<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998 COMMISSION FILE
NUMBER: 333-42407
UNICCO SERVICE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2872501
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FOUR COPLEY PLACE, BOSTON, MASSACHUSETTS 02116
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 859 - 9100
(REGISTRANT'S TELEPHONE NUMBER)
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 [ ]
================================================================================
<PAGE> 2
UNICCO SERVICE COMPANY
FORM 10-Q
QUARTER ENDED SEPTEMBER 27, 1998
TABLE OF CONTENTS
PAGE
PART I. Financial Information
ITEM 1. Financial Statements:
Consolidated Statements of Income and Comprehensive
Income for the three months ended September 27, 1998
and September 28, 1997 (unaudited) 3
Consolidated Balance Sheets at September 27, 1998
(unaudited) and June 28, 1998 4
Consolidated Statements of Cash Flows for the three
months ended September 27, 1998 and September 28,
1997 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. Other Information 15
Signatures 16
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNICCO SERVICE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Service revenues ....................................... $122,791 $120,235
Cost of service revenues ............................... 108,311 107,420
-------- --------
Gross profit ........................................ 14,480 12,815
Selling, general and administrative expenses ........... 9,221 8,363
Amortization of intangible assets ...................... 1,082 1,042
-------- --------
Operating income .................................... 4,177 3,410
Interest income ........................................ 161 1
Interest expense ....................................... (2,985) (3,007)
-------- --------
Income from continuing operations before
income taxes ........................................ 1,353 404
Provision for income taxes ............................. 232 123
-------- --------
Income from continuing operations ...................... 1,121 281
Discontinued operations:
Income from discontinued operations,
Net of tax of $13 and $66 .............................. 727 297
-------- --------
Net income ............................................. $ 1,848 $ 578
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
UNICCO SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 27,
1998 JUNE 28,
(UNAUDITED) 1998
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 3,196 $ 9,151
Accounts receivable, less reserves of $2,215 and $2,010 ........... 52,869 48,789
Unbilled receivables .............................................. 28,593 27,361
Other current assets .............................................. 2,282 2,394
-------- --------
Total current assets .......................................... 86,940 87,695
-------- --------
Property and equipment, at cost ..................................... 15,673 13,626
Less - accumulated depreciation and amortization .................. 10,083 9,692
-------- --------
5,590 3,934
-------- --------
Notes receivable and accrued interest from officers ................. 475 475
Intangible assets, net of amortization .............................. 46,656 45,258
Other assets, net ................................................... 6,343 6,046
Net assets of discontinued operations ............................... 7,204 7,381
-------- --------
60,678 59,160
-------- --------
$153,208 $150,789
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft .................................................... $ 1,479 $ --
Accounts payable .................................................. 4,942 5,114
Accrued payroll and payroll-related expenses ...................... 15,595 17,835
Deferred income taxes ............................................. 2,628 2,628
Other accrued expenses ............................................ 8,208 6,377
-------- --------
Total current liabilities ..................................... 32,852 31,954
-------- --------
Long-term liabilities:
Long-term debt, less current portion .............................. 109,556 109,544
Other long-term liabilities ....................................... 298 401
-------- --------
Total long-term liabilities ................................... 109,854 109,945
-------- --------
Commitments and Contingencies
Shareholders' equity:
Common shares ..................................................... 378 378
Retained earnings ................................................. 10,870 9,222
Accumulated other comprehensive income ............................ (84) (48)
-------- --------
11,164 9,552
Less:
Treasury shares at cost ............................................. (502) (502)
Notes receivable from stock sales ................................... (160) (160)
-------- --------
Total shareholders' equity ..................................... 10,502 8,890
-------- --------
$153,208 $150,789
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
UNICCO SERVICE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows relating to operating activities:
Net income ....................................................... $ 1,848 $ 578
