10-Q 1 b39402use10-q.txt UNICCO SERVICE COMPANY 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 MARCH 25, 2001 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.) 275 GROVE STREET, AUBURNDALE, MASSACHUSETTS 02466 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (617) 527 - 5222 (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 [ ] ================================================================================ 2 UNICCO SERVICE COMPANY FORM 10-Q QUARTER ENDED MARCH 25, 2001 TABLE OF CONTENTS

2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 UNICCO SERVICE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 25, 2001 (1) INTERIM FINANCIAL STATEMENTS These condensed consolidated financial statements include the accounts of UNICCO Service Company, a Massachusetts business trust ("UNICCO" or the "Company"), and its wholly-owned subsidiaries. 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 25, 2001 and the results of their operations and their cash flows for the three and nine month periods ended March 25, 2001 and March 26, 2000, 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 25, 2000 in its Annual Report on Form 10-K as filed with the Securities and Exchange Commission. (2) COMPREHENSIVE INCOME The components of comprehensive income for the three-month and nine-month periods ended March 25, 2001 and March 26, 2000 are set forth below:

(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 7 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

7 8 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

8 9 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

9 10 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

10 11 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)

11 12 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)

12 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) NOTES RECEIVABLE FROM OFFICER In March 2001, the Company loaned a total of $3.75 million to five officer/shareholders. These notes bear interest at the prime rate and are payable in full on March 15, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTH PERIODS ENDED MARCH 25, 2001 AND MARCH 26, 2000 Beginning in January 2000, the Company refined the manner in which the regional results are reported and analyzed. The regional operating results are divided into two divisions: Commercial and Industrial. REVENUES Revenues for the third quarter of fiscal 2001, which ended March 25, 2001, were $154.4 million compared to $140.5 million for the third quarter of fiscal 2000, which ended March 26, 2000, an increase of $13.9 million or 9.9%. This change was primarily attributable to an increase in the Commercial Division's revenue of $18.6 million, partially offset by a decrease in the Industrial Division's revenue of $4.7 million. The increase in the Commercial Division's revenue was the result of additional services performed under new and existing contracts outpacing reductions in revenue due to the reduction in scope of work or lost contracts. A major contributor to the increase in the Commercial Division revenue was the increase in the scope of work with an existing customer which resulted in an additional $9.6 million in revenues compared with the same period in the prior year. The decrease in the Industrial Division revenue was the result of lost contracts and decreased services to existing customers outpacing new contracts and increased services with existing customers. COST OF SERVICE REVENUES Cost of revenues for the third quarter of fiscal 2001 were $138.2 million, or 89.5% of revenues, compared to $125.7 million, or 89.5% of revenues, for the third quarter of fiscal 2000. The increase in cost of revenues is the result of increased volume of business, primarily in the Commercial Division. The unchanged cost of revenue as a percentage of revenues is the result of salary increases effective July 1, 2001 and increased workers' compensation and general liability insurance premiums offset by increased efficiencies on new and existing contracts. GROSS PROFIT As a result of the foregoing, gross profit for the third quarter of fiscal 2001 was $16.2 million, or 10.5% of revenues, compared to $14.8 million, or 10.5% of revenues, for the comparable period in fiscal 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the third quarter of fiscal 2001 were $10.8 million, or 7.0% of revenues, compared to $10.3 million, or 7.4% of revenues, for the third quarter of fiscal 2000. The Company experienced a decrease of $0.1 million in payroll and payroll-related expenses which was the net result of the following factors: a decrease of $0.2 million related to a decline in the liability associated with the Company's deferred compensation plan and a decrease of $0.1 million as a result of the sale of certain contracts effective December 31, 1999, partially offset by an increase of $0.2 million primarily related to salary increases effective July 1, 2000, and an increase in headcount in the Company's shared service center in order to provide adequate resources to support the Company's higher volume of business. Rent expense increased approximately $0.2 million as a result of higher rent at the Company's