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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-42407
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UNICCO SERVICE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2872501
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
FOUR COPLEY PLACE 02116
BOSTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 859-9100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
NOT APPLICABLE
(TITLE OF CLASS)
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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 [ ]
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
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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DOCUMENTS INCORPORATED BY REFERENCE
NOT APPLICABLE
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UNICCO SERVICE COMPANY
FORM 10-K
FISCAL YEAR ENDED JUNE 28, 1998
TABLE OF CONTENTS
ITEM PART I PAGE
1. Business........................................................ 3
2. Properties...................................................... 6
3. Legal Proceedings............................................... 7
4. Submission of Matters to a Vote of Security Holders............. 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 7
6. Selected Financial Data......................................... 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
7A. Quantitative and Qualitative Disclosures About Market Risk...... 15
8. Financial Statements and Supplementary Data..................... 16
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 40
PART III
10. Directors and Executive Officers of the Registrant.............. 41
11. Executive Compensation.......................................... 43
12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 44
13. Certain Relationships and Related Transactions.................. 45
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 46
Signatures...................................................... 48
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report, particularly in Items 1, 2, 3
and 7 hereof, are forward-looking and represent the Company's expectations or
beliefs concerning future events. Without limiting the foregoing, the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that these and similar
statements are subject to risks, uncertainties and assumptions that could cause
actual results or events to differ materially from those described in such
forward-looking statements. Factors which could cause such differences include
the Company's degree of leverage, restrictions in the Company's debt agreements,
dependence on key personnel, the short-term nature of the Company's contracts,
potential environmental or other liabilities, competitive factors and pricing
pressures, wage and insurance rates, assimilation of past or future
acquisitions, general economic conditions and acts of third parties, as well as
other factors which are described in the Company's Registration Statement on
Form S-4 (File No. 333-42407), and from time to time in the Company's periodic
reports, filed with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
BACKGROUND
UNICCO Service Company ("UNICCO" and, together with its subsidiaries on a
consolidated basis, the "Company") provides integrated facilities services to a
broad base of industrial, commercial and institutional clients throughout the
United States and Canada. The Company offers an extensive array of commercial,
operational and administrative services to its customers, providing a single
source solution for those services that can be cost-effectively outsourced.
Services offered by the Company include industrial and mechanical engineering,
plant operations, custodial and maintenance services, and administrative
services. UNICCO was founded as a Massachusetts corporation in 1949, and was
reorganized as a Massachusetts business trust in 1988. UNICCO is a subchapter S
company for federal and certain state income tax purposes.
In June, 1996, the Company consummated the strategic acquisition (the
"Ogden Acquisition") of the Allied Facilities Services business of Ogden
Corporation ("Ogden"). The Ogden Acquisition expanded the Company's geographic
range to cover most of the United States and Canada. The purchase price for the
Ogden Acquisition was approximately $62 million, of which $50 million was paid
in cash and $12 million was paid in the form of a subordinated promissory note
(the "Ogden Note").
In October 1997, the Company consummated a $105 million Senior Subordinated
Notes offering (the "Notes Offering") and entered into a $45 million Amended and
Restated Revolving Credit Agreement (the "Credit Facility"). The net proceeds
from the Notes Offering and the Credit Facility were used to repay approximately
$84.8 million of indebtedness under the Company's existing credit facilities and
$19.7 million to pay certain other indebtedness, fees and expenses incurred in
connection with such financing.
In the fourth quarter of fiscal 1998, the Company's management and Advisory
Board approved a plan to divest the Company's security business, which it
acquired as part of the Ogden Acquisition.
The Company's fiscal year ends on the last Sunday in June of each year.
References herein to "fiscal 1998" refer to the Company's fiscal year ended June
28, 1998.
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GENERAL
UNICCO offers a range of integrated facilities management and support
services relating to the operation and maintenance of buildings and plants.
These services are designed to optimize the facility's operating efficiency
while relieving the Company's customers from the management and personnel
burdens associated with non-core functions.
The Company's building operation and maintenance services include
traditional custodial functions such as janitorial and housekeeping services,
and mechanical and plant maintenance, which are provided to customers across the
Company's various market sectors. In connection with the Company's total
facility management concept, the Company provides additional contract building
services in the areas of grounds maintenance, utility operations, energy
management, recycling, snow removal and building systems controls.
The Company also supplies certain facility support services and a
combination of manufacturing and administrative support functions to its
customers. The Company has partnered with a number of organizations in supplying
process management and staffing in the areas of production support, warehousing,
distribution, shipping and receiving, preventive and predictive maintenance of
manufacturing equipment, vehicle maintenance, waste water treatment and chemical
distribution systems maintenance and reprographic and mailroom operations
support.
The Company also selects, manages and integrates services provided by third
parties into the Company's overall portfolio of services. For example, the
Company is able to provide sub-contracted services in areas such as facility
renovation, facility planning, space design and office relocation to relieve its
customers of individually searching for and contracting with suppliers of these
services.
The Company's corporate operations are headquartered in Boston,
Massachusetts. The Company's customer service functions are organized by
geographic regions under a system of regional managers.
SERVICES
The Company's principal service offerings are listed by category below.
Engineering:
- - Mechanical Engineering - Energy Management
- - Planning/Scheduling - Space Planning
- - Power Generation Management - CAD Services
- - Plant Engineering - CMMS Programs
- Environmental
Commercial Services:
- - Janitorial/Housekeeping - Window Washing
- - Recycling - Pest Control
- - Relamping Services - Specialty Cleaning
- - Porter/Matron Services - Clean Rooms/High Tech
- - Snow Removal - Sterile Environment
- - Landscaping/Grounds
Maintenance
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Operations & Maintenance:
- - Facility Management/Repair - Distribution Management
- - Production Equipment Maintenance/Repair - Waste Management
- - Warehouse Services and Inventory Control - Elevator/Escalator Maintenance
- - Utility Program Operation - Fleet Maintenance
- - Shipping/Receiving Services - Roof Repair
- - Construction Project Management - Telecommunications
Administration:
- - Subcontract Administration - Audio/Visual Services
- - Materials Procurement - Secretarial/Clerical Services
- - Reprographics/Copy Center - Service Call Desk
- - Mail Distribution - Switchboard/Reception
CUSTOMERS
The Company has approximately 900 active customer accounts, including
several of the Fortune 500 companies, operating in a wide variety of business
sectors including commercial real estate, banking, insurance, consumer products,
automotive and heavy equipment manufacturing, pharmaceuticals,
telecommunications, high technology, aerospace, defense contracting and chemical
manufacturing. In addition, the Company provides services to government
agencies, colleges and universities and other organizations and institutions
such as museums and sports facilities.
The Company's revenue stream is diverse, with no single customer accounting
for more than 4% of the Company's revenues in fiscal 1998. The Company services
customers in over 40 states, including Hawaii, and each of the Canadian
provinces. The Company has enjoyed a long-term relationship with many of its
largest customers.
CONTRACTS
The Company's business is generally conducted under written contracts with
its customers. Contracts vary in type and duration, with a majority having a
term of one to three years, often with automatic renewal clauses unless either
party elects to terminate. Most of the Company's contracts are subject to
termination without penalty at the option of the customer, or by either the
Company or the customer, upon 30 to 90 days' notice.
The Company structures its service contracts under three principal methods:
fixed price, cost plus fixed fee and hourly billing. All contracts are based
upon a defined scope and frequency of services to be provided. Under fixed price
contracts, which currently account for approximately 37% of the Company's
revenues, the customer agrees to a fixed dollar amount for all labor and
non-labor costs. Cost plus fixed fee contracts, which currently account for
approximately 48% of the Company's revenues, provide for the customer to be
billed for labor and non-labor costs, allocated overhead and a negotiated fee
based upon these costs. Modified cost plus contracts, which currently account
for approximately 15% of the Company's revenues, primarily provide for actual
hours worked to be billed at pre-determined hourly rates. In certain instances,
modifications to the cost plus fixed fee contracts are structured to include an
incentive fee or shared cost savings based upon operating efficiencies obtained.
Certain of the Company's contracts, particularly government contracts,
require the Company to post a performance bond and/or payment bond as a
condition of the contract award.
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INDUSTRY AND COMPETITION
Over the last several years, a trend towards outsourcing of non-core
business functions has transformed the traditional facility services industry.
The larger facility services companies have expanded beyond providing
traditional cleaning services for commercial property managers and large
corporations to performing higher value added services for companies in the
industrial, manufacturing, education and healthcare sectors.
The facility services industry is characterized by a combination of a small
number of large national organizations, none of which has a dominant market
share, as well as numerous smaller companies providing a narrow range of
services in a limited geographic area. While the Company operates throughout the
United States and Canada, its services are delivered at the local level and as a
result it competes with both national organizations as well as the smaller
contractors. There are many firms that provide traditional cleaning services,
principally in the Company's commercial market sector, on either a regional
basis or limited to a small number of geographically proximate cities or
contiguous states. In addition, the Company faces competition from large
national firms that have branch offices or operating locations in major cities
established to service the local business community.
In the broader market for providing bundled facility management services to
customers or for multi-site/multi-function contracts, as well as outsourced
manufacturing and administrative support services, the Company competes
primarily against large national firms. ABM Industries, Aramark, Fluor Corp.,
ISS-International Service Systems, Johnson Controls, Marriott Corporation,
Pinkerton and Service Master, among others, all supply similar services to
customers in the Company's principal market sectors. These organizations
generally have substantially greater financial and marketing resources than the
Company.
The Company believes that the principal competitive factors in the market
segments in which it operates are quality of service, cost, capability to
provide a broad range of fully integrated services, geographic scale of
operations and the ability to establish and maintain long-term customer
relationships. The Company believes that it competes favorably with respect to
each of these factors.
EMPLOYEES
The Company employs over 19,000 employees of which approximately 54% are
full time and approximately 46% are part-time. Approximately 41% of the
Company's work force is unionized under more than 170 different union contracts.
The Company has not experienced any strikes or work stoppages, and management
generally considers its relationships with its employees and its unions to be
satisfactory.
ITEM 2. PROPERTIES
The following table sets forth the Company's principal office facilities
throughout North America. The Company also has a number of smaller offices in
other cities, all of which are leased. The majority of the Company's employees
are engaged in providing services directly to customers at the customers'
facilities. Accordingly, the Company does not consider any of these locations to
be material to its operations as a whole.
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NO. OF LEASE
LOCATION SQUARE FEET EXPIRATION
-------- ----------- ----------
Arlington, Virginia................... 4,555 1999
Boston, Massachusetts(1).............. 23,555 2001
Boston, Massachusetts................. 12,800 2002
Chicago, Illinois..................... 7,801 2003
Fairfax, Virginia..................... 4,880 1999
Hauppauge, New York................... 3,500 2002
Farmington Hills, Michigan (2)........ 6,165 --
Honolulu, Hawaii...................... 3,500 2005
Oklahoma City, Oklahoma............... 14,624 2001
Pine Brook, New Jersey................ 12,850 2002
Somerville, Massachusetts............. 3,521 2001
Toronto, Ontario...................... 7,121 1999
Dayton, Ohio.......................... 5,000 1999
Chelsea, Massachusetts................ 10,400 2006
(1) This location serves as the Company's corporate headquarters.
(2) This location is occupied under a month-to-month tenancy.
The following locations are leased by the Company on behalf of a customer.
The Company is fully reimbursed by the customer for all rental expenses under
the lease. The lease is assignable to the customer if the Company's services are
terminated.
NO. OF LEASE
LOCATION SQUARE FEET EXPIRATION
-------- ----------- ----------
Niagara Falls, Ontario............... 80,000 2001
Terre Haute, Indiana................. 129,600 2002
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in numerous pending legal proceedings, primarily
employment and labor relations matters, arising in the ordinary course of the
Company's business. Management believes that the resolution of these matters
will not materially affect the Company's financial condition, results of
operations or its cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is privately-owned and there is no public trading market
for the Company's equity securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five years
in the period ended June 28, 1998 have been derived from, and are qualified by
reference to, the Consolidated Financial Statements of the Company. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company, including the notes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------------------------------------
JUNE 26, JUNE 25, JUNE 30, JUNE 29, JUNE 28,
1994 1995 1996(1) 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues ................................. $77,797 $88,095 $ 98,315 $471,869 $491,014
Cost of revenues ......................... 64,866 74,695 84,244 421,487 436,599
------- ------- -------- -------- --------
Gross profit ........................... 12,931 13,400 14,071 50,382 54,415
Selling, general and
administrative expenses ................ 9,918 10,204 11,492 31,651 35,827
Amortization of intangible
assets ................................. 558 535 551 4,151 4,208
------- ------- -------- -------- --------
Income from operations ................. 2,455 2,661 2,028 14,580 14,380
Interest income .......................... 68 107 85 66 201
Interest expense ......................... (110) (80) (178) (11,491) (11,631)
------- ------- -------- -------- --------
Income from continuing
operations before income
taxes .................................. 2,413 2,688 1,935 3,155 2,950
Provision for income taxes(2) ............ 205 214 189 2,328 646
------- ------- -------- -------- --------
Income from continuing
operations ............................... 2,208 2,474 1,746 827 2,304
Discontinued operations:
Income from discontinued
operations, net of taxes of $11
and $591 ............................... -- -- -- 356 1,070
------- ------- -------- -------- --------
Income before extraordinary
item ..................................... 2,208 2,474 1,746 1,183 3,374
Extraordinary loss, net of tax
benefit of $66 ........................... -- -- -- -- (2,958)
------- ------- -------- -------- --------
Net income ............................. $ 2,208 $ 2,474 $ 1,746 $ 1,183 $ 416
======= ======= ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(3) ................................ $ 3,683 $ 3,863 $ 3,398 $ 21,174 $ 20,870
EBITDA margin(4) ......................... 4.7% 4.4% 3.5% 4.5% 4.3%
Cash Flow:
Operating activities ................... 1,250 1,018 5,643 (35,841) 12,716
Investing activities ................... (797) (1,190) (52,399) (2,528) (3,683)
Financing activities ................... (935) 172 46,792 42,140 (3,843)
Depreciation and amortization
from continuing operations ............... $ 1,228 $ 1,202 $ 1,370 $ 6,594 $ 6,490
Capital expenditures for
continuing operations .................... 649 949 1,227 2,484 1,513
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash ................................... $ 121 $ 121 $ 157 $ 3,928 $ 9,151
Working capital from
continuing operations ................. 3,000 4,543 (2,278) 45,050 55,741
Total assets ........................... 17,117 21,335 85,167 161,087 150,789
Total long-term debt
(including current maturities) ......... 1,532 2,687 62,850 107,147 109,544
</TABLE>
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(1) Fiscal 1996 was a 53-week year. As a result, the Company's results of
operations for fiscal 1996 include approximately $1.0 million of payroll and
payroll-related expenses attributable to the additional week of operations
that were not billed in the period to customers with fixed price contracts.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) For the years ended June 25, 1995 and June 30, 1996, the Company was not
subject to federal and certain state income taxes as it had elected to be
treated as a subchapter S corporation. For the year ended June 29, 1997,
certain entities of the Company were taxed as C corporations through
December 31, 1996, at which time they elected to be treated as subchapter S
corporations. See Note 8 of Notes to the Company's Consolidated Financial
Statements.
(3) EBITDA is defined as earnings before provision for income taxes, interest
expense, interest income and depreciation and amortization. EBITDA excludes
the earnings of the Company's discontinued security operations, which were
$1.0 million and $2.4 million in fiscal 1997 and 1998, respectively. EBITDA
is presented because it is a widely accepted financial indicator of a
leveraged company's ability to service and/or incur indebtedness and because
management believes that EBITDA is a relevant measure of the Company's
ability to generate cash without regard to the Company's capital structure
or working capital needs. EBITDA as presented may not be comparable to
similarly titled measures used by other companies, depending upon the
non-cash charges included. When evaluating EBITDA, investors should consider
that EBITDA (i) should not be considered in isolation but together with
other factors which may influence operating and investing activities, such
as changes in operating assets and liabilities and purchases of property and
equipment; (ii) is not a measure of performance calculated in accordance
with generally accepted accounting principles; (iii) should not be construed
as an alternative or substitute for income from operations, net income or
cash flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows; and (iv) should not be used
as an indicator of the Company's operating performance or as a measure of
its liquidity.
