10-Q 1 b38219uce10-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 DECEMBER 24, 2000 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 [ ] ================================================================================ 2 UNICCO SERVICE COMPANY FORM 10-Q QUARTER ENDED DECEMBER 24, 2000 TABLE OF CONTENTS PAGE PART I. Financial Information ITEM 1. Financial Statements: Condensed Consolidated Statements of Income for the three months and six months ended December 24, 2000 and December 26, 1999 (unaudited) 3 Condensed Consolidated Balance Sheets at December 24, 2000 (unaudited) and June 25, 2000 4 Condensed Consolidated Statements of Cash Flows for the six months ended December 24, 2000 and December 26, 1999 (unaudited) 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. Other Information 18 Signatures 19 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS)

THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- --------------------------- ~~SEPTEMBER~~DECEMBER 24, ~~SEPTEMBER~~DECEMBER 26, DECEMBER 24, DECEMBER 26, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Service revenues ............................ $~~138~~147,~~874~~524 $~~135~~141,~~466~~631 $286,398 $277,097 Cost of service revenues .................... ~~123~~131,~~116~~367 ~~119~~124,~~542~~910 254,483 244,452 -------- -------- -------- -------- Gross profit ............................. 1516,~~758~~157 1516,~~924~~721 31,915 32,645 Selling, general and administrative expenses................................. 1110,~~059~~771 10,~~883~~679 21,830 21,562 Amortization of intangible assets ........... ~~946~~945 1,~~020~~022 1,891 2,042 -------- -------- -------- -------- Operating income ......................... 34,~~753~~441 45,~~021~~020 8,194 9,041 Interest income ............................. 3328 ~~361~~372 61 733 Interest expense ............................ (12,~~893~~036) (2,~~958~~885) (3,929) (5,843) Gain on sale of contracts ................... 440 -- 440 -- -------- -------- -------- -------- Income from operations before income taxes...........................~~......~~ 12,~~893~~873 12,~~424~~507 4,766 3,931 Provision for income taxes .................. ~~372~~416 ~~344~~326 788 670 -------- -------- -------- -------- Net income before extraordinary item ........ 2,457 2,181 3,978 3,261 Extraordinary gain, net of tax of $16 ....... -- 388 -- 388 -------- -------- -------- -------- Net income .................................. $ 12,~~521~~457 $ 12,~~080~~569 $ 3,978 $ 3,649 ======== ======== ======== ========

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

~~SEPTEMBER~~DECEMBER 24, 2000 JUNE 25, (UNAUDITED) 2000 ------------- --------- ASSETS Current assets: Cash and cash equivalents ................................ $ 34,~~512~~053 $ 2,333 Accounts receivable, less reserves of $3,~~131~~008 and $3,194 .. 5758,~~957~~946 49,067 Unbilled receivables ..................................... 2725,~~362~~394 24,567 Other current assets ..................................... 45,~~327~~006 5,679 -------- -------- Total current assets ................................. 93,~~158~~399 81,646 -------- -------- Property and equipment, at cost ............................ 19,~~119~~431 18,234 Less - accumulated depreciation and amortization ......... 1213,~~809~~251 12,435 -------- -------- 6,~~310~~180 5,799 -------- -------- Notes receivable and accrued interest from officers ........ 545 645 Intangible assets, net of amortization ..................... 3534,~~163~~182 36,166 Other assets, net .......................................... 4,~~116~~324 3,875 -------- -------- 39,~~824~~051 40,686 -------- -------- $~~139~~138,~~292~~630 $128,131 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft ........................................... 75,~~574~~061 2,597 Accounts payable ......................................... 1012,~~141~~024 8,966 Accrued payroll and payroll-related expenses ............. 1416,~~813~~967 16,301 Deferred income taxes .................................... 2,343 2,343 Current portion of long-term debt ....................... 3,500 -- Other accrued expenses ................................... 7,~~986~~240 6,433 -------- -------- Total current liabilities ............................ 4247,~~857~~135 36,640 -------- -------- Long-term liabilities: Line of credit ........................................... 2926,~~221~~637 25,886 Long-term debt, ~~less current portion~~.......................................... 5047,~~754~~009 50,998 Other long-term liabilities .............................. 1,~~240~~398 647 -------- -------- Total long-term liabilities .......................... 8175,~~215~~044 77,531 -------- -------- Commitments and Contingencies Shareholders' equity: Common shares ............................................ 378 378 Retained earnings ........................................ 1516,~~555~~949 14,234 Accumulated other comprehensive income ................... (~~211~~374) (150) -------- -------- 1516,~~722~~953 14,462 Less: Treasury shares at cost .................................... (502) (502) -------- -------- Total shareholders' equity ............................ 1516,~~220~~451 13,960 -------- -------- $~~139~~138,~~292~~630 $128,131 ======== ========

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)

