 190 -- -- --
Foreign Currency
translation adjustments -- -- -- -- -- -- -- -- 1,904 1,904
Change in fair value of
derivative instruments,
net of tax -- -- -- -- -- -- -- -- 345 345
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $29,269
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 30, 2003 10,599 10,175 (1,595) $1,060 $ 1,018 $(26,005) $12,693 $ 348,043 $(1,429)
===================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
UniFirst Corporation and Subsidiaries
Year Ended August 30, August 31, August 25,
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 27,020 $ 26,859 $ 23,224
Adjustments:
Cumulative effect of accounting change, net 2,242 -- --
Depreciation 35,262 32,755 30,553
Amortization of other assets 4,397 5,276 7,015
Accretion on asset retirement obligations 292 -- --
Interest rate swap (income) expense (1,292) 1,256 2,240
Changes in assets and liabilities, net of acquisitions:
Receivables (3,229) 1,158 (1,446)
Inventories (548) (2,394) 5,161
Rental merchandise in service (4,225) 1,618 2,439
Prepaid expenses (92) (40) 23
Accounts payable 13,667 (2,670) (143)
Accrued liabilities (4,982) (3,156) 5,856
Accrued and deferred income taxes (7,704) (11,351) (324)
Deferred income taxes -- 3,388 1,613
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 60,808 52,699 76,211
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (2,785) (12,342) (1,300)
Capital expenditures (37,919) (33,304) (34,196)
Other 1,912 3,940 (3,261)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,792) (41,706) (38,757)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in debt -- 152 981
Reduction of debt (16,667) (9,998) (32,580)
Repurchase of common stock (1,249) (1) (4,706)
Proceeds from exercise of common stock options 192 65 --
Cash dividends (2,572) (2,577) (2,587)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (20,296) (12,359) (38,892)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,720 (1,366) (1,438)
Cash and cash equivalents at beginning of year 4,333 5,699 7,137
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,053 $ 4,333 $ 5,699
======================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 4,554 $ 8,776 $ 8,588
Income taxes paid 24,179 24,418 13,014
======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
UniFirst Corporation and Subsidiaries
(Amounts in thousands, except per share and common stock options data)
1. Summary Of Critical and Significant Accounting Policies
Business Description
UniFirst Corporation (the "Company") is a leading company in the garment service
business. The Company designs, manufactures, personalizes, rents, cleans,
delivers and sells a variety of superior quality occupational garments, career
apparel and imagewear programs to businesses of all kinds. It also services
industrial wiper towels, floor mats and other non-garment items and provides
first aid cabinet services and other safety supplies. The Company's UniTech
subsidiary decontaminates and cleans, in separate facilities, garments which may
have been exposed to radioactive materials.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany balances and
transactions are eliminated in consolidation. All assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts are
translated at average exchange rates during the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or the method of determining estimates that had a
material effect on our condensed consolidated financial statements for the
periods presented.
Fiscal Year
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2003 had 52 weeks, while fiscal 2002 had 53 weeks and
fiscal 2001 had 52 weeks.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Had the Company used the first-in, first-out (FIFO) accounting
method, inventories would have been approximately $1.5 million higher at August
30, 2003 and August 31, 2002. Substantially all inventories represent finished
goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method based on the following estimated useful
lives:
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Motor vehicles 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. Expenditures
for renewals and betterments are capitalized.
Goodwill and Other Intangible Assets
Customer contracts are amortized over their estimated useful lives which have a
weighted average life of 14.25 years. Restrictive covenants are amortized over
the terms of the respective non-competition agreements, which have a weighted
average life of 7.5 years. In accordance with the provisions of Statement of
Financial Accounting Standards "SFAS" No. 142, the Company does not amortize
goodwill.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures. Based
on the Company's evaluation of current tax positions, the Company believes they
have appropriately accrued for probable exposures.
Net Income Per Share
Basic and diluted net income per share is calculated using the weighted average
number of common and dilutive potential common shares outstanding during the
year. The following table illustrates the amounts used in the denominator of the
calculation:
Year Ended August 30, 2003 August 31, 2002 August 25, 2001
Weighted average number of shares outstanding
- -- Basic 19,182 19,222 19,364
Add: effect of dilutive potential common shares -
employee common stock options 40 56 14
------------------------------------------------
Weighted average number of shares outstanding
- - Diluted 19,222 19,278 19,378
------------------------------------------------
Stock Based Compensation
The Company has stock-based employee compensation plans which are described in
Note 10 to the consolidated financial statements. The Company uses the intrinsic
value method to account for the plans under Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost has
been recognized related to Stock option grants. The Company has adopted the
disclosure provisions of SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure". Had compensation cost for this plan been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts for the following
periods:
Year Ended August 30, 2003 August 31, 2002 August 25, 2001
Income before cumulative effect of accounting change $ 29,262 $ 26,859 $ 23,224
Less: pro forma compensation expense, net of tax (171) (126) (146)
---------------------------------------------------
Pro forma income before cumulative effect of accounting change 29,091 26,733 23,078
Cumulative effect of accounting change, net of tax (2,242) -- --
---------------------------------------------------
Pro forma net income $ 26,849 $ 26,733 $ 23,078
========== ========== ==========
Basic net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 1.53 $ 1.40 $ 1.20
Cumulative effect of accounting change, net of tax (0.12) -- --
---------------------------------------------------
Net income per share $ 1.41 $ 1.40 $ 1.20
========== ========== ==========
Basic net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 1.52 $ 1.39 $ 1.19
Cumulative effect of accounting change, net of tax (0.12) -- --
---------------------------------------------------
Pro forma net income per share $ 1.40 $ 1.39 $ 1.19
========== ========== ==========
Diluted net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 1.52 $ 1.39 $ 1.20
Cumulative effect of accounting change, net of tax (0.12) -- --
---------------------------------------------------
Net income per share $ 1.40 $ 1.39 $ 1.20
========== ========== ==========
Diluted net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 1.51 $ 1.39 $ 1.19
Cumulative effect of accounting change, net of tax (0.12) -- --
---------------------------------------------------
Pro forma net income per share $ 1.39 $ 1.39 $ 1.19
========== ========== ==========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model as prescribed by SFAS No. 123, based upon the
date of grant, with the following assumptions used for grants each year:
2003 2002 2001
----------------------------------------
Risk-free interest rate 4.00% 4.03% 5.78%
Expected dividend yield 1.00% 1.00% 1.00%
Expected life in years 10 8 8
Expected volatility 30% 30% 30%
The weighted average fair values of options granted during fiscal years 2003,
2002 and 2001 were $8.63, $6.67 and $4.28, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and bank short-term investments
with maturities of less than ninety days.
