<PAGE> 1
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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 MARCH 29, 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 (I.R.S. 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
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<PAGE> 2
UNICCO SERVICE COMPANY
FORM 10-Q
QUARTER ENDED MARCH 29, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. Financial Information
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Operations for the three months and nine months ended 3
March 29, 1998 and March 30, 1997 (unaudited)
Condensed Consolidated Balance Sheets at March 29, 1998 (unaudited) and June 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the nine months ended March 29, 1998 5
and March 30, 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. Other Information 15
Signatures 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNICCO SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service revenues .............................................. $139,347 $134,321 $411,479 $397,892
Cost of service revenues ...................................... 124,168 121,443 368,471 358,808
-------- -------- -------- --------
Gross profit ............................................... 15,179 12,878 43,008 39,084
Selling, general and administrative expenses .................. 9,262 8,263 26,871 22,844
Amortization of intangible assets ............................. 1,206 1,190 3,588 3,571
-------- -------- -------- --------
Income from operations ..................................... 4,711 3,425 12,549 12,669
Interest income ............................................... 56 2 62 4
Interest expense .............................................. (2,869) (3,082) (8,664) (8,480)
-------- -------- -------- --------
Income before provision for income taxes and
extraordinary loss ....................................... 1,898 345 3,947 4,193
Provision for income taxes .................................... 282 228 1,748 2,510
-------- -------- -------- --------
Income before extraordinary loss .............................. 1,616 117 2,199 1,683
Extraordinary loss, net of tax benefit of $66 ................. -- -- (2,958) --
-------- -------- -------- --------
Net income (loss) ............................................. $ 1,616 $ 117 $ (759) $ 1,683
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
UNICCO SERVICE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 29,
1998 JUNE 29,
(UNAUDITED) 1997
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 3,950 $ 3,928
Accounts receivable, less reserves of $1,976 and $1,561 .......... 56,928 61,890
Unbilled receivables ............................................. 28,554 27,036
Prepaid insurance ................................................ 206 248
Other current assets ............................................. 2,382 3,101
-------- --------
Total current assets ......................................... 92,020 96,203
-------- --------
Property and equipment, at cost .................................... 13,831 11,693
Less -- accumulated depreciation and amortization ................ (9,225) (7,046)
-------- --------
4,606 4,647
-------- --------
Notes receivable and accrued interest from officers ................ 487 716
Intangible assets, net of amortization ............................. 53,659 55,437
Other assets, net .................................................. 6,346 4,084
-------- --------
$157,118 $161,087
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Cash overdraft ................................................... $ 509 $ 11,316
Current portion of long-term debt ................................ -- 7,000
Accounts payable ................................................. 5,998 7,550
Accrued payroll and payroll-related expenses ..................... 20,257 18,514
Deferred income taxes ............................................ 3,928 2,823
Other accrued expenses ........................................... 9,040 3,950
-------- --------
Total current liabilities .................................... 39,732 51,153
-------- --------
Long-term liabilities:
Line of credit ................................................... -- 50,587
Long-term debt, less current portion ............................. 109,531 49,278
Note payable to officer .......................................... -- 282
Other long-term liabilities ...................................... 201 951
-------- --------
Total long-term liabilities .................................. 109,732 101,098
-------- --------
Commitments and Contingencies
Shareholders' equity:
Common shares .................................................... 378 378
Retained earnings ................................................ 8,047 9,202
Cumulative translation adjustment ................................ (34) --
-------- --------
8,391 9,580
Less:
Treasury shares at cost ............................................ (502) (502)
Notes receivable from stock sales .................................. (235) (242)
-------- --------
Total shareholders' equity .................................... 7,654 8,836
-------- --------
$157,118 $161,087
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
UNICCO SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
MARCH 29, MARCH 30,
1998 1997
--------------------------
<S> <C> <C>
Cash flows relating to operating activities:
Net income (loss) .................................................... $ (759) $ 1,683
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of intangible assets ................................ 3,588 3,571
Amortization of debt issue costs and discount .................... 531 815
Depreciation and amortization .................................... 1,719 1,718
Loss on disposals ................................................ (46) 22
Extraordinary loss ............................................... 3,024 --
Deferred income taxes ............................................ 740 1,671
Changes in assets and liabilities:
Accounts receivable .............................................. 5,613 (46,237)
Unbilled receivables ............................................. (1,521) (23,091)
Prepaid insurance ................................................ 67 2,026
Other current assets ............................................. 889 (1,263)
Other long-term assets ........................................... 138 (783)
Cash overdraft ................................................... (10,807) 2,920
Accounts payable ................................................. (1,580) 3,457
Accrued expenses and other current liabilities ................... 6,223 16,376
Other long-term liabilities ...................................... (750) (521)
-------- --------
Net cash provided by (used in) operating activities .............. 7,069 (37,636)
-------- --------
Cash flows relating to investing activities:
Purchases of property and equipment, net ............................. (1,399) (1,757)
Payments received for notes receivable from officers ................. 229 65
Acquisition, net of acquired cash of $380 ............................ (2,220) --
-------- --------
Net cash used in investing activities ............................ (3,390) (1,692)
-------- --------
Cash flows relating to financing activities:
Proceeds (repayments) from line of credit ............................ (50,587) 38,716
Proceeds from debt ................................................... 104,507 3,000
Payments of debt ..................................................... (52,400) (1,800)
Increase in debt issuance costs ...................................... (4,511) --
Distributions to shareholders ........................................ (400) (600)
Payment on note payable to related party ............................. (282) --
Payments received for notes receivable from stock sales............... 7 --
-------- --------
Net cash provided by (used in) financing activities .............. (3,666) 39,316
-------- --------
Effect of exchange rate changes on cash and cash equivalents ............. 9 --
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... 22 (12)
Cash and cash equivalents, beginning of period ........................... 3,928 157
-------- --------
Cash and cash equivalents, end of period ................................. $ 3,950 $ 145
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
UNICCO SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 1998
(1) INTERIM FINANCIAL STATEMENTS
These condensed 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 2). All significant intercompany transactions have
been eliminated.
In the opinion of management, the accompanying unaudited condensed 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 March 29, 1998 and the results of their
operations for the three and nine month periods ended March 29, 1998 and March
30, 1997, respectively and their cash flows for the nine month periods ended
March 29, 1998 and March 30, 1997.
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. The accompanying, unaudited condensed consolidated financial statements
should be read in conjunction with the Company's combined financial statements
for the year ended June 29, 1997 in its Registration Statement on Form S-4 as
filed with the Securities and Exchange Commission and declared effective on
February 6, 1998.
Certain information in the accompanying 1997 condensed consolidated statements
of operations has been reclassified to conform to the 1998 presentation.
(2) REFINANCING
On October 17, 1997, UNICCO and certain of its affiliates consummated a $105
million Senior Subordinated Note offering (the "Notes") and entered into a $45
million Amended Credit Facility. The net proceeds from the Note offering and the
Amended Facility were used to repay approximately $84.8 million of indebtedness
under the Group's existing credit facilities and $19.7 million of certain other
indebtedness, fees and expenses incurred in connection with such financing. The
Notes mature on October 15, 2007. The Notes are not redeemable prior to October
15, 2002. Thereafter, the Notes are 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, commencing on April 15,
1998. The payment of principal and interest on the Notes is subordinated in
right to the prior payment of all Senior Debt, as defined in the Indenture under
which the Notes were issued.
Upon the occurrence of a change in control, as defined, the issuers are
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. The covenants under
the Notes and the Amended Facility include limitations on certain sales of
assets, certain payments of dividends and incurrence of debt, certain mergers
and acquisitions and certain transactions with affiliates. With respect to the
Amended Facility, the Company is required to maintain certain financial ratios
which become more stringent over the term of the facility.
During the second quarter of fiscal 1998, the Company recorded an
extraordinary loss of $3.0 million, net of state tax benefit related to the
refinancing discussed above. 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
indebtedness on the Company's balance sheet at the settlement date (October 17,
1997) was $10.0 million.
In connection with the Note offering, the shareholders of UNICCO contributed
their ownership interests in USC, Inc. to UNICCO. As a result, all of the
operations of the Group are conducted through UNICCO and its wholly-owned
subsidiaries. This transaction
6
<PAGE> 7
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. Further,
in connection with the contribution of ownership interests, USC, Inc. and its
subsidiaries elected to change to the cash basis of accounting for income tax
purposes, consistent with the basis followed by UNICCO. In connection with such
change, the Company recorded deferred tax assets and liabilities of $1.3 million
and $1.3 million, respectively. In addition, based upon a review of all
available evidence, management recorded a valuation allowance associated with
the deferred tax assets of $.9 million.
