10-Q 1 b41875uce10-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 DECEMBER 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 DECEMBER 23, 2001 TABLE OF CONTENTS PAGE PART I. Financial Information ITEM 1. Financial Statements: Condensed Consolidated Statements of Income for the 3 three months and six months ended December 23, 2001 and December 24, 2000 (unaudited) Condensed Consolidated Balance Sheets at December 23, 4 2001 (unaudited) and June 24, 2001 Condensed Consolidated Statements of Cash Flows for the 5 six months ended December 23, 2001 and December 24, 2000 (unaudited) Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition 13 and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. Other Information 17 Signatures 19 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNICCO SERVICE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS)

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 DECEMBER 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 December 23, 2001 and the results of their operations and their cash flows for the three and six month periods ended December 23, 2001 and December 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 included in its Annual Report on Form 10-K as filed with the Securities and Exchange Commission. (2) OTHER INCOME In December 2001, the Company received 15,082 shares of Prudential Life Insurance Company common stock following its demutualization. The value of the shares received was $455,000 based on the closing price of the stock on the date it was received. The Company determined that 80% of the shares received were the property of the Company. The value of the remainder of the shares will be distributed to the Company's employees according to applicable regulations. During the second quarter of fiscal 2002, the Company recorded a gain of $364,000 for its portion of the value of the shares received. 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 23, 2001 and December 24, 2000 are set forth below:

6 (4) ACCOUNTING DEVELOPMENTS The results for the quarter and six-months ended December 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 and $0.4 million reduction in expenses, respectively (also $0.2 and $0.4 million net of tax, respectively). 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 reductions of amortization expense recognized this year represents the amount of 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- and six-month periods ended December 24, 2000: (UNAUDITED) IN THOUSANDS -------------------------------------------------------- FOR THE FOR THE FOR THE FOR THE THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED DECEMBER 23, DECEMBER 24, DECEMBER 23, DECEMBER 24, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Income: As reported: $1,443 $2,457 $3,795 $3,978 Goodwill amortization -- 208 -- 416 ------ ------ ------ ------ As adjusted $1,443 $2,665 $3,795 $4,394 ====== ====== ====== ====== The following table reflects the components of intangible assets as of December 23, 2001: (UNAUDITED) IN THOUSANDS ------------------------------------------------ GROSS CARRYING AMOUNT ACCUMULATED AMORTIZATION --------------------- ------------------------ Amortized intangible assets: Capitalized contracts $40,129 $17,732 Adjusted amortization expense for the three- and six-month periods ended December 23, 2001 was $721,000 and $1,444,000, respectively. 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 was approximately $8.3 million at December 23, 2001. There have been no changes in this carrying amount since June 24, 2001. The Company completed its impairment testing of goodwill upon adoption of this Standard, concluding that its goodwill is not impaired. Management believes that the Company's goodwill balance as of December 23, 2001 was properly valued. 7 (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)

8 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - (IN THOUSANDS)