Financial Instruments
The Company's financial instruments, which may expose the Company to
concentrations of credit risk, include cash and cash equivalents, receivables,
accounts payable, notes payable and long-term obligations. Each of these
financial instruments is recorded at cost, which approximates its fair value.
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claims experience and
other factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, employment claims. Accounting principles generally
accepted in the United States require that a liability for contingencies be
recorded when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is required to
determine the existence of a liability, as well as the amount to be recorded.
The Company regularly consults with attorneys and outside consultants to ensure
that all of the relevant facts and circumstances are considered, before a
contingent liability is recorded. The Company records accruals for environmental
and other contingencies based on enacted laws, regulatory orders or decrees, the
Company's estimates of costs, insurance proceeds, participation by other parties
and the timing of payments, and the input of outside consultants and attorneys.
The estimated liability for environmental contingencies has been discounted
using credit-adjusted risk-free rates of interest that range from approximately
4.0% to 5.0% over periods ranging from fifteen to thirty years. The estimated
current costs, net of legal settlements with insurance carriers, have been
adjusted for the estimated impact of inflation at 3% per year. Changes in
enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
2. Acquisitions
Aggregate information relating to the acquisition of businesses which were
accounted for as purchases is as follows:
Year ended August 30, August 31, August 25,
2003 2002 2001
- ---------------------------------------------------------------------------------------------
Fair value of tangible assets acquired $ 598 $ 4,371 $ 300
Fair value of intangible assets and goodwill acquired 2,479 9,008 1,000
Fair value of liabilities assumed or created (292) (1,037) --
-------------------------------------
Acquisition of businesses, net of cash acquired $ 2,785 $ 12,342 $1,300
=====================================
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. See Note 15 for Subsequent Events.
3. Income Taxes
The provision for income taxes consists of the following:
Year ended August 30, August 31, August 25,
2003 2002 2001
------------------------------------
Current:
Federal and Foreign $16,218 $ 13,383 $ 14,466
State 2,026 1,624 1,873
------------------------------------
18,244 15,007 16,339
------------------------------------
Deferred:
Federal and Foreign 60 1,354 (1,208)
State 6 99 (898)
------------------------------------
66 1,453 (2,106)
------------------------------------
$18,310 $ 16,460 $ 14,233
====================================
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 30, August 31, August 25,
2003 2002 2001
-----------------------------------
Income taxes at the statutory federal
income tax rate $16,650 $15,160 $ 13,110
State income taxes 1,315 1,120 385
Foreign income taxes 193 148 481
Puerto Rico exempt income -- -- (183)
Other 152 32 440
-----------------------------------
$18,310 $16,460 $ 14,233
===================================
The Company's Puerto Rico subsidiary's income was 90% exempt from Puerto Rico
income taxes through 2001. The Company provides for anticipated tollgate taxes
on the repatriation of the subsidiary's accumulated earnings.
The tax effect of items giving rise to the Company's deferred tax (assets)
liabilities is as follows:
August 30, August 31, August 25,
2003 2002 2001
-----------------------------------
Rental merchandise in service $ 8,612 $ 12,765 $ 20,061
Tax in excess of book depreciation 25,730 23,630 20,151
Accruals and other (14,885) (11,547) (13,991)
-----------------------------------
Net deferred tax liabilities $ 19,457 $ 24,848 $ 26,221
===================================
4. Long-Term Obligations
Long-term obligations outstanding on the accompanying consolidated balance
sheets are as follows:
August 30, August 31,
2003 2002
- -----------------------------------------------------------------------------------------
Unsecured revolving credit agreement with a syndicate of banks,
interest rates of 2.26% and 2.84% at August 30, 2003 and
August 31, 2002, respectively $65,710 $80,000
Notes payable, interest rates from 4.9% - 7.5%, payable
in various installments through 2007 4,001 4,431
Amounts due for restrictive covenants and other,
payable in various installments through 2005 101 665
- -----------------------------------------------------------------------------------------
69,812 85,096
Less - current maturities 2,493 1,406
- -----------------------------------------------------------------------------------------
$67,319 $83,690
=========================================================================================
Aggregate current maturities of long-term obligations for years subsequent to
August 30, 2003 are $2,493 in 2004, $505 in 2005, $65,992 in 2006, $208 in 2007,
$132 in 2008, and $482 thereafter.