(4) EBITDA margin represents EBITDA as a percentage of revenues, excluding the
revenues of discontinued operations, which were $62.0 million and $58.6
million in 1997 and 1998, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed below and elsewhere herein include forward-looking
statements regarding the future performance and financial condition of the
Company and other anticipated future events. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements contained herein. See "Disclosure Regarding Forward-Looking
Statements" above.
GENERAL
The Company provides integrated facilities services to a broad base of
industrial, commercial and institutional clients throughout the United States
and Canada. Services offered by the Company include industrial and mechanical
engineering, plant operations, custodial and maintenance services and
administrative services.
The Company's cost of service revenues primarily consists of direct labor
costs and related benefits, insurance, supplies and equipment. For fiscal 1998
and fiscal 1997, 82.6% and 80.8%, respectively, of the cost of service revenues
consisted of direct labor costs and related benefits. Selling, general and
administrative expenses include employee compensation and benefits, travel,
insurance, rent, recruiting and training, professional fees and bad debt
expense. For fiscal 1998 and fiscal 1997, 50.5% and 53.0%, respectively, of
selling, general and administrative expenses consisted of employee compensation
and benefits.
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The Company's fiscal 1997 and 1998 results of operations were significantly
influenced by the Ogden Acquisition on June 28, 1996 (during the last week of
fiscal 1996). The Company accounted for this transaction under the purchase
method of accounting. A significant portion of the purchase price of $62 million
was allocated to intangible assets. Accordingly, the Company incurred
significant amortization expenses in fiscal 1997 and 1998, and will continue to
do so in the future. Interest expense also increased significantly due to the
indebtedness incurred to finance the acquisition. The original acquisition
indebtedness was subsequently re-financed through the Notes Offering during
October, 1997. In addition, historical operating profit margins were negatively
impacted by the Ogden Acquisition because Ogden's business consisted of more
lower margin contracts than the Company's prior business.
The accompanying consolidated financial statements include the accounts of
UNICCO and USC, Inc., which were owned, managed and controlled by common
shareholders. In connection with the October, 1997 Notes Offering, the
shareholders of UNICCO contributed their ownership interests in USC, Inc. to
UNICCO. As a result, all of the operations of the Company are now conducted
through UNICCO and its wholly-owned subsidiaries. This transaction was accounted
for in a manner similar to that in pooling of interests accounting with the
assets and liabilities being recorded at their historical cost due to the
exchange of stock occurring between entities under common control.
DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 1998, the Company's management and Advisory
Board approved a plan to divest of the Company's security business, which was
acquired in Ogden Acquisition. Accordingly, the accompanying financial data and
financial statements and related notes set forth herein have been classified to
present the security services operations as discontinued operations. Revenues
for the operations were $58.6 million and $62.0 million in fiscal 1998 and
fiscal 1997, respectively. Divestiture of the security services operations is
expected to occur in fiscal 1999.
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RESULTS OF OPERATIONS
The following comparisons of the Company's results of operations for fiscal
years 1996, 1997 and 1998 should be read in conjunction with the Consolidated
Financial Statements of the Company, including the notes thereto. The following
table sets forth, for the periods indicated, certain operating data expressed
both in dollars and as a percentage of revenues for the period.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 30,1996
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $491,014 100.0% $471,869 100.0% $98,315 100.0%
Cost of revenues ................ 436,599 88.9 421,487 89.3 84,244 85.7
-------- ----- -------- ----- ------- -----
Gross profit .................. 54,415 11.1 50,382 10.7 14,071 14.3
Selling, general and
administrative expenses ....... 35,827 7.3 31,651 6.7 11,492 11.7
Amortization of intangible
assets ........................ 4,208 0.9 4,151 0.9 551 0.6
-------- ----- -------- ----- ------- -----
Income from continuing
operations .................... 14,380 2.9 14,580 3.1 2,028 2.1
Interest income ................. 201 -- 66 -- 85 0.1
Interest expense ................ (11,631) (2.4) (11,491) (2.4) (178) (0.2)
-------- ----- -------- ----- ------- -----
Income from continuing
operations before income
taxes ......................... 2,950 0.6 3,155 0.7 1,935 2.0
Provision for income
taxes ......................... 646 0.1 2,328 0.5 189 0.2
-------- ----- -------- ----- ------- -----
Income from continuing
operations .................. 2,304 0.5 827 0.2 1,746 1.8
Discontinued operations:
Income from discontinued
operations, net of tax $591
and $11 ......................... 1,070 0.2 356 0.1 -- --
-------- ----- -------- ----- ------- -----
Income before extraordinary
item ............................ 3,374 0.7 1,183 0.3 1,746 1.8
Extraordinary loss, net of tax
benefit of $66 .................. (2,958) (0.6) -- -- -- --
-------- ----- -------- ----- ------- -----
Net income .................... $ 416 0.1% $ 1,183 0.3% $ 1,746 1.8%
======== ===== ======== ===== ======= =====
</TABLE>
COMPARISON OF YEARS ENDED JUNE 28, 1998 AND JUNE 29, 1997
Revenues. Revenues for fiscal 1998 were $491.0 million, an increase of
$19.1 million, compared to revenues of $471.9 million for fiscal 1997. This
increase was primarily attributable to revenue increases in the company's
Eastern Region ($10.3 million), Midwest Region ($2.8 million), Northeast Region
($2.5 million), Southwest Region ($2.3 million), Canadian Region ($5.5 million)
and Hawaiian Region ($0.5 million). Such increases resulted from services
performed under new contracts and increased services provided to established
customers. These increases were offset by a $4.8 million revenue decrease
associated with the loss of a contract in May, 1997 which generated revenues in
all of the Company's regions, excluding Canada.
Cost of Revenues. Cost of revenues for fiscal 1998 was $436.6 million, or
88.9% of revenues, compared to $421.5 million, or 89.3% of revenues, for fiscal
1997. This improvement was primarily due to a decrease in direct labor as a
percentage of revenues and favorable trends in insurance costs. Direct labor as
a percentage of revenues was 57.4% for fiscal 1998, compared to 57.7% for fiscal
1997. This improvement was primarily attributable to tighter management of labor
costs.
Gross Profit. As a result of the foregoing, gross profit for fiscal 1998
was $54.4 million, or 11.1% of revenues, compared to $50.4 million, or 10.7% of
revenues, for fiscal 1997.
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<PAGE> 12
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1998 were $35.8 million, or 7.3% of revenues,
compared to $31.7 million, or 6.7% of revenues, for fiscal 1997. The increase of
$4.1 million was primarily attributable to incremental costs associated with the
assimilation of the facility services business acquired from Ogden Corporation
("Ogden") in June, 1996. Salaries and wages and payroll-related costs increased
$1.8 million as a result of the additional headcount required to support the
acquired Ogden business as well as the impact of annual salary adjustments
effective July 1, 1997. Additionally, office and occupancy costs increased $2.9
million between the comparable periods, primarily as a result of increased
computer lease costs, depreciation expense, temporary help, relocation expense
and recruiting expenses. Professional fees, primarily consisting of external
programming related costs, decreased $1.2 million between the comparable period
as a result of the completion of the systems integration of the acquired Ogden
business during the last quarter of fiscal 1997. Vehicle expenses increased $0.5
million as a result of the general expansion of the Company's business. Travel
and entertainment expenses increased by $0.1 million primarily due to greater
air travel by corporate personnel to support the regional operations of the
Company.
Amortization of Intangible Assets. Amortization expense was $4.2 million in
fiscal years 1998 and 1997.
Income from Continuing Operations. As a result of the foregoing, income
from continuing operations for fiscal 1998 was $14.4 million, or 2.9% of
revenues, compared to $14.6 million, or 3.1% of revenues, for fiscal 1997.
EBITDA. EBITDA for fiscal 1998 was $20.9 million, or 4.3% of revenues,
compared to $21.2 million, or 4.5% of revenues, for fiscal 1997. EBITDA is
defined as earnings before provision for income taxes, interest expense,
interest income and depreciation and amortization. EBITDA excludes the earnings
of the Company's discontinued security operations, which were $2.4 million and
$1.0 million in fiscal 1998 and 1997, respectively. EBITDA as presented may not
be comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating EBITDA, investors should
consider that EBITDA (i) should not be considered in isolation but together with
other factors which may influence operating and investing activities, such as
changes in operating assets and liabilities and purchases of property and
equipment; (ii) is not a measure of performance calculated in accordance with
generally accepted accounting principles; (iii) should not be construed as an
alternative or substitute for income from operations, net income or cash flows
from operating activities in analyzing the Company's operating performance,
financial position or cash flows; and (iv) should not be used as an indicator of
the Company's operating performance or as a measure of its liquidity. Cash flows
from operating, investing and financing activities for fiscal 1998 were $12.7
million, $(3.7) million and $(3.8) million, respectively. Cash flows from
operating, investing and financing activities for fiscal 1997 were $(35.8)
million, $(2.5) million and $42.1 million, respectively.
Interest Expense. Interest expense for fiscal 1998 was $11.6 million, or
2.4% of revenues, compared to $11.5 million, or 2.4% of revenues, for fiscal
1997.
Income Taxes. Provision for income taxes for fiscal 1998 was $0.6 million,
or 21.9% of income from continuing operations before provision for income taxes,
compared to $2.3 million, or 73.8% of income from continuing operations before
provision for income taxes, for fiscal 1997. The fiscal 1997 provision for
income taxes included the recognition of a valuation allowance recorded in
connection with operating losses generated by the Company as a result of its
prior election to be treated as a cash basis taxpayer and the significant
increase in working capital associated with the Ogden Acquisition.
Net Income. As a result of the foregoing, as well as income of $1.1 million
from the Company's discontinued security business, and an extraordinary loss
(both net of related tax consequences) of $3.0 million due to the write-off of
deferred financing costs and the repayment of certain indebtedness in connection
with the Notes Offering, net income for fiscal 1998 was $0.4 million, or 0.1% of
revenues, compared to $1.2 million, or 0.3% of revenues for fiscal 1997.
-12-
<PAGE> 13
COMPARISON OF YEARS ENDED JUNE 29, 1997 AND JUNE 30, 1996
Revenues. Revenues for fiscal 1997 were $471.9 million, an increase of
$373.6 million, compared to revenues of $98.3 million for fiscal 1996. This
increase was primarily attributable to the Ogden Acquisition. Revenues of the
acquired business were approximately $335.0 million for the fiscal year
preceding the acquisition. The balance of the revenue increase of approximately
$38.6 million was attributable to new customer contracts, increased services to
existing customers and the impact of a full year's revenue from contracts
acquired in the prior year.
Cost of Revenues. Cost of revenues for fiscal 1997 was $421.5 million, or
89.3% of revenues, compared to $84.2 million, or 85.7% of revenues, for fiscal
1996. The increase as a percentage of revenues was primarily due to a higher
labor component associated with the acquired Ogden business. The higher labor
component is primarily associated with contracts related to certain commercial
services and the regional infrastructure necessary to support the Company's
national scope of operations following the Ogden Acquisition.
Gross Profit. As a result of foregoing, gross profit for fiscal 1997 was
$50.4 million, or 10.7% of revenues, compared to $14.1 million, or 14.3% of
revenues, for fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1997 were $31.7 million, or 6.7% of revenues,
compared to $11.5 million, or 11.7% of revenues, for fiscal 1996. The increase
of $20.2 million was primarily attributable to the absorption of overhead costs
associated with the acquired Ogden business. A total of $2.3 million of the
increase in expense represented non-salary related incremental costs in the
accounting, information systems, payroll and human resources departments
attributable to the Ogden Acquisition, including information systems conversion
costs, programming costs, computer lease costs, temporary help and systems
training. The Company also increased headcount in its accounting, payroll and
human resources and information systems departments in order to develop the
infrastructure necessary to support the acquired Ogden business. Payroll costs
and benefits associated with the increased headcount were approximately $0.5
million during fiscal 1997. Selling, general and administrative expenses in 1997
also included $0.5 million of non-recurring charges related to an accounting
services agreement between Ogden and the Company which ended in June, 1997. The
decline in the Selling, General and Administrative Expenses as a percentage of
revenue was primarily due to economies of scale the Company realized in
absorbing the Ogden business.
Amortization of Intangible Assets. Amortization of intangible assets for
fiscal 1997 was $4.2 million, compared to $0.6 million for fiscal 1996.
Approximately $59 million of the $62 million purchase price for the Ogden
business was allocated to intangible assets, which are being amortized over
various lives ranging from seven to 15 years.
Income from Continuing Operations. As a result of the foregoing, income
from continuing operations for fiscal 1997 was $14.6 million, or 3.1% of
revenue, compared to $2.0 million, or 2.1% of revenue, for fiscal 1996.
EBITDA. EBITDA for fiscal 1997 was $21.2 million (excluding EBITDA from
discontinued operations of $1.0 million), or 4.5% of revenues, compared to $3.4
million, or 3.5% of revenues for fiscal 1996. Cash flows from operating,
investing and financing activities for fiscal 1997 were $(35.8) million, $(2.5)
million and $42.1 million, respectively. Cash flows from operating, investing
and financing activities for fiscal 1996 were $5.6 million, $(52.4) million and
$46.8 million, respectively.
Interest Expense. Interest expense for the year ended June 29, 1997 was
$11.5 million, or 2.4% of revenue, compared to $0.2 million, or 0.2% of revenue
for fiscal 1996. This substantial increase was attributable to indebtedness
incurred in connection with the Ogden Acquisition and the increased working
capital requirements associated therewith. This indebtedness included a $90
million bank credit facility and $20 million of other subordinated debt. The
blended average interest rate on the bank credit facility was 8.96% as of June
29, 1997.
-13-
<PAGE> 14
Income Taxes. Provision for income taxes for fiscal 1997 was $2.3 million,
or 73.8% of income from continuing operations before provision for income taxes,
compared to $0.2 million, or 9.8% of income from continuing operations before
provision for income taxes, for fiscal 1996. The fiscal 1997 provision for
income taxes included the recognition of a valuation allowance recorded in
connection with operating losses generated by the Company as a result of its
prior election to be treated as a cash basis taxpayer and the significant
increase in working capital associated with the Ogden Acquisition.
Net Income. As a result of the foregoing as well as income from
discontinued operations of $0.4 million (net of related tax consequences), net
income for fiscal 1997 was $1.2 million, or 0.3% of revenue, compared to $1.7
million, or 1.8% of revenue, for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1998, the Company's cash balance increased by $5.2 million. The
increase was primarily attributable to cash provided by a $12.7 million
reduction in accounts receivable, partially offset by $7.5 million of net cash
used for investing and financing activities. Net cash of $3.7 million used for
investing activities included cash used of $2.3 million for an acquisition in
February, 1998. Net cash used for financing activities during fiscal 1998 was
$3.8 million.
For fiscal 1997, $38.3 million of net cash was used for operating and
investing activities which consisted of $35.8 million of net cash used for
operating activities and $2.5 million used for investing activities. For fiscal
1996, the Company used $46.8 million for operating and investing activities
which consisted of $5.6 million of net cash provided by operating activities and
$52.4 million used in investing activities ($51.0 million of which was used for
the Ogden Acquisition). Net cash provided by financing activities in fiscal 1996
was $46.8 million, primarily resulting from bank indebtedness related to the
Ogden Acquisition.
Capital expenditures were $1.8 million in fiscal 1998 and $2.6 million in
fiscal 1997. The Company's operations do not generally require material
investment in capital assets. The Company expects that its capital expenditure
requirements will not increase materially in fiscal 1999. The Company's business
generally is not seasonal.