~~THREE~~SIX MONTHS ENDED ------------------------------- ~~SEPTEMBER~~DECEMBER 24, ~~SEPTEMBER~~DECEMBER 26, 2000 1999 ------------- ------------- Cash flows relating to operating activities: Net income ................................................ $ 13,~~521~~978 $ 13,~~080~~649 Adjustments to reconcile net income to net cash provided by ~~(used in)~~ operating activities: Amortization of intangible assets ..................... ~~946~~ 1,~~020~~891 2,042 Amortization of debt issue costs and discount ......... 116 138 Depreciation and amortization .........................~~.....~~ 58984 ~~125~~1,086 ~~Depreciation~~Gain ~~and~~on ~~amortization~~disposals ..................................... ~~477~~(9) ~~535~~(101) ~~Loss~~Gain on ~~disposals~~sale of contracts ............................... (7440) -- Extraordinary gain, net of tax ........................ -- (57388) Deferred compensation plan ............................ (8139) -- Changes in assets and liabilities: Accounts receivable ................................... (810,~~999~~061) (13,~~853)~~394 Unbilled receivables .................................. (~~2,816~~848) 2(1,~~047~~810) Other current assets .................................. ~~1,346~~660 1,~~420~~495 Other long-term assets ................................ (~~294~~397) (48102) Accounts payable ...................................... ~~520~~2,416 (1,~~701~~415) Accrued expenses and other current liabilities ........ 2,187 (760) Other long-term liabilities ........................... ~~771~~593 ~~452~~254 Other ~~long-term liabilities~~..................... ~~592 67 Other~~............................~~...............~~ ~~115~~173 2417 -------- -------- Net cash ~~(used in)~~ provided by operating ~~(5,778) 3,111~~ activities .............~~.........................~~ 1,104 7,499 -------- -------- Cash flows relating to investing activities: Purchases of property and equipment, net .................. (1,~~032~~511) (~~926~~1,560) Proceeds from sale of property and equipment .............. 28116 94144 ~~Payments~~Proceeds ~~received for notes receivable~~ from ~~100~~sale 83of ~~officers,~~contracts ~~net~~........................... 440 -- Payments received for notes receivable from officers ........ 100 509 -------- -------- Net cash used in investing activities ................. (~~904~~855) (~~749~~907) -------- -------- Cash flows relating to financing activities: Cash overdraft ............................................ 42,~~977~~464 -- ~~Net~~Proceeds ~~proceeds~~ from line of credit .............................. ~~3,335~~751 -- ~~Payments~~Debt ofprepayment ~~debt~~........................................... (~~250~~500) (~~250~~8,424) Distributions to shareholders ............................. (~~200~~1,263) (~~200~~400) -------- -------- Net cash provided by (used in) financing activities ...~~...............................~~ 71,~~862~~452 (~~450~~8,824) -------- -------- Effect of exchange rate changes on cash and cash equivalents ..~~.................................~~ ~~(1)~~19 (210) -------- -------- Net increase (decrease) in cash and cash equivalents ............ 1,~~179~~720 1(2,~~910~~242) Cash and cash equivalents, beginning of period ................ 2,333 24,938 -------- -------- Cash and cash equivalents, end of period ...................... $ 34,~~512~~053 $ 2622,~~848~~696 ======== ========

The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 UNICCO SERVICE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 24, 2000 (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 December 24, 2000 and the results of their operations and their cash flows for the three and six month periods ended December 24, 2000 and December 26, 1999, 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 included in its Annual Report on Form 10-K as filed with the Securities and Exchange Commission. (2) GAIN ON SALE OF CONTRACTS In October 2000, the Company received $440,000 of the potential $450,000 of contingent purchase price related to the sale, effective December 31, 1999, of certain janitorial contracts. In the quarter ended December 24, 2000, the Company recorded a gain on sale of assets for the full amount received. (3) COMPREHENSIVE INCOME The components of comprehensive income for the three-month and six-month periods ended December 24, 2000 and December 26, 1999 are set forth below:

~~FOR THE THREE MONTHS ENDED SEPTEMBER 24, 2000~~ (UNAUDITED) IN THOUSANDS -----------------------------------------------------------------~~------------------~~ ~~NONGUARANTOR~~FOR ~~GUARANTOR~~THE ~~SUBSIDIARY~~THREE ~~CONSOLIDATED~~FOR ~~UNICCO~~THE ~~SUBSIDIARIES~~THREE ~~UFSCC~~FOR ~~ELIMINATIONS~~THE ~~TOTAL~~SIX ~~---------~~FOR ~~------------~~THE ~~------------~~SIX ~~------------~~MONTHS ~~------------~~ENDED ~~Service~~MONTHS ~~revenues......................~~ENDED $MONTHS ~~116,106~~ENDED $MONTHS ~~8,845~~ENDED ~~$13~~DECEMBER 24,~~923~~ $DECEMBER ~~-- $ 138~~26,~~874~~ ~~Cost~~DECEMBER ~~of service revenues.............. 102~~24,~~396~~ ~~8,087~~DECEMBER 1226,~~633~~ --2000 ~~123,116~~1999 ~~---------~~2000 ~~-------~~1999 ------- ----- --------- ~~Gross profit........................ 13,710 758 1,290~~ -- ~~15,758 Selling, general and administrative expenses............................. 10,191 313 555~~ -- ~~11,059 Amortization of intangible assets..... 775 95 76~~ -- ~~946~~ --------- ------- ------- ----- --------- ~~Operating income.................... 2,744 350 659~~ -- ~~3,753~~Net ~~Interest~~ income ....................... ~~17 -- 16 -- 33 Interest expense~~..............~~........~~ (1$2,~~607)~~457 ~~(137) (149) -- (1~~$2,~~893)~~569 ~~--------- ------- ------- ----- --------- Income from operations before income taxes............................... 1~~$3,~~154~~978 ~~213 526 -- 1~~$3,~~893~~649 ~~Provision~~Other ~~for~~comprehensive income ~~taxes............ 70 40 262~~ -- ~~372~~Foreign ~~---------~~currency ~~-------~~translation ~~------- ----- --------- Income from operations before equity in net earnings of subsidiaries~~adjustment.... ~~1,084~~(32) ~~173~~6 ~~264~~(85) --(10) ~~1,521~~Marketable ~~Equity~~securities ~~in net earnings of subsidiaries~~....................... ~~437~~(131) 5543 -- (~~492~~139) --43 ------~~---~~ ------- ------- ----- -~~--------~~ ~~Net~~Comprehensive income ............................ $ 12,~~521~~294 $2,618 ~~228~~ $3,754 ~~264~~ $~~(492) $ 1~~3,~~521~~682 ======~~===~~ ======= ======= ===== =~~========~~

6 7 (4) SEGMENT INFORMATION The Company operates in one segment, that is, as a provider of integrated facility services. Although management reviews and operates the business on a regional basis, the economic characteristics of the regions' services and client bases are similar. Therefore, the Company's regions are aggregated as one business segment. The table below contains certain financial information by geographic region (in thousands):

