<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1998 COMMISSION FILE
NUMBER: 333-42407
UNICCO SERVICE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2872501
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FOUR COPLEY PLACE, BOSTON, MASSACHUSETTS 02116
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(617) 859 - 9100
(REGISTRANT'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
================================================================================
<PAGE> 2
UNICCO SERVICE COMPANY
FORM 10-Q
QUARTER ENDED DECEMBER 27, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. Financial Information
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income and Comprehensive Income for the
three months and six months ended December 27, 1998 and December 28, 1997
(unaudited) 3
Condensed Consolidated Balance Sheets at December 27, 1998 (unaudited) and
June 28, 1998 4
Condensed Consolidated Statements of Cash Flows for the six
months ended December 27, 1998 and December 28, 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information 18
Signatures 19
</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 SIX MONTHS ENDED
---------------------------- ----------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service revenues ............................ $ 130,081 $ 122,791 $ 252,872 $ 243,025
Cost of service revenues .................... 114,219 109,430 222,530 216,850
--------- --------- --------- ---------
Gross profit ............................. 15,862 13,361 30,342 26,175
Selling, general and administrative
expenses .................................... 10,475 8,586 19,696 16,948
Amortization of intangible assets ........... 1,086 1,041 2,168 2,083
--------- --------- --------- ---------
Operating income ......................... 4,301 3,734 8,478 7,144
Interest income ............................. 46 5 207 6
Interest expense ............................ (2,907) (2,788) (5,892) (5,795)
--------- --------- --------- ---------
Income from continuing operations before
income taxes ............................. 1,440 951 2,793 1,355
Provision for income taxes .................. 319 477 551 600
--------- --------- --------- ---------
Income from continuing operations ........... 1,121 474 2,242 755
Discontinued operations:
Income (loss) from discontinued operations,
Net of tax of $(25), $800, $(12) and $866 .. 416 (469) 1,143 (172)
-------- --------- --------- ---------
Net income before extraordinary item ........ 1,537 5 3,385 583
Extraordinary loss, net tax benefit of $66 .. -- (2,958) -- (2,958)
--------- --------- --------- ---------
Net income (loss)............................ $ 1,537 $ (2,953) $ 3,385 $ (2,375)
========= ========= ========= =========
</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>
DECEMBER 27,
1998 JUNE 28,
(UNAUDITED) 1998
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 3,659 $ 9,151
Accounts receivable, less reserves of $2,383 and $2,010 .. 56,241 48,789
Unbilled receivables ..................................... 28,258 27,361
Other current assets ..................................... 2,818 2,394
--------- ---------
Total current assets ................................. 90,976 87,695
--------- ---------
Property and equipment, at cost ............................ 15,904 13,626
Less - accumulated depreciation and amortization ......... 10,492 9,692
--------- ---------
5,412 3,934
--------- ---------
Notes receivable and accrued interest from officers ........ 807 475
Intangible assets, net of amortization ..................... 45,322 45,258
Other assets, net .......................................... 5,883 6,046
Net assets of discontinued operations ...................... 7,026 7,381
--------- ---------
59,038 59,160
--------- ---------
$ 155,426 $ 150,789
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft ........................................... $ 2,081 $ --
Accounts payable ......................................... 5,917 5,114
Accrued payroll and payroll-related expenses ............. 17,394 17,835
Deferred income taxes .................................... 2,628 2,628
Other accrued expenses ................................... 6,820 6,377
--------- ---------
Total current liabilities ............................ 34,840 31,954
--------- ---------
Long-term liabilities:
Long-term debt, less current portion ..................... 109,568 109,544
Other long-term liabilities .............................. 207 401
--------- ---------
Total long-term liabilities .......................... 109,775 109,945
--------- ---------
Commitments and Contingencies
Shareholders' equity:
Common shares ............................................ 378 378
Retained earnings ........................................ 11,455 9,222
Accumulated other comprehensive income ................... (360) (48)
--------- ---------
11,473 9,552
Less:
Treasury shares at cost .................................... (502) (502)
Notes receivable from stock sales .......................... (160) (160)
--------- ---------
Total shareholders' equity ............................ 10,811 8,890
--------- ---------
$ 155,426 $ 150,789
========= =========
</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>
SIX MONTHS ENDED
-----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------- ------------
<S> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ................................ $ 3,385 $ (2,375)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Amortization of intangible assets ............ 2,467 2,382
Amortization of debt issue costs and discount 251 417
Depreciation and amortization ................ 1,085 1,142
Loss on disposals ............................ (21) 14
Other ........................................ 151 80
