<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 28, 1999 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 MARCH 28, 1999
TABLE OF CONTENTS
PAGE
PART I. Financial Information
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Operations
for the three months and nine months ended
March 28, 1999 and March 29, 1998 (unaudited) 3
Condensed Consolidated Balance Sheets at March 28,
1999 (unaudited) and June 28, 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended March 28, 1999 and
March 29, 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information 19
Signatures 20
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 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service revenues ........................................ $132,991 $124,515 $385,863 $367,540
Cost of service revenues ................................ 118,255 110,273 340,785 327,123
-------- -------- -------- --------
Gross profit ......................................... 14,736 14,242 45,078 40,417
Selling, general and administrative expenses ............ 10,308 8,870 30,004 25,818
Amortization of intangible assets ....................... 1,066 1,056 3,234 3,139
-------- -------- -------- --------
Operating income ..................................... 3,362 4,316 11,840 11,460
Interest income ......................................... 231 56 438 62
Interest expense ........................................ (2,891) (2,869) (8,783) (8,664)
-------- -------- -------- --------
Income from continuing operations before
income taxes ........................................ 702 1,503 3,495 2,858
Provision for income taxes .............................. 222 210 773 810
-------- -------- -------- --------
Income from continuing operations ....................... 480 1,293 2,722 2,048
Discontinued operations :
Income from discontinued operations, net of tax
of $0, $72, $(12) and $938 ............................ -- 323 1,143 151
Gain on sale of discontinued operations, net of tax
of $0 .................................................. 4,082 -- 4,082 --
-------- -------- -------- --------
Net income before extraordinary item .................... 4,562 1,616 7,947 2,199
Extraordinary loss, net tax benefit of $66 .............. -- -- -- (2,958)
-------- -------- -------- --------
Net income (loss) ...................................... $ 4,562 $ 1,616 $ 7,947 $ (759)
======== ======== ======== ========
</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 28,
1999 JUNE 28,
(UNAUDITED) 1998
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 34,666 $ 9,151
Accounts receivable, less reserves of $2,476 and $2,010 ............. 44,394 48,789
Unbilled receivables ................................................ 25,301 27,361
Other current assets ................................................ 3,271 2,394
-------- --------
Total current assets ............................................ 107,632 87,695
-------- --------
Property and equipment, at cost ....................................... 16,284 13,626
Less - accumulated depreciation and amortization .................... 10,828 9,692
-------- --------
5,456 3,934
-------- --------
Notes receivable and accrued interest from officers ................... 475 475
Intangible assets, net of amortization ................................ 44,492 45,258
Other assets, net ..................................................... 5,694 6,046
Net assets of discontinued operations ................................. -- 7,381
-------- --------
50,661 59,160
-------- --------
$163,749 $150,789
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 7,248 $ 5,114
Accrued payroll and payroll-related expenses ........................ 20,987 17,835
Deferred income taxes ............................................... 2,628 2,628
Other accrued expenses .............................................. 9,690 6,377
-------- --------
Total current liabilities ....................................... 40,553 31,954
-------- --------
Long-term liabilities:
Long-term debt, less current portion ................................ 109,581 109,544
Other long-term liabilities ......................................... 161 401
-------- --------
Total long-term liabilities ..................................... 109,742 109,945
-------- --------
Commitments and Contingencies
Shareholders' equity:
Common shares ....................................................... 378 378
Retained earnings ................................................... 14,014 9,222
Accumulated other comprehensive income .............................. (286) (48)
-------- --------
14,106 9,552
Less:
Treasury shares at cost ............................................... (502) (502)
Notes receivable from stock sales ..................................... (150) (160)
-------- --------
Total shareholders' equity ....................................... 13,454 8,890
-------- --------
$163,749 $150,789
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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UNICCO SERVICE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
MARCH 28, MARCH 29,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ...................................................... $ 7,947 $ (759)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of intangible assets .................................. 3,533 3,588
Amortization of debt issue costs and discount ...................... 376 531