~~FOR~~NET ~~THE~~REVENUE ~~THREE~~FROM ~~MONTHS~~LONG-LIVED ~~ENDED~~OPERATIONS ~~SEPTEMBER~~ASSETS ~~26, 1999 (UNAUDITED)~~ -------------------------------------------------------------~~----------------------~~ ~~NONGUARANTOR GUARANTOR SUBSIDIARY CONSOLIDATED UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL~~ --------- ------------ --~~----------~~ ~~------------~~FOR ~~------------~~THE ~~Service~~THREE ~~revenues......................~~FOR $THE ~~113,699~~THREE $FOR ~~9,227~~THE ~~$12,540~~SIX $FOR --THE $SIX ~~135,466~~MONTHS ~~Cost~~ENDED ofMONTHS ~~service~~ENDED ~~revenues..............~~MONTHS ~~100,255~~ENDED ~~8,125~~MONTHS ~~11,162~~ENDED --AS ~~119,542~~OF ~~---------~~AS ~~-------~~OF ~~-------~~DECEMBER ~~------~~24, ~~---------~~DECEMBER ~~Gross profit........................ 13~~26,~~444~~ ~~1,102~~DECEMBER 124,~~378~~ --DECEMBER 1526,~~924~~ ~~Selling,~~DECEMBER ~~general and administrative expenses............................. 9~~24,~~850~~ ~~306~~JUNE ~~727 -- 10~~25,~~883~~ ~~Amortization~~2000 of1999 ~~intangible~~2000 ~~assets.....~~1999 ~~848~~2000 972000 75 -- ~~1,020~~ --------- ---~~----~~ ------- ------ --------- ~~Operating income.................... 2,746 699 576~~ -- ~~4,021 Interest income....................... 345~~ -- 16 -- ~~361 Interest expense...................... (2,809)~~ -- ~~(149)~~ -- ~~(2,958)~~ ------~~---~~ ------- ------- ------ --~~-------~~ ~~Income~~By ~~from~~Geographic ~~continuing~~Area ~~operations~~United ~~before income taxes~~States.........~~.........~~ ~~282~~$134,189 ~~699~~$128,713 ~~443~~$259,140 --$251,639 1$40,~~424~~301 ~~Provision~~$41,188 ~~for income taxes~~Canada................ 4213,335 2512,918 ~~277~~27,258 --25,458 ~~344~~4,930 5,297 --------- ------- -~~------~~ ----- ---~~------~~ ~~Income from operations before equity in net earnings of subsidiaries...... 240 674 166~~ -- ~~1,080 Equity in net earnings of subsidiaries......................... 840 35~~ -- ~~(875)~~ -- --~~-------~~ ------- ------- ~~------ --------- Net income~~Consolidated............~~................~~ $ 1147,~~080~~524 $141,631 ~~709~~ $286,398 ~~166~~ $277,097 ~~(875)~~ $45,231 1$46,~~080~~485 ========= ======== ======== ======== ======= =======

7 8 (5) 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. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

~~SEPTEMBER~~FOR THE THREE MONTHS ENDED DECEMBER 24, 2000 (UNAUDITED) ----------------------------------------------------------------------------~~----~~ NONGUARANTOR GUARANTOR SUBSIDIARY- CONSOLIDATED UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL -------- ------------ ------------- ------------ ------------ ~~Assets~~Service ~~Current~~revenues ~~assets: Cash and cash equivalents~~................... ~~$ 2,252 $ 13 $ 1,247 $ -- $ 3,512 Accounts receivable, less reserve of $3,131~~. ~~46,177 4,671 7,109 -- 57,957 Unbilled receivables~~..........~~..............~~ 22$125,~~733~~691 2$8,~~998~~498 1$13,~~631~~335 $ -- 27$147,~~362~~524 ~~Intercompany~~Cost ~~receivable~~of ~~(payable)...........~~service ~~5,428~~revenues ~~2,560 (7,988) -- -- Other current assets~~........................ 3111,~~891~~016 --8,353 ~~436~~11,998 -- 4131,~~327~~367 -------- -------- ------- ----~~----~~ --------- ~~Total~~Gross ~~current~~profit ~~assets~~............... ~~80,481 10,242 2,435 -- 93,158 -------- -------- ------- -------- --------- Property and equipment, at cost~~................. 1514,~~487~~675 ~~996~~145 21,~~636~~337 -- 1916,~~119~~157 ~~Less~~Selling, ~~-accumulated~~general ~~depreciation~~ and ~~amortization~~administrative expenses...~~............................~~ 109,~~777~~851 ~~886~~320 ~~1,146~~600 -- 1210,~~809~~771 ~~--------~~Amortization ~~--------~~of ~~-------~~intangible ~~--------~~assets ~~--------- Net property and equipment~~.............. ~~4,710~~776 ~~110~~95 ~~1,490~~74 -- ~~6,310~~945 -------- -------- ------- ----~~----~~ --------- ~~Due~~Operating ~~from~~income ~~(to) affiliates~~............................ 144,~~509~~048 (~~620~~270) 663 -- ~~(13~~4,~~889)~~441 --Interest ~~Investment~~income ~~in subsidiary~~............................... ~~15,929~~10 ~~758~~ -- ~~(16,687)~~18 -- ~~Notes~~28 ~~receivable~~Interest ~~and~~expense ~~accrued interest from officers~~..............................~~.....~~ ~~545~~(1,754) --(137) --(145) -- ~~545~~(2,036) ~~Intangible~~Gain ~~assets,~~on ~~net~~sale of ~~amortization......~~contracts ~~27,834 3,720 3,609 -- 35,163 Other assets, net~~.....................~~......~~ ~~4,087~~440 -- 29 -- ~~4,116~~ --~~------~~ ~~--------~~440 ------- -~~-------~~ ------~~---~~ ~~62,904 3,858 3,638 (30,576) 39,824~~ -------- ----~~----~~ ------- -~~-------~~ ~~---------~~Income ~~$148,095~~before $provision ~~14,210~~for $income ~~7,563~~taxes ~~$(30,576) $ 139,292 ======== ======== ======= ======== ========= Liabilities and Shareholders' Equity Current liabilities: Cash overdraft~~......~~........................~~ ~~$ 7~~2,~~103~~744 $(407) ~~471~~536 $ -- ~~$ -- $ 7~~2,~~574~~873 ~~Accounts~~Provision ~~payable............................~~for ~~7,529 660 1,952 -- 10,141 Accrued payroll and payroll-related expenses................................... 13,121 647 1,045 -- 14,813 Deferred~~ income taxes~~.......................~~ ~~2,145 198 -- -- 2,343 Other accrued expenses~~...................... ~~6,659~~120 ~~124~~40 ~~1,203~~256 -- ~~7,986~~416 -------- -------- ------- ----~~----~~ --------- ~~Total~~Income ~~current~~before ~~liabilities..........~~equity ~~36,557~~in ~~2,100~~net ~~4,200~~earnings ~~-- 42,857 -------- -------- ------- -------- --------- Long-term liabilities: Line~~ of ~~credit~~subsidiaries .............................. ~~29,221 -- -- -- 29,221 Long-term debt, less current portion~~..~~......~~ 502,~~754~~624 --(447) --280 -- 502,~~754~~457 ~~Other~~Equity ~~long-term~~in ~~liabilities.................~~net ~~1,240~~earnings --of --subsidiaries ~~-- 1,240 -------- -------- ------- -------- --------- Total long-term liabilities~~........ ~~81,215~~(167) --58 -- 109 -- ~~81,215~~ -------- -------- ------- ----~~----~~ --------- ~~Commitments~~Net ~~and~~income ~~Contingencies Shareholders' equity~~........................ ~~30,825 12,110 3,363 (30,576) 15,722 Less treasury shares at cost~~............~~....~~ ~~(502)~~$ ~~-- -- -- (502) -------- -------- ------- -------- --------- Total shareholders' equity......... 30~~2,~~323~~457 ~~12,110~~$ ~~3,363~~ (~~30,576~~389) ~~15,220 -------- -------- ------- -------- ---------~~ $~~148,095~~ $280 ~~14,210~~ $109 ~~7,563~~ $~~(30,576)~~ ~~$ 139~~2,~~292~~457 ======== ======== ======= ====~~====~~ =========