corporate headquarters, which was relocated to a larger facility in May 2000. The Company's expense related to its receivable with its Canadian subsidiary increased $0.3 million as a result of changes in the exchange rate. The Company had a decrease in professional fees of $0.2 million primarily related to the reduction of consulting fees related to the implementation of the Company's shared service center incurred in the prior year. The Company's marketing and promotion expense increased $0.1 million as a result of increased advertising in trade publications and costs associated with the enhancement of the Company's web site. The Company also had an increase of $0.1 million related to recruiting and training as a result of advertising and search fees incurred to fill open positions. 13 14 AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $0.9 million and $1.0 million in the third quarter of fiscal 2001 and fiscal 2000, respectively. OPERATING INCOME As a result of the foregoing, income from operations for the third quarter of fiscal 2001 was $4.4 million, or 2.9% of revenues, compared to $3.5 million, or 2.5% of revenues for the third quarter of fiscal 2000. EBITDA As a result of the foregoing, EBITDA for the third quarter of fiscal 2001 was $5.9 million, or 3.8% of revenues, compared to $5.0 million, or 3.5% of revenues, for the third quarter of fiscal 2000. EBITDA is defined as income from continuing operations 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 2001 was $1.9 million, or 1.3% of revenues, compared to $2.1 million, or 1.5% of revenues, for the third quarter of fiscal 2000. The reduction in interest expense is the result of the retirement during the third quarter of fiscal 2000 of $49.3 million (face amount) of the Company's Notes, partially offset by an increase in borrowings under the Company's Credit Facility. INCOME TAXES Provision for income taxes for the third quarter of fiscal 2001 was $0.3 million, or 11.6% 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 2000. The lower effective tax rate in the third quarter of fiscal 2001 was primarily the result of a decrease in the percentage of taxable income generated by the Company's Canadian subsidiary, which is taxed at a higher effective rate. EXTRAORDINARY LOSS During the third quarter of fiscal 2000, the Company recorded an extraordinary loss of $1.3 million, net of state tax benefit. The extraordinary loss was attributable to the repurchase and retirement of $49.3 million of Notes during the third quarter. The extraordinary loss resulted from the write-off of unamortized deferred financing costs and bond discount associated with the Notes offset by the gain recorded by repurchasing a portion of the Notes at prices below par. NET INCOME (LOSS) As a result of the foregoing, net income for the third quarter of fiscal 2001 was $2.2 million, or 1.5% of revenues, compared to net loss of $15,000 for the third quarter of fiscal 2000. COMPARISON OF NINE MONTH PERIODS ENDED MARCH 25, 2001 AND MARCH 26, 2000 REVENUES Revenues for the nine months ended March 25, 2001 were $440.8 million compared to $417.6 million for the comparable period of fiscal 2000, an increase of $23.2 million or 5.6%. This increase was primarily attributable to an increase in the Commercial Division's revenue of $41.8 million, partially offset by a decrease in the Industrial Division's revenue of $6.1 million and a decrease in revenue of $12.5 million that was the result of the sale of certain contracts, primarily in the Midwest, effective December 31, 1999. The increase in the Commercial Division's revenue was the result of additional services performed under new and existing contracts outpacing reductions in revenue due to the reduction in scope of work or lost contracts. A major contributor to the increase in the Commercial Division revenue was the increase in the scope of work with an existing customer which resulted in an additional $22.2 million in revenues compared with the same period in the prior year. The decrease in the Industrial Division revenue was the result of lost contracts and decreased services to existing customers outpacing new contracts and increased services with existing customers. COST OF SERVICE REVENUES Cost of revenues for the nine months ended March 2001 were $392.7 million, or 89.1% of revenues, compared to $370.1 million, or 88.6% of revenues, for the comparable period of fiscal 2000. The increase in cost of revenues as a percentage of revenues resulted primarily from salary increases effective July 1, 2000 and increases in the Company's workers' compensation and general liability insurance premiums. Cost of revenues for fiscal 2001 included $0.5 million of charges related to a cancelled contract in the Industrial Division. 