In October, 1997 the Company consummated the $105 million Notes Offering
and entered into the Credit Facility. The net proceeds from the Notes Offering
and the Credit Facility were used to repay approximately $84.8 million of
indebtedness under the Company's existing credit facilities and $19.7 million of
certain other indebtedness, fees and expenses incurred in connection with such
financing. In March, 1998, the Company exchanged all $105 million in principal
amount of the privately-placed Senior Subordinated Notes issued in the Notes
Offering for a like amount of freely-tradable Senior Subordinated Notes (the
"Notes").
The Notes will mature on October 15, 2007. The Notes will not be redeemable
at the Company's option prior to October 15, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the issuers at fixed
redemption prices. Interest on the Notes accrues at the rate of 9 7/8% per annum
and is payable in arrears on April 15 and October 15 of each year, in an annual
amount equal to approximately $10.4 million. The payment of principal and
interest on the Notes is subordinated in right to the prior payment of all
senior debt of the Company, including borrowings under the Credit Facility.
The Company's long-term indebtedness consists of borrowings under the
Credit Facility (if any), the Notes and $5.0 million of subordinated
indebtedness (which ranks equal in right of payment with the Notes). Under the
Credit Facility, the Company has the ability to borrow up to $45.0 million for
working capital and general corporate purposes, subject to certain conditions.
At June 28, 1998, the Company had no borrowings outstanding under the Credit
Facility. The Credit Facility, the Indenture governing the Notes and the terms
of the Company's other subordinated indebtedness include certain financial and
operating covenants which, among other things, restrict the
-14-
<PAGE> 15
ability of the Company to incur additional indebtedness, make investments and
take other actions. The ability of the Company to meet its debt service
obligations will be dependent upon the future performance of the Company, which
will be impacted by general economic conditions and other factors.
The Company's principal capital requirements are to service the Company's
indebtedness, for working capital and, to a lesser extent, to fund capital
expenditures. The Company believes that its cash flow from operations, together
with its borrowing capacity under the Credit Facility, will be sufficient to
meet such requirements during fiscal 1999.
YEAR 2000 COMPLIANCE
Status of Year 2000 Preparations. The Company's information technology
systems are licensed from outside vendors. The Company's principal outside
vendor has released an upgrade of the primary software used by the Company to
perform its accounting, payroll, accounts payable, invoicing and financial
reporting functions. The vendor has represented to the Company that this upgrade
is Year 2000 compliant. Under its current timetable, the Company anticipates
installation and testing of the upgrade in late calendar 1998 and implementation
by March, 1999. Following this implementation, the Company believes that its
primary information technology systems will be Year 2000 compliant.
With respect to non-information technology systems, such as embedded
microprocessors, the Company is in the process of completing a review of its
potential Year 2000 exposure from these systems. Once this assessment is
completed, the Company will develop a plan to upgrade any deficient systems.
Costs of Year 2000 Remediation. The Company's Year 2000 remediation costs
expended in fiscal 1998, including costs of acquiring Year 2000 compliant
software, hardware and non-information technology equipment (other than
replacements that would have been purchased regardless of the Year 2000 issue),
and hiring or outsourcing Year 2000 solution providers, have been approximately
$65,000. The Company anticipates that its additional expenditures related to
Year 2000 remediation of its primary information technology systems will be
approximately $260,000. Such estimate is subject to change, particularly as a
result of uncertainties resulting from the factors described below.
Year 2000 Risks. The Company does not believe at this time that Year 2000
issues will have a material adverse effect on its financial condition or results
of operations. However, there can be no assurance given, as most of the
Company's Year 2000 risk is in the hands of third parties. The Company is
relying on its principal outside software vendor for remediation of the
Company's own systems. In addition, the Company may face exposure to Year 2000
compliance issues affecting its customers, suppliers and other third parties.
These parties may not be able to process invoices or purchase orders immediately
following January 1, 2000. The Company has not made any comprehensive
independent investigation to determine, and may never be able to determine in
advance, the extent of this third-party risk.
Contingency Plans. The Company has not completed detailed contingency plans
in the event that its own and third-party systems experience widespread Year
2000 failures. However, the Company believes that it can secure sufficient
additional external resources to minimize the likelihood of long term, material
adverse effects.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-15-
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNICCO SERVICE COMPANY
PAGE
----
Report of PricewaterhouseCoopers LLP, Independent Accountants ......... 17
Consolidated Statement of Income for the years ended June 28,
1998, June 29, 1997 and June 30, 1996 ................................ 18
Consolidated Balance Sheet at June 28, 1998 and June 29, 1997 ......... 19
Consolidated Statement of Shareholders' Equity for the period
from June 25, 1995 to June 28, 1998 .................................. 20
Consolidated Statement of Cash Flows for the years ended June 28,
1998, June 29, 1997 and June 30, 1996 ................................ 21
Notes to Consolidated Financial Statements ............................ 22
Financial Statement Schedules:
For each of the three years in the period ended June 28, 1998
I - Valuation and Qualifying Accounts ................................ 40
All other schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or notes thereto.
-16-
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of UNICCO Service Company
In our opinion, the financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of UNICCO
Service Company and its subsidiaries (the "Company") at June 28, 1998 and June
29, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended June 28, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 18, 1998
-17-
<PAGE> 18
UNICCO SERVICE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service revenues ............................... $491,014 $471,869 $98,315
Cost of service revenues ....................... 436,599 421,487 84,244
-------- -------- -------
Gross profit ................................ 54,415 50,382 14,071
Selling, general and administrative expenses ... 35,827 31,651 11,492
Amortization of intangible assets .............. 4,208 4,151 551
-------- -------- -------
Income from continuing operations ........... 14,380 14,580 2,028
Interest income ................................ 201 66 85
Interest expense ............................... (11,631) (11,491) (178)
-------- -------- -------
Income from continuing operations before
income taxes ................................ 2,950 3,155 1,935
Provision for income taxes ..................... 646 2,328 189
-------- -------- -------
Income from continuing operations .............. 2,304 827 1,746
Discontinued operations (Note 2):
Income from discontinued operations,
net of tax of $591 and $11 ..................... 1,070 356 --
-------- -------- -------
Income before extraordinary item ............... 3,374 1,183 1,746
Extraordinary loss, net of tax benefit of $66 .. (2,958) -- --
-------- -------- -------
Net income ..................................... $ 416 $ 1,183 $ 1,746
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE> 19
UNICCO SERVICE COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 9,151 $ 3,928
Accounts receivable, less reserves of approximately
$2,010 and $1,561 at June 28, 1998 and June 29, 1997,
respectively ................................................... 48,789 61,890
Unbilled receivables .............................................. 27,361 27,036
Other current assets .............................................. 2,394 3,349
-------- --------
Total current assets .......................................... 87,695 96,203
-------- --------
Property and equipment, at cost:
Transportation equipment .......................................... 1,455 1,416
Machinery and equipment ........................................... 7,167 6,145
Furniture and fixtures ............................................ 4,460 3,814
Leasehold improvements ............................................ 544 318
-------- --------
13,626 11,693
Less - accumulated depreciation and amortization .................. 9,692 7,046
-------- --------
3,934 4,647
-------- --------
Notes receivable and accrued interest from officers ................. 475 716
Intangible assets, net of amortization .............................. 45,258 55,437
Other assets, net ................................................... 6,046 4,084
Net assets of discontinued operations ............................... 7,381 --
-------- --------
59,160 60,237
-------- --------
$150,789 $161,087
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft .................................................... $ -- $ 11,316
Current portion of long-term debt ................................. -- 7,000
Accounts payable .................................................. 5,114 7,550
Accrued payroll and payroll-related expenses ...................... 17,835 18,514
Deferred income taxes ............................................. 2,628 2,123
Other accrued expenses ............................................ 6,377 4,650
-------- --------
Total current liabilities ..................................... 31,954 51,153
-------- --------
Long-term liabilities:
Line of credit .................................................... -- 50,587
Long-term debt, less current portion .............................. 109,544 49,278
Note payable to officer ........................................... -- 282
Other long-term liabilities ....................................... 401 951
-------- --------
Total long-term liabilities ................................... 109,945 101,098
-------- --------
Commitments and Contingencies (Note 7)
Shareholders' equity:
Common shares ..................................................... 378 378
Retained earnings ................................................. 9,222 9,202
Cumulative translation adjustment ................................. (48) --
-------- --------
9,552 9,580
Less treasury shares at cost ...................................... (502) (502)
Less notes receivable from stock sales ............................ (160) (242)
-------- --------
Total shareholders' equity ..................................... 8,890 8,836
-------- --------
$150,789 $161,087
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE> 20
UNICCO SERVICE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON STOCK RETAINED FROM TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK SALES SHARES AMOUNT EQUITY
------ ------ -------- ----------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
UNICCO Service Company
- ----------------------
Balance, June 25, 1995 .................. 1,093 $161 $ 8,714 $ (35) 11 $ (58) $ 8,782
Issuance of shares ...................... 27 217 -- (217) -- --
Repurchase of shares .................... -- -- -- -- 55 (444) (444)
Net income .............................. -- -- 1,746 -- -- -- 1,746
Distributions to shareholders ........... -- -- (800) -- -- -- (800)
----- ---- ------- ----- --- ----- -------
Balance, June 30, 1996 .................. 1,120 378 9,660 (252) 66 (502) 9,284
===== ==== ======= ===== === ===== =======
USC, INC.
- ---------
Balance, June 25, 1995 .................. -- -- -- -- -- -- --
Initial issuance of shares .............. 1,054 -- -- -- -- -- --
----- ---- ------- ----- --- ----- -------
Balance, June 30, 1996 .................. 1,054 -- -- -- -- -- --
----- ---- ------- ----- --- ----- -------
Consolidated balance, June 30, 1996 ..... 2,174 378 9,660 (252) 66 (502) 9,284
===== ==== ======= ===== === ===== =======
UNICCO SERVICE COMPANY
- ----------------------
Balance, June 30, 1996 .................. 1,120 378 9,660 (252) 66 (502) 9,284
Net income .............................. -- -- 1,971 -- -- -- 1,971
Cumulative foreign currency translation . -- -- (4) -- -- -- (4)
Repayment of note receivable ............ -- -- -- 10 -- -- 10
Distributions to shareholders ........... -- -- (1,637) -- -- -- (1,637)
----- ---- ------- ----- --- ----- -------
Balance, June 29, 1997 .................. 1,120 378 9,990 (242) 66 (502) 9,624
===== ==== ======= ===== === ===== =======
USC, INC.
- ---------
Balance, June 30, 1996 .................. 1,054 -- -- -- -- -- --
Net loss .............................. -- -- (788) -- -- -- (788)
----- ---- ------- ----- --- ----- -------
Balance, June 29, 1997 .................. 1,054 -- (788) -- -- -- (788)
----- ---- ------- ----- --- ----- -------
Consolidated balance, June 29, 1997 ..... 2,174 378 9,202 (242) 66 (502) 8,836
===== ==== ======= ===== === ===== =======
UNICCO SERVICE COMPANY
- ----------------------
Balance, June 29, 1997 .................. 1,120 378 9,990 (242) 66 (502) 9,624
USC, Inc. contribution .................. -- -- (788) -- -- -- (788)
Net income .............................. -- -- 416 -- -- -- 416
Cumulative foreign currency translation . -- -- (44) -- -- -- (44)
Repayment of notes receivable ........... -- -- -- 10 -- -- 10
Forgiveness of notes receivable ......... -- -- -- 72 -- -- 72
Distributions to shareholders ........... -- -- (400) -- -- -- (400)
----- ---- ------- ----- --- ----- -------
Consolidated balance, June 28, 1998 ..... 1,120 $378 $ 9,174 $(160) 66 $(502) $ 8,890
===== ==== ======= ===== === ===== =======
</TABLE>
-20-
<PAGE> 21
UNICCO SERVICE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------------------------------
JUNE 28, 1998 JUNE 29, 1997 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows relating to operating activities:
Net income .......................................................... $ 416 $ 1,183 $ 1,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ................................ 4,806 4,749 551
Amortization of debt issue costs and discount .................... 676 1,087 --
Depreciation and amortization .................................... 2,394 2,513 818
(Gain) loss on disposals ......................................... (82) 61 43
Extraordinary loss ............................................... 3,024 -- --
Deferred income taxes ............................................ 618 1,798 31
Forgiveness of notes receivable and accrued
interest from officers ........................................... 84 497 108
Changes in assets and liabilities:
Accounts receivable ............................................ 12,732 (53,998) 1,016
Unbilled receivables ........................................... 572 (23,467) (502)
Other current assets ........................................... 1,147 106 (593)
Other long-term assets ......................................... 137 (272) 56
Cash overdraft ................................................. (11,316) 9,274 411
Accounts payable ............................................... (2,447) 4,847 1,394
Accrued expenses and other current
liabilities .................................................. 505 15,854 2,005
Other long-term liabilities .................................... (550) (73) (1,441)
-------- -------- --------
Net cash provided by (used in) operating
activities ..................................................... 12,716 (35,841) 5,643
-------- -------- --------
Cash flows relating to investing activities:
Acquisitions, including working capital of $233, net of
acquired cash of $380 in 1998 ....................................... (2,257) -- (51,004)
Purchases of property and equipment, net ............................ (1,780) (2,578) (1,227)
Proceeds from sale of property and equipment ........................ 125 -- --
Increases in notes receivable and accrued interest
from officers .................................................... -- (56) (296)
Payments received for notes receivable from
officers ......................................................... 229 106 128
-------- -------- --------
Net cash used in investing activities ..................... (3,683) (2,528) (52,399)
-------- -------- --------
Cash flows relating to financing activities:
Net (payments) proceeds from line of credit ......................... (50,587) 44,367 3,815
Proceeds from debt .................................................. 104,507 3,000 47,000
Payments on debt .................................................... (52,400) (3,600) --
Increase in debt issuance costs ..................................... (4,691) -- (2,779)
Purchase of treasury stock .......................................... -- -- (444)
Distribution to shareholders ........................................ (400) (1,637) (800)
Payments on note receivable from stock
sales ............................................................ 10 10 --
Payment on note payable to related party ............................ (282) -- --
-------- -------- --------
Net cash provided by (used in) financing
activities .................................................... (3,843) 42,140 46,792
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ........... 33 -- --
-------- -------- --------
Net increase in cash and cash equivalents .............................. 5,223 3,771 36
Cash and cash equivalents, beginning of year ........................... 3,928 157 121
-------- -------- --------
Cash and cash equivalents, end of year ................................. $ 9,151 $ 3,928 $ 157
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ............................................................ $ 10,219 $ 8,637 $ 178
======== ======== ========
Income taxes ........................................................ $ 577 $ 760 $ 4
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE> 22
UNICCO SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
These consolidated financial statements include the accounts of UNICCO
Service Company ("UNICCO" or the "Company") and its wholly owned subsidiaries
for the period subsequent to October 17, 1997. Prior to that time, the financial
statements were prepared on a combined basis as all entities within the
consolidated group (the "Group") had been owned, managed and controlled by
common shareholders (see Note 9). The Company provides integrated facilities
services, including industrial and mechanical engineering, plant operations,
custodial and maintenance services and administrative services. The Company's
customers include commercial, industrial and financial institutions, educational
and healthcare facilities and state and federal government agencies.
2. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 1998, the Company formalized its plan to
offer for sale its security business. Accordingly, its operating results have
been reclassified and reported in discontinued operations. The Company is in
the process of negotiating the sale of these operations and expects that the
sale will be completed in fiscal 1999.
Operating results of discontinued security operations are as follows:
1998 1997
IN THOUSANDS IN THOUSANDS
------------ ------------
Revenues ................................. $58,568 $62,013
Income before income taxes ............... 1,661 367
Income taxes ............................. 591 11
Net income ............................... 1,070 356
The components of the assets of discontinued security operations are as follows
at June 28, 1998:
IN THOUSANDS
------------
Property and equipment .................... $ 293
Acquired contract rights, net ............. 7,067
Deposits .................................. 21
------
$7,381
======
Certain assets and all liabilities of the security business, comprised
primarily of working capital items, are expected to be retained by the Company.