Depreciation and amortization ...................................... 1,662 1,719
Gain on disposals .................................................. (7) (46)
Extraordinary loss ................................................. -- 3,024
Gain on sale of discontinued operations ............................ (4,082) --
Deferred income taxes .............................................. -- 740
Other .............................................................. 65 39
Changes in assets and liabilities:
Accounts receivable ................................................ 4,261 5,613
Unbilled receivables ............................................... 2,060 (1,521)
Other current assets ............................................... (504) 956
Other long-term assets ............................................. (135) 138
Cash overdraft ..................................................... -- (10,807)
Accounts payable ................................................... 2,116 (1,580)
Accrued expenses and other current liabilities ..................... 5,555 6,223
Other long-term liabilities ........................................ (194) (750)
------- --------
Net cash provided by operating activities .......................... 22,653 7,108
------- --------
Cash flows relating to investing activities:
Purchases of property and equipment, net ............................... (1,613) (1,399)
Proceeds from sale of discontinued operations .......................... 12,000 --
Proceeds from sale of property and equipment ........................... 62 --
Increase in notes receivable from officers ............................. -- 229
Acquisition ............................................................ (4,437) (2,220)
------- --------
Net cash provided by (used in) investing activities ................ 6,012 (3,390)
------- --------
Cash flows relating to financing activities:
Payments on line of credit ............................................. -- (50,587)
Proceeds from debt ..................................................... -- 104,507
Payments of debt ....................................................... -- (52,400)
Increase in debt issuance costs ........................................ -- (4,511)
Distributions to shareholders .......................................... (3,152) (400)
Payment on note payable to related party ............................... -- (282)
Payments received for notes receivable from stock sales ................ 10 7
------- --------
Net cash used in financing activities .............................. (3,142) (3,666)
------- --------
Effect of exchange rate changes on cash and cash equivalents ............... (8) (30)
------- --------
Net increase in cash and cash equivalents .................................. 25,515 22
Cash and cash equivalents, beginning of period ............................. 9,151 3,928
------- --------
Cash and cash equivalents, end of period ................................... $34,666 $ 3,950
======= ========
</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 28, 1999
(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. 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 28, 1999 and the results of their
operations and their cash flows for the three and nine month periods ended March
28, 1999 and March 29, 1998, 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 unaudited condensed consolidated
statements of operations for the three and nine month periods ended March 29,
1998 has been reclassified to conform to the current year presentation.
(2) SALE OF DISCONTINUED OPERATIONS
Effective December 28, 1998, the Company sold its subsidiary, UNICCO Security
Services, Inc., for $12 million in cash. The Company recorded a gain of
approximately $4.1 million in connection with this sale. The Company has not
provided for any state income taxes as a result of the gain on the sale due to
the utilization of state net operating loss carryforwards. The gain and the
operating results of the Company's Security subsidiary are reported as
discontinued operations in the accompanying financial statements. The security
business provided $2.0 million in cash from its operating activities during the
nine month period ended March 28, 1999, which was used to reduce intercompany
debt. The Company retained net assets of $7.4 million relating to the Security
subsidiary, comprised primarily of accounts receivable less accounts payable and
payroll-related accruals. These retained net assets were transferred to UNICCO
Service Company and were excluded from the determination of the gain on sale.
(3) 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 and nine month periods ended
March 28, 1999 and March 29, 1998 are set forth below:
<TABLE>
<CAPTION>
(In Thousands -- Unaudited)
___________________________________________________________________________
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net income ...................................... $ 4,562 $ 1,616 $ 7,947 $ (759)
Other comprehensive income-
foreign currency translation adjustment ......... 74 (3) (238) (34)
------- ------- ------- -------
Comprehensive income ............................ $ 4,636 $ 1,613 $ 7,709 $ 793
------- ------- ------- -------
</TABLE>
6
<PAGE> 7
(4) CONDENSED 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 condensed
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.