The Company's unsecured revolving credit agreement ("Agreement") runs through
August 30, 2005. As of August 30, 2003, the maximum line of credit was $125,000
of which approximately $39.2 million was available, net of outstanding
borrowings of $65.7 million and letters of credit of $20.1 million. Under this
Agreement, the Company may borrow funds at variable interest rates based on the
Eurodollar rate or the bank's money market rate, as selected by the Company.
This Agreement contains, among other things, provisions regarding net worth and
debt coverage. Under the most restrictive of these provisions, the Company
was required to maintain minimum consolidated tangible net worth of $195,887 as
of August 30, 2003. The Company was in compliance with these provisions as of
August 30, 2003. See Note 15 for Subsequent Events.
5. Derivative Instruments and Hedging Activities
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The Company
accounts for these agreements in accordance with SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The swap agreements are cash flow hedges and are used to manage exposure to
interest rate movement by effectively changing the variable rate to a fixed
rate. Such instruments are matched with the underlying borrowings. SFAS No. 133
eliminates special hedge accounting if a swap agreement does not meet certain
criteria, thus requiring the Company to reflect all changes in the fair value of
the swap agreement in earnings in the period of change.
In October 1999, the Company entered into an interest rate swap agreement,
notional amount $40,000 ("the $40,000 SWAP"), maturing October 13, 2004. The
Company pays a fixed rate of 6.38% and receives a variable rate tied to the
three month LIBOR rate. As of August 30, 2003, the applicable variable rate was
1.11%. On October 15, 2002, the bank had the option to terminate the $40,000
SWAP without further obligation to make payments to the Company. The bank did
not exercise this option. Because of the existence of this termination option,
the $40,000 SWAP did not meet the required criteria to qualify as a cash flow
hedge and use special hedge accounting, under SFAS No. 133. Accordingly, the
Company has recorded, in the interest rate swap expense (income) line item of
its consolidated statements of income, income of $1,292, expense of $1,256 and
expense of $2,240 for the three years ended August 30, 2003, August 31, 2002,
and August 25, 2001, respectively, for the changes in the fair value of $40,000
SWAP.
In June 2001, the Company entered into a second interest rate swap agreement
with a notional amount of $20,000 ("the $20,000 SWAP"), maturing June 5, 2003.
The Company paid a fixed rate of 4.69% and received a variable rate tied to the
three month LIBOR rate. At maturity, the applicable variable rate was 1.34%. The
$20,000 SWAP met the required criteria as defined in SFAS No. 133 to use special
hedge accounting. Accordingly, the Company has recorded, through the other
comprehensive loss section of shareholders' equity, income of $345, net of tax
of $230 for the year ended August 30, 2003, expense of $195, net of tax of $130
for the year ended August 31, 2002, and expense of $150, net of tax of $100 for
the year ended August 25, 2001, respectively, for the change in the fair value
in the $20,000 SWAP. The $20,000 SWAP matured on June 5, 2003.
During 2001, the Company entered into natural gas swap agreements to mitigate
the commodity price risk associated with the natural gas used at certain laundry
facilities. During the third quarter of fiscal 2002, the Company liquidated
these swap agreements. The impact of this liquidation was not material to the
Company's financial condition or results of operations. These swap agreements
met the required criteria as defined in SFAS No. 133 to use special hedge
accounting. Accordingly, the Company recorded, in accumulated other
comprehensive income (loss), income of $515, net of tax of $343 for the year
ended August 31, 2002 and expense of $515, net of tax of $343 for the year ended
August 25, 2001 related to the change in the fair value of the swap agreements.
6. Employee Benefit Plans
The Company has a profit sharing plan with a 401(k) feature for all eligible
employees not under collective bargaining agreements. The Company matches a
portion of the employee's contribution and can make an additional contribution
at its discretion. Contributions charged to expense under the plan were $5,887
in 2003 $6,176 in 2002, and $5,744 in 2001.
Some employees under collective bargaining agreements are covered by
union-sponsored multi-employer pension plans. Company contributions, generally
based upon hours worked, are in accordance with negotiated labor contracts.
Payments to these plans amounted to $348 in 2003, $402 in 2002, and $282 in
2001. Information is not readily available for the Company to determine its
share of unfunded vested benefits, if any, under these plans.
7. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets ("SFAS No. 142")". SFAS No. 142
addresses financial accounting and reporting for goodwill and other intangible
assets. SFAS No. 142 supersedes Accounting Principles Board ("APB") Opinion No.
17, "Intangible Assets" The Company adopted SFAS No. 142 effective August 26,
2001. Under SFAS No. 142, goodwill is no longer amortized, but reviewed
annually, or more frequently if certain indicators arise, for impairment. There
were no impairment losses related to goodwill
and indefinite-lived intangible assets due to the application of SFAS No. 142.
In addition, the remaining useful lives of amortizable intangible assets were
reviewed and deemed appropriate.