Such assets consist of accounts receivable and unbilled receivables
(approximately $11,000,000 at June 28, 1998). Accounts payable, accrued payroll
and other accrued expenses of (approximately $3,100,000 at June 28, 1998) are
expected to be retained by the Company. The Company expects to settle working
capital amounts within the next year. During 1998, the security business used
cash flows in its operating and investing activities of $346,000 and $268,000,
respectively.
3. ACQUISITIONS
Effective February 1, 1998, the Company acquired 100% of the outstanding
common stock of American Building Services, Inc. ("ABS"). The acquisition was
accounted for as a purchase, and accordingly, the operations of ABS are included
in the accompanying financial statements from the effective date. The aggregate
purchase price was approximately $2.6 million in cash.
-22-
<PAGE> 23
On June 28, 1996: (1) UNICCO acquired certain assets and the business, as
defined, of certain Ogden Allied Facility Services ("AFS") operations engaged in
janitorial, office, facility management and mechanical maintenance services,
primarily in the United States; (2) USC, Inc., an affiliate, acquired all of the
common stock and the business of certain AFS operations engaged primarily in (a)
building security and (b) facility services to agencies of the federal
government; and (3) UFSCC, the Company's Canadian subsidiary, acquired the
assets and the business of certain AFS operations engaged in janitorial, office
facility management and mechanical maintenance services in Canada. The aggregate
purchase price of approximately $62 million was financed in part by senior bank
debt, subordinated debt and a $12 million note payable to the seller (see Note
5). The acquisition was accounted for as a purchase, and accordingly, the
operations of the acquired businesses are included in the accompanying financial
statements from the date of acquisition. The operations of the acquired
businesses did not have a material effect on the Company's statement of income
for the year ended June 30, 1996.
The allocation of the purchase price of the acquired businesses, including
acquisition related costs of approximately $946,000, was as follows:
IN THOUSANDS
------------
Property and equipment ................................. $ 2,850
Acquired contract rights ............................... 42,324
Favorable leasing ...................................... 320
Favorable financing .................................... 2,652
Goodwill ............................................... 14,858
-------
$63,004
=======
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Significant intercompany transactions have been eliminated in
consolidation.
Accounting Records
UNICCO is on the cash basis of accounting for tax reporting purposes. All
adjustments have been made to the financial statements to reflect the accrual
basis of accounting.
Fiscal Year
The Company is on a 52/53 week fiscal year ending on the close of business
on the last Sunday of June. The fiscal year ended June 30, 1996 was a
fifty-three week year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining
maturities of three months or less at the time of acquisition to be cash
equivalents. The Company's cash equivalents consists of overnight time deposits
with a major bank. At June 28, 1998, cash equivalents were carried at cost which
approximated fair value.
-23-
<PAGE> 24
Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of property and equipment and
leasehold improvements over their estimated useful lives using the declining
balance and straight-line methods as follows:
ESTIMATED
DESCRIPTION USEFUL LIFE
- ----------- -----------
Transportation equipment 3-5 years
Machinery and equipment 5-10 years
Furniture and fixtures 5-10 years
Leasehold improvements Shorter of estimated
useful life or life of lease
Intangible Assets
Intangible assets consist primarily of acquired contract rights, favorable
lease arrangements, noncompete agreements and goodwill, representing the excess
of the purchase price over the fair value of the net assets acquired in each
acquisition accounted for as purchase. Acquired contract rights are amortized on
a straight-line basis over the estimated remaining lives of the customer
relationships, which range from seven to 15 years. These lives represent the
estimated remaining average lives of the contracts acquired which exceed the
actual contract lives and are based generally on the historical experience of
the individual businesses and contracts acquired. Capitalized noncompete
agreements are amortized over three years, representing the contractual
noncompete period. Goodwill is amortized on a straight-line basis over an
estimated life of 15 years. Intangible assets (rounded to the nearest thousand)
consist of the following at June 28, 1998 and June 29, 1997:
1998 1997
IN THOUSANDS IN THOUSANDS
------------ ------------
Acquired contract rights ................. $ 44,324 $48,856
Favorable leases ......................... 271 320
Noncompete agreements .................... 803 803
Goodwill ................................. 13,068 14,858
-------- -------
58,466 64,837
Less -- Accumulated amortization ......... (13,208) (9,400)
-------- -------
$ 45,258 $55,437
======== =======
Impairment
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." In accordance with this Statement, the Group reviews
long-lived assets and related goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amounts of such assets may not be
fully recoverable.
Other Assets
Other assets consist principally of deferred financing costs, which are
amortized over the repayment term of the respective debt.
-24-
<PAGE> 25
Revenue Recognition
Service revenues are generated primarily by efforts expended on cost-plus
fixed-fee, fixed price and time and material contracts. Revenue from cost-plus
fixed-fee contracts is recognized on the basis of direct and indirect expenses
incurred plus the allocable portion of the fixed fee. Revenues on fixed price
contracts are recognized based on the monthly amount as stipulated in the
contract and the performance of services. Revenues under time and material
contracts are recorded at the contracted rates as labor efforts are expended and
other direct costs are incurred. Losses, if any, are provided for at the time
that management determines that costs, including estimated costs to complete,
exceed contract revenue.
Financial Instruments
The Company's financial instruments consist of cash, cash equivalents,
receivables, accounts payable and debt instruments. The estimated fair values of
the Company's cash, cash equivalents, receivables, accounts payable and
fixed-rate debt instruments approximate their carrying value.
Income Taxes
Income taxes for financial reporting purposes are recorded in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). The asset and liability approach underlying FAS 109 requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of the Company's assets and liabilities.
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," the financial statements of UFSCC are translated
into U.S. dollars as follows: assets and liabilities at year-end exchange rates;
income, expenses and cash flows at average exchange rates; and shareholders'
equity at historical exchange rates. The resulting translation adjustment is
recorded as a component of shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts and disclosures reported in the accompanying
combined financial statements. Actual amounts could differ from those estimates.
Concentration of Credit Risk
Concentrations of credit risk with respect to accounts receivable and
unbilled receivables are limited because a large number of North American
customers make up the Company's customer base, thus spreading trade credit risk.
In addition, the Company performs ongoing evaluations of customers' financial
position. The Company does not require collateral and maintains reserves for
potential uncollectible amounts which, in the aggregate, have not exceeded
management expectations.
Reclassifications
Certain prior year amounts have been reclassified within the financial
statements to conform to the current year presentation.
-25-
<PAGE> 26
5. DEBT
Notes Offering
On October 17, 1997, the Company consummated a $105 million Senior
Subordinated Notes Offering (the "Notes Offering") and entered into a $45
million Amended and Restated Revolving Credit Facility (the "Credit Facility").
The net proceeds from the Notes Offering and the Credit Facility were used to
repay approximately $84.8 million of indebtedness under the Company's existing
credit facilities and $19.7 million of certain other indebtedness, fees and
expenses incurred in connection with such financing.
The Notes will mature on October 15, 2007. The Notes will not be redeemable
at the issuers' option prior to October 15, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the issuers at redemption
prices set forth in the Notes. Interest on the Notes accrues at the rate of 9
7/8% per annum and is payable semi-annually in arrears on April 15 and October
15 of each year. The payment of principal and interest on the Notes is
subordinated in right to the prior payment of all senior debt, as defined.
Upon the occurrence of a change in control, as defined, the issuers will be
obligated to make an offer to each holder of the Notes to repurchase all or any
part of such holders' Notes at an offer price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest. Restrictions under
the Notes and the Credit Facility include limitations on certain sales of
assets, certain payments of dividends and incurrence of debt, and limitations on
certain mergers and transactions with affiliates.
In connection with the Notes Offering, the Company recorded an
extraordinary loss of $3.0 million, net of state tax benefit. A total of $2.0
million of the loss was attributable to the write-off of unamortized deferred
financing costs in connection with the refinancing of the Company's indebtedness
in October, 1997. A total of $1.0 million of the extraordinary loss was
attributable to the payment of $11 million in October, 1997 to settle certain
indebtedness incurred in connection with the June, 1996 Ogden acquisition. The
book value of such Note in the Company's balance sheet at the settlement date
(October 17, 1997) was $10.0 million. In addition, the Company recorded $4.7
million of new deferred financing costs.
Credit Facility
The Credit Facility described above is available for working capital
requirements and acquisition financing. Base Rate loans bear interest at the
Base Rate plus the Applicable Base Rate Margin, as defined (9.25% at June 28,
1998). Eurodollar loans bear interest at the Adjusted Eurodollar Rate plus the
Applicable Eurodollar Margin, as defined (7.91% at June 28, 1998). There were no
cash borrowings outstanding under the Credit Facility at June 28, 1998. The
Credit Facility matures on October 14, 2002. Availability under the Credit
Facility is reduced by outstanding letters of credit (see Note 7).
The Credit Facility provides for certain covenants, including maintenance
of defined levels of tangible net worth, earnings before interest, taxes,
depreciation and amortization and certain other financial ratios. Borrowings
under the Credit Facility are collateralized by substantially all assets of the
Company. The Credit Facility also provides for a limited recourse guarantee and
pledge agreement from UFSCC.
-26-
<PAGE> 27
Terminated Revolving Credit Facilities
On June 28, 1996, the Company entered into a revolving credit and term loan
agreement (the Agreement) with a syndicated bank group for a $48 million
revolving line of credit (see Acquisition Financing below for discussion of term
loans). The Agreement terminated as part of the refinancing on October 17, 1997.
The Company had borrowings designated at either Base Rate Loans or Eurodollar
Loans, as defined. For Base Rate Loans and Eurodollar loans, the interest rates
were 10.0% and 8.8%, respectively, at June 29, 1997.
On September 23, 1996, UNICCO entered into a demand line of credit
agreement with a bank. The agreement allowed UNICCO to borrow up to $5,000,000
at the bank's discretion, for working capital purposes. The terms and conditions
of the agreement were substantially the same as those contained in the $48
million revolving line of credit and term loan agreement described above.
Borrowings outstanding under this line of credit were $4,162,999 at June 29,
1997. This agreement was terminated as part of the refinancing at October 17,
1997.
Acquisition Financing
Amounts outstanding at June 29, 1997 related to debt agreements entered
into in connection with the AFS acquisition were:
JUNE 29,
1997
-----------
Term Loan A ............................................. $28,400,000
Term Loan B ............................................. 10,000,000
Senior subordinated promissory note ..................... 5,000,000
Seller senior subordinated promissory note .............. 9,878,400
Junior subordinated promissory notes .................... 3,000,003
-----------
Total debt ......................................... 56,278,403
Less:
Current portion ......................................... 7,000,000
-----------
Long-term portion .................................. $49,278,403
===========
Term Loan A was designated as a Eurodollar loan with an annual rate of 8.8%
at June 29, 1997. Term Loan B was designated as a Eurodollar loan with an annual
rate of 9.3% at June 29, 1997. These Notes were refinanced with the Notes
Offering in October, 1997.
On June 28, 1996, the Company entered into a $5,000,000 subordinated
promissory note agreement with Massachusetts Capital Resource Company ("MCRC").
The promissory note is due on September 30, 2001 and provides for quarterly
interest payments based on an annual interest rate of 14%. The agreement
provides for certain customary restrictive covenants. This note was not
extinguished as part of the October 17, 1998 Notes Offering.
In connection with the AFS acquisition (see Note 3), UNICCO entered into a
$12,000,000 subordinated promissory note agreement with the seller. The
promissory note was subordinated to the line of credit, Term Loans A and B, and
the MCRC loan described above, and was due on September 30, 2001. The agreement
provided for quarterly interest payments based on an annual interest rate of 8%
and included a limited recourse guarantee from a key shareholder and UFSCC, as
well as a pledge agreement from a key shareholder. As previously discussed, this
note was extinguished at a $1.0 million premium as part of the October 17, 1997
Notes Offering due to the Company recording the note at a discount at the time
of the AFS acquisition (see Note 3).
-27-
<PAGE> 28
Junior subordinated promissory notes were issued in June, 1996 to certain
shareholders of the Company for approximately $3 million. The promissory notes
were paid off as part of the refinancing on October 17, 1997.
Minimum future principal payments of long-term debt are as follows:
AMOUNT
FISCAL YEAR IN THOUSANDS
- ----------- ------------
1999 ............................................... $ 0
2000 ............................................... 0
2001 ............................................... 0
2002 ............................................... 5,000
2003 ............................................... 0
------
$5,000
======
6. TRANSACTIONS WITH RELATED PARTIES
Notes Receivable From Officers
Notes receivable from officers consist primarily of demand notes receivable
from officers/shareholders bearing interest at the applicable federal rate. The
long-term portion of the notes receivable represents the portion the Company
will not collect within the next year, in accordance with the repayment terms.
Interest income related to these loans was approximately $50,000, $56,000 and
$77,000 during 1998, 1997 and 1996, respectively. Interest receivable related to
these notes was approximately $271,000 and $312,000 at June 28, 1998 and June
29, 1997, respectively.
On June 24, 1996, UNICCO loaned an officer of the Company approximately
$217,000 to purchase 27 shares of nonvoting common stock. This loan bears
interest at an average of the applicable federal rate (5.88% at June 28, 1998
and 5.68% at June 29, 1997). A portion of the note and related accrued interest
was forgiven in 1998. The remaining balance will be forgiven over a two year
period provided continued employment of the officer. The remaining balance is
classified as a deduction from shareholders' equity.
Demand Note Payable To An Officer
The Company had a demand note payable to an officer of approximately $282,000,
included in the accompanying consolidated balance sheet at June 29, 1997. This
note was paid in full, including accrued interest, on September 3, 1997.
Lease Agreement With An Affiliate
The Company leases certain office space from an affiliated company. The
agreement commenced on July 1, 1995 and will be effective for a term of five
years and five months. Approximate future minimum payments under this lease were
$51,800 per year from July 1996 through June 1998, and $57,000 per year from
July 1998 through November 2000. Such amounts are included in Note 7.
-28-
<PAGE> 29
Insurance Agreement With An Affiliate
Prior to the end of fiscal 1995, the Company insured its workers'
compensation and general liability risks through a combination of a
self-insurance program and indemnity coverage obtained from a third-party
carrier. At the end of fiscal 1995, the Company entered into an agreement with a
commercial insurance carrier whereby its workers' compensation and general
liability insurance risks are reinsured with an affiliated company. Under the
terms of this arrangement, the Company's obligations with respect to workers'
compensation and general liability claims are limited to the premiums paid for
such insurance. The Company's insurance premiums are actuarially determined
based on its historical loss experience. The amount charged to expense related
to the arrangement was approximately $8,061,000, $10,129,000 and $3,501,000 in
fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
Included in the Company's consolidated results of operations for the year
ended June 30, 1996 is approximately $929,000 in income representing refunds
received in fiscal 1996 from a third-party insurance carrier as a result of the
Company's ultimate favorable claims experience from accident years prior to
fiscal 1996. Additionally, in fiscal 1996, as a result of the Company's
sustained favorable experience with respect to its self insurance program and,
as discussed above, the establishment of the reinsurance arrangement at the end
of fiscal 1995, the Company reevaluated its reserve requirements and reversed
approximately $1,148,000 of workers' compensation and general liability
insurance reserves.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain equipment and facilities under noncancelable
operating leases through October 31, 2006. Rent expense under these leases was
approximately $3,348,000, $3,207,000 and $1,095,000 for the years ended June 28,
1998, June 29, 1997 and June 30, 1996, respectively. The approximate future
minimum payments under these leases are as follows:
AMOUNT
FISCAL YEAR IN THOUSANDS
- ----------- ------------
1999 ............................................... $ 3,153
2000 ............................................... 3,478
2001 ............................................... 2,402
2002 ............................................... 1,728
2003 ............................................... 552
Thereafter ......................................... 363
-------
$11,676
=======
The Company leases certain facilities under tenancy-at-will agreements,
which are not included in the future minimum lease payments above. Future
payments above do not include the lease of warehouses at annual costs of
approximately $369,000 in 1999 and $204,000 in 2000 and 2001, which is fully
reimbursed by a customer.