Extraordinary loss ........................... -- 3,024
Deferred income taxes ........................ -- 1,230
Changes in assets and liabilities:
Accounts receivable .......................... (7,649) 924
Unbilled receivables ......................... (902) 714
Other current assets ......................... (36) 702
Other long-term assets ....................... (62) 60
Cash overdraft ............................... 2,081 (4,537)
Accounts payable ............................. 825 (634)
Accrued expenses and other current liabilities (5) (1,057)
Other long-term liabilities .................. (194) (683)
------- ---------
Net cash provided by operating activities .... 1,376 1,403
------- ---------
Cash flows relating to investing activities:
Purchases of property and equipment, net ......... (990) (737)
Proceeds from sale of property and equipment ..... 61 --
Increase in notes receivable from officers ....... 332 205
Acquisition ...................................... (4,436) --
------- ---------
Net cash used in investing activities ........ (5,697) (532)
------- ---------
Cash flows relating to financing activities:
Payments on line of credit ....................... -- (50,130)
Proceeds from debt ............................... -- 104,507
Payments of debt ................................. -- (52,400)
Increase in debt issuance costs .................. -- (4,317)
Distributions to shareholders .................... (1,152) (400)
Payment on note payable to related party ......... -- (282)
Payments received for notes receivable from
stock sales .................................... -- 5
------- ---------
Net cash used in financing activities ........ (1,152) (3,017)
------- ---------
Effect of exchange rate changes on cash and cash
equivalents ........................................ (19) (20)
------- ---------
Net decrease in cash and cash equivalents ............ (5,492) (2,166)
Cash and cash equivalents, beginning of period ....... 9,151 3,928
------- ---------
Cash and cash equivalents, end of period ............. $ 3,659 $ 1,762
======= =========
</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
DECEMBER 27, 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. 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 December 27, 1998 and the results of their
operations and their cash flows for the three and six month periods ended
December 27, 1998 and December 28, 1997, respectively.
Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as allowed by Regulation S-X, Article
10. Results for any interim period are not necessarily indicative of results to
be anticipated for a full year. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended June 28, 1998 in
its Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
Certain information in the accompanying unaudited condensed consolidated
statements of operations for the three and six month periods ended December 28,
1997 has been reclassified to conform to the current year presentation.
(2) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130), became effective for annual periods beginning after December
15, 1997 and establishes standards for reporting and displaying comprehensive
income and its components in a full set of financial statements. FAS 130
requires only additional reporting in the consolidated financial statements and
does not affect the Company's financial position or results of operations. The
components of comprehensive income for the three and six month periods ended
December 27, 1998 are set forth below:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 27, 1998 December 27, 1998
In Thousands In Thousands
------------------ -----------------
<S> <C> <C>
Net income ............................ $ 1,537 $ 3,385
Other comprehensive income-
foreign currency translation adjustment
(276) (312)
------- -------
Comprehensive income .................. $ 1,261 $ 3,073
------- -------
</TABLE>
(3) 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.
6
<PAGE> 7
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 27, 1998 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Service revenues ....................... $ 106,166 $ 10,304 $ 13,611 $ -- $ 130,081
Cost of service revenues ............... 93,615 8,515 12,089 -- 114,219
--------- -------- -------- -------- ---------
Gross profit ......................... 12,551 1,789 1,522 -- 15,862
Selling, general and administrative
expenses .............................. 9,179 439 857 -- 10,475
Amortization of intangible assets ...... 887 129 70 -- 1,086
--------- -------- -------- -------- ---------
Operating income ..................... 2,485 1,221 595 -- 4,301
Interest income ........................ 43 -- 3 -- 46
Interest expense ....................... (2,575) (185) (147) -- (2,907)
--------- -------- -------- -------- ---------
Income (loss) from continuing operations
before income taxes ................... (47) 1,036 451 -- 1,440
Provision for income taxes ............. 21 45 253 -- 319
--------- -------- -------- -------- ---------
Income (loss) from continuing operations
before equity in net earnings of
subsidiaries .......................... (68) 991 198 -- 1,121
Equity in net earnings of subsidiaries.. 1,604 42 -- (1,646) --
--------- -------- -------- -------- ---------
Income from continuing operations ...... 1,536 1,033 198 (1,646) 1,121
Discontinued operations:
Income from discontinued operations, net
of tax of $(25) ........................ -- 416 -- -- 416
--------- -------- -------- -------- ---------
Net income ............................. $ 1,536 $ 1,449 $ 198 $ (1,646) $ 1,537
========= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 28, 1997 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues ....................... $ 104,395 $ 9,305 $ 9,090 $ -- $ 122,790