14 15 GROSS PROFIT As a result of the foregoing, gross profit for the nine months ended March 2001 was $48.1 million, or 10.9% of revenues, compared to $47.4 million, or 11.4% of revenues, for the comparable period in fiscal 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the nine months ended March 2001 were $32.6 million, or 7.4% of revenues, compared to $31.9 million, or 7.6% of revenues, for the comparable period of fiscal 2000. The increase of $0.7 million was due to several factors. Rent expense increased approximately $0.6 million as a result of higher rent at the Company's corporate headquarters, which was relocated to a larger facility in May 2000. The Company's expense that related to its receivable with its Canadian subsidiary increased $0.5 million as a result of changes in the exchange rate. The Company's marketing and promotion expense increased $0.1 million as a result of increased advertising in trade publications and costs associated with the enhancement of the Company's web site. The Company experienced a $0.3 million increase in other office and occupancy costs that included lease expense for office furniture at the new corporate offices, personal computer leases, telephone and utility charges and phone mail system maintenance. The above increases were partially offset by various decreases in the following areas. The Company experienced a $0.6 million decrease in payroll expense which was the net result of the following factors: an increase of $0.4 million related to salary increases effective July 1, 2000 and an increase in headcount related to staffing Company's shared services center in order to provide adequate resources to support the Company's increased volume of business, a decrease of $0.4 million related to a decline in the liability associated with the Company's deferred compensation plan and a decrease of $0.6 million in payroll expense as a result of the sale of certain contracts effective December 31, 1999. The Company also experienced a $0.3 million decrease in various non-payroll expenses as a result of the sale of certain contracts effective December 31, 1999. AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $2.8 million and $3.0 million in the nine-month periods of fiscal 2001 and fiscal 2000, respectively. The change in expense was the result of the write-off of intangible assets attributable to certain contracts sold effective December 31, 1999. OPERATING INCOME As a result of the foregoing, income from operations for the nine-month period ended March 2001 was $12.6 million, or 2.9% of revenues, compared to $12.5 million, or 3.0% of revenues for the comparable period. EBITDA As a result of the foregoing, EBITDA for the nine months ended March 25, 2001 was $17.0 million, or 3.8% of revenues, compared to $17.1 million, or 4.1% of revenues, for the comparable period. EBITDA is defined as income from continuing operations before provision for income taxes, interest expense, interest income and depreciation and amortization. INTEREST INCOME Interest income for the nine months ended March 2001 was $0.1 million compared to $0.9 million for the comparable period. The reduction in interest income was the result of the use of excess cash during fiscal 2000 to retire $57.8 (face amount) of the Company's Notes in fiscal 2000. In fiscal 2001, cash on hand was used to reduce borrowings under the Company's Credit Facility. In the previous period, cash on hand was deposited into interest bearing overnight investments. INTEREST EXPENSE Interest expense for the nine months ended March 2001 was $5.9 million, or 1.3% of revenues, compared to $8.0 million, or 1.9% of revenues, for the comparable period. The reduction in interest expense was the result of the retirement during the second and third quarter of fiscal 2000 of $57.8 million (face amount) of the Company's Notes. GAIN ON SALE OF CONTRACTS In October 2000, the Company received $440,000 of contingent purchase price related to the sale, effective December 31, 1999, of certain janitorial contracts. In the second quarter of fiscal 2001, the Company recorded a gain on sale of assets for the full amount received. INCOME TAXES Provision for income taxes for the nine months ended March 2001 was $1.1 million, or 14.8% of income before provision for income taxes, compared to $0.9 million, or 16.2% of income before provision for income taxes, for the comparable period. The lower effective tax rate for the first nine months of fiscal 2001 was primarily the result of a decrease in the percentage of overall taxable income generated by of the Company's Canadian subsidiary, which is taxed at a higher effective rate. EXTRAORDINARY LOSS During the first nine months of fiscal 2000, the Company recorded an extraordinary loss of $0.9 million, net of state tax benefit. The extraordinary loss was attributable to the repurchase and retirement of $57.8 million of Notes. The extraordinary loss resulted from the write-off of unamortized deferred financing costs and bond discount associated with the Notes offset by the gain recorded for repurchasing a portion of the Notes at prices below par. NET INCOME As a result of the foregoing, net income for the nine months ended March 2001 was $6.2 million, or 1.4% of revenues, compared to net income of $3.6 million, or 0.9% of revenues, for the comparable period. 