10-Q 1 b40939use10-q.txt UNICCO SERVICE COMPANY ================================================================================ 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 SEPTEMBER 23, 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, SUITE 3-200, 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 [ ] ================================================================================ UNICCO SERVICE COMPANY FORM 10-Q QUARTER ENDED SEPTEMBER 23, 2001 TABLE OF CONTENTS PAGE PART I. Financial Information ITEM 1. Financial Statements: Condensed Consolidated Statements of Operations for the three months ended September 23, 2001 and September 24, 2000 (unaudited) 3 Condensed Consolidated Balance Sheets at September 23, 2001 (unaudited) and June 24, 2001 4 Condensed Consolidated Statements of Cash Flows for the three months ended September 23, 2001 and September 24, 2000 (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 15 PART II. Other Information 16 Signatures 17 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED ----------------------------- SEPTEMBER 23, SEPTEMBER 24, 2001 2000 ------------- ------------- Service revenues ............................... $ 146,988 $ 138,874 Cost of service revenues ....................... 131,135 123,116 --------- --------- Gross profit ................................ 15,853 15,758 Selling, general and administrative expenses ... 10,695 11,059 Amortization of intangible assets .............. 723 946 --------- --------- Operating income ............................ 4,435 3,753 Interest income ................................ 9 33 Interest expense ............................... (1,787) (1,893) --------- --------- Income from operations before income taxes ..................................... 2,657 1,893 Provision for income taxes ..................... 305 372 --------- --------- Net income ..................................... $ 2,352 $ 1,521 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 3 UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 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 UNICCO SERVICE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 23, 2001 (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. 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 September 23, 2001 and the results of their operations and cash flows for the three month periods ended September 23, 2001 and September 24, 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 24, 2001 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 periods ended September 23, 2001 and September 24, 2000 are set forth below:

6 (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 consolidating financial information for (i) UNICCO only, (ii) the guarantor subsidiaries on a combined basis, (iii) the nonguarantor subsidiary - UFSCC - and (iv) the Company on a consolidated basis. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

7 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

8 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

9 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)