7
<PAGE> 8
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 28, 1999 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $110,270 $ 9,285 $13,436 $ -- $132,991
Cost of service revenues ...................... 98,277 7,957 12,021 -- 118,255
-------- ------- ------- ------- --------
Gross profit ................................ 11,993 1,328 1,415 -- 14,736
Selling, general and administrative ........... 8,924 471 913 -- 10,308
Amortization of intangible assets ............. 865 128 73 -- 1,066
-------- ------- ------- ------- --------
Operating income ............................ 2,204 729 429 -- 3,362
Interest income ............................... 223 -- 8 -- 231
Interest expense .............................. (2,567) (183) (141) -- (2,891)
-------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes ......................... (140) 546 296 -- 702
Provision (benefit) for income taxes .......... (16) 37 201 -- 222
-------- ------- ------- ------- --------
Income (loss) from continuing operations
before equity in net earnings of
subsidiaries ................................ (124) 509 95 -- 480
Equity in net earnings of subsidiaries ........ 4,687 20 -- (4,707) --
-------- ------- ------- ------- --------
Income from continuing operations ............. 4,563 529 95 (4,707) 480
Discontinued operations :
Gain on sale of discontinued operations,
net of tax of $0 ............................ -- 4,082 -- -- 4,082
-------- ------- ------- ------- --------
Net income .................................... $ 4,563 $ 4,611 $ 95 $(4,707) $ 4,562
======== ======= ======= ======= ========
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 29, 1998 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $104,659 $11,438 $ 8,418 $ -- $124,515
Cost of service revenues ...................... 92,573 10,085 7,615 -- 110,273
-------- ------- ------- ------- --------
Gross profit ................................ 12,086 1,353 803 -- 14,242
Selling, general and administrative
expenses .................................... 8,046 325 499 -- 8,870
Amortization of intangible assets ............. 916 116 24 -- 1,056
-------- ------- ------- ------- --------
Operating income ............................ 3,124 912 280 -- 4,316
Interest income ............................... 51 1 4 -- 56
Interest expense .............................. (2,054) (707) (108) -- (2,869)
-------- ------- ------- ------- --------
Income from continuing operations before
income taxes ................................ 1,121 206 176 -- 1,503
Provision for income taxes .................... 51 16 143 -- 210
-------- ------- ------- ------- --------
Income from continuing operations before
equity in net earnings of subsidiaries ...... 1,070 190 33 -- 1,293
Equity in net earnings of subsidiaries ........ 546 7 -- (553) --
-------- ------- ------- ------- --------
Income from continuing operations ............. 1,616 197 33 (553) 1,293
Discontinued operations:
Income from discontinued operations, net
of tax of $72 ............................... -- 323 -- -- 323
-------- ------- ------- ------- --------
Net income .................................... $ 1,616 $ 520 $ 33 $ (553) $ 1,616
======== ======= ======= ======= ========
</TABLE>
8
<PAGE> 9
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 28, 1999 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $320,330 $30,523 $35,010 $ -- $385,863
Cost of service revenues ...................... 283,893 25,704 31,188 -- 340,785
-------- ------- ------- ------- --------
Gross profit ................................ 36,437 4,819 3,822 -- 45,078
Selling, general and administrative ........... 26,358 1,375 2,271 -- 30,004
Amortization of intangible assets ............. 2,661 384 189 -- 3,234
-------- ------- ------- ------- --------
Operating income ............................ 7,418 3,060 1,362 -- 11,840
Interest income ............................... 410 2 26 -- 438
Interest expense .............................. (8,010) (388) (385) -- (8,783)
-------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes ......................... (182) 2,674 1,003 -- 3,495
Provision for income taxes .................... 5 132 636 -- 773
-------- ------- ------- ------- --------
Income (loss) from continuing operations
before equity in net earnings of
subsidiaries ................................ (187) 2,542 367 -- 2,722
Equity in net earnings of subsidiaries ........ 8,134 77 -- (8,211) --
-------- ------- ------- ------- --------
Income from continuing operations ............. 7,947 2,619 367 (8,211) 2,722
Discontinued operations :
Income from discontinued operations, net
of tax of $(12) ............................. -- 1,143 -- -- 1,143
Gain on sale of discontinued operations,
net of tax of $0 ............................ -- 4,082 -- -- 4,082
-------- ------- ------- ------- --------
Net income .................................... $ 7,947 $ 7,844 $ 367 $(8,211) $ 7,947
======== ======= ======= ======= ========
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 29, 1998 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues .............................. $312,003 $30,262 $25,275 $ -- $367,540
Cost of service revenues ...................... 277,590 26,674 22,859 -- 327,123
-------- ------- ------- ------- --------
Gross profit ................................ 34,413 3,588 2,416 -- 40,417
Selling, general and administrative ........... 23,555 702 1,561 -- 25,818
Amortization of intangible assets ............. 2,739 310 90 -- 3,139
-------- ------- ------- ------- --------
Operating income ............................ 8,119 2,576 765 -- 11,460
Interest income ............................... 57 1 4 -- 62