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Amortization of intangible assets ............................ 1,232 1,192
Amortization of debt issue costs and discount ................ 125 271
Depreciation and amortization ................................ 499 585
Loss on disposals ............................................ (4) 14
Changes in assets and liabilities:
Accounts receivable .......................................... (4,171) 2,660
Unbilled receivables ......................................... (1,238) (1,986)
Other current assets ......................................... 288 913
Other long-term assets ....................................... (190) 87
Cash overdraft ............................................... 1,479 (2,301)
Accounts payable ............................................. (161) (2,099)
Accrued expenses and other current liabilities ............... (449) 852
Other long-term liabilities .................................. (103) (602)
------- -------
Net cash provided by (used in) operating activities .......... (845) 164
------- -------
Cash flows relating to investing activities:
Purchases of property and equipment, net ......................... (495) (250)
Proceeds from sale of property and equipment ..................... 19 --
Payments received for notes receivable from officers ............. -- 30
Acquisition ...................................................... (4,436) --
------- -------
Net cash used in investing activities ........................ (4,912) (220)
------- -------
Cash flows relating to financing activities:
Proceeds from line of credit ..................................... -- 1,165
Payments of debt ................................................. -- (1,900)
Increase in debt issuance costs .................................. -- (552)
Distributions to shareholders .................................... (200) (200)
Payment on note payable to related party ......................... -- (282)
Payments received for notes receivable from stock sales .......... -- 3
------- -------
Net cash used in financing activities ........................ (200) (1,766)
------- -------
Effect of exchange rate changes on cash and cash equivalents ......... 2 --
------- -------
Net decrease in cash and cash equivalents ............................ (5,955) (1,822)
Cash and cash equivalents, beginning of period ....................... 9,151 3,928
------- -------
Cash and cash equivalents, end of period ............................. $ 3,196 $ 2,106
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
UNICCO SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(1) INTERIM FINANCIAL STATEMENTS
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. All significant intercompany transactions have been
eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments consisting only of normal recurring accruals
necessary for a fair presentation of the financial position of the Company and
its subsidiaries at September 27, 1998 and the results of their operations and
their cash flows for the three month periods ended September 27, 1998 and
September 28, 1997, respectively.
Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as allowed by Regulation S-X, Article
10. Results for any interim period are not necessarily indicative of results to
be anticipated for a full year. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended June 28, 1998 in
its Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
Certain information in the accompanying condensed consolidated statements of
operations for the three month period ended September 28, 1997 has been
reclassified to conform to the current three month presentation.
(2) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130), became effective for annual periods beginning after December
15, 1997 and establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. FAS 130
requires only additional reporting in the consolidated financial statements and
does not affect the Company's financial position or results of operations. The
components of comprehensive income for the three month period ended September
27, 1998 are set forth below:
(Unaudited)
In Thousands
------------
Net income ............................................... $1,848
Other comprehensive income-
foreign currency translation adjustment .................. (36)
------
Comprehensive income ..................................... $1,812
======
(3) CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
The Company's Senior Subordinated Notes due 2007 (the "Notes") are
guaranteed, fully, unconditionally and jointly and severally, by certain of
UNICCO's directly and indirectly wholly owned domestic subsidiaries. UNICCO's
wholly-owned Canadian subsidiary ("UFSCC") is not a guarantor of this debt.
Separate financial statements of the guarantor subsidiaries and of UNICCO
Finance Corp., a wholly-owned restricted-purpose subsidiary which is the
co-issuer of the Notes, are not presented because management has determined that
they would not be material to investors. The following presents consolidating
financial information 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.