~~JUNE~~FOR 25THE THREE MONTHS ENDED DECEMBER 26, ~~2000~~1999 (UNAUDITED) -------------------------------------------------------------------------~~--------~~ NONGUARANTOR GUARANTOR SUBSIDIARY- CONSOLIDATED UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------- ~~Assets~~Service ~~Current~~revenues ~~assets: Cash and cash equivalents~~................... ~~$ 2,320 $ 13 $ -- $ -- $ 2,333 Accounts receivable, less reserve of $3,194~~. ~~38,387 3,888 6,792 -- 49,067 Unbilled receivables~~.........~~...............~~ 21$119,~~278~~512 2$9,~~343~~201 ~~946~~$12,918 $ -- 24$141,~~567 Intercompany receivable (payable)........... 2,~~631 ~~3,578~~Cost ~~(6,209)~~of --service --revenues ~~Other current assets~~.....................~~...~~ 5104,~~106~~921 --8,336 ~~573~~11,653 -- 5124,~~679~~910 -------- -------- ------- -----~~---~~ --------- ~~Total~~Gross ~~current~~profit ~~assets~~............... ~~69,722 9,822 2,102 -- 81,646 -------- -------- ------- -------- --------- Property and equipment, at cost~~................ 14,~~624~~591 ~~987~~865 21,~~623~~265 -- 1816,~~234~~721 ~~Less~~Selling, ~~-accumulated~~general ~~depreciation~~ and ~~amortization~~administrative expenses .~~.............................~~ 109,~~465~~617 ~~873~~304 ~~1,097~~758 -- 1210,~~435~~679 ~~--------~~Amortization ~~--------~~of ~~-------~~intangible ~~--------~~assets ~~--------- Net property and equipment~~............. ~~4,159~~848 ~~114~~97 ~~1,526~~77 -- 51,~~799~~022 -------- -------- ------- -----~~---~~ --------- ~~Due~~Operating ~~from~~income ~~(to) affiliates~~.................... ~~14,509 (620) -- (13,889) -- Investment in subsidiary~~.......~~.............~~ 154,~~492~~126 ~~703~~464 430 -- ~~(16~~5,~~195)~~020 --Interest ~~Notes~~income ~~receivable and accrued interest from officers~~..............................~~....~~ ~~645~~354 -- --18 -- ~~645~~372 ~~Intangible~~Interest ~~assets,~~expense ~~net of amortization~~...... ~~28,609 3,815 3,742 -- 36,166 Other assets, net~~.......................~~....~~ 3(2,~~846~~454) --(274) 29(157) -- ~~3,875 -------- -------- ------- -------- --------- 63,101 3,898 3,771~~ (302,~~084~~885) ~~40,686~~ -------- -------- ------- -----~~---~~ --------- ~~$136,982~~Income $before ~~13,834~~provision $for ~~7,399~~income ~~$(30,084)~~taxes ~~$ 128,131 ======== ======== ======= ======== ========= Liabilities and Shareholders' Equity Current liabilities: Cash overdraft~~.....~~.........................~~ ~~$ 329 $ 399 $ 1,869 $ -- $~~ 2,~~597~~026 ~~Accounts~~190 ~~payable............................~~291 ~~7,168 689 1,109~~ -- 82,~~966~~507 ~~Accrued~~Provision ~~payroll~~for ~~and payroll-related expenses.................................. 14,783 656 862 -- 16,301 Deferred~~ income taxes~~.......................~~ ~~2,145 198 -- -- 2,343 Other accrued expenses~~...................~~...~~ ~~6,016~~77 1045 ~~407~~204 -- ~~6,433~~326 -------- -------- ------- -----~~---~~ --------- ~~Total~~Income ~~current~~before ~~liabilities..........~~equity ~~30,441~~in ~~1,952~~net ~~4,247~~earnings --of ~~36,640~~subsidiaries ~~--------~~and ~~--------~~extraordinary ~~-------~~item ~~-------- --------- Long-term liabilities: Line of credit~~........~~......................~~ 251,~~886~~949 --145 --87 -- 252,~~886~~181 ~~Long-term~~Equity ~~debt..............................~~in ~~50,998~~net --earnings --of --subsidiaries ~~50,998 Other long-term liabilities~~.......~~..........~~ ~~647~~232 --18 -- (250) -- ~~647~~ -------- -------- ------- -----~~---~~ --------- ~~Total~~Net ~~long-term~~income ~~liabilities~~before extraordinary item ......... 772,~~531~~181 163 87 (250) 2,181 Extraordinary gain, net of tax of $16 ........ 388 -- -- -- ~~77,531~~388 -------- -------- ------- -----~~---~~ --------- ~~Commitments~~Net ~~and~~income ~~Contingencies Shareholders' equity~~........................ ~~29,512 11,882 3,152 (30,084) 14,462 Less treasury shares at cost~~...........~~.....~~ ~~(502)~~$ ~~-- -- -- (502) -------- -------- ------- -------- --------- Total shareholders' equity......... 29~~2,~~010~~569 ~~11,882 3,152 (30,084) 13,960 -------- -------- ------- -------- ---------~~ $~~136,982~~ $163 ~~13,834~~ $ ~~7,399~~87 $(~~30,084~~250) $ ~~128~~2,~~131~~569 ======== ======== ======= =====~~===~~ =========