Interest expense .............................. (6,255) (2,078) (331) -- (8,664)
-------- ------- ------- ------- --------
Income from continuing operations before
income taxes ................................ 1,921 499 438 -- 2,858
Provision (benefit) for income taxes .......... (54) 478 386 -- 810
-------- ------- ------- ------- --------
Income from continuing operations before
equity in net earnings of subsidiaries ...... 1,975 21 52 -- 2,048
Equity in net earnings of subsidiaries ........ 224 11 -- (235) --
-------- ------- ------- ------- --------
Income from continuing operations ............. 2,199 32 52 (235) 2,048
Discontinued operations :
Income from discontinued operations, net
of tax of $938 .............................. -- 151 -- -- 151
-------- ------- ------- ------- --------
Net income before extraordinary item .......... 2,199 183 52 (235) 2,199
Extraordinary loss ............................ (2,958) -- -- -- (2,958)
-------- ------- ------- ------- --------
Net income (loss) ............................. $ (759) $ 183 $ 52 $ (235) $ (759)
======== ======= ======= ======= ========
</TABLE>
9
<PAGE> 10
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 28, 1999 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY - CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ 33,144 $ 269 $ 1,517 $ (264) $ 34,666
Accounts receivable, less reserve of
$2,476 ...................................... 36,090 3,778 4,526 -- 44,394
Unbilled receivables .......................... 22,048 2,450 803 -- 25,301
Intercompany receivable (payable) ............. 2,828 3,693 (6,521) -- --
Other current assets .......................... 2,189 227 855 -- 3,271
-------- ------- ------- -------- --------
Total current assets ................. 96,299 10,417 1,180 (264) 107,632
-------- ------- ------- -------- --------
Property and equipment, at cost ............... 12,875 1,025 2,384 -- 16,284
Less -accumulated depreciation and
amortization ................................ 9,506 807 515 -- 10,828
-------- ------- ------- -------- --------
Net property and equipment ................ 3,369 218 1,869 -- 5,456
-------- ------- ------- -------- --------
Due from (to) affiliates ...................... 14,509 (620) -- (13,889) --
Investment in subsidiary ...................... 14,714 653 -- (15,367) --
Notes receivable and accrued interest from
Officers .................................... 475 -- -- -- 475
Intangible assets, net of amortization ........ 34,567 5,907 4,018 -- 44,492
Other assets, net ............................. 5,599 77 18 -- 5,694
-------- ------- ------- -------- --------
69,864 6,017 4,036 (29,256) 50,661
-------- ------- ------- -------- --------
$169,532 $16,652 $ 7,085 $(29,520) $163,749
======== ======= ======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft ................................ $ -- $ 264 $ -- $ (264) $ --
Accounts payable .............................. 5,585 837 826 -- 7,248
Accrued payroll and payroll-related expenses .. 17,439 765 2,783 -- 20,987
Deferred income taxes ......................... 2,357 271 -- -- 2,628
Other accrued expenses ........................ 8,692 342 656 -- 9,690
-------- ------- ------- -------- --------
Total current liabilities ............ 34,073 2,479 4,265 (264) 40,553
-------- ------- ------- -------- --------
Long-term liabilities:
Long-term debt, less current portion .......... 109,581 -- -- -- 109,581
Other long-term liabilities ................... 161 -- -- -- 161
-------- ------- ------- -------- --------
Total long-term liabilities .......... 109,742 -- -- -- 109,742
-------- ------- ------- -------- --------
Commitments and Contingencies
Shareholders' equity .......................... 26,369 14,173 2,820 (29,256) 14,106
Less:
Treasury shares at cost ....................... (502) -- -- -- (502)
Notes receivable from stock sales ............. (150) -- -- -- (150)
-------- ------- ------- -------- --------
Total shareholders' equity ........... 25,717 14,173 2,820 (29,256) 13,454
-------- ------- ------- -------- --------
$169,532 $16,652 $ 7,085 $(29,520) $163,749
======== ======= ======= ======== ========
</TABLE>
10
<PAGE> 11
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, 1998
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY - CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ 9,089 $ 300 $ 1,007 $ (1,245) $ 9,151
Accounts receivable, less reserve of
$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)
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>
11
<PAGE> 12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 28, 1999 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY - CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income ...................................... $ 7,947 $ 7,844 $ 367 $(8,211) $ 7,947
Net earnings from equity investment ............. (8,134) (77) -- 8,211 --
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of intangible assets ............ 2,661 683 189 -- 3,533
Amortization of debt issue costs and
discount ................................... 376 -- -- -- 376
Depreciation and amortization ................ 1,227 164 271 -- 1,662
Gain on disposals ............................ (7) -- -- -- (7)
Gain on sale of discontinued operations ...... -- (4,082) -- -- (4,082)
Other ........................................ 7 (7) -- 65 65
Changes in assets and liabilities:
Accounts receivable ........................ 3,711 1,904 (1,354) -- 4,261
Unbilled receivables ....................... 2,585 99 (624) -- 2,060
Intercompany receivable (payable) .......... 1,693 (6,264) 4,636 (65) --
Other current assets ....................... (149) (20) (335) -- (504)