Cost of service revenues ............... 92,714 8,390 8,326 -- 109,430
--------- ------- ------- -------- ---------
Gross profit ......................... 11,681 915 764 -- 13,360
Selling, general and administrative
expenses .............................. 8,033 75 477 -- 8,585
Amortization of intangible assets ...... 911 97 33 -- 1,041
--------- ------- ------- -------- ---------
Operating income ..................... 2,737 743 254 -- 3,734
Interest income ........................ 5 -- -- -- 5
Interest expense ....................... (2,037) (640) (111) -- (2,788)
--------- ------- ------- -------- ---------
Income from continuing operations
before income taxes ................... 705 103 143 -- 951
Provision for income taxes ............. (63) 414 126 -- 477
--------- ------- ------- -------- ---------
Income (loss) from continuing operations
before equity in net earnings of
subsidiaries .......................... 768 (311) 17 -- 474
Equity in net earnings of subsidiaries.. (763) 3 -- 160 --
--------- ------- ------- -------- ---------
Income (loss) from continuing
operations ............................ 5 (308) 17 160 474
Discontinued operations:
Loss from discontinued operations, net
of tax of $800......................... -- (469) -- -- (469)
--------- ------- ------- -------- ---------
Net income (loss) before extraordinary
item .................................. 5 (777) 17 160 5
Extraordinary loss, net of tax benefit
of $66 ................................ (2,958) -- -- -- (2,958)
--------- ------- ------- --------- ---------
Net income (loss) ...................... $ (2,953) $ (777) $ 17 $ 160 $ (2,953)
========= ======= ======= ========= =========
</TABLE>
7
<PAGE> 8
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 27, 1998 (UNAUDITED)
-----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues ....................... $ 210,060 $ 21,238 $ 21,574 $ -- $ 252,872
Cost of service revenues ............... 185,616 17,747 19,167 -- 222,530
--------- -------- -------- -------- ---------
Gross profit ......................... 24,444 3,491 2,407 -- 30,342
Selling, general and administrative
expenses .............................. 17,434 904 1,358 -- 19,696
Amortization of intangible assets ...... 1,796 256 116 -- 2,168
--------- -------- -------- -------- ---------
Operating income ..................... 5,214 2,331 933 -- 8,478
Interest income ........................ 187 2 18 -- 207
Interest expense ....................... (5,443) (205) (244) -- (5,892)
--------- -------- -------- -------- ---------
Income (loss) from continuing operations
before income taxes ................... (42) 2,128 707 -- 2,793
Provision for income taxes ............. 21 95 435 -- 551
--------- -------- -------- -------- ---------
Income (loss) from continuing operations
before equity in net earnings of
subsidiaries........................... (63) 2,033 272 -- 2,242
Equity in net earnings of subsidiaries.. 3,447 57 -- (3,504) --
--------- -------- -------- -------- ---------
Income from continuing operations ...... 3,384 2,090 272 (3,504) 2,242
Discontinued operations:
Income from discontinued operations, net
of tax of $(12) ....................... -- 1,143 -- -- 1,143
--------- -------- -------- -------- ---------
Net income ............................. $ 3,384 $ 3,233 $ 272 $ (3,504) $ 3,385
========= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 28, 1997 (UNAUDITED)
----------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues ...................... $ 207,344 $ 18,824 $ 16,857 $ -- $ 243,025
Cost of service revenues .............. 185,017 16,589 15,244 -- 216,850
--------- -------- -------- -------- ---------
Gross profit ........................ 22,327 2,235 1,613 -- 26,175
Selling, general and administrative
expenses ............................. 15,509 377 1,062 -- 16,948
Amortization of intangible assets ..... 1,823 194 66 -- 2,083
--------- -------- -------- -------- ---------
Operating income .................... 4,995 1,664 485 -- 7,144
Interest income ....................... 6 -- -- -- 6
Interest expense ...................... (4,201) (1,371) (223) -- (5,795)
--------- -------- -------- -------- ---------
Income from continuing operations
before income Taxes................... 800 293 262 -- 1,355
Provision for income taxes ............ (105) 462 243 -- 600
--------- -------- -------- -------- ---------
Income (loss) from continuing
operations before equity in net
earnings of subsidiaries.............. 905 (169) 19 -- 755
Equity in net earnings of subsidiaries (322) 4 -- 318 --
--------- -------- -------- -------- ---------
Income (loss) from continuing
operations ........................... 583 (165) 19 318 755
Discontinued operations:
Loss from discontinued operations,
net of tax of $866 ................... -- (172) -- -- (172)
--------- -------- -------- -------- ---------
Net income (loss) before extraordinary
item.................................. 583 (337) 19 318 583
Extraordinary loss .................... (2,958) -- -- -- (2,958)
--------- -------- -------- -------- ---------
Net income (loss) ..................... $ (2,375) $ (337) $ 19 $ 318 $ (2,375)
========= ======== ======== ======== =========
</TABLE>
8
<PAGE> 9
CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, 1998 (UNAUDITED)
-------------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................. $ 2,802 $ 38 $ 819 $ -- $ 3,659
Accounts receivable, less reserve of
$2,383 .................................... 39,013 12,293 4,935 -- 56,241
Unbilled receivables ....................... 21,042 7,216 -- -- 28,258
Intercompany receivable (payable) .......... 11,556 (5,437) (6,119) -- --