8 9 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

~~THREE~~FOR THE SIX MONTHS ENDED ~~SEPTEMBER~~DECEMBER 24, 2000 (UNAUDITED) -----------------------------------------------------------------------~~----~~ NONGUARANTOR GUARANTOR SUBSIDIARY- CONSOLIDATED UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ ~~Cash~~Service ~~flows~~revenues ~~relating to operating activities: Net income~~ ...........................~~.....~~ $ 1241,~~521~~797 $17,343 ~~228~~ $27,258 ~~264~~ $ ~~(492)~~-- $ 1286,~~521~~398 ~~Net~~Cost ~~earnings from equity investment........ (437) (55) -- 492 -- Adjustments to reconcile net income to net cash provided by operating activities: Amortization~~ of ~~intangible~~service ~~assets.......~~revenues ~~775 95 76 -- 946 Amortization of debt issue costs and discount~~...................~~...........~~ 58213,412 16,440 24,631 -- 254,483 -- -- ~~58 Depreciation and amortization........... 388 13 76~~ -- ~~477 Loss on disposals....................... (7)~~ -- -- ----- ~~(7) Deferred compensation plan.............. (8)~~ ------- ----- -------- ~~(8)~~Gross ~~Changes~~profit ~~in assets and liabilities: Accounts receivable~~................... ~~(7,789) (783) (427) -- (8,999) Unbilled receivables~~..........~~........~~ (128,~~454)~~385 ~~(656)~~903 ~~(706) -- (~~2,~~816)~~627 ~~Intercompany receivable (payable)..... (2,796) 1,017 1,894 (115)~~ -- ~~Other current assets.................. 1~~31,~~215~~915 ~~1 130 -- 1~~Selling,~~346~~ ~~Other~~general ~~long-term~~and ~~assets................~~administrative ~~(294) -- -- -- (294) Accounts payable~~expenses...................... ~~361 (28) 187 -- 520 Accrued expenses and other current liabilities~~............~~.............~~ (120,~~020)~~042 ~~105~~633 1,~~686~~155 -- ~~771~~21,830 ~~Other~~Amortization ~~long-term~~of ~~liabilities...........~~intangible ~~592~~assets ~~-- -- -- 592 Other~~..........~~.......................~~ --1,551 --190 150 -- ~~115~~1,891 ~~115~~ -------- ------- ------- ------ --------- ~~Net~~Operating ~~cash~~income ~~(used in) provided by operating activities~~.........................~~....~~ (86,~~895)~~792 ~~(63)~~80 31,~~180~~322 -- (58,~~778)~~194 ~~--------~~Interest ~~-------~~income ~~------- ------ --------- Cash flows relating to investing activities: Purchase of property and equipment, net~~.... ~~(960) (9) (63) -- (1,032) Proceeds from sale of property and equipment~~........................~~........~~ 2827 -- --34 -- 2861 ~~Payments~~Interest ~~received~~expense ~~for notes receivable from officers, net~~............................ ~~100~~(3,361) --(274) --(294) -- ~~100~~(3,929) ~~--------~~Gain ~~-------~~on ~~-------~~sale ~~------~~of ~~---------~~contracts ~~Net cash used in investing activities~~.................. ~~(832)~~440 ~~(9)~~-- ~~(63)~~-- -- ~~(904)~~440 -------- ------- ------- ------ --------- ~~Cash~~Income ~~flows~~before ~~relating~~provision tofor ~~financing~~income ~~activities:~~taxes ~~Cash overdraft~~...~~..........................~~ 63,~~774~~898 72 (194) 1,~~869)~~062 -- 4,~~977~~766 ~~Net~~Provision ~~proceeds~~for ~~from~~income ~~line~~taxes ~~of credit~~........... ~~3,335 -- -- -- 3,335 Payment on debt~~......~~......................~~ ~~(250)~~190 --80 --518 -- ~~(250)~~788 ~~Distribution to shareholders............... (200)~~ -- -- -- ~~(200)~~ --~~------~~ ------- ------- ------ --------- ~~Net~~Income ~~cash~~before ~~provided~~equity byin ~~(used~~net ~~in)~~earnings ~~financing~~of ~~activities~~subsidiaries and gain on sale ............~~......~~ 93,~~659~~708 72 (~~1,869~~274) 544 -- 73,~~862~~978 ~~--------~~Equity ~~-------~~in ~~-------~~net ~~------~~earnings ~~--------- Effect~~ of ~~exchange~~subsidiaries ~~rate changes on cash and cash equivalents~~.....~~......................~~ --270 113 -- (1383) -- ~~(1)~~ -------- ------- ------- ------ --------- Net ~~(decrease)~~income ~~increase in cash and cash equivalents~~................................ ~~(68) -- 1,247 -- 1,179 Cash and cash equivalents, beginning of period 2,320 13 -- -- 2,333 -------- ------- ------- ------ --------- Cash and cash equivalents, end of period~~.~~.....~~ $ 23,~~252~~978 $ 13(161) $ ~~1,247~~544 $(383) -- $ 3,~~512~~978 ======== ======= ======= ====== =========