9 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

10 CONDENSED CONSOLIDATING BALANCE SHEET - (IN THOUSANDS)

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

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

13 (6) SUBSEQUENT EVENT Effective February 1, 2002, the Company sold certain contracts located in the province of Quebec. The purchase price and the impact of the sale of these contracts on the results of operations is immaterial. (7) 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. 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 injunctive 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTH PERIODS ENDED DECEMBER 23, 2001 AND DECEMBER 24, 2000 REVENUES Revenues for the second quarter of fiscal 2002, which ended December 23, 2001, were $150.6 million compared to $147.5 million for the second quarter of fiscal 2001, which ended December 24, 2000, an increase of $3.1 million or 2.1%. This change was primarily attributable to an increase in the Company's Commercial Division revenue of $5.7 million, partially offset by a decrease in the Company's Industrial Division revenue of $2.6 million. 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's revenue primarily reflects the aftermath of the cancellation of a contract by 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. COST OF SERVICE REVENUES Cost of service revenues for the second quarter of fiscal 2002 were $135.2 million, or 89.8% of revenues, compared to $131.4 million, or 89.1% of revenues, for the second quarter of fiscal 2001. The increase in cost of revenues as a percentage of revenue 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 second quarter of fiscal 2002, the Company continued to experience 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 has not experienced a material decrease in the collectibility of its accounts receivable. The Company's operations during the quarter 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. Based on the Company's fiscal calendar fiscal 2002 will be a 53-week year. The expected impact will be approximately $3.8 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. GROSS PROFIT As a result of the foregoing, gross profit for the second quarter of fiscal 2002 was $15.4 million, or 10.2% of revenues, compared to $16.2 million, or 11.0% of revenues, for the comparable period in fiscal 2001. The Company believes that competitive pressures in its industry, combined with the impact of the poor economy on its customer base, may constrain the Company's ability to achieve higher levels of gross profit during the remainder of fiscal 2002. The decline in gross profit is also partially due to decreased profitability in the Company's Canadian operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the second quarter of 14 fiscal 2002 were $11.6 million, or 7.7% of revenues, compared to $10.8 million, or 7.3% of revenues, for the second quarter of fiscal 2001. The increase of $0.8 million was due to several factors. The Company experienced a $0.8 million increase in payroll and payroll-related expenses comprised of an increase of $0.5 million due to staffing open positions and salary increases effective July 1, 2001 and an increase of $0.3 million related to the change in the liability associated with the Company's deferred compensation plan. Vehicle expense increased $0.1 million related to costs associated with certain leased equipment. These increases were partially offset by the following: (i) a decrease in travel and entertainment expenses of $0.1 million primarily the result of decreased travel following the events of September 11, 2001 and (ii) a decrease in office and occupancy costs of $0.1 million. AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $0.7 million and $0.9 million in the second quarters of fiscal 2002 and fiscal 2001, respectively. The decrease in amortization expense is the result of the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which provides that goodwill is no longer amortized. OPERATING INCOME As a result of the foregoing, income from operations for the second quarter of fiscal 2002 was $3.1 million, or 2.1% of revenues, compared to $4.4 million, or 3.0% of revenues for the second quarter of fiscal 2001. OTHER INCOME The gain on receipt of stock of $0.4 million was the result of a gain recorded for shares the Company received from the demutualization of one of its life insurance carriers. (See Note 2 of the Notes to Condensed Consolidated Financial Statements.) EBITDA EBITDA for the second quarter of fiscal 2002 was $4.4 million, or 2.9% of revenues, compared to $5.9 million, or 4.0% of revenues, for the second quarter of fiscal 2001. 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 2002 was $1.8 million, or 1.2% of revenues, compared to $2.0 million, or 1.4% of revenues, for the second quarter of fiscal 2001. The decrease in interest expense was primarily the result of the $2.75 million repayment of the Company's Subordinated Promissory Note, which occurred during the second quarter of fiscal 2002. The Subordinated Promissory Note bore interest at the rate of 14%. INCOME TAXES Provision for income taxes for the second quarter of fiscal 2002 was $0.2 million, or 12.4% of income before provision for income taxes, compared to $0.4 million, or 14.5% of income before provision for income taxes, for the second quarter of fiscal 2001. The lower effective tax rate in the second quarter of fiscal 2002 was the result of a lower percentage of pre-tax income generated by the Company's Canadian operations, which are taxed at a higher effective rate. NET INCOME As a result of the foregoing, net income for the second quarter of fiscal 2002 was $1.4 million, or 1.0% of revenues, compared to $2.5 million, or 1.7% of revenues, for the second quarter