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

11 (4) LITIGATION The Company is involved in numerous pending legal proceedings, primarily employment and labor relations matters and contract litigation related to payment disputes, arising in the ordinary course of the Company's business. Based on the information currently available, management believes that the resolution of these matters will not materially affect the Company's financial condition, results of operations or cash flows. On August 1, 2001, the Equal Employment Opportunity Commission ("EEOC") issued probable cause findings against the Company in connection with a joint investigation (which included the Massachusetts Attorney General ("AG") and the Massachusetts Commission Against Discrimination ("MCAD")) of certain sexual harassment claims filed by seven former employees. The agencies allege "pattern and practice" sexual harassment violations by the Company. The EEOC is seeking monetary and affirmative relief from the Company. Although the Company strongly disagrees with the agencies' findings, it has joined with EEOC, MCAD and the AG in a collective effort toward conciliation of this matter. By law, this conciliation must occur prior to the filing of any litigation. This dispute concerns only the Company's janitorial operations in Massachusetts. (5) ACCOUNTING DEVELOPMENTS The results for the quarter ended September 23, 2001 include the effect of adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which resulted in a $0.2 million pre-tax reduction in expenses (also $0.2 million net of tax). SFAS No. 142 provides that goodwill is no longer amortized. Goodwill must be tested for impairment on at least an annual basis and within six months of the adoption of SFAS 142. The $0.2 million pre-tax reduction of amortization expense recognized this quarter represents amortization of goodwill that arose from a prior acquisition and is no longer amortized. The following table reflects consolidated results adjusted as though adoption of SFAS No. 142 occurred as of the beginning of the three month period ended September 24, 2000: (UNAUDITED) IN THOUSANDS --------------------------------------------------- FOR THE THREE MONTHS FOR THE THREE MONTHS ENDED SEPTEMBER 23, 2001 ENDED SEPTEMBER 24, 2000 ------------------------ ------------------------ Net income: As reported $ 2,352 $ 1,521 Goodwill amortization -- 208 ------- ------- As adjusted $ 2,352 $ 1,729 ======= ======= The following table reflects the components of intangible assets as of September 23, 2001: (UNAUDITED) IN THOUSANDS ------------------------------------------------- GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION --------------------- ------------------------ Amortized intangible assets: Capitalized contracts $40,167 $17,011 Adjusted amortization expense for the three months ended September 23, 2001 was $723,000. Estimated amortization expense for each of the five succeeding fiscal years is as follows: (UNAUDITED) IN THOUSANDS ------------ Fiscal Year: 2002 $ 2,738 2003 2,584 2004 2,584 2005 2,584 2006 2,584 The carrying value of the Company's goodwill is approximately $8.3 million at September 23, 2001. There have been no changes 12 in this carrying amount since June 24, 2001. The Company has completed its impairment testing of goodwill as of September 23, 2001. Based on the results of this testing, management does not believe that the Company's goodwill is impaired. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-lived Assets", which supersedes SFAS 121 and Accounting Principles Board Opinion No. 30 and establishes a single accounting model for the disposal of long-lived assets. As of September 23, 2001, this standard has no effect on the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 23, 2001 AND SEPTEMBER 24, 2000 REVENUES Revenues for the first quarter of fiscal 2002, which ended September 23, 2001, were $147.0 million compared to $138.9 million for the first quarter of fiscal 2001, which ended September 24, 2000, an increase of $8.1 million or 5.8%. This change was primarily attributable to an increase in the Commercial Division's revenue of $10.9 million, partially offset by a decrease in the Industrial Division's revenue of $2.8 million. A major contributor to the increase in the Commercial Division's revenue was the increase in the scope of work with an existing customer which resulted in an additional $9.0 million in revenues compared with the same period in the prior year. This increase was partially offset by reductions with other existing customers and lost contracts slightly outpacing additional services performed under new and existing contracts. The decrease in the Industrial Division's revenue was primarily the result the cancellation of a contract with a major customer in the second quarter of fiscal 2001 as a result of the customer's decision to decentralize facility related-purchasing decisions. The Industrial Division also experienced some reductions in revenues from another major customer due to the impact of the slowing economy. These decreases were partially offset by increases in revenues under new and existing contracts outpacing decreases in revenues due to reductions with existing customers and lost contracts. COST OF REVENUES Cost of revenues for the first quarter of fiscal 2002 were $131.1 million, or 89.2% of revenues, compared to $123.1 million, or 88.7% of revenues, for the first quarter of fiscal 2001. The increase in cost of revenues was primarily the result of salary increases effective July 1, 2001 and increases in the Company's workers' compensation and general liability insurance premiums. During the first quarter of fiscal 2002, the Company experienced some reductions in revenues and gross profit due to the impact of the slowing U.S. economy on certain of its customers. Although to date these reductions in the scope of services for such customers have not had a material impact on profitability, management believes that a sustained economic decline could adversely impact the Company's profitability. The Company's operations were not directly affected by the terrorist attacks that occurred in the United States on September 11, 2001. The Company has no contracts in New York City. However, the Company is unable to predict the long-term impact, if any, of these events on its operations. GROSS PROFIT As a result of the foregoing, gross profit for the first quarter of fiscal 2002 was $15.9 million, or 10.8% of revenues, compared to $15.8 million, which was 11.3% of revenues, for the comparable period in fiscal 2001. Based on the Company's fiscal calendar fiscal 2002 will be a 53-week year. The expected impact will be approximately $3.5 million of additional payroll and payroll-related expenses related to unbilled direct costs for customers who have fixed-price contracts, and selling, general and administrative personnel. The Company will record the charge related to the 53rd week in the fourth quarter of fiscal 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the first quarter of fiscal 2002 were $10.7 million, or 7.3% of revenues, compared to $11.1 million, or 8.0% of revenues, for the first quarter of fiscal 2001. The decrease was primarily the result of the following: a $0.5 million decrease in professional fees (which was primarily the result of non-recurring consulting fees incurred in fiscal 2001 in connection with the implementation of the Company's shared service center), a decrease of $0.2 million in expenses related to recruiting fees for executive personnel and a $0.1 million decrease in travel and entertainment expense. These decreases were partially offset by a $0.5 million net increase in payroll and payroll-related expenses comprised of an increase of $0.7 million due to headcount and salary increases that were partially offset by a decrease of $0.2 million related to a decline in the liability associated with the Company's deferred compensation plan. The Company also had an increase of $0.1 million in expense related to its receivable with its Canadian subsidiary as a result of changes in the exchange rate. 13 AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $0.7 million in the first quarter of fiscal 2002 and $0.9 million in the first quarter of fiscal 2001. The decrease in amortization expense is primarily the result of the adoption SFAS 142, which provides that goodwill is no longer amortized. (See Note 5 of the Notes to Condensed Consolidated Financial Statements). INCOME FROM OPERATIONS As a result of the foregoing, income from operations for the first quarter of fiscal 2002 was $4.4 million, or 3.0% of revenues, compared to $3.8 million, or 2.7% of revenues for the first quarter of fiscal 2001. EBITDA As a result of the foregoing, EBITDA for the first quarter of fiscal 2002 was $5.7 million, or 3.9% of revenues, compared to $5.2 million, or 3.7% of revenues, for the first quarter of fiscal 2001. 