6
<PAGE> 7
CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 27, 1998 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $103,894 $10,934 $7,963 $ -- $122,791
Cost of service revenues ...................... 92,001 9,232 7,078 -- 108,311
-------- ------- ------ ------- --------
Gross profit ................................ 11,893 1,702 885 -- 14,480
Selling, general and administrative
expenses .................................... 8,255 465 501 -- 9,221
Amortization of intangible assets ............. 909 127 46 -- 1,082
-------- ------- ------ ------- --------
Operating income ............................ 2,729 1,110 338 -- 4,177
Interest income ............................... 144 2 15 -- 161
Interest expense .............................. (2,868) (20) (97) -- (2,985)
-------- ------- ------ ------- --------
Income from continuing operations
before income taxes ......................... 5 1,092 256 -- 1,353
Provision for income taxes .................... -- 50 182 -- 232
-------- ------- ------ ------- --------
Income from continuing operations
before equity in net earnings of
subsidiaries ................................ 5 1,042 74 -- 1,121
Equity in net earnings of subsidiaries ........ 1,843 15 -- (1,858) --
-------- ------- ------ ------- --------
Income from continuing operations ............. 1,848 1,057 74 (1,858) 1,121
Discontinued operations :
Income from discontinued operations,
net of tax of $13 ........................... -- 727 -- -- 727
-------- ------- ------ ------- --------
Net income (loss) ............................. $ 1,848 $ 1,784 $ 74 $(1,858) $ 1,848
======== ======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 1997 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $ 102,949 $9,519 $7,767 $ -- $120,235
Cost of service revenues ...................... 92,303 8,199 6,918 -- 107,420
--------- ------ ------ ---- --------
Gross profit ................................ 10,646 1,320 849 -- 12,815
Selling, general and administrative
expenses .................................... 7,476 302 585 -- 8,363
Amortization of intangible assets ............. 912 97 33 -- 1,042
--------- ------ ------ ---- --------
Operating income ............................ 2,258 921 231 -- 3,410
Interest income ............................... 1 -- -- -- 1
Interest expense .............................. (2,583) (311) (113) -- (3,007)
--------- ------ ------ ---- --------
Income from continuing operations
before income Taxes ......................... (324) 610 118 -- 404
Provision for income taxes .................... (42) 48 117 -- 123
--------- ------ ------ ---- --------
Income from continuing operations
before equity in net earnings of
subsidiaries ................................ (282) 562 1 -- 281
Equity in net earnings of subsidiaries ........ 1 -- -- (1) --
--------- ------ ------ ---- --------
Income from continuing operations ............. (281) 562 1 (1) 281
Discontinued operations :
Income from discontinued operations,
net of tax of $66 ........................... -- 297 -- -- 297
--------- ------ ------ ---- --------
Net income (loss) ............................. $ (281) $ 859 $ 1 $ (1) $ 578
========= ====== ====== ==== ========
</TABLE>
7
<PAGE> 8
CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ 2,340 $ 46 $ 810 $ -- $ 3,196
Accounts receivable, less reserve of
$2,215 ........................................ 36,227 12,986 3,656 -- 52,869
Unbilled receivables .......................... 21,485 6,983 125 -- 28,593
Intercompany receivable (payable) ............. 13,625 (7,507) (6,118) -- --
Other current assets .......................... 1,680 318 284 -- 2,282
-------- ------- ------- -------- --------
Total current assets ................. 75,357 12,826 (1,243) -- 86,940
-------- ------- ------- -------- --------
Property and equipment, at cost ............... 12,237 1,133 2,303 -- 15,673
Less -accumulated depreciation and
amortization .................................. 8,962 856 265 -- 10,083
-------- ------- ------- -------- --------
Net property and equipment ................ 3,275 277 2,038 -- 5,590
-------- ------- ------- -------- --------
Due from (to) affiliates ...................... 14,509 (620) -- (13,889) --
Investment in subsidiary ...................... 8,423 591 -- (9,014) --
Notes receivable and accrued interest
from officers ................................. 475 -- -- -- 475
Intangible assets, net of amortization ........ 36,319 6,110 4,227 -- 46,656
Other assets, net ............................. 6,009 89 245 -- 6,343
Net assets of discontinued operations ......... -- 7,204 -- -- 7,204
-------- ------- ------- -------- --------
65,735 13,374 4,472 (23,903) 60,678
-------- ------- ------- -------- --------
$144,367 $26,477 $ 5,267 $(22,903) $153,208
======== ======= ======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft ................................ $ 340 $ 1,139 $ -- $ -- $ 1,479
Accounts payable .............................. 3,018 972 952 -- 4,942