Other long-term assets ..................... (196) 59 2 -- (135)
Cash overdraft ............................. (671) (310) -- 981 --
Accounts payable ........................... 1,915 (180) 381 -- 2,116
Accrued expenses and other current
liabilities .............................. 3,706 223 1,626 -- 5,555
Other long-term liabilities ................ (194) -- -- -- (194)
------- -------- ------- ------- --------
Net cash provided by operating
activities ............................... 16,477 36 5,159 981 22,653
------- -------- ------- ------- --------
Cash relating to investing activities:
Proceeds from sale of discontinued operations
Acquisition ................................... 12,000 -- -- -- 12,000
Purchase of property and equipment, net ......... 104 (15) (4,526) -- (4,437)
Proceeds from sale of property and equipment .... (1,446) (52) (115) -- (1,613)
62 -- -- -- 62
------- -------- ------- ------- --------
Net cash provided by (used in) investing
activities ................................. 10,720 (67) (4,641) -- 6,012
------- -------- ------- ------- --------
Cash flows relating to financing activities:
Distributions to shareholders ................... (3,152) -- -- -- (3,152)
Payments received for notes receivable from
stock sales .................................. 10 -- -- -- 10
------- -------- ------- ------- --------
Net cash used in financing activities ........ (3,142) -- -- -- (3,142)
------- -------- ------- ------- --------
Effect of exchange rate changes on cash and
cash equivalents ................................ -- -- (8) -- (8)
------- -------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents ..................................... 24,055 (31) 510 981 (25,515)
Cash and cash equivalents, beginning of period ..... 9,089 300 1,007 (1,245) 9,151
------- -------- ------- ------- --------
Cash and cash equivalents, end of period ........... $33,144 $ 269 $ 1,517 $ (264) $ 34,666
======= ======== ======= ======= ========
</TABLE>
12
<PAGE> 13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 29, 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) .......................... $ (759) $ 183 $ 52 $(235) $ (759)
Net earnings from equity investment ........ (224) (11) -- 235 --
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
Gain on disposals ....................... (33) (13) -- -- (46)
Extraordinary loss ...................... 3,024 -- -- -- 3,024
Deferred taxes .......................... (256) 996 -- -- 740
Other ................................... -- -- -- 39 39
Changes in assets and liabilities:
Accounts receivable ................... 1,292 3,668 653 -- 5,613
Unbilled receivables .................. 2,096 (3,145) (472) -- (1,521)
Intercompany receivable (payable) ..... 4,207 (4,265) 97 (39) --
Other current assets .................. 636 429 (109) -- 956
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 ......................... 6,182 (81) 122 -- 6,223
Other long-term liabilities ........... (750) -- -- -- (750)
-------- ------- ------- ----- --------
Net cash provided by (used in) operating
activities ............................ 7,950 (800) 796 (838) 7,108
-------- ------- ------- ----- --------
Cash relating to investing activities:
Due to/from affiliates ..................... (37) 37 -- -- --
Acquisition, including cash acquired ....... (2,600) 380 -- -- (2,220)
Purchases of property and equipment, net ... (1,107) (230) (62) -- (1,399)
Payments received for notes receivable from
officers ................................ 229 -- -- -- 229
-------- ------- ------- ----- --------
Net cash provided by (used in) investing
activities ............................ (3,515) 187 (62) -- (3,390)
-------- ------- ------- ----- --------
Cash flows relating to financing activities:
Net payments on 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)
Distributions 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) -- (30)
-------- ------- ------- ----- --------
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>
13
<PAGE> 14
(5) LITIGATION
In the ordinary course of business, the Company is party to various types of
litigation. The Company believes that, in the aggregate, the litigation matters
currently pending will not have a material adverse effect on the Company's
financial position, results of operations or its cash flows, taken as a whole.
(6) 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 operations of Empire are included in the accompanying unaudited condensed
consolidated financial statements since the effective date of acquisition.
(7) REFINANCING
On October 17, 1997, UNICCO and certain of its affiliates consummated a $105
million Series A Note Offering and entered into a $45 million Amended Credit
Facility. The net proceeds from the Series A Note Offering and the Amended
Facility were used to pay 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
Series A Note Offering matures 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.
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 holder's 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, the Amended Facility and the Company's other subordinated
indebtedness 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, including defined levels of
tangible net worth, earnings before interest, taxes, depreciation and
amortization, and others.
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 Note in
the Company's balance sheet at the settlement date (October 17, 1997) was $10.0
million.
In connection with the Series A 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 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
Service Company. 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.