Letters of Credit
The Company was contingently liable under certain letters of credit, in the
aggregate amounts of approximately $1,634,000 and $1,556,000 as of June 28, 1998
and June 29, 1997, respectively. The letters of credit were primarily issued in
connection with the Company's surety bonding arrangements. The letters of credit
expire on various dates through June 30, 2000.
Stock Repurchase Agreement
All nonvoting common shares (see Note 9) may be redeemed by the Company, at
its option, at the then book value of the shares, as defined, in the event that
the shareholders cease employment with the Company.
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<PAGE> 30
Litigation
In July 1998, the Company settled a lawsuit with a former employee
regarding certain employment-related matters. The settlement amount of $345,000
is included in selling, general and administrative expenses in the accompanying
consolidated statement of income for fiscal 1998.
UNICCO was a party to a lawsuit filed in May 1994 by a former employee who
alleged breach of contract and misrepresentation in connection with his
employment. In 1996, the parties to the lawsuit reached agreement to settle the
litigation pursuant to a court-ordered mediation of the claims. The settlement
amount (approximately $400,000) is included in selling, general and
administrative expenses in the accompanying consolidated statement of income for
fiscal 1996.
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes it has meritorious defenses to these claims,
and, in its opinion, all litigation currently pending or threatened will not
have a material adverse effect on the Company's financial condition or results
of operations.
8. INCOME TAXES
UNICCO has elected to be taxed as an S corporation for federal and certain
state income tax purposes and is a business trust for Massachusetts state tax
purposes. UNICCO's provision for income taxes results from states that do not
recognize its S corporation status for state income tax purposes and its
business trust status in Massachusetts.
Effective January 1, 1997, USC elected to be taxed as an S corporation for
federal and certain state income tax purposes. Prior to January 1, 1997, USC was
a C corporation and was subject to federal and state income taxes at the
corporate level.
Income from continuing operations before provision for income taxes was
taxed under the following jurisdictions:
YEAR ENDED
-------------------------------------------
IN THOUSANDS
-------------------------------------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
-------- -------- --------
Domestic .............. $2,223 $2,956 $1,935
Foreign ............... 727 199 --
------ ------ ------
$2,950 $3,155 $1,935
====== ====== ======
The provision for income taxes related to income from continuing operations
consists of the following:
YEAR ENDED
-------------------------------------------
IN THOUSANDS
-------------------------------------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
-------- -------- --------
Current
Federal ............. $ -- $ 309 $ --
State ............... 35 133 158
Foreign ............. 584 99 --
Deferred
Federal ............. -- -- --
State ............... 27 1,787 31
---- ------ ----
$646 $2,328 $189
==== ====== ====
Deferred taxes arise primarily from book (accrual basis) and tax (cash
basis) differences in recording revenues and expenses.
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<PAGE> 31
Deferred tax assets (liabilities) are comprised of the following:
JUNE 28, JUNE 29,
1998 1997
IN THOUSANDS IN THOUSANDS
------------ ------------
Receivables .................................. $(3,558) $(2,936)
Other assets ................................. (112) (80)
------- -------
Gross deferred tax liabilities ............... (3,670) (3,016)
------- -------
Accounts payable ............................. 183 202
Accrued payroll .............................. 614 517
Other accruals and reserves .................. 245 174
State net operating loss carryforwards ....... 1,527 2,040
------- -------
Gross deferred tax assets .................... 2,569 2,933
Valuation allowance .......................... (1,270) (1,670)
------- -------
Net deferred tax assets ...................... 1,299 1,263
------- -------
Net deferred tax liabilities ................. $(2,371) $(1,753)
======= =======
The deferred tax amounts relating to discontinued operations result
primarily from differences in the financial reporting and income tax basis of
the working capital associated with such operations. As previously discussed in
Note 2, working capital associated with the discontinued operations is expected
to be retained by the Company. Accordingly, the above table includes deferred
tax items relating to both continuing and discontinued operations.
In connection with the current year contribution of USC, Inc. ownership
interests to UNICCO (see Note 9), USC, Inc. was required to change from the
accrual to the cash basis for income tax reporting purposes. As a cash basis
tax payer, USC, Inc. generated an operating loss of approximately $12,700,000
during fiscal 1998. Further, as a result of changes in working capital during
fiscal 1998, UNICCO generated a level of taxable income allowing for the
utilization of operating losses generated in the prior year. As a result of
the above, UNICCO has a consolidated operating loss carryforward of
approximately $31,088,000 at June 28, 1998. Such carryforward at June 29, 1997
approximated $29,350,000. These operating loss carryforwards are limited to
those states which do not recognize UNICCO's subchapter S status and are
further limited to the carryforward period for each respective state in which
such loss was generated, generally ranging from three to fifteen years.
Management believes that it is more likely than not that it will realize
approximately $257,000 of the tax benefit associated with the operating loss
described above at June 28, 1998. Such estimate of realization at June 29, 1997
approximated $370,000. This belief is based upon a review of all available
evidence, including historical operating results, projections of future taxable
income, recognizing the limitations described above, and tax planning
strategies. The Company has recorded a valuation allowance against the
remaining portion of the tax benefit related to the above referenced operating
losses.
The effective income tax rate for continuing operations differs from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------------------------
JUNE 28, JUNE 29, JUNE 28,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate ....................................... 34.0% 34.0% 34.0%
Income from S corporations not taxable for corporate
income tax purposes ........................................ (34.0) (25.8) (34.0)
State income taxes, net of federal benefit (1997
only) ...................................................... 6.0 13.1 9.7
Rate difference - foreign taxes .............................. 19.8 3.1 --
Valuation allowance .......................................... (4.6) 49.4 --
Other ........................................................ .7 -- --
----- ----- -----
21.9% 73.8% 9.7%
===== ===== =====
</TABLE>
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<PAGE> 32
9. SHAREHOLDERS' EQUITY
Common shares of UNICCO consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
IN THOUSANDS IN THOUSANDS
------------ ------------
<S> <C> <C>
Common shares of beneficial interest, voting, no par
value --
Issued and outstanding-- 1,000 shares..................... $ 10 $ 10
Common shares of beneficial interest, nonvoting, no par
value --
Issued-120 shares (includes 66 shares in treasury) ....... 368 368
---- ----
$378 $378
==== ====
</TABLE>
The accompanying consolidated financial statements include the accounts of
UNICCO and USC, Inc., which were owned, managed and controlled by common
shareholders. In connection with the October 1997 Notes Offering, the
shareholders of UNICCO contributed their ownership interests in USC, Inc. (1,000
no par voting and 54 no par nonvoting common shares) to UNICCO. As a result, all
of the operations of the Company are now conducted through UNICCO and its
wholly-owned subsidiaries. This transaction was accounted for in a manner
similar to that in pooling of interests accounting with the assets and
liabilities being recorded at their historical cost due to the exchange of stock
occurring between entities under common control.
10. EMPLOYEE BENEFIT PLANS
Multi-employer Pension Plans
Certain employees under collective bargaining agreements are covered by
union-sponsored, multi-employer pension plans. Company contributions, generally
based on hours worked, are in accordance with negotiated labor contracts. The
Company recorded expenses of approximately $4,942,000, $5,398,000 and $703,000
in fiscal 1998, 1997 and 1996, respectively, related to the plans. Information
is not readily available for the Company to determine its share of unfunded
vested benefits, if any, under the plans.
401(k) Investment Savings Plans
UNICCO maintains 401(k) retirement plans (the "Plans") covering all
employees who have completed one year of service, as defined, and are not
subject to a collective bargaining agreement. The Plans allow eligible employees
to make salary-deferred contributions for not less than 1% nor more than 20% of
their compensation for the contribution period, as defined, subject to certain
IRS limitations. UNICCO may contribute to the Plans in any year at its
discretion. UNICCO made contributions of approximately $1,177,419, $1,017,000
and $32,000 in fiscal 1998, 1997 and 1996, respectively.
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<PAGE> 33
11. RESIGNATION OF OFFICERS
On January 3, 1996, one of UNICCO's officers and shareholders resigned.
UNICCO repurchased the officer's 55 nonvoting outstanding shares for
approximately $444,000. The former officer also signed a noncompete agreement
with UNICCO for approximately $800,000, which UNICCO has capitalized and is
amortizing over the life of the noncompete agreement. The provisions of the
agreement require monthly payments of approximately $23,000, commencing on
January 1, 1996 through December 31, 1998, subject to the former officer not
competing with the Company. Further, the agreement provides for such payments to
cease and reimbursement of all payments previously made under the terms of the
arrangement if the former officer violates the agreement. Amortization expense
on the noncompete agreement was approximately $267,500, $267,500 and $134,000
for the years ended June 28, 1998, June 29, 1997 and June 30, 1996,
respectively.
In July 1997, one of UNICCO's officers resigned. The severance agreement
with the officer provides for periodic payments totalling approximately
$370,000. Such amount is included in the accompanying consolidated financial
statements.
12. CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
Each guarantor subsidiary of UNICCO is under common management, is directly
or indirectly wholly-owned and the guarantees related to the Notes Offering are
full, unconditional and joint and several. UFSCC is indirectly wholly-owned and
is not a guarantor of this debt. Separate financial statements of the guarantor
subsidiaries are not presented because management has determined that they would
not be material to investors. However, consolidated financial information as of
June 28, 1998 and June 29, 1997 and for the years then ended, are presented. The
following presents consolidating financial information (rounded to the nearest
thousand) for (i) UNICCO only, (ii) the guarantor subsidiaries on a combined
basis, (iii) the nonguarantor subsidiary --UFSCC, and (iv) the Company on a
consolidated basis (see Note 9). The guarantor subsidiaries' income statement
and balance sheet for and as of June 28, 1998 and June 29, 1997 reflect the
discontinued operations of the security business.
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<PAGE> 34
CONDENSED CONSOLIDATING STATEMENT OF INCOME - (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 28, 1998
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues ..................................... $415,397 $41,549 $34,068 $ -- $491,014
Cost of service revenues ............................. 369,512 36,313 30,774 -- 436,599
-------- ------- ------- ------- --------
Gross profit ....................................... 45,885 5,236 3,294 -- 54,415
Selling, general and administrative expenses ......... 32,685 1,105 2,037 -- 35,827
Amortization of intangible assets .................... 3,652 435 121 -- 4,208
-------- ------- ------- ------- --------
Income from operations ............................. 9,548 3,696 1,136 -- 14,380
Interest income ...................................... 169 1 31 -- 201
Interest expense ..................................... (8,437) (2,754) (440) -- (11,631)
-------- ------- ------- ------- --------
Income from continuing operations before
income taxes ....................................... 1,280 943 727 -- 2,950
Provision for income taxes ........................... (168) 230 584 -- 646
-------- ------- ------- ------- --------
Income from continuing operations before
equity in net earnings of subsidiaries and
extraordinary items ................................ 1,448 713 143 -- 2,304
Equity in net earnings of subsidiaries ............... 1,926 30 -- (1,956) --
-------- ------- ------- ------- --------
Income from continuing operations .................... 3,374 743 143 (1,956) 2,304
Discontinued operations
Income from discontinued operations, net
of tax $591 ........................................ -- 1,070 -- -- 1,070
-------- ------- ------- ------- --------
Income (loss) before extraordinary items ............. 3,374 1,813 143 (1,956) 3,374
Extraordinary loss, net of tax benefit ............... (2,958) -- -- -- (2,958)
-------- ------- ------- ------- --------
Net income (loss) .................................... $ 416 $ 1,813 $ 143 $(1,956) $ 416
======== ======= ======= ======= ========
</TABLE>
-34-
<PAGE> 35
CONDENSED CONSOLIDATING STATEMENT OF INCOME - (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 29, 1997
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues ..................................... $403,154 $40,176 $28,539 $ -- $ 471,869
Cost of service revenues ............................. 358,929 36,766 25,792 -- 421,487
-------- ------- ------- ----- ---------
Gross profit ....................................... 44,225 3,410 2,747 -- 50,382
Selling, general and administrative expenses 28,621 767 2,263 -- 31,651
Amortization of intangible assets .................... 3,626 389 136 -- 4,151
-------- ------- ------- ----- ---------
Income from operations ............................. 11,978 2,254 348 -- 14,580
Interest income ...................................... 97 -- -- (31) 66
Interest expense ..................................... (10,468) (905) (149) 31 (11,491)
-------- ------- ------- ----- ---------
Income from continuing operations before
income taxes ....................................... 1,607 1,349 199 -- 3,155
Provision for income taxes ........................... 1,804 425 99 -- 2,328
-------- ------- ------- ----- ---------
Income from continuing operations before
equity in net earnings of subsidiaries and
extraordinary items ................................ (197) 924 100 -- 827
Equity in net earnings of subsidiaries ............... 79 21 -- (100) --
-------- ------- ------- ----- ---------
Income from continuing operations .................... (118) 945 100 (100) 827
Discontinued operations
Income from discontinued operations, net
of tax $11 ........................................ -- 356 -- -- 356
-------- ------- ------- ----- ---------
Income (loss) before extraordinary items ............. (118) 1,301 100 (100) 1,183
Extraordinary loss, net of tax benefit ............... -- -- -- -- --
-------- ------- ------- ----- ---------
Net income (loss) .................................... $ (118) $ 1,301 $ 100 $(100) $ 1,183
======== ======= ======= ===== =========
</TABLE>
-35
<PAGE> 36
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, 1998
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................ $ 9,089 $ 300 $ 1,007 $ (1,245) $ 9,151
Accounts receivable, less reserve of
approximately $2,010 ............................. 33,519 12,013 3,257 -- 48,789
Unbilled receivables ............................. 20,178 7,003 180 -- 27,361
Intercompany receivable (payable) ................ 10,837 (8,934) (1,903) -- --
Other current assets ............................. 1,995 278 121 -- 2,394
-------- ------- ------- -------- --------
Total current assets .................... 75,618 10,660 2,662 (1,245) 87,695
-------- ------- ------- -------- --------
Property and equipment, at cost .................. 11,835 1,133 658 -- 13,626
Less -accumulated depreciation and amortization .. 8,628 820 244 -- 9,692
-------- ------- ------- -------- --------
Net property and equipment .................. 3,207 313 414 -- 3,934
-------- ------- ------- -------- --------
Due from (to) affiliates ......................... 14,509 (620) -- (13,889) --
Investment in subsidiary ......................... 6,581 575 -- (7,156) --
Notes receivable and accrued interest from
officers, net of amortization .................. 475 -- -- -- 475
Intangible assets, net of amortization ........... 37,229 6,239 1,790 -- 45,258
Other assets, net ................................ 5,887 138 21 -- 6,046
Net assets of discontinued operations ............ -- 7,381 -- -- 7,381
-------- ------- ------- -------- --------
64,681 13,713 1,811 (21,045) 59,160
-------- ------- ------- -------- --------
$143,506 $24,686 $ 4,887 $(22,290) $150,789
======== ======= ======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft ................................... $ -- $ 1,245 $ -- $ (1,245) $ --
Accounts payable ................................. 3,452 1,235 427 -- 5,114
Accrued payroll and payroll-related expenses .... 14,056 2,380 1,399 -- 17,835
Deferred income taxes ............................ 1,771 857 -- -- 2,628
Other accrued expenses ........................... 5,557 453 367 -- 6,377
-------- ------- ------- -------- --------
Total current liabilities ............... 24,836 6,170 2,193 (1,245) 31,954
-------- ------- ------- -------- --------
Long-term liabilities:
Line of credit ................................... -- -- -- -- --
Long-term debt, less current portion ............. 109,544 -- -- -- 109,544
Other long-term liabilities ...................... 401 -- -- -- 401
-------- ------- ------- -------- --------
Total long-term liabilities ............. 109,945 -- -- -- 109,945
-------- ------- ------- -------- --------
Commitments and Contingencies
Shareholders' equity ............................. 9,387 18,516 2,694 (21,045) 9,552
Less treasury shares at cost ..................... (502) -- -- -- (502)
Less notes receivable from stock sales ........... (160) -- -- -- (160)
-------- ------- ------- -------- --------
Total shareholders' equity .............. 8,725 18,516 2,694 (21,045) 8,890
-------- ------- ------- -------- --------
$143,506 $24,686 $ 4,887 $(22,290) $150,789
======== ======= ======= ======== ========
</TABLE>
-36-
<PAGE> 37
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, 1997
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................ $ 1,998 $ 621 $ 1,309 $ -- $ 3,928
Accounts receivable, less reserve of
approximately $1,561 ............................. 40,510 17,916 3,464 -- 61,890
Unbilled receivables ............................. 22,710 4,326 -- -- 27,036
Intercompany receivable (payable) ................ 19,520 (17,420) (2,100) -- --
Other current assets ............................. 2,871 438 40 -- 3,349
-------- -------- ------- -------- --------
Total current assets .................... 87,609 5,881 2,713 -- 96,203
-------- -------- ------- -------- --------
Property and equipment, at cost .................. 10,675 408 610 -- 11,693
Less -accumulated depreciation and amortization .. 6,784 134 128 -- 7,046
-------- -------- ------- -------- --------
Net property and equipment .................. 3,891 274 482 -- 4,647
-------- -------- ------- -------- --------
Due from (to) affiliates ......................... 14,459 (570) -- (13,889) --
Investment in subsidiary ......................... 2,054 546 -- (2,600) --
Notes receivable and accrued interest from
officers ....................................... 716 -- -- -- 716
Intangible assets, net of amortization ........... 40,881 12,645 1,911 -- 55,437
Other assets, net ................................ 4,056 7 21 -- 4,084
-------- -------- ------- -------- --------
62,166 12,628 1,932 (16,489) 60,237
-------- -------- ------- -------- --------
$153,666 $ 18,783 $ 5,127 $(16,489) $161,087
======== ======== ======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft ................................... $ 10,840 $ 476 $ -- $ -- $ 11,316
Current portion of long-term debt ................ 7,000 -- -- -- 7,000
Accounts payable ................................. 5,178 1,585 787 -- 7,550
Accrued payroll and payroll-related expenses .... 14,507 2,379 1,628 -- 18,514
Deferred income taxes ............................ 2,123 -- -- -- 2,123
Other accrued expenses ........................... 4,293 240 117 -- 4,650
-------- -------- ------- -------- --------
Total current liabilities ............... 43,941 4,680 2,532 -- 51,153
-------- -------- ------- -------- --------
Long-term liabilities:
Line of credit ................................... 50,587 -- -- -- 50,587
Long-term debt, less current portion ............. 49,278 -- -- -- 49,278
Note payable to officer .......................... 282 -- -- -- 282
Other long-term liabilities ...................... 951 -- -- -- 951
-------- -------- ------- -------- --------
Total long-term liabilities ............. 101,098 -- -- -- 101,098
-------- -------- ------- -------- --------
Commitments and Contingencies
Shareholders' equity ............................. 9,371 14,103 2,595 (16,489) 9,580
Less treasury shares at cost ..................... (502) -- -- -- (502)
Less notes receivable from stock sales ........... (242) -- -- -- (242)
-------- -------- ------- -------- --------
Total shareholders' equity .............. 8,627 14,103 2,595 (16,489) 8,836
-------- -------- ------- -------- --------
$153,666 $ 18,783 $ 5,127 $(16,489) $161,087
======== ======== ======= ======== ========
</TABLE>
-37-
<PAGE> 38
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 28, 1998
--------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ................................ $ 416 $ 1,813 $ 143 $(1,956) $ 416
Net earnings from equity investment .............. (1,926) (30) -- 1,956 --
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Amortization of intangible assets ............ 3,652 1,033 121 -- 4,806
Amortization of debt issue costs and
discount ................................... 676 -- -- -- 676
Depreciation and amortization ................ 2,049 223 122 -- 2,394
Gain on disposals ............................ (69) (13) -- -- (82)
Extraordinary loss ........................... 3,024 -- -- -- 3,024
Deferred income taxes ........................ (198) 816 -- -- 618
Forgiveness of notes receivable and accrued
interest from officers ..................... 84 -- -- -- 84
Changes in assets and liabilities:
Accounts receivable .......................... 6,991 5,741 -- -- 12,732
Unbilled receivables ......................... 2,532 (1,775) (185) -- 572
Intercompany receivable (payable) ........... 8,696 (8,497) (94) (105) --
Other current assets ......................... 876 358 (87) -- 1,147
Other long-term assets ....................... 163 (25) (1) -- 137
Cash overdraft ............................... (10,840) 769 -- (1,245) (11,316)
Accounts payable ............................. (1,726) (403) (318) -- (2,447)
Accrued expenses and other current
liabilities ................................ 812 (440) 133 -- 505
Other long-term liabilities .................. (550) -- -- -- (550)
-------- ------- ------ ------- --------
Net cash provided by (used in) operating
activities ................................. 14,662 (430) (166) (1,350) 12,716
-------- ------- ------ ------- --------
Cash flows relating to investing activities:
Due to/from affiliates ........................... (51) 51 -- -- --
Acquisition, including cash acquired ............. (2,600) 343 -- -- (2,257)
Purchases of property and equipment, net ......... (1,411) (305) (64) -- (1,780)
Proceeds from sale of property and equipment ..... 105 20 -- -- 125
Payments received for notes receivable from
officers ....................................... 229 -- -- -- 229
-------- ------- ------ ------- --------
Net cash provided by (used in) investing
activities ................................... (3,728) 109 (64) -- (3,683)
-------- ------- ------ ------- --------
Cash flows relating to financing activities:
Repayments from line of credit ................... (50,587) -- -- -- (50,587)
Proceeds from debt ............................... 104,507 -- -- -- 104,507
Payments of debt ................................. (52,400) -- -- -- (52,400)
Increase in debt issuance costs .................. (4,691) -- -- -- (4,691)
Distributions to shareholders .................... (400) -- -- -- (400)
Payments received for notes receivable from
stock sales .................................... 10 -- -- -- 10
Payment on notes payable to related party ........ (282) -- -- -- (282)
-------- ------- ------ ------- --------
Net cash provided by (used in) financing
activities ................................. (3,843) -- -- -- (3,843)
-------- ------- ------ ------- --------
Effect of exchange rate changes on cash and cash
equivalents ........................................ -- -- (72) 105 33
-------- ------- ------ ------- --------
Net increase (decrease) in cash and cash equivalents . 7,091 (321) (302) (1,245) 5,223
Cash and cash equivalents, beginning of period ....... 1,998 621 1,309 -- 3,928
-------- ------- ------ ------- --------
Cash and cash equivalents, end of period ............. $ 9,089 $ 300 $1,007 $(1,245) $ 9,151
======== ======= ====== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ..................................... $ 10,219 $ -- $ -- $ -- $ 10,219
======== ======= ====== ======= ========
Income taxes ................................. $ 253 $ -- $ 324 $ -- $ 577
======== ======= ====== ======= ========
</TABLE>
-38-
<PAGE> 39
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 28, 1998
--------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) .................................. $ 969 $ 214 $ 100 $(100) $ 1,183
Net earnings from equity investment ................ (79) (21) -- 100 --
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Amortization of intangible assets .............. 3,615 987 147 -- 4,749
Amortization of debt issue costs and discount .. 1,087 -- -- -- 1,087
Depreciation and amortization .................. 2,251 134 128 -- 2,513
Loss on disposals .............................. 61 -- -- -- 61
Deferred income taxes .......................... 1,798 -- -- -- 1,798
Forgiveness of notes receivable and accrued
interest from officers ....................... 497 -- -- -- 497
Changes in assets and liabilities:
Accounts receivable ............................ (32,618) (17,916) (3,464) -- (53,998)
Unbilled receivables ........................... (19,141) (4,326) -- -- (23,467)
Intercompany receivable (payable) ............. (19,520) 17,420 2,100 -- --
Other current assets ........................... 584 (438) (40) -- 106
Other long-term assets ......................... (239) (7) (26) -- (272)
Cash overdraft ................................. 8,798 476 -- -- 9,274
Accounts payable ............................... 2,474 1,586 787 -- 4,847
Accrued expenses and other current
liabilities .................................. 11,491 2,618 1,745 -- 15,854
Other long-term liabilities .................... (73) -- -- -- (73)
-------- -------- ------- ----- --------
Net cash provided by (used in) operating
activities ................................... (38,045) 727 1,477 -- (35,841)
-------- -------- ------- ----- --------
Cash flows relating to investing activities:
Due to/from affiliates ............................. (45) 45 -- -- --
Purchases of property and equipment, net ........... (2,259) (151) (168) -- (2,578)
Increase in notes receivable and accrued interest
from officers .................................... (56) -- -- -- (56)
Payments received for notes receivable from
officers ......................................... 106 -- -- -- 106
-------- -------- ------- ----- --------
Net cash provided by (used in) investing
activities ................................... (2,254) (106) (168) -- (2,528)
-------- -------- ------- ----- --------
Cash flows relating to financing activities:
Proceeds from line of credit ....................... 44,367 -- -- -- 44,367
Proceeds from debt ................................. 3,000 -- -- -- 3,000
Payments of debt ................................... (3,600) -- -- -- (3,600)
Increase in debt issuance costs .................... -- -- --
Distributions to shareholders ...................... (1,637) -- -- -- (1,637)
Payments received for notes receivable from stock
sales ............................................ 10 -- -- -- 10
-------- -------- ------- ----- --------
Net cash provided by (used in) financing
activities ................................... 42,140 -- -- -- 42,140
-------- -------- ------- ----- --------
Net increase (decrease) in cash and cash equivalents ... 1,841 621 1,309 -- 3,771
Cash and cash equivalents, beginning of period ......... 157 -- -- -- 157
-------- -------- ------- ----- --------
Cash and cash equivalents, end of period ............... $ 1,998 $ 621 $ 1,309 $ -- $ 3,928
======== ======== ======= ===== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ....................................... $ 8,637 $ -- $ -- $ -- $ 8,637
======== ======== ======= ===== ========
Income taxes ................................... $ 760 $ -- $ -- $ -- $ 760
======== ======== ======= ===== ========
</TABLE>
-39-
<PAGE> 40
13. SUBSEQUENT EVENTS
On September 17, 1998, the Company purchased certain assets of Empire
Maintenance Industries, Inc., a Canadian corporation, effective as of September
1, 1998. The acquisition was accounted for as a purchase. The aggregate purchase
price was approximately $4.4 million in cash.
(UNAUDITED)
On September 30, 1998, the Company entered into an agreement to lease
certain equipment from an affiliated company. The monthly payments are
approximately $71,000 and the lease expires September 2002. The Company is
responsible for all costs and expenses of owning, operating and maintaining the
equipment.
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
YEAR ENDED JUNE 28, 1998
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTIONS BALANCE
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $1,561 $1,166 $(717) $2,010
====== ====== ===== ======
</TABLE>
YEAR ENDED JUNE 29, 1997
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTIONS BALANCE
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $239 $1,336 $(14) $1,561
==== ====== ==== ======
</TABLE>
YEAR END JUNE 30, 1996
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTIONS BALANCE
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $192 $50 $(3) $239
==== === === ====
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In March, 1997, the Company's management retained PricewaterhouseCoopers
LLP as its independent accountants. The reports of the Company's former
accountants on the Company's financial statements did not contain any adverse
opinion or disclaimer of opinion and were not modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with the former
accountants on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's financial statements, which, if not resolved to the former
accountants' satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their reports. Prior to
retaining PricewaterhouseCoopers LLP, the Company had not consulted with such
firm regarding accounting principles or practices.
-40-
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF TRUSTEES
UNICCO is a Massachusetts business trust and, as such, has a Board of
Trustees that serves a function similar to that of the board of directors of a
corporation. The Trustees serve for an indefinite term. The Company's Trustees
and executive officers are as follows:
TRUSTEES AND EXECUTIVE OFFICERS
NAME POSITION
---- --------
Steven C. Kletjian Chief Executive Officer and Chairman of the Board
of Trustees
Richard J. Kletjian Vice Chairman of the Board of Trustees
Robert P. Kletjian Vice President and Vice Chairman of the Board of
Trustees
Sharkay Kletjian Trustee
Robert J. Scoble Executive Vice President of Operations and Sales
George A. Keches Executive Vice President -- Finance and
Administration, Chief Financial Officer and
Treasurer
Richard T. Healey Vice President - Corporate Development
John C. Feitor Senior Vice President - Operations
Michael Finn Vice President - Human Resources
James Biere Marceau Executive Vice President -- Sales and Marketing
ADVISORY BOARD
During fiscal 1998, the Company established an Advisory Board made up of
non-employee and non-shareholder independent advisors with whom senior
management consults on a periodic basis. The members of the Advisory Board are
as follows:
NAME POSITION
---- --------
Dr. Gregory Adamian Former President, Bentley College
Anton Bernard (Ton) Former President, HODON-GROUP
Funke Kupper
Leonard Lynch Retired Partner, Arthur Andersen LLP
Mitchell Reese Managing Director, The Carlyle Group
Harvey Wagner Chief Financial Officer, Scientific Atlanta
Corporation
BIOGRAPHICAL INFORMATION
Set forth below is additional biographical information regarding each of
the persons listed in the tables above.
-41-
<PAGE> 42
TRUSTEES AND EXECUTIVE OFFICERS
STEVEN C. KLETJIAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER Steven Kletjian,
54, has been Chairman and Chief Executive Officer of the Company since 1969. He
has over 31 years of service with the Company. He has served as a Trustee since
the Company's reorganization as a business trust in 1988, and had served as a
director of the Company's corporate predecessor.
RICHARD J. KLETJIAN, VICE CHAIRMAN Richard Kletjian, 51, has been Vice
Chairman of the Company since 1993 and served as President for six years prior
to 1993. From 1992 to 1993, he was also general manager of the Mid-Atlantic
Division, and was general manager of the Commercial Division from 1990 to 1992.
He has over 28 years of service with the Company. He has served as a Trustee
since 1988, and had served as a director of the Company's corporate predecessor.
ROBERT P. KLETJIAN, VICE PRESIDENT AND VICE CHAIRMAN Robert Kletjian, 48,
has been Vice Chairman of the Company since 1993 and was Vice President and
general manager of the Corporate and Education Division from 1990 to 1993. Prior
to 1990, Mr. Kletjian managed the Company's Hartford operations. He has over 25
years of service with the Company. He has served as a Trustee since 1988, and
had served as a director of the Company's corporate predecessor.
SHARKAY KLETJIAN, TRUSTEE Ms. Kletjian, 78, co-founded the Company in 1949.
She served as a director of the Company's corporate predecessor, and has served
as a Trustee since 1988. Until 1997, she also served as Treasurer of the
Company.
ROBERT J. SCOBLE, EXECUTIVE VICE PRESIDENT OF OPERATIONS AND SALES Mr.
Scoble, 47, joined the Company in June 1996 as a result of the Ogden
Acquisition. During fiscal 1998 he headed the Company's Industrial Division and
was later promoted to Executive Vice President of Operations and Sales. Prior to
joining the Company, Mr. Scoble had served in Ogden's facilities services and
food service operations businesses since 1981 and was a Vice President of Ogden
from 1989 to 1996.
GEORGE A. KECHES, EXECUTIVE VICE PRESIDENT -- FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND TREASURER Mr. Keches, 41, joined the Company in 1991
having previously held management positions at The Westwood Group, Inc. and
Arthur Andersen & Co. Mr. Keches is a Certified Public Accountant, and serves as
the Company's principal financial officer.
RICHARD T. HEALEY, VICE PRESIDENT - CORPORATE DEVELOPMENT Mr. Healey, 56,
joined the Company as Vice President - Corporate Development in April, 1998,
having served in a similar capacity as a consultant to the Company since 1996.
From 1995 to 1996, Mr. Healey was providing merger and acquisition consulting
services. Prior to that he was Senior Vice President of I.T.E.C.O., a private
holding company.