Accrued payroll and payroll-related
expenses ...................................... 11,494 2,755 1,346 -- 15,595
Deferred income taxes ......................... 1,771 857 -- -- 2,628
Other accrued expenses ........................ 7,517 454 237 -- 8,208
-------- ------- ------- -------- --------
Total current liabilities ............ 24,140 6,177 2,535 -- 32,852
-------- ------- ------- -------- --------
Long-term liabilities:
Long-term debt, less current portion .......... 109,556 -- -- -- 109,556
Other long-term liabilities ................... 298 -- -- -- 298
-------- ------- ------- -------- --------
Total long-term liabilities .......... 109,854 -- -- -- 109,854
-------- ------- ------- -------- --------
Commitments and Contingencies
Shareholders' equity .......................... 11,035 20,300 2,732 (22,903) 11,164
Less treasury shares at cost .................. (502) -- -- -- (502)
Less notes receivable from stock sales ........ (160) -- -- -- (160)
-------- ------- ------- -------- --------
Total shareholders' equity ........... 10,373 20,300 2,732 (22,903) 10,502
-------- ------- ------- -------- --------
$143,367 $26,477 $ 5,267 $(22,903) $153,208
======== ======= ======= ======== ========
</TABLE>
8
<PAGE> 9
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
$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 ............................... 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:
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>
9
<PAGE> 10
CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 27, 1998 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ............................... $ 1,848 $ 1,784 $ 74 (1,858) $ 1,848
Net earnings from equity investment ............. (1,843) (15) -- 1,858 --
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of intangible assets ............ 909 277 46 -- 1,232
Amortization of debt issue costs
and discount ............................... 125 -- -- -- 125
Depreciation and amortization ................ 413 66 20 -- 499
Loss on disposals ............................ (4) -- -- -- (4)
Extraordinary loss ........................... -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable ........................ (2,708) (973) (490) -- (4,171)
Unbilled receivables ....................... (1,307) 20 49 -- (1,238)
Intercompany receivable (payable) .......... (2,788) (1,427) 4,254 (39) --
Other current assets ....................... 315 (41) 14 -- 288
Other long-term assets ..................... (234) 47 (3) -- (190)
Cash overdraft ............................. 340 (106) -- 1,245 1,479
Accounts payable ........................... (435) (262) 536 -- (161)
Accrued expenses and other current
liabilities .............................. (601) 376 (224) -- (449)
Other long-term liabilities ................ (103) -- -- -- (103)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities ....................... (6,073) (254) 4,276 1,206 (845)
------- ------- ------- ------- -------
Cash relating to investing activities:
Due to/from affiliates .......................... -- -- -- -- --
Acquisition ..................................... -- -- (4,436) -- (4,436)
Purchase of property and equipment, net ......... (495) -- -- -- (495)
Proceeds from sale of property and
equipment .................................... 19 -- -- -- 19
------- ------- ------- ------- -------
Net cash used in
investing activities ....................... (476) -- (4,436) -- (4,912)
------- ------- ------- ------- -------
Cash flows relating to financing activities:
Proceeds (repayments) of line of credit ......... -- -- -- -- --
Proceeds from debt .............................. -- -- -- -- --
Payments of debt ................................ -- -- -- -- --
Increase in debt issuance costs ................. -- -- -- -- --
Distribution to shareholders .................... (200) -- -- -- (200)
Payment on note payable to related party ........ -- -- -- -- --
Payments received for notes receivable
from stock sales ............................... -- -- -- -- --
------- ------- ------- ------- -------
Net cash used in financing activities ........ (200) -- -- -- (200)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents ................................ -- -- (37) 39 2
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents ..................................... (6,749) (254) (197) 1,245 (5,955)
Cash and cash equivalents, beginning
of period ....................................... 9,089 300 1,007 (1,245) 9,151
------- ------- ------- ------- -------
Cash and cash equivalents, end of period ........... $ 2,340 $ 46 $ 810 $ -- $ 3,196
======= ======= ======= ======= =======
</TABLE>
10
<PAGE> 11
CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 28, 1997 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ............................... $ (281) $ 859 $ 1 $ (1) $ 578
Net earnings from equity investment ............. (1) -- -- 1 --
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of intangible assets ............ 910 247 35 -- 1,192