Other current assets ....................... 1,925 302 591 -- 2,818
--------- -------- -------- --------- ---------
Total current assets .............. 76,338 14,412 226 -- 90,976
--------- -------- -------- --------- ---------
Property and equipment, at cost ............ 12,505 1,164 2,235 -- 15,904
Less - accumulated depreciation and
amortization............................... 9,206 892 394 -- 10,492
--------- -------- -------- --------- ---------
Net property and equipment ............. 3,299 272 1,841 -- 5,412
--------- -------- -------- --------- ---------
Due from (to) affiliates ................... 14,509 (620) -- (13,889) --
Investment in subsidiary ................... 10,027 633 -- (10,660) --
Notes receivable and accrued interest from
Officers .................................. 807 -- -- -- 807
Intangible assets, net of amortization ..... 35,432 5,982 3,908 -- 45,322
Other assets, net .......................... 5,780 80 23 -- 5,883
Net assets of discontinued operations ...... -- 7,026 -- -- 7,026
--------- -------- -------- --------- ---------
66,555 13,101 3,931 (24,549) 59,038
--------- -------- -------- --------- ---------
$ 146,192 $ 27,785 $ 5,998 $ (24,549) $ 155,426
========= ======== ======== ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Cash overdraft ............................. $ 1,127 $ 954 $ -- $ -- $ 2,081
Accounts payable ........................... 4,032 1,087 798 -- 5,917
Accrued payroll and payroll-related
expenses .................................. 12,687 2,598 2,109 -- 17,394
Deferred income taxes ...................... 1,771 857 -- -- 2,628
Other accrued expenses ..................... 5,843 540 437 -- 6,820
--------- -------- -------- --------- ---------
Total current liabilities ......... 25,460 6,036 3,344 -- 34,840
--------- -------- -------- --------- ---------
Long-term liabilities:
Long-term debt, less current portion ....... 109,568 -- -- -- 109,568
Other long-term liabilities ................ 207 -- -- -- 207
--------- -------- -------- --------- ---------
Total long-term liabilities ....... 109,775 -- -- -- 109,775
--------- -------- -------- --------- ---------
Commitments and Contingencies
Shareholders' equity ....................... 11,619 21,749 2,654 (24,549) 11,473
Less treasury shares at cost ............... (502) -- -- -- (502)
Less notes receivable from stock sales ..... (160) -- -- -- (160)
--------- -------- -------- --------- ---------
Total shareholders' equity ........ 10,957 21,749 2,654 (24,549) 10,811
--------- -------- -------- --------- ---------
$ 146,192 $ 27,785 $ 5,998 $ (24,549) $ 155,426
========= ======== ======== ========= =========
</TABLE>
9
<PAGE> 10
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)
Less notes receivable from stock sales ..... (160) -- -- -- (160)
--------- -------- -------- --------- ---------
Total shareholders' equity ........ 8,725 18,516 2,694 (21,045) 8,890
--------- -------- -------- --------- ---------
$ 143,506 $ 24,686 $ 4,887 $ (22,290) $ 150,789
========= ======== ======== ========= =========
</TABLE>
10
<PAGE> 11
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 27, 1998 (UNAUDITED)
-------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY - CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income ................................. $ 3,384 $ 3,233 $ 272 (3,504) $ 3,385
Net earnings from equity investment ........ (3,447) (57) -- 3,504 --
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of intangible assets ....... 1,796 555 116 -- 2,467
Amortization of debt issue costs and
discount................................ 251 -- -- -- 251
Depreciation and amortization ........... 806 128 151 -- 1,085
Loss on disposals ....................... (21) -- -- -- (21)
Other ................................... -- -- -- 151 151
Changes in assets and liabilities:
Accounts receivable ................... (5,495) (280) (1,874) -- (7,649)
Unbilled receivables .................. (864) (212) 174 -- (902)
Intercompany receivable (payable) ..... (719) (3,497) 4,367 (151) --
Other current assets .................. 70 (25) (81) -- (36)
Other long-term assets ................ (117) 59 (4) -- (62)
Cash overdraft ........................ 1,127 (291) -- 1,245 2,081
Accounts payable ...................... 580 (148) 393 -- 825
Accrued expenses and other current
liabilities ......................... (1,083) 304 774 -- (5)
Other long-term liabilities ........... (194) -- -- -- (194)
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities ............................ (3,926) (231) 4,288 1,245 1,376
------- ------- ------- ------- -------
Cash relating to investing activities:
Acquisition ................................ -- -- (4,436) -- (4,436)
Purchase of property and equipment, net .... (938) (31) (21) -- (990)
Proceeds from sale of property and
equipment ................................. 61 -- -- -- 61
Increases in notes receivable from
officers .................................. (332) -- -- -- (332)
------- ------- ------- ------- -------
Net cash used in investing activities ... (1,209) (31) (4,457) -- (5,697)
------- ------- ------- ------- -------
Cash flows relating to financing activities:
Distributions to shareholders .............. (1,152) -- -- -- (1,152)
------- ------- ------- ------- -------
Net cash used in financing activities ... (1,152) -- -- -- (1,152)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents ........................... -- -- (19) -- (19)
------- ------- ------- ------- -------
Net decrease in cash and cash equivalents ..... (6,287) (262) (188) 1,245 (5,492)
Cash and cash equivalents, beginning of period 9,089 300 1,007 (1,245) 9,151
------- ------- ------- ------- -------