(8) SHAREHOLDER DISTRIBUTION
In February 1999, the Company made a $2,000,000 pro rata distribution to its
shareholders. In connection with this distribution, the Company obtained waivers
from its bank group under the terms of the Amended Credit Facility. Such
distribution did not exceed the restricted payment covenant, as defined, in the
Indenture governing the Company's Senior Subordinated Notes.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 28, 1999 AND MARCH 29, 1998
REVENUES Revenues for the third quarter of fiscal 1999, which ended March
28, 1999, were $133.0 million compared to $124.5 million for the third quarter
of fiscal 1998, which ended March 29, 1998, an increase of $8.5 million or 6.8%.
This increase is primarily attributable to revenue increases in the Company's
Canadian operations ($5.0 million) as a result of the September 1998 acquisition
of Empire Maintenance Industries, Inc., as well as revenue increases in the
Company's Northeast Region ($3.0 million), Southwest Region ($0.8 million) and
Southeast Region ($0.5 million) as a result of additional services performed
under new and established contracts. Revenues in the Eastern Region decreased
$1.4 million due to the loss of several contracts. Management believes that the
loss of such contracts is not material to the consolidated results of
operations. Other regions accounted for an aggregate increase of $0.6 million.
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.
COST OF REVENUES Cost of revenues for the third quarter of fiscal 1999 were
$118.3 million, or 89.0% of revenues, compared to $110.3 million, or 88.6% of
revenues, for the third quarter of fiscal 1998. The increase, as a percentage of
revenue, was primarily due to higher payroll-related expenses in the current
period.
GROSS PROFIT As a result of the foregoing, gross profit for the third
quarter of fiscal 1999 was $14.7 million, or 11.1% of revenues, compared to
$14.2 million, or 11.4% of revenues, for the comparable period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the third quarter of fiscal 1999 were $10.3 million,
or 7.8% of revenues, compared to $8.9 million, or 7.1% of revenues, for the
third quarter of fiscal 1998. The increase of $1.4 million is primarily due to
increases in payroll related expenses of $0.7 million as a result of annual
salary increases effective July 1, 1998, headcount increases, and incremental
salary expense of $0.2 million associated with the Empire acquisition effective
September 1, 1998. Travel and entertainment and vehicle expenses also increased
$0.3 million and as a result of the impact of new business opportunities and
servicing a growing, geographically disbursed customer base. The Company's Year
2000 remediation costs increased $0.2 million between the comparable periods.
Office and occupancy costs increased $0.2 million between periods, primarily as
a result of increased equipment lease and maintenance costs, bank fees and
depreciation expense. Professional fees, primarily consisting of general
business consulting services, increased $0.1 million between comparable periods.
Foreign currency translation charges decreased $0.1 million due to the
strengthening of Canadian dollar from the prior year comparable period.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $1.1 million and
$1.1 million in the third quarter of fiscal 1999 and fiscal 1998, respectively.
OPERATING INCOME As a result of the foregoing, income from operations for
the third quarter of fiscal 1999 was $3.4 million, or 2.5% of revenues, compared
to $4.3 million, or 3.5% of revenues for the third quarter of fiscal 1998.
EBITDA As a result of the foregoing, EBITDA for the third quarter of
fiscal 1999 was $5.0 million, or 3.8% of revenues, compared to $5.9 million, or
4.7% of revenues, for the third quarter of fiscal 1998. EBITDA for the third
quarter of fiscal 1999 excludes the gain on the sale of the Company's
discontinued security operations of $4.1 million. EBITDA for the third quarter
of fiscal 1998 excludes the EBITDA of the discontinued security operations
of $0.6 million. 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 third quarter of fiscal 1999 was
$2.9 million, or 2.2% of revenues, compared to $2.9 million, or 2.3% of
revenues, for the third quarter of fiscal 1998.
15
<PAGE> 16
INCOME TAXES Provision for income taxes for the third quarter of fiscal 1999
was $0.2 million, or 31.6% of income before provision for income taxes, compared
to $0.2 million, or 14.0% of income before provision for income taxes, for the
third quarter of fiscal 1998. The higher effective tax rate in the third quarter
of fiscal 1999 resulted primarily from an increase in taxable income of the
Company's Canadian subsidiary, which is taxed at the full Canadian statutory
rate.
NET INCOME As a result of the foregoing, as well as the gain of $4.1 million
on the sale of the Company's discontinued security business, net income for the
third quarter of fiscal 1999 was $4.6 million, or 3.4% of revenues, compared to
$1.6 million, or 1.3% of revenues, for the third quarter of fiscal 1998.