JOHN C. FEITOR, SENIOR VICE PRESIDENT - OPERATIONS Mr. Feitor, 53, has
worked for the Company since 1970. He has held various positions including Area
Manager and Vice President of Operations. He was promoted to Senior Vice
President - Operations in 1996.
MICHAEL J. FINN, VICE PRESIDENT - HUMAN RESOURCES Mr. Finn, 55, joined the
Company in April, 1998. Prior to that, he held Human Resource leadership
positions with General Electric, most recently as Manager Human Resources for
General Electric Power Systems Global Services Operations. Prior to that, he was
Manager - Human Resources for General Electric Plastics-Americas.
-42-
<PAGE> 43
JAMES BIERE MARCEAU, EXECUTIVE VICE PRESIDENT -- SALES AND MARKETING Mr.
Marceau, 35, joined the Company in May, 1997. He is responsible for the
Company's overall marketing efforts. From 1993 to 1997, Mr. Marceau served as
Director of International Sales and Marketing of Ryder System, Inc., an
international transportation and logistics company. Prior to that, he was
Assistant Vice President of Atlantic Gulf Corporation.
ADVISORY BOARD
GREGORY ADAMIAN, J.D., PH.D. (HON.) Dr. Adamian, 72, currently serves as
Chancellor and President Emeritus of Bentley College in Waltham, Massachusetts,
having previously served as its President. Dr. Adamian also serves on the boards
of Hesser College, Liberty Mutual Life Insurance Company and the West End House,
an affiliate of the Boys Club of America.
ANTON BERNARD (TON) FUNKE KUPPER Mr. Funke Kupper, 69, is the past
President and Chief Executive Officer of HODON-GROUP (currently known as ABILIS
International), a facility services company operating in the Netherlands,
Belgium and France, where he worked from 1949 to 1989. Mr. Funke Kupper has also
served as a board member of the U.S.A. Building Service Contractors Association
from 1985 to 1989, President of the World Federation of Building Contractors
from 1980 to 1982 and President of the Dutch Association of Contractors from
1970 to 1983.
LEONARD LYNCH Mr. Lynch, 61, is a retired partner of Arthur Andersen LLP
where he served as the Director of the Audit Practice and head of the Audit and
Business Advisory Practice in the Boston and Southern California offices. He
currently serves as a consultant to the firm. Mr. Lynch has also served as a
past trustee of the New England Aquarium, member of the Advisory Board of the
Heritage Plantation and a member of Town Hall of Los Angeles.
MITCHELL REESE Mr. Reese, 39, is a Managing Director of The Carlyle Group,
where he is responsible for the operations of Carlyle Venture Partners, L.P., a
$250 million fund established to pursue venture-oriented investments. Prior to
joining The Carlyle Group, Mr. Reese was employed for seven years by Morgan
Keegan Inc., an investment banking firm, as President of its venture capital
division and co-head of its investment banking group. Prior thereto, Mr. Reese
was a Vice President in the mergers and acquisitions department of Alex. Brown &
Sons Incorporated.
HARVEY WAGNER Mr. Wagner, 57, is the Chief Financial Officer and Treasurer
of Scientific-Atlanta Corporation. From 1989 to 1994 Mr. Wagner was Vice
President, Finance and Chief Financial Officer at Computervision Corporation
(formerly Prime Computer). Mr. Wagner is a member of the Financial Executives
Institute, the Institute of Management Accountants and the American Electronics
Association. He sits on the President's Council of the University of Miami, the
Executive Advisory Board of the Wharton School of the University of Pennsylvania
and is a founding Board Member and Executive Vice President of The Wellness
Community-Atlanta.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information concerning
the compensation paid or accrued by the Company with respect to the Company's
Chief Executive Officer and certain other persons who served as executive
officers of the Company during the fiscal year ended June 28, 1998.
-43-
<PAGE> 44
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------------------------------------- ---------------------------
OTHER ANNUAL SHARES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) OPTIONS COMPENSATION
- --------------------------- --------------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steven C. Kletjian........... 1998 $634,766 $ -- $26,329 -- $ 88,435(2)
Chief Executive Officer 1997 615,122 -- 24,562 -- $104,299(2)
and Chairman
Richard J. Kletjian.......... 1998 373,080 -- 26,358 -- 52,422(2)
Vice Chairman 1997 346,696 -- 23,169 -- 57,234(2)
Robert P. Kletjian.......... 1998 358,609 -- 24,318 -- 41,040(2)
Vice President and Vice 1997 342,379 -- 22,277 -- 64,997(2)
Chairman
George A. Keches.......... 1998 206,827 70,000 1,445 -- 5,991(3)
Executive Vice President 1997 179,511 60,000 -- -- 4,162(3)
-- Finance and
Administration, Chief
Financial Officer and
Treasurer
Robert J. Scoble............ 1998 201,938 80,000 -- -- 5,792(3)
Executive Vice President 1997 195,729 60,000 -- -- 2,452(3)
of Operations and Sales
John P. McGillicuddy..... 1998 338,086 100,000 31,467 -- 9,625(3)
Chief Operating 1997 334,972 150,000 8,400 -- 5,688(3)
Officer(4)
</TABLE>
- ----------
(1) Includes automobile allowance paid by the Company to or on behalf of the
designated officer.
(2) Amount represents premiums paid by the Company for life insurance for the
designated officer.
(3) Amount represents matching contributions by the Company to the executive's
401(k) plan.
(4) Mr. McGillicuddy resigned from the position of Chief Operating Officer in
January, 1998 but continues to be employed by the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Under UNICCO's Declaration of Trust, UNICCO may issue an unlimited number
of shares of beneficial interest. The Trustees may determine the classes and
series of such shares and may designate the relative designations, preferences,
privileges, voting powers and restrictions applicable to the shares of each such
class and series. As of the date hereof, the outstanding securities of UNICCO
consist of an aggregate of 1,054 common shares of beneficial interest,
consisting of 1,000 voting common shares and 54 non-voting common shares.
-44-
<PAGE> 45
The following table sets forth the beneficial and record ownership of
UNICCO's voting and non-voting common shares of beneficial ownership, taken
together as a single class.
NUMBER OF PERCENTAGE OF PERCENTAGE OF
SHAREHOLDER SHAERES CLASS VOTING POWER
- ----------- --------- ------------- -------------
Steven C. Kletjian................... 510 48.4% 51.0%
Richard J. Kletjian.................. 245 23.2 24.5
Robert P. Kletjian................... 245 23.2 24.5
John C. Feitor....................... 27(1) 2.6 --
George A. Keches..................... 27(1) 2.6 --
----- ----- -----
1,054 100.0% 100.0%
===== ===== =====
- ----------
(1) Non-voting shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A component of the Company's operating expenses consists of insurance
premiums for workers' compensation and general liability insurance. In May,
1995, the Company's shareholders organized Ashmont Insurance Company, Limited, a
Bermuda corporation ("Ashmont"), as a captive insurance company. Premiums for
workers' compensation and general liability insurance are paid by the Company to
Liberty Mutual Insurance Company and one of its subsidiaries, the fronting
carrier ("Liberty"). After deducting pre-determined fees for administration,
claims processing and taxes, Liberty remits the net premiums to Ashmont pursuant
to a re-insurance agreement. Ashmont, as re-insurer, then reimburses Liberty for
insurance losses paid on a monthly basis. Net insurance premiums received by
Ashmont pursuant to this arrangement aggregated $7.0 million for fiscal 1998.
Workers' compensation insurance premiums are based on statutory rates within the
states that the Company operates, adjusted for the Company's claims experience;
accordingly, management believes that these insurance premiums are consistent
with the premiums that would be paid for comparable insurance coverage obtained
on an arm's-length basis.
In connection with the Ogden Acquisition in June, 1996, the Company
borrowed $3.0 million from the Company's shareholders. The notes bore interest
at 15%, which was payable in-kind until the notes were to mature in October
2001. The Company used a portion of the net proceeds of the Notes Offering to
repay such notes, including accrued interest. In addition, upon the repayment of
the Ogden Note, Steven C. Kletjian, the Company's Chief Executive Officer and
principal shareholder, was released from a limited recourse guarantee of the
Ogden Note and the pledge of Mr. Kletjian's shares of Ashmont which secured such
guarantee.
In September, 1997, the Company repaid a note payable to Sharkay Kletjian,
a Trustee of the Company, in the aggregate principal amount of approximately
$282,000. Interest on this note was payable at a rate of 20% per annum.
The Company holds notes receivable, including notes receivable from stock
sales, aggregating approximately $364,000 from five of its shareholders
consisting primarily of demand notes that bear interest at an average Applicable
Federal Rate (5.88% at June 28, 1998). Interest receivables related to those
notes were approximately $271,000 at June 28, 1998.
-45-
<PAGE> 46
On September 30, 1998, the Company entered into an agreement to lease
certain equipment from an entity owned by Steven C. Kletjian, the Company's
Chief Executive Officer. The monthly payments under this lease are approximately
$71,000. The lease expires in September 2002. The Company is responsible for all
costs and expenses of owning, operating and maintaining the equipment.
PART IV
ITEM. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements are listed in the Index to Financial Statements
contained in Item 8 of this Report.
2. Financial Statement Schedules, to the extent required, are listed
in the Index to Financial Statements contained in Item 8 of this
Report.
3. Exhibits are listed in subsection (c) below.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.1 Amended Declaration of Trust of UNICCO Service Company
*3.2 Certificate of Incorporation of UNICCO Finance Corp.
*3.3 By-laws of UNICCO Service Company
*3.4 By-laws of UNICCO Finance Corp.
*3.5 Articles of Organization of USC, Inc.
*3.6 Certificate of Incorporation of UNICCO Government Services, Inc.
*3.7 Certificate of Incorporation of UNICCO Security Services, Inc.
*3.8 By-laws of USC, Inc.
*3.9 By-laws of UNICCO Government Services, Inc.
*3.10 By-laws of UNICCO Security Services, Inc.
*4.1 Indenture dated October 17, 1997 among UNICCO Service Company,
UNICCO Finance Corp., the Guarantors party thereto and State
Street Bank and Trust Company, as Trustee
**4.2 First Supplemental Indenture and Guarantee
*4.3 Form of Notes (included in Exhibit 4.1)
-46-
<PAGE> 47
*4.4 Form of Guaranty (included in Exhibit 4.1)
*10.1 Amended and Restated Revolving Credit Agreement dated as of
October 17, 1997 by and among BankBoston, N.A. and other banks
party thereto, and UNICCO Service Company, USC, Inc., UNICCO
Finance Corp., UNICCO Security Services, Inc. and UNICCO
Government Services, Inc.
***10.2 Modification No. 1 dated as of March 31, 1998 to Amended and
Restated Revolving Credit Agreement
***10.3 Second Amendment dated as of June 30, 1998 to Amended and
Restated Revolving Credit Agreement
*10.4 Employment Agreement with John P. McGillicuddy dated June 25,
1996
*10.5 Share Purchase Agreement with George A. Keches dated June 20,
1996 and Amendment No. 1 to Share Purchase Agreement dated
February 2, 1998
*10.6 Share Purchase Agreement with John C. Feitor dated July 1, 1989
and Amendment No. 1 to Share Purchase Agreement dated
February 2, 1998
*10.7 Amendment to Employment Agreement with John P. McGillicuddy
dated January 13, 1998
*10.8 Non-Competition Agreement with John P. McGillicuddy dated
January 13, 1998
*10.9 Note Purchase Agreement dated June 28, 1996 by and among
Massachusetts Capital Resource Company and UNICCO Service
Company, USC, Inc., UNICCO Security Services, Inc. and UNICCO
Government Services, Inc., as amended by First Amendment to Note
Purchase Agreement dated October 17, 1997
*16.1 Letter re: change in certifying accountant
***21.1 Subsidiaries of the Registrant
***27.1 Financial Data Schedule
- -------------
* Incorporated by reference to the Company's Form S-4 Registration Statement
declared effective by the Commission on February 6, 1998 (File No.
333-42407).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998.
*** Filed herewith.
-47-
<PAGE> 48
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.
UNICCO SERVICE COMPANY
Dated: October 1, 1998 By: /s/ Steven C. Kletjian
----------------------------
Steven C. Kletjian
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Steven C. Kletjian Chief Executive Officer October 1, 1998
- --------------------------- and Chairman of the
Steven C. Kletjian Board of Trustees
/s/ George A. Keches Executive Vice President, October 1, 1998
- --------------------------- Chief Financial Officer
George A. Keches and Treasurer
/s/ Richard J. Kletjian Trustee October 1, 1998
- ---------------------------
Richard J. Kletjian
/s/ Robert P. Kletjian Trustee October 1, 1998
- ---------------------------
Robert P. Kletjian
/s/ Sharkay Kletjian Trustee October 1, 1998
- ---------------------------
Sharkay Kletjian
-48-
<PAGE> 1
EXHIBIT 10.2
Modification No. 1
Dated as of March 31, 1998
to
Amended and Restated Revolving Credit Agreement
Dated as of October 17, 1997
-----------------------------------------------
MODIFICATION NO. 1 ("Modification No. 1"), dated as of March 31, 1998,
to the Amended and Restated Revolving Credit Agreement, dated as of October 17,
1997 (as amended from time to time, the "Agreement"), by and among UNICCO
SERVICE COMPANY, USC, INC., UNICCO SECURITY SERVICES, INC., UNICCO GOVERNMENT
SERVICES, INC. AND UNICCO FINANCE CORP. (collectively, the "Borrowers"),
BANKBOSTON, N.A. and the other lending institutions which may become parties
thereto (individually, a "Bank" and, collectively, the "Banks"), and BANKBOSTON,
N.A., as agent for the Banks (the "Agent") and joined in for certain purposes by
UNICCO FACILITY SERVICES CANADA COMPANY ("U-Canada").
W I T N E S S E T H :
---------------------
WHEREAS, the Borrowers (including U-Canada), the Agent and the Banks
have entered into the Agreement pursuant to which the Banks have, on the terms
and subject to the conditions stated therein, made certain loans to the
Borrowers as contemplated thereby;
WHEREAS, the Borrowers, U-Canada, the Agent and the Banks desire to
amend the Agreement in certain respects to provide for (a) the purchase by
UNICCO Service Company ("Unicco") of all of the outstanding capital stock of
American Building Services, Inc. pursuant to and as contemplated by the
provisions of the Stock Purchase Agreement, dated as of February 28, 1998 (the
"AmBuild Acquisition") and (b) the organization of UNICCO Service of N.J., Inc.,
a New Jersey corporation, as a 90% owned subsidiary of Unicco (the "NJ
Incorporation");
WHEREAS, as a consequence of the consummation of the AmBuild
Acquisition, Unicco owns all of the outstanding capital stock of American
Building Services, Inc. and as a consequence of the NJ Incorporation, Unicco
owns all of the outstanding capital stock of UNICCO Service of N.J., Inc.; and
WHEREAS, the Borrowers have requested the Agent and the Banks to waive
certain provisions of the Agreement for the sole purpose of permitting the
consummation of the AmBuild Acquisition and the NJ Incorporation;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms used herein which are defined
in the Agreement shall have the same meanings herein as therein,
except as otherwise specifically provided herein or effected
hereby.
2. MODIFICATIONS OF THE AGREEMENT. Upon the terms and subject to the
conditions of this Modification No. 1, the Agreement is amended
in each of the following respects:
(a) The preamble to the Agreement is amended by inserting
immediately prior to the definition of the Borrowers, the
following: "American Building Services, Inc. ("AmBuild"), an Ohio
corporation having its chief executive office at 4 Copley Place,
Boston, Massachusetts, 02116, and UNICCO Service of N.J.
("U-NJ"), Inc., a New Jersey corporation having its chief
executive office at 4 Copley Place, Boston, Massachusetts 02116".
(b) The definition of "Borrower Affiliated Group" is
hereby amended to read in its entirety as follows: "Collectively,
(i) Unicco, (ii) USC, (iii) the USC Subsidiaries, (iv) U-Canada,
(v) U-Finance, (vi) American Building Services, Inc. and (vii)
UNICCO Service of N.J., Inc."