(3) CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
The Notes are guaranteed, fully, unconditionally and jointly and severally, by
each 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. However, condensed consolidating
financial information as of June 29, 1997 and March 29, 1998 and the three and
nine month periods ended March 29, 1998 are presented. The following presents
condensed combining 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.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 29, 1998 (UNAUDITED)
--------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO AFFILIATES UFSCC ELIMINATIONS TOTAL
---------------------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $104,659 $26,270 $8,418 $ -- $139,347
Cost of service revenues ...................... 92,928 23,625 7,615 -- 124,168
-------- ------- ------ ----- --------
Gross profit ................................ 11,731 2,645 803 -- 15,179
Selling, general and administrative expenses .. 8,046 717 499 -- 9,262
Amortization of intangible assets ............. 916 266 24 -- 1,206
-------- ------- ------ ----- --------
Income from operations ...................... 2,769 1,662 280 -- 4,711
Interest income ............................... 51 1 4 -- 56
Interest expense .............................. (2,054) (707) (108) -- (2,869)
-------- ------- ------ ----- --------
Income before provision for income taxes ...... 766 956 176 -- 1,898
Provision for income taxes .................... 54 85 143 -- 282
-------- ------- ------ ----- --------
Income (Loss) before equity in net earnings
of subsidiaries and extraordinary items .... 712 871 33 -- 1,616
Equity in net earnings of subsidiaries ........ 904 7 0 (911) --
-------- ------- ------ ----- --------
Income (Loss) before extraordinary loss ....... 1,616 878 33 (911) 1,616
Extraordinary loss, net of tax benefit ........ -- -- 0 -- --
-------- ------- ------ ----- --------
Net income (loss) ............................. $ 1,616 $ 878 $ 33 $(911) $ 1,616
======== ======= ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 29, 1998 (UNAUDITED)
--------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO AFFILIATES UFSCC ELIMINATIONS TOTAL
---------------------------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $312,003 $74,201 $25,275 $ -- $411,479
Cost of service revenues ...................... 277,275 68,337 22,859 -- 368,471
-------- ------- ------- ----- --------
Gross profit ................................ 34,728 5,864 2,416 -- 43,008
Selling, general and administrative expenses . 23,555 1,755 1,561 -- 26,871
Amortization of intangible assets ............. 2,739 759 90 -- 3,588
-------- ------- ------- ----- --------
Income from operations ...................... 8,434 3,350 765 -- 12,549
Interest income ............................... 57 1 4 -- 62
Interest expense .............................. (6,255) (2,078) (331) -- (8,664)
-------- ------- ------- ----- --------
Income before provision for income taxes .... 2,236 1,273 438 -- 3,947
Provision for income taxes .................... 275 1,087 386 -- 1,748
-------- ------- ------- ----- --------
Income (Loss) before equity in net earnings
of subsidiaries and extraordinary items ..... 1,961 186 52 -- 2,199
Equity in net earnings of subsidiaries ........ 238 11 0 (249) --
-------- ------- ------- ----- --------
Income (Loss) before extraordinary loss ....... 2,199 197 52 (249) 2,199
Extraordinary loss, net of tax benefit ........ (2,958) -- -- -- (2,958)
-------- ------- ------- ----- --------
Net income (loss) ............................. $ (759) $ 197 $ 52 $(249) $ (759)
======== ======= ======= ===== ========
</TABLE>
7
<PAGE> 8
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, 1997
-------------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO AFFILIATES 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) -- --
Prepaid insurance ................................... 237 11 -- -- 248
Other current assets ................................ 2,634 427 40 -- 3,101
-------- -------- ------- -------- --------
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)
-------- -------- ------- -------- --------
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, net of current portion .................... 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 ............................... 2,823 -- -- -- 2,823
Other accrued expenses .............................. 3,593 240 117 -- 3,950
-------- -------- ------- -------- --------
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>
8
<PAGE> 9
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 29, 1998 (UNAUDITED)
-------------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO AFFILIATES UFSCC ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................... $ 2,767 $ 8 $ 2,013 $ (838) $ 3,950