COMPARISON OF NINE MONTH PERIODS ENDED MARCH 28, 1999 AND MARCH 29, 1998
REVENUES Revenues for the nine months ended March 1999, were $385.9 million
compared to $367.5 million for the comparable period of fiscal 1998, an increase
of $18.4 million or 5.0%. This increase was primarily attributable to revenue
increases in the Company's Canadian operations ($9.7 million) as a result of the
September 1998 acquisition of Empire Maintenance Industries, Inc., the Company's
Midwest Region ($3.5 million) as a result of the February 1998 acquisition of
American Building Services, Inc., and the Company's Northeast Region ($5.5
million) and Southwest Region ($1.4 million) as a result of additional services
performed under new and established contracts. Revenues in the Company's Eastern
Region decreased $1.9 million, due to the loss of several contracts. Management
believes that the loss of such contracts is not material to the consolidated
results of operations. Other regions accounted for an aggregate increase of $0.2
million of revenue. Such increases resulted from services performed under new
contracts and the impact of a full nine months of revenue from contracts
acquired in the prior year.
COST OF REVENUES Cost of revenues for the nine months ended March 1999 were
$340.8 million, or 88.3% of revenues, compared to $327.1 million, or 89.0% of
revenues, for the comparable period of fiscal 1998. The improvement was
primarily attributable to overall cost reductions achieved through tighter
management of labor and expenditures.
GROSS PROFIT As a result of the foregoing, gross profit for the nine months
ended March 1999 was $45.1 million, or 11.7% of revenues, compared to $40.4
million, or 11.0% of revenues, for the comparable period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the nine months ended March 28, 1999 were $30.0
million, or 7.8% of revenues, compared to $25.8 million, or 7.0% of revenues,
for the comparable period of fiscal 1998. The increase of $4.2 million is
primarily due to increases in office and occupancy costs of $1.3 million between
the comparable periods, primarily as a result of increased equipment lease
costs, bank fees and depreciation expense. The Company's Year 2000 remediation
costs increased $0.6 million between comparable periods. Payroll related
expenses increased $1.7 million as a result of annual salary increases effective
July 1, 1998 and incremental salary expense of $0.4 million associated with the
Empire acquisition effective September 1, 1998. Travel and entertainment and
vehicle expenses also increased $0.7 million as a result of the impact of new
business opportunities and servicing a growing, geographically disbursed
customer base. Professional fees, primarily consisting of external programming
related costs and temporary help costs, decreased $0.1 million between the
comparable periods as a result of the completion of the systems integration of
the Ogden business acquired in June 1996.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $3.2 million and
$3.1 million in the nine month periods of fiscal 1999 and fiscal 1998,
respectively.
OPERATING INCOME As a result of the foregoing, income from operations for
the nine month period ended March 1999 was $11.8 million, or 3.1% of revenues,
compared to $11.5 million, or 3.1% of revenues for the comparable period.
EBITDA As a result of the foregoing, EBITDA for the nine months ended March
28, 1999 was $16.7 million, or 4.3% of revenues, compared to $16.2 million, or
4.4% of revenues, for the comparable period. EBITDA excludes the EBITDA of the
discontinued security operations of $1.5 million and $1.6 million for the nine
month periods of fiscal 1999 and 1998, respectively. EBITDA for the fiscal 1999
period also excludes the gain on the sale of the discontinued security
operations of $4.1 million.
INTEREST EXPENSE Interest expense for the nine months ended March 1999 was
$8.8 million, or 2.3% of revenues, compared to $8.7 million, or 2.4% of
revenues, for the comparable period.
16
<PAGE> 17
INCOME TAXES Provision for income taxes for the nine months ended March 1999
was $0.8 million, or 22.1% of income before provision for income taxes, compared
to $0.8 million, or 28.3% of income before provision for income taxes, for the
comparable period. The effective rate for the nine month period ended March 1999
is higher than expected due to the increase in taxable income from the Company's
Canadian subsidiary, which is taxed at the full Canadian statutory rate. The
effective rate in 1998 resulted from the significant growth in the working
capital of the Ogden operations that were acquired at the end of fiscal 1996 and
due to the fiscal 1998 second quarter election made by USC, Inc. and its
subsidiary 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 significant deferred tax assets and liabilities. In addition,
based upon a review of all available evidence, management recorded a valuation
allowance associated with the deferred tax assets.