~~THREE~~FOR THE SIX MONTHS ENDED ~~SEPTEMBER~~DECEMBER 26, 1999 (UNAUDITED) ----------------------------------------------------------------------~~--------~~ NONGUARANTOR GUARANTOR SUBSIDIARY- CONSOLIDATED UNICCO SUBSIDIARIES UFSCC ELIMINATIONS TOTAL -------- ------------ ------------ ------------ ------------ ~~Cash~~Service ~~flows~~revenues ~~relating to operating activities: Net income (loss)~~........................... $ 1233,~~080~~211 $18,428 ~~709~~ $25,458 ~~166~~ $ ~~(875) $ 1,080 Net earnings from equity investment........ (840) (35)~~ -- ~~875 -- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of intangible assets....... 848 97 75 -- 1~~$277,~~020~~097 ~~Amortization~~Cost of ~~debt~~service ~~issue~~revenues ~~costs and discount~~...................~~...........~~ ~~125~~205,176 16,461 22,815 -- 244,452 -- -- ~~125 Depreciation and amortization........... 424 19 92~~ -- ~~535 Loss on disposals....................... (50) (7)~~ -- -- ~~(57) Changes in assets and liabilities: Accounts receivable................... 457 (2,699) 389~~ -- ~~(1,853) Unbilled receivables.................. 2,653 (612) 6~~ --- ~~2,047 Intercompany receivable (payable)..... (3,151) 3,023 152 (24)~~ -- ~~Other current assets.................. 1,437 (1) (16)~~ -- ~~1,420 Other long~~-~~term assets................ (55)~~ -- 7 -- ~~(48) Cash overdraft........................~~ -- ~~146~~ --- ~~(146)~~ -------- ~~Accounts~~Gross ~~payable~~profit ...................... ~~(584) (613) (504) -- (1,701) Accrued expenses and other current liabilities~~.......~~..................~~ ~~477~~28,035 521,967 ~~(77)~~2,643 -- ~~452~~32,645 ~~Other~~Selling, ~~long-term~~general ~~liabilities...........~~and 67administrative ~~-- -- -- 67 Other~~expenses.................................. 119,467 (610 1),485 -- 2421,562 24Amortization ~~--------~~of ~~-------~~intangible ~~-------~~assets ~~------ --------- Net cash provided by (used in) operating activities~~..........~~.......~~ 21,~~889~~696 78194 ~~290~~152 ~~(146)~~-- 32,~~111~~042 -------- ------- ------- ------- --------- ~~Cash~~Operating ~~flows~~income ~~relating to investing activities: Purchase of property plant and equipment, net~~.........................~~.............~~ ~~(837)~~6,872 ~~(86)~~1,163 ~~(3)~~1,006 -- ~~(926)~~9,041 ~~Proceeds~~Interest ~~from~~income ~~sale of property and equipment~~............................~~....~~ 87699 7 -- 34 -- 94733 ~~Payments~~Interest ~~received~~expense ~~for notes receivable from officers, net~~............................ ~~83 -- -- -- 83 -------- ------- ------- ------ --------- Net cash used in investing activities...~~ (~~667~~5,263) (79274) (3306) -- (~~749~~5,843) -------- ------- ------- ------- --------- ~~Cash~~Income ~~flows~~before ~~relating~~provision tofor ~~financing~~income ~~activities:~~taxes ~~Payment on debt~~...~~.........................~~ ~~(250)~~2,308 --889 --734 -- ~~(250)~~3,931 ~~Distribution~~Provision tofor ~~shareholders~~income taxes ................. ~~(200)~~119 --70 --481 -- ~~(200)~~670 -------- ------- ------- ------- --------- ~~Net~~Income ~~cash~~before ~~used~~equity in ~~financing~~net ~~activities...~~earnings ~~(450)~~of --subsidiaries --and --extraordinary ~~(450)~~item ~~--------~~...... ~~-------~~2,189 ~~-------~~819 ~~------~~253 --~~-------~~ ~~Effect~~3,261 ofEquity ~~exchange~~in ~~rate~~net ~~changes~~earnings onof ~~cash~~subsidiaries ~~and cash equivalents~~.....~~......................~~ --1,072 53 -- (21,125) -- ~~(2)~~ -------- ------- ------- ------- --------- Net ~~increase~~income ~~(decrease)~~before inextraordinary ~~cash~~item ~~and cash equivalents~~.......~~.........................~~ 13,~~772~~261 ~~(1)~~872 ~~285~~253 (~~146~~1,125) 13,~~910~~261 ~~Cash~~Extraordinary ~~and~~gain, ~~cash~~net ~~equivalents,~~of ~~beginning~~tax of ~~period~~$16 ~~24,002~~..... 13388 ~~1,205~~-- ~~(282)~~-- ~~24,938~~-- 338 -------- ------- ------- ------- --------- ~~Cash~~Net ~~and~~income ~~cash equivalents, end of period~~................................. $ 253,~~774~~649 $ 12872 $ ~~1,490~~253 $ (~~428~~1,125) $ 263,~~848~~649 ======== ======= ======= ======= =========

9 10 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

10 11 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

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

12 13 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - (IN THOUSANDS)