Accounts receivable, less reserve of approximately
$1,976 ............................................ 39,218 14,989 2,721 -- 56,928
Unbilled receivables .............................. 20,614 7,471 469 -- 28,554
Intercompany receivable (payable) ................. 15,326 (13,167) (2,159) -- --
Prepaid insurance ................................. 182 24 -- -- 206
Other current assets .............................. 2,053 182 147 -- 2,382
-------- -------- ------- -------- --------
Total current assets ..................... 80,160 9,507 3,191 (838) 92,020
-------- -------- ------- -------- --------
Property and equipment, at cost ................... 11,612 1,564 655 -- 13,831
Less -accumulated depreciation and amortization ... (8,081) (935) (209) -- (9,225)
-------- -------- ------- -------- --------
3,531 629 446 -- 4,606
-------- -------- ------- -------- --------
Due from (to) affiliates .......................... 14,496 (608) -- (13,888) --
Investment in subsidiary .......................... 4,892 557 -- (5,449) --
Notes receivable and accrued interest from
officers, net of amortization ................... 487 -- -- -- 487
Intangible assets, net of amortization ............ 38,142 13,695 1,822 -- 53,659
Other assets, net ................................. 5,834 492 20 -- 6,346
-------- -------- ------- -------- --------
$147,542 $ 24,272 $ 5,479 $(20,175) $157,118
======== ======== ======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft .................................... $ -- $ 1,347 $ -- $ (838) $ 509
Accounts payable .................................. 3,627 1,330 1,041 -- 5,998
Accrued payroll and payroll-related expenses ..... 15,947 2,666 1,644 -- 20,257
Deferred income taxes ............................. 2,413 1,515 -- -- 3,928
Other accrued expenses ............................ 8,349 514 177 -- 9,040
-------- -------- ------- -------- --------
Total current liabilities ................ 30,336 7,372 2,862 (838) 39,732
-------- -------- ------- -------- --------
Long-term liabilities:
Line of credit .................................... -- -- -- -- --
Long-term debt, less current portion .............. 109,531 -- -- -- 109,531
Other long-term liabilities ....................... 201 -- -- -- 201
-------- -------- ------- -------- --------
Total long-term liabilities .............. 109,732 -- -- -- 109,732
-------- -------- ------- -------- --------
Commitments and Contingencies
Shareholders' equity .............................. 8,211 16,900 2,617 (19,337) 8,391
Less treasury shares at cost ...................... (502) -- -- -- (502)
Less notes receivable from stock sales ............ (235) -- -- -- (235)
-------- -------- ------- -------- --------
Total shareholders' equity ............... 7,474 16,900 2,617 (19,337) 7,654
-------- -------- ------- -------- --------
$147,542 $ 24,272 $ 5,479 $(20,175) $157,118
======== ======== ======= ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 29, 1998 (UNAUDITED)
------------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO AFFILIATES UFSCC ELIMINATIONS TOTAL
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ................................. (759) 197 52 (249) (759)
Net earnings from equity investment ............... (238) (11) -- 249 --
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Amortization of intangible assets .............. 2,739 759 90 -- 3,588
Amortization of debt issue costs and discount .. 531 -- -- -- 531
Depreciation and amortization .................. 1,489 145 85 -- 1,719
Loss on disposals .............................. (33) (13) -- -- (46)
Extraordinary loss ............................. 3,024 -- -- -- 3,024
Deferred income taxes .......................... (256) 996 -- -- 740
Changes in assets and liabilities:
Accounts receivable .......................... 1,292 3,668 653 -- 5,613
Unbilled receivables ......................... 2,096 (3,145) (472) -- (1,521)
Prepaid insurance ............................ 55 12 -- -- 67
Intercompany receivable (payable) ............ 4,207 (4,265) 97 (39) --
Other current assets ......................... 581 417 (109) -- 889
Other long-term assets ....................... 167 (29) -- -- 138
Cash overdraft ............................... (10,840) 871 -- (838) (10,807)
Accounts payable ............................. (1,551) (307) 278 -- (1,580)
Accrued expenses and other current
liabilities ................................ 6,196 (95) 122 -- 6,223
Other long-term liabilities .................. (750) -- -- -- (750)
------- ------ ----- ---- -------
Net cash provided by (used in) operating
activities ................................... 7,950 (800) 796 (877) 7,069
------- ------ ----- ---- -------
Cash relating to investing activities:
Due to/from affiliates ............................ (37) 37 -- -- --