Cash and cash equivalents, end of period ...... $ 2,802 $ 38 $ 819 $ -- $ 3,659
======= ======= ======= ======= =======
</TABLE>
11
<PAGE> 12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 28, 1997 (UNAUDITED)
--------------------------------------------------------------------
NONGUARANTOR
GUARANTOR SUBSIDIARY- CONSOLIDATED
UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash flows relating to operating activities:
Net income (loss) ......................... $ (2,375) $ (337) $ 19 $ 318 $ (2,375)
Net earnings from equity investment ....... 322 (4) -- (318) --
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Amortization of intangible assets ...... 1,822 493 67 -- 2,382
Amortization of debt issue costs and
discount............................... 417 -- -- -- 417
Depreciation and amortization .......... 1,011 77 54 -- 1,142
Loss on disposals ...................... (2) 16 -- -- 14
Extraordinary loss ..................... 3,024 -- -- -- 3,024
Deferred taxes ......................... (67) 1,297 -- -- 1,230
Other .................................. -- -- -- 80 80
Changes in assets and liabilities:
Accounts receivable .................. (2,023) 3,663 (716) -- 924
Unbilled receivables ................. 1,711 (997) -- -- 714
Intercompany receivable (payable) .... 4,551 (4,560) 89 (80) --
Other current assets ................. 510 260 (68) -- 702
Other long-term assets ............... 503 (443) -- -- 60
Cash overdraft ....................... (4,932) 395 -- -- (4,537)
Accounts payable ..................... (183) (132) (319) -- (634)
Accrued expenses and other current
Liabilities ........................ (508) (209) (340) -- (1,057)
Other long-term liabilities .......... (683) -- -- -- (683)
--------- ------- ------- ----- ---------
Net cash provided by (used in) operating
Activities ........................... 3,098 (481) (1,214) -- 1,403
--------- ------- ------- ----- ---------
Cash relating to investing activities:
Due to/from affiliates .................... (25) 25 -- -- --
Purchases of property and equipment, net .. (519) (159) (59) -- (737)
Payments received for notes receivable from
Officers ............................... 205 -- -- -- 205
--------- ------- ------- ----- ---------
Net cash used in investing activities .. (339) (134) (59) -- (532)
--------- ------- ------- ----- ---------
Cash flows relating to financing activities:
Net payments on line of credit ............ (50,130) -- -- -- (50,130)
Proceeds from debt ........................ 104,507 -- -- -- 104,507
Payments of debt .......................... (52,400) -- -- -- (52,400)
Increase in debt issuance costs ........... (4,317) -- -- -- (4,317)
Distributions to shareholders ............. (400) -- -- -- (400)
Payment on note payable to related party .. (282) -- -- -- (282)
Payments received for notes receivable from
stock Sales.............................. 5 -- -- -- 5
--------- ------- ------- ----- ---------
Net cash used in financing activities .. (3,017) -- -- -- (3,017)
--------- ------- ------- ----- ---------
Effect of exchange rate changes on cash and
cash equivalents .......................... -- -- (20) -- (20)
--------- ------- ------- ----- ---------
Net decrease in cash and cash equivalents .... (258) (615) (1,293) -- (2,166)
Cash and cash equivalents, beginning of
period ...................................... 1,998 621 1,309 -- 3,928
--------- ------- ------- ----- ---------
Cash and cash equivalents, end of period ..... $ 1,740 $ 6 $ 16 $ -- $ 1,762
========= ======= ======= ===== =========
</TABLE>
12
<PAGE> 13
(4) 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.
(5) 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.
(6) NOTES RECEIVABLE FROM OFFICER
During the three month period ended December 27, 1998, the Company loaned
an officer-shareholder a total of $331,500. Such loans bear interest at the
Applicable Federal Rate and are payable on demand. Subsequent to December 27,
1998, the Company loaned an additional $300,000 to this officer-shareholder.
(7) REFINANCING
On October 17, 1997, UNICCO Service Company ("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 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 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 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 maintains 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 the 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 the common control. Further, in
connection with the contribution of ownership interest, 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
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) SALE OF DISCONTINUED OPERATIONS - SUBSEQUENT EVENT
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 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 six month period ended
December 27, 1998, which was used to reduce intercompany debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
REVENUES Revenues for the second quarter of fiscal 1999, which ended
December 27, 1998, were $130.1 million compared to $122.8 million for the second
quarter of fiscal 1998, which ended December 28, 1997, an increase of $7.3
million or 5.9%. This increase is primarily attributable to revenue increases in
the Company's Canadian operations ($4.5 million) as a result of the September
1998 acquisition of Empire Maintenance Industries, Inc., the Company's Midwest
Region ($1.6 million) as a result of the February 1998 acquisition of American
Building Services, Inc., and the Company's Northeast Region ($2.1 million) as a
result of services performed under new contracts. Revenues in the Company's
Eastern Region decreased $1.6 million due to the completion of a one-time
project in December 1997 ($0.5 million) and the loss of several contracts.