Upon adoption of SFAS No. 142, the Company discontinued the amortization of
goodwill. The following table presents a reconciliation of net income and
earnings per share, adjusted for the exclusion of goodwill, net of tax:
August 30, August 31, August 25,
Year ended (in thousands) 2003 2002 2001
----------------------------------
Reported net income $27,020 $26,859 $23,224
Add: Goodwill amortization, net of tax -- -- 1,178
----------------------------------
Adjusted net income $27,020 $26,859 $24,402
==================================
Reported Net Income per share - Basic $ 1.41 $ 1.40 $ 1.20
Add: Goodwill amortization, net of tax -- -- .06
----------------------------------
Adjusted Net Income per share - Basic $ 1.41 $ 1.40 $ 1.26
==================================
Reported Net Income per share - Diluted $ 1.40 $ 1.39 $ 1.20
Add: Goodwill amortization, net of tax -- -- .06
----------------------------------
Adjusted Net Income per share - Diluted $ 1.40 $ 1.39 $ 1.26
==================================
The changes in the carrying amount of goodwill are as follows:
Balance as of August 25, 2001 $54,579
Goodwill acquired during the period 6,946
Effect of foreign currency translation 14
-------
Balance as of August 31, 2002 $61,539
Goodwill acquired during the period 910
Effect of foreign currency translation 159
-------
Balance as of August 30, 2003 $62,608
=======
Intangible assets, net on the Company's accompanying consolidated balance sheets
are as follows:
August 30, August 31,
Year Ended 2003 2002
----------------------
Customer contracts, net of accumulated amortization of
$33,120 and $30,586, respectively $16,713 $18,170
Restrictive covenants, net of accumulated amortization of
$13,449 and $11,745, respectively 3,038 4,073
Other intangible assets, net of accumulated amortization of
$940 and $811, respectively 773 912
----------------------
$20,524 $23,155
======================
Estimated amortization expense for the five fiscal years subsequent to August
30, 2003, based on intangible assets, net as of August 30, 2003 is as follows:
2004 $ 3,427
2005 2,757
2006 2,335
2007 2,028
2008 1,894
8. Accrued Liabilities
Accrued liabilities on the accompanying consolidated balance sheets are as
follows:
August 30, August 31,
Year Ended 2003 2002
----------------------
Insurance related $18,149 $18,372
Payroll related 13,824 13,537
Environmental related 5,377 5,377
Interest rate swap related 2,203 3,840
Asset retirement obligations 7,060 742
Other 7,057 11,463
----------------------
$53,670 $53,331
======================
9. Commitments and Contingencies
Lease Commitments
The Company leases certain buildings from independent parties. Total rent
expense on all leases was $3,280 in 2003, $3,436 in 2002, and $3,564 in 2001.
Annual minimum lease commitments for all years subsequent to August 30, 2003 are
$3,441 in 2004, $2,685 in 2005, $1,774 in 2006, $1,118 in 2007, $757 in 2008,
and $225 thereafter.
Contingencies
The Company and its operations are subject to various federal, state and local
laws and regulations governing, among other things, the generation, handling,
storage, transportation, treatment and disposal of hazardous wastes and other
substances. In particular, industrial laundries use and must dispose of
detergent waste water and other residues. The Company is attentive to the
environmental concerns surrounding the disposal of these materials and has
through the years taken measures to avoid their improper disposal. In the past,
the Company has settled, or contributed to the settlement of, actions or claims
brought against the Company relating to the disposal of hazardous materials and
there can be no assurance that the Company will not have to expend material
amounts to remediate the consequences of any such disposal in the future.
Further, under environmental laws, an owner or lessee of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in or emanating from such property, as well as related
costs of investigation and property damage. Such laws often impose liability
without regard to whether the owner or lessee knew of or was responsible for the
presence of such hazardous or toxic substances. There can be no assurances that
acquired or leased locations have been operated in compliance with environmental
laws and regulations or that future uses or conditions will not result in the
imposition of liability upon the Company under such laws or expose the Company
to third-party actions such as tort suits. The Company continues to address
environmental conditions under terms of consent orders negotiated with the
applicable environmental authorities or otherwise with respect to sites located
in or related to Woburn, Massachusetts, Uvalde, Texas, Williamstown, Vermont,
and Springfield, Massachusetts.
The Company's nuclear garment decontamination facilities are licensed by the
Nuclear Regulatory Commission ("NRC"), or in certain cases by the applicable
state agency, and are subject to regulation by federal, state and local
authorities. In recent years, there has been increased scrutiny and, in certain
cases, regulation of nuclear facilities or related services that have resulted
in the suspension of operations at certain nuclear facilities served by the
Company or disruptions of the Company's ability to service such facilities.
There can be no assurance that such increased scrutiny will not lead to the
shut-down of such facilities or otherwise cause material disruptions in the
Company's garment decontamination business.
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations, including litigation
related to charges for certain ancillary services on invoices, personal injury
claims, customer contract matters, employment claims and environmental matters
as described above.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company believes
that the aggregate amount of such liabilities, if any, in excess of amounts
accrued or covered by insurance, will not have a material adverse effect on the
consolidated financial position or results of operation of the Company. It is
possible, however, that future results of operations for any particular future
period could be materially affected by changes in the Company's assumptions or
strategies related to these contingencies or changes out of the Company's
control.
As security for certain agreements with the NRC and various state agencies
related to the nuclear operations (see Note 14) and certain insurance programs,
the Company had standby irrevocable bank commercial letters of credit and
mortgages of $20,061 and $14,927 outstanding as of August 30, 2003 and August
31, 2002, respectively.