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 first quarter of fiscal 2002 was $1.8 million, or 1.2% of revenues, compared to $1.9 million, or 1.4% of revenues, for the first quarter of fiscal 2001. The decrease in interest expense is the result of principal payments, which reduced the Company's subordinated indebtedness and a decrease in interest rates applicable to the Company's revolving credit facility. INCOME TAXES Provision for income taxes for the first quarter of fiscal 2002 was $0.3 million, or 11.5% of income before provision for income taxes, compared to $0.4 million, or 19.7% of income before provision for income taxes, for the first quarter of fiscal 2001. The lower effective tax rate in the first quarter of fiscal 2002 resulted primarily from a smaller profit contributions by the Company's Canadian subsidiary, which is taxed at a higher effective rate. NET INCOME As a result of the foregoing, net income for the first quarter of fiscal 2002 was $2.4 million, or 1.6% of revenues, compared to net income of $1.5 million, or 1.1% of revenues, for the first quarter of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES For the three months ended September 23, 2001, the Company's cash balance decreased by $2.6 million, comprised of $7.3 million of net cash used in operating activities, and $0.5 million of net cash used in investing activities, partially offset by $5.2 million of net cash provided by financing activities. Cash used in operating activities was primarily the result of an increase in accounts receivable and unbilled receivables of $9.9 million and $0.3 million, respectively. The increase in accounts receivable was primarily the result of a reduction in cash collections in the weeks following the events of September 11, 2001. The Company's cash collections have returned to normal levels in the second quarter of fiscal 2002. Also contributing to the cash used in operating activities was the increase in other current assets of $1.5 million and a decrease in accounts payable of $1.0 million. The increase in other current assets was primarily the result of a prepaid insurance premium of $1.0 million. The decrease in cash was partially offset by increases of $3.7 million related to net income adjusted for non-cash items such as amortization, amortization of debt issue costs and discount, as well as an increase in accrued expenses and other current liabilities of $1.6 million. Cash used in investing activities was primarily the result of capital expenditures of $0.5 million. Financing activities included a $3.3 million increase in the cash overdraft as well as $2.4 million in additional proceeds drawn under the revolving credit facility. During the quarter, the Company made a $250,000 payment of principal on the Company's subordinated indebtedness and a shareholder distribution of $200,000. The Company repaid the $2.75 million balance of a Subordinated Promissory Note subsequent to September 23, 2001. Capital expenditures were $0.5 million and $1.0 million, respectively, for the three-month periods ended September 2001 and 2000. The Company's operations do not generally require material investment in capital assets. The Company does not expect that its 14 capital expenditure requirements will increase materially during the next 12 months. The Company is a party to a revolving credit facility (the "Credit Facility") under which the Company may borrow up to $55.0 million for acquisitions, working capital and general corporate purposes, subject to certain conditions. Cash borrowings under the Credit Facility were $30.1 million as of September 23, 2001. The Credit Facility and the Indenture governing the Company's Senior Subordinated Notes (the "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 Company was in compliance with all covenants as of September 23, 2001. 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, to fund acquisitions and, to a lesser extent, to fund capital expenditures. As of September 23, 2001, the Company had outstanding cash borrowings of $30.1 million under the Credit Facility, as well as outstanding letters of credit of $18.6 million. An increase in accounts receivable balances and related days sales outstanding necessitated a higher level of cash borrowings during the first quarter of fiscal 2002. The increase in receivables was directly attributable to a slowdown in cash collections due to the events of September 11, 2001. Availability under the Credit Facility was $6.3 million as of September 23, 2001. 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. As a result of the Company's accounting calendar, fiscal 2002 will be a 53-week year. The expected impact will be approximately $3.5 million of additional payroll and payroll-related expenses in June 2002 related to unbilled direct costs for customers who have fixed price contracts, and selling, general and administrative personnel. 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 absorb such additional payroll expense. 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," "intends," "will" and similar expressions are intended to identify forward-looking statements. The Company cautions that these and similar statements are subject to 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, covenants and 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, wage and insurance rates, assimilation of past or future acquisitions, general economic conditions and 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 from time to time in the Company's periodic reports filed 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 24, 2001. 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 $30.1 million in cash borrowings under the Credit Facility as of September 23, 2001. These funds were borrowed under two rates: (i) $25.0 million was borrowed at LIBOR plus 2.25% (5.75% as of September 23, 2001) and (ii) the remaining outstanding balance was borrowed at the prime rate plus 0.75% (6.75% as of September 23, 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 September 23, 2001, the Company had additional outstanding indebtedness that consisted of $47.2 million of Senior Subordinated Notes and $2.75 million under a Subordinated Promissory Note with fixed interest rates of 9.875% and 14.0%, respectively. The Subordinated Promissory Note was paid in full during the second quarter of fiscal 2002. 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. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than those arising in the ordinary course of the Company's business. Management believes that the resolution of these matters will not materially affect the Company's financial position or results of operations (see Note 4 to the accompanying Condensed Consolidated Financial Statements). ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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: November 8, 2001 Time: 11:00 AM Eastern Standard Time Dial-in-Number: (800) 547-5078 Access Code: 611101 Replay Number: (800) 475-6701 Access Code: 611101 Available From: November 8, 2001 at 2:15 PM to November 15, 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. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNICCO SERVICE COMPANY ------------------------------------------------ Registrant November 7, 2001 By: /s/ Steven C. Kletjian -------------------------------------------- Steven C. Kletjian Chief Executive Officer (Principal Executive Officer) November 7, 2001 By: /s/ George A. Keches -------------------------------------------- George A. Keches, President, Chief Operating Officer and Treasurer (Principal Financial and Accounting Officer)

UNICCO SERVICE CO 10-Q