Amortization of debt issue costs
and discount ............................... 271 -- -- -- 271
Depreciation and amortization ................ 517 43 25 -- 585
Loss on disposals ............................ (2) 16 -- -- 14
Changes in assets and liabilities:
Accounts receivable ........................ 1,758 1,421 (519) -- 2,660
Unbilled receivables ....................... (1,730) (256) -- -- (1,986)
Prepaid insurance .......................... -- -- -- -- --
Intercompany receivable (payable) .......... 3,539 (3,517) (22) -- --
Other current assets ....................... 1,014 4 (105) -- 913
Other long-term assets ..................... 102 (16) 1 -- 87
Cash overdraft ............................. (3,470) 847 322 -- (2,301)
Accounts payable ........................... (1,401) (276) (422) -- (2,099)
Accrued expenses and other current
liabilities .............................. 1,373 10 (531) -- 852
Other long-term liabilities ................ (602) -- -- -- (602)
------- ------- ------- ---- -------
Net cash provided by (used in)
operating activities ....................... 1,997 (618) (1,215) -- 164
------- ------- ------- ---- -------
Cash relating to investing activities:
Due to/from affiliates .......................... (11) 11 -- -- --
Purchases of property and equipment, net ........ (231) (8) (11) -- (250)
Payments received for notes receivable
from officers ................................ 30 -- -- -- 30
------- ------- ------- ---- -------
Net cash provided by (used in)
investing activities ....................... (212) 3 (11) -- (220)
------- ------- ------- ---- -------
Cash flows relating to financing activities:
Proceeds (repayments) of line of credit ......... 1,165 -- -- -- 1,165
Proceeds from debt .............................. -- -- -- -- --
Payments of debt ................................ (1,900) -- -- -- (1,900)
Increase in debt issuance costs ................. (552) -- -- -- (552)
Distribution to shareholders .................... (200) -- -- -- (200)
Payment on note payable to related party ........ (282) -- -- -- (282)
Payments received for notes receivable
from stock sales ............................... 3 -- -- -- 3
------- ------- ------- ---- -------
Net cash used in financing activities ........ (1,766) -- -- -- (1,766)
------- ------- ------- ---- -------
Effect of exchange rate changes on cash and
cash equivalents ................................ -- -- -- -- --
------- ------- ------- ---- -------
Net increase (decrease) in cash and cash
equivalents ..................................... 19 (615) (1,226) -- (1,822)
Cash and cash equivalents, beginning of
period .......................................... 1,998 621 1,309 -- 3,928
------- ------- ------- ---- -------
Cash and cash equivalents, end of period ........... $ 2,017 $ 6 $ 83 $ -- $ 2,106
======= ======= ======= ==== =======
</TABLE>
11
<PAGE> 12
(3) LITIGATION
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes that, in the aggregate, all litigation
currently pending or threatened will not have a material adverse effect on the
Company's financial position or results of operations.
(4) ACQUISITION
Effective September 1, 1998, the Company acquired certain assets of Empire
Maintenance Industries, Inc., a Canadian janitorial services company ("Empire"),
for $4.4 million in cash. The acquisition was accounted for as a purchase and
the purchase price has been allocated on a preliminary basis in the September
27, 1998 consolidated balance sheet. The operations of Empire for the period
September 1, 1998 through September 27, 1998 are not included in the
accompanying financial statements as the information was not available and is
not material to the consolidated results of operations.
(5) SALE OF DISCONTINUED OPERATIONS - SUBSEQUENT EVENT
On October 26, 1998, the Company entered into a Stock Purchase Agreement
whereby the Company will sell its subsidiary, UNICCO Security Services,
Inc., for $12 million in cash. The consummation of the transaction is
subject to certain customary conditions specified in the Agreement. The
operating results of the Company's Security subsidiary are reported in
discontinued operations in the accompanying financial statements. The
security business provided $805,000 in cash from its operating activities
during the three month period ended September 27, 1998, which was used to
reduce intercompany debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28,
1997
REVENUES Revenues for the first quarter of fiscal 1999, which ended
September 27, 1998, were $122.8 million compared to $120.2 million for the first
quarter of fiscal 1998, which ended September 28, 1997, an increase of $2.6
million or 2.2%. This increase was primarily attributable to revenue increases
in the Company's Midwest Region ($1.7 million) as a result of the February, 1998
acquisition of American Building Services, Inc. Revenues in the Company's
Southwest Region decreased $1.1 million due to the loss of several contracts.