10. Common Stock Options
The Company adopted an incentive stock option plan (the "Plan") in November,
1996 and reserved 150,000 shares of common stock for issue under the Plan. In
January of 2002, the Company increased to 450,000 the number of shares of common
stock reserved for issuance under the Plan. Options granted under the Plan,
through August 30, 2003, are at a price equal to the fair market value of the
Company's common stock on the date of grant. Options granted prior to fiscal
2003 are subject to a proportional four-year vesting schedule and expire eight
years from the grant date. Options granted in fiscal 2003 are subject to a
five-year cliff-vesting schedule under which options become vested or
exercisable after five years from date of grant and expire ten years after the
grant date.
The following table summarizes the common stock option activity for the fiscal
years ended August 30, 2003, August 31, 2002, and August 25, 2001:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
Outstanding, August 26, 2000 55,800 $15.07
Granted 57,700 10.06
Exercised 0 0.00
Forfeited (5,700) 12.60
---------------------
Outstanding, August 25, 2001 107,800 $12.52
=====================
Granted 55,700 17.55
Exercised (4,875) 13.44
Forfeited (11,375) 13.71
---------------------
Outstanding, August 31, 2002 147,250 $14.30
Granted 56,200 20.10
Exercised (14,250) 13.45
Forfeited (1,500) 14.65
---------------------
Outstanding, August 30, 2003 187,700 $16.10
=====================
Exercisable, August 25, 2001 13,075 $15.13
Exercisable, August 31, 2002 46,288 $13.78
Exercisable, August 30, 2003 91,967 $14.05
The following table summarizes information relating to currently outstanding and
exercisable stock options as of August 30, 2003:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------- -------------------
REMAINING
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (IN YEARS) PRICES EXERCISABLE PRICES
- --------------------------------------------------------------
38,325 4.0 $ 15.13 38,325 $ 15.13
43,125 5.2 10.06 30,619 10.06
50,050 6.2 17.55 23,023 17.55
48,000 9.7 20.13 -- --
8,200 9.8 19.93 -- --
------- ------
187,700 91,967
======= ======
11. Shareholders' Equity
The significant attributes of each type of stock are as follows:
Common stock -- Each share is entitled to one vote and is freely transferable.
Each share of common stock is entitled to a cash dividend equal to 125% of any
cash dividend paid on each share of Class B common stock.
Class B common stock -- Each share is entitled to ten votes and can be converted
to common stock on a share-for-share basis. Until converted to common stock,
however, Class B shares are not freely transferable.
12. Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income/(loss) are as follows:
Change in Fair Value Total Accumulated
Foreign Currency of Derivative Other Comprehensive
Translation Instruments, net of tax Loss
--------------------------------------------------------------
Balance, August 26, 2000 $(1,969) $ -- $(1,969)
Change during the period (893) (665) (1,558)
--------------------------------------------------------------
Balance, August 25, 2001 (2,862) (665) (3,527)
Change during the period (471) 320 (151)
--------------------------------------------------------------
Balance, August 31, 2002 (3,333) (345) (3,678)
Change during the period 1,904 345 2,249
--------------------------------------------------------------
Balance, August 30, 2003 $(1,429) $ -- $(1,429)
==============================================================
13. Segment Reporting
The Company operates as a single reportable segment, that being the design,
rental, cleaning and delivery of occupational garments, industrial wiper towels,
floor mats and other non-garment items, which represents more than 90% of
consolidated net sales. The Company's reporting segment relating to first aid
cabinet services and other safety supplies do meet the thresholds of a
reportable segment as outlined in SFAS 131. The Company also has activities in
Canada, Mexico and Europe, which do not meet the reporting thresholds outlined
in SFAS 131.
14. Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. Under the new accounting method, the Company
now recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
As of September 1, 2002, the Company recognized as a liability the present value
of the estimated future costs to decommission its nuclear laundry facilities in
accordance with the provisions of SFAS No. 143. The adoption of SFAS No. 143
resulted in a cumulative charge of $2.2 million, net of tax benefit of $1.4
million, related to the change in accounting principle, the
recognition of a discounted asset retirement obligation of $5.3 million, and an
increase of $2.4 million to the gross carrying value of the related long-lived
assets ($900,000, net of accumulated depreciation of $1.5 million). The Company
will depreciate, on a straight-line basis, the amount added to property and
equipment and recognize accretion expense in connection with the discounted
liability over the various remaining lives which range from approximately one to
thirty years.
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
The Company revised its estimate of this liability in the quarter ended August
30, 2003 due to changes in the estimate of future decommissioning costs related
to one of the Company's nuclear facilities. The change in estimate resulted in
an increase of $1,255 to the carrying amount of the liability and the carrying
amount of the related long-lived asset. Since this revision is a change in
estimate, the Company will depreciate the increase in the long-lived asset over
the estimated remaining useful life of the related nuclear facility which is 28
years. In the quarter ended August 30, 2003, the Company also recognized as a
liability the present value of the estimated future costs to decommission a new
nuclear laundry facility. The Company recognized a discounted asset retirement
obligation of $503, and an increase of $497 to the gross carrying value of the
related long-lived asset ($494, net of accumulated depreciation of $3). In the
current fiscal year, the Company began decommissioning one of the nuclear
laundry facilities for which it had recognized an asset retirement obligation.
Costs incurred in connection with the decommissioning for the year ended August
30, 2003 were approximately $300. As of August 30, 2003, the Company believes
this current decommissioning project will be completed by the end of fiscal
2004.