Purchases of property and equipment, net .......... (1,107) (230) (62) -- (1,399)
Payments received for notes receivable from
officers ....................................... 229 -- -- -- 229
Acquisition, including cash acquired .............. (2,600) 380 -- -- (2,220)
------- ------ ----- ---- -------
Net cash provided by (used in) investing
activities ................................... (3,515) 187 (62) -- (3,390)
------- ------ ----- ---- -------
Cash flows relating to financing activities:
Proceeds (repayments) of 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 ................... (4,511) -- -- -- (4,511)
Distribution to shareholders ...................... (400) -- -- -- (400)
Payment on note payable to related party .......... (282) -- -- -- (282)
Payments received for notes receivable from stock
sales............................................. 7 -- -- -- 7
------- ------ ----- ---- -------
Net cash used in financing activities .......... (3,666) -- -- -- (3,666)
------- ------ ----- ---- -------
Effect of exchange rate changes on cash and
cash equivalents .................................. -- -- (30) 39 9
------- ------ ----- ---- -------
Net increase (decrease) in cash and cash equivalents.. 769 (613) 704 (838) 22
Cash and cash equivalents, beginning of period ....... 1,998 621 1,309 -- 3,928
------- ------ ----- ---- -------
Cash and cash equivalents, end of period ............. 2,767 8 2,013 (838) 3,950
======= ====== ===== ==== =======
</TABLE>
10
<PAGE> 11
(4) LITIGATION
In the ordinary course of business, the Company is party to various types
of litigation. The Company believes it has meritorious defenses to all claims,
and, in its opinion, all litigation currently pending or threatened will not
have a material adverse effect on the Company's financial position or results of
operations.
(5) ACQUISITION
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 ABS
acquisition is not material to the Company's operations and the purchase price
has been allocated on a preliminary basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During the third quarter of fiscal 1998, the Company began to report
revenues and expenses based upon its regional operations. Revenue comparisons
for the period presented are based upon these classifications. The Company's
regional operations include Northeast, Eastern, Southeast, Southwest, Midwest,
Canada and Hawaii.
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 29, 1998 AND MARCH 30, 1997
REVENUES Revenues for the third quarter of fiscal 1998, which ended March
29, 1998, were $139.3 million compared to $134.3 million for the third quarter
of fiscal 1997, which ended March 30, 1997, an increase of $5.0 million or 3.7%.
This increase was primarily attributable to revenue increases in the Company's
Eastern Region ($3.5 million), Midwest Region ($1.8 million) and Canadian Region
($1.6 million). Such increases resulted from services performed under new
contracts and the impact of a full year's revenue from contracts acquired in the
prior year. These increases were partially offset by a $1.9 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 the third quarter of fiscal 1998 were
$124.2 million, or 89.2% of revenues, compared to $121.4 million, or 90.4% of
revenues, for the third quarter of fiscal 1997. This improvement was primarily
due to a decrease in direct labor as a percentage of revenues as well as
favorable trends in insurance costs. Direct labor as a percentage of revenues
was 56.4% in the 1998 period, compared to 58.9% in the comparable quarter in
fiscal 1997. This improvement was primarily attributable to tighter management
of labor costs.
GROSS PROFIT As a result of the foregoing, gross profit for the third
quarter of fiscal 1998 was $15.2 million, or 10.9% of revenues, compared to
$12.9 million, or 9.6% of revenues, for the comparable period in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the third quarter of fiscal 1998 were $9.3 million,
or 6.7% of revenues, compared to $8.3 million, or 6.2% of revenues, for the
third quarter of fiscal 1997. The increase of $1.0 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 $1.0 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 $.5 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 $.5 million between the comparable periods as a result
of the completion of the systems integration of the acquired Ogden business
during the last quarter of fiscal 1997.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $1.2 million in
the third quarter of fiscal 1998 and fiscal 1997.
INCOME FROM OPERATIONS As a result of the foregoing, income from operations
for the third quarter of fiscal 1998 was $4.7 million, or 3.4% of revenues,
compared to $3.4 million, or 2.6% of revenues for the third quarter of fiscal
1997.