15 16 LIQUIDITY AND CAPITAL RESOURCES For the nine months ended March 25, 2001, the Company's cash increased by $0.4 million. Cash activity included $5.8 million of net cash used for financing activities partially offset by $0.8 million and $5.4 million of net cash provided by operating and investing activities, respectively. Cash provided by operating activities was primarily the result of $10.7 million related to net income (adjusted for non-cash items such as depreciation and amortization) and increases of $1.8 million and $4.3 million related to accounts payable and accrued expenses, respectively. This increase in cash was partially offset by increases in accounts receivable and unbilled receivables of $10.9 and $6.4 million, respectively. Cash used in investing activities was primarily the result of a $3.75 million increase in notes receivable from officers (See Note 5 to the Condensed Consolidated Financial Statements) and $2.7 million for capital expenditures partially offset by the receipt of $0.4 million in contingent purchase price from the sale of certain contracts, effective December 31, 1999. Financing activities included a $3.6 million increase in the cash overdraft as well as $4.0 million in additional borrowings under the Company's line of credit. During the nine-month period, the Company made $0.75 million of optional principal payments on the Company's subordinated indebtedness and shareholder distributions of $1.5 million, which included a tax distribution of $0.9 million. Capital expenditures were $2.7 million and $1.9 million respectively, for the nine-month periods ended March 2001 and 2000. The Company's operations do not generally require material investment in capital assets. The Company does not expect that its capital expenditure requirements will increase materially during the next 12 months. The Company is a party to an amended revolving credit facility (the "Credit Facility") under which the Company may borrow up to $55.0 million for working capital and general corporate purposes, subject to certain conditions. There were cash borrowings of $29.9 million under the Credit Facility as of March 25, 2001. 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 Subordinated Promissory Note ($3.25 million at March 25, 2001) is due on September 30, 2001 and is classified as a current liability in the accompanying balance sheet as of March 25, 2001. 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. 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," "will" 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 The information provided below updates that which was previously presented in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the Company's Form 10-K for the fiscal year ended June 25, 2000. 16 17 The Company is subject to market risks arising from changes in interest rates and foreign currency exchange rates. The Company's primary interest rate exposure results from changes in LIBOR and the prime rate which are used to determine the applicable interest rates under the Credit Facility. The Company had $29.9 million in cash borrowings under the Credit Facility as of March 25, 2001. These funds were borrowed under two rates: (i) $23.0 million was borrowed at LIBOR plus 2.25% (7.48% as of March 25, 2001) and (ii) the remaining outstanding balance was borrowed at the prime rate plus 0.75% (8.25% as of March 25, 2001). Given a stable principal amount, the Company's potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate on all variable rate obligations would be approximately $0.3 million. At March 25, 2001, the Company had additional outstanding indebtedness that consisted of $47.2 million of Senior Subordinated Notes and $3.25 million of a Subordinated Promissory Note with fixed interest rates of 9.875% and 14.0%, respectively. Fluctuations in interest rates will not affect the interest payable on the Senior Subordinated Notes or Subordinated Promissory Note, which is fixed. The Company also has some exposure to foreign currency exchange rate fluctuations for the cash flows received from its foreign affiliate. This risk is mitigated by the fact that the affiliate operates in Canada and operations are conducted in their local currency. Currently the Company does not engage in any foreign currency hedging activities as it does not believe that its foreign currency exchange rate risk is material. 17 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, results of operations or cash flows, 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 The Company has scheduled a conference call to discuss its third quarter and year-to-date financial results. Interested parties may access the conference call as follows: Date: May 10, 2001 Time: 9:00 AM Eastern Standard Time Dial-in-Number: (800) 547 - 5078 Access Code: 585920 Replay Number: (800) 475-6701 Access Code: 585920 Available From: May 10, 2001 at 2:00 PM to May 17, 2001 at 11:59 PM ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Not applicable. b. Reports on Form 8-K: Not applicable. 18 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 May 9, 2001 By: /s/ Steven C. Kletjian ---------------------------------------------- Steven C. Kletjian, President, Chief Executive Officer (Principal Executive Officer) May 9, 2001 By: /s/ George A. Keches ---------------------------------------------- George A. Keches, Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 19

UNICCO SERVICE CO 10-Q