Management believes that the loss of such contracts is not material due to the
low margins associated with this lost business. Other regions accounted for an
aggregate increase of $2.0 million of revenue. Such increases resulted from
services performed under new contracts and the impact of a full quarter's
revenue from contracts acquired in the prior year. In addition, the Company's
Canadian operations increased its revenues by $1.3 million (Canadian dollars);
however, the weakening of the Canadian dollar from the prior year comparable
quarter substantially reduced the impact of this increase, resulting in an
increase of only $0.2 million (U.S. dollars).
COST OF REVENUES Cost of revenues for the first quarter of fiscal 1999 were
$108.3 million, or 88.2% of revenues, compared to $107.5 million, or 89.4% of
revenues, for the first quarter of fiscal 1998. This improvement was primarily
due to a decrease in direct labor as a percentage of revenues. Direct labor as a
percentage of revenues was 57.5% in the 1998 period, compared to 58.0 % in the
comparable quarter in fiscal 1997. This improvement was primarily attributable
to efficiencies in the management of labor costs. Insurance costs increased in
the first quarter of fiscal 1999 due to the payment of additional administrative
costs of $0.5 million representing additional workers' compensation
insurance costs relating to payroll audits and state assessments by the
Company's insurance carrier.
GROSS PROFIT As a result of the foregoing, gross profit for the first
quarter of fiscal 1999 was $14.5 million, or 11.8% of revenues, compared to
$12.8 million, or 10.7% of revenues, for the comparable period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the first quarter of fiscal 1999 were $9.2 million,
or 7.5% of revenues, compared to $8.4 million, or 7.0% of revenues, for the
first quarter of fiscal 1998. The increase of $ 0.8 million is primarily due to
increases in salaries and wages and payroll-related costs of $ 0.4 million as a
result of the impact of annual salary adjustments effective July 1, 1998.
Additionally, office and occupancy costs increased $ 0.2 million between the
comparable periods, primarily as a result of increased computer lease costs,
depreciation expense and temporary help.
12
<PAGE> 13
Professional fees, primarily consisting of external programming related costs,
decreased $ 0.2 million between the comparable periods as a result of the
completion of the systems integration of the Ogden business acquired in June
1996. Recruiting expenses, including relocation expense, increased $0.2 million,
primarily due to the relocation expenses of certain management personnel to the
corporate headquarters as well as regional offices. Travel and entertainment
expenses also increased $0.1 million as a result of the impact of new business
opportunities and servicing a larger, geographically disbursed customer base.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $1.0 million in
the first quarter of fiscal 1999 and fiscal 1998.
INCOME FROM OPERATIONS As a result of the foregoing, income from operations
for the first quarter of fiscal 1999 was $4.2 million, or 3.4% of revenues,
compared to $3.4 million, or 2.8% of revenues for the first quarter of fiscal
1998.
EBITDA As a result of the foregoing, EBITDA for the first quarter of fiscal 1999
was $5.7 million, or 4.6 % of revenues, compared to $ 5.0 million, or 4.2 % of
revenues, for the first quarter of fiscal 1998. EBITDA excludes the earnings of
the Company's discontinued security operations, which were $ 0.9 million and $
0.5 million for the first quarter of fiscal 1999 and 1998, respectively. EBITDA
is defined as earnings before provision for income taxes, interest expense,
interest income and depreciation and amortization. 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.
INTEREST EXPENSE Interest expense for the first quarter of fiscal 1999 was
$2.9 million, or 2.4% of revenues, compared to $3.0 million, or 2.5% of
revenues, for the first quarter of fiscal 1998.