EBITDA As a result of the foregoing, EBITDA for the third quarter of fiscal
1998 was $6.5 million, or 4.7% of revenues, compared to $5.2 million, or 3.9% of
revenues, for the third quarter of fiscal 1997. EBITDA is defined as earnings
before provision
11
<PAGE> 12
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 third quarter of fiscal 1998 was
$2.9 million, or 2.1% of revenues, compared to $3.1 million, or 2.3% of
revenues, for the third quarter of fiscal 1997. The decrease resulted from lower
outstanding indebtedness during the third quarter of fiscal 1998.
INCOME TAXES Provision for income taxes for the third quarter of fiscal
1998 was $0.3 million, or 14.9% of income before provision for income taxes and
extraordinary items, compared to $0.2 million, or 66.1% of income before
provision for income taxes and extraordinary items, for the third quarter of
fiscal 1997. The higher effective tax rate in the third quarter of fiscal 1997
resulted from the significant growth in the working capital of the Ogden
operations acquired at the end of fiscal 1996 and the Company's previous
election to be a cash basis taxpayer.
NET INCOME (LOSS) As a result of the foregoing, net income for the third
quarter of fiscal 1998 was $1.6 million, or 1.2% of revenues, compared to net
income of $.1 million, or .1% of revenues, for the third quarter of fiscal 1997.
COMPARISON OF NINE MONTH PERIODS ENDED MARCH 29, 1998 AND MARCH 30, 1997
REVENUES Revenues for the nine months ended March 1998 were $411.5 million
compared to $397.9 million for the comparable period of 1997, an increase of
$13.6 million, or 3.4%. This increase was primarily attributable to revenue
increases in the Eastern Region ($8.0 million), the Canadian Region ($4.8
million), the Southwest Region ($2.2 million), Southeast Region ($1.5 million),
Northeast Region ($1.4 million), Midwest Region ($1.3 million) and Hawaii ($.4
million). Such increases resulted from services performed under new contracts
and the impact of a full year's revenue from contracts acquired in the prior
year. These increases were partially offset by a $4.0 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 and a decrease in revenues in the
Security Division of ($2.0 million) which was primarily due to revenues
generated from significant one time work for a customer in 1997 of approximately
$1.4 million.
COST OF REVENUES Cost of revenues for the nine months ended March 1998 were
$368.5 million, or 89.6% of revenues, compared to $358.8 million, or 90.2% of
revenues, for the comparable period. This improvement was primarily due to a
decrease in direct labor as a percentage of revenues as well as favorable trends
in insurance costs. Direct labor as a percentage of revenues was 56.9% in the
1998 period, compared to 58.8% in the comparable 1997 period. This improvement
was primarily attributable to tighter management of direct labor costs.
GROSS PROFIT As a result of the foregoing, gross profit for the nine months
ended March 1998 was $43.0 million, or 10.5% of revenues, compared to $39.1
million, or 9.8% of revenues, for the comparable period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the nine months ended March 1998 were $26.9 million,
or 6.5% of revenues, compared to $22.8 million, or 5.7% of revenues for the
comparable period. The increase of $4.1 million was primarily attributable to
incremental costs associated with the Ogden acquisition. The majority of these
incremental costs were incurred after the second quarter of fiscal 1997.
Salaries and wages increased $2.3 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 $1.7 million between the comparable periods, primarily
as a result of increased computer lease costs, depreciation expense, temporary
help, relocation expense and recruiting expenses.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $3.6 million in
each of the nine month periods of fiscal 1998 and 1997.
INCOME FROM OPERATIONS As a result of the foregoing, income from operations
for the nine months ended March 1998 was $12.5 million, or 3.0% of revenues,
compared to $12.7 million, or 3.2% of revenues, for the comparable period.
EBITDA As a result of the foregoing, EBITDA for the nine months ended March
1998 was $17.9 million, or 4.3% of revenues, compared to $18.0 million, or 4.5%
of revenues, for the nine months ended March 1997.
INTEREST EXPENSE Interest expense for the nine months ended March 1998 was
$8.7 million, or 2.1% of revenues, compared to $8.5 million, or 2.1% of
revenues, for the nine months ended March 1997. The increase resulted from
higher borrowings under the Company's revolving credit facilities during the
first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997.
