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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A*
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 [ ]
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* AMENDMENT OF PART I, ITEM 2, AS SET FORTH HEREIN.
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This Amendment to the Registrant's Quarterly Report on Form 10-Q is being
filed to correct a typographical error in the following sections: Part I, 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 - EBITDA" (in the second sentence thereunder) and
"- Comparison of Six Month Periods Ended December 27, 1998 and December 28, 1997
- - EBITDA" (in the second sentence thereunder).
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PART I. FINANCIAL INFORMATION
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.
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 $0.6
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
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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.
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
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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 $1.5
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.
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.
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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.
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's anticipates the completion of its
data gathering, 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.
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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.
.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to its Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized.
UNICCO SERVICE COMPANY
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Registrant
February 17, 1999 By: /s/ Steven C. Kletjian
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Steven C. Kletjian, President,
Chief Executive Officer
(Principal Executive Officer)
February 17, 1999 By: /s/ George A. Keches
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George A. Keches, Vice President -
Finance, Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
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