The pro forma effects of the application of SFAS No. 143 as if the Statement had
been adopted on August 27, 2000 (instead of September 1, 2002) are not material
and, therefore, have not been presented.
A reconciliation of the Company's liability for the year ended August 30, 2003,
is as follows:
Upon adoption at September 1, 2002 $ 5,310
Accretion expense 292
Change in estimate of liability 1,255
Additional liabilities recognized 503
Asset retirement costs incurred (300)
-------
Balance at August 30, 2003 $ 7,060
=======
As of August 30, 2003, the $7.1 million asset retirement obligation is included
in accrued liabilities in the accompanying condensed consolidated balance sheet.
15. Subsequent Event - Acquisition/Revolving Senior Credit Facility
On September 2, 2003 ("Closing Date"), the Company completed its acquisition of
100% of Textilease Corporation ("Textilease"). The purchase price of
approximately $175.6 million in cash, net of assumed debt of approximately $2.4
million, was financed as part of a new $285 million unsecured revolving credit
agreement ("Credit Agreement"), with a syndicate of banks. The Credit Agreement,
completed on the Closing Date, replaces the Company's previous $125 million
unsecured revolving credit agreement and is due on the third anniversary of the
Closing Date (September 2, 2006). Availability of credit requires compliance
with financial and other covenants, including maximum leverage, minimum fixed
charge coverage, and minimum tangible net worth, as defined in the Credit
Agreement.
Textilease, headquartered in Beltsville, Maryland, had fiscal year 2002 revenues
of approximately $95 million. It services over 25,000 uniform and textile
products customers from 12 locations in six southeastern states, and also
services a wide range of large and small first-aid service customers from
additional specialized facilities.
The following is a summary of the Company's preliminary estimate of the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition. The Company has engaged a third party to appraise the fair value
of the acquired tangible and intangible assets. The appraisal report has not yet
been finalized. The results of the appraisal may differ from the Company's
preliminary estimate of the fair value of the acquired tangible and intangible
assets. The Company is also completing its analysis of the fair values of the
liabilities assumed in connection with the acquisition, including certain
liabilities that qualify for recognition under Emerging Issues Task Force 95-3
"Recognition of Liabilities in connection with a Purchase Business Combination".
The Company will finalize the purchase price allocation after it receives the
appraisal report, completes its analysis of assumed liabilities, and receives
other relevant information relating to the acquisition. The final purchase price
allocation may be significantly different than the Company's preliminary
estimate as presented below.
Assets:
Current assets $ 32,601
Property and equipment 23,963
Goodwill 124,007
Intangible assets subject to amortization (estimated twelve year weighted-average useful life): 30,750
Other assets 4,085
---------
Total assets acquired $ 215,406
=========
Liabilities:
Current liabilities $ 23,288
Deferred compensation 5,616
Deferred income taxes 10,198
Long-term debt 676
---------
Total liabilities assumed $ 39,778
---------
Net assets acquired $ 175,628
=========
The $124.0 million of goodwill was assigned to our only reportable segment, that
being the design, rental, cleaning and delivery of occupational garments,
industrial wiper towels, floor mats and other non-garment items. None of the
goodwill is expected to be deductible for income tax purposes.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
UniFirst Corporation
We have audited the accompanying consolidated balance sheets of UniFirst
Corporation and subsidiaries as of August 30, 2003 and August 31, 2002 and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of UniFirst Corporation and subsidiaries for the year ended
August 25, 2001 were audited by other auditors who have ceased operations and
whose report dated October 31, 2001, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
UniFirst Corporation and subsidiaries at August 30, 2003 and August 31, 2002,
and the consolidated results of their operations and their cash flows for each
of the two years then ended in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 14 to the consolidated financial statements, effective
September 1, 2002, the Company adopted Statement of Financial Accounting
Standards (Statement) No. 143 "Asset Retirement Obligations."
As discussed in Note 7 to the consolidated financial statements, effective
August 26, 2001, the Company adopted Statement No. 142, "Goodwill and Other
Intangible Assets." As discussed above, the consolidated financial statements of
UniFirst Corporation and subsidiaries for the year ended August 25, 2001, were
audited by other auditors who have ceased operations. As described in Note 7,
these consolidated financial statements have been revised to include the
transitional disclosures required by Statement No. 142 which was adopted as of
August 26, 2001. Our audit procedures with respect to the disclosures in Note 7
related to the year ended August 25, 2001 included (a) agreeing the previously
reported net income to the previously issued financial statements and agreeing
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill as a result of initially applying Statement No. 142 (including any
related tax effects) to the Company's underlying records obtained from
management, and (b) testing the mathematical accuracy of the reconciliation of
reported net income to adjusted net income, and the related earnings per share
amounts. In our opinion, the disclosures for the year ended August 25, 2001 in
Note 7 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the consolidated financial statements of UniFirst Corporation
and subsidiaries as of August 25, 2001 and for the year then ended, other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the consolidated financial statements as of
August 25, 2001 and for the year then ended, taken as a whole.
/s/ Ernst & Young LLP
- ----------------------------
Boston, Massachusetts
November 4, 2003
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
UniFirst Corporation and Subsidiaries:
To UniFirst Corporation:
We have audited the accompanying consolidated balance sheets of UniFirst
Corporation (a Massachusetts corporation) and subsidiaries as of August 25, 2001
and August 26, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended August 25, 2001. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
UniFirst Corporation and subsidiaries as of August 25, 2001 and August 26, 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended August 25, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
- ----------------------------
Boston, Massachusetts
October 31, 2001
NOTE:
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with UniFirst Corporation's filing on Form 10-K for the year ended
August 25, 2001. This audit report has not been reissued by Arthur Andersen LLP
in connection with this filing on Form 10-K. See Exhibit 23.2 for further
discussion.