INCOME TAXES Provision for income taxes for the first quarter of fiscal
1999 was $0.2 million, or 17% of income before provision for income taxes,
compared to $0.1 million, or 30% of income before provision for income taxes,
for the first quarter of fiscal 1998. The higher effective tax rate in the first
quarter of fiscal 1998 resulted from the significant growth in the working
capital of the Ogden operations acquired at the end of fiscal 1996.
NET INCOME (LOSS) As a result of the foregoing, net income for the first
quarter of fiscal 1999 was $1.8 million, or 1.5% of revenues, compared to net
income of $0.6 million, or 0.5% of revenues, for the first quarter of fiscal
1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 27, 1998, the Company's cash balance
decreased by $6.0 million, including $0.8 million of net cash used in operating
activities and $4.9 million used for investing activities. Investing activities
included cash of $4.4 million for the Empire acquisition in September 1998. Net
cash used in financing activities during the period was $0.2 million.
For the three months ended September 28, 1997, net cash used in financing
activities was $1.8 million, which primarily represented borrowings under the
Company's line of credit.
Capital expenditures were $0.5 million and $0.3 million, respectively, for
the three month periods ended September 1998 and l997. 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
during the next three quarters of fiscal 1999.
The Company is party to an amended revolving credit facility (the "Credit
Facility") under which the Company may borrow up to $45.0 million for working
capital and general corporate purposes, subject to certain conditions. There
were no borrowings under the Credit Facility as of September 27, 1998. The
Credit Facility, the Indenture governing the Company's Senior Subordinated Notes
due 2007 and the terms of the Company's other subordinated indebtedness include
certain financial and operating covenants which, among other things, restrict
the 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
13
<PAGE> 14
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 as they now exist.
YEAR 2000 COMPLIANCE
Status of Year 2000 Preparations. The Company's information 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 continuing its review of its potential Year 2000
exposure from these systems.
Cost of Year 2000 Remediation. The Company's Year 2000 remediation costs
expended in fiscal 1998 and the three month period ended September 27, 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 and $195,000,
respectively. The Company's most recent assessment of its additional
expenditures related to Year 2000 remediation of its primary information
technology systems was increased to approximately $680,000 due to an increase in
required programming and training resources. 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.
GENERAL
Certain statements contained in this report 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 involve 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, assimilation of past or future
acquisitions, general economic conditions and the acts of third parties, as well
as other factors which are described, from time to time, in the Company's
Registration Statement on Form S-4 (File No. 333-42407), and periodic reports
filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings
other than those 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 position or results of operations (see Note 3 to the
accompanying Consolidated Financial Statements).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
See the information regarding acquisition and disposition activity in
Notes 4 and 5 to the accompanying Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNICCO SERVICE COMPANY
--------------------------------------------------
Registrant
November 12, 1998 By: /s/ Steven C. Kletjian
----------------------------------------------
Steven C. Kletjian, President,
Chief Executive Officer
(Principal Executive Officer)
November 12, 1998 By: /s/ George A. Keches
----------------------------------------------
George A. Keches, Vice President -
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS REPORT, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-29-1999
<PERIOD-START> SEP-27-1999
<PERIOD-END> SEP-27-1998
<CASH> 3,196
<SECURITIES> 0
<RECEIVABLES> 83,677
<ALLOWANCES> 2,215
<INVENTORY> 0
<CURRENT-ASSETS> 86,940
<PP&E> 15,673
<DEPRECIATION> 10,083
<TOTAL-ASSETS> 153,208
<CURRENT-LIABILITIES> 32,852
<BONDS> 109,556
0
0
<COMMON> 378
<OTHER-SE> 10,124
<TOTAL-LIABILITY-AND-EQUITY> 153,207
<SALES> 122,791
<TOTAL-REVENUES> 122,791
<CGS> 108,311
<TOTAL-COSTS> 108,311
<OTHER-EXPENSES> 10,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,824
<INCOME-PRETAX> 1,353
<INCOME-TAX> 232
<INCOME-CONTINUING> 1,121
<DISCONTINUED> 727
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,848
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE COMPANY'S EQUITY IS NOT PUBLICLY TRADED.
</FN>
</TABLE>