13 14 (6) 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 cash flows, taken as a whole. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 24, 2000 AND DECEMBER 26, 1999 REVENUES Revenues for the second quarter of fiscal 2001, which ended December 24, 2000, were $147.5 million compared to $141.6 million for the second quarter of fiscal 2000, which ended December 26, 1999, an increase of $5.9 million or 4.2%. This change was primarily attributable to an increase in the Company's Commercial Division revenue of $15.3 million partially offset by a decrease in the Company's Industrial Division revenue of $3.1 million and a decrease in revenue of $6.3 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 revenue was the result of additional services performed under new and existing contracts outpacing reductions in revenue due to reduction in scope of work or lost contracts. The majority of the increase in the Commercial Division revenue was the result of an increase in the scope of work with an existing customer. The decrease in the Industrial Division revenue was the result of lost contracts and decreased services to existing customers outpacing new contracts and increases in services with existing customers. During the second quarter, the Company was notified of the cancellation of a contract as a result of a customer's decision to decentralize facility-related purchasing decisions. Revenues from this contract were approximately $11.7 million in fiscal 2000. Management believes that the loss of this contract will have an insignificant effect on the Company's results of operations and financial position. COST OF REVENUES Cost of revenues for the second quarter of fiscal 2001 were $131.4 million, or 89.0% of revenues, compared to $124.9 million, or 88.2% of revenues, for the second quarter of fiscal 2000. The increase in cost of revenues as a percentage of revenue was primarily the result of salary increases effective July 1, 2000 and increases in the Company's workers' compensation and general liability insurance premiums. Cost of revenues in the second quarter included $0.7 million of charges related to the cancelled contract described above. Such charges included severance pay, lease expense, cost of disposal of a fleet of vehicles and expenses associated with the abandonment of office space utilized in the performance of the cancelled contract. Cost of revenues also increased as a percentage of revenues due to the impact of start up expenses associated with new contracts that commenced during the quarter. GROSS PROFIT As a result of the foregoing, gross profit for the second quarter of fiscal 2001 was $16.2 million, or 11.0% of revenues, compared to $16.7 million, or 11.8% of revenues, for the comparable period in fiscal 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the second quarter of fiscal 2001 were $10.8 million, or 7.3% of revenues, compared to $10.7 million, or 7.5% of revenues, for the second quarter of fiscal 2000. The increase of $0.1 million was due to several factors. The Company experienced a $0.2 million decrease in payroll expense which was the net result of the following factors: an increase of $0.1 million related primarily to salary increases effective July 1, 2000, a decrease of $0.1 million related to a decline in the liability associated with the Company's deferred compensation plan and a decrease of $0.2 million in payroll expense as a result of the sale of certain contracts effective December 31, 1999. The Company's 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 $0.1 million as a result of changes in the exchange rate. The Company's advertising and promotion expense increased $0.1 million as a result of increased trade publication advertising. Vehicle expense increased $0.1 million due to increased costs associated with certain leased equipment. The Company also experienced a $0.2 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 $0.9 million and $1.0 million in the second quarters of fiscal 2001 and fiscal 2000, respectively. The decrease in amortization expense is the result of the write-off of intangible assets related to the contracts sold effective December 31, 1999. OPERATING INCOME As a result of the foregoing, income from operations for the second quarter of fiscal 2001 was $4.4 million, or 3.0% of revenues, compared to $5.0 million, or 3.5% of revenues for the second quarter of fiscal 2000. 14 15 EBITDA EBITDA for the second quarter of fiscal 2001 was $5.9 million (which excludes the gain on sale of contracts of $0.4 million), or 4.0% of revenues, compared to $6.6 million, or 4.7% of revenues, for the second quarter of fiscal 2000. EBITDA is defined as income from 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 second quarter of fiscal 2001 was $2.0 million, or 1.4% of revenues, compared to $2.9 million, or 2.0% of revenues, for the second quarter of fiscal 2000. The decrease in interest expense was the result of the repurchase of $57.9 million (face amount) of the Company's Notes, which occurred during the second and third quarters of fiscal 2000, partially offset by higher interest cost related to the Company's use of its line of credit. GAIN ON SALE OF CONTRACTS In October 2000, the Company received $440,000 of the potential $450,000 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 second quarter of fiscal 2001 was $0.4 million, or 14.5% of income before provision for income taxes, compared to $0.3 million, or 13% of income before provision for income taxes, for the second quarter of fiscal 2000. The higher effective tax rate in the second quarter of fiscal 2001 was the result of the treatment of certain expenses associated with the cancelled contract discussed above and a higher percentage of pre-tax income generated by the Canadian operations, which is taxed at a higher effective rate. NET INCOME As a result of the foregoing, net income for the second quarter of fiscal 2001 was $2.5 million, or 1.7% of revenues, compared to $2.6 million, or 1.8% of revenues, for the second quarter of fiscal 2000. COMPARISON OF SIX MONTH PERIODS ENDED DECEMBER 24, 2000 AND DECEMBER 26, 1999 REVENUES Revenues for the six months ended December 24, 2000 were $286.4 million, compared to $277.1 million for the comparable period of fiscal 2000, an increase of $9.3 million or 3.4%. This increase was primarily attributable to an increase in the Company's Commercial Division revenue of $23.5 million partially offset by a decrease in the Company's Industrial Division revenue of $1.7 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 revenue was the result of additional services performed under new and existing contracts outpacing reductions in revenue due to reduction in scope of work or lost contracts. The majority of the increase in the Commercial Division revenue was the result of an increase in the scope of work with an existing customer. 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 REVENUES Cost of revenues for the six months ended December 2000 were $254.5 million, or 88.9% of revenues, compared to $244.5 million, or 88.2% of revenues, for the comparable period of fiscal 2000. The increase of 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 in the second quarter included $0.7 million of charges related to the cancelled contract described in the second quarter comparison above. Such charges included severance pay, lease expense, cost of disposal of a fleet of vehicles and expenses associated with the abandonment of office space utilized in the performance of the cancelled contract. Cost of revenues also increased as a percentage of revenues due to the impact of start up expenses associated with new contracts that commenced during the quarter. GROSS PROFIT As a result of the foregoing, gross profit for the six months ended December 2000 was $31.9 million, or 11.1% of revenues, compared to $32.6 million, or 11.8% of revenues, for the comparable period in fiscal 2000. 