of fiscal 2001. COMPARISON OF SIX MONTH PERIODS ENDED DECEMBER 23, 2001 AND DECEMBER 24, 2000 REVENUES Revenues for the six months ended December 23, 2001 were $297.6 million, compared to $286.4 million for the comparable period of fiscal 2001, an increase of $11.2 million or 3.9%. This increase was attributable to an increase in the Company's Commercial Division revenue of $16.7 million partially offset by a decrease in the Company's Industrial Division revenue of $5.5 million. The 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 $14.0 million in revenues compared with the same period in the prior year. The balance of the increase in the Commercial Division's revenues 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 decrease in the Industrial Division's revenue was primarily the result of the cancellation of a contract with a major customer in the second quarter of fiscal 2001 as a result 15 of the customer's decision to decentralize facility related purchasing decisions. The Industrial Division's revenue also decreased as a result of lost business and reductions in services from other customers due to the impact of the slowing economy, partially offset by increases in revenues under new and existing contracts. COST OF REVENUES Cost of revenues for the six months ended December 2001 were $266.3 million, or 89.5% of revenues, compared to $254.5 million, or 88.9% of revenues, for the comparable period of fiscal 2001. The increase of cost of revenues as a percentage of revenues resulted primarily from salary increases effective July 1, 2001 and increases in the Company's workers' compensation and general liability insurance premiums. During the first six months 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 has not experienced a material decrease in the collectibility of its accounts receivable. 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. Based on the Company's fiscal calendar fiscal 2002 will be a 53-week year. The expected impact will be approximately $3.8 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. GROSS PROFIT As a result of the foregoing, gross profit for the six months ended December 2001 was $31.3 million, or 10.5% of revenues, compared to $31.9 million, or 11.1% of revenues, for the comparable period in fiscal 2001. The Company has increased its scope of work with an existing customer in the Commercial Division as noted above. Consolidated gross profit, as a percentage of revenue, has decreased in past due to the lower profitability associated with this business. The Company believes that competitive pressures in its industry, combined with the impact of the poor economy on its customer base, may constrain the Company's ability to achieve higher levels of gross profit during the remainder of fiscal 2002. The decline in gross profit is also partially due to decreased profitability in the Company's Canadian operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the six months ended December 23, 2001 were $22.3 million, or 7.5% of revenues, compared to $21.8 million, or 7.6% of revenues, for the comparable period of fiscal 2001. The increase of $0.5 million was due to several factors. The Company experienced a $1.3 million increase in payroll and payroll related expenses which was primarily the result of headcount increase as a result of staffing open positions and salary increases effective July 1, 2001. The Company also experienced a $0.2 million increase in advertising and promotional expense as a result of increased marketing efforts. These increases were partially offset by the following: travel and entertainment expenses decreased $0.2 million as a result of increased controls and a decrease in travel following the events of September 11, 2001. Recruiting expense decreased $0.2 million as a result of fees and relocation expense in fiscal 2001 related to the hiring of senior executives. Professional fees decreased $0.5 million, 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. The Company also experienced a decrease in office and occupancy costs of $0.2 million due to a decrease in telephone and office equipment expense. AMORTIZATION OF INTANGIBLE ASSETS Amortization expense was $1.4 million and $1.9 million in the six-month periods of fiscal 2002 and fiscal 2001, respectively. The decrease in amortization expense is the result of the Company's adoption of SFAS No. 142, which provides that goodwill is no longer amortized. OPERATING INCOME As a result of the foregoing, income from operations for the six-month period ended December 2001 was $7.5 million, or 2.5% of revenues, compared to $8.2 million, or 2.9% of revenues for the comparable period in the prior year. OTHER INCOME The gain on receipt of stock of $0.4 million was the result of a gain recorded for shares the Company received from the demutualization one of its life insurance carriers. (See Note 2 of the Notes to Condensed Consolidated Financial Statements.) EBITDA EBITDA for the six months ended December 24, 2000 was $10 million, or 3.4% of revenues, compared to $11.1 million, or 3.9% of revenues, for the comparable period. 