Management believes that the loss of such contracts is not material due to the
low margins associated with this business. Other regions accounted for an
aggregate increase of $0.7 million of revenue. Such increases resulted from
services performed under new contracts and the impact of a full quarter's
revenue from contracts acquired in the prior year.
COST OF REVENUES Cost of revenues for the second quarter of fiscal 1999 were
$114.2 million, or 87.8% of revenues, compared to $109.4 million, or 89.1% of
revenues, for the second quarter of fiscal 1998. This improvement was primarily
due to the replacement of subcontracting expense with less costly in-house labor
for several contracts. Subcontracting expense decreased approximately $1.0
million between comparable periods. Other efficiencies were also achieved in the
management of supplies and office and occupancy costs. This improvement was
partially offset by an increase in direct labor as a percentage of revenue. This
increase is primarily due to the addition of labor intensive contracts obtained
in the Empire acquisition.
GROSS PROFIT As a result of the foregoing, gross profit for the second
quarter of fiscal 1999 was $15.9 million, or 12.2% of revenues, compared to
$13.4 million, or 10.9% of revenues, for the comparable period in fiscal 1998.
13
<PAGE> 14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the second quarter of fiscal 1999 were $10.5
million, or 8.1% of revenues, compared to $8.6 million, or 7.0% of revenues, for
the second quarter of fiscal 1998. The increase of $1.9 million is primarily due
to increases in office and occupancy costs of $0.9 million between the
comparable periods, primarily as a result of increased equipment lease costs,
bank fees and depreciation expense. Payroll related expenses increased $0.6
million as a result of annual salary increases effective July 1, 1998 and
incremental salary expense of $0.2 million associated with the Empire
acquisition effective September 1, 1998. The Company's Year 2000 remediation
costs increased $ 0.2 million between the comparable periods. Travel and
entertainment expenses also increased $0.2 million as a result of the impact of
new business opportunities and servicing a growing, geographically disbursed
customer base. Professional fees, primarily consisting of general business
consulting services, increased $0.1 million between comparable periods. Foreign
currency translation charges increased $0.1 million due to the weakening of the
Canadian dollar from the prior year comparable quarter. Recruiting expenses,
including relocation expense, decreased $0.2 million due to relocation expenses
incurred in the second quarter of fiscal 1998, for relocating certain management
personnel to the corporate headquarters as well as regional offices.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $1.1 million and
$1.0 million in the second quarter of fiscal 1999 and fiscal 1998, respectively.
OPERATING INCOME As a result of the foregoing, income from operations for
the second quarter of fiscal 1999 was $4.3 million, or 3.3% of revenues,
compared to $3.7 million, or 3.0% of revenues for the second quarter of fiscal
1998.
EBITDA As a result of the foregoing, EBITDA for the second quarter of fiscal
1999 was $5.9 million, or 4.5% of revenues, compared to $ 5.3 million, or 4.3%
of revenues, for the second quarter of fiscal 1998. EBITDA excludes the earnings
of the Company's discontinued security operations, which were $ 1.1 million and
$ 0.5 million for the second quarter of fiscal 1999 and 1998, respectively.
EBITDA is defined as earnings before provision for income taxes, interest
expense, interest income and depreciation and amortization. EBITDA as presented
may not be comparable to similarly titled measures used by other companies,
depending upon the non-cash charges included. When evaluating EBITDA, investors
should consider that EBITDA (i) should not be considered in isolation but
together with other factors which may influence operating and investing
activities, such as changes in operating assets and liabilities and purchases of
property and equipment; (ii) is not a measure of performance calculated in
accordance with generally accepted accounting principles; (iii) should not be
construed as an alternative or substitute for income from operations, net income
or cash flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows; and (iv) should not be used as an
indicator of the Company's operating performance or as a measure of its
liquidity.
INTEREST EXPENSE Interest expense for the second quarter of fiscal 1999 was
$2.9 million, or 2.3% of revenues, compared to $2.8 million, or 2.3% of
revenues, for the second quarter of fiscal 1998.
INCOME TAXES Provision for income taxes for the second quarter of fiscal
1999 was $0.3 million, or 22% of income before provision for income taxes,
compared to $0.5 million, or 50% of income before provision for income taxes,
for the second quarter of fiscal 1998. The higher effective tax rate in the
second quarter of fiscal 1998 resulted from the significant growth in the
working capital of the Ogden operations acquired at the end of fiscal 1996 and
due to USC, Inc. and its subsidiaries electing 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. 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.
NET INCOME (LOSS) As a result of the foregoing, net income for the second
quarter of fiscal 1999 was $1.5 million, or 1.2% of revenues, compared to a net
loss of $(3.0) million, or (2.4)% of revenues, for the second quarter of fiscal
1998.