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. A total of $1.0 million of the
extraordinary loss was attributable to the payment of $11 million in October
1997 to settle certain indebtedness incurred in connection with the June 1996
Ogden acquisition. The book value of such Note 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, as well as income of $5.2
million (net of tax) from the operations and the sale of the Company's
discontinued security business, net income for the nine months ended March 1999
was $7.9 million, or 2.1% of revenues, compared to a net loss of $(0.8) million,
or (0.2)% of revenues, for the comparable period.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 28, 1999, the Company's cash increased by
$25.5 million. Net cash provided by operating activities of $22.7 million
included net income of $7.9 million and a decrease in accounts receivable of
$6.3 million. The net income includes a $4.1 million gain on the sale of
discontinued security operations (See Note 2 to the accompanying Condensed
Consolidated Financial Statements). The decrease in accounts receivable was
primarily due to the collection of receivables associated with the discontinued
security operations as well as management's efforts to expedite the collection
of receivables. Net cash provided by investing activities was $6.0 million.
Investing activities included cash used of $4.4 million for the Empire
acquisition in September 1998 and cash provided of $12.0 million from the sale
of the discontinued security operations in December 1998. Net cash used in
financing activities was $3.1 million, representing distributions to
shareholders.
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 in 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.
Capital expenditures were $1.6 million and $1.4 million, respectively, for
the nine month periods ended March 1999 and l998. 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 1999 or during fiscal 2000.
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 cash borrowings under the Credit Facility as of March 28, 1999. 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. (See Note 7 to the accompanying Condensed Consolidated
Financial Statements.) 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.
17
<PAGE> 18
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 cash on hand and 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. The Company implemented the software upgrade in March 1999. The
Company plans to complete compliance testing of the upgrade in September of
1999. The Company believes that its primary information technology systems are
Year 2000 compliant.
With respect to non-information technology systems, such as embedded
microprocessors, the Company has completed its review of its potential Year 2000
exposure from these systems. In April 1999, the Company completed its data
gathering, identification and risk assessment of business critical issues, and
the development of a remediation plan to address business critical issues. The
Company has begun the implementation of its remediation plan and expects the
plan to be completed in November 1999.
Cost of Year 2000 Remediation. The Company's Year 2000 remediation costs of
approximately $65,000 and $610,000 expended in fiscal 1998 and the nine month
period ended March 28, 1999, respectively, includes 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. The Company's
most recent assessment of its total expenditures related to Year 2000
remediation of its primary information technology systems is approximately
$830,000. The expended and projected costs do not include internal costs as the
Company does not separately track the internal costs of the Year 2000 project.
Such costs are principally the related payroll costs for its information systems
group. 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. As part of the Company's Year 2000 risk assessment
process, the Company is using questionnaires to systematically survey customers'
and vendors' operations, to identify the status of their Year 2000 compliance
and their criticality to the Company's business operations.
Contingency Plans. The Company believes that it can secure additional
external resources to minimize the likelihood of long term, material adverse
effects in the event that its own and third-party systems experience widespread
Year 2000 failures. The Company has not completed detailed contingency plans.
These plans are being developed in conjunction with the remediation plan.
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," "intends,"
"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 in the
Company's Registration Statement on Form S-4 (File No. 333-42407), and periodic
reports filed from time to time with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE> 19
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,
taken as a whole (see Note 5 to the accompanying Condensed
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 disposition and acquisition
activity in Notes 2 and 6 to the accompanying Condensed
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:
On January 1, 1999, the Company filed a current
report on Form 8-K (Items 2 and 7), which
disclosed the Company's sale of its security
operations effective as of December 28, 1998.
19
<PAGE> 20
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 12, 1999 By: /s/ Steven C. Kletjian
----------------------------------------------
Steven C. Kletjian, President,
Chief Executive Officer
(Principal Executive Officer)
May 12, 1999 By: /s/ George A. Keches
----------------------------------------------
George A. Keches, Vice President -
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED 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> 9-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-END> MAR-28-1999
<CASH> 34,666
<SECURITIES> 0
<RECEIVABLES> 72,171
<ALLOWANCES> 2,476
<INVENTORY> 0
<CURRENT-ASSETS> 107,632
<PP&E> 16,284
<DEPRECIATION> 10,828
<TOTAL-ASSETS> 163,749
<CURRENT-LIABILITIES> 40,553
<BONDS> 109,581
0
0
<COMMON> 378
<OTHER-SE> 13,076
<TOTAL-LIABILITY-AND-EQUITY> 163,749
<SALES> 385,863
<TOTAL-REVENUES> 385,863
<CGS> 340,785
<TOTAL-COSTS> 340,785
<OTHER-EXPENSES> 33,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,345
<INCOME-PRETAX> 3,495
<INCOME-TAX> 773
<INCOME-CONTINUING> 2,722
<DISCONTINUED> 5,225
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,947
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE COMPANY'S EQUITY IS NOT PUBLICLY TRADED.
</FN>
</TABLE>