(c) The definition of "Security Agreements" is hereby
amended by deleting the word "and" in the fourth line of such
definition and inserting after the word "Agent" at the end
thereof, the following: " and (iii) the separate Security
Agreements, each dated as of March 31, 1998, and executed and
delivered by each of AmBuild and U-NJ to the Collateral Agent for
the ratable benefit of the Banks and the Agent."
(d) EXHIBIT A to the Agreement is amended to read in its
entirety as set forth on Annex 1 attached hereto.
3. MODIFICATION OF BANKBOSTON REVOLVING CREDIT NOTE. The BankBoston
Revolving Credit Note issued by the Borrowers in favor of
BankBoston is amended as set forth in the Allonge (the "Allonge
No. 1") attached hereto as Annex 2.
4. LOAN DOCUMENTS. The term "Loan Documents" shall, wherever used in
any of the Loan Documents, be deemed to also mean and include
this Modification No. 1, the Security Agreements entered into by
AmBuild and
<PAGE> 3
U-NJ (the "AmBuild and U-NJ Security Agreements") and the Allonge
No. 1 delivered in connection with this Modification No. 1.
5. CONDITIONS PRECEDENT. This Modification No. 1 shall become and be
effective as of the date hereof, but only if:
(v) an Allonge to the Revolving Credit Note issued in
favor of BankBoston in the form of Annex 2 hereto
shall be duly executed and delivered by the
Borrowers to BankBoston;
(w) a Certificate or Certificates of a Clerk/Secretary
and/or appropriate executive officer, as the case
may be, shall be executed and delivered to the
Agent and the Banks stating that: (A) the
execution and delivery of this Modification No. 1,
the AmBuild and U-NJ Security Agreements and the
Allonge No. 1 are each within the corporate
authority of each of the respective Borrowers
party thereto and that such execution and delivery
have been duly authorized by all necessary
corporate proceedings on the part of each of the
relevant Borrowers; (B) each of the
representations and warranties made by or on
behalf of the Borrowers in the Agreement, as
amended through this Modification No. 1, was true
and correct in all material respects when made and
is true and correct in all material respects on
and as of the date hereof with the same full force
and effect as if each of such representations and
warranties had been made by the Borrowers on the
date hereof and in this Modification No. 1, except
to the extent that such representations and
warranties relate solely to a prior date; (C) no
Event of Default exists on the date hereof, and no
condition exists on the date hereof which would,
with notice or the lapse of time, or both,
constitute an Event of Default; (D) as to AmBuild
and U-NJ, the Certificate sets forth the name of
(together with a specimen signature of) each
individual who shall be authorized to sign, in the
name of and on behalf of AmBuild and U-NJ,
respectively, each of the Loan Documents to which
it is or is to become a party; and (E) as to
AmBuild and U-NJ, all insurance that is required
by the Agreement to be in effect in respect of all
property and fixtures of AmBuild and U-NJ,
respectively, is in effect as of the date hereof;
(x) a Certificate of the Chief Financial Officer of
Unicco shall be executed and delivered to the
Agent and the Banks to the
<PAGE> 4
effect that the AmBuild Acquisition meets all of
the criteria to qualify as a "Permitted
Acquisition", except that the Borrowers did not
receive the prior written notice required by
clause (ii) of the definition of "Permitted
Acquisition" and except that the Agent did not
receive the computation required by clause (vii)
thereof until after the consummation of the
AmBuild Acquisition; and
(y) (a) each of AmBuild and U-NJ deliver to the Agent
and the Banks a copy, certified by a duly
authorized officer of each such Borrower to be
true and complete on the date hereof, of (i) its
charter as in effect on the date hereof and (ii)
its by-laws as in effect on the date hereof; (b)
each of AmBuild and U-NJ deliver to the Agent and
the Banks a copy, certified by a duly authorized
officer of each such Borrower to be true and
complete on the date hereof, of records of all
corporate action taken by such Borrower to
authorize its execution and delivery of this
Modification No. 1, its respective Security
Agreement and the Allonge No. 1 contemplated
hereby and its performance of all of its
agreements and obligations under each of the Loan
Documents; and (c) each of AmBuild and U-NJ
deliver to the Agent and the Banks all other
corporate, governmental or other proceedings in
connection with the transactions contemplated
hereunder (including the AmBuild Purchase and the
NJ Incorporation) as the Agent, on behalf of
itself and the Banks, shall have reasonably
requested; and
(z) this Modification No. 1 shall be signed by the
Borrowers, the Agent, the Banks and U-Canada.
6. MISCELLANEOUS. This Modification No. 1 may be executed and
delivered in any number of counterparts, each of which when
executed and delivered shall be deemed an original, but all of
which together shall constitute one instrument. In making proof
of this Modification No. 1, it shall not be necessary to produce
or account for more than one counterpart thereof signed by each
of the parties hereto. Except to the extent specifically amended
hereby, the provisions of the Agreement shall remain unmodified,
and the Agreement, as amended hereby, is hereby confirmed as
being in full force and effect, and the Borrowers and U-Canada
hereby ratify and confirm all of their joint and several
agreements and obligations contained therein.
(Signatures on next page)
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Modification
No. 1 as of the date first above written.
The Borrowers:
--------------
UNICCO SERVICE COMPANY
USC., INC.
UNICCO SECURITY SERVICES, INC.
UNICCO GOVERNMENT SERVICES, INC.
UNICCO FINANCE CORP.
AMERICAN BUILDING SERVICES, INC.
UNICCO SERVICE OF N.J., INC.
WITNESS By: /s/ George A. Keches
----------------------------------
In his capacity as Treasurer of
By: /s/ Scott Moy each of the above-named entities
-----------------------------
Title: Controller
The Agent:
----------
BANKBOSTON, N.A., as Agent,
Administrative Agent and Collateral
Agent
By: /s/ Henry L. Petrillo
----------------------------------
Title: Director
The Banks:
----------
BANKBOSTON, N.A.
By: /s/ Henry L. Petrillo
----------------------------------
Title: Director
The undersigned hereby acknowledges and agrees to each of the terms of the
foregoing Modification No. 1 applicable to it as a member of the Borrower
Affiliated Group or otherwise.
UNICCO FACILITY SERVICES CANADA COMPANY
By: /s/ George A. Keches
-----------------------------
Title: Authorized Signatory
<PAGE> 1
EXHIBIT 10.3
UNICCO SERVICE COMPANY
USC, INC.
UNICCO SECURITY SERVICES, INC.
UNICCO GOVERNMENT SERVICES, INC.
UNICCO FINANCE CORP.
AMERICAN BUILDING SERVICES, INC.
UNICCO SERVICE OF N.J., INC.
Four Copley Place
Boston, MA 02116
Dated as of: June 30, 1998
BankBoston, N.A.
Individually and as Agent
100 Federal Street
Boston, Massachusetts 02110
Fleet National Bank
One Federal Street
Boston, Massachusetts 02110
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Re: Second Amendment to Amended and Restated Revolving Credit Agreement
-------------------------------------------------------------------
Ladies and Gentlemen:
We refer to the Amended and Restated Revolving Credit Agreement, dated
as of October 17, 1997 (as amended, the "Agreement"), among Unicco Service
Company, USC, Inc., Unicco Security Services, Inc., Unicco Government Services,
Inc., Unicco Finance Corp., American Building Services, Inc. and Unicco Service
of N.J., Inc. (collectively, the "Borrowers"), the banking institutions referred
to therein as Banks (the "Banks"), and BankBoston, N.A. as Agent (the "Agent").
Upon the terms and subject to the conditions contained in the Agreement, you
agreed to make Revolving Loans to the Borrowers.
Terms used in this letter of agreement (the "Second Amendment") which
are not defined herein, but which are defined in the Agreement, shall have the
same respective meanings herein as therein.
<PAGE> 2
We have requested you to make certain amendments to the Agreement. You
have advised us that you are prepared and would be pleased to make the
amendments so requested by us on the condition that we join with you in this
Second Amendment.
Accordingly, in consideration of these premises, the promises, mutual
covenants and agreements contained in this Second Amendment, and fully intending
to be legally bound by this Second Amendment, we hereby agree with you as
follows:
ARTICLE I
AMENDMENTS TO AGREEMENT
Effective as of June 30, 1998 (the "Second Amendment Date"), the
Agreement is amended in each of the following respects:
(a) The terms "Loan Documents" and "Security Documents" shall,
wherever used in any of the Loan Documents or Security Documents, be deemed to
also mean and include this Second Amendment.
(b) The definition of "Majority Banks" contained in Section 1 of the
Agreement is hereby deleted in it its entirety and is replaced with the
following:
"MAJORITY BANKS. Those Banks whose aggregate Commitments
constitute sixty-six and two-thirds percent (66 2/3%) or more of
the aggregate Total Commitment in effect at the relevant time of
reference, or in the event that the Commitments have been
terminated, those Banks holding sixty-six and two-thirds percent
(66 2/3%) or more of the outstanding Loans at the relevant time
of reference"
(c) Schedule 1 of the Agreement is hereby deleted in its entirety and
is replaced with Annex 1 attached hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrowers hereby jointly and severally represent and warrant to you
as follows:
(a) REPRESENTATIONS IN AGREEMENT. Each of the representations and
warranties made by the Borrowers to you in the Agreement was true, correct and
complete when made and is true, correct and complete in all material respects on
and as of the date hereof
<PAGE> 3
with the same full force and effect as if each of such representations and
warranties had been made by the Borrowers on the date hereof and in this Second
Amendment (except to the extent such representations and warranties expressly
relate to an earlier date).
(b) NO DEFAULTS OR EVENTS OF DEFAULT. No Default or Event of Default
exists on the date of this Second Amendment (after giving effect to all of the
arrangements and transactions contemplated by this Second Amendment).
(c) BINDING EFFECT OF DOCUMENTS. This Second Amendment has been duly
executed and delivered to you by the Borrowers and is in full force and effect
as of the date hereof, and the agreements and obligations of the Borrowers
contained herein constitute the joint and several, and legal, valid and binding
obligations of the Borrowers enforceable against the Borrowers in accordance
with their respective terms.
ARTICLE III
PROVISIONS OF GENERAL APPLICATION
(a) NO OTHER CHANGES. Except to the extent specifically amended and
supplemented hereby, all of the terms, conditions and the provisions of the
Agreement and each of the Security Documents shall remain unmodified, and the
Agreement, the Notes entered into on the date hereof and each of the other
Security Documents, as amended and supplemented by this Second Amendment, are
confirmed as being in full force and effect.
(b) GOVERNING LAW. This Second Amendment and each of the new Notes
delivered herewith are intended to take effect as a sealed instrument and shall
be deemed to be a contract under the laws of the Commonwealth of Massachusetts.
This Second Amendment, each of the new Notes delivered herewith and the rights
and obligations of each of the parties hereto shall be governed by and
interpreted and determined in accordance with the laws of the Commonwealth of
Massachusetts.
(c) BINDING EFFECT; ASSIGNMENT. This Second Amendment and each of the
new Notes delivered herewith shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors in title and assigns.
(d) COUNTERPARTS. This Second Amendment and each of the new Notes
delivered herewith may be executed in any number of counterparts, each of which
when executed and delivered shall be deemed an original, but all of which
together shall constitute one instrument. In making proof of this Second
Amendment, it shall not be necessary to produce or account for more than one
counterpart thereof signed by each of the parties hereto.
<PAGE> 4
(e) CONFLICT WITH OTHER AGREEMENTS. If any of the terms of this Second
Amendment shall conflict in any respect with any of the terms of any of the
Agreement or any other Loan Document, the terms of this Second Amendment shall
be controlling.
(f) CONDITIONS PRECEDENT. This Second Amendment shall become and be
effective as of the Second Amendment Date, but only if the form of acceptance at
the end of this Second Amendment shall be signed by the Agent and the Banks
(including the Banks becoming parties to the Agreement through this Second
Amendment) and the Borrowers have duly executed and delivered this Second
Amendment and each of the new Notes delivered herewith.
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this Second Amendment and return such
counterpart to the undersigned, whereupon this Second Amendment, as so accepted
by you, shall become a binding agreement among you and the undersigned.
Very truly yours,
The Borrowers:
--------------
UNICCO SERVICE COMPANY
By: /s/ George A. Keches
-------------------------------
Title: Vice President
USC, INC.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
UNICCO SECURITY SERVICES, INC.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
UNICCO GOVERNMENT SERVICES, INC.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
<PAGE> 5
UNICCO FINANCE CORP.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
AMERICAN BUILDING SERVICES, INC.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
UNICCO SERVICE OF N.J., INC.
By: /s/ George A. Keches
-------------------------------
Title: Vice President
The foregoing Second Amendment is hereby accepted by the undersigned as
of June 30, 1998.
The Banks:
- ----------
BANKBOSTON, N.A.
By: /s/ Henry L. Petrillo
---------------------------------
Title: Director
FLEET NATIONAL BANK
By: /s/ Michael A. Palmer
---------------------------------
Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By: /s/ Mark Miller
---------------------------------
Title: Vice President
(signatures continued on next page)
<PAGE> 6
The Agent:
- ----------
BANKBOSTON, N.A.
By: /s/ Henry L. Petrillo
---------------------------------
Title: Director
<PAGE> 7
CONSENT OF GUARANTOR
Unicco Facility Services Canada Company (the "Guarantor") has guaranteed
the Obligations of the Borrowers under (and as defined in) the Agreement by
executing one or more Unlimited Guarantees, dated as of October 17, 1997 (the
"U-Canada Guaranty"). By executing this letter, the Guarantor hereby absolutely
and unconditionally reaffirms the U-Canada Guaranty and acknowledges and agrees
to the terms and conditions of this letter and the Agreement as amended hereby.
UNICCO FACILITY SERVICES CANADA COMPANY
By: /s/ George A. Keches
--------------------------------------
Title: Authorized Signatory
<PAGE> 8
Annex 1
-------
SCHEDULE 1
Commitment
Bank Percentage
---- ----------
BankBoston, N.A. 55.5556%
100 Federal Street
Boston, MA 02110
Fleet National Bank 33.3333%
One Federal Street
Boston, MA 02110
State Street Bank and Trust Company 11.1111%
225 Franklin Street
Boston, MA 02110
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF UNICCO SERVICE COMPANY
(1) UNICCO Finance Corp. (Delaware corporation)
(2) USC, Inc. (Massachusetts corporation)
(a) UNICCO Government Services, Inc. (f/k/a Ogden Allied Eastern
States Maintenance Corporation) (Delaware corporation)
(b) UNICCO Security Services, Inc. (f/k/a Ogden Allied Security
Services, Inc.) (Delaware corporation)
(3) American Building Services, Inc. (Ohio corporation)
(4) UNICCO Service of N.J., Inc. (New Jersey corporation)
(5) UNICCO Facility Services Canada Company (Nova Scotia unlimited liability
company)*
* UNICCO Facility Services Canada Company is owned jointly by UNICCO Service
Company (79%) and USC, Inc. (21%).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS
INCLUDED IN THIS REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> JUN-28-1998
<CASH> 9,151
<SECURITIES> 0
<RECEIVABLES> 78,160
<ALLOWANCES> 2,010
<INVENTORY> 0
<CURRENT-ASSETS> 87,695
<PP&E> 13,626
<DEPRECIATION> 9,692
<TOTAL-ASSETS> 150,789
<CURRENT-LIABILITIES> 31,954
<BONDS> 109,544
0
0
<COMMON> 378
<OTHER-SE> 8,512
<TOTAL-LIABILITY-AND-EQUITY> 150,789
<SALES> 0
<TOTAL-REVENUES> 491,014
<CGS> 0
<TOTAL-COSTS> 436,599
<OTHER-EXPENSES> 40,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,430
<INCOME-PRETAX> 2,950
<INCOME-TAX> 646
<INCOME-CONTINUING> 2,304
<DISCONTINUED> 1,070
<EXTRAORDINARY> (2,958)
<CHANGES> 0
<NET-INCOME> 416
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