14
<PAGE> 15
COMPARISON OF SIX MONTH PERIODS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
REVENUES Revenues for the six months ended December 1998, were $252.9
million compared to $243.0 million for the comparable period of fiscal 1998, an
increase of $9.9 million or 4.1%. This increase was primarily attributable to
revenue increases in the Company's Canadian operations ($4.7 million) as a
result of the September 1998 acquisition of Empire Maintenance Industries, Inc.,
the Company's Midwest Region ($3.2 million) as a result of the February 1998
acquisition of American Building Services, Inc., and the Company's Northeast
Region ($2.7 million) as a result of services performed under new contracts.
Revenues in the Company's Southeast Region decreased $1.0 million due to the
loss of several contracts. Management believes that the loss of such contracts
for the six months ended December 1998 is not material due to the low margins
associated with this lost business. Other regions accounted for an aggregate
increase of $0.3 million of revenue. Such increases resulted from services
performed under new contracts and the impact of a full six months of revenue
from contracts acquired in the prior year.
COST OF REVENUES Cost of revenues for the six months ended December 1998
were $222.5 million, or 88.0% of revenues, compared to $216.9 million, or 89.3%
of revenues, for the comparable period of fiscal 1998. This improvement was
primarily due to the replacement of subcontracting expense with less costly
in-house labor for several contracts. Subcontracting expense decreased
approximately $3.0 million between comparable periods. This improvement was
partially offset by an increase in direct labor as a percentage of revenue. This
increase is primarily due to the addition of labor intensive contracts obtained
in the Empire acquisition.
GROSS PROFIT As a result of the foregoing, gross profit for the six months
ended December 1998 was $30.3 million, or 12.0% of revenues, compared to $26.2
million, or 10.8% of revenues, for the comparable period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses for the six months ended December 27, 1998 were $19.7
million, or 7.8% of revenues, compared to $17.0 million, or 7.0% of revenues,
for the comparable period of fiscal 1998. The increase of $2.7 million is
primarily due to increases in office and occupancy costs of $1.2 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 $0.4 million between comparable periods. Payroll related
expenses increased $1.0 million as a result of annual salary increases effective
July 1, 1998 and incremental salary expense of $0.2 million associated with the
Empire acquisition effective September 1, 1998. Travel and entertainment
expenses also increased $0.2 million as a result of the impact of new business
opportunities and servicing a growing, geographically disbursed customer base.
Foreign currency translation charges increased $0.1 million due to the weakening
of the Canadian dollar from the prior year comparable period. Professional fees,
primarily consisting of external programming related costs and temporary help
costs, decreased $0.2 million between the comparable periods as a result of the
completion of the systems integration of the Ogden business acquired in June
1996.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $2.2 million and
$2.1 million in the six month periods of fiscal 1999 and in fiscal 1998.
OPERATING INCOME As a result of the foregoing, income from operations for
the six month period ended December 1998 was $8.5 million, or 3.4% of revenues,
compared to $7.1 million, or 2.9% of revenues for the comparable period.
EBITDA As a result of the foregoing, EBITDA for the six months ended December
27, 1998 was $11.7 million, or 4.6% of revenues, compared to $10.3 million, or
4.2 % of revenues, for the comparable period. EBITDA excludes the earnings of
the Company's discontinued security operations, which were $2.1 million and $1.0
million for the six month periods of fiscal 1999 and 1998, respectively.
INTEREST EXPENSE Interest expense for the six months ended December 1998 was
$5.9 million, or 2.3% of revenues, compared to $5.8 million, or 2.3% of
revenues, for the comparable period.
INCOME TAXES Provision for income taxes for the six months ended December
1998 was $0.6 million, or 20% of income before provision for income taxes,
compared to $0.6 million, or 44% of income before provision for income taxes,
for the comparable period. The higher effective tax rate in 1998 resulted from
the significant growth in the working capital of the Ogden operations acquired
at the end of fiscal 1996 and due to USC, Inc. and its subsidiaries electing 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.
15
<PAGE> 16
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 in 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 income for the six
months ended December 1998 was $3.4 million, or 1.3% of revenues, compared to a
net loss of $(2.4) million, or (1.0)% of revenues, for the comparable period.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 27, 1998, the Company's cash decreased by
$5.5 million. Net cash used in investing activities was $5.7 million. Investing
activities included cash used of $4.4 million for the Empire acquisition in
September 1998. Net cash used in financing activities was $1.2 million,
representing distributions to shareholders. A total of $0.8 million of such
distributions represents payments to cover federal income taxes paid by such
shareholders due to the Company's "S" corporation status. Net cash provided by
operating activities of $1.4 million included an increase of accounts receivable
of $7.6 million. This increase is primarily due to accounts receivables
generated from new business and the Empire acquisition.
For the six months ended December 28, 1997, the Company's cash decreased by
$2.2 million. A total of $0.8 million of cash was provided by operating
activities and investing activities which consisted of $1.3 million of net cash
provided by operating activities and $0.5 million used for investing activities.
Net cash used for financing activities during the period was $3.0 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 $1.0 million and $0.7 million, respectively, for
the six month periods ended December 1998 and l997. The Company's operations do
not generally require material investment in capital assets. The Company expects
that its capital expenditure requirements will not increase materially during
the next two quarters of fiscal 1999.