15 16 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the six months ended December 24, 2000 were $21.8 million, or 7.6% of revenues, compared to $21.6 million, or 7.8% of revenues, for the comparable period of fiscal 2000. The increase of $0.2 million was due to several factors. The Company experienced a $0.5 million decrease in payroll expense which was the net result of the following factors: an increase of $0.1 million related primarily to salary increases effective July 1, 2000, a decrease of $0.1 million related to a decline in the liability associated with the Company's deferred compensation plan and a decrease of $0.5 million in payroll expense as a result of the sale of certain contracts effective December 31, 1999. There was an increase in professional fees of $0.2 million as a result of consulting fees related to the implementation of the Company's shared services center. The Company's rent expense increased approximately $0.4 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 $0.2 million as a result of changes in the exchange rate. Vehicle expense increased $0.2 million due to increase costs associated with leased equipment. 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 $1.9 million and $2.0 million in the six-month periods of fiscal 2001 and fiscal 2000, respectively. The decrease in amortization expense is the result of the write-off of intangible assets related to the contracts sold effective December 31, 1999. OPERATING INCOME As a result of the foregoing, income from operations for the six-month period ended December 2000 was $8.2 million, or 2.9% of revenues, compared to $9.0 million, or 3.3% of revenues for the comparable period. EBITDA EBITDA for the six months ended December 24, 2000 was $11.1 million (which excludes the gain on sale of contracts of $0.4 million), or 3.9% of revenues, compared to $12.2 million, or 4.4% of revenues, for the comparable period. INTEREST EXPENSE Interest expense for the six months ended December 2000 was $3.9 million, or 1.4% of revenues, compared to $5.8 million, or 2.1% of revenues, for the comparable period. The decrease in interest expense was the result of the repurchase of $57.9 million (face amount) of the Company's Notes, which occurred during the second and third quarter of fiscal 2000, partially offset by higher interest cost related to the Company's use of its line of credit. GAIN ON SALE OF CONTRACTS As described in the three-month comparison above, during the second quarter of fiscal 2000, the Company recorded a gain on sale of $0.4 million related to the receipt of contingent purchase price related to the sale of the contracts effective December 31, 1999. INCOME TAXES Provision for income taxes for the six months ended December 2000 was $0.8 million, or 16.5% of income before provision for income taxes, compared to $0.7 million, or 17% of income before provision for income taxes, for the comparable period. The lower effective tax rate in for the first six months of fiscal 2001 was the result of lower taxable income for fiscal 2001 from the Canadian operations, which are taxed at a higher effective rate. NET INCOME As a result of the foregoing, net income for the six months ended December 2000 was $4.0 million, or 1.4% of revenues, compared to $3.6 million, or 1.3% of revenues, for the comparable period. LIQUIDITY AND CAPITAL RESOURCES For the six months ended December 24, 2000, the Company's cash increased by $1.7 million, resulting from $1.1 million of net cash provided by operating activities and $1.5 million of cash provided by financing activities, partially offset by $0.9 million of net cash used for investing activities. Cash provided by operating activities was primarily the result of $7.0 million related to net income (adjusted for non-cash items such as depreciation and amortization) and increases of $2.4 million and $2.2 million related to accounts payable and accrued expenses, respectively. This increase in cash was partially offset by an increase in accounts receivable and unbilled receivables of $10.1 million and $.8 million, respectively. Cash used in investing activities was $0.9 million. Investing activities consisted primarily of cash used of $1.5 million for capital expenditures offset by the receipt of $0.4 million in contingent purchase price from the sale of certain contracts, effective December 31, 1999. 16 17 Financing activities included a $2.5 million increase in the cash overdraft as well as $0.8 million in additional borrowings under the Company's line of credit. During the six-month period, the Company made $0.5 million of optional principal payments on the Company's subordinated indebtedness and shareholder distributions of $1.3 million, which included a tax distribution of $0.9 million. Capital expenditures were $1.5 million and $1.6 million, respectively, for the six-month periods ended December 2000 and 1999. 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 it borrows funds for working capital and general corporate purposes, subject to certain conditions. Effective December 21, 2000, the Company increased the amount that it may borrow from $45.0 million to $55.0 million. The Company has no plans to utilize the additional borrowing capacity at this time. The Credit Facility, the Indenture governing the Notes 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 ($3.5 million at December 24, 2000) is due on September 30, 2001 and is classified as a current liability in the accompanying balance sheet as of December 24, 2000. 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. 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 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. 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 $26.6 million in cash borrowings under the Credit Facility as of December 24, 2000. These funds were borrowed under two rates: (i) $24,000,000 was borrowed at LIBOR plus 2.25% (8.89% as of December 24, 2000) and (ii) the remaining outstanding balance was borrowed at the prime rate plus 0.75% (10.25% as of December 24, 2000). 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 of our variable rate obligations would be approximately $0.3 million. At December 24, 2000, the Company had additional outstanding indebtedness that consisted of $47.2 million of Senior Subordinated Notes and $3.50 million of a Subordinated Promissory Note with fixed interest rates of 9.875% and 14%, 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 exposure to some 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, and it is not the Company's intention to repatriate earnings prospectively. Currently, the Company does not engage in any foreign currency hedging activities as it does not believe that 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 have a material adverse effect on the Company's financial position, results of operations or cash flows, taken as a whole (see Note 6 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 second quarter and year to date financial results. Interested parties may access the conference call as follows: Date: February 12, 2001 Time: 2:00PM Eastern Standard Time Dial-in-Number: (800)547-5078 Access Code: 570236 Replay Number: (800)475-6701 Access Code: 570236 Available from: February 12, 2001 at 4:35PM to February 19, 2001 at 11:59PM 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 February 7, 2001 By: /s/ Steven C. Kletjian -------------------------------------------- Steven C. Kletjian, President, Chief Executive Officer (Principal Executive Officer) February 7, 2001 By: /s/ George A. Keches -------------------------------------------- George A. Keches, Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 19

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