SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File March 2, 2002 Number 1-8504 UNIFIRST CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2103460 (State of Incorporation) (IRS Employer ID Number) 68 Jonspin Road Wilmington, Massachusetts 01887 (Address of principal executive offices) Registrant's telephone number: (978) 658-8888 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 [X] No [ ] The number of outstanding shares of the registrant's Common Stock and Class B Common Stock as of April 5, 2002 were 8,993,354 and 10,227,344 respectively.
PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (In thousands, except per share data) March 2, August 25, February 24, 2002 2001* 2001 - ---------------------------------------------------------------------------------------------- Assets Current assets: Cash $ 6,011 $ 5,699 $ 6,108 Receivables 57,476 55,427 58,321 Inventories 25,929 22,320 25,799 Rental merchandise in service 51,445 56,677 58,339 Prepaid expenses 261 275 296 - ---------------------------------------------------------------------------------------------- Total current assets 141,122 140,398 148,863 - ---------------------------------------------------------------------------------------------- Property and equipment: Land, buildings and leasehold improvements 201,839 199,084 197,666 Machinery and equipment 220,365 224,143 215,326 Motor vehicles 59,728 57,620 57,944 - ---------------------------------------------------------------------------------------------- 481,932 480,847 470,936 Less - accumulated depreciation 214,445 215,154 202,749 - ---------------------------------------------------------------------------------------------- 267,487 265,693 268,187 - ---------------------------------------------------------------------------------------------- Goodwill, net 54,484 54,579 55,425 Other intangible assets 23,493 26,110 26,433 Other assets 5,846 5,033 5,054 - ---------------------------------------------------------------------------------------------- $ 492,432 $ 491,813 $ 503,962 ============================================================================================== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 1,361 $ 1,664 $ 1,824 Notes payable 1,359 1,344 1,359 Accounts payable 16,907 19,334 18,359 Accrued liabilities 61,291 55,242 55,655 Accrued and deferred income taxes 8,716 11,928 12,450 - ---------------------------------------------------------------------------------------------- Total current liabilities 89,634 89,512 89,647 - ---------------------------------------------------------------------------------------------- Long-term obligations, net of current maturities 81,852 93,131 114,879 Deferred income taxes 24,150 23,625 22,491 - ---------------------------------------------------------------------------------------------- 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 10,528,409 shares 1,053 1,052 1,051 Class B Common stock, $.10 par value; 20,000,000 shares authorized; issued and outstanding 10,227,344 shares 1,023 1,024 1,025 Treasury stock, 1,535,055 shares, at cost (24,755) (24,755) (23,171) Capital surplus 12,443 12,438 12,438 Retained earnings 310,818 299,313 288,501 Accumulated other comprehensive income (3,786) (3,527) (2,899) - ---------------------------------------------------------------------------------------------- Total shareholders' equity 296,796 285,545 276,945 - ---------------------------------------------------------------------------------------------- $ 492,432 $ 491,813 $ 503,962 ============================================================================================== * Condensed from audited financial statements The accompanying notes are an integral part of these condensed consolidated financial statements.
FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) Twenty-seven Twenty-six Fourteen Thirteen weeks ended weeks ended weeks ended weeks ended (In thousands, except per share data) March 2, February 24, March 2, February 24, 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Revenues $ 294,148 $ 277,571 $ 151,523 $ 136,562 - ------------------------------------------------------------------------------------------------------------- Costs and expenses: Operating costs 177,904 171,845 92,711 85,211 Selling and administrative expenses 71,813 62,889 37,618 31,730 Depreciation and amortization 18,508 18,719 9,360 9,438 - ------------------------------------------------------------------------------------------------------------- 268,225 253,453 139,689 126,379 - ------------------------------------------------------------------------------------------------------------- Income from operations 25,923 24,118 11,834 10,183 - ------------------------------------------------------------------------------------------------------------- Other expense (income): Interest expense 5,843 5,104 4,227 2,474 Interest income (825) (582) (451) (362) Interest rate swap expense (income) 271 1,645 (263) 1,130 - ------------------------------------------------------------------------------------------------------------- 5,289 6,167 3,513 3,242 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 20,634 17,951 8,321 6,941 Provision for income taxes 7,841 6,822 3,162 2,638 - ------------------------------------------------------------------------------------------------------------- Net income $ 12,793 $ 11,129 $ 5,159 $ 4,303 ============================================================================================================= Weighted average number of shares outstanding -- basic 19,220 19,491 19,221 19,362 ============================================================================================================= Weighted average number of shares outstanding -- diluted 19,265 19,491 19,276 19,362 ============================================================================================================= Net income per share - basic $ 0.67 $ 0.57 $ 0.27 $ 0.22 ============================================================================================================= Net income per share - diluted $ 0.66 $ 0.57 $ 0.27 $ 0.22 ============================================================================================================= The accompanying notes are an integral part of these condensed consolidated financial statements.
FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Twenty-Seven Twenty-Six weeks ended weeks ended (In thousands) March 2, February 24, 2002 2001 - ----------------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 12,793 $ 11,129 Adjustments: Depreciation 15,918 15,224 Amortization of other assets 2,590 3,495 Interest rate swap expense 271 1,645 Changes in assets and liabilities, net of acquisitions: Receivables (2,170) (4,433) Inventories (3,400) 1,741 Rental merchandise in service 5,109 (1,962) Prepaid expenses 14 2 Accounts payable (2,636) (1,323) Accrued liabilities 5,808 6,864 Accrued and deferred income taxes (3,154) 196 Deferred income taxes 549 477 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 31,692 33,055 - ----------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (18,046) (18,700) Increase in other assets (501) (1,264) - ----------------------------------------------------------------------------------------- Net cash used in investing activities (18,547) (19,964) - ----------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in debt - 291 Reduction of debt (11,550) (9,985) Repurchase of common stock - (3,122) Proceeds from exercise of stock options 5 - Cash dividends (1,288) (1,304) - ----------------------------------------------------------------------------------------- Net cash used in financing activities (12,833) (14,120) - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash 312 (1,029) Cash at beginning of period 5,699 7,137 - ----------------------------------------------------------------------------------------- Cash at end of period $ 6,011 $ 6,108 ========================================================================================= Supplemental disclosure of cash flow information: Interest paid $ 5,712 $ 4,098 Income taxes paid 10,528 6,215 ========================================================================================= The accompanying notes are an integral part of these condensed consolidated financial statements.
FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SEVEN WEEKS ENDED MARCH 2, 2002 1. These condensed consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the information furnished reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. It is suggested that these condensed consolidated financial statements should be read in conjunction with the financial statements and the notes, thereto, included in the Company's latest annual report on Form 10-K. Results for an interim period are not indicative of any future interim periods or for an entire fiscal year. 2. From time to time, the Company is subject to legal proceedings and claims arising from the conduct of its business operations, including legal proceedings and claims relating to personal injury, customer contract, employment and environmental matters. In the opinion of management, such proceedings and claims are not likely to result in losses which would have a material adverse effect upon the financial position or results of operations of the Company. 3. Certain prior period amounts have been reclassified to conform with the current period presentation. 4. The components of comprehensive income for the twenty-seven and fourteen week periods ended March 2, 2002 and the twenty-six and thirteen week periods ended February 24, 2001 were as follows: Twenty-seven Twenty-six Fourteen Thirteen weeks ended weeks ended weeks ended weeks ended (in thousands) March 2, February 24, March 2, February 24, 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------- Net income $12,793 $11,129 $5,159 $4,303 Other comprehensive income (loss): Foreign currency translation adjustments (171) (930) 444 (539) Change in fair value of derivative instruments, net (88) - 126 - --------------------------------------------------------- Comprehensive income $12,534 $10,199 $5,729 $3,764 ========================================================= 5. Net income per share is calculated using the weighted average number of common and dilutive potential common shares outstanding during the year. Anti-dilutive shares of 113,500 for the twenty-six and thirteen weeks ended February 24, 2001 were excluded from the weighted average number of common and dilutive potential common shares outstanding. 6. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, in 2001. SFAS No. 133 establishes standards for accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company has entered into interest rate swap agreements to manage its exposure to movements in interest rates on its variable rate debt. The swap agreements are cash flow hedges and are used to manage exposure to interest rate movement by effectively changing the variable rate to a fixed rate. Such instruments are matched with the underlying borrowings. SFAS No. 133 eliminated special hedge accounting if a swap agreement does not meet