Average monthly borrowings under these facilities were $51.0 million for the
first quarter of 1998, as compared to $20.5 million for the comparable 1997
period.
12
<PAGE> 13
INCOME TAXES In October 1997, USC, Inc. and its subsidiaries elected to
change to the cash basis of accounting for income tax purposes, consistent with
the basis followed by UNICCO Service Company. As a result, the Company recorded
deferred tax assets and liabilities of $1.3 million and $1.3 million,
respectively. In addition, based upon a review of all available evidence,
management recorded a valuation allowance associated with the deferred tax
assets of $.9 million.
EXTRAORDINARY LOSS During the second quarter of fiscal 1998, 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 (see Note 2 to the accompanying Condensed
Consolidated Financial Statements). 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 indebtedness on the Company's balance sheet
at the settlement date (October 17, 1997) was $10.0 million.
NET INCOME (LOSS) As a result of the foregoing, net loss for the nine
months ended March 1998 was $.8 million, or .2% of revenue, compared to net
income of $1.7 million or .4% of revenue, for the comparable period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 29, 1998, the Company's cash balance did
not materially change. A total of $3.7 million of cash was provided by operating
activities and investing activities which consisted of $7.1 million of net cash
provided by operating activities and $3.4 million used for investing activities.
Investing activities included cash of $2.2 million for an acquisition in
February 1998. Net cash used in financing activities during the period was $3.7
million. In October 1997, the Company consummated an offering of $105 million of
9 7/8%. Senior Subordinated Notes due 2007. Proceeds from the offering, net of
bond discount and expenses, were $101.2 million. Proceeds were used to repay
long-term debt of $52.4 million and outstanding borrowings under the Company's
prior revolving credit facilities of $48.8 million.
For the nine months ended March 1997, $39.3 million of cash was used in
operating and investing activities which consisted of $37.6 million of cash used
in operating activities and $1.7 million used in investing activities. The cash
used in operating activities was primarily to fund the working capital
requirements related to the Ogden acquisition, which occurred on June 28, 1996.
Net cash provided by financing activities during the period was $39.3 million,
which primarily represented borrowings under the Company's $48 million line of
credit.
Capital expenditures were $1.4 million and $1.8 million, respectively, for
the nine month periods ended March 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 fourth quarter of fiscal 1998.
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 March 29, 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
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.
13
<PAGE> 14
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. 333-424407), 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 4 to the accompanying Condensed Consolidated
Financial Statements).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The use of proceeds from the Company's offering of Senior Subordinated
Notes due 2007 in October 1997 is described in Part I, Item 2 above.
There were no proceeds to the Company in the exchange offer described
in response to Part II, Item 5 below.
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
Effective March 12, 1998, the Company exchanged $105 million aggregate
principal amount of its Series B Senior Subordinated Notes due 2007 for
an equal principal amount of Series A Senior Subordinated Notes due
2007. The Series B Notes were issued on the same terms as the Series A
Notes, except that the Series B Notes were registered under the
Securities Act of 1933, as amended.
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
May 13, 1998 By: /s/ Steven C. Kletjian
----------------------------------------------
Steven C. Kletjian, President,
Chief Executive Officer
(Principal Executive Officer)
May 13, 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
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS REPORT, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> MAR-29-1998
<CASH> 3,950
<SECURITIES> 0
<RECEIVABLES> 87,458
<ALLOWANCES> 1,976
<INVENTORY> 0
<CURRENT-ASSETS> 92,020
<PP&E> 13,831
<DEPRECIATION> 9,225
<TOTAL-ASSETS> 157,118
<CURRENT-LIABILITIES> 39,732
<BONDS> 109,531
0
0
<COMMON> 378
<OTHER-SE> 7,276
<TOTAL-LIABILITY-AND-EQUITY> 157,118
<SALES> 411,479
<TOTAL-REVENUES> 411,479
<CGS> 368,471
<TOTAL-COSTS> 368,471
<OTHER-EXPENSES> 30,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,664
<INCOME-PRETAX> 3,947
<INCOME-TAX> 1,748
<INCOME-CONTINUING> 2,199
<DISCONTINUED> 0
<EXTRAORDINARY> (2,958)
<CHANGES> 0
<NET-INCOME> (759)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