The following is a summary of the results of operations for each of the
quarters within the years ended August 30, 2003 and August 31, 2002. This
summary should be read in conjunction with the Company's Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in this
Item 8.
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2003 had 52 weeks and fiscal 2002 had 53 weeks. Each
of the quarters presented below includes 13 weeks except the second quarter of
2002 which includes 14 weeks.
(Unaudited)
(In thousands, except per share data)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
Revenues $149,179 $146,425 $153,690 $147,642
Income before income taxes 14,089 6,137 15,624 11,722
Income before cumulative effect of accounting change 8,665 3,774 9,609 7,214
Weighted average shares outstanding - basic 19,218 19,168 19,168 19,172
Weighted average shares outstanding - diluted 19,271 19,208 19,175 19,233
Net income per share - basic $0.45 $0.20 $0.50 $0.38
==============================================================================================================
Net income per share - diluted $0.45 $0.20 $0.50 $0.37
==============================================================================================================
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
Revenues $142,625 $151,523 $144,259 $140,491
Income before income taxes 12,313 8,321 12,149 10,536
Income before cumulative effect of accounting change 7,634 5,159 7,532 6,534
Weighted average shares outstanding - basic 19,220 19,221 19,223 19,225
Weighted average shares outstanding - diluted 19,250 19,276 19,293 19,288
Net income per share - basic $0.40 $0.27 $0.39 $0.34
==============================================================================================================
Net income per share - diluted $0.39 $0.27 $0.39 $0.34
==============================================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 27, 2002, the Company filed a Current Report on Form 8-K - Item 4.
Changes to Registrant's Certifying Accountant. On June 24, 2002, the Board of
Directors of the Company decided to no longer engage Arthur Andersen LLP as its
independent auditors and instead engage Ernst & Young LLP to serve as the
Company's independent auditors for the year ending August 31, 2002.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As required by Rule 13a-15 under the
Securities Exchange Act of 1934 (the "Exchange Act"), the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon their evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. In
designing and evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in designing and evaluating the controls and procedures. The Company
currently is in the process of further reviewing and documenting its disclosure
controls and procedures, and its internal control over financial reporting, and
may from time to time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business.
Changes in Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting during the fourth quarter of
fiscal year 2003 that have materially affected, or that are reasonably likely to
materially affect our internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the information provided under the caption
"Election of Directors" in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information provided under the caption "Summary
Compensation Table," "Option Grants with Respect to Fiscal Year 2003," "Option
Exercises and Year-End Holdings," "Supplemental Executive Retirement Plan" and
"Stock Performance Graph" in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information provided under the captions
"Election of Directors," "Security Ownership of Management and Principal
Shareholders", and "Amendment to 1996 Stock Option Plan" in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information provided under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for its
2004 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference to the information provided under the caption
"Independent Auditors" in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements listed below are filed as part of this report:
1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The financial statements listed below are included under Item 8 of this Form
10-K.
Consolidated balance sheets as of August 30, 2003 and August 31, 2002
Consolidated statements of income for each of the three years in the period
ended August 30, 2003
Consolidated statements of shareholders' equity for each of the three years in
the period ended August 30, 2003
Consolidated statements of cash flows for each of the three years in the period
ended August 30, 2003
Notes to consolidated financial statements
Report of Ernst & Young LLP, Independent Auditors
Report of Arthur Andersen LLP, Independent Public Accountants
The following additional schedule is filed herewith:
Schedule II - Valuation and qualifying accounts and reserves for each of the
three years in the period ended August 30, 2003
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
UniFirst Corporation
We have audited the consolidated financial statements of UniFirst Corporation
and subsidiaries as of August 30, 2003 and August 31, 2002, and for each of the
two years then ended, and have issued our report thereon dated November 4, 2003
(included elsewhere in this Form 10-K). Our audits also included Schedule II --
Valuation and Qualifying Accounts and Reserves as of August 30, 2003 and August
31, 2002, and for each of the two years then ended, included in this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this schedule based
on our audits. The financial statement schedule of UniFirst Corporation and
subsidiaries as of August 25, 2001 and for the year then ended, was subjected to
the auditing procedures applied by other auditors, who have ceased operations,
in connection with their audit of the consolidated financial statements for that
year and whose report dated October 31, 2001, indicated that such financial
statement schedule fairly stated in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
In our opinion, the financial statement schedule as of August 30, 2003 and
August 31, 2002, and for each of the two years then ended, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
- ---------------------
Boston, Massachusetts
November 4, 2003
Report of Arthur Andersen LLP, Independent Public Accountants
To UniFirst Corporation:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in this Form 10-K,
and have issued our report thereon dated October 31, 2001. Our audit was made
for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The supplemental schedule to the consolidated
financial statements listed as Item 15(a)(2) in the Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This supplemental schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein, in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Boston, Massachusetts
October 31, 2001
NOTE:
- ----
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with UniFirst Corporation's filing on Form 10-K for the year ended
August 25, 2001. This audit report has not been reissued by Arthur Andersen LLP
in connection with this filing on Form 10-K. See Exhibit 23.2 for further
discussion.