certain criteria, thus requiring the Company to reflect all changes in the fair value of the swap agreement in earnings in the period of change. In October 1999, the Company entered into an interest rate swap agreement with a bank, notional amount $40,000, maturing October 13, 2004. The Company pays a fixed rate of 6.38% and receives a variable rate tied to the three month LIBOR rate. As of March 2, 2002, the applicable variable rate was 1.83%. On October 15, 2002 the bank has the option to terminate the swap agreement without further obligation to make payments to the Company. Since this swap agreement does not meet the required criteria necessary to use special hedge accounting, the Company has recorded charges of $271 and $1,645 for the twenty-seven weeks ended March 2, 2002 and twenty-six weeks ended February 24, 2001, respectively, and (income) charges of $(263) and $1,130 for the fourteen weeks ended March 2, 2002 and thirteen weeks ended February 24, 2001, respectively, through other expense, as a result of the change in the fair value of the swap agreement. In June 2001, the Company entered into a second interest rate swap agreement with a bank, notional amount $20,000, maturing June 5, 2003. The Company pays a fixed rate of 4.69% and receives a variable rate tied to the three month LIBOR rate. As of March 2, 2002, the applicable variable rate was 2.01%. This swap agreement meets the required criteria as defined in SFAS No. 133 to use special hedge accounting, and the Company has recorded charges (income) of $133, net of tax of $89, and $(29), net of tax of $(19) for the twenty-seven and thirteen weeks ended March 2, 2002, respectively, through other comprehensive income, for the change in the fair value of the swap agreement. During 2001, the Company entered into natural gas swap agreements to mitigate the commodity price risk associated with the natural gas used at certain laundry facilities. These agreements were based on forecasted monthly usage for certain laundry facilities through December 2002. As of March 2, 2002, the Company had hedged approximately 657 MMBtus, paying fixed prices between $3.79 and $3.92 and receiving variable prices based on the New York Mercantile Exchange closing prices for each month during the lives of the contracts. The swap agreements meet the required criteria as defined in SFAS No. 133 to use special hedge accounting as cash flow hedges. As a result, the Company has recorded income of $45, net of tax of $30, and $97, net of tax of $65 for the twenty-seven and thirteen weeks ended March 2, 2002, respectively, through other comprehensive income, for the change in the fair value of the swap agreements. These amounts will be recognized in operating costs in the accompanying consolidated statements of income as the natural gas is used in the laundry facilities. 7. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." The Company adopted SFAS No. 142 effective August 26, 2001. The provisions of SFAS No. 142 were applied to all goodwill and other intangible assets recognized in the Company's consolidated financial statements as of August 26, 2001. There were no impairment losses related to goodwill and intangible assets due to the application of SFAS No. 142. 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: Twenty-seven Twenty-six Fourteen Thirteen weeks ended weeks ended weeks ended weeks ended (in thousands) March 2, February 24, March 2, February 24, 2002 2001 2002 2001 Reported net income $12,793 $11,129 $5,159 $4,303 Add: Goodwill amortization, net of tax - 593 - 332 --------------------------------------------------------- Adjusted net income 12,793 11,722 5,159 4,635
Reported basic earnings per share $0.67 $0.57 $0.27 $0.22 Add: Goodwill amortization, net of tax - 0.03 - 0.02 --------------------------------------------------------- Adjusted basic earnings per share $0.67 $0.60 $0.27 $0.24 Reported diluted earnings per share $0.66 $0.57 $0.27 $0.22 Add: Goodwill amortization, net of tax - 0.03 - 0.02 --------------------------------------------------------- Adjusted diluted earnings per share $0.66 $0.60 $0.27 $0.24 Information regarding the Company's intangible assets is as follows: As of March 2, 2002 ------------------------ Carrying Accumulated Amount Amortization Net Customer contracts, restrictive covenants and other assets arising from acquisitions $ 63,847 $40,354 $23,493 Goodwill 63,675 9,191 54,484 Total $127,522 $49,545 $77,977 As of August 25, 2001 ------------------------ Carrying Accumulated Amount Amortization Net Customer contracts, restrictive covenants and other assets arising from acquisitions $63,926 $37,816 $26,110 Goodwill 63,770 9,191 54,579 Total $127,696 $47,007 $80,689 As of February 24, 2001 ------------------------ Carrying Accumulated Amount Amortization Net Customer contracts, restrictive covenants and other assets arising from acquisitions $ 61,675 $35,242 $26,433 Goodwill 63,640 8,215 55,425 Total $125,315 $43,457 $81,858 Amortization expense for the twenty-seven and fourteen weeks ended March 2, 2002 was $2,590 and $1,344, respectively. Amortization expense for the twenty-six and thirteen weeks ended February 24, 2001 was $3,495 and $1,756, respectively. Estimated amortization expense for each of the following fiscal years based on the intangible assets as of March 2, 2002 is as follows: 2002 $4,927 2003 3,864 2004 3,117 2005 3,061 2006 2,986
8. In June 2001, the FASB approved the issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company has not yet determined the adoption date or the impact of adopting SFAS No. 143. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impariment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not yet determined the adoption date or the impact of adopting SFAS No. 144.
FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE TWENTY-SEVEN WEEKS ENDED MARCH 2, 2002 RESULTS OF OPERATIONS TWENTY-SEVEN WEEKS OF FISCAL 2002 COMPARED WITH TWENTY-SIX WEEKS OF FISCAL 2001 Revenues. Revenues for the first twenty-seven weeks of fiscal 2002 increased $16.6 million or 6.0% to $294.1 million as compared with $277.6 million for the first twenty-six weeks of fiscal 2001. This increase can be attributed to an extra week of revenue in fiscal 2002 (4.0%), increased revenue from the nuclear garment services business (1.3%), and growth from existing operations and price increases in the core uniform rental and first aid business (0.7%). Operating Costs. Operating costs increased to $177.9 million for the first half of fiscal 2002 as compared with $171.8 million for the first half of fiscal 2001. As a percentage of revenues, operating costs decreased to 60.5% from 61.9% for these periods, primarily due to lower merchandise costs as the Company continued to see benefits from its in-plant stockrooms and higher contribution from its manufacturing operations. The Company also had slightly lower energy related costs. Selling and Administrative Expenses. The Company's selling and administrative expenses increased to $71.8 million, or 24.4% of revenues, for the first half of fiscal 2002 as compared with $62.9 million, or 22.7% of revenues, for the first half of fiscal 2001. In the first quarter of fiscal 2001 these costs were favorably impacted by a $1.1 million settlement from a lawsuit related to the Company's nuclear garment services business. Excluding this settlement, these expenses would have been $64.0 million, or 23.1% of revenues, in the first half of fiscal 2001. The increase in selling and administrative expenses is primarily attributable to higher selling costs as the Company has expanded its sales force, and increased employee health care costs. Depreciation and Amortization. The Company's depreciation and amortization expense decreased to $18.5 million, or 6.3% of revenues, for the first half of fiscal 2002 as compared with $18.7 million, or 6.7% of revenues, for the first half of fiscal 2001. The decrease was primarily the result of the adoption of SFAS No. 142 in the first quarter of fiscal 2002, whereby the Company ceased the amortization of goodwill. See Note 7 for a further discussion of the impact of this change. Other Expense (Income). Net other expense (interest and interest rate swap expense less interest income) was $5.3 million, or 1.8% of revenues, for the first half of fiscal 2002 as compared with $6.2 million, or 2.2% of revenues, for the first half of fiscal 2001. During the second quarter of fiscal 2002 the Company recorded a $2.3 million interest charge which is an estimate of the interest which will be due from settling a revenue agent review with the IRS. Excluding this charge, net other expense would have been $3.0 million, or 1.0% of revenues, in the first half of fiscal 2002. The decrease in net other expense is attributable to lower interest rates and reduced debt in the first half of fiscal 2002 as well as lower interest rate swap expense resulting from the change in the fair value of the Company's $40 million notional amount interest rate swap agreement. Income Taxes. The Company's effective income tax rate was 38.0% for both the first half of fiscal 2002 and the first half of fiscal 2001. FOURTEEN WEEKS ENDED MARCH 2, 2002 COMPARED TO THIRTEEN WEEKS ENDED FEBRUARY 24, 2001 Revenues. Fiscal 2002 second quarter revenues increased $15.0 million or 11.0% to $151.5 million as compared with $136.6 million for the second quarter of fiscal 2001. This increase can be attributed to an extra week of revenue in the fiscal 2002 second quarter (8.0%), increased revenue from the nuclear garment services business (2.9%), and growth from existing operations and price increases in the core uniform rental and first aid business (0.1%). Operating Costs. Operating costs increased to $92.7 million for the second quarter of fiscal 2002 as compared with $85.2 million for the second quarter of fiscal 2001. As a percentage of revenues, operating costs decreased to 61.2% from 62.4% for these periods, primarily due to lower merchandise costs as the Company continued to see benefits from its in-plant stockrooms and higher contribution from its manufacturing operations. The Company also had slightly lower energy related costs. Selling and Administrative Expenses. The Company's selling and administrative expenses increased to $37.6 million, or 24.8% of revenues, for the second quarter of fiscal 2002 as compared with $31.7 million, or 23.2% of revenues, for the