16 INTEREST EXPENSE Interest expense for the six months ended December 2001 was $3.6 million, or 1.2% of revenues, compared to $3.9 million, or 1.4% of revenues, for the comparable period. The decrease in interest expense was primarily the result of quarterly prepayments under, and the eventual $2.75 million repayment of, the Company's Subordinated Promissory Note, during the second quarter of fiscal 2002. The Subordinated Promissory Note bore interest at the rate of 14%. INCOME TAXES Provision for income taxes for the six months ended December 2001 was $0.5 million, or 11.8% of income before provision for income taxes, compared to $0.8 million, or 16.5% of income before provision for income taxes, for the comparable period in the prior year. The lower effective tax rate in for the first six months of fiscal 2002 was the result of lower taxable income for fiscal 2002 from the Company's 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 2001 was $3.8 million, or 1.3% of revenues, compared to $4.0 million, or 1.4% of revenues, for the comparable period. LIQUIDITY AND CAPITAL RESOURCES For the six months ended December 23, 2001, the Company's cash increased by $0.3 million, resulting from $0.3 million of net cash from operating activities and $1.6 million of net cash provided by financing activities, partially offset by $1.5 million of net cash used in investing activities and a $0.1 million decrease in cash due to the effect of exchange rate changes on cash and cash equivalents. Cash provided by operating activities was primarily the result of $6 million of net income adjusted for non-cash items such as depreciation and amortization and the gain on receipt of stock (See Note 2 to the Condensed Consolidated Financial Statements) and increases of $3.8 million related to accounts payable. These increases in cash were partially offset by increases in accounts receivable and unbilled receivables of $7.2 million and $0.8 million, respectively and a decrease in accrued expenses of $1.5 million. Cash used in investing activities was $1.5 million. Investing activities consisted primarily of cash used of $0.8 million for capital expenditures and $0.7 million related to increases in notes receivable from officers. Financing activities included a $3.2 million increase in the cash overdraft as well as $2.1 million in additional borrowings under the Company's line of credit. During the six-month period, the Company made $0.25 million of optional principal payments on the Company's Subordinated Promissory Note. During the second quarter, the Company repaid the entire remaining principal amount ($2.75 million) of the Company's Subordinated Promissory Note. Financing activities also included shareholder distributions of $0.8 million, which included a tax distribution of $0.4 million. Capital expenditures were $0.8 million and $1.5 million, respectively, for the six month periods ended December 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 acquisitions, working capital and general corporate purposes, subject to certain conditions. Cash borrowings under the Credit Facility were $29.8 million as of December 23, 2001. The Credit Facility and the Indenture governing the Company's Senior Subordinated Notes (the "Notes") due 2007 include certain financial and operating covenants that, among other things, restrict the ability of the Company to incur additional indebtedness, make investments and take other actions. The Company was not in compliance with two of the credit facility's financial ratios as of December 23, 2001. The Company obtained a waiver for these covenant violations from the lenders. The lenders amended certain financial covenants for the remainder of fiscal 2002. As the Credit Facility expires in October 2002, the entire balance of cash borrowing outstanding at December 23, 2001 is classified as a current liability. The Company is currently negotiating with lenders for long-term financing after the expiration of the Credit Facility and expects to have a new facility in place by June 2002. The Company's principal capital requirements are to service the Company's indebtedness, for working capital and, to fund acquisitions and, to a lesser extent, to fund capital expenditures. As of December 23, 2001, the Company had outstanding cash borrowings of $29.8 million under the Credit Facility, as well as outstanding letters of credit of $18.6 million. Availability under the Credit Facility was $6.6 million. 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. 17 As a result of the Company's accounting calendar, fiscal 2002 will be a 53-week year. The expected impact will be approximately $3.8 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, debt payments and other operating needs. 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 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 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 $29.8 million in cash borrowings under the Credit Facility as of December 23, 2001. These funds were borrowed under two rates: (i) $25 million was borrowed at LIBOR plus 2.5% (4.5625% as of December 23, 2001) and (ii) the remaining outstanding balance was borrowed at the prime rate plus 0.75% (5.75% as of December 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 of our variable rate obligations would be approximately $0.3 million. At December 23, 2001, the Company had additional outstanding indebtedness of $47.2 million of Senior Subordinated Notes with a fixed interest rate of 9.875%. Fluctuations in interest rates will not affect the interest payable on the Senior Subordinated Notes, 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. 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 7 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. 18 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 22, 2002 Time: 9:30 AM Eastern Standard Time Dial-in-Number: (800)547-5078 Access Code: 628839 Replay Number: (800)475-6701 Access Code: 628839 Available from: February 22, 2002 at 12:15 PM to March 8, 2002 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. 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 20, 2002 By: /s/ Steven C. Kletjian ---------------------------- Steven C. Kletjian, Chief Executive Officer (Principal Executive Officer) February 20, 2002 By: /s/ George A. Keches ----------------------------- George A. Keches, President, Chief Operating Officer and Treasurer (Principal Financial and Accounting Officer) 20

UNICCO SERVICE CO 10-Q