UNIFIRST CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR EACH
OF THE THREE YEARS IN THE PERIOD ENDED AUGUST 30, 2003
(THOUSANDS)
Balance, Charged to Charges for Balance,
Beginning Costs and Which Reserves End of
Description of Period Expenses Were Created Period
- ----------------------------------- --------- --------- --------------- -------
For the year ended August 30, 2003
Allowance for doubtful accounts $2,687 $3,066 $(3,142) $2,611
====== ====== ======= ======
For the year ended August 31, 2002
Allowance for doubtful accounts $3,237 $3,326 $(3,876) $2,687
====== ====== ======= ======
For the year ended August 25, 2001
Allowance for doubtful accounts $3,110 $3,357 $(3,230) $3,237
====== ====== ======= ======
Separate financial statements of the Company have been omitted because the
Company is primarily an operating company and all subsidiaries included in the
consolidated financial statements are totally held.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
3. EXHIBITS. The list of exhibits filed as part of this annual report
on Form 10-K are set forth at (c) below.
(b) Reports filed on Form 8-K
On July 7, 2003, the Company furnished a Current Report on Form 8-K to report
information pursuant to Item 12 - Results of Operations and Financial Conditions
in accordance with the interim guidance provided by the SEC pursuant to SEC
Release No. 33-8216. The Company attached as Exhibit 99.1 to the Current Report
the Company's press release announcing second quarter and first half of fiscal
2003 financial results.
(c) Exhibits
DESCRIPTION
2.1 Stock Purchase Agreement dated as of July 17, 2003 by and among the Company
and the stockholders of Textilease Corporation signatory thereto - incorporated
by reference to the Company's Current Report on Form 8-K filed on September 17,
2003.
3-A Restated Articles of Organization -- incorporated by reference to Exhibit
3-A to the Company's Registration Statement on Form S-1 (No. 2-83051) -- and the
Articles of Amendment dated January 12, 1988, a copy of which was filed on an
exhibit to the Company's Annual Report on Form 10-K for fiscal year ended August
27, 1988 -- and the Articles of Amendment dated January 21, 1993, a copy of
which was filed on an exhibit to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended February 27, 1993.
3-B By-laws -- incorporated by reference to Exhibit 3-B to the Company's Annual
Report on Form 10-K for fiscal year ended August 31, 1991.
10-A UniFirst Corporation Profit Sharing Plan -- incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (number
33-60781) -- and the Amendment dated June 27, 1995, a copy of which was filed on
an exhibit to the Company's Annual Report on Form 10-K for fiscal year ended
August 31, 1996.
10-D UniFirst Corporation 1996 Stock Incentive Plan, as amended, (incorporated
by reference to Exhibit 10-D to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2002.
* 21 List of Subsidiaries
* 23.1 Consent of Ernst & Young LLP, Independent Auditors
* 23.2 Information Regarding Consent of Arthur Andersen LLP
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UniFirst Corporation
By: /s/ Ronald D. Croatti
---------------------
Ronald D. Croatti
President and Chief
Executive Officer
November 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Ronald D. Croatti Principal Executive Officer and Director November 26, 2003
- ----------------------------
Ronald D. Croatti
/s/ John B. Bartlett Principal Financial Officer and
- ---------------------------- Principal Accounting Officer November 26, 2003
John B. Bartlett
/s/ Cynthia Croatti
- ----------------------------
Cynthia Croatti Director November 26, 2003
/s/ Donald J. Evans
- ----------------------------
Donald J. Evans Director November 26, 2003
/s/ Albert Cohen
- ----------------------------
Albert Cohen Director November 26, 2003
/s/ Phillip L. Cohen
- ----------------------------
Phillip L. Cohen Director November 26, 2003
/s/ Anthony F. DiFillippo
- ----------------------------
Anthony F. DiFillippo Director November 26, 2003
EXHIBIT INDEX
DESCRIPTION
2.1 Stock Purchase Agreement dated as of July 17, 2003 by and among the Company
and the stockholders of Textilease Corporation signatory thereto - incorporated
by reference to the Company's Current Report on Form 8-K filed on September 17,
2003.
3-A Restated Articles of Organization -- incorporated by reference to Exhibit
3-A to the Company's Registration Statement on Form S-1 (No. 2-83051) -- and the
Articles of Amendment dated January 12, 1988, a copy of which was filed on an
exhibit to the Company's Annual Report on Form 10-K for fiscal year ended August
27, 1988 -- and the Articles of Amendment dated January 21, 1993, a copy of
which was filed on an exhibit to the Company's Quarterly Report on Form 10-Q for
fiscal quarter ended February 27, 1993.
3-B By-laws -- incorporated by reference to Exhibit 3-B to the Company's Annual
Report on Form 10-K for fiscal year ended August 31, 1991.
10-A UniFirst Corporation Profit Sharing Plan -- incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (number
33-60781) -- and the Amendment dated June 27, 1995, a copy of which was filed on
an exhibit to the Company's Annual Report on Form 10-K for fiscal year ended
August 31, 1996.
10-D UniFirst Corporation 1996 Stock Incentive Plan, as amended, (incorporated
by reference to Exhibit 10-D to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2002.
* 21 List of Subsidiaries
* 23.1 Consent of Ernst & Young LLP, Independent Auditors
* 23.2 Information Regarding Consent of Arthur Andersen LLP
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
* Filed herewith
** Furnished herewith