second quarter of fiscal 2001. The increase in selling and administrative expenses is primarily attributable to higher selling costs and increased employee health care costs. Depreciation and Amortization. The Company's depreciation and amortization expense was $9.4 million for both the second quarter of fiscal 2002 and the second quarter of fiscal 2001. As a percentage of revenues, depreciation and amortization expense decreased to 6.2% from 6.9% for these periods, primarily due to the adoption of SFAS No. 142 in the first quarter of fiscal 2002, whereby the Company ceased the amortization of goodwill. See Note 7 for a further discussion of the impact of this change. Other Expense (Income). Net other expense (interest and interest rate swap expense less interest income) was $3.5 million, or 2.3% of revenues, for the second quarter of fiscal 2002 as compared with $3.2 million, or 2.4% of revenues, for the second quarter of fiscal 2001. During the second quarter of fiscal 2002 the Company recorded a $2.3 million interest charge which is an estimate of the interest which will be due from settling a revenue agent review with the IRS. Excluding this charge, net other expense would have been $1.2 million, or 0.8% of revenues, in the fiscal 2002 second quarter. The decrease in net other expense is attributable to lower interest rates and reduced debt in the second quarter of fiscal 2002 as well as interest rate swap income of $0.3 million in the second quarter of fiscal 2002 as compared with expense of $1.1 million in the second quarter of fiscal 2001 resulting from the change in the fair value of the Company's $40 million notional amount interest rate swap agreement. Income Taxes. The Company's effective income tax rate was 38.0% for both the second quarter of fiscal 2002 and the second quarter of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES Shareholders' equity at March 2, 2002 was $296.8 million, or 78.1% of total capitalization. During the twenty-seven weeks ended March 2, 2002 net cash provided by operating activities ($31.7 million) was primarily used for capital expenditures ($18.0 million), debt repayment ($11.6 million) and dividends ($1.3 million). The Company had $6.0 million in cash and $79.0 million available on its $170 million unsecured line of credit with a syndicate of banks as of March 2, 2002. The Company expects to pay approximately $15 million by August, 2002 resulting from the settlement of a revenue agent review with the IRS as discussed above. The Company believes its generated cash from operations and its borrowing capacity will adequately cover its foreseeable capital requirements. SEASONALITY Historically, the Company's revenues and operating results have varied from quarter to quarter and are expected to continue to fluctuate in the future. These fluctuations have been due to a number of factors, including: general economic conditions in the Company's markets; the timing of acquisitions and of commencing start-up operations and related costs; the effectiveness of integrating acquired businesses and start-up operations; the timing of nuclear plant outages; capital expenditures; seasonal rental and purchasing patterns of the Company's customers; and price changes in response to competitive factors. In addition, the Company's operating results historically have been lower during the second and fourth fiscal quarters than during the other quarters of the fiscal year. The operating results for any historical quarter are not necessarily indicative of the results to be expected for an entire fiscal year or any other interim periods. 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. These forward-looking statements are subject to certain risks and uncertainties. The words "anticipate" and "should," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of factors, including, but not limited to, performance of acquisitions; economic and business changes; fluctuations in the cost of materials, fuel and labor; economic and other developments associated with the on-going war on terrorism including the instability created by the escalating conflict in the Middle East; strikes and
unemployment levels; demand and price for the Company's products and services; improvement in under performing rental operations; and the outcome of pending and future litigation and environmental matters. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Exchange Risk Management has determined that all of the Company's foreign subsidiaries operate primarily in local currencies that represent the functional currencies of the subsidiaries. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rate prevailing at the balance sheet date, while income and expense accounts are translated at average exchange rates during the year. As such, the Company's operating results are affected by fluctuations in the value of the U.S. dollar as compared to currencies in foreign countries, as a result of the Company's transactions in these foreign markets. The Company does not operate a hedging program to mitigate the effect of a significant rapid change in the value of the Canadian Dollar, Euro or Mexican Peso as compared to the U.S. dollar. If such a change did occur, the Company would have to take into account a currency exchange gain or loss in the amount of the change in the U.S. dollar denominated balance of the amounts outstanding at the time of such change. While the Company does not believe such a gain or loss is likely, and would not likely be material, there can be no assurance that such a loss would not have an adverse material effect on the Company's results of operations or financial condition. Interest Rate Risk The Company is exposed to market risk from changes in interest rates which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities. In fiscal 2000, the Company entered into an interest rate swap agreement with a bank, notional amount $40 million, 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 March 2, 2002, the applicable variable rate was 1.83%. On October 15, 2002 the bank has the option to terminate the swap agreement without further obligation to make payments to the Company. In fiscal 2001, the Company entered into a second interest rate swap agreement with a bank, notional amount $20 million, maturing June 5, 2003. The Company pays a fixed rate of 4.69% and receives a variable rate tied to the three month LIBOR rate. As of March 2, 2002, the applicable variable rate was 2.01%. See Note 6 for details on the Company's derivative instruments and hedging activities. The Company is exposed to interest rate risk primarily through its borrowings under its $170 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 March 2, 2002 and February 24, 2001, the fair market value of the Company's outstanding debt approximates its carrying value. Other During 2001, the Company entered into natural gas swap agreements to mitigate the commodity price risk associated with the natural gas used at certain laundry facilities. These agreements were based on forecasted monthly usage for certain laundry facilities through December 2002. As of March 2, 2002, the Company had hedged approximately 657 MMBtus, paying fixed prices between $3.79 and $3.92 and receiving variable prices based on the New York Mercantile Exchange closing prices for each month during the lives of the contracts. The swap agreements meet the required criteria as defined in SFAS No. 133 to use special hedge accounting as cash flow hedges. As a result, the Company has recorded income of $45, net of tax of $30, and $97, net of tax of $65 for the twenty-seven and thirteen weeks ended March 2, 2002, respectively, through other comprehensive income, for the change in the fair value of the swap agreements. These amounts will be recognized in operating costs in the accompanying consolidated statements of income as the natural gas is used in the laundry facilities.
PART II - OTHER INFORMATION FORM 10-Q UNIFIRST CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on January 8, 2002. Ronald D. Croatti and Donald J. Evans were reelected and Anthony F. DiFillippo was elected to the Board of Directors. With respect to Mr. Croatti, 7,051,893 shares of Common Stock and 9,841,552 shares of Class B Common Stock were voted for his election and 871,261 shares of Common Stock and no shares of Class B Common Stock were withheld from voting for his election. With respect to Mr. Evans, 7,682,549 shares of Common Stock and 9,841,552 shares of Class B Common Stock were voted for his election and 240,605 shares of Common Stock and no shares of Class B Common Stock were withheld from voting for his election. With respect to Mr. DiFillippo, 7,702,139 shares of Common Stock and 9,841,552 shares of Class B Common Stock were voted for his election and 221,015 shares of Common Stock and no shares of Class B Common Stock were withheld from voting for his election. The terms of office of Ms. Cynthia Croatti and Messrs. Albert Cohen and Phillip L. Cohen continued after the meeting. At the annual meeting of shareholders, the shareholders also approved an amendment to the Corporation's 1996 Stock Incentive Plan (the "Plan"), which authorized the issuance of an additional 300,000 shares of Common Stock for issuance under the Plan. With respect to this proposed amendment, 2,435,301 shares of Common Stock and 9,841,552 shares of Class B Common Stock were voted in favor of approving such amendment, 29,570 shares of Common Stock and no shares of Class B Common Stock were voted against such approval and no shares of Common Stock or Class B Common Stock abstained from voting on the matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized. UNIFIRST CORPORATION /s/ RONALD D. CROATTI ------------------------------ Ronald D. Croatti President and Chief Executive Officer Date: April 16, 2002 /s/ JOHN B. BARTLETT ------------------------------ John B. Bartlett Senior Vice President and Chief Financial Officer