The Company is party to an amended revolving credit facility (the "Credit
Facility") under which the Company may borrow up to $45.0 million for working
capital and general corporate purposes, subject to certain conditions. There
were no borrowings under the Credit Facility as of December 27, 1998. The Credit
Facility, the Indenture governing the Company's Senior Subordinated Notes due
2007 and the terms of the Company's other subordinated indebtedness include
certain financial and operating covenants which, among other things, restrict
the ability of the Company to incur additional indebtedness, make investments
and take other actions. The ability of the Company to meet its debt service
obligations will be dependent upon the future performance of the Company, which
will be impacted by general economic conditions and other factors.
The Company's principal capital requirements are to service the Company's
indebtedness, for working capital and, to a lesser extent, to fund capital
expenditures. The Company believes that its cash flow from operations, together
with its borrowing capacity under the Credit Facility, will be sufficient to
meet such requirements as they now exist.
YEAR 2000 COMPLIANCE
Status of Year 2000 Preparations. The Company's information systems are
licensed from outside vendors. The Company's principal outside vendor has
released an upgrade of the primary software used by the Company to perform its
accounting, payroll, accounts payable, invoicing and financial reporting
functions. The vendor has represented to the Company that this upgrade is Year
2000 compliant. The Company has completed the installation and testing of the
upgrade and anticipates implementation by April 1999. Following this
implementation, the Company believes that its primary information technology
systems will be Year 2000 compliant.
16
<PAGE> 17
With respect to non-information technology systems, such as embedded
microprocessors, the Company is continuing its review of its potential Year
2000 exposure from these systems. The Company anticipates completion of its
data identification and risk assessment of business critical issues, and the
development of an action plan to address business critical issues by April
1999. This action plan will be implemented shortly thereafter.
Cost of Year 2000 Remediation. The Company's Year 2000 remediation costs
expended in fiscal 1998 and the six month period ended December 27, 1998,
including costs of acquiring Year 2000 compliant software, hardware and
non-information technology equipment (other than replacements that would have
been purchased regardless of the Year 2000 issue), and hiring or outsourcing
Year 2000 solution providers, have been approximately $65,000 and $431,000,
respectively. The Company's most recent assessment of its total expenditures
related to Year 2000 remediation of its primary information technology systems
is approximately $680,000. Such estimate is subject to change, particularly as a
result of uncertainties resulting from the factors described below.
Year 2000 Risks. The Company does not believe at this time that Year 2000
issues will have a material adverse effect on its financial condition or results
of operations. However, there can be no assurance given, as most of the
Company's Year 2000 risk is in the hands of third parties. The Company is
relying on its principal outside software vendor for remediation of the
Company's own systems. In addition, the Company may face exposure to Year 2000
compliance issues affecting its customers, suppliers and other third parties.
These parties may not be able to process invoices or purchase orders immediately
following January 1, 2000. 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 has not completed detailed contingency plans
in the event that its own and third-party systems experience widespread Year
2000 failures. However, the Company believes that it can secure sufficient
additional external resources to minimize the likelihood of long term, material
adverse effects. The Company plans to develop contingency plans after the risk
assessment phase is completed in April 1999.
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 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.
17
<PAGE> 18
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 4 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 acquisition and disposition
activity in Notes 5 and 8 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 November 2, 1998, the Company filed a current
report on Form 8-K which disclosed the Company's
intention to sell its security operations
pursuant to a Stock Purchase Agreement dated
October 26, 1998.
18
<PAGE> 19
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
February 10, 1999 By: /s/ Steven C. Kletjian
---------------------------------------
Steven C. Kletjian, President,
Chief Executive Officer
(Principal Executive Officer)
February 10, 1999 By: /s/ George A. Keches
---------------------------------------
George A. Keches, Vice President -
Finance, Chief Financial Officer
and Treasurer (Principal Financial
and Accounting Officer)
19
<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> 6-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-END> DEC-27-1998
<CASH> 3,659
<SECURITIES> 0
<RECEIVABLES> 86,882
<ALLOWANCES> 2,383
<INVENTORY> 0
<CURRENT-ASSETS> 90,976
<PP&E> 15,904
<DEPRECIATION> 10,492
<TOTAL-ASSETS> 155,426
<CURRENT-LIABILITIES> 34,840
<BONDS> 109,568
0
0
<COMMON> 378
<OTHER-SE> 10,433
<TOTAL-LIABILITY-AND-EQUITY> 155,426
<SALES> 252,872
<TOTAL-REVENUES> 252,872
<CGS> 222,530
<TOTAL-COSTS> 222,530
<OTHER-EXPENSES> 21,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,685
<INCOME-PRETAX> 2,793
<INCOME-TAX> 551
<INCOME-CONTINUING> 2,242
<DISCONTINUED> 1,143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,385
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE COMPANY'S EQUITY IS NOT PUBLICLY TRADED.
</